MC4104 FUNDAMENTALS OF ACCOUNTING

UNIT I INTRODUCTION TO ACCOUNTING

Introduction to Financial, Cost and Management Accounting - Objectives of Financial

Accounting – Accounting Principles, Concepts and Conventions – Book keeping and
Accounting.

Practical exercise session using Tally. 1. Company Creation, Creating Groups 2. Creation of
Ledgers and Vouchers.

PART – A

1) Define the term Accounting. Nov/Dec 2023

According to American Institute of Certified Public Accountants (AICPA) “Accounting is

the art of recording, classifying and summarizing in a significant manner and in terms of money
transactions and events which are of a financial character and interpreting the results thereof”.

2) Write the principles or golden rules of accounting.

 Personal Accounts
“Debit the receiver, Credit the giver”.

 Real Accounts
“Debit what comes, Credit what goes out”

 Nominal Accounts
“Debit all expenses and losses, Credit all incomes and gains”.

3) What is meant by financial accounting? Nov/Dec 2023

The accounting for revenues, expenses, assets and liabilities that is commonly Carried on in
the general offices of business is known as “Financial Accounting”. Financial accounting
information is expressed in two main types of financial statements, viz.

 Profit and Loss account

 The balance sheet
4) Write the functions of financial Accounting.

 Keeping systematic records

 Protecting the properties of the business
 Communicating the results to the stake holders of the business.
 Meeting the legal requirements.
5) Write the Limitations of Financial Accounting.

 Only transactions which can be measured in terms of money can be recorded in the
books of accounts.
 According to the cost concept assets are recorded at the cost at which they are acquired
and therefore ignore the changes in values of assets brought about by changing value of
money and market factors.

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  Financial accounting can be understood only by persons who have accounting
knowledge.

6) Define Cost Accounting.

According to the Institute of Cost and Works Accountants (ICWA), London, Cost
accounting is “the process of accounting for costs from the point at which expenditure is incurred
or committed to the establishment of its ultimate relationship with cost centers and cost units. In its
widest usage it embraces the preparation of statistical data, the application of cost control methods
and the ascertainment of the profitability of activities carried out or planned.”

7) What are the Objectives of Cost Accounting?

 To aid in the development of long range plans by providing cost data that acts as a basis
for projecting data for planning.
 To ensure efficient cost control by communicating essential data costs at regular
intervals and thus minimize the cost of manufacturing.
 Determine cost of products or activities, which is useful in the determination of selling
price or quotation.
 To identify profitability of each product, process, department etc of the business.

8) Write the Limitations of Cost Accounting.

Cost Accounting like other branches of accountancy is not an exact science but is an art
which was developed through theories and accounting practices based on reasoning and
commonsense. These practices are dynamic and evolving. Hence, it lacks a uniform procedure
applicable to all the industries across. It has to be customized for each industry, company etc.

9) Write the Meaning of Management Accounting. Nov/Dec 2023

According to M.A.Sahaf Management Accounting is “a system for gathering,

summarizing, reporting and interpreting accounting data and other financial information primarily
for the internal needs of the management. It is designed to assist internal management in the
efficient formulation, execution and appraisal of business plans.”

10) Write the Functions of Management Accounting.

 To help the management in planning, forecasting and policy formulation

 To help in analysis and interpretation of financial information
 To help in decision making- long term as well as short term
 To help in controlling and coordinating the business operations
 To motivate the employees by encouraging them to look forward
 To help the management in tax administration.
11) What are the tools and techniques of Management Accounting? Nov/Dec 2023

 Financial planning
 Analysis of financial statements
 Cost accounting
 Standard costing
 Marginal costing
 Budgetary control
 Funds flow analysis
 Management reporting
 Statistical analysis

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12) Write the Advantages of Management Accounting.

 It increases efficiency of business operations

 It ensures efficient regulation of business activities
 It ensures utilization of available resources and thereby increase the return on capital
employed.
 It ensures effective control of performance
 It helps in evaluating the efficiency of the company’s business policies.

13) What are the Limitations of Management Accounting?

 It is based on historical data; as such it suffers from the drawbacks of the financial
statements.
 The application of management accounting tools and techniques requires people who
are knowledgeable in subjects such as accounting, costing, economics, taxation,
statistics, mathematics, etc.
 The installation of management accounting system is expensive and hence not suitable
for small firms.
14) Who are the Users of Financial Accounts?

 Employees
 Debtors
 Creditors
 Lenders
 Investors
 Government
 Analysts
 Public at large.
15) Explain GAAP principles.
The common set of accounting principles, standards and procedures that companies use to
compile their financial statements. GAAP are a combination of authoritative standards (set by
policy boards) and simply the commonly accepted ways of recording and reporting accounting
information. GAAP ensures that all companies are in a level playing field and that the information
they present is consistent, relevant reliable and comparable.

16) Explain the Concepts of Accounting.

Accounting concepts are the assumptions or postulator or ideas which are essential to the
practice of accounting and preparation of financial statements.

 Business Entity concept

 Going concern concept
 Dual aspect concept
 Cost concept
 Money measurement concept
 Realization concept
 Accrual concept
 Matching concept
 Accounting period concept.
17) Explain the convention of accounting.

Accounting conventions are those customs, usage and traditions that are being followed by the
accountants.

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  Convention of conservation
 Convention of consistency
 Convention of material disclosure
 Convention of full disclosure

18) Explain the Uses of accounting.

 Preparation of financial statements

 Evidence in courts
 Taxation problem
 Assessment of progress
 Aid to decision making
19) Explain the Double Entry System?

This system was invented by on ‘Italian’ named “Luco Pacioli” in 1494 A.D and became
popular as Arabic numerals. It is the most common system of book keeping whereby the two
aspects of every transaction i.e., the receiving aspect (debit) and the giving aspect (credit) are
recorded in the books of accounts.

20) Explain the Single Entry System.

It does not mean that there is only one entry for each transaction. It simply signifies that
principles of double entry have not been observed and only the personal accounts of the debtors,
creditors and cash book of trader are maintained. As it not contains sales and purchase book the
final accounts cannot be prepared.

 The final effect of a series of transactions of a certain customer or certain property or a

certain expense is not disclosed by the journal. It is not designed in that way. But the
final effect is known at a glance.
 The journal could not provide immediately the totality of certain dealings but in ledger
it is possible.

21) What is Money Measurement Concept?

The money measurement concept underlines the fact that in accounting every worth
recording event happening or transaction is recorded in terms of money. In other words, a fact or a
happening which cannot be expressed in terms of money is not recorded in the accounting books.

22) Mention the objectives of accounting.

 To maintain the cash accounts through the Cash Book and to find out the Cash balance
on any particular day.
 To maintain various other Journals for recording day-to –day non –cash transactions.
 To maintain various Ledger Accounts to find out the exact amounts of incomes and
expenses or gain and losses or receivables and payables.
23) What is Cost accounting?
According to the Institute of Cost and Works Accountants(ICWA),London, Cost
accounting is “ the process of accounting for costs from the point at which expenditure is incurred
or committed to the establishment of its ultimate relationship with cost centers and cost units.

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24) What is meant by Book keeping? Nov/Dec 2023

It means recording of business transactions in the books of accounts in accordance with the
principles of accounting. In short, it means the recording of business transactions in a set of
account books in a systematic or proper manner.

25) What is Convention of Materiality? Jan 2022

Convention of materiality states that items of small significance need not to be given strict
theoretically correct treatment. There are many events in business which are insignificant in nature.
Moreover, it is one of the most important accounting conventions.

26) Name four objectives of Financial Accounting? Nov/Dec 2022

To ascertain the operating results of the enterprises

To reveal the financial position of the business

To enable control over the operation as well as the resources of the business.

To enhances the Planning & Controlling the business activity.

27) What do you understand by the Principle of consistency? Nov/Dec 2022

This is concept that, once you adopt an accounting principle or method, you continue to use
it until a demonstrably better principle or method comes along.

PART-B

1) Explain Briefly Financial Accounting Concepts. Nov/Dec 2022, Nov/Dec 2023

Accounting has been termed as the language of business. The basic function of accounting
thus is to communicate the operating results of the business to the stake holders and shareholders of
a business.

Accounting is a means of communicating the results of business operations to various

parties interested in or connected with the business viz., the owners, creditors, investors, banks and
financial institutions, Government and other agencies

DEFINITION OF ACCOUNTING:

The American Institute of certified public accountants (AICPA) defined accounting as

“Accounting is the art of recording classifying and summarizing in a significant manner and in
terms of money transactions and events which are in part at least of a financial character and
interpreting the results thereof”.

OBJECTIVES OF FINANCIAL STATEMENTS

The basic objective of financial statements according to AICPA is ‘to provide qualitative
financial information about the business enterprise that is useful to statement users, particularly
owners and creditors in making economic decisions. Apart from this the other important objectives
are:

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  To provide information about the economic activities of the enterprise to several
external groups who, otherwise have no access to such information.
 To provide useful information to investors and creditors in taking decisions relating to
investment and lending.
 To provide information to potential investors in evaluating the earning power of the
enterprise.
 To provide economic information to the owners to judge the management on its
stewardship of the resources of the enterprise and the achievements of the corporate
objectives.
 To provide information which enables the investors to compare the performance with
similar other undertakings and take appropriate decisions regarding retention or
disinvestments of their holdings.
 To provide information regarding accounting policies and contingent liabilities of the
enterprise as these have a barring in predicting, comparing and evaluating the earning
power of the enterprise.

FUNCTIONS OF FINANCIAL ACCOUNTING:

 Keeping systematic records

 Protecting the properties of the business
 Communicating the results to the stake holders of the business
 Meeting the legal requirements.

LIMITATIONS OF FINANCIAL ACCOUNTING:

 Only transactions which can be measured in terms of money can be recorded in the
books of accounts. Events however important they may be to the business do not find a
place in the accounts if they cannot be measured in terms of money.

 According to the cost concept assets are recorded at the cost at which they are acquired
and therefore ignore the changes in values of assets brought about by changing value of
money and market factors.

 There is conflict between one accounting principle and another. For example, current
assets are valued on the basis of cost or market price whichever less according to the
principle of conservatism is. Therefore, in one year cost basis may be taken, whereas in
another year market price may be taken. This principle contravenes the principle of
consistency.

 The balance sheet is largely the result of the personal judgment of the accountant with
regard to the adoption of accounting policies and as such objectivity factor is lost.

 Financial accounting can be understood only by persons who have accounting

knowledge.

 Inter firm comparison and comparative study of two periods is not possible under this
system as required past information cannot be made available.
2) Explain the terms used in Financial Accounting. Nov/Dec 2022

Purchase day book

This book is maintained mainly to record credit purchases of goods. The term ‘goods’ refers
to all such commodities and services in which the firm normally deals. Hence, cash purchases of
goods or purchase of assets are not recorded in this book. Entries are made in this book from

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inward invoices of credit purchases. It is also known as ‘bought book’ or ‘purchase journal’ or
‘invoice book’.

Sales day book

It is also known as ‘sold book’ or ‘sales journal’. All credit sales of goods are recorded in
this book. Cash sales and credit sales of assets are not shown in this book.“Outward invoices” form
the basis for making entries in the sales and must be authenticated.

Purchase return book

It is also called as ‘returns outward book’. Goods returned to suppliers which were
originally purchased on credit are recorded in this book.

Sales return book

It is also called as ‘returns inward book’. Goods returned by customers who were originally
sold on credit are recorded in this book. Here it includes ‘credit note no’ instead of ‘debit note no.

Bills receivable book

This is maintained to keep a detailed record of all the bills receivable received by the firm.
This book provides a medium for posting bills receivable transactions.

Bills payable book

This book is maintained to keep a detailed record of all bills payables accepted by the firm.

Cash book

In most of the business concerns, the number of cash transactions will be large. Hence, a
separate cash book is maintained for recording such transactions. This keeps a record of cash
receipt and cash payment. It plays a dual role. It is a book of original entry as well as book of final
entry (ledger). There are four types of cash book.

 Simple cash book

 Two column cash book
 Three column cash book
 Petty cash book

Journal

It is a book of original entry or prime entry which records the transactions in a

chronological order.

Ledger

It is a book of main entry. It is nothing but a summary statement of all transaction relating
persons, assets or liabilities and expenses or incomes which have taken place during a period of
time showing their net effect.

Trial balance

It is a list of all balances standing on the ledger accounts and cash book of a concern. It is a
statement with debit and credit balance.

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Subsidiary books

In bigger concerns transactions are numerous so posting in journal and different ledger
account will be very difficult. So the journal is sub-divided into various subsidiary books which is
used for recording transactions of similar nature.

Transactions

Transactions are those activities of businessmen, which involve transfer of money or goods
or services between to persons or to accounts. When cash paid immediately then it is cash
transaction. When cash received or paid in future data it is credit transaction.

Goods

The term goods include all merchandise, commodities, etc, in which a trader deals in the
normal course of business. Thus, commodities bought for resale are treated as goods. E.g. For
furniture dealer, furniture is a good and for others it is a asset.

Book – keeping.

It means recording business transactions in a set of account books in a systematic or proper

manner.

Assets

According to Finny & Miller ‘Assets are future economic benefits, the rights which are
owned or controlled by an organization or individual. It is also defined as anything of value owned
by a business’.

Liabilities

According to Finny & Miller ‘Liabilities are debits, they are amounts owned to creditors,
theses the claims of those who are not owners are called liabilities’. In simple it is a ‘debt repayable
to outsiders by the businesses.

Capital

It represents owners fund invested in a business. It may be original amount invested by the
owner or original contribution adjusted for profits and drawings. It is also known as ‘owners’
equity’ or ‘net worth’.

Revenue

It is defined as the inflow of assets which result in an increase in the owners’ equity. It includes all
incomes like sales receipt, etc. The receipts of capital nature like additional capital, etc are not a
part of revenue.

Expenses

It is spent in order to produce and sell the goods and services which bring in the revenue.
Expenses may be defined as ‘the cost of the use of things services for the purpose of generating
revenue. It may be capital or revenue expenses.

Purchase

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 Buying of goods with the intention of resale is called purchases. If cash in paid immediately
for the purchase, it is cash purchase. If the payment is postponed, it is credit purchases.

Sales

Selling of goods in the normal course of business is termed as sales. If cash is received
immediately it is cash sales. If the payment for sale is postponed, it is credit sales.

Purchase returns

These are the goods returned by the trader to the supplier because of poor quality or defects
in the goods, supplied. It is also known as ‘return outwards’ or ‘return to suppliers’.

Sales returns

When the trader receives back goods from the customer for poor quality or defects in the
goods sold out, it will be called as ‘sales return’ or ‘return inwards’ or ‘returns from customers’.

Stock

It refers to goods lying unsold on a particular date. The stock of goods at the end of the
accounting period is called ‘closing stock’ and the stock at the beginning of an accounting period is
called ‘opening stock’.

Debtors

A person who receives a benefit without giving money or money’s worth immediately, but
liable to pay in future is a debtor. Debtor can be a ‘trade debtor’ if he buys goods on credit, others
are non-trade debtors.

Creditors

A person who gives a benefit without receiving money or money’s worth immediately but,
liable to claim in future is a creditor. Creditor can be ‘trade creditor’ if he supplies goods on credit.
Others are non-trade creditors.

Drawings

Any amount of money or money’s worth withdrawn by the owners of the business is termed
as drawings. It is usually subtracted from capital.

Equity or net worth - It is also known as capital.

Turnover - It is also called as ‘sales’.

Work – In progress - It is a value of semi or partly finished goods at the time of preparation of
cost sheet.

3) Explain the classification of accounting.

Accounting broadly classified two types are,

 Personal Accounts
 Impersonal Accounts – Real Account, Nominal Account

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 i. Personal Account

Account of personal with which the business has dealings is known as personal accounts. A
separate account is prepared for each person.

Natural Persons: The name of an individual, customer or suppliers, etc, both males and
females are included in it.

Artificial persons or legal bodies: Firms account, limited companies, educational

institutions, bank account, co-operative society, etc, are known an artificial person’s account.

Representative Personal Accounts: All accounts representing outstanding expenses and

accrued or prepaid incomes are representative personal accounts e.g. prepaid insurance,
outstanding wages, etc., when a person starts a business he is called proprietor. These proprietors
are represented by capital account for all that he investor in business and by drawings account for
all that which he withdrawn from business. So, capital account and drawings account are also
personal accounts.

ii. Real accounts

Accounts in which the business records the real things owned by it i.e., assets of the
business are known as real accounts. It is of two types, tangible and intangible real accounts. The
assets which can be touched and felt and they have no physical shape e.g trademark, goodwill etc.,
are intangible real accounts.

iii. Nominal accounts

It relates to the items which exist in name only. Accounts which record expenses, losses,
incomes and gains of the business are known as nominal accounts. E.g. rent account, postage
account, etc.

The double entry system of book-keeping is a scientific and complete system. Hence the
transactions should be recorded according to the following:

Personal Accounts

“Debit the receiver, Credit the giver”.

Real Accounts

“Debit what comes, Credit what goes out”

Nominal Accounts

“Debit all expenses and losses, Credit all incomes and gains”.

These are the rules for making entries under double entry system.

4) Explain the concepts of accounting.

Evaluate the Generally Accepted Accounting Conventions.

Explain the Importance of Various Accounting Concepts & Conventions. (Jan 2022),
Nov/Dec 2022, Nov/Dec 2023

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ACCOUNTANCY PRINCIPLES (GAAP – GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES)

Accounting is the language of business and information about business is communicated

to outsiders through accounting statements. In order to make these statements easily understandable
and meaningful, it is necessary that accounting should be based on certain uniform scientifically
laid down norms, which are called as accounting principles. The accounting principles are rules of
action or a body of doctrine universally adopted while recording the business transactions.
Adopting uniform principles in recording the transactions will ensure uniformity, clarity and
understanding. If accounting is to serve its purpose more effectively, it should be based on certain
uniform and scientifically laid down principles or postulates also termed as accounting standards.
The accounting principles can be classified into two categories: (1) Accounting Concepts and (2)
Accounting Conventions.

Basic features of accounting principles

The general acceptance of an accounting principle depends on how well it meets the following
criteria:
1. Usefulness or Relevance: A principle is said to be useful if it results in information that
is meaningful and useful to its users.
2. Objectivity: A principle is said to be objective if it results in information, which is not
influenced, by the personal bias or judgment of those who furnish it. Objectivity means
reliability, trustworthiness and verifiability of accounting system.
3. Feasibility: A principle is said to be feasible if it can be implemented without undue
complexity or cost. Thus, the time, labour and cost of generating accounting data should
not exceed its probable use and resulting benefits.

ACCOUNTING CONCEPTS – MEANING AND SIGNIFICANCE

Accounting concepts are those basic assumptions or conditions upon which the accounting
system is based. Some of the important accounting concepts are as follows:
Business Entity Concept: As per this concept, business is treated as a separate entity or unit
distinct from that of the proprietor. The significance of this concept is that without such a
distinction the affairs of the business will be mixed up with the private affairs of the proprietor and
the true picture of the business will not be available. The transactions between the proprietor and
the business will be recorded in the business books separately and shown separately under the
heading ‘capital account’.
Going Concern Concept: As per this concept it is assumed that a business unit has a perpetual
succession or continued existence and transactions are recorded from this point of view. Hence,
while valuing the business assets, the accountant does not take into account the realizable or market
values of the assets. Assets are valued at cost at which they were originally purchased less
depreciation till date, which is calculated on the basis of the original cost only.
Dual Aspect Concept: Each business transaction has two aspects, i.e., the receiving of a benefit
[debit] and giving of a benefit [credit]. As each transaction has giving account and receiving

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account equally, the total assets of a business firm will always be equal to its total equities [i.e.,
liabilities]. That is
External liabilities + Capital = Total Assets
Total Liabilities = Total Assets
This is called the Accounting or Balance Sheet equation.
Cost Concept: This concept is based on the ‘going concern concept’. According to this concept,
assets purchased are normally entered in the accounting books at the cost at which they are
purchased and this cost is the basis for all subsequent accounting for asset. The market value is
immaterial for accounting purpose since the business is not going to be liquidated but is to be
continued for a long time to come. This concept also prevents arbitrary values being used for
recording purposes, mainly those resulting in the acquisition of assets.
Money Measurement Concept: According to this concept, accounting records only those
transactions, which can be expressed in terms of money. Events or transactions, which cannot be
expressed in terms of money cannot find place in the books, however important they may be..
Realization Concept: According to this concept, the revenue is recognized only when the sale
is made. But the sale is a gradual process, which starts with the purchase of raw materials for
production and ends with the sale. If no sale is effected, no revenue is recognized. This is important
to stop business firms from inflating their profits. However, there are certain exceptions to this
concept like hire purchase sale, or contract etc.
Accrual Concept: This concept is based on the economic premise that all transactions are
settled in cash but even if cash settlement has not yet taken place, it is proper to bring the
transaction or event concerned into the books. Expenditure incurred during the year but not paid
and Income earned but not received is called as accrued items. According to this concept these
items will be taken into consideration while arriving at profit or loss. This concept enables to define
income and expense.
Matching Concept: The matching concept provides the guidelines as to how the expense be
matched with revenues. In other words, costs are reported as expenses in the period in which the
associated revenue is reported. Note that costs are matched with revenues, not the other way round.
The expense shown in an income statement must refer to the same accounting period, production
units, division or department of business unit to which revenue refers.

ACCOUNTING CONVENTIONS – MEANING AND SIGNIFICANCE

Accounting conventions are those customs, usage and traditions that are being followed by the
accountants for along time while preparing the accounting statement.
The most important conventions are conservatism, consistency, and material disclosure.
Convention of Conservatism: According to this convention, financial statements are usually
drawn up on a conservative basis. While preparing accounts and statements, the accountants are
expected not to take into account ‘anticipated profits’ but to provide for all possible ‘anticipated
losses.’
Convention of Consistency: According to this convention, accounting practices should remain
unchanged for a fairly long time. And they should not be changed unless it becomes absolutely
essential to change them. The aim of this convention is to provide for continuity in accounting

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practices and methods and enable meaningful comparison of accounting statements over a period or
between different firms.
Convention of Material Disclosure: Apart from the legal requirements, good accounting
practice demands that all vital information should be disclosed. Accountants should report only
material information and ignore insignificant details while preparing the accounting statements. If
this is not done, the whole accounting process will become highly cumbersome and meaningless.

5) Explain the difference branches of Accounting with their Significances. Explain Briefly the
Cost Accounting Concepts.

COST ACCOUNTING

DEFINITION: According to the Institute of Cost and Works Accountants (ICWA), London,
Cost accounting is “the process of accounting for costs from the point at which expenditure is
incurred or committed to the establishment of its ultimate relationship with cost centers and cost
units. In its widest usage it embraces the preparation of statistical data, the application of cost
control methods and the ascertainment of the profitability of activities carried out or planned.”

OBJECTIVES OF COST ACCOUNTING:

 To aid in the development of long range plans by providing cost data that acts as a basis
for projecting data for planning.
 To ensure efficient cost control by communicating essential data costs at regular
intervals and thus minimize the cost of manufacturing.
 Determine cost of products or activities, which is useful in the determination of selling
price or quotation.
 To identify profitability of each product, process, department etc of the business
 To provide management with information in connection with various operational
problems by comparing the actual cost with standard cost, which reveals the
discrepancies or variances?

LIMITATIONS OF COST ACCOUNTING

Cost Accounting like other branches of accountancy is not an exact science but is an art
which was developed through theories and accounting practices based on reasoning and
commonsense. These practices are dynamic and evolving. Hence, it lacks a uniform procedure
applicable to all the industries across. It has to be customized for each industry, company etc.

6) Explain Briefly the Management Accounting Concepts.

DEFINITION: According to M.A.Sahaf Management Accounting is “a system for gathering,

summarizing, reporting and interpreting accounting data and other financial information primarily
for the internal needs of the management.

It is designed to assist internal management in the efficient formulation, execution and appraisal of
business plans.”Management Accounting covers not only the use of financial data and a part of
costing theory but extends beyond. It scope covers

 Financial accounting
 Cost accounting
 Financial statement analysis
 Budgeting

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  Inflation accounting
 Management reporting
 Quantitative techniques
 Tax accounting
 Internal audit
 Office services
FUNCTIONS OF MANAGEMENT ACCOUNTING:


To help the management in planning, forecasting and policy formulation

To help in analysis and interpretation of financial information

To help in decision making- long term as well as short term

To help in controlling and coordinating the business operations

To communicate and report the operational results to the share and stock holders of the
business.
 To motivate the employees by encouraging them to look forward
 To help the management in tax administration.
TOOLS AND TECHNIQUES OF MANAGEMENT ACCOUNTING:

 Financial planning
 Analysis of financial statements
 Cost accounting
 Standard costing
 Marginal costing
 Budgetary control
 Funds flow analysis
 Management reporting
 Statistical analysis

ADVANTAGES OF MANAGEMENT ACCOUNTING:

 It increases efficiency of business operations

 It ensures efficient regulation of business activities
 It ensures utilization of available resources and thereby increase the return on capital
employed.
 It ensures effective control of performance
 It helps in evaluating the efficiency of the company’s business policies
LIMITATIONS OF MANAGEMENT ACCOUNTING:

 It is based on historical data; as such it suffers from the drawbacks of the financial
statements.
 The application of management accounting tools and techniques requires people who
are knowledgeable in subjects such as accounting, costing, economics, taxation,
statistics, mathematics, etc.
 Though management accounting attempts to analyze both qualitative and quantitative
factors that influence a decision, the elements of intuition in managerial decision
making have not been completely eliminated.
 The installation of management accounting system is expensive and hence not suitable
for small firms.

7) Explain the Users of Financial Accounts.

What is Nature of Accounting? In What ways accounting information is Useful to

creditors, Investors and Employees of a business Enterprise?

There are primarily two types of users of accounting information;

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Internal users (primary users) – If a user of the information is part of the business itself then
he/she is considered as one of the internal or primary users of accounting information.

For example, management, owners, employees, etc. The branch of accounting which deals with
internal users is called management accounting.

External users (secondary users) – If a user of the information is an external party and is not
related to the business then he/she is considered as one of the external or secondary users of
accounting information.

For example, potential investors, lenders, vendors, customers, legal and tax authorities, etc.

Following are the primary users of accounting information:

 Management – Organization’s internal management includes all junior and senior business
managers.

They use it for

1. Budgeting, forecasting, analysis & take important financial decisions.

2. Investment decisions, identification of warning and opportunity signals.

3. Taking informed & evaluated decisions.

4. Compliance with all statutory, regulatory, and any other external body.

 Owners/Partners – Owners are the legal stakeholders of the business and the ultimate signing
authority.

They use it for

1. Tracking their investment and monitoring their return on investment.

2. Observing their capital invested and evaluating its upward or downward move.

3. Keeping an eye on the overall well-being of the business.

 Employees – Full-time & part-time workers. They are essentially on the company’s payroll.

They use it for

1. Checking the overall financial health of the company as it affects their remuneration and job

15
security.

2. Decision making in case of shares based payment such as ESOPs offered by the employers.

3. Examining if the employer is depositing all required funds to the appropriate authorities such
as the provident fund, 401(k), etc.

Following are the secondary users of accounting information:

 Investors – They may be current investors, minority stakeholder, potential future investors, etc.

They use it for

1. Checking how the management is utilizing the equity invested in the business.

2. Decisions related to an increase in investment or to divest from the business.

3. Analyzing their present investment in the business or the overall financial health in case of a
potential investor.

 Lenders – Banks and Non-banking financial companies which provide loans in the form of
cash or credit are termed as lenders.

They use it for

1. Evaluation of short-term and long-term financial stability of a business.

2. An insight into the liquidity, profitability, etc. with the help of ratio analysis

3. Assessment of the creditworthiness with the help of financial ratios and scrutiny of the three
main financial statements in accounting.

 Regulatory and Tax Authorities – Regulatory bodies such as the stock exchange &
authorities include the govt. along with various statutory and tax departments.

They use it for

1. To keep a check and ensure that the firm is following all required accounting
principles,standards, rules & regulations.

16
2. The ultimate intent is to protect business integrity & safeguard investors.

3. Tax department as one of the users of accounting information assures accurate tax calculation
by the companies.

 Customers – Are buyers of goods or services and may exist at any stage of a business cycle.
They may be producers, manufacturers, retailers, etc.

They use it for

1. Checking the continuous inflow of stock and the pace of overall production.

2. Assessing the financial position of its suppliers which is essential to maintain a stable source
of supply.

 Suppliers – Are the sellers of goods and services.

They use it for

1. Inspecting the credibility of their customers by evaluating their repayment ability.

2. Setting up a credit limit & payment terms with their customers.

 Public – The general public is also among users of accounting information. They are keen to
know the financial health of a business to get a fair idea of the firm’s niche market, business
environment, and economic atmosphere of the country

8) DIFFERENCE BETWEEN DOUBLE ENTRY SYSTEM AND SINGLE ENTRY

SYSTEM

Double Entry Single Entry

The double aspects of a transaction
1. Only one aspect is recorded.
are recorded.

There may a debit without a

For every debit, there is a credit of
2. corresponding credit and vice
equal amount
versa.
There are personal accounts, real There are personal accounts and
3.
accounts, and nominal accounts cash accounts only

17
 It cannot be prepared, as the
A trial balance can be prepared to test
4. ledger does not contain all
the arithmetical accuracy of accounts
accounts
Trading and Profit and loss account
5. and Balance sheet can be prepared They cannot be prepared directly
directly

Actual net profit can be calculated Approximate net profit can be

6.
directly indirectly calculated
7. It involves more clerical labour It involves less clerical labour
It is an imperfect way of book
8. It is a perfect scientific system
keeping
9. Tax authorities accept this system They do not accept it as such

9) Explain briefly the Concepts of Book keeping and Accounting? Jan 2022, Nov/Dec 2023

Bookkeeping refers to the maintaining of the various sets of account books and deals with
recording routine and repetitive business transactions in a significant and orderly manner.
Assistants usually do it. On the other hand, accounting is more analytical and deals with the
designing of accounting system, forecasting, preparation of financial statements and audits, cost
analysis, income tax and interpretation of financial statements and reports for decision-making, etc.
Senior accountants normally do them. Where bookkeeping ends, accounting starts. Bookkeeping
provides necessary data for accounting in the case of big concerns. But in small concerns the same
person does both.

Books of accounts mean a set of suitably ruled account books used for recording business
transactions. The various books of accounts maintained by a business concern depend upon the
method of accounting followed by it. There are two methods, viz., conventional or traditional
method and modern or practical method of accounting. The traditional method is suitable for small
concerns, which have relatively less volume of transactions. Big concern, which have a large
volume of transactions, find the traditional method inconvenient, and therefore follow the practical
method.
Under the traditional method, a single journal for recording all business transactions and a ledger
for maintaining all accounts are kept. But under the modern method, several subsidiary books or
special journals are maintained for recording all cash and credit transactions. In addition, one
journal proper book is also kept for recording those transactions, which cannot be recorded in the
subsidiary books. And a ledger is also maintained for keeping all the accounts of the business.

Bookkeeping Accounting
Recording and categorizing financial transactions Preparing adjusting entries
Posting debits and credits Preparing financial statements
Producing and sending invoices Completing income tax returns

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Bookkeeping Accounting
Maintaining and balancing subsidiaries, general ledgers, and
Financial analysis and strategy
historical accounts
Completing payroll Tax strategy and tax planning
Recordkeeping Financial forecasting

The function of book keeping

Bookkeeping is the process of recording daily transactions in a consistent way, and is a key
component to gathering the financial information needed to run a successful business.
Bookkeeping is comprised of:
 Recording financial transactions
 Posting debits and credits
 Producing invoices
 Preparation of financial statements (balance sheet, cash flow statement, and income
statement)
 Maintaining and balancing subsidiaries, general ledgers, and historical accounts
 Completing payroll.
Maintaining a general ledger is one of the main components of bookkeeping. The general
ledger is a basic document where a bookkeeper records the amounts from sale and expense
receipts. This is referred to as posting. The more sales that are completed, the more often the
ledger is posted. A ledger can be created with specialized software, a computer spreadsheet, or
simply a lined sheet of paper.
The complexity of a bookkeeping system often depends on the size of the business and the
number of transactions completed daily, weekly, and monthly. All sales and purchases made by
your business need to be recorded in the ledger, and certain items need supporting documents.
The IRS lays out which business transactions require supporting documents on their website.
The function of accounting
Accounting is a high-level process that uses financial data compiled by a bookkeeper or
business owner to produce financial models.
The accounting process is more subjective than bookkeeping, which is largely transactional.
Accounting is comprised of:
 Preparing adjusting entries (recording expenses that have occurred but aren’t yet recorded
in the bookkeeping process)
 Reviewing company financial statements
 Analyzing costs of operations
 Completing income tax returns
 Aiding the business owner in understanding the impact of financial decisions
A key part of the accounting process is analyzing financial reports to help you make business
decisions. The result is a better understanding of actual profitability and an awareness of cash
flow in your business. Accounting turns the information from the general ledger into insights
that reveal the bigger picture of the business, and the path the company is progressing on.
Business owners will often look to accountants for help with strategic tax planning, analysing
their financial position, forecasting, and tax filing.

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UNIT II MANAGEMENT ACCOUNTING AND BOOK KEEPING

Meaning-Objectives of Management Accounting-Accounting System – Preparation of Journal,

Ledger, Cash Book and Trial Balance – Errors disclosed and not disclosed by Trial Balance –Final
Accounts - Ratio Analysis

Practical Exercise session using Tally. 1. Creating Contra, Journals, Credit and Debit Notes 2.
Preparing Trial Balance and Final Accounts

PART – A

1) Write the Meaning of Management Accounting. Nov/Dec 2022

According to M.A.Sahaf Management Accounting is “a system for gathering,

summarizing, reporting and interpreting accounting data and other financial information primarily
for the internal needs of the management. It is designed to assist internal management in the
efficient formulation, execution and appraisal of business plans.”

2) Write the Objectives of Management Accounting. Nov/Dec 2023

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problem areas
3) What is meant by accounting system?

An accounting system is a set of accounting processes with integrated procedures and

controls. The intent of an accounting system is to record business transactions, summarize those
transactions into an aggregated form, and create reports that can be used by decision makers to
monitor, analyze, and improve operations.

4) Define Journal?
A journal may be defined as the book or original or prime entry entry containing a
chronological record of the transactions from which posting is done to the ledger. The transactions
are recorded first in the journal in the order in which they occur.

5) Write the Format of Journal.

Date Particulars L.F. Debit (4) Credit (5)

(1) (2) (3) Amount Amount
Year Name of the A/C to be debited
Month Name of the A/C to be credited
Date [Narration]

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6) What is Ledger?
A ledger is a book of main entry and it contains various accounts such as personal accounts,
real accounts, and nominal accounts. It is Principal book of accounts where identical transactions
related to specific person or thing are entered. A ledger account is nothing but a summary statement
of all transactions relating persons, assets or liabilities, and expenses or incomes, which have taken
place during a period of time showing their net effect. In order to have a consolidated view of the
similar transactions, the transactions entered in the journal are transferred to the ledger accounts.
The transferring process from journal to ledger is known as posting.
7) How can a ledger be sub-divided?

 The creditors’ ledger: All accounts of creditors will be found in this ledger.
 The debtors’ ledger:It contains the accounts of those customers to whom goods are sold on
credit. It is also known as ‘customers’ ledger’ or ‘sales ledger’.
 General ledger:It contains all accounts other than debtors and creditors.

8) Format of Ledger.

Specimen Ledger Account

Dr. Name of Account Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
` `
Year To [Name Year By [Name
Month of credit Month of the debit
Date element] Date element]

9) What is Trial Balance?

When the transactions are recorded under double entry system there is a credit for every debit.
When one account is debited, another account is credited with equal amount. Therefore, it is quite
evident that the total of debit balances of the ledger accounts of given transactions will be equal to
the credit balances. If a statement is prepared with debit balances in one side/column and credit
balances on the other side/column, the totals of the two sides/columns will be equal. Such a
statement is called as ‘Trail Balance’. Or simply a trial balance may be defined as “a list of
balances standing on the ledger accounts and cashbook of a concern”.

10) What is Subsidiary Books?

Subsidiary Books are those books of original entry in which transactions of similar nature are
recorded at one place and in chronological order. In a big concern, recording of all transactions in
one Journal and posting them into various ledger accounts will be very difficult and involve a lot of
clerical work.

11) What is meant by Final Accounts?

Final Accounts refers to final statements of accounts prepared in order to ascertain and
report the results of the financial activities of a business. Having prepared the Trial balance, which
establishes the accuracy of books of accounts, the next step is to ascertain the operating results and
financial position of the business. For this purpose, the final accounts are prepared, which include
mainly the Trading and Profit and loss account, also called as Income Statement and Balance Sheet.

21
12) What is the trading account?

Trading account is an account prepared to ascertain the trading results of a business. It is

usually prepared usually by merchandising concerns which purchase goods and sell the same
during a particular accounting period. It is mainly prepared to ascertain the gross profit or gross
loss. The excess of net sales (total sales less returns) over cost of goods sold is termed as “Gross
profit”

Cost of goods sold = opening stock + Purchases + Direct expenses on purchases of good – closing
stock.

13) What is profit and loss account?

Accounting to Prof. Carter “Profit and loss account is an account into which all gains and
losses are calculated in order to ascertain the excess of gains over the losses or vice versa”. Profit
and loss account is an account which prepared to calculate the final profit or loss of the business.

All operating expenses and other non-operating income and expenditures and losses are
charged to profit and loss account to find out the net profit, operating expenses are indirect
expenses such as office and administrative expenses, selling and distribution expenses and indirect
charges.

14) List out the various assets and liabilities.

Assets are valuable resources owned by a business entity that benefit future period.

a) According to their nature assets are classified into:

 Fixed assets
 Current assets
 Liquid assets
 Tangible assets
 Intangible assets
 Fictitious assets
 Wasting assets
 Contingent assets

b) All that claims the business owner to others in called “Liabilities”.

 Fixed Liabilities
 Long-term Liabilities
 Current Liabilities
 Contingent Liabilities

15) Explain the current assets with some examples.

The assets which can be converted into cash in normal course of business i.e. less than one
year are termed as current assets. It is also known as floating assets or circulating assets.

Circulating asset is that with the help of which the owners earn profit by parting with it and
letting others to become its owner. These assets are turned over and while being turned over yields
profit or loss. E.g. stock, debtors, etc.,

22
16) What is Balance Sheet?

A balance sheet [B/S] may be defined as “a statement drawn upon a given date, generally at the end
of each accounting year, to measure the exact financial position of a business, setting forth the
various assets and liabilities of the concern at this date.”

17) What do you meant by Ratio Analysis?

Ratio analysis is an instrument for diagnosis of the financial health of an enterprise. to the
systematic use of ratios to interpret the financial statements in terms of the operating performance
and financial position of a firm. It involves comparison for a meaningful interpretation of the
financial statements.

18) What are the Limitations of Ratio Analysis? Nov/Dec 2023

1. Limited use of a single ratio: A single ratio does not convey any meaning. Ratios
are useful only when calculated in sufficient nos.
2. Lack of adequate standards: It is difficult to set ideal ratios for each firm/industry.
And also setting of standard ratios for all the firms in every industry is also difficult.
3. Inherent limitations of accounting: As Ratio analysis is based on financial
statements, the analysis suffers from the limitations of financial statements.
4. Change of accounting procedure: If different methods are followed by different
firms for their valuation, comparison will practically be of no use.

19) Explain Liquidity Ratios (Short Term Solvency Ratios)? Nov/Dec 2022

These Ratios measure the ability of the firm to meet its current obligations. They indicate
whether the firm has sufficient liquid resources to meet its short term liabilities. The various
liquidity ratios are:-
 Current Ratio
 Quick / Liquid / Acid-Test Ratio
 Absolute Liquid Ratio
 Debtor’s Turnover Ratio
 Average Debt Collection Period
 Stock / Inventory Turnover Ratio
20) What are profitable ratios?

These Ratios measure the profitability of a firm’s business operations. They may be related
to sales (ex- Gross Profit Ratio) or investments (ex – Return on Assets or Return on Capital
Employed)
 Gross Profit Ratio
 Net Profit Ratio
 Operating Ratio
 Return on Capital Employed (ROCE)
 Asset Turnover
 Return on Assets (ROA)
 Return on Equity (ROE)
 Earnings Per Share (EPS)

23
21) Write the formula for debt-equity ratio?

This Ratio measures the relationship between borrowed Capital to own Capital. There are
many variations to this Ratio. But, the most popular ones are:
Debt (or) Outsider’s funds
Equity Share holders’ funds
22) Assets= Equities Explain? (Jan 2022)

Equity is also referred to as net worth or Capital and shareholders equities. This equity
becomes an assets as it is something that a owner can borrow against if need.

23) What is Contra entry? Provide Example (Jan 2022).

These are transactions that are recorded between cash and bank accounts. For example, a
company withdraws cash from the bank account to meet its daily expenses and this entry is
recorded as follows: cash Account is debited while the Bank account is credited.

Part-B

1) Explain Briefly Functions and scope Management Accounting Concepts. Nov/Dec 2022

Meaning and Definition:

In ordinary language any system of accounting, which assists management in carrying out its
functions more efficiently may be termed as management accounting.
The Institute of Cost and Management Accountants, London has defined Management
Accounting as the “application of professional knowledge and skill in the preparation of accounting
information in such a way as to assist management in the formation of policies and in the planning
and control of the operations of the undertakings”.
The American Accounting Association has defined as follows: “Management Accounting is the
application of appropriate techniques and concepts in processing historical and projected economic
data of an entity to assist management in establishing plans for reasonable economic objectives in
the making of rational decisions with a view towards these objectives.”
The above definitions clearly indicate that management accounting is concerned with accounting
information, which is useful to management. The common thread underlying these definitions is
that management accounting is concerned with the efficiency of the various phases of management.
Functions of Management Accounting
The basic function of management accounting is to assist the management in performing its
functions effectively. The manner in which management accounting satisfies the requirements of
the management for arriving at appropriate business decisions may be described as follows:
1. Modification of Data: Management accounting modifies the available accounting data
by rearranging the same, by resorting to a process of classification and combination, which enable
retention of the similarities of data without eliminating the dissimilarities.
2. Analysis and Interpretation of Data: The accounting data is analyzed and interpreted
meaningfully for effective planning and decision-making. For this purpose the data is presented in a
comparative form. Analytical tools such as Comparative Financial Statements, Common-size
Statements, Trend percentages, and ratio Analysis are used and likely trends are projected.
3. Facilitating Management Control: Management accounting enables all accounting
efforts to be directed towards the attainment of goals efficiently by controlling the operations of the

24
company more effectively. Standards of performance and measure of variation there from are the
essential elements of any control system.
4. Use of Qualitative Information: Mere financial data and its analysis and interpretation
are not sufficient for decision-making purposes. The management may need qualitative
information, which cannot be readily converted into monetary terms. Management accounting does
not restrict itself to financial data alone for helping management; it also uses such [qualitative]
information.
5. Satisfaction of Information Needs of different levels of management: Different levels
of management such as top level, middle level, and lower level managements need different types
of information. The top management needs concise information covering the entire field of
business activities at relatively long intervals. The middle level management requires technical data
regularly, and the lower level management is interested in detailed figures relating to the particular
sphere of activity at short intervals.
Scope of Management Accounting
The main concern of management accounting is to provide necessary quantitative and qualitative
information to the management for planning and control. For this purpose it draws out information
from accounting as well as non-accounting sources. Hence, its scope is quite vast and it includes
within its fold almost all aspects of business operations. However, the following areas may rightly
be pointed out as lying within the scope of management accounting.
 Financial Accounting: The major function of management accounting is the
rearrangement or modification of data. Financial accounting provides the very
basis for such a function. Hence, management accounting cannot obtain full control
and coordination of operations without a well-designed financial accounting
system.
 Cost Accounting: Planning, decision-making and control are the basic managerial
functions. The cost accounting system provides necessary tools such as standard
costing, budgetary control, inventory control, marginal costing, and differential
costing etc., for carrying out such function efficiently. Hence, cost accounting is
considered a necessary adjunct of management accounting.
 Revaluation Accounting: Revaluation or replacement value accounting is mainly
concerned with ensuring that capital is maintained in real terms and profit is
calculated on this basis.
 Statistical Methods: Statistical tools such as graph, charts, diagrams and index
numbers etc., make the information more impressive and comprehensive. Other
tools such as time series, regression analysis, sampling techniques etc., are highly
useful for planning and forecasting.
 Operations Research: Modern managements are faced with highly complicated
business problems in their decision-making processes. O P techniques like linear
programming, queuing theory, decision theory, etc., enable management to find
scientific solutions for the business problems.
 Taxation: This includes computation of income tax as per tax laws and
regulations, filing of returns and making tax payment. In recent times, it also
includes tax planning.

25
  Organization and Methods [O & M]: O & M deals with organizations reducing
cost and improving the efficiency of accounting, as also of office systems,
procedures, and operations etc.
 Office Services: This includes maintenance of proper data processing other office
management services, communication and best use of latest mechanical devices.
 Law: Most of the management decisions have to be taken in a level environment
where the requirements of a number of statutory provisions or regulations are to be
fulfilled. Some of the Acts, which have their influence on management decisions,
are as follows: The Companies Act, MRTP Act, FEMA, SEBI Regulations, etc.
 Internal Audit: This includes the development of a suitable system of internal
audit for internal control.
 Internal Reporting: This includes the preparation of quarterly, half yearly, and
other interim reports and income statements, cash flow and funds flow statements,
scarp reports, etc.
2) Difference between Management Accounting and Financial Accounting? Nov/Dec
2022
There is close relationship between management accounting and financial accounting.
Management accounting draws out a part of the information from the financial accounting and
modifies the same for the managerial use. Despite such close relationship between these two, there
are certain fundamental differences, which are as follows:
Objective: The main objective of management accounting is to assist management in its task of
planning and control. It is so designed as to provide information mainly for internal use by
management. Financial accounting is designed to supply information through financial statements
to external parties like shareholders, creditors, debenture holders, banks, regulatory bodies, etc.
Thus management accounting is primarily an internal reporting system and financial accounting is
external reporting systems.
Subject matter: Financial accounting deals with the overall performance or position of the
business. On the other hand, management accounting deals with the details of the various divisions,
departments, products, types of inventory or other sub-divisions of the enterprise. Its reports are
mainly concerned with the profitability or performance of each of the divisions or departments. In
short, it provides detailed analytical data for managerial use.
Nature of data used: Financial accounting is concerned with the monetary records of past
events, whereas management accounting is concerned with future information. In other words,
financial accounting makes use data, which is historical, quantitative, monetary, and objective,
while management accounting uses data, which is descriptive, qualitative, statistical, and subjective
and relates to the future.
Periodicity of Reporting: The period of reporting is longer in financial accounting when
compared to management accounting. Normally financial statements are prepared at the end of the
accounting year. But the management requires information at frequent intervals. Hence, greater
emphasis is laid in management accounting on furnishing information quickly at short intervals.
Precision: As the information is meant for interval use, there is less emphasis on precision in the
case of management accounting. But external parties mean the information provided in financial
accounting for use, and therefore, it has to be more precise, as compared to management
accounting.

26
 Elements of Compulsion: Financial accounting has more or less become compulsory or
statutory for every business. But a business is free to install or not to install a system of
management accounting.
Flexibility: The above points of distinctions show that management accounting is highly
flexible or less rigid in approach as compared to financial accounting.

3) Difference between Management Accounting and Cost Accounting?

Cost accounting is not merely a tool for cost ascertainment and cost recording; it is also a good
tool for cost control and ascertainment of profitability and for management decision-making. That
is why most of the cost accounting concepts are used in management accounting for assisting the
management. Although there appeared to be overlapping between cost and management
accounting, the following distinctions between the two may be listed.
Cost accounting is mostly concerned with cost ascertainment and cost control and employs tools
like budgetary control, standard costing and responsibility accounting, etc., for such purposes.
Management accounting is concerned with all such matters in a wider perspective, which
would go to assist the management in the formulation of policies, improvement of productivity and
profitability and in guiding the management on the point of finance in the day-to-day operations.
Cost accounting deals primarily with cost data, while management accounting involves
considerations of both cost and revenue.
Management accounting is an all inclusive accounting information system, which covers
financial accounting, cost accounting and all aspects of business finance. But it is not a substitute
for other accounting functions.

4) Briefly explain the advantages, objectives and disadvantages of Management Accounting

There are many objectives of but the prime objective is to assist the management team of an
organization in improving the quality of their decisions. Purpose of management accounting is to help
the managerial team with financial information so that they can execute business operations and
activities more efficiently. Following is the list of all benefits of management accounting –

1. Decision Making
2. Planning
3. Controlling business operations
4. Organizing
5. Understanding financial data
6. Identifying business problem areas
7. Strategic Management

Decision Making
This is the most important benefit of the process of management accounting. In fact, it is the main
purpose of it. In this form of accounting, we use techniques from all fields like costing, economics,
statistics, etc. It provides us with charts, tables, forecasts and various such analyses that makes the
process of decision making easier and more justified.

27
Planning

Managerial accounting does not have any strict timelines like financial accounting. It is, in fact, a
continuous and ongoing process. So financial and other information is presented to the management at
regular intervals like weekly, monthly or sometimes even daily. Hence managers can use this analysis
and data to plan the activities of the organization. For example, if the recent data shows a dip in the
sales for a certain region, then the sales manager can advise his team and plan some action to rectify
the situation.

Identifying Business Problem Areas

If some product is not performing well, or some department is running into unexpected losses, etc.
managerial accounting can help us identify the underlying cause. Actually, if the management is
diligent and their data and reports are frequent, they can identify the problem very early on. This will
allow the management to get ahead of the problem.

Limitations of Management Accounting

 Data based on Financial accounting – Decisions taken by the management team are based on
the data provided by Financial Accounting.
 Less knowledge – Management has insufficient knowledge of economics, finance, statistics,
etc.
 Outdated data – Management team receives historical data, which may change eventually
when management is taking the decisions.
 Expensive – Setting up a management accounting system requires a lot of investment.

5) Explain in detail about the Accounting System?

An accounting system is a set of accounting processes with integrated procedures and controls.
The intent of an accounting system is to record business transactions, summarize those
transactions into an aggregated form, and create reports that can be used by decision makers to
monitor, analyze, and improve operations.

An accounting system allows a business to keep track of all types of financial transactions,
including purchases (expenses), sales (invoices and income),liabilities (funding, accounts
payable), etc. and is capable of generating comprehensive statistical reports that provide
management or interested parties with a clear set of data to aid in the decision-making process.

Today, the system used by a company is generally automated and computer-based, using
specialized software and/or cloud-based services. However, historically, accounting systems
were a complex series of manual calculations and balances.

What an accounting system manages

1. Expenses: The amount of cash that flows out of the company in exchange for goods or
services from another person or company are the expenses. In older accounting software or
with a manual system such as Excel, it is necessary to manually enter, balance, and
categories each expense. An automatic accounting system allows quick entry, categorization
and automatic balance of expenses.

28
 2. Invoices: Creating a professional looking invoice is an important part of developing a
positive brand image and building confidence with customers. Today, some accounting
systems such as Debtor allow for instant invoice creation with the ability to customize and
automatically keep track of paid invoices and income.
3. Funding: All the business liabilities, whether accounts payable, bank loans taken to support
the business, or mortgages, etc. An accounting system keeps track of these liabilities as
payable values and automatically updates the balances as soon a payment is made and
accounts are settled.

Accounting Systems in History

The earliest known accounting records were found in the Middle East and date back over 7,000
years! It was important for early rulers, businesses, and individuals to be able to keep track of
income and expenditure, whether due to a desire to determine whether a particular activity was
profitable, to tax citizens or to impose customs fees.

In the late 1400s, the Italian friar Luca Pacioli earned his accreditation as the 'Father of
Accounting', for describing the structure of the double-entry bookkeeping system used by
Venetian merchants during the Italian Renaissance, which has served as the direct predecessor
of modern accounting practices. He is perhaps best known for stating the Golden Rule of
Accounting:

Modern accounting systems

Jumping ahead to 1880, the first accounting machine was invented by a man named Herman
Hollerith. Known as the tabulating machine, it used punch cards to add numbers to a card that
could then use to determine the total. Hollerith also founded a company that later merged to
become a component of IBM. In the 20th century, developments in computer technology and
especially the introduction of the PC meant that it was possible for "ordinary people" to gain
access to a definite system. That is: an accounting system that does it all. From the first DOS-
based accounting systems such as to today's Internet-based accounting systems such as Debtor,
which uses SaaS (or cloud computing), all serve as models for the distribution of accounting
systems.

How Does Accounting Differ from Bookkeeping

Bookkeeping refers to the maintaining of the various sets of account books and deals
with recording routine and repetitive business transactions in a significant and orderly manner.
Assistants usually do it. On the other hand, accounting is more analytical and deals with the
designing of accounting system, forecasting, preparation of financial statements and audits, cost
analysis, income tax and interpretation of financial statements and reports for decision-making, etc.
Senior accountants normally do them. Where bookkeeping ends, accounting starts. Bookkeeping
provides necessary data for accounting in the case of big concerns. But in small concerns the same
person does both.
Books of accounts
Books of accounts mean a set of suitably ruled account books used for recording business
transactions. The various books of accounts maintained by a business concern depend upon the
method of accounting followed by it. There are two methods, viz., conventional or traditional
method and modern or practical method of accounting. The traditional method is suitable for small
concerns, which have relatively less volume of transactions. Big concern, which have a large
volume of transactions, find the traditional method inconvenient, and therefore follow the practical
method.

29
Under the traditional method, a single journal for recording all business transactions and a ledger
for maintaining all accounts are kept. But under the modern method, several subsidiary books or
special journals are maintained for recording all cash and credit transactions. In addition, one
journal proper book is also kept for recording those transactions, which cannot be recorded in the
subsidiary books. And a ledger is also maintained for keeping all the accounts of the business.

6) Explain the concepts Journal, Ledger and Trial balance and its procedure & examples?
Nov/Dec 2022, Nov/Dec 2023

JOURNAL:
A journal may be defined as the book or original or prime entry containing a chronological
record of the transactions from which posting is done to the ledger. The transactions are recorded
first in the journal in the order in which they occur. The prescribed format of a journal is shown
below.
FORMAT: Journal
Date Particulars L.F. Debit (4) Credit (5)
(1) (2) (3) Amount Amount
Year Name of the A/C to be debited
Month Name of the A/C to be credited
Date [Narration]

Explanation
1. Date: The date on which the transaction takes place is entered here.
2. Particulars: The name of the account to be debited is written in the first line and
abbreviation ‘Dr’ is written against it. In the second line, the account to be credited is
written preceded by the word ‘To’. An explanation of the entry known as ‘narrration’ is
also given within bracket explaining briefly about the transactions.
3. L.F: Stands for Ledger Folio, which means the page number in the ledger in which the
entry is posted.
4. Debit: In this column the amount to be debited against the ‘dr’ account is entered.
5. Credit: In this column, the amount to be credited against the ‘cr’ account is entered.

The Procedure for Journalizing

From the given business transaction, the receiving aspect and the giving aspect should be
identified. Depending upon the nature of account that is affected by the transaction, the rule for
journalizing should be selected as follows:

Nature of account Rule for debiting an account Rule for crediting an account
Personal Account Debit the Receiver a/c Credit the Giver a/c
Real Account Debit what comes in Credit what goes out
Nominal Account Debit all expenses and losses Credit all incomes and gains
These rules may be used either jointly or separately for journalizing each and every transaction.
The examples given below would explain the same.
Example:

30
 Transaction 1: 1-1-2002 Vignesh started business with `60,000.
Journal: In this transaction, the receiving aspect is that ‘cash’ is received by the business, which
is distinct from Vignesh’s private or personal property and the giving aspect is that Vignesh is the
giver. Proprietor’s personal account is represented by Capital a/c.
The journal entry in the business books is a follows:

L.F. Debit Credit

Date Particulars
` `
1-1-2002 Cash a/c dr. 60,000
To Vignesh’s Capital a/c 60,000
[Being capital brought in]
Debit what comes in, here cash comes in, hence cash a/c is debited. Proprietor is the giver;
hence, capital a/c is credited. A short explanation to explain the entry is given within brackets by
way of narration. Note that separate rules are used for debiting and crediting the accounts. Real
account rule is used for making the debit entry and personal account rule for making credit entry.

LEDGER- BOOK OF FINAL ENTRY

A ledger is a book of main entry and it contains various accounts such as personal accounts, real
accounts, and nominal accounts. It is Principal book of accounts where identical transactions
related to specific person or thing are entered. A ledger account is nothing but a summary statement
of all transactions relating persons, assets or liabilities, and expenses or incomes, which have taken
place during a period of time showing their net effect. In order to have a consolidated view of the
similar transactions, the transactions entered in the journal are transferred to the ledger accounts.
The transferring process from journal to ledger is known as posting.

Specimen Ledger Account

Dr. Name of Account Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
` `
Year Month To [Name Year By [Name
Date of credit Month of the debit
element] Date element]

This is the standard form of ledger account, which is in “T” form. It is widely used. Each
account in the ledger is divided into two equal parts. The left hand side is the debit side [Dr.] and
the right hand side is the credit side [Cr.]. Each of the two sides is further divided into four columns
for recording the date of the transactions, the name of the account to be debited or credited, folio,
and the amount of the transaction. J.F. stands for journal folio i.e., the page number in the journal or
subsidiary book from where the posting to the account is made.
Running Balance Form of Ledger Account. This form has six columns, vic., (1) Date; (2)
Particulars; (3) J.F.; (4) Dr. Amount [`]; (5) Cr. Amount [`]; and (6) Balance. Commercial banks
and some business houses use this type of ledger.

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 Example 1 Journalize the following transactions, post them in the ledger and balance the
accounts as on 31st December 2001. Nov/Dec 2022, Nov/Dec 2023

December 1 Rashmi started business with a capital of `50,000

2 She purchased furniture for `5,000
3 Bought goods on credit from Vinod for `8,000
14 Sold goods to Suresh for `5,000
15 Received cash from Suresh `3,000
18 Purchased goods for cash `12,000
27 Sold goods for cash `8,000
28 Paid rent `1,200
31 Paid Vinod`3,000 on account

Solution:

Journal of Rashmi
Date Particulars J.F. Dr. [`] Cr. [`]
2001 Cash a/c Dr. 50,000
Dec. 1 To Rashmi capital a/c 50,000
[Being capital introduced]
2 Furniture a/c Dr. 5,000
To Cash a/c 5,000
[Being furniture purchased]
3 Purchases a/c Dr. 8,000
To Vinod a/c 8,000
[Being credit purchases]
14 Suresh a/c Dr. 5,000
To Sales a/c 5,000
[Being credit sales]
15 Cash a/c Dr. 3,000
To Suresh a/c 3,000
[Being cash received]
18 Purchases a/c Dr. 12,000
To Cash a/c 12,000
[Being cash purchases]
27 Cash a/c Dr. 8,000
To Sales a/c 8,000
[Being cash sales]
28 Rent a/c Dr. 1,200
To Cash a/c 1,200
[Being rent paid]

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 Date Particulars J.F. Dr. [`] Cr. [`]
31 Vinod a/c Dr. 3,000
To Cash a/c 3,000
[Being cash paid]

Ledger of Rashmi
Dr. Cash a/c Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2001 2001
Dec. To Capital a/c 50,000 Dec. By Furniture a/c 5,000
1 To Suresh a/c 3,000 2 By Purchase a/c 12,000
15 To Sales a/c 8,000 18 By Rent a/c 1,200
25 28 By Vinod a/c 3,000
31 By balance c/d 39,800
31
61,000 61,000
1-1-2002 To balance b/d 39,800
Dr. Rashmis Capital a/c Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2001 To balance c/d 50,000 2001 By Cash a/c 50,000
Dec. Dec. 1
31
50,000 50,000
1-1-2002 By balance b/d 50,000

Dr. Furniture a/c Cr.

Date Particulars J.F ` Date Particulars J.F `
2001 To Cash a/c 50,000 2001 By balance c/d 50,000
Dec. 2 Dec. 31

50,000 50,000
1-1-2002 To balance b/d 50,000

Dr. Purchase a/c Cr.

Date Particulars J.F. ` Date Particulars J.F. `
2001 Dec. 2 To Vinod a/c 8,000 2001 By balance c/d 20,000
To Cash a/c 12,000 Dec. 31

20,000 50,000
1-1-2002 To balance b/d 50,000

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Dr. Sales a/c Cr.
J. J.
Date Particulars ` Date Particulars `
F. F.
2001 Dec. 31 To balance c/d 13,000 2001 Dec. 1 By Suresh a/c 5,000
By Cash a/c 8,000

13,000 13,000
1-1-2002 By balance b/d 13,000

Dr. Vinod a/c Cr.

Date Particulars J.F. ` Date Particulars J.F. `
2001 Dec. 31 To Cash 3,000 2001 Dec. 1 By Purchase a/c 8,000
To balance c/d 5,000
8,000 8,000
1-1-2002 By balance b/d 5,000

Dr. Suresh a/c Cr.

Date Particulars J.F. ` Date Particulars J.F. `
2001 Dec. 14 To Sales a/c 5,000 2001 Dec. 15 By Cash a/c 3,000
31 By balance c/d 2,000
5,000 5,000
1-1-2002 To balance b/d 5,000

Dr. Rent a/c Cr.

Amount Amount
Date Particulars J.F. Date Particulars J.F.
` `
2001 Dec. 28 To Cash a/c 1,200 2001 Dec. 31 By balance c/d 1,200

1,200 1,200
1-1-2002 To balance a/c 1,200

TRAIL BALANCE
When the transactions are recorded under double entry system there is a credit for every debit.
When one account is debited, another account is credited with equal amount. Therefore, it is quite
evident that the total of debit balances of the ledger accounts of given transactions will be equal to
the credit balances. If a statement is prepared with debit balances in one side/column and credit
balances on the other side/column, the totals of the two sides/columns will be equal. Such a
statement is called as ‘Trail Balance’. Or simply a trial balance may be defined as “a list of
balances standing on the ledger accounts and cashbook of a concern”.
Features: The following are its main features:

34
 1. It is a tabular statement having separate sides/columns for debit balances and credit
balances.
2. Closing balances of the various ledger accounts are brought to this statement.
3. It can be prepared at any date on which accounts are closed and balanced. But it is
usually prepared at the end of the accounting year.
4. Trial balance is not an account. It is only a statement.
The important advantages of a trial balance are:
1. It presents to the businessman a consolidated list of all ledger balances.
2. It is the shortest method of verifying the arithmetical accuracy of entries made in the
ledger.
3. If the total of debit side/column is equal to the total of credit side/column, the trial
balance is said to agree. Otherwise, it is implied that some errors have been committed in
the preparation of accounts.
4. It helps in the preparation of the final accounts i.e., Trading a/c. Profit and Loss a/c and
Balance Sheet.
Methods of Preparing a Trial Balance
There are two methods of preparing a trial balance. They are: (1) Total Method and (2) Balance
Method.
Total Method: In this method, ledger accounts are not balanced. They are totaled. These totals
are entered in the debit and credit columns. The grand total of debit column will be equal to the
total of the credit column. The format of a Trial balance under this method is as follows: Trial
Balance as on ..................... [closing date]

Particulars [Name of the Dr. Total of A/c Cr. Total of A/c

L.F.
Accounts] Amount [ `] Amount [ `]

Balance Method, under this method, the closing balances of ledger accounts are tabulated in a
separate statement. The brought down balances are brought to this statement. All debit balances are
shown in the debit balances are shown in the debit column and all credit balances in the credit
column. This method is more commonly used one. The format of Trial balance under this method is
as follows:

Particulars [Name of the Debit balance Credit balance

L.F.
Accounts] Amount [ `] Amount [ `]

Important Note: All debtors’ accounts, Assets or Properties accounts, all expenses or losses
accounts will always show debit balances. They will be shown in the debit side/column of the trial
balance.
All credit balances. They will be shown in the credit side/column of the trial balance.

35
 Example 5 Prepare a trial balance using the closing balances of ledger accounts prepared
for example 1.5.
The closing balances are as follows: Cash a/c `39,800; Capital a/c
`50,000; Furniture a/c `5,000; Purchases a/c `20,000; Sales a/c
`13,000; Vinod a/c [cr.] `5,000; Suresh a/c [dr.] `2,000; and Rent
`1,200.

Solution:

Debit Credit
Particulars L.F.
balance ` balance `
Cash a/c 39,800
Capital a/c 50,000
Furniture a/c 5,000
Purchases a/c 20,000
Sales a/c 13,000
Vinod a/c 5,000
Suresh a/c 2,000
Rent a/c 1,200
Total 68,000 68,000

SUBSIDIARY BOOKS
Subsidiary Books are those books of original entry in which transactions of similar nature are
recorded at one place and in chronological order. In a big concern, recording of all transactions in
one Journal and posting them into various ledger accounts will be very difficult and involve a lot of
clerical work. This is avoided by sub-dividing the journal into various subsidiary journals or books.
The subdivisions of journal into various subsidiary journals for recording transactions of similar
nature are called as ‘Subsidiary Books’. The different subsidiary books and their purpose are shown
below:
1. Purchase Day Book – for recording credit purchase of goods only. Cash purchase or
assets purchased on credit are not entered in this book.
2. Sales Day Book – for recording credit sales of goods only. Assets sold or cash sales are
not recorded in this book.
3. Purchases Returns Book – for recording the goods returned to the suppliers when
purchased on credit.
4. Sales Returns Books – for recording goods returned by the customers when sold on
credit.
5. Bills Receivable Book – for recording the bills received [Bills Receivables] from
customers for credit sales.
6. Bills Payables Book – for recording the acceptances [Bills Payables] given to the
suppliers for credit purchases.
7. Cash Book – for all receipts and payments of cash.

36
 8. Journal Proper – for recording any transaction which could not be recorded in the
above – mentioned subsidiary books. For example, assets purchased or sold on credit and
opening entry etc., are entered in this book.

8) Explain Briefly the Final Accounts and Related Concepts.

Profit And Loss Account and Related Concepts

The starting point in understanding the profit and loss account is to be clear about the
meaning of "profit". Profit is the reward for taking risk. Profit has an important role in allocating
resources (land, labor, capital and enterprise).

Put simply, falling profits signal that resources should be taken out of that business and put
into another one; rising profits signal that resources should be moved into this business. The main
task of accounts, therefore, is to monitor and measure profits.

Profit = Revenues less Costs.

So monitoring profit also means monitoring and measuring revenues and costs. There are
two parts to this:

 Recording financial data. This is the ‘book-keeping’ part of accounting.

 Measuring the result. This is the ‘financial’ part of accounting.

Profits are ‘spent’ in three ways.

 Retained for future investment and growth

 Returned to owners
 Paid as tax

Components of Profit and Loss Account

The Profit & Loss Account aims to monitor profit. It has three parts.

The Trading Account:

This records the money in (revenue) and out (costs) of the business as a result of the
business’ ‘trading’ ice buying and selling. This might be buying raw materials and selling finished
goods; it might be buying goods wholesale and selling them retail. The figure at the end
of this section is the Gross Profit.

The Profit and Loss Account:

This starts with the Gross Profit and adds to it any further costs and revenues, including
overheads. These further costs and revenues which may be in the nature of other operating,
administrative, selling and distribution expenses. This account also includes expenses which are
from any other activities not directly related to trading (non-operating).

An example is interest on investments. Thus, profit and loss account contains all other expenses
and losses, incomes and gains of the business for the accounting year for which financial
statements are being prepared.

37
 In this process, it follows the mercantile basis of accounting (i.e., it takes into account all
paid and payable expenses, and received and receivable receipts).

The net result of profit and loss account is called as net profit. The main feature of profit
and loss account is that it takes into account all expenses and incomes that belong to the current
accounting year and excludes those expenses and incomes that belong either to the previous period
or the future period.

Introduction to the trading account:

A Trading account is a statement prepared by a firm to ascertain its trading results for the
accounting year. Just like Profit & Loss account, it is also prepared for the year ending. It takes into
account the various trading expenses (usually all direct expenses) and incomes.

FORMAT OF TRADING ACCOUNT

Trading account of ABC. Ltd for the year ending…..

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Opening stock By Closing stock

To Purchases By Sales
By Gross Loss transferred
To Direct or productive to
Wages Profit & Loss account

To wages and salaries

To Power and Fuel

To Factory rent

To Carriage inwards

To Octroi duty

To Gross profit transferred

to Profit & Loss account

TOTAL TOTAL

The format of a typical profit and loss account is as follows:

38
39
Uses of the Profit and Loss Account.

 The main use is to monitor and measure profit. This assumes that the information recording
is accurate. Significant problems can arise if the information is inaccurate, either through
incompetence or deliberate fraud.

 Once the profit (loss) has been accurately calculated, this can then be used for comparison
or judging how well the business is doing compared to itself in the past, compared to the
managers’ plans and compared to other businesses.

THE BALANCE SHEET AND RELATED CONCEPTS:

According to Howard, a Balance sheet may be defined as – ‘a statement which reports the
values owned by the enterprise and the claims of the creditors and owners against these properties’.

The Balance sheet is a statement that is prepared usually on the last day of the accounting
year, showing the financial position of the concern as on that date. It comprises of a list of assets,
liabilities and capital.

An asset is any right or thing that is owned by a business. Assets include land, buildings,
equipment and anything else a business owns that can be given a value in money terms for the
purpose of financial reporting. To acquire its assets, a business may have to obtain money from
various sources in addition to its owners (shareholders) or from retained profits.

The various amounts of money owed by a business are called its liabilities. To provide
additional information to the user, assets and liabilities are usually classified in the balance sheet
as:

Current:

Those due to be repaid (Current liabilities) or converted into cash within 12 months of the
balance sheet date.(Current Assets).

Long-term:

Those due to be repaid (Long term liabilities) or converted into cash more than 12 months
after the balance sheet date (Fixed Assets).

Fixed Assets:

A further classification other than long-term or current is also used for assets. A "fixed
asset" is an asset which is intended to be of a permanent nature and which is used by the business
to provide the capability to conduct its trade.

Examples of "tangible fixed assets" include plant & machinery, land & buildings and
motor vehicles. "Intangible fixed assets" may include goodwill, patents, trademarks and brands -
although they may only be included if they have been "acquired".
Investments in other companies which are intended to be held for the long-term can also be
shown under the fixed asset heading.
Capital:

As well as borrowing from banks and other sources, all companies receive finance from
their owners. This money is generally available for the life of the business and is normally only
repaid when the company is "wound up".

40
 To distinguish between the liabilities owed to third parties and to the business owners, the
latter is referred to as the "capital" or "equity capital" of the company.

In addition, undistributed profits are re-invested in company assets (such as stocks,

equipment and the bank balance).

Although these "retained profits" may be available for distribution to shareholders - and
may be paid out as dividends as a future date - they are added to the equity capital of the business
in arriving at the total "equity shareholders' funds".

At any time, therefore, the capital of a business is equal to the assets (usually cash) received
from the shareholders plus any profits made by the company through trading that remain
undistributed

The basic functions of a balance sheet are:

 It gives the financial position of a company on any given date

 It gives the liquidity picture of the concern
 It gives the solvency position of the concern

The basic components of a balance sheet are:

LIABILITIES ASSETS

1. Net Worth 1. Fixed assets

2. Non-current liabilities / long term 2. Intangible assets
Liabilities 3. Current assets

3. Current liabilities 4. Deferred expenditure

5. Other assets

Balance sheet of ABC Ltd as on 31st December 2005

LIABILITIES AMOUNT ASSETS AMOUNT

(Rs) (Rs)
Capital Fixed assets
Add: Net profit for the Land & Buildings
period Plant & Machinery
Further Capital Equipment
Introduced Furniture & Fixtures
Interest on capital Investments:
Less: Drawings Current assets:
Interest on drawings Sundry debtors
Closing stock
Bills / Notes receivable
Net loss for the period
Prepaid expenses
Loans
Outstanding incomes
Other long term borrowings Cash in hand

41
Sundry creditors
Cash at bank etc
Bills / Notes payable
Outstanding expenses
Incomes received in advance
etc

TOTAL LIABILITIES TOTAL ASSETS

COMMON ADJUSTMENTS AFFECTING THE PREPARATION OF BALANCE SHEET

ARE:

Income received in advance: Income received in respect of which service has not been rendered is
known as income received in advance. In order to calculate the exact profit or less made during the
year, such income should not be taken in to account while preparing profit and loss account.

Hence this amount must be deducted from the respective income account in the profit and
loss account and must be treated as a liability in the balance sheet. The adjustment entry is

Income account Dr.

To income received in advance.

Closing stock: Closing stock appears on the credit side of trading account and assets side of
balance sheet if it is given in the adjustments. If it is given in the trial balance it will appear only on
the assets side of the balance sheet. The entry passed is

Closing Stock A/c Dr.

To Trading Account.

Outstanding expenses: Outstanding expenses refer to those expenses which have become due
during the accounting period for which financial statements are being prepared, but not yet have
been paid. Such expenses if given in the adjustments should be added to the respective expenditure
account on the debit side of profit and loss account and must be shown as liabilities in the balance
sheet. If such expenses are given in the trial balance they should be recorded only on the liability
side of the balance sheet. The journal entry to be passed is

Respective Expenditure A/c Dr.

To Outstanding Expenditure

Pre-paid expenses: They are those expenses which have been paid in advance. They are also
known as un-expired expenses. If given in adjustments, they should be deducted from the
respective expenditure account on the debit side of the profit and loss account and must be shown
on the asset side of the balance sheet. If given in the trial balance, they must be shown only on the
asset side of the balance sheet. The adjustment entry is

42
 Pre-paid expenditure A/c Dr.

To Respective Expenditure

Outstanding or accrued income: This is the income which has been earned during the current
accounting year and has become due but not yet received by the firm. If given in the adjustments, it
must be added to the respective income account on the credit side of the profit and loss account and
must be shown on the assets side of the balance sheet. But if given in the trial balance, it must be
shown only on the asset side of the balance sheet. The entry is

Outstanding/Accrued Income A/c Dr.

To Respective Income

Depreciation: It is a reduction in the value of the asset due to wear and tear, lapse of time,
obsolescence, exhaustion and accident. It is charged on fixed assets of the business. If given in the
adjustments, it must be shown on the debit side of the profit and loss account and must be deducted
from the respective asset account in the balance sheet. If given in the trial balance, it must be
shown only on the debit side of the profit and loss account. The entry is

Depreciation A/c Dr.

To Respective Fixed Asset

Bad Debts: They represent that portion of credit sales (debtors) that had become bad due to the
inability of the debtor to repay the amount. It is a loss to the business and gain to the debtor. This is
a real loss to the business and as such must be deducted from the debtors before deducting any
reserves created on debtors. If given in the adjustments it must be shown on the debit side of the
profit and loss account and must be deducted from the debtors account on the asset side of the
balance sheet. If given in the trial balance this amount must be shown only in the profit and loss
account. The entry is

Bad debts A/c Dr.

To Debtor’s personal account

Provision for bad debts: This represents a provision made by the business for any potential
bad debts. It is charged to the profit and loss account debit side and must be deducted from the
debtors after deducting the bad debts if any on the asset side of the balance sheet, if given in the
adjustments. If given in the trial balance, it must be considered only in preparing the profit and loss
account. The entry is

Profit and loss A/c Dr.

To Provision for bad debts

Provision for doubtful debts: This represents a provision made by the business for any potential
doubtful debts. If given in the adjustments, it must be charged to the profit and loss account debit
side and must be deducted from the debtors after deducting the bad debts (if any) and reserve for
bad debts on the asset side of the balance sheet. If given in the trial balance, it must be considered
only in preparing the profit and loss account. The entry is

Profit and loss A/c Dr.

To Provision for doubtful debts

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Provision for doubtful debts: This represents a provision made by the business for any potential
discount to be allowed to the debtors. If given in the adjustments, it must be charged to the profit
and loss account debit side and must be deducted from the debtors after deducting the bad debts (if
any), reserve for bad debts (if any) and reserve for doubtful debts (if any) on the asset side of the
balance sheet. If given in the trial balance, it must be considered only in preparing the profit and
loss account. The entry is

Profit and loss A/c Dr.

To Provision for discount on debtors

Reserve for discount on creditors: This represents a provision made by the business for any
potential discount to be allowed by the creditors of the business. If given in the adjustments, it must
be charged to the profit and loss account credit side and must be deducted from the creditors on the
liabilities side of the balance sheet. If given in the trial balance, it must be considered only in
preparing the profit and loss account. The entry is

Reserve for discount on creditors A/c Dr

To Profit and Loss A/c

Interest on capital: This is the return the owners of the business will get for investing in the
business. Usually it is paid or added to the capital at a fixed percentage. If given in the adjustments,
it is shown on the debit side of the profit and loss account and is usually added to the capital
account on the liabilities side of the balance sheet. If given in the trial balance, it must be shown on
the debit side of profit and loss account. The entries are:

Profit and Loss A/c

To Interest on capital

Interest on capital A/c Dr

To capital A/c

Interest on Drawings: Drawings represent the withdrawals made by the owners during the
accounting year either in the form of stock, cash or withdrawal from bank for personal use. They
must be deducted from the capital account on the liabilities side of the balance sheet. Sometimes,
firms charge interest on such drawings made by the owners to discourage them from withdrawing
their investment. Usually it is levied as a fixed percentage. It is an income to the business and a loss
to the owner. Hence, if given in the adjustments, it must be shown on the credit side of the profit
and loss account and deducted from the capital in the balance sheet. If given in the trial balance, it
must be shown only in the profit and loss account. The respective entries are:

Interest on Drawings A/c Dr

To Profit and loss A/c

Interest on Drawings A/c Dr

To capital A/c

44
9) DISTINGUISH BETWEEN A TRAIL BALANCE AND BALANCE SHEET

Trial Balance Balance Sheet

1. It is a list of balances of all ledger It is a statement of assets ad

accounts; no account with a balance liabilities; only personal and real
can be left out. accounts appear here.

2. Its object is to check the arithmetical Its object is to reveal at a glance the
accuracy of the ledger balances. financial position of the business
concerns.

3. It includes the opening stock. It includes the closing stock.

4. It is prepared whenever desired or at It is usually prepared at the end of a

the end of every month or quarterly, trading period or accounting year.
half yearly, or annually.

5. It does not give information about the It gives information about the profits
net profit or net loss. and the capital balance includes the
profit.

6. It is not absolutely necessary to Preparation of balance sheet is

prepare the trail balance. It can be absolutely necessary to complete the
dispensed with. accounting process.

7. It is generally prepared without giving It cannot be prepared without making

effect to any adjustment. adjustments for outstanding and
prepayments.

8. It contains the headings ‘debit’ and It contains the headings ‘liabilities’

‘credit’. and assets’.

10) Example: From the following trial balance of Evergreen and Company, prepare the
trading and profit and loss account and balance sheet Jan 2022, Nov/Dec 2023

Trial Balance as on 31st December 1995

Particulars Debit [ `] Credit [ `]

Cash in hand 2,400

Purchases 2,40,000
st
Stock on 1 January 1995 70,000
Debtors 1,00,000
Plant and Machinery 1,20,000
Furniture 30,000

45
 Bills Receivable 40,000
Rent and Taxes 20,000
Wages 32,000
Salaries 37,600
Capital 2,00,000
Bills Payable 44,000
Creditors 48,000
Sales 4,00,000

6,92,000 6,92,000

Additional information
(a) Closing Inventory as on 31st December 1995 ` 50,000.
(b) Outstanding wages ` 5,000.
(c) Depreciation on Plant and Machinery at 10 percent and Furniture at 5 percent.

Solution:

BOOKS OF EVERGREEN AND COMPANY

Trading Account for the year ended 31st December 1995
Particulars ` Particulars `
To Opening Stock 70,000 By Sales 4,00,000
To Purchases 2,40,000 By Closing Stock 50,000
To Wages 32,000
Add Outstanding 5,000 37,000
To Gross Profit c/d 1,03,000
4,50,000 4,50,000

Profit and Loss account for the year ended 31st December 1995
Particulars ` Particulars `
To Salaries 37,600 By Gross Profit b/d 1,03,000
To Rent and Taxes 20,000
To Depreciation:
Plant & Machinery 12,000
Furniture 1,500
To Net Profit carried to 31,900
Capital a/c.
1,03,000 1,03,000

Balance Sheet as on 31st December 1995

Liabilities ` Assets `
Creditors 48,000 Cash in hand 2,400

46
 Bills Payable 44,000 Debtors 1,00,000
Outstanding 5,000 Bills Receivable 40,000
wages
Capital 2,00,000 Stock 50,000
Add Net Profit 31,900 2,31,900 Furniture 30,000
Less: Depreciation 1,500 28,500
Plant & Machinery 1,20,000
Less Depreciation 12,000 1,08,000
3,28,900 328900

11) From the following particulars, prepare Final Accounts for the year ended 31st
March 2002: (Jan 2022)
Particulars Debit [ `] Credit [ `]
Drawings 10,000
Stock on 1.4.2001 46,000
Purchases and Returns 1,50,250 600
Cash in hand 3,400
Cash at bank 22,660
Freehold Premises 38,600
Trade expenses 840
Printing and Advertising 1,640
Professional charges 280
Commission 3,300
Investments as on 1.4.2001 @ 10% 4,000
Interest on Deposits 200
Debtors and Creditors 36,000 29,000
Wages 25,000
Salaries 14,000
Capital 1,14,000
Income Tax 1,600
Discounts 6,300 4,600
Sales Returns and Sales 500 2,08,950
Bills Receivable / Bills Payable 3,200 10,000
Office Furniture 3,050
Rent rates and insurance 4,000
Bad debts provision 670
3,71,320 3,71,320
Adjustments:
(a) Provide for wages `5,000.
(b) Write off 5% depreciation of Freehold Premises and 10% on Furniture.
(c) Insurance paid in advance `200.
(d) Stock on 31.3.2002 is `52,000.

47
 (e) Charges interest on capital at 5% and on drawings `300.
(f) Further bad debts are `1,000.
(g) Provide for bad and doubtful debts at 5% on debtors.
(h) Make provision for discount on debtors and reserve for discount on creditors at 2%.
[Ans. Gross Profit `34,800; Net Profit `6,440; Balance Sheet
Total `1, 57,600]
12) Explain in detail the concept of Ratio Analysis. Nov/Dec 2023

Ratio Analysis

A ‘Ratio is defined as an arithmetical/quantitative/numerical relationship between two

numbers. Ratio analysis is a very important and age old technique of financial analysis.

Uses of Ratio Analysis:

1. It helps in managerial decision making

2. It helps in financial forecasting and planning

3. It helps in communicating the financial strength of a concern

4. It is an essential part of budgetary control and Standard costing

5. It helps an investor/prospective investor in decision making

6. It provides information to the creditors about the solvency of the firm

7. It helps the government in policy making by providing financial information about the
industry/firm etc

8. It facilitates inter-firm; intra-firm; and firm-industry comparison

Limitations of Ratio Analysis:

1) Limited use of a single ratio: A single ratio does not convey any meaning.Ratiosare
useful only when calculated in sufficient nos.

2) Lack of adequate standards: It is difficult to set ideal ratios for each firm/industry.
And also setting of standard ratios for all the firms in every industry is also difficult.

3) Inherent limitations of accounting: As Ratio analysis is based on financial

statements, the analysis suffers from the limitations of financial statements.

4) Change of accounting procedure: If different methods are followed by different

firms for their valuation, comparison will practically be of no use.

5) Window dressing: Ratios based on dressed up (manipulated) financial information

are not of much use as they show unreliable position of the firm

6) Personal bias: Different people will interpret the same ratio in different ways. Thus,
there is always the possibility that interpretation of the data may be different for
different people, and this in turn may result in many inferences for the same data,
which may be confusing.

48
7) Price level changes are not provided for in ratio analysis which may lead to a
misleading interpretation of a business operations

8) Ignorance of qualitative factors: Ratios are tools of quantitative analysis only

and normally qualitative factors which may generally influence the conclusions.

Classification of Ratios: Financial Ratios can be classified in many ways.

Differentauthors have classified the Ratios in different groups. The most common
classification is as follows:

1. Liquidity Ratios (Short Term Solvency Ratios): These Ratios measure the ability
ofthe firm to meet its current obligations. They indicate whether the firm has
sufficient liquid resources to meet its short term liabilities. The various liquidity
ratios are: -

(i) Current Ratio:This Ratio measures the ability of the firm to pay debts in theshort
term

Current Ratio = Current Assets (Ideal Ratio = 2:1)

Current Liabilities

(ii) Quick / Liquid / Acid-Test Ratio:This Ratio measures the short term debtpaying
ability of the firm

Quick / Liquid / Acid-Test Ratio = Quick Assets (Ideal Raito = 1:1)

Current Liabilities

iii) Absolute Liquid Ratio / Cash position Ratio=

Cash in hand & at Bank + Short term Marketable securities

Current Liabilities

(Ideal Ratio = 0.75:1, or even 0.50:1)

(iv) Debtor’s Turnover Ratio: This Ratio is a measure of quality of Debtors and of
the effectiveness of the collection efforts.

Debtor’s Turnover Ratio = Debtors + Bills Receivable X No. of working days

Credit sales in a year

49
 (v) Average Debt Collection Period: This Ratio measures the time taken to collect
from Debtors

Average Debt Collection Period = Average Debtors

Net Sales / 360 days

(vi) Stock / Inventory Turnover Ratio: This Ratio measures the time taken to turn
inventory into sales.

Stock / Inventory Turnover Ratio =Cost of Goods sold

Average Stock

(Where Average Stock = Opening stock + Closing Stock )

2. Solvency Ratios (Long Term): These Ratios measure the long term financial
condition of the firm. Bankers and creditors are most interested in liquidity. But
shareholders, debenture holders and financial institutions are concerned with the long-
term financial prospects. The various Solvency Ratios are:
(i) Debt-Equity Ratio: This Ratio measures the relationship between borrowed
Capital to own Capital. There are many variations to this Ratio. But, the most

popular ones’ are:

Debt (or) Outsider’s funds (Ideal Ratio = 1:1)

Equity Share holders’ funds

(ii) Proprietary Ratio: Share holders’ Funds

Total Assets

(iii) Assets to Proprietary Ratios:

(a) Fixed Assets to Proprietor’s Fund Ratio =

Fixed Assets after Depreciation (Ideal Ratio = 60% to 65%)

Shareholders’ Funds

(b) Current Assets to Proprietor’s Fund Ratio = Current Assets

Shareholders’ Funds

(iv) Interest Coverage Ratio :This Ratio measures the ability of the firm in meeting
its interest charges and thus gives the measure of protection to creditors for payment
of interest. Interest coverage ratio less than 2.0 suggest a risky situation
Interest Coverage Ratio = Profit before interest and Taxes

Interest Expense

50
3. Profitability Ratios: These Ratios measure the profitability of a firm’s business
operations. They may be related to sales (ex- Gross Profit Ratio) or investments (ex – Return
on Assets or Return on Capital Employed)

(i) Gross Profit Ratio=Gross Profit *100

Sales

(ii) Net Profit Ratio =Net Profit * 100

Sales

(iii) Operating Ratio = Cost of Goods Sold + Operating Expenses X 100

Sales

(iv) Return on Capital Employed (ROCE) : This Ratio measures the overall
profitability and efficiency of the business.

ROCE = Net Profit + Interest + Taxes X 100

Average Capital Employed

Where Capital Employed = Fixed Assets + Current Assets – Current Liabilities

(or) Shareholders’ Funds + Long Term Liabilities.

(v) Profit Margin: This Ratio gives the amount of Net Profit earned by each rupee of
revenue.

Profit Margin = Profit after Tax

Net Sales

(v) Asset Turnover: This Ratio measures the efficiency with which Assets are
utilized

Asset Turnover = Net Sales

Average Total Assets

(vi) Return on Assets (ROA):This Ratio measures the profitability from agiven
level of investment

Return on Assets (ROA) = Profit after Tax

Average Total Assets

(vii) Return on Equity (ROE) :This Ratio measures the profitability on

Shareholders’ Funds.

Return on Equity (ROE) = Profit after Tax

Average Shareholders’ Equity

51
 (viii) Earnings Per Share (EPS) :This Ratio measures the earnings on each equity
share

Earnings Per Share (EPS) = Profit after Tax

4. Activity Ratios: These Ratios indicate the number of times stock is replaced during a
year. A high Ratio indicates quick movement of stock and vice-versa. i.e, Activity Ratios
measures the efficiency of asset management. The efficient utilization of assets would be
reflected by the speed with which they are converted into sales.

(i) Stock / Inventory Turnover Ratio =Cost of Goods sold

Average stock

(Where Average Stock = Opening stock + Closing Stock )

(ii) Debtor’s Turnover Ratio =Debtors + Bills Receivable X No. of working days

Credit sales in a year

(iii) Creditor’s Turnover Ratio: This Ratio shows the no. of days taken by the firms
to pay its creditors.

Creditor’s Turnover Ratio = Creditors + Bill Payable X No of working days in a

(iv) Fixed Assets Turnover Ratio: This Ratio indicates the sales generated by every
rupee invested in Fixed Assets

Fixed Assets Turnover Ratio = Sales

Net Fixed Assets

5. Capital Structure Ratio / Capital Gearing Ratio:

This Ratio explains the relationship between Equity Shareholders’ Funds and Fixed
interest bearing funds + Preference Share Capital. If the Ratio is more than 1, the Capital
Structure is highly geared. If it is less than 1, the Capital Structure is low geared)

Capital Structure Ratio / Capital Gearing Ratio = Preference Share Capital+ Fixed
Interest Bearing Securities

Equity Shareholders’ Funds

6. Capital Market Ratios: These Ratios are usually related to the Stock Market and are
highly useful to the investors / potential investors.

(i) Price Earnings Ratio (P/E Ratio): This Ratio measures the amount investors are
willing to pay for a rupee of earnings.
Price Earnings Ratio (P/E Ratio) = Market Price per share (MPS)

Earnings per Share (EPS)

52
 (ii) Dividend Yield : This Ratio measures the current return to investors

Dividend Yield = Dividend per Share (DPS)

Market Price per share (MPS)

No of Equity Shares

13) From the following balance sheet of M/S Preethi Ltd, as on 31st March 2016,

Liabilities ` Assets `
Share Capital 5,00,000 Land and Buildings 4,00,000
6% Preference Share Capital 2,00,000 Plant and Machinery 3,80,000
Profit & Loss A/c 2,50,000 Furniture & Fixtures 1,00,000
General Reserve 1,00,000 Goodwill 1,50,000
12% Debentures 3,00,000 Stock 1,00,000
Sundry Creditors 80,000 Sundry Debtors 1,02,000
Bills Payable 1,00,000 Bills Receivable 40,000
Bank Overdraft 20,000 Cash at Bank 60,000
Marketable Securities 2,00,000
Prepaid Expense 18,000
Total 15,50,000 Total 15,50,000
Calculate, Nov/Dec 2022, Nov/Dec 2023

I. Liquidity Ratios

a) Current Ratio,

b) Quick Ratio,

c) Absolute Liquid Ratio

d) Inventory to Working capital Ratio

II. Solvency Ratios

a) Debt Equity Ratio

b) Proprietary Ratio

c) Capital Gearing Ratio

d) Solvency Ratio

e) Fixed Assets to Net worth Ratio

f) Current Assets to Net worth Ratio

g) Interest Coverage Ratio.

53
Solution:

I. Liquidity Ratios

a) Current Ratio
Current Assets 5,20,000
Current Ratio = Current Liabilities = 2,00,000 = 2.6:1

Working Notes:
 Stock + Sundry debtors + Bills receivable + Cash at bank 
Current Assets = 
 + marketable securities + Prepaid expense 

= { 1,00,000 + 1,02,000 + 40,000 + 60,000 + 2,00,000 + 18,000 }

= ` 5,20,000

Current Liabilities = Sundry creditors + Bills payable + Bank overdraft

= 80,000 + 1,00,000 + 20,000

= `2,00,000

b) Liquid or Quick Ratio

Quick Assets
= Current Liabilities

4,02,000
= 2,00,000 = 2:1

Working Notes:

Quick Assets = Current Assets – (Stock + Prepaid expense)

= 5,20,000 – ( 1,00,000+18,000)

= ` 4,02,000

c) Absolute Liquid Ratio

Cash + Marketable Securities
= Current Liabilities

60,000 + 2,00,000
= 2,00,000

2,60,000
= 2,00,000

= 1.3: 1

d) Inventory to Working Capital Ratio

54
 Stock
= Working Capital

1,00,000
= 3,20,000

= 0.31:1

Working Notes:

Working capital = Current Assets – Current Liabilities

= 5, 20,000 – 2, 00,000 = ` 3,20,000

II. Solvency Ratios

(a) Debt Equity Ratio

Total Debts (or) Outsiders Funds
=
Shareholder's Funds

5,00,000
= 10,50,000 = 0.47 : 1

Working Notes:
 12% Debentures + Sundry creditors 
Total Debts =  
 + Bills payable + Bank overdraft 

= 3,00,000 + 80,000 + 1,00,000 + 20,000

= ` 5,00,000
 Share Capital + 6% Preference Share Capital 
Shareholder’s Fund =  
 + Profit and Loss Account + General Reserve 

= 5,00,000 + 2,00,000 + 2,50,000 + 1,00,000

= ` 10,50,000

(b) Proprietary Ratio

Shareholder's Funds
= Total Tangible Assets

10,50,000
= 14,00,000

= 0.75 : 1

Working Notes:
 Share Capital + 6% Preference Share Capital +
Shareholder’s Fund =  
 Profit and Loss Account + General Reserve 

55
 = 5,00,000 + 2,00,000 + 2,50,000 + 1,00,000

= ` 10,50,000

Total Tangible Assets = Total Assets – Goodwill

= 15,50,000 -1,50,000

= ` 14,00,000

(c) Capital Gearing Ratio

Fixed Interest Bearing Funds
= Equity Shareholder's Funds

5,00,000
= 8,50,000 = 0.58 : 1Working Notes:

Fixed Interest Bearing Fund = 6% Preference Share Capital + 12% Debenture

= 2,00,000 + 3,00,000

= ` 5,00,000

14) From the data given below compute:

(a)Working Capital, (b) Net capital Employed, (c) Current Ratio, (d) Acid Test
Ratio,(e)Debt Equity Ratio (f) Fixed Assets Ratio.

CROMPTON LTD.
As on 31st December

Liabilities ` Assets `

Equity Share Capital 25,000 Fixed Assets 30,000

Preference Share Capital 5,000 Current Assets:

Reserve and Surplus 4,000 Stores 2,000

Debentures 8,000 Sundry Debtors 1,000

Bank Loans 4.000 Bank 2,500

Sundry Creditors 1,000 Cash 500

Proposed Dividend 1,000 Preliminary Expense 8,000

Provision for Taxation 2,000 Brokerage on Shares 2,000

Stock 4,000

Total 50,000 Total 50,000

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Solution:

(a) Working Capital

Working Capital = Current Assets – Current Liabilities

= 10,000 - 4,000 = `6,000

Working Notes:

Current Assets = Stores + Sundry debtors + Bank + Cash +Stock

= 2,000 + 1,000 + 2,500 + 500 + 4,000 = `10,000

 Sundry Creditors + Proposed 
Current Liabilities =  
 Dividend + Provision for Taxation 

= 1,000 + 1,000 + 2,000 = `4,000

(b) Net Capital Employed

 (Total Assets – Fictitious Assets) 
=  
 – Current Liabilities 

= (50,000 – 10,000 ) – 4,000

= 40,000 – 4,000 = ` 36,000

Working Notes:

Fictitious assets = Preliminary Expense + Brokerage on Shares

= 8,000 +2,000 = `10,000

(c) Current Ratio

Current Assets 10,000
= = = 2.5:1
Current Liabilities 4,000

(d) Acid Test Ratio

Liquid Assets 4,000
= = = 1:1
Current Liabilities 4,000

Working Notes:

Liquid Assets = Current Assets – (Stock + Stores)

= 10,000 – (4,000 + 2,000) = `4,000

(e) Debt Equity Ratio

Outsider's Funds 16,000
= Shareholder's Funds = = 0.47: 1
34,000

57
Working Notes:
 Debenture + Bank Loan + Sundry Creditors 
Outsider’s Fund =  
 + Proposed Dividend + Provision for Taxation 

= 8,000 + 4,000 + 1,000 + 1,000 + 2,000

= ` 16,000
 Equity capital + Preference 
Shareholder’s Fund =  
 capital + Reserve & Surplus 

= 25,000 +5,000 + 4,000

= ` 34,000

(f) Fixed Assets Ratio

Fixed Assets 30,000
= Long Term Funds = 46,000 = 0.65:1

Working Notes:
 Equity capital + Preference capital 
Long Term Fund =  
 + Reserve & Surplus + Debenture +Bank Loan 

= 25,000 +5,000 + 4,000 + 8,000 + 4,000

= ` 46,000

15) From the data calculate: Nov/Dec 2022,Nov/Dec 2023

(1) Gross Profit Ratio, (2) Net Profit Ratio, (3) Return on Total Assets,
(4) Inventory Turnover Ratio, (5) Working Capital Turnover Ratio, (Jan 2022)

Sale - 25,20, 000

Cost of Sales - 19,20, 000

Net Profit - 3,60, 000

Inventory - 8,00, 000

Other current Assets - 7,60, 000

Fixed Assets - 14,40, 000

Net Worth - 15,00, 000

Debt - 9,00, 000

Current Liabilities - 6,00, 000

Solution:

58
 1. Gross Profit Ratio
Gross Profit
=  100
Sales

6,00,000
=  100 = 23.81%
25,20,000

Working Notes:

Gross Profit = Sales – Cost of Sales

= 25,20,000 - 19,20,000 = `6,00,000

2. Net Profit Ratio

Net Profit
=  100
Slaes

3,60,000
=  100 = 14.28%
25,20,000

3. Return on Total Assets

Net Profit
=  100
Total Assets

3,60,000
=  100 = 12%
30,00,000

Working Notes:

Total Assets = Inventory + Other Current Assets + Fixed Assets

= 8,00,000 + 7,60,000 +14,40,000 = `30,00,000

4. Inventory Turnover Ratio

Cost of Sales 19,20,000
= = 8,00,000 = 2.4 Times
Inventory

5. Working Capital Turnover Ratio

Cost of Sales 19,20,000
= Working Capital = 9,60,000 = 2 Times

Working Notes:

Working Capital = Current Assets – Current Liabilities

Current Assets = Inventory + Other Current Assets

= 8,00,000 + 7,60,000 = 15,60,000

= 15,60,000 – 6,00,000 = ` 9,60,000

59
Jan 2022

60