Topic Video source Duration

Introduction to Accounting https://youtu.be/8gvsTN10_tA?si=D41WhAAB_w9bz2KD 22 min

Basic Accounting https://youtu.be/fNRXVAmkjDE?si=_kvf6hVmMyyEP7Q6 21 min
Concepts & Conventions
Classification of Accounts https://youtu.be/MoRuuh4k6A0?si=kOQHMpUgk4_KYT18 15 min
Preparation of Journal https://youtu.be/I3VYr8FRZs8?si=TusUCNeccBz_lgy6https://y 26 min
Entries outu.be/J7ntz3YSzY0?si=cGS6NNsM3VMBM_gH 13 min
Preparation of ledgers https://youtu.be/9r22nu4pFCA?si=UQQWx_D9aWEoL3Ir 14 min
Preparation of Trail https://youtu.be/ZWLrCvLBjls?si=ovCaLsKce-iGskIq 15 min
Balance https://youtu.be/l257BeT5WGE?si=WvHV-H_nO2nykVnN 20 min
Trial Balance https://youtu.be/ZWLrCvLBjls?si=hG7sQiY61zi93eTy 12 min
https://youtu.be/wtNWOuLsUJk?si=-LDIBuyfXmJbWlmb 06 min
https://youtu.be/EkfbWZzOQpA?si=_9eHm11baN3xHe-K 09 min
Trading Account https://youtu.be/4dG7JXdkQ34?si=9MkgXkG3RDt4s-gE 10 min
https://youtu.be/4dG7JXdkQ34?si=wiIdzUvFxkwdYux4 10 min
Profit and Loss Account https://youtu.be/Tas_k7ay32g?si=KcuNot4feMsHLHRm 12 min
https://youtu.be/GqKnrlXLdHg?si=p5LCRho2HKKDfsX9 10 min
https://youtu.be/GqKnrlXLdHg?si=p5LCRho2HKKDfsX9 06 min
Introduction to Ratio https://youtu.be/CnhU3duai-c?si=13FwXqrzZ86rYgfo 09 min
Analysis https://youtu.be/RH0N_6Y_fFs?si=jXR4tIejtIvjhUEK 12 min
Types of Ratios https://youtu.be/ToOEICRlwNg?si=C-mNNuEogmF05of0 12 min
https://youtu.be/NcFekaoE8Jw?si=jhqHtUOeZPNPBDuE 16 min
Sample Problems https://youtu.be/2AXSEsJmePU?si=bZ22x6E3GWtzPM7_ 08 min
https://youtu.be/WonF0sqz0_U?si=MkPVplbls09CMISD 13 min

Origin of Accounting in India:

Accounting was practiced in India thousand years ago and there is a clear evidence for
this. In his famous book Arthashastra, Kautilya dealt with not only politics and economics but
also the art of proper keeping of accounts. However, the accounting on modern lines was
introduced in India after 1850 with the formation joint stock companies in India.

Accounting in India is now a fast developing discipline. The two premier Accounting
Institutes in India viz., Chartered Accountants of India and the Institute of Cost and Works
Accountants of India are making continuous and substantial contributions. The international
Accounts Standards Committee (IASC) was established as on 29 th June 1973. In India the
‘Accounting Standards Board (ASB) is formulating ‘Accounting Standards’ on the lines of
standards framed by International Accounting Standards Committee.

American Institute of Certified Public Accountants (AICPA): “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.”

Thus, accounting is an art of identifying, recording, summarizing and interpreting business

transactions of financial nature. Hence accounting is the Language of Business.

FUNCTIONS OF AN ACCOUNTANT

The job of an accountant involves the following types of accounting works :

1. Designing Work : It includes the designing of the accounting system, basis for
identification and classification of financial transactions and events, forms, methods,
procedures, etc.
2. Recording Work : The financial transactions are identified, classified and recorded in
appropriate books of accounts according to principles. This is “Book Keeping”. The
recording of transactions tends to be mechanical and repetitive.
3. Summarizing Work : The recorded transactions are summarized into significant form
according to generally accepted accounting principles. The work includes the preparation
of profit and loss account, balance sheet. This phase is called ‘preparation of final
accounts’
4. Analysis and Interpretation Work: The financial statements are analysed by using
ratio analysis, break-even analysis, funds flow and cash flow analysis.
5. Reporting Work: The summarized statements along with analysis and interpretation
are communicated to the interested parties or whoever has the right to receive them. For
Ex. Share holders. In addition, the accou8nting departments has to prepare and send
regular reports so as to assist the management in decision making. This is ‘Reporting’.
6. Preparation of Budget : The management must be able to reasonably estimate the
future requirements and opportunities. As an aid to this process, the accountant has to
prepare budgets, like cash budget, capital budget, purchase budget, sales budget etc. this
is ‘Budgeting’.
7. Taxation Work : The accountant has to prepare various statements and returns
pertaining to income-tax, sales-tax, excise or customs duties etc., and file the returns with
the authorities concerned.
 8. Auditing : It involves a critical review and verification of the books of accounts
statements and reports with a view to verifying their accuracy. This is ‘Auditing’

This is what the accountant or the accounting department does. A person may be
placed in any part of Accounting Department or MIS (Management Information System)
Department or in small organization, the same person may have to attend to all this work.

ADVANTAGES FROM ACCOUNTING

The role of accounting has changed from that of a mere record keeping during the 1 st
decade of 20th century of the present stage, which it is accepted as information system and
decision making activity. The following are the advantages of accounting.

1. Provides for systematic records: Since all the financial transactions are recorded in the
books, one need not rely on memory. Any information required is readily available from
these records.
2. Facilitates the preparation of financial statements: Profit and loss accountant and
balance sheet can be easily prepared with the help of the information in the records. This
enables the trader to know the net result of business operations (i.e. profit / loss) during the
accounting period and the financial position of the business at the end of the accounting
period.
3. Provides control over assets: Book-keeping provides information regarding cash in had,
cash at bank, stock of goods, accounts receivables from various parties and the amounts
invested in various other assets. As the trader knows the values of the assets he will have
control over them.
4. Provides the required information: Interested parties such as owners, lenders, creditors
etc., get necessary information at frequent intervals.
5. Comparative study: One can compare the present performance of the organization with
that of its past. This enables the managers to draw useful conclusion and make proper
decisions.
6. Less Scope for fraud or theft: It is difficult to conceal fraud or theft etc., because of the
balancing of the books of accounts periodically. As the work is divided among many
persons, there will be check and counter check.
7. Tax matters: Properly maintained book-keeping records will help in the settlement of all
tax matters with the tax authorities.
 8. Ascertaining Value of Business: The accounting records will help in ascertaining the
correct value of the business. This helps in the event of sale or purchase of a business.
9. Documentary evidence: Accounting records can also be used as an evidence in the court
to substantiate the claim of the business. These records are based on documentary proof.
Every entry is supported by authentic vouchers. As such, Courts accept these records as
evidence.
10. Helpful to management: Accounting is useful to the management in various ways. It
enables the management to assess the achievement of its performance. The weakness of the
business can be identified and corrective measures can be applied to remove them with the
helps accounting.

BASIC ACCOUNTING CONCEPTS

Accounting is a system evolved to achieve a set of objectives. In order to achieve the goals, we
need a set of rules or guidelines. These guidelines are termed here as “BASIC ACCOUNTING
ONCEPTS”. The term concept means an idea or thought. Basic accounting concepts are the
fundamental ideas or basic assumptions underlying the theory and profit of FINANCIAL
ACCOUNTING. These concepts help in bringing about uniformity in the practice of accounting.
In accountancy following concepts are quite popular.

1. BUSINESS ENTITY CONEPT: In this concept “Business is treated as separate from the
proprietor”. All the transactions recorded in the books of Business and not in the books of
proprietor. The proprietor is also treated as a creditor for the Business.

2. GOING CONCERN CONCEPT: This concept relates with the long life of Business. The
assumption is that business will continue to exist for unlimited period unless it is dissolved due
to some reasons or the other.

3. MONEY MEASUREMENT CONCEPT: In this concept “Only those transactions are

recorded in accounting which can be expressed in terms of money, those transactions which can
not be expressed in terms of money are not recorded in the books of accounting”.

4. COST CONCEPT: According to this concept, can asset is recorded at its cost in the books of
account. i.e., the price, which is paid at the time of acquiring it. In balance sheet, these assets
appear not at cost price every year, but depreciation is deducted and they appear at the amount,
which is cost, less classification.
5. ACCOUNTING PERIOD CONCEPT: every Businessman wants to know the result of his
investment and efforts after a certain period. Usually one-year period is regarded as an ideal for
this purpose. This period is called Accounting Period. It depends on the nature of the business
and object of the proprietor of business.

6. DUAL ASCEPT CONCEPT: According to this concept “Every business transactions has
two aspects”, one is the receiving benefit aspect another one is giving benefit aspect. The
receiving benefit aspect is termed as “DEBIT”, where as the giving benefit aspect is termed as
“CREDIT”. Therefore, for every debit, there will be corresponding credit.

7. MATCHING COST CONCEPT: According to this concept “The expenses incurred during
an accounting period, e.g., if revenue is recognized on all goods sold during a period, cost of
those good sole should also be charged to that period.

8. REALISATION CONCEPT: According to this concept revenue is recognized when a sale

is made. Sale is considered to be made at the point when the property in goods posses to the
buyer and he becomes legally liable to pay.

ACCOUNTING CONVENTIONS

Accounting is based on some customs or usages. Naturally accountants here to adopt that usage
or custom. They are termed as convert conventions in accounting. The following are some of the
important accounting conventions.

1.CONSISTENCY: It means that accounting method adopted should not be changed from year
to year. It means that there should be consistent in the methods or principles followed. Or else
the results of a year Cannot be conveniently compared with that of another.

2. FULL DISCLOSURE: According to this convention accounting reports should disclose fully
and fairly the information. They purport to represent. They should be prepared honestly and
sufficiently disclose information which is if material interest to proprietors, present and potential
creditors and investors. The companies ACT, 1956 makes it compulsory to provide all the
information in the prescribed form.

3..MATERIALITY: Under this convention the trader records important factor about the
commercial activities. In the form of financial statements if any unimportant information is to be
given for the sake of clarity it will be given as footnotes.
4. CONSERVATISM: This convention warns the trader not to take unrealized income in to
account. That is why the practice of valuing stock at cost or market price, which ever is lower is
in vague. This is the policy of “playing safe”; it takes in to consideration all prospective losses
but leaves all prospective profits.

CLASSIFICATION OF BUSINESS TRANSACTIONS

All business transactions are classified into three categories:

1. Those relating to persons

2. Those relating to property(Assets)

3. Those relating to income & expenses

Thus, three classes of accounts are maintained for recording all business transactions.
They are:

1. Personal accounts

2. Real accounts

3. Nominal accounts

1.Personal Accounts :Accounts which are transactions with persons are called “Personal
Accounts”. A separate account is kept on the name of each person/firm for recording the benefits
received from ,or given to the person/firm in the course of dealings with him.

E.g.: Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd. A/C, Obul Reddy & Sons
A/C , HMT Ltd. A/C, Capital A/C, Drawings A/C etc.

2.Real Accounts: The accounts relating to properties or assets are known as “Real Accounts”
.Every business needs assets such as machinery , furniture etc, for running its activities .A
separate account is maintained for each asset owned by the business .

E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.

3.NominalAccounts:Accounts relating to expenses, losses, incomes and gains are known as

“Nominal Accounts”. A separate account is maintained for each item of expenses, losses,
income or gain.
E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest A/C,
purchases A/C, rent A/C, discount A/C, commission received A/C, interest received A/C, rent
received A/C, discount received A/C.

Before recording a transaction, it is necessary to find out which of the accounts is to be debited
and which is to be credited. The following three different rules have been laid down for the three
classes of accounts….

1.Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and
the account of the person giving the benefit (given) is to be credited.

Rule: “Debit----The Receiver

Credit---The Giver”

2.Real Accounts: When an asset is coming into the business, account of that asset is to be debited
.When an asset is going out of the business, the account of that asset is to be credited.

Rule: “Debit----What comes in

Credit---What goes out”

3. Nominal Accounts: When an expense is incurred or loss encountered, the account representing
the expense or loss is to be debited . When any income is earned or gain made, the account
representing the income of gain is to be credited

Rule: “Debit----All expenses and losses

Credit---All incomes and gains”

JOURNAL

The first step in accounting therefore is the record of all the transactions in the books of original
entry viz., Journal and then posting into ledges.

JOURNAL: The word Journal is derived from the Latin word ‘journ’ which means a day.
Therefore, journal means a ‘day Book’ in day-to-day business transactions are recorded in
chronological order.

Journal is treated as the book of original entry or first entry or prime entry. All the business
transactions are recorded in this book before they are posted in the ledges. The journal is a
complete and chronological(in order of dates) record of business transactions. It is recorded in a
 systematic manner. The process of recording a transaction in the journal is called
“JOURNALISING”. The entries made in the book are called “Journal Entries”.

The proforma of Journal is given below.

Date Date Particulars L.F.no Debit RS. Credit RS

1998 Jan 1 Purchases account 10,000/-

To cash account 10,000/-

(being goods purchased for cash)

Q:- Mahesh started a business with a capital of 3,00,000/- on 1st April, 2018. Journalize the
given transactions in the books of Mahesh for the month of april, 2018.

• April 2nd deposited cash in bank 1,50,000/

• April 4th purchased stock 70,000/

• April 7th purchased goods from sekhar 60000

• April 10th furniture purchased at Raju traders 5,000/

• April 12th sales 40,000/

• April 15th postage 100/

• April 18th rent and repairs 1200/

• Appril 20th sales to Aravind 75,000/

• April 22nd cheque issued to Raju traders 4800/

• April 24th cash received from Aravind 73,000/ as full settlement.

• April 27th drawings 10,000 for his personal.

• April 29th paid commission 300/

• April 30th paid salaries to workers 6000/

• April 30th wages paid 3000/-

Prepare the journal entries in the books of Mahesh and also prepare cash book
Sol: Journal Entries in the books of Mahesh on 30th April, 2018

Date Particulars L.F Debit Credit

No Rs. Rs.

1st April Cash a/c . . . . . . . . . . . . . . 3,00,000

………………….Dr.
3,00,000
To Capital a/c

(Being business started)

2nd April Bank a/c … . . . . . . . . . . . …………………Dr. 1,50,000

To Cash a/c 1,50,000

(Being cash deposited in bank)

4th April Purchases a/c . . . ……. …. 70,000

…………………Dr.
70,000
To Cash a/c

(Being goods purchased for cash)

7th April Purchases a/c . . . . . . . . . …………………. 60,000

.Dr.
60,000
To Sekhar a/c

(Being credit purchases made)

10th April Furniture a/c ….. . . . . . . . . . …………….. .. 5,000

Dr.
5,000
To Raju traders a/c

(Being furniture purchased on credit)

12th April Cash a/c .. . . . . . . . . . . . . . . ……………. ... 40,000

Dr.
40,000
 To Sales a/c

(Being goods sold for cash)

15th April Postage a/c . . . . . . . . . . . . . . . …………..... Dr. 100

To Cash a/c 100

(Being postal charges paid)

18th April Rent and repairs a/c . . . . . . . . ……………. 1,200

Dr.
1,200
To Cash a/c

(Being expenses made on rent and repairs)

20th April Aravind a/c . . . . . . . …… . . . . …………... 75,000

Dr.
75,000
To Sales a/c

Being goods sold for credit)

22nd April Raju Traders a/c . . . . . . . . . . . …………….Dr, 5,000

To Bank a/c 4,800

To Discount a/c 200

(Being cheque issued to Raju traders)

24th April Cash a/c . . . . . . . . . . . . . . . . . 73,000

……………Dr.
2,000
Discount a/c . . . . . . . . . . . . . ……………..
75,000
Dr.

To Aravind a/c

(Being cash received from Aravind)

27yh Drawings a/c . . . . . . . . . . . . . . . 10,000

April ………......Dr. 10,000

To cash a/c

(Being cash withdrawn for personal)

29th April Commission a/c ………. .. . … . …………. 300

Dr.
300
To cash a/c

(Being cash paid as commission)

30th April Salaries a/c . . . . . . . . . . . . . . . . . ………….. 6,000

Dr.
6,000
To Cash a/c

(Being salaries paid)

30th April Wages a/c . . . . . . . . . . . . . . . . . ………….. 3,000

Dr.
3,000
To Cash a/c

(Being wages paid)

LEDGER

All the transactions in a journal are recorded in a chronological order. After a certain period, if
we want to know whether a particular account is showing a debit or credit balance it becomes
very difficult. So, the ledger is designed to accommodate the various accounts maintained the
trader. It contains the final or permanent record of all the transactions in duly classified form. “A
ledger is a book which contains various accounts.” The process of transferring entries from
journal to ledger is called “POSTING”.

Posting is the process of entering in the ledger the entries given in the journal. Posting into ledger
is done periodically, may be weekly or fortnightly as per the convenience of the business. The
following are the guidelines for posting transactions in the ledger.

1. After the completion of Journal entries only posting is to be made in the ledger.
 2. For each item in the Journal a separate account is to be opened. Further, for each new
item a new account is to be opened.
3. Depending upon the number of transactions space for each account is to be determined
in the ledger.
4. For each account there must be a name. This should be written in the top of the table. At
the end of the name, the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the account, by
starting with “TO”.
6. The credit side of the Journal entry is to be posted on the debit side of the account, by
starting with “BY”.
Proforma for ledger: LEDGER BOOK

Cash account

Date Particulars Amount Date Particulars amount

Dr. Cash Account Cr.

Date Particulars Rs. Date Particulars Rs.

1/4 To Capital A/C 3,00,000 2/4 By Bank A/c 1,50,000

12/4 To Sales A/c 40,000 4/4 By Purchases A/c 70,000
24/4 To Aravind A/c 73,000 15/4 By Postage A/c 100
18/4 By Rent & Rates A/c 1,200
27/4 By Capital A/c 10,000
29/4 By Commission A/c 300
30/4 By Salaries A/c 6,000

30/4 By Wages A/c 3,000

30/4 By Balance C/d 1,72,400

4,13,000 4,13,000
1/5 To Balance B/d 1,72,400
Dr. Capital Account Cr.

Date Particulars Rs. Date Particulars Rs.

1/4 By Cash A/c 3,00,000

30/4 Balance C/d 3.00,000 3,00,000

3,00,000

----------- 1/5 By Balance B/d 3,00,000

Dr. Bank Account Cr.

Date Particulars Rs. Date Particulars Rs.

2/4 To Cash A/c 1,50,000 22/4 By Raju Traders A/c 4,800

1,50,000 By Balance C/d 1,45,200

1/5 To Balance B/d 1,45,200 30/4 1,50,000

Dr. Purchases Account Cr.

Date Particulars Rs. Date Particulars Rs.

4/4 To Cash A/c 70,000

7/4 To Sekhar A/c 60,000

30/4 By Balance C/d 1,30,000

1,30,000 1,30,000

1/5 To Balance B/d 1,30,000

Dr. Sekhar Account Cr.

Date Particulars Rs. Date Particulars Rs.

7/4 By Purchases A/c 60,000

30/4 To Balance C/d 60,000

60,000 60,000

----------- 1/5 By Balance B/d 60,000

Dr. Furniture Account Cr.

Date Particulars Rs. Date Particulars Rs.

10/4 Raju Traders A/c 5,000

30/4 By Balance C/d 5,000

5,000 5,000

1/5 To Balance B/d 5,000

Dr. Raju Traders Account Cr.

Date Particulars Rs. Date Particulars Rs.

22/4 To Bank /c 4,800 10/4 By Furniture A/c 5,000

22/4 To Discount A/c 200

5,000 5,000

-----------
Dr. Sales Account Cr.

Date Particulars Rs. Date Particulars Rs.

12/4 By Cash A/c 40,000

30/4 To Balance C/d 1,15,000 20/4 By Aravind A/c 75,000

1,15,000 1,15,000

1/5 By Balance B/d 1,15,000

Dr. Postage Account Cr.

Date Particulars Rs. Date Particulars Rs.

15/4 To Cash A/c 100

100 30/4 By Balance C/d 100

1/5 To Balance B/d 100 100

Dr. Rent & Repairs Account Cr.

Date Particulars Rs. Date Particulars Rs.

18/4 To Cash A/c 1,200

30/4 By Balance C/d 1,200

1,200 1,200

1/5 To Balance B/d 1,200

Dr. Aravind Account Cr.

Date Particulars Rs. Date Particulars Rs.

20/4 To Sales A/c 75,000 24/4 By Cash A/c 73,000

24/4 By Discount A/c 2,000

75,000 75,000

Dr. Discount Account Cr.

Date Particulars Rs. Date Particulars Rs.

24/4 To Aravind A/c 2,000 22/4 By Raju Traders A/c 200

30/4 By Balance C/d 1,800

2,000 2,000

1/5 To Balance B/d 1,800

Dr. Commission Account Cr.

Date Particulars Rs. Date Particulars Rs.

29/4 To Cash A/c 300

30/4 By Balance C/d 300

300

1/5 To Balance B/d 300

Dr. Salaries Account Cr.

Date Particulars Rs. Date Particulars Rs.

30/4 To Cash A/c 6,000

30/4 By Balance C/d 6,000

6,000 6,000

1/5 To Balance B/d 6,000

Dr. Drawings Account Cr.

Date Particulars Rs. Date Particulars Rs.

30/4 To Cash A/c 10,000

30/4 By Balance C/d 10,000

10,000 10,000

1/5 To Balance B/d 0,000

Dr. Wages Account Cr.

Date Particulars Rs. Date Particulars Rs.

30/4 To Cash A/c 3,000

30/4 By Balance C/d 6,000

3,000 6,000

1/5 To Balance B/d 3,000

TRAIL BALANCE

The first step in the preparation of final accounts is the preparation of trail balance. In the double
entry system of book keeping, there will be credit for every debit and there will not be any debit
without credit. When this principle is followed in writing journal entries, the total amount of all
debits is equal to the total amount all credits.

A trail balance is a statement of debit and credit balances. It is prepared on a particular date with
the object of checking the accuracy of the books of accounts. It indicates that all the transactions
for a particular period have been duly entered in the book, properly posted and balanced. The
trail balance doesn’t include stock in hand at the end of the period. All adjustments required to be
done at the end of the period including closing stock are generally given under the trail balance.

DEFINITIONS: SPICER AND POGLAR :A trail balance is a list of all the balances
standing on the ledger accounts and cash book of a concern at any given date.

J.R.BATLIBOI:

A trail balance is a statement of debit and credit balances extracted from the ledger with a view
to test the arithmetical accuracy of the books. Thus a trail balance is a list of balances of the
ledger accounts’ and cash book of a business concern at any given date.

PROFORMA FOR TRAIL BALANCE:

Trail balance for MR…………………………………… as on …………

S. NO. PARTICULARS DEBIT CREDIT

1 Capital xxx
2 Opening stock xxx
3 Purchases xxx
4 Sales xxx
5 Returns inwards xxx
6 Returns outwards xxx
7 Wages xxx
8 Freight xxx
9 Transport expenses xxx
10 Royalities on production xxx
11 Gas, fuel xxx
12 Discount received xxx
13 Discount allowed xxx
14 Bas debts xxx
15 Dab debts reserve xxx
16 Commission received xxx
17 Repairs xxx
18 Rent xxx
19 Salaries xxx
20 Loan Taken xxx
21 Interest received xxx
22 Interest paid xxx
23 Insurance xxx
24 Carriage outwards xxx
25 Advertisements xxx
26 Petty expenses xxx
27 Trade expenses xxx
28 Petty receipts xxx
29 Income tax xxx
30 Office expenses xxx
31 Customs duty xxx
32 Sales tax xxx
33 Provision for discount on xxx
debtors

34 Provision for discount on xxx

creditors

35 Debtors xxx
36 Creditors xxx
 37 Goodwill xxx
38 Plant, machinery xxx
39 Land, buildings xxx
40 Furniture, fittings xxx
41 Investments xxx
42 Cash in hand xxx
43 Cash at bank xxx
44 Reserve fund xxx
45 Loan advances xxx
46 Horse, carts xxx
47 Excise duty xxx
48 General reserve xxx
49 Provision for depreciation xxx
50 Bills receivable xxx
51 Bills payable xxx
52 Depreciation xxx
53 Bank overdraft xxx
54 Outstanding salaries xxx
55 Prepaid insurance xxx
56 Bad debt reserve xxx
57 Patents & Trademarks xxx
58 Motor vehicle xxx

FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has resulted in
profit or loss and what the financial position of the business is at a given time. In brief, he wants
to know (i) The profitability of the business and (ii) The soundness of the business.

The trader can ascertain this by preparing the final accounts. The final accounts are prepared
from the trial balance. Hence the trial balance is said to be the link between the ledger accounts
and the final accounts. The final accounts of a firm can be divided into two stages. The first stage
is preparing the trading and profit and loss account and the second stage is preparing the balance
sheet.
TRADING ACCOUNT

The first step in the preparation of final account is the preparation of trading account. The main
purpose of preparing the trading account is to ascertain gross profit or gross loss as a result of buying and
selling the goods.

Trading account of MR……………………. for the year ended …………………

Particulars Amount Particulars Amount

To opening stock Xxxx By sales xxxx

To purchases xxxx Less: returns xxx

Xxxx
Less: returns xx By closing stock
Xxxx Xxxx
To carriage inwards
Xxxx
To wages
Xxxx
To freight
Xxxx
To customs duty, octroy duties
Xxxx
To gas, fuel, coal,
Xxxx
Water
Xxxx
To factory expenses
Xxxx
To other man. Expenses
Xxxx
To productive expenses
Xxxx
To gross profit c/d
xxxx

Xxxx
Xxxx

Finally, a ledger may be defined as a summary statement of all the transactions relating to a person ,
asset, expense or income which have taken place during a given period of time. The up-to-date state of
any account can be easily known by referring to the ledger.

PROFIT AND LOSS ACCOUNT

The business man is always interested in knowing his net income or net profit.Net profit represents the
excess of gross profit plus the other revenue incomes over administrative, sales, Financial and other
expenses. The debit side of profit and loss account shows the expenses and the credit side the incomes. If
the total of the credit side is more, it will be the net profit. And if the debit side is more, it will be net loss.

PROFIT AND LOSS A/C OF MR…………………….FOR THE YEAR ENDED…………

PARTICULARS AMOUNT PARTICULARS AMOUNT

TO office salaries Xxxxxx By gross profit b/d Xxxxx

TO rent,rates,taxes Xxxxx Interest received Xxxxx

TO Printing and stationery Xxxxx Discount received Xxxx

TO Legal charges Commission received Xxxxx

Audit fee Xxxx Income from Xxxx

investments
TO Insurance Xxxx Xxx
Dividend on shares
TO General expenses Xxxx Xxxx
Miscellaneous
TO Advertisements Xxxxx
investments
TO Bad debts Xxxx xxx
Rent received
TO Carriage outwards Xxxx

TO Repairs Xxxx

TO Depreciation Xxxxx

TO interest paid Xxxxx

TO Interest on capital Xxxxx

TO Interest on loans Xxxx

TO Discount allowed Xxxxx

TO Commission Xxxxx

TO Net profit------- Xxxxx

(transferred to capital a/c) xxxxxx Xxxxxx

BALANCE SHEET

The second point of final accounts is the preparation of balance sheet. It is prepared often in the trading
and profit, loss accounts have been compiled and closed. A balance sheet may be considered as a
statement of the financial position of the concern at a given date.

DEFINITION: A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at
a certain state.

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial position of a business
at a particular date.

Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a business firm
and which serves to as certain the financial position of the same on any particular date. On the left-hand
side of this statement, the liabilities and the capital are shown. On the right-hand side all the assets are
shown. Therefore, the two sides of the balance sheet should be equal. Otherwise, there is an error
somewhere.

BALANCE SHEET OF ………………………… AS ON …………………………………….

Liabilities and capital Amount Assets Amount

Creditors Xxxx Cash in hand Xxxx

Bills payable Xxxx Cash at bank Xxxx

Bank overdraft Xxxx Bills receivable Xxxx

Loans Xxxx Debtors Xxxx

Mortgage Xxxx Closing stock Xxxx

Reserve fund Xxxx Investments Xxxx

Capital xxxxxx Furniture and fittings Xxxx

Add: Plats&machinery

Net Profit xxxx Land & buildings Xxxx

------- Patents, tm ,copyrights Xxxx

xxxxxxx Goodwill Xxxx

-------- Prepaid expenses

Less: Outstanding incomes Xxxx

Drawings xxxx Xxxx Xxxx

Xxxx

XXXX XXXX

Advantages: The following are the advantages of final balance .

1. It helps in checking the arithmetical accuracy of books of accounts.

 2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.

2Q. Fromm the following trial balance and adjustments of Swaraj Emporium, prepare trading,
profit and loss account and balance sheet for the year ended December 31, 2017.

Particulars Debit Rs. Credit Rs.

Sundry Debtors 64,000

Opening stock 44,000
Cash in hand 70

Machinery 35,000
Sundry creditors 21,300
Trade expenses 2,150
Sales 2,69,000
Salaries 4,450
Carriage outwards 800

Rent 1,800
Bills payables 15,000
Purchases 2,37.740
Discounts 2,200
Business premises 69,000
Capital 1,59,000

Cash at bank 3,090

--------------- --------------
4,64,300 4,64.300

Adjustments:-

1. Closing stock Rs.24,900

2. Rent was unpaid to the extent of Rs.170/-
3. Outstanding trade expenses were Rs.300/-
4. Written off bad debts Rs.800/-
5. Provide 5% for doubtful bad debts
6. Depreciate plant and machinery @10% per annum
 7. Business premises are to be depreciated by 2% per annum.

Solution:

Dr Trading account of Swarajya Emporium for the year ended 31st December, 2017 Cr

Particulars Amount Particulars Amount

To Opening stock 44,000 By Sales 2,69,000

To Trade expenses 2,150 By Closing stock 24,900

Add: outstanding expenses 300 2,450

-------

To Purchases 2,37,740

To Gross profit

(Transfer to profit & loss a/c) 9,710

2,93,900 2,93,900

Profit and loss account of Swarajya Emporium for the year ended 31st December, 2017

Dr Cr

Particulars Amount Particulars Amount

To Bad debts written off 800 By Gross profit 9,710

To Doubtful bad debts 3,160

To Depreciation on machinery 3,500

To Salaries 4,450

To Carriage outwards 800

To Rent 1,800

Add: Outstanding rent 170 1,970 By Net loss

------ (Transfer to Capital a/c) 8,550

To Discounts allowed 2,200

To Depriciation on business prem. 1,380 --------------

18,160 18,160
 Balance Sheet in the books of Swarajya as on 31st December 2017
Liabilities and capital Amount Assets Amount
Capital 1,59,000 Sundry Debtors 64,000

Less: Net loss 8,550 1,50,450 Less: Bad debts 800

----------

Sundry creditors 21,300 63,200

Outstanding trade expenses 300 Less: Doubtful bad debts 3,160 60,040

Outstanding rent 170

Bills Payables 15,000 Cash in hand 70

Plant 35,000

Less: Depriciation@10% 3,500

31,500
Business premises 69,000
67,620
Less. Depriciation@2% 1380

--------

Closing stock
24,900
Cash in Bank
3,090

-------------- --------------

1,87,220 1,87,220
Ratio Analysis

Absolute figures are valuable but they standing alone convey no meaning unless compared with
another. Accounting ratio show inter-relationships which exist among various accounting data.
When relationships among various accounting data supplied by financial statements are worked
out, they are known as accounting ratios.

Accounting ratios can be expressed in various ways such as:

1. a pure ratio says ratio of current assets to current liabilities is 2:1 or

2. a rate say current assets are two times of current liabilities or
3. a percentage say current assets are 200% of current liabilities.
Each method of expression has a distinct advantage over the other the analyst will selected that
mode which will best suit his convenience and purpose.

Uses or Advantages or Importance of Ratio Analysis

Ratio Analysis stands for the process of determining and presenting the relationship of items and
groups of items in the financial statements. It is an important technique of financial analysis. It is
a way by which financial stability and health of a concern can be judged. The following are the
main uses of Ratio analysis:

(a) Useful in financial position analysis: Accounting reveals the financial position of the
concern. This helps banks, insurance companies and other financial institution in lending
and making investment decisions.
(ii) Useful in simplifying accounting figures: Accounting ratios simplify, summaries and
systematic the accounting figures in order to make them more understandable and in lucid
form.

(iii) Useful in assessing the operational efficiency: Accounting ratios helps to have an idea of
the working of a concern. The efficiency of the firm becomes evident when analysis is based
on accounting ratio. This helps the management to assess financial requirements and the
capabilities of various business units.

(iv) Useful in forecasting purposes: If accounting ratios are calculated for number of years,
then a trend is established. This trend helps in setting up future plans and forecasting.

(v) Useful in locating the weak spots of the business: Accounting ratios are of great
assistance in locating the weak spots in the business even through the overall performance
may be efficient.

(vi) Useful in comparison of performance: Managers are usually interested to know which
department performance is good and for that he compare one department with the another
department of the same firm. Ratios also help him to make any change in the organisation
structure.
Classification of ratios:

All the ratios broadly classified into four types due to the interest of different parties for
different purposes. They are:

1. Profitability ratios
2. Turn over ratios
3. Liqquidity ratios
4. Leverage ratios
5.
1. Profitability ratios: These ratios are calculated to understand the profit positions of the
business. These ratios measure the profit earning capacity of an enterprise. These ratios
can be related its save or capital to a certain margin on sales or profitability of capital
employ. These ratios are of interest to management. Who are responsible for success and
growth of enterprise? Owners as well as financiers are interested in profitability ratios as
these reflect ability of enterprises to generate return on capital employ important
profitability ratios are:
Profitability ratios in relation to sales: Profitability ratios are almost importance of
concern. These ratios are calculated to focus the end results of the business activities
which are the sole eritesiour of overall efficiency of organisation.

gross profit
1. Gross profit ratio= x 100
Nest sales
Note: Higher the ratio the better it is

Net profit after interest & Tax

2. Net profit ratio: Net sales X 100

Note: Higher the ratio the better it is

3. Operating ratio = operating exenses X100

Net sales
Operating expenses = Cost of goods sold + Administrative expenses + Selling and
distribution expenses
Not: Lower the ratio the better it is
Operating profit
4. Operating profit ratio = X100
Net sales

cost of goods sold= opening stock + purchase + wages + other direct expenses- closing
stock (or) sales – gross profit.
Note: Higher the ratio the better it is
 Operating expenses:

= administration expenses + setting, distribution expenses operating profit= gross profit –

operating expense.
concern expense
Expenses ratio = X 100
Net sales

Note: Lower the ratio the better it is

Profitability ratios in relation to investments:

Net profit after tax & latest depreciati on X100
share holders funds

1. Return on investments:
Share holders funds = equity share capital + preference share capital + receives & surpluses
+undistributed profits.

Note: Higher the ratio the better it is

2. Return on equity capital:= Net Profit after tax & interest - preference divident X100
equity share capital

Note: Higher the ratio the better it is

Net profit after tax - preferecne divident

3. Earnings per share=
No. of equity shares

operating profit
4. Return on capital employed = X100
capital employed

N. P. after tax and interest

5. Return on total assets =
Total Assets
Here, capital employed = equity share capital + preference share capital + reserves &
surpluses + undistributed profits + debentures+ public deposit + securities + long term loan +
other long term liability – factious assets (preliminary expressed & profit & loss account
debt balance)

II. Turn over ratios or activity ratios:

These ratios are used to know the turn over position of various things in the firm. The turnover
ratios are measured to help the management in taking the decisions regarding the levels
maintained in the assets, and raw materials and in the funds. These ratio s are measured in ratio
method.
 cost of goods sold
1. Stock turnover ratio =
average stock
Here

Average stock= opening stock  closing stock

2

Note: Higher the ratio, the better it is

sales
2. Working capital turnover ratio =
working capital

Note: Higher the ratio the better it is

working capital = current assets – essential liabilities.

sales
3. Fixed assets turnover ratio = fixed assets

Note: Higher the ratio the better it is.

sales
3 (i) Total assets turnover ratio is : total assets

Note: Higher the ratio the better it is.

Sales
4. Capital turnover ratio= Capital employed

Note: Higher the ratio the better it is

credits sales or sales

5. Debtors turnover ratio=
average debtors
5(i)= Debtors collection period= 365 (or) 12
Turnove ratio

Here,
opening debitors  closing bebtors
Average debtors = 2
Debtors = debtors + bills receivable

Note: Higher the ratio the better it is.

credit purchasers or purchases

6. Creditors turnover ratio = average credetors

365 (or) 12
6 (i) creditors payment period= Creditor t urnover ratio

Here,
opening  closing credetors
Average creditor= 2

Creditors = creditors + bills payable.

Note: lower the ratio the better it is.

Financial ratios or liquidity ratios:

Liquidity refers to ability of organisation to meet its current obligation. These ratios are used to
measure the financial status of an organisation. These ratios help to the management to make the
decisions about the maintained level of current assets & current libraries of the business. The
main purpose to calculate these ratios is to know the short terms solvency of the concern. These
ratios are useful to various parties having interest in the enterprise over a short period – such
parties include banks. Lenders, suppliers, employees and other.

The liquidity ratios assess the capacity of the company to repay its short term liabilities. These
ratios are calculated in ratio method.

current assets
1. Current ratio =
current liabilitie s

Note: The ideal ratio is 2:1

i. e., current assets should be twice. The Current Liabilities.

quick assets
Quick ratio or liquid ratio or acid test ratio: =
current liabilitie s

Quick assets = cash in hand + cash at bank + short term investments + debtors + bills receivables short
term investments are also known as marketable securities.

Here the ideal ratio is 1:1 is, quick assets should be equal to the current liabilities.

absolute liquid assets

Absolute liquid ratio=
current liabilitie s
Here,

Absolute liquid assets=cash in hand + cash at bank + short term investments + marketable securities.

Here, the ideal ratio is 0,0:1 or 1:2 it, absolute liquid assets must be half of current liabilities.

Leverage Ratio Or Solvency Ratios: Solvency refers to the ability of a business to honour long item
obligations like interest and installments associated with long term debts. Solvency ratios indicate long
term stability of an enterprise. These ratios are used to understand the yield rate if the organisation.

Lenders like financial institutions, debenture, holders, banks are interested in ascertaining solvency of the
enterprise. The important solvency ratios are:

outsiders funds Debt

1. Debt – equity ratio = share holders funds Equity

Here,

Outsiders funds = Debentures, public deposits, securities, long term bank loans + other long term
liabilities.

Share holders funds = equity share capital + preference share capital + reserves & surpluses +
undistributed projects.

The ideal ratio is 2:1

share holder funds

2. Preprimary ratio or equity ratio=
total assets
The ideal ratio is 1:3 or 0.33:1

3. Capital – greasing ratio:

 (equity share capital  reserves & surplusses  undistribu ted projects)
= (Outsiders funds  preference share capital )

Here,

higher gearing ratio is not good for a new company or the company in which future earnings are
uncertain.

outsiders funds
11. Debt to total fund ratio= capital employed

Capital employed= outsiders funds + share holders funds = debt + equity.

The ideal ratio is 0.6.7 :1 or 2:3

PROBLEMS AND SOLUTIOS:

1. From the following Balance Sheet of XYZ Co. Ltd. Calculate A. Current Ratio and B Quick
Ratio.
Liabiolities Rs. Assets Rs.

Preferential Share capital 1,00,000 Lands and Buildings 2,25,000

Equity share capital 1,50,000 Plant and machinery 2,50,000

General Reserve 2,50,000 Furniture 1,00,000

Debentures 4,00,000 Stock 2,50,000

Creditors 2,00,000 Debtors 1,25,000

Bills payables 50,000 Cash at bank 2,50,000

Outstanding expenses 50,000 Cash in hand 1,25,000

Profit ad Loss account 1,00,000 Prepaid expenses 50,000

Bank load 2,00,000 Marketable securities 1,25,000

15,00,000 15,00,000

current assets
A. Current ratio =
current liabilitie s

Current Assets:-
Stock 2,50,000
Debtors 1,25,000
 Cash at bank 2,50,000
Cash in hand 1,25,000
Prepaid expenses 50,000

Marketable securities 1,25,000

------------
Total current assets 9,25,000
------------
Current Liabilities:-
Creditors 2,00,000
Bills paybles 50,000
Outstanding expenses 50,000
-----------
Current Liabilities 3,00,000
-----------
Current ratio = 9,25,000/3,00,000 =3.08:1
Quick Ratio:-
quick assets
Quick ratio or liquid ratio or acid test ratio: =
current liabilitie s
Quick Assets = Current Assets – (Closing stock + Prepaid expenses)
9,25,000 – (2,50,000 + 50,000)
=9,25,000 – 3,00,000 =6,25,000
Quick Ratio = 6,25,000/3,00,000 = 2.08:1

2. The following is a extract of a balance sheet of a company during the last year. Compute Current
Ratio and Quick Ratio
Lands and buildings 50,000
Plant and machinery 1,00,000
Furniture and fixture 25,000
Closing stock 25,000
Sundry debtors 12,500
Wages prepaid 2,500
Sundry creditors 8,000
Rent outstanding 2,000
A. Current Assets = Closing stock + Sundry debtors + Wages prepaid
=25,000 +12,500 + 2,500 = 40,000
Current Liabilities = Sundry creditors + Rent outstanding
= 8,000 + 2,000 = 10,000
Current Ratio – 40,000/10/000 = 4:1
Quick Assets = Current assets – (Stock + Prepaid expenses)
40,000 – (25,000 + 2,500)
= 40,000 – 27,500 = 12,500
Quick Ratio = 12,500/10,000 =1.25:1
3. A firm sold goods worth Rs.5,00,000/- and its gross profit is 20% of its sale value. The inventory
at the beginning of the year was Rs.16,000/- and at the end of the year was Rs.14,000/-. Compute
inventory turn over ratio and also the inventory holding period.
A. Cost of goods sold = sales – gross profit
Gross profit = 20% of sales value
= 5,00,000X20/100 = 1,00,000
Cost of goods sold = 5,00,000 – 1,00,000
= 4,00,000
Average inventory = ½(opening stock + closing stock)
= ½(16,000 + 14,000)
= 15,000
Inventory turnover ratio = Cost of goods sold/Average inventory
= 4,00,000/15,000 =26.66 times
The inventory holding period = 365 days / inventory turnover ratio
= 365 / 26.66
= 13.69 days or 14 days.
4. A firm’s sales during the year was Rs.4,00,000/- of which 60% were on credit basis. The balance
of debtors of the beginning and end of the year were 25,000/- ad 15,000/- respectively. Calculate
debtors turn over ratio and also find out debt collection period.
A. Credit sales = 60% of total sales
= 4,00,000 X 60/100
= 2,40,000/-
Average debtors = ½(Opening debtors + Closing debtors)
= ½(25,000 + 15,000)
= 20,000
Debtors turnover ratio = Credit sales / Average Debtors
= 2,40,000 / 20,000
= 12 times
Debt collection period = 365 days / Debtors turnover ratio
= 365 / 12
= 30.41 days
5. The earnings before interest and taxes (EBIT) of a company is Rs.5,60,000/-. Its fixed
commitments include payment of 10% on 7,000 debentures of Rs.100/- each. It is subject to tax
of 30% per annum. Calculate Interest coverage ratio.
A. Net profit before interest and taxes = 5,60,000
Fixed interest charges on the debentures = (7,000X100) X 10/100
= 70,000
Interest coverage ratio = EBIT/Net Interest
= 5,60,000/70,000
= 8 times
6. A firm’s net sales is 50,000/- and cost of goods sold is Rs.20,000/-. The details of expenses are as
given below.

Administrative expenses 3,000/-

Selling and distribution expenses 4,000/-

 Loss on sale of fixed asset 3,000/-

Interest on investment 2,000/-

Taxes 20%

Calculate the net profit ratio.

A. Sales 50,000
Less: Cost of goods sold 20,000
______
Gross profit 30,000
Less: Administrative expenses 3,000
Selling and distribution expenses4,000
--------
7,000
---------
Net profit 23,000
Add: Interest on investment(non-operating) 2,000
----------
21,000
Less: loss on sale of asset 3,000
---------
18,000
Less: Taxes @ 20% 3,600
---------
Net profit after taxes 14,400
---------
Net profit Ratio = (Net profit after taxes/ Net sales) X 100%
= 14,400/50,000 X 100
= 28.8%
7. The following data is extracted from the financial statements of a firm dealing in fertilisers. The
fertiliser business, in general, has an inventory ratio of 6 times.

Determine and interpret the following ratios.

a. Inventory turnover ratio

b. Average period of the holding the stock

Sundry debtors Rs, 45,000

Closing stock Rs. 30,000
Sales Rs.4,00,000
Sales returns Rs.20,000
Opening stock Rs.40,000
Closing stock Rs.40,000

60% of the sales are credit sales.

A. Net sales = Sales – sales returns

 = 4,00,000 – 20,000 =3,80,000
Credit sales = 60% of total sales
= 3,80,000 X60/100
= 2,28,000
Average stock = (opening stock + closing stock)/2
= (40,000+60,000)/2 = 50,000
Inventory turnover ratio = Credit sales / average stock
= 2,28,000 / 50,000 = 4.56 times

Inventory turnover ratio of 4.56 is not satisfactory as it is less than the industry average .
B) Average period of holding inventory = 365 days/4.56 = 80.04 days.
The average period of holding inventory is 80 days which is very high. As per the
industry ITR, the average period is 61 days (365/6) The firm should identify what are the reasons
obstructing its performance. The possible reason could be lack of working capital, inability to
collect its debts promptly or need for more advertisement, and so on

8. Given the following data relating to firm X and firm Y in the hosiery business, Calculate which firm is
handling its debtors and creditors position eficiently with the help of debtors and creditors turnover
ratios.
Particulars Firm - A Firm - B

Debtors (1-1-2017) 8,000 12,000

Debtors (31-12-2017) 16,000 14,000

Creditors Purchases (50% credit) 32,000 28,000

(1-1-2017) 2,50,000 3,60,000

Sales (75% credit) 1,50,000 2,25,000

Furniture 25,000 35,000

Cash 5,000 8,000

Creditors (31-12-2017) 26,000 42,000

A. Debtors turnover ratio = (Credit sales / Average debtors)

From the given problem, Credit sales is 75% of total sales
DEBTORS TURNOVER RATIO
Particulars Firm – A Firm – B
Credit sales
1,50,000X75/100, 2,25,000X75/100 1,87,500 2,70,000
Average debtors
½(opening + closing debtors) 12,000 13,000
Debtors turnover
1,87,500/12,000 & 2,70,000/13,000 15.6 times 20.76times
Average debt collection period=
(365 / 15.6) & 2,70,000 / 13,0000 23.6 days 17..58 days
Note: The debtors turnover ratio of Y(20.76 times) is better than that of X (15.6 times). This
indicates that the firm Y is collecting its average debtors 20.76 times which is higher than firm X.
CREDITORS TURNOVER RATIO
Particulars Firm X Firm Y
Creditors turnover ratio = credit purchases / average creditors
Credit purchases = 60% of 1,50,000 60% of 2,25,000
90,000 1,35,000
Average creditors = (32,000+26,000)/2 (28,000+42,000)/2
= 29,000 35,000
Creditors turnover ratio = 90,000/29,000 1,35,000/35,000
3.1 times 3.8 times
From the above creditors turnover ratio it is clear that Firm X is slower than firm Y in repaying
its debt.