Introduction To

Accounting
Assistant Professor Prathmesh U Tawade
 (Source- Capital Mind)

Assistant Professor Prathmesh U Tawade

 Accounting
Accounting is a system meant for measuring business activities, processing of
information into reports and making the findings available to decision-makers.

‘As 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 financial
character, and interpreting the results thereof’ - The American Institute of Certified
Public Accountants (AICPA)- 1941

‘The process of identifying, measuring and communicating economic information

to permit informed judgments and decisions by users of information’- The
American Accounting Association (AAA)
Assistant Professor Prathmesh U Tawade
 Refined Definition of Accounting
The process of identifying,
measuring, recording and Identification,
Measurement,
Economic Events
Recording and
communicating the required Communication
information relating to the economic
events of an organization to the Interested User of
Organization
Information
interested users of such information.

Assistant Professor Prathmesh U Tawade

 An Accounting
Is The
‘Language of Business’
Assistant Professor Prathmesh U Tawade
 Objectives of Accounting
To keep systematic records

To protect business properties

To ascertain the operational profit or loss

To ascertain the financial position of the business

To facilitate rational decision making

Information System

Assistant Professor Prathmesh U Tawade

Users of Accounting Information
Investors

Creditors

Government
External
Consumers

Researchers

Users Banks & Financial

Institutions

Owners

Internal Management

Employees

Assistant Professor Prathmesh U Tawade

 Branches of Accounting
Branches Preparation of financial statements

of Financial External Reporting

Aids management in directing and controlling
activities of the firm
Accounting Accounting
Determination and Control of Cost

Cost Helps in making revenue decisions

Accounting
Tailor made accounting

Management Supply relevant information at appropriate time to

the management
The use of Financial and Cost Accounting

Accounting information for making informed business decisions

Assistant Professor Prathmesh U Tawade

 Financial Accounting Vs Management Accounting

Financial Accounting Management Accounting

Primary Users are outside parties and Primary users are business managers
manager of the business

Accounts are based on generally It is based on comparison of costs and

accepted accounting principles benefits of proposed action

Past orientation Future orientation

It is a summary reports regarding the It is a detailed reports on the parts of

whole entity the entity

Assistant Professor Prathmesh U Tawade

 Accounting Cycle
A cycle is something that has a starting point and then some things are
happening and ends at the starting point again and repeat itself again.

When complete sequence of accounting procedure is done which happens

frequently and repeated in same directions during an accounting period, the
same is called an accounting cycle.

The accounting cycle, also commonly referred to as accounting process, is a

series of procedures in the collection, processing, and communication of
financial information.
Assistant Professor Prathmesh U Tawade
 Accounting Cycle
Identifying Recording in
and Analyzing Journals-
business Books of
transaction Original Entry

Posting To the
Financial Ledger –
Statements Books of final
entry
Recording Classification

Closing Unadjusted
Verification Summarizing
Entries Trial Balance

Adjusted Trial Adjusting

Balance Entries

Assistant Professor Prathmesh U Tawade

 Books of Original Entry
General Journal Or
Journal Proper
Journal

Purchase Book

Sales Book

Cash Book

Purchase Return Book

Subsidiary Books
Sales Return Book

Bills Receivable Book

Bills Payable Book

Assistant Professor Prathmesh U Tawade
 Financial Statements
Financial statements are the basic and
formal annual reports through which the Profit and Loss
Balance Sheet Account/ Income
corporate management communicates Statement
financial information to its owners and
various other external parties which Cash Flow
Statement
include investors, tax authorities,
government, employees, etc.

Assistant Professor Prathmesh U Tawade

 Financial Statements
Refer To Infosys Financial Statements

Assistant Professor Prathmesh U Tawade

 Lecture 2
Accounting Standards, Concepts used in Accounting
 Accounting Standards
Accounting Standards (ASs) are written policy documents issued by
the Government with the support of other regulatory bodies (e.g.,
Ministry of Corporate Affairs (MCA) issuing Accounting Standards for
corporates in consultation with National Financial Reporting Authority
(NFRA).

Assistant Professor Prathmesh U Tawade

 Accounting Standards

Recognition of events and transactions

Measurement of transactions and events

Presentation of transactions and events

Disclosure requirements

Assistant Professor Prathmesh U Tawade

Benefits of Accounting Standards

Benefits of AS Standardization of
alternative accounting
treatments

Requirements for
additional disclosures
Intra-Enterprises
Comparability of financial
statements
Inter-Enterprises

Assistant Professor Prathmesh U Tawade

 Standards Setting Process
Identification of Constitution of Preparation of draft
Area by ASB Study Group and its circulation

Ascertainment of Comments received

Finalization of
views of different on exposure draft
exposure draft (E.D.)
bodies on draft (E.D.)

Modification of the
Issue of AS
draft

Assistant Professor Prathmesh U Tawade

Accounting Standards

Accounting Standards
IFRS

US GAAP

Indian Accounting
Standards (Ind AS)

Assistant Professor Prathmesh U Tawade

 International Financial Reporting Standards (IFRS)

IFRS is a set of accounting standards developed and maintained by the

International Accounting Standards Board (IASB).

IFRS is used by companies in many countries around the world, and its adoption
has been increasing globally.

IFRS aims to provide a common accounting language that facilitates comparability

and transparency in financial reporting across different countries and industries.

Many countries have fully adopted IFRS, while others have converged their
national standards with IFRS or allow its use for certain types of companies.
Assistant Professor Prathmesh U Tawade
 Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles (GAAP) refer to a common set of

accepted accounting principles, standards, and procedures that business reporting
entity must follow when it prepares and present its financial statements.

GAAP is a combination of authoritative standards (set by policy boards) and the

commonly accepted ways of recording and reporting accounting information.

At international level such authoritative standards are known as International

Financial Reporting Standards (IFRS) and in India we have authoritative standards
named as AS and IND-AS.

Assistant Professor Prathmesh U Tawade

 US GAAP
GAAP refers to the accounting standards and guidelines followed in the United
States.

The Financial Accounting Standards Board (FASB) is the primary authority

responsible for setting GAAP in the US.

GAAP provides a framework for how financial statements should be prepared,

including the balance sheet, income statement, and statement of cash flows.

These standards are primarily used by companies operating in the United States
or those that need to report financial information to US regulatory bodies.

Assistant Professor Prathmesh U Tawade

 Indian Accounting Standards (Ind AS)
Ind AS is the accounting standard used in India. It is largely based on IFRS, with
some modifications to suit the Indian business environment and regulatory
requirements.

The adoption of Ind AS in India began in phases, with listed companies and
specific categories of companies required to comply with Ind AS based on their
size and other criteria.

The Indian Accounting Standards are aimed at improving the quality and
transparency of financial reporting in India and aligning it with global standards.
Assistant Professor Prathmesh U Tawade
Accounting System

Accounting System
Cash Basis/ Cash
System of Accounting

Accrual Or Mercantile
System of Accounting

Assistant Professor Prathmesh U Tawade

 Cash Basis/ Cash System of Accounting
A financial transaction is recorded in the books of accounts only when
it is settled in cash.

All income and expenses are recorded in the books at the time of
receiving or paying cash.

It is usually followed by non profit service organizations like schools,

colleges, clubs, charitable societies etc.

Assistant Professor Prathmesh U Tawade

Accrual/ Mercantile System of Accounting
Under this system a transaction is recorded in the books of accounts
irrespective of the fact that it has been settled in cash or not.

The accrual basis of accounting typically recognizes revenue when a

firm sells goods (manufacturing and retailing firms) or renders
services (service firms), and recognizes expenses in the period when
the firm recognizes the revenues that the costs helped produce.

This system is followed by the business organizations.

Assistant Professor Prathmesh U Tawade
 Principles And Concepts in Accounting
The Money Measurement The Accounting Period
The Historical Cost The Matching Concept
The Balance The Profit &
Sheet Loss
The Going Concern The Realization Concept Statement

The Business Entity The Conservatism

The Dual Aspects The Materiality

The Consistency
Assistant Professor Prathmesh U Tawade
 The Money Measurement Concept
Only those events and transactions which can be converted or
expressed in monetary terms are subject matter of accounting.

Money is the only medium to measure and express different types of

transactions using common denominator.

Assistant Professor Prathmesh U Tawade

 The Historical Cost Concept
The financial transactions are recorded at the actual cost involved in
the transaction.

The long term assets are shown in the financial statements at their
historical cost irrespective of the current realizable or liquidation
value.

Assistant Professor Prathmesh U Tawade

 The Going Concern
Every organization has an endless life.

In the other words there is neither the need nor the intent to
discontinue operations.

This has the strong implications on the value of the asset.

Assistant Professor Prathmesh U Tawade

 The Business Entity Concept
It is also known as ‘Separate Entity’ concept.

The business and the owner of the business are two separate or
distinct entities.

Assistant Professor Prathmesh U Tawade

 The Dual Aspect
The understanding of the accounting process depends on the clear
understanding of this concept.

There are two aspects to every business transaction.

It makes the basis for modern accounting which is called as ‘double
entry bookkeeping system’.

This concept also leads to ‘Accounting Equation’.

Assistant Professor Prathmesh U Tawade

 Accounting Equation

Assets= Capital + Liabilities

Assets= Owners Claim+ Outsiders Claim

Assets- Outsiders Claim = Owners Claim

Assets is what business owns

Capital means business’s obligations towards owner

Liabilities mean what the business owns to the non-owners

Assistant Professor Prathmesh U Tawade
 The Accounting Period
The stakeholders want accounting information on a regular basis,
therefore financial statements are prepared periodically.

The period covered by such financial statements is called the

accounting period.

In India, accounting period is from 1st April to 31st March whereas
internationally, calendar year is the preferred choice as accounting
period.
Assistant Professor Prathmesh U Tawade
 The Matching Concept
 A business must keep a record of expenses along with earned revenues.

 It works with the concept that a business must incur expenses to earn revenues.

 This concept is applied while calculating profit or loss for an accounting period.

 The matching principle looks at a window of time in terms of how much income came in and

how much it cost to generate that income.

 The key here is the “window of time,”.

 It compares how much came in in sales in a month vs. how much was spent.

 Any revenue or expenses before that month or after that month are not considered.
Assistant Professor Prathmesh U Tawade
The Matching Concept

Assistant Professor Prathmesh U Tawade

 The Realization Concept
A revenue or an earning can be recorded in the books if either the
cash has been received against the transaction or outside party has
promised to pay.

Assistant Professor Prathmesh U Tawade

 The Conservatism or Prudence
It states that it is better to understand the financial position of the
business rather than overstate.

In more specific terms, gains should be recognized when they are
reasonably certain and losses should be recognized even if they are
reasonably probable.

Assistant Professor Prathmesh U Tawade

 The Materiality
Every piece of financial information which is significant or material
should be properly disclosed by the companies.

This concept guides the level of details required to be disclosed in the

financial statements.

In general, any information that is relevant to the users of financial

statements should be disclosed.

Assistant Professor Prathmesh U Tawade

 The Consistency
It requires that accounting policies once chosen must be applied
consistently period after period.

This concept facilitates inter period comparison by requiring that

same accounting policies are followed period after period.

Changes in accounting policies, if any, must be adequately disclosed.

Assistant Professor Prathmesh U Tawade

 Lecture 3
Accounting Mechanics And Process
 An Account
An account is an individual record of increase or decrease in an item
which is likely to be of interest or importance.

An account is a formal record of all transactions relating to particular

item at one place.

 This record is kept in a book called ledger.

Assistant Professor Prathmesh U Tawade

Format of An Account

T-Account
Assistant Professor Prathmesh U Tawade
Format of An Account

Running Balance Account

Assistant Professor Prathmesh U Tawade
Traditional Classification of Accounting

Traditional Classification
Personal Account

Real Account

Nominal Account

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 Personal Account
Personal accounts are the accounts of persons- natural or artificial or
legal – with whom the enterprise has business transactions.

They represent the amount receivable or payable by the enterprise.

Assistant Professor Prathmesh U Tawade

 Real Account
These are the accounts of tangible or intangible assets.

Tangible assets are land, building, plant and machinery, furniture etc.

Intangible assets are goodwill, patent, trademarks etc.

Assistant Professor Prathmesh U Tawade

 Nominal Account
These are accounts related to income or gains and losses or
expenses.

Examples are wages, salaries, rent, discount allowed, discount

received, sales etc.

Assistant Professor Prathmesh U Tawade

 Rules for Debits and Credits
Types of Account Rules

Real A/c Debit what comes in

Credit what goes out

Personal A/c Debit the receiver

Credit the giver

Nominal A/c Debit all expenses/losses

Credit all income/gains

Assistant Professor Prathmesh U Tawade

Modern/ Accounting Equation Based Classification

Modern Approach
Assets
Liabilities
Equity

Assistant Professor Prathmesh U Tawade

 Assets
Assets are those which related to the economic resources of an
enterprise.

Cash in hand, Cash at bank, Debtors, Stock, Investment, Machinery,

Building etc.

Assistant Professor Prathmesh U Tawade

 Liabilities
Labilities are accounts related to the amount payable by an
enterprise to outsider.

Creditors, outstanding expenses, bills payable, bank overdraft etc.

Assistant Professor Prathmesh U Tawade

 Equity
It is the difference between firm’s assets and liabilities.

It relates to the owner’s of the enterprise.

Capital account of an owner, capital account of the partners,

drawings accounts, current accounts of partners etc.

Assistant Professor Prathmesh U Tawade

 Rules for Debit and Credit

Assets Liabilities Equity

Debit Credit Debit Credit Debit Credit

Increase Decrease Decrease Increase Decrease Increase

Assistant Professor Prathmesh U Tawade

 Entry As Per Modern Accounting
Analysis- Analyze in terms of increase or
decrease in assets, liabilities, equity

Rules- Apply Debit and Credit rule

Entry- Record showing account debit or credit

Accounts- Present the related account after

entry
Assistant Professor Prathmesh U Tawade
 Classification of Accounts
Classification Asset Account
of Accounts
American Liabilities Account

Approach Revenue Account

Expenses Account

Personal Account
English Real Account

Approach Nominal Account

Assistant Professor Prathmesh U Tawade

 Recording of Transaction In Journal
It is a basic book of original entry.

It is a book in which transactions are recorded in the order in which

they takes place.

The process of recording a transaction in the journal is called

journalizing.

The entry which is made is called as a Journal Entry.

Assistant Professor Prathmesh U Tawade

 Compounded Journal Entry
When two or more transactions take place in the business relating to
a same account on the same date, in the place of passing many
entries for the same account a single journal entry is pass which is
called a compound journal entry.

Single debit account and more than one credit account

Single credit account and more than one debit accounts

More than one debit account and more than one credit account
Assistant Professor Prathmesh U Tawade
Format Of Journal

Assistant Professor Prathmesh U Tawade

 Journal Entries
Ashok started business with Rs. 2,00,000/-.

Purchased goods for Cash Rs. 50,000/-.

Purchased Furniture for Cash Rs. 40,000/-.

Sold goods for Cash Rs. 10,000/-

Purchased goods on credit from Mr. Birbal Rs. 20,000/-

Paid Cash to Birbal Rs. 5,000/-.

Cash withdrawn by Mr. Ashok for personal use Rs. 2,000/-

Assistant Professor Prathmesh U Tawade
 Posting Of Transactions In Ledger
Ledger is the principal book where accounts are opened to which the
transactions recorded in the books of original entry are posted.

Posting is a process of transferring information from Journal to

Ledger.

All the transactions relating to a particular account for a particular

period are recorded at a particular page or place in the ledger.

Accounts are kept in a ledger so that it will be easy to locate them.

Assistant Professor Prathmesh U Tawade
Format Of Ledger

Assistant Professor Prathmesh U Tawade

 Balancing of Accounts
Balance of an account is the difference between the debit and the
credit totals of an account.

When the total of the debit side is more than the total of credit side,
the account is said to have a debit balance.

When the total of the credit side is more than the total of debit side,
the account is said to have a credit balance.

Assistant Professor Prathmesh U Tawade

 Balancing of Different Types of Accounts
Assets: All asset accounts are balanced. These accounts always have a debit
balance.

Liabilities: All Liability accounts are balanced. All these accounts have a credit
balance.

Capital: This account is always balanced and usually has a credit balance.

Expense and Revenues: These Accounts are not balanced but are simply totaled
up. The debit total of Expense/Loss will show the expense/Loss. In the same
manner, credit total of Revenue/Income will show increase in income.
Assistant Professor Prathmesh U Tawade
 Trial Balance
It is a list of the names and balances of all the accounts in the ledger and cash
book.

It is a T shaped statement separately showing all the debits and credit balances
at the end of the accounting period.

Trial Balance serves three basic principles-

It ensures that the dual aspects concept has been properly followed.

It gives an overview of balances in various ledge accounts.

It forms the basis for the preparation of financial statements.

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
Satya Paul started a business on 1st April 20XX. His transactions are listed as below-
1. Started business with Rs. 10,00,000/-
2. Opened a bank account and deposited Rs. 9,90,000/-

Assistant Professor Prathmesh U Tawade

Expanded Accounting Equation

Assistant Professor Prathmesh U Tawade

Analysis Date Particulars L/F Amount Amount
(Dr.) (Cr.)

A +, C+ 1 Cash A/c - Dr. 10,00,000

To Capital A/c 10,00,000

A+, A- 2 Bank A/c - Dr. 9,90,000

To Cash A/c 9,90,000

L-, A- 3 Rent A/C - Dr. 60,000

To Bank A/c 60,000

A+, A- 4 Stationery A/c -Dr 7,000

To Cash 7,000

A+, A- 5 Investment A/c - Dr. 1,00,000

To Bank A/c 1,00,000

A+, A- 6 Machinery A/c - Dr. 2,50,000

To Bank A/c 2,50,000

A+, A- 7 Furniture A/C -Dr 1,50,000

To M/s Furniture Mart 1,50,000

Assistant Professor Prathmesh U Tawade

Analysis Date Particulars L/F Amount Amount
(Dr.) (Cr.)

A+, A- 8 Purchase A/c - Dr. 4,00,000

To Bank A/c 4,00,000

A+, L+ 9 Purchase A/c - Dr. 2,00,000

To X Ltd A/c 2,00,000

A+, A- 10 Cash A/c - Dr. 5,50,000

To Sales A/c 5,50,000

L-, A- 11 Mr. X A/c -Dr. 1,50,000

To Cash A/C 1,50,000

A+, A- 12 Mr. Y A/c -Dr. 2,50,000

To Sales A/c 2,50,000

A+, C-, L- 13 Bank A/c - Dr. 1,75,000

Discount A/c - Dr. 5,000
To Y A/c 1,80,000
A+, C+ 14 Bank A/c - Dr. 1000
To Interest Earned A/c 1000

C-, A- 15 Salary A/c -Dr. 1,10,000

To Cash A/c 1,10,000
Assistant Professor Prathmesh U Tawade
 Capital A/c
Debit Credit
Particulars Amount Particulars Amount
By Cash A/c 10,00,000
To Balance C/f 10,00,000
10,00,000 10,00,000

Cash A/C
Debit Credit
Particulars Amount Particulars Amount
To Capital A/c 10,00,000 By Bank A/c 9,90,000
To Sales A/c 5,50,000 By Stationery A/c 7,000
By X A/c 1,50,000
By Bal C/f 4,03,000
15,50,000 15,50,000

Stationery A/c
Debit Credit
Particulars Amount Particulars Amount
To Cash A/c 7,000 By Bal c/f 7,000
7,000 Assistant Professor Prathmesh U Tawade 7,000
 Bank A/c
Debit Credit
Particulars Amount Particulars Amount
To Cash A/c 9,90,000 By Rent A/c 60,000
To Y A/c 1,75,000 By Investment A/c 1,00,000
To Interest Earned 1,000 By Machinery A/c 2,50,000
By Purchases A/c 4,00,000
By Salaries A/c 1,10,000
By Balance c/f 2,46,000
11,66,000 11,66,000

Rent A/c
Debit Credit
Particulars Amount Particulars Amount
To Bank A/c 60,000 By Bal c/f 60,000
60,000 60,000

Assistant Professor Prathmesh U Tawade

 Investment A/c
Debit Credit
Particulars Amount Particulars Amount
To Bank A/c 1,00,000 By Bal c/f 1,00,000
1,00,000 1.00,000
Interest Earned A/c
Debit Credit
Particulars Amount Particulars Amount
To Bal c/f 1000 By Bank A/c 1000
1000 1000
Machinery A/c
Debit Credit
Particulars Amount Particulars Amount
To Bank A/c 2,50,000 By Bal c/ 2,50,000
2,50,000 2,50,000

Assistant Professor Prathmesh U Tawade

 Purchase A/c
Debit Credit
Particulars Amount Particulars Amount
To Bank A/c 4,00,000 By Bal c/f 6,00,00
To X A/c 2,00,000
6,00,000 6,00,000
X Account
Debit Credit
Particulars Amount Particulars Amount
To Cash A/c 1,50,000 By Purchases A/c 2,00,000
To Bal c/f 50,000
2,00,000 2,00,000
Sales A/c
Debit Credit
Particulars Amount Particulars Amount
By Cash A/c 5,50,000
To Bal c/f 8,00,000 By Y A/c 2,50,000
8,00,000 8,00,000
Assistant Professor Prathmesh U Tawade
 Y A/c
Debit Credit
Particulars Amount Particulars Amount
To Sales a/c 2,50,000 By Bank A/c 1,75,000
By Discount A/c 5,000
By Bal c/f 70,000
2,50,000 2,50,000
Discount A/c
Debit Credit
Particulars Amount Particulars Amount
To Y A/c 5,000 By Bal c/f 5,000
5,000 5,000
Salaries A/c
Debit Credit
Particulars Amount Particulars Amount
To Bank A/c 1,10,000 By Bal c/f 1,10,000
1,10,000 1,10,000
Assistant Professor Prathmesh U Tawade
 Furniture Mart A/c
Debit Credit
Particulars Amount Particulars Amount
To Bal c/f 1,50,000 By Furniture a/c 1,50,000
1,50,000 1,50,000

Furniture A/c
Debit Credit
Particulars Amount Particulars Amount
To Furniture Mart A/c 1,50,000 By Bal c/f 1,50,000
1,50,000 1,50,000

Assistant Professor Prathmesh U Tawade

 Trial Balance As on
Debit Credit
Particular Amount (in Rs.) Particular Amount (in Rs.)
Purchase A/c 6,00,000 Capital A/c 10,00,000
Rent A/c 60,000 X A/c 50,000
Salaries A/c 1,10,000 Sales A/c 8,00,000
Stationery A/c 7,000 Interest Earned A/c 1,000
Cash A/c 4,03,000 Furniture Mart A/c 1,50,000
Y A/c 70,000
Discount A/c 5,000
Furniture A/c 1,50,000
Plant & Machinery A/c 2,50,000
Investment A/c 1,00,000
Bank A/c 2,46,000
Total 20,01,000 20,01,000

Assistant Professor Prathmesh U Tawade

 Trial Balance As on
Debit Credit
Particular Amount (in Rs.) Particular Amount (in Rs.)
Purchase A/c 6,00,000 Capital A/c 10,00,000
Rent A/c 60,000 X A/c 50,000
Salaries A/c 1,10,000 Sales A/c 8,00,000
Stationery A/c 7,000 Interest Earned A/c 1,000
Cash A/c 4,03,000 Furniture Mart A/c 1,50,000
Y A/c 70,000
Discount A/c 5,000
Furniture A/c 1,50,000
Plant & Machinery A/c 2,50,000
Investment A/c 1,00,000
Bank A/c 2,46,000
Total 20,01,000 20,01,000

Assistant Professor Prathmesh U Tawade

 Lecture 4
Preparation of Financial Statements with
Adjustment
 Recognizing Revenues
When a company agrees to perform a service or sell a
product to a customer, it has a performance obligation.

When the company meets this performance obligation,

it recognizes revenue.

The revenue recognition principle therefore requires

that companies recognize revenue in the accounting
period in which the performance obligation is satisfied.

Assistant Professor Prathmesh U Tawade

 Expense Recognition Principle
It requires that companies recognize expenses in
the period in which they make efforts (consume
assets or incur liabilities) to generate revenue.

Let the expenses follow the revenues.

Assistant Professor Prathmesh U Tawade

Recognizing Revenues and Expenses

Assistant Professor Prathmesh U Tawade

 Deferral And Accrual
Deferral is the lag in the recognition of an expense already paid or a
revenue already received.

It relates to past cash receipts and payments.

Accrual is the recognition of an expense incurred but not paid or a

revenue earned but not received.

It relates to the expected future cash receipts and payments.

Assistant Professor Prathmesh U Tawade

 Adjusting Entries
In order for revenues to be recorded in the period in which services are
performed and for expenses to be recognized in the period in which they
are incurred, companies make adjusting entries.

Adjusting entries ensure that the revenue recognition and expense

recognition principles are followed.

Adjusting entries are necessary because the trial balance—the first pulling
together of the transaction data—may not contain up-to-date and
complete data.
Assistant Professor Prathmesh U Tawade
 Adjustment Entries
Outstanding Expenses/ Accrued Expenses- Liability

Pre-paid Expenses- An Asset

Income Earned but not received- An Asset

Income Received in advance/ Unearned Revenues- Liability

Provision for Doubtful Debts

Provisions for expenses- Liability

Assistant Professor Prathmesh U Tawade

 Adjusted Trial Balance
After a company has journalized and posted all adjusting entries, it prepares another
trial balance from the ledger accounts.

This trial balance is called an adjusted trial balance. It shows the balances of all
accounts, including those adjusted, at the end of the accounting period.

The purpose of an adjusted trial balance is to prove the equality of the total debit
balances and the total credit balances in the ledger after all adjustments.

Because the accounts contain all data needed for financial statements, the adjusted
trial balance is the primary basis for the preparation of financial statements.

Assistant Professor Prathmesh U Tawade

 Financial Statements
 Whatever business activities are done, it is essential to know its operational results i.e.

whether business is running at profit or loss, for this purpose balances of all ledger accounts

are taken and a statement of balances is prepared which is known as trial balance.

 Final accounts are prepared from such balances. Therefore, it is necessary to know the

meaning and object of final accounts.

 Final accounts mean profit & loss account and the balance sheet.

 Profit & loss account also contains one more account, known as Trading account, and if the

business is manufacturing any item or article, then Manufacturing account is also there. All

these accounts are prepared only after preparing trial balance.

Assistant Professor Prathmesh U Tawade
 Final Accounts
There are two objectives of preparing Final accounts-

Know the operational results i.e. profit or loss during a particular

period through the profit & loss account which is also known as
income statement, and

Ascertain the financial position of the business on a particular date

through the balance sheet, also known as position statement.

Assistant Professor Prathmesh U Tawade

 Trading Account
Trading account is the comparison of sales and purchase.

This account is prepared to determine the amount of gross profit or

gross loss on sales.

Trading account is prepared to know the trading result. Trading result

indicates gross profit or loss of the trading period.

Gross profit or loss is the difference between selling price and

purchase price of the goods sold.
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Profit and Loss Account
Profit & Loss Account is the second part of Trading and Profit & Loss
Account.

The gross profit cannot be treated as net profit while the businessman
wants to know how much net profit he has earned from the operating
activities during a period.

For this purpose, Profit & Loss Account is prepared keeping in mind all
the operating and non-operating incomes and losses of the business.

Assistant Professor Prathmesh U Tawade

 Profit and Loss Account
In the debit (left hand side) side all the expenses and losses are
disclosed and in the credit side (right hand side) all the incomes are
disclosed.

The excess of credit side over debit side is called net profit while the
excess of debit side over credit side shows net loss.

Net profit increases the net worth of the business; therefore, it is

added to the capital of owner.
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Balance Sheet
The Balance Sheet depicts the financial position of the business on a
fixed date. Balance Sheet is prepared with those balances of Trial
Balance which are left out (personal and real accounts) after taking
out the nominal accounts’ balances to prepare the Trading and Profit
& Loss Account.

Assistant Professor Prathmesh U Tawade

 Balance Sheet
Balance sheet As On
Equities and Liabilities Amount Assets Amount
Equity Non-Current Assets
Share Capital Property, Plant
Other Equity Machinery
Land and Building
Non-Current Liabilities Intangible Assets
Long Term Borrowings
Other long-term liabilities Current Assets
Long term provisions Investment
Cash at bank
Current Liabilities Cash
Short term borrowings Short term loans and advances
Trade Payables Other current assets
Other Current Liabilities
Total Total
Assistant Professor Prathmesh U Tawade
Financial Statements As per Companies Act 2013
According to S. 2(40) financial statement in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in case of a company carrying on any activity
not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year; and

(iv) any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv).

Assistant Professor Prathmesh U Tawade

 Lecture 5
Capital And Revenue Items
 Capital And Revenue Items
Capital Transactions

Transactions having long-term effect are known as capital

transactions.

Revenue Transactions

Transactions having short-term effect are known as revenue

transactions.

Assistant Professor Prathmesh U Tawade

 Capital Expenditure
 Capital expenditure can be defined as expenditure incurred on the purchase, alteration or improvement of
fixed assets. For example, the purchase of a car to be used to deliver goods is capital expenditure. Included
in capital expenditure are such costs as:

 Buy a fixed assets;

 Installation of fixed assets;

 Increase the useful life of fixed assets;

 Legal costs of buying property;

 Increase the productivity of or capacity of fixed assets;

 Make an asset usable or reusable;

 Demolition costs;

 Architects fees
Assistant Professor Prathmesh U Tawade
Rules for Determining Capital Expenditure
An expenditure incurred for the purpose of acquiring long term assets (useful life is
at least more than one accounting period) for use in business to earn profits and
not meant for resale, will be treated as a capital expenditure.

When an expenditure is incurred to improve the present condition of a machine or

putting an old asset into working condition, it is recognized as a capital expenditure.

If an expenditure is incurred to increase earning capacity of a business, it will be

considered as capital expenditure.

Preliminary expenses incurred before the commencement of business is considered

capital expenditure.
Assistant Professor Prathmesh U Tawade
 Revenue Expenditure
Revenue expenditure is the expenditure incurred in the
running/management of the business.

For example, the cost of petrol or diesel for cars is revenue expenditure.

Other revenue expenditure:

Maintenance of Fixed Assets;

Administration of the business;

Selling and distribution expenses.

Assistant Professor Prathmesh U Tawade
 Treatment for Capital And Revenue Expenditure

Capital expenditures are shown in the Balance Sheet Assets Side

while Revenue Expenditures are shown in the Trading and Profit And
Loss Account debit side.

Assistant Professor Prathmesh U Tawade

 Capital Receipts and Revenue Receipts
Revenue Receipts

The receipts or income which are received by the business organization in the
course of normal activities are revenue receipts.

Sales of goods, interest, commission etc. are the examples of revenue receipts.

Capital Receipts

Receipts which are not of revenue nature are capital receipts.

Receipts received from the sale of old fixed assets, sale of investment, issue of
shares, issue of debentures, by raising loans etc.
Assistant Professor Prathmesh U Tawade
Rules for Determining Revenue Expenditure
Any expenditure which cannot be recognized as capital expenditure can be termed as
revenue expenditure.

A revenue expenditure temporarily influences only the profit earning capacity of the
business.

An expenditure is recognized as revenue when it is incurred for the following

purposes: Expenditure for day-to-day conduct of the business, the benefits of which
last less than one year.

Examples are wages of workmen, interest on borrowed capital, rent, selling expenses,
and so on.
Assistant Professor Prathmesh U Tawade
Capital Expenditure Vs. Revenue Expenditure
Capital Expenditure Revenue Expenditure

The economic benefits of Capital Expenditures are The economic benefits of Revenue Expenditures are
enjoyed for more than one accounting period. enjoyed within a particular accounting period.

Capital Expenditures are of non-recurring in Revenue Expenditures are of recurring in nature.

nature.

Capital Expenditures are not matched with Capital All Revenue Expenditures are matched with Revenue
Receipts. Receipts.

Assistant Professor Prathmesh U Tawade

 Deferred Revenue Expenditures
 Deferred revenue expenditures represent certain types of assets whose usefulness does
not expire in the year of their occurrence but generally expires in the near future.

 These type of expenditures are carried forward and are written off in future accounting
periods.

 A business can pay insurance premium in advance, say, for a 3 year period.

 The right does not expire in the accounting period in which it is paid but will expire within a
fairly short period of time (3 years).

 Only a portion of the total premium paid should be treated as a revenue expenditure
(portion pertaining to the current period) and the balance should be carried forward as an
asset to be written off in subsequent years.
Assistant Professor Prathmesh U Tawade
 Capital Receipt
A receipt of money is considered as capital receipt when a contribution is
made by the proprietor towards the capital of the business or a contribution
of capital to the business by someone outside the business.

Capital receipts do not have any effect on the profits earned or losses incurred
during the course of a year.

Additional capital introduced by the proprietor; by partners, in case of

partnership firm, by issuing fresh shares, in case of a company; and, by selling
assets, previously not intended for resale.
Assistant Professor Prathmesh U Tawade
 Revenue Receipt
A receipt of money is considered as revenue receipt when it is
received from customers for goods supplied or fees received for
services rendered in the ordinary course of business, which is a result
of the firm’s activity in the current period.

Receipts of money in the revenue nature increase the profits or

decrease the losses of a business and must be set against the revenue
expenses in order to ascertain the profit for the period.

Assistant Professor Prathmesh U Tawade

 Capital Receipts Vs. Revenue Receipts
Capital Receipts Revenue Receipts
It has long-term effect. The benefit is enjoyed for It has short-term effect. The benefit is enjoyed within
many years in future one accounting period.
It does not occur again and again. It is nonrecurring It occurs repeatedly. It is recurring and regular.
and irregular.
Capital receipt, when invested, produces revenue It does not produce capital receipt.
receipt e.g. when capital is invested by the owner,
business gets revenue receipt (i.e. sale proceeds of
goods etc.).
It is shown in the Balance Sheet on the liability side. It is shown in profit and loss account on the credit
side, as an income for the year.
The capital receipt decreases the value of asset or This does not increase or decrease the value of asset
increases the value of liability e.g. sale of a fixed asset, or liability.
loan from bank etc.

Assistant Professor Prathmesh U Tawade

Classify the following items as capital or revenue expenditure

An extension of railway tracks in the factory area;

Wages paid to machine operators;

Installation costs of new production machine;

Materials for extension to foremen’s offices in the factory;

Rent paid for the factory;

Payment for computer time to operate a new stores control system,

Wages paid to own employees for building the foremen’s offices

Assistant Professor Prathmesh U Tawade
Classify the following items as capital or revenue
expenditure or deferred revenue expenditure

Assistant Professor Prathmesh U Tawade

Lecture 6
Annual Report
 Annual Report
An annual report is a document that publicly traded (or listed) companies must
provide annually to shareholders.

It describes the company‘s operations and financial performance/position in a

detailed manner.

Apart from this, it contains images and graphics coupled with an accompanying
narrative, all of which highlight the company‘s activities over the past year.

The annual report may also provide information regarding the company‘s
forecasts.
Assistant Professor Prathmesh U Tawade
Content of the Annual Report
Narrative items
Non-Audited
Information Non-narrative

Content of the Annual Report

items

Balance Sheet

Financial Profit And Loss

Statements Account
Notes to the Cash Flow
account Statement
Accounting
policies
Assistant Professor Prathmesh U Tawade
 Narrative Items
Chairman‘s statement

Directors‘ report

Operating and financial review

Statement of corporate governance

Auditors report, Statement of directors‘ responsibilities

Sustainability report and Management Discussion and Analysis

Assistant Professor Prathmesh U Tawade

 Chairman’s Statement
Chairman‘s statement highlights corporate activities, strategies, researches, labour
relations, main achievements, focuses on future goals, growth.

In corporate annual report, the chairman‘s statement may or may not always be found
but may be provided to shareholders as a separate document.

Chairman‘s statement may concentrate on economic condition of the industry to which

the corporate unit belongs and the economy of the country.

It also provides an overview of the trading year, a personalized overview of the
company‘s performance over the past year and usually covers strategy, financial
performance and future prospects.
Assistant Professor Prathmesh U Tawade
 Director’s Report
 Its principal objective is to supplement the financial information with other information
consider necessary for a full appreciation of the company‘s activities.

 A description of the principal activities of the company

 A fair review of the current and future prospects of the business

 Information on the sale, purchase or valuation of assets

 Recommended dividends

 Employee statistics

 Names of directors and their interests

 Details of political or charitable donations

Assistant Professor Prathmesh U Tawade
 Operating And Financial Review
This is a statement in the annual report which provides a formalized,
structured explanation of financial performance

The operating review covers items such as operating results, profit

and dividend

The financial review discusses items such as capital structure and

treasury policy

Assistant Professor Prathmesh U Tawade

 Statement of Corporate Governance
Statement of corporate governance includes a statement of
corporate governance procedures and compliance, information on
board composition, statements on the company's performance, and
information about compliance and conformance with best practices
for good corporate governance.

Corporate Governance focuses on a company‘s structure and

processes to ensure transparent and responsible corporate behaviour.

Assistant Professor Prathmesh U Tawade

 Auditor’s Report
 The independent and external audit report is typically published with the company's
annual report.

 The auditor's report is important because banks and creditors require an audit of a
company's financial statements before lending to them.

 The auditors shall make a report to the members of the company.

 It is the obligatory duty of the directors to get the accounts of company audited
every year by qualified auditors.

 It is the duty of the board of directors to attach the auditor‘s report to the balance
sheet so as to provide a copy of auditor‘s report to every member of company.
Assistant Professor Prathmesh U Tawade
 Statement of Director’s Responsibilities
It is an important statement in the annual report and is prepared in
accordance with section 135 (5) of the Companies Act, 2013.

Assistant Professor Prathmesh U Tawade

 Sustainability Report
A sustainability report is a report published by a company about the
economic, environmental and social impacts caused by its everyday
activities.

A sustainability report is the key platform for communicating

sustainability performance and impacts – whether positive or
negative.

Assistant Professor Prathmesh U Tawade

 Management Discussion And Analysis
This section is perhaps one of the most important sections in the whole of
Annual Report.

The most standard way for any company to start this section is by talking
about the macro trends in the economy.

They discuss the overall economic activity of the country and the business
sentiment across the corporate world.

This is an important section as we can understand what the company

perceives as threats and opportunities in the industry.
Assistant Professor Prathmesh U Tawade
 Non-Narrative Items
Within non-narrative items in the annual report are:

Financial highlights,

Highlights of the year

Shareholder information

Assistant Professor Prathmesh U Tawade

 Financial Highlights
Financial highlights include year on year comparison of revenue from
operations, EBITDA (Earnings before Interest, Tax, Depreciation and
Amortization), ROE (Return on Equity) and PAT (Profit after Tax)

Assistant Professor Prathmesh U Tawade

 Highlights of the year
It includes other than financial highlights, for instance, launching new
products, brands, opening new showrooms and the like.

Assistant Professor Prathmesh U Tawade

 Financial Statements
There are three financial statements discussed in the annual report,
namely,

Balance Sheet

Profit and Loss account

Cash flow statement

Assistant Professor Prathmesh U Tawade

 Balance Sheet
A balance sheet is a statement of the resources owned and controlled by a
business at a single point in time.

It gives a snapshot of assets, liabilities and capital at a point in time. It provides
information about the company‘s funds and how they are used in the business.

Balance sheet which is also known as position statement provides a bird‘s eye
view on company‘s financial position as well as condition.

This statement indicates whatever company has and whatever company owes.

Assistant Professor Prathmesh U Tawade

 Profit And Loss Account
 The Profit and Loss Account is a statement which shows total business revenue less expenses.

 The P&L account quantifies and explains the gains or losses of the company over the period of time
bounded by two balance sheets.

 It provides a summary of the year‘s trading activities: revenue from sales (turnover), business cost, and
profit or (loss).

 The profit and loss account which is also known as Income Statement indicates net profits earned by
company during current financial year.

 Income statement also indicates profits available for distribution and appropriation after meeting tax
liabilities.

 Profit and Loss Appropriation Account or Retained Earnings Account is also submitted with profit and loss
account which indicates appropriations made during the period.
Assistant Professor Prathmesh U Tawade
 Cash Flow Statement
This is a statement which shows the flow of cash into and out of the business

It is not the same as a profit and loss account

The cash flow statement only records movements of cash and, for example, does
not include credit sales or purchases until such time as cash actually flows

This statement became mandatory because of some high profile business failures
of the 1980s/90s - these were companies that, in terms of the P&L, were
profitable but were short of cash to pay their debts

Assistant Professor Prathmesh U Tawade

 Notes to the Account
 Provides a more detailed analysis of some of the entries in the accounts including:

 Disclosure of accounting policies used (e.g. depreciation) and any changes to these

policies

 Inventories

 Sources of turnover from different product segments

 Details of fixed assets and share capital

 Directors‘ emoluments (how much the Directors earned)

 Earnings per share

Assistant Professor Prathmesh U Tawade
 10 Minutes Reading of Annual Report

Glance through the Chairman / CEO’s statement Read the first two
and last two paragraphs in detail.

This should give you a gist of how the business is going.

Do the same for the management discussions and operational

analysis.

Assistant Professor Prathmesh U Tawade

 10 Minutes Reading of Annual Report
Look at the financial statements and check if:

Net profits are positive, rising or falling;

Sales are rising or falling;

Operating cash flow after working capital adjustments is positive or

negative;

Net debt is rising or falling;

Dividends are rising or falling (as a % of net profits)

Assistant Professor Prathmesh U Tawade
 Some Questions to be asked
Chairman’s statement, business review and outlook, management
discussions

Assistant Professor Prathmesh U Tawade

 Some Questions to be asked
Corporate Governance Disclosure

Assistant Professor Prathmesh U Tawade

 Some Questions to be asked
Financials

Assistant Professor Prathmesh U Tawade

 Some Questions to be asked
Segment Details

Assistant Professor Prathmesh U Tawade

 Some Questions to be asked
Dividend

Assistant Professor Prathmesh U Tawade

Some Questions to be asked

Assistant Professor Prathmesh U Tawade

 Basic Understanding of Company’s Financial
Statements
Basic Understanding

Assistant Professor Prathmesh U Tawade

 Lecture 7
Fixed Assets And Depreciation Accounting
 Fixed Assets
A fixed asset is held for the purpose of producing or supplying good
or services and not for sale in the normal course of business.

Whether the asset is fixed or not depends on the purpose for which it
is held.

Fixed assets are also known as long-lived assets or long term assets.

Assistant Professor Prathmesh U Tawade

Types of The Fixed Assets

Types of the fixed assets

Property, Plant
and Equipment

Intangible Assets

Natural Resources

Assistant Professor Prathmesh U Tawade

 Property, Plant And Equipment (PPE)
As per Ind-AS 16, PPE are tangible items that

Are held to use in the production and or supply of goods, for rental to others, or
for administrative purposes.

Are expected to be used during more than one period.

Examples- Land and Building, Plant and machinery, vehicle, furniture, office
equipment etc.

The basic purpose of buying these assets is to facilitate the business operations.

These assets are used and not consumed.

Assistant Professor Prathmesh U Tawade
 Intangible Assets
These assets do not have physical existence.

They represents legal rights with associated economic benefits.

Examples- Brand names, patents, copyrights, licenses and franchisees,

copyrights and designs etc.

The basis of valuation for intangible assets is cost.

The term amortization describes the systematic write-off to expense of the cost
of an intangible asset over its useful life. Amortization of an intangible asset is
essentially the same as depreciation for a tangible asset.
Assistant Professor Prathmesh U Tawade
 Natural Resources
Mining properties, oil and gas reserves, and tracts of standing timber are examples
of natural resources.

The distinguishing characteristic of these assets is that they are physically removed
from their natural environment and are converted into inventory.

In the balance sheet, mining property and other natural resources are classified as
property, plant, and equipment.

A mine or an oil reserve does not depreciate for these reasons, but it is gradually
depleted as the natural resource is removed from the ground.
Assistant Professor Prathmesh U Tawade
Can you link matching
concept with the fixed
asset?
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
Depreciation and Depreciation Accounting
The process of allocating the cost of fixed assets over its useful life is
called depreciation accounting and the amount which is allocated
every year to profit and loss account is called as depreciation.

Assistant Professor Prathmesh U Tawade

 Depreciation
As per Schedule II of the Companies Act 2013 depreciation can be
defined as the systematic allocation of the depreciable amount on an
asset over its useful economic life.

The depreciable amount of an asset is the cost of an asset less its

residual value.

Assistant Professor Prathmesh U Tawade

 Causes of Depreciation
Physical Deterioration

Obsolescence

Expiration of Legal Rights

Assistant Professor Prathmesh U Tawade

 Need For Depreciation
Matching of Costs and Revenue

Consideration of Tax

True and Fair Financial Position

Compliance with Law

Assistant Professor Prathmesh U Tawade

 Depreciation Accounting Process

Establishing the Choosing an

Estimating the
depreciable appropriate cost
useful life
amount allocation method

Assistant Professor Prathmesh U Tawade

 Estimating the Depreciable Amount
The depreciable amount of an asset is the cost of an asset less its
residual value.

The residual value of an asset is the estimated amount that an

enterprise would currently realize from its disposal after deducting
the estimated cost of disposal.

Assistant Professor Prathmesh U Tawade

 Estimating Useful Life
The useful life of an asset is either

The period over which an asset is expected to be available for use by

the enterprise or

The number of production or similar units expected to be obtained

from the asset by the enterprise.

Assistant Professor Prathmesh U Tawade

Factors In Computing Depreciation

Assistant Professor Prathmesh U Tawade

 Choosing an appropriate cost allocation method

Methods of Depreciation
The final step in the
depreciation process is to Straight Line
Method
decide the method of
appropriating the asset’s Accelerated
Method
depreciable amount.
Production Unit
The common methods of Method
depreciation are -

Assistant Professor Prathmesh U Tawade

 Straight Line Method
Under this method, an equal amount of depreciation
is written off during the estimated life of the asset.

As a result cost of the asset reduces to Nil or its

residual value at the end of its useful life.

Formula- (Cost- Scrap Value)/ Life of the asset

This method is the simplest and most widely used

method.
Assistant Professor Prathmesh U Tawade
 Straight Line Method
Merits Demerits

Easy to apply Undercharges depreciation in early years when assets

are considerably more productive.

Suitable for assets that depreciate with time and are Smoothens income, so users may get a misleading view.
little affected by wear and tear due to usage.

Asset can be depreciated upto the net scrap value or

zero value.

Assistant Professor Prathmesh U Tawade

 Accelerated Method
This method is based on the assumption that the
productivity on an asset does not remain same
throughout its life.

This method assume that depreciation depends only

on time.

Charging higher depreciation in the early years would

be consistent with the matching principles if the
benefits received in those years are higher.
Assistant Professor Prathmesh U Tawade
 WDV Method
It is also called as Diminishing Balance Method/
Reducing Balance Method.

Under this method depreciation reduces every year.

Under this method depreciation is calculated every

year on the balance written down value of the
asset.

The Income Tax Rules, prescribe this method for

computing depreciation.
Assistant Professor Prathmesh U Tawade
 WDV Method
Merits Demerits

Charges substantially higher depreciation in early Produces lower profits in early years after asset
years when assets are conceivably more productive. acquisition.

Suitable for assets that have high obsolescence.

Assistant Professor Prathmesh U Tawade

 SLM vs. WDV
SLM WDV

Depreciation is charged on Original Cost or Historical Depreciation is charged on Net Book Value.
Cost
Annual Amount of Depreciation remains constant. Annual amount of deprecation changes every year.
Straight line method is suitable for assets in which Written down value method is suitable for assets
repair charges are low , the possibility of obsolescence which are affected by technological changes and
is low and scrap value depends upon the time period require more repair expenses with passage of time
involved, such as freehold land and buildings, patents, such as plant and machinery, vehicles, etc.
trade marks, etc.

Assistant Professor Prathmesh U Tawade

 Sum-of-the- year’s digits method
This method is rarely used in India.

It charges large part of the cost of an

asset in the early years.

Assistant Professor Prathmesh U Tawade

 Production Unit Method
 It assumes that deprecation arises solely from the
use of the asset.

 Under this method depreciable amount of an asset

is divided by the total estimated output during its
useful life to obtain the unit depreciation rate.

 This method is appropriate when it is possible to

estimate the productive capacity of an asset with a
fair degree of accuracy and there is a direct
relationship between an asset’s use and its loss of
service potential.
Assistant Professor Prathmesh U Tawade
 Production Unit Method
Merits Demerits

Matches expenses better by relating it to output. Produces volatility in income that may give an
impression that managers have no control over the
firm’s performance.

Assistant Professor Prathmesh U Tawade

 Legal Requirements Relating to
Depreciation
Schedule II to the Companies Act 2013 specifies the useful life and
residual value of various tangible assets.

The provisions are applicable as follows-

Prescribed class of companies- The useful life and residual value of an

asset shall not normally be different from those specified in schedule
II. The ‘prescribed class of companies’’ would include listed
companies.
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Numerical
Ganesh Construction Company bought an earth moving machine for
Rs. 2,00,000/-. The equipment was expected to be useful for six years
or 15,000 hours, with an estimated residual value of Rs. 20,000 at the
end of that time. The equipment logged 2000 hours in the first year.

Compute deprecation under SLM, WDV, Sum-of- the year’s digit and
Production Unit.

Assistant Professor Prathmesh U Tawade

 Accounting for Depreciation

In the books of account, there are two types of arrangements for
recording depreciation on fixed assets-

Charging depreciation to asset account or

Creating Provision for depreciation/Accumulated depreciation

account

Assistant Professor Prathmesh U Tawade

 Charging Depreciation to Asset account
 According to this arrangement, depreciation is deducted from the depreciable cost of the asset
(credited to the asset account) and charged (or debited) to profit and loss account.

 For deducting depreciation amount from the cost of the asset.

Depreciation A/c Dr. (with the amount of depreciation)

To Asset A/c

 For charging depreciation to profit and loss account.

Profit & Loss A/c Dr. (with the amount of depreciation)

To Depreciation A/c

 Balance Sheet Treatment- When this method is used, the fixed asset appears at its net book value
(i.e. cost less depreciation charged till date) on the asset side of the balance sheet
Assistant Professor Prathmesh U Tawade
 Creating Provision for Depreciation
Account/Accumulated Depreciation Account
This method is designed to accumulate the depreciation provided on
an asset in a separate account generally called ‘Provision for
Depreciation’ or ‘Accumulated Depreciation’ account.

By such accumulation of depreciation the asset account need not be

disturbed in any way and it continues to be shown at its original cost
over the successive years of its useful life.

Assistant Professor Prathmesh U Tawade

 Creating Provision for Depreciation Account/Accumulated Depreciation
Account

 For crediting depreciation amount to provision for depreciation account

Depreciation A/c Dr. (with the amount of depreciation)

To Provision for depreciation A/c

 For charging depreciation to profit and loss account

Profit & Loss A/c Dr. (with the amount of depreciation)

To Depreciation A/c

 Balance sheet treatment- In the balance sheet, the fixed asset continues to appear at its original cost on
the asset side. The depreciation charged till that date appears in the provision for depreciation account,
which is shown either on the “liabilities side” of the balance sheet or by way of deduction from the
original cost of the asset concerned on the asset side of the balance sheet.
Assistant Professor Prathmesh U Tawade
 Numerical

On 15th April 20X1, ABC Ltd. buys a machinery for Rs. 90,000 and
spends another Rs. 10,000 on its transportation, erection etc. The
company decides to charge deprecation following Straight line
method @10%. The life of the machine is 10 years. The machine was
sold on March 25th, 20X4 for Rs. 20,000/-. Pass the Journal entries and
prepare the ledger.

Assistant Professor Prathmesh U Tawade

 Journal Entries
Date Particulars L/F Amount (Dr.) Amount
(Cr.)
15th April 20X1 Machinery A/c- Dr 1,00,000
To Bank A/c 1,00,000

31st March 20X2 Deprecation A/c- Dr 10,000

To Provision for Deprecation 10,000

31st March 20X2 Profit & Loss A/c- Dr 10,000

To Deprecation A/c 10,000

31st March 20X3 Deprecation A/c- Dr 10,000

To Provision for Deprecation 10,000

31st March 20X3 Profit & Loss A/c- Dr 10,000

To Deprecation A/c 10,000

25th March 20x4 Deprecation A/c- Dr 10,000

To Provision for Deprecation 10,000

25th March 20x4 Provision for Deprecation A/c- Dr 30,000

To Machinery A/c 30,000
Assistant Professor Prathmesh U Tawade
 Journal Entries
Date Particulars L/F Amount (Dr.) Amount (Cr.)

25th March 20x4 Bank A/c- Dr. 20,000

Profit & Loss A/c- Dr. 50,000
To Machinery A/c 70,000
31st March 20x4 Profit & Loss A/c- Dr 10,000
To Deprecation A/c 10,000

Assistant Professor Prathmesh U Tawade

 Lecture 8
Evaluation And Accounting Of Inventory
 Classification of Inventory
In a merchandising company, inventory consists of all goods owned and held
for sale to customers.

Inventory is expected to be converted into cash within the company’s

operating cycle.

In a manufacturing company, some inventory may not yet be ready for sale.

As a result, manufacturers usually classify inventory into three categories:

finished goods, work in process, and raw materials.

Assistant Professor Prathmesh U Tawade

 Classification of Inventory
 Finished goods inventory is manufactured items that are completed and ready for sale.

 Work in process is that portion of manufactured inventory that has been placed into
the production process but is not yet complete.

 Raw materials are the basic goods that will be used in production but have not yet
been placed into production.

 Consumable stores are used in the production process but do not form a part of the
finished goods.

 By observing the levels and changes in the levels of these three inventory types,
financial statement users can gain insight into management’s production plans.
Assistant Professor Prathmesh U Tawade
 Determining Inventory Quantities
Determining inventory quantities involves two steps:

(1) taking a physical inventory of goods on hand and

(2) determining the ownership of goods.

Assistant Professor Prathmesh U Tawade

 Taking Physical Inventory
Companies take a physical inventory at the end of the accounting
period. Taking a physical inventory involves actually counting,
weighing, or measuring each kind of inventory on hand.

An inventory count is generally more accurate when goods are not
being sold or received during the counting. Consequently, companies
often “take inventory” when the business is closed or when business
is slow.

Assistant Professor Prathmesh U Tawade

 Determining Ownership Of Goods
One challenge in computing inventory quantities is determining what
inventory a company owns.

To determine ownership of goods, two questions must be answered:

Do all of the goods included in the count belong to the company?

Does the company own any goods that were not included in the
count?

Assistant Professor Prathmesh U Tawade

 Determining Ownership Of Goods
When the terms are FOB (free on board) shipping point, ownership of
the goods passes to the buyer when the public carrier accepts the
goods from the seller.

When the terms are FOB destination, ownership of the goods

remains with the seller until the goods reach the buyer.

Assistant Professor Prathmesh U Tawade

 Inventories And Financial Statements
Matching Principle

Cost of Goods Sold= Opening Stock + Purchases during the year-

Closing Stock

Opening Stock From the previous year Balance Sheet

+ Goods Purchased during the year

- Closing Stock To Balance Sheet

= Cost of goods sold To Profit and Loss Account

Assistant Professor Prathmesh U Tawade

 Inventories And Financial Statements
S Ltd. is a dealer in TV sets. As on 1st April 2021, it had 100 sets
costing Rs. 28,00,000/- in showroom which was purchased in the year
2020-21. During year 2021-22 it purchased 1500 sets for Rs.
4,50,00,000/- and it was able to sell 1300 units for Rs. 4,55,00,000/-.
As on 31st March 2022, it has 300 sets still unsold costing Rs.
87,00,000/- .

Assistant Professor Prathmesh U Tawade

 Inventories And Financial Statements
Profit And Loss Account Amount Amount
Sales 4,55,00,000
Less- COGS
Opening Stock 28,00,000
Add- Purchases 4,50,00,000
Less- Closing Stock 87,00,000 3,91,00,000

Gross Profit 6,40,00,000

Balance Sheet
Current Assets
Closing Stock 87,00,000

Assistant Professor Prathmesh U Tawade

 Inventory Methods
Inventory is accounted for at cost.

Cost includes all expenditures necessary to acquire goods and place them in a condition
ready for sale. For example, freight costs incurred to acquire inventory are added to the
cost of inventory, but the cost of shipping goods to a customer is a selling expense.

After a company has determined the quantity of units of inventory, it applies unit costs
to the quantities to compute the total cost of the inventory and the cost of goods sold.

This process can be complicated if a company has purchased inventory items at

different times and at different prices.

Assistant Professor Prathmesh U Tawade

Inventory Methods

Inventory Methods
Specific
Identification
Cost Flow
Assumption

Assistant Professor Prathmesh U Tawade

 Specific Identification
Specific identification requires that companies keep records of the original cost of
each individual inventory item.

Historically, specific identification was possible only when a company sold a limited
variety of high-unit-cost items that could be identified clearly from the time of
purchase through the time of sale.

Examples of such products are cars, pianos, or expensive antiques.

Today, bar coding, electronic product codes, and radio frequency identification make it
theoretically possible to do specific identification with nearly any type of product. The
reality is, however, that this practice is still relatively rare.
Assistant Professor Prathmesh U Tawade
 Cost Flow Assumptions
 Because specific identification is often impractical, other cost flow methods are permitted.

 These differ from specific identification in that they assume flows of costs that may be
unrelated to the physical flow of goods.

 There are three assumed cost flow methods:

 First-in, first-out (FIFO)

 Last-in, first-out (LIFO)

 Average-cost

 Weighted- Average Cost

Assistant Professor Prathmesh U Tawade

 FIFO
Under FIFO method, we assume that inventory purchased first are
sold or consumed first.

With this assumption, the ending inventory will be made up of the

most recent purchases whereas the oldest purchases will be
appropriated towards cost of goods sold.

This method is preferred when the prices are falling for the inventory.

Assistant Professor Prathmesh U Tawade

 FIFO- First In First Out
Date Particulars
2nd Jan Receipt of 50 units @ Rs. 10 per unit
4th Jan Receipt of 100 units @ Rs. 10.50 per unit
6th Jan Issue of 40 units
8th Jan Receipt of 100 units @ Rs. 11.00 per unit
10th Jan Issue of 70 units
14th Jan Issue of 80 units
18th Jan Receipt of 75 units @ Rs. 10.75 per unit
21st Jan Receipt of 200 units @ Rs. 11 per unit
25th Jan Issue of 100 units
30th Jan Issue of 75 units

Assistant Professor Prathmesh U Tawade

Date Receipts Issues Balance
Qty Rate Value Qty Rate Value Qty Rate Value
2nd Jan 50 10 500 50 10 500
4th Jan 100 10.5 1050 50 10 500
100 10.5 1050
6th Jan 40 10 400 10 10 100
100 10.5 1050
8th Jan 100 11 1100 10 10 100
100 10.5 1050
100 11 1100
10th Jan 10 10 100 40 10.5 420
60 10.5 630 100 11 1100
14th Jan 40 10.5 420 60 11 660
40 11 440
18th Jan 75 10.75 806.25 60 11 660
75 10.75 806.25
21st Jan 200 11 2200 60 11 660
75 10.75 806.25
200 11 2200
25th Jan 60 11 660 35 10.75 376.25
40 10.75 430 200 11 2200
30th Jan 35 10.75 376.25
40 11 440 160 11 1760
Assistant Professor Prathmesh U Tawade
 LIFO- Last In Last Out
Under this method most recent purchases are assumed to have been
consumed first.

Accordingly COGS will be made up of cost of recent acquisition whereas the

ending inventory will be valued at price applicable to the oldest purchase.

Under this method cost of the production appears at the current market
rates.

However, the inventory is not at the current market rates because materials
from the oldest remain in the industry.
Assistant Professor Prathmesh U Tawade
Date Receipts Issues Balance
Qty Rate Value Qty Rate Value Qty Rate Value
2nd Jan 50 10 500 50 10 500
4th Jan 100 10.5 1050 50 10 500
100 10.5 1050
6th Jan 40 10.5 420 50 10 500
60 10.5 630
8th Jan 100 11 1100 50 10 500
60 10.5 630
100 11 1100
10th Jan 70 11 770 50 10 500
60 10.5 630
30 11 330
14th Jan 30 11 330 50 10 500
50 10.5 525 10 10.5 105
18th Jan 75 10.75 806.25 50 10 500
10 10.5 105
75 10.75 806.25
21st Jan 200 11 2200 50 10 500
10 10.5 105
75 10.75 806.25
200 11 2200
25th Jan 100 11 1100 50 10 500
10 10.5 105
75 10.75 806.25
100 11 1100
30th Jan 75 11 825 50 10 500
10 10.5 105
75 10.75 806.25
25 11 275

Assistant Professor Prathmesh U Tawade

 Simple Average Cost Method
In this method the ending inventory as well as COGS is valued at the
average cost of goods available.

This method is based on the assumption that since all the lots of the
materials are stored at the same physical location in the stores the
individual identity of the various lots is lost.

Therefore, the price to be considered for the issue of materials is

average price.
Assistant Professor Prathmesh U Tawade
Date Receipts Issues Balance
Qty Rate Value Qty Rate Value Qty Rate Value
2nd Jan 50 10 500 50 10 500
4th Jan 100 10.5 1050 50 10 500
100 10.5 1050
6th Jan 40 10.25 410 110 10.25 1127.5
8th Jan 100 11 1100 110 10.25 1127.5
100 11 1100
10th Jan 70 10.625 743.75 140 10.625 1487.5
14th Jan 30 10.625 318.75 110 10.625 1168.75
50 10.625 531.25 60 10.625 637.5
18th Jan 75 10.75 806.25 60 10.625 637.5
75 10.75 806.25
21st Jan 200 11 2200 60 10.625 637.5
75 10.75 806.25
200 11 2200
25th Jan 100 10.792 1079.2 235 10.792 2536.12
30th Jan 75 10.792 809.4 160 10.792 1726.72
Assistant Professor Prathmesh U Tawade
 Weighted Average Cost
This method takes care of the drawbacks of Simple Average Method.

Under this method the number of units i.e. the quantity of the
materials is also taken into consideration to calculate average prices.

So under this method, the average price of a unit is simply total cost
of materials in stores divided by total quantity.

Assistant Professor Prathmesh U Tawade

Date Receipts Issues Balance
Qty Rate Value Qty Rate Value Qty Rate Value
2nd Jan 50 10 500 50 10 500
4th Jan 100 10.5 1050 150 10.33 1549.5
6th Jan 40 10.33 413.2 110 10.33 1136.3
8th Jan 100 11 1100 210 10.65 2236.5

10th Jan 70 10.65 745.5 140 10.65 1491

14th Jan 30 10.65 319.5

50 10.65 532.5 60 10.65 639

18th Jan 75 10.75 806.25 135 11.11 1499.9

21st Jan 200 11 2200 335 11.04 3698.4

25th Jan 100 11.04 1104 235 11.04 2594.4

30th Jan 75 11.04 828 160 11.04 1766.4

Assistant Professor Prathmesh U Tawade
 Inventory Valuation Principle
 As per AS2, inventories should be valued at the lower of cost and net realizable value.

 This is Lower-of-cost-or market (LCM)

 Cost is computed using a cost formula.

 Market means Net Realizable Value (NRV). It is defined as the estimated selling price in the
ordinary course of business less the estimated costs of completion and the cost necessary to
make the sale.

 NRV= Estimated Selling Price- Estimated cost of completion- Estimated Cost to make the sale

 The NRV is compared with the cost of inventory and the lower of the two is taken as the
carrying value in the balance sheet.
Assistant Professor Prathmesh U Tawade
 Numerical
Suman Company Ltd. has the following inventory, purchases and sales data for
August. The physical inventory count on 31st Aug is 300 units. Compute the
cost of inventory on hand on Aug 31st under each of the following methods (i)
FIFO (ii) LIFO
Inventory Aug 1 100 units @ Rs. 5
Purchases Aug 5 600 units @ Rs. 6
Aug 11 300 units @ Rs. 8
Aug 23 400 units @ Rs. 9
Sales Aug 9 400 units
Aug 18 500 units
Aug 28 200 units

Assistant Professor Prathmesh U Tawade

 Solution
Date Particulars Units Unit Cost Total Cost
Aug 1 Beginning Inventory 100 5 500
Aug 5 Purchase 600 6 3600
Aug 11 Purchase 300 8 2400
Aug 23 Purchase 400 9 3600
Available for sale 10100
FIFO
Ending Inventory 300
Ending Inventory 2700 (300*9)

COGS
Cost of goods available for sale 10100
Less- Ending Inventory 2700
7400
Assistant Professor Prathmesh U Tawade
 Solution
LIFO
Ending Inventory 300
Ending Inventory 100 units @ Rs. 5 500
Ending Inventory 200 units @ Rs. 6 1200
1700
COGS
Cost of goods available for sale 10100
Less- Ending Inventory 1700
8400

Assistant Professor Prathmesh U Tawade

 Numerical
The following is the information available for Shradha Ltd- Closing stock
for the last year was 700 units valued at Rs. 1200 per unit. Sales of the
company for that quarter was Rs. 27,00,000/- Using FIFO, LIFO and
Date Quantity Unit Price (Rs.)
average cost method calculate: Purchase
10 April 800 1240
Value of closing inventory 5 May 500 1250
15 June 700 1290
COGS Sales
7 April 400 1800
Gross Profit 10 May 800 1800
12 June 300 1800

Assistant Professor Prathmesh U Tawade

Cash Flow Statements
Assistant Professor Prathmesh U Tawade
 Why Cash Flow Statement?
The balance sheet provides information about an enterprise’s assets and how
those assets have been financed as on a reporting day.

However, it does not explain the changes during a period in assets, liabilities
and equity resulting from the enterprise’s activities.

The statement of profit and loss provides information about an enterprise's

financial performance during a period.

However, since the earnings are measured by accrual accounting, it does not
show the cash generated through an enterprise’s operations.
Assistant Professor Prathmesh U Tawade
 Why Cash Flow Statement?
It provides information about inflows and outflows of cash from
operating activities, investing activities and financing activities during
the year at one place.

When read with the other two statements, it helps the users in better
assessment of financial health of an organization by highlighting its
ability to generate cash.

Assistant Professor Prathmesh U Tawade

 Applicability of Cash Flow Statement
Companies Act 2013 requires all companies except One Person
companies to prepare a cash flow statement.

Assistant Professor Prathmesh U Tawade

 What is Cash?
For the purpose of preparing cash flow statement, the word ‘cash’ is
used in wider sense.

The term includes cash in hand, cash balances with banks that are
repayable on demand and cash equivalents.

Cash equivalent are short term investments that can be quickly

converted in cash without significant risk of change in value.

Assistant Professor Prathmesh U Tawade

 Structure of Cash Flow Statement

Operating Investing Financing

Activities Activities Activities

Assistant Professor Prathmesh U Tawade

 Operating Activities
These involve producing and
delivering goods and providing
services.
Cash Inflows Cash Outflows
These are the principal revenue Cash Sales Materials and Services
generating activities of the
Advances from Salaries and employee
enterprise. customers benefits
Here sources and uses of cash are
Collection of trade
Taxes and duties
from the main revenue generating receivables

activities of the business.

Assistant Professor Prathmesh U Tawade

 Investing Activities
These involves making and
Cash Inflows Cash Outflows
collecting loans, acquiring and
disposing of debt and equity Sale of fixed assets Payment to buy fixed assets

instruments and fixed assets.

Collection of loan Disbursement of loans
Sources and uses of cash for
acquiring or disposing off long Sale of shares and bonds of
other enterprise
Payment to buy shares and
bonds of other enterprises

term assets and investments.

Interest and dividends received
on loans and advances

Assistant Professor Prathmesh U Tawade

 Financing Activities
 These involve obtaining resources from
owners and providing them with a Cash Inflows Cash Outflows
return on and return of their investment
Proceeds from issuing Payment to buy back or
and obtaining and repaying borrowings shares and bonds redeem own shares

and paying for their borrowings. Principal payments of

Proceeds from loans
bonds and loans
 These are the activities that result in
changes in the size and composition of Payment of interest
the owner’s capital (including
preference share capital) and Payments of dividends
borrowings of the enterprise.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Answers
a) Operating activities - 3, 6, 7, 10, 13, 15, 19, 20, 23, 24, 27;

b) Investing activities - 1, 5, 8, 11, 12, 16, 17, 21, 22

c) Financing activities - 2, 4, 9, 14, 18, 25, 26, 28, 29;

d) Cash equivalents - 30, 31, 32, 33.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Relationship Between Cash Flow and Cash Balance in Balance
Sheet

Cass flow during

Cash and Cash the year from Cash and Cash
Equivalents in the Operating Activities Equivalents in the
previous year’s current year’s
balance sheet Investing Activities balance sheet
Financing Activities

Assistant Professor Prathmesh U Tawade

 Numerical
As on 31st March 2023, the cash and cash equivalents of Power Ltd.
stood at Rs. 945 million as compared to Rs. 1041 million in the
previous year’s balance sheet. During the year, the company
generated a net cash flow of Rs. 844 million rom its operating
activities and used a net amount of Rs. 1235 million towards its
investing activities. What are the net cash flows from financing
activities?

Assistant Professor Prathmesh U Tawade

 Solution
Rs. Million

Balance at the end of the year 945

Less- Balance in the beginning of the year 1041

Net decrease in the cash and cash equivalents (96)

Cash Flow from Operating+ Financing+ Investing = Net change in the cash and cash equivalents

844-1235+ Financing activities= (96)

Financing Activities= 322

Assistant Professor Prathmesh U Tawade

Methods for ascertaining Cash Flows

Operating Cash Flow

Direct

Indirect

Assistant Professor Prathmesh U Tawade

 Direct Method
The direct method, whereby major classes of gross cash receipts and gross cash
payments are considered.

The direct method excludes non-cash expenses, non-operating expenses and

non-operating income.

It also removes the effect of accrual basis of accounting by only considering
actual receipts and payments rather than income accrued and expenses incurred.

This method is easier to understand for the reader but may require more efforts
for the business enterprises to prepare it.
Assistant Professor Prathmesh U Tawade
Numerical

Assistant Professor Prathmesh U Tawade

 Solution
Cash Flow Statement of _____
For the year ended March 31, 20XX
Particulars Amount Amount
Operating Activities:
Inflows
Cash Received from sale of goods 1,40,000
Cash received from Trade Receivables 1,75,000
Trade Commission received 50,000
Total Inflow (A) 3,65,000
Outflow
Payment for cash purchases 1,20,000
Payment to trade payables 1,57,000
Office and selling expenses 75,000
Payment for income tax 30,000
Total Outflow (B) 3,82,000
Cash Flow from operating activities (A-B) (17,000)
Assistant Professor Prathmesh U Tawade
 Numerical
(1) Company sold goods for cash only. (9) Amount paid to trade payables during the year Rs. 4,60,000.

(2) Gross Profit Ratio was 30% for the year, gross profit amounts to (10) Tax paid during the year amounts to Rs.65,000 (Provision for
Rs. 3,82,500. taxation as on 31.03.20X1` 45,000).

(3) Opening inventory was lesser than closing inventory by (11) Investments of Rs. 7,00,000 sold during the year at a profit
Rs.35,000. of Rs. 20,000.

(4) Wages paid during the year Rs. 4,92,500. (12) Depreciation on fixed assets amounts to Rs. 85,000.

(5) Office and selling expenses paid during the year Rs. 75,000. (13) Plant and machinery purchased on 15th November, 20X0 for
(6) Dividend paid during the year Rs. 30,000 (including dividend Rs. 2,50,000.
distribution tax.) (14) Cash and Cash Equivalents on 31st March, 20X0 Rs.2,00,000.
(7) Bank loan repaid during the year Rs. 2,15,000 (included
(15) Cash and Cash Equivalents on 31st March, 20X1 Rs.6,07,500.
interest ` 15,000)
Prepare cash flow statement of M/s MNT Ltd. for the year ended
(8) Trade payables on 31st March, 20X0 exceed the balance on
31st March, 20X1 with the help of the information.
31st March, 20X1 by Rs.25,000. Assistant Professor Prathmesh U Tawade
 M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1

Particulars Amount (in Rs.) Amount (in Rs.)

Cash flows from Operating Activities
Cash Sales (3,82,500/0.30) 1275000
Less- Cash payments for trade payables (460000)
Wages paid (492500)
Office and selling expenses (75000) (1027500)
Cash generated from operations before tax 247500
Income tax paid (65000)
Net cash generated from operating activities (A) 182500
Cash flows from investing activities
Sale of investments (7,00,000 + 20,000) 720000
Payments for purchase of Plant & machinery (250000)
Net cash used in investing activities (B) 470000

Assistant Professor Prathmesh U Tawade

 M/s MNT Ltd.
Cash Flow Statement for the year ended 31st March, 20X1 (Continued)

Particulars Amount (in Rs.) Amount (in Rs.)

Cash flows from financing activities

Bank loan repayment(including interest) (215000)

Dividend paid(including dividend distribution tax) (30000)

Net cash used in financing activities (C) (245000)

Net increase in cash (A+B+C) 407500

Cash and cash equivalents at beginning of the period 200000

Cash and cash equivalents at end of the period 607500

Assistant Professor Prathmesh U Tawade

 Indirect Method
The indirect method starts with net profit and adjusts it for revenue
and expenses items that did not involve operating cash receipts or
cash payments in the current period to arrive at net cash flow from
operating activities.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Cash Flow from Operating Activities of Samurai Toys Ltd. for 2010-11
Particulars Amount (in Rs. Crore)
Profit Before Tax 30.47
Add-
Depreciation 18.56
Interest and Finance Charges 13.45
Less-
Interest Earned (22.43)
Profit before working capital charges 40.05
Add-
Decrease in debtors 9.34
Increase in other liabilities 3.59
Less-
Increase in inventories (11.91)
Decrease in sundry creditors (6.44)
Profit after working capital charges 34.63
Less- Taxes paid (8.00)
Cash Flow from operating activities Assistant Professor Prathmesh U Tawade 26.63
Fund Flow Statement
Assistant Professor Prathmesh U Tawade
 Fund
The term “Fund” is commonly used with cash.

Fund refers to the economic values expressed expressed in terms of

money listed in the balance sheet.

It is also called net working capital.

Fund= Working Capital= Current Assets- Current Liabilities

Assistant Professor Prathmesh U Tawade

 Flow of Funds
The concept of flow of funds is also called as “fund flow”.

The term flow means change and therefore the term ‘flow of fund’ means
change in funds or change in working capital.

Flow of funds means any increase or decrease in working capital.

If the transaction results in the increase of funds it is called as a ‘source of

funds’.

If the results in the decrease of funds it is known as an ‘application of funds’.

Assistant Professor Prathmesh U Tawade

 Flow of Funds
 Fixed Asset changes to Current Assets Or

Flow Of Funds
 Current Assets changes to Fixed Assets Or

 Fixed Liability changes to Current liability Or

 Current liability changes to Fixed liability

But if

 Current Assets changes to Current Assets Or

 Current Assets changes to Current Liabilities Or

Flow Of Funds
 Current Liabilities to Current Liabilities Or

 Non-Current To Non-Current
Assistant Professor Prathmesh U Tawade
 Fund Flow Statement
It is popularly known as a “ Statement of Sources and Uses of Funds”.

A fund flow statement is a statement which highlights the changes in

the financial structure of a business unit.

Simply, it is a statement that shows how the funds are obtained and
how it is put into use.

Assistant Professor Prathmesh U Tawade

 Objectives of Fund Flow Statement
To show how the resources have been obtained and used.

To indicate the results of current financial management.

To point out the most important changes that have taken place
during a specified period.

To have an assessment of the working capital position of the concern.

To show the financial strengths and weakness of the business.

Assistant Professor Prathmesh U Tawade

 Significance of Fund Flow Statement
Helps in knowing the sources and uses of fund.

Suggests the ways to improve the working capital positions.

Helps in assessing the efficiency of management in utilization of funds.

Helps in planning investment of idle funds.

Indicates the effectiveness of the management in handling and forecasting the

working capital and long-term requirements of a business.

Reveals the cause for financial difficulties faced by the firm.

It is used in giving needful information to banks for obtaining loans.

Assistant Professor Prathmesh U Tawade
Steps Involved In Preparation Of Fund Flow
Statement

Preparation of Schedule Preparation of non–

of Changes in Working current account (Ledger
Capital Accounts)

Preparation of
Statement of Funds from
Preparation of Fund
Operation or
Flow Statement
Preparation of Adjusted
Profit and Loss Account

Assistant Professor Prathmesh U Tawade

 Principle for Working Capital
Increase in Current Assets – Increases W.C

Decrease in Current Assets – Decrease W.C

Increase In Current Liability – Decreases W.C

Decrease in Current Liability – Increases W.C

Assistant Professor Prathmesh U Tawade

Statement Of Changes In Working Capital

Assistant Professor Prathmesh U Tawade

 Numerical
Balance sheet of XYZ Ltd., as on 31st March 2023
Liabilities 2022 2023 Assets 2022 2023

Share Capital 6,00,000 6,00,000 Fixed Assets 10,00,000 11,20,000

Less- Depreciation 3,70,000 4,60,000
Reserves 50,000 1,80,000 6,30,000 6,60,000

Profit & Loss A/c 40,000 65,000 Stocks 2,40,000 3,70,000

Debentures 3,00,000 2,50,000 Book Debts 2,50,000 2,30,000

Creditors 1,70,000 1,60,000 Cash in hand & Bank 80,000 60,000

Provision for Income Tax 60,000 80,000 Preliminary Expenses 20,000 15,000

12,20,000 13,35,000 12,20,000 13,35,000

Assistant Professor Prathmesh U Tawade

 Statement of Changes in Working Capital
Particulars 2022 2023 Working Capital
Increase Decrease
Current Assets
Stocks 2,40,000 3,70,000 1,30,000
Book Debts 2,50,000 2,30,000 20,000
Cash In Hand 80,000 60,000 20,000
Total Current Assets (A) 5,70,000 6,60,000
Less- Current Liabilities
Creditors 1,70,000 1,60,000 10,000
Provision for Income Tax 60,000 80,000 20,000
Total Current Liabilities (B) 2,30,000 2,40,000
Working Capital (A-B) 3,40,000 4,20,000
Increase in Working Capital 80,000 80,000
4,20,000 4,20,000 1,40,000 1,40,000
Assistant Professor Prathmesh U Tawade
 Preparation of Adjusted Profit and Loss Account

 The next step is to ascertainment of hidden information about sources and applications of
funds.

 In order to ascertain the various sources and application of funds, analysis of non-current
accounts is essential.

 If no additional information is given for non-current accounts, there is no need to prepare ledger
accounts.

 In case, any additional information is given for noncurrent accounts, it is necessary to open an
account for each non-current assets and non-current liabilities to dig out the hidden information
as balancing figures.

 The balancing figures may be a sources of fund or an applications of funds or an item to be

debited or credited to adjusted profit and loss account.
Assistant Professor Prathmesh U Tawade
Preparation of Statement of Funds from Operation

Assistant Professor Prathmesh U Tawade

 Numerical
A company’s reported
profit of Rs. 90,000
after incorporating
the given information,
you are required to
calculate the net
inflow of fund from
operation.

Assistant Professor Prathmesh U Tawade

 Statement Showing Funds From Operations
Particulars Amount Amount
Net Profit for the current year 90,000
Add- Non Fund- Non Operating Expenses
Loss on sale of equipment 11,000
Discount on issue of debentures 2,500
Depreciation on machinery 25,000
Depletion of natural resources 11,500
Amortization of goodwill 25,000
Premium on redemption of debentures 2,000
Interim dividend 12,500
Excess provision of taxation 21,000
Transfer General Reserve 6,000
Preliminary expenses written off 1,500 1,18,000
Less- Non-Fund/ Non-operating income
Profit on sale of non- current assets 50,000
Profit on revaluation of investment 3,000
Dividend income on investment 5,000 (58,000)
Net Inflow of funds from operations 1,50,000

Assistant Professor Prathmesh U Tawade

Preparation of Fund Flow Statement

Assistant Professor Prathmesh U Tawade

 Numerical
From the following 31.03.22 31.03.23 31.03.22 31.03.23

balance sheet of Sun Co.

Ltd., as on 31 March
2022 and as on 31 March
2023 , prepare (i) A
schedule of changes in
working capital and (ii)
Fund flow statement.
Assistant Professor Prathmesh U Tawade
 Statement of Changes in Working Capital
Particulars 2022 2023 Working Capital
Increase Decrease
Current Assets
Stocks 5,08,000 5,78,000 70,000
Debtors 62,000 56,000 6,000
Cash In Hand 44,000 62,000 18,000
Total Current Assets (A) 6,14,000 6,96,000
Less- Current Liabilities
Bills Payable 50,000 40,000 10,000
Trade Creditors 70,000 80,000 10,000
Outstanding Expenses 4,000 2,000 2,000
Total Current Liabilities (B) 1,24,000 1,20,000
Working Capital (A-B) 4,90,000 5,74,000
Increase in Working Capital 84,000 84,000
5,74,000Assistant Professor
5,74,000
Prathmesh U Tawade1,00,000 1,00,000
Statement Showing Funds From Operations
Particulars Amount Amount

Net Profit for the current year 70,000

Add- Non Fund/Non Operating Expenses

Deprecation 12,000

Goodwill Write off 4,000

Transfer To General Reserves 20,000

Discount On Debentures 2,000 38,000

Less- Non-Fund/ Non-operating income

Previous Year Profit (40,000)

Net Inflow of funds from operations 68,000

Assistant Professor Prathmesh U Tawade

 Fund Flow Statement
Sources of Fund Amount Application of Fund Amount

Issue of Capital 1,00,000 Purchase of furniture 20,000

Increase in share premium 10,000 Purchase of long-term investment 24,000

Funds from operations 68,000 Redemption of debenture 50,000

Increase in working capital 84,000

1,78,000 1,78,000

Assistant Professor Prathmesh U Tawade

 Numerical
31.03.22 31.03.23 31.03.22 31.03.23
 The balance sheet of Moon
Limited for the year ended
31st March 2022 and 2023
is given :

 Depreciation written off

during the year 2023 was as
under: Plant & Machinery –
Rs.12,800 ; Furniture &
Fixtures – Rs. 400

 Prepare a statement of
sources and uses of funds.

Assistant Professor Prathmesh U Tawade

 Statement of Changes in Working Capital
Particulars 2022 2023 Working Capital
Increase Decrease
Current Assets
Stocks 22,100 26,000 3900
Debtors 36,500 39,100 2600
Bank 4800 4000 800
Total Current Assets (A) 63,400 69,100
Less- Current Liabilities
Income Tax Provisions 9800 10,900 1100
Creditors 33500 36,400 2900
Total Current Liabilities (B) 43,300 47,300
Working Capital (A-B) 20,100 21,800 6,500 4,800
Increase in Working Capital 1,700 1,700
6,500 6,500

Assistant Professor Prathmesh U Tawade

 Non-Current Account Ledger
Plant & Machinery A/c
Debit Credit
Particulars Amount Particulars Amount
To Bal B/d 35,600 By Adjusted P & L A/c 12,800
(Deprecation)
To Cash purchases 28,500 By Bal C/d 51,300
(Balancing Figure)
64,100 64,100

Furniture And Fixtures A/c

Debit Credit
Particulars Amount Particulars Amount
To Bal B/d 2,400 By Adjusted P & L A/c 400
(Deprecation)
By Cash Sales (Balancing 500
figure)
By Bal C/d 1,500
2,400 2,400
Assistant Professor Prathmesh U Tawade
 Statement Showing Funds From
Particulars
Operations Amount Amount

Net Profit for the current year 20,800

Add- Non Fund/Non Operating Expenses

Deprecation On Plant & Machinery 12,800

Deprecation On Furniture and Fixtures 400

Transfer To General Reserves 3000 16,200

37,000

Less- Non-Fund/ Non-operating income

Previous Year Profit 19,500 19,500

Net Inflow of funds from operations 17,500

Assistant Professor Prathmesh U Tawade

 Fund Flow Statement
Sources of Fund Amount Application of Fund Amount

Issue of shares 40,000 Purchase of Plant & Machinery 28,500

Share Premium 4,000 Purchase of freehold premises 57,800

Issue of debentures 26,000 Increase in working capital 1,700

Sale of furniture and fixtures 500

Funds from operations 17,500

88,000 88,000

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Fund Flow Statement Vs. Cash Flow Statement
Fund Flow statement Cash Flow statement
It is based on accrual accounting system. In cash flow statement, transactions effecting cash or cash
equivalents are considered.
Fund flow analysis is based on the working capital concept Cash flow analysis is based on the cash concept of funds.
of funds.
It shows the various causes for changes in the working Cash Flow statement analysis reveals the causes for change
capital position over a period. in the cash position over the same accounting period.

FFS is more useful for decision making in the long run. Cash flow analysis is more useful in the short run. It is useful
tool for short term financial decisions.
FFS is a better indicator for short term solvency because it Cash flow statement cannot clearly reveal the short-term
considers all the C.A and C.L. solvency position of firm because it considers only cash and
ignore all other C.A and C.L.

Working capital includes cash also. Thus, improvement in But the reverse is not always true. Working capital may
cash position automatically improves working capital also. increase even if cash decreases.

Assistant Professor Prathmesh U Tawade

Ethics In Accounting
Assistant Professor Prathmesh U Tawade
 Ethics
The word ethics is said to have been derived from the Latin word ‘Ethicus’ or in Greek
‘Ethicos’.

The origin of these words is from ‘ethos’ meaning character.

Ethics may be defined as a set of moral principles, values, norms or rules of conducts of
behavior and practice of a group, community, society, organization or a profession.
Ethics can also be seen as acceptable standards of behavior or moral principles that
guide the society, an organization or a profession.

‘Ethics’ which may be defined as ‘those moral principles which guide the conduct of
individuals’ irrespective of the differences of opinions amongst individuals.
Assistant Professor Prathmesh U Tawade
 Need for Ethics in Accounting
 Accountants have a responsibility to consider the public interest and maintain the reputation of the accounting

profession and their personal interest must not prevail over their duties.

 Accountants deal with a range of issues on behalf of their clients. They often have access to confidential and sensitive

information and auditors are expected to give an independent view.

 The professional sees himself or herself as responsible to the customer; the mission is to solve the problem of the

customer, to create the value that the customer requires. If that value is not created, if the problem is not solved, then

the professional has failed in his or her job.

 Technically, accountants should carry out their professional services in accordance with the relevant technical and

professional standards. The professional accountants have a duty to carry out with care and skills, the instructions of

the client or employer in so far as they are compatible with the requirements of integrity, objectivity and independence

(in the case of professional accountants in practice).

Assistant Professor Prathmesh U Tawade
 Potential Conflicts To An Accountant
 Act contrary to law or regulation.

 Act contrary to technical or professional standards.

 Facilitate unethical or illegal earnings management strategies.

 Lie to, or otherwise intentionally mislead (including misleading by remaining silent) others, in
particular:

 The auditors of the employing organization; or

 Regulators.

 Issue, or otherwise be associated with, a financial or non-financial report that materially

misrepresents the facts, including statements in connection with,
Assistant Professor Prathmesh U Tawade
 Reasons for Unethical Behavior
Emphasis on short term results

Ignoring small unethical issues

Economic cycles

Accounting rules

Assistant Professor Prathmesh U Tawade

Motivation And Opportunities for Accounting Fraud

Motivation Performance Based Accounting Flexibilities

Compensation Weak Internal Controls
Earning Expectations Lack of Auditor’s
Conceal Company’s Independence
Deteriorating Financial Poor Governance Structure
Conditions

Opportunities
Evade Taxes
Raising Funds
Diversion of Funds

Assistant Professor Prathmesh U Tawade

 Fundamental Principles related to Ethics
 The principle of Integrity

 Avoid being involved in activities which would impair the goodwill of the organisation

 Communicate adverse as well as favourable information with those concerned

 Refuse any gift or favour which could influence actions taken or to be taken

 Refuse to get involved in any activity which would adversely affect the achievement of an
organisations objective.

 Avoid conflicts and advise related parties on apparent conflicts which could arise in the
future.
Assistant Professor Prathmesh U Tawade
 Fundamental Principles related to Ethics
The principle of objectivity

The principle of confidentiality

The principle of professional competence and due care

The principle of professional behavior

Assistant Professor Prathmesh U Tawade

 Threats for the business
 Self-interest threats, which may occur as a result of the financial or other interests of a finance and
accounting professional or of an immediate or close family member;

 Self-review threats, which may occur when a previous judgment needs to be reevaluated by the finance
and accounting professional responsible for that judgment;

 Advocacy threats occur when a professional promotes a position or opinion to the point that subsequent
objectivity may be compromised;

 Familiarity threats occur when a finance and accounting professional has close relationships in the work
environment and such relationships impair his selfless attitude towards work.

 Intimidation threats occur when a professional may be prohibited from acting objectively by threats,
actual or perceived
Assistant Professor Prathmesh U Tawade
 Safeguarding

Safeguards
Created by the profession,
legislation or regulation

Safeguards in the work

environment

Assistant Professor Prathmesh U Tawade

 Created by the profession, legislation or regulation

Educational, training and experience requirements for entry into the profession.

Continuing professional development requirements.

Corporate governance regulations.

Professional standards.

Professional or regulatory monitoring and disciplinary procedures.

External review by a legally empowered third party of the reports, returns,

communications or information produced by concerned professionals.

Assistant Professor Prathmesh U Tawade

 Safeguards in the work environment
The employing organization’s systems of corporate oversight or other
oversight structures.

The employing organization's ethics and conduct programs.

Recruitment procedures in the employing organisation emphasizing the

importance of employing high caliber competent staff.

Strong internal controls.

Appropriate disciplinary processes.

Assistant Professor Prathmesh U Tawade
 Safeguards in the work environment
 Leadership that stresses the importance of ethical behavior and the expectation that
employees will act in an ethical manner.

 Policies and procedures to implement and monitor the quality of employee performance.

 Timely communication of the employing organization's policies and procedures, including

any changes to them, to all employees and appropriate training and education on such
policies and procedures.

 Policies and procedures to empower and encourage employees to communicate to senior

levels within the employing organization any ethical issues that concern them without fear
of retribution.
Assistant Professor Prathmesh U Tawade
 Creating An Ethical Accounting
Environment
Ensuring that employees are aware of their legal and ethical responsibilities.

Providing a communication system between the management and the

employees so that any one in the company can report about fraud and
mismanagement without the fear of being reprimanded.

Ensuring fair treatment to those who act as whistle blowers.

Setting realistic goals

Establish and maintain strong internal controls

Assistant Professor Prathmesh U Tawade

 Creating An Ethical Accounting
Environment
Emphasis on regular reconciliation and confirmation of outstanding
balances- large outstanding entries in suspense account, gap between
inventory records and physical inventory, non-confirmation of
balances outstanding with debtors etc.

Proper corporate communication with stakeholders so that potential

damage caused by below par financial results can be minimized.

Assistant Professor Prathmesh U Tawade

Basics of Cost Accounting
Assistant Professor Prathmesh U Tawade
 Basics of Cost Accounting

Types of Accounting Financial Accounting

Shows the net profit and
financial position of the
company

Ascertainment of product
Cost Accounting
costs and services

All accounting information

Management Accounting
useful to the organization

Assistant Professor Prathmesh U Tawade

 Costing
“The techniques and processes of ascertaining costs”. (The Chartered
Institute of Management Accountants (CIMA) of UK)

“The classifying, recording and appropriate allocation of expenditure

for the determination of costs, the relation of these costs to sales
value and the ascertainment of profitability’.” (Wheldon)

Assistant Professor Prathmesh U Tawade

 Cost Accounting
Cost accounting is a formal system of accounting for costs in the books of
account by means of which costs of products and services are ascertained and
controlled.

“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 centres and cost units. In its widest usage, it embraces
the preparation of statistical data, the application of cost control methods and
ascertainment of profitability of activities carried out or planned.”
Assistant Professor Prathmesh U Tawade
 Cost Vs. Cost Accounting
Costing is simply determining costs by using any method like arithmetic
process, memorandum statements, etc.

Cost Accounting, on the other hand, denotes the formal accounting

mechanism by means of which costs are ascertained by recording them in the
books of account .

In simple words, costing means finding out the cost of product or service by
any technique or method, cost accounting means costing using double entry
system.
Assistant Professor Prathmesh U Tawade
 Cost Accountancy
Cost Accountancy means and includes the principles, conventions, techniques
and systems which are employed in a business to plan and control the utilization
of its resources.

“The application of costing and cost accounting principles, methods and

techniques to the science, art and practice of cost control and the ascertainment
of profitability. It includes the presentation of information derived therefrom for
the purposes of managerial decision-making.” (The CMA, UK)

Cost accountancy is thus the science, art and practice of a cost accountant .
Assistant Professor Prathmesh U Tawade
 Objectives and Functions of Cost
Accounting
Ascertainment of cost

Control and reduction of cost

Guide to business policy

Determination of selling price

Measuring and improving performance

Assistant Professor Prathmesh U Tawade

 Financial Accounting Vs. Cost Accounting
Financial Accounting Cost Accounting
The main purpose of Financial accounting is to prepare The main purpose of cost accounting is to provide detailed
Profit and Loss Account and Balance Sheet for reporting to cost information to management, i.e., internal users.
owners or shareholders and other outside agencies, i.e,
external users.
These accounts are obligatory to be prepared according to Maintenance of these accounts is voluntary except in
the legal requirements of Companies Act and Income Tax certain industries where it has been made obligatory to
Act. keep cost records under the Companies Act.
Financial accounts reveal the profit or loss of the business Cost accounts show the detailed cost and profit data for
as a whole for a particular period. It does not show the each product line, department, process, etc.
figures of cost and profit for individual products,
departments and processes.
Financial reports (Profit and Loss Account and Balance Cost reporting is a continuous process and may be on daily,
Sheet) are prepared periodically, usually on an annual weekly, monthly basis, etc.
basis.
It lays emphasis on the recording of financial transactions It provides for a detailed system of controls with the help of
and does not attach importance to control aspect. certain special techniques like standard costing and
budgetary control.

Assistant Professor Prathmesh U Tawade

 Financial Accounting Vs. Cost Accounting
Financial Accounting Cost Accounting
It is concerned almost exclusively with historical records.
It is concerned not only with historical costs but also with
The historical nature of financial accounting can be easily
predetermined costs. This is because cost accounting does
understood in the context of the purposes for which it not end with what has happened in the past. It
was designed. extends to plans and policies to improve performance in
the future.
Financial accounting has a single uniform format of Cost accounting has varied forms of presenting cost
presenting information, i.e., Profit and Loss Account, information which are tailored to meet the needs of
Balance Sheet and Cash Flow Statement. management and thus lacks a uniform format.
Financial accounting records only external transactions like Cost accounting not only records external transact ions but
sales, purchases, receipts, etc., with outside parties. It does also internal or inter-departmental transactions like issue of
not record internal transactions. materials by store-keeper to production
departments.
Financial accounting prepares general purpose statements Cost accounting generates special purpose statements and
like Profit and Loss Account and Balance Sheet. That is to reports like Report on Loss of Materials, Idle Time Report,
say that financial accounting must produce information Variance Report, etc. Cost accounting identifies the user,
that is used by many classes of people, none of whom have discusses his problems and needs and provides tailored
explicitly defined informational needs. information.

Assistant Professor Prathmesh U Tawade

 Advantages of Cost Accounting
Reveals profitable and Aids in formulating policies
unprofitable activities Helps in cost reduction
Helps in cost control Reveals idle capacity
Helps in decision making Checks the accuracy of financial

Guides in fixing selling prices accounts

Helps in inventory control Prevents frauds and

manipulation
Assistant Professor Prathmesh U Tawade
 Cost
 Cost is “the amount of expenditure (actual or notional) incurred or attributable to a given thing”.
(CIMA, UK)

 “Cost is a measurement, in monetary terms, of the amount of resources used for the purpose of
production of goods or rendering services “. (Cost Accounting Standards of ICWA of India)

 “A cost is the value of economic resources used as a result of producing or doing the things costed”.
(W.M. Harper)

 “Cost means economic sacrifice, measured in terms of standard monetary unit, incurred or
potentially to be incurred, as a consequence of a business decision to achieve a specific objective”.
(Committee on Cost Concepts and Standards of American Accounting Association).

Assistant Professor Prathmesh U Tawade

 Classification Of Cost
Classification is the process of grouping costs according to their
common characteristics.

It is a systematic placement of like items together according to their

common features.

Each classification serves a different purpose.

Assistant Professor Prathmesh U Tawade

 Direct And Indirect Cost
Costs are classified into direct costs and indirect costs on the basis of
their identifiability with cost units or jobs or processes or cost centres.

Assistant Professor Prathmesh U Tawade

 Direct And Indirect Cost
Direct costs- These are those costs which are incurred for and conveniently
identified with a particular cost unit , process or department. Cost of raw materials
used, and wages of machine operator are common examples of direct costs.

Indirect costs- These are general costs and are incurred for the benefit of a number
of cost units, processes or departments. These costs cannot be conveniently
identified with a particular cost unit or cost centre. Depreciation of machinery,
insurance, lighting, power, rent , managerial salaries, materials used in repairs, etc.,
are common examples of indirect costs.

Assistant Professor Prathmesh U Tawade

 Fixed Cost And Variable Cost
Costs behave differently when level of product ion rises or falls.
Certain costs change in sympathy with product ion level while other
costs remain unchanged.

As such on the basis of behaviour or variability, costs are classified

into fixed, variable and semi-variable.

Assistant Professor Prathmesh U Tawade

 Fixed Cost
These costs remain constant in ‘total’ amount over a wide range of activity
for a specified period of time; i.e., these do not increase or decrease when
the volume of product ion changes.

For example, building rent , managerial salaries remain constant and do not
change with change in output level and thus are fixed costs.

But fixed cost ‘per unit’ decreases when volume of product ion increases and
vice versa, fixed cost per unit increases when volume of product ion
decreases.
Assistant Professor Prathmesh U Tawade
Fixed Cost

Assistant Professor Prathmesh U Tawade

 Variable Cost
These costs tend to vary in direct proport ion to the volume of output .

In other words, when volume of output increases, total variable cost
also increases, and vice versa, when volume of output decreases, total
variable cost also decreases.

But, the variable cost per unit remains fixed.

Assistant Professor Prathmesh U Tawade

Variable Cost

Assistant Professor Prathmesh U Tawade

 Semi-Variable/ Semi- Fixed Cost/ Mixed
Cost
These costs include both a fixed and a variable component ; i.e.,
these are partly fixed and partly variable.

A semi-variable cost has often a fixed element below which it will not
fall at any level of output .

The variable element in semi-variable costs changes either at a

constant rate or in lumps.

Assistant Professor Prathmesh U Tawade

Semi-Variable/ Semi- Fixed Cost/ Mixed
Cost

Assistant Professor Prathmesh U Tawade

 Controllable And Non-Controllable Cost
Controllable costs- These are the costs which may be directly regulated
at a given level of management authority. Variable costs are generally
controllable by department heads. For example, cost of raw material may
be controlled by purchasing in larger quantities.

Noncontrollable costs- These are those costs which cannot be influenced

by the action of a specified member of an enterprise. For example, it is
very difficult to control costs like factory rent , managerial salaries, etc.

Assistant Professor Prathmesh U Tawade

 Historic Cost And Pre-determined Cost
On the basis of time of computation, costs are classified into historical costs
and pre-determined costs.

Historical costs- These are past costs which are ascertained after these have
been incurred. Historical costs are thus nothing but actual costs. These costs
are not available until after the completion of the manufacturing operations.

Pre-determined costs- These are future costs which are ascertained in advance
of production on the basis of a specification of all the factors affecting cost .
These costs are extensively used for the purpose of planning and control.
Assistant Professor Prathmesh U Tawade
 Normal and Abnormal Cost
Normal cost may be defined as cost which is normally incurred on
expected lines at a given level of output . This cost is a part of cost of
production.

Abnormal cost is that which is not normally incurred at a given level

of output. Such cost is over and above the normal cost and is not
treated as a part of the cost of production. It is charged to costing
Profit and Loss Account .
Assistant Professor Prathmesh U Tawade
Classification of Costs for Decision Making
There are certain costs which are specially computed for use by the
management for the purpose of decision-making. These costs may
not be recorded in the books of account .

Assistant Professor Prathmesh U Tawade

Classification of Costs for Decision Making
Sunk Cost - A sunk cost is a cost that has already been incurred and that cannot be
changed by any decision made now or in the future. Such costs are not relevant for
decision-making about the future.

Differential/ Incremental Cost- Differential cost is the increase or decrease in total

cost that results from an alternative course of action. It is ascertained by subtracting
the cost of one alternative from the cost of another alternative. The alternative
choice may arise because of change in method of production, in sales volume,
change in product mix, make or buy decisions, take or refuse decision, etc.

Assistant Professor Prathmesh U Tawade

Classification of Costs for Decision Making
Marginal Cost- Marginal cost is the additional cost of producing one additional unit.
Marginal cost is the same thing as variable cost. Marginal costing is also a very
important analytical and decision- making tool in the hands of management. It helps
in decisions like make or buy, pricing of products, selection of sales mix, etc.

Opportunity Cost- An opportunity cost may be defined as the potential benefit that
is lost or sacrificed when the selection of one course of action makes it necessary to
give up competing course of action. Opportunity cost is a pure decision-making cost.
It is an imputed cost that does not require cash outlay and it is not entered in the
accounting books.
Assistant Professor Prathmesh U Tawade
Classification of Costs for Decision Making
Replacement Cost- This is the cost at which there could be purchased an asset
identical to that which is being replaced. In simple words, replacement cost is the
current market cost of replacing an asset .

Out of Pocket Cost- There are certain costs which require cash payment to be made
(such a wages, rent ) whereas many costs do not require cash out lay (such as
depreciation). Out-of-pocket costs, also known as explicit costs, are those costs that
involve cash outlays or require the utilization of current resources. Depreciation on
plant and machinery does not involve any cash out lay and therefore it is implicit
costs.
Assistant Professor Prathmesh U Tawade
Classification of Costs for Decision Making
Conversion Cost - It is the total cost of converting a raw material into
finished product. This term is used to denote the sum of direct labour
and factory overhead costs in the production of a product . In other
words, conversion cost is the factory cost minus direct material cost .
Appropriate use of this cost can be made in certain managerial
decisions.

Assistant Professor Prathmesh U Tawade

 Elements of Cost

Elements of Cost
Material
Labour
Expenses

Assistant Professor Prathmesh U Tawade

 Material Cost
 According to CIMA, UK, material cost is “the cost of commodities supplied to an undertaking.

 Direct materials- Direct material cost is that which can be conveniently identified with and

allocated to cost units. Direct materials generally become a part of the finished product .

 Indirect materials- These are those materials which cannot be conveniently identified with

individual cost units. These are minor in importance, such as (i) small and relatively
inexpensive items which may become a part of the finished product ; e.g., pins, screws, nuts
and bolts, thread, etc., (ii) those items which do not physically become a part of the finished
products; e.g.. coal, lubricating oil and grease, sandpaper used in polishing, soap, etc:
Assistant Professor Prathmesh U Tawade
 Labour Cost
This is “the cost of remuneration (wages, salaries, commissions, bonuses, etc.), of the
employees of an undertaking”. CIMA

Direct labour- Direct labour cost consists of wages paid to workers directly engaged in
converting raw materials into finished products. These wages can be conveniently
identified with a particular product , job or process. Wages paid to a machine operator is
a case of direct wages.

Indirect labour- It is of general character and cannot be conveniently identified with a

particular cost unit . In other words, indirect labour is not directly engaged in the
production operations but only to assist or help in production operations.
Assistant Professor Prathmesh U Tawade
 Expenses
All costs other than material and labour are termed as expenses. It is
defined as “the cost of services provided to an undertaking and the
notional cost of the use of owned assets.” (CIMA)

Direct expenses- According to CIMA, UK, “direct expenses are those

expenses which can be identified with and allocated to cost centres or
units.” These are those expenses which are specifically incurred in
connection with a particular job or cost unit . Direct expenses are also
known as chargeable expenses.
Assistant Professor Prathmesh U Tawade
 Expenses
Indirect expenses- All indirect costs, other than indirect materials and
indirect labour costs, are termed as indirect expenses. These cannot
be conveniently identified with a particular job, process or work order
and are common to cost units or cost centres.

Assistant Professor Prathmesh U Tawade

 Prime Cost
This is the aggregate of direct material cost, direct labour cost and
direct expenses.

Assistant Professor Prathmesh U Tawade

 Overhead
This is the aggregate of indirect material cost , indirect labour cost
and indirect expenses. Overhead is also known as oncost.

Overheads are divided into production overhead, office overhead

and selling overhead.

Assistant Professor Prathmesh U Tawade

 Overhead
 Production overhead- Also known as factory overhead, works overhead or manufacturing
overhead, these are those overheads which are concerned with the production function. It
includes indirect materials, indirect wages and indirect expenses in producing goods or services.

 Indirect material — Examples : Coal, oil, grease, etc., stationery in factory office, cotton waste,
brush, sweeping broom etc.

 Indirect labour — Examples : Works manager’s salary, salary of factory, office staff, salary of
inspector and supervisor, wages of factory sweeper, wages of factory watchmen.

 Indirect expenses — Examples : Factory rent , depreciation of plant , repair and maintenance of
plant , insurance of factory building, factory lighting and power, internal transport expenses.

Assistant Professor Prathmesh U Tawade

 Office And Administration Overheads
This is the indirect expenditure incurred in general administrative
function, i.e., in formulating policies, planning and controlling the
functions, directing and motivating the personnel of an organization in
the attainment of its objectives.

These overheads are of general character and have no direct connect ion
with production or sales activities. This category of overhead is also
classified into indirect material, indirect labour and indirect expenses.

Assistant Professor Prathmesh U Tawade

 Selling And Distribution Overheads
Selling overhead is the cost of promoting sales and retaining customers. It is defined
as “the cost of seeking to create and stimulate demand and of securing orders.”
Examples are advertisement, samples and free gifts, salaries of salesmen, etc.

Distribution cost - It includes all expenditure incurred from the time the product is
completed until it reaches its destination. It is defined as “the cost of sequence of
operations which begins with making the packed product available for dispatch and
ends with making the reconditioned returned empty packages, if any, available for
re-use”. Examples are carriage outwards, insurance of goods in transit , upkeep of
delivery vans, warehousing, etc.
Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
Components of Total Cost

Assistant Professor Prathmesh U Tawade

 Cost Sheet
Cost sheet is defined by C1MA, U.K. as “a document which provides for the
assembly of the detailed cost of a cost centre or cost unit.”

Thus, cost sheet is a periodical statement of cost designed to show in detail the
various elements of cost of goods produced like prime cost, factory cost of
production and total cost .

It is prepared at regular intervals, e.g., weekly, monthly, quarterly, yearly, etc.

Comparative figures of the previous period may also be shown in the cost sheet
so that assessment can be made about the progress of the business.
Assistant Professor Prathmesh U Tawade
 Purpose of Cost Sheet
It reveals the total cost and cost per unit of goods produced.

It discloses the break-up of total cost into different elements of cost .

It provides a comparative study of the cost of current period with that
of the corresponding previous period.

It acts as a guide to management in fixation of selling prices and

quotation of tenders.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Numerical

Assistant Professor Prathmesh U Tawade

Particulars Total Cost Cost Per Unit
Direct Material 20,000
Cost Sheet For the period ………
Direct Labour 8,000
Prime Cost 28,000
Work/ Factory Overhead Cost
Indirect Labour 2,500
Supervision Cost 1,000
Factory Rent 1,600
Factory Lighting 600
Depreciation for machinery 500
Oil for machine 100
Works/ Factory Cost 34,300
Office & Admin Overhead
Office Overhead 8000
Office Salary 2000
Misc. Expenses 1000
Cost of Production 45,300
Selling & Distribution Overhead 6000
Total Cost 51,300
Add- Profit (20%) 10,260
Sales 61,560

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Treatment of Stock
Stock of Raw Material- In calculating the value of raw materials
consumed during the period, opening stock of raw material is added
in purchases and the value of closing stock is subtracted from
purchases.

Cost of Materials Consumed= Opening Stock+ Purchases- Closing

Stock

Assistant Professor Prathmesh U Tawade

 Treatment of Stock
Stock of Work-in-Progress- This is the stock of semi-finished goods,
i.e., the goods which are in manufacturing process. The cost of work-
in-progress consists of cost of materials consumed, direct wages and a
proportionate part of the factory overhead. Therefore, in the
preparation of cost sheet , opening and closing stocks of work-in-
progress are adjusted at the stage of factory cost.

Assistant Professor Prathmesh U Tawade

 Treatment of Stock
Stock of Finished Goods- This stock is adjusted after the calculation of
cost of production. The opening stock is added to and closing stock is
subtracted from the cost of production.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade
Assistant Professor Prathmesh U Tawade
 Cost Sheet for the period………
Particulars Amount Amount
Opening Stock of Raw Materials 75,000
Add- Purchases of raw materials 66,000
Expenses on purchases 1,500
1,42,500
Less- Closing Stock of raw materials 91,500
Materials Consumed 51,000
Direct Wages 52,500
Prime Cost 1,03,500
Add- Opening working Stock 28,000
Factory Overheads
Indirect Wages 2,750
Factory rent, rates and power 15,000
Depreciation on plant and machinery 3,500
1,52,750
Assistant Professor Prathmesh U Tawade
Particulars Amount Amount
Less- Closing Work in progress 35,000
Factory/ Works Cost 1,17,750
Office and Admin Overhead
Office Rent and taxes 2500
Cost of Production 1,20,250
Add- Opening stock of finished goods 54,000
1,74,250
Less- Closing Stock of Finished Goods 31,000
Cost of Goods Sold 1,43,250
Selling and Distribution Overheads
Carriage outward 2,500
Advertising 3,500
Traveler's Wages and Commission 6,500 12,500
Cost of Sales 1,55,750
Profit 44,250
Sales 2,00,000
Assistant Professor Prathmesh U Tawade
 Items Excluded From Cost
Cash discount Goodwill written off

Transfer to reserves Dividend paid

Interest paid Provision for taxation

Donations Profit / loss on sale of fixed assets

Preliminary expenses written off Provision for bad debts

Income-tax paid Damages payable at law, etc.

Assistant Professor Prathmesh U Tawade

Assistant Professor Prathmesh U Tawade