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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-9
Learning Objective
After studying this chapter, you should be able to:
o  Explain what are Assets and Liabilities: and
o  Draw up simple Balance Sheet from given information in trial balance.
Assets are economic resources that are owned by a business and are expected to benefit future operations.
In most cases, the benefit to future operations comes in the form of positive future cash flows. The positive
future cash flows may come directly as the asset is converted into cash(collection of a receivable)or indirectly
as the asset is used in operating the business to create other assets that result in positive future cash
flows(building & land used to
Manufacture a product for sale). Assets may have definite physical form such as building, machinery or
stock. On the other hand, some assets exist not in physical or tangible form, but in the form of valuable legal
claims or right; examples are accounts receivables, investment in govt. bonds, and patent rights.
Liabilities are debts. The person or organization to which the debt is owed is called creditors. All businesses
have liabilities; even the most successful companies purchase stocks, supplies, and services on credit. The
liabilities arising from such purchases are called accounts payable.
Rule of Debit and Credit
Assets (increase in assets is debit and decrease in asset is credit)
Liabilities (Increase in liability is credit and decrease in liability is debit)
Classification of Assets
Fixed Assets ­ Are the assets of permanent nature that a business acquires, such as plant, machinery,
building, furniture, vehicles etc. Fixed assets are subject to depreciation.
Long Term Assets ­These are the assets of the business that are receivable after twelve months of the
balance sheet date. For example, if business has invested some money for two years in any saving
scheme or has purchased saving certificates for more than one year, it is a long term asset.
Current Assets ­ Are the receivables that are expected to be received within one year of the balance
sheet date. Debtors, closing stock & all accrued incomes are the examples of Current Assets because
these are expected to be received within one accounting period from the balance sheet date.
 The year, in which long term asset is expected to be received, long term asset is transferred to
current assets in that year.
Classification of Liabilities
Capital ­ is the funds invested by the owners of the business. Business has a liability to return these
funds to the owner.
We know that for the purpose of accounting, business is treated separately from its owners. This is
known as Separate Entity Concept i.e. Business is a separate entity. Therefore, if the owner gives
something (can be in form of Cash or Some other Asset) to the business then the business, not only has
to return the amount to the owner but it also has to give some return on that money. That is why we
treat Capital (Owners Funds) as a Liability.
Profit and Loss Account ­ The net balance of the profit and loss account i.e. either profit or loss also
belongs to the owners.
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Financial Accounting (Mgt-101)
VU
While explaining capital we said that the business has to give return to the owners. Now if the business
is managed successfully, then this return would be a Favorable figure (Profit). This return will, therefore,
be added to the Owners' investment.
On the other hand, if the business is managed un-successfully then this return would be an un-favorable
figure (Loss). It will, therefore, be deducted from the Owners' Investment.
Long Term Liabilities ­ These are the liabilities that will become payable after a period of more than
one year of the balance sheet date. For example, if business has taken a loan from bank or any third
person and it is payable after three years, it is a long term liability of the business.
Current Liabilities ­ These are the obligations of the business that are payable within twelve months of
the balance sheet date. Creditors and all accrued expenses are the examples of current liabilities of the
business because business is expected to pay these back within one accounting period.
The year in which long term liability is to be paid back, long term liability is transferred to
current liability in that year.
BALANCE SHEET
 It is a position statement that shows the standing of the organization in Monetary Terms at a Specific
Time.
 Unlike Profit and Loss that shows the performance of the entity over a period of time, the Balance Sheet
shows the Financial State of Affairs of the entity at a given date.
 Balance sheet is the summarized analysis in a `T' form of all assets and liabilities of the entity, with
liabilities listed on left hand side and assets on right hand side.
 Asset is any owned physical object (tangible asset) or a right (intangible asset) having economic value to
the owner.
 Liability is an obligation of the business to deliver goods or to provide a benefit in future.
Format of Balance Sheet (Account Form)
Name of the Entity
Balance Sheet As At-------
Liabilities
Amount
Assets
Amount
Rs.
Rs.
Capital
100000
Fixes Assets
75000
Profit and loss Account + 15000
115000
Long Term Assets
20000
Long Term Liabilities
50000
Current assets
80000
Current liabilities
10000
Total
175000
Total
175000
Format of Balance Sheet (Report Form)
Name of the Entity
Balance Sheet As At-------
PARTICULARS
Amount
Amount
Rs.
Rs.
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Financial Accounting (Mgt-101)
VU
ASSETS
Fixes Assets
75000
Long Term Assets
20000
Current Assets
80000
Total
175000
LIABILITIES
Capital
100000
Profit
15000
115000
Long Term Liabilities
50000
Current Liabilities
10000
Total
175000
SOLVED EXAMPLES
ILLUSTRATION # 1
The following is the trial balance extracted from the books of Naeem & Sons as on 30/06/2002.
Prepare a profit & loss account & balance sheet for the year ended June 30, 2002.
Particulars
Dr.
Cr.
Sales
100,000
Purchases
45,000
purchase return
3,000
Salaries
12,000
Rent
5,000
Debtors
25,000
Creditors
16,000
Capital
368,000
Plant & machinery
400,000
487,000
487,000
Grand Total
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Financial Accounting (Mgt-101)
VU
SOLUTION
Naeem & Sons
Profit & Loss Account for the year ended June 30, 2002.
Rs.
Rs.
Sales
100,000
cost of goods sold:
Purchases
45,000 Purchase return
3,000
Gross Profit
58,000
103,000
103,000
Salaries
12,000 Gross Profit
58,000
Rent
5,000
Net Profit
41,000
This is a presentation of profit & loss account in `T' account form. Now same illustration is presented in
statement form.
Naeem & sons
Profit & Loss Account for the year ended June 30, 2002
Particulars
Amount
Amount
Rs.
Rs.
100,000
Income / Sales / Revenue
Less: Cost of Goods Sold
Purchases
45,000
Less: Purchase Return
(3,000)
(42,000)
58,000
Gross Profit
Less: Administrative expenses
Salaries
(12,000)
Rent
(5,000)
(17,000)
Net Profit
41,000
This is not a correct way to present profit & loss account in statement form. In actual practice only main heads
of expenses are presented in profit & loss account along with foot note number. Detail of that head of
expense is given in the note. Correct presentation of profit & loss account is hereunder:
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Financial Accounting (Mgt-101)
VU
Naeem & sons
Profit & Loss Account for the year ended June 30, 2002
Particulars
Amount
Amount
Rs.
Rs.
100,000
Income / Sales / Revenue
Less: Cost of Goods Sold
(42,000)
(See Note # 1)
58,000
Gross Profit
Less: Administrative expenses
(17,000)
(See Note # 2)
Net Profit
41,000
Note # 1
Cost of goods sold
Purchases
45,000
Less: Purchase Return
(3,000)
Net Purchases
42,000
Note # 2
Administrative expenses
Salaries
12,000
Rent
5,000
Total Administrative expenses
17,000
It is recommended that Profit & loss account should be prepared in above mentioned format.
36
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Financial Accounting (Mgt-101)
VU
BALANCE SHEET
Naeem & Sons
Balance Sheet As At June 30, 2002
Liabilities
Assets
Particulars
Amount
Particulars
Amount
Rs.
Rs.
Capital
368,000 Fixed Assets
Profit and Loss Account
41,000 Plant & Machinery
400,000
409,000
Current Liabilities
Current Assets
Creditors
16,000 Debtors
25,000
Total
425,000 Total
425,000
Balance sheet in statement form is presented hereunder:
Naeem & Sons
Balance Sheet As At June 30, 2002
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets
Plant & machinery
400,000
Current Assets
Debtors
25,000
Total
425,000
Liabilities
Capital
368,000
Profit
41,000
409,000
Current Liabilities
Creditors
25,000
Total
425,000
425,000
37
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Financial Accounting (Mgt-101)
VU
Illustration # 2
The following trial balance has been extracted from the books of Saeed & co. on 30-06-2002. From this,
prepare an income statement and balance sheet for the year ended 30-06-2002.
Dr.
Cr.
Sales
200,000
Purchases
180,000
purchase return
2,500
Office salaries
3,500
Furniture & Fixture
16,000
Office Equipment
11,000
Rent
5,000
Accounts Payable(creditors)
28,000
Sales Salaries
3,000
Freight & custom duty on purchases
6000
Repair of office equipment
2,000
Accounts Receivable(debtors)
52,000
Freight on sales
1,000
Capital
41,500
Cash in hand
37,000
Loan from bank(for three years)
50,000
Bank charges
500
Interest on loan
5,000
Grand Total
322,000
322,000
SOLUTION
Saeed & Co.
Profit & Loss Account for the year ended June 30, 2002.
Rs.
Rs.
Sales
200,000
Purchases
180,000 Purchase return
2,500
Freight, custom duty on purchases
6,000
Gross Profit
16,500
202,500
202,500
Salaries
3,500 Gross Profit
16,500
Rent
5,000
Repair of office equipment
2,000
Sales salaries
3,000
Freight on sales
1,000
Interest on loan
5,000
Bank charges
500
Net loss
3,500
Total
20,000
20,000
Profit & loss account in statement form:
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Financial Accounting (Mgt-101)
VU
Naeem & sons
Profit & Loss Account for the year ended June 30, 2002
Particulars
Amount
Amount
Rs.
Rs.
200,000
Income / Sales / Revenue
Less: Cost of Goods Sold
(183,500)
(See Note # 1)
Gross Profit
16,500
Less: Administrative expenses
(10,500)
(See Note # 2)
Less: Selling expenses
(4,000)
(See Note # 3)
Less: Financial Expenses
(5,500)
(See Note # 4)
Net Profit/(Loss)
(3,500)
NOTE # 1
COST OF GOODS SOLD
Purchases
180,000
Less: purchase return
(2,500)
Add: Freight, custom duty on purchases
(6,000)
TOTAL
183,500
NOTE # 2
Administrative expenses
Salaries
3,500
Rent
5,000
Repair of office equipment
2,000
TOTAL
10,500
NOTE # 3
Selling expenses
Sales salaries
3,000
Freight on sales
1,000
TOTAL
4,000
NOTE # 4
Financial expenses
Interest on loan
5,000
Bank charges
500
TOTAL
5,500
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Financial Accounting (Mgt-101)
VU
BALANCE SHEET
Saeed & co.
Balance Sheet As At June 30, 2002
Liabilities
Assets
Particulars
Amount
Particulars
Amount
Rs.
Rs.
Capital
41,500 Fixed Assets
Profit and Loss Account
(3,500) Furniture & Fixture
16,000
38,000
Long Term Liabilities
Current Assets
Loan from bank
50,000 Debtors
52,000
Current Liabilities
Office equipment
11,000
Creditors
28,000 Cash
37,000
Total
116,000 Total
116,000
Balance sheet in statement form
Saeed & Co.
Balance Sheet As At June 30, 2002
Particulars
Amount Rs.
Amount Rs.
Assets
Fixed Assets
Furniture & Fixture
16,000
Current Assets
Debtors
52,000
11,000
Office Equipment
Cash
37,000
Total
116,000
Liabilities
Capital
41,500
Profit/(Loss)
(3,500)
38,,000
Long Term Liabilities
Loan from bank
50,000
Current Liabilities
Creditors
28,000
Total
116,000
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Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES