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Financial Statement Analysis

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Financial Statement Analysis-FIN621
VU
Lesson-6
ACCOUNTING CYCLE/PROCESS
(Continued)
Business transactions during August, 2006
Now let us suppose  that during the month of August, actual business operations
commenced and Khizr provided services to clients at the agreed commission/fee rate of 2% of rental
value of property. Suppose rental value of property during August was Rs.532, 000. Commission/fee
earned at the rat of 2% comes to Rs.10, 640. Commission actually received (in cash) during August was
Rs.5, 000, the rest was to be paid later.
Provided services to clients at the agreed commission/fee rate of 2% of rental value of property.
Rental value of property during Aug:
Rs.532, 000
Rental Value
= Rs.532, 000
Commission (532,000 x 2%)
= Rs. 1 0,640
Actual Cash Received
= Rs.  5,000
Date
Description
L/F
Dr.
Cr.
Aug
Cash Account
5,000
Accounts Receivable
5,640
Commission Received
10,640
Commission Income Received
Advertising expenses (paid in advance) Rs.645.
Date
Description
L/F
Dr.
Cr.
Cash Account
645
Advertising expense
paid
·
Salaries for Aug (to be paid in September) Rs.7, 400.
Date
Description
L/F
Dr.
Cr.
Salaries Expense
7,400
Salaries Payables
7,400
Accrued salaries for the month of
August
Telephone bill for Aug (to be paid in September) Rs.400.
Date
Description
L/F
Dr.
Cr.
Utilities Expense
400
Utilities bill Payables
400
Accrued telephone bill
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Financial Statement Analysis-FIN621
VU
Expenses were:-
Advertising expenses (paid in advance)
Rs.  645
Salaries for Aug (to be paid in September)
Rs.7, 400
Telephone bill for Aug (to be paid in September)
Rs.  400
The above is incomplete list of Expenses. There are certain invisible expenses
amounting to Rs.195 (in which no cash is involved), which are recorded at the end of accounting period.
Before we take these up, let us distinguish between Expenditure and Expenses.
Expenditure Vs Expenses
Expenditure: It is the cost benefiting or spreading over two or more accounting periods. Expense is the
portion of Expenditure for one accounting period only.
Examples: Expenditure on fixed assets is incurred in lump sum. Then there are pre-paid costs e.g.
insurance, pre-paid rent, for more than one year/accounting period. It may be noted that expenditure on
advertisements, employees training, are directly charged to expenses because in these cases, the number
of accounting periods over which revenue is likely to be produced (or increased) because of these, are
not readily estimable.
·
Incomplete list of Expenses: Invisible expenses (non cash involved), recorded at the end of
accounting period.
Date
Description
L/F
Dr.
Cr.
Depreciation Expense-Building
150
Depreciation Expense-Equipment
45
Accumulated Depreciation
195
Depreciation Expenses
Invisible Expenses
Cost value of Building
= Rs. 36,000
Estimated useful life
= 20 years
Expense for one month will be calculated as follows:
= 36,000 x 1/240
= Rs. 150 per month
This Rs. 150 is the portion of expenditure of Rs.36, 000. This expense is technically called Depreciation
Note: Land is not depreciated
Value of Office Equipment
= 5,400
Estimated useful life
= 10 years
The calculation of expense on equipment will be
Calculated as follows:
= 5,400 X 1/120
= Rs. 45
This Rs. 45 is technically called depreciation on Office Equipment.
Pre-paid costs e.g. Insurance, Pre-paid rent, will be recorded as follows:
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Financial Statement Analysis-FIN621
VU
Date
Description
L/F
Dr.
Cr.
Prepaid Rent
12,000
Cash Account
12,000
Rent paid in advance
Rent Expense
1,000
Prepaid Rent
1,000
Recording rent expense
Income Statement
For the period ending August 31, 2006
Revenues
Rs.
Sales Commission earned.
10,640
Expenses
Advertising expenses.
645
Salaries expenses.
7,400
Telephone expenses.
400
Depreciation expense: building
150
Depreciation expense: office equipment
45
Total Expense
8,640
Net Income
2000
With this background, let us now move on to the fifth step in the Accounting Cycle.
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