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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-7
STANDARD FORMAT OF BALANCE SHEET
(LIABILITY SIDE)
Particulars
Amount Rs. Amount Rs.
Liabilities
Capital and Reserves
Capital
X
Reserves
X
Profit and Loss Account
X
X
Non Current / Long Term Liabilities
Long term loans
X
Other long term liabilities
X
X
Current Liabilities
Trade creditors and other payables
X
Short term borrowings
X
Current portion of long term borrowings
X
X
Total
X
CAPITAL
Capital is the first item shown on the liability side of the balance sheet of an organization. Capital is the
Money invested in the business by the owners. Capital is a liability for the business as the business has to pay
return against this money and in case the business is closed, then it has to return the amount. Capital is also
termed as "Share Capital".
RECORDING OF CAPITAL
Recording of Capital is Simple
At the time of receipt
Debit
Cash / Bank
Credit
Capital
If the owner contributes an asset instead of cash, then
Debit
Asset Account
Credit
Capital
When the capital is repaid (this does not happen in normal course of business, but just in case)
Debit
Capital
Credit
Cash / Bank
RESERVES
The portion of profit which is not paid to proprietor, but is kept apart for meeting some known or unknown
losses is called Reserve, e.g. Reserve fund, contingencies reserve etc.
.
There are two major types of reserves:
Revenue reserves
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Financial Accounting (Mgt-101)
VU
From the view point of its creation revenue reserve may again be classified into:
o
a. General reserve
Reserve which is not created for any specific purpose, but for strengthening the financial position of the
business is known as General Reserve, e.g. Reserve fund, contingencies reserve etc.
b. Specific Reserve
Reserve created for any special purpose is known as Specific Reserve. e.g., Dividend Equalization fund,
Debenture sinking fund etc.
Capital Reserves
Capital reserves, in most of the cases, are created due to legal requirements. Profit may arise from sources,
other than normal business activity. For example, profit on sale of fixed assets or profit on revaluation of
fixed assets. When a reserve is created out of these profits, it is termed as capital reserve. One capital reserve
about which we already know is "Fixed Assets Revaluation Reserve". Capital reserves can be used for
specific purposes only.
DIFFERENCE BETWEEN RESERVE AND PROVISION
Both reserves and provisions are created out of revenues of the business, but they differ from each other.
 Creating a provision is necessary to show a true profit for the period, whereas the reserve is created
on the discretion of the owner, out of profits.
 Provision is to be made, even, if there is a loss; Reserves are created out of profits only.
 Reserve is shown as liability in the balance sheet, Provision is shown as a reduction from the asset
against which it is created.
 Provision is used specifically for the purpose for which it is made, Reserves are usually general and
can be used for any purpose.
PROFIT AND LOSS ACCOUNT
Profit and Loss Account or Accumulated Profit and Loss Account shows the balance of un-
distributed profit accumulated over the periods.
In the first year of business, this account shows following figure:
Profits for the year
X
Less: Transferred to Reserve
(X)
Less: Profit distributed
(X)
Balance carried to Balance Sheet
X
In Subsequent years, balance brought forward from previous years and profit for the year is added
and distributed as above and the balance is carried to next year.
This is why; it is termed as Accumulated Profit and Loss Account.
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Financial Accounting (Mgt-101)
VU
LONG TERM LOANS
The owners of the business may feel that their business can flourish, if there are more funds. These
funds can be arranged from their own resources, if possible, or they can ask a bank or financial
institution for funds. This loan, if extended by bank for a period of more than one year is termed as
a long term loan. There can be other sources of long term loans as well, e.g. Term Finance
Certificates and Debentures, where money is borrowed from general public under certain legal
restrictions.
OTHER LONG TERM LIABILITIES
These include all other liabilities that are payable after a period of one year of balance sheet date. For
example, staff gratuity and other benefits, taxes and liabilities that become payable after a period of one year.
CURRENT LIABILITIES
Current Liabilities are the obligations of the business that are payable within twelve months of the balance
sheet date. Creditors, all accrued expenses are the examples of current liabilities of the business because
business is expected to pay these back within one accounting period.
CURRENT PORTION OF LONG TERM LIABILITIES
Long term loans are usually payable in installments. Therefore, at every year end, some portion of the loan
becomes payable within one year of the balance sheet date. The portion that becomes payable within the
next accounting period is transferred to current liabilities and classified under current portion of long term
liabilities.
Format of current liabilities shown in the balance sheet is as follows:
Current Liabilities
Trade Creditors
Short Term Borrowings
Other Short Term Liabilities
Salaries Payable
Accrued Expenses
Bills payable
Advances from Customers
Current Portion of Long Term Liabilities
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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