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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-29
STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
Standard format of profit & loss account is shown as follows:
Particulars
Amount
Amount
Rs.
Rs.
Sales
X
Less: Cost of Goods Sold
(X)
Gross Profit
X
Less: Administrative Expenses
Selling Expenses
X
X
(X)
Operating Profit
X
Less: Financial Expenses
(x )
Add : Other income
Profit Before Tax
X
Less: Tax
(X)
Net Profit After Tax for the Year
X
Other income
SALES
Sales as we know are the revenue against the sale of the product in which the organization deals.
In case of a service organization, there will be Income against Services Rendered instead of Sales
and there will be no Cost of Sales or Gross Profit.
COST OF GOODS SOLD/GROSS PROFIT
Cost of goods sold is the cost incurred in purchasing or manufacturing the product, which an
organization is selling plus any other expense incurred in bringing the product in salable condition.
Cost of goods sold contain the following heads of accounts:
o  Purchase of raw material/goods
o  Wages paid to employees for manufacturing of goods
o  Any tax/freight is paid on purchases
o  Any expense incurred on carriage/transportation of purchased items.
Gross Profit = Sales ­ Cost of goods sold
OTHER INCOME
 Other income includes revenue from indirect source of income, such as return on investment, profit
on PLS account etc.
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Financial Accounting (Mgt-101)
VU
ADMINISTRATIVE EXPENSES
Administrative expenses are the expenses incurred in running a business effectively. Main
components of this group are:
o  Payment of utility bills
o  Payment of rent
o  Salaries of employees
o  General office expenses
o  Repair & maintenance of office equipment & vehicles.
It is important to distribute expenses properly among the three classifications i.e. Cost of Goods
Sold, Administrative Expenses and Selling Expenses to present the financial statements fairly. Take
the example of following costs:
o  Salaries and Wages
Although both these terms mean remuneration paid to labour and employee
against services.
Wages usually denotes remuneration paid to daily wages labour. Whereas salary
denotes payments to permanent employees.
Salaries can be classified in any of the classifications mentioned below.
 Salaries / wages paid to labour and supervisors/officers working for the
manufacturing of goods become a part of Cost of Goods Sold.
 Salaries and benefits of general administrative staff becomes part of
Administrative Expenses
 Salaries and benefits of sales and marketing staff become part of selling
expenses.
Other expenses like Depreciation, Utilities and Maintenance can also be classified in all three,
depending upon the exact nature of the expenditure.
SELLING EXPENSES
Selling expenses are the expenses incurred directly in connection with the sale of goods. This head
contains:
o  Transportation/carriage of goods sold
o  Tax/freight paid on sale
If the expense head `salaries' includes salaries of sales staff. It will be excluded from salaries &
appear under the heading of `selling expenses'.
FINANCIAL EXPENSES
Financial expenses are the interest paid on bank loan & charges deducted by bank on entity's bank
accounts. These are shown separately in the Profit and Loss Account. These includes:
o  Interest on loan
o  Bank charges
There is, however, one exception and that is the interest paid on loan taken to build an asset is
capitalized as cost of the asset up to the time that asset is completed.
INCOME TAX
Different types of entities have to pay income tax at different rates.
At the time of preparing annual financial statements, an estimate of expected tax liability is made.
A provision is then, created equal to that estimate.
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Financial Accounting (Mgt-101)
VU
You should remember the treatment of Provision for Doubtful debts. Same is the case with income
tax i.e. provision is made at the time of preparing accounts which is then adjusted accordingly at the
time when actual tax expense is known.
BALANCE SHEET (ASSET SIDE)
Standard format of the balance sheet is given as follows:
Particulars
Amount Rs.
Amount Rs.
Assets
Non Current Assets
Fixed Assets
X
Capital Work In Progress
X
Deferred Costs
X
Long Term Investments
X
Current Assets
Stocks
X
Trade debtors and Other Receivables
X
Prepayments
X
Short Term Investments
X
Cash and Bank
X
Total
X
X
FIXED ASSETS
Fixed assets are the assets of permanent nature that a business acquires, such as plant, machinery,
building, furniture, vehicles etc.
Fixed assets are presented at cost less accumulated depreciation OR revalued amount.
CAPITAL WORK IN PROGRESS
If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that
asset up to the balance sheet date are transferred to an account called Capital Work in Progress
Account. This account is shown separately in the balance sheet below the fixed assets. Capital work
in progress account contains all expenses incurred on the asset until it is converted into working
condition. All these expenses will become part of the cost of that asset. When an asset is completed
and it is ready to work, all costs will transfer to the relevant asset account.
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Financial Accounting (Mgt-101)
VU
DEFERRED COSTS
An expense that has a future benefit in excess of one year and recorded in a capital asset account
LONG TERM AND SHORT TERM INVESTMENTS
Where a business has surplus funds, it is better to invest those funds where these can generate a
return greater than PLS accounts.
These investments can be of different types e.g. shares of other companies, fixed deposits with
banks, government securities, national savings etc.
For presentation purposes, these investments are classified in two categories, long term and short
term investments.
Investments made with the intention that they will be held for a period longer than twelve months
are classified as long term and those made for a period equal to or shorter than 12 months are
classified as short term.
Following things are important to note here:
Classification is to be made every time a balance sheet is prepared and the period is to be calculated
from the date of balance sheet.
This means that an investment made for 2 years on May 2000 will be classified as long term
investment in accounts prepared on Jun 30, 2000 and the same investment will be classified as
current investment in the accounts prepared on June 30, 2001.
An investment may initially be made as current investment. Subsequently, if it is decided to hold it
for a longer period, then its classification will have to be changed accordingly and vice versa.
Therefore, investments are checked for classification every time a balance sheet is prepared and
presented accordingly.
CURRENT ASSETS
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.
It is important to note that assets and liabilities are presented in the balance sheet in the order of
their maturity i.e. assets / liabilities having longer life are presented first and assets / liabilities
having shorter life are presented later.
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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