Accounting

Balance Sheet - the information it provides
A typical balance sheet would look something like this.

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Eq. Share Capital Pr. Share Capital Reserves and Surplus Capital Reserve General Reserve Share Premium Retained Earnings (P/L Appr.) Other Reserves Long Term Loans Fixed Deposits Collected Debentures Provisions for Taxation Provisions for Dividends Outstanding Expenses Pre-received Incomes Unclaimed Dividends Sundry Creditors Bills Payable Bank Overdraft 6,00,000 12,00,000 3,50,000 43,50,000 Amount 35,00,000 Goodwill Buildings Plant and Machinery Furniture and Fittings Motor Vehicles Patents, Trade Marks, Copyrights Investments Work in Progress 54,00,000 16,00,000 24,00,000 3,00,000 4,00,000 5,00,000 2,00,000 20,000 13,00,000 12,00,000 Finished Goods Stock Prepaid Expenses Incomes Receivable Sundry Debtors Cash Bank Balance Loans and Advances Bills Receivable Deferred Revenue Expenditure Miscellaneous Expenses Accumulated Loss (P/L Appr. a/c debit balance) 2,54,20,000 2,54,20,000 Assets Amount 8,00,000 35,00,000 27,00,000 15,00,000 25,00,000 35,00,000 18,00,000 24,00,000 2,50,000 2,40,000 3,00,000 4,00,000 3,00,000 26,00,000 1,16,000 6,00,000 15,00,000 54,000 1,20,000 2,40,000
12,00,000 Land
4,00,000 Stock of Raw Material
5,00,000 Discounts to be written off
A position statement
A Balance sheet is a statement that is prepared at a particular moment. It contains the information relating to the assets and liabilities of an organisation as at that moment. It is called a position statement as it indicates the position of the organisation as that moment.
Statement of Real, Personal, Nominal account balances

In accounting terms, a balance sheet is a statement of balances in ledger accounts after closing the nominal accounts i.e. a statement of Real, Personal and Special Nominal account balances.
Special Nominal Accounts

Nominal accounts whose balances are carried over from one accounting period to another.
Statement of balances carried forward

If the balance sheet is the one drawn on the last day of the accounting period, the balances represent the ledger account balances to be carried forward to the subsequent accounting period.
Deriving additional information from the Balance Sheet

Apart from the information relating to the organisation's assets and liabilities, a lot of other information can be derived from the balance sheet. For deriving some kinds of information, arranging the assets and liabilities in a specific order is all that is needed to be done. For deriving some other kinds of information the balance sheet may have to be redrawn by grouping and rearranging the information contained in it. Some of the methods used to derive the additional information are
Setting off related ledger account balances

Balance sheet contains some derived information that is obtained by clubbing or setting off certain related ledger account balances.
Net Value of Assets

Asset account has a debit balance which indicates the net value [cost - depreciation to date] of the asset. Ledgers Show Where depreciation reserve account is being maintained, the asset account balance indicates the cost value of the asset and depreciation reserve account balance indicates the depreciation charged on the asset till date. In such cases, the net value of the asset is obtained by setting off depreciation reserve account balance against the asset account balance. Ledgers Show Such set off is shown in the balance sheet on the assets side. Depreciation Reserve account balance is deducted from Asset account balance and the net value is derived.
Balance Sheet of M/s ___ as on 31st December __ Liabilities Amount Assets Amount
... ...
... ...
... Plant and Machinery 5,00,000
...
...
...
Less: Depr Reserve 2,10,000 ...
2,90,000 ...
Net Debtors
Debtors account has a debit balance. This balance indicates the amounts due from the debtors as on that date. Bad Debts Reserve account has a credit balance. This balance indicates reserve being maintained to confront losses on account of bad debts that may have to be borne in the subsequent accounting period. Based on the nature of their balances, Debtors account which has a debit balance appears on the assets side of the balance sheet and bad debt reserve account which has a credit balance appears on the liabilities side of the balance sheet.
... Bab Debt Reserve ...
... 32,000
... Debtors
... 14,16,000 ...
... ...
The net value of debtors realisable in the subsequent accounting period, can be obtained by setting off the balance due from debtors with the balance in the Bad debt reserve account. Such set off is shown in the balance sheet on the assets side. Bad Debt Reserve account balance is deducted from Debtors account balance and the net value is derived.
... ... ...
... ... ...
... Debtors ... 14,16,000 Less: Bad Debt Reserve32,000
... 13,84,000 ...
Marshalling of Assets and Liabilities
The assets and liabilities are arranged in an order based on a key characteristic, liquidity, which is one of the most important characteristic aiding decision making in relation to assets and liabilities.
Remaking in Statutory Formats

Remaking in statutory formats requires rearrangement, grouing and ordering of the information within the balance sheet in a manner required by the statute. This is done to meet the statutory requirements with respect to presenting accounting information, The statutory formats for presenting balance sheet information under the Indian Companies Act, 1956 are
Horizontal Form of Balance Sheet (Schedule VI PART I) Vertical Form of Balance Sheet (Schedule VI PART I)
Both these formats involve grouping and ordering the balance sheet information.
Remaking in a form suitable for financial analysis

In remaking the balance sheet in a form suitable for financial analysis, the assets and liabilities are re-arranged, grouped and presented in a vertical form, presenting additional information like the value of cost of goods sold, operating expenses, current assets etc. This enables derivation of various other kinds of information like working capital, capital employed etc.
Marshalling of Assets and Liabilities : Order of Liquidity/Permanence

The process of arranging the balance sheet items (assets and liabilities) in a specific order is called Marshalling of assets and liabilities.
Marshal
Meaning
1. To arrange in a logical order. 2. Place in proper rank. 3. Make ready for action or use.
Synonyms
1. Assemble.
2. Line up. 3. Organise. 4. Position. 5. Collect. 6. Gather together. The two most common orders followed in this process are Order of liquidity and Order of permanence.
Order of Liquidity
Under this method, the assets are arranged in the decreasing order of their liquidity.
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Bank Overdraft Bills Payable Sundry Creditors ... ... ... ... Pr. Share Capital Eq. Share Capital Amount 5,00,000 12,00,000 13,00,000 ... ... ... ... 12,00,000 35,00,000 2,54,20,000 Cash Bank Balance Bills Receivable Sundry Debtors ... ... Buildings Land Goodwill Assets Amount 11,60,000 ... 15,00,000 26,00,000 ... ... 27,00,000 35,00,000 8,00,000 2,54,20,000
Liquidity
Liquidity is the characteristic of an asset to get converted to cash. The faster an asset can be converted to cash, the more liquid it is.
Arrangement of Assets
The highest liquid asset is placed first (at the top) and the least liquid asset is placed last. Cash is considered to be the highest liquid asset. We do not need any time to convert cash to cash. Goodwill is considered to be the least liquid asset. It is attached to the organisation and can be realised only when the organisation is dissolved.
Arrangement of Liabilities
Every liability is supported to the extent of its value, by one or more assets. Assuming all liabilities are cleared by paying out, we need cash to clear the liabilities. Since short term liabilities are to be cleared at short notice, we use assets that can be speedily converted to cash (more liquid assets) to clear the short term liabilities.
Short term liabilities like creditors, bank overdraft are matched with assets which are more liquid, while long term liabilities are matched with lesser liquid assets. Since assets with higher liquidity are placed at the top (first), under this method, the liabilities to be paid out at the earliest are placed first (so that they match the higher liquid assets) and the liabilities to be paid out last are placed last. Capital is the liability that is paid out last. Paying out capital amounts to dissolving the organisation. It has to be paid out only after every other liability is paid out. Bank Overdraft is the liability which has to be paid out at the earliest. It gets adjusted with every transaction carried on that involves the organisation's bank account.
Order of Permanence
Under this method, the assets are arranged in the decreasing order of permanence.
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Eq. Share Capital Pr. Share Capital ... ... ... ... Sundry Creditors Bills Payable Bank Overdraft Amount 35,00,000 12,00,000 ... ... ... ... 13,00,000 12,00,000 5,00,000 2,54,20,000 Goodwill Land Buildings ... ... Sundry Debtors Bills Receivable Bank Balance Cash Assets Amount 8,00,000 35,00,000 27,00,000 ... ... 26,00,000 15,00,000 ... 1,16,000 2,54,20,000
Permanence
The affinity of an asset to stay with the organisation or the longevity of the life of an asset with the organisation. The longer an asset stays with an organisation, the more permanence it has.
Arrangement of Assets
The asset with the highest permanence is placed first (at the top) and the the asset with least permanence is placed last. Goodwill is considered to be the asset with the highest permanence. It moves out of the organisation only when the organisation is dissolved. Cash is considered to be the asset with the least permanence. It keeps moving in and out regularly.
Permanence can be understood as the inverse of liquidity. Though it is not a requirement that a less liquid asset should have greater permanence, this idea holds in most cases. Thus, the Order of permanence is considered to be the reverse of the Order of Liquidity.
Arrangement of Liabilities
Every liability is supported to the extent of its value, by one or more assets. Assuming all liabilities are cleared by paying out, we need cash to clear the liabilities. To clear short term liabilities we bank on assets that can be speedily converted to cash. Since short term liabilities are to be cleared at short notice, we use assets with a short life span, which are generally the ones that can be speedily converted to cash (more liquid assets) to clear the short term liabilities. Short term liabilities like creditors, bank overdraft are matched with assets with a lesser permanence (i.e. assets which are more liquid), while long term liabilities are matched to assets with a higher permanence (i.e. assets which are less liquid). Since assets with higher permanence are placed at the top (first), under this method, the liabilities with higher permanence are placed first (so that they match the assets with higher permanence) and the liabilities with lesser permanence are placed last. Capital is considered to be the liability with highest permanence. Paying out capital amounts to dissolving the organisation. It has to be paid out only after every other liability is paid out. Bank Overdraft is considered to be the liability with the least permanence. It has to be paid at the earliest. It gets transformed/adjusted with every transaction carried on that involves the organisation's bank account.
Statutory Horizontal Form of Balance Sheet

Indian Companies Act, 1956. Schedule VI PART I Horizontal Form of Balance Sheet
Stretch/Expand this balance sheet
Balance Sheet of M/s Free Flow Fluids on 30th June 2007 Liabilities SHARE CAPITAL: L: (a) Authorised: (a) Goodwill x Equity shares of Rs. _ each (b) Land A A Assets FIXED ASSETS [A: (a), (b), (c), (d) ] A A
(Previous) (Current)
(Previous) (Current)
y Preference shares of Rs. _ each Issued: [L: (b)] a Equity shares of Rs. _ each b Preference shares of Rs. _ each Subscribed Capital: [L: (c), G: (c)] Equity - p shares of Rs. _ each, Rs. _ called up Equity - q shares of Rs. _ each, Rs. _ called up Preference - m shares of Rs. _ each, Rs. _ called up Of these :
(c) Buildings (d) Leaseholds (e) Railway Sidings (f) Plant and Machinery (g) Furniture and Fittings (h) Development of Property (i) Patents, Trade Marks and Designs (j) Livestock (k) Vehicles INVESTMENTS : [A: (e), (f), (g)] (a) In Government or
Shares allotted as fully paid-up A) Pursuant to a contract without payments being received in cash : Equity - k shares of Rs._ each Preference - h shares of Rs._ each B) By way of bonus shares : [L: (d)] Equity - r shares of Rs._ each Less : Calls in Arrears By Managing Agents/Secretaries/Treasurers [L: (e)] By Directors By Others Add : Forfeited Shares [L: (d)]
Trust Securities (b) In Shares [A: (h)] (c) In Debentures [A: (h)] (d) In Bonds [A: (h)] (e) In Immovable properties (f) In Capital of partnership firms (g) Balance of unutilised monies raised by issue CURRENT ASSETS, LOANS AND ADVANCES: (A) CURRENT ASSETS (1) Interest accrued on Investments (2) Stores and spare parts [A: (i)] (3) Loose tools
(amount originally paid up.) RESERVES and SURPLUS [L: (g), (h)] (1) Capital Reserves. (2) Capital Redemption Reserve. (3) Share Premium Account [G: (cc)] (4) Other reserves (specifying the nature of each Reserve and the amount in respect thereof.)
(4) Stock-in-trade [A: (i)] (5) Works-in-progress (6) Sundry debtors [A: (k)] (a) Debts outstanding for over six months. (b) Other debts. Less: Provision (7) Cash and Bank Balances (A) Cash balance on
Less : Debit balance in P/L a/c. [G: (h)] (5) Surplus bal in P/L a/c
hand (B) Bank balances [A: (l), (m)] (a) with Scheduled
(after providing for Dividend, bonus, reserves etc.) (6) Proposed additions to reserves. (7) Sinking Funds
banks (b) with others. (B) LOANS AND ADVANCES [A: (k)] (8) Advances and
SECURED LOANS [L: (i), (j), (k), (l)]
Loans (i) To subsidiaries.
(1) Debentures [L: (l)] (2) Loans and advances from banks. (3) Loans and advances from subsidiaries. (4) Other loans and advances. UNSECURED LOANS
(ii) To partnership firms (in which the company or any of its subsidiaries is a partner.) (9) Bills of Exchange.
(1) Fixed deposits. (2) Loans and advances from subsidiaries. [L: (m), (n), (o)]
(10) Advances recoverable (in cash or in kind or
(3) Short-term loans and advances: [L: (m), (n), (o); G: (d)] (a) From Banks. (b) From others (4) Other loans and advances: (a) From Banks. (b) From others. CURRENT LIABILITIES AND PROVISIONS : A. CURRENT LIABILITIES : [L: (p)] (1) Acceptances. (2) Sundry creditors. Total outstanding dues i) of small scale industrial undertaking(s); and ii) of other creditors (3) Subsidiary companies. (4) Advance payments and unexpired discounts for the portion for which value has still to be given e.g., in the case of the following classes of companies :Newspaper, Fire Insurance, theaters, clubs, banking, steamship companies, etc. (5) Unclaimed dividends. (6) Other liabilities (if any) (7) Interest accrued but not due
for value to be received Eg : Rates, Taxes, Insurance, etc.) (11) Balances with customs, port trust, etc. (where payable on demand) MISCELLANEOUS EXPENDITURE : (to the extent not written off or adjusted): (1) Preliminary expenses. (2) Expenses including commission or brokerage on underwriting or subscription of shares or debentures. (3) Discount allowed on the issue of shares or debentures. (4) Interest paid out of capital (with rate of interest) during construction (5) Development expenditure not adjusted. (6) Other items PROFIT AND LOSS ACCOUNT [A: (n)]
on loans. B. PROVISIONS (8) Provision for taxation. (9) Proposed dividends. (10) For contingencies. (11) For provident fund scheme. (12) For insurance, pension and similar staff benefit schemes. (13) Other provisions.
Footnotes
A foot note to the balance-sheet may be added to show separately :-
(1) Claims against the company not acknowledged as debts. (2) Uncalled liability on shares partly paid. (3) Arrears of fixed cumulative dividends. The period for which the dividends are in arrears or if there is more than one class of shares, the dividends on each such class are in arrears, shall be stated. (4) Estimated amount of contracts remaining to be executed on capital account and not provided for. The amount shall be stated before deduction of income-tax, except that in the case of tax-free dividends the amount shall be shown free of income-tax and the fact that it is so shown shall be stated. (5) Other money for which the company is contingently liable. The amount of any guarantees given by the company on behalf of directors or other officers of the company shall be stated and where practicable, the general nature and amount of each such contingent liability, if material, shall also be specified.
Instructions in accordance with which liabilities should be made out Show Instructions in accordance with which assets should be made out Show General instructions for preparation of balance sheet Show
Statutory Vertical Form of Balance Sheet

Indian Companies Act, 1956. Schedule VI PART I Vertical Form of Balance Sheet
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Figures as at the end Particulars Schedule No. of Current Financial year I. SOURCE OF FUNDS (1) Shareholders' funds : (a) Capital (b) Reserves and surplus (2) Loan funds (a) Secured loans (b) Unsecured loans TOTAL II. APPLICATION OF FUNDS (1) Fixed assets : (a) Gross; block (b) Less : Depreciation (c) Net block (d) Capital work-in-progress (2) Investments (3) Current assets, loans and advances : (a) Inventories (b) Sundry debtors (c) Cash and bank balances Previous Financial year
(d) Other current assets (e) Loans and advances Less : Current liabilities and provisions: (a) Liabilities (b) Provisions (4) (a) Miscellaneous expenditure to the extent not written off or adjusted (b) Profit and loss account TOTAL
Notes
1. Details under each of the above items shall be given in separate Schedules. The Schedules shall incorporate all the information required to be given under A-Horizontal Form read with notes containing general instructions for preparation of balance sheet. The Schedules, referred to above, accounting policies and explanatory notes that may be 2. attached shall form an integral part of the balance sheet. The figures in the balance sheet may be rounded off to the nearest '000' or '00' as may be 3. convenient or may be expressed in terms of decimals of thousands. 4. A footnote to the balance sheet may be added to show separately contingent liabilities.]
Are the Statutory Formats useful?

All the benefits derived by marshalling of assets and liabilities are derived by following the statutory format. The presentation of the information relating to the previous period and the current period side by side would also enable the organisation to have a comparative overview of each of the items within the Balance Sheet.
information not obtainable

Marshalling of assets and liabilities or arranging the balance sheet items in the statutory formats would give a better understanding of the balance sheet as well as provide for derivation of additional information.
However, there is a lot of other information that is needed by the organisation that is not obtained ready hand from the Balance Sheets even after they are arranged in the aforesaid manner. Information relating to values of Working Capital, Net Fixed Assets, total Capital employed, long term loans employed in the business, share holders Net Worth, equity share holders Net Worth, Non-Assets (Asset side items not to be considered as fixed assets) etc., are examples of such information. These values have to be worked out using the information available within the balance sheet.
Solution
To enable derivation of such additional information, the information in the balance sheet is redrawn into a statement which is termed "Balance Sheet in a Form Suitable for Financial Analysis".
Balance Sheet in a Form Suitable for Financial Analysis

To enable derivation of additional information, the information in the balance sheet is redrawn into a statement which is termed "Balance Sheet in a Form Suitable for Financial Analysis".
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Particulars Amount (Previous) Amount (Current)
I. LIQUID ASSETS
86,000 40,000
1,16,000 15,00,000
(1) Cash balance on hand (2) Bank balance (3) Bills Receivable
13,80,000
(4) Sundry debtors
25,18,000 24,20,000
Less: Reserve for Doubtful Debts
Previous Period = 27,30,000 - 2,12,000 Current Period = 26,00,000 - 1,80,000
3,25,000
3,83,000
(5) Advances recoverable in cash or for value
to be received TOTAL 43,49,000 44,19,000
II. CURRENT ASSETS
43,49,000 25,30,000
44,19,000 28,90,000 3,80,000 1,60,000 5,00,000
(1) Liquid Assets (2) Stocks/Inventories (3) Prepaid Expenses (4) Incomes Receivable (5) Short Term Investments TOTAL
2,45,000 1,80,000 3,00,000
76,04,000
83,49,000
III. CURRENT LIABILITIES and PROVISIONS
13,50,000 15,20,000
13,00,000 12,00,000 5,00,000 5,00,000 20,000 2,23,000
(1) Sundry Creditors (2) Bills Payable (3) Bank Overdraft (4) Outstanding Expenses (5) Unclaimed dividends.
6,00,000 24,000 1,98,000
(6) Pre-received Incomes (7) Provision for Taxation (8) Provision for Dividends TOTAL
3,40,000 3,80,000
3,00,000 4,00,000
44,12,000
44,25,000
IV. NET WORKING CAPITAL [II - III]
28,92,000
39,24,000
Current Assets - Current Liabilities and Provisions
V. FIXED ASSETS
8,00,000 65,75,000
8,00,000 62,00,000 15,00,000 5,00,000 4,26,000 18,00,000 24,00,000
(1) Goodwill at Cost (2) Land and Buildings (3) Plant and Machinery (4) Furniture and Fittings (5) Loose Tools (6) Patents, Trademarks, Copyrights (7) Investments TOTAL
18,00,000 6,00,000 5,37,000 19,45,000 17,59,000
1,40,16,000
1,36,26,000
VI. CAPITAL EMPLOYED [IV + V]
1,84,28,000
1,80,51,000
Net Working Capital + Fixed Assets
VII. OTHER ASSETS
2,00,000 1,75,000
2,80,000 1,62,000
(1) Investments not relating to business
(2) Advances to Directors TOTAL 3,75,000 4,42,000
VII. NET ASSETS [VI + VII]
1,88,03,000
1,84,93,000
Capital Employed + Other Assets
VIII. LONG TERM LIABILITIES
62,00,000 25,00,000
54,00,000 25,00,000 14,62,000
(1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected TOTAL
11,75,000
98,75,000
93,62,000
IX. SHAREHOLDERS NET WORTH 89,28,000 (Or) TOTAL TANGIBLE NET WORTH [VII - VIII] Net Assets - Long Term Liabilities X. PREFERENCE SHARE CAPITAL 12,00,000 12,00,000 91,31,000
XI. EQUITY SHAREHOLDERS NET WORTH [IX - X]
77,28,000
79,31,000
Shareholders Net Worth - Preference Share Capital
Liquid Assets
All assets which are capable of being liquidated in a short period of time (typically a few i.e. 1 or 2 months time) are considered to be liquid assets.
Cash balance, Bank balance, Bills Receivable, Recoverable Advances, Sundry debtors etc are some examples of liquid assets. Liquid assets requiring special attention.
Sundry Debtors
In measuring/analysing funds flow, based on the concept of conservatism, assets are considered at their net values after setting off all losses of which there is information. Reserve for bad and doubtful debts and reserve for discounts on debtors are not actual losses. They are profits kept aside to confront losses in the subsequent accounting period. These reserves are set off from the balance in sundry debtors account to ascertain the net figure of Sundry Debtors. This net figure is considered for the purpose of Funds flow analysis.
Advances
Assets representing advances which are recoverable in the near future (short period) in cash or any other value are only to be considered as liquid assets. These do not include prepaid expenses since they are not recovered in cash but are written off as expenses in the future. Journal in the books of ___ for the period from ___ to ___
Date R/V No. Cash/Bank Dr. a/c To Loans and Advances a/c [For the amount received from Mr. Chang, towards the installment recovering the festival advance.] 3112 2009 To Prepaid Rent a/c [For writing off the pre-paid rent as expense.] Rent a/c Dr. 5,000 5,000 Amount Particulars L/F Debit 5,000 5,000 Credit
3112 2009
Current Assets
All those assets which are capable of being liquidated within a reasonable period of time (typically a year or less) are considered to be current assets. Since Liquid Assets can also be liquidated within this time span, they also form part of Current Assets. Thus Current Assets = Liquid Assets + Current Assets other than Liquid Assets. Cash balance, Bank balance, Bills Receivable, Sundry debtors, Recoverable Advances, etc., which are all liquid assets along with other current assets like Stocks/Inventories, Prepaid expenses, Incomes receivable etc., form some examples for current assets. The following other Current Assets require special attention
Prepaid Expenses
Prepaid expenses which are not recoverable in cash but are capable of being set off as expenses in the future, are made part of current assets other than liquid assets.
Stock/Inventories
Stocks/Inventories generally form a significant portion of other current assets. In the absence of any other information, we assume that current assets other than liquid assets are made up of stocks/inventories.
Current Assets - Liquid Assets = Stock/Inventories
Current Assets = Liquid Assets + Current Assets other than Liquid Assets. = Liquid Assets + Stock/Inventories.
Stock/Inventories = Current Assets - Liquid Assets This relationship is useful in problem solving.
Current Assets = Liquid Assets

In the absence of current assets other than liquid assets, current assets should be equal to liquid assets.
Current Assets
= Liquid Assets + Current Assets other than Liquid Assets. = Liquid Assets + 0 = Liquid Assets
Current Liabilities and Provisions

Liabilities which are to be cleared within a short period of time (typically a year or less) are considered to be current liabilities. The following other Current Assets require special attention
Reserve/Provision for Taxation/Dividends

Certain liability side items like Reserve/Provision for Taxation, Reserve/Provision for Dividends, etc., have dual nature. They can be considered to be a part of :
Current Liabilities
They may be treated as being part of Current Liabilities, indicating an existing liability. Reserve/Provision for Taxation Taxes are due but have not been paid yet. Reserve/Provision for Dividends Dividends have been declared and provided for but have not been paid yet.
Non - Current Liabilities

They may be treated as part of Reserves (Non-Current Liabilities), indicating that they represent profits set aside. Reserve/Provision for Taxation Certain amount of profits are set aside for Taxes. Reserve/Provision for Dividends Certain amount of profits are set aside for Dividends.
The Tax or Dividend is not yet an ascertained liability and the profit is being set aside to meet the expenditure which may/would arise in the future.
How Possible?
The possibility to treat these items in a dual manner arises on account of the fact that the net effect of the journal entries for (a) recording creation of reserves and (b) recording outstanding expenses is the same.
Recording Outstanding Expenses

Where the Expenditure account has already been closed and the outstanding expenses are recorded thereon, the journal and ledger would be as follows. Journal in the books of ___ for the period from ___ to ___
Date
R/V No. Expenses a/c
Amount Particulars L/F Debit Dr. To Outstanding Expenses a/c [For the amount of outstanding expenses brought into the books of accounts.] 8,000 8,000 Credit
3112 2009
3112 2009
Profit and Loss a/c To Expenses a/c
Dr.
8,000 8,000
[For charging the profit and loss account with the outstanding expenditure.]
Recording outstanding expenses results in the expenditure being taken into account in the relevant/current accounting period. Ledgers Show
Net Effect
The net effect of the above two entries for recording outstanding expenses would be a charge against the current period profits and the creation of a liability (Outstanding Expenses a/c) Journal in the books of ___ for the period from ___ to ___
Date R/V No. Profit and Loss a/c To Outstanding Expenses a/c [For the charging the profit and loss account with the outstanding expenses.] All nominal accounts prefixed or suffixed by the terms prepaid, outstanding, pre-recieved, still payable etc represent personal accounts and would be an equivalent of either debtors or creditors depending on the nature of their balance and have to be treated accordingly. Accounts with debit balances ( Debtors) are shown on the assets side of the balance sheet and accounts with credit balances ( Creditors) are shown on the liabilities side of the balance sheet. Amount Particulars L/F Debit Dr. 8,000 8,000 Credit
3112 2009
Where the Expenditure account has not yet been closed and the outstanding expenses are recorded before transferring the balance therein to the profit and loss account, the journal and ledger would be as follows : Show
Creating a Reserve
Reserves should be understood as profits kept aside for some purpose. Accounts showing profits (say profit and loss account) show a credit balance. Transferring a credit balance from one account to another would result in the transferee account being credited and the transferor account being debited. This amounts to taking a credit balance from one account and placing it in another account. This is what we do in creating reserves. Though, reserves are also created by charging profits, they are an appropriation of profits and not a charge on profits. Journal in the books of ___ for the period from ___ to ___
Date R/V No. Profit and Loss a/c To Reserve a/c [For the amount of reserve created out of profits.] Amount Particulars L/F Debit Dr. 25,000 25,000 Credit
3112 2009
Unlike in the case of the recording outstanding expenditure, the second account affected in the transaction of creating a reserve does not indicate a liability that has to be paid out.
Difference
Both recording an outstanding expenditure and creating a reserve result in a charge on profits. Both will result in a reduction of available profits. However, the effect on the second account is not the same. Recording an outstanding expenditure would result in creation of an existing liability, which is generally treated as a current liability. Whereas creating a reserve would result in a reserve account (special nominal account) which is treated as a non-current liability.
Balance Sheet of M/s Free Flow Fluids as on 31st December 2009 Liabilities Capital ... Reserve ... ... ... Sundry Creditors Amount 5,00,000 ... 25,000 ... ... ... 1,10,000 Assets Plant and Machinery Amount 4,25,000
Outstanding Expenses ...
8,000 ...
Outstanding Expenses a/c which represents a liability goes into the Current area and the Reserve a/c which represents an appropriation of profit goes into the non-current area of the liabilities side of the balance sheet. An account that appears in the
current area
represents an account that has been created through a charge on profits.
non-current area
represents an account that has been created through an appropriation of profits.
Thus, if Reserve/Provision for Taxation/Dividend is treated as
a current liability
(included in current liabilities), it represents an expenditure charged to the profit and loss account.
a non-current liability
(included in non-current liabilities), it represents an appropriation of profit.
Fixed Assets
All assets other than Current Assets are generally included under the head Fixed Assets. There may be other assets which sometimes are not to be considered as part of fixed assets for the purpose of funds flow analysis.
Accumulated Losses
Items present on the assets side of the Balance Sheet which do not represent assets, like accumulated losses, miscellaneous expenses, discount on issue of shares/debentures to the extent not written off etc., are not to be included in the value of Fixed Assets.
Intangible Assets
Intangible assets like Goodwill should be included in fixed assets only if they have been purchased (or expenditure has been incurred on their acquisition). Intangible assets like patents, trade marks, copyrights etc., should be included in fixed assets only if they have some realisable value.
Assets to be taken at their Net Values

Assets should be considered at their Net Values (values remaining after setting off depreciation). If asset values are being maintained at their cost i.e. depreciation reserve account exists in relation to any asset, then the cost and the reserve are to be set off and only the net value is to be considered as the value of the asset.
Accumulated Losses
Assets are those entities which are capable of being converted to cash or at least into any other asset. The items on the Assets side of the balance sheet, which do not possess this characteristic should not be included in the value of Fixed Assets. Some such asset side items Profit and Loss Appropriation a/c (debit balance) Preliminary Expenses Discount on issue of Shares/Debentures to the extent not written off Miscellaneous Expenses
Deferred Revenue Expenditure

Meaning
Postponed until a future date; Withheld until a future date.
Synonyms
Late Delayed Postponed Overdue
Deferred revenue expenditure is an expenditure that has already been incurred but whose charge (all or some proportion of the expenditure) to the profit and loss account is being postponed to the future accounting periods. The value of the expenditure whose charge is being deferred can be treated as both an accumulated loss or as an asset. There are arguments for and against both these treatments. The decision as to under what head this should go is to be taken by the management. Based on that decision, it would be included under the appropriate head in the "Balance Sheet" for the purpose of analysing funds flow. Where there is no indication as to its treatment, one can choose either of the treatments indicating the choice taken up.
Balance Sheet = Non-Current Area + Current Area

For the purpose of funds flow analysis, the Balance Sheet (both the assets side as well as the liabilities side) is considered to be made up of two areas. For this purpose, classification of assets and liabilities is based on time i.e. the life span of the assets and liabilities. An example balance sheet with the two areas marked.
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities
EQUITY SHARE CAPITAL PREFERENCE SHARE CAPITAL RESERVES 29,57,000 a) P/L Appropriation a/c (Retained Earnings) b) Share Premium c) Shares Forfeited d) Capital Redemption Reserve e) General Reserve 54,00,000 LONG TERM LIABILITIES 25,00,000 14,62,000 Miscellaneous Expenses (1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected 13,00,000 12,00,000 Goodwill (Self Generated) Patents, Trade Marks, Copyrights (unrealisable) Discount on issue of 2,10,000 ACCUMULATED LOSSES 14,00,000 1,74,000 12,00,000 20,00,000
Amount
15,00,000 9,00,000
Assets
FIXED ASSETS
Amount
8,00,000 Goodwill at cost Land and Buildings Plant and Machinery Furniture and Fittings Loose Tools Patents, Trade Marks, Copyrights Investments 2,40,000 2,00,000 1,00,000 62,00,000 35,00,000 5,00,000 4,26,000 18,00,000 24,00,000
CURRENT LIABILITIES AND PROVISIONS
5,00,000 5,00,000
shares and Debentures
(1) Sundry Creditors (2) Bills Payable (3) Bank Overdraft (4) Outstanding Expenses (5) Unclaimed Dividends (6) Pre-received Incomes (7) Provision for Taxation (8) Provision for Dividends
20,000 2,23,000 3,00,000 4,00,000
CURRENT ASSETS
1,17,000
A. LIQUID ASSETS
15,00,000 38,20,000
(1) Cash balance on hand (2) Bank Balance (3) Bills Receivable (4) Sundry Debtors 3,83,000
Less: Reserve for

Doubtful Debts
6,00,000 3,80,000 1,60,000
(5) Advances recoverable in cash or for value to be received
5,00,000
B. OTHER CURRENT ASSETS
(1) Stocks/Inventories (2) Prepaid Expenses (3) Incomes Receivable (4) Short Term Investments 2,38,36,000 2,38,36,000
Current Area
Assets which generally get liquidated and liabilities which generally get cleared within a time span of a year or less are classified as current natured and are identified as current assets and current liabilities respectively. Thus, the current area of the balance sheet is made up of the current assets on the assets side and the current liabilities on the liabilities side.
...
Amount
... ...
Assets
Amount
...
CURRENT LIABILITIES AND PROVISIONS 13,00,000 (1) Sundry Creditors (2) Bills Payable 12,00,000 5,00,000
CURRENT ASSETS
A. LIQUID ASSETS 1,17,000
(3) Bank Overdraft (4) Outstanding Expenses (5) Unclaimed Dividends (6) Pre received Incomes (7) Provision for Taxation (8) Provision for Dividends
5,00,000 20,000 2,23,000 3,00,000 4,00,000
(1) Cash balance on hand (2) Bank Balance (3) Bills Receivable (4) Sundry Debtors
15,00,000 38,20,000
Less: Reserve for

44,43,000 Doubtful Debts
3,83,000
(5) Advances recoverable in cash or for value to be received
6,00,000 3,80,000 1,60,000
B. OTHER CURRENT ASSETS
5,00,000
(1) Stocks/Inventories (2) Prepaid Expenses (3) Incomes Receivable (4) Short Term Investments 2,38,36,000
72,60,000
2,38,36,000
Current Assets > Current Liabilities

In general, the aggregate value of current assets would be greater than the aggregate value of current liabilities. This is not a rule and need not be so always. From the above balance sheet, aggregate of Current Assets = 72,60,000 aggregate of Current Liabilities = 44,43,000
Non-Current Area
Assets which generally have a life span of more than one year and liabilities which generally get cleared over a long period of time (greater than one year) are classified as non-current natured and are identified as non-current assets and non-current liabilities respectively. With a few exclusions, we can also say that assets other than current assets are noncurrent assets and liabilities other than current liabilities are non-current liabilities. Thus, the non-current area of the balance sheet is made up of the non-current assets on the assets side and the non-current liabilities on the liabilities side.
Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Amount Assets Amount
EQUITY SHARE CAPITAL PREFERENCE SHARE CAPITAL RESERVES
15,00,000 9,00,000
FIXED ASSETS 8,00,000 Goodwill at cost 62,00,000 35,00,000 5,00,000 4,26,000 18,00,000 24,00,000
29,57,000 a) P/L Appropriation a/c (Retained Earnings) b) Share Premium c) Shares Forfeited d) Capital Redemption Reserve e) General Reserve 54,00,000 LONG TERM LIABILITIES 25,00,000 14,62,000 (1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected 1,93,93,000 ... 14,00,000 1,74,000 12,00,000 20,00,000
Land and Buildings Plant and Machinery Furniture and Fittings Loose Tools Patents, Trade Marks, Copyrights Investments
2,40,000 ACCUMULATED LOSSES 2,00,000 1,00,000 Miscellaneous Expenses Goodwill (Self Generated) Patents, Trade Marks, Copyrights (unrealisable) Discount on issue of 1,65,76,000 ... 2,10,000
...
shares and Debentures
... 2,38,36,000 2,38,36,000
Non-Current Liabilities > Non-Current Assets

In general, the aggregate value of non-current liabilities would be greater than the aggregate value of non-current assets. This is not a rule and need not be so always. From the above balance sheet, aggregate of Non-Current Assets = 1,65,76,000 aggregate of Non-Current Liabilities = 1,93,93,000
Working Capital : Residue of Current Area

...
Amount
... ...
Assets
Amount
...
CURRENT LIABILITIES AND PROVISIONS 13,00,000 (1) Sundry Creditors 12,00,000
CURRENT ASSETS
A. LIQUID ASSETS
(2) Bills Payable (3) Bank Overdraft (4) Outstanding Expenses (5) Unclaimed Dividends (6) Pre received Incomes (7) Provision for Taxation (8) Provision for Dividends
5,00,000 5,00,000 20,000 2,23,000 3,00,000 4,00,000
(1) Cash balance on hand (2) Bank Balance (3) Bills Receivable (4) Sundry Debtors
1,17,000 15,00,000 38,20,000
Less: Reserve for

Doubtful Debts 3,83,000
44,43,000 (5) Advances recoverable in cash or for value to be received 6,00,000 3,80,000 B. OTHER CURRENT ASSETS 1,60,000 5,00,000 (1) Stocks/Inventories (2) Prepaid Expenses (3) Incomes Receivable (4) Short Term Investments 2,38,36,000 2,38,36,000 72,60,000
Working Capital [= Current Assets - Current Liabilities/Provisions]

The difference between the aggregate values of the current assets and current liabilities is working capital. From the above balance sheet,
Working Capital = Current Assets - Current Liabilities = 72,60,000 - 44,43,000 = 28,17,000

A negative value for working capital indicates that the aggregate of current liabilities is greater than the aggregate of current assets.
Working Capital is excess of Current Assets over Current Liabilities.

Since, Working Capital = Current Assets - Current Liabilities, Working capital can be interpreted as the excess of current assets over current liabilities or as the residue of the current area (after setting of current assets and liabilities).
Working Capital is that part of the Current Assets which are not financed by Current Liabilities.
Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible.
Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities. Since Current assets in excess of current liabilities is working capital, we say Working capital is financed by non-current liabilities that part of current assets which are financed by non-current liabilities. not financed by current liabilities that part of current assets which are not financed by current liabilities.
Working Capital : Residue of Non-Current Area

EQUITY SHARE CAPITAL PREFERENCE SHARE CAPITAL RESERVES 29,57,000 a) P/L Appropriation a/c (Retained Earnings) b) Share Premium c) Shares Forfeited d) Capital Redemption Reserve e) General Reserve 54,00,000 LONG TERM LIABILITIES 25,00,000 14,62,000 (1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected 1,93,93,000 ... Miscellaneous Expenses Goodwill (Self Generated) Patents, Trade Marks, Copyrights (unrealisable) Discount on issue of ... shares and Debentures 1,65,76,000 ... 2,10,000 ACCUMULATED LOSSES 14,00,000 1,74,000 12,00,000 20,00,000
Amount
15,00,000 9,00,000
Assets
FIXED ASSETS
Amount
8,00,000 Goodwill at cost Land and Buildings Plant and Machinery Furniture and Fittings Loose Tools Patents, Trade Marks, Copyrights Investments 2,40,000 2,00,000 1,00,000 62,00,000 35,00,000 5,00,000 4,26,000 18,00,000 24,00,000
... 2,38,36,000 2,38,36,000
Working Capital = Non-Current Liabilities - Non-Current Assets
Total Assets = Total Liabilities Non-Current Assets + Current Assets = Non-Current Liabilities + Current Liabilities Current Assets - Current Liabilities = Non-Current Liabilities - Non-Current Assets Working Capital = Fund (Non-Current) Liabilities - Fund (Non-Current) Assets The difference between the aggregate values of non-current liabilities and non-current assets is working capital. From the above balance sheet,
Working Capital = Non-Current Liabilities - Non-Current Assets = 1,93,93,000 - 1,65,76,000 = 28,17,000

A negative value for working capital indicates that the aggregate of non-current assets is greater than the aggregate of non-current liabilities.
Working Capital is excess of non-current liabilities over non-current assets

Since, Working Capital = Non-Current Liabilities - Non-Current Assets, Working capital is the residue of the non-current area (after setting of non-current assets and liabilities).
Working Capital is that part of current assets financed by non-current liabilities

Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible. Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities. Since Current assets in excess of current liabilities is working capital, we say Working capital is financed by non-current liabilities that part of current assets which are financed by non-current liabilities. not financed by current liabilities that part of current assets which are not financed by current liabilities.
Working Capital is that part of non-current liabilities supported by current assets

Every rupee of a liability supports a rupee of an asset. We match similar natured assets and liabilities as far as possible.
Assuming non-current liabilities > non-current assets, Non-Current liabilities support noncurrent assets to the extent they are available and only the surplus non-current liabilities support current assets. Since non-Current liabilities in excess of non-current assets represent working capital, we say Working capital is that part of non-current liabilities supported by current assets that part of non-current liabilities not supported by non-current assets
Working Capital belongs to both Current area as well as Non - Current area
Working Capital as a residue of the Current area leads us to the understanding that it is current natured. Excess of current assets over current liabilities implies a part of the current assets is what is remaining and thus it can be said that working capital is current natured. Working capital as a residue of the Non-Current area leads us to the understanding that it is Non-Current natured. Excess of Non-Current liabilities over Non-Current assets implies part of the Non-Current liabilities (capital) is what is remaining and thus it can be said that working capital is Non-Current natured. Working capital is thus dual natured. It is also capital and in this regard it is to be considered as long term capital belonging to the non-current area. Every rupee of a liability is supported by a rupee of an asset and the assets that support working capital are current natured.
Information available from balance sheets pertaining to two periods

In statutory formats and in many cases we come across two balance sheets clubbed into one single statement giving us a comparative view of the figures pertaining to the two dates. One the last day of the current accounting period and the other the last day of the previous accounting period i.e. the first day of the current accounting period.
Stretch/Expand this balance sheet
Balance Sheet of M/s ___ as on 31st March 2007 LIABILITIES Amount Particulars Amount Amount Amount ASSETS Particulars Amount Amount
(Previou s) 12,00,00 EQUITY SHARE 0 CAPITAL 7,00,000 PREFERENCE SHARE CAPITAL 20,00,00 RESERVES 0 a) P/L Appropriation a/c b) Share Premium 15,00,00 e) General Reserve 0 LONG TERM LIABILITIES 18,00,00 0 (1) Loans from Banks (2) Debentures CURRENT LIABILITIES/PROVISIO NS (1) Sundry Creditors (2) Bills Payable (3) Bank Overdraft (4) Outstanding Expenses (7) Provision for Taxation (8) Provision for Dividends 2,50,000 3,00,000 2,50,000 1,00,000 11,00,00 0 4,00,000 8,00,000 8,00,000 9,00,000 6,00,000 8,00,000
(Current (Previou ) 15,00,00 0 9,00,000 23,00,00 0 s) 37,00,00 FIXED ASSETS 0 (1) Goodwill at Cost (2) Land and Buildings (3) Plant and 28,00,00 Machinery 0 (4) Furniture 16,00,00 0 and Fittings (7) Investments CURRENT 24,00,00 0 A. LIQUID ASSETS 7,00,000 (1) Cash Balance (2) Bills Receivable (3) Sundry debtors Less: Bad Debt Reserve B. OTHER CURRENT ASSETS (1) Stocks/Inventori es (2) Prepaid Expenses ACCUMULATED LOSSES 1) Miscellaneous 12,00,00 0 2,84,000 12,25,00 ASSETS 78,000 8,25,000 4,00,000 13,00,00 0 14,00,00 0 8,00,000
(Current ) 45,00,00 0
6,00,000 36,00,00 0
0 6,00,000 (12,000)
Expenses 72,00,00 0 Total 87,00,00 0 72,00,00 0 Total 87,00,00 0
Use
In addition to providing all the information pertaining to an accounting period, the information from such a balance sheet enables us to compare the figures relating to the current period with the figures relating to the previous period. Such a comparison enables us to analyse the changes in the current and non-current areas of the balance sheet over the period involved between the two balance sheet dates.
Deriving information relating to changes from two balance sheets

From two balance sheets, we can derive the data relating to the changes that have occurred in relation to the various balance sheet items over the period between the two dates. The figures representing the changes in the balance sheet items are not straight away available but are to be derived.
Changes in the Current Area

Changes in the current area can be assessed by taking into consideration only the current natured accounts, both on the assets as well as the liabilities side i.e. current assets and current liabilities only.
Balance as on 31st March Name Type 2007 2008 Change Nature
Cash Balance Bills Receivable Sundry Debtors Stocks/Inventories Prepaid Expenses Sundry Creditors Bills Payable Bank Overdraft
Asset Asset Asset Asset Asset Liability Liability Liability
56,000 5,75,000 9,15,000 9,48,000 3,24,000 7,40,000 2,20,000 2,81,000
78,000 8,25,000 12,25,000 12,00,000 2,84,000 11,00,000 4,00,000 2,50,000
22,000 2,50,000 3,10,000 2,52,000 40,000 3,60,000 1,80,000 31,000
Increase Increase Increase Increase Decrease Increase Increase Decrease
Outstanding Expenses Provision for Taxation Provision for Dividends Reserve for Bad Debts
Liability Liability Liability Liability
1,23,000 2,38,000 1,98,000 18,000
1,00,000 3,00,000 2,50,000 12,000
23,000 62,000 52,000 6,000
Decrease Increase Increase Decrease
Bad Debt reserve is current natured and is also a reserve

Reserve for Bad Debts account carries a credit balance. Being related to sundry debtors which are current natured, it is also treated as a current natured account. Ledger accounts with a credit balance which appear in the balance sheet are shown on the liabilities side. As such, Reserve for Bad Debts account should also be shown on the liabilities side of the balance sheet and since it is current natured it is shown along with current liabilities. Showing an item on the liabilities side of the balance sheet is the same as deducting it from an item on the assets side of the balance sheet. Thus to derive the information relating to the net realisable debtors, conventionally we deduct the reserve for bad debts from the figure of debtors on the assets side of the balance sheet.
Changes in the Non-Current Area

Changes in the fund area can be assessed by taking into consideration only the fund natured accounts, both on the assets as well as the liabilities side i.e. fund (non-current) assets and fund (non-current) liabilities only.
Balance as on 31st March Name Type 2007 2008 Change Nature
Equity Share Capital Preference Share Capital Reserves Long Term Liabilities Fixed Assets Accumulated Losses
Liability Liability Liability Liability Assets Assets
12,00,000 7,00,000 20,00,000 15,00,000 37,00,000 7,00,000
15,00,000 9,00,000 23,00,000 16,00,000 45,00,000 6,00,000
3,00,000 2,00,000 3,00,000 1,00,000 8,00,000 1,00,000
Increase Increase Increase Increase Increase Decrease
Note that the information that is derived only speaks of the magnitude of change and the direction of change. It does not give us an idea of the reasons for change.
Preparation of Schedule/Statement of changes in working capital

Schedule/Statement of changes in working capital
The information relating to the changes in current natured accounts between two periods of time presented in the form of a statement is what we call the schedule/statement of changes in working capital.
Preparing the Schedule/Statement of changes in working capital

Preparing the schedule/statement of changes in working capital requires us to present the information relating to the current area of the balance sheets pertaining to the two periods in the format given below and deriving and presenting the changes within them.
Schedule/Statement of Changes in Working Capital for the period from __ to __
Balance as on 31st March Particulars/Account 2007 2008
Working Capital Change
Increase
Decrease
a) CURRENT ASSETS 56,000 1) Cash Balance 2) Bills Receivable 3) Sundry Debtors 4) Stocks/Inventories 5) Prepaid Expenses 5,75,000 9,15,000 9,48,000 3,24,000 78,000 8,25,000 12,25,000 12,00,000 2,84,000 22,000 2,50,000 3,10,000 2,52,000 40,000
TOTAL
28,18,000
36,12,000
8,34,000
40,000
b) CURRENT LIABILITIES 7,40,000 1) Sundry Creditors 2) Bills Payable 3) Bank Overdraft 2,20,000 2,81,000 1,23,000 11,00,000 4,00,000 2,50,000 1,00,000 31,000 23,000 3,60,000 1,80,000
4) Outstanding Expenses 5) Provision for Taxation 6) Provision for Dividends 7) Reserve for Bad Debts
2,38,000 1,98,000 18,000
3,00,000 2,50,000 12,000 6,000
62,000 52,000
TOTAL
18,18,000
24,12,000
60,000
6,72,000
Working Capital [(a) - (b)]
10,00,000
12,00,000
TOTAL
8,94,000
6,94,000
Net Change in Working Capital
2,00,000
Identify all the Current natured accounts on the assets as well as the liabilities sides of the two balance sheets in consideration. Fill the statement with the data relating to those accounts, taking current assets as a group and current liabilities as another group. A balance sheet item may have data in only one of the balance sheets or in both. Each item should appear only once in the statement.
What is a Fund?
Fund
Meaning
1. Money that is set aside for a particular purpose. 2. To provide money for paying off the interest or principal of (a debt). 3. To finance, using long-term debt or Capital.
Synonyms
1. Finance 2. Support
3. Back 4. Furnish
Fund = Capital
We use the phrase "We need additional funds" to mean we need additional capital whether be it for acquiring assets, clearing liabilities or for meeting expenses. This indicates that Fund means Capital. All capital of the organisation whether owned or loaned is capable of being called Fund.
Fund is Capital freely available for use

A Fund by its nature would be capital kept aside with a purpose. The fund should be capable of being used for the specified purpose at any time. Fund, in the topic Funds Flow Analysis, is a general purpose fund. It represents capital resource that would be available to the organisation for general purposes. It would be capable of being used in any manner the organisation prefers without any restriction/hindrance.
Fund is Capital supported by Current Assets

Every rupee of a liability/capital is supported by a rupee of an asset. Every rupee of an asset is financed by a rupee of a liability. Consider a new business that has been started with a capital of Rs. 2,00,000 brought in cash. The organisation's Balance Sheet immediately after this first transaction would be:
Balance Sheet of M/s ___ as on 31st December __ Liabilities Capital Amount Assets Amount 2,00,000 2,00,000
2,00,000 Cash 2,00,000
1. Liabilities supported by Assets : Capital is supported by cash 2. Assets financed by Liabilities : Cash is financed by Capital The next day, Furniture worth Rs. 1,00,000 and Stock Worth Rs. 50,000 have been bought for cash. The Balance Sheet after these transaction would be :
Balance Sheet of M/s ___ as on 31st December __
Liabilities Capital
Amount
Assets
Amount 50,000 1,00,000 50,000 2,00,000
2,00,000 Cash Furniture Stock 2,00,000
1. Liabilities supported by Assets : Capital is supported by Cash, Furniture and Stock 2. Assets financed by Liabilities : Cash, Furniture and Stock are financed by Capital
Capital/Cash is employed in purchasing Assets

Since Cash used in purchasing Furniture was financed by Capital, we can say that Furniture is financed by Capital. Whereby, we say that capital is employed in purchasing furniture. On converting an asset into a new one, the liability that was being supported by the replaced asset would now be supported by the new asset. Therefore, on employing capital, the assets supporting capital change.
Capital that can be employed

To be able to employ capital for any purpose, the asset that is supporting it should be easily convertible.
Fund is Capital supported by easily convertible Assets

Fund is capital freely available for being used in any which way the organisation intends i.e. for long term or short term needs. To enable such usage, funds (capital that we call funds) should be supported not just by assets which are convertible but by assets that are easily convertible.
Current Assets are easily convertible Current

Meaning
1. Belonging to the present time. 2. Not overdue; occurring this period.

Synonyms
1. Present 2. Existing 3. Recent 4. In Progress
Current Assets are assets that are capable of being liquidated in a time span of a year or less. They represent easily convertible assets. Fund is capital supported by easily convertible assets + Current Assets are easily convertible assets. Fund is capital supported by Current Assets
Funds exclude Current Liabilities

Current Liabilities
Current liabilities are liabilities that are to be repaid/cleared within the near future (a short period of time). Current liabilities are considered to be supported by current assets as they are similar in nature i.e. both of them have a short life span (a year or less). Current liabilities have a charge on current assets. Fund is capital that is freely available for use for any purpose the organisation intends without any hindrance/restriction. All the capital that is supported by current assets cannot be said to be freely available for use without any hindrance. We do not consider Current liabilities to be representing capital that is freely available for use, since they are to be repaid within a short time span Therefore, capital supported by current assets excluding current liabilities would only be considered as fund.
Fund = Current Assets - Current Liabilities

Fund is freely available capital + Fund is capital supported by Current Assets + Fund is capital supported by current assets excluding current liabilities [Current assets in excess of those supporting current liabilities support funds.] Funds = Current Assets - Current Liabilities
Fund = Working Capital

Excess of Current Assets over Current Liabilities is Working Capital Working Capital = Current Assets - Current Liabilities. Fund = Working Capital
What is Funds Flow?
Flow
Meaning
i. ii. To move or run smoothly with unbroken continuity like in the case of a fluid. Something that resembles a flowing stream in moving continuously
Synonyms
i. ii. iii. Stream Gush Course
Funds Flow
Fund being working capital, Funds flow indicates the flow of working capital between two points of time. It involves information relating to the various transformations undergone by working capital (i.e. the changes that have taken place in working capital) during the period involved between the two points of time. Every change in working capital is associated with (or is on account of) a flow either an inflow or an outflow. Thus, funds flow involves information relating to the inflows and outflows that resulted in a change in working capital between the two points of time.
When do we say that there is a flow of fund?

Fund (Working Capital) in an Organisation is like water in a reservoir. The Fund is analogous to water and the reservoir to the organisation.
There is a change whenever there is a flow

There would be a change in fund (working capital) whenever there is a flow (in/out) of fund. An inflow would result in an increase and An outflow would result in a decrease.
There is a flow whenever there is a change

A change in fund (working capital) in the organisation is an indication of flow of fund. An increase would indicate an inflow and A decrease would indicate an outflow.
Hidden/Masked flows
When there is an inflow followed by an outflow of the same magnitude, there may not be a change in fund (working capital). An inflow would result in an increase in fund which would be set off by an outflow resulting in a decrease. Since the magnitude is the same, after the two transactions, the fund seems to be unchanged. In such situations, to notice the change, we will have to break down the transactions into two instead of viewing them in total.
All Business/Accounting Transactions influence the Balance Sheet

Every accounting transaction has it effect on the balance sheet. To understand this we need to look at the process of final accounting during which we prepare the balance sheet.
Route to the Balance Sheet

All nominal accounts are closed - to ascertain profits
To ascertain the profits/losses made by the organisation during the accounting period, all the nominal accounts are closed (at the end of the accounting period) by transfer to either the manufacturing account , trading account or profit and loss account as the case may be. The balance in the Profit and Loss account which we call Net Profit represents the residue of the nominal account balances.
Profits are capitalised

The P and L a/c balance is either added to the Capital (profits increase capital) or to the profit and loss appropriation account which is shown as a distinct account in the balance sheet, by transferring it to the respective account. P/L appropriation a/c represents owners capital accumulated through profits. Thus it can be treated a personal account. We use the term special nominal accounts for such accounts, which seem to be nominal accounts by their name, but are not and whose balances are carried forward to the subsequent accounting periods.
Balance Sheet is prepared

Balance sheet is a position statement, showing the ledger balances in real, personal and special nominal accounts as at a particular point of time (the last day of the accounting period). It is an abstract of the ledger account balances after finalising and capitalising profits
All accounting transactions affect the Balance Sheet

Every accounting transaction would affect two ledger accounts. The affected ledger accounts may be personal, real or nominal. Since the personal or real account balances are shown in the balance sheet, we can say that those transactions which affect the personal or real accounts, affect the balance sheet. The residue of the nominal account balances i.e. the net profit/loss is capitalised by transfer to capital account or to the profit and loss appropriation account thereby getting into the balance sheet. Thus accounting transactions which affect nominal accounts can also be assumed to be affecting the balance sheet,
Cross Transactions influence the Fund (Working Capital)

Balance Sheet is made up of Current Assets, Current Liabilities, Non-Current Assets and Non-Current Liabilities. + All accounting transactions affect the balance sheet. All accounting transactions affect one or more of Current Assets, Current Liabilities, NonCurrent Assets and Non-Current Liabilities. All accounting transactions may influence funds
From
Working Capital = Current Assets - Current Liabilities; (Or) = Non-Current Liabilities - Non-Current Assets
we can say that any transaction that brings about a change in one or more of Current Assets, Current Liabilities, Non-Current Assets or Non-Current Liabilities may result in a change in Fund or Working Capital.
+ All accounting transactions affect one or more of Current Assets, Current Liabilities, NonCurrent Assets and Non-Current Liabilities. All accounting transactions may influence the fund or working capital. We use may because there are some accounting transactions which do not bring about a change in fund or working capital.
Accounting transactions not influencing funds

We see no change in working capital, where, on account of a transaction, there is a
change by the same amount in the same direction in
a current asset and a current liability (Or) a non current asset and a non current liability
change by the same amount in opposite directions in
two current assets (Or) two current liabilities (Or) two non-current assets (Or) two non-current liabilities Cross Transactions : Accounting transactions influencing funds
We see a change in working capital, where, on account of a transaction, there is a
change by the same amount in the same direction in
a current asset and a non-current liability (Or) a current liability and a non current asset
change by the same amount in opposite directions in
a current asset and a non-current asset (Or) a current liability and a non-current liability
Cross Transactions
Cross transactions are accounting transactions involving one account which falls in the current area and another account which falls in the non-current area of the balance sheet and which change in the same direction when one of them is an asset and the other is a liability or in opposing directions when both are either assets or liabilities. Cross transactions is an idea used in the topic funds flow analysis. Such transactions influence i.e. bring about a change in fund or working capital.
Transactions not influencing Fund (Working Capital) illustrations

Consider, the following consolidated balance sheet
Balance Sheet of M/s __ as on 30th June __ Liabilities Non-Current Liabilities Current Liabilities Amount 89,00,000 Assets Non-Current Assets Amount 80,00,000 24,00,000 1,04,00,000
15,00,000 Current Assets 1,04,00,000
From the above balance sheet,
Working Capital = Current Assets - Current Liabilities = 24,00,000 - 15,00,000 = 9,00,000 (Or) = Non-Current Liabilities - Non-Current Assets = 89,00,000 - 80,00,000 = 9,00,000
An accounting transaction will not influence the fund or working capital when it brings about a change in
A Current Asset and a Current Liability in the same direction

Payment made to Creditors 50,000
Dr. Creditor a/c Current Liability Decrease Cr. Cash/Bank a/c Current Asset Decrease
After taking into account the affect of the above transaction,
Current Assets (Changed) = Current Assets (old) - Decrease = 24,00,000 - 50,000 = 23,50,000 Current Liabilities (Changed) = Current Liabilities (old) - Decrease = 15,00,000 - 50,000 = 14,50,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities (Changed) = 23,50,000 - 14,50,000 = 9,00,000
There is no change in working capital.
A Non-Current Asset and a Non-Current Liability in the same direction

Issue of Shares/Debentures valued 4,00,000 in exchange for buying an asset
Dr. Fixed Asset a/c Cr. Debentures a/c
Non-Current Asset Increase Non-Current Liability Increase
Non-Current Assets (Changed) = Non-Current Assets + Increase = 80,00,000 + 4,00,000 = 84,00,000 Non-Current Liabilities (Changed) = Non-Current Liabilities (old) + Increase = 89,00,000 + 4,00,000 = 93,00,000 Working Capital (Changed) = Non-Current Liabilities (Changed) - Non-Current Assets (Changed) = 93,00,000 - 84,00,000 = 9,00,000
Two Current Assets in opposing directions

Payment received from Debtors 1,00,000.
Dr. Cash/Bank a/c Cr. Debtors a/c
Current Asset Current Asset
Increase Decrease
Current Assets (Changed) = Current Assets + Increase - Decrease = 24,00,000 + 1,00,000 - 1,00,000 = 24,00,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities
= 24,00,000 - 15,00,000 = 9,00,000

Two Current Liabilities in opposing directions

Bills drawn by Creditors Accepted 48,000
Dr. Creditors a/c Current Liability Decrease Cr. Bills Payable a/c Current Liability Increase
Current Liabilities (Changed) = Current Liabilities + Increase - Decrease = 15,00,000 + 48,000 - 48,000 = 15,00,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 15,00,000 = 9,00,000
Two Non-Current Liabilities in opposing directions

Issuing Debentures worth 3,50,000 towards the Preference Shareholders dues
Dr. Preference Shares a/c Cr. Debentures a/c
Non-Current Liability Non-Current Liability
Decrease Increase
Non-Current Liabilities (Changed) = Non-Current Liabilities + Increase - Decrease = 89,00,000 + 3,50,000 - 3,50,000 = 89,00,000 Working Capital (Changed) = Non-Current Liabilities (Changed) - Non-Current Assets = 89,00,000 - 80,00,000
= 9,00,000
Two Non-Current Assets in opposing directions

Purchasing an Asset worth 2,40,000 in Exchange for an Old Asset
Dr. New Asset a/c Cr. Old Asset a/c
Non-Current Asset Non-Current Asset
Increase Decrease
Non-Current Asset (Changed) = Non-Current Assets + Increase - Decrease = 80,00,000 + 2,40,000 - 2,40,000 = 80,00,000 Working Capital (Changed) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 80,00,000 = 9,00,000
Non Cross Transations

Where both the ledger accounts affected by an accounting transaction belong to the same area of the balance sheet i.e. either current or non-current, then the transaction would be a non cross transaction. Non Cross transaction is an identification relevant to the topic funds flow analysis. Such transactions would not result in a change in fund or working capital.
Cross Transaction - Transactions influencing Fund (Working Capital) illustrations

Balance Sheet of M/s __ as on 30th June __ Liabilities Non-Current Liabilities Current Liabilities Amount 89,00,000 Assets Non-Current Assets Amount 80,00,000 24,00,000
15,00,000 Current Assets
1,04,00,000
1,04,00,000
Working Capital = Current Assets - Current Liabilities = 24,00,000 - 15,00,000 = 9,00,000 (Or) = Non-Current Liabilities - Non-Current Assets = 89,00,000 - 80,00,000 = 9,00,000
An accounting transaction will influence the fund or working capital when it brings about a change in
A Current Asset and a Non-Current Asset in opposing directions

Purchase of an Asset valued 4,00,000 for cash
Dr. Fixed Asset a/c Cr. Cash a/c
Non-Current Asset Current Asset
Increase Decrease
Current Assets (Changed) = Current Assets (old) - Decrease = 24,00,000 - 50,000 = 23,50,000 Non-Current Asset (Changed) = Non-Current Asset (old) + Increase = 80,00,000 + 4,00,000 = 84,00,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 20,00,000 - 15,00,000 = 5,00,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 84,00,000 = 5,00,000
Working capital has changed from 9,00,000 to 5,00,000. Sold Land 5,60,000 and received consideration through a cheque
Dr. Bank a/c Cr. Land a/c
Current Asset Increase Non-Current Asset Decrease
Current Assets (Changed) = Current Assets (old) + Increase = 24,00,000 + 5,60,000 = 29,60,000 Non-Current Asset (Changed) = Non-Current Asset (old) - Decrease = 80,00,000 - 5,60,000 = 74,40,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 29,60,000 - 15,00,000 = 14,60,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 74,40,000 = 14,60,000
Working capital has changed from 9,00,000 to 14,60,000.
A Current Asset and a Non-Current Liability in the same direction

Issued a cheque for 2,35,000 to clear a Long term loan
Dr. Long Term Loan a/c Cr. Bank a/c
Non-Current Liability Decrease Current Asset Decrease
Current Assets (Changed) = Current Assets (old) - Decrease = 24,00,000 - 2,35,000 = 21,65,000
Non-Current Liability (Changed) = Non-Current Liability (old) - Decrease = 89,00,000 - 2,35,000 = 86,65,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 21,65,000 - 15,00,000 = 6,65,000 (Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 86,65,000 - 80,00,000 = 6,65,000
Working capital has changed from 9,00,000 to 6,65,000. Partner introduced capital by endorsing bills receivable worth 85,000
Dr. Bills Receivable a/c Cr. Partners Capital a/c
Current Asset Increase Non-Current Liability Increase
Current Assets (Changed) = Current Assets (old) + Increase = 24,00,000 + 85,000 = 24,85,000 Non-Current Liability (Changed) = Non-Current Liability (old) + Increase = 89,00,000 + 85,000 = 89,85,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 24,85,000 - 15,00,000 = 9,85,000 (Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 89,85,000 - 80,00,000 = 9,85,000
A Current Liability and a Non-Current Asset in the same direction
Purchased an Asset and accepted a Bills Payable for the amount due 5,00,000
Dr. Fixed Asset a/c Non-Current Asset Cr. Bills Payable a/c Current Liability
Increase Increase
Non-Current Assets (Changed) = Non-Current Assets (old) + Increase = 80,00,000 + 5,00,000 = 85,00,000 Current Liability (Changed) = Current Liability (old) + Increase = 15,00,000 + 5,00,000 = 20,00,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 20,00,000 = 4,00,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 85,00,000 = 4,00,000
Working capital has changed from 9,00,000 to 4,00,000. Settled creditors account 2,90,000 by giving away long term investments
Dr. Creditors a/c Current Liability Decrease Cr. Investments a/c Non-Current Asset Decrease
Current Liability (Changed) = Current Liabilities (old) - Decrease = 15,00,000 - 2,90,000 = 12,10,000 Non-Current Asset(Changed) = Non-Current Assets (old) - Decrease = 80,00,000 - 2,90,000 = 77,10,000
Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 12,10,000 = 11,90,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 77,10,000 = 11,90,000
A Current Liability and a Non-Current Liability in the opposite directions

Issued Debentures to creditors worth 4,00,000
Dr. Creditors a/c Current Liability Decrease Cr. Debentures a/c Non-Current Liability Increase
Non-Current Liabilities (Changed) = Non-Current Liabilities (old) + Increase = 89,00,000 + 4,00,000 = 93,00,000 Current Liability (Changed) = Current Liability (old) - Decrease = 15,00,000 - 4,00,000 = 11,00,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 11,00,000 = 13,00,000 (Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 93,00,000 - 80,00,000 = 13,00,000
Working capital has changed from 9,00,000 to 13,00,000. Bills payable accepted for the amount due to a partner on his capital account 1,20,000
Dr. Partners Capital a/c Cr. Bills Payable a/c
Non-Current Liability Decrease Current Liability Increase
Current Liabilities (Changed) = Current Liabilities (old) + Increase = 15,00,000 + 1,20,000 = 16,20,000 Non-Current Liabilities(Changed) = Non-Current Liabilities (old) - Decrease = 89,00,000 - 1,20,000 = 87,80,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 16,20,000 = 7,80,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 87,80,000 - 80,00,000 = 7,80,000
What is a Funds Flow Statement?

A funds flow statement is a consolidated statement of all the cross transactions over the period for which the flow is being analysed. Cross Transactions i.e. transactions involving a current account and a non-current account bring about a change in the fund or working capital. Some bring about an increase in fund and others bring about a decrease in the available fund (working capital). The cross transactions presented in the funds flow statement are classified/grouped into two as,
i.
Sources/Inflows of funds
Transactions which bring about an increase in the available fund (working capital)
ii.
Applications/Outflows of funds
Transactions which bring about a decrease in the available fund (working capital)
Identifying Inflows/Outflows from changes in NonCurrent Accounts

A cross transaction which brings about a change through an inflow/outflow of fund involves a current account and a non-current account. Of all the transactions that take place in an organisation during a period, the number of transactions involving non-current accounts would be far lesser than the transactions involving current accounts. Therefore, in identifying cross transactions it would be easier to look out for transactions involving non-current accounts and then looking out for cross transactions within them rather than going through all the transactions.
Inflow/Sources of Funds
Where, on account of an accounting transaction, there is an increase in Fund (working capital) we say that there is an inflow/source of fund. There will be an inflow, when, on account of the transaction, there is a decrease in the value of a non-current asset (Or) an increase in the value of a non-current liability
We raise funds either by selling away assets or by taking loans (liabilities).
Illustrative Explanation
15,00,000 Current Assets 1,04,00,000
Working Capital = Current Assets - Current Liabilities = 24,00,000 - 15,00,000 = 9,00,000 (Or) = Non-Current Liabilities - Non-Current Assets = 89,00,000 - 80,00,000 = 9,00,000 Decrease in the value of Non-Current Assets
Sold Land 5,60,000 and received consideration through a cheque
Dr. Bank a/c Cr. Land a/c
Current Asset Increase Non-Current Asset Decrease
Current Assets (Changed) = Current Assets (old) + Increase = 24,00,000 + 5,60,000 = 29,60,000 Non-Current Asset (Changed) = Non-Current Asset (old) - Decrease = 80,00,000 - 5,60,000 = 74,40,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 29,60,000 - 15,00,000 = 14,60,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 74,40,000 = 14,60,000
Working capital has changed from 9,00,000 to 14,60,000. Settled creditors account 2,90,000 by giving away long term investments
Dr. Creditors a/c Current Liability Decrease Cr. Investments a/c Non-Current Asset Decrease
Current Liability (Changed) = Current Liabilities (old) - Decrease = 15,00,000 - 2,90,000 = 12,10,000 Non-Current Asset(Changed) = Non-Current Assets (old) - Decrease = 80,00,000 - 2,90,000 = 77,10,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 12,10,000 = 11,90,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 77,10,000 = 11,90,000
Increase in the value of Non-Current Liabilities

Partner introduced capital by endorsing bills receivable worth 85,000
Dr. Bills Receivable a/c Cr. Partners Capital a/c
Current Asset Increase Non-Current Liability Increase
Current Assets (Changed) = Current Assets (old) + Increase = 24,00,000 + 85,000 = 24,85,000 Non-Current Liability (Changed) = Non-Current Liability (old) + Increase = 89,00,000 + 85,000 = 89,85,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 24,85,000 - 15,00,000 = 9,85,000
(Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 89,85,000 - 80,00,000 = 9,85,000

Working capital has changed from 9,00,000 to 9,85,000. Issued Debentures to creditors worth 4,00,000
Dr. Creditors a/c Current Liability Decrease Cr. Debentures a/c Non-Current Liability Increase
Non-Current Liabilities (Changed) = Non-Current Liabilities (old) + Increase = 89,00,000 + 4,00,000 = 93,00,000 Current Liability (Changed) = Current Liability (old) - Decrease = 15,00,000 - 4,00,000 = 11,00,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 11,00,000 = 13,00,000 (Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 93,00,000 - 80,00,000 = 13,00,000
Outflow/Applications of Funds
Where, on account of an accounting transaction, there is a decrease in Fund (working capital) we say that there is an outflow/application of fund. There will be an outflow, when, on account of the transaction, there is a decrease in the value of a non-current liability (Or)
an increase in the value of a non-current asset
We employ funds either in purchasing assets or towards clearing liabilities.
Illustrative Explanation
15,00,000 Current Assets 1,04,00,000
Working Capital = Current Assets - Current Liabilities = 24,00,000 - 15,00,000 = 9,00,000 (Or) = Non-Current Liabilities - Non-Current Assets = 89,00,000 - 80,00,000 = 9,00,000 Increase in the value of Non-Current Assets
Purchase of an Asset valued 4,00,000 for cash
Dr. Fixed Asset a/c Cr. Cash a/c
Non-Current Asset Current Asset
Increase Decrease
Current Assets (Changed) = Current Assets (old) - Decrease = 24,00,000 - 50,000 = 23,50,000 Non-Current Asset (Changed) = Non-Current Asset (old) + Increase = 80,00,000 + 4,00,000
= 84,00,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 20,00,000 - 15,00,000 = 5,00,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 84,00,000 = 5,00,000
Working capital has changed from 9,00,000 to 5,00,000. Purchased an Asset and accepted a Bills Payable for the amount due 5,00,000
Dr. Fixed Asset a/c Non-Current Asset Cr. Bills Payable a/c Current Liability
Increase Increase
Non-Current Assets (Changed) = Non-Current Assets (old) + Increase = 80,00,000 + 5,00,000 = 85,00,000 Current Liability (Changed) = Current Liability (old) + Increase = 15,00,000 + 5,00,000 = 20,00,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed) = 24,00,000 - 20,00,000 = 4,00,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 89,00,000 - 85,00,000 = 4,00,000
Decrease in the value of Non-Current Liabilities

Issued a cheque for 2,35,000 to clear a Long term loan
Dr. Long Term Loan a/c Cr. Bank a/c
Non-Current Liability Decrease Current Asset Decrease
Current Assets (Changed) = Current Assets (old) - Decrease = 24,00,000 - 2,35,000 = 21,65,000 Non-Current Liability (Changed) = Non-Current Liability (old) - Decrease = 89,00,000 - 2,35,000 = 86,65,000 Working Capital (Changed) = Current Assets (Changed) - Current Liabilities = 21,65,000 - 15,00,000 = 6,65,000 (Or) = Non-Current Liabilities (Changed) - Non-Current Assets = 86,65,000 - 80,00,000 = 6,65,000
Working capital has changed from 9,00,000 to 6,65,000. Bills payable accepted for the amount due to a partner on his capital account 1,20,000
Dr. Partners Capital a/c Cr. Bills Payable a/c
Non-Current Liability Decrease Current Liability Increase
Current Liabilities (Changed) = Current Liabilities (old) + Increase = 15,00,000 + 1,20,000 = 16,20,000 Non-Current Liabilities(Changed) = Non-Current Liabilities (old) - Decrease = 89,00,000 - 1,20,000 = 87,80,000 Working Capital (Changed) = Current Assets - Current Liabilities (Changed)
= 24,00,000 - 16,20,000 = 7,80,000 (Or) = Non-Current Liabilities - Non-Current Assets (Changed) = 87,80,000 - 80,00,000 = 7,80,000
Doesn't the Statement of Changes in Working Capital help in analysing funds flow
The statement of changes in working capital (fund) is prepared by taking the current account balances from the balance sheet. It is prepared for the period for which funds flow is being analysed which generally is the accounting period. It provides us the information relating to change in the values of the various current account balances by comparing the balance as on the first day (opening balance) with the balance on the last day (closing balance) of that period. The aggregate value of the changes in the current accounts would give us the net change in working capital (fund) over the period.
Funds flow analysis not possible from the Statement of changes in Working Capital
From the statement of changes in working capital, we can only say that there is a change in fund (working capital) on account of a change in so and so current account balance. The statement only provides the information relating to the magnitude of the fund before and after the flow along with the magnitude of change in the fund. Funds flow analysis involves analysing the flow i.e. finding the reasons for the flow. This involves dealing with the actual transactions that have caused the flow. The statement of changes in working capital does not provide any information relating to the actual transactions that have caused that change.
For analysing Funds Flow we need additional information

Cross transactions are the reason for funds flow. Of all the accounting transactions that have brought about a change in the current accounts, only cross transactions would be relevant in analysing funds flow.
To analyse funds flow using the information relevant to current accounts, we need consider all the accounting transactions that have affected current accounts and from among them we need to identify the cross transactions which have also brought about a change in the fund (working capital).
Minimizing the effort

Cross transaction involves a current account and a non-current account. Cross transactions are all that we need to be able to analyse funds flow. The magnitude of accounting transactions involving non-current accounts are generally far lesser compared to the accounting transactions involving current accounts. Therefore, in analysing funds flow we try to identify the cross transactions using the changes in non-current accounts.
Identifying inflow/outflow (source/application) of funds from changes in Balance Sheet figures

To prepare a funds flow statement, we need the information relating to the non-current area of the balance sheet at two points of time. The analysis we make from that information would be relating to the period between the two dates.
Balance Sheet of M/s ___ As on 31st December 2004 10,000 5,000 4,000 8,000 5,000 2005 15,000 8,000 6,000 12,000 3,000 As on 31st December 2004 5,000 10,000 10,000 3,000 4,000 2005 8,000 15,000 12,000 5,000 4,000
Liabilities Share Capital Profit and Loss Appropriation account Long Term Loan Sundry Creditors Bills Payable
Assets Cash Debtors Stock Machinery Land
32,000
44,000
32,000
44,000
From the information relating to the non-current area from the balance sheet figures on 31st Dec 2004 and 31st Dec 2005, we would be able to prepare a funds flow statement for the period between 31stDecember 2004 and 31st December 2005 i.e. for the year 2005.
Identify the accounts within the current area and the non-current area distinctly
Balance Sheet of M/s ___ As on 31st December 2004 10,000 5,000 4,000 8,000 5,000 2005 15,000 8,000 6,000 12,000 3,000 As on 31st December 2004 5,000 10,000 10,000 3,000 4,000 2005 8,000 15,000 12,000 5,000 4,000
Liabilities Share Capital Profit and Loss Appropriation account Long Term Loan Sundry Creditors Bills Payable
Assets Cash Debtors Stock Machinery Land
32,000
44,000
32,000
44,000
Current, Non-Current
Prepare the statement/schedule of changes in working capital

With the accounts within the current area, we make up a schedule/statement of changes in working capital. Though the statement is not a requisite for analysing funds flow or making up the funds flow statement, it would help in cross checking the accuracy of the results. Both the statement of changes in working capital and the funds flow statement give the change in working capital (fund) as the residue figure.
Schedule/Statement of Changes in Working Capital for the period from __ to __
Balance as on 31st December Particulars/Account 2004 2005
Increase
Decrease
a) CURRENT ASSETS 5,000 1) Cash 2) Sundry Debtors 3) Stock 10,000 10,000 8,000 15,000 12,000 3,000 5,000 2,000
TOTAL
25,000
35,000
10,000
b) CURRENT LIABILITIES 1) Sundry Creditors 2) Bills Payable 8,000 5,000 12,000 3,000 4,000 2,000
TOTAL
13,000
15,000
4,000
2,000
12,000
20,000
TOTAL
4,000
12,000
8,000
Ascertain the cross transactions

Using the non current account balances, identify the cross transactions that have caused a change in fund (working capital). Depending on the information available, such identification can be done by simple comparison of the two figures (balances) pertaining to each of the noncurrent accounts. (Or) drawing up ledgers for all the non-current accounts and ascertaining the reasons for changes if any.
Prepare the funds flow statement

The last step would be building up the funds flow statement from the information relating to the cross transactions ascertained as above.
Ascertaining Cross transactions by comparing Balance
Sheet figures
A preliminary conclusion with regard to cross transactions can be drawn by a simple comparison of the balance sheet figures pertaining to non-current accounts. A change in the non-current account balance is an indication of a flow. Based on the following logic we can identify whether the change indicates an inflow or outflow.
Non-Current Asset
increase - outflow
Assets increase when we acquire them. We employ funds/capital in acquiring assets. There would be an outflow of funds on account of employing funds for acquisition. We can assume an outflow of funds when there is an increase in the value of non-current assets.
decrease - inflow.
Assets decrease when we dispose (assume sale) them. Disposal of assets would bring in sale proceeds which can be used (as capital) for acquiring other assets or for disposing liabilities. There would be an inflow of funds on account of disposal of assets. We can assume an inflow of funds when there is a decrease in the value of non-current assets.
Non-Current Liability
increase - inflow
Liabilities (assume loan) increase when we take up new ones. We get funds by taking up new/additional liabilities. There would be an inflow of funds on account of such new/enhanced liabilities. We can assume an inflow of funds when there is an increase in the value of non-current liabilities.
decrease - outflow.
Liabilities decrease when we clear them. We employ funds/capital to clear liabilities. There would be an outflow of funds on account of clearing liabilities. We can assume an outflow of funds when there is a decrease in the value of non-current liabilities.
From the above balance sheet, we can identify the inflows and outflows
Statement of changes in Non-Current Accounts
Balance as on 31st Dec Account 2004 2005
Change Type Amount Direction Result
Share Capital P/L Appropriation account Long Term Loans Machinery Land
10,000 5,000 6,000 3,000 4,000
15,000 8,000 4,000 5,000 4,000
5,000 3,000 2,000 2,000 -
Increase Increase Decrease Increase No Change
Liability Liability Liability Assets Assets
Inflow Inflow outflow outflow No Flow
Limitations
Such assumptions just based on the balance sheet amounts would be possible only in the absence of any other information to the contrary. When there is other information available the changes have to be analysed taking that information also into consideration. In such cases the alternate method is the one to be followed for identifying cross transactions.
Note
You will have a better understanding of how to deal with the Profit and Loss appropriation account after getting aware of the idea of funds from operations. For now, consider it as just another non-current liability.
Ascertaining Cross transactions by drawing up ledgers

Cross transactions can also be ascertained by drawing up ledgers for all the non-current accounts. Drawing up a ledger for a non-current account may be avoided where there is no change in the balance and we are sure that it has not been affected by any other transaction. When in doubt just draw up all the accounts. Such an approach for analysing funds flow is necessitated when there is additional information available along with the balance sheets. This approach can be taken up in all cases.
We start with building the ledger accounts one by one by filling the opening and closing balances using the data available in the balance sheet. Ledgers Show Based on rational assumptions and the additional information provided, we need to fill up the ledger accounts with postings so as to make it complete.
Dr
Machinery a/c
Cr
Date
Particulars
J/F
Amount
Date
Particulars
J/F
Amount
01/01/04 To Balance b/d To Bank a/c (?)
3,000 2,000 31/12/05 By Balance c/d 5,000
01/01/05 To Balance b/d
5,000
Assumption : Increase in the value of machinery is on account of purchase of new
machinery.
Dr
Share Capital a/c
Cr
Date
Particulars
J/F
Amount
Date
Particulars
J/F
Amount
01/01/04 By Balance b/d 31/12/04 To Balance c/d 15,000 By Bank a/c (?)
10,000 5,000
01/01/05 By Balance b/d
15,000
Assumption : Additional Capital has been raised and received through cheque.
Dr
Long Term Loan a/c
Cr
Date
Particulars
J/F
Amount
Date
Particulars
J/F
Amount
To Bank a/c (?)
2,000 4,000
6,000
31/12/04 To Balance c/d
4,000
Assumption : Loan repaid by cheque. Land account Assumption : No transactions affecting the account.
We may skip preparing a non-current ledger account, if we are sure that there are no cross transactions in relation to an account generally indicated by no change in its balance.
Dr
Profit and Loss Appropriation a/c
Cr
Date
Particulars
J/F
Amount
Date
Particulars
J/F
Amount
01/01/04 By Balance b/d 31/12/04 To Balance c/d 8,000 31/12/04 By Funds From Operations (?)
5,000 3,000
8,000
Assumption : Funds from operations (capital accumulated through profits).
Current account holding accumulated profits

During final accounting, the profit and loss account is closed by transferring the net profit to either the capital account or the profit and loss appropriation account. The appropriation account may also be named Retained Earnings account or Profit and Loss account or with any other similar name. Ensure that the account which holds the profits being transferred from the profit and loss account is placed towards the end irrespective of its position in the balance sheet. But for this, the order in which we consider the ledger accounts is not important. This is only for giving us some help in deriving the funds flow statement. For now, understand that the balancing figure in the account that holds accumulated profits would be posted to "Funds From Operations a/c".
Preparing the Funds Flow Statement

The information required for making up the funds flow statement is available in the statement of changes in non-current accounts or the ledgers prepared for the purpose.
Using the Statement of Changes in Non-Current accounts
Share Capital P/L Appropriation account Long Term Loans Machinery Land
10,000 5,000 6,000 3,000 4,000
15,000 8,000 4,000 5,000 4,000
5,000 3,000 2,000 2,000 -
Increase Increase Decrease Increase No Change
Inflow Inflow outflow outflow No Flow
Using the Non-Current account Ledgers

Consider the posting to Bank/Cash in the ledgers prepared. Postings on the credit side indicate an inflow and posting on the debit side indicate an outflow. Ledgers Show From the ledger account holding the accumulated profits, (P/L appropriation account, Retained Earnings a/c etc), locate the posting to Funds from Operations. Consider that posting as being similar in nature to posting to Bank/Cash. If the posting is on the credit side, it indicates an inflow and if it is on the debit side, it indicates an outflow. Ledgers Show Once we identify the inflows and outflows, placing the inflows as a group and then outflows as a group is all that we need to do to obtain the funds flow statement.
Funds Flow Statement for the period from __ to __
Particulars
Amount
Amount
a) Sources (Inflow) of Funds 5,000 1) Share Capital 2) Funds from Operations [P/L appropriation account] 3,000 8,000
b) Applications (Outflow) of Funds 1) General Reserve 2) Machinery 2,000 2,000 4,000
Change in Working Capital [a - b]
+ 4,000
Since the Net change is positive, there is an increase in Fund (Working Capital) This statement is also sometimes called Statement of Sources and Applications of Funds
Funds Flow Statement in T Form

The information presented in the funds flow statement can also be presented in a ledger format which is commonly called the 'T' form. The sources/inflows of funds are shown on the left site and the outflows/applications are shown on the right side making up a format similar to a ledger account.
Statement of Sources and Applications of Funds for the period from __ to __
Sources/Inflows of Funds
Amount
Applications/Outflows of Funds
Amount
Share Capital Funds from Operations [P/L Appropriation account]
5,000 3,000
General Reserve Machinery
2,000 2,000
8,000
4,000
Change in Fund (Working Capital)
4,000
Since the Sources/Inflows are more, there is a Net increase in Fund (Working Capital)
Is Funds Flow analysis meant only for Company form of Organisation?

Because we come across the item Equity Share Capital in most of the problems and illustrations relating to Funds Flow analysis, we may be driven to the misconception that such an analysis is meant only for company form of organisations. Funds flow analysis is meant for analysing the changes in the balance sheet over a period of time. Such an analysis is possible in relation to balance sheets of any form of business organisation. In balance sheets of forms of business organisations other than a company, we do not find the items like Equity Share Capital, Preference Share Capital, etc., which are specific to the company form of organisation. But for the presence or absence of these, there is no difference in analysing Funds Flow for a Corporate entity and a Non-Corporate entity.
Preperation of Funds Flow Statement - Schedule/Statement of Changes in working capital

From the following information prepare
i) A Schedule of Changes in Working Capital ii) A Funds Flow Statement

Balance Sheet of M/s ______ as on 31stMarch 2006 18,50,000 14,78,000 12,00,000 2007 21,00,000 17,64,000 9,00,0000 as on 31stMarch 2006 6,00,000 18,50,000 4,74,000 2007 6,00,000 22,00,000 5,24,000
Liabilities Capital Profit/Loss Appropriation
Assets Goodwill (at Cost) Land and Buildings Plant and Machinery
Bank Loan Bills Payable Sundry Creditors Reserve for Taxation
4,00,000 14,00,000 2,00,000
6,80,000 12,20,000 1,80,000
Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash
1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000
1,94,000 7,24,000 12,80,000 7,21,000 4,83,000 1,18,000
TOTAL
65,28,000
68,44,000 TOTAL
65,28,000
68,44,000
Solution : Working Notes

Identify the Current and Non-Current accounts from within the balance sheet distinctly.
Balance Sheet of M/s ______ as on 31stMarch 2006 18,50,000 14,78,000 12,00,000 4,00,000 14,00,000 2,00,000 2007 21,00,000 17,64,000 9,00,0000 6,80,000 12,20,000 1,80,000 as on 31stMarch 2006 6,00,000 18,50,000 4,74,000 1,94,000 8,26,000 12,00,000 8,00,000 5,00,000 84,000 2007 6,00,000 22,00,000 5,24,000 1,94,000 7,24,000 12,80,000 7,21,000 4,83,000 1,18,000
Liabilities Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation
Assets Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash
TOTAL
65,28,000
68,44,000 TOTAL
65,28,000
68,44,000
We need not redraw the total balance sheet, but we should ensure that we are taking all the accounts into consideration. Marking in the problem itself is an option. But in examination conditions, we may not be allowed to mark anything on the question paper. In such situations, a list of the account names would help.
Liabilities Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation Assets Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors
Bills Receivable Bank Cash
Solution Statement/Schedule of Changes in Working Capital

Schedule/Statement of Changes in Working Capital for the period from 31/03/06 to 31/03/07
Increase
Decrease
a) CURRENT ASSETS 8,26,000 1) Stock/Inventories 2) Sundry Debtors 3) Bills Receivable 4) Bank 5) Cash 12,00,000 8,00,000 5,00,000 84,000 7,24,000 12,80,000 7,21,000 4,83,000 1,18,000 34,000 80,000 79,000 17,000 1,02,000
TOTAL
34,10,000
33,26,000
1,14,000
1,98,000
b) CURRENT LIABILITIES 1) Bills Payable 2) Sundry Creditors 3) Provision for Taxation 4,00,000 14,00,000 2,00,000 6,80,000 12,20,000 1,80,000 1,80,000 20,000 2,80,000
TOTAL
20,00,000
20,80,000
2,00,000
2,80,000
14,10,000
12,46,000
TOTAL
3,14,000
4,78,000
1,64,000
There is a decrease in working capital to the extent of 1,64,000. The net change can also be obtained from the working capital figures relating to the two balance sheet dates.
Change in Working Capital
Working Capital as on 31/03/07 - Working Capital as on 31/03/06
= 12,46,000 - 14,00,000 = - 1,64,000

Negative value indicates a decrease in working capital.
Solution Working Notes

Make up the ledgers for all the non-current accounts. We may skip making up the ledgers for the non-current accounts which have not changed over the period. If in doubt make up all the accounts. Try Placing the account holding the accumulated profits towards the end.
Dr
Capital a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
21,00,000
01/04/06 By Balance b/d By Bank a/c (?)
18,50,000 2,50,000
21,00,000
21,00,000
21,00,000
Assumption :
Capital has been raised during the period for cash.
Dr
Bank Loan a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
To Bank a/c (?)
3,00,000 9,00,000
12,00,000
12,00,000
12,00,000
9,00,000
Assumption :
Bank loan has been repaid during the period through a cheque.
Dr
Land and Buildings a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
18,50,000 3,50,000
31/03/07 By Balance c/d
22,00,000
22,00,000
22,00,000
22,00,000
Assumption :
Additional assets have been purchased during the period for cash.
Dr
Plant and Machinery a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
4,74,000 50,000
5,24,000
5,24,000
5,24,000
5,24,000
Assumption :
Additional assets have been purchased during the period for cash. Posting by name Bank on the credit side indicates an inflow and on the debit side indicates an outflow.
Dr
Profit and Loss Appropriation
Cr
Date
Particulars
Amount
Date
Particulars
Amount
17,64,000
01/04/06 By Balance b/d 31/03/07 By Funds From Operations (?)
14,78,000 2,86,000
17,64,000
17,64,000
17,64,000
Assumption :
Funds have been generated through operations during the period. Treat the Funds from operations posting as if it is a posting by name bank.
Alternative : Using the Statement of Changes in Non-Current accounts

Where there is no additional data apart from the balance sheets and we are sure that there are no other transactions that have affected the non-current accounts, we may derive the inflow/outflow by comparing the opening and closing figures.
Capital Profit/Loss Appropriation Bank Loan Land and Building Plant and Machinery
18,50,000 14,78,000 12,00,000 18,50,000 4,74,000
21,00,000 17,64,000 9,00,000 22,00,000 5,24,000
2,50,000 2,86,000 3,00,000 3,50,000 50,000
Increase Increase Decrease Increase Increase
Inflow Inflow outflow outflow outflow
Solution Funds Flow Statement

Funds Flow Statement for the period from 31/03/06 to 31/03/07
Particulars
Amount
Amount
a) Sources (Inflow) of Funds 2,50,000 1) Share Capital 2) Funds from Operations [P/L appropriation account] 2,86,000 5,36,000
b) Applications (Outflow) of Funds 1) Land and Buildings 2) Plant and Machinery 3) Bank Loan 3,50,000 50,000 3,00,000 7,00,000
- 1,64,000
Since the Net change is negative, there is a decrease in Fund (Working Capital)
Alternative : T Form
Amount
Amount
Capital Funds from Operations [P/L Appropriation account]
2,50,000 2,86,000
Land and Buildings Plant and Machinery Bank Loan
3,50,000 50,000 3,00,000
5,36,000
7,00,000
1,64,000
Since the Applications/outflows are more, there is a Net decrease in Fund (Working Capital)
Preperation of Funds Flow Statement - Schedule/Statement of Changes in working capital

From the following information prepare
i) A Schedule of Changes in Working Capital ii) A Funds Flow Statement

TOTAL
65,28,000
68,44,000 TOTAL
65,28,000
68,44,000
Solution : Working Notes

TOTAL
65,28,000
68,44,000 TOTAL
65,28,000
68,44,000
Liabilities Capital Profit/Loss Appropriation Bank Loan Bills Payable Sundry Creditors Reserve for Taxation Assets Goodwill (at Cost) Land and Buildings Plant and Machinery Furniture and Fittings Stock/Inventories Sundry Debtors Bills Receivable Bank Cash
Solution Statement/Schedule of Changes in Working Capital

Schedule/Statement of Changes in Working Capital for the period from 31/03/06 to 31/03/07
Increase
Decrease
a) CURRENT ASSETS 8,26,000 1) Stock/Inventories 2) Sundry Debtors 3) Bills Receivable 4) Bank 5) Cash 12,00,000 8,00,000 5,00,000 84,000 7,24,000 12,80,000 7,21,000 4,83,000 1,18,000 34,000 80,000 79,000 17,000 1,02,000
TOTAL
34,10,000
33,26,000
1,14,000
1,98,000
b) CURRENT LIABILITIES 1) Bills Payable 2) Sundry Creditors 3) Provision for Taxation 4,00,000 14,00,000 2,00,000 6,80,000 12,20,000 1,80,000 1,80,000 20,000 2,80,000
TOTAL
20,00,000
20,80,000
2,00,000
2,80,000
14,10,000
12,46,000
TOTAL
3,14,000
4,78,000
1,64,000
There is a decrease in working capital to the extent of 1,64,000. The net change can also be obtained from the working capital figures relating to the two balance sheet dates.
= 12,46,000 - 14,00,000 = - 1,64,000

Negative value indicates a decrease in working capital.
Solution Working Notes

Make up the ledgers for all the non-current accounts. We may skip making up the ledgers for the non-current accounts which have not changed over the period. If in doubt make up all the accounts. Try Placing the account holding the accumulated profits towards the end.
Dr
Capital a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
21,00,000
01/04/06 By Balance b/d By Bank a/c (?)
18,50,000 2,50,000
21,00,000
21,00,000
21,00,000
Assumption :
Capital has been raised during the period for cash.
Dr
Bank Loan a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
To Bank a/c (?)
3,00,000 9,00,000
12,00,000
12,00,000
12,00,000
9,00,000
Assumption :
Bank loan has been repaid during the period through a cheque.
Dr
Land and Buildings a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
18,50,000 3,50,000
22,00,000
22,00,000
22,00,000
22,00,000
Assumption :
Additional assets have been purchased during the period for cash.
Dr
Plant and Machinery a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
4,74,000 50,000
5,24,000
5,24,000
5,24,000
5,24,000
Assumption :
Additional assets have been purchased during the period for cash. Posting by name Bank on the credit side indicates an inflow and on the debit side indicates an outflow.
Dr
Profit and Loss Appropriation
Cr
Date
Particulars
Amount
Date
Particulars
Amount
17,64,000
01/04/06 By Balance b/d 31/03/07 By Funds From Operations (?)
14,78,000 2,86,000
17,64,000
17,64,000
17,64,000
Assumption :
Funds have been generated through operations during the period. Treat the Funds from operations posting as if it is a posting by name bank.
Alternative : Using the Statement of Changes in Non-Current accounts

Where there is no additional data apart from the balance sheets and we are sure that there are no other transactions that have affected the non-current accounts, we may derive the inflow/outflow by comparing the opening and closing figures.
Capital Profit/Loss Appropriation Bank Loan
18,50,000 14,78,000 12,00,000 18,50,000
21,00,000 17,64,000 9,00,000 22,00,000
2,50,000 2,86,000 3,00,000 3,50,000
Increase Increase Decrease Increase
Liability Liability Liability Assets
Inflow Inflow outflow outflow
Land and Building Plant and Machinery
4,74,000
5,24,000
50,000
Increase
Assets
outflow
Solution Funds Flow Statement

Funds Flow Statement for the period from 31/03/06 to 31/03/07
Particulars
Amount
Amount
a) Sources (Inflow) of Funds 2,50,000 1) Share Capital 2) Funds from Operations [P/L appropriation account] 2,86,000 5,36,000
b) Applications (Outflow) of Funds 1) Land and Buildings 2) Plant and Machinery 3) Bank Loan 3,50,000 50,000 3,00,000 7,00,000
- 1,64,000
Since the Net change is negative, there is a decrease in Fund (Working Capital)
Alternative : T Form
Amount
Amount
Capital Funds from Operations [P/L Appropriation account]
2,50,000 2,86,000
Land and Buildings Plant and Machinery Bank Loan
3,50,000 50,000 3,00,000
5,36,000
7,00,000
1,64,000
Since the Applications/outflows are more, there is a Net decrease in Fund (Working Capital)
Do transactions involving nominal accounts influence Fund (Working Capital)

At the end of the accounting period,
All the nominal accounts are closed by transfer to the trading and profit and loss account. + Profit and loss account is closed by transfer to either the capital account or the profit and loss appropriation account. + Profit and loss appropriation account is shown along with the reserves in the balance sheet. The Profit and loss appropriation account is a non-current account and it can be considered to be a representative account for all the nominal accounts. A debit/credit to a nominal account has the affect of a debit/credit to a non-current account (the Profit and loss appropriation account). Cross Transactions involving nominal accounts
Where in a transaction involving a nominal account, the account other than the nominal account is a current account, the transaction becomes a cross transaction. Since,
A cross transaction involves one account from the current area and another account from the non-current area of the balance sheet. + A debit/credit to a nominal account has the affect of a debit/credit to a non-current account.
The following transactions would be cross transactions and thus bring about a in working capital Transactions resulting in a charge on profits representing expenses. an accrual of profits representing incomes.
The following transactions would not be cross transactions and thus do not bring about a in working capital Transactions resulting in a charge on profits representing losses. an accrual of profits representing gains. Approrpriations of profits. Adjustment of losses.
Transactions involving two nominal accounts would not be a cross transaction, and thus does not bring about a change in fund (working-capital).
Transactions resulting in a charge to profit/loss account

Transactions involving nominal accounts which ultimately result in a charge to the profit and loss account are transactions relating to expenses and losses.
Expenses
In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a current natured account. Paid cash towards expenses
Dr. Expenditure a/c Cr. Cash/Bank a/c
Non-Current Current Asset
Purchased goods on credit
Dr. Purchases a/c Cr. Creditors a/c
Non-Current Current Liability
All transactions relating to expenses can be considered to be cross transactions in general.
Losses
In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a non-current natured account. Loss on Sale of Asset
Dr. Loss on Sale of Asset a/c Cr. Asset a/c

Depreciation on Assets
Non-Current Non-Current Asset
Dr. Depreciation on Asset a/c Cr. Asset a/c
Goodwill Written off
Dr. Profit and Loss a/c Cr. Goodwill a/c
All transactions relating to losses can be considered to be non-cross transactions in general. Writing off Intangible assets like Goodwill, Patents, Trademarks etc., charging depreciation, writing off brought forward deferred revenue expenses, writing off loss on issue of shares, discounts on issue of debentures, writing off loss on sale of assets etc., are some such transactions.
Transactions resulting in accrual of incomes to profit/loss account

Transactions involving nominal accounts which ultimately result in accrual of income to the profit and loss account are transactions relating to incomes and gains.
Incomes
In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a current natured account. Received commission
Dr. Cash/Bank a/c Current Asset Cr. Expenditure a/c Non-Current

Sold goods on credit
Dr. Debtors a/c Cr. Sales a/c
Current Asset Non-Current
All transactions relating to incomes can be considered to be cross transactions in general.
Gains
In most transactions of this kind, the second account affected i.e. the account other than the nominal account, would be a non-current natured account. Profit on Sale of Asset
Dr. Asset a/c Non-Current Asset Cr. Profit on Sale of Asset a/c Non-Current
All transactions relating to losses can be considered to be non-cross transactions in general.
Transactions resulting in appropriations of profits

Transactions involving nominal accounts which represent appropriations of profits from the profit and loss account do not form cross transactions and thus do not bring about a change in fund (working capital). Creation of General Reserve
Dr. Profit and Loss a/c Cr. General Reserve a/c
Non-Current Non-Current Liability
Transactions resulting in adjustment of losses
Transactions involving nominal accounts which represent adjustment/transfer of losses from the profit and loss account do not form cross transactions and thus do not bring about a change in fund (working capital). Contingency Reserve absorbing the loss
Dr. Contingency Reserve a/c Cr. Profit and Loss a/c
Non-Current Liability Non-Current
What are Funds From Operations?

Operations imply the regular activities carried on by the organisation.
Capital accumulated through profits

All the nominal accounts representing the incomes and expenses relating to the operations of the business are closes at the end of the accounting period by transfer to the profit and loss account. Profit and loss account has a credit balance when there are profits and is closed by transfer to the capital account. The transfer of profit to the capital account would result in the capital account being credited and thereby increasing the existing credit balance in that account which indicates an increase in capital. Thus, we say that operations result in profits which increase capital. The opposing idea that operations result in losses which decreases capital is equivalently true.
Funds from operations = working capital accumulated through profits

There are many transactions taking place in the day to day business operations, which in most cases affects nominal accounts. Transactions involving nominal accounts can be considered to be cross transactions when they are related to expenses and incomes. All transactions involving expenses and incomes being cross transactions would bring about a change in working capital (fund). Since, assessing the impact of each and every such transaction on working capital, would involve a laborious work and would not be of much use in analysing working capital changes or funds flow we consider the consolidated view of all such transactions.
Funds from operations represent the change in working capital (fund) brought about by the business operations or transactions involving nominal accounts which represent expenses and incomes.
Funds from Operations = Net Profit

Where there are no transactions representing appropriations, adjustments, losses, gains in the transactions involving nominal accounts, funds from operations would be nothing but the Net Profit as revealed by the profit and loss account. Though this is theoretically possible, it would not be so in most cases as we find losses like depreciation in most cases. By Net Profit we mean the net balance as revealed by the profit and loss account which may be a profit/loss.
Finding/Calculating Funds from Operations - Methods available

Net profit can be taken to be the funds from operations only when there are no transactions involving nominal accounts which represent losses, gains, appropriations and adjustments or if the net profit is a figure that is not affected by such transactions. However, in most cases, the net profit is a figure that is affected at least by transactions involving nominal accounts that represent losses and gains. In most cases, net profit is a figure arrived at after deducting depreciation. The transaction for recording depreciation, not being a cross transaction does not bring about a change in working capital (fund). If we have to take the figure of net profit as the funds from operations, then it should have been arrived at without its influence. Therefore, we ascertain the funds from operations by making proper adjustments to the figure of net profit based on the transactions that should not have affected it, if it is to be considered as the funds from operations. Such adjustment involves writing back the affect of transactions which represents losses, gains, appropriations and adjustments.
Methods for Calculating/Finding Funds From Operations

There are three methods available for finding the funds from operations Direct Method
Adjusted Profit and Loss Account Method Add Back Method
Which method to use?

We can use any method of our choice for ascertaining the Funds from Operations. To use the Direct Method, we should be knowing the figure of Gross Profit. The other two methods are the similar. The difference is in the way, the information is presented. It would be useful to know both the methods.
Direct Method for calculating Funds from Operations

Direct method involves redrawing/making up the profit and loss account with postings that represent incomes and expenses excluding the posting that represent losses, gains, appropriations and adjustments. To use this method, we at least need to have the information relating to gross profit, incomes and expenses.
Problem
From the information provided in the following profit and loss account, find out the Funds from Operations
Dr Profit and Loss a/c Cr
Particulars
Amount
Particulars
Amount
To Salaries and Wages To Rent and Rates To Interest To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car To Reserve for Bad Debts To General Reserve To Special Reserve To Goodwill Written off To Discounts on issue of Shares
3,42,000 1,24,000 76,000 1,32,000 87,000 39,000 91,000 42,000 1,25,000 75,000 50,000 40,000
By Gross Profit By Commission By Miscellaneous Income By Profit on Sale of Asset
12,50,000 2,80,000 1,54,000 64,000
To Net Profit
5,25,000
16,84,000
16,84,000
Finding/Calculating Funds from Operations

Particulars
Amount
Particulars
Amount
To Salaries and Wages To Rent and Rates To Interest To Reserve for Bad Debts To Funds From Operations
3,42,000 1,24,000 76,000 42,000 11,00,000
By Gross Profit By Commission By Miscellaneous Income
12,50,000 2,80,000 1,54,000
16,84,000
16,84,000
The funds from operations would be carried down to the Profit and Loss appropriation account. The affect of the other transactions relating to losses, gains, appropriations and adjustments is dealt with through this account.
Deriving Net Profit from Funds from Operations

The Funds from Operations are brought down from the Profit and Loss account to the Profit and Loss appropriation a/c and the postings relating to losses, gains, appropriations and adjustments are made in that account for ascertaining the net profit.
Dr Profit and Loss Appropriation a/c Cr
Particulars
Amount
Particulars
Amount
To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car
1,32,000 87,000 39,000 91,000
By Funds from Operations By Profit on Sale of Asset
11,00,000 64,000
To Goodwill Written off To Discounts on issue of Shares To Net Profit (unappropriated)
50,000 40,000 7,25,000
11,64,000
11,64,000
To General Reserve To Special Reserve To Net Profit
1,25,000 75,000 5,25,000
By Net Profit (unappropriated)
7,25,000
7,25,000
7,25,000
We first consider the postings representing losses, gains and thus obtain the net profit before appropriations and adjustments. Next we consider the postings representing appropriations and adjustments thereby obtaining the net profit transferred to the capital account. We generally come across a consolidated view of the above account wherein information relating to losses and appropriations are mixed up and information relating to adjustments and gains are mixed up instead of being dealt with separately.
Particulars
Amount
Particulars
Amount
To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car To General Reserve To Special Reserve To Goodwill Written off To Discounts on issue of Shares To Net Profit
1,32,000 87,000 39,000 91,000 1,25,000 75,000 50,000 40,000 5,25,000
11,00,000 64,000
11,64,000
11,64,000
Profit and Loss Appropriation account in Financial Accounting and Financial Management
The Profit and Loss account in financial accounting is posted with transactions representing expenses, losses, incomes and gains. whereas in financial management (in finding funds from operations) it is posted with transactions representing incomes and expenses only. The Profit and Loss appropriation account in financial accounting is posted with transactions representing appropriations and adjustments only. Whereas in financial management (in finding funds from operations) it is posted with transactions representing losses, gains, appropriations and adjustments.
Why call this the Direct Method?

Since we prepare the account starting with the gross profit, (just like in the case of the Profit/Loss account), this method is called the Direct Method.
Clubbing both the accounts may give a better idea

Particulars
Amount
Particulars
Amount
To Salaries and Wages To Rent and Rates To Interest To Reserve for Bad Debts To Funds From Operations
3,42,000 1,24,000 76,000 42,000 11,00,000
By Gross Profit By Commission By Miscellaneous Income
12,50,000 2,80,000 1,54,000
16,84,000
16,84,000
To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car To Goodwill Written off
1,32,000 87,000 39,000 91,000 50,000
11,00,000 64,000
To Discounts on issue of Shares To Net Profit (unappropriated)
40,000 7,25,000
11,64,000
11,64,000
To General Reserve To Special Reserve To Net Profit
1,25,000 75,000 5,25,000
By Net Profit (unappropriated)
7,25,000
7,25,000
7,25,000
Adjusted Profit and Loss Account method for calculating Funds from Operations
Under this method, we make up an account by name Adjusted Profit and Loss a/c posting the Net Profit along with all the postings representing losses, gains, appropriations and adjustments. This account is the same as the second part of the account prepared in the direct method. We start with posting the net profit and obtain the funds from operations as a balancing figure. Whereas in the direct method we start with the funds from operations and obtain the net profit as the balancing figure.
Problem
Particulars
Amount
Particulars
Amount
To Salaries and Wages To Rent and Rates To Interest To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture
3,42,000 1,24,000 76,000 1,32,000 87,000 39,000
12,50,000 2,80,000 1,54,000 64,000
To Loss on Sale of Motor Car To Reserve for Bad Debts To General Reserve To Special Reserve To Goodwill Written off To Discounts on issue of Shares To Net Profit
91,000 42,000 1,25,000 75,000 50,000 40,000 5,25,000
16,84,000
16,84,000

Dr Profit and Loss Adjustment a/c Cr
Particulars
Amount
Particulars
Amount
To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car To General Reserve To Special Reserve To Goodwill Written off To Discounts on issue of Shares To Net Profit
1,32,000 87,000 39,000 91,000 1,25,000 75,000 50,000 40,000 5,25,000
11,00,000 64,000
11,64,000
11,64,000
Why call it Adjusted Profit and Loss a/c method?

Since we arrive at funds from operations by adjusting all the losses, incomes, appropriations and adjustments that have affected the net profit as revealed by the profit and loss account we call this the adjusted profit and loss account method.
Add Back method for calculating Funds from Operations
Except for the way the information is presented, this method is similar to the adjusted profit and loss account method. Under this method, we make up a statement that starts with Net Profit and make adjustments relating to the transactions of incomes, losses, appropriations and adjustments that have affected the net profit to arrive at the funds from operations. We start with the NET PROFIT The current period Net Profit may have to be ascertained from the ledger account to which the Net Profit is transferred (Capital a/c, Profit and Loss Appropriation a/c, Retained Earnings a/c etc). Where there are no further transactions affecting the account to which the net profit/loss is transferred, the current period net profit would be equal to the difference between the closing and opening balances in that account. A negative difference indicates that a net loss has been transferred to that account during the current period. To it we ADD losses and appropriations that have been taken into consideration in calculating the above figure of net profit. From that sum we DEDUCT incomes and adjustments which have been taken into consideration in calculating the above figure of net profit.
Problem
Particulars
Amount
Particulars
Amount
To Salaries and Wages To Rent and Rates To Interest To Provision for Taxes To Depreciation on Machinery To Depreciation on Furniture To Loss on Sale of Motor Car
3,42,000 1,24,000 76,000 1,32,000 87,000 39,000 91,000
12,50,000 2,80,000 1,54,000 64,000
To Reserve for Bad Debts To General Reserve To Special Reserve To Goodwill Written off To Discounts on issue of Shares To Net Profit
42,000 1,25,000 75,000 50,000 40,000 5,25,000
16,84,000
16,84,000
Statement for Calculation of Funds from Operations
Particulars
Amount
Amount
Profit and Appropriation a/c: Closing Balance

Less: Opening Balance
Current Period Profit

Add: Losses/Appropriations debited to Profit/Loss a/c
5,25,000 1,32,000
1) Provision for Taxes 2) Depreciation on Machinery 3) Depreciation on Furniture 4) Loss on Sale of Motor Car 5) General Reserve 6) Special Reserve 7) Goodwill Written off 8) Discounts on issue of Shares/Debentures
87,000 39,000 91,000 1,25,000 75,000 50,000 40,000 6,39,000
Less: Gains and Adjustments credited to Profit/Loss a/c
11,64,000 64,000 64,000
1) Profit on Sale of Asset
Funds From Operations
11,00,000
Why call it the Add Back method?

Since we find the Funds from Operations by starting with the net profit, and adding back the losses and appropriations which have been taken into consideration in calculating the net profit earlier, this method is called the Add Back Method.
Is Funds From Operations a Source/Inflow or Application/Outflow

Funds from operations implies capital accumulated through profits from operations. The Profit/Loss account shows a credit balance when there are profits and a debit balance when there are losses. The P/L account is closed by transferring its balance to either the Capital account or the Profit and Loss appropriation account, both of which are non-current liabilities. For the purpose of the below explanation, assume that the profit and loss account is closed by transfer to the capital account and the capital account has a credit balance.
When there are profits

A transfer of net profit from profit and loss account to the Capital account will result in the capital account being credited and the profit and loss account being debited. Capital account generally has a credit balance and any further credit to it would result in an increase in the balance in that account.
Dr Capital a/c Cr
Particulars
Amount
Particulars
Amount
To Balance c/d
8,05,000
By Balance b/d By Net Profit
2,80,000 5,25,000
8,05,000
8,05,000
By Balance b/d
8,05,000
Capital would appear in the balance sheet as below

Balance Sheet of M/s ___ as on ___ 31st March 2009 2,80,000 2010 8,05,000 ... 31st March 2009 ... 2010 ...
Liabilities Capital
Assets
Capital account being a non-current account, an increase in its balance indicates an inflow of working capital (fund). When there are profits, the funds from operations would amount to an inflow/source of funds.
When there are losses

A transfer of net loss from the profit and loss account to the Capital account will result in the capital account being debited and the profit and loss account being credited. Capital account generally has a credit balance and a debit to it would result in a decrease in the balance in that account.
Dr Capital a/c Cr
Particulars
Amount
Particulars
Amount
To Net Loss
65,000
By Balance b/d
2,80,000
To Balance c/d
2,15,000
2,80,000
2,80,000
By Balance b/d
2,15,000
Capital would appear in the balance sheet as below

Balance Sheet of M/s ___ as on ___ 31st March 2009 2,80,000 2010 2,15,000 ... 31st March 2009 ... 2010 ...
Liabilities Capital
Assets
Capital account being a non-current account, a decrease in its balance indicates an outflow of working capital (fund). When there are losses, the funds from operations would amount to an outflow/application of funds.
What are Adjustments

Adjustments in Financial Accounting
In financial accounting, adjustments are transactions relating to the business, which have not yet been journalised. These are incorporated into accounting by making mathematical adjustments to the figures in the trading account, profit and loss account and balance sheet at the time of making up final accounts. To know what adjustments are to be made in relation to a transaction, we need to know the journal entry that we use to record that transaction.
Adjustments in Funds Flow Analysis

Even in Funds Flow analysis, adjustments are transactions relating to the business. However, they are transactions which have already been journalised.
They represent transactions relating to the business which might have brought about a change in (influenced) working capital (Fund). To know the influence of a transaction, we need to know the journal entry that we use to record that transaction.
Why do we need adjustments?

In Funds flow analysis, we identify the changes in working capital from the changes in noncurrent accounts. The balance sheets provide us only the figures of opening and closing balances in the Non-Current accounts. The opening figure after going through none or more changes during the period for which funds flow is being measured, would end up as the closing figure. Analysing funds flow is analysing the reasons for the change in balances of non-current accounts. Therefore, to analyse funds flow we need the information relating to the accounting transactions that have brought about a change in the balances.
What do we do with the adjustments?

We consider the journal entry relating to each transaction given under adjustments, find out the affect of the transaction on the non-current account and thereby identify the changes in working capital on account of that transaction. For this we prepare a working notes by building the non-current ledger accounts (on a memorandum basis) and posting each transaction to enable us to explain the difference between the opening and closing balance. If the difference still remains unexplained, we make proper assumptions to explain the remaining difference. While making up the journal entries, considering Profit and Loss a/c for nominal accounts in case of cross transactions and Profit and Loss Appropriation a/c for nominal accounts in case of non-cross transactions which are not cross transactions would be helpful.
Depreciation Charged on Assets

Depreciation is a loss and the transaction for recording depreciation would be a non-cross transaction. The journal entries for recording depreciation are
Recording
Dr. Depreciation on Asset a/c Cr. Asset a/c Dr. Profit/Loss Appropriation a/c Cr. Depreciation on Asset a/c Dr. Profit/Loss Appropriation a/c Cr. Asset a/c Non-Current Non-Current
Appropriating
Net Effect
For the purpose of analysing the affect of these transactions we consider the net effect
Where depreciation is recorded using Depreciation Reserve a/c

Under this method, depreciation is accumulated in a separate account named "Depreciation Reserve a/c" instead of writing off every year from the asset account.
Appropriating
Dr. Profit/Loss Appropriation a/c Cr. Depreciation Reserve a/c Dr. Profit/Loss Appropriation a/c Cr. Depreciation Reserve a/c Non-Current Non-Current
Net Effect
At any point of time, the written down value of the asset is ascertained by setting off the asset account and the relevant depreciation reserve account.
Purchase of Assets
The transaction relating to purchase of an asset would be a cross transaction where the other account involved in the transaction is a current account, i.e. Cash a/c or Bank a/c (where the payment is made in cash or by cheque) a current asset or current liability (by taking over the vendors/sellers liability).
Purchase of Asset
Dr. Asset a/c Non-Current Cr. Cash/Bank/Creditor a/c Current
Where the other account involved is a non-current account, the transaction would not be a cross transaction and as such would not result in a change in working capital.
Purchase of Asset
Dr. Asset a/c Non-Current Cr. Capital/Debentures/Old Asset a/c Non-Current
Assets purchased by issuing capital or by accepting long term liability, or in exchange of another asset would be examples of such transactions.
Sale of Asset at a Profit or Loss

Asset maintained at its net value - depreciation written off to the Asset account
Where the asset is maintained at its net value, the value of the asset is shown at its net value in the books of accounts. At the end of every accounting period, value equal to the depreciation to be charged is transferred from the asset account to the depreciation account treating it as a loss. There are two transactions involved in the sale of such asset. The transaction of sale of asset and the transaction of recording profit/loss on the sale of asset. They are two distinct transactions. Where there is neither profit/loss on sale, the second transaction would be irrelevant. In financial accounting we generally combine both the transactions which should be avoided here to get a clear understanding.
Recording Asset Sale
Dr. Cash/Bank a/c Cr. Asset a/c Dr. Asset a/c Cr. Profit/Loss Appropriation a/c Dr. Profit/Loss Appropriation a/c Cr. Asset a/c
Current Non-Current Non-Current Non-Current Non-Current Non-Current
Recording Gain
Recording Loss
When sale is recorded using Asset Disposal a/c
Writing off Asset Sold
Dr. Asset Disposal a/c Cr. Asset a/c
Non-Current Non-Current
Dr. Cash/Bank a/c Cr. Asset Disposal a/c Dr. Asset Disposal a/c Cr. Profit/Loss Appropriation a/c Dr. Profit/Loss Appropriation a/c Cr. Asset Disposal a/c
Current Non-Current Non-Current Non-Current Non-Current Non-Current
Recording Gain
Recording Loss
Using Asset sale account would give a better understanding of the transaction by providing clear information.
The basic purpose of accounting is derivation of information. The more the information we need the more the accounting heads we need to maintain.
Asset maintained at its cost - Depreciation Reserve a/c is maintained

Where a depreciation reserve account is being maintained, the value of the asset is shown at its cost in the books of accounts. At the end of every accounting period, value equal to the depreciation to be charged on the asset is credited to the depreciation reserve account by charging the profit and loss account. The reserve account is carried forward over the accounting periods and is shown on the liabilities side of the balance sheet or is adjusted from the value of the relevant asset on the assets side of the balance sheet. At the time of sale or disposal of the asset, the depreciation reserve account is closed by transfer to the relevant asset account thereby bringing down the asset to its real value. Even in the sale of this asset, there are two transactions involved. The transaction of sale of asset and the transaction of recording profit/loss on the sale of asset. They are two distinct transactions. Where there is neither profit/loss on sale, the second transaction would be irrelevant.
Writing off Depreciation Reserve
Dr. Depreciation Reserve a/c Cr. Asset a/c Dr. Cash/Bank a/c Cr. Asset a/c
Non-Current Non-Current Current Non-Current
Recording Gain
Dr. Asset a/c Cr. Profit/Loss Appropriation a/c Dr. Profit/Loss Appropriation a/c Cr. Asset a/c
Non-Current Non-Current Non-Current Non-Current
Recording Loss
When sale is recorded using Asset Disposal a/c
Writing off Asset Sold
Dr. Asset Disposal a/c Cr. Asset a/c Dr. Depreciation Reserve a/c Cr. Asset Disposal a/c Dr. Cash/Bank a/c Cr. Asset Disposal a/c Dr. Asset Disposal a/c Cr. Profit/Loss Appropriation a/c Dr. Profit/Loss Appropriation a/c Cr. Asset Disposal a/c
Non-Current Non-Current Non-Current Non-Current Current Non-Current Non-Current Non-Current Non-Current Non-Current
Recording Gain
Recording Loss
Notice that the journal entry indicating the Net Effect in all the above cases is the same.
Sale of Asset - Non Cross Transaction

The transaction relating to sale of an asset would be a cross transaction where the other account involved in the transaction is a current account, i.e. Cash a/c or Bank a/c (where the sale proceed is received in cash or by cheque) a current asset or current liability (by the buyer taking over a liability).
Dr. Cash/Bank a/c Cr. Asset a/c
Current Non-Current
Where the other account involved is a non-current account, the transaction would not be a cross transaction and as such would not result in a change in working capital (fund).
Dr. Machinery/Debentures a/c Non-Current Cr. Asset a/c Non-Current
Giving away an Asset for clearing a long term liability, giving an asset in exchange of another asset would be examples of such transactions.
Reserve for Bad and Doubtful Debts

In general, creation of any Reserve amounts to appropriation of profits.
Creating General Reserve
Dr. Profit and Loss a/c Non-Current Cr. General Reserve a/c Non-Current
Bad Debt Reserve is also created by appropriating profits. However, for the purpose of funds flow analysis, this transaction is treated as a cross transaction involoving nominal accounts and thus the debit to the profit and loss account is considered a charge against profits.
Creating Bad Debt Reserve
Dr. Profit and Loss a/c Non-Current Cr. Reserve for Bad and Doubtful Debts a/c Current
Why is it a charge?
The prefix 'Reserve' in Reserve for Bad and Doubtful Debts creates an understanding that the transaction amounts to an appropriation of profit and not a charge. A transaction resulting in a debit to the profit and loss can be claimed to be an appropriation if the account to which the profits are being transferred is a part non-current liabilities in the balance sheet. Therefore, creation of reserve for bad and doubtful debts can be treated as an appropriation if the Reserve for Bad and Doubtful Debts account is a non-current liability in the balance sheet.
Where is Bad Debt Reserve positioned in the balance sheet?

In making up a balance sheet, we conventionally deduct the balance in the reserve for bad and doubtful debts account, from the value of debtors on the assets side of the balance sheet.
Deducting an item from the assets side is the same as placing the item on the liabilities side. Assuming that the balance sheet is marshalled, since Sundry Debtors are Current Assets, the reserve related to it would be a Current Liability. Thus Reserve for Bad and Doubtful Debts is treated as a current account. Any transaction resulting in a debit to the profit and loss account wherein the other account involved is a current account results in a charge on profits.
Provision for Taxes and Dividends

Where Provision for Taxes/Dividends accounts are Non-Current Liabilities
Where provision for taxation and provision for dividends accounts are non-current accounts, the transaction for creating the reserve would not be a cross transaction and as such would not result in a change in working capital.
Creation of Reserve for Taxation
Dr. Profit and Loss Appropriation a/c Cr. Provision for Taxation a/c Dr. Profit and Loss Appropriation a/c Cr. Provision for Dividends a/c
Non-Current Non-Current Non-Current Non-Current
Creation of Reserve for Dividends
Where Provision for Taxes/Dividends accounts are Current Liabilities

Where provision for taxation and provision for dividends accounts are current accounts, the transaction for creating the reserve would be a cross transaction and as such would bring about a change in working capital.
Creation of Reserve for Taxation
Dr. Profit and Loss a/c Cr. Provision for Taxation a/c
Non-Current Current
Creation of Reserve for Dividends
Dr. Profit and Loss a/c Non-Current Cr. Provision for Dividends a/c Current
Since the debit is made to the profit and loss account, it represents a transaction that results in a charge to the profit and loss account. The affect of all such transactions on the working capital is considered in a consolidated manner under the head funds from operations.
Moreover, because these accounts are current accounts, they would not be considered for the purpose of analysing funds flow They will be taken into consideration only for the purpose of preparing the statement of changes in working capital.
Note
Using Profit/Loss account in place of Profit/Loss Appropriation account for non-cross transactions would be helpful in finding the funds from operations easily.
Are they Current or Non-Current

Where there is no specific indication as to whether the accounts like provision for taxation/dividends accounts are current natured or non-current natured, we are required to make an assumption and decide for ourselves. When there is no indication we may choose either of the options. However, it is a convention that if we find the accounts grouped together with current accounts we treat them as current natured and if they are grouped together with non-current natured accounts we treat them as non-current accounts. Where it is not possible to decide based on their presence in the Balance Sheet (in cases where the balance sheet items are not arranged in an order or where the Balance Sheet is not known/given), then we can make our own assumptions, in the absence of any other indication regarding the same. In such cases, because these are capable of being treated either ways, it would always be appropriate to indicate our assumption.
All need not be of the same kind

Where there are two or more such accounts and we are required to decide upon their nature, it is not a requirement that all of them should be considered to be of the same kind. One or more of them can be assumed to be current natured and the rest to be non-current natured accounts.
Payments for Taxes and Dividends

Where Provision for Taxes/Dividends accounts are Non-Current Liabilities
Assuming payment of tax/dividend in cash, the transaction of payment of tax/dividend would be a cross transaction, where the provision for taxation/dividend account are noncurrent accounts as the other account involved is a current account (cash/bank account)
Payment of Taxes
Dr. Provision for Taxation a/c Cr. Cash/Bank a/c
Non-Current Current
Payment of Dividends
Dr. Provision for Dividends a/c Cr. Cash/Bank a/c
Non-Current Current
Where Provision for Taxes/Dividends accounts are Current Liabilities

Assuming payment of tax/dividend in cash, the transaction of payment of tax/dividend would be a non-cross transaction, since both the accounts affected by the transaction would be current accounts. Such a transaction, since it is not related to any non-current account would be irrelevant for the purpose of analysing funds flow.
Reserve/Provision for Taxation/Dividends Assumptions

In problem solving, there are certain assumptions we make with regard to the reserve/provision for taxation/dividend accounts.
Opening Balance becomes a determined liability

The opening credit balance in the Reserve for Taxation/Dividend is an amount that has been created by charging/appropriating the previous period profits. It represents An existing liability, when the account is assumed to be a current liability A provision for a future liability (one which has not been determined), when the account is assumed to be a non-current liability. In this case, the liability would become an existing liability as and when the tax/dividend due is determined. In the absence of information to the contrary, we make the following assumptions, By the end of the current period the liability has been determined and is equal to opening balance in these accounts.
Determined liability is cleared by paying out

In the absence of information to the contrary, we make the following assumptions,
The liability which has been pre determined or has been determined in the current period is paid out in the current period.
Closing balance represents/relates to reserve created during the current period

In the absence of information to the contrary, we make the following assumptions, The total closing balance in the reserve for Taxation/Dividend accounts is on account of the provision created during the current period.
Example
Balance Sheet of M/s ___ as on ___ 31st March 2009 2010 ... Reserve for Taxation 1,24,000 1,32,000 31st March 2009 ... 2010 ...
Liabilities
Assets
Where only the information relating to the opening and closing balances is known, we assume that the opening balance becomes a determined liability by the end of the accounting period and is therefore paid out by the end of the accounting period.
Dr
Reserve for Taxation a/c
Cr
Date
Particulars
Amount
Date
Particulars
Amount
../../09
To ...
1,24,000 1,32,000
01/04/09 By Balance b/d 31/03/10 By P/L Appropriation a/c (?)
1,24,000 1,32,000
2,56,000
2,56,000
1,32,000
Assumptions
1. The opening balance of 1,24,000 is paid out during the current period. 2. The balancing represents the provision made by charging profits during the current period or by appropriating profits at the end of the accounting period.
The basis for such assumptions

This assumption is based on a rational approach.
Reserve for Taxation

The opening balance of Provision for Taxation account represents the amount set aside by charging/appropriating the previous period profits. When charged to profits, it represents a determined liability and when appropriated from profits it represents profits set aside to cover taxes that would be determined in the subsequent accounting period. Where it represents a provision for future liability, it would be rational to assume that the tax liability that has been provided for towards the end of the previous period would be determined by the end of the current period i.e. within a years time. Once the tax liability becomes a determined liability, it being a statutory obligation, becomes payable within a short time. For this reason, we assume the liability to have been paid out by the end of the year. However, where there is a specific information/indication regarding the amount paid as tax during the current period, only that should be considered. Where the actual tax liability assessed is more/less than the amount provided for during the previous period, the amount paid may be more/less than the opening balance in the reserve/provision account. Where the opening balance, the closing balance and the amount provided for during (at the end of) the current period are known, we find out the amount paid out as the balancing figure.
Provision for Dividends

The opening balance in the Provision for Dividends account represents the amount set aside by charging/appropriating the previous period profits. When charged to profits, it represents a determined liability and when appropriated from profits it represents profits set aside to cover liability on account of dividends payable which would be determined in the subsequent accounting period. Where it represents a provision for future liability, it would be rational to assume that the tax liability that has been provided for towards the end of the previous period would be determined by the end of the current period i.e. within a years time. Once the dividend has been declared, the provision becomes an existing liability on account of the statutory
obligation to payout dividends within a period of 30 days of their declaration. For this reason, we assume the liability to have been paid out by the end of the year. However, where there is a specific information/indication regarding the amount paid as dividend during the current period, only that should be considered. Where the actual dividend liability determined is more/less than the amount provided for during the previous period, the amount paid may be more/less than the opening balance in the reserve/provision account. Where the opening balance, the closing balance and the amount provided for during (at the end of) the current period are known, we find out the amount paid out as the balancing figure.
Companies Act, 1956 Show
Interim Dividend - Appropriation - Payment

Normally the dividends of a company for a particular financial year can be paid only out of the profits for that year arrived at after providing for depreciation. Thus declaration of dividends would be possible only after finalising accounts.

Interim dividend can be declared by the Board of Directors at any time.

Interim dividends are first paid and then appropriated from profits. If provision for dividends account exits, then we consider the interim dividend account to be similar in nature to the provision for dividends account. Interim dividend account is treated as a current account or a non-current account accordingly as the provision for dividends account is current or non-current.
Interim Dividend - Current Account

The interim dividend account being a current account has to be considered only for the purpose of preparing the statement of changes in working capital. Since we need to consider only the accounts present in the balance sheet for the purpose of preparation of the statement of changes in working capital, and the interim dividend account would not be present in the balance sheet, we need not consider the transactions relating to interim dividends for the purpose of analysing funds flow when it is a current account.
Payment of Interim Dividend
Dr. Interim Dividend a/c Cr. Bank a/c Dr. Profit and Loss a/c Cr. Interim Dividend a/c
Current Current Non-Current Current
Charge to/against Profits
Interim Dividend - Non-Current Account

The transaction relating to payment of interim dividend would be a cross transaction.
Payment of Interim Dividend
Dr. Interim Dividend a/c Cr. Bank a/c Dr. Profit and Loss Appropriation a/c Cr. Interim Dividend a/c
Non-Current Current Non-Current Non-Current
Appropriation from Profits
Since the balance sheet is prepared after finalisation of accounts, we will find no trace of the interim dividend, unless there is an indication in the form of adjustments or additional information.
Appropriation of Profits to Reserves

This being a transaction involving a nominal account representing an appropriation of profit is not a cross transactions and thus does not bring about a change in working capital (fund).
Appropriating
Dr. Profit/Loss Appropriation a/c Cr. Reserve a/c
Capital brought in - Additional Capital raised

Capital can be contributed either by bringing in an asset or taking over a liability. Capital being a non-current liability, the asset brought in or the liability taken over towards contribution of capital should be of a current nature so as to form a cross transaction bringing about a change in working capital.
Recording
Dr. Cash/Bank/Current (Asset/Liability) a/c Cr. Capital a/c
Current Non-Current
If the asset brought in is a non current Asset, or if the liability taken over is a non-current Liability, the transaction would not amount to a cross transaction and as such there would be no change in working capital on account of this transaction.
Recording
Dr. Machinery/Debentures (Asset/Liability) a/c Cr. Capital a/c
Drawings of Capital
The drawings in the form of the ownership taking over any Current Assets or the organisation taking over any current liability of the owners would give rise to a cross transaction and thus result in a change in working capital (fund).
Drawings made
Dr. Drawings a/c Non-Current Cr. Cash/Bank/Current (Asset/Liability) a/c Current Dr. Capital a/c Cr. Drawings a/c Non-Current Current
Adjusting drawings
Drawings in the form of the ownership taking over any Non-Current Assets or the organisation taking over any non-current liability of the owners would not give rise to a cross transaction and thus does not result in a change in working capital (fund).
Drawings made
Dr. Drawings a/c Non-Current Cr. Furniture/Bank Loan (Asset/Liability) a/c Non-Current Dr. Capital a/c Cr. Drawings a/c Non-Current Non-Current
Adjusting Drawings
Changes in working Capital, Funds From operations, Funds Flow Statement illustration
Following are the Balance Sheets of BROYHILL Industries Ltd, as on 31.12.2005 and 31.12.2006
Balance Sheet of M/s BROYHILL Industries Ltd, As on 31st December 2005 12,00,000 4,00,000 3,00,000 2,50,000 4,50,000 8,00,000 2,00,000 12,000 on Buildings on Plant & Machinery 60,000 Provision for: Bad & Doubtful Debts Taxation 37,62,000 49,74,000 37,62,000 49,74,000 50,000 70,000 1,20,000 40,000 2006 16,00,000 6,00,000 3,50,000 5,00,000 3,80,000 13,00,000 6,000 48,000 As on 31st December 2005 6,00,000 8,00,000 2,00,000 6,00,000 2,20,000 3,50,000 3,38,000 6,00,000 40,000 14,000 2006 5,50,000 14,90,000 2,00,000 10,00,000 4,70,000 3,72,000 8,00,000 80,000 12,000
Liabilities Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Provision for Depreciation
Assets Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock Bank Preliminary expenses
You are required to analyse the Funds Flow and the Changes in working Capital in as much detail as possible, using the following additional details available.
1.
A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000 ) was sold for Rs. 1,20,000. Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000. Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve. All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture. Dividends of Rs. 1,00,000 were paid during the year. Provision for taxation in 2006 Rs. 1,10,000. During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000.
2. 3.
4.
5. 6. 7.
Soution Working Notes - Identify the Current and Non Current Accounts
Balance Sheet of M/s BROYHILL Industries Ltd, As on 31st December 2005 12,00,000 4,00,000 3,00,000 2,50,000 4,50,000 8,00,000 2,00,000 12,000 on Buildings on Plant & Machinery 60,000 Provision for: Bad & Doubtful Debts Taxation 37,62,000 49,74,000 37,62,000 49,74,000 50,000 70,000 1,20,000 40,000 2006 16,00,000 6,00,000 3,50,000 5,00,000 3,80,000 13,00,000 6,000 48,000 As on 31st December 2005 6,00,000 8,00,000 2,00,000 6,00,000 2,20,000 3,50,000 3,38,000 6,00,000 40,000 14,000 2006 5,50,000 14,90,000 2,00,000 10,00,000 4,70,000 3,72,000 8,00,000 80,000 12,000
Liabilities Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Provision for Depreciation
Assets Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock Bank Preliminary expenses
Liabilities Share capital Debentures Reserve Profit & Loss a/c Creditors Bank Loan Fixed Deposits Assets Goodwill (at Cost) Plant and Machinery (Cost) Furniture Buildings Investments Land Debtors Stock
Provision for Depreciation Bank Preliminary expenses on Buildings on Plant & Machinery Provision for: Bad & Doubtful Debts Taxation
Non-Current Accounts Current Accounts
Solution Schedule of Changes in Working Capital

The schedule/statement of changes in working capital is an abstract of the information relating to all the current natured accounts i.e. all accounts that are part of current assets and current liabilities in a specified format.
M/S BROYHILL Industries Ltd Schedule/Statement of Changes in Working Capital for the period from 31/12/05 to 31/12/06
Increase
Decrease
a) CURRENT ASSETS 3,38,000 1) Debtors 2) Stock 3) Bank 6,00,000 40,000 3,72,000 8,00,000 80,000 34,000 2,00,000 40,000 -
TOTAL
9,78,000
12,52,000
2,74,000
b) CURRENT LIABILITIES 1) Creditors 2) Provision for Bad Debts 2) Provision for Taxation 4,50,000 60,000 50,000 3,80,000 70,000 1,20,000 70,000 10,000 70,000
TOTAL
5,60,000
5,70,000
70,000
80,000
4,18,000
6,82,000
TOTAL
3,14,000
4,78,000
2,64,000
There is an increase in working capital to the extent of 2,64,000. The net change can also be obtained from the working capital figures relating to the two balance sheet dates.
= 6,82,000 - 4,18,000 = + 2,64,000

Positive value indicates an increase in working capital.
Assumption : Provision for Taxation is a current account.
Solution Altered Non Current Accounts

Altered non current accounts are the non current accounts which have been affected by the accounting transactions during the period for which the funds flow is being analysed. These are non Current Accounts which are
Present in both the Balance Sheets having different balances.
Share Capital a/c, Plant and Machinery a/c are examples

Present in only one of the balance sheets
Fixed Deposits a/c and Investments a/c

Present in both the Balance Sheets and whose balance does not differ. Furniture a/c
A non current account balance might be the same in the two balance sheets, even if it had been affected by the transactions during the period for which the funds flow is being analysed, if the change on account of one or more transactions is offset by the change on account of one or more other transactions.
Not present in both the balance sheets.
Non current accounts which would have been created and closed during the period for which the funds flow is being analysed will not be present in the balance sheets. Interim Dividend account is an example. Altered non current accounts not revealed by the balance sheet information should be assessed from the additional information provided along with the two balance sheets.
Preparing the altered Non Current Ledger Accounts

Non current Ledger account should be prepared so as to reveal all the information relating to that account for the period for which the funds flow is being analysed. Draw all the altered ledger accounts filling them with the information in the balance sheets. Balance Sheet information is used only once. Additional information represents accounting transactions. Identify the journal entries for the transactions and where they affect the noncurrent accounts, post them into the ledgers. Close the account holding the appropriated profits (Profit and Loss a/c in this problem) to obtain the figure of funds from operations.
Preparing the account holding the accumulated profits towards the end would aid understanding. If in doubt prepare all the non-current ledger accounts.
Soution Working Notes - Journal Entries for additional information

A part of the machinery costing Rs. 1,40,000 (Accumulated depreciation Rs. 12,000) was sold for Rs. 1,20,000. Book value of Machine sold
= Cost - Accumulated Depreciation = 1,40,000 - 12,000 = 1,28,000

Profit/Loss on sale
= Sale price - Book Value = 1,20,000 - 1,28,000 = - 8,000 [Loss]

Writing off Machinery
Dr. Machine Sale a/c Cr. Plant and Machinery a/c Dr. Provision for Depreciation on Plant and Machinery a/c Cr. Machine Sale a/c Dr. Bank a/c Cr. Machine Sale a/c Dr. Profit/Loss Appropriation a/c Cr. Machine Sale a/c
Recording Machine Sale
Recording Loss
Buildings costing Rs. 1,00,000 (Accumulated depreciation 10,000) was sold for Rs. 1,10,000. Book value of Building sold
= Cost - Accumulated Depreciation
= 1,00,000 - 10,000 = 90,000

Profit/Loss on sale
= Sale price - Book Value = 1,10,000 - 90,000 = + 20,000 [Profit]

Writing off Building
Dr. Building Sale a/c Cr. Building a/c Dr. Provision for Depreciation on Building a/c Cr. Building Sale a/c Dr. Bank a/c Cr. Building Sale a/c Dr. Building Sale a/c Cr. Profit/Loss Appropriation a/c
Recording Building Sale
Recording Profit
Land costing Rs. 1,50,000 was sold for Rs. 1,70,000. Profit of Rs. 20,000 transferred to reserve.
Recording Land Sale
Dr. Bank a/c Cr. Land a/c Dr. Land a/c Cr. Profit/Loss Appropriation a/c
Recording Profit
This being a simple transaction we may avoid using the asset sale account. All the Investments are sold at a profit of Rs. 24,000 and the sale proceeds are utilised for clearing the fixed deposits and purchasing new furniture. Sale proceeds of investments
= Book Value of investments + Profit
= 2,20,000 + 24,000 = 2,44,000

Value of Furniture Purchased
= Investment Sale proceeds - Fixed Deposits Cleared = 2,44,000 - 2,00,000 = 44,000

Recording Investment Sale
Dr. Bank a/c Cr. Investments a/c Dr. Investment a/c Cr. Profit/Loss Appropriation a/c Dr. Fixed Deposits a/c Cr. Bank a/c Dr. Furniture a/c Cr. Bank a/c
Recording Profit
Clearing Fixed Deposits
Purchasing Furniture
Dividends of Rs. 1,00,000 were paid during the year. Since there is no Reserve/Provision for dividend account either at the beginning or the end, the payment of dividend is to be treated as an equivalent of interim dividend. The dividend is paid and appropriated from profits during the current accounting period itself.
Payment of Dividend
Dr. Dividend a/c Cr. Bank a/c Dr. Profit/Loss Appropriation a/c Cr. Dividend a/c
Appropriation of Dividend
Provision for taxation in 2006 Rs. 1,10,000. Since provision for taxation has been shown along with other current natured accounts it is treated as a current account.
Provision for taxation being a current natured account, the transaction of creation of provision would result in a charge to the profit and loss account.
Provision created
Dr. Profit and Loss a/c Cr. Provision for Taxation a/c Dr. Provision for Taxation a/c Cr. Bank a/c
Payment of Tax
Since we know the opening and closing balances, the amount paid towards taxation would be revealed by the Provision for taxation account as the balancing figure. Since both the provision for taxation account and the bank account are current natured, the transaction of payment of tax would not be a cross transaction. During 2006 Assets of another company were purchased for a consideration of Rs. 1,00,000, payable in shares. These assets included buildings worth Rs. 50,000 and stock worth Rs. 50,000. In financial accounting, this transaction of purchase of assets for consideration other than cash is assumed to involve three distinct transactions. 1. Purchase of Asset 2. Falling due to the vendor on account of the purchase 3. Clearing vendors due
Purchase of Assets
Dr. Building a/c Dr. Stock a/c Cr. Asset Purchase a/c Dr. Asset Purchase a/c Cr. Vendor a/c Dr. Vendor a/c Cr. Equity Share Capital a/c
Falling due to the vendor
Clearing Vendor dues
In analysing funds flow, we avoid considering the transactions in such detailed. However we consider the transactions of acquisition of the assets separately as transaction representing
the acquisition of the current asset will form a cross transaction and the other transaction is a non-cross transaction.
Purchase of Building
Dr. Building a/c Cr. Equity Share Capital a/c Dr. Stock a/c Cr. Equity Share Capital a/c
Purchase of Stock
In preparing the Funds flow statement, we neither record journal entries nor post ledger accounts. We only take the help of the formats in financial accounting to help us derive the information needed.
Solution Working Notes : Altered Non Current Ledger Accounts

From Balance Sheets From additional information Appropriations/Losses Funds Flow - Posting relevant to transaction resulting in flow of fund
Share Capital
Dr Share Capital a/c Cr
Particulars
Amount
Particulars
Amount
To Balance c/d
16,00,000
By Balance b/d By Buildings By Stock By Bank (?)
12,00,000 50,000 50,000 3,00,000
16,00,000
16,00,000
By Balance b/d
16,00,000
From additional information - 7.
Assumption : 1.
The balancing figure represents additional capital raised during the current period in consideration for cash or any other current assets.
Debentures
Dr Debentures a/c Cr
Particulars
Amount
Particulars
Amount
To Balance c/d
6,00,000
By Balance b/d By Bank (?)
4,00,000 2,00,000
6,00,000
6,00,000
By Balance b/d
6,00,000
Assumption : 1.
The balancing figure represents additional capital raised through debentures during the current period in consideration for cash or any other current assets.
Reserve
Dr Reserve a/c Cr
Particulars
Amount
Particulars
Amount
To Balance c/d
3,50,000
By Balance b/d By Land By P/L Appr. a/c (?)
3,00,000 20,000 30,000
3,50,000
3,50,000
By Balance b/d
3,50,000

Assumption : 1.
The balancing figure represents reserve created by appropriating profits during the current period.
Profit and Loss a/c

Particulars
Amount
Particulars
Amount
To Balance c/d
5,00,000
By Balance b/d By P/L Appr. a/c (?)
2,50,000 2,50,000
5,00,000
5,00,000
By Balance b/d
5,00,000
Assumption : 1.
The balancing figure represents net profit of the current period.
Bank Loan
Dr Bank Loan a/c Cr
Particulars
Amount
Particulars
Amount
To Balance c/d
13,00,000
By Balance b/d By Bank a/c (?)
8,00,000 5,00,000
13,00,000
13,00,000
By Balance b/d
13,00,000

Assumption : 1.
The balancing figure represents additional loan taken during the current period.
Fixed Deposits
Dr Fixed Deposits a/c Cr
Particulars
Amount
Particulars
Amount
To Bank a/c
2,00,000
By Balance b/d
2,00,000
2,00,000
2,00,000
Since there is no change in the balance and we find no transactions affecting this account in the additional information, we may avoid preparing this account. If in doubt prepare all non-current accounts.
Goodwill
Dr Goodwill a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d
6,00,000
By P/L Appr. a/c (?) By Balance b/d
50,000 5,50,000
6,00,000
6,00,000
To Balance b/d
5,50,000
Assumption : 1.
The balancing figure represents goodwill written off as loss from the profits of the current period.
Plant and Machinery

Dr Plant and Machinery a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d To Bank a/c
8,00,000 8,30,000
By Machinery Sale a/c By Balance b/d
1,40,000 14,90,000
16,30,000
16,30,000
To Balance b/d
14,90,000

Assumption : 1.
The balancing figure represents value of machinery purchased during the current period for a consideration in cash or other current asset.
Reserve for Depreciation on Plant and Machinery a/c Cr
Dr
Particulars
Amount
Particulars
Amount
To Machinery Sale a/c To Balance c/d
12,000 48,000
By Balance b/d By P/L Appr. a/c
40,000 20,000
60,000
60,000
By balance b/d
48,000

Assumption : 1. Dr
The balancing figure represents the depreciation charged to profits in the current period.
Machinery Sale a/c Cr
Particulars
Amount
Particulars
Amount
To Plant and Machinery a/c
1,40,000
By Res. Depr. Pl/Mach a/c By Bank a/c By P/L Appr. a/c
12,000 1,20,000 8,000
1,40,000
1,40,000

Assumption : 1.
The balancing figure represents loss on sale of machinery charged to profits during the current period.
Furniture
Dr Furniture a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d To Bank a/c
2,00,000 44,000
By P/L Appr. a/c (?) By Balance b/d
44,000 2,00,000
2,44,000
2,44,000
To Balance b/d
2,00,000

Assumption : 1.
The balancing figure represents depreciation on furniture charged to profits during the accounting period.
Buildings
Dr Buildings a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d To Equity Share Cap a/c To Bank a/c
6,00,000 50,000 4,50,000
By Building Sale a/c By Balance c/d
1,00,000 10,00,000
11,00,000
11,00,000
To Balance b/d
10,00,000
From additional information - 2., 7.

Assumption :
1.
The balancing figure represents value of building purchased during the current period for a consideration in cash or other current asset.
Reserve for Depreciation on Building a/c Cr
Dr
Particulars
Amount
Particulars
Amount
To Building Sale a/c To Balance c/d
10,000 6,000
By Balance b/d By P/L Appr. a/c
12,000 4,000
16,000
16,000
By balance b/d
6,000

Assumption : 1. Dr
The balancing figure represents the depreciation charged to profits in the current period.
Building Sale a/c Cr
Particulars
Amount
Particulars
Amount
To Building a/c To P/L Appr. a/c
1,00,000 20,000
By Res. Depr. Bldg a/c By Bank a/c
10,000 1,10,000
1,20,000
1,20,000

Assumption : 1.
The balancing figure represents profit on sale of building included in profits during the current period.
Land
Dr
Land a/c
Cr
Particulars
Amount
Particulars
Amount
To Balance b/d To Reserve a/c To Bank a/c (?)
3,50,000 20,000 2,70,000
By Bank a/c By Balance c/d
1,70,000 4,70,000
6,40,000
6,40,000
To Balance b/d
4,70,000

Assumption : 1.
The balancing figure represents value of land purchased during the current period for a consideration in cash or other current asset.
Investments
Dr Investments a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d To P/L Appr. a/c
2,20,000 24,000
By Bank a/c
2,44,000
2,44,000
2,44,000
Preliminary Expenses
Dr Preliminary Expenses a/c Cr
Particulars
Amount
Particulars
Amount
To Balance b/d
14,000
By P/L Appr. a/c By Balance c/d
2,000 12,000
14,000
14,000
To Balance b/d
12,000
Assumption : 1.
The balancing figure represents value of preliminary expenses written off to profits during the current period.
Solution Working Notes - Funds from Operation

We have to ascertain funds from operations to prepare the funds flow statement. To ascertain funds from operations, prepare a ledger account by name ... Profit and Loss Appropriation account. Sometimes we may find this account in the balance sheet, in which chase, use that account here for finding the funds from operations. After preparing the altered non-current accounts, look out for the postings by name "To P/L Appr. a/c" or "By P/L Appr. a/c" and complete the postings in the "Profit and Loss Appropriation account". The balancing figure in that account would be the Fund From Operations. If the balancing figure appears on the credit side it represents a source and if it appears on the debit side it represents an application of fund.
Particulars
Amount
Particulars
Amount
To Reserve a/c To Profit and Loss a/c To Goodwill a/c To Reserve for Depreciation on Plant and Machinery To Machine Sale a/c To Depreciation on Furniture To Reserve for Depreciation on Building To Preliminary Expenses
30,000 2,50,000 50,000 20,000 8,000 44,000 4,000 2,000
By Building Sale a/c By Investments a/c By Funds From Operations (?)
20,000 24,000 3,64,000
4,08,000
4,08,000
Since the Funds From Operations appears on the credit side, it represents a Source of Funds.
Statement Method
Statement for Calculation of Funds from Operations
Particulars
Amount
Amount
Current Period Profit Capitalised

Add: Losses/Appropriations debited to Profit/Loss a/c
2,50,000 30,000
1) Reserve created 2) Goodwill written off 3) Reserve for Depreciation on Plant and Machinery 4) Loss on Sale of Machine
50,000 20,000 8,000
5) Depreciation on Furniture 6) Reserve for Depreciation on Building 7) Preliminary Expenses Written off
44,000 4,000 2,000 1,58,000
Less: Gains and Adjustments credited to Profit/Loss a/c
4,08,000 20,000 24,000 44,000
1) Profit on Sale of Building 1) Profit on Sale of Investments
Funds From Operations
3,64,000
Since the Funds From Operations is positive, it represents a Source of Funds. You may use a method that is convenient to you. We recommend that you know both the methods.
Solution Funds Flow Statement - Statement Form

To prepare the funds flow statement, we only need the information relating to the noncurrent ledger accounts and the funds from operations. In the non-current ledger accounts prepared, all postings of Bank/Cash (or any other current natured accounts) on the Credit side represents sources/inflows of funds Debit side represents applications/outflows of funds
Collect that information and fill it in the statement to make up the funds flow statement.
Funds Flow Statement of M/s BROYHILL Industries Ltd, for the period from 31/12/05 to 31/12/06
Particulars
Amount
Amount
a) Sources (Inflow) of Funds 50,000 1) Share Capital (Stock) 2) Share Capital (Cash/Bank) 3) Debentures 4) Bank Loan 5) Plant Sale 6) Building Sale 7) Investments Sale 8) Land Sale 9) Funds from Operations 3,00,000 2,00,000 5,00,000 1,20,000 1,10,000 2,44,000 1,70,000 3,64,000 20,58,000
b) Applications (Outflow) of Funds 1) Purchase of Plant and Machinery 2) Purchase of Furniture 3) Purchase of Buildings 4) Fixed Deposits Cleared 5) Purchase of Land 8,30,000 44,000 4,50,000 2,00,000 2,70,000 17,94,000
+ 2,64,000
Since the Net change is positive, there is an increase in Working Capital (Fund)
Cross Check
The change in working capital as shown by the "Statement of Chanes in Working Capital" and the "Funds Flow Statement" should be the same.
Solution Funds Flow Statement - T Form

Amount
Amount
Share Capital (Stock) Share Capital (Cash/Bank) Debentures Bank Loan Plant Sale Building Sale Investments Sale Land Sale Funds from Operations
50,000 3,00,000 2,00,000 5,00,000 1,20,000 1,10,000 2,44,000 1,70,000 3,88,000
Purchase of Plant and Machinery Purchase of Furniture Purchase of Buildings Fixed Deposits Cleared Purchase of Land
8,30,000 44,000 4,50,000 2,00,000 2,70,000
20,58,000
17,94,000
2,64,000
Since the Sources/inflows are more, there is a Net increase in Fund (Working Capital)

Accounting

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Accounting

Загружено:

Авторское право:

Доступные форматы

Balance Sheet - the information it provides

A typical balance sheet would look something like this.

4,00,000 Stock of Raw Material

5,00,000 Discounts to be written off

Statement of Real, Personal, Nominal account balances

Special Nominal Accounts

Statement of balances carried forward

Deriving additional information from the Balance Sheet

Setting off related ledger account balances

Net Value of Assets

... Plant and Machinery 5,00,000

Less: Depr Reserve 2,10,000 ...

... Bab Debt Reserve ...

... 14,16,000 ...

... ... ...

... ... ...

... Debtors ... 14,16,000 Less: Bad Debt Reserve32,000

... 13,84,000 ...

Marshalling of Assets and Liabilities

Remaking in Statutory Formats

Remaking in a form suitable for financial analysis

Marshalling of Assets and Liabilities : Order of Liquidity/Permanence

Statutory Horizontal Form of Balance Sheet

SECURED LOANS [L: (i), (j), (k), (l)]

Loans (i) To subsidiaries.

(10) Advances recoverable (in cash or in kind or

Statutory Vertical Form of Balance Sheet

Are the Statutory Formats useful?

information not obtainable

Balance Sheet in a Form Suitable for Financial Analysis

(4) Sundry debtors

Less: Reserve for Doubtful Debts

Previous Period = 27,30,000 - 2,12,000 Current Period = 26,00,000 - 1,80,000

(5) Advances recoverable in cash or for value

to be received TOTAL 43,49,000 44,19,000

II. CURRENT ASSETS

44,19,000 28,90,000 3,80,000 1,60,000 5,00,000

2,45,000 1,80,000 3,00,000

III. CURRENT LIABILITIES and PROVISIONS

13,00,000 12,00,000 5,00,000 5,00,000 20,000 2,23,000

6,00,000 24,000 1,98,000

IV. NET WORKING CAPITAL [II - III]

Current Assets - Current Liabilities and Provisions

8,00,000 62,00,000 15,00,000 5,00,000 4,26,000 18,00,000 24,00,000

18,00,000 6,00,000 5,37,000 19,45,000 17,59,000

VI. CAPITAL EMPLOYED [IV + V]

Net Working Capital + Fixed Assets

VII. OTHER ASSETS

(1) Investments not relating to business

(2) Advances to Directors TOTAL 3,75,000 4,42,000

VII. NET ASSETS [VI + VII]

Capital Employed + Other Assets

VIII. LONG TERM LIABILITIES

54,00,000 25,00,000 14,62,000

XI. EQUITY SHAREHOLDERS NET WORTH [IX - X]

Shareholders Net Worth - Preference Share Capital

Current Assets - Liquid Assets = Stock/Inventories

Current Assets = Liquid Assets

Current Liabilities and Provisions

Reserve/Provision for Taxation/Dividends

Non - Current Liabilities

Recording Outstanding Expenses

R/V No. Expenses a/c

Schedule/Statement of Changes in Working Capital for the period from to