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Course Design
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Advisory Council
Chairman
Dr Parag Diwan
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Members
Dr Shrihari Dr Anirban Sengupta Dr Ashish Bhardwaj
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Dean Dean CIO
Dr K K Pandey
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Print Production
Author
N Balwani
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All rights reserved. No parts of this work may be reproduced in any form, by mimeograph or any other means,
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Contents
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Block-I
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Unit 1 Fundamentals of Accounting................................ ................................ ........................ 3
Unit 2 Generally Accepted Accounting Principles (GAAP)................................ ................... 17
Unit 3 Accounting Principles and Standards ................................ ................................ ........ 29
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Unit 4 Accounting Equation ................................ ................................ ................................ .. 41
Unit 5 Case Studies................................ ................................ ................................ ................ 49
Block-II
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Unit 6 Accounts ................................ ................................ ................................ ...................... 55
Unit 7 Journal ................................ ................................ ................................ ........................ 67
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Block-III
Unit 12 Preparation of Trading, Profit & Loss Account and Balance Sheet ........................ 127
Unit 13 Depreciation Accounting................................ ................................ ........................... 141
Unit 14 Cash Flow Statements................................ ................................ .............................. 153
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Block-IV
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Block-V
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Unit 22 International Financial Reporting Standards ................................ ......................... 233
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Unit 25 Case Study ................................ ................................ ................................ ................ 263
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UNIT 1: Fundamentals of Accounting
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Notes
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Accounting in Logistics and Supply Chain Sector
Detailed Contents
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Notes
UNIT 1: FUNDAMENTALS OF ACCOUNTING
___________________ UNIT 3: ACCOUNTING PRINCIPLES AND
STANDARDS
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Introduction
___________________ Introduction
Characteristics of Accounting
___________________ Accounting Process
Stages of Accounting
___________________ Uses, Advantages or Role of Accounting
Objectives of Accounting
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___________________ Limitations of Accounting
Accounting Information
___________________
Functions of Accounting UNIT 4: ACCOUNTING EQUATION
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___________________ Introduction
Branches of Accounting
___________________ Meaning of Accounting Equation
UNIT 2: GENERALLY ACCEPTED ACCOUNTING
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___________________
PRINCIPLES (GAAP) Calculation/Computation of Accounting Equation
Introduction
___________________ Effect of Transactions on Accounting Equation
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Notes
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Fundamentals of Accounting
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___________________
___________________
Objectives
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Stages of Accounting ___________________
Objectives of Accounting
___________________
Accounting Information
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___________________
Characteristics of Accounting Information
Functions of Accounting ___________________
Branches of Accounting
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Introduction
Accounting is used as an information system by its users. The
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business.”
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—Robert N. Anthony
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events which are, in part, at least, of a financial character, and
Notes interpreting the results there of.”
Activity
___________________
Write an article on the —American Institute of Certified Public Accountants, 1941
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characteristics of accounting.
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___________________
Recording of transactions of financial nature: Transactions
___________________ or events which are of economic/financial nature are only recorded
in accounting. Events/transactions which cannot be measured in
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___________________
terms of money, are not at all recorded in accounting. For example,
___________________
efficiency or honesty of the employees cannot be recorded because
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___________________ it cannot be measured in terms of money though it affects the total
___________________ profits of business. Similar is the case of a quarrel between the
factory workers and the factory production Manager which affects
the production, but it is not recorded in the books as it can neither
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be measured in terms of money nor has any exchange or economic
value.
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recording is done for the net amount in the books of the business
and not in terms of 10 or 20 or so on the number of books only.
It is an art of classifying the data: Accounting is also an art of
classifying the data systematically. After all the transactions are
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whereas sales day book for recording credit sales of goods.
Purchases book for recording credit purchases of goods and returns Notes
Activity
books for recording purchase returns and sales returns and other
W ___________________
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subsidiary books such as Bills Receivable book, Bills Payable book,
___________________
etc.
___________________
Accounting can be used for analyzing and interpreting
business transactions: As we know that the purpose of ___________________
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accounting is not only recording of transactions but also of ___________________
analyzing and interpreting data for taking certain important ___________________
future decisions. This is also known as future forecasting. Thus, we
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___________________
see that definition of accounting is changing rapidly because of
increase in its functions. i.e., from recording of transactions to ___________________
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___________________
___________________
Stages of Accounting
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After knowing the characteristics of Accounting, one can list the
different stages of Accounting which are as follows:
Financial Transactions,
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Recording of Transactions,
Classifying in different groups of transactions based as per the
nature of transactions,
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performed by
machines.
Contd...
Accounting in Logistics and Supply Chain Sector
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5 Accounting Book-keeping is just Accounting involves the entire
Notes Process one part of process of accounting that is
Activity accounting process. why it is said that accounting
___________________
Make a report on the begins where book-keeping
ends.
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objectives of accounting.
___________________
6 Rules to be Rules of accounting Along with rules, assumptions
___________________ followed are followed for and conventions are also there
recording. to follow.
___________________ 7 Net Results Net results of the Whereas accounting is used to
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Profit or loss business cannot be find out net results of the
___________________ known from book- business.
keeping.
___________________
8 Time Transactions are Transactions are generally
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___________________ immediately recorded after a gap of time or
recorded. at the end of a financial year.
___________________
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___________________
Objectives of Accounting
The basic objective of Accounting is to provide necessary
information to the persons interested in the business. As we know
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(a) Internal users: These are the persons who manage the
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(b) External users: External users are all persons other than
internal users such as Investors, creditors, Government. The
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3. Presentation of the financial position of the business.
Notes
4. To provide and make available the necessary and financial
___________________
information to the users.
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___________________
The above objectives can be explained in detail:
___________________
1. Maintenance of records of business: The Primary objective
___________________
of accounting is to maintain proper records of business, i.e.,
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every transaction which is of financial nature must be ___________________
recorded fully otherwise it is very difficult to remember all the ___________________
transactions because human memory is very short. Moreover,
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___________________
correct and fair results of the business transactions cannot be
ascertained (calculated). So it is very much essential to keep ___________________
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proper and complete records of all business transactions so ___________________
that records can be used as and when required/desired by the ___________________
persons interested in the business.
2. Calculation of Profit or Loss: As we know that one of the
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most important objectives of business is to earn profit, and the
main objective of accounting is to maintain proper records of
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assets and current and other assets. If total liabilities are
Notes deducted from the total assets, then balance depicts the
Activity
___________________
Present a draft on accounting owners’ capital (owned funds). As we know that the objective of
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information. accounting is not only recording of financial events, make
___________________
available information relating to profit or loss of the business
___________________
but also provide full information regarding financial position of
___________________ the business. This is done through a financial statement. The
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___________________ balance sheet is a mirror showing the financial solvency or
insolvency of the business. If assets are more than its
___________________
liabilities, it is a solvent otherwise in case of reverse, it is an
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___________________ insolvent business.
___________________
4. To provide and make available the necessary and
financial information to the users: The major objective of
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___________________
Accounting Information
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decisions.”
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The information which is provided by these statements is as
follows: Notes
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2. Information about financial position of the business. ___________________
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Information about Profit or Loss of the Business
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The Profit & Loss account which is also known as income
___________________
statement provides accounting information about profit earned or
loss suffered (incurred) during an accounting period. This ___________________
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statement provides gross profit through trading account and net ___________________
profit through Profit & Loss account.
___________________
Gross profit = Sales – Cost of Sales
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___________________
This information is very useful as it helps in deciding the following ___________________
questions:
1. Whether cost of sales is reasonable or not?
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2. Whether it can be reduced or not?
3. Whether selling price can be increased or not?
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Net profit is the profit earned after allowing all the expenses
relating to factory administration, financial, selling and
distribution. Thus, income statement makes available information
about net profit earned or net loss suffered. This also helps in
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following questions:
Accounting in Logistics and Supply Chain Sector
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1. Whether funds invested are safe and sound, means provides
Notes
reasonable return of income along with safety of funds?
___________________
2. Whether return of income is adequate or not?
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___________________
3. It helps the investors, the creditors to arrive at a correct
___________________
decision regarding investment, lending of funds, etc.
___________________
4. It helps in restoring confidence among the employees about
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___________________
their provident fund being properly deposited with the cost as
___________________ per requirements.
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___________________
Characteristics of Accounting Information
___________________
Accounting information consists of the following characteristics:
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___________________
1. Reliability: Whatever accounting information is supplied
___________________
must be reliable, means it must be free from all sorts of biases.
Otherwise the basic purpose of using accounting information is
defeated. Accounting information is reliable if following rules
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are observed:
(a) Principle of prudence is followed: It means the principle of
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business.
(b) Neutral Accounting information is free from all sorts of
biases because if information supplied is biased, it would
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4. Comparability: The users should be able to compare the
accounting information as inter firm or intra firm comparison. Notes
It is therefore necessary to use standardized accounting ___________________
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policies consistently.
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1. The owners: Whosoever’s money is provided to the business, ___________________
such persons are known as owners of the business. Such ___________________
persons may be either the proprietor, the partners or the
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___________________
shareholders. They are very much interested in knowing about
the profit or loss of the business and also the financial health ___________________
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and wealth of the business. ___________________
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Functions of Accounting
Notes
Activity
___________________
Prepare an assignment on the
The main function of accounting is to record the business
transactions scientifically and systematically. Apart from this,
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functions and branches of
___________________
accounting. there are other functions of accounting which are as follows:
___________________
1. It depicts the true and fair picture of the financial position of
___________________
the company.
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___________________
2. It helps in ascertaining profit or loss of the business which is
___________________ the only primary aim of the business.
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___________________
3. It helps in future decision-making by different persons
___________________ interested in such accounting information.
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___________________ 4. It depicts the earning capacity of the business.
___________________ 5. It satisfies all Government rules and regulations connected
with Accounting information such as all the companies are
required to prepare their statements as per requirements of
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the Indian companies Act, 1956, amended up to date.
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Branches of Accounting
As we know that the objectives of accounting are recording of
business transactions and also make necessary information
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Thus, we see that there are different branches of accounting, each
Notes
branch is assigned a different job.
___________________
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Check Your Progress ___________________
Fill in the blanks:
___________________
1. ................... is mainly concerned with the ascertainment ___________________
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of profit or loss made during a particular period and
___________________
also presents the financial position of the business.
___________________
2. ................... accounting is a tool in the hands of
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management for various functions; (i) to control costs ___________________
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___________________
Summary ___________________
Keywords
Accounting: It is the process of identifying, measuring and
communicating economic information to permit informed
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Internal Users: These are the persons who manage the business,
Notes
i.e., management at all the levels–top, middle and lower level.
___________________
Management Accounting: This type of accounting is a tool in the
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___________________
hands of management for various functions; (i) to control costs (ii)
___________________ to take important future decisions (forecasting).
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___________________ Questions for Discussion
___________________ 1. Describe the characteristics of accounting.
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___________________ 2. Explain the stages of accounting.
___________________ 3. Discuss the objectives of accounting.
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___________________
4. What do you understand by accounting information?
___________________
5. Explain the characteristics of accounting information.
6. Describe the functions of accounting.
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Further Readings
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Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
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Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html Notes
www.accsoft.ch/download/accountingconcepts.pdf ___________________
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www.investopedia.com/university/accounting/ ___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf ___________________
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___________________
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Notes
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___________________
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___________________
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
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Activity
___________________
Write an article on the
Generally Accepted Accounting
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classification of accounting
___________________
principles.
Principles (GAAP) ___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
Classification of Accounting Principles
Basic Assumptions ___________________
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Basic Accounting Principles ___________________
___________________
Introduction
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Accounting is a medium of recording the transactions made in the
business that is why; accounting is termed as the language of the
business. All the persons interested in the business, such as the
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1. Basic assumptions are like pillars on which the structure of
Notes
accounting is based
___________________
2. Basic Principles and
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___________________
3. Modifying Principles.
___________________
In this unit, we will study the basic assumptions and the basic
___________________
principles. We will study the modifying principles in the next unit.
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___________________
___________________
Basic Assumptions
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___________________
Assumptions provide a base for accounting process without which
___________________ no enterprise can prepare its financial statements. The following
are the basic assumptions:
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___________________
Accounting Entity
It is also termed as Economic entity assumption which means that
economic unit/event can be known with a specific unit. For this
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they are considered as separate entities from practical accounting
point of view. But in case of companies, the law recognizes legal Notes
and separate entity from its owners, i.e., the shareholders. ___________________
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Monetary Unit/Money Measurement Concept ___________________
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transactions/events which cannot be measured in terms of money
___________________
are not at all recorded in accounting. For example, if there is
dispute between a manager and a worker which affects/does not ___________________
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affect the business, it cannot be recorded unless and until it is ___________________
measured in terms of money. Likewise the health of the proprietor,
___________________
sale policy of the business, entrance of other competitors in the
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___________________
business are such events which cannot be recorded in accounting
howsoever important it may be, because these cannot be measured ___________________
in terms of money. This is a peculiar feature of the Money
measurement concept but this can also be termed as limitation of
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this concept which has attracted the attention of all the
accountants in the world. All the transactions which are recorded if
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(ii) There is no consideration for purchasing power of money
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which is fluctuating. Again the result is that it is not a true
___________________
and fair view of the business.
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___________________
Going Concern Concept
___________________
It is assumed that every business would continue for a long period
___________________
or have an indefinite life unless it is likely to be sold or wound up
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___________________ in the near future. This is also known as the concept of continuity.
___________________ Keeping this in view, recording of transactions in accounting and
division of expenses is done. In other words, it is seen whether
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___________________
benefit from expenses is immediate or long-term. If it is
___________________
immediate, then it is to be treated as revenue or if it is long-term,
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___________________ it is to be treated as capital, depending upon the nature of
___________________ expenses. This concept of going concern is considered better as
compared to short-term or temporary business. In other words, a
businessman charges depreciation on the historical (probable) costs
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as well as expected life and not on the market value. This is also a
sound and fundamental basic principle of financial statement. This
concept helps the investors in providing necessary capital to the
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periods are called interim reports. Such reports are generally less
reliable than annual reports. So it is very much desired to have
relevant information, so that quick decisions can be taken. Thus,
we see that the idea of accounting period is quite helpful and
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Make a report on the basic
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1. ................... means that economic unit/event can be accounting principles.
___________________
known with a specific unit.
___________________
2. ................... is also known as time period assumption,
___________________
and the economic life is divided into different periods
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for preparing financial statements. ___________________
___________________
Basic Accounting Principles
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___________________
The Accountants have agreed on some principles which tell how ___________________
the transactions should be recorded and reported in the books of
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___________________
the business. Important basic accounting principles are as given
___________________
below:
1. Cost principle
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2. Revenue/Realization principle
3. Matching principle
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6. Objectivity principle.
The above principles can be explained in detail one by one.
1. The Cost Principle: Every transaction should be recorded at
its actual (historical) cost or cost of its acquisition and not its
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in case of fixed assets as well as the current assets. In the
Notes words of Hendriksen, “Expenses are using or consuming goods
___________________ and services in the process of obtaining revenues.” Thus, it is
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the amount that is spent with a view to produce or procures
___________________
goods or services to obtain revenue from the sale of such goods
___________________
or services. In spite of so many criticisms of this, the cost
___________________ principle is definite and reliable. So, it has an edge over other
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___________________ principles. It also provides an objective and comparable data in
the financial statements.
___________________
2. Revenue Principle (Realization Principle): Only such
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___________________
transactions are recorded in accounting which have actually
___________________
taken place not the ones which would take place in future.
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___________________ This is based on revenue realization principle. For example, if
___________________ goods are sold or purchased by a trader, transaction is
recorded but if there is a contract or an agreement has taken
place, it would not be recorded unless and until the contract is
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executed/complete/obligations/duties are performed as per
contract. However, there are certain exceptions to the sales
basis for revenue realization. In case of construction projects,
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owns (assets). Apart from this, one can also know about the
profit earned or loss suffered.
3. Matching Principle: As we all know that the business is a
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facilitated. This matching is termed as matching principle of
accounting. The equation can be written as: Notes
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This principle of Matching is very much important for ___________________
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revenues in the current accounting period are taken as
___________________
expenses. The matching of expenses with revenue is based on
accrual system of accounting. In accrual system, revenue is ___________________
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recognized when sale is complete or services are rendered ___________________
rather than when cash is received. Similar rule is applicable in
___________________
the case of expenses, i.e., expenses are recognized, when assets
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and services are put to generate revenues and not when cash ___________________
is paid. ___________________
treated as an expense.
(b) When an item of revenue is recorded in the Profit & Loss
account, all the expenses incurred whether paid for cash
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only that information which is required up to the stage when
Notes the Balance Sheet is prepared but after the preparation of
___________________ Balance Sheet also. For example, bad debts, destruction of any
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machinery/building because of natural calamity, loan taken
___________________
within a week or so, after the Balance Sheet is prepared,
___________________
method of providing depreciation and Valuation of stock. All
___________________ such events affect the investor’s decisions. So such events must
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___________________ be given compulsorily. The purpose of this principle is to
convey all material and relevant facts relating to the
___________________
operational result and the financial positions to the parties
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___________________ using the financial statements.
___________________
Financial Statement must be duly supported by footnotes. A
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___________________ good accounting principle requires that all significant and
___________________ important information must be disclosed, apart from legal
requirements.
5. Dual Aspect Principle: Every transaction of a business is
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recorded at two places. That is why it is termed as Double
entry system of accounting. Every debit has a credit. For
example, when a business is started by a proprietor for cash,
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To Proprietor's a/c
Or
To Capital a/c
Cash or Goods brought in as capital by the proprietor or partners.
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If any loan is taken then Notes
Capital + Loan = Cash + Stock ___________________
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OR ___________________
OR ___________________
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Internal + External Liabilities = Fixed Assets + Current ___________________
Assets ___________________
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In other words, we can say that ___________________
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___________________
Thus, we see that the Principle of Dual aspect would provide
___________________
us all the rules required for recording all the transactions of a
business.
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6. Principle of Objectivity: All transactions which are recorded
must be duly supported, by documents as far as possible. Then
only the auditor would be able to verify the accounts: if it is
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Summary
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get the necessary business information through accounting
Notes because it is properly recorded, analysed and summarized to the
___________________ extent that it can be understood by all. This is possible when all
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the financial statements are prepared in accordance with generally
___________________
accepted accounting principles. If such uniform principles are not
___________________
adhered /followed, there would be a lot of difficulties and confusion
___________________ which makes comparison impossible, unreliable or dependence is
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___________________ also reduced because, its acceptability is unsuitable for different
business houses, etc.
___________________
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___________________
Lesson End Activity
___________________
Gather information about the GAAP. Present the information
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___________________
collected in the form of a collage.
___________________
Keywords
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Accounting Entity: It is also termed as Economic entity
assumption which means that economic unit/event can be known
with a specific unit.
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actual (historical) cost or cost of its acquisition and not its market
price.
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Further Readings
Notes
Books ___________________
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Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., ___________________
Homewood, Illinois, Richard D. Irwin, 1995.
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management–
___________________
Text and Cases, New Delhi, Vikas, 1996.
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___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
II, Sultan Chand and Sons. ___________________
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting, ___________________
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Jawahar Lal, Cost Accounting, Vikas Publishing House, New ___________________
Delhi.
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
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www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Accounting in Logistics and Supply Chain Sector
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Notes
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___________________
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___________________
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UNIT 3: Accounting Principles and Standards
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Notes
Activity
___________________
Write an article on the
Accounting Principles and
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modifying accounting
___________________
principles.
Standards ___________________
___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
Modifying Accounting Principles
Accounting Standards in India ___________________
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Accounting Process ___________________
Uses, Advantages or Role of Accounting ___________________
Limitations of Accounting
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Introduction
Basic accounting assumptions and principles provide different
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In First Out) or any other method, the same method must be
Notes followed in subsequent years likewise is in case of depreciation
___________________ and if there is any change in the method of charging
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depreciation it must be reported. Because of this, convention of
___________________
consistency occupies an important place in the field of
___________________
accounting. Consistent use of accounting principle and
___________________ conventions is necessary in achieving comparability. Though
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___________________ the principle of consistency requires that a particular method
used, generally should not be changed unless otherwise
___________________
required and the user is informed accordingly. The Generally
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___________________ Accepted Accounting Principles (GAAP) allow more than one
___________________ method of explaining similar operational results but in such
situations, financial statements are not comparable. This is
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___________________
why the principle of consistency requires that the basis should
___________________
remain consistent with the previous accounting year. One can
conclude from the above that the principle of consistency does
not allow a firm to change its method under any situation. It
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allows the firm to change its method if it is more useful or can
supply better information or results. This change must be
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all possible losses are taken into account and all (probable)
(unrealized) profits/gains are left out. Likewise stock can be
valued either at cost or market price whichever is lower.
Similarly, provision for doubtful debts or provision for
depreciation can also be arranged as per the conservatism. It
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would be underestimated.
Nowadays conservatism has been replaced by prudence which
means the principle of conservatism is applied by the
accountants only in case of doubts or uncertainties with
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statement of profit or assets rather than over-statement of
profit or assets. Notes
3. Principle of Materiality: The American Accounting ___________________
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Association defines the term materiality as, “an item should be
___________________
regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed ___________________
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information should be used which influences the decision of
___________________
the investors, creditors, shareholders, etc. Though there may
___________________
be so much financial information, but only relevant must be
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taken into account. This is very subjective. Likewise the ___________________
problem may be in case of allocation of costs/other expenses. ___________________
Moreover information material for one concern may not be
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___________________
material for others so, an alert is required and care has to be
exercised while selecting or rejecting information. As per ___________________
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of no use. It is therefore desired that information must be
Notes available for decision-making before it becomes redundant. Old
Activity
___________________
Present a report on the
and late information hampers the ability of users on
n/S
accounting standards of India. application of different accounting principles.
___________________
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___________________ example, in case of a lease the lessor is funding the
___________________ transactions, hence he recognized the assets so financed as his
assets whereas the lessee recognized lease payments as hire
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___________________
charges paid. In the First case, it is the legal form whereas in
___________________
the second case, it is the substance of the transaction.
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___________________
7. Variations in Accounting Practices: It means different
___________________ accounting practices, which are equally acceptable. As such
there is no single accounting practice which is applicable in all
cases. For example valuation of inventories, method of
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charging depreciation, treatment of contingent liabilities etc.
In the above such cases, the Management is required to use
considerable judgment to select an appropriate/just practice.
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Meaning of Accounting Standards
Notes
It is a set of certain generally accepted rules, principles, concepts
and conventions issued by the Institute of Chartered Accountants ___________________
n/S
of India in consultation with other International Accounting ___________________
Bodies. The purpose of making uniform rules and principles is to
___________________
make the preparation and presentation of financial statement
easy, relevant, reliable, understandable and finally comparable. In ___________________
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other words, Accounting standards are the basis of accounting ___________________
policies and practices to facilitate the recording of transactions and
___________________
events in such a way which can change them into financial
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___________________
statements, to be used by the persons interested in getting the
correct and reliable information with a view to take future ___________________
decisions.
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___________________
Nature
The Institute of Chartered Accountants of India had set up
Accounting Standards Board on 22nd April, 1977 to formulate
accounting standards on a number of accounting issues, taking
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India, business customs usages and conventions, etc. The
Notes Accounting Standards made were not mandatory in the beginning
___________________ but after the amendment in the Sec 211(3C) of Companies Act,
n/S
1956 Accounting Standards out of 28 have been made mandatory.
___________________
The Auditor is required to give in his report to the shareholders
___________________
that accounts are prepared (drawn) in accordance with the
___________________ provisions relating to Accounting Standards in India.
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___________________
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___________________ The basic accounting process is shown in the Figure 3.1.
___________________ The first thing that the accounting system takes on is the financial
transactions. A transaction is defined as an external event or
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___________________
internal event which gives rise to a change affecting the operations
___________________
or finances of an organisation. Now there should be evidence that a
transaction has taken place. This evidence comes from the
documents that are used to support a transaction, like invoices,
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receipts, cheques, bank statements, etc. For recording a
transaction, it must be analysed to determine its effects on the two
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(or more) accounts and the reason why it affects those accounts. As
the original document cannot be used to write these details, a
standard document known as a voucher is used to accompany the
original document.
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Voucher is therefore the basic document of an accounting
transaction. Every voucher mentions the two (or more) accounts Notes
that are being affected, the amount with which each account is ___________________
n/S
affected and the reason for the transaction (known as narration).
___________________
Each voucher is numbered and dated, so as to make referencing
___________________
easier.
___________________
Once the vouchers are made for the day, they are entered into an
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intermediate book known as Journal. Vouchers are normally ___________________
recorded in the order in which they occur. Journal entries contain ___________________
all relevant information pertaining to a transaction.
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___________________
This data from the journal has to be rearranged to assist in ___________________
analysis. For this the data is transferred to Accounts in the
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___________________
General Ledger (the process is known as posting). In accounting
the term account is used to denote any item for which the ___________________
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A T-account is balanced only periodically (note that the rupee sign
Notes
Activity is not shown in the T-account, as it is the normal book keeping
___________________
Construct a summarized procedure). In the T-account in Figure 3.2 above, the left-hand side
n/S
report on the uses,
___________________ is called the debit side and the right-hand side is called the credit
advantages, or role of
accounting. side. Therefore, to debit means to make an entry on the left-hand
___________________
side of the account and to credit means to make an entry in the
___________________ right-hand side of an account.
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___________________
Check Your Progress
___________________
Fill in the blanks:
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___________________
1. ................... is a set of certain generally accepted rules,
___________________
principles, concepts and conventions issued by the
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___________________ Institute of Chartered Accountants of India in
___________________ consultation with other International Accounting
Bodies.
2. ................... is defined as an external event or internal
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event which gives rise to a change affecting the
operations or finances of an organisation.
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4. Helpful in calculating tax liabilities: Accounting is also
Notes
helpful in calculating correct liabilities relating to income-tax
and other taxes such as sales-tax, etc. ___________________
n/S
5. Accounting records: It can be used as evidence in the court ___________________
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time of transaction can be used as evidence in the court of law.
___________________
This is considered as a good proof/evidence by the court.
___________________
6. Helpful to an insolvent person: If proper records are
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maintained by the businessman, then it can be helpful to an ___________________
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___________________
7. Helpful in the sale of a business: If sometimes business is ___________________
closed down, it can get reasonable price if proper records are
maintained otherwise, it is very difficult to realize the assets’
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correct values and also difficult to pay off the liabilities.
8. Helpful in detecting errors and frauds: If any error or
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firm.
10. Helpful in comparative study: If proper record is
maintained then accounting helps in comparing past
No
Limitations of Accounting
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cases because of different nature of persons. The result will be
Notes different amount of profit/loss. Since there is no uniformity in
___________________ the above estimates, the profit may vary in different cases and
n/S
cannot be treated as exact.
___________________
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___________________ business because, there are certain assets which are not meant
___________________ for resale but for use in the business where depreciation is
provided as a regular practice.
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___________________
___________________
3. Accounting is unable to disclose the full information
about the business: As we know only such transactions are
rod
___________________
recorded which are of financial nature. The transactions which
___________________ are not of financial/economic nature are not at all recorded
such as honesty of the manager, Good health of workers,
quality of goods and efficiency of labour, etc. unless all such
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items are taken into account, it cannot disclose the full
information of the business.
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different cases.
6. Accounting figures are not at all affected by inflation: If
proper adjustments are not made, figures of profit or loss
ascertained would not be accurate because inflation is not
.
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Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. ............... can be used as evidence in the court of law.
___________________
2. The transactions are recorded in accounting on
___________________
................... basis, i.e., as and when it takes place such
___________________
as sales and purchases and receipt or payment of cash.
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___________________
Summary ___________________
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Basic accounting assumptions and principles provide different ___________________
rules for preparing certain financial, statements which can provide ___________________
useful information to different interested persons.
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___________________
The information is useful if it is relevant and reliable. Information ___________________
is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
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statements, it is necessary, to modify certain assumptions and
principles. Cost benefits relationship, materiality, consistency,
conservatism. Timeliness and industry practice, etc., have to be
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Keywords
Accounting Standards: It is a set of certain generally accepted
rules, principles, concepts and conventions issued by the Institute
of Chartered Accountants of India in consultation with other
.
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Voucher: It is therefore the basic document of an accounting
Notes
transaction.
___________________
n/S
___________________
Questions for Discussion
___________________
1. What are modifying accounting principles?
___________________
2. Explain the Accounting Standards in India.
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___________________
3. Describe the concept of accounting process.
___________________
4. Discuss the uses, advantages or role of accounting.
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___________________
5. Highlight the limitations of accounting.
___________________
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___________________
Further Readings
___________________
Books
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Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
Bhattacharya S. K. and Dearden J. Accounting for Management–
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
UP
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
(c)
UNIT 4: Accounting Equation
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Notes
Activity
___________________
Make a report on the meaning
Accounting Equation
n/S
and relevance of accounting
___________________
equation.
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Calculation/Computation of Accounting Equation ___________________
Effect of Transactions on Accounting Equation
___________________
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___________________
Introduction
___________________
The basic accounting equation is the foundation for the double-
entry bookkeeping system. For each transaction, the total debits
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equal the total credits.
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equation form, it is known as accounting equation or the Balance
Notes
Activity sheet equation. Thus we can say that
___________________
Write an article on the
C = A
n/S
calculation and computation of
___________________
accounting equation.
Or C + L = A
___________________
___________________ Where C stands for owner’s equity, L stands for liabilities and A
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stands for Total Assets. The above equation can also be expressed
___________________
in the following ways namely:
___________________
C = A–L
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___________________
___________________ L = A–C
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___________________ A – C – L = Zero
___________________
Thus, it is clear from the above equations that owner’s equity
stands for capital paid + accumulated profits which are earned
during the period. The above point can be illustrated from the
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following Balance Sheet of Ram Krishna Ltd.
Balance Sheet of M/s Ram Krishna Ltd.
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As on 31-3-2006
(Profits accumulated)
Loans
Current liabilities
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concept
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liabilities then it means an increase in capital in the first case
whereas decrease in the amount of capital in the second case. Notes
___________________
Thus, we see that every transaction before it is recorded is
n/S
analysed to ascertain which account is debited and which account ___________________
is to be credited. The test of equality is kept in mind before ___________________
recording each and every transaction, which have taken place in
___________________
the books of M/s Producers (India) Ltd. during January, 2006.
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___________________
1. Jan. 1, 2006 Business started with a capital of 10,000. This
transaction makes two things very clear: ___________________
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___________________
(i) Cash brought in by the proprietor is equal to 10,000 and
___________________
(ii) Capital contributed by the proprietor (owner) is equal to
rod
10,000. If it is put in an accounting equation form or ___________________
Assets = Capital
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10,000 = 10,000 (Cash in hand)
Assets
Cash in Capital
Furniture =
Hand +
3. Jan. 3, 2006 the business took a loan for 20,000 from SBI
.
Cash in
+ Furniture = Capital + Liabilities
hand
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4. Jan. 5, 2006 the business purchased goods for 12,000 for
Notes cash. The effect of this transaction would be reduction in Cash
Activity
___________________
Prepare an assignment on the
Balance but a new current asset in the form of goods or
n/S
effect of transaction on merchandise would be there, thus without affecting the
___________________
accounting equation. overall position of assets. This would be clear from the
___________________ following equation:
___________________ Assets = Capital + Liabilities
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Cash Goods
___________________ in + Furniture + =
hand (Merchandise)
___________________
Old Balance 29,000 + 1,000 + 0 = 10,000 + 20,000
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___________________ Effect of
12,000 + 0 + 12,000 = 10,000 + 20,000
transaction
___________________
New
17,000 + 1000 + 12,000 = 10,000 + 20,000
Balance
rod
___________________
change accordingly.
2006
April 1 Ashish commenced business with a capital of 25,000.
April 2 He purchased furniture for 15,000 for cash.
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Solution:
Notes
Accounting Equation: Assets = Capital + Liabilities
Date Transactions Assets = Capital + Liabilities ___________________
n/S
April 1 Ashish commences business 25,000 = 25,000 + 0 ___________________
April 2 Purchased furniture –15,000
___________________
for cash + 15,000 = 0 + 0
New equation 25,000 = 25,000 + 0 ___________________
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April 4 Purchased Goods ___________________
on credit 25,000 = 0 + 25,000
___________________
New equation 50,000 = 25,000 25,000
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April 7 Paid cartage –250 = – 250 + 0 ___________________
rod
___________________
` 7,500 costing + 7,500 = +700 + 0
` 6,800 for cash – 6,800 = ___________________
New equation 50,450 = 25,450 + 25,000
April 15 Withdrew for personal use –2,500 = –2,500 + 0
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New equation 47,950 = 22,950 + 25,000
April 18 Paid to his supplier –20,000 = 0 + (–20,000)
New equation 27,950 =
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22,950 + 5,000
April 21 Rent due but not paid — = –600 + 600
New equation 27,950 = 22,350 + 5,600
April 27 Introduced further Capital 10,000 = + 10,000 + 0
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Solution:
Notes
Accounting Equation: Assets = Capital + Liabilities
___________________ No. Transactions Capital + Liabilities = Total Assets
n/S
___________________ 1. Business commenced with
cash 1,00,000 + 0 = 1,00,000
___________________ 1,00,000 + 20,000
– 20,000
___________________
2. Goods purchased for cash 1,00,000 + 0 = 1,00,000
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___________________ 3. Goods purchased on credit 1,00,000 + 40,000 = 1,40,000
1,00,000 + 40,000 = 1,40,000
___________________
4. Goods sold for cash + 30,000
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___________________ – 30,000
1,00,000 + 40,000 = 1,40,000
___________________
5. Goods sold on credit 1,00,000 + 40,000 = – 25,000
rod
___________________ +25,000
1,00,000 + 40,000 = 1,40,000
___________________
6. Furniture purchased for + 10,000
cash –10,000
1,00,000 + 40,000 = 1,40,000
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7. Building purchased for + 50,000
cash – 50,000
1,00,000 + 40,000 = 1,40,000
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Summary
The basic accounting equation is the foundation for the double-
entry bookkeeping system.
Every transaction which passes through books of accounts is
.
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Lesson End Activity
Notes
With the help of internet, find out more practical problems on
___________________
accounting equation and try to solve them.
n/S
___________________
Keywords ___________________
___________________
Double-entry Book Keeping: It is a set of rules for recording
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financial information in a financial accounting system in which ___________________
every transaction or event changes at least two different nominal ___________________
ledger accounts.
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___________________
Outsider’s Capital: The value of investments minus operating
___________________
expenses that are held by company stockholders.
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___________________
Owner’s Equity: Total assets minus total liabilities of an
___________________
individual or company. For a company, it is also called net worth or
shareholders' equity or net assets.
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Total Assets: These are everything that a business or an
individual owns. Based inherently on the purchase value of an
item, total assets are listed on a balance sheet.
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Further Readings
Books
.
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Notes
Jawahar Lal, Cost Accounting, Vikas Publishing House, New
Delhi.
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
n/S
___________________
New Delhi.
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New
___________________ Delhi.
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___________________ R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
___________________ Chand & Sons, New Delhi.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
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___________________
Chand, New Delhi.
___________________
Web Readings
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___________________
___________________ www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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UNIT 5: Case Studies
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study 1: Rental Company Applies Accounting Concepts
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to Transaction Processing in MAS200 with help from ___________________
Connective Values ___________________
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Sage Software and its channel partners provide “second-to-none” ___________________
technical (program) support for MAS90 and MAS200 (a robust
client/server edition of MAS90). But to operate their systems ___________________
effectively, users must also be able to apply underlying accounting
concepts to MAS90/200 transaction processing.
ep
After we implemented MAS200 for a rental company, they asked
us to provide ongoing technical and accounting support for their
system. There were 10-12 users of this system, ranging from the
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Contd…
Accounting in Logistics and Supply Chain Sector
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A better understanding of accounting concepts improved our
Notes client’s ability to use MAS200. Thanks to our remote support
___________________
capabilities, we were able to resolve both simple and complex
issues quickly while strengthening our clients accounting skills.
n/S
___________________ Often, we were able to handle incidents at the time they occurred
with one phone call. We did this without increasing the cost of our
___________________ services.
___________________ Question:
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___________________ Analyse the case and summarise it in your own words.
___________________
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___________________
___________________
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___________________
___________________
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(c)
UNIT 5: Case Studies
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Case Study 2: General Accounting Files
Notes
The Situation
A Fortune 500 diversified manufacturing corporation processes ___________________
n/S
thousands of journal entries and monthly reconciliations each ___________________
month.
___________________
The staff entering the journal entries is in seven different states,
and their outside auditors consistently raise red flags about ___________________
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missing and incomplete documentation.
___________________
The Challenges
___________________
Our client came to us with two key objectives: ensure that each
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documentation packet included several different components ___________________
(calculation worksheet, approval signature, and supporting
documentation) and that documentation for every journal entry ___________________
was accounted for.
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___________________
The Solution ___________________
Pickup: After each monthly close, National Scanning picks up
the journal entry documentation from each of the client locations.
An extract from their GL system is sent to us electronically that
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lists every journal entry made. Processing each record is scanned
upon receipt and tagged by GL Account, Journal entry number,
date, and amount. The scanned records are output to an
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encrypted DVD, which is loaded by the client onto their server for
access by all authorized employees.
Auditing: This is where the National Scanning accounting
records scanning services truly shine. Utilizing a combination of
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documents.
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This entire process takes just a few days. Typically, the final DVD
is sent to the client within a week of monthly close.
The Outcome
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Contd…
Accounting in Logistics and Supply Chain Sector
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All and all, it is a very successful engagement (the client has been
Notes with us for three years now!).
___________________
Question:
n/S
___________________ Study the case and recommend what could have done to better
solve the problem.
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 6: Accounts
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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BLOCK-II
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Accounting in Logistics and Supply Chain Sector
Detailed Contents
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Notes
UNIT 6: ACCOUNTS
___________________ UNIT 8: LEDGER
n/S
Introduction Introduction
___________________
Traditional Classification Meaning of Ledger
___________________
Classification of Accounts based on Accounting Importance of Ledger
___________________
Equation
Sub-division of Ledger
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___________________
Balancing of an Account
uc
___________________
Introduction
Need for sub-division of Journal
___________________
Double Entry System of Accounting
Types of Subsidiary Books
rod
___________________
Books of Business
Cash Book with Bank and Discount Columns or
___________________ Three Columns Cash Book
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Notes
Activity
Activity
D ___________________
Write an article on the concept
Accounts
n/S
of accounts.
___________________
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
uc
Traditional Classification ___________________
Classification of Accounts based on Accounting Equation
___________________
Balancing of an Account
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___________________
___________________
Introduction
A record of financial transactions for an asset or individual, such
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as at a bank, brokerage, credit card company, or retail store is
called an account. More generally, an arrangement between a
buyer and a seller in which payments are to be made in the future.
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Meaning of an Account
An account is a summary of all relevant transactions relating to
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one person at one place for a particular period. This is also known
as the condensed form of a statement. It records not only the
amount of transactions but also their effect and direction.
Generally, an account is in “T” form. Following is the form of an
No
account.
Form of Account
Dr. Cr.
.
above form of account that the entire space is divided in two equal
parts and column 1 is meant for date, column 2 for particulars,
Accounting in Logistics and Supply Chain Sector
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column 3 for journal folio and column 4 for amount, etc. The same
Notes procedure is carried out in case of other 4 columns. The account,
Activity
___________________
Prepare a report on the
which involves receiving the goods/cash etc., is generally put on the
n/S
traditional classification of debit side whereas the account which involves giving/supplying
___________________
accounts.
cash/goods etc. is put on the credit side.
___________________
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___________________ There are two types of classification: (1) Traditional classification
and (2) Classification of Accounts based on Accounting equation.
___________________
Also known as Modern classification. These are explained in the
uc
___________________ following sections.
___________________
Traditional Classification
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___________________
Personal Accounts
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Bipasha, Priyanka, Lara Dutta etc., who either buy or sell the
goods, or lend or borrow the money or render services.
2. Legal entities: Such as companies, corporations or an
association of persons such as co-operative societies, etc.
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prepaid expenses a/c similarly accrued Incomes a/c or
unaccrued Incomes a/c because it represents a particular Notes
person or group of persons. If something is added with these ___________________
n/S
accounts, they become personal accounts and if nothing is
___________________
added, then they are Nominal accounts. So it is important to
see whether something is added, also known as prefix, then it ___________________
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account.
___________________
uc
All transactions involving tangible assets or goods are the subject ___________________
matter of this category. Such assets are cash, bank, furniture, ___________________
goods, etc. Following is the golden principle of passing the journal
rod
___________________
entry relating to the above transactions:
___________________
‘Debit whatever comes in, credit whatever goes out’
For example: If Ram purchases furniture from Ashish for
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1000 for cash then Ram is getting furniture so in the books of
Ram, Furniture account is to be debited and cash account is to be
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Furniture A/C
Dr.
To Cash A/C
Furniture purchase for cash
No
Real Accounts are meant for assets and properties which are of two
types:
1. Assets, which are used in the business such as land and
buildings, plant and machinery, furniture and fixture, etc.
.
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(b) Intangible Assets: These are such assets which can not be
Notes
seen but only felt such as goodwill and trade marks or
___________________
patents.
n/S
___________________
(c) Fictitious Assets: These are those assets which have no
___________________ value such as cost of establishment, preliminary expense,
___________________ etc.
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___________________
Nominal Accounts
___________________
All gains/profits/incomes and losses and expenses are recorded.
uc
___________________ Following is the principle of passing the journal entry relating to
___________________ the above items in the books of the business:
‘Debit losses or expenses, credit gains/profits/incomes’.
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___________________
Dr. Cr.
S. No. Particulars L.F.
Rent A/c 200
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Dr. Cr.
S. No Particulars L.F.
Cash A/c
To Interest a/c
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Table 6.1: Distinction between Personal and Impersonal Accounts
Notes
Basis of Personal Account Impersonal Accounts
Difference ___________________
n/S
1. Subject The subject matter is The subject matter is
matter person’s whether-natural, Assets and Goods as well as ___________________
Institutions or deemed to be income and expense such as
___________________
person. Such as–Name of an land and buildings rent,
Individual, Name of a firm interest, commission cash
___________________
or a Company in hand/at Bank or stock.
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2. Rules for Debit the receiver 1. Debit what comes in ___________________
debit and Credit the giver. 2. Credit what goes out
credit ___________________
3. Debit Expenses/Losses
uc
4. Credit Income/Gains ___________________
3. Balances of Balances of personal Balances of Assets are
Accounts accounts are shown in the shown in balance sheet ___________________
Balance sheet. where balances of expenses
rod
___________________
are in P&L a/c or trading
a/c as the case may be. ___________________
Example: Classify the following accounts into Personal, Real, and
Nominal accounts.
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1. Cash A/c 2. Salary A/c 3. Goods A/c 4. PN Bank
A/c
5. Dividend 6. Furniture A/c 7. Purchases 8. Sales A/c
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Solution:
Name of Item Type of Account
1. Cash A/c Real A/c
2. Salary A/c Nominal A/c
No
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(ii) Cash
Notes
Activity
___________________
(iii) Outstanding Salary
Present an assignment on the
n/S
classification of accounts (iv) Depreciation
___________________
based on accounting
equation. (v) Prepaid Insurance Premium
___________________
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___________________ Solution:
___________________ Name of Item Type of Accounts
(i) Drawings (i) Personal A/c
uc
___________________
(ii) Cash (ii) Real A/c
___________________ (iii) Outstanding Salary (iii) Personal A/c
(iv) Depreciation (iv) Nominal A/c
rod
___________________ (v) Prepaid Insurance Premium (v) Personal A/c
___________________ (vi) Loan (vi) Personal A/c
(b) Liabilities
(c) Capital
Let us discuss the above types of accounts one by one.
(c)
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Plants and Machinery, Furniture and fixture, all current
assets–such as cash, Bank, Stock, Debtors, Bills receivable, Notes
Goodwill, Patents a/c, etc. ___________________
n/S
(b) Liabilities refer to such accounts, which create obligations for ___________________
the business for the outsiders. Such as creditors, bills payable,
___________________
long-term loans in the form of debentures and outstanding
liabilities, etc. ___________________
tio
___________________
(c) Capital refers to such accounts which are for the proprietor of
the business, example is Cash/Goods brought in as capital and ___________________
uc
drawings, etc. ___________________
As the capital is affected by expenses and profits, there will be two ___________________
more types of accounts as part of capital:
rod
___________________
(i) Expenses and ___________________
(ii) Incomes or Gains
ep
(i) Expenses refer to such accounts which show the amount which
is incurred/spent or lost in the process of earning Revenues, for
example: Purchases a/c, wages a/c, discount allowed, interest
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ale
(II) In case of Modern classification of Account also known as
Notes classification based on accounting equation.
___________________
Capital = Assets
n/S
___________________
___________________
___________________
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Owned Borrowed = Total Assets
___________________
uc
___________________
is bound to be affected. This change occurs because of the concept
___________________
of dual aspect.
rod
___________________
Technically, when some transaction is entered/recorded on the left-
___________________ hand side of an account it is termed as debit whereas when some
transaction is recorded/entered on the right-hand side of an
account, it is termed as credit. Both debit and credit result, either
ep
an increase or decrease depending upon the nature of an account.
Following are the rules for debit and credit
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ale
All the above explained rules of Debit and Credit can be explained
Notes
in a Tabular Form.
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
Example: From the following Decrease in the Accounts, write ___________________
down the side of account to be recorded along with the nature of
rod
___________________
the account.
___________________
1. Cash withdrew by the owner
2. Furniture a/c
ep
3. Rent a/c
4. Interest a/c
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5. Bills Receivable
6. Wages a/c
t fo
7. Plant a/c
8. Rent outstanding a/c
9. Commission prepaid/paid in advance
No
Solution:
ES
UP
(c)
Accounting in Logistics and Supply Chain Sector
ale
Balancing of an Account
Notes
Activity
Every account is closed at the end of a month or year with a view
___________________
Develop a draft on the
to ascertain the balance in an account. The procedure of balancing
n/S
process of balancing an
___________________
account. of an account is very simple. From the total of the greater side the
___________________ total of smaller side is deducted, the remaining is the balance of an
___________________ account. For example, if the total of debit side is 10,000 and the
total of credit side is 7,500 and the balancing is done then it is
tio
___________________
2,500 i.e., ( 10,000 – 7,500). After balancing the account, the
___________________ most important problem to be faced by a beginner is to know the
type of balance whether it is a debit balance or a credit balance.
uc
___________________
The answer is very clear that is the balance represents the greater
___________________
side. In the given example as the debit side is greater than credit
rod
___________________
side, hence it is the debit balance. Otherwise if the credit side is
___________________ greater than debit side, then it is a credit balance. The balancing of
an account is carried down to the next month/year as the case may
be and there balancing is carried forward/brought down for the
ep
next month/year balancing for the first time when it is ascertained,
it is termed as closing balance and when balancing is brought
down, it is termed as opening balance.
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Notes:
ale
Summary
Notes
A record of financial transactions for an asset or individual, such
___________________
as at a bank, brokerage, credit card company, or retail store is
n/S
called an account. More generally, an arrangement between a ___________________
buyer and a seller in which payments are to be made in the future. ___________________
tio
not only the amount of transactions but also their effect and
___________________
direction. Generally, an account is in “T” form.
___________________
uc
___________________
Lesson End Activity
___________________
Create an effective presentation on accounts and the forms and
rod
types of accounts. ___________________
___________________
Keywords
ep
Account: It is a summary of all relevant transactions relating to
one person at one place for a particular period.
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Tangible Assets: These are such assets, which can be seen and
felt
UP
ale
Further Readings
Notes
___________________ Books
n/S
___________________ Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
___________________ Homewood, Illinois, Richard D. Irwin, 1995.
tio
___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
___________________
II, Sultan Chand and Sons.
uc
___________________
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
___________________ 5th ed. New Delhi, Sultan Chand, 1992.
rod
___________________ Jawahar Lal, Cost Accounting, Vikas Publishing House, New
___________________ Delhi.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
ep
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
No
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
.
ES
UP
(c)
UNIT 7: Journal
ale
Notes
Activity
Make___________________
a report on the double
Journal
n/S
entry system of accounting.
___________________
___________________
Objectives
___________________
tio
After completion of this unit, the students will be aware of the following
topics: ___________________
uc
Meaning of Source Documents ___________________
Books of Business
___________________
rod
___________________
Introduction
___________________
Even when a business has a single owner we make a distinction
between the owner's assets and the assets of the business. For
ep
example if the owner gives a van to the business this will count as
capital introduced, if the owner takes a salary this will be
accounted for as drawings.
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credited.
Accounting in Logistics and Supply Chain Sector
ale
Advantages of Double Entry System of Accounting
Notes
As we know that double entry system of accounting is a systematic
___________________ and scientific system of accounting, so it offers a number of
n/S
___________________ advantages. The following are the most important advantages of
the system.
___________________
tio
___________________
personal or impersonal accounts.
___________________
2. Ascertainment of profit or loss: Under this system of
uc
___________________ accounting complete Profit & Loss account can be prepared by
___________________ which profit or loss of a particular period can be ascertained.
rod
___________________ 3. Mathematical check on accuracy: Every debit has a credit,
___________________ so it is an accurate system as far as mathematical accuracy is
concerned which may be proved by preparing trial balance.
4. Check for fraud: Scope of fraud is limited as it minimizes the
ep
chances of fraud because of scientific system.
5. Ascertainment and knowledge of financial position of
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the previous year’s results with the current year’s result and
take corrective steps as and when necessary to improve the
operational results.
UP
disadvantages:
UNIT 7: Journal
ale
1. It is suitable only for big business houses.
Notes
Activity
2. It is expensive.
___________________
Prepare a report on source
n/S
3. Complete knowledge of accounting is essential. documents in accounting.
___________________
4. If any transaction is left, it is difficult to trace. ___________________
Though the above mentioned are the defects of double entry ___________________
tio
system of accounting, but the fact is that the defects are not of the
___________________
system but of the users. If proper care is taken, the system would
prove perfect, scientific and the best system of recording all ___________________
uc
transactions of the business. ___________________
___________________
Check Your Progress
rod
___________________
Fill in the blanks:
___________________
1. ................... is a system in which every transaction
affects at least two accounts.
ep
2. Under the double entry system, it is possible to prepare
................... statement and also compare the previous
year’s results with the current year’s result.
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There are many types of source documents, which are used for
recording business transactions in the books of the business. The
following are widely used source documents:
1. Cash memo
(c)
ale
Notes
4. Invoice
Activity
___________________ 5. Pay in slip
Present an assignment on the
n/S
books of business.
___________________ Meaning of Voucher
___________________ As we know that the recording of Transactions is done with the
___________________ help of source documents as explained above. On the basis of
tio
___________________
source documents, a detailed statement is prepared which is
termed as a voucher. We can know from the voucher, the no. of
___________________
accounts debited and credited.
uc
___________________
rod
___________________
The books which are used in the business are generally classified
___________________ into two categories namely:
second account is written after leaving some space from the margin
in the particular column to make it distinct from the debit account.
UNIT 7: Journal
ale
Note: Nowadays Dr/Cr or to is not written but the old practice is
Notes
adopted keeping in view the convenience.
___________________
n/S
Narration: After recording of a transaction is over then a brief
___________________
summary of the transactions is given which is known as narration.
___________________
The Memorandum Book or the Waste Book: The traders
___________________
generally note down the transactions in a book known as the
tio
Memorandum book or the waste book or the rough book. This is ___________________
the book where the transactions are recorded briefly as and when
___________________
transactions take place. The purpose of maintaining this book is to
uc
avoid slip-out of any transaction from memory. This book is ___________________
actually used before journalizing the transactions in the main book ___________________
of the business.
rod
___________________
That is why it is considered as an aid for the preparation of the ___________________
Journal.
Form of the Waste Book
ep
Date Particulars
2006
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ale
Example: Classify the following transactions into different types
Notes of accounts. Also journalize them clearly indicating the reasons for
___________________ debiting or crediting a particular account.
n/S
___________________ Date Particulars
2006
___________________
April 1 Mr. Ram Reddy Started business with 5000
___________________ April 2 Purchased furniture for cash 1,500
tio
April 5 Goods purchased from Raja Rao 4,000
___________________
April 7 Goods Sold to Gundu Rao 2,500
___________________ April 12 Goods Returned to Raja Rao 500
April 15 Paid Rent 750
uc
___________________ April 20 Cash sales 3500
April 27 Cash purchases 2000
___________________
rod
___________________
___________________
different Accounts along with reasons for debiting or crediting a
particular account.
Date Transactio Nature of Type of Reasons for
ep
n A/c’s Accounts debit/credit
2006
April 1 Business (i) Cash Real Cash is to be debited as
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2006 Particulars
March 1 ‘X brought capital into the Business 20,000
March 3 Purchased Furniture for cash 4,000
March 5 Purchases of Goods 15,000
(c)
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March 15 Sold goods to ‘N’ 8,000
March 20 Cash Sales 10,000 Notes
March 22 Cash paid to ‘M’ 10,000
___________________
n/S
March 31 Salaries paid 2,000
___________________
Solution: ___________________
Journal Entries
___________________
tio
Date Particulars L.F. ` `
___________________
2006
June 1 Cash a/c Dr. 2,500 ___________________
To Ramu 2,500
uc
___________________
Cash received from Ramu
June 4 Purchases a/c Dr. 1,000 ___________________
To cash a/c 1,000
rod
___________________
Goods purchased for cash
June 5 Hari Dr. 4,000 ___________________
To Goods a/c (Sales A/c) 4,000
Goods sold to Hari
ep
June 8 Furniture a/c Dr. 500
To Raju 500
Furniture bought from Raju
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accounts involved are three, i.e., (1) Cash A/c (2) Discount A/c and
(3) The Debtors A/c
2006
ale
Aug 3 Purchased goods 'From 'X' and Co. for 10,000/- Paid
Notes Cash 5,000/-,
___________________
Aug 5 Goods returned to 'X' Co. 200/-,
n/S
___________________
Aug 10 Sold goods to 'Y' & Co. 30,000/- and cash received from
___________________
him 20,000/-,
___________________
Aug 15 'Y' & Co. returned goods 500/-,
tio
___________________
Solution:
___________________
Journal Entries
uc
___________________
Cr. Dr.
___________________
Date Particulars L.F.
rod
___________________ 2006
Aug 1 Cash a/c Dr. 40,000
___________________
Goods a/c Dr. 20,000
To Capital a/c 60,000
business commenced with cash and goods
ep
Purchases a/c Dr.
Aug 3 To X & Co. 10,000
Goods purchased from x 10,000
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To sales a/c
ES
ale
Advantages of Journal
Notes
The following are the main advantages of using the journal:
___________________
n/S
(i) It provides a permanent record of all transactions.
___________________
(ii) It provides a record in a chronological (date-wise) order which
___________________
saves time if some entries are checked later on.
___________________
tio
(iii) It reduces the possibility of error because both the columns
___________________
are totalled and must be equal. If there is any difference, it
can be searched out but if direct entries are passed in the ___________________
ledger account, the chances are there to commit error which is
uc
___________________
very difficult to locate later on.
___________________
(iv) If the journal is sub-divided into other subsidiary books then
rod
___________________
it reduces the burden of the administration (office).
___________________
Limitations of Journal
Though the journal is very useful but still it is not free from
ep
criticisms, which are known as its limitations. If every transaction
is recorded (as discussed earlier) in the journal then it makes the
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capital are credited. If the owner’s capital is not given, then the
ES
Dr. Cr.
Date Particulars L.F.
All Assets a/c Dr.
To all liabilities a/c
To Capital a/c
(c)
ale
Example: Pass the necessary opening entry on 1st January, 2006
Notes in the books of Gopinath.
___________________
Cash in hand 3,000
n/S
___________________
Cash at Bank 16,000
___________________ Stock in trade 30,000
___________________ Furniture & Fittings 5,000
tio
___________________ Sundry Debtors 21,000
___________________ Sundry Creditors 18,000
Loan from Ganesh & Co. 9,000
uc
___________________
___________________ Solution:
rod
___________________ Opening Journal Entries
___________________ Dr. Cr.
Date Particulars L.F.
1.1.2006 Cash in hand a/c Dr. 3,000
ep
Cash at Bank a/c Dr. 16,000
Stock in trade a/c Dr. 30,000
Furniture’s Fittings a/c Dr. 5,000
Sundry debtors a/c Dr. 21,000
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Summary
UP
transactions are recorded first time are called the books of original
entries or records.
UNIT 7: Journal
ale
When a transaction takes place in the business it is first roughly
Notes
written in the memorandum book chronologically for the memory
only. 'Journal' word is derived from French word 'Jour' which ___________________
n/S
means a day book. Journal is a primary book of original entries for ___________________
accounting data. If all the transactions of the business are recorded
___________________
in Journal it will be too bulky to manage. Therefore, now-a-days
original records are maintained in the subsidiary books. These ___________________
tio
subsidiary books are also called sub-division of Journal. ___________________
___________________
Lesson End Activity
uc
___________________
Make a journal of your last week’s expenses and classify them into ___________________
the various subsidiary books.
rod
___________________
___________________
Keywords
Journal: Journal is a primary book of original entries for
ep
accounting data.
Memorandum Book: When a transaction takes place in the
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Further Readings
UP
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
Bhattacharya S. K. and Dearden J. Accounting for Management–
(c)
ale
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
Notes II, Sultan Chand and Sons.
___________________
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
n/S
___________________ 5th ed. New Delhi, Sultan Chand, 1992.
___________________ Jawahar Lal, Cost Accounting, Vikas Publishing House, New
___________________
Delhi.
tio
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New
uc
___________________
Delhi.
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
rod
___________________ Chand & Sons, New Delhi.
___________________ M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
ep
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdf
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www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
t fo
. No
ES
UP
(c)
UNIT 8: Ledger
ale
Notes
Activity
W ___________________
Write an article on the
Ledger
n/S
meaning and importance of
___________________
ledger.
___________________
Objectives
___________________
tio
After completion of this unit, the students will be aware of the following
topics: ___________________
uc
Importance of Ledger ___________________
Sub-division of Ledger
___________________
rod
___________________
Introduction
___________________
Meaning of Ledger
Ledger is also called as a book of final entry because all
transactions are finally recorded in the ledger accounts. Journal of
.
a business is very useful but it does not reply the different queries
ES
ale
Importance of Ledger
Notes
Activity
As we know that the ledger is a bound book. It offers many
W ___________________
Prepare an assignment on the
advantages which are as follows:
n/S
sub-division of ledger.
___________________
___________________
1. Final position of an account: It is possible through an
account to know the final position regarding the balance which
___________________
is either outstanding or owing as the case may be.
tio
___________________
2. It makes the accounting exercise done as full and final as it is
___________________ difficult to know at once the same from the Journal.
uc
___________________ 3. It saves a lot of time: As all the entries are available at one
___________________
place, it saves a lot of time which can be used for other useful
purposes.
rod
___________________
4. Indispensable: Nowadays, it has become indispensable i.e.,
___________________
there is no escape from it. It has to be maintained at all times,
whatever may be the cost.
ep
Check Your Progress
Fill in the blanks:
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Sub-division of Ledger
No
It is not possible to have one ledger for all the accounts in big
business houses. It is possible only for a small businessman. Thus,
the ledger is sub-divided as per the convenience of the trade. The
following are the sub-divisions of a ledger:
.
ES
Main Ledger.
2. Debtors Ledger: It is meant for all the debtors to whom
goods are sold on credit. It is also known as sold ledger or
sales ledger.
(c)
UNIT 8: Ledger
ale
3. Creditors Ledger: It is meant for all the creditors from whom
Notes
goods are bought on credit. It is also known as bought ledger
or purchase ledger. ___________________
n/S
4. Private Ledger: It is meant for personal account of the ___________________
proprietor. i.e. the capital account, drawing account, current ___________________
account and final a/c (Trading and Profit & Loss a/c) and a
___________________
balance sheet.
tio
___________________
Balancing of Account
___________________
Accounts are periodically balanced generally at the end of the
uc
___________________
accounting period. The purpose of this balancing is to know the
___________________
financial position of the business. Balancing of an account means
rod
that both the sides of an account are totalled and the difference ___________________
between them is termed as balance, which is written as balance c/d ___________________
at the side which is shorter and this amount is brought down in
the next accounting period thinking that it is a continuous process
ep
till the account is finally closed.
large, it becomes a
subsidiary book
2. Original/ Final It is the book of original It is the book of final entry.
entry entry
3. Used daily It is used daily to record It is used periodically,
No
ale
columns are of credit side. Account is in form of T. Following is the
Notes form of Account.
___________________ Form of Account
n/S
___________________ Dr. Name (Title) Page No……. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
___________________
( ) ( )
___________________
tio
___________________
___________________
uc
___________________
As it is clear from the above form of account that the entire space
___________________
is divided into two equal parts and Date, Particulars, Journal Folio
rod
___________________
and Amount etc., are written in column 1, 2, 3 & 4 respectively.
___________________ The same procedure is adopted in case of other columns.
Rules/Points to be kept in mind while posting into ledger account:
The following points are to be remembered while posting:
ep
1. When one is going to post the journal entries first read out the
names of accounts involved.
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After determining the side post the other account to that side
to which the account concerned represents.
No
2006
ale
Solution:
Notes
X & Co. Account
___________________
n/S
Dr. Cr.
Date Particulars J.F. Date Particulars J.F. ___________________
2006 2006
___________________
Feb 1 To balance b/d 1,000 Feb 4 By furniture a/c 250
Feb 9 To sales a/c 1,200 Feb 10 By sales returns a/c 150 ___________________
tio
Feb 20 By Bank a/c 1780
By Discount a/c 20 ___________________
2,200 2,200
___________________
uc
Example: The following were the transactions of Delite Furniture, ___________________
Delhi during July 2006 ___________________
Date Particulars
rod
___________________
2006
July 1 Started business with ___________________
Cash 3,500
Bank 9,200
ep
July 3 Bought furniture from M/s New Light 2,000
July 5 Bought furniture for the office 1,000
July 6 Sold furniture to Roop 2,000
July 8 Bought furniture
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1,800
July 10 Returned furniture to M/s New Light 50
July 12 Roop returned furniture 200
July 14 Paid taxi fare 10
July 15 Sold furniture to Sanjay for Rs. 500
t fo
ale
Solution:
Notes
Journal Entries
___________________
Date Particulars L.F.
n/S
___________________ 2006
___________________ July 1 Cash a/c Dr. 3,500
Bank a/c Dr. 9,200
___________________ To capital a/c 12,700
tio
Business started
___________________
July 3 Purchases a/c Dr. 2,000
___________________ To M/s New light a/c 2,000
Furniture bought
uc
___________________
July 5 Furniture a/c Dr. 1,000
___________________ To Cash a/c 1,000
Furniture purchased for office use
rod
___________________
July 6 Roop Dr. 2,000
___________________ To goods a/c 2,000
Furniture sold to Roop
July 8 Purchases a/c Dr. 1,800
To Cash a/c 1,800
ep
Furniture bought
July 10 M/s New Light A/c Dr. 50
To goods (Return) A/c 50
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Commission Received
ES
ale
July 23 Rent a/c Dr. 150
To cash a/c 150 Notes
Rent paid to Naresh
July 24 Roop Dr. 500 ___________________
n/S
To Bank A/c 500
___________________
Roop’s cheque dishonoured.
July 25 Drawings A/c Dr. 400 ___________________
To Goods A/c 400
___________________
Furniture taken away for personal
tio
use. ___________________
July 26 Cash A/c Dr. 10
___________________
To interest A/c 10
uc
Interest received. ___________________
July 27 Cash A/c Dr. 25 25
To Dividend A/c ___________________
Dividend Received.
rod
___________________
July 29 Postage Stamp A/c Dr. 5
(Trade Expenses) 5 ___________________
To cash A/c
Postage Paid
ep
July 30 Drawings A/c Dr. 100
To Bank a/c 100
House rent paid by cheques
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ale
Following are ledger accounts:
Notes
Cash Account
___________________
Dr. Cr.
n/S
___________________ Date Particulars L.F. Amount Date Particulars L.F. Amount
( ) ( )
___________________
2006 2006
___________________ July 1 To capital A/c 3,500 July 5 By office furniture A/c 1,000
July 17 To commission 15 July 8 By goods A/c 1,800
tio
___________________ July 26 A/c 10 July 14 By Trade Expenses A/c 10
July 27 To interest A/c 25 July 19 Bank A/c 200
___________________ July 31 To dividend A/c 2,000 July 23 By Rent A/c 150
To bank A/c July 29 By Postage stamp A/c 5
uc
___________________
July 31 By salary A/c 300
___________________ July 31 By trade expenses A/c 250
July 31 By balance c/d 1,835
rod
___________________ 5,550 5,550
Aug. 1
___________________ To balance b/d 1,835
Bank Account
ep
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
( ) ( )
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2006 2006
July 1 To Capital A/c 9,200 July 18 By new light 1,000
July 19 To Cash A/c 200 July 24 By Roop 500
July 22 To Roop 500 July 30 By Drawings 100
July 31 By Cash A/c 2,000
t fo
Capital Account
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount
( ) ( )
2006 12,700 2006
.
ale
Goods Account
Dr. Cr. Notes
Amount Amount
Date Particulars L.F. Date Particulars L.F. ___________________
( ) ( )
n/S
2006 2006 ___________________
July 3 To M/s New light 2,000 July 6 By Roop 2,000
July 8 To Cash A/c 1,800 July 15 By Sanjay 450 ___________________
July 25 By Drawings 400
July 31 A/c 950 ___________________
tio
3,800 By Balance c/d 3,800
Aug 1. To balance b/d ___________________
950
___________________
uc
M/s New Light Account
___________________
Dr. Cr.
Amount Amount ___________________
Date Particulars L.F. Date Particulars L.F.
( ) ( )
rod
___________________
2006 2006
July 10 To Goods (Ret) 50 July 3 By Goods A/c 2,000 ___________________
July 18 A/c 1,000
July 31 To bank A/c 950
To Balance c/d 2,000 2,000
ep
Aug 1 By Balance 950
b/d
Dr. Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
2006 2006
t fo
Roop
No
Dr. Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
2006 2006
July 6 To Goods A/c 2,000 July 12 By Goods (Ret.) A/c 200
July 24 To Bank A/c 500 July 22 By Bank A/c 500
.
2,500 2,500
Aug 1. To Balance b/c 1,800
Dr. Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
2006 2006
July 12 To Roop 200 July 10 By new Light A/c 50
July 31 By Balanced c/d 150
(c)
200 200
Aug 1. To Balance 150
b/d
Accounting in Logistics and Supply Chain Sector
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Trade Expenses Account
Notes Dr. Cr.
n/S
___________________ 2006 2006 265
July 14 To cash a/c 10 July 31 By balance c/d
___________________
July 29 To cash A/c 5
___________________ July 31 To cash a/c 250
tio
___________________ 265 265
Aug a To Balance
___________________ a/c 265
uc
___________________ Sanjay
___________________ Dr. Cr.
Amount Amount
rod
___________________ Date Particulars L.F. Date Particulars L.F.
( ) ( )
___________________ 2006 2006
July 15 To Goods A/c 450 July 31 By balance c/d 450
Aug 1. To Balance b/d 450
ep
Commission A/c
Dr. Cr.
Amount Amount
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Rent Account
Dr. Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
No
2006 2006
July 23 To cash A/c 150 July 31 By Balance c/d 150
Aug 1 To Balance b/d 150
Drawings Account
.
ES
Dr. Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
2006 2006
UP
A/c
UNIT 8: Ledger
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Interest Account
Dr. Cr. Notes
Amount Amount
Date Particulars L.F Date Particulars L.F. ___________________
( ) ( )
n/S
2006 2006 ___________________
July 31 To balance c/d 10 July 26 By balance A/c 10
Aug. 1 By Balance b/d ___________________
10
___________________
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Dividend Account
Dr. Cr.
___________________
uc
___________________
2006 2006
July 31 To balance c/d 25 July 27 By cash a/c 25 ___________________
rod
Aug.1 By Balance b/d ___________________
25
___________________
Salary Account
Dr. Cr.
ep
Amount Amount
Date Particulars L.F. Date Particulars L.F.
( ) ( )
2006 2006
July 31 To cash a/c 300 July 31 By balance c/d 300
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Summary
.
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Lesson End Activity
Notes
Draw a sample of an account ledger.
___________________
n/S
___________________
Keywords
___________________
Creditors Ledger: It is meant for all the creditors from whom
___________________
goods are bought on credit.
tio
___________________
Debtors Ledger: It is meant for all the debtors to whom goods are
___________________
sold on credit.
uc
___________________
General Ledger: It is meant for all the accounts other than
___________________ debtors and creditors.
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___________________ Ledger: It is also called as a book of final entry because all
___________________ transactions are finally recorded in the ledger accounts.
Private Ledger: It is meant for personal account of the proprietor.
ep
Questions for Discussion
1. Explain the meaning of ledger.
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Further Readings
Books
No
New Delhi.
UNIT 8: Ledger
ale
K K Verma, Financial Accounting and Analysis, Excel Books, New
Notes
Delhi.
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
n/S
Chand & Sons, New Delhi. ___________________
tio
___________________
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html ___________________
uc
www.accsoft.ch/download/accountingconcepts.pdf ___________________
www.investopedia.com/university/accounting/ ___________________
rod
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf ___________________
___________________
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. No
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(c)
Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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(c)
UNIT 9: Subsidiary Books
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Notes
Activity
___________________
Make a report on the need for
Subsidiary Books
n/S
sub-division of journal.
___________________
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Types of Subsidiary Books ___________________
Cash Book
___________________
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___________________
Introduction
___________________
Subsidiary Books is a normal routine to record individually each
and every transaction which takes place in the business. As we
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know it is first recorded in a book known as memorandum book
from where it is recorded in a book known as the journal being the
primary book of the business.
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Though the journal is very useful but still it is not free from
criticisms which are known as its limitations. If every transaction
is recorded in the journal then it makes the journal unwieldy
UP
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3. It is difficult to handle the entire work of journalization by one
Notes person as the work will be very heavy and large.
Activity
___________________
Prepare a draft on cash book, 4. It fails to provide details regarding sales tax and other
n/S
its characteristics, nature, its
___________________
kinds and the balancing of taxation.
cash book.
___________________ 5. It is also difficult to comply with the formalities connected with
___________________ each journal entry.
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___________________ In order to overcome the above limitations of the journal, the need
for its sub-division arises. Therefore, it is advisable to sub-divide
___________________
the journal. This sub-division of the journal is termed as the use of
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___________________
subsidiary books.
___________________
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___________________
___________________
Following are the subsidiary books:
1. Cash book
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2. Purchases journal
3. Sales journal
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clearly.
2. Maintenance of records systematically and accurately: It
also helps in maintaining records accurately and
UP
systematically.
3. It saves time in locating any transaction.
4. Minimization of fraud: It reduces (minimizes) the chances of
fraud.
(c)
UNIT 9: Subsidiary Books
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5. Availability of information: It helps in providing more and
more details about all the transactions which otherwise would Notes
not be possible with one journal. ___________________
n/S
6. Serves as a ready reference: It serves as a ready reference. If ___________________
some information about credit sales or credit purchases is
___________________
required, it is easily available.
___________________
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7. Helpful in increasing efficiency: It increases the efficiency
___________________
of the workers as they work with speed and accuracy.
___________________
8. Helpful in fixing responsibility: It helps in fixing
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responsibility of each worker. ___________________
rod
___________________
Now we would discuss all the books one by one. The first and most
___________________
important subsidiary book of the business is the cash book.
Cash Book
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Most of the transactions relate generally to receipts and payment
of cash. It may be either purchase of goods for cash or sale of goods
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desires to know. All cash transactions are directly entered into the
Cash Book and on the basis of Cash Book, ledger accounts are
prepared.
No
2. Cash receipts are recorded on the debit side of the cash book.
3. Cash payments are recorded on the credit side of the cash
book.
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book of the business because all cash transactions are directly
Notes recorded in it and on the basis of such record, ledger accounts are
___________________ prepared.
n/S
___________________
Kinds of Cash Book
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___________________ 2. Cash Book with discount column also known as two columns
___________________ Cash Book.
3. Cash Book with Bank and discount column also known as
uc
___________________
three columns Cash Book.
___________________
Apart from the above division of Cash Book, nowadays, one more
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___________________
Cash Book is also used by big business houses which are termed as
___________________
Petty Cash Book. Now we shall discuss all the Cash Books one by
one.
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Simple Cash Book: Also known as one column-Cash Book. This is
just like cash account where all the transactions relating to
receipts and payment are recorded. The following is the form of
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Dr.
Particulars Amount Particulars Amount
L.F. Date L.F.
Date (Receipts) ( ) (Payments) ( )
No
credit side of the account as balance c/d and next month or year it
is shown on the debit side of the Cash Book as balance b/d.
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Example: Enter the following transactions in the Cash Book of
Notes
Mr. Ashish Kumar for the month of June 2006 and find out its
closing balance. ___________________
n/S
___________________
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June 4 Good purchased for cash 3,000
___________________
June 5 Cash sales 2,800
June 7 Cartage paid 50 ___________________
uc
June 18 Cash purchases 2,500 ___________________
June 23 Cash sales 3,000
___________________
June 24 Rent paid 500
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June 28 Paid to Rakesh 500 ___________________
Notes:
.
ES
(i) It is clear from the above Cash Book that all the receipts and
payments are properly recorded.
ale
Notes The discount is an incentive given or received for prompt payment.
To record discount, one additional column on both the sides of the
___________________
Cash Book is added i.e. (4 + 4 + 2). The Cash Book is termed as
n/S
___________________ Cash Book with discount column because of recording of discount.
___________________ Discount is of two types:
___________________ I. Trade Discount
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___________________
II. Cash Discount
___________________
I. Trade Discount: It is given for increasing the volume of sales
uc
___________________ and it is adjusted in the invoice, hence no entry is passed in
___________________ the books of the business, as it is always deducted from the
catalogue price. It is usually allowed by a whole seller to a
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___________________
retailer. For example, if the printed price of a book is 200
___________________ and 10% is offered as a Trade discount, then it is 20/- and
the net price would be 180/- i.e., ( 200 – 20) accordingly
entries are to be made by the seller as well as the buyer for
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180 in their books.
II. Cash Discount: It is given for prompt payment; hence it is
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Dr. Cr.
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passed in the Journal if no Cash Book is used in the books of M/s
Goyal Traders. Notes
n/S
Date Particulars L.F.
___________________
Cash A/c Dr. 990
Discount A/c Dr. 10 ___________________
To Roop 1000
___________________
Cash received and discount allowed.
tio
___________________
If Cash Book is used, then both the accounts namely cash and
discount are to be recorded on the debit side of the Cash Book. ___________________
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Similarly, if discount is received for making prompt payment then ___________________
such items are to be recorded on the credit side of the Cash Book,
___________________
i.e., amount received or paid in the Amount/Cash column and
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discount allowed/received in the discount column. ___________________
___________________
Example: Enter the following transactions into a two columns
Cash Book:
ep
2006
July 1 Balance of cash in hand 2,100
July 2 Cash sales 550
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Solution:
Double Columns Cash Book
UP
Dr. Cr.
Cash Cash
Particulars Discount Amount Particulars Discount Amount
Date L.F. Date L.F.
(receipts) (Payments)
2006 2006
(c)
Contd...
Accounting in Logistics and Supply Chain Sector
ale
July 2 To Sales a/c 550 July By Furniture 1,500
10 a/c
Notes
July 5 To Mukesh 40 1,460 July By purchases 900
___________________ 15 a/c
n/S
July To Sales a/c 2,500 July By Sanjay 50 1,950
___________________ 12 25
tio
30
___________________
July By Rent a/c 500
31
___________________
July Balance c/d 1,220
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31
___________________
60 9,090 80 9,090
___________________
Aug. 1 To balance b/d 1,220
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___________________
Note: As it is clear from the above cash book that cash balance is
___________________ taken whereas in discount column-no balance is taken, it is simply
totalled which shows that if debit side is taken 60 is allowed as
discount which is a loss and on the other hand, if credit side is
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taken then 80 which is received as discount hence it is a
profit/gain.
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2006
July 1 Cash in hand 840
July 3 Recorded from Wilson and Co. 180
July 7 Paid to Thomas and Bros. 65
No
Solution:
(c)
UNIT 9: Subsidiary Books
ale
Double Columns Cash Book
Discoun Amoun Discoun Amou Notes
Particular L.F t t Particular L.F t nt
Date Date
s . s .
( ) ( ) ( ) ( ) ___________________
n/S
2006 2006
___________________
July To Balance 840 July 7 By Thomas 65
1 b/d 160 July 10 & Bros. 150 ___________________
July To Willson 550 July 12 By 270
3 & Co. Electricity ___________________
50 2,450 July 25 20 980
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July To sales A/c A/c
July 27 12
15 To By ___________________
July 30 Purchases 153
July Ramanatha
24 n July 31 A/c 2370
___________________
50 4,000 By 20 4000
uc
Devdanam ___________________
A/c
By Cartage ___________________
A/c
rod
By Rent A/c ___________________
By Balance
c/d ___________________
Aug. To Balance 2,370
1 b/d
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Note: Whenever two column cash book is used, it is not necessary
to have two columns meant for cash and discount only. The
columns may be used as –2 for cash and 2 for bank. This system of
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cash book is adopted when the receipts and the payments are by
cheques and, the transactions with bank are in large numbers. The
bank account maintained by the business is of personal nature
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3. Cash withdrawn from Bank: This transaction also affects
Notes both the accounts of the Cash Book i.e., (i) Cash A/c and (ii)
Activity
___________________ Bank A/c. This also requires posting at both the sides of the
Present a draft of the cash
Cash Book. Though it is different from the earlier one i.e., on
n/S
book with bank and discount
___________________
columns. the reverse side.
___________________
Contra: As the transaction is posted on both the sides of Cash
___________________ Book, such entry is called Contra. This is indicated by the
tio
___________________
capital word ‘C’.
uc
___________________
cheque is issued so Bank A/c is credited in place of cash. Thus
___________________ when it is directly put in the Cash Book, amount is entered in
Bank column on the credit side of the Cash Book.
rod
___________________
This type of Cash Book is used by big business houses because (i)
there is large number of transactions and (ii) receipts and
payments are through cheques. Under this Cash Book three
UP
columns meant for (A) Discount (B) Cash and (C) Bank, are shown
on both the sides of the Cash Book. Other columns remain as
usual. This Cash Book contains three columns; hence it is termed
as Three Column Cash Book.
(c)
UNIT 9: Subsidiary Books
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Following is the form of Three Columns Cash Book.
Notes
Three Columns Cash Book
Ca Ba Disco Ba ___________________
n/S
Da Partic L. sh nk Da Particul L. unt nk
Discount Cash
te ulars F. te ars F. ___________________
( ) ( ) ( ) ( ) ( ) ( )
___________________
___________________
tio
___________________
Example: From the following particulars, write up the Cash Book ___________________
of M/s K.K. of Chennai with Cash and Bank columns and bring
uc
___________________
down the final balance:
___________________
2006
rod
___________________
Oct. 1 Cash in hand 100
___________________
Oct. 1 Cash at Bank 3,500
Oct. 5 Paid salary by cheque 250
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Oct. 7 Paid to K.K. & Co. by cheque 260
Oct. 9 Received a cheque from B & Co. 2,500
Oct. 12 Bought goods for cash paid by cheque 750
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Oct. 19 Received from debtors by cheque Which could not be sent 1,780
to bank
Oct. 20 B & Co. cheque dishonoured 2,500
Oct. 22 B & Co. paid cash 2,500
No
Oct. 24 R & Co. issued a cheque for 470 in full Satisfaction of 500
his account for
Oct. 27 Shyam Lal was paid 395 in full Settlement of his A/c 400
amounting to
.
Solution:
Three Columns Cash Book
UP
Oct.9 – 260
Oct.1 To B & Co. 1,50 Oct.1 By K & Co. – 750
5 To S. (C) 0 1450 2 By (C) 1450 –
Oct.1 Chand – Oct.1 Purchase
Accounting in Logistics and Supply Chain Sector
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7 To Cash 1,78 – 7 A/c – 1250
Oct.1 A/c 0 – Oct.1 By Bank – 2,500
Notes
9 To 30 2,50 470 8 A/c 5 395
Oct.2 Debitors 0 2,200 Oct.2 By S.
___________________ (C) (C) 2,20
2 A/c 0 Creditors 0 5,110
n/S
___________________ Oct.2 To B & Co. Oct.2 By B & Co. 4,88
4 To R & Co. 7 By Shyam 5
___________________ Oct.3 To Cash Oct.3 Lal
1 A/c 1 By Bank
___________________ A/c
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By Balance
___________________ c/d
30 5,88 10,12 5 5,88 10,12
___________________
0 0 0 0
uc
___________________
Petty Cash Book
___________________
This type of Cash Book is used in such concerns where small
rod
___________________
payments are made daily and that too in large numbers. In such
___________________ situation, a fixed amount of cash in the beginning of the month is
given to a person who is known as petty cashier. After a fixed
period say a week or month, he is again reimbursed or paid back
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the amount whatever he has spent at the end of week or period.
Such a system is known as imprest system which is becoming very
popular because of certain advantages.
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amount spent, so that necessary accounts are debited. The
following is the form of Petty Cash Book. Notes
n/S
Total Amount Printing
___________________
Receipts Date Particulars Voucher No. Cartage Postage
& Stationery
___________________
___________________
tio
___________________
Example: Enter the following transactions in Analytical petty ___________________
Cash Book:
uc
___________________
2006
___________________
Jan.1 Received cheque from Head Cashier 100.00
rod
Jan.2 Paid for Postage and Telegram 15.00 ___________________
Jan.2 cleaning
8.00 8.00 – – –
ES
9 charges
Jan.3 By Carriage
0 By Telegram 65.00 23.00 500 19.00 18.00
Jan.3 35.00
1
100.00 Jan.3 100.00
UP
1
35.00 By Balance
65.00 c/d
100.00 Total
Feb.1 To Balance
Feb.1 b/d
(c)
To Cash
Accounting in Logistics and Supply Chain Sector
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Purchases Day Book
Notes
All credit purchases are recorded in this book which is either used
___________________
for resale or Raw materials used for production. The purchases
n/S
___________________ which are made for cash are not at all recorded in this book.
___________________ Similarly the assets which are bought for running the business are
also not recorded such as machinery, furniture, etc. All these
___________________
assets and cash purchases are separately recorded in the journal
tio
___________________ Cash Book. Following is the form of Purchases Day Book.
___________________ Purchases Day Book
uc
___________________ Date Particulars Invoice No. L.F. Amount ( )
I II III IV V
___________________
rod
___________________
Thus, all the credit purchases are totalled which give us the
t fo
sales are made for cash or assets are sold either for cash or on
credit, these are not at all recorded in this book, but are recorded
either in the cash book or in the journal. The form of this book is
similar to that of purchases book.
.
Thus all the credit sales are totalled which give us the amount of
ES
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Purchase Returns Book
Notes
This book is also known as Returns Outward Book. This book
records all the returns to the suppliers which are made during the ___________________
n/S
period. The return is of goods or raw materials purchased from the ___________________
Suppliers and Return is on account of difference in quantity or
___________________
quality. This book is used when the returns are in sufficient
number. If returns are not much, then it may be recorded in the ___________________
tio
Journal. The form of Purchase Returns Book is similar to that of ___________________
Purchase Day Book.
___________________
Form of Purchase Returns Book
uc
___________________
Debit Amount
Date Particulars L.F. ___________________
Note No. ( )
rod
I II III IV V ___________________
___________________
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Debit Note: Whenever goods are returned to the supplier, a letter
which is known as the debit note is also sent along with returned
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goods. The purpose of this note is to inform the supplier about this
deduction or debit given to his account. This note contains the
following particulars such as:
1. Name and address of the supplier
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5. Signature
Following is the specimen of a debit note -
Debit Note
.
ES
No. ..........................
Place .......................
Date ........................
UP
From
ale
We are debiting your account with value of under mentioned goods
Notes returned to you for reasons stated below:
___________________
Sales Returns Book
n/S
___________________
This is also known as Returns Inward Book. As and when goods
___________________
are returned by the customers, a credit note is issued and the entry
___________________ is made in this book. This book again contains the same columns
tio
___________________ which a Purchases Returns Book contains. There is only one
difference i.e. in place of debit note No. the column is used to note
___________________
the credit note No. The form of sales Returns Book is as under:
uc
___________________
Sales Returns Book
___________________
Credit Amount
Date Particular L.F.
Note No. ( )
rod
___________________
I II III IV V
___________________
ep
Credit Note: As and when goods are returned by the customers, a
credit note is being sent to him.
This note informs the customer that his account has been credited
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for the goods returned and he is required to pay less from the
original amount outstanding in his account. It also contains the
following particulars.
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(iv) Signature
Credit Note
.
ES
No. .....................
Place .................
Date ..................
UP
From
Name and Address
When bills are received from debtors and number of such bills
received is larger (big) then such bills are recorded in a separate
UNIT 9: Subsidiary Books
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book, known as bills Receivable Book. All such bills are totalled for
a particular period and are posted in the accounts of the debtors Notes
from whom such bills are received. Following is the form of Bills ___________________
n/S
Receivable Book.
___________________
Bills Receivable Book
___________________
Date of Receipt
Cash Discount
Where payable
Amount of bill
Terms of Bill
From Whom
Endorser(s)
___________________
Received
Due date
Acceptor
Remarks
Tenor or
allowed
Drawer
Date of
tio
L.F.
Bill
( )
___________________
___________________
uc
___________________
___________________
Bills Payable Book
rod
___________________
Where either purchase is made for credit or loans are taken, then ___________________
Bills are issued which are termed as Bills Payable. The book in
which these bills are recorded is termed as Bills Payable Book. All
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such Bills are totalled after a lapse of a certain period and are
posted in the accounts of the creditors to whom such bills are
issued. Following is the form of Bills Payable Book:
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Endorser
Due Date
Acceptor
Payable
Amount
payable
Drawer
Where
Term
Date
L.F.
( )
(s)
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Summary
UP
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Lesson End Activity
Notes
With the help of internet, gather information on subsidiary books
___________________
accounting.
n/S
___________________
___________________
Keywords
___________________
Cash Book: All cash transactions are directly entered into the
tio
___________________ Cash Book and on the basis of Cash Book, ledger accounts are
___________________ prepared.
uc
___________________ Cash Discount: It is given for prompt payment; hence it is
___________________ recorded in the Cash Book.
Petty Cash Book: This type of Cash Book is used in such concerns
rod
___________________
where small payments are made daily and that too in large
___________________
numbers.
Subsidiary Books: It is a normal routine to record individually
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each and every transaction which takes place in the business.
Trade Discount: It is given for increasing the volume of sales and
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Further Readings
UP
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
(c)
ale
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
Notes
II, Sultan Chand and Sons.
___________________
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
n/S
5th ed. New Delhi, Sultan Chand, 1992. ___________________
Delhi. ___________________
tio
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, ___________________
New Delhi.
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New
uc
___________________
Delhi.
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
rod
Chand & Sons, New Delhi. ___________________
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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. No
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UP
(c)
Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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(c)
UNIT 10: Case Studies
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
tio
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study 1: Profit vs. Cash Flow
uc
___________________
If you keep your business's books on the accrual method of
accounting, you'll have to make some adjustments to determine ___________________
your actual cash flow. These adjustments are necessary because
rod
___________________
certain accrual accounting transactions are taken into account to
determine your accrual net profit, even though these expenses do ___________________
not currently require a cash outlay.
The following example looks at the adjustments necessary to
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convert the accrual profits of Bug Busters Exterminating Service
to its cash flow for its year ending December 31, 2011.
To convert its accrual profit to its cash flow profit, Bug Busters
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will need balance sheets from the beginning and end of the period
it wishes to examine. In this case, Bug Busters will examine the
period starting on January 1, 2011, and ending on December 31,
2011. Below is the comparative balance sheet provided by Bug
Busters' accountant for December 31, 2011, and December 31,
t fo
2009:
Bug Busters Exterminating Service
Comparative Balance Sheets
12/31/08 12/31/2009
No
The conversion process also requires an income statement for the end of
the period under examination. The income statement of Bug
Busters Exterminating Service for the year ending December 31,
2011 is presented below. The income statement was prepared
(c)
Contd…
Accounting in Logistics and Supply Chain Sector
ale
Bug Busters Exterminating Service Income Statement
Notes December 31, 2011
Sales $267,189
___________________
Less: Cost of Goods Sold 132,122
n/S
___________________ Gross Profit $135,067
Less: Operating Expenses (115,405)
___________________
Less: Depreciation (4,163)
___________________ Net Profit $15,499
tio
___________________ Bug Busters will have to adjust its accrual net profit to determine
its cash flow for the year. As a general rule, Bug Busters can
___________________ convert its accrual net profit using the following formula:
uc
___________________ Net Profit
___________________ + Depreciation
- Increases (or + Decreases) in Accounts Receivable
rod
___________________
- Increases (or + Decreases) in Inventories
___________________ + Increases (or - Decreases) in Accounts Payable
- Decreases (or + Increases) in Notes Payable (Bank Loans)
= Net Cash Flow
ep
Using the formula above, Bug Busters can adjust its accrual net
profit to determine its cash flow for the year:
Adjustment Description Amount
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Bug Busters' accrual net profit and the net cash flow for the year
No
Question:
Analyse the case and make a comparative balance sheet for the
two years.
UP
Source: http://www.wbsonline.com/resources/case-study-profit-vs-cash-flow/
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UNIT 10: Case Studies
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Case Study 2: The Importance of Accounting Standards – A
PricewaterhouseCoopers Case Study Notes
n/S
Several of the SSAPs and FRSs are detailed in the context of a ___________________
fictional oil company (Global Oil). Further FRSs are expected as
business becomes more complex. How these different standards ___________________
are applied varies with the type of business conducted by a
___________________
company. As for any company the shareholders’ interests must be
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protected. The following examples of SSAPs and FRSs ___________________
demonstrate the consideration that must be given in drawing up
financial accounts in order that interested individuals, such as ___________________
financial analysts, can clearly judge a company’s performance and
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___________________
position.
SSAP 12 Accounting for Depreciation ___________________
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Companies invest in assets (such as machinery) in order to ___________________
produce goods or services to sell. These are known as fixed assets.
In the case of the gas or oil industry, an oil rig is a fixed asset – ___________________
the company must own an oil rig to supply oil or gas. All
companies have some form of fixed assets although the
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dependence on these assets varies with the type of business.
Another example could be machinery for manufacturing a car, or
a building in which employees work.
In this example, Global Oil has built an oil rig for £50m. In its
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balance sheet, cash will be reduced by £50m and fixed assets will
increase by £50m. In 20 years’ time (the ‘economic life’); the
company knows that the oil rig will need to be replaced. By the
20th year, the value of the oil rig in the company’s balance sheet
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will be zero. Thus, the value of the oil rig will reduce each year by
a set amount (£2.5m in this example). This is known as
depreciation and the annual depreciation figure is shown in the
profit and loss account.
SSAP 12 states that the economic life of a fixed asset should be
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expected and the fixed asset’s value is reduced. Global Oil must
therefore make a general reduction in the value of the asset and
charge the loss to the profit and loss account.
FRS 11 states that all companies must reassess the value of their
fixed assets on a regular basis to establish whether the figure in
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FRS 1 Cash flow Statements
Notes
There are three main statements in a company’s annual report
___________________ and accounts - the profit and loss account, the balance sheet and
n/S
the cash flow statement. For example, while Global Oil may be
___________________ highly profitable, without any cash it will be unable to pay its
___________________ employees or suppliers. Clearly, when Global Oil sells oil to its
customers, it needs to ensure it receives prompt payment. Cash is
___________________ the lifeblood of a business and it is therefore important for a
company to issue a cash flow statement. FRS 1 sets out the
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___________________ format and contents of a company’s cash flow statement.
___________________ Question:
Analyse the case and summarise it briefly.
uc
___________________
Source: http://businesscasestudies.co.uk/pricewaterhousecoopers.html
___________________
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___________________
___________________
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UNIT 11: Trial Balance
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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BLOCK-III
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Accounting in Logistics and Supply Chain Sector
Detailed Contents
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Notes
UNIT 11: TRIAL BALANCE
___________________ UNIT 13: DEPRECIATION ACCOUNTING
n/S
Introduction Introduction
___________________
Meaning of Trial Balance Meaning of Depreciation
___________________
Types of Errors Need of Depreciation
___________________
Methods for Providing Depreciation
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UNIT 12: PREPARATION OF TRADING, PROFIT &
___________________
LOSS ACCOUNT AND BALANCE SHEET
___________________ UNIT 14: CASH FLOW STATEMENTS
Introduction
Introduction
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___________________
Classification of Final Accounts
Meaning of Cash Flow Statement
___________________
Manufacturing Account
Objectives of Cash Flow Statement
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___________________
Balance Sheet
Classification of Cash Flow
___________________
UNIT 15: CASE STUDIES
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UNIT 11: Trial Balance
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Notes
Activity
___________________
Prepare an assignment on the
Trial Balance
n/S
meaning of a trial balance.
___________________
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Methods of Preparing Trial Balance ___________________
Types of Errors
___________________
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___________________
Introduction
___________________
Every transaction which takes place in the business is recorded
either in the journal or in the subsidiary books. It is posted in the
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concerned accounts. After posting is over, final accounts are
prepared in order to know the operational results of the business
during a particular or fixed period and also to depict financial
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accounts in the ledger including cash and bank balances from the
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Cash Book.
3. Amount (Cr.)
Accounting in Logistics and Supply Chain Sector
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The above columns if put in a statement form, can be depicted as
Notes given below:
___________________ Trial Balance as on____________________
n/S
___________________ Amount (Dr.) Amount (Cr.)
Particulars
___________________
___________________
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___________________
___________________
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___________________
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___________________ Generally speaking there is one method of preparing Trial Balance
___________________ i.e., by balance method. But as per Accountants, the following are
the methods of preparing Trial balance:
1. By Balance Method
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2. By Total Method
taken.
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2. It helps in locating error if any. Notes
3. It acts as a base for the preparation of final accounts. ___________________
n/S
Example: Prepare a trial balance from the following transactions: ___________________
2006 ___________________
July 1 Ram commenced business with cash 10,000
___________________
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July 3 Paid to bank 8,000
___________________
July 3 Bought goods for cash 500
July 5 Bought office furniture 400 ___________________
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July 10 Drew from bank for office 1,000 ___________________
July 13 Goods sold to Shyam 600
___________________
July 15 Bought goods from Krishan 410
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July 18 Trade expenses paid 100 ___________________
Solution:
Trial Balance
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It is clear from the above trial balance that it is tallied and one can
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accounts because of certain errors which are not disclosed by the
Notes trial balance.
Activity
Make___________________
a report on the types of
Check Your Progress
n/S
errors that can be made in trial
___________________
balance.
Fill in the blanks:
___________________
1. Under ................... method, as the name of method
___________________
suggests the balance of each account is taken.
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___________________
2. Under ................... method, instead of taking balance of
___________________
each account, the total of both the sides of each account
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___________________ is taken.
___________________
Types of Errors
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___________________
___________________ There are two types of errors. They are explained below.
errors.
(i) Error of Omission: These errors occur when any business
transaction is completely or partially omitted from the
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balance.
(ii) Error of Commission: Such type of errors is found when one
account is debited or credited in the place of another account.
As cash received from Shyam Rs.1,000 has been credited in the
.
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(iv) Compensating Error: When two errors of the same account
Notes
occur and the effect of one error is compensated by the effect of
other error it is called compensating error. For example, if ___________________
n/S
purchase of Rs.10,000 from Ajay is credited only by Rs.1,000 ___________________
while the purchases from Vijay for Rs.1,000 is credited by
___________________
Rs.10,000. Thus, such type of errors do not affect on the
agreement of the Trial Balance. ___________________
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___________________
Errors which can be located by Trial Balance
___________________
The errors which affect the agreement of the totals of the Trial
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___________________
balance can be located easily. These are also known as principle
errors. These errors may be relating to: ___________________
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(i) Totals of the subsidiary books or ledger accounts. ___________________
___________________
(ii) Balancing of an account of the ledger.
(iii) Wrong posting of any amount in any account.
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(iv) Posting of any account may be in the wrong side of the
account.
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of commission.
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Summary
A Trial Balance is a statement which contain the debit and credit
balances of all the ledger accounts, prepared on a particular date to
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of debit column is equal to the total of credit column of the trial
Notes balance, it can be assumed that books of accounts are
___________________ arithmetically correct. If the trial balance does not agree, it means
n/S
mistakes have been done in recording the transaction.
___________________
___________________
Lesson End Activity
___________________
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On a chart, prepare the Performa of a trial balance. Also state the
___________________
components that are included in a trial balance.
___________________
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___________________
Keywords
___________________
Balance Method: Under this method as the name of method
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___________________ suggests, the balance of each account is taken.
___________________
Combined Method: Under this method, as it is clear from the
name of the method, both the above explained methods i.e.,
balance as well as total method is used.
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Total Method: Under this method, instead of taking balance of
each account, the total of both the sides of each account is taken.
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Further Readings
Notes
Books ___________________
n/S
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., ___________________
Homewood, Illinois, Richard D. Irwin, 1995.
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management–
___________________
Text and Cases, New Delhi, Vikas, 1996.
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___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
II, Sultan Chand and Sons. ___________________
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting, ___________________
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Jawahar Lal, Cost Accounting, Vikas Publishing House, New ___________________
Delhi.
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
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www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
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Notes
Activity
___________________
Prepare a report on the final
Preparation of Trading, Profit &
n/S
accounts classification.
___________________
___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
Classification of Final Accounts
Manufacturing Account ___________________
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Balance Sheet ___________________
___________________
Introduction
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The Profit & Loss account and the balance sheet are, together
popularly known as the final accounts. The Profit & Loss account
is prepared to show the financial results of a business and the
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In the Trading and Profit & Loss Account all those accounts are
disclosed which affect the profit or loss of the business. In other
words, all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left-hand
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side, all the expenses incurred during a period and in the right-
hand side all the incomes earned during a period are disclosed.
This account contains two parts:
1. Trading Account
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Trading Account
Notes
Trading account is the comparison of sales and purchase. This
___________________
account is prepared to determine the amount of gross profit or
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___________________ gross loss on sales. The proforma of Trading Account is given
___________________ below:
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In the Books of …………….
___________________
Trading Account
___________________ (for the year ending …………….)
Dr. Cr.
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___________________
Particulars Amount Particulars Amount
___________________ ( ) ( )
To Opening Stock ------- By Sales --------
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___________________
To Purchases --------- Less: Returns -------- -------
___________________ Less: Returns --------- ------- By Closing stock -------
To Wages & Salaries ------ By Gross Loss (if any)
To Carriage Inwards ------- Transferred to P/L A/c -------
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To Cartage ------
To Freight -------
To Light Power & Heating in
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factory
To Factory Insurance ------
To Works Manager’s Salary -------
------ -------
Profit & Loss Account is the second part of Trading and Profit &
Loss Account. Trading Account shows the gross profit which is the
difference of sales and cost of sale. Thus the gross profit cannot
treated as net profit while the businessman wants to know how
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much net profit he has earned from the operating activities during
a period. For this purpose Profit & Loss Account is prepared
UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
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keeping in mind all the operating and non-operating incomes and
losses of the business. In the debit (left-hand side) side all the Notes
expenses and losses are disclosed and in the credit side (right-hand ___________________
n/S
side) all the incomes are disclosed. The excess of credit side over
___________________
debit side is called net profit while the excess of debit side over
credit side shows net loss. Net profit increases the net worth of the ___________________
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decreases the net worth of business so it is subtracted from capital.
___________________
The proforma of Profit & Loss Account is given below:
___________________
Proforma of Profit & Loss Account
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___________________
Particulars Particulars
To Gross Loss (if any) transferred By Gross Profit (transferred ___________________
from Trading Account — from Trading Account) —
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___________________
To Staff Salaries — By Discount Received —
To Office Rent — By Commission Received — ___________________
To Rates & Taxes — By Dividend —
To Office Lighting and Heating — By Interest Received —
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To Printing & Stationary — By Rent from Tenant —
To Bank Charges — By Interest from Bank —
To Insurance — By Interest on Drawings —
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To Audit Fees —
To Depreciation on —
Land & Buildings —
.
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To Bank Charges —
To Interest on Loan —
To Interest on Capital —
To Discount on B/R —
To Sales Tax —
(c)
Contd...
Accounting in Logistics and Supply Chain Sector
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To Advertisement —
Notes To Bad Debts —
Activity
___________________ To Agents’ Commission —
Write an article on the
To Travelling Expenses —
n/S
manufacturing account.
___________________
To Free Samples distributed —
___________________ To Warehouse Expenses —
To Packing Expenses —
___________________
To Brokerage —
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___________________ To Distribution Expenses —
To Delivery Van Expenses —
___________________
To Provision for Bad and Doubtful —
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___________________ Debts
To Entertainment Expenses —
___________________
To Carriage Cutward —
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___________________ To Loss on Sale of Assets —
Manufacturing Account
If in the business some goods are being manufactured along with
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1. Manufacturing Account Notes
2. Trading Account ___________________
n/S
3. Profit & Loss Account ___________________
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Manufacturing Account ___________________
(for the year ending ………)
___________________
Particulars Particulars
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To Opening Stock By Closing Stock ___________________
Raw Materials ------ Raw Materials ------
Work-in-progress ------ — Work-in-progress ------ — ___________________
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By Sale of Scrape — ___________________
By Cost of Production —
(Transferred to Trading A/c) ___________________
To Purchase of materials ------
Less returns ----- —
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To Manufacturing Wages —
To Carriage Inwards —
To Factory Expenses —
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To Stores Consumed —
To Factory Rent —
To Electricity —
To Depreciation on Plant —
To Repairs of Plant —
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Salaries 1,80,000
Notes
Distribution Expenses 30,000
___________________ Selling Expenses 2,10,000
n/S
___________________ Purchase Expenses 1,80,000
Export Duty 90,000
___________________
Import Duty 60,000
___________________ Interest on Bank Loan 1,80,000
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___________________ Stock on 1 April, 2007:
st
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___________________
Finished Goods 1,23,000
___________________ Sales 58,50,000
Return Outwards 25,500
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___________________
Carriage Inwards 31,500
___________________
Discount allowed 3,000
Sale of Scrap 6,000
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Depreciation on Plant 1,50,000
Depreciation on Furniture 12,000
Solution:
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Manufacturing Account
(for the year ending 31st March, 2008)
Particulars Particulars
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To Opening Stock
Materials 1,20,000 By Sale of Scrap 6,000
Work-in-Progress 90,000 By Closing Stock:
To Purchase less Materials 3,63,000
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Returns
(39,58,500- 25,500) 39,33,000 Work-in-Progress 3,00,000
To Productive Wages 6,00,000 By Cost of
Production
.
Trading A/c)
To Purchase Exps. 1,80,000
To Import Duty 60,000
To Carriage Inwards 30,000
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To Depreciation on 1,50,000
Plant
To Repairs to Machines 30,000
57,45,000 57,45,000
(c)
UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
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Trading and Profit & Loss Account
(for the year ending 31st March, 2008)
Notes
Activity
Particulars Particulars
___________________
Present a draft of an
n/S
To Opening Stock of By Sales less assignment on balance sheet
Finished Goods Returns and___________________
marshaling of its assets
To Cost of Production 1,23,000 (58,50,000 – 21,000) 58,29,000 and liabilities.
___________________
(Transfer from 50,76,000 By Closing Stock 4,11,000
Manufacturing A/c) ___________________
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To Gross Profit c/d 10,41,000
___________________
62,40,000 62,40,000
___________________
To General Office Exps. 90,000 By Gross Profit b/d 10,41,000
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To Salaries 1,80,000 ___________________
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To Discount Allowed 9,000 ___________________
Capital A/c.)
10,41,000 10,41,000
is also prepared.
2. The balance of a manufacturing account is transferred
to ................... Account.
.
Balance Sheet
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side and liabilities side. The assets and liabilities are shown in a
Notes particular order.
___________________
Marshalling of Assets and Liabilities
n/S
___________________
___________________
Order of presenting the assets and liabilities in the balance sheet
is called marshalling of assets and liabilities. A balance sheet may
___________________ be prepared by marshalling the assets and liabilities in the
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___________________ following orders:
___________________ Balance Sheet prepared in Liquidity Order: Here liquidity
means conversion of assets into cash. When a Balance Sheet is
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___________________
prepared on the basis of liquidity order, more easily convertible
___________________
assets into cash are shown first and those assets which cannot be
easily converted into cash are shown later and so on. In the case of
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___________________
___________________ liabilities, first those liabilities are shown which are payable
earlier and then those liabilities are shown which are payable
later. The proforma of such a Balance Sheet is given below:
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Proforma of Balance Sheet in Order of Liquidity
(as on ………………….. )
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Liabilities Assets
Current Liabilities Current Assets ------
Sundry Creditors ------ Cash in Hand
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shown which are more permanent means fixed assets and then less
permanent assets (Current Assets) are shown. Similarly, first long- Notes
term liabilities (more permanent) are shown then less permanent ___________________
n/S
(short-term on current) liabilities are shown. The proforma of such
___________________
type of Balance Sheet is given below:
___________________
Proforma of Balance Sheet in Permanency Order
(as on ……………. ) ___________________
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Liabilities Assets ___________________
Long-term Liabilities Fixed Assets
___________________
Capital ------ Land & Building -----
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___________________
(+) Net Profit ------ Plant & Machinery -----
------ Furniture ----- ___________________
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(–) Drawings ------ ------ Long-term Investment ----- ___________________
Long-term Loans ------ Goodwill -----
___________________
Current Liabilities Patents & Trademarks -----
Sundry Creditors ------ Livestock etc. -----
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Bank Overdraft ------ Current Assets
Bill Payable ------ Cash in Hand -----
Short-term Loan ------ Cash in Bank -----
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Trial Balance
(as on 31st December, 2007)
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Particulars
Stock on 1.1.2007:
Raw Materials: 8,000 ---
Work-in-Progress 20,000 ---
Finished Goods 40,000 ---
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Purchases of Raw Materials 1,20,000 ---
Notes Factory Rent 20,000 ---
___________________ Carriage of Raw Materials 12,000 ---
n/S
Salary of the Works Manager 8,000 ---
___________________
Office Rent 8,000 ---
___________________
Printing and Stationary 4,000 ---
___________________ Bad Debts 4,000 ---
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___________________ Sales --- 2,40,000
Land and Buildings 1,20,000 ---
___________________
Plant and Machinery 80,000 ---
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___________________ Depreciation on Plant 8,000 ---
___________________ Sundry Debtors 20,000 ---
Sundry Creditors --- 1,20,000
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___________________
Cash in Hand 20,000 ---
___________________
Capital --- 1,72,000
5,32,000 5,32,000
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Closing stock on 31st December, 2007 were as follows:
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Work-in-Progress 16,000
Solution:
Particulars Particulars
To Opening Stock: By Closing Stock:
Raw Materials 8,000 Raw Material 20,000
Work-in-Progress 20,000 28,000 Work-in-Progress 16,000
To Purchase of Materials 1,20,000 By Cost of Production 36,000
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Trading and Profit & Loss Account
(for the year ending 31st December, 2007)
Notes
n/S
(Rs.)
To Opening Stock: By Sales ___________________
2,40,000
Finished Goods 40,000 By Closing Stock
40,000 ___________________
To Cost of Production 2,00,000 Finished Goods
(Transfer from Manufacturing A/c) ___________________
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To Gross Profit
(carried to P. & L. A/c) 40,000 ___________________
2,80,000 2,80,000
___________________
To Office Rent 8,000 By Gross Profit (brought
40,000
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To Printing & Stationary 4,000 from Trading A/c)
___________________
To Bad Debts 4,000
To Net Profit (carried to Capital ___________________
A/c) 24,000
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40,000
___________________
40,000
___________________
Balance Sheet
(as on 31st December, 2007)
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Liabilities Amount Assets Amount
(Rs.) (Rs.)
Capital 1,72,000 Land and Buildings 1,20,000
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balance sheet.
3. Interest on Capital is added to the capital of owner in
the ................... side of the Balance Sheet ...................
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Summary
Final accounts include the Trading and Profit & Loss Account and
Balance Sheet. Trading and Profit & Loss Account is prepared to
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Balance Sheet of a business is prepared to disclose the financial
Notes picture of the business.
___________________
In this unit, we have learnt about the basic elements of balance
n/S
___________________ sheet that includes assets and liabilities and the purpose of
___________________ preparing balance is to ascertain the financial position of the
business concern as on a particular date.
___________________
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We have also learned about the concept of assets and liabilities and
___________________
their classification. Assets can be classified as current assets and
___________________ fixed assets while liabilities are classified as current liabilities and
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___________________ long term liabilities.
___________________
Lesson End Activity
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___________________
___________________ Analyse the profit & loss account of HDFC bank for FY 2009-10
and make a balance sheet from it.
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Keywords
Financial Statements: These include the Trading and Profit &
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5. Write short notes on the following:
Notes
(a) Net Profit
___________________
n/S
(b) Manufacturing Accounts
___________________
___________________
Further Readings
___________________
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Books ___________________
uc
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management– ___________________
Text and Cases, New Delhi, Vikas, 1996.
rod
___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
___________________
II, Sultan Chand and Sons.
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
ep
5th ed. New Delhi, Sultan Chand, 1992.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
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Web Readings
http://accounting4management.com/examples_of_trading_and_prof
t fo
it_and_loss_account_and_balance_sheet.htm
http://www.futureaccountant.com/funds-flow-cash-flow/study-
notes/balance-sheet-information-derived-marshalling-assets-
liabilities-vertical-horizontal-forms/f17l/
No
http://www.kkhsou.in/main/EVidya2/commerce/financial_
statement.html
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Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 13: Depreciation Accounting
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Notes
Activity
___________________
Write an article on the concept
Depreciation Accounting
n/S
and causes of depreciation.
___________________
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Need of Depreciation ___________________
Methods for Providing Depreciation
___________________
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___________________
Introduction
___________________
Depreciation means decrease in the value of assets. According to
W. Pickles, depreciation is permanent continuing diminution in the
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quality, quantity or the value of an asset whereas J.R. Batliboi
says; the term depreciation represents loss or diminution in the
value of an asset consequent upon wear and tear, obsolescence,
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Meaning of Depreciation
Depreciation is allocated so as to charge a fair proportion of the
depreciable amount in each accounting period during the expected
.
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Causes of Depreciation
Notes
Activity As we know that every asset is having a working life and if it is
___________________
Prepare a brief report on the over, then life of the asset is wasted. As the asset is in use of the
n/S
need for providing
___________________
depreciation.
business, the value of asset decreases and it must be charged from
the year’s relevant Profit & Loss account. The decrease in the
___________________
value of assets is because of the following causes:
___________________
1. Normal wear and tear: It is a very important cause of
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___________________
depreciation in case of tangible assets because of their use.
___________________
2. Obsolescence because of new inventions, old assets may be
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___________________ scrapped such machines become obsolete. Still they are capable
___________________ of being run physically.
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___________________ 3. On account of accidents such as loss by fire, earthquake or any
___________________ other natural calamity.
4. Fall in market prices: Market conditions may change the
market prices of the current assets but not the book value.
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5. Effect of time etc.: Some assets have definite time life like
lease hold property. On the expiry of its term, such asset ceases
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to exist.
Need of Depreciation
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3. Depreciation funds can be created for replacement of fixed
Notes
assets. After the expiry of life of the asset, replacement of such Activity
asset is possible if it is properly provided for in the form of ___________________
Present an assignment on the
n/S
different methods for providing
depreciation fund created from Profit & Loss account. ___________________
depreciation of assets to be
recorded in the books of
Thus, we see that depreciation plays an important role in ___________________
records.
ascertaining the correct amount of profit as well as depicting a true
___________________
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and fair financial position of the business.
___________________
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Depreciation can be calculated if the following items of information ___________________
are available. ___________________
1. Cost of the asset: including all expenses incurred for freight
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___________________
carriage including erection charges.
___________________
2. Scrap or residual value of the asset: It is estimated and
deducted from the original cost of the asset. Effective working
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life of the asset is not the physical life of asset.
any divided by the number of years i.e., life of the asset. This can
be expressed like:
Accounting in Logistics and Supply Chain Sector
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Original Cost ScrapValue
Notes Depreciation
Life of the Asset
___________________
n/S
___________________ Cost ScrapValue
Amount of Depreciation
Number of useful life i.e., No. of Years
___________________
___________________
This method is also known as fixed/original cost/straight line
method of depreciation.
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___________________
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___________________ Fixed instalment method has the following characteristics:
___________________ (i) The amount of depreciation remains uniform/fixed under this
method.
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___________________
___________________ (ii) The value of the asset becomes zero at the end of its life.
passage of time.
(ii) Loss of interest as the amount is not invested outside the firm.
(iii)If any other asset is purchased, then depreciation is separately
UP
calculated.
(iv) No provision for replacement as the amount of deprecation is
retained in the business.
(v) This method is not scientifically recognized; hence income tax
(c)
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Accounting Entries
Notes
Following entries are required to pass in the books of the owner of
assets. ___________________
n/S
___________________
(i) For Depreciation of assets when depreciation account is not
maintained ___________________
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1 Depreciation a/c Dr. ___________________
To particular asset a/c
Depreciation on asset provided. ___________________
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2. Profit and Loss a/c Dr. ___________________
To Depreciation a/c
Balance transferred ___________________
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___________________
All the above two entries are passed every year except the year
when scrap is sold. If scrap or residual is sold the following entry is ___________________
to be passed.
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Dr. Cr.
Date Particulars L.F.
Cash a/c Dr.
rR
To Asset a/c
Sale of scrap recorded
2006.
2006
January 1 Purchased a second hand machine for 40,000
No
Solution:
ES
Machinery Account
Date Particulars Date Particulars
2005 2005
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Working Notes:
Notes
___________________ (i) Depreciation on machine I for one year on 50,000 @ 10% p.a. = 5,000
n/S
(ii) Depreciation on machinery II for six months on 20,000 @ 10%
___________________
p.a. = 1,000
___________________ Total Depreciation = 6,000
(iii) Spent 2,000 in Sept 2006 as revenue expense to be debited to profit and
___________________ loss a/c.
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___________________
Sale of Asset: If the asset is disposed-off in the middle of the year,
___________________ the sale proceeds are to be credited in the asset account. If there is
any balance in the asset account, it may be either loss or profit to
uc
___________________
be transferred to Profit & Loss account. For example if the above
___________________
machine written down value of which was 16,700 as on 31.12.05
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___________________ is disposed of on 1st July 2006 for 13,500 then the machinery a/c
___________________ would be as follows:
Machinery Account
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Date Particulars Date Particulars
1.1.06 To Balance b/d 16700 1.7.06 By cash 13,500
(sale proceeds)
1.7.06 By Depreciation 825
rR
can be determined on the basis of cash, scrap value and useful life
ES
s
R 1 n 100
UP
c
Where, R stands for rate of depreciation in %
S stands for scrap/salvage value
(c)
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Merits
Notes
1. It is very easy to calculate as compared to other methods.
___________________
2. The amount of depreciation and repairs put same amount of
n/S
___________________
burden on Profit & Loss a/c.
___________________
3. No difficulty in calculating the amount of depreciation where
expansion or increase in the value of assets takes place. ___________________
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4. This method is scientific/systematic and is recognized under ___________________
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5. It is suitable for assets having long life such as land and ___________________
building, plant and machinery, etc. ___________________
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Demerits ___________________
___________________
1. No attention is given towards interest on capital invested.
Accounting entries
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The change may be effective from the year in which the decision is
ES
method asked to adopt, but if this change is effective from the back
date or retrospective year, then it poses some difficulties. If
patiently worked out, the problem can be sorted out. The following
illustration would help the reader to understand the mechanisms
(c)
explained.
Accounting in Logistics and Supply Chain Sector
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Depletion Method
Notes
This is also known as production method. It is suitable for mining,
___________________ oil wells etc. At that time when mines are taken on a contract and
n/S
___________________ that too on rent which is divided by the total production. This can
be calculated with the following formula:
___________________
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___________________
Lifetime Output ( Expected )
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___________________
___________________ Amortization
In the course of doing business, you will likely acquire what are
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___________________
cost. Some intangible assets have limited useful life and are,
therefore, written off. The process of their writing off is called
amortization.
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Calculating Amortization
The formula for calculating the amortization on an intangible asset
is similar to that one used for calculating straight-line
No
Formula
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Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. Straight Line Method is also known as ...................
___________________
2. Diminishing Balance Method is also known as
___________________
...................
___________________
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3. In ................... method, depreciation is calculated on
___________________
diminishing value but the rate of depreciation remains
constant. ___________________
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___________________
Summary ___________________
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According to W. Pickles, depreciation is permanent continuing ___________________
diminution in the quality, quantity or the value of an asset ___________________
whereas J.R. Batliboi says; the term depreciation represents loss
or diminution in the value of an asset consequent upon wear and
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tear, obsolescence, affluxion of time or permanent fall in market
value. Whereas the Institute of Chartered Accountants of India
defines depreciation as follows: “Depreciation is a measure of the
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Keywords
Amortization: The term amortization is used in respect of
.
which are recorded at cost. The process of their writing off is called
amortization.
Depreciation: It is a measure of the wearing out, consumption, or
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Fixed Instalment Method: Under this method, depreciation is a
Notes
certain percentage of cost which is calculated on the basis of the
___________________
original cost-scrap value if any divided by the number of years
n/S
___________________
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___________________ need for providing for depreciation?
___________________ 2. Discuss the reasons for depreciation.
uc
___________________ 3. Explain the methods for providing depreciation.
___________________ 4. Write brief notes on the following:
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___________________
(a) Fixed Instalment Method
___________________
(b) Diminishing Value (Balance) Method
(c) Amortization
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Further Readings
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Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
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Delhi.
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Web Readings Notes
www.accountingcoach.com/online-accounting-course/60Xpg01.html ___________________
n/S
www.accsoft.ch/download/accountingconcepts.pdf
___________________
www.investopedia.com/university/accounting/
___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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(c)
UNIT 14: Cash Flow Statements
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Notes
Activity
___________________
Write a report on the meaning
Cash Flow Statements
n/S
and the objectives of the cash
flow___________________
statement in accounting.
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Utility of Cash Flow Statement ___________________
Classification of Cash Flow
___________________
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___________________
Introduction
___________________
Cash is considered one of the vital sources of the firm to meet day
to day financial commitments. The cash is considered to be as most
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important source of life blood of the business. The day to day
financial commitments are met out only out of the available
resources. The cash resources are availed through two different
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and even for monthly. The cash includes not only means that cash
Notes in hand but also cash at bank.
Activity
___________________
Prepare an assignment on the The following are the main motives of preparing the cash flow
n/S
classification of cash flow.
___________________ statement:
___________________ 1. To identify the causes for the cash balance changes in between
___________________ two different time periods, with the help of corresponding two
tio
different balance sheets.
___________________
2. To enlist the factors of influence on the reduction of cash
___________________
balance as well as to indicate the reasons though the profit is
uc
___________________
earned during the year and vice versa
___________________
Check Your Progress
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___________________
Choose the correct option:
___________________
1. How are cash flows denominated in terms of both
current assets and current liabilities?
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(a) Increase in current assets and decrease in current
liability
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liability
(d) Both (a) and (b)
2. Cash position in the opening and closing comprises of:
No
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1. Knowledge of Cash Position: CFS is prepared on the basis of
Notes
cash which indicates the changes in cash position of a concern
during a specified period. It also discloses the causes of such a ___________________
n/S
change of cash. ___________________
tio
cash from where the cash is generated during an accounting
___________________
period. The cash requirement in the coming time can also be
forecasted by the preparation of project CFS. ___________________
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3. Knowledge of Short-term Solvency: CFS helps in the ___________________
rod
___________________
4. Help in Framing the Financial Policies: CFS may also be ___________________
used to get the help in framing the financial policies of a
business regarding the sources and uses of cash during a
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period.
5. Helpful in Dividend Policy: CFS helps the management of a
rR
Activities: Under the CFS all the activities of the business are
classified into three – operating, investing and financial
activities. The sources and uses of cash from all these activities
UP
are mentioned in the CFS. Thus we can study the trend of cash
inflow and outflow from CFS.
ale
1. Cash Flow from Operating Activities: Cash flows from
Notes
operating activities are earned from the principal revenue –
___________________
producing activities of an enterprise. Through these activities
n/S
___________________ the net profit or loss of the business is also determined.
___________________ Examples of such a flow from operating activities are given in
AS-3 (revised) as follows:
___________________
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(a) Cash receipts from the sale of goods and rendering of
___________________
services;
___________________
(b) Cash receipts from royalties, fees, commissions and other
uc
___________________
revenue;
___________________
(c) Cash payments to suppliers for goods and services;
rod
___________________
(d) Cash payments to and on behalf of employees;
___________________
(e) Cash receipts and cash payments of an insurance enterprise
for premiums and claims, annuities and other policy
ep
benefits;
(f) Cash payments or refunds of income taxes unless they can
be specifically identified with financing and investing
rR
activities; and
(g) Cash receipts and payments relating to future contracts,
forward contracts, option contracts and swap contracts
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Some transactions, such as the sale of an item of plant, may give
rise to a gain or loss which is included in the determination of net Notes
profit or loss. However, the cash flows relating to such transactions ___________________
n/S
are cash flows from investing activities.
___________________
2. Cash Flow from Investing Activities: Investing activities of ___________________
an enterprise include the purchase of fixed assets (as plant
___________________
and machinery, land and buildings, furniture and fixtures)
tio
with an intention to generate the future incomes. On account ___________________
uc
___________________
flows arising from investing activities are in AS-3 (revised) as
___________________
follows:
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___________________
(a) Cash payments of acquired fixed assets (including
intangibles). These payments include those relating to ___________________
financial enterprise);
(g) Cash payments for future contracts, forward contracts,
option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
(c)
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(h) Cash receipts from future contracts, forward contracts,
Notes
option contracts and swap contracts except when the
___________________
contracts are held for dealing or trading purposes, or the
n/S
___________________ receipts are classified as financing activities.
___________________ When a contract is accounted for as a hedge of an identifiable
___________________ position, the cash flows of the contract are classified in the same
tio
manner as the cash flows of the position being hedged.
___________________
___________________
uc
___________________
___________________
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___________________
___________________
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
Figure 14.3: Diagrammatic Presentation of ___________________
Cash Flow from Financing Activities
___________________
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Check Your Progress ___________________
Summary
.
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Lesson End Activity
Notes
With the help of internet, find out the schedule and format of the
___________________
various components of cash flow as stated in cash flow statement.
n/S
___________________
___________________
Keywords
___________________
Adjusted Profit & Loss A/c: Statement devised to determine the
tio
___________________
cash from operations.
___________________
Cash from Operations: Cash resources accrued in the business
uc
___________________ operations.
___________________
Decrease in Working Capital: Decrease in Net working capital
rod
___________________ i.e. Excess of current liabilities over the current assets – Resources
___________________ side of the fund flow.
Flow: Flow means changes occurred in between two different time
periods.
ep
Fund from Operations: Income generated from only operations.
Fund Loss in Operations: Loss incurred in the operations.
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Contd...
UNIT 14: Cash Flow Statements
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Accounts
20,720 23,680 Inventories 98,400 85,400
payable
Notes
Provision
1,400 1,600 Land 40,000 60,000 ___________________
for debts
n/S
Reserves ___________________
and 20,080 21,120 Good will 20,000 10,000
Surpluses ___________________
2,06,400 2,06,200 2,06,400 2,06,200
___________________
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Additional Information: ___________________
uc
year 1996. ___________________
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(c) 10,000 were written off on good will during the year. ___________________
___________________
(d) Bonds of 12,000 were paid during the course of the year.
Further Readings
Books
No
New Delhi.
Accounting in Logistics and Supply Chain Sector
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Notes
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
n/S
___________________
Chand & Sons, New Delhi.
___________________ M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
___________________ Chand, New Delhi.
tio
___________________
Web Readings
___________________
www.accountingbase.com/CashFlow.html
uc
___________________
www.kkhsou.in/main/EVidya2/management/cash_flow.html
___________________
www.investopedia.com/university/accounting/
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___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________
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UNIT 15: Case Studies
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study 1: Kathryn Kennedy’s Trial Balance
uc
___________________
Kathryn Kennedy’s pet grooming business has been operating for
one month. Kennedy prepared her financial records according to ___________________
accepted accounting procedures. At month’s end she had the
rod
___________________
following accounts and balances:
Cash $2,202. ___________________
Expenses $ 900.
Kennedy prepared her trial balance for the month and ended up
with debit and credit balances of $8,304. She was pleased that her
trial balance did, in fact, balance—proving that she had kept
accurate records for the month. When she explained her pride to
No
Source: highered.mcgraw-hill.com/sites/dl/free/.../sample_chapter5.pdf
UP
(c)
Accounting in Logistics and Supply Chain Sector
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Case Study 2: Asian Pacific Community Counseling, Inc.
Notes
Several years ago I received a call from the Executive Director of
___________________ this non-profit organization who's bookkeeper had just quit.
n/S
Payroll was approaching and they needed help that day to
___________________
calculate and prepare their payroll checks. We were able to do
___________________ that in a matter of a couple of hours. But they needed much more
help than that. They were receiving funding from several sources
___________________ and needed to maintain the integrity of their bookkeeping and
tio
cost allocation plan (such as it was). After getting into the details
___________________
of how their books were organized we determined that changes
___________________ needed to be made to more reasonably allocate costs to cost
centers and to better manage unexpended balances so that a
uc
___________________ closer monitoring of spending was possible. We ended up
becoming their full-charge bookkeeper handling daily
___________________ transactions, monitoring grant spending and providing on -going
financial reports for their executive director and Board of
rod
___________________
Directors. We were able to essentially replace the full-time person
___________________ they had employed for many years with a flat, monthly fee that
not only saved the company over $12,000 in annual accounting
costs, but ended the situation at year-end of being required to
send grant funds back to the funder because of under-spending.
ep
Better information with less hassle and headaches for a lower
cost. That's one of the advantages of using a professional, online
bookkeeping company that has the experience to do the job
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Case Study 3: X & Co.
Notes
From the following balances extracted from the books of X & Co.,
prepare a trading and profit and loss account and balance sheet ___________________
n/S
on 31st December, 1991.
___________________
$ $
Stock on 1st January 11,000 Returns outwards 500 ___________________
Bills receivables 4,500 Trade expenses 200 ___________________
tio
Purchases 39,000 Office fixtures 1,000
___________________
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750 ___________________
Sundry debtors 30,000 Tent and taxes 1,100
uc
___________________
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000 ___________________
Interest on capital 700 Bills payable 3,000
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___________________
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900 ___________________
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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UNIT 16: Financial Aspects of Supply Chain Management
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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BLOCK-IV
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Accounting in Logistics and Supply Chain Sector
Detailed Contents
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Notes
UNIT 16: FINANCIAL ASPECTS OF SUPPLY
___________________ UNIT 18: COST ACCOUNTING
CHAIN MANAGEMENT
n/S
Introduction
___________________
Introduction
Scope of Cost Accounting in Chain Management
___________________
Supply Chain Accounting
Functions of Cost Accounting
___________________
Accounting and Logistics Cost: An Impediment to
Essentials of Cost Accounting System
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Supply Chain Effectiveness
___________________
Costing Systems
Consignment Accounting
___________________
Role of Cost in Cost Accounting
uc
UNIT 17: INVENTORY
___________________ MANAGEMENT’S
Elements of Cost
TECHNIQUES AND CONTROL
___________________
Introduction
UNIT 19: EVA AND BUDGETS
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___________________
Inventory Costs Introduction
___________________
Factors affecting Levels of Inventory Economic Value Added (EVA)
Inventory Measures Budget
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Budgetary Control
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Notes
Activity
___________________
Present a detailed report on
Financial Aspects of Supply Chain
n/S
the techniques used to boost
___________________
competitiveness in the supply
Management chain management
___________________
accounting.
___________________
tio
Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
uc
___________________
Supply Chain Accounting
SCMA in Practice: Sainsbury’s ___________________
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Accounting and Logistics Cost: An Impediment to Supply Chain ___________________
Effectiveness
___________________
Consignment Accounting ep
Introduction
Management accounting in supply chains (or supply chain
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both supplier and customer share process cost information, they
Notes are more likely to be successful in identifying non-value adding
___________________ processes.
n/S
___________________ Value Chain Costing
___________________
Value chain costing builds on Porter’s value chain analysis which
___________________ argues that competitive advantage in the marketplace results from
tio
___________________
either better customer value for the same cost (a differentiation
strategy) or the same customer value for less cost (a cost leader
___________________
strategy).
uc
___________________
A series of activities, or ‘links in a chain’ occur between a product’s
___________________ design and its distribution. Management accountants need to
identify where in the chain:
rod
___________________
___________________
customer value can be enhanced
costs can be reduced or
differentiation can be achieved in the company’s segment of
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that value chain.
Target Costing
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Quality Costing
Quality costing is an important SCMA technique that aims to
improve supply chain quality, both in and across organisations. It
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The intention is to reduce poor quality and waste by improved
preventative measures that minimise the recurrence of failure Notes
costs and improve customer experience. Management accounting ___________________
n/S
has a significant role to play because organisations can be unaware
___________________
of the costs of failure.
___________________
Performance Measurement
___________________
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This needs to occur throughout the supply chain, and should
___________________
include both financial and non-financial measures. The balanced
scorecard can be extended to include supply chain partners, ___________________
uc
because the objective is to create a far more competitive supply ___________________
chain than the alternative supply chain providers of that product
___________________
or service.
rod
___________________
The balanced scorecard has its greatest impact when it drives the
___________________
change process in support of the organisation’s strategic
intentions.
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The challenge for management accountants is how to extend the
traditional balanced scorecard (financial perspective, customer
perspective, internal perspective, innovation and learning
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Benchmarking
Management accountants can use benchmarking to compare
performance of one organisation against the best in class to provide
(c)
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The technique can be extended to benchmark performance across
Notes
supply chains – for example, different supplier performance or
___________________
different customer performance in terms of using a particular
n/S
___________________ product or service.
___________________ Benchmarking is often used in conjunction with other SCMA
___________________ techniques – for example, there are numerous examples of firms
tio
using Activity-based costing and benchmarking together.
___________________
uc
___________________ This approach to costing focuses on processes rather than
___________________ functions. Finance professionals can only manage costs by
managing the activities that cause the costs. The key aspect is to
rod
___________________
identify cost drivers and to allocate costs to an activity on the basis
___________________ of that cost driver.
Activity-based costing collects data that cuts across traditional
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organisational functional boundaries. It can be used alongside
continuous improvement programmes such as Six Sigma or Kaizen
to create leaner and more responsive organisations and supply
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chains.
Activity-based costing can also be used with open book accounting
and quality costing to remove non value adding processes. In terms
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Create a draft of an
n/S
1. ................... is where management accountants share assignment on the accounting
and___________________
logistic cost as an
cost information about relevant processes in the supply obstacle in the supply chain
chain, both within and across organisations. ___________________
effectiveness.
___________________
2. ................... builds on Porter’s value chain analysis
tio
which argues that competitive advantage in the ___________________
marketplace results from either better customer value ___________________
for the same cost
uc
___________________
3. ................... is an important SCMA technique that aims
___________________
to improve supply chain quality, both in and across
rod
organisations. ___________________
___________________
that every company reports its financial data the same way. This
financial snapshot is consistent then from firm to firm. This makes
analysis of the data and comparisons possible.
These accounting standards have a long history. They date back to
(c)
Henry Ford and the Model A. Companies then may have been
vertically integrated with a primary focus on domestic sales,
Accounting in Logistics and Supply Chain Sector
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sourcing and production. That business model has become nearly
Notes extinct, especially for large companies. As a result, accounting
___________________ rules have not kept up with present business operations and
n/S
practices.
___________________
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Process versus Transactions: SCM flows across the
___________________
organization. As a process, it flows across many of the
___________________ company departments and boundaries. Accounting is
uc
___________________ transactions-oriented with its focus on identifying and
___________________
summarizing vertical sales and make-or-buy activities.
Organization Direction: Supply chain management is
rod
___________________
horizontal and crosses departments and organization
___________________
boundaries. Transactions are vertical and are consistent with
organization silos.
ep
Scope: SCM extends into suppliers and logistics service
providers to gain inventory velocity and to reduce cycle time.
Accounting stays within the company facilities and boundaries
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Dynamic versus Static: Supply chain management is
Notes
constantly changing – as suppliers, customers, plants and
warehouses, shipment sizes and order mix and as store ___________________
n/S
locations change. This contrasts with accounting which has the ___________________
historical perspective of what has already happening. As a
___________________
result, accounting does not understand changes in
transportation costs, for example, because of changes in the ___________________
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distance inbound and outbound shipments must travel, or in ___________________
the shipment size or in the mix of commodities being shipped. ___________________
uc
These differences make it difficult to develop meaningful ___________________
performance metrics for supply chain management that are
___________________
recognized in the board room and that are aligned with the
rod
company strategic plan. Financial metrics, while commonly used, ___________________
purchase order to sale or time within the total supply chain, are
measure of company performance with strong bottom line
implications. Yet none of these are part of traditional accounting
measures which are rooted in the past.
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Notes
Check Your Progress
Activity
Fill in the blanks:
___________________
Develop an assignment on
n/S
consignment accounting.
___________________
1. ................... is one of the key drivers in today’s business
world with offshore sourcing, foreign competition and
___________________
global markets.
___________________
2. SCM extends into suppliers and logistics service
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___________________ providers to gain inventory velocity and to reduce
___________________ ....................
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___________________
___________________
Consignment Accounting
The word consignment can be generally defined as the act of
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___________________
sending a quantity of goods by the manufacturers and producers of
___________________
one country or place to their agents in another at the risk of the
principals for the purpose of sale.
ep
Goods so sent are known as “consignment”. The sender of the goods
is called the consignor. Generally the manufacturers or producers
are consignors. The person to whom goods are forwarded for the
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Inward consignment.
It is called “outward” when the dispatch of a quantity of goods from
one country to another is made for the purpose of sale and is called
No
“inward” when the receipt of the quantity of goods is made for the
purpose of sale.
consignee.
UNIT 16: Financial Aspects of Supply Chain Management
ale
2. Relationship between Consignor and Consignee: In case
Notes
of a sale of goods, the relationship between the seller and the
purchaser of the goods is that of a creditor and a debtor ___________________
n/S
whereas in case of a consignment the relationship between the ___________________
consignor and the consignee is that of a principal and agent,
___________________
because the consignee is to sell goods on behalf of the
consignor. ___________________
tio
___________________
3. Expenses Incurred: In consignment, expenses incurred by
the consignee in connection with the goods consigned to him ___________________
uc
are usually borne by the consignor whereas in case of a sale, ___________________
expenses incurred after sale of goods are born by the
___________________
purchaser.
rod
___________________
4. Risk Attached to the Goods: In case of consignment, risk
___________________
attached to the goods sold lies with the consignor till the goods
consigned are sold by the consignee. But in case of a sale, risk
attached to the goods sold is transferred to the buyer of goods.
ep
5. Return of Goods: In case of consignment, return of goods is
possible if the goods are not sold by the consignee. But in case
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Summary
Management accounting in supply chains (or supply chain
controlling (SCC)) is part of the supply chain management concept.
(c)
Accounting in Logistics and Supply Chain Sector
ale
The goal of management accounting in supply chains is the
Notes
optimization of these processes. Therefore, this strategy is a form
___________________
of controlling, focused on the support of management.
n/S
___________________
Activity-based costing collects data that cuts across traditional
___________________ organisational functional boundaries. It can be used alongside
___________________ continuous improvement programmes such as Six Sigma or Kaizen
tio
to create leaner and more responsive organisations and supply
___________________
chains.
___________________
Suppliers were analysed into three categories depending on the
uc
___________________
volume they delivered and the strategic importance of their
___________________ products to Sainsbury’s. The three categories were core suppliers,
middle to large suppliers, and small suppliers. Activity-based
rod
___________________
costing information was developed – mainly with core suppliers –
___________________
to provide benchmark data and to identify development
opportunities.
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Lesson End Activity
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Keywords
t fo
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Quality Costing: It aims to improve supply chain quality, both in
Notes
and across organisations. It has two benefits – to reduce quality
costs and to increase the quality offering to the ultimate customer. ___________________
n/S
Value Chain Costing: It is built on Porter’s value chain analysis ___________________
tio
differentiation strategy) or the same customer value for less cost (a
___________________
cost leader strategy).
___________________
uc
Questions for Discussion ___________________
___________________
1. How accounting in supply chain can boost competition?
rod
___________________
2. “Inventory measures reflect in part, the success in structuring
supplier relationship to optimize inventory at the buying ___________________
company”. Discuss the aptness of the statement with example
to justify your response.
ep
3. Distinguish between a sales and consignment.
4. Explain accounting and logistics cost: an impediment to supply
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chain effectiveness.
Further Readings
t fo
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
No
ale
Web Readings
Notes
www.aamu.edu/academics/bpa/accountinglogistics/pages/default.as
___________________ px
n/S
___________________
www.agribusiness-mgmt.wsu.edu/.../IventoryMgmtControl. pdf
___________________
www.accountingcoach.com/online-accounting-course/60Xpg01.html
___________________
www.accsoft.ch/download/accountingconcepts.pdf
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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t fo
. No
ES
UP
(c)
UNIT 17: Inventory Management’s Techniques and Control
ale
Notes
Activity
___________________
Write an article on the
Inventory Management’s
n/S
inventory costs in supply chain
___________________
management.
Techniques and Control ___________________
___________________
tio
Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
uc
___________________
Inventory Costs
Factors affecting Levels of Inventory ___________________
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Inventory Measures ___________________
___________________
Introduction
ep
Inventory is the major source of cost in the supply chain and also
the basis for improving customer service and enhancing customer
satisfaction. For example, high inventory at retail outlets may help
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Inventory Costs
No
is about two things: not running out, and not having too much.
Essentially, inventory is a reserve system to prevent stockouts.
However, as important as it is to prevent such a stockout, you also
UP
don’t want to hold onto too much inventory because holding costs
can become a major encumbrance. So how do you balance the two
and what is the right amount? More importantly, when should you
reorder in order to prevent a stockout? The answer to this can be
determined by obtaining and applying the appropriate inventory
(c)
models in decision-making.
Accounting in Logistics and Supply Chain Sector
ale
The heart of inventory decisions lies in the identification of
Notes
inventory costs and optimizing the costs relative to the operations
___________________
of the organization. As inventory is a necessary but idle resource,
n/S
___________________ stock levels and inventory costs in manufacturing need to be
___________________ minimized. Large holdings of inventory also cause long cycle times
which may not be desirable.
___________________
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___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
Figure 17.1: Cost of Inventory with Time
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Average Inventory
.
stock.
The assumption made is that at any point in time, the cycle stock
(stock planned to be used excluding safety stock) is on an average
half the recipient quantity i.e. it is half-way in-between the receipt
quantity and zero left. The practical implication of this is that it
reduces order quantity and the average cycle stock by half. If a
(c)
ale
Safety stock is determined from such factors as customer service
Notes
level required, demand variability and replenishment lead-time.
Once the customer service level required is agreed upon, safety ___________________
n/S
stock is calculated. ___________________
___________________
Holding (or Carrying) Costs
___________________
The very fact that an item is held in stock accrues cost. These are
tio
the real costs to hold inventory. Such costs are called inventory ___________________
holding costs or carrying costs. This broad category includes the ___________________
costs for:
uc
___________________
1. Storage and Handling: This includes the total warehousing
___________________
facility. This is typically 6 per cent. It is estimated that the
rod
total cost to the company is 35 per cent per annum of the value ___________________
ale
Though holding costs are represented by a straight line, there are
Notes
some fixed and variable costs of holding inventory i.e. some of the
___________________
costs will not change by increase or decrease in inventory levels,
n/S
___________________ while some costs are dependent on the levels of inventory held. The
___________________ general breakdown for inventory holding costs has been shown in
Table 17.1.
___________________
tio
Table 17.1: Fixed and Variable Holding Costs
___________________
Fixed costs Variable cost
___________________
Capital costs of warehouse or store Cost of capital in inventory
uc
___________________ Cost of operating the warehouse or Insurance on inventory value
store
___________________
Personnel costs Losses due to obsolescence, theft and
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___________________ spoilage
costs in the total holding costs is much greater than that of the
fixed costs.
Ordering Costs
t fo
Inventory Ordering Costs are those costs that are incurred in the
purchase cycle are called procurement costs or inventory ordering
costs. Ordering costs have two components:
(a) One component that is relatively fixed, and
(c)
ale
Table 17.2: Fixed and Variable Ordering Costs
n/S
Fixed costs on IT systems Cost of placing and order (phone,
___________________
postage, order forms)
Office rental and equipment costs Running costs of IT systems ___________________
Fixed costs of vendor development Receiving and inspection costs ___________________
tio
Variable costs of vendor development
___________________
The fixed and variable components of the ordering or procurement
___________________
costs are shown in Table 17.2.
uc
___________________
One major component of cost associated with inventory is the cost
___________________
of replenishing it. If a part or raw material is ordered from outside
rod
suppliers, and places orders for a given part with its supplier three ___________________
times per year instead of six times per year, the costs to the ___________________
organization that would change are the variable costs, and which
would probably not are the fixed costs.
ep
There are costs incurred in maintaining and updating the
information system, developing vendors, evaluating capabilities of
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For manufactured items, the equivalent cost is known as set-up. In
Notes
the case of subassemblies, or finished products that may be
___________________
produced in-house, the costs associated with changing over
n/S
___________________ equipment from producing one item to producing another is
___________________ usually referred to as setup costs.
___________________ This includes all the costs that are not related to the order
tio
quantity (the costs incurred to prepare the order paperwork,
___________________
processing and tracking the order operations, the cost of setting up
___________________ the machine, and first off inspection). This total
uc
___________________ ordering/processing cost is eventually passed on to the products.
___________________ Set-up costs reflect the costs involved in obtaining the necessary
materials, arranging specific equipment setups, filling out the
rod
___________________
required papers, appropriately charging time and materials, and
___________________
moving out the previous stock of materials, in making each
different product. If there were no costs or loss of time associated
in changing from one product to another, many small lots would be
ep
produced, permitting reduction in inventory levels and the
resultant savings in costs.
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stock.
UNIT 17: Inventory Management’s Techniques and Control
ale
For a retailer, the costs include both the lost profits from the
Notes
immediate order because of cancellations, and the long-run costs if Activity
stockouts reduce the likelihood of future orders. For a ___________________
Prepare an informative report
n/S
on the factors affecting the
manufacturer, these include the loss of production as well as ___________________
levels of inventory.
capacity. In addition, the ultimate consequence is that sales of
___________________
goods may be lost, and finally customers can be lost.
___________________
tio
If the unfulfilled demand for the items can be satisfied at a later
___________________
date (back order case), in this case, cost of back orders are assumed
to vary directly with the shortage quantity (in rupee value) and the ___________________
uc
cost involved in the additional time required to fulfil the backorder ___________________
( / /year).
___________________
However, if the unfulfilled demand is lost, the cost of shortages is
rod
___________________
assumed to vary directly with the shortage quantity ( /unit
___________________
shortage). When this is related to the total cost of inventory, the
cost decreases increasingly with the increase in inventory, as this
cost is relatively fixed with respect to the value of the inventory.
ep
Frequently, the assumed shortage cost is little more than a guess,
although it is usually possible to specify a range of such costs.
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stock.
3. ................... are the real costs to hold inventory.
constant.
Accounting in Logistics and Supply Chain Sector
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Lead-time: Lead-time is defined as time period from initiation
Notes
Activity of an activity to its completion. For inventory management, we
___________________
Create an assignment on the need following lead times: Purchase lead-time, Manufacturing
n/S
inventory measures.
___________________ lead-time and Delivery lead-time.
___________________ Rework/Scrap Rate: This rate is dictated by the efficiency of
___________________ the manufacturing process. It involves knowing the number of
tio
defective units that are produced by a manufacturing unit. This
___________________
is a highly empirical rate and very much depends upon the skill
___________________ of the labour operating the machine and the accuracy offered by
uc
___________________ the machine.
___________________ Excess inventory is the quantity of material in stock or on
order that is greater than the anticipated demand for an agreed
rod
___________________
time period.
___________________
Obsolete inventory on the other hand is the inventory that
results from an unanticipated demand. This inventory typically
ep
occurs due to model run outs, engineering change notes, or
supplier minimum/multiple order quantities. Companies tend
to be reluctant to write off this value as it is a loss in the books
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Inventory Measures
t fo
ale
for better comparison among companies. This is calculated as a
ratio of company’s sales to its average inventory investment: Notes
___________________
Inventory turnover = annual cost of goods sold/average
n/S
inventory investment ___________________
This is a measure of how many times during a year the inventory ___________________
turns around. It is the ratio of the cost of annual sales to the ___________________
tio
average inventory level. The higher the inventory turns, the better
___________________
the firm uses its inventory assets. Another common measure is
days of supply. A firm’s days of supply is found by dividing the ___________________
uc
average inventory level by the cost of one day’s sales. ___________________
___________________
Check Your Progress
rod
___________________
Fill in the blanks:
___________________
1. ................... can be defined as number of units
manufactured over a period of time.
ep
2. ................... is defined as time period from initiation of
an activity to its completion.
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Summary
t fo
ale
Lesson End Activity
Notes
Prepare a presentation on the inventory management techniques
___________________
and control in supply chain management.
n/S
___________________
___________________
Keywords
___________________
Average Inventory: Defined as half the batch size plus safety
tio
___________________ stock.
___________________
Excess Inventory: The quantity of material in stock or on order
uc
___________________ that is greater than the anticipated demand for an agreed time
___________________ period.
Lead-time: Lead-time is defined as time period from initiation of
rod
___________________
an activity to its completion. For inventory management, we need
___________________
following lead times: Purchase lead-time, manufacturing lead-time,
Delivery lead-time.
ep
Obsolete Inventory: It is the inventory that results from an
unanticipated demand.
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machine.
sale or return”?
ES
ale
Further Readings
Notes
Books ___________________
n/S
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., ___________________
Homewood, Illinois, Richard D. Irwin, 1995.
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management–
___________________
Text and Cases, New Delhi, Vikas, 1996.
tio
___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
II, Sultan Chand and Sons. ___________________
uc
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, ___________________
rod
Jawahar Lal, Cost Accounting, Vikas Publishing House, New ___________________
Delhi.
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
ep
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
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Web Readings
www.management-hub.com/inventory-management-intro. html
No
shodhganga.inflibnet.ac.in/bitstream/10603/703/12/12_chapter6.pdf
www.accountingcoach.com/online-accounting-course/60Xpg01.html
.
ES
UP
(c)
Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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(c)
UNIT 18: Cost Accounting
ale
Notes
Activity
___________________
Prepare a report on the scope
Cost Accounting
n/S
of cost accounting in the chain
___________________
management.
___________________
Objectives
___________________
tio
After completion of this unit, the students will be aware of the following
topics: ___________________
uc
Objectives of Cost Accounting ___________________
Functions of Cost Accounting
___________________
Essentials of Cost Accounting System
rod
___________________
Costing Systems
Role of Cost in Cost Accounting ___________________
Elements of Cost
ep
Introduction
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(i) Technique and Process of Costing: The technique of costing
Notes
involves two distinct steps, namely, (a) classification of costs
___________________
according to various elements and (b) allocation and
n/S
___________________ apportionment of the expenses which cannot be directly
___________________ charged to production. As a process, costing is concerned with
the routine ascertainment of cost with a formal and selected
___________________
procedure.
tio
___________________
(ii) Cost Control: Cost control is the guidance and regulation by
___________________ executive action of the costs of operating and undertaking.
uc
___________________ This guidance and regulation is done by the executive who is
___________________
responsible for causing the deviation. This process will become
clear by enumerating the steps involved in any technique of
rod
___________________
cost control. Cost control is exercised through a variety of
___________________ techniques such as inventory control, product control, quality
control, budgetary control, standard costing, etc.
(iii) Ascertainment of Cost: It deals with the collection and
ep
analysis of expenses, the measurement of production at
different stages and linking up of production with the
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Objectives of Cost Accounting
Notes
The objectives of cost accounting are ascertainment of cost, fixation Activity
of selling price of product, proper recording and presentation of ___________________
Construct a written
n/S
assignment on the objectives
cost data to the management for measuring efficiency and for cost ___________________
of cost accounting.
control. Following are the main objectives of cost accounting:
___________________
(i) Ascertainment of Cost: Ascertainment of cost is primary ___________________
tio
objective of cost accounting in the initial stages of its
___________________
development. However, in modern times this has assumed the
secondary objective of cost accounting. Cost ascertainment ___________________
uc
involves the collection and classification of expenditures at the ___________________
first instance. Those items of expenditures or expenses which
___________________
are capable of charging directly to the products manufactured
rod
___________________
are allocated. Then the other expenses which are not capable
of direct allocation are apportioned on some suitable basis. ___________________
Thus the cost of production of goods manufactured is
ascertained. In this process, cost accounting involves
ep
maintenance of different type of books to record various cost
elements. Cost of production is ascertained by using any of the
costing technique and method such as historical costing,
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ale
control techniques enable the management in knowing the
Notes operating efficiency of a business organisation.
Activity
___________________
Make a detailed report on the (iv) Provide Various Policies: Cost data to a great extent helps
n/S
functions of cost accounting.
___________________ in formulating the various policies of a business or industry
___________________ and in decision-making. As every alternative decision involves
investment of capital outlay, costs play an important role in
___________________
decision-making of organisation. Therefore, availability of cost
tio
___________________ data is a must for all levels of management.
___________________ (v) Preparation of Accounts and Reports: The management of
uc
___________________ every business or organisation constantly rely upon the reports
___________________
on cost data in order to know the level of efficiency relating to
purchase, production, sales and operating positions. Financial
rod
___________________
accounts provide various information only at the end of the
___________________ year because closing stock value is available only at the end of
the year. But cost accounts provide the value of closing stock
time to time by a system of continuous stock verification.
ep
Using the value of closing stock, it is possible to prepare final
accounts and know the operating results of the business or
industry.
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(a) To establish various cost centres in the business or industry.
Notes
Activity
(b) To provide necessary data to the management for fixing the
___________________
Create a draft on the
selling price.
n/S
essentials of cost accounting
___________________
system.
(c) To prepare various reports on wastages, loss of labour, idle
___________________
capacity of machines so as to improve profitability of business
or industry. ___________________
tio
(d) To ascertain the cost of every product, job or process both in ___________________
terms of total cost and per unit cost of product. ___________________
uc
(e) To implement various cost control techniques such as ___________________
budgetary control, historical costing and standard costing. ___________________
(f) To design suitable system for defining responsibilities and
rod
___________________
controlling cost.
___________________
(g) To prepare cost schedules to assist management in decision-
making.
ep
(h) To prepare cost statements and profit and loss account for
giving advice to management.
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3. Accuracy: The system of cost accounting must provide for
Notes
accuracy in terms of both ascertainment of cost and
___________________
presentation of cost data. Otherwise it will prove to be
n/S
___________________ misleading.
___________________ 4. Comparability: The records to be maintained must facilitate
___________________ comparison over a period of time. The past records must serve
tio
as a basis to guide the future.
___________________
5. Economical: The costs of production costing system must be
___________________
less. It must result in increased benefit when compared to the
uc
___________________
expenses incurred in installing it.
___________________
6. Uniformity: The various forms and documents used under
rod
___________________ costing system must be uniform in size and quality of paper.
___________________ Printed forms must be used to avoid delay in the preparation
of various reports. This also reduces the unnecessary burden of
clerical staff. Forms of different colours can be used in
ep
different documents or reports.
7. Reconciliation of Cost and Financial Accounts: It
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ale
Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Make a chart on the main
n/S
1. The system of cost accounting must provide for costing systems available for
___________________
chain management.
................... in terms of both ascertainment of cost and
presentation of cost data. Otherwise it will prove to be ___________________
misleading. ___________________
tio
2. The basis of apportioning overheads to products, ___________________
departments or jobs must be ................... and ___________________
....................
uc
___________________
___________________
Costing Systems
rod
___________________
Costing systems defined an accounting system as “an organisation
___________________
of forms, records and reports, closely co-ordinated to facilitate
business management through determining certain basic and
ep
required information. A cost system is an aspect of the accounting
system designed specifically to provide information concerning
costs and efficiency”. The following are main costing systems:
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As historical costs are recorded after the event takes place
Notes
Activity it is not possible to rectify the defect until the inefficiency.
___________________
Give a report on the role of
It does not facilitate preparation of tender and quotations.
n/S
cost in cost accounting.
___________________
(iii) Standard Cost System: It is a system of cost accounting
___________________
which makes use of predetermined standards relating to
___________________ elements of cost. Having fixed the standard costs, they are
tio
___________________ compared with actual costs to develop variances to know the
efficiency of industry or business. Standard cost system is
___________________
applicable where the production process is standardized.
uc
___________________
Standard costs are recorded in the accounting books.
___________________
rod
___________________
___________________
The role of cost in cost accounting is the following:
1. It helps in fixation of pricing decisions.
ep
2. It helps to make or buy decisions in respect of cost
components.
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Elements of Cost
The correct of interpretation of the term ‘cost’ may also be
(c)
ale
Notes
___________________
n/S
___________________
___________________
___________________
tio
___________________
___________________
uc
___________________
Figure 18.1: Elements of Cost
___________________
The following is the brief description of these elements of cost:
rod
___________________
(i) Direct Material: Direct material is material that can be
___________________
directly identified with each unit of the product. Direct
material can be conveniently measured and directly charged to
ep
the product. For example, raw cotton in textile manufactures
sugarcane in sugar industry and leather for shoe-making
industry. The cost of direct material includes the following:
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etc.
(ii) Indirect Material: They are those materials which do not
normally form a part of the finished product. It has been
defined as “materials which cannot be allocated but which can
.
ES
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(iii) Direct Labour: Direct labour is labour that can be identified
Notes
directly with a unit of finished product. All the labour charges
___________________
expended in altering the construction, composition,
n/S
___________________ confirmation or condition of the product is included in it. It
___________________ includes the payment of direct wages made to the following
groups of direct labour:
___________________
tio
Direct labour engaged on the actual production of the
___________________
product.
___________________
Direct labour engaged in adding this manufacture by way
uc
___________________
of supervision, maintenance and tool setting, etc.
___________________
Inspectors, analysts, etc. specially required for such
rod
___________________ production.
___________________ (iv) Indirect Labour: The wages of that labour which cannot be
allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour. In other
ep
words, wages paid to labour which are employed other than or
production constitute indirect labour costs.
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Office and administrative overhead consists of all
Notes
expenses incurred in the direction, control and
administration of a factory. ___________________
n/S
Selling overheads comprise the cost of products or ___________________
tio
retain customers.
___________________
Distribution overheads comprise all expenditure incurred
___________________
from the time the product is completed in the work until it
uc
reaches its destination. ___________________
___________________
Check Your Progress
rod
___________________
Fill in the blanks:
___________________
1. ................... an organisation of forms, records and
reports, closely
ep
2. ................... is defined as an organisation of forms,
records and reports, closely co-ordinated to facilitate
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Summary
Cost accounting is an important development in the field of
accounting. It is the process of accounting for costs. It embraces the
accounting procedures relating to recording of all income and
.
ES
ale
Keywords
Notes
Cost Accounting: It involves the application of costing principle,
___________________
methods and techniques for ascertaining costs and their control by
n/S
___________________
comparing actual costs with the budget or standard.
___________________
Cost Centre: It refers to a part of a factory for which costs are
___________________ accumulated separately.
tio
___________________ Cost Unit: It is defined by the ICMA as “a quantitative unit of
___________________ product or service in relation to which costs are ascertained”.
Costing Systems: Defined an accounting system as “an
uc
___________________
organisation of forms, records and reports, closely coordinated to
___________________
facilitate business management through determining certain basic
rod
___________________ and required information.
___________________ Direct Material: Material that can be directly identified with
each unit of the product.
ep
Indirect Labour: The wages of that labour which cannot be
allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour.
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ale
Further Readings
Notes
Books ___________________
n/S
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., ___________________
Homewood, Illinois, Richard D. Irwin, 1995.
___________________
Bhattacharya S. K. and Dearden J. Accounting for Management–
___________________
Text and Cases, New Delhi, Vikas, 1996.
tio
___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
II, Sultan Chand and Sons. ___________________
uc
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, ___________________
rod
Jawahar Lal, Cost Accounting, Vikas Publishing House, New ___________________
Delhi.
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
ep
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
No
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
.
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UP
(c)
Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
rod
___________________
___________________
ep
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(c)
UNIT 19: EVA and Budgets
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Notes
Activity
Make___________________
a report on the
EVA and Budgets
n/S
economic value added and
the ___________________
method of its calculation.
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
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Budget ___________________
Budgetary Control
___________________
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___________________
Introduction
___________________
In corporate finance, Economic Value Added or EVA, a registered
trademark of Stern Stewart & Co and of EVA Dimensions LLC, is
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an estimate of a firm’s economic profit – being the value created in
excess of the required return of the company’s investors (being
shareholders and debt holders).
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EVA is the profit earned by the firm less the cost of financing the
firm’s capital. The idea is that value is created when the return on
the firm’s economic capital employed is greater than the cost of
that capital. This amount can be determined by making
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Calculating EVA
EVA is net operating profit after taxes (or NOPAT) less a capital
charge, the latter being the product of the cost of capital and the
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where:
(c)
NOPAT
r , is the Return on Invested Capital (ROIC);
K
Accounting in Logistics and Supply Chain Sector
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Notes C is the weighted average cost of capital (WACC);
n/S
___________________ NOPAT is the net operating profit after tax, with adjustments and
___________________ translations, generally for the amortization of goodwill, the
capitalization of brand advertising and others non-cash items.
___________________
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EVA = net operating profit after taxes – a capital
___________________
charge [the residual income method]
___________________
therefore EVA = NOPAT – (c × capital), or alternatively
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___________________
EVA = (r x capital) – (c × capital) so that
___________________
EVA = (r-c) × capital [the spread method, or excess
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___________________ return method]
___________________
where:
r = rate of return, and
c = cost of capital, or the Weighted Average Cost
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of Capital (WACC).
NOPAT is profits derived from a company’s operations after cash
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Added value: Added value in financial analysis of shares is to be
Notes
distinguished from value added. Used as a measure of shareholder
value, calculated using the formula: ___________________
n/S
Added Value = Price that the product/service is sold at – cost of ___________________
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particular product’s final selling price and the direct and indirect ___________________
input used in making that particular product.
___________________
The difference is profit for the firm and its shareholders after all
uc
___________________
the costs and taxes owed by the business have been paid for that
financial year. Value added or any related measure may help ___________________
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investors decide if this is a business that is worthwhile investing ___________________
on, or that there are other and better opportunities (fixed deposits, ___________________
debentures).
Market value added: Market Value Added (MVA) is the
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difference between the current market value of a firm and the
capital contributed by investors. If MVA is positive, the firm has
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the market.
The formula for MVA is:
MVA = V – K
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where:
V is the market value of the firm, including the value of the firm’s
.
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Notes EV A t
Activity
MVA V K0
t 1 (1 c)t
___________________
Write an article on budget and
n/S
its features and objectives. Note that MVA = PV of EVA.
___________________
___________________ More enlightening is that since MVA = NPV of Free cash flow
(FCF) it follows therefore that the NPV of FCF = PV of EVA; since
___________________
after all, EVA is simply the rearrangement of the FCF formula.
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___________________
___________________
Check Your Progress
Fill in the blanks:
uc
___________________
___________________ 1. ................... is the profit earned by the firm less the cost
of financing the firm’s capital.
rod
___________________
2. ................... is the amount of cash invested in the
___________________
business, net of depreciation.
3. The capital charge is the ................... flow required to
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compensate investors for the riskiness of the business
given the amount of economic capital invested.
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Budget
Planning and control are the most important functions of Supply
Chain management. For assisting business management in these
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a financial or quantitative statement, prepared prior to a defined
period of time, of the policy to be pursued during that period for Notes
the purpose of attaining a given objective. The following are some ___________________
n/S
of the important definitions:
___________________
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1. A budget is prepared for a definite future period of time. ___________________
Generally, budgets are prepared for one year. However, in the ___________________
case of seasonal business like sugar, ice-cream, apparels, etc.,
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___________________
there may be two budgets for each year.
___________________
2. The figures in the budget are expressed in monetary and
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quantitative terms. ___________________
___________________
3. Budget is a plan for the operations and resources of the
business or firm.
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4. Budget is a tool for developing the cooperation, coordination
and control between the various departments.
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budgetee.
7. After the budget has been approved by the top management of
the organisation, the same cannot be altered except under
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Objectives of Budget
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every function.
Accounting in Logistics and Supply Chain Sector
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4. Budgets grow from bottom and are controlled from top-level,
Notes
and
___________________
5. The budgets are compared with actual performance.
n/S
___________________
___________________ Budgeting
___________________ Budgeting means the process of preparing budgets. In other words,
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budgeting refers to the management action of formulating budgets.
___________________
Preparation of budgets involves study of business situations and
___________________
understanding of management goals as also the capacity of the
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___________________ organisation.
___________________ According to Welsch, “Budgeting is the principal tool of planning
and control offered to management by accounting functions.”
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___________________
Objectives of Budgeting
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managers.
7. To prevent wastages or losses and reduce the expenditures, and
8. To ensure the availability of working capital in the
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organisation.
(c)
UNIT 19: EVA and Budgets
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Check Your Progress
Notes
Activity
Fill in the blanks:
___________________
Prepare a chart for your
n/S
1. ................... is a predetermined detailed plan of action display board on the
___________________
budgetary control and its
developed as a guide for future operations. objectives.
___________________
2. Budgeting refers to the management action of
___________________
...................
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___________________
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Budgetary control is a system of planning and controlling costs. It ___________________
rod
___________________
the continuous comparison of actual with budgeted results, either
___________________
to secure by individual action the objective of that policy or to
provide a basis for its revision. In other words, budgetary control is
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applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as
possible and actual results when known are compared with budget
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estimates.
According to Wheldon, “Budgetary control is the planning in
advance of the various function of a business, so that business as a
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period.
Accounting in Logistics and Supply Chain Sector
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3. Calculation of the variances and analysing the reasons for
Notes
them.
___________________
4. Revision of budgets in the light of changed circumstances, and
n/S
___________________
5. Taking suitable or prompt action to achieve the desired
___________________
objective.
___________________
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___________________ Objectives of Budgetary Control
___________________
After defining the term budgetary control, it is necessary to
explain the objectives of it. The main objectives of a budgetary
uc
___________________
control can be stated in the following way:
___________________
1. To incorporate the ideas of all levels of management in
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___________________ preparing a budget.
___________________
2. To lay down a plan to implement the policy of the organisation.
3. To coordinate the activities of the departments of an
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organisation.
4. To provide sufficient working capital for effective operation of
the organisation.
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Summary
Budgetary control is a system of planning and controlling costs. It
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the continuous comparison of actual with budgeted results, either
to secure by individual action the objective of that policy or to Notes
provide a basis for its revision. In other words, budgetary control is ___________________
n/S
applied to a system of management and accounting control by
___________________
which all operations and output are forecasted.
___________________
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___________________
Prepare an effective presentation to be presented in the class on
the concept and measures of economic value added and the basics ___________________
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of budget. ___________________
___________________
Keywords
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___________________
Budgetary Control: Planning in advance of the various function ___________________
of a business, so that business as a whole can be controlled.”
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Budgeting: The principal tool of planning and control offered to
management by accounting functions.
added.
ES
Further Readings
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
(c)
ale
Notes
Bhattacharya S. K. and Dearden J. Accounting for Management–
Text and Cases, New Delhi, Vikas, 1996.
___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &
n/S
___________________
II, Sultan Chand and Sons.
___________________
Hingorani, N.L. and Ramanathan, A. R., Management Accounting,
___________________ 5th ed. New Delhi, Sultan Chand, 1992.
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___________________ Jawahar Lal, Cost Accounting, Vikas Publishing House, New
___________________ Delhi.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
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___________________
New Delhi.
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New
rod
___________________
Delhi.
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
ep
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdf
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www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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(c)
UNIT 20: Case Studies
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Notes
___________________
Case Studies
n/S
___________________
___________________
Objectives
___________________
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After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study 1: Private Enterprises Inc.
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___________________
This publication presents an example of non-consolidated and
consolidated financial statements prepared in accordance with ___________________
pre-changeover accounting standards – XFI Version and financial
rod
___________________
statements restated in accordance with accounting standards for
private enterprises (ASPE). This example, Private Enterprises ___________________
Inc., is based on a number of assumptions that do not encompass
all aspects of financial reporting matters but include many of the
common concepts that would be encountered in a private company
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environment.
The comparisons provided in this example are not comprehensive
and do not attempt to cover all of the differences between the two
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Contd…
Accounting in Logistics and Supply Chain Sector
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with pre-changeover accounting standards – XFI Version
Notes approximates the actuarial valuation for funding purposes.
___________________
Instead of consolidating subsidiaries, management made an
accounting policy choice to account for subsidiaries using the
n/S
___________________ cost method.
___________________
Management made an accounting policy choice to account for
income taxes using the future income taxes method. For
___________________ simplicity, refundable taxes were ignored.
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___________________ The following assumptions and/or decisions were made in
restating the consolidated statements in accordance with
___________________ ASPE:
Management made an accounting policy choice to account for
uc
___________________
defined benefit pension plans using the immediate
___________________ recognition approach. For simplicity, it is assumed that the
actuarial valuation for accounting purposes in accordance
rod
___________________ with pre-changeover accounting standards – XFI Version
___________________
approximates the actuarial valuation for funding purposes.
Management made an accounting policy choice to account for
income taxes using the future income taxes method. For
simplicity, refundable taxes were ignored.
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Question:
Analyse the case and recommend a suitable solution.
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Source: http://www.cica.ca/applying-the-standards/accounting-standards-for-private-
enterprises/site-utilities/item49821.pdf
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UNIT 20: Case Studies
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Case Study 2: New Lease Accounting Standard: Is your
organisation prepared to cope with the new standard? Notes
Introduction ___________________
n/S
A New Sri Lankan lease accounting standard has been developed ___________________
in a joint project between the International Accounting Standards
Board (IASB) and the Institute of Chartered Accountants of Sri ___________________
Lanka (ICASL) that could result in a complete overhaul of the
___________________
way in which leases are reported in financial statements,
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commencing 1 January 2012. ___________________
Industry projections estimate over $1.3 trillion would be
___________________
transferred to U.S. corporate balance sheets, with roughly 70%
uc
being real estate leases. The impact on the Sri Lankan leasing ___________________
industry had not been quantified yet and the objective of this
paper is to enlighten the reader of the consequences arising from ___________________
the new standard to corporate financial statements.
rod
___________________
Presented below are the significant changes that are anticipated
in the new standard, some issues and impact they create, and ___________________
some of the ways the management accountant can add value to
the organisation in coping with these changes.
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Synopsis of the standard reviewed
A. What is the area of application of this standard?
This accounting standard would deal with the accounting
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IFRIC 4
De-recognition of finance lease receivables – LKAS 39
Embedded derivatives in lease contracts – LKAS 39
Impairment
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Disclosures – SLFRS 7
Notes
Investment property – LKAS 40
___________________
C. Definition of terms
n/S
___________________ The standard would define the following key terms inherent to
leases:
___________________
Lease; finance lease; operating lease; non-cancellable lease;
___________________ inception of a lease; commencement of the lease term; lease term;
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minimum lease payments; fair value; economic life; useful life;
___________________
guaranteed residual value; unguaranteed residual life; initial
___________________ direct costs; gross investment in the lease; net investment in the
lease; unearned finance income; interest rate implicit in the lease;
uc
___________________ lessee’s incremental borrowing rate of interest; contingent rent.
___________________ D. Regulatory framework for lease
The leasing industry in Sri Lanka is regulated via the Finance
rod
___________________
Leasing Act (FLA), No 56 of 2000, with the Central Bank of Sri
___________________ Lanka acting as its regulator. It is interesting to note that only
the finance leases that gets regulated under this statute (and not
the operating leases). However the hire purchase transactions are
regulated via the Consumer Credit (Amended) Act No 7 of 1990.
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Impact on Management Accounting
Key issues arising from the standard which are relevant to
management accountants
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use: Together with the right to use the asset, what gets
transferred (or not transferred) would be the risks and
rewards arising from the leased asset. The difficulty of
identifying the locus would also be an issue for the
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Source: http://www.cimaglobal.com/Documents/Our%20locations%20docs/Sri%20Lanka/
LKAS%2017%20_%20Leases%20V3.pdf
UNIT 21: Corporate Financial Reporting
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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BLOCK-V
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Accounting in Logistics and Supply Chain Sector
Detailed Contents
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Notes
UNIT 21: CORPORATE FINANCIAL REPORTING
___________________ UNIT 23: INTERNATIONAL ACCOUNTING
STANDARDS-I
n/S
Introduction
___________________ Introduction
Prescribed Format
___________________ International Accounting Standards
Balance Sheet Grouping
___________________
Profit & Loss Account UNIT 24: INTERNATIONAL ACCOUNTING
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___________________ STANDARDS-II
UNIT 22: INTERNATIONAL FINANCIAL
___________________ Introduction
REPORTING STANDARDS
Other Accounting Standards
uc
___________________
Introduction
___________________
International Financial Reporting Standards UNIT 25: CASE STUDY
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___________________
___________________
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UNIT 21: Corporate Financial Reporting
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Notes
Activity
___________________
Write an article on the
Corporate Financial Reporting
n/S
prescribed format for reports
and___________________
the mandatory reporting.
___________________
Objectives
___________________
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After completion of this unit, the students will be aware of the following
topics: ___________________
uc
Balance Sheet Grouping ___________________
Profit & Loss Account
___________________
rod
___________________
Introduction
___________________
The form of presentation of financial reports of non-corporate
business organisations suffers from non-conformity. Rigid rules
ep
and regulations, as to the manner of presenting financial reports,
do not bind the individual businessman in a sole trading or the
partners in a firm. They enjoy a higher degree of individuality,
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are prepared for the own use of the businessman and are made
available only to select groups, such as lenders of resources and to
tax authorities. Corporates, which are governed by their respective
acts, have not been given this latitude. The reasons are obvious in
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Prescribed Format
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The Companies Act, 1956 has laid down specific form in which
balance sheet of a company has to be presented and the period
within which it has to be laid before the shareholders. It has also
prescribed parameters for preparing profit and loss account.
(c)
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electricity by their separate acts. The annual reports are to be
Notes signed by the managing director and at least one more director.
___________________
Mandatory Reporting
n/S
___________________
Section 210 of the Companies Act, 1956 stipulates that the board of
___________________
directors of every company should submit, before the annual
___________________ general meeting of the company, a duly audited profit and loss
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___________________ account and balance sheet. These documents should be placed
before the meeting within six months of the expiry of the financial
___________________
year. Three copies of the annual reports as approved by the
uc
___________________ shareholder are to be filed with the Registrar of Companies within
___________________ thirty days of the meeting in which they were approved. It may be
mentioned that the message conveyed by these statements are
rod
___________________
similar to that of non-corporate reports, except for the greater
___________________
degree of disclosure, which are on the lines of the generally
accepted accounting principles.
ep
The format for balance sheet is quite exhaustive with detailed
instructions as to how assets and liabilities are to be displayed.
The corporates can choose either horizontal form or vertical form of
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and miscellaneous expenditure. A brief description of the groups is
given below. Notes
___________________
Liabilities
n/S
___________________
Share Capital ___________________
The balance sheet should furnish details of the kinds of shares a ___________________
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corporate has issued and the stages of the issue. After the coming
___________________
into force of the Companies Act, 1956, corporates can issue only
two kinds of shares – equity and preference. The status of issue of ___________________
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these capitals is to be indicated in the balance sheet under the ___________________
heads of authorised, issued, subscribed and paid up.
___________________
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Format 21.1: Balance Sheet of Tata Steels Ltd. ___________________
for the year 2008
___________________
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Accounting in Logistics and Supply Chain Sector
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Authorised
Notes
Also called nominal or registered share capital, it is the maximum
___________________
extent up to which a corporate can issue shares to the public, at a
n/S
___________________ particular point of time. It is the ceiling limit. Authorised capital is
___________________ specified in the Memorandum and Articles of Association of the
corporate. It is an enabling provision, in the sense that the entire
___________________
amount authorised need not be issued at one stroke. It can be (and
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___________________ is usually) issued in parts, a number of times, till the limit is
___________________ exhausted. However, no company can issue shares in excess of the
authorised capital.
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___________________
___________________ Issued
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___________________
Issued share capital is that part of the authorised capital, which is
___________________ offered to the public for subscription. Nowadays, companies prefer
to raise funds through private placement. The offer to the public is
made through a document called prospectus. Prospectus is an
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invitation to the public to offer for the issue. The issue may be any
size. But corporates are aware that small issues cost up to 10% of
the value of the issue compared to about 6% in case of larger
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issues. Hence, they do not enter the market every now and then
with smaller issues.
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Subscribed
It is that part of the issued capital, which has been agreed to be
taken up by the public. Subscription or offer by the public might be
for a number equal to the volume issued or for more or less. In a
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Called Up
A special feature of share issue is that the entire issue price is not
usually called upon to be paid in one lump sum. The subscribers
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is the call money. The called-up share of a corporate, therefore, is
that part of the issue price, which the investors have to pay. It Notes
includes application money, allotment money and call money. ___________________
n/S
Assets ___________________
closer look at the segments of assets. Assets are classified into four ___________________
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distinct categories— fixed or block assets, investments or non-
___________________
current assets, current assets and miscellaneous expenses to the
___________________
extent not written off.
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___________________
Block Assets (Fixed Assets)
___________________
Fixed assets are fixed in time. That is, they have a fixed number of
rod
___________________
useful years. Gross block is the original or historic value of all the
___________________
fixed assets that are in use as at the end of the accounting year. In
the balance sheet, it is shown in the inner column and depreciation
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thereon up to that date is deducted therefrom.
Investments
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Current Assets
.
outstanding for more than six months, less than six months, etc.,
has to be given.
Miscellaneous Expenses
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forward loss balance of the previous years, etc., not written off.
Notes These are to be written off from the future profits of the business
Activity
___________________
Make a brief report on the
as per the admissible limitation periods.
n/S
profit and loss account.
___________________
Additional Exposures
___________________
In addition to listing of assets and liabilities, a corporate balance
___________________
sheet also gives, by way of separate statements, details of fixed
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___________________ assets brought forward, acquired and disposed during the year and
___________________ revaluation, if any, made, depreciation of the past years and the
year under consideration. In case the corporate has subsidiaries,
uc
___________________
the audited financial reports of each of the subsidiaries are also to
___________________ be given as annexure. Efforts are on to incorporate the financial
data of subsidiaries into the financial statements of holding
rod
___________________
companies. ICAI is shaping the requisite standard to give effect to
___________________
this. Further, list of executives entitled to monthly remuneration
in excess of certain amount should also to be furnished. An
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auditor’s report, as to the compliance, by the corporate, of the
various legal requirements, is attached to the financial reports.
Directors report, another important document accompanying
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statement is that in a non-corporate report, the value of the inputs
is given as costs. Incorporates, however, in addition to value, Notes
quantitative information also has to be furnished. This ___________________
n/S
quantitative information may form part of the profit and loss
___________________
account or though a note attached thereto. Usually, companies
furnish quantitative data in a separate schedule. ___________________
___________________
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Issue Expenses
___________________
Corporates have the privilege to invite the public to subscribe to
___________________
their share and debt capitals. For this purpose, a corporate has to
uc
obtain the consent of the shareholders in a general meeting. The ___________________
procedure for issue needs elaborate arrangement. One or more ___________________
merchant bankers are engaged, depending upon the size of the
rod
___________________
issue, to handle the issue.
___________________
Underwriting Commission
Underwriting commission and brokerage payable by a company
ep
differs inversely to the rating of the corporate by the investors.
Higher the rating, lower is the rate of the underwriting
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Segmental Reporting
With increasing tempo of globalisation, the trend in Indian
corporates is to adopt international standards in financial
No
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Notes
Check Your Progress
Fill in the blanks:
___________________
n/S
___________________
1. Underwriting commission and brokerage payable by a
company differs ................... to the rating of the
___________________
corporate by the investors.
___________________
2. One of the major differences between a corporate and a
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___________________ non-corporate income statement is that in a non-
___________________ corporate report, the value of the inputs is given as
...................
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___________________
___________________
Summary
rod
___________________
Financial reporting in corporate organisations is regulated by the
___________________
laws under which the organizations are registered. As such, these
reports are more transparent compared to non-corporate financial
ep
reports. The Companies Act, 1956 has prescribed a format in which
corporates are to present their balance sheet. For profit and loss
account, the act has laid down parameters to be followed. A
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Keywords
.
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Questions for Discussion
Notes
1. Are non-corporate business organizations legally obliged to
___________________
prepare financial statements?
n/S
___________________
2. Why should law prescribe format for financial reporting to
corporates? ___________________
___________________
3. How are assets and liabilities of corporate organisations
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marshalled? ___________________
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___________________
Further Readings ___________________
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___________________
Books
___________________
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
ep
Bhattacharya S. K. and Dearden J. Accounting for Management–
Text and Cases, New Delhi, Vikas, 1996.
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New Delhi.
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
.
Web Readings
220.227.161.86/19328sm_finalnew_cp3.pdf
www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf
(c)
www.accountingcoach.com/online-accounting-course/60Xpg01.html
www.accsoft.ch/download/accountingconcepts.pdf
Accounting in Logistics and Supply Chain Sector
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
uc
___________________
___________________
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___________________
___________________
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UNIT 22: International Financial Reporting Standards
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Notes
___________________
International Financial Reporting
n/S
___________________
Standards ___________________
___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
uc
___________________
IFRS 1: First-time Adoption
IFRS 2: Share-based Payment ___________________
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IFRS 3: Business Combinations ___________________
IFRS 4: Insurance Contracts ___________________
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
IFRS 6: Exploration for and Evaluation of Mineral Resources
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IFRS 7: Financial Instruments: Disclosures
IFRS 8: Operating Segments
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Introduction
International Financial Reporting Standards (IFRS) is fast
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to IFRS is a major change both for the finance function and for the
wider business.
The International Accounting Standards Board (IASB) has
recognised the need for guidance. In 2003 it published IFRS1 First-
.
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International Financial Reporting Standards
Notes
Activity
___________________
Write an article on the IFRS 1: First-time Adoption
n/S
international financial
___________________
reporting standards.
IFRS 1 requires an entity to do the following in the opening IFRS
___________________
statement of financial position that it prepares as a starting point
for its accounting under IFRSs: (a) Recognize all assets and
___________________
liabilities whose recognition is required by IFRSs; (b) Not recognize
tio
___________________ items as assets or liabilities if IFRSs do not permit such
___________________ recognition; (c) Reclassify items that it recognized under previous
GAAP as one type of asset, liability or component of equity, but are
uc
___________________
a different type of asset, liability or component of equity under
___________________ IFRSs; and (d) Apply IFRSs in measuring all recognized assets and
liabilities.
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___________________
___________________
IFRS 2: Share-based Payment
The objective of this IFRS is to specify the financial reporting by an
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entity when it undertakes a share-based payment transaction. In
particular, it requires an entity to reflect in its profit or loss and
financial position the effects of share-based payment transactions,
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accounting by insurers for insurance contracts; (b) disclosure that
identifies and explains the amounts in an insurer’s financial Notes
Activity
statements arising from insurance contracts and helps users of ___________________
Prepare a presentation on
n/S
those financial statements understand the amount, timing and non-current assets held for
sale___________________
and discontinued
uncertainty of future cash flows from insurance contracts. operations.
___________________
Check Your Progress ___________________
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Fill in the blanks:
___________________
1. IFRS 1 requires an entity to do the following in the ___________________
opening IFRS statement of financial position that it
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___________________
prepares as a ................... for its accounting under
IFRSs ___________________
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2. The objective of IFRS 2 is to specify the financial ___________________
lower of carrying amount and fair value less costs to sell, and
depreciation on such assets to cease; and (b) assets that meet the
criteria to be classified as held for sale to be presented separately
in the statement of financial position and the results of
No
discontinued.
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IAS 36 but measures the impairment in accordance with that
Notes Standard once the impairment is identified.
___________________
IFRS 7: Financial Instruments: Disclosures
n/S
___________________
The IFRS applies to all entities, including entities that have few
___________________
financial instruments (for example: a manufacturer whose only
___________________ financial instruments are accounts receivable and accounts
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___________________ payable) and those that have many financial instruments (for
example: a financial institution most of whose assets and liabilities
___________________
are financial instruments).
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___________________
The objective of this IFRS is to require entities to provide
___________________
disclosures in their financial statements that enable users to
rod
___________________ evaluate (a) the significance of financial instruments for the
___________________ entity’s financial position and performance; and (b) the nature and
extent of risks arising from financial instruments to which the
entity is exposed during the period and at the end of the reporting
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period, and how the entity manages those risks. The qualitative
disclosures describe management’s objectives, policies and
processes for managing those risks. The quantitative disclosures
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or (ii) that files, or is in the process of filing, the consolidated
financial statements with a securities commission or other Notes
regulatory organisation for the purpose of issuing any class of ___________________
n/S
instruments in a public market.
___________________
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1. The objective of this IFRS is to specify the accounting ___________________
for assets held for sale, and the presentation and ___________________
disclosure of discontinued operations.
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___________________
2. IFRS 6 ................... includes continuing to use
___________________
recognition and measurement practices that are part of
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those accounting policies. ___________________
___________________
Summary
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Accounting standards are, as we have already seen, prescribed
with the objective of ushering in a sense of conformity in
accounting practices. However, the rigidity with which the
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Keywords
Notes
Accounting Standards: An accounting standard is a guideline
___________________
for financial accounting, such as how a firm prepares and presents
n/S
___________________
its business income and expense, assets and liabilities.
___________________
International Financial Reporting Standards: A set of
___________________ international accounting standards stating how particular types of
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___________________ transactions and other events should be reported in financial
statements. IFRS are issued by the International Accounting
___________________
Standards Board.
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___________________
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___________________
1. Explain the IFRS 1: First-time Adoption
___________________
2. Describe the concept of share-based payment standard.
3. Discuss about IFRS 3.
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4. What is the objective of IFRS 4?
5. Explain the exploration for and evaluation of mineral
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resources.
Further Readings
t fo
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
No
Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
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Web Readings
Notes
www.ifrs.org/
___________________
www.charteredclub.com/what-is-ifrs/
n/S
___________________
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf ___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 23: International Accounting Standards-I
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Notes
Activity
___________________
Write a report on the IAS 1 to
International Accounting
n/S
IAS 11.
___________________
Standards-I ___________________
___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
International Accounting Standards
Standards on Income tax, property, land, leases, revenue, and employee ___________________
benefits, etc.
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___________________
___________________
Introduction
An older set of standards stating particular types of transactions
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and other events should be reflected in financial statements. In the
past, international accounting standards (IAS) were issued by the
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IAS 2: Inventories
The objective of this Standard is to prescribe the accounting
treatment for inventories. A primary issue in accounting for
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subsequent recognition as an expense, including any write-down to
Notes net realisable value. It also provides guidance on the cost formulas
___________________ that are used to assign costs to inventories. Inventories shall be
n/S
measured at the lower of cost and net realisable value.
___________________
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___________________ information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows,
___________________
which classifies cash flows during the period from operating,
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___________________ investing and financing activities. Cash flows are inflows and
___________________ outflows of cash and cash equivalents. Cash comprises cash on
hand and demand deposits. Cash equivalents are short-term,
rod
___________________
highly liquid investments that are readily convertible to known
___________________
amounts of cash and which are subject to an insignificant risk of
changes in value.
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IAS 8: Accounting Policies, Changes in Accounting Estimates
and Errors
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The Standard also requires that an entity should not prepare its
Notes
financial statements on a going concern basis if events after the
reporting period indicate that the going concern assumption is not ___________________
n/S
appropriate. ___________________
___________________
IAS 11: Construction Contracts
___________________
The objective of this Standard is to prescribe the accounting
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treatment of revenue and costs associated with construction ___________________
contracts. Because of the nature of the activity undertaken in ___________________
construction contracts, the date at which the contract activity is
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___________________
entered into and the date when the activity is completed usually
fall into different accounting periods. Therefore, the primary issue ___________________
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in accounting for construction contracts is the allocation of contract ___________________
revenue and contract costs to the accounting periods in which
___________________
construction work is performed. This Standard shall be applied in
accounting for construction contracts in the financial statements of
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contractors.
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recognised in an entity’s balance sheet; and (b) transactions and
Notes other events of the current period that are recognised in an entity’s
Activity
___________________
Make an assignment on the
financial statements.
n/S
IAS 16 to IAS 23.
___________________
IAS 16: Property, Plant and Equipment
___________________
The objective of this Standard is to prescribe the accounting
___________________ treatment for property, plant and equipment, so that, users of the
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___________________ financial statements can discern information about an entity’s
investment in its property, plant and equipment and the changes
___________________
in such investment. The principal issues in accounting for
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___________________ property, plant and equipment are the recognition of the assets,
___________________ the determination of their carrying amounts and the depreciation
charges and impairment losses to be recognised in relation to
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___________________
them.
___________________
Property, plant and equipment are tangible items that (a) are held
for use in the production or supply of goods or services, for rental to
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others, or for administrative purposes; and (b) are expected to be
used during more than one period.
The cost of an item of property, plant and equipment shall be
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that future economic benefits will flow to the entity and these
benefits can be measured reliably. This Standard identifies the Notes
circumstances in which these criteria will be met and, therefore, ___________________
n/S
revenue will be recognised. It also provides practical guidance on
___________________
the application of these criteria. Revenue is the gross inflow of
economic benefits during the period arising in the course of the ___________________
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increases in equity, other than increases relating to contributions
___________________
from equity participants.
___________________
This Standard shall be applied in accounting for revenue arising
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___________________
from the following transactions and events (a) the sale of goods; (b)
the rendering of services; and (c) the use by others of entity assets ___________________
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___________________
___________________
IAS 19: Employee Benefits
Employee benefits are all forms of consideration given by an entity
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in exchange for service rendered by employees.
The objective of this Standard is to prescribe the accounting and
disclosure for employee benefits. The Standard requires an entity
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Payment applies.
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IAS 21: The Effects of Changes in Foreign Exchange Rates
Notes
An entity may carry on foreign activities in two ways. It may have
___________________ transactions in foreign currencies or it may have foreign
n/S
___________________ operations. In addition, an entity may present its financial
statements in a foreign currency. The objective of this Standard is
___________________
to prescribe how to include foreign currency transactions and
___________________
foreign operations in the financial statements of an entity and how
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___________________ to translate financial statements into a presentation currency. The
___________________ principal issues are which exchange rate(s) to use and how to
report the effects of changes in exchange rates in the financial
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___________________
statements.
___________________
This Standard does not apply to hedge accounting for foreign
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___________________
currency items, including the hedging of a net investment in a
___________________ foreign operation. IAS 39 applies to hedge accounting.
This Standard does not apply to the presentation in a statement of
cash flows of the cash flows arising from transactions in a foreign
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currency, or to the translation of cash flows of a foreign operation
(see IAS 7 Statement of Cash Flows).
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Check Your Progress
Notes
Fill in the blanks:
___________________
n/S
1. The objective of ................... Standard is to prescribe the
___________________
accounting treatment for property, plant and
equipment, so that, users of the financial statements ___________________
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its property, plant and equipment and the changes in
___________________
such investment.
___________________
2. The objective of ................... Standard is to prescribe,
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___________________
for lessees and lessors, the appropriate accounting
policies and disclosure to apply in relation to leases. ___________________
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3. A lease is classified as a/an ................... if it transfers ___________________
Summary
In the past, international accounting standards (IAS) were issued
by the Board of the International Accounting Standards
No
Income Taxes, IAS 16: Property, Plant and Equipment, IAS 17:
Leases, IAS 18: Revenue, IAS 19: Employee Benefits, IAS 20:
Accounting for Government Grants and Disclosure of Government
Assistance, IAS 21: The Effects of Changes in Foreign Exchange
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Keywords
Notes
Borrowing Costs: These are directly attributable to the
___________________
acquisition, construction or production of a qualifying asset form
n/S
___________________
part of the cost of that asset
___________________
Employee Benefits: These are all forms of consideration given by
___________________ an entity in exchange for service rendered by employees.
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___________________ International Accounting Standards: An older set of standards
___________________ stating how particular types of transactions and other events
should be reflected in financial statements. In the past,
uc
___________________
International Accounting Standards (IAS) was issued by the Board
___________________
of the International Accounting Standards Committee (IASC).
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___________________
Further Readings
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
.
ale
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
Notes
New Delhi.
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New
n/S
Delhi. ___________________
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. ___________________
Chand, New Delhi.
___________________
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Web Readings ___________________
www.ifrs.org/ ___________________
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www.charteredclub.com/what-is-ifrs/ ___________________
www.investopedia.com/university/accounting/ ___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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UNIT 24: International Accounting Standards-II
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Notes
Activity
Make___________________
a report on the IAS 24
International Accounting
n/S
to 36.
___________________
Standards-II ___________________
___________________
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Objectives ___________________
After completion of this unit, the students will be aware of the following
___________________
topics:
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___________________
Other Accounting Standards
Accounting Standards for related party disclosure, Investments in ___________________
Associates, Interests in Joint Ventures, and many more.
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___________________
___________________
Introduction
The International Accounting Standards Board (IASB) is the
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independent, accounting standard-setting body of the IFRS
Foundation.
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entity that gives it significant influence over the entity; or (iii) has
joint control over the entity; (b) the party is an associate (as
defined in IAS 28 Investments in Associates) of the entity; (c) the
party is a joint venture in which the entity is a venturer (see IAS
(c)
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is a close member of the family of any individual referred to in (a)
Notes or (d); (f) the party is an entity that is controlled, jointly controlled
___________________ or significantly influenced by, or for which significant voting power
n/S
in such entity resides with, directly or indirectly, any individual
___________________
referred to in (d) or (e); or (g) the party is a post-employment
___________________
benefit plan for the benefit of employees of the entity, or of any
___________________ entity that is a related party of the entity.
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___________________
IAS 26: Accounting and Reporting by Retirement
___________________
Benefit Plans
uc
___________________
rod
___________________
prepared.
___________________
Retirement benefit plans are arrangements whereby an entity
provides benefits for employees on or after termination of service
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(either in the form of an annual income or as a lump sum) when
such benefits, or the contributions towards them, can be
determined or estimated in advance of retirement from the
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IAS 28: Investments in Associates
Notes
This Standard shall be applied in accounting for investments in
associates. However, it does not apply to investments in associates ___________________
n/S
held by (a) venture capital organisations, or (b) mutual funds, unit ___________________
trusts and similar entities including investment-linked insurance
___________________
funds that upon initial recognition are designated as at fair value
through profit or loss or are classified as held for trading and ___________________
tio
accounted for in accordance with IAS 39 Financial Instruments: ___________________
Recognition and Measurement. Such investments shall be
___________________
measured at fair value in accordance with IAS 39, with changes in
uc
___________________
fair value recognised in profit or loss in the period of the change.
___________________
IAS 29: Financial Reporting in Hyper Inflationary Economies
rod
___________________
The financial statements of an entity whose functional currency is
___________________
the currency of a hyper inflationary economy shall be stated in
terms of the measuring unit current at the end of the reporting
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period. The corresponding figures for the previous period required
by IAS 1 Presentation of Financial Statements and any
information in respect of earlier periods shall also be stated in
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Measurement.
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different enterprises in the same period and between different
Notes accounting periods for the same enterprise. IAS 33 applies to
___________________ entities whose securities are publicly traded or that are in the
n/S
process of issuing securities to the public. [IAS 33.2] Other entities
___________________
that choose to present EPS information must also comply with IAS
___________________
33. [IAS 33.3] .If both parent and consolidated statements are
___________________ presented in a single report, EPS is required only for the
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___________________ consolidated statements.
___________________
IAS 34: Interim Financial Reporting
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___________________ The objective of IAS 34 is to prescribe the minimum content of an
___________________ interim financial report and to prescribe the principles for
recognition and measurement in financial statements presented
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___________________
for an interim period. For the purpose of the reporting, Interim
___________________
period is defined as a financial reporting period shorter than a full
financial year (most typically a quarter or half-year) and Interim
financial report is a financial report that contains either a
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complete or condensed set of financial statements for a period
shorter than an enterprise’s full financial year.
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an asset’s fair value, less costs to sell (sometimes called net selling
price) and its value in use. Fair value is defined as the amount
UNIT 24: International Accounting Standards-II
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obtainable from the sale of an asset in a bargained transaction
between knowledgeable and willing parties. Value in use is the Notes
Activity
discounted present value of estimated future cash flows expected to ___________________
Prepare an assignment on the
n/S
arise from the continuing use of an asset and from its disposal at IAS 37 to IAS 41.
___________________
the end of its useful life.
___________________
Check Your Progress ___________________
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Fill in the blanks:
___________________
1. ................... applies to all assets except: inventories, ___________________
assets arising from construction contracts, deferred tax
uc
___________________
assets, assets arising from employee benefits.
___________________
2. The objective of IAS 33 is to prescribe principles for the
rod
determination and presentation of ...................... ___________________
Assets
The objective of IAS 37 is to ensure that appropriate recognition
criteria and measurement bases are applied to provisions,
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from recognition.
IAS 37 excludes obligations and contingencies arising from
financial instruments carried at fair value (but IAS 37 does apply
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result of past events and settlement is expected to result in an
Notes outflow of resources (payment). Contingent liability is defined as a
___________________ possible obligation, depending on whether some uncertain future
n/S
event occurs, or a present obligation but payment is not probable
___________________
or the amount cannot be measured reliably. Contingent asset is a
___________________
possible asset that arises from past events and whose existence
___________________ will be confirmed only by the occurrence or non-occurrence of one
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___________________ or more uncertain future events not wholly within the control of
the enterprise.
___________________
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___________________ IAS 38: Intangible Assets
___________________ The objective of IAS 38 is to prescribe the accounting treatment for
intangible assets that are not dealt with specifically in another
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___________________
IAS. The Standard requires an enterprise to recognise an
___________________
intangible asset if, and only if, certain criteria are met. The
Standard also specifies how to measure the carrying amount of
intangible assets and requires certain disclosures regarding
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intangible assets.
IAS 38 applies to all intangible assets other than financial assets,
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Measurement
ES
or IAS 31; however IASs 32 and 39 apply in cases where under IAS
27, IAS 28, or IAS 31 such interests are to be accounted for under
IAS 39 – for example, derivatives on an interest in a subsidiary,
associate, or joint venture; employers’ rights and obligations under
(c)
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obligations under insurance contracts, except IAS 39 does apply to
financial instruments that take the form of an insurance (or Notes
reinsurance) contract but that principally involve the transfer of ___________________
n/S
financial risks and derivatives embedded in insurance contracts;
___________________
and financial instruments that meet the definition of own equity.
___________________
IAS 40: Investment Property ___________________
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Investment property is property (land or a building or part of a
___________________
building or both) held (by the owner or by the lessee under a
___________________
finance lease) to earn rentals or for capital appreciation or both.
uc
Examples of investment property: land held for long-term capital ___________________
appreciation, land held for undecided future use, building leased ___________________
out under an operating lease, vacant building held to be leased out
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___________________
under an operating lease and property that is being constructed or
developed for future use as investment property. ___________________
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Accounting standards are, thus, the codified forms of generally
Notes
accepted accounting principles. Standards consist of detailed rules
___________________
to be adopted for treatment of various items in accounting, before
n/S
___________________ the periodic financial reports are presented to the concerned. The
___________________ main objective of setting up standards is to convey the same
meaning of any accounting concept to all people in the same sense
___________________
so that uniformity and comparability in financial reporting is
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___________________ achieved. The accounting standard will be useful when it provides
___________________ for a generally understood and accepted measure of phenomenon of
the business and when it aims at reducing any manipulation of the
uc
___________________
financial data.
___________________
Check Your Progress
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___________________
Summary
No
In this unit, you studied the IAS 24: Related Party Disclosures,
IAS 26: Accounting and Reporting by Retirement, IAS 27:
Consolidated and Separate Financial Statements, IAS 28:
Investments in Associates, IAS 29: Financial Reporting in Hyper
.
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Lesson End Activity
Notes
Prepare a presentation on the International Accounting Standards
___________________
from IAS 24 to IAS 41. Also, include the objectives of each
n/S
accounting standard. ___________________
___________________
Keywords ___________________
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Carrying Amount: It is the amount at which an asset is ___________________
recognised in the balance sheet, after deducting accumulated ___________________
depreciation and accumulated impairment losses.
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___________________
Contingent Asset: It is a possible asset that arises from past
___________________
events and whose existence will be confirmed only by the
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occurrence or non-occurrence of one or more uncertain future ___________________
resources (payment).
Provision: It is defined as a liability of uncertain timing or
amount.
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Questions for Discussion
Notes
1. Explain the related party disclosures.
___________________
n/S
___________________
2. Discuss the accounting and reporting by retirement.
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4. Write short notes on:
___________________
___________________
(a) IAS 34: Interim Financial Reporting
(b) IAS 36: Impairment of Assets
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___________________
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___________________
___________________
Further Readings ep
Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,
Homewood, Illinois, Richard D. Irwin, 1995.
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Web Readings
Notes
www.ifrs.org/
___________________
www.charteredclub.com/what-is-ifrs/
n/S
___________________
www.investopedia.com/university/accounting/
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf ___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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Notes
___________________
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___________________
___________________
___________________
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___________________
___________________
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___________________
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___________________
___________________
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UNIT 25: Case Study
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Notes
___________________
Case Study
n/S
___________________
___________________
Objectives
___________________
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After analysing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
___________________
Case Study: Decision Making Techniques – A CIMA Case
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Study ___________________
___________________
Ratio analysis
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Businesses generate a huge amount of data. Management ___________________
accountants can use a number of the company’s key accounting
___________________
statements to extract greater meaning from this information.
The income statement sets out the total sales revenue and
subtracts the costs of generating that revenue to give operating
profit. This is the surplus earned by the normal operations of the
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Contd…
Accounting in Logistics and Supply Chain Sector
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assets (what it owns) followed by its liabilities (what it owes) – the
Notes difference being the net assets. Assets may be current, such as
cash, or fixed, such as property or equipment. This value
___________________ represents the shareholders' equity – the value in the company
n/S
that the shareholders actually own.
___________________
This looks as if Prospect plc has expanded very fast indeed – but
___________________ how strong is its performance? Accounting ratios allow different
pieces of financial data to be compared. Analysing some key ratios
___________________
helps to explore behind the figures and offer strong clues for the
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___________________ business to steer towards its objectives (previous year data in
brackets):
___________________ The chart shows every sign of a firm that has expanded too
quickly:
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___________________
sales have increased by an impressive 50% in one year
___________________
however, profitability has halved
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___________________ liquidity has weakened while gearing is more risky at nearly
___________________
50%.
Question:
Analyse the case and recommend a suitable solution.
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Source: http://dl.is.vnu.edu.vn/bitstream/123456789/272/1/NGUYEN%20THI%20
IM%20THOA.pdf
(c)
Glossary
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Glossary Notes
___________________
n/S
Account: It is a summary of all relevant transactions relating to one ___________________
person at one place for a particular period.
___________________
Accounting Entity: It is also termed as Economic entity assumption
___________________
which means that economic unit/event can be known with a specific unit.
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___________________
Accounting Period Concept: This is also known as time period
assumption, and the economic life is divided into different periods for ___________________
preparing financial statements.
uc
___________________
Accounting Standards: An accounting standard is a guideline for
___________________
financial accounting, such as how a firm prepares and presents its
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business income and expense, assets and liabilities. ___________________
Adjusted Profit & Loss A/c: Statement devised to determine the cash
from operations.
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Average Inventory: Defined as half the batch size plus safety stock.
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Budgeting: The principal tool of planning and control offered to
Notes
management by accounting functions.
___________________ Carrying Amount: It is the amount at which an asset is recognised in
n/S
___________________ the balance sheet, after deducting accumulated depreciation and
accumulated impairment losses.
___________________
Cash Book: All cash transactions are directly entered into the Cash Book
___________________
and on the basis of Cash Book, ledger accounts are prepared.
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___________________
Cash Discount: It is given for prompt payment; hence it is recorded in
___________________ the Cash Book.
uc
___________________ Cash from Operations: Cash resources accrued in the business
operations.
___________________
Combined Method: Under this method, as it is clear from the name of
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___________________
the method, both the above explained methods i.e., balance as well as
___________________ total methods are used.
Contingent Asset: It is a possible asset that arises from past events and
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Cost Benefit Principle: This principle says that the cost of applying an
accounting principle should not exceed its benefit.
(c)
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Cost Unit: It is defined by the ICMA as “a quantitative unit of product or
service in relation to which costs are ascertained”. Notes
n/S
forms, records and reports, closely coordinated to facilitate business ___________________
management through determining certain basic and required
___________________
information.
___________________
Creditors Ledger: It is meant for all the creditors from whom goods are
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bought on credit. ___________________
Debtors Ledger: It is meant for all the debtors to whom goods are sold ___________________
on credit.
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___________________
Decrease in Working Capital: Decrease in Net working capital i.e. ___________________
Excess of current liabilities over the current assets – Resources side of the
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___________________
fund flow.
___________________
Depreciation: It is a measure of the wearing out, consumption, or other
loss of value of depreciable asset arising from use, affluxion of time or
obsolescence through technology and market changes
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Diminishing Value (Balance) Method: Under this method
depreciation is calculated as a certain percentage of the value but the rate
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External Users: All persons other than internal users such as Investors,
.
creditors, Government.
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Financial Statements: These include the Trading and Profit & Loss
Account, and Balance Sheet of the business.
Accounting in Logistics and Supply Chain Sector
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Fixed Instalment Method: Under this method, depreciation is a certain
Notes
percentage of cost which is calculated on the basis of the original cost-
___________________ scrap value if any divided by the number of years
n/S
___________________ Flow: Flow means changes occurred in between two different time
___________________
periods.
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___________________ Fund Loss in Operations: Loss incurred in the operations.
___________________ Fund: Fund means working capital.
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___________________ General Ledger: It is meant for all the accounts other than debtors and
creditors.
___________________
Generally Accepted Accounting Principles (GAAP): Groups of
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___________________
accounting standards that are widely accepted as appropriate e to the
___________________ field of accounting.
but which can be apportioned to or absorbed by, cost centres or cost units
is known as indirect labour.
Intangible Assets: These are such assets which cannot be seen but only
felt
.
Internal Users: These are the persons who manage the business, i.e.,
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Investment Property: It is property (land or a building or part of a
building or both) held (by the owner or by the lessee under a finance Notes
n/S
Issued Share Capital: It is that part of the authorised capital, which is ___________________
offered to the public for subscription.
___________________
Job Costing: This refers to a system of costing where the items of direct
___________________
costs are traced to specific jobs or orders.
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___________________
Journal: Journal is a primary book of original entries for accounting
data. ___________________
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Lead-time: Lead-time is defined as time period from initiation of an ___________________
activity to its completion. For inventory management, we need following
___________________
lead times: Purchase lead-time, manufacturing lead-time, Delivery lead-
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time. ___________________
Ledger: It is also called as a book of final entry because all transactions ___________________
are finally recorded in the ledger accounts.
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Liability: It has been defined as present obligation as a result of past
events and settlement is expected to result in an outflow of resources
(payment).
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informed investor
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Non-current Liabilities: Long-term financial resources.
Notes
Obsolete Inventory: It is the inventory that results from an
___________________ unanticipated demand.
n/S
___________________ Open Book Accounting: It promotes margin improvement through cost
___________________ reduction, which can be shared between partner organisations.
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___________________
Overheads: Defined as the cost of indirect materials, indirect labour and
___________________ such other expenses including services as cannot conveniently be charged
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___________________ direct to specific cost units.
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___________________
net assets.
___________________
Personal Accounts: The transactions which involve Cash Receipts or
Cash Payments or transfer of assets from one person or institution to
other persons or institutions, are recorded in this category.
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Petty Cash Book: This type of Cash Book is used in such concerns where
small payments are made daily and that too in large numbers.
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Real Account: All transactions involving tangible assets or goods are the
subject matter of this category.
rate and very much depends upon the skill of the labour operating the
machine and the accuracy offered by the machine.
Statement of Changes in Working Capital: Enlisting the changes
taken place in between the current assets and current liabilities of two
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Subscribed Capital: It is that part of the issued capital, which has been
agreed to be taken up by the public. Notes
n/S
also called sub-division of Journal. ___________________
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Tangible Assets: These are such assets, which can be seen and felt
___________________
The Cost Principle: Every transaction should be recorded at its actual
___________________
(historical) cost or cost of its acquisition and not its market price.
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___________________
Total Assets: These are everything that a business or an individual
owns. Based inherently on the purchase value of an item, total assets are ___________________
listed on a balance sheet.
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___________________
Total Method: Under this method, instead of taking balance of each
___________________
account, the total of both the sides of each account is taken.
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Notes
___________________
n/S
___________________
___________________
___________________
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___________________
___________________
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___________________
___________________
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___________________
___________________
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