B. Voc.

RA112/RA113

Retail
Management
Semester-II

FUNDAMENTALS IN ACCOUNTING AND

TECHNOLOGY (COMPUTER SKILLS) II

Dr. Rajneesh Sharma Dr. Mamta Sharma

Assistant Professor Assistant Professor
Government Degree College, Government Degree College,
Dhaneta, Distt. Hamirpur (H.P.) Nalagarh (H.P.)
 UNIT-1: INTRODUCTION TO ACCOUNTING
Learning Objectives
1. To introduce students to Accounting system.
2. To make students conversant with the concepts of Accounting, Accounting
Standards, IFRS.

CONTENTS
1.1 INTRODUCTION TO ACCOUNTING
1.2 RULES OF ACCOUNTING
1.3 ACCOUNTING STANDARDS
1.4 INTERNATIONAL FINANCIAL REPORTING STANDARDS
1.5 INDIAN ACCOUNTING STANDARDS

1.1 INTRODUCTION TO ACCOUNTING

An account is defined as ‘a record or statement of financial expenditure and receipts relating to a
particular period or purpose’. For example- Purchase Account, Cash Account, Creditor Account
etc.
American Accounting Association defines accounting as “the process of identifying, measuring
and communicating economic information to permit informed judgments and decision by users
of the information”.
Accounting is defined as a systematic process of identifying, recording, measuring, classifying,
verifying, summarizing, interpreting and communicating financial information. It reveals profit
or loss for a given period, and the value and nature of a firm's assets, liabilities and owners'
equity.
Objectives of Accounting- Accounting is done so as to fulfill the following objectives-

 To have permanent record of all the economic business transactions.

 To keep records of income and expenses in such a way that the net profit or net loss may
be calculated.
 To keep records of assets and liabilities in such a way that the financial position of the
business may be ascertained.
 To know the extent of liability of different stakeholders of the business.
 To have important information for legal and tax purposes.
 To communicate information to different stakeholders.
Advantages of Accounting- Accounting offer certain advantages for business which makes it an
important tool for managerial decision making. Some of the advantages are as follows-

 Record Maintenance: Accounting provides permanent record for all business

transactions, replacing the memory which fails to remember everything.
  Arithmetical Accuracy of the Accounts: With the help of Accounting trial balance can be
easily prepared. This is used to check the arithmetical accuracy of accounts.
 Ascertainment of Financial Position: Assessment of Profit-Loss by preparing P&L
account and balance sheet helps in true assessment of financial position of the business.
This information helps in making plans easier.
 Comparison with the competition: making final accounts helps in inter industry
comparison. Not only with others, by comparing final statements of two years, can a
business ascertain growth in its operations.
 Ascertainment of liabilities: It is necessary for a business to determine how much
payment it has to make in short and long term. Thus accounting helps in determining how
much company owes to others.
 Valuation of Assets: A business must maintain a record of assets it purchases over a
period of time. The values of assets determine the value of the business. As value of
assets keep on changing, it is necessary to regularly calculate the value of assets, so as to
determine company’s worth.
 Legal Requirements: Different laws in country make it compulsory to prepare accounts.
So accounting helps in removing any legal complications a business might have faced
otherwise.
 Management Decision-making: Accounting helps in taking other managerial decisions
like planning, controlling, organising. For example- decision related to selling price can
be taken with the help of accounting information such as cost of production, cost of sales,
contribution margin etc.
Limitations of Accounting- Accounting suffers from following limitations-

 Only economic information- Accounting does not consider qualitative non economic
data. Such information however useful it might be, cannot be represented through
accounting.
 Lack of universal standard policies- Different businesses in different industry follow
different accounting policies. This makes inter industry comparison difficult, thus
undermining utility of accounting in general.
 Dependency on information- accounts reflects information in a systematized form.
Unless the information is true, they will not reflect true position about the business.
 Professional Judgment- it requires knowledge to derive information from financial
statement of companies. Also the information given by expert is just an expressed
opinion and does not guarantee company’s future performance.
 Fraud and Errors- many frauds have been unearthed which were done by exploiting
limitations of accounting.

Test your understanding

 What do you understand by Accounting?

 What are the objectives accounting?
 What are the importance and limitations of Accounting?
Process of Accounting
Accounting comprises of a set of activities done in order to communicate the required
information to different stakeholders. The process of accounting has following steps-

Identification : Identifying the business transactions from the source

documents

Recording: It means is to keep a systematic

record of all business transactions, which are identified in an orderly manner.

Classification : classification of the recorded

business transactions so as to group the transactions of similar type at one place

Summarising: preparing profit and loss account and balance sheet to provide useful information
to the stakeholders

Analysis : establishing the relationship between the items of the profit

and loss account and the balance sheet

Interpreting : explaining the meaning and significance

of the relationship so established by the analysis

Communicating: The results obtained from the summarised, analysed

and interpreted information are communicated to the interested parties
1.2 BASIC RULES OF ACCOUNTING

 In Accountancy, accounts can be classified into 2 heads- Personal accounts and

impersonal accounts. Impersonal accounts are further classified into Real accounts and
Nominal accounts.

ACCOUNTS

PERSONAL IMPERSONAL

REAL NOMINAL

1. PERSONAL ACCOUNTS
These are the accounts which represents the natural persons, artificial persons or accounts
representative of a group of persons.
1. Natural Persons Accounts-The accounts which relate to living persons. These accounts
are in the name of the person. For example- Amit Account, Himanshu Account.
2. Artificial Persons Account- these accounts are of artificial persons like other corporations
having legal entity. For example- bank of Baroda account, Tata Motors account.
3. Representative Accounts- Accounts which represent a certain person or a group directly
or indirectly. It includes accounts like prepaid wages/salary account, outstanding rent
account.
4. As the business has a separate legal entity, the owner and business are different. Thus,
Capital Account and Drawing account which belong to the owner also come under the
Personal accounts.
2. IMPERSONAL ACCOUNTS
All the accounts which do not represent any person come under the category of impersonal
accounts. They are of two types: Real account and Nominal Account.
1. Real Accounts- the accounts pertaining to the assets of the firm which may be tangible or
intangible. For example- Land account, Building account etc.
2. Nominal Accounts-Accounts which are related to expenses, losses, incomes or gains.
These items don’t have a physical existence. For example- Salary account, wages
account, Rent account.
While Salary Account is a nominal account, outstanding salary will come under Personal account
because it represents a future claim which the organisation has to pay. This element of
representativeness makes it a personal account.
Double Entry System
In the words of Luca Friar Pacioli, “Double Entry System is a method of arranging accounts
in such a way that the dual aspect would be expressed by a debit amount and an equal and
offsetting credit amount.
In other words, while recording a transaction in books of accounts, for every debit, there is a
credit entry. Thus if a transaction gives a debit effect in our accounts, then simultaneously it
will have a credit entry which will give an overall balanced account. This is what is known
as Double Entry book keeping system.
The basic Rules of Double Entry System are-
 Every business transaction affects two accounts.
 Each transaction has two aspects, i.e., debit and credit.

Advantages of Double Entry system

The double entry system offers following advantages while preparing books of account -
1. Overall Balancing of Accounts –
When accounts are prepared under Double Entry System, it automatically lead to balancing
of accounts. Because any transaction automatically gives rise to offsetting credit and debit
balance, the sum of the Debit side is always equal to the Credit side.

2. Preparation of Trial Balance-

When accounts are prepared under Double Entry system, it helps in preparing of trial
balance, which acts as a tool to verify the arithmetic accuracy of accounting system.
3. Helps in setting up Control standards-
Under this system, accounts reflect detailed description of an item. Thus while establishing
control standards we can easily set the objectives and standards for future.
4. Preparation of financial statements-
Financial statements prepared under Double Entry System are error free. This also helps in
acknowledging the current financial position of firm as well as helps in comparing of
financial performance of organisation with its past records as well as with records of other
firms.
Disadvantages of Double Entry system- The Double Entry System offers following
disadvantages:
1. Time factor-Double Entry System records every detail about a transaction. So it a tedious
task to collect and record information accurately, else we will have errors.
2. Cost factor-Accounts under this system have to maintained and updated regularly by a
trained person, thus adding to cost of employing additional labour force.
3. More number of books prepared-Under this method each transaction is recorded in books
in two stages (journal and ledger) and two sides (debit and credit). This results in increase
of number and size of books of account.
RULES OF DEBITING AND CREDITING OF ACCOUNT
Depending upon the nature of an account, there are different rules which decide which account is
to be debited or credited. These rules are referred to as “Golden Rules of Debit and Credit”. To
debit an account means writing its amount in the debit side of the account, while crediting an
account means writing an amount on credit side of an account.

S.NO NATURE OF THE ACCOUNT RULE

Debit the receiver
1 PERSONAL ACCOUNTS
Credit the giver.
Debit what comes in
2 REAL ACCOUNTS
Credit what goes out

Debit all expenses and losses

NOMINAL ACCOUNTS
3 Credit all incomes and gains

1.3 ACCOUNTING STANDARDS

An accounting standard is a principle that guides and standardizes accounting practices. The
Generally Accepted Accounting Principles (GAAP) is a group of accounting standards
widely accepted as appropriate to the field of accounting necessary so that financial
statements are meaningful across a wide variety of businesses and industries. An accounting
standard is a guideline for financial accounting, such as how a firm prepares and presents its
business income, expenses, assets and liabilities, and may be in accordance to standards se t
by the International Accounting Standards Board (IASB).Accounting standards specify how
transactions and other events are to be recognized, measured, presented and disclosed in
financial statements. The objective of such standards is to provide financial information to
investors, lenders, creditors, contributors and others that is useful in making decisions about
providing resources to the entity.

Importances of Accounting Standards- Accounting Standards are important for following

reasons-
 Comparison: Accounting is done to provide information to a variety of stakeholders.
This information is then analysed and compared with previous year or a inter
industry analysis may be done. As comparison has to be done, it requires therefore a
set of defined principles or rules, on which financial statements are prepared
worldwide so that comparison could take place.
 Transparency: These standards provide the basic guidelines which any one can
understand. A person could read the standards and derive the information wh ich he
requires from such statements. Following the standards while preparing the statement
would ensure the transparency in the statement.
 Relevance: The standards ensure that all the relevant information is presented in the
financial statements in proper manner. This maintains the relevance aspect of the
financial statements.
 Protecting Investors: Using the accounting standards, the interests of investors are
ensured that the documents they examine are certainly accurate and sincere. As
investors, they are interested to know that their money will eventually pull ahead and
 come back to them.Accounting standards increase the confidence of investors in the
company.

List of International Accounting Standards (AS)-

As on July 31 2017, the following Accounting Standards are mandatory to be followed by

Indian entities-
AS 1- Disclosure of Accounting Policies
AS 2- Valuation of Inventories
AS 3- Cash Flow Statements
AS 4- Contingencies and Events Occurring After Balance Sheet Date
AS 5- Net profit or Loss for the period, Prior Period Items and Changes in
Accounting Policies
AS 7- Construction Contracts
AS 9- Revenue Recognition
AS 10- Property, Plant and Equipment
AS 11 - The Effects of Changes in Foreign Exchange Rates
AS 12 - Government Grants
AS 13 - Accounting for Investments
AS 14 - Accounting for Amalgamations
AS 15 - Employee Benefits
AS 16 - Borrowing Costs
AS 17 - Segment Reporting
AS 18 - Related Party Disclosures
AS 19 - Leases
AS 20 - Earnings Per Share
AS 21 - Consolidated Financial Statements
AS 22 - Accounting for Taxes on Income
AS 23 - Accounting for Investments in Associates
AS 24 - Discontinuing Operations
AS 25 - Interim Financial Reporting
AS 26 - Intangible Assets
AS 27 - Financial Reporting of Interests in Joint Ventures
AS 28 - Impairment of Assets
AS 29 - Provisions, Contingent Liabilities and Contingent Assets
Following standards have been declared non- mandatory by the ICAI
AS 30- Financial Instruments: Recognition and Measurement
AS 31- Financial Instruments: Presentation
AS 32- Financial Instruments: Disclosures
1.4 INTERNATIONAL FINANCIAL REPORTING STANDARDS-
As per Investopedia, International Financial Reporting Standards (IFRS) are a set of
international accounting standards stating how particular types of transactions and other
events should be reported in financial statements. IFRS are issued by the International
Accounting Standards Board (IASB), and they specify exactly how accountants must
maintain and report their accounts. IFRS were established in order to have a common
accounting language, so business and accounts can be understood from company to
company and country to country.
These are the following IFRS which are followed while preparing final accounts -
IFRS 1- First-time Adoption of International Financial Reporting Standards
IFRS 2- Share Based payment
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
IFRS 7- Financial Instruments: Disclosures
IFRS 8- Operating segments
IFRS 9- Financial Instruments
IFRS 10- Consolidated Financial Statements
IFRS 11- Joint agreement
IFRS 13- Fair Value Measurement
IFRS 12- Disclosure of Interests in Other Entities

1.5 INDIAN ACCOUNTING STANDARDS

The Institute of Chartered Accountant in India (ICAI) has issued certain of its own
standards which are known as Indian Accounting Standards which can be followed by
Indian Companies. The list of such standards is as follows-

Ind AS 1 – Presentation of Financial Statements

Ind AS 2 – Inventories
Ind AS 7 – Statement of Cash Flows
Ind AS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
Ind AS 10 – Events after the Reporting Period
Ind AS 12 – Income Taxes
Ind AS 16 – Property, Plant and Equipment
Ind AS 17 – Leases
Ind AS 19 – Employee Benefits
Ind AS 20 – Accounting for Gov. Grants and Disclosure of Govt. Assistance
Ind AS 21 – The Effects of Changes in Foreign Exchange Rates
Ind AS 23 – Borrowing Costs
Ind AS 24 – Related Party Disclosures
Ind AS 27 – Separate Financial Statements
Ind AS 28 – Investments in Associates and Joint Ventures
Ind AS 29 – Financial Reporting in Hyperinflationary Economies
Ind AS 32 – Financial Instruments: Presentation
Ind AS 33 – Earnings per Share
Ind AS 34 – Interim Financial Reporting
Ind AS 36 – Impairment of Assets
Ind AS 37 – Provisions, Contingent Liabilities and Contingent Assets
 Ind AS 38 – Intangible Assets
Ind AS 40 – Investment Property
Ind AS 41 – Agriculture
Ind AS 101 – First-time Adoption of Indian Accounting Standards
Ind AS 102 – Share-based Payment
Ind AS 103 – Business Combinations
Ind AS 104 – Insurance Contracts
Ind AS 105 – Non-current Assets Held for Sale and Discontinued Operations
Ind AS 106 – Exploration for and Evaluation of Mineral Resources
Ind AS 107 – Financial Instruments: Disclosures
Ind AS 108 – Operating Segments
Ind AS 109 – Financial Instruments
Ind AS 110 – Consolidated Financial Statements
Ind AS 111 – Joint Arrangements
Ind AS 112 – Disclosure of Interests in Other Entities
Ind AS 113 – Fair Value Measurement
Ind AS 114 – Regulatory Deferral Accounts
Ind AS 115 – Revenue from Contracts with Customers

Do it yourself

 What is the process of Accounting?

 What are the golden rules of Dr and Cr in accounts?
 What do you mean by Real account, Personal account and Nominal
account?
 Prepare a chart of comparison of Indian AS with International AS.
 What are Accounting Standards?
 Write down the need for having International Accounting Standards.
 UNIT-2: BANK RECONCILIATION STATEMENT
Learning Objectives
1. To introduce students to Bank Reconciliation Statement (BRS).
2. To understand the need for BRS and problems related with making BRS.
CONTENTS
2.1 INTRODUCTION TO BANK RECONCILIATION STATEMENT
2.2 CAUSES OF DIFFERENCE IN BALANCE OF BANK AND CASH BOOK
2.3 PROCEDURE OF CONSTRUCTING A BRS
2.4 SOLVED PROBLEMS OF BRS
2.1 INTRODUCTION TO BANK RECONCILIATION STATEMENT
Every organisation maintains a cash book which records all the transactions of business of
cash nature. When a business has a bank account, it records the transactions of its bank
account in cash book. Similarly, bank records the same transaction in a book called as bank
pass book. Normally, the balance in the bank column of cash book and passbook should be
equal. But sometimes, it happens that there is difference in the balances shown by the two
books. Under such circumstances, the accountant in the business will prepare a statement
known as Bank Reconciliation Statement which shows the items which cause the balance to
mismatch.
Thus, a Bank Reconciliation Statement is defined as a list in which the various items that
cause a difference between bank balance as per cash book and pass book on any given date
are indicated.
Preparing a BRS offers certain advantages-
 It shows the accuracy of balances of passbook and cash book.
 It helps in updating of cash book as per pass book.
 The errors which cause the balance can easily be detected and rectified thereon.
 If prepared at regular intervals, frauds can easily be detected.
2.2 CAUSES OF DIFFERENCE IN BALANCE OF BANK AND CASH BOOK
There are two main reasons due to which difference between the balance of cash book and
pass book could arise. These are as follows-
1. Errors due to timing of transaction- sometimes there is mismatch in the recording
date of transactions in cash book and pass book. If a BRS is prepared during such
period, both the books will show different balance. Some examples of different errors of
timing are as follows-
 Cheque presented but yet not credited- sometimes it happens that the cahier has
deposited some cheque for collection in bank. The cashier has debited the amount in
the bank column of the cash book as duly received. But it might happen that the same
cheques have yet not been credited by the bank and thus no entry has been passed in
the passbook. It might be that cheques might have been dishonored or bank staff has
omitted the entry in passbook or simply that cheques have not been credited till the
date the matching of books is done. In this case, bank column in cash book will
always show more balance than the bank pass book.
  Cheque issued but yet not presented for payment- similarly it might happen that
business has issued some cheques to its suppliers, creditors which have not yet been
presented in the bank. So the cashier had deducted the amount from cash book when
it issued the cheques, but as they have not been presented to the bank, no deduction
is made in the bank passbook. In this case, balance in cash book will always be less
than bank pass book.
 Transactions dome by Bank directly- there are certain transactions which occur
without the knowledge of cashier. As these transactions are carried out by bank
autonomously, there is no record in the cash book. This causes difference in the
totals of these books. The transactions could be of two types-
o Amount directly credited in bank account- transactions like rent collected,
dividend collected, direct deposits by customer in bank, interest credit is done
without knowledge of cashier. As these transactions are recorded only in
bank passbook, it will show more balance than bank column of cash book.
o Amount directly debited in bank account- transactions such as banking
charges, interest on overdrafts, bills dishonored charges, and other pa yments
on behalf of customer are made directly by bank. If no entry is made in cash
book, the balance of bank passbook will be less than the cash book.
 Bank overdraft-Bank overdraft is an amount drawn over and above the actual balance
kept in the bank account. This facility is available only to the current accountholders.
In case of overdraft, the balance in cash book is negative, whereas passbook will
show a debit balance.
2. Errors in recording a transaction-sometimes errors may occur while recording a
transaction. These errors may be of omission, commission or principle errors. Because
of such errors, the balance of the two books will mismatch. These errors are discussed
below-
 Errors committed in recording transactions by the firm- There may be certain errors
from firm’s side, e.g., omission or wrong recording of transactions relating to
cheques deposited, cheques issued and wrong balancing etc. In this case, there would
be a difference between the balances as per Cash Book and as per Pass Book.
 Errors committed in recording transactions by the Bank- Sometimes, bank may also
commit errors, e.g., omission or wrong recording of transactions relating to cheques
deposited etc. As a result, the balance of the bank pass book and cash book will not
agree.
Test your understanding

1. What are the reasons for preparing a Bank Reconciliation Statement?

2. List out the different errors which cause difference in balance of cash book and pass
book.

2.3 PROCEDURE OF CONSTRUCTING A BRS

There are two methods of constructing a BRS. These methods are-

1. Without adjusting the cash book balance- under this approach, either of the two,
balance as per cash book or balance as per passbook is taken as starting point.
 Favorable balance means the cash book will have a debit balance and the passbook will
have a credit balance. Bank overdraft or unfavourable balance means cash book will
have a credit balance and passbook will have debit balance.
If balance as per cash book is starting point then BRS will be prepared as per following
format-

Particulars Amount (Dr) Amount(Cr)

A Favourable Balance as per cash book ***
B Add:
Cheques issued but yet not presented ***
Interest credited by bank but not recorded in cash
book
Debtors directly paid into bank but not recorded in ***
cash book
Wrong credit by banker ***
Collections by banker as per customer standing
instructions
***

***
C Less:
Cheques deposited but not credited by the bank ***
Dishonoured cheques appeared in the pass book but
not entered in the cash book ***
Bank charges as per pass book wrong debit by
banker
Payments as per standing instructions
***

***
D Balance as per passbook *** (A+B-C)

If a BRS is prepared by taking balance as per passbook as starting point, then the format
will be as follows-

Particulars Amount (Dr) Amount (Cr)

A Favourable Balance as per pass book ***
B Less:
Cheques issued but yet not presented ***
Interest credited by bank but not recorded in cash
book ***
Debtors directly paid into bank but not recorded in
cash book
Wrong credit by banker ***
Collection by banker on standing instructions
 ***
***

C Add:
Cheques deposited but not credited by the bank ***
Dishonoured cheques appeared in the pass book but
not entered in the cash book ***
Bank charges as per pass book wrong debit by
banker
Payments as per standing instructions
***

***
D Favourable Balance as per cash book *** (A-B+C)

2. After preparing an amended cash book- under this method, we first calculate an
amended cash book balance by incorporating items which appear only in passbook in
cash book. The benefit of this approach is that it reduces the number of items that
appear in the reconciliation statement. Items which are included in BRS are as follows -
a. Cheques issued but not yet presented
b. Cheques deposited but yet not credited
c. Errors in pass book
Thus it is clear that errors of timing are recorded in BRS whereas other errors are
recorded in the amended cash book. This method is followed in real life.

2.4 SOLVED PROBLEMS OF BRS

Illustration 1- From the following details, make out a bank reconciliation statement for
M/s. ABC as on December 31, 2017 to find out the balance as per pass book.
Particulars Amount
Cheques deposited but not yet collected by the bank 1500
Cheque issued to Mr. X has not yet been presented for payment 2500
Bank charges debited in the pass book 200
Interest allowed by the bank 100
Insurance premium directly paid by the bank as per standing instructions 500
Balance as per cash book 200

Solution-
Bank Reconciliation Statement as on December 31, 2017
Particulars Amount Amount
A Balance as per cash book 200
B Add:
Cheque issued to Mr. X has not yet been presented for 2500
payment
Interest allowed by bank
 100
C Less:
Cheques deposited but not yet collected by the bank 1500
Insurance premium directly paid by the bank as per
standing instructions
Bank charges debited in the pass book 500

200
Balance as per Pass book 600

Illustration 2 Bank Pass book of M/s. PQR Industries showed a credit balance of Rs.27,350
on July 31,2017. The following differences were found on that date between the cash book
and the pass book:
1. Cheques issued before July 31, 2017, amounting to Rs.19, 000 had not been presented for
payment.
2. Two cheques of Rs.5, 000 and Rs.3, 500 were deposited into bank on July 31, but the
bank gives credit for the same in August.
3. Insurance premium directly paid by bank Rs.5, 000.
4. Rs.2, 000 wrongly debited to the firm account by the bank.
Prepare Bank Reconciliation Statement as on July 31, 2017.
Solution-
Bank Reconciliation Statement as on July 31, 2017

Particulars Amount (Dr) Amount (Cr)

A Balance as per pass book 27350
B Less:
Cheque issued but yet not presented for payment 19000

C Add:
Cheques deposited but not yet collected by the bank 8500
Insurance premium directly paid by the bank as per
standing instructions
Wrong debit done by the bank 5000

2000
Balance as per Cash Book 23850

Illustration 3 From the following particulars, prepare a bank reconciliation statement as on

March 31, 2017.
Particulars Amount
1. Debit balance as per cash book 10000
2. Cheque deposited but bot recorded in cash book 1000
3. Amount recorded in cash coloumn of cash book instead of bank 200
coloumn
 4. Cheques issued for 250 was recorded as 205 in cash coloumn of book -
5. Debit balance brought forward as credit balance in cash book 1500
6. Payment side of cash book was found to be undercast 100
7. Cash discount allowed for 112 was recorded as 121 in bank coloumn -
8. Cheque received from debtor recorded in cash book but not deposited 500
in bank
9. Cheque issued recorded twice in cash book 300

Solution:
Bank Reconciliation Statement as on March 31, 2017

Particulars Amount (Dr) Amount (Cr)

A Debit balance as per cash book 10000
B Add:
Cheque deposited but recorded in cash book 1000
Debit balance brought forward as credit balance in 3000
cash book
Cheque issued recorded twice in cash book 300
Amount recorded in cash column of cash book instead 200
of bank coloumn
C Less:
Cheques issued for 250 was recorded as 205 in cash 250
coloumn of book
Payment side of cash book was found to be under cast
Cash discount allowed for 112 was recorded as 121 in 100
bank coloumn
Cheque received from debtor recorded in cash book 121
but not deposited in bank

500
Balance as per Pass book 13529

Illustrations 4 From the following particulars prepare a Bank Reconciliation statement as

on March 31, 2016.
1. Overdraft as per passbook on March 31 is Rs 12000
2. On 30th March, cheques amounting to Rs 70000 had been issued. But till date
cheques of Rs 3000 had been presented.
3. Cheques amounting to Rs 3500 had been paid into the bank for collection but only
Rs 500 had been credited in passbook.
4. Bank has charged Rs 500 as Bank overdraft charges.
5. Amount of Rs 1000 was directly deposited b a customer in bank account. No such
entry is made in cash book.
6. A cheque of Rs 200 has been debited in cash book but was not sent to bank for
collection.
Solution:
Bank Reconciliation Statement as on March 31, 2016.

Particulars Amount (Dr) Amount (Cr)

A Overdraft as per pass book 12000
B Add:
Cheques deposited but yet not credited 3000
Overdraft charges by bank 500
Amount debited in cash book but not sent to bank 200
C Less:
Cheques issued but yet not presented 67000
Amount directly deposited in bank account 1000
Unfavourable Balance as per Cash book 76300

Illustration 5The bank overdraft of ABC Ltd. On March 31, 2017 as per cash book is Rs
18000. From the following particulars, find the amended cash balance and prepare a BRS.
Particulars Amount
1. Un presented cheques 6000
2. Uncleared cheques 3400
3. Bank interest debited in pass book only 1000
4. Bills collected and credited in passbook only 1600
5. Cheques collected Dishonoured 1000
6. Cheques issued yet not recorded in cash book 600

Solution: Amended cash book as on March 31, 2017

Date Particulars L.F Amount Date Particulars L.F Amount

Bills collected 1600 Balance b/d 18000
as per passbook Interest 1000
Balance c/d 19000 Cheques collected 1000
Dishonoured
Cheques not recorded 600
20600 20600

Bank Reconciliation Statement as on March 31, 2017

Particulars Amount (Dr) Amount (Cr)

Bank overdraft as per cash book 19000
Less: Un-cleared cheques 3400
Add: cheques issued yet not presented 6000
Overdraft as per pass book 16400
 UNIT-3: PREPARATION OF FINAL ACCOUNTS
Learning Objectives
1. To know the Meaning, Purpose, Content and Format of Trading, Profit and Loss
Account and Balance Sheet.
2. To understand the Differences between Trial Balance and Balance Sheet.
3. To prepare the Final Accounts in different formats
4. To understand the treatment of different adjustments while preparing final accounts
CONTENTS
3.1 INTRODUCTION TO FINAL ACCOUNTS
3.2 TRADING ACCOUNT
3.3 PROFIT AND LOSS ACCOUNT
3.4 BALANCE SHEET
3.5 DIFFERENCE BETWEEN TRIAL BALANCE AND BALANCE SHEET
3.6 ADJUSTMENT IN FINAL ACCOUNTS
3.7 SOLVED ILLUSTRATIONS

3.1 INTRODUCTION TO FINAL ACCOUNTS

The financial statements are statements that summarize a large company's operations,
financial position and cash flows over a particular period. If a person wants to know about
the financial position of the business and its profitability, it can do it by looking at the final
accounts. Final accounts have 3 parts- a trading account, a Profit and Loss account and a
balance sheet. These 3 statements together are known as final accounts of the business.
These are prepared at the end of every accounting period.

Trading
Account

Final
Accounts

Profit and Balance

Loss Account Sheet

3.2 TRADING ACCOUNT

The account which is prepared to determine the gross profit or gross loss of a business concern is
called trading account. Trading account is nominal account which is prepared at the end of
accounting year. Trading account consists of two sides 'debit and credit'. All direct expenses are
debited and direct incomes are credited in trading account. Trading account contains mainly
purchase of goods, sale of goods and expenses relating to the daily operation of factory.
Objectives of preparing Trading account
The main objectives for which trading account is prepared are as follows-

 Ascertainment of Gross Profit- it is very important in a business to know about the

gross profit or loss. Gross profit shows the difference between the revenue generated
and cost associated in making a product.
 Direct expenses- direct expenses are expenses which can be attributed to a particular
product. These expenses need to be monitored as they impact cost of the products
directly.
 Safety against loss- Gross profit margin is necessary to be determined as it prevents
business from future losses.
Advantages of Trading and Loss Account Trading account offers following advantages-

 Trading account shows the relationship between gross profit and sales that helps to
measure profitability position.
 Trading account shows the ratio between costs of goods sold and gross profit.
 Trading account gives the information about efficiency of trading activities.
 Trading account helps to compare between costs of goods sold and gross profit.
 Trading account provides information regarding stock and cost of goods sold.
Format of Trading Account- a trading account has two sides, a debit and a credit. All
direct expenses are debited and direct incomes are credited in trading account.
Trading Account for the year ending XXXX

Particulars Amount Particulars Amount

To Opening Stock By net sales
To net purchases By closing stock
To direct expenses By Gross Loss ( if Dr side is
more)
To Gross Profit (if Cr side is
more)

List of Items appearing in Debit side of Trading Account-

 Opening Stock: Stock on hand at the beginning of the year is termed as opening
stock. The closing stock of the previous accounting year is brought forward as
opening stock of the current accounting year. In the case of new business, there will
not be any opening stock.
 Purchase- Purchase includes both credit purchase and cash purchase. Purchas e is
available in trial balance.
 Purchase Returns- Purchase returns appear in the credit side of trial balance.
Purchase returns may be shown by deduction from purchases.
  Direct Expenses- Direct expenses mean all the expenses which are directly
attributable to the purchase of goods. These are the some examples of direct
expenses.
o Direct labour or direct wages.
o Freight on purchase.
o Carriage on purchase.
o Fuel, power and lighting expenses.
o Packing charges.
o Manufacturing expenses.
o Commission on purchase.
o Royalty
List of items appearing in Credit side of Trading account-
 Sales- Both cash sales and credit sales are included in trading account.
 Sales return- Sales returns must be deducted from total sales and to be shown in the
credit side of trading account. Sales returns are the sold goods which are returned
from customers.
 Closing stock- Closing stock means the value of goods which are remain unsold in a
particular accounting period. Closing sock may be in the form of raw materials, work
in progress or finished goods. Closing stock is valued at cost or market price.
3.3 PROFIT AND LOSS ACCOUNT
The main objective of preparing profit and loss account is to achieve the operating results of
a company at the end of accounting period. Profit and loss account is a nominal account
having debit side and credit side. All the indirect expenses are recorded in the debit side of
the profit and loss account and all the incomes except sales and closing stocks are recorded
in the credit side of the profit and loss account. In profit and loss account if debit side is
excess the credit side, the difference is called net loss. If the credit side of profit and loss
account is excess than the debit side, the difference is called net profit. Profit and loss
account helps to ascertain net profit or net loss from business operation.
Advantages of preparing Profit and Loss account-

 Profit and loss account gives the actual information about net profit or net loss of the
business for an accounting period.
 Profit and loss account gives the information about indirect expenses.
 Profit and loss account serves to determine the ratio between net profit to s ales.
 Profit and loss account helps in determining the ratio between net profit to operating
expenses.
 Profit and loss account helps in controlling indirect expenses.
Format of Profit and Loss Account

Particulars Amount Particulars Amount

To net loss b/d By Gross profit b/d
To indirect expenses By Indirect incomes
To depreciation
To Net profit ( transferred to By Net loss ( Transferred to
capital A/c) Capital A/c)

List of items appearing in debit side of Profit and Loss account-

 Gross Loss- Gross loss is the debit balance of trading account which is transferred to
the profit and loss account.
 Selling and distribution expenses- Expenses incurred for the promotion of sales and
distribution of sold goods are selling and distribution expenses. Packing charge,
carriage , freight outward, sales tax, forwarding charge , export duty , travelling
expenses etc. are the examples of selling and distribution expenses.
 Administrative Expenses- Administrative expenses are those expenses which are
incurred in day to day office management.
 Financial Expenses- Financial Expenses are incurred in arranging funds to run the
business. Cash discount allowed, interest on capital, interest on loan discount on bill
etc. are the examples of financial expenses.
 Maintenance Expenses- Expenses incurred for maintaining the fixed assets are called
maintenance expenses. Repair and renewable depreciation of assets are some
examples of maintenance expenses.
 Abnormal Losses- Abnormal losses are those losses which are incurred due to the
carelessness of the management. Loss on sale of asset, stock lost by fire etc. are the
examples of abnormal losses.
List of items appearing in Credit side of Profit and Loss account-
 Gross Profit- Gross profit is transferred from trading account and it is the beginning
item of profit and loss account.
 Non-trading Income- Interest received from bank, incomes received from outside
investments like share and debenture are known as non-trading incomes.
 Other incomes- Those incomes other than income from sale of goods are called other
income. Discounts or commission received are the examples of other income.

3.4 BALANCE SHEET

Balance Sheet also known as Statement of Financial Position is a tabular statement of
balances carried forward after closing the books of account kept according to principles of
accounting. Balance sheet is a statement prepared with a view to measure the financial
position of a business on a certain fixed date. Balance sheet indicates the financial position
of a concern by its assets on a given date and its liabilities on that date. Excess of assets
over liabilities represents capital or net worth or shareholders' fund and is indicative of the
financial soundness of a company. Balance sheet is prepared by taking up all personal
accounts and real accounts (assets and properties) together with the net result obtained from
profit and loss account. On the left hand side of the statement, the liabilities and capital are
shown. On the right hand side, all the assets are shown. Balance sheet is defined as ‘a
statement which sets out the assets and liabilities of a business firm and which serves to
ascertain the financial position of the same on any particular date.
Importance of preparing Balance Sheet-
  Balance sheet helps in assessment of financial position of a business at a given date.
 It is helpful in ascertainment of liquidity and solvency of business.
 It is helpful in knowing the external and internal liabilities of business.

Format of preparing a balance sheet

A balance sheet can be prepared in following 2 ways
1. Horizontal Balance Sheet- The right hand side of the balance sheet is asset side and
the left hand side is liabilities side. All accounts having debit balance will appear in
the asset side and all those having credit balance will appear in the liability side. The
total of debit side is always equal to the total of credit side because of double entry
system in accounts.

Balance sheet of XYZ as on …….

Liabilities Amount Assets Amount
Sundry creditors **** Cash in hand ****
Bills payable **** Cash at bank ****
Bank overdraft **** Bills receivable ****
Outstanding expenses **** Sundry debtors ****
Mortgage loans **** Investments ****
Reserve fund **** Closing stock ****
Capital **** Prepaid expenses ****
Add: Net profit (or) **** Furniture & fittings ****
Less: Net loss **** Plant & machinery ****
Less: Drawings **** Land & buildings ****
Less: Income tax **** Business premises ****
Patents & trade marks ****
Good will ****
 2. Vertical Balance Sheet

List of items included in Liabilities head of Balance Sheet

 Fixed Liabilities- These liabilities are payable to the owners only on the liquidation
of the company after making the payment of other outside liabilities are called fixed
liabilities.
 Current Liabilities- These are liabilities which are payable out of current assets
within the next accounting period. Bills payable, short term bank overdrafts are the
examples of current liabilities.
 Long term Liabilities- These are liabilities which are not payable within the next
accounting period but will be payable within next few years. Debentures are the
example of long term liabilities.
List of items included in the Assets head of Balance Sheet
 Fixed Assets- Those assets which are acquired and held permanently for a long time
in the business are fixed assets.
 Current Assets- Those assets which can not be put to constant uses and intended for
resale or which in the ordinary course of business will be converted into other assets
are current assets.
 Intangible Assets- Intangible assets are those assets which can not be touched, seen
and have no volume but have value.
  Wasting Assets- Those assets which are depicted gradually or exhausted in the
process of earning income are known as wasting assets.

3.5 DIFFERENCE BETWEEN TRIAL BALANCE AND BALANCE SHEET

S. No Basis
1 Objective
2 Format
3 Content
4 Period
5 Compulsion
6 Evidence
Trial Balance
To know the arithmetical
accuracy of the accounting
work
The columns are debit
balances and credit balances.
It is a summary of all the
ledger balances – personal,
real and nominal accounts.
It can be prepared
periodically, say at the end
of the month, quarterly or
half yearly, etc.
Preparation of trial balance
is not compulsory.
It cannot be produced as
documentary evidence in the
court.
Balance Sheet
To know the true and fair
financial position of a business
The two sides are assets
and liabilities
It is a statement showing
closing balances of
personal & real accounts
It is generally prepared at the
end of the accounting period.
Preparation of Balance sheet is
compulsory.
It can be produced as a
documentary evidence

3.6 ADJUSTMENTS IN FINAL ACCOUNTS

Generally final accounts are prepared from information given in the trial balance. But
sometimes certain information is given outside the trial balance and is known as adjustment.
Such information includes information about closing stock, additional inform ation on
certain expenditure on income, any outstanding liability detected after preparation of trial
balance. These adjustments must be made before preparing the final accounts. Following is
the list of adjustments that may be given alongside the trial balance, along with the
adjustment needed for them.

S. No Adjustment Adjustment Entry Treatment in Treatment in

P&L A/c Balance Sheet
1 Closing Stock Closing stock A/c Dr Shown on the Shown as an
To Trading A/c credit side. asset.
2 Outstanding Expense A/c Dr Added to the Shown in the
expenses To Outstanding expense on Debit liability side.
expense side.
3 Prepaid Expense Prepaid expense Dr Deducted from the Shown on asset
To Expense A/c expense on debit side of balance
side. sheet.
4 Income earned but Accrued income Dr Added to Shown on the
 not received To Income respective income asset side.
on credit side.
5 Income received in Income A/c Dr Deducted from Shown in the
advance To Income respective income liabilities side
received in advance on credit side.
6 Depreciation Depreciation A/c Dr Shown on the Deducted from
To Asset A/c debit side. respective asset.
7 Provision for Bad P&L A/c Dr Shown on the Shown as
and Doubtful Debts To Provision for debit side. deductions from
doubtful debts debtors.
8 Provision for P&L A/c Dr Shown on the Shown as
discount on debtors To provision for debit side. deduction from
discount on debtors debtors.
9 Manager’s Manager’s Shown on the Shown on the
commission commission Dr debit side. liabilities side.
To outstanding
commission A/c
10 Interest on Capital Interest on capital Dr Shown on the Shown as addition
To Capital A/c debit side. to capital.
11 Further Bad Debts Bad debts A/c Dr Shown on the Deductions from
To Sundry Debtors debit side. debtors.

3.7 SOLVED ILLUSTRATIONS

Illustration 1 From the following Trial Balance of M/s. Ram & Sons, prepare trading and
profit and loss account for the year ending on 31st March 2012 and the balance sheet as on
the date:
Trial Balance as on 31st March 2002
Particulars Amount (Dr) Amount (Cr)
Opening stock 5000
Purchases 16750
Discount allowed 1300
Wages 6500
Sales 30000
Salaries 2000
Travelling expenses 400
Commission 425
Carriage inward 275
Administrative expenses 105
Trade expenses 600
Interest 250
Building 5000
Furniture 200
Debtors 4250
Creditors 2100
Cash 2045
Capital 13000
Closing stock was valued at 6000.
Solution:
M/s. Ram & Sons
Trading and Profit and Loss Account for the year ending 31st March 2012
Particulars Amount Particulars Amount
To opening stock 5000 By sales 30000
To purchases 16750 By closing stock 6000
To wages 6500
To carriage inward 275
To gross profit c/d 7475
36000 36000
To discount 1300 By gross profit b/d 7475
To salaries 2000
To travelling expenses 400
To commission 425
To administrative expenses 105
To trade expenses 600
To interest 250
To net profit 2395
7475 7475

Balance Sheet as on 31st March 2012

Liabilities Amount Assets Amount
Creditors 2100 Cash 2045
Capital 13000 Debtors 4250
Net Profit 2395 Stock 6000
Furniture 200
Building 5000

17495 17495

Illustration 2 Prepare final accounts from the trial balance extracted from the books of M/s
ABC for the year ending March 31, 2015.

Debit Balances Amount Credit Balances Amount

Drawings 6300 Capital 150000
Cash at bank 13870 Discount received 2980
Bills receivables 1860 Loans 15000
Loan and Building 42580 Purchase returns 1450
Furniture 5130 Sales 281500
Discount allowed 3960 Reserve for bad debts 4650
Bank charges 100 Creditors 18670
Salaries 6420
Purchases 199080
Opening stock 60220
Sales return 1870
Carriage 5170
Rent and taxes 7680
General expenses 3630
Plant and machinery 31640
Book Debts 82740
Bad debts 1250
Insurance 750
474250 474250

Adjustments-
 Create a reserve for bad and doubtful debts at 10% on book debtors.
 Closing stock Rs 70000.
 Rent outstanding Rs 150.
 Prepaid insurance Rs 50.
 Interest on loan is due at 6%.
Solution:
Trading and Profit and Loss Account for the year ending march 31 2015

Dr Cr
Particulars Amount Particulars Amount
opening stock 60220 Sales 281500
Purchases 199080 Purchase Returns 1450
Carriage 5170 Closing Stock 70000
Sales returns 1870
Gross Profit c/d 86610
352950 352950

Discount Allowed 3960 By Gross Profit b/d 86610

Bank charges 100 discount received 2980
Salaries 6420
Rent and Taxes 7680
Add: Rent outstanding 150 7830
General Expenses 3630
Insurance 750 700
 Less: Insurance prepaid (50)
Bad Debts 1250
Add: New provision for debts
8274
Less: old provision for debts
(4650) 4874
Interest on Loan O/s 900
Net profit 61176
89590 89590

Balance Sheet as on March 31 2015

Liabilities Amount Assets Amount

Creditors 18670 Cash at bank 13870

Rent Outstanding 150 Bills Receivables 1860
Loan 15000 Book Debts 82740
Add: Interest on Loan less: reserve for doubtful
Outstanding 900 15900 debts (8274) 74466
Capital 150000 Land and Building 42580
Add: Net profit 61176 Plant and Machinery 31640
less: Drawings (6300) 204876 Furniture 5130
Insurance prepaid 50
Closing stock 70000

239596 239596

Test your understanding

 List 5 adjustments and their treatment in Profit and Loss statement and
Balance Sheet.
 List out the importance of Trading and profit and Loss Account.
 Give reasons for preparing the Balance Sheet.
 UNIT-4: DEPRECIATION
Learning Objectives
1. To understand the meaning of Depreciation.
2. To know the causes and objectives of charging Depreciation.
3. To know about the different methods of charging depreciation.

CONTENTS
4.1 INTRODUCTION TO DEPRECIATION
4.2 CAUSES OF DEPRECIATION
4.3 OBJECTIVES OF CHARGING DEPRECIATION
4.4 METHODS OF CHARGING DEPRECIATION
4.5 COMPARISON BETWEEN STRAIGHT LINE METHOD AND DIMINISHING
BALANCE METHOD

4.1 INTRODUCTION TO DEPRECIATION

Eric Kohler defined depreciation as “the lost usefulness, expired utility, the diminution in
service yield.”
According to Institute of Cost and Management Accounting, London (ICMA), “The
depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time.”
Depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic
manner until the value of the asset becomes zero or negligible. Depreciation is systematic
allocation the cost of a fixed asset over its useful life. It is a way of matching the cost of a fixed
asset with the revenue (or other economic benefits) it generates over its useful life. We must
provide for depreciation in our accounts for two reasons:
(a) To calculate profits or loss correctly;
(b) To retain funds for replacement of the assets when it is no longer serviceable.
This is mandatory under the matching principle as revenues are recorded with their associated
expenses in the accounting period when the asset is in use. This helps in getting a complete
picture of the revenue generation transaction.
An example of Depreciation – If a delivery truck is purchased a company with a cost of Rs.
100,000 and the expected usage of the truck are 5 years, the business might depreciate the asset
under depreciation expense as Rs. 20,000 every year for a period of 5 years.

4.2 CAUSES OF DEPRECIATION

The following factors may cause the value of an asset to reduce overtime-

 Constant use- An Asset may lose its value because of wear and tear it suffers during its
use. Example- a new bike costs more than a used bike. Similarly an asset loses its value if
it is used.
  Obsolescence- The old assets will become obsolete due to new inventions, improved
techniques and technological advancements. Example- old television sets have zero or
negligible value if sold during time of LED TV.
 Permanent fall in price- Though fluctuations in the market value of fixed assets is not
recorded in the books. Sometimes we have to account for this loss such as permanent fall
in the value of investments.
 Abnormal factors- Depreciation may also be due to the loss in the value of assets by
accidents and damage.

4.3 OBJECTIVES OF CHARGING DEPRECIATION

It is necessary to charge depreciation because of the following reasons-

 Correct calculation of cost of production: Depreciation is an allocated cost of a fixed

asset. It is to be calculated and charged correctly against the revenue of an accounting
period. It must he correctly included within the cost of production.
 Correct calculation of profits: Costs incurred for earning revenues must be charged
properly for correct calculation of profits. The consumed cost of assets (depreciation) has
to be provided for correct matching of revenues with expenses.
 Correct disclosure of fixed assets at reasonable value: Unless depreciation is charged, the
depreciable asset cannot be correctly valued and presented in the Balance Sheet.
Depreciation is charged so that the Balance Sheet exhibits a true and fair view of the
affairs of the business.
 Provision of replacement cost: Depreciation is a non-cash expense. But net profit is
calculated after charging it. Through annual depreciation cash resources are saved and
accumulated to provide replacement cost at the end of the useful life of an asset.
 Maintenance of capital: A significant portion of capital has to be invested for purchasing
fixed assets. The values of such assets are gradually reduced due to their regular use and
passage of time. Depreciation on the assets is treated as an expired cost and it is matched
against revenue. It is charged against profits. If it is not charged the profits will remain
inflated. This will cause capital erosion.
 Compliance with technical and legal requirements: Depreciation has to be charged to
comply with the relevant provisions of the Companies Act and Income Tax Act.

Practical Exercise
Identify 10 things in your surrounding which have suffered depreciation. Identify causes
for the same.

Factors affecting the amount of Depreciation

Depreciation depends upon the following factors-

 Original Cost of the asset: Besides the purchase price, it includes freight and
transportation cost, transit insurance, installation cost, registration cost, commission paid
 on purchase of asset. In case of purchase of a second hand asset it includes initial repair
cost to put the asset in workable condition.
 Estimated Net Residual Value: Net Residual value (scrap value or salvage value for
accounting purpose) is the estimated net realizable value of the asset at the end of its
useful life. The net residual value is calculated after deducting the expenses necessary for
the disposal of the asset.
 Estimated life of asset: As per Accounting Standard – 6 useful life of an asset is normally
the “period over which it is expected to be used by the enterprise”. Normally, useful life
is shorter than the physical life. The useful life of an asset is expressed in number of years
but it can also be expressed in other units, e.g., number of units of output (as in case of
mines) or number of working hours.
Recording of depreciation in Books- there are two methods for recording the depreciation in
the books of account. Under one method, it includes direct entry in the asset account. Under the
second method, recording is done by passing the entry through provision for depreciation
account.
Method 1: Direct entry in the asset account-
Depreciation A/c Dr.
To Asset A/c
Method 2: Provision for Depreciation account-
Depreciation A/c Dr.
To Provision for Depreciation A/c
And,
Provision for Depreciation A/c Dr.
To Profit& Loss A/c

Comparison of both the Methods

Direct Entry in Asset Account Provision for Depreciation

The asset is shown in Balance Sheet at original
cost/book value less depreciation charged in
the relevant year.
It is not possible to know the amount of
depreciation written off till date from single
balance sheet.
In the absence of information, it is not possible
to know that asset is new or old.
The asset always appears at its cost in the
books.
The balance in provision of depreciation shows
the amount of depreciation written till date.
It is easier to find the age of an asset.

4.4 METHODS OF CHARGING DEPRECIATION

There are various methods for charging depreciation. The amount for depreciation charged
depends upon the method followed. Some of the methods are discussed below-
 Straight line Balance Method
The straight-line method of depreciation attempts to allocate equal portion of
depreciable cost to each period of the asset’s useful life. This method assumes that
the depreciation is a function of the passage of time rather than the actual productive
use of the asset. Under this method, the depreciation expense for a period is
calculated by dividing the depreciable cost of the asset by the years of its useful.
Depreciable cost is arrived at by deducting salvage or residual value from the
original cost of the asset.

Depreciation = (Original Cost – Salvage Value)/ years of useful life of asset

Advantages of SLB Method-

o Easier to use: This method is easy to use as complex mathematical
calculations are not required for calculating depreciation.
o Follows Matching Principle: This method realistically matches cost and
revenues.
o Makes Comparison Easier: There is not change either in the rate or amount of
depreciation over the useful life of the asset. Such a procedure provid es sound
basis for comparison.

Disadvantages:
o It does not take into consideration the interest on the amount invested with the
fixed asset.
o Faulty assumptions: This method is illogical because depreciation is
considered a function of time rather than a function of use. It is based on the
wrong assumption of equal utility of the asset during its useful life.
o Effect of Maintenance costs: The maintenance of the asset is generally costly
in the later years. Thus the amount transferred to P&L account under this
method is more which reduces our profits unnecessarily.
o Recognition: This method is not recognised by the Income Tax Act. 1961.
o Complex calculations in case of purchase of additional asset: If an additional
asset is purchased, the amount of depreciation on that asset has to be
recalculated. Hence a separate calculation has to be made for each item
because of difference in useful life and scarp value.

Suitability: This method is suitable in the following cases:

o Where the useful life of the asset can be estimated accurately;
o when repairs/maintenance expenses are uniform for each accounting period;
o Where use of the asset is consistent from period to period and therefore each
period benefits equally from the use of the asset e.g., furniture, leases,
copyright, trade mark etc.
o Where the asset is not likely to become obsolete.
Illustration 1On April 1 st 2014, Mr. A purchased machinery costing Rs 40000 and spent
Rs 5000 on its erection. The useful life of the machine is 10 years and its salvage value
is estimated to be Rs 5000. Calculate the amount of depreciation, pass the required
journal entries and show the Machinery Account for first 3 years only.
 Solution:
Annual Depreciation = (45000-5000)/10000 = 4000
Journal Entries

Date Particulars L.f Amount Amount

2014
April 1st Machinery account Dr. 45000
To Bank A/c 45000
2015
31st march Depreciation A/c Dr. 4000
To Machinery A/c 4000
Profit & Loss A/c Dr. 4000
To Depreciation A/c 4000
2016
March 31st Depreciation A/c Dr. 4000
To Machinery A/c 4000

Profit & Loss A/c Dr. 4000

To Depreciation A/c 4000
2017
March 31st Depreciation A/c Dr. 4000
To Machinery Account 4000

Profit & Loss A/c Dr. 4000

To Depreciation A/c 4000

Machinery A/c

Dr Cr
Date Particulars J.F Amount Date Particulars J.F Amount
2014 2015
Apr-01 To bank A/c 45000 Mar-31 By depreciation A/c 4000
Mar-31 By Bal C/d 41000
45000 45000
2015 2016
Apr-01 To Bal b/d 41000 Mar-31 By depreciation A/c 4000
Mar-31 By Bal C/d 37000
41000 41000
2016 2017
Apr-01 To Bal b/d 37000 Mar-31 By depreciation A/c 4000
Mar-31 By Bal C/d 33000
37000 37000
  Diminishing Balance Method-
Under this method, the depreciation is calculated at a certain fixed percentage each year on
the decreasing book value commonly known as WDV of the asset (book value less
depreciation).The use of book value (the balance brought forward from the previous year)
and fixed rate of depreciation result in decreasing depreciation charges over the life sp an of
the asset.While applying the depreciation rate both salvage or scrap value and removal costs
are ignored. It is not possible to reduce the book value to zero; but it can be reduced close to
its salvage value at the end of its useful life.

The rate of depreciation may be determined using the following formula:

Advantages:
o Benefits in the later years: The higher depreciation is charged in the earlier
years when the machine is most efficient. This matches higher cost with
larger revenues resulting from the high production.
o Easy replacement of asset: The obsolescence problem is given due care
because the major part of the depreciation is charged in the earlier years and
the management has no difficulty in replacing the asset.
o Beneficial for Income statement in later years: The problem of higher
maintenance or repair charges is solved since the depreciation expense in later
years is lower than the depreciation expense of early years.
o No complexity when additional asset is purchased: All items including
additions are added together and depreciated at the same rate. So no
recalculation is necessary when additional assets are purchased.
o Recognition: The method is recognised by AS-6 and Companies Act. 1956
and is applicable for income tax purposes.

Disadvantages:
o Complex calculations: This method requires much figure work. Such a
method involves the use of mathematical tables where the arithmetic is
difficult.
o Asset can not be replaced in short run: It takes very long time to write off the
asses unless a very high rate of depreciation is applied. The result is that the
asset cannot be replaced at the earliest.
 o Not suitable for asset with short life: If the life of the asset is short, the
depreciation charged in the earlier years has adverse impact on the net profit.
Hence this method is not applied for assets with a very short life.
o No fair basis for charging depreciation: The depreciation is neither based on
the use of the asset nor distributed evenly throughout the useful life of the
asset.
Suitability: In general this method is suitable to plant and machinery where repairs are
heavy in the later years and additions, extensions and substitution are frequent. If there is
possibility of obsolescence of asset, it is better to use this method.
Illustration 2A firm purchased a machine on 1st April, 2004 for Rs. 37,000 and spent Rs.
3,000 on its installation. Depreciation is written off at the rate of 10% on the original cost.
Accounts are closed on 31st December every year. On 30th June, 2008 the machine was
disposed off for Rs. 20,000. Write up the Machinery Account from 2004 to 2008.
Machinery Account
Dr Cr
Date Particulars J.F Amount Date Particulars J.F Amount
2004 2004
Apr-01 To bank A/c 37000 Dec-31 By Depreciation A/c 3000
Apr-01 To bank A/c 3000 Dec-31 By Bal c/d 37000
40000 40000
2005 2005
Jan-01 To Bal b/d 37000 Dec-31 By Depreciation A/c 3700
Dec-31 By Bal c/d 33300
37000 37000
2006 2006
Jan-01 To Bal b/d 33300 Dec-31 By Depreciation A/c 3330
Dec-31 By Bal c/d 29970
33300 33300
2007 2007
Jan-01 To Bal b/d 29970 Dec-31 By Depreciation A/c 2997
Dec-31 By Bal c/d 26973
29970 29970
2008 2008
Jan-01 To Bal b/d 26973 Jun-30 By Depreciation A/c 1349
Jun-30 By P&L a/c 5624
26973 26973

4.5 COMPARISON OF STRAIGHT LINE BALANCE METHOD AND DIMINISHING

BALANCE METHOD
Basis Straight Line Balance Method Diminishing Balance Method
Meaning A method of depreciation under which A method of depreciation in
the cost of asset is spread uniformly which a fixed rate of depreciation
over the life of years by writing off a is charged on the book value of
fixed amount every year. asset, over its useful life.
Calculation of On the original cost On written down value of asset.
Depreciation
Amount of Amount of depreciation remains Amount of depreciation reduces
Depreciation constant every year under this every year under this method.
method.
Value of Asset Value of asset is reduced to zero or nil The value of asset never becomes
at the end of lifetime of asset. zero at the end of lifetime of
asset.
Profits earned The profits earned on the asset during The profit earned on the asset
the earlier years of the asset is higher during earlier years is less when
because of less maintenance and compared to later years.
repair cost.
Effect on Profit for the year decreases in later Profits for the year remain
Income year because of increase in unaffected as effect of increasing
statement maintenance costs and same maintenance costs are nullified
depreciation amount. by decreasing depreciation.
Suitable for Assets with negligible repairs and Assets whose repairs increases as
maintenance like leases, copyrights they get older like machinery,
etc. vehicles etc.

Test your understanding

 What are the different methods of charging depreciation on assets?

 Compare and contrast SLB and WDV method of depreciation.
 What are the causes for charging depreciation?
 UNIT-5: MANAGEMENT ACCOUNTING: NATURE AND SCOPE

Learning objectives
1. To impart basic knowledge of Management Accounting.
2. To understand the difference between management accounting and financial accounting
3. To know the scope of management accounting
4. To understand the difference between management accounting and cost accounting
5. To describe the limitations of management accounting

CONTENTS:
5.1 MEANING AND DEFINITIONS OF MANAGEMENT ACCOUNTING
5.2 SCOPE OF MANAGEMENT ACCOUNTING
5.3 NATUER AND FUNCTIONS OF MANAGEMENT ACCOUNTING
5.4 DISTINGUISH BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL
ACCOUNTING
5.5 DISTINGUISH BETWEEN MANAGEMENT ACCOUNTING AND COST
ACCOUNTING
5.6 LIMITATIONS OF THE MANAGEMENT ACCOUNTING
5.7 KEY TERMS
5.8 CHECK YOUR PROGRESS

5.1 MEANING AND DEFINITIONS OF MANAGEMENT ACCOUNTING

Management Accounting, also known as Managerial Accounting is the accounting for managers
which helps the management of the organisation to formulate policies and forecasting, planning
and controlling the day to day business operations of the organisation? Both the quantitative and
qualitative information are captured and analysed by the management accounting.
Management Accounting includes every accounting technique which may be useful to
management in discharging its function Planning Organizing directing coordinating
communicating & controlling thus Management Accounting is the accounting Services to
management is of accounting of management point of view that why is called Management
oriented accounting or Accounting for Management.
 Definitions of Management Accounting

Robert N. Anthony: “Management Accounting is concerned with accounting information,

which is useful to the management.”
Brown and Howard: “Management Accounting is concerned with the efficient management of
a business through the presentation to management of such information that will facilitate
efficient planning and control.”
The Institute of Chartered Accountants of England and Wales: “Any form of Accounting
which enables a business to be conducted more efficiently can be regarded as Management
Accounting.”
Brown and Howar: “Management Accounting is concerned with the efficient management of a
business through the presentation to management of such information that will facilitate efficient
planning and control.”
The American Accounting Association: “the methods and concepts necessary for effective
planning for choosing among alternative business actions and for control through the evaluation
and interpretation of performances”.

5.2 SCOPE OF MANAGEMENT ACCOUNTING

Management accounting is concerned with presentation of accounting information in the most

useful way for the management. Its scope is, therefore, quite vast and includes within its fold
almost all aspects of business operations. However, the following areas can rightly be identified
as falling within the ambit of management accounting:

Scope of Management Accounting

Financial Accounting Statistical Methods

Cost Accounting Revaluation Accounting

Budgetary Control Interim Reporting

Taxation Internal Audit

Inventory Control Methods and Procedures

1.Financial Accounting: Financial accounting provides the data base on the basis of which
management accounting processes information to management to serve their needs. Proper
designed financial accounting system forms the very base on which management accounting
prepares relevant and analytical report to facilitate management decision making. Management
accounting assembles and presents the financial accounting data in meaningful terms for
resolution of managerial issues. Hence, without the back up by Financial Accounting feeding
system, management accounting functions are not possible.

2.Cost Accounting: Standard costing, marginal costing, opportunity cost analysis, differential
costing and other cost techniques play a useful role in operation and control of the business
undertaking.
3. Revaluation Accounting: This is concerned with ensuring that capital is maintained intact in
real terms and profit is calculated with this fact in mind.

4. Budgetary Control: This includes framing of budgets, comparison of actual performance

with the budgeted performance, computation of variances, finding of their causes, etc.

5. Inventory Control: It includes control over inventory from the time it is acquired till its final
disposal.

6. Statistical Methods: Graphs, charts, pictorial presentation, index numbers and other
statistical methods make the information more impressive and intelligible.

7. Interim Reporting: This includes preparation of monthly, quarterly, half-yearly income

statements and the related reports, cash flow and funds flow statements, scrap reports, etc.

8. Taxation: Tax planning is another important area which has a serious impact on the
profitability of the concern. Without proper planning of tax, the profits of the enterprise are
hijacked which affects adversely the business operations.

9. Internal Audit: Development of a suitable internal audit system for internal control.

Experience Assignment
Suppose you are the co-owner and manager of a retail store that sells and repairs mountain
bikes. Provide one example of a financial accounting report that would be useful to you and
your co-owner. Provide two examples of managerial accounting reports that would be useful
to you as the manager.

5.3 NATUER AND FUNCTIONS OF MANAGEMENT ACCOUNTING

The main functions of Management Accounting are:

1. Furnishing of relevant and vital data: Relevant and vital data is collected from
concerned sources and presented through meaningful reports to management which
facilitates decision making. Accounting data provides a strong base for furnishing
financial figures to management to enable appropriate and timely action.

2. Compilation of data in suitable form: Accounting data as it is may not serve a

meaningful and useful purpose to management for decision making. This data is required
to be suitably modified and amended in manner that suits the management purpose.
Hence the data is classified and rearranged in a way that helps the management to gain
insight into the situation.

3. Analysis and Interpretation: Management accounting provides the tools and techniques
for analysis and interpretation of data. Information is furnished in a comparable and
 analytical manner for easy grasp of the situation. This facilitates planning and decision
making.

4. Planning: Planning is an important function of management accounting which is most

effectively performed by the preparation of budgets and forecasts. Forecasting is the
process of estimation of the expected financial performance and position of a business in
the future. Common types of forecasts include cash flow forecast, projected profit and
loss and balance sheet forecast. Budgets quantify the financial targets to be achieved by
the management of an organization. Budgeting helps in the effective allocation of
resources of an organization between competing needs (e.g., departments, products, etc.)
in order to achieve the financial goals of a business.

5. Decision making: In Management accounting, there are special techniques which help
the management in making the short-term and long-term decisions. For example,
techniques like marginal costing, differential costing, discounted cash flow, capital
expenditure, etc. help in decisions such as pricing of products, make or buy,
discontinuance of a product line, etc.

6. Accountability: Management accounting lays great emphasis on accountability through

effective performance measurement. By setting targets for strategic business units and as
well as for departments, management accounting assists in the assignment of
responsibility for the achievement of business targets by individual managers.
Responsibility accounting is achieved by appraising the performance of managers
responsible for their business units while giving due consideration for factors not within
their control or influence.

7. Controlling: Controlling is an important aspect of Management accounting. In

management accounting, various controlling tools and techniques are framed like
standard costing, budgetary control, etc. These are planned for the future after analyzing
the past so that the scarce resources can be effectively utilized.

8. Reporting to Management: Management report forms the integral aspect of

management accounting system. They identify the areas where management attention is
desired for corrective action. Decision making is facilitated based on the information
provided by the report. The reports should portray all the relevant aspects concerning the
operative efficiency of the business. Reports have to be well designed and frequent to
help the management. This is an essential part of management accounting.

Practical Task

How can financial accounting be made useful for the management accounting?
5.4 DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL
ACCOUNTING
Comparison Basis Management Accounting Financial Accounting

1. Meaning Management accounting is a The process of recording,

field of accounting that summarizing and reporting the
analyzes and provides cost myriad of transactions from a
information to the internal business, so as to provide an
management for accurate picture of its financial
the purposes of planning, position and performance
controlling and decision
making.
2. Format It does not follow the formats. Financial accounting records are
made as per the predetermined
formats.
3. Period Regular Intervals Period Usually for a period of 12
Months

4. Scope More wide Not vast

5. Aims It aims at helping management It aims at finding out results of

by providing information that accounting year in the form of
used by management to plan, Profit and Loss Account and
evaluate and control. Balance Sheet.
6. Nature of Management Accounting is an Financial accounting reports the
Reporting internal reporting system for an results and position of business to
organization’s own government, creditors, investors
Management for decision and external parties which is
making. So, no legal rules for mandatory.
preparation.
7. Publication & The publication and audit of Financial Statement like profit &
Audit management accounting reports Loss and balance Sheet are
is neither feasible nor published for the use of general
mandatory. public. They are audited by CA

5.5 DISTINGUISH BETWEEN MANAGEMENT ACCOUNTING AND COST

ACCOUNTING
S. Cost Accounting Management Accounting
No
1. A method of accounting in which all costs Management accounting is a field of
incurred in carrying out an activity or accounting that analyzes and provides cost
accomplishing a purpose are collected, information to the internal management
classified and recorded. This data is then for the purposes of planning, controlling
summarized and analyzed to arrive at a selling and decision making.
price, or to determine where savings are
 possible.
2. Cost accounting system uses quantitative cost Management accounting uses both
data that can be measured in monitory terms. quantitative and qualitative data. It also
uses those data that cannot be measured in
terms of money.
3. Determination of cost and cost control are the Efficient and effective performance of a
primary roles of cost accounting. concern is the primary role of
management accounting.
4. Success of cost accounting does not depend Success of management accounting
upon management accounting system depends on sound financial accounting
system and cost accounting systems of a
concern.
5. Provides future cost-related decisions based Provides historical and predictive
on the historical cost information information for future decision-making.
6. It is based on some predetermined principles There are no specific rules in management
and procedures. accounting.
7. The various techniques used by cost Management accounting also uses these
accounting are standard costing, budgetary techniques but also uses techniques like
control, marginal costing, cost-volume-profit ratio analysis, funds flow statement,
analysis, uniform costing, inter-firm statistical analysis, etc.
comparison, etc.

Practical Assignment
 Bring out the differences between the Financial Accounting and Cost Accounting
 Ascertain the differences between the Financial Accounting and Management Accounting
 Find out the differences between the Cost Accounting and Management Accounting

5.6 LIMITATIONS OF THE MANAGEMENT ACCOUNTING

Management accounting being comparatively a new discipline, it suffers from the following
limitations:

1. Limitations of Accounting Records: Management accounting derives its information

from financial accounting, cost accounting and other records. It is concerned with the
rearrangement or modification of data. The correctness or otherwise of the management
accounting depends upon the correctness of these basic records. The limitations of these
records are also the limitations of management accounting.
2. It is only a Tool: Management accounting is not an alternate or substitute for
management. It is a mere tool for management. Ultimate decisions are being taken by
management and not by management accounting.
3. Persistent efforts: The conclusions drawn by the management accountant are not
executed automatically. He has to convenience people at all levels. In other words he
must be an efficient salesman in selling his ideas.
4. Wide scope: Management accounting embraces many disciplines and its scope is very
wide. Hence it requires a thorough knowledge and understanding of many subjects to
 make the data more meaningful and informative. This makes the task of management
accounting difficult.

5. Heavy Cost of Installation: The installation of management accounting system needs a

very elaborate organization. This results in heavy investment which can be afforded only
by big concerns.
6. Personal Bias: The interpretation of financial information depends upon the capacity of
interpreter as one has to make a personal judgment. Personal prejudices and bias affect
the objectivity of decisions.
7. Psychological Resistance: The installation of management accounting involves basic
change in organization set up. New rules and regulations are also required to be framed
which affect a number of personnel and hence there is a possibility of resistance from
some or the other.
8. Cannot replace Management: Management accounting with all its tools and techniques
can only facilitate decision making process for the management. It cannot be treated as an
alternative or substitute for management. Ultimately it depends on the management for
execution. Therefore, it is only a tool in the hands of management and cannot replace
management. Management accounting processes quantitative data and collaborates with
qualitative data. Only qualitative and un-quantified data cannot be easily processed by
management accounting.

Test Your Understanding-1

(a) Management Accounting tailors ___________information to meet the specific needs of
Management.
(b) Management Accounting is ___________in its orientation.
(c) Management accounting a ________ tools to management.
(d) What are the tools and techniques used in management Accounting?

Test Your Understanding-2

State whether the following Statements are True or False
1. Any form of accounting, which enables a business to be conducted more efficiently can
be regarded as Management Accounting.
2. Standard formats are used in management accounting for preparation of reports.
3. In the Management Accounting, Generally Accepted Accounting Principles and Practices
of Accounting govern the preparation of reports.
4. The Management Accounting reports are public documents
5.7 KEY TERMS
Management Accounting: accounting for internal management needs.
Cost Accounting: accounting for determination and control of costs.
Accounting: It is the means of collecting, summarizing and reporting in monetary terms,
information about the business.
Financial accounting: Financial accounting deals with the maintenance of books of accounts
with a view to ascertain the profitability and the financial status of the business.

Experience Assignment
Match the followings:
Column A Column B
1. Management accounting is composed of. A. Planning, Organizing, Controlling and
Decision making
2. Management Accounting is a tool to. B. Effective and efficient
3. Function of Management C. Management and Accounting
4. Objective of management Accounting D. Management
5. Organization has to be both E. Maximization of profit and minimization
of losses.

5.8 CHECK YOUR PROGRESS

1. Describe the functions of management accounting.

2. What do you understand by “Management Accounting”?
3. List down the limitation of management accounting.
4. Explain the benefits of management accounting in the business sector and service sector
5. Distinguish management accounting from financial accounting and cost accounting.
6. Define Management Accounting and explain its scope and functions.
7. What are the duties and responsibilities of a Management Accountant?

References
1. Charles T. Horngren, Cost Accounting, A Managerial Emphasis, Prentice Hall Inc., 1973.
2. D. T. Decoster and E. L. Schafer, Management Accounting, New York: John Willey and
Sons, 1979
3. R. K. Sharma and Shashi K. Gupta, Management Accounting- Principles and Practice
(7th.), New Delhi: Kalyani Publishers, 1996.
 UNIT- 6: FINANCIAL STATEMENTS ANALYSIS- AN INTRODUCTION

Learning Objectives
1. To Know the financial statements
2. To Understand the financial statements for analysis
3. To know the need and purpose of financial statement analysis
4. To identify the parties interested in analysis of financial statements

CONTENTS:
6.1 MEANINGAND TYPES OF FINANCIAL STATEMENTS
6.2 MEANING AND DEFINITIONS OF FINANCIAL STATEMENTS ANALYSIS
6.3 OBJECTIVES AND IMPORTANCE OF FINNCIAL STATEMENTS
6.4 PARTIES INTERESTED IN FINANCIAL ANALYSIS
6.5 LIMITATIONS OF FINANCIAL STATEMENTS ANALYSIS
6.6 KEYWORDS
6.7 CONCEPT SELF-CHECK

6.1 MEANING AND TYPES OF FINANCIAL STATEMENTS

Every business concern wants to know the various financial aspects for effective decision
making. The preparation of financial statement is required in order to achieve the objectives of
the firm as a whole. The term financial statement refers to an organized collection of data on the
basis of accounting principles and conventions to disclose its financial information. Financial
statements are broadly grouped in to four statements:

Types of Financial Statements

Income Statement Balance Statement of Statement of Changes

Sheets Retained Earnings in Financial Position

Manufacturing
Account
Fund Flow Statement

Trading
Account Cash Flow Statement
Profit & Loss
Profit & Loss Appropriation
Account Account

(1) Income Statements: The term 'Income Statements' is also known as Trading, Profit and Loss
Account. This is the first stage of preparation of final accounts in accounting cycle. The purpose
of preparing Trading, Profit and Loss Accounts to ascertain the Net Profit or Net Loss of a
business concern during the accounting period.
(2) Balance Sheet: Balance Sheet may be defined as "a statement of financial position of any
economic unit disclosing as at a given moment of time its assets, at cost, depreciated cost, or
other indicated value, its liabilities and its ownership equities." In other words, it is a statement
which indicates the financial position or soundness of a business concern at a specific period of
time. Balance Sheet may also be described as a statement of source and application of funds
because it represents the source where the funds for the business were obtained and how the
funds were utilized in the business.
(3) Statement of Retained Earnings: This statement is considered to be as the connecting link
between the Profit and Loss Account and Balance Sheet. The accumulated excess of earning
over losses and dividend is treated as Retained Earnings. The balance of retained earnings shown
on the Profit and Loss Accounts and it is transferred to liability side of the balance sheet.
(4) Statement of Changes in Financial Position: Income Statements and Balance sheet do not
disclose the operational efficiency of the concern. In order to measure the operational efficiency
of the concern it is essential to identify the movement of working capital or cash inflow or cash
outflow of the business concern during the particular period. To highlight the changes of
financial position of a particular firm, the statement is prepared may emphasize of the following
aspects:
 Fund Flow Statement is prepared to know the changes in the firm's working capital.
 Cash Flow Statement is prepared to understand the changes in the firm's cash position.
 Statement of Changes in Financial Position is used for the changes in the firm's total
financial position.

Practical Task
Draw a specimen form of Methodical Classification of Income Statements and
Balance Sheet.

6.2 MEANING AND DEFINITIONS OF FINANCIAL STATEMENT ANALYSIS

Financial Statement Analysis is an analysis which highlights important relationships in the
financial statements. Financial Statement analysis embraces the methods used in assessing and
interpreting the results of past performance and current financial position as they relate to
particular factors of interest in investment decisions. It is an important means of assessing past
performance and in forecasting and planning future performance.

The term ‘financial statement analysis’ includes both ‘analysis’, and ‘interpretation’. A
distinction should, therefore, be made between the two terms. While the term ‘analysis’ is used
to mean the simplification of financial data by methodical classification of the data given in the
financial statements, ‘interpretation’ means, ‘explaining the meaning and significance of the data
so simplified.’

The purpose of financial analysis is to diagnose the information contained in financial statements
so as to judge the profitability and financial soundness of the firm. Just like a doctor examines
his patient by recording his body temperature, blood pressure, etc. before making his conclusion
regarding the illness and before giving his treatment, a financial analyst analysis the financial
statements with various tools of analysis before commenting upon the financial health or
weaknesses of an enterprise.

 Definitions of Financial Statement Analysis

Lev: “Financial Statement Analysis is an information processing system designed to provide
data for decision-making models, such as the portfolio selection model, bank lending decision
models, and corporate financial management models.”
Metcalf and Titard: “is a process of evaluating the relationship between component parts of a
financial statement to obtain a better understanding of a firm’s position and performance.”
Myers: “Financial statement analysis is largely a study of relationship among the various
financial factors in a business as disclosed by a single set-of statements and a study of the trend
of these factors as shown in a series of statements.”

Practical Assignment
1. “It is said that financial statements reflect recorded facts, accounting conventions and
personal judgments.” Critical examine this statement.

2. What are the types of financial statement analysis? How an accountant in a firm can
arrange them?

6.3 OBJECTIVES AND IMPORTANCE OF FINNCIAL STATEMENT

The mere preparation of Profit and Loss Account and Balance Sheet does not give more
information for managerial decision making. Hence, there is a need for analyzing the financial
statements. Various objectives of financial statement analysis are given below.

1. Knowing Profitability of Business: Financial statements are required to ascertain whether

the enterprise is earning adequate profit and to know whether the profits have increased or
decreased as compared to the previous year(s), so that corrective steps can be taken well in
advance.

2. Knowing the Solvency of the Business: Financial statements help to analyse the position
of the business as regards to the capacity of the entity to repay its short as well as long term
liabilities.

3. Judging the Growth of the Business: Through comparison of data of two or more years of
business entity, we can draw a meaningful conclusion as regard to growth of the business.
For example, increase in sales with simultaneous increase in the profits of the business,
indicates a healthy sign for the growth of the business.

4. Judging Financial Strength of Business: Financial statements help the entity in

determining solvency of the business and help to answer various aspects viz., whether it is
capable to purchase assets from its own resources and/or whether the entity can repay its
outside liabilities as and when they become due.
5. Indicating the trend of Achievements: Financial statements of the previous years can be
compared and the trend regarding various expenses, purchases, sales, gross profits and net
profit etc. can be ascertained. Value of assets and liabilities can be compared and the future
prospects of the business can be envisaged.
6. Comparative position in relation to other firms: The purpose of financial statements
analysis is to help the management to make a comparative study of the profitability of
various firms engaged in similar businesses. Such comparison also helps the management to
study the position of their firm in respect of sales, expenses, profitability and utilising
capital, etc.
7. Assess overall financial strength: The purpose of financial analysis is to assess the
financial strength of the business. Analysis also helps in taking decisions, whether funds
required for the purchase of new machines and equipments are provided from internal
sources of the business or not if yes, how much? And also to assess how much fund have
been received from external sources.
8. Assess solvency of the firm: The different tools of an analysis tell us whether the firm has
sufficient funds to meet its short term and long term liabilities or not.
9. Communicating with Different Parties: Financial statements are prepared by the entities
to communicate with different parties about their financial position. Hence, it can be
concluded that understanding the basic financial statements is a necessary step towards the
successful management of a commercial enterprise.

6.4 PARTIES INTERESTED IN FINANCIAL ANALYSIS

Analysis of financial statements has become very significant due to widespread interest of
various parties in the financial results of a business unit. The following parties are interested in
the analysis of financial statement:

1. Shareholders
In every public limited company, shareholders are the real owners of the company. Hence, they
want to know the way of utilizing their investments and ascertain the profitability and financial
strength of the company.

2. Debenture holders
Debenture holders are the lenders or creditors of the company. They want to know the short term
and long term solvency position of the company. Short term solvency is find out to know
whether interest is payable by a company and long term solvency is find out to know whether
principal amount is payable by a company.

3. Creditors
They are the suppliers of the raw materials and other necessary items on credit to the company.
They are interested to know the liquidity position of the company.

4. Commercial Banks and Financial Institutions:

Both commercial banks and financial institutions may lend both short term loan and long term
loan. Hence, they are interested to know the short term solvency, long term solvency
and profitability of the company.
 5. Investors
Shareholders or proprietors of the business are interested in the well being of the business. They
like to know the earning capacity of the business and its prospects of future growth.

6. Employees
The regular payment of wages and salaries are based on the financial position of the company.
Hence, they are interested to know financial position of the company.

7. Trade Unions
They are interested in financial statements for negotiating the wages or salaries or bonus
agreement with the management.

8. Customers
Some customers are loyal to the company since they are buying the products for a long period
continuously. Hence, they are interested to verify the financial strength of the company.

9. Tax authorities
Tax authorities are interested in financial statements for determining the tax liability.

10. Government Departments:

Department of company affairs and other government departments are dealing with the industry
in which the company is engaged are interested in the financial information relating to the
company.

11. Research Institutions and Researchers:

Social research institutions and researchers are using the financial statements. They analyze the
financial statements to find out the role of each industry in economic development of a nation.

12. Economists
The economists are using the financial statements information for assessing economic conditions
of workers.

13. Stock exchange

The stock exchange members take interest in financial statements for the purpose of analysis
because they provide useful financial information about companies.

Check your progress

Two columns are given below. Column I lists the parties interested in analysis and
column II states the subject of their interest. Match the two columns.
Column I Column II
(i) Management (a) about solvency of the business
(ii) Employees (b) Profitability
(iii) Shareholders (c) Performance of the enterprise as a whole
(iv) Suppliers and creditors (d) Better remunerations
6.5 LIMITATIONS OF FINANCIAL STATEMENTS ANALYSIS

1. Incomplete Information
Generally, the financial statements are prepared for an accounting period. Hence, there is a
possibility of disclosing incomplete information. The correct financial position and exact
financial strength of the company can be known when the business is closed down.

2. No Brief Information
Accounting rules, methods and conventions are applied for preparing financial statements.
Sometimes experiences of the accountancy profession are also used for preparation. These lead
to detailed information included in the financial statements.

3. Qualitative Information is ignored

Only quantitative information are included in the financial statements and are expressed in
monetary terms. But, the qualitative information such as efficiency of management executives,
goodwill of the company, employee and employer relationship, efficiency of workers, customer
satisfaction, loyalty of customers, competitive strength and the like are not expressed in
monetary terms.

4. Shows only Historical Information

The financial statements are prepared taking into account of recorded historical costing
information. They do not consider present value of money and cost of living index in the price
level changes. Hence, historical information has little scope for decision making.

5. Financial Statements are Dumb

The financial statements cannot speak themselves. They need detailed analysis and
interpretation.

6. Balance Sheet is not a Valuation Statement

Various assets and liabilities are recorded in the balance sheet at their book value. But, the real
value is different from the book value. Hence, it is clear that real financial position of the
company cannot be judged from the balance sheet.

7. No Comparison of Financial Statements

The financial statements are prepared by different companies in different accounting methods.
The reason is that there are different accounting policies and size of business concern differs
from one company to another. Hence, the financial statements of two companies cannot be
compared.

Test Your Understanding

(i) Financial statements are ...................... and......................
(ii) The term financial analysis include both ...................... and......................
(iii) In order to ascertain the financial status of the business every enterprise prepares a
...................... statement.
(iv) Financial statements are mainly prepared for ...................... purposes.
6.6 KEYWORDS
Financial Statement: A financial statement is the combination of the three major reports on a
business. It will contain the cash flow statement, the income statement and the balance sheet of
the business. All three together produce an overall picture of the health of the business.

Financial analysis: is a process of selecting, evaluating, and interpreting financial data, along
with other pertinent information, in order to formulate an assessment of a company’s present and
future financial condition and performance.

Balance Sheet: A balance sheet is a financial statement that shows what the business is worth at
a given point in time.

Profit and Loss Account: A profit and loss statement (P&L), also known as an income
statement, is a financial report that shows a company's revenues and expenses over a given
period of time, usually a year.

6.7 CONCEPT SELF CHECK

1. What is financial statement analysis? Explain its objectives.

2. What do you mean by financial statements? Explain their different types.
3. Explain the benefits of financial statement analysis to a business operating in the
manufacturing sector and service sector.
4. What are limitations of financial statements?
5. Briefly explain the parties interested in analysis of financial statements.
6. Explain the benefits of financial statement analysis to a business operating in the
manufacturing sector and service sector.
UNIT- 7: TOOLS AND TECHNIQUES OF FINNCIAL ANALYSIS

Learning Objectives
1. To Know the types of financial analysis
2. To explain the various techniques and tools of analysis of financial statements.
3. To know the need and purpose of financial statement analysis
4. To identify the parties interested in analysis of financial statements

CONTENTS:
7.1 TYPES OF FINANCIAL ANALYSIS AND INTERPRETATIONS
7.2 TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS
7.3 KEYWORDS
7.4 CONCEPT SELF-CHECK

7.1 TYPES OF FINANCIAL ANALYSIS AND INTERPRETATIONS

Financial statements are analysed by different parties for different purposed. The analysis is done
from different angles. The analysis and interpretation of financial statements can be classified
into different categories. The following chart shows the classification of financial analysis:

Types of Financial Analysis

On the Basis of Materials On the Basis of Modus

Used Operandi

External Analysis Horizontal Analysis

Vertical Analysis
Internal Analysis

1. On the Basis of Materials Used: On the basis of materials used the analysis and
interpretations of financial statements may be classified into (a) External Analysis and (b)
Internal Analysis.
Internal Analysis: This analysis is undertaken by the management of the company to monitor its
financial and operating performance. As the analysis is done by the party who has access to the
internal records and policies, it is expected to be more effective and reliable.
External Analysis: When the analysis is undertaken by outside parties namely existing and
prospective investors, suppliers, lenders, government agencies, customers etc., it is external
financial statement analysis. These external parties do not have any access to the internal records
of the company; nor do they have any scope to know the hidden accounting policy, if any, of the
management. So, they have to depend almost entirely on the published financial statements and
other additional information supplied by the management.
2. On the basis of Modus Operandi
On the basis of Modus operandi, the analysis and interpretation of financial statements may be
classified into: (a) Horizontal Analysis and (b) Vertical Analysis.

Horizontal Analysis: Horizontal analysis is the comparison of data sets for two periods.
Financial statements users review the change in data much like an indicator. Optimistic analysts
look for growth in revenue, net income and assets in addition to reductions in expenses and
liabilities. Calculating absolute dollar changes requires the user to subtract the base figure from
the current figure. Expressing changes with percentages requires the user to divide the base
figure by the current figure, and multiply by 100.

Vertical Analysis: Analyzing a single period financial statement works well with vertical
analysis. On the income statement, percentages represent the correlation of each separate account
to net sales. Express all accounts other than net sales as a percentage of net sales. Net income
represents the percentage of net sales not used on expenses. For example, if expenses total 69
percent of net sales, net income represents the remaining 31 percent. Vertical analysis performed
on balance sheets uses total assets and total liabilities for comparison of individual balance sheet
accounts.

Test Your Understanding

State whether the following Statements are True or False
1. In horizontal analysis, balance sheets of different years of the same firm are kept side by
side for comparison.
2. External analysis is better than the internal analysis.
3. Horizontal Analysis is used for comparing data of several years of one firm, while Vertical
Analysis is used for comparing the relative performance of different firms in the same
industry for the same period.

7.2 TOOLS AND TECHNIQUES OF FINANCIAL STATEMENT ANALYSIS

A variety of tools can be used by a financial analyst for the purposes of analysis and
interpretation of financial statements particularly with a view to suit the requirements of the
specific enterprise. The principal tools are as under:
 Common-size
Statements

Comparative Cash Flow

Statements Statement
Techniques
of financial
analysis

Ratio Analysis
Funds Flow
and Trend
statements
Analysis

1. Comparative Statements: These are the statements showing the profitability and financial
position of a firm for different periods of time in a comparative form to give an idea about the
position of two or more periods. It usually applies to the two important financial statements,
namely, balance sheet and statement of profit and loss prepared in a comparative form. The
financial data will be comparative only when same accounting principles are used in preparing
these statements. If this is not the case, the deviation in the use of accounting principles should
be mentioned as a footnote. Comparative figures indicate the trend and direction of financial
position and operating results. This analysis is also known as ‘horizontal analyses.

Comparative Income Statement

The comparative Income Statement is the study of the trend of the same items / group of items in
two or more Income Statements of the firm for different periods. The changes in the Income
Statement items over the period would help in forming opinion about the performance of the
enterprise in its business operations.

Interpretation of Comparative Income Statement

(i) The changes in sales should be compared with the changes in cost of goods sold. If increase in
sales is more than the increase in the cost of goods sold, then the profitability will improve.
ii) An increase in operating expenses or decrease in sales would imply decrease in operating
profit and a decrease in operating expenses or increase in sales would imply increase in operating
profit.
iii) The increase or decrease in net profit will give an idea about the overall profitability of the
concern.
Illustration
From the following information, prepare a comparative income statement of Rajneesh & Sanjeet
Com. Limited
2017 2018
Sales 120% of cost of goods sold 150% of Cost of goods sold

Cost of goods sold 20,00,000 25,00,000

Indirect Expenses 10 percentage of Gross Profit

Rate of income tax 50 percentage of Net Profit before tax

Comparative Income Statement of Rajneesh & Sanjeet Com. Limited

Particulars 2017 2018 Absolute Percentage

Change Change

Sales 2400000 3750000 1350000 56.25

Less: Cost of goods sold 2000000 2500000 500000 25.00

Gross Profit 400000 1250000 850000 212.50

Less :Indirect Expenses 40000 125000 85000 212.50

Profit before tax 360000 1125000 765000 212.50

Less: Income Tax 180000 562500 382500 212.50

Net Profit after Tax 180000 562500 382500 212.50

Practical Assignment
Convert the following statement of profit and loss into the comparative statement
of profit and loss of Nag & Com. Ltd.:

Particulars Note 2016-17 2016-17

No. Rs. Rs.
(i) Revenue from operations 60,00,000 75,00,000
(ii) Other incomes 1,50,000 1,20,000
(iii) Expenses 44,00,000 50,60,000
(iv) Income tax 35% 40%
Comparative Balance Sheet:

Comparative balance sheet as on two different dates can be used for comparing assets and
liabilities and finding out on increase or decrease in those items. While interpreting comparative
balance sheet, the interpreter is expected to consider the following points.

a. Current financial position- For studying the current financial position, one should see the
working capital for both the year. A study of increase or decrease in current assets and current
liabilities enable to see the current financial position.

b. Long term financial position- The long term financial position of the concern can be
analyzed by studying the changes in fixed assets, long term liabilities & capital. An increase in
fixed assets should be compared to the increase in long term loans and capitals.

c. Profitability of the concern- The study of increase or decrease in retained earnings will
enable the interpreters to see cheater the profitability has improved or not.

Illustration
The following are the Balance sheets of a concern for the years 2016 and 2017. Prepare a
comparative Balance sheet and study the financial position of the concern.

Liabilities 2016 2017 Assets 2016 2017

Equity share capital 3000 4000 Land and Building 4000 4000

General reserve 3000 3000 Plant and Machinery 6500 8000

Profit & Loss A/c 1400 2660 Furniture 600 800

12% Debentures 5000 4000 Stock 1500 1200

Sundry Creditors 630 720 Debtors 300 400

Bills Payable 80 150 Cash at Bank 150 50

Cash in Hand 60 80

13110 14530 13110 14530

Solution:

Comparative Balance sheets as on 31st March 2016 and 2017

Increase/ % Increase/
Liabilities 31/03/2016 31/03/2017 Decrease Decrease

Equity Share Capital 3000 4000 1000 33.33

General Reserve 3000 3000 - -

Profit and Loss A/c 1400 2660 1260 90.00

Share Holders fund[A] 7400 9660 2260 30.54

12% Debentures 5000 4000 (1000) (20)

Sundry Creditors 630 720 90 14.28

Bills Payable 80 150 70 87.50

Borrowed Funds [B] 5710 4870 (840) (14.71)

Total Funds [A+B] 13110 14530 1420 10.83

Assets
Fixed Assets
Land and Building 4000 4000 - -
Plant and Machinery 6500 8000 1500 23.07
Furniture 600 800 200 33.33
Total Fixed Assets [a] 11100 12800 1700 15.32
Current Assets
Stock 1500 1200 (300) (20)
Debtors 300 400 100 33.33
Cash at Bank 150 50 (100) (66.67)
Cash in Hand 60 80 20 33.33
Total Current 2010 1730 (280) (13.93)
Assets[b]
Total Assets [a+b] 13110 14530 1420 10.83
 Comments: Fixed Assets have increased moderately by 15.32% during 2016.
Current Assets have also increased similarly except Cash at Bank which
actually decreased by 66.67%.Total borrowed funds decreased during the year
while shareholders funds increased by over 30% mainly due to issue of new
shares and accumulation of profits. Overall financial position has improved
satisfactorily during 2017.

Practical Assignment
From the following Balance Sheets of Rajneesh Limited as at March 31, 2016 and
2017, prepare comparative balance sheet:
Particulars Note March 31, March 31,
No. 2017 (Rs.) 2016 (Rs.)

I. Equity and Liabilities

1. Shareholders’ Funds
a) Share capital 20,00,000 15,00,000
b) Reserve and surplus 13,00,000 14,00,000
2. Non-current Liabilities
Long-term borrowings 19,00,000 16,00,000
3. Current liabilities
Trade payables 3,00,000 2,00,000
Total 55,00,000 47,00,000
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible assets 20,00,000 15,00,000
- Intangible assets 19,00,000 16,00,000
2. Current assets
- Inventories 13,00,000 14,00,000
- Cash and Cash Equivalents 3,00,000 2,00,000

Total 55,00,000 47,00,000

2. Common-size statement: The common-size statements are known as ‘component percentage

statements or know as’ component percentage statements or vertical statements. In this
technique, the total assets or liabilities and the figure or net sales are taken equal to one hundred
and the percentages at individual items are calculated liar wise. In the common-size income
statement, the net sales are assumed to be 100%and other items are expressed, as a percentage at
sales. Similarly in the common-size balance sheet the total assets as total liabilities are assumed
to be 100% and other items at assets and liabilities are expressed as a percentage at this total.
Common size income statements:
In common size income statement various item of income statements are shown as percentage of
sales.
Illustration Following are the income statements of a company for the year ending 31st
December 2016 and 2017 prepare common size Income Statement.

2016 2017
Rs Rs
Sales 500,000 700,000
Miscellaneous income 20,000 15,000

520,000 715,000

Expenses
Cost of sales 330,000 510,000
Office expenses 20,000 30,000
Interest 25000 30,000
Selling expenses 30,000 40,000
405,000 610,000
Net profit 115,000 105,000
520,000 715,000
Solution:
Common size Income Statement for the year ending 31st December 2016 and 2017.
2016 2017
Amount % Amount %
Rs Rs
Sales 500,000 100.00 700,000 100.00
Less : Cost of sales 330,000 66.00 510,000 72.86
Gross profit 170,000 34.00 190,000 27.14
Operating expenses
Office expenses 20,000 4.00 30,000 4.29
Selling expenses 30,000 6.00 40,000 5.71
Total operating expenses 50,000 10.00 70,000 10.00
Operating profit 120,000 24.00 120,000 17.14
Miscellaneous income 20,000 4.00 15,000 2.14
Total income 140,000 28.00 135,000 19.28
Less : Non operating expenses 25,000 5.00 30,000 4.28
Net profit 115,000 23.00 105,000 15.00
\Interpretation
 The sale and gross profit have increased in absolute figures in 2017 as compared to 2016. But
the percentage of gross profit to sales has gone down in 2017.
 The increase in cost of sales as a percentage of sales has brought the profitability from 34%
to 27.14%.
 Operating expenses have remained the same in both the years.
 Net profit have decreased both in absolute figures and as a percentage in 2017 as compared
to 2016.

Practical Task
From the following information, prepare a Common size Income
Statement for the year ended March 31, 2016 and 2017
Particulars 2016-17 2015-16
Rs. Rs.
18,00,000 25,00,000
Net sales
Cost of goods sold 10,00,000 12,00,000

Operating expenses 80,000 1,20,000

Non-operating expenses 12,000 15,000

Depreciation 20,000 40,000

Wages 10,000 20,000

Common Size Balance Sheet:

For the purpose of common size Balance Sheet, the total of assets or liabilities is taken as 100
and all the figures are expressed as percentage of the total. In other words, each asset is
expressed as percentage to total assets/ liabilities and each liability is expressed as percentage to
total assets/liabilities. This statement will throw light on the solvency position of the concern by
providing an analysis of pattern of financing both long-term and working capital needs of the
concern.
Illustration
Prepare a Common size Balance sheet of Rajneesh & Basu Com. Ltd. from the following data

Particulars March 31, March 31,

2016 2017
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital 15,00,000 12,00,000
b) Reserves and surplus 5,00,000 5,00,000
2. Non-current liabilities
Long-term borrowings 6,00,000 5,00,000
3. Current liabilities
Trade Payable 15,50,000 10,50,000
Total 41,50,000 32,50,000
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible asset
Plant & machinery 14,00,000 8,00,000
- Intangible assets
Goodwill 16,00,000 12,00,000
b) Non-current investments 10,00,000 10,00,000
2. Current assets
Inventories 1,50,000 2,50,000
Total 41,50,000 32,50,000

Solution:
Common size Balance Sheet of Rajneesh & Basu Com. Ltd as at March 31, 2016
and March 31, 2017:

Particulars Absolute Amounts Percentage of Total Assets

31.03.2016 31.03.2017 31.03.2016 31.03.2017

Rs. Rs. (%) (%)
I. Equity and Liabilities
1. Shareholders fund
a) Share capital 15,00,000 12,00,000 36.14 36.93
b) Reserve and surplus 5,00,000 5,00,000 12.05 15.38
2. Non-current liabilities
Long-term borrowings 6,00,000 5,00,000 14.46 15.38
3. Current liabilities
Trade payables 15,50,000 10,50,000 37.35 32.31
Total 41,50,000 32,50,000 100 100

II. Assets
1. Non-current assets
a) Fixed assets
- Tangible asset
Plant & machinery 14,00,000 8,00,000 33.73 24.62
- Intangible assets
Goodwill 16,00,000 12,00,000 38.55 36.92
Non-current investments 10,00,000 10,00,000 24.10 30.77
2. Current assets
Inventories 1,50,000 2,50,000 3.62 7.69
Total 41,50,000 32,50,000 100 100
 Practical Task
The following are the Balance Sheets of Ms Rajneesh Ltd for the year ending 31st December 2016 and 2017.
Liabilities 2006 2007 Assets 2006 2007
Rs Rs Rs Rs
Equity share 200000 330000 Fixed Assets less 340000 450000
capital depreciation
Preference share 200000 250000 Stock 40000 50000
capital
Reserve 20000 30000 Debtors 100000 125000
Profit and loss A/c 15000 20000 Bills receivable 20000 60000
Bank overdraft 50000 50000 Prepaid expenses 10000 12000
Creditors 40000 50000 Cash in hand 40000 53000
Provision for 20000 25000 Cash at Bank 10000 30000
taxation
Proposed dividend 15000 25000

560000 780000 560000 780000

3. Trend Analysis: The financial statements may be analysed by computing trends of series of
information. Trend analysis determines the direction upwards or downwards and involves the
computation of the percentage relationship that each item bears to the same item in the base year.
In case of comparative statement, an item is compared with itself in the previous year to know
whether it has increased or decreased or remained constant. Common size analysis is to ascertain
whether the proportion of an item (say cost of revenue from operations) is increasing or
decreasing in the common base (say revenue from operations). But in case of trend analysis, we
learn about the behaviour of the same item over a given period, say, during the last 5 years. Take
for example, administrative expenses, whether they are exhibiting increasing tendency or
decreasing tendency or remaining constant over the period of comparison. Generally trend
analysis is done for a reasonably long period. Many companies present their financial data for a
period of 5 or 10 years in various forms in their annual reports.

Illustration
Calculate the trend percentages from the following figures of sales, stock and profit of Madan
Patyal Ltd., taking 2013 as the base year and interpret them.
 (Rs. in lakhs)
Year Sales Stock Profit
(Rs.) (Rs.) before tax (Rs.)

2013 1,881 709 321

2014 2,340 781 435
2015 2,655 816 458
2016 3,021 944 527
2017 3,768 1,154 627

Solution:
Trend Percentages (base year 20113 = 100) (Rs. in lakhs)
Year Sales Trend % Stock Trend % Profit Trend %
Rs. Rs. Rs.
2013 1881 100 709 100 321 100
2014 2340 124 781 110 435 136
2015 2655 141 816 115 458 143
2016 3021 161 944 133 527 164
2017 3768 200 1154 163 627 195

Practical Assignment
The following data is available from the Statement of profit and loss of Rajneesh Ltd.
Particulars 2014(Rs.) 20135(Rs.) 2016 (Rs.) 2017 (Rs.)
Revenue from operations 3,20,000 3,37,500 3,30,000 3,42,500
Wages 1,07,500 1,07,500 1,15,000 1,20,000
Selling Expenses 27,250 29,000 29,750 27,750
Gross Profit 90,000 95,000 77,500 80,000
You are required to show Trend Percentages of different items.

4. Fund Flow Statement: Balance sheet discloses the financial position at the end of the year
and it is a static statement. The management is interested to know what changes occurs in the
balance sheet figures between two balance sheet dates. The statement prepared to show changes
in assets, liabilities and owners equity of a business are called statement of changes in financial
position. These include Funds flow statement and cash flow statement. Statement of changes in
financial position prepared on working capital basis is called funds flow statement and on cash
basis is called cash flow statement.

5. Cash Flow Statement: Cash plays an important role in the entire economic life of a business.
A firm needs cash to make payments to suppliers, to incur day-to-day expenses and to pay
salaries; wages, interest and dividend etc .Management of liquidity or cash flow is an important
aspect for the successful functioning of every business. Cash is the most liquid form of current
asset and maintenance of sufficient cash is a pre requisite for the smooth functioning of the
business. Therefore, it is necessary to make a cash flow analysis by preparing a Cash flow
statement.

6. Ratio Analysis: ratio is a simple arithmetical expression of the relationship of one number to
another. It may be defined as the indicated quotient of two mathematical expressions. According
to Accountant’s Handbook by Wixon, Kell and Bedford, a ratio is an expression of the
quantitative relationship between two numbers. In simple language ratio is one number
expressed in terms of another and can be worked out by dividing one number into the other. A
ratio can be expressed in the form of a fraction, number of times, percentage or in proportion.
7.3 KEYWORDS
Financial Statement: A financial statement is the combination of the three major reports on a
business. It will contain the cash flow statement, the income statement and the balance sheet of
the business. All three together produce an overall picture of the health of the business.

Comparative Statements: Comparative statements deal with the comparison of different items
of the Profit and Loss Account and Balance Sheets of two or more periods. Separate comparative
statements are prepared for Profit and Loss Account as Comparative Income Statement and for
Balance Sheets.

Cash Flow Analysis: Cash flow analysis is the analysis of the change in the cash position during
a period.

Ratio Analysis: Ratio analysis is the analysis of the interrelationship between two financial
figures.

Trend Analysis: Trend analysis is the analysis of the trend of the financial ratios of
the company over the years.

7.4 CONCEPT SELF CHECK

1. Explain the usefulness of trend percentages in interpretation of financial performance of a

company.
2. What do you mean by financial statements? Explain their different types.
3. Explain how common size statements are prepared giving an example.
4. What are limitations of financial statements?
5. Explain the various techniques and tools of analysis of financial statements.
6. Write short notes on:
(a) Horizontal Analysis.
(b) Vertical Analysis.
(c) External and Internal Analysis.
 UNIT- 8: ELEMENTS OF COST AND COST SHEET

Learning Objectives
1. To state the meaning and type of Cost Sheet
2. To know the objectives of cost accounting
3. To know the state the importance of Cost Sheet
4. To explain the components of total cost
5. To understand the elements of cost sheet
6. To prepare the cost sheet as per format
CONTENTS:
8.1 MEANING OF COST ACCOUNTING
8.2 OBJECTIVES OF COST ACCOUNTING
8.3 MEANING OF COST SHEET
8.4 ADVANTAGES OF A COST SHEET
8.5 NEED AND OBJECTIVES OF COST SHEET
8.6 ELEMENTS OF COST SHEET
8.7 COMPONENTS OF COST SHEET
8.8 FORMAT OF COST SHEET
8.9 KEYWORDS
8.10 CONCEPT SELF-CHECK

8.1 MEANING OF COST ACCOUNTING

Cost Accounting may be defined as “Accounting for costs classification and analysis of
expenditure as will enable the total cost of any particular unit of production to be ascertained
with reasonable degree of accuracy and at the same time to disclose exactly how such total cost
is constituted”. Thus Cost Accounting is classifying, recording an appropriate allocation of
expenditure for the determination of the costs of products or services, and for the presentation of
suitably arranged data for the purpose of control and guidance of management.

8.2 OBJECTIVES OF COST ACCOUNTING

1. Ascertaining Costs: - The first and foremost objective of cost accounting is to find out cost
of a product, process or service. The other objectives which have been mentioned hereafter scan
be achieved only when the costs have been ascertained.
2. Determination of selling price:- Cost accounting provides cost information on the basis of
which selling prices of products or services may be fixed. In periods of depression, cost
accounting guides in deciding the extent to which the selling prices may be reduced to meet the
situation.
3. Measuring and Increasing Efficiency: - Cost accounting involvers a study of the various
operations used in manufacturing a product or providing a services. The study facilitates
measuring of the efficiency of the organisation as a whole as well as of the departments besides
devising means of increasing the efficiency.
4. Guide to business policy: - Cost accounting aims at serving the needs of management in
conducting the business with utmost efficiency. Cost data provide guidelines for various
managerial decisions like make or buy, selling below cost, utilisation of idle plant capacity,
introduction of a new product, etc.
5. Cost Control and Cost Reduction: - Cost accounting assists in cost control it uses
techniques such as budgetary control, standard costing etc. for controlling costs. Budgets are
prepared will in advance. The standards for each item of cost are determined, the actual costs are
compared with the standard costs and variances are found out as to their causes. This greatly
increases the operating efficiency of the enterprise.
6. Cost Management: - The term ‘Cost Management’ includes the activities of managers in
short-run and long-run planning and control of costs. Cost management has a broad focus. It
includes both cost control and lost reduction. As a matter of fact cost management is often
invariably linked with revenue and profit planning.
7. Ascertaining Profits: - Cost accounting also aims at ascertaining the profits of each and
every activity. It produces statements at such intervals as the management may require. The
financial statements prepared under financial accounting, generally once a year or half – year,
are spaced too far apart in time to meet the needs of the management. In order to operate the
business at a high level of efficiency, it is essential for the management to have a frequent
review of production, sales and operating results.

8. Measuring and improving performance:- Cost accounting measures efficiency by

classifying and analysing cost data and then suggest various steps in improving performance so
that profitability is increased.

8.3 MEANING OF COST SHEET

Cost sheet is a statement, which shows various components of total cost of a product. It classifies
and analyses the components of cost of a product. Previous period’s data is given in the cost
sheet for comparative study. It is a statement which shows per unit cost in addition to Total Cost.
Selling price is ascertained with the help of cost sheet. The details of total cost presented in the
form of a statement are termed as Cost sheet. Cost sheet is prepared on the basis of:
 Preparation of Cost Sheet

Historical Cost Sheet Estimated Cost Sheet

1. Historical Cost Sheet: Historical Cost sheet is prepared on the basis of actual cost incurred.
The statement of cost prepared after incurring the actual cost is called Historical Cost Sheet.

2. Estimated Cos Sheet: Estimated cost sheet is prepared on the basis of estimated cost. The
statement prepared before the commencement of production is called estimated cost sheet. Such
cost sheet is useful in quoting the tender price of a job or a contract.

8.4 ADVANTAGES OF A COST SHEET

1. It helps to ascertain total cost and cost per unit.

2. Costs are classified under proper headings and presented in a logical order.

3. It enables inter-firm and intra-firm comparison of costs.

4. It helps in price fixation.

 5. It helps to ascertain profit or loss for a period.

6. It helps in preparing tenders and quotations.

7. It helps in preparing budgets.

8. It enables close watch over cost for cost control.

8.5 NEED AND OBJECTIVES OF COST SHEET

The main objectives of cost sheet are as follows:
1. Cost ascertainment: The main objective of the cost sheet is to ascertain the cost of a product.
Cost sheet helps in ascertainment of cost for the purpose of determining cost after they are
incurred. It also helps to ascertain the actual cost or estimated cost of a Job.
2. Fixation of selling price: To fix the selling price of a product or service, it is essential to
prepare the cost sheet. It helps in fixing selling price of a product or service by providing detailed
d information of the cost.
3. Help in cost control: For controlling the cost of a product it is necessary for every manufacturing
unit to prepare a cost sheet. Estimated cost sheet helps in the control of material cost, labour cost and
overheads cost at every point of production.

4. Facilitates managerial decisions: It helps in taking important decisions by the management

such as: whether to produce or buy a component, what prices of goods are to be quoted in the
tender, whether to retain or replace an existing machine etc.

Test Your Understanding

Fill in the blanks with suitable words:

(i) Cost sheet classifies and analyses the............... of cost of a

Product.
(ii) ............... is ascertained with the help of cost sheet.
(iii) ............... Cost sheet is prepared on the basis of actual cost
incurred.
...............
(iv) Cost sheet also helps to ascertain the actual cost or cost
of a job.
(v) Cost sheet helps in fixing ............... of products or services by
providing detailed cost information.
(vi) ............... cost sheet helps in the control of material cost of a
product/service.
8.6 ELEMENTS OF COST SHEET
There are three broad elements of cost:-

(a) Material
(b) Labour
(c) Expenses
Material: - The substance from which the product is made is known as material. It may be in a
raw or a manufactured state. It can be direct as well as indirect.
Labour: - For conversion of materials into finished goods, human effort is needed such human
effort is called labour. Labour can be direct as well as indirect.
Expenses: - Expenses may be direct or indirect.
Direct expenses: - These are expenses which can be directly, conveniently and wholly allocated
to specific cost centers or cost units. Examples of such expenses are: hire of some special
machinery required for a particular contract, cost of defective work incurred in connection with a
particular job or contract etc.
Direct expenses are sometimes also described as “chargeable expenses”.

Indirect expenses:- these are expenses which cannot be directly, conveniently and wholly
allocated to cost centers or cost units.

ELEMENTS OF COST

MATERIAL LABOUR EXPENSES

DIRECT INDIRECT DIRECT INDIRECT Direct INDIRECT

FACTORY FACTORY FACTORY

OFFICE OFFICE OFFICE

SELLING SELLING SELLING

DISTRIBUTION DISTRIBUTION DISTRIBUTION

8.7 COMPONENTS OF COST SHEET

Prime Cost: It consists of direct material, direct wages and direct expenses. In other words
“Prime cost represents the aggregate of cost of material consumed, productive wages, and direct
expenses”. It is also known as basic, first, flat or direct cost of a product.

Prime Cost = Direct material + Direct Wages + Direct expenses

Direct Material: - All material which becomes an integral part of the finished product and
which can be conveniently assigned to specific physical units is termed as “Direct Material”. It
is not necessary that all the material purchased in a particular period is used in production. There
is some stock of raw material in balance at opening and closing of the period. Hence, it is
necessary that the cost of opening and closing stock of material is adjusted in the material
purchased. Opening stock of material is added and closing stock of raw material is deducted in
the material purchased and we get material consumed or used in production of a product. It is
calculated as:

Material Consumed = Material purchased + Opening stock of material – Closing stock of

material.

Illustration
From the following calculate the prime cost:

Stock on materials on 1.4.09 28,000

Purchase of materials 1,60,000
Expenses in connection with purchases 20,000
Direct materials returned to supplier 20,000
Stock of direct materials on 31.3.10 35,000
Manufacturing wages 90,000
Royalty charges 75,000
Hire and maintenance charges of a special machinery 45,000

Solution
Statement showing computation of prime cost:
Particular Rs. Rs.
Materials consumed:

Stock on materials on 1.4.16 28,000

Add: Purchase of materials 1,60,000
Less: Direct materials returned
20,000
Less: Stock of direct materials on 31.3.17 35,000 55,000
Manufacturing wages 90000
Direct expenses:
75,000
Royalty charges
Hire and maintenance charges of a special machinery 45,000 1,20,000

Prime cost 363000

 Practical Assignment
Calculate prime cost from the following particulars for a production unit:
Rs.
Cost of material purchased 30,000
Opening stock of material 6,000
Closing stock of material 4,000
Wages paid 3,000
Rent of hire of a special machine for production 5,000

Factory Cost: In addition to prime cost it includes works or factory overheads. Factory
overheads consist of cost of indirect material, indirect wages, and indirect expenses incurred in
the factory. Factory cost is also known as works cost, production or manufacturing cost.

Factory Cost = Prime cost + Factory overheads

Illustration
Calculate factory cost from the following particulars of Rajneesh & Com.

Rs.
Material consumed 70,000
Productive wages 10,000
Direct Expenses 5,000
Consumable stores 2,000
Oil grease/Lubricating 500
Salary of a factory manager 6,000
Unproductive wages 1,000
Factory rent 2,000
Repair and Depreciation on Machine 600

Solution:
Statement showing Factory cost
 Details Amount
(Rs.)
Direct Material: Material Consumed 70,000
Direct Labour: Productive wages 10,000
Direct Expenses 5,000
Prime cost 85,000
Add : Factory overheads
Indirect Material:
Consumable stores 2,000
Oil grease/lubricants 500 2,500
Indirect Labour:
Unproductive wages 1,000
Salary of a factory Manager 6,000 7,000
Indirect Expenses:
Factory rent 2,000
Repair and Depreciation on Machine 600 2,600

Factory cost 97,100

Practical Assignment
Calculate works cost or factory cost from the following details:-
Raw material consumed = Rs 50,000
Direct wages = Rs20, 000
Direct expenses = Rs 10,000
Factory expenses 80% of direct wages
Opening stock of work in progress = Rs 15,000
Closing stock of work in progress = Rs 21,000

Office cost: - If office and administrative overheads are added to factory cost office cost is
arrived at this is also termed as administrative cost or the total cost of production.

Total cost: - Office cost or total cost of production selling and distribution overheads are added
to the total cost of production to get the total cost or the cost of sales.

Total Cost = Cost of Goods sold + Selling and distribution overheads

8.9 FORMAT OF COST SHEET
COST SHEET – FORMAT
Particulars Amount Amount
Opening Stock of Raw Material ***
Add: Purchase of Raw materials ***
Add: Purchase Expenses ***
Less: Closing stock of Raw Materials ***
Raw Materials Consumed ***
Direct Wages (Labour) ***
Direct Charges ***
Prime cost (1) ***
Add :- Factory Over Heads:
Factory Rent ***
Factory Power ***
Indirect Material ***
Indirect Wages ***
Drawing Office Salary ***
Factory Insurance ***
Factory Asset Depreciation ***
***
Works cost Incurred ***
Add: Opening Stock of WIP ***
Less: Closing Stock of WIP ***
Works cost (2) ***
Add:- Administration Over Heads:-
Office Rent ***
Asset Depreciation ***
General Charges ***
Audit Fees ***
Bank Charges ***
Counting house Salary ***
Other Office Expenses ***
Cost of Production (3) ***
Add: Opening stock of Finished Goods ***
Less: Closing stock of Finished Goods ***
Cost of Goods Sold ***
Add:- Selling and Distribution OH:-
Sales man Commission ***
Sales man salary ***
Traveling Expenses ***
Advertisement ***
Delivery man expenses ***
Sales Tax ***
Bad Debts ***
Cost of Sales (5) ***
Profit (balancing figure) ***
Sales ***

Illustration Prepare cost sheet in the book of Rajneesh Sharma from the following
particulars.
Opening stock: - Raw material = Rs 5,000
Finished goods = Rs 4,000
Closing stock: - Raw material = Rs 4,000
Finished goods = Rs 5,000
Raw material purchased = Rs 50,000
Wages paid to laboures = Rs 20,000
Chargeable expenses = Rs 2,000
Rent and Taxes = Rs 7,400
Power = Rs 3,000
Experimental expenses = Rs 600
Sale of wastage of material = Rs 200
Office management salary = Rs 4,000
Office printing & stationery = Rs 200
Salaries to salesman = Rs 2,000
Commission to traveling agents = Rs 1,000
Sales = Rs 1, 00,000
Solution:-
Book of Rajneesh Sharma
Cost sheet for the Year----------
Particular Details (Rs) Amount (Rs)

Raw material purchased 50,000

Add:- Opening stock of raw material 5,000
---------------
Raw material for consumption 55,000
Less:- closing stock of raw material 4,000
---------------
Raw material consumed 51,000
Less:- Sale of wastage of materials 200
------------- 50,800
Add:- Direct labour 20,000
Add:- Direct chargeable expenses 2,000
--------------
Prime cost 72,800
Add:- Factory overhead
Rent & Taxes 7,400
Power 3,000
Experimental charges 600
-------------- 11,000
Factory cost 83,800
Add:- Administrative overhead:-
Office management salary 4,000
Office printing & stationery 200
--------------- 4,200
Cost of production 88,000
Add:- Opening stock of finished goods 4,000
-------------
Goods available for sales 92,000
Less:- closing stock of finished goods 5,000
-------------
Cost of goods sold 87,000
Add:- selling and distribution overhead:-
Salaries of salesman 2,000
Commission to traveling agent 1,000
-------------- 3,000
Cost of sales 90,000
Profit 10,000
-------------

Sales 1,00,000

Practical Task
3. From the following particulars of a manufacturing firm, prepare a statement showing: (a) Prime
Cost (b) Works Cost (c) Cost of Production (d) Cost of Sales and (e) Profit.
Rs.
Materials used in manufacturing 60,000
Materials used in primary packing 10,000
Materials used in selling the product 1,500
Materials used in the factory 750
Administrative expenses 1,250
Depreciation on office building 750
Depreciation on factory building 1,750
Materials used in the office 1,250
Wages- production 10,000
Wages- factory supervision 2,000
Indirect expenses - factory 1,000
Selling expenses 3,500
Freight on materials purchased 5,000
Advertising 1,250
Assuming that all the products manufactured are sold, what should be the selling price to obtain
a profit of 20% on selling price?
Ans: (1) Prime Cost Rs. 85,000; (2) Works Cost Rs. 90,500; (3) Cost of Production Rs. 93,750;
(4) Cost of Sales Rs. 1,00,000; (5) Profit Rs. 25,000; (6) Selling Price Rs. 1,25,000
8.10 KEYWORDS
Cost: Expense incurred at the either cost centre or service centre.

Cost Centre: The location at where the cost of the activity is ascertained.

Cost of Production: It is the combination of cost of manufacturing an article or a product and

administrative cost.
Cost of Sales: It is the entire cost of a product.

Cost Sheet: It is a statement prepared for the computation of cost of a product/service.

Direct Cost: cost incurred which can be easily ascertained and measured for a product.

Factory Cost: It is the total cost incurred both direct and indirect at the work spot during the
production of an article.

Indirect Cost: Cost incurred cannot be easily ascertained and measured for a product.

8.11 CONCEPT SELF CHECK

1. What is meant by cost sheet? Explain the importance of Cost Sheet.

2. Define various components of total cost.
3. What do you understand by 'cost sheet'? Briefly explain with specimen of cost sheet.
4. Explain the importance of cost sheet.
5. Explain and illustrate the various elements of cost.
6. Distinguish between:
a) Direct material and indirect material.
b) Direct labour and Indirect labour.
c) Direct expenses and indirect expenses.

7. Compute materials consumed from the following:

Opening stock of materials 20,000
Purchase of materials 1,25,000
Carriage on purchases 15,000
Sale of materials scrap 7,000
Closing stock of materials 18,000
(Ans: Materials consumed Rs. 1, 35,000)

8. Compute prime cost:

|
Opening Stock of materials 35,000
Purchase of materials 4,10,000
Import duty and Clearing charges 1,50,000
 Other purchase expenses 25,000
Closing stock of materials 30,000
Factory wages 2,40,000
Factory overheads 1,60,000
Royalty paid on production 1,20,000
Hire charges for special machinery 40,000
Ans: Prime cost Rs. 9, 90,000)

9. From the following information. Prepare cost sheet.

Rs.
Direct material 1,60,000
Direct Labour 45,000
Direct Expenses 15,000
Factory overheads 35,000
Office and administration overheads 20% of works cost
Selling and distribution overheads 45,000
Opening stock of finished goods 25,000
Closing stock of finished goods 10,000
Profit on Sales 10%
3. Ans: Sales Rs 4,07,000
 UNIT-9 TOOLS AND TECHNIQUES OF FINNCIAL ANALYSIS

Learning Objectives
1. To understand the meanings of marginal cost and marginal costing
2. To explain the advantages and disadvantages of the marginal costing
3. To understand the tools and techniques of marginal costing
4. To explain the break even analysis

CONTENTS:
9.1 MEANING OF MARGINAL COST
9.2 MEANING OF MARGINAL COSTING
9.3 FEATURES OF MARGINAL COSTING
9.4 ADVANTAGES OF MARGINAL COSTING
9.5 LIMITATIONS OF MARGINAL COSTING
9.6 TOOLS AND TECHNIQUES OF MARGINAL COSTING D TECHNIQUES OF MAGINATING
9.7 KEYWORDS
9.8 CONCEPT SELF-CHECK

9.1 MEANING OF MARGINAL COST

The term Marginal Cost refers to the amount at any given volume of output by which the
aggregate costs are charged if the volume of output is changed by one unit. Accordingly, it
means that the added or additional cost of an extra unit of output. Marginal cost may also be
defined as the "cost of producing one additional unit of product." Thus, the concept marginal
cost indicates wherever there is a change in the volume of output, certainly there will be some
change in the total cost. It is concerned with the changes in variable costs. Fixed cost is treated as
a period cost and is transferred to Profit and Loss Account.

9.2 MEANING OF MARGINAL COSTING

Marginal costing is ―the ascertainment of marginal costs and of the effect on profit of changes
in volume or type of output by differentiating between fixed costs and variable costs.‖ Several
other terms in use like direct costing, contributory costing, variable costing, comparative
costing, differential costing and incremental costing are used more or less synonymously with
marginal costing. It is a process whereby costs are classified into fixed and variable and with
such a division so many managerial decisions are taken. The essential feature of marginal
costing is division of total costs into fixed and variable, without which this could not have
existed. Variable costs vary with volume of production or output, whereas fixed costs remains
unchanged irrespective of changes in the volume of output. It is to be understood that unit
variable cost remains same at different levels of output and total variable cost changes in direct
proportion with the number of units. On the other hand, total fixed cost remains same disregard
of changes in units, while there is inverse relationship between the fixed cost per unit and the
number of units.

According to J. Batty, Marginal costing is "a technique of cost accounting pays special attention to the
behaviour of costs with changes in the volume of output." This definition lays emphasis on the
ascertainment of marginal costs and also the effect of changes in volume or type of output on the
company's profit.

9.3 FEATURES OF MARGINAL COSTING

The technique of marginal costing is based on the distinction between product costs and period
costs. Only the variables costs are regarded as the costs of the products while the fixed costs are
treated as period costs which will be incurred during the period regardless of the volume of
output. The main features of marginal costing are as follows:
1. All elements of costs are classified into fixed and variable costs.
2. Marginal costing is a technique of cost control and decision making.
3. Variable costs are charged as the cost of production.
4. Valuation of stock of work in progress and finished goods is done on the basis of variable
costs.
5. Profit is calculated by deducting the fixed cost from the contribution, i.e., excess of selling
price over marginal cost of sales.
6. Profitability of various levels of activity is determined by cost volume profit analysis.

Check your progress

Define marginal costing. Is it possible or desirable at times to reduce selling price
below total cost. If yes, narrate the circumstances winning such action.

9.4 ADVANTAGES OF MARGINAL COSTING

The main advantages of marginal costing are given below:
1. Stock of finished goods and work-in-progress are valued at marginal cost, which is
uniform.
2. By using marginal costing technique, the assessment of various sales or production
alternatives options becomes more convenient and easy which helps in generating
optimum return.
3. The technique provides useful data for managerial decision-making.
4. Marginal costing is simple and easy to understand as it avoids the complexities of
arbitrarily charging fixed overheads to the units of output.
5. Cost control can be exercised in a better way by putting more efforts in maintaining a
contrast and consistent Costas fixed cost are assumed to be constant.
6. It establishes a clear relationship between cost, sales and volume of output and breakeven
analysis.
7. It avoids the complication of under or over absorption of overheads.
8. Fixed costs incur on time basis and are independent of volume of output. To avoid
misleading calculations only marginal costs are considered for product costing.
9. Inventories carried forward to the next year do not include an element of current period’s
fixed overheads.
10. It also helps to compare performance between two or more products and departments.
9.5 LIMITATIONS OF MARGINAL COSTING

1. The separation of costs into fixed and variable is difficult and sometimes gives
misleading results.
2. Normal costing systems also apply overhead in the situation of normal operating volume
and this shows that no advantage is gained by the marginal costing.
3. In the marginal costing, stocks and work-in-progress are understated. The exclusion of
fixed costs from inventories affects the profit, and true and fair view of financial affairs
of an organization may not be clearly visible.
4. Volume variance in the standard costing also discloses the effect of fluctuating output on
fixed overhead. The marginal cost data becomes unrealistic in case of highly fluctuating
levels of production, e.g., in case of seasonal factories.
5. Application of fixed overhead depends on estimates and not on the actual and as such
there may be under or over absorption of the same.
6. Control affected by means of the budgetary control is also accepted by many. In order to
know the net profit, one should not be satisfied with the contribution and hence, fixed
overhead is also a valuable item. A system which ignores fixed costs is less effective, for
a major portion of fixed cost is not taken care of in the marginal costing.
7. In practice, sales price, fixed cost and variable cost per unit may vary. Thus, the
assumptions underlying the theory of marginal costing sometimes becomes unrealistic.
For the long term profit planning, absorption costing is the only answer.

Test Your Understanding

State the following statement is true or false:
 Marginal cost includes prime cost plus fixed overheads.
 Contribution is the difference between the selling price and the total costs.
 All variable costs are included in the marginal cost.
 The breakeven point will be lower if the selling price is increased but the amount
of cost does not change.
 At breakeven point margin of safety is nil.
 When fixed cost is deducted from total cost, we get marginal cost.
 An increase in the volume of the production will result in reduction in unit
variable cost.

9.6 TOOLS AND TECHNIQUES OF MARGINAL COSTING

Contribution: Contribution is the excess of sales over marginal cost. It is not purely profit. It is
the profit before recovery of fixed assets. Fixed costs are first met out of contribution and only
the remaining amount is regarded as profit. Contribution is an index of profitability. It has a fixed
relationship with sales. Larger the sales more will be the contribution and vice versa.
Contribution = Sales – Marginal cost
Marginal Cost Equation:

Marginal Cost Statement

Sales xxxx
Less: Variable Cost xxxx
Contribution xxxx
Less: Fixed Cost xxxx
Profit/ Loss xxxx

Contribution to Sales Ratio (Profit Volume Ratio or P/V ratio): This ratio is usually
expressed in percentage.
Contribution Change in contribution / Profit
P/V Ratio  or P/V Ratio =
Sales Change in sales

A higher contribution to sales ratio implies that the rate of growth of contribution is faster than
that of sales. This is because, once the breakeven point is reached, profits shall grow at a faster
rate when compared to a product with a lesser contribution to sales ratio.
By transposition, we have derived the following equations:

Contribution
P/V Ratio =
Sales
Change in profit
P/V Ratio =
Change in sales

Change in contribution
P/V Ratio =
Change in sales

Break -Even Analysis: Break-even analysis is a generally used method to study the CVP
analysis. This technique can be explained in two ways:
(i) In narrow sense it is concerned with computing the break-even point. At this point of
production level and sales there will be no profit and loss i.e. total cost is equal to total sales
revenue.
(ii) In broad sense this technique is used to determine the possible profit/loss at any given level
of production or sales.
Methods of Break -Even Analysis: Break even analysis may be conducted by the following
two methods:

Methods of Break -Even Analysis

Algebraic Computations Graphic Presentations

Algebraic Calculations:

Fixed Cost
(a) BEP (in terms of units) =
Contribution per unit
Fixed Cost × Sales
(b) B/E (in terms of sales value) =
Contribution
Or Fixed Cost
P/V Ratio

Fixed Cost
P/V Ratio =
BES
OR

Fixed Cost
Break-even Sales (BES) =
P/ V Ratio

MARGIN OF SAFETY [MOP]

1. Actual sales – Break even sales

2. Net profit / P/V Ratio

3. Profit / Contribution per unit [In units]

3. Sales unit at Desired profit = {Fixed cost + Desired profit} / Cont. per unit

4. Sales value for Desired Profit = {Fixed cost + Desired profit} / P/V Ratio
Illustration:
A company produces single product which sells for ` 20 per unit. Variable cost is ` 15
per unit and Fixed overhead for the year is ` 6, 30,000.
Required:
(a) Calculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1, 20,000 units.
(c) Calculate margin of safety sales if profit is ` 60,000.

(a) Suppose Sales units are x then

S=V+F+P
(S = Sales ; V = Variable Cost; F = Fixed Cost; P = Profit)
` 20x = ` 15x + ` 6,30,000 + ` 2x
` 20x – `17x = ` 6,30,000
= 6,30,000
∴x =2,10,000units
3
Sales value = 2,10,000 units ` 20 = ` 42,00,000 to earn a profit of 10% on sales.
(b) Sales price to bring down BEP to 1,20,000 units

Fixed Cost
B.E.P (Units) Contribution per
= unit
Or, Contribution per `6,30,000
unit = 1,20,000uni = ` 5.25
ts
So, Sales Price = ` 15 + ` 5.25 = ` 20.25
(c) Margin of Safety Sales Profit Or ` 60,000
= P/V , P/V
Ratio Ratio

Contribution per
where, P/V Ratio 10 10
unit `5
= 0 Or, 0 = 25%
Sales Pr ice ` 20
 Margin of Safety Sales `
= 60,000 = ` 2,40,000
25%
So if profit is ` 60,000, margin of safety sale will be ` 2,40,000.

Illustration:
From the following information, calculate Break‐even point and Sales to earn profit of
Rs. 2, 40, 000.
Particulars Rs.
Sales 8, 00, 000
Fixed cost 3, 60, 000
Variable cost 5, 60,000

Solution:
Contribution = Sales – Variable cost
= 8, 00, 000 – 5, 60, 000
= 2, 40, 000
= 2, 40, 000 / 8, 00, 000 x 100
= 30%
= Fixed cost + Desired Profit / P/V Ratio
= 3, 60, 000 + 2, 40, 000 / 30%
= 6, 00, 00 / 30%
= 20, 00, 000

Practical Assignment
Rajneesh and Sanjeet Company produce a single article. Following cost data is given about its
product: ‐
Selling price per unit Rs.40
Marginal cost per unit Rs.24
Fixed cost per annum Rs. 16000
Calculate:
(a) P/V ratio (b) break even sales (c) sales to earn a profit of Rs. 2,000 (d) Profit
at sales of Rs. 60,000 (e) New break even sales, if price is reduced by 10%.
9.7 KEYWORDS
Marginal Cost the variable cost of one unit of product or a service.
Marginal Cost Equation: S x U – V x U = F ± P
Marginal Costing a principle whereby variable cost are charged to cost units and fixed cost
attributable to the relevant period is written off in full against contribution for that period.
Profit Volume Chart a diagram showing the expected relationship between costs, revenue at
various volumes with profit being the residual.
Profit Volume ratio the ratio establishing the relationship between the contribution and the sales
value.
Margin of Safety is the difference between the expected level of sales and the break even sales
Projected Sales – Break even sales
Break Even Point: the level of activity there is neither a profit nor a loss.
Break even chart: A mathematical or graphical representation, showing approximate profit or
loss of an enterprise at different levels of activity within a limited range.
9.8 CONCEPT SELF CHECK

1 Distinguish between Marginal Costing and Absorption costing.

2. Define marginal costing and state the features of marginal costing
3. State the benefits accrue out of application of Marginal Costing
4. What is marginal costing? What are its advantages and disadvantages?
5. Explain the concept of contribution. How it related to profits?
6. Discuss the importance of the following
a. P/V Ratio
b. Breakeven point
c. Contribution
d. Margin of safety
 UNIT -10: DATA PROCESSING
Learning Objectives
1. Help to define the concepts of data and data processing
2. To explain various data processing activities
3. To know the data processing cycle
4. To understand the methods of data processing

CONTENTS:
10.1 MEANING OF DATA
10.2 MEANING OF DATA PROCESSING
10.3 TYPES OF DATA PROCESSING
10.4 MEANING OF DATA PROCESSING CYCLE
10.5 STAGES OF THE DATA PROCESSING CYCLE
10.6 LETS SUM UP
10.7 CHECK YOUR PROGRESS
10.1 MEANING OF DATA

The word "data" is the plural of datum, which means fact, observation, assumption or
occurrence. More precisely, data are representations of facts pertaining to people, things, ideas
and events. Data are represented by symbols such as letters of the alphabets, numerals or other
special symbols. In this information-rich world, it is very important for everyone to have
knowledge about computers. A computer is that electronic data device which processes data. It
receives and stores data as input, processes the raw data, and generates the output in various
formats.

Today, organizations are accumulating vast and growing amounts of data in different formats
and different databases. This includes:

 Operational or transactional data such as, sales, cost, inventory, payroll, and accounting.
 Non-operational data, such as industry sales, forecast data, and macro economic data.
 Meta data - data about the data itself, such as logical database design or data dictionary
definitions

10.2 MEANING OF DATA PROCESSING

Data processing is the conversion of data into usable and desired form. This conversion or
“processing” is carried out using a predefined sequence of operations either manually or
automatically. Most of the data processing is done by using computers and thus done
automatically. The output or “processed” data can be obtained in different forms like image,
graph, table, vector file, audio, charts or any other desired format depending on the software or
method of data processing used.

Data processing is the process through which facts and figures are collected, assigned meaning,
communicated to others and retained for future use. Hence we can define data processing as a
series of actions or operations that converts data into useful information. We use the term 'data
processing system' to include the resources that are used to accomplish the processing of data.

Definition of Data Processing

 The converting of raw data to machine-readable form and its subsequent processing (such as
storing, updating, rearranging, or printing out) by a computer.
 Data processing refers to the transformating raw data into meaningful output.

Example of Data Processing

 Check your Progress
Differentiate between the following :
(a) Data and Information.
(b) Data and data processing.
(c) Data processing and Data processing system

10.3 TYPES OF DATA PROCESSING

There are number of methods and techniques which can be adopted for processing of data
depending upon the requirements, time availability, software and hardware capability of the
technology being used for data processing. There are number of types of data processing
methods.

TYPES OF DATA PROCESSING

On the Basis of Process/Steps On the Basis of Technology

Performed Adopted

Batch Processing Manual Data Processing

Real Time Processing

- Mechanical Data Processing

Online Processing

Electronic Data Processing

Multiprocessing

Time Sharing

1. On the basis of technology: Types of data processing can be understood on basis of methods
and technology adopted. Generally mechanical and electronic data processing is used and at
times manual data processing is used.
Manual data processing: In this method data is processed manually without use of machine or
electronic device. This method might be accompanied with automatic method for completion of
the data processing. It was used before the invention of calculators. But data is still processed
manually in many small shops.
Mechanical data processing – Data processing is done by use of mechanical device or very
simple electronic devices like calculator and type writers. When the need for processing is
simple this method can be adopted. . Any device which facilitates data processing can be
considered under this category.

Electronic data processing – This is the fastest and best available method with highest
reliability and accuracy. Technology used is latest as this method uses computers and employed
in most of the agencies. The use of software forms the part of this type of data processing.

2. On basis of process/steps performed

1. Batch Processing
2. Real time processing
3. Online Processing
4. Multiprocessing
5. Time sharing

1. Batch Processing: Batch processing is grunt work, the simplest form of data processing. It's
useful when an organization has a large volume of data that can be clumped into one or two
categories. A store, for example, can batch-process its transactions at the end of the day or the
week, sending the results to the head office. If the information doesn't have to be updated for
every change, batch processing is fast enough.

2. Real-Time Processing: Sometimes batch-processing isn't fast enough. Real-time processing

methods handle data when it requires an instant turn-around. If someone buys an airline ticket or
cancels a reservation, for instance, the airline needs to update its records instantly. A radar
system has to give its operator immediate feedback on what it detects; an ATM has to process
your request for money promptly. Where batch processing handles large loads of data at
specified times, real-time processing is continuous. Example includes banking system, tickets
booking for flights, trains, movie tickets, rental agencies etc.

3. Online processing: This processing method is a part of automatic processing method. Under
this method the job received by the system is processed at same time of receiving. This can be
considered and often mixed with real-time processing. This system features random and rapid
input of transaction and user defied/ demanded direct access to data bases/content when needed.

4. Multi processing – This type of processing perhaps the most widely used types of data
processing. Multi processing makes use of CPUs (more than one CPU). The task or sets of
operations are divided between CPUs available simultaneously thus increasing efficiency and
throughput. Moreover CPUs work independently as they are not dependent on other CPU; failure
of one CPU does not result in halting the complete process as the other CPUs continue to work.
Examples include processing of data and instructions in computer, laptops, mobile phones etc.

5. Time sharing – Time based used of CPU is the core of this data processing type. The single
CPU is used by multiple users. All users share same CPU but the time allocated to all users
might differ. This is done by providing a terminal for their link to main CPU and the time
available is calculated by dividing the CPU time between all the available users as scheduled.

10.4 MEANING OF DATA PROCESSING CYCLE

The data processing activities described above are common to all data processing systems from
manual to electronic systems. These activities can be grouped in four functional categories, viz.,
data input, data processing, data output and storage, constituting what is known as a data
processing cycle.
It refers to the sequence of activities involved in data transformation from its row form to
information. it is often referred to as cycle because the output obtained can be stored after
processing and may be used in future as input.
 10.5 STAGES OF THE DATA PROCESSING CYCLE
The following stages of the data processing cycle are as under:

1. Input
The term input refers to the activities required to record data and to make it available for
processing. The input can also include the steps necessary to check, verify and validate data
contents. Input step can be further divided into following steps:
I. Planning: Here objectives of data processing are defined. For example, in examination
system, objective is to process student examination data to get result cards.
II. Data Collecting: Here data is collected. Data is the raw material for data processing. This
must be accurate for getting accurate results.
III. Input: Here data is entered into computer.
IV. Verification: Here collected data is verified to determine whether it is valid for processing.
For example marks must be in numeric form.
V. Coding: Data is stored in computer in binary form. Here data is converted (or coded) into
computer readable (binary) form.
2. Processing
Now data is ready for processing. We process collected data to convert into information. Some
important activities in processing are as following:
I. Once the input is provided the raw data is processed by a suitable or selected processing
method. This is the most important step as it provides the processed data in form of output which
will be used further.
II. Processing is usually done by CPU (Central Processing unit) in a computer. CPU is the
crucial component for getting the operations done.
After completing the processing, output is received.
3. Output
Output involves following steps:
I) Testing: The results are tested to find if they are according to requirements. And any errors
are removed. If results are not satisfactory then we repeat above-mentioned steps again and
again until the accurate results are found.
II) Summarizing: Huge results are summarized to make them short and precise.
III) Storing results: The results are stored properly on secondary storage devices for future use.
IV) Output the result: Here output is produced as softcopy on screen or as hard copy as
printout. Information is sent to different places as needed.
V) Feed Back: In this step we take comments from users about output results. If results are not
satisfactory then we repeat above-mentioned steps again and again until the accurate results are
found.

4. Storage
Saving data in soft/physical form

I. This is the final outcome and the raw data provided in the first stage is now “processed” and
the data is useful and provides information and no longer called data.

II. Storage can be done on external hard disk, inbuilt hard disk, pen drives, micro SD cards,
compact disks or even in registers.

Assignment No. 2

How data is organized before processing on a computer starts? Discuss briefly.

10.6 LETS SUM UP

The word "data" is the plural of datum, which means fact, observation, assumption or
occurrence. Data processing is the process through which facts and figures are collected,
assigned meaning, communicated to others and retained for future use. Hence we can define data
processing as a series of actions or operations that converts data into useful information. We use
the term 'data processing system' to include the resources that are used to accomplish the
processing of data.

10.7 CHECK YOUR PROGRESS

1. Define the terms data, data processing and information.
2. What is data processing? Describe the various methods of data processing.
3. Explain the various stages of the data processing cycle.
 UNIT- 11: COMPUTRE APPLICATION IN BUSINESS

Learning objectives
1. To help to understand basics of computer technology
2. To know the importance of computer application in business
3. To understand the different uses of computer in business

CONTENTS:
11.1 MEANING AND DEFINITIONS OF COMPUTER
11.2 IMPORTANCE OF COMPUTER
11.3 IMPORTANCE OF COMPUTERS IN BUSINESS
11.4 DIFFERENT USES OF COMPUTER IN BISINESS
11.5 LETS SUM UP
11.6 CHECK YOUR PROGRESS

11.1 MEANING AND DEFINITIONS OF COMPUTER

In a layman language, a computer is a fast calculating device that can perform arithmetic
operations. Although the computer was originally invented mainly for doing high speed and
accurate calculations, it is not just a calculating device. The computer can perform any kind of
work involving arithmetic and logical operations on data. It gets the data through an input
device, processes it as per the instructions given and gives the information as an output.
Charles Babbage is the "Grand Father" of the computer. He designed the first mechanical
computer called Analytical Engine. It works with the read-only memory in the form of punch
cards.
Computer is an advanced electronic device. It takes raw data as input. The data is processed
under the control of set of instructions (called program), then provides the result (output) .output
can be saved for the future use. It can solve both numerical and non-numerical (arithmetic and
logical) calculations.
Digital Computer Definition
The basic components of a modern digital computer are: as follows:
Input Device, Output Device, Central Processor Unit (CPU), mass storage device and memory.
LSI Chips are used in modern computer
Digital Computer Definition
The basic components of a modern digital computer are: Input Device, Output Device, Central
Processor Unit (CPU), mass storage device and memory. A Typical modern computer uses LSI
Chips.
Computer performs these functions:
Receives data Input
Processes on data Processing
Provides the output Output
stores output Storage
-
11.2 IMPORTANCE OF COMPUTER
Following are certain importance of computers.
1.Fast Speed
a. Computer has a very high speed.
b. It is capable of doing large calculation of data.
c. The speed of computer is measured in microsecond, nanosecond, and even the
picoseconds.
d. It can perform the millions of functions in a few seconds as compared to man who will
spend many months to perform the same task.

2. Accuracy
a. The results of computer are accurate with high speed.
b. The output is error free.
c. Accuracy of computer results depends upon the accuracy of the input.

3. Storage Capability
a. Memory is a most important feature of computers.
b. It has huge storage capacity than human being.
c. It can store billions of data.
d. Various kinds of data such as images, videos, text, audio, etc can be stored in the
computer
5. Flexible
a. A computer can perform different kinds of functions because of its versatility.
b. The working of computer is flexible.
c. It works on various topics and fields.
d. It is capable of doing complex scientific problem to simple games.

6. Reliable
a. A computer is a reliable device.
b. The storage of electronic components has long life.
c. Computer is easy to maintain and operate.

8. Cost Saving
a. Computer is the electronic device. it helps in minimum use of paper.
b. It has very high speed of performing task.
c. Any information can be retrieved at any time. It is easy to maintain the big files.
d. It is cost saving the cost of each transaction is very low.
 Check your Progress
1. Fill in the blanks.
a. Compute means to …………. of the computer.
b. Mechanical devices are a type of..................
2. Answer in brief.
a. Define a computer..............................................................................................................
............................................................................................................
b. What is software?
.............................................................................................................
..............................................................................................................

Computer in Business

11.3 IMPORTANCE OF COMPUTERS IN BUSINESS

Personal computers have helped workers in business perform their jobs more efficiency, since
their introduction in the 1980s. Routine functions such as sending memos can instead be done by
email. Workers can research information from the Internet with a click of the button. The
importance of computers in business also has many other positive benefits in the work force.
1. Organization of Information: Computers allow the application of different types of software
that can help businesses keep track of their files, documents, schedules and deadlines. Computers
also allow businesses to organize all of their information in a very accessible manner. The ability
to store large amounts of data on a computer is convenient and inexpensive, and saves space. A
computer's ability to allow a company to organize its files efficiently leads to better time
management and productivity.
2. Increased Productivity: Employees can process more information in less time using
computers. Additionally, all business operations can be connected through computers, improving
overall business operations.
3. Faster Operations: Computers can increase the speed of business operations. Ordering
materials, inspecting products, and collecting customer feedback via computers allow businesses
to operate faster and produce better results.
4. Cheaper R&D: Research and Development (R&D) costs will decrease when using
computers. Scientific research can be done quickly using computer software designed to develop
new products and services.
5. Higher Sales: Computers can generate higher sales for businesses through the use of websites.
Businesses can now stay open around the clock, allowing customers from around the globe to
shop their stores.

11.4 DIFFERENT USES OF COMPUTER IN BISINESS

The Business must understand and adapt in the new source of competitive advantage by
connecting to core competencies and customer interaction on global scale, global market place.
In the global business world, global interaction is very important. In every organization there are
major business processes that provide the critical tasks such that customer bills, analyzing sales
of various products in different locations etc. In business, computers are used as given below.

1. Communications: A business not involved in electronic communications - particularly

email -closes off one of the largest communication channels today. Customers, clients,
vendors and business partners use email to make contact and transact business. Some
companies go beyond email and actually encourage the use of in-house instant messaging
as a method of communications between employees and departments.
2. Inventory Management: Retail and wholesale business have increasingly come to rely
on computers' advanced ability to keep track of inventory and assist in ordering more
when stocks get low. The computer systems place orders for goods as they are needed.
This allowed them not to carry too much or too little of any particular item as well as to
save on the manpower required to manage much of the supply chain. However,
businesses of all sizes use inventory management and point of sales systems to do smaller
scale versions of the same thing.

3. Customer Relationship Management: Stand-alone software exists that can help

business owners find service and retain customers. Modern CRM applications integrate
many of these functions into a single, unified system. Typical tasks that full-featured
CRM apps perform include contact management, customer service and sales force
automation.
4. Data Management: Data management activities form the foundation for many activities
that businesses perform. Computers make it possible for companies to organize and
manipulate massive amounts of information productively. Regardless of your business's
size, you probably work with information and need to store it. Business websites also use
database software to sell products and even give people the ability to join their sites.
 5. Design and presentation: Just a few short decades ago, artists were still creating
business documents by hand. The advent of graphic design, digital photography and
printing technology has enabled businesses to display information more clearly and
artistically.

6. Telecommuting and remote business: Portable laptop computers, smart phones,

wireless internet, air cards and hub spots are the wave of the future when it comes to
computer uses in business. Today, business can be conducted remotely from almost
anywhere

7. Internet Access: Internet access is a business' communications lifeline. Internet-enabled

computing allows you to receive orders from customers, place orders with suppliers,
research businesses, explore business ideas, communicate with government agencies and
even manage your business' banking. In addition, online presence with at least a website
is critical to legitimizing a business. Many companies go further and participate in social
networking sites for marketing and branding purposes.

Assignment-2

How are computers useful for Airline Reservation and Automated Banking?

11.5 LETS SUM UP

Computer is an advanced electronic device. It takes raw data as input. The data is processed
under the control of set of instructions (called program), then provides the result (output) .output
can be saved for the future use. It can solve both numerical and non-numerical (arithmetic and
logical) calculations. The Business must understand and adapt in the new source of competitive
advantage by connecting to core competencies and customer interaction on global scale, global
market place. In the global business world, global interaction is very important. In every
organization there are major business processes that provide the critical tasks such that customer
bills, analyzing sales of various products in different locations etc.
11.6 CHECK YOUR PROGRESS
1. What is a computer? Explain its importance.
2. Explain in brief the different uses of computer in business.
3. What are output devices? Give examples
4. Define brief:
a. Input
b. Output
 UNIT-12: COMPUTER SYSTEM: AN OVERVIEW
Learning Objectives
1. To introduce students to Computer system.
2. To make students conversant with the concepts of Hardware, Software, Storage Devices
and other computer terminologies.
CONTENTS
12.1 INTRODUCTION TO COMPUTER
12.2 STORAGE DEVICES
12.3 COMPUTER PERIPHERALS
12.4 COMPUTER LANGUAGES

12.1 INTRODUCTION TO COMPUTER

Computer-A computer is defined as an electronic device that operates on a set of command to
give the desired output. A computer accepts data in the form of input and as per the instructions
given by the user gives the output.

INPUT PROCESSING OUTPUT

So computer can be defined as a programmable electronic device that accepts data, performs
operations on that data, presents the results and can store the data.
Characteristics of Computer-

 Diligence- Computer can perform work without getting tired. Unlike humans, it does not
need rest and does not even get bored doing some work. It can work for hours without
creating any error. If millions of calculations are to be performed, a computer will
perform every calculation with the same accuracy. Due to this capability it overpowers
human being in routine type of work.
 Accuracy- The degree of accuracy of computer is very high and every calculation is
performed with the same accuracy
 Versatility- versatility is defined as the ability to do different types of jobs. Computers
are versatile in the sense that they are used in different types of industries for different
types of work. From doing accounting work to launching a space shuttle, computer
performs variety of functions.
 Speed- Computer takes few seconds to perform calculation for which humans will take
hours. Thus computer is very fast in performing calculations. Not only calculations, a
basic computer can perform millions of instructions in a second.
  Multitasking- Computers are multi tasking in the sense that they can perform multiple
functions at once without any loss in efficiency in any work. One can play music, use
word processor and perform calculations all at once with same accuracy.
 Storage: - The Computer has an in-built memory where it can store a large amount of
data. You can also store data in secondary storage devices such as floppies, which can be
kept outside your computer and can be carried to other computers.
 No IQ- Computer lacks Intelligence Quotient. Neither it can not learn from its previous
mistakes nor can it take any decision on its own. It depends upon the instruction of user
to perform an action.
 GIGO- It stands for Garbage-In Garbage-Out. A computer works on the instructions
given by the user. In case there is some error in the data and instruction, the desired
output will never be achieved. Faulty instructions will result into faulty results.
Types of Computers-
If broadly categorized, Computers can be divided into following categories-

COMPUTERS

On The Basis Of On The Basis Of On The Basis Of Their

Use Technology Used Size and Capacity

1. On The Basis Of Use- On the basis of Nature and the purpose for which computer is used, it
can be divided into two categories-
1.1. General Purpose Computers- a general computer can a variety of functions like word
processing, financial analysis, gaming and so on. These types of system are those which
we use at home or in computer labs in educational institutions.
1.2. Specific Purpose Computers- specific purpose computers are those which are used for
some specific type of work only. They can perform different functions related only to
their work. Such types of systems are used in space research, weather forecasting where
the functions are specified primarily.

2. On The Basis Of Technology Used- on the basis of how the computer accepts data and
processes it, it is divided into three categories-
2.1. Digital Computers-A computer that performs calculations and logical operations with
quantities represented as digits, usually in the binary number system.Generally it uses
binary number system and thus it can understand only 0 and 1. These systems are high
speed and give very accurate results. These are most commonly used systems in colleges
and homes.
2.2. Analog Computers- An analog computer is a computer which is used to process analog
data. Analog computers store data in a continuous form of physical quantities and
perform calculations with the help of measures.Analog computers are excellent for
situations which require data to be measured directly without converting into numerals
or codes. Analog computers are used in industrial and scientific applications like control
systems and aircraft, or measuring of electric current by ammeter or voltmeter.
 2.3. Hybrid Computers- Hybrid Computers are those Computers which are combinations of
Digital and Analog computers. They process the analog signals and convert and store
them in form of 0 and 1. A very common example of Hybrid system is the Digital
Thermometer which measures the temperature through signals and gives the output in
form of digits.

3. On the basis of Size and their capacity- On the basis of the size, number of operations a
computer can handle, it is divided into following categories-
3.1. Super Computers- these are the most powerful and expensive computers.Super
Computers are those computers which are used for extensive workload. These types of
computers are primarily used where humongous calculations are to be done. Because the
nature of their work is heavy, these computers are equipped with advanced technology.
These computers can perform billions of instructions per second. Some areas where
such computers are used- By agencies such as NASA or ISRO in launching their
satellites and their monitoring, weather forecasting, defence research and other similar
areas. Examples of super computers are- Titan (USA), Tianhe 2 (China), PARAM
YUVA (INDIA).
3.2. Main frame Computers- these computers are also very large in size but smaller to
super computers. These computers can support thousands of users at a time. These are
majorly used by banking companies or similar organizations in maintaining their servers.
Server used by IRCTC is an example of mainframe computer.
3.3. Mini Computers- Mini computers are used in a department in a large organization.
These computers are smaller in size and are suitable where a maximum of few hundreds
of systems are needed to be attached to a single server. They are mid-range servers and
are suitable for acting as network servers in an organization.
3.4. Micro Computers-these are the smallest type of computers which we generally
encounter in our daily life. These are simple general purpose computers which are very
small in size. Their speed is very low and they are used in educational institutions or
homes for simple work. The example of such computers are personal desktops,
Calculators, Laptops, Notebooks, smartphones etc. Micro computers can be further
divided into 3 categories-
3.4.1. PDA’s or Personal Digital Assistant- these include your calculators, mobile
phones, tablets and other similar device. These are those which can be hand held.
3.4.2. Desktop Computers- the computers that we use in our homes, educational
institutions, cyber cafes. The Laptops are also included in these categories but the
difference is that Laptops are portable in nature whereas desktops are not. These are
also known as Personal Computers.
3.4.3. Workstations- These are modifications over desktop computers in terms of
memory and better operational efficiency. These are used to perform high end
technical and mathematical function such as scientific work.

12.2 STORAGE DEVICES

A storage device is any computing hardware that is used for storing, porting and extracting data
files and objects. It can hold and store information both temporarily and permanently, and can be
internal or external to a computer, server or any similar computing device.A storage device may
also be known as a storage medium or storage media.
To store data internally computer makes use of Primary Memory consisting of Random Access
Memory (RAM) or Read Only Memory (ROM).
1. Random Access Memory- RAM (Random Access Memory) is the internal memory of the
CPU for storing data, program, and program result. As it is volatile in nature RAM stores
data until the machine is working. As soon as the machine is switched off, data is erased.
Ram could be of following two types-

1.1. Static RAM (SRAM)- The word static indicates that the memory retains its contents as
long as power is being supplied. However, data is lost when the power gets down due to
volatile nature. SRAM is thus used as cache memory and has very fast access. SRAM
has Long life, is faster, expensive and requires high power consumption. SRAM is used
as a cache memory. There is no need to continuously refresh data in SRAM.
1.2. Dynamic RAM (DRAM)-DRAM, unlike SRAM, must be continually refreshed in order
to maintain the data. This is done by placing the memory on a refresh circuit that
rewrites the data several hundred times per second. DRAM is used for most system
memory as it is cheap and small. Data on DRAM has short data lifetime, is slower,
smaller in size and less expensive than SRAM. It requires less power consumption and is
used as RAM.
2. Read Only Memory- A ReadOnly Memory (ROM) is a non- volatile primary memory. The
information on ROM can only be written during its manufacturing and the users can only
read the information stored on it.A ROM stores such instructions that are required to start a
computer. This operation is referred to as bootstrap. BIOS ( Basic Input Output System) is an
example of information stored in ROM. As ROM is Non-volatile in nature it cannot be
accidentally changed. It is Cheaper than RAMs and are easy to test. These are more reliable
than RAMs as contents are always known and can be verified. ROM is of following types-
2.1. Programmable Read Only Memory- PROM is read-only memory that can be modified
only once by a user. The user buys a blank PROM and enters the desired contents using
a PROM program. It can be programmed only once and is not erasable.
2.2. Erasable and Programmable Read Only Memory- EPROM is an extension to PROM in
which data stored can be erased by exposing the disk to Ultra-violet rays for around 40
minutes.
2.3. Electrically Erasable and Programmable Read Only Memory- EEPROM is programmed
and erased electrically. It can be erased and reprogrammed about ten thousand times.
Both erasing and programming take about 4 to 10 millisecond.
To store data externally, computers use a number of devices such as Magnetic Tapes, Compact
Disk, Hard Disk, Floppy Disk, Blue Ray Disk etc. These devices differ in their capacity to store
and the medium they use to read and record the data.
Secondary Storage Devices can be broadly classified on the basis of mechanism they used to
read and write data. On the basis of it, storage devices are of four types-
 Secondary Storage Devices

Magnetic Optical Storage Flash Memory Online Storage

Storage Devices Devices Devices

1. Magnetic Storage Devices- Any storage medium that utilizes magnetic patterns to represent
information is considered magnetic media. Some of the common magnetic storage devices
are as follows-
1.1. Magnetic tapes- A magnetic tape, in computer terminology, is a storage medium that
allows for data archiving, collection, and backup. At first, the tapes were wound in
wheel-like reels, but then cassettes and cartridges came along, which offered more
protection for the tape inside. One side of the tape is coated with a magnetic material.
Data on the tape is written and read sequentially.
1.2. Floppy Disks- A Floppy Disk Drive, also called FDD or FD for short, is a computer
disk drive that enables a user to save data to removable diskettes. The common size for a
floppy disk is 5 ¼” and 3 ½”.A 5 ¼” floppy disk was capable of storing between 360 KB
and 1.2 MB of data, and the 3 ½” floppy disk was capable of storing between 360 KB
and 1.44 MB of data. For both sizes of floppy disk, the amount of data that could be
stored was dependent on whether the disk was single or double sided and whether the
disk was regular or high density.
1.3. Hard Disk Drive- A hard disk drive (sometimes abbreviated as Hard Drive, HD,
or HDD) is a non-volatile memory hardware device that permanently stores and
retrieves data on a computer. A hard drive is a secondary storage device that consists of
one or more platters to which data is written using a magnetic head, all inside of an air-
sealed casing. Internal hard disks reside in a drive bay, connect to the motherboard using
an ATA, SCSI, or SATA cable, and are powered by a connection to the PSU (power
supply unit). At present the storage capacity for Hard Disk ranges from 1 GB to 4 TB.
2. Optical Storage Devices- Any storage medium that utilizes laser patterns to represent
information is called optical storage media. Some of the common optical storage devices are
as follows-
2.1. Compact Disk- A Compact Disk or CDas commonly known is a storage device which
uses laser mechanism to store data. It requires a CD disk Drive to run a CD. The process
of writing on a CD is known as Burning. A standardized CD can store up to 700 MB of
data. CD could be of following 3 types-
2.1.1.CD Read Only Memory- A CD ROM is an optical device which can store data only
for reading purpose. This means that we cannot write or burn a CD ROM. Example
of such CD’s include Audio CD’s and disk containing software.
2.1.2.CD R- CD R or CD Recordable is a type of compact disk which gives user a facility
of reading the data as well as writing the data for once only. The data stored could
not be erased by any means.Data cannot be deleted from a CD-R disc and a CD-R
disc cannot be formatted.
2.1.3.CD RW- CD rewritable is an extension over CD R wherein, the user can read as
well write data multiple times on a CD. These disks can be formatted easily. As the
size of programs, software and files have increased; these disks are not much longer
in use due to their low storage capacity.
 2.2. Digital Versatile Disk- A DVD is just like a CD with an increased Storage capacity.
There is need for DVD writer to read and write on a DVD. A DVD can store a large
amount of data ranging from 4.7 GB- 17.08 GB. A DVD could be a DVD R which could
be written only once and then read multiple times. Another variant is DVD RW which
like its CD counterpart could be read and written multiple times.
3. Flash Storage Devices- A flash Memory device is a storage device that does not require use
of power supply to retain the data. These devices are plugged in into the Universal Serial Bus
ports to operate. The use of flash storage devise has increased in recent years mainly due to
their easy handling, cost reduction and less requirements of drives to operate. Common
examples of Flash storage are Memory Cards in Mobile phones, Pen Drives, Memory Stick
and SSD. The storage capacity of such devices varies from 512 MB to 256 GB.
4. Online Storage- As the users have started accessing the data from multiple devices, it is
necessary to store data at someplace from where it can be accessed anytime. Although
storage devices have portability there is a hassle in carrying them and risk of losing data in
case of loss of device or its destruction. To overcome these shortcomings online storage or
Cloud Computing has gained immense popularity. A common online service called
DropBox provides for online backup of the data which can be retrieved on any device by
logging in through your credentials. Cloud storage can offer up to 100 TBs of Data. Other
examples of cloud storage are Google Docs, Amazon Web Services, Dash lane etc.

12.3 COMPUTER PERIPHERALS

A peripheral device in computers means any device used to enter or extract information from
computers. The purpose of peripherals is to help users usecomputer more efficiently. Different
Peripherals used with Personal Computers can be clubbed into three categories-

Input Devices Output Devices Other Devices

 Keyboard  Visual Display  Routers and

 Mouse Unit switches
 Scanner  Printers  Port adapter
 Light Pen  Projectors  Hub
 Micro phone  Secondary storage
 Web camera devices

1. Input Device- All those devices that are used to enter data and information into computer
system are known as Input Devices. Some of the Input devices are-
1.1. Keyboard- a keyboard is used to type the data and instructions into computers. The data
could be in form of alphabets, numbers or symbols. Keyboard has keys which also act as
shortcuts to perform various functions in computers. A standard keyboard has 101 keys.
 1.2. Mouse- A computer mouse is a handheld hardware input device that controls a cursor in
a Graphical User Interface and is used to move and select text, icons, files, and folders. It
is one of the most common input devices used.
1.3. Scanner- It is a device which is used to enter hand written or hardcopy of image into the
computer by converting into either pdf or an image format.
1.4. Light Pen- It is a light-sensitive pointing input device commonly used to select or
otherwise modify text or data on a screen. Used with a CRT monitor, these devices were
an early form of manipulating and highlighting data on the screen
1.5. Microphone- This device converts sound waves into electric signals and is used to input
sound into computers. These devices are used primarily for audio recordings.
1.6. Web Camera- A webcam is a hardware camera and input device that connects to a
computer and the Internet and captures either still pictures or motion video of a user or
other object.
2. Output Devices- All those devices which are used to display the processed output to the user
either in form of soft copy or hard copy are known as Output devices. Some common
examples of output devices are as follows-
2.1. Visual Display unit- A VDU or commonly known as Monitor is a output device which is
used to display the processed results to the user in form of soft copy.
2.2. Speakers- One of the most common output device is Speaker. The purpose of speaker is
to amplify the sound produced or produces the sound which can be heard by the user.
2.3. Printers- While Monitor is used to display the soft copy; Printer is used to make a hard
copy for the result displayed. Printers could be impact or non- impact printers. Some of
the common printers sued are laser printers, inkjet printers, dot matrix printers.
2.4. Projectors- These are used to display the contents of monitor on an external screen such
as wall or other flat surface.
3. Other Devices- these devices are devices which do not perform function of input or output
directly but assist the input/ output devices or help in performing other functions smoothly.
Some of the common devices are-
3.1. Switches and Routers- these are networking devices that allow one or more computers to
be connected to other computers, networked devices, or to other networks. The
difference between switches and routers is that switches create network whereas routers
are used to transmit data between two or more networks. A router directs data in a
network and passes data between home computers, and between computers and the
modem. A switch allows connections to multiple devices, manages ports, manage
VLAN security settings.
3.2. Hub-A Hub is a networking device which receives signal from the source, amplifies it
and send it to multiple destinations or computers. The only limitation of Hub is that it
will transmit data to all the computers connected through it even though data was
required only to be transmitted to certain devices.
3.3. Modem- Modulator and Demodulator is a hardware device that allows a computer to
send and receive data over a telephone line or a cable or satellite connection.Computer
information is stored digitally, whereas information transmitted over telephone lines is
transmitted in the form of analog waves. A modem converts between these two forms.
3.4. External Storage Devices- any device that is used to store information and data into large
quantities so that it can be transferred from computer to computer are called external
 storage devices. Examples of such devices are pen drives, CD, DVD, Floppy disks, Hard
disk etc.
3.5. Portsand Adapter-computers have multiple ports and adapters to connect variety of small
and large devices to it. Certain ports are inbuilt but some ports can be added as externals
to attach devices to the computers. Some common examples of such ports are 3.5 mm
headphone jack in mobiles or latest Type C port, Ethernet port in laptops and PCs to
connect to Ethernet, HDMI port.

12.4 COMPUTER LANGUAGES

Computer languages are those languages in which codes are written to perform specific action.
These written codes are called as programme. Every language has its own syntax which is to be
followed while writing programme. Computer languages are of following types-

 Machine Level Language (MLL) -It is the only language which can be understood by the
computer. Binary Language is an example of low level language. Machine level language
is also known as Low Level Language. Coding in these languages was done in the form
of 0 & 1. There was no need to convert these languages as these languages are
understood by computer. The coding was hard to learn as only experts were able to
properly code. Also these codes were machine specific in nature, which means a code for
one machine will not work on another machine.
 Assembly Level Language- In assembly language coding was done with some pre
defined words called as mnemonics. The instructions were created using symbols such as
letters, digits and special characters. As computers understand only 0 & 1 there is need
for an assembler which translates code written in assembly language into machine level
language and vice versa.
 High Level Language (HLL)- These languages are like the ones which humans use in
their conversation. Coding in these languages are done using words, symbols, letters and
digits. HLL require the use of interpreter and compiler to convert the code from HLL to
MLL and vice versa. While interpreter translates the code line by line and detects the
error simultaneously, compiler first translates the code and then lists down all the errors
in the end. Some of the common HLL are-
o Common Business Oriented Language (COBOL)
o Formula Translation (FORTRAN)
o Beginners All Purpose Symbolic Instruction Code (BASIC)
o C++, C, Java
Generations of Languages- Computer languages have seen major changes and have evolved into
a more user friendly product over the years. Computer language have evolved and passed
through several stages known as generations of computers. Languages belonging to a particular
generations have similarities either in their use or their syntax.
 First Generation Languages (1 GL) - these languages were machine oriented in the sense
that the code written in these languages was specific to a machine. Coding was done in
Machine level language in the form of 0 & 1.
 Second Generation Languages (2 GL) - the codes written in these languages was also not
portable across the processors. These languages improve over 1GL in the sense that codes
written used certain symbols, words that were easier to understand for the user. 2GL uses
 assemblers to convert the data into machine level language. These languages are also
known as assembly level languages.
 Third Generation Languages (3 GL)- these languages are high level languages which
make use of normal human language for coding. These languages use Compiler and
Interpreter to convert the HLL into the machine level language for computer to
understand. Languages like COBOL, FORTRAN, BASIC, and JAVA are examples of
such languages. These languages are architect independent i.e. they can be executed on
any device without any problem.
 Fourth Generation Languages (4 GL)- these languages are more specific purpose in
nature over the 3GL. These languages perform a specified function only. These are used
for problem solving like database management. They reduce use of punctuation marks
and grammatical rules in syntax. SPSS, R, SQL, ORACLE are examples of 4GLs.
 Fifth Generation Languages (5 GL)- these are extension over 4GL that uses a visual or
graphical development interface to create source language. Prolog, OPS5, Mercury are
examples of such languages.

Test Your Understanding

1. What are the characteristics of computer?

2. What are different peripherals used with computers?
3. Describe different types of storage devices used by computers?
4. What is the function of Random Access Memory? How is it different from
ROM?
5. What are generations of languages used by computers?
6. How is interpreter different from a compiler?
 UNIT-13: COMPUTER COMMUNICATION
Learning Objectives
1. To impart knowledge about Networking in Computers.
2. To have understanding of different types of networks in computers.
3. To understand about different structures of computer networks.
4. To know about different devices used in computer networks.

CONTENTS
13.1 COMMUNICATION MEDIAS
13.2COMMUNICATION AND NETWORK DEVICES
13.3 CLIENT- SERVER COMPUTING

13.1 COMMUNICATION MEDIAS

Communication media refers to the means of delivering and receiving data or information. In
telecommunication, these means are transmission and storage tools or channels for data storage
and transmission. These mediums could be of two types-
1. Guided Media- it includes all those mediums in which messages flows through a physical
media. It includes co-axial cable, twisted pair of cables and optic fiber cable.
a. Twisted Pair of cables- Twisted-Pair Cable One of the most commonly used types
of guided media is twisted-pair cable, insulated pairs of wires that can be packed
quite close together. The twisted-pair cable is mostly used in used in LANs and
MANs. It can support data transfer rate from 16 to 500 Mb/s (millions of bit per
second).

a. Co-axial Cable- Coaxial cable has wide bandwidth and noise immunity. These are
widely used in MANs such as long distance telephone lines. Its transmission
speed is much higher than twisted pair cables.Coaxial cables cost about three
times as much as twisted-pair wires but offer few additional benefits other than
better shielding. Coaxial cable has a copper core (the inner conductor) with an
outer cylindrical shell for insulation. The outer shield, just under the shell, is the
second conductor.
 b. Fiber Optic Cable- These use high-speed streams of light pulses from lasers or
LEDs (light-emitting diodes) that carry information inside hair-thin strands of
glass called optical fibers for data transmission. Fiber optic cable transmission is
not affected by electromagnetic interference. These can be used to communicate
either analog or digital signals. These are most commonly used for point to point
one way communication.

2. Wireless Media- these are mediums in which messages are transmitted through air. It
includes infrared, microwaves and satellite transmission.
a. Radio wave Transmission- It is one of the most commonly used forms of wireless
media. When we connect your laptop into the network wirelessly, we are using
radio transmission. Radio data transmission uses the same basic principles as
standard radio transmission. Each device or computer on the network has a radio
receiver/transmitter that uses a specific frequency range that does not interfere
with commercial radio stations. The transmitters are very low power, designed to
transmit a signal only a short distance, and are often built into portable computers
or handheld devices such as phones and personal digital assistants.
b. Infrared Transmission- It uses low-frequency light waves (below the visible
spectrum) to carry the data through the air on a direct line-of-sight path between
two points. This technology is similar to the technology used in infrared TV
remote controls. It is prone to interference, particularly from heavy rain, smoke,
and fog that obscure the light transmission. Infrared transmitters are quite small
but are seldom used for regular communication among portable or handheld
computers because of their line-of-sight transmission requirements.
c. Microwave Transmission- Microwave transmission is an extremely high-
frequency radio communication beam that is transmitted over a direct line-of-
sight path between any two points. As its name implies, a microwave signal is an
extremely short wavelength. Microwave signals can be focused into narrow,
powerful beams that can be projected over long distances. This transmission
medium is typically used for long-distance data or voice transmission.
 d. Satellite Transmission- It is similar to microwave transmission except instead of
transmission involving another nearby microwave dish antenna; it involves a
satellite many miles up in space. One disadvantage of satellite transmission is the
propagation delay that occurs because the signal has to travel out into space and
back to earth. Satellite transmission is sometimes also affected by raindrop
attenuation when satellite transmissions are absorbed by heavy rain.

Table 1: Comparison of different mediums of communication

Guided Media
Network
Media Cost Distance Security Error Rate Speed
Type
Twisted Pair of LAN Low Short Good Low Low
Cable
Co-axial Cable LAN, Moderate Moderate Good Low Medium
MAN
Fiber Optics All High Long Excellent Very Low High
Wireless Media
Radio waves LAN Low Short Poor Moderate Moderate
Infrared wave LAN Low Short Poor Moderate Low
Microwaves WAN Moderate Long Poor Low Moderate
Satellite WAN High Long Poor Low Moderate

13.2 COMMUNICATION AND NETWORKING DEVICES

Some of the devices which are used in networking and make it more efficient are discussed
below.
 Modem- Modem is a device which converts the computer-generated digital signals of a
computer into analog signals to enable their travelling via phone lines. The ‘modulator-
demodulator’ or modem can be used as a dial up for LAN or to connect to an ISP. Modems
can be both external, as in the device which connects to the USB or the serial port of a
computer, or proprietary devices for handheld gadgets and other devices, as well as internal;
in the form of add-in expansion cards for computers and PCMCIA cards for laptops.
 Multiplexers- a multiplexer is a device that merges several low speed transmissions into one
high speed transmission. It is a communication device that enables several devices to share
one communication line on a network. Multiplexers work by continuously asking connected
devices if there is any signal to be transmitted. This is known as Polling. A de-multiplexer is
required on the other end to divide and relocate the signals to their original destination.
 C1 C5

C2 C6
MULTIPL MULTIPLE
EXER XER

C3 C7

C4 C8

 Gateway- A gateway is a data communication device that provides a remote network with
connectivity to a host network. It is a device which is used to connect multiple networks and
passes packets from one packet to the other network. Every network has a limit to which it
can communicate. If a device wants to communicate outside the limit, it would use gateway
to do so. It manages all the data communication that is routed internally or externally from
that network. If a network node wants to communicate with a foreign network, it will pass
the data packet to the gateway, which then routes it to the destination using the best possible
path.

 Bridges- A Bridge is a computer networking device that builds the connection with the other
bridge networks which use the same protocol. It works at the Data Link layer of the OSI
Model and connects the different networks together and develops communication between
them. It connects two local-area networks; two physical LANs into larger logical LAN or
two segments of the same LAN that use the same protocol. Apart from building up larger
networks, bridges are also used to segment larger networks into smaller portions. The bridge
does so by placing itself between the two portions of two physical networks and controlling
the flow of the data between them. There are mainly three types in which bridges can be
characterized:
o Transparent Bridge: As the name signifies, it appears to be transparent for the
other devices on the network. The other devices are ignorant of its existence. It
only blocks or forwards the data as per the MAC address.
o Source Route Bridge: It derives its name from the fact that the path which packet
takes through the network is implanted within the packet. It is mainly used in
Token ring networks.
o Translational Bridge: The process of conversion takes place via Translational
Bridge. It converts the data format of one networking to another. For instance
Token ring to Ethernet and vice versa.

 Routers- A router directs data in a network and passes data between home computers, and
between computers and the modem. Router is used to create larger complex networks by
complex traffic routing. It has the ability to connect dissimilar LANs on the same protocol.
 It also has the ability to limit the flow of broadcasts. When a router receives the data, it
determines the destination address by reading the header of the packet. Once the address is
determined, it searches in its routing table to get know how to reach the destination and then
forwards the packet to the higher hop on the route.

 Ethernet- Ethernet is a family of computer networking technologies for local area networks
commercially introduced in 1980. Standardized in IEEE 802.3, Ethernet has largely replaced
competing wired local area network technologies. Ethernet uses a bus or star topology
Network and supports data transfer rates of 10 Mbps. It is one of the most widely
implemented LAN standards. A newer version of Ethernet Network, called 100Base-T (or
Fast Ethernet), supports data transfer rates of 100 Mbps. And the newest version, Gigabit
Ethernet supports data rates of 1 gigabit (1,000 megabits) per second. Ethernet is a physical
and data link layer technology for local area networks (LANs). Ethernet Network was
invented by engineer Robert Metcalfe.

13.3 CLIENT- SERVER COMPUTING

In a client server computing architecture, every computer on network is either client or server.
The servers are powerful computers which are dedicated to manage disk drives, peripherals and
network devices. The clients are computer users who contact servers for their data. All the data,
software are loaded on to the server and are made available to the clients on request. The security
rules are defied to the server and it manages the security of whole network. A server performs
following functions in Client- server relationship-

 Management of applications
 Management of network traffic
 A centralized storage for files
 Access control as per the defined security rules
Advantages of Client- Server Computing-

 Centralised administration- In this architecture there is a Centralised control. Server helps

in administering the set-up. Access rights and resource allocation is done by servers.
 Back-up ad recovery possible- as all the data is stored on server; it is easier to make a
back-up copy of the data. In case data is lost, it can be recovered easily and efficiently.
 Up gradation and Scalability in Client- server set up- changes can be made easily ass data
has to be modified only at he server. New resources can also be added easily.
 Accessibility- from various platforms in the network, servers can be accessed remotely.
 Security- Rules defining security and access rights can be defined at the time of set up of
server.
Disadvantages of Client- Server computing-

 Congestion in Network- too many requests fro the clients can lead to congestion in
network. Overloading can lead to breakdown of network.
 As this network depends heavily upon the server, its breakdown will lead to failure of
network.
 It is expensive to install as server computers are costly.
  It requires professional to maintain servers and technical details of network.
Client- Server Computing can be of two types-
1. Two- tier structure- it involves a server and a client. It is a basic structure.
2. Three Tier structure- it involves use of middleware in the network. Middleware allows
the clients and servers to interact. It stores bulk of business application logic.

Test Your Understanding

1. A device that merges several low speed transmissions into one high speed transmission
is known as ……
2. A communication device which carries voice or sound signals is known as …….
3. What are communication devices? Name a few and describe their purpose.
4. What are multiplexers? How are they different from Modem?
5. What is the distinction between Bridge and Repeater?
 UNIT-14: COMPUTERNETWORK
Learning Objective
1. To have a basic understanding about computer network and its goals
2. To know about the different types of computer networks.
3. To understand the basics of networking topologies.

CONTENTS
14.1 COMPUTER NETWORK
14.2 TYPES OF NETWORK
14.3 NETWORK TOPOLOGIES

14.1 COMPUTER NETWORK

Networks are known as a medium of connections between nodes or computers. A network is

consist of group of computer systems, servers, networking devices are linked together to share
resources, including a printer or a file server. The connection is established by using either cable
media or wireless media.
Goals of network- A network could be formed for the following reasons-

 Resource sharing-Resource sharing is the main objective of the computer network. The
goal is to provide all the program, date and hardware is available to everyone on the
network without regard to the physical location of the resource and the users.
 Reliability- The second objective is to provide the high Reliability. It is achieved by
replicating the files on two or more machines, so in case of unavailability (due to failure
of hardware) the other copies can be used.
 Saves money- a mainframe or mini computer costs much more than a micro computer. If
networking is not done then there will be a need for multiple mainframe systems which
would prove very costly. Thus if computers are connected, this would reduce need for
many costly components and will lead to cost saving.
 Increases the systems performance- Computer network have provided means to increase
system performance as the work load increases. In the absence of network if a computer
gets full, it has to be replaced with the other large computer, usually at an expensive rate.
 Communication medium- Computer network help people who live or work apart to report
together. So, when one user prepared some documentation, he can make the document
online enabling other to read and convey their opinions. Thus computer network is a
powerful communication medium.

14.2TYPES OF NETWORK
Computer networks can be classified on the basis of scope and the purpose they serve. On the
basis of their scope, computers can be classified into-

 Local Area Network (LAN)-this is one of the frequently used network connection. A
LAN connects computer together over a small distance, such as within a building or a
group of building. This type of connection is usually found in homes with multiple
 devices or in school and college computer labs. A LAN is used to connect the computers
and other network devices so that the devices can communicate with each other to share
the resources. The resources to be shared can be a hardware device like printer, software
like an application program or data.LAN offers high speed communication of data rates
of 4 to 16 megabits per second (Mbps).High speed and relatively low cost are the
defining characteristics of LANs. There are two types of Local Area Networks namely:
ARCnet and Ethernet.
 Metropolitan Area Network (MAN)-A metropolitan area network has a broader range
as compared to a LAN. It can cover a distance of up to 100 Kms. A MAN usually
interconnects a number of local area networks using a high-capacity backbone
technology, such as fiber-optical links, and provides up-link services to wide area
networks and the Internet. A common example of MAN is the Cable Tv network in a
city.A MAN is typically owned and operated by a single entity such as a government
body or large corporation. When this type of network is specifically designed for a
college campus, it is sometimes referred to as a Campus Area Network, or CAN.
 Wide Area Network (WAN) - A wide area network, or WAN, occupies a very large
area, such as an entire country or the entire world. A WAN can contain multiple smaller
networks, such as LANs or MANs. The Internet is the best-known example of a public
WAN.WAN is generally used for connecting two or more LANs through some medium
such as leased telephone lines, microwaves, etc. In WAN, data is transferred at slow rate.
 Wireless Local Area Network (WLAN) - Itprovides wireless network communication
over short distances using radio or infrared signals instead of traditional network cabling.
WLANsis one in which a mobile user can connect to a local area network through a
wireless connection. WLAN sare built by attaching a device called the access point (AP)
to the edge of the wired network. Clients communicate with the AP using a wireless
network adapter similar in function to a traditional Ethernet adapter.
 Personal Area Network (PAN) - PAN is the interconnection of information technology
devices within the range of an individual person, typically within a range of 10 meters.
These types of networks are typically found in small offices or residences, and are
managed by one person or organization from a single device. A person connecting a
mobile, a tablet and a laptop through Wi-Fi is an example of PAN. PAN first was
developed by Thomas Zimmerman and other researchers at M.I.T.'s
On the basis of Purpose they serve, computer network is classified into-

 Storage Area Network- A storage area network (SAN) is a high-speed special purpose
local area network (LAN). A SAN typically supports data storage, retrieval and
replication on business networks using high-end servers, multiple disk arrays and Fiber
Channel interconnection technology. SANs are designed specifically for data
management.SANs support disk mirroring, backup and restore, archival and retrieval of
archived data, data migration from one storage device to another and the sharing of data
among different servers in a network.
 Virtual Private Network- A VPN, or Virtual Private Network, is a secure tunnel
between two or more devices. VPNs are used to protect private web traffic from
snooping, interference, and censorship.A virtual private network allows internet users to
access blocked content around the web. They also allow users to secure their online
experience and remain anonymous through tools like encryption.With a virtual private
 network, an internet user can download music; access sports streams, chat on forums, and
more. Content restrictions can be completely avoided.A VPN is a type of connection. It is
a middle layer that sits between you and your internet content. Internet content providers
sometimes try to restrict your access to the entire internet. VPNs use encryption to break
these restrictions, which allow you to access blocked content.
 Enterprise Private Network- An enterprise private network is a computer network built
by a business to interconnect its various company sites (such as production sites, offices
and shops) in order to share computer resources.

14.3NETWORK TOPOLOGIES
The arrangement of a network which comprises of nodes and connecting lines via sender and
receiver is referred as network topology. The different types of network topologies are as
follows-

 Ring Topology- this is the simplest form of topology. Under Ring arrangement each node is
connected to its adjacent two nodes. All message travel through a single direction, either
clockwise or anti-clockwise. To implement a ring network, one typically uses FDDI,
SONET, or Token Ring technology. Ring topologies are found in some office buildings or
school campuses. In Ring Topology, all the nodes are connected to each-other in such a way
that they make a closed loop. This topology is used in LAN and WAN.

Advantages-
 This topology is easy to install and expand.
 The possibility of collision between two data signals is least under this type of
arrangement.
 There is no need for network server to control the connectivity between workstations.
 Performance of network does not get affected by addition of components to the
network.
 Each computer has equal access to resources.
Disadvantages-
 As the data has to pass through all the nodes in the network, it makes data transmission
slower than other topologies.
 In case one or more than one nodes get damaged, it leads to network failure.
  Network is dependent on the wire that connects the nodes. In case wire gets damaged,
whole network gets affected.
 Bus Topology-In this type of topology, all the nodesare connected to the single cable, by the
help of interface connectors. This central cable is the backbone of the network and is known
as Bus. Thus this topology derives its name from the wire. Every workstation communicates
with the other device through this Bus. This topology is suitable for smaller networks such
as LAN.

Advantages-
 It is very easy to set up and expand.
 The cable required for this type of set up is very less.
 This topology is very economical as it does not need any other requirement.
Disadvantages-
 Because this network depends upon the central cable, in case of fault in wire, whole
network suffers.
 There is limit on the number of devices that can be connected to the central wire.
 There is necessity to use terminators at the end of the network so as to terminate the
signals and complete a transmission.
 It is extremely difficult to detect and diagnose the fault in the network.
 If network is over burdened with data, then this type of topology is not suitable.
 As each computer receives signals from various computers, security risk increases in this
type of network.
 Star Topology-In Star topology, every network is connected to a central device which may
be Hub, Router or switch with the help of a wire. The connected nodes are individually
connected to the hub in the form of P2P (Point to Point) connection. All the data passes
through the central device before reaching its destination. The central device acts as junction
in the network and manages and controls the whole network. This topology requires use of
twisted pair of Ethernet cables to join workstations to the central device.
Advantages-
 The network could easily be expanded without causing much disturbance in the network.
 Data need not to pass through every node to reach its destination, so the transmission if
faster compared to previously discussed topologies.
 The data transmission can be easily monitored through the central device.
 Even if a node fails, it does not impact the whole network.
Disadvantages-
 There is over dependency on the central device. In event of its failure, whole network
crashes down.
 As there is need for devices such as hub, routers or switches, this topology is not
economical as compared to other set ups.
 There is limit on number of devices that could be attached to the central hub.

 Mesh Topology- In a mesh network topology, each of the network node, computer and
other devices, are interconnected with one another. Every node not only sends its own
signals but also relays data from other nodes. This topology is used in WANs.

Advantages-
  As data could be transmitted to multiple devices at once, so this network could
withstand high traffic as well.
 Even if a node fails, it does not get impact whole network as data could be transmitted
to other nodes through some other node.
 Expansion of the network can be done without interrupting the whole of network.
 Fault is diagnosed easily. Data is reliable because data is transferred among the devices
through dedicated channels or links.
Disadvantages-
 There are high chances of redundancy in many of the network connections.
 Overall cost of this network is way too high as compared to other network topologies.
 Set-up and maintenance of this topology is very difficult. Even administration of the
network is tough.
 Tree Topology- a combination of Star topology and a Bus topology is known as Tree
topology.

Advantages-
 It is easier to extend as new nodes or even a whole network could be attached as node in
this type of arrangement.
 Error detection becomes easier in such kind of arrangement.
 The whole arrangement does not get affected if a particular node gets damaged.
 This arrangement combines benefits of both the Star and Bus topologies.
Disadvantages-
 The length of cable required in this type of arrangement is huge; this increases cost of
maintenance in future.
 In case the wire or the central device gets affected, it will bring down the whole network.
 Test your understanding

1. A group of computer connected by communication facilities is known as ……….

2. A set of rules that govern the transmission of data over communication networks is ……
 UNIT-15: OPERATING SYSTEM AN OVERVIEW

Learning objectives
1. To impart basic knowledge of OS
2. To know the functions of operating system
3. To know the different types of operating system
4. To impart the basic knowledge of different types of software

CONTENTS:
15.1 INTRODUCTION TO OPERATING SYSTEMS
15.2 FUNCTIONS OF OPERATING SYSTEM
15.3 TYPES OF OPERATING SYSTEMS
15.4 MEANING AND TYPES OF SOFTWARE
15.5 LET’S SUM UP
15.6 CHECK YOUR PROGRESS

15.1 INTRODUCTION TO OPERATING SYSTEMS

The computer system has many resources (hardware and software), which may be require to
complete a task. The commonly required resources are input/output devices, memory, file
storage space, CPU etc. The operating system acts as a manager of the above resources and
allocates them to specific programs and users, whenever necessary to perform a particular task.
Therefore operating system is the resource manager i.e. it can manage the resource of a computer
system internally. The resources are processor, memory, files, and I/O devices. In simple terms,
an operating system is the interface between the user and the machine.

Definition of operating systems:

An operating system is a program that acts as an interface between the user and the computer
hardware and controls the execution of all kinds of programs.
Views of Operating System
1. User's View
2. System View
1. User View: The user view of the computer refers to the interface being used. Such systems are
designed for one user to monopolize its resources, to maximize the work that the user is
performing. In these cases, the operating system is designed mostly for ease of use, with some
attention paid to performance, and none paid to resource utilization.
2. System View: Operating system can be viewed as a resource allocator also. A computer
system consists of many resources like - hardware and software - that must be managed
efficiently. The operating system acts as the manager of the resources, decides between
conflicting requests, controls execution of programs etc.

Operating System Management Tasks

1. Processor management which involves putting the tasks into order and pairing them
into manageable size before they go to the CPU.
2. Memory management which coordinates data to and from RAM (random-access
memory) and determines the necessity for virtual memory.
3. Device management which provides interface between connected devices.
4. Storage management which directs permanent data storage.
5. Application which allows standard communication between software and your computer.
6. User interface which allows you to communicate with your computer.

15.2 FUNCTIONS OF OPERATING SYSTEM

1. It boots the computer
2. It performs basic computer tasks e.g. managing the various peripheral devices e.g. mouse,
keyboard
3. It provides a user interface, e.g. command line, graphical user interface (GUI)
4. It handles system resources such as computer's memory and sharing of the central
processing unit (CPU) time by various applications or peripheral devices.
 5. It provides file management which refers to the way that the operating system
manipulates stores, retrieves and saves data.
6. Error Handling is done by the operating system. It takes preventive measures whenever
required to avoid errors.

Test Your Understanding

1. What are the three major activities of an operating system in regard to memory
management?
2. What are the five major activities of an operating system in regard to file
management?
3. List five services provided by an operating system. Explain how each provides
convenience to the users. Explain also in which cases it would be impossible for user-
level programs to provide these services.

15.3 TYPES OF OPERATING SYSTEMS

Following are some of the most widely used types of Operating system.
1. Simple Batch System
2. Multiprogramming Batch System
3. Multiprocessor System
4. Desktop System
5. Distributed Operating System
6. Clustered System
7. Real time Operating System
8. Handheld System

1. Simple Batch Systems:

 In this type of system, there is no direct interaction between user and the computer.
 The user has to submit a job (written on cards or tape) to a computer operator.
 Then computer operator places a batch of several jobs on an input device.
 Jobs are batched together by type of languages and requirement.
 Then a special program, the monitor, manages the execution of each program in the
batch.
 The monitor is always in the main memory and available for execution.

Following are some disadvantages of this type of system:

1. No interaction between user and computer.
2. No mechanism to priorities the processes.
2. Multiprogramming Batch Systems
 In this the operating system picks up and begins to execute one of the jobs from memory.
 Once this job needs an I/O operation operating system switches to another job (CPU and
OS always busy).
 Jobs in the memory are always less than the number of jobs on disk (Job Pool).
 If several jobs are ready to run at the same time, then the system chooses which one to
run through the process of CPU Scheduling.
 In Non-multi-programmed system, there are moments when CPU sits idle and does not
do any work.
 In Multiprogramming system, CPU will never be idle and keeps on processing.

Time-Sharing Systems are very similar to Multiprogramming batch systems. In fact time sharing
systems are an extension of multiprogramming systems.
In time sharing systems the prime focus is on minimizing the response time, while in
multiprogramming the prime focus is to maximize the CPU usage.

3. Multiprocessor Systems:
A multiprocessor system consists of several processors that share a common physical memory.
Multiprocessor system provides higher computing power and speed. In multiprocessor system all
processors operate under single operating system. Multiplicity of the processors and how they do
act together are transparent to the others.
Following are some advantages of this type of system.

1. Enhanced performance
2. Execution of several tasks by different processors concurrently, increases the system's
throughput without speeding up the execution of a single task.
3. If possible, system divides task into many subtasks and then these subtasks can be
executed in parallel in different processors. Thereby speeding up the execution of single
tasks.

4. Desktop Systems:
Earlier, CPUs and PCs lacked the features needed to protect an operating system from user
programs. PC operating systems therefore were neither multiuser nor multitasking. However, the
goals of these operating systems have changed with time; instead of maximizing CPU and
peripheral utilization, the systems opt for maximizing user convenience and responsiveness.
These systems are called Desktop Systems and include PCs running Microsoft Windows and the
Apple Macintosh. Operating systems for these computers have benefited in several ways from
the development of operating systems for mainframes.

Microcomputers were immediately able to adopt some of the technology developed for larger
operating systems. On the other hand, the hardware costs for microcomputers are sufficiently
low that individuals have sole use of the computer, and CPU utilization is no longer a prime
concern. Thus, some of the design decisions made in operating systems for mainframes may not
be appropriate for smaller systems.

5. Distributed Operating Systems:

The motivation behind developing distributed operating systems is the availability of powerful
and inexpensive microprocessors and advances in communication technology. These
advancements in technology have made it possible to design and develop distributed systems
comprising of many computers that are inter connected by communication networks. The main
benefit of distributed systems is its low price/performance ratio.

Following are some advantages of this type of system.

1. As there are multiple systems involved, user at one site can utilize the resources of
systems at other sites for resource-intensive tasks.
2. Fast processing.
3. Fewer loads on the Host Machine.

The two types of Distributed Operating Systems are: Client-Server Systems and Peer-to-Peer
Systems.

Client-Server Systems
Centralized systems today act as server systems to satisfy requests generated by client systems.
The general structure of a client-server system is depicted in the figure below:

Server Systems can be broadly categorized as compute servers and file servers.
 Compute-server systems provide an interface to which clients can send requests to
perform an action, in response to which they execute the action and send back results to
the client.
 File-server systems provide a file-system interface where clients can create, update, read,
and delete files.
Peer-to-Peer Systems
The growth of computer networks - especially the Internet and World Wide Web (WWW) – has
had a profound influence on the recent development of operating systems. When PCs were
introduced in the 1970s, they were designed for personal use and were generally considered
standalone computers. With the beginning of widespread public use of the Internet in the 1980s
for electronic mail and ftp many PCs became connected to computer networks.
In contrast to the tightly coupled systems, the computer networks used in these applications
consist of a collection of processors that do not share memory or a clock. Instead, each processor
has its own local memory. The processors communicate with one another through various
communication lines, such as high-speed buses or telephone lines. These systems are usually
referred to as loosely coupled systems (or distributed systems). The general structure of a client-
server system is depicted in the figure below:

6. Clustered Systems:
 Like parallel systems, clustered systems gather together multiple CPUs to accomplish
computational work.
 Clustered systems differ from parallel systems, however, in that they are composed of
two or more individual systems coupled together.
 The definition of the term clustered is not concrete; the general accepted definition is that
clustered computers share storage and is closely linked via LAN networking.
 Clustering is usually performed to provide high availability.
 A layer of cluster software runs on the cluster nodes. Each node can monitor one or more
of the others. If the monitored machine fails, the monitoring machine can take ownership
of its storage, and restart the application(s) that were running on the failed machine. The
failed machine can remain down, but the users and clients of the application would only
see a brief interruption of service.
 Asymmetric Clustering - In this, one machine is in hot standby mode while the other is
running the applications. The hot standby host (machine) does nothing but monitor the
active server. If that server fails, the hot standby host becomes the active server.
 Symmetric Clustering - In this, two or more hosts are running applications, and they are
monitoring each other. This mode is obviously more efficient, as it uses all of the
available hardware.
 Parallel Clustering - Parallel clusters allow multiple hosts to access the same data on the
shared storage. Because most operating systems lack support for this simultaneous data
 access by multiple hosts, parallel clusters are usually accomplished by special versions of
software and special releases of applications.

7. Real-Time Operating System:

It is defined as an operating system known to give maximum time for each of the critical
operations that it performs, like OS calls and interrupt handling.

The Real-Time Operating systems which guarantees the maximum time for critical operations
and complete them on time are referred to as Hard Real-Time Operating Systems.

While the real-time operating systems that can only guarantee a maximum of the time, i.e. the
critical task will get priority over other tasks, but no assured of completing it in a defined time.
These systems are referred to as Soft Real-Time Operating Systems.

8. Handheld Systems:
Handheld systems include Personal Digital Assistants (PDAs), such as Palm-Pilots or Cellular
Telephones with connectivity to a network such as the Internet. They are usually of limited size
due to which most handheld devices have a small amount of memory, include slow processors,
and feature small display screens.

 Many handheld devices have between 512 KB and 8 MB of memory. As a result, the
operating system and applications must manage memory efficiently. This includes
returning all allocated memory back to the memory manager once the memory is no
longer being used.
 Currently, many handheld devices do not use virtual memory techniques, thus forcing
program developers to work within the confines of limited physical memory.
 Processors for most handheld devices often run at a fraction of the speed of a processor in
a PC. Faster processors require more power. To include a faster processor in a handheld
device would require a larger battery that would have to be replaced more frequently.
 The last issue confronting program designers for handheld devices is the small display
screens typically available. One approach for displaying the content in web pages is web
clipping, where only a small subset of a web page is delivered and displayed on the
handheld device.

Some handheld devices may use wireless technology such as Blue Tooth, allowing remote access
to e-mail and web browsing. Cellular telephones with connectivity to the Internet fall into this
category. Their use continues to expand as network connections become more available and
other options such as cameras and MP3 players expand their utility.

Check Your Progress

1. What are the differences between Batch processing system and Real Time
Processing System?
2. What are the differences between Real Time System and Timesharing System?
3. What are the differences between multiprocessing and multiprogramming?
15.4 MEANING AND TYPES OF SOFTWARE
The term 'software' refers to the set of electronic program instructions or data a computer
processor reads in order to perform a task or operation. In contrast, the term 'hardware' refers to
the physical components that you can see and touch, such as the computer hard drive, mouse,
and keyboard. Software can be categorized according to what it is designed to accomplish. There
are two main types of software:

1. Systems Software
2. Application Software.

1. Systems Software: Systems software includes the programs that are dedicated to managing
the computer itself, such as the operating system, file management utilities, and disk operating
system (or DOS). The operating system manages the computer hardware resources in addition to
applications and data. Without systems software installed in our computers we would have to
type the instructions for everything we wanted the computer to do!

2. Applications Software: Application software, or simply applications, are often called

productivity programs or end-user programs because they enable the user to complete tasks, such
as creating documents, spreadsheets, databases and publications, doing online research, sending
email, designing graphics, running businesses, and even playing games! Application software is
specific to the task it is designed for and can be as simple as a calculator application or as
complex as a word processing application. When you begin creating a document, the word
processing software has already set the margins, font style and size, and the line spacing for you.
But you can change these settings, and you have many more formatting options available. For
example, the word processor application makes it easy to add color, headings, and pictures or
delete, copy, move, and change the document's appearance to suit your needs.
 Test Your Understanding
1. Types of software programs are:
A. Application programs
B. Replicate programs
C. Logical programs
D. both A and B
2. Set of programs which consist of full set of documentations is termed as
A. database packages
B. file packages
C. bus packages
D. software packages

15.5 LET’S SUM UP

An operating system is the interface between the user and the machine. The term 'software' refers
to the set of electronic program instructions or data a computer processor reads in order to
perform a task or operation. In contrast, the term 'hardware' refers to the physical components
that you can see and touch, such as the computer hard drive, mouse, and keyboard. Software can
be categorized according to what it is designed to accomplish. There are two main types of
software: systems software and application software

15.6 CHECK YOUR PROGRESS

1. What do you mean by operating systems? Explain its various types.

2. Explain the main functions of operating system.

3. What is software? Explain its types

4. Explain the main purpose of an operating system?

5. What is the relationship between operating systems and computer hardware?

6. What are the differences between Multiprocessor System and Real Time Processing System?

7. What are the advantages of multiprogramming?

 UNIT-16: MS-DOS COMMANDS

Learning objectives
1. To understand the difference between Internal and External Commands of DOS
2. To understand the use of MS DOS commands

CONTENTS:
16.1 MEANING OF MS-DOS COMMANDS
16.2 TYPES OF MS-DOS COMMANDS-INTERNAL AND EXTERNAL
16.3LET’S SUM UP
16.4 CHECK YOUR PROGRESS

16.1 MEANING OF MS-DOS COMMANDS

MS-DOS is a computer operating system by Microsoft Corporation. It stands for "Microsoft
Disk Operating System", and came from an operating system Microsoft bought called QDOS, or
the "Quick and Dirty Operating System."

DOS commands are the commands available in MS-DOS that are used to interact with the
operating system and other command line based software. Unlike in Windows, DOS
commands are the primary way in which you use the operating system.

16.2 TYPES OF MS-DOS COMMANDS

There are two types of MS-DOS commands.

1. Internal Command: Internal Command is work by Command.Com file. The features of

Internal Command is-

 The working speed of this command is very fast.

 This command is used much time.
 Do not erase Internal Command.
 The length of Internal Command is very short.

The internal commands are those commands that are automatically loaded in the memory. Some
commonly used DOS internal commands are:
1. Cl 2.Dir 3.Date 4.Time 5. Ver 6.Copycon 7.Typ 8.Ren 9.Del 10.MD 11.CD 12.
RD 13. Copy

1) Cls: - The purpose of this command is to clear the display screen and redisplay the Dos
prompt at the top left corner of the screen.
Syntax: - C: / > Cls

2) Dir: - It displays the list of directories and files on the screen.

Syntax:- C : / > dir.
a. C : / > dir/p – It displays the list of directories or files page wise
 b. C: / > dir/w- It displays the list of directories or files width wise
c. C : / > dir/d: –It display list of directories or files in drive D
d. C : / > dir filename . extension – It displays the information of specified file.
e. C : / > dir file name with wild cards.
Wild cards: - It is the set of special characters wild are used with some commonly used DOS
commands there are two types of wild cards.
1. Asterisk (*˜)
2. Question mark (?)
1. Asterisk:- (*) The wild word will match all characters.
1. C: / > dir *.* - will display list of all files and directories.
2. C: / > dir R*.* - will display all files stored with first character R.
2. Question mark: - This wild card represents a single character that a group or files have in
common.
1) C: / > dir ac .* ˜- will display all files having any first character and remaining name has given
in command.
2) C: / > dir??? R. doc-will display all files having extension doc and having any first three
letters and fourth letter is R.

3) Date: - It displays the current system date. User can also change the current date with new
date by using this command.
Syntax: - C: /> date
Current date is: sat 3-25-2015
Enter of new date (mm-dd-yy):-

4. Time: - It displays the current systems time user can also change existing time with new time
by using this command.
Syntax : - C : / > time
Current time is 12: 39 - 48: 36 p
Enter new time: -

5. VER: It displays the version of DOS being used currently.

Syntax : - C : / > Ver
MS – Dos version 6 : 20
Copy card .

6. Copycon : - The purpose of this command is to create a file.

Syntax : - C : / > copy con filename . extension
Saves the contents of file by pressing ctrl +z key combination at the last time of the file. File
name should not be greater than 11 characters out of which 8 characters are for the name and 3
characters are for the extension.
Extension is optional :
Eg : C : / > copy con ram
I am a good boy
1. File is copied.
C:/>
7. TYPE:- Allows the user to see the contents of a file.
Syntax :- C :/ >Type path
Eg: C:/ > Type D:/> ramu

8. REN : - The purpose of this command is to rename the old file name with new file name.
Syntax : - C : / > ren oldfilename new filename
C : / > ren ramu somu

9. DEL:- The purpose of this command is to delete file. The user can also delete multiple files by
busing this command and long with while cards.
Syntax : - C : / > Del file name . extension
C : / > Del ramu
C : Del x . prg.

10. MD:- The purpose of this command is to create a new directly or sub directly i.e sub ordinate
to the currently logged directly.
Syntax : - C : /> MD directory
C : /> MD sub directory
Ex : C : / > MD college
Now user wants to create a sub directory first year in college directory then
C : / > cd college
C : / > college > Md first year

11. CD : - The purpose of this command is to change from one director to another directory or
sub – directory.
Syntax : - C : / > CD directory name
Ex : C: / > cd college
C : / > college > CD first year
C : / > college > first year >
If the user wants to move to the parents directory then use CD command as
C : / > college > first year > cd ….
C : / > college >

12. RMDIR (RD): - The purpose of this command is to remove a directory or sub directory. If
the user wants to remove a directory or sub – directory then first delete all the files in the sub –
directory and then remove sub directory and remove empty main directory.

13. COPY: The purpose of this command is to copy one or more specified files to another disk
with same file name or with different file name.

2. External Command: Some commands are used in external part that is known as External
Command. The features of External Command is-

 The length of External Command is very long.

 Erased this commands.
 Working speed is very slow.
 The example of External Command is:
CHKDSK, SCANDISK ATTRIB, SORT, EDIT, TREE, MOVE, DISKCOPY, FIND,
XCOPY, MORE, LABLE, FORMATE etc.

 CHKDSK:- The command CHSDK returns the configuration status of the selected disk.
It returns the information about the volume, serial number, total disk space, space in
directories, and space in each allocation unit, total memory and free memory.

Syntax: - C : / > CHKDSK drive name

Eg:- C : / > CHKDSK e :
If drive name is not mentioned by default current drive is considered.
 SCANDISK: - This utility is used to repair and check various disk errors. It also
defects various physical disk errors and surface errors.
Syntax : - C : / > scandisk < drive names >
C : / > Scandisk A

 TIME – It is an Internal Command. By this we can see and display the current time on
the computer system.

 VER (Version) – It is an Internal Command. By this command, we can see the version
number of system software.

 CHKDSK: – It is an External Command. By this command we can check the status of

disk.
  VOL (Volume) – It is an Internal Command. By this command, we can see the Volume
number of system software.

 LABEL: – It is an External Command. By this command we can display and delete the
current label.

PATH
Internal - DOS 2.0 and above
Displays or sets a search path for executable files.
PATH [[drive:] path [;...]]
PATH;
Type PATH; to clear all search-path settings and direct DOS to search
Only in the current directory.
Type PATH without parameters to display the current path.

PROMPT
Prompts are simply the location where the cursor is set to start typing its next command.
PROMPT [text]
text Specifies a new command prompt.
Prompt can be made up of normal characters and the following special codes:
$Q = (equal sign)
$$ $ (dollar sign)
$T Current time
$D Current date
$P Current drive and path
$V DOS version number
$N Current drive
$G > (greater-than sign)
$L < (less-than sign)
$B | (pipe)
$H Backspace (erases previous character)
$E Escape code (ASCII code 27)
$_ Carriage return and linefeed
Type PROMPT without parameters to reset the prompt to the default setting.

VOL
Display the disk volume label and serial number, if they exist.
VOL [drive:]

ECHO
Displays messages, or turns command-echoing on or off.

ECHO [ON | OFF]

ECHO [message]
Type ECHO without parameters to display the current echo setting.

FDISK
Configure a hard disk for use with DOS.
FDISK [/STATUS]

/STATUS Displays the status of the fixed disk drive

Test Your Understanding

1. Which statement is valid about “TIME” command?

a. Time command is used to display and allow changes to the system time
b. Time format can be changed by changing in country setting in config.sys file
c. MS DOS displays the time in 12-hour or 24-hour format
d. All of above
2. You can copy command.com to your disk from hard disk
a. True
b. False
16.3 LET’S SUM UP
MS-DOS is a computer operating system by Microsoft Corporation. It stands for "Microsoft
Disk Operating System", and came from an operating system Microsoft bought called QDOS, or
the "Quick and Dirty Operating System." DOS commands are the commands available in MS-
DOS that are used to interact with the operating system and other command line based software.
Unlike in Windows, DOS commands are the primary way in which you use the operating
system. There are two types of MS-DOS commands internal command and external command.

16.4 CHECK YOUR PROGRESS

1. How to Open MS-DOS Command Prompt?

2. Define internal command. Explain its types.

3. Explain the types of MS-DOS commands.

 UNIT-17: WINDOWS EXPLORER AND DIALOG BOXES

Learning objectives
1. To impart basic knowledge of WINDOWS
2. To understand the concept of Windows Explorer
3. To understand the use of various Dialog boxes and their use

CONTENTS:
17.1 MEANING OF WINDOWS EXPLORER AND ITS PARTS
17.2 MEANING OF PRINT MANAGER
17.3 CONTROL PANEL IN WINDOWS 7
17.4 MEANING OF PAINT BRUSH
17.5 USE OF MICROSOFT PAINT IN WINDOWS
17.6 MEANING OF DIALOG BOX
17.7 MEANING AND TYPES OF TEXT BOX
17.8 MEANING AND FEATURES OF SWIPE/SLIDE BOXES
17.9 LET’S SUM UP
17.10 CHECK YOUR PROGRESS
17.1 MEANING OF WINDOWS EXPLORER AND ITS PARTS
File Explorer (previously called Windows Explorer) helps you browse locations on your PC and
network and work with files and folders. Open File Explorer by swiping in from the right edge of
the screen, tapping Search (or if you’re using a mouse, pointing to the upper-right corner of the
screen, moving the mouse pointer down, and then clicking Search), entering File Explorer in the
search box, tapping or clicking Apps, and then tapping or clicking File Explorer.

Here’s a Typical Window with Its Parts:

1. Navigation Pane:-Use the navigation pane to access all kinds of locations: folders
you’ve added to your favorites list, your libraries, and the drives on your PC, and other
 PCs on your network. Tap or click a location to view its contents in the file list, or tap or
click an arrow to expand a location in the navigation pane. To browse your PC’s drives
and the folders in them, expand Computer.

2. Back, forward, and Up Buttons:-Use the Back button to go back to the last location or
search results you were viewing and the Forward button to return to the next location or
search results. Use the Up button to open the location where the folder you’re viewing is
saved (sometimes called the parent folder).

3. Ribbon:-Use the ribbon for common tasks, such as copying and moving, creating new
folders, emailing and zipping items, and changing the view. The tabs change to show
extra tasks that apply to the selected item. For example, if you select Computer in the
navigation pane, the ribbon shows different tabs than it would if you select a folder in
your Music library. If you don’t see the ribbon, tap or click the Expand the Ribbon button
in the upper right or press Ctrl+F1.

4. Address Bar:-Use the address bar to enter or select a location. Tap or click a part of the
path to go to that level, or tap or click at the end of the path to select the path for copying.

5. File List:-This is where the contents of the current folder or library are displayed. It’s
also where your search results appear when you enter a search term in the search box.

6. Column Headings:-In Details view; you can use the column headings to change how the
files in the file list are organized. For example, you can tap or click the Date
modified heading to sort by date (with the files you worked on most recently at the top).
If you tap or click the column heading again, the files are sorted with the oldest ones at
the top. Press and hold or right-click a column heading to select other columns to add. To
learn how to switch to Details view, see “Change the view” later in this topic.

7. Search Box:-Enter a word or phrase in the search box to look for an item in the current
folder or library. The search begins as soon as you begin typing—so if you enter “B,” for
example, all the files with names starting with the letter B will appear in the file list. For
more info, see Searching for files in File Explorer.

8. Status Bar:-Use the status bar to quickly see the total number of items in a location, or
the number of selected items and their total size.

9. Details Pane:-Use the details pane to see the most common properties associated with
the selected file. File properties provide more detailed info about a file, such as the
author, the date you last changed the file, and any descriptive tags you might have added
to the file. If you don’t see the details pane, tap or click the View tab, and then tap or
click Details pane.

10. Preview Pane: - Use the preview pane to see the contents of a file, such as an Office
document, without opening it in an app. If you don’t see the preview pane, tap or click
the View tab, and then tap or click Preview pane.
 Practical Assignment
Search and locate the files that you have created (MyFile.docx, Family.docx) and cut-paste
or drag-drop them in a new folder say My Work in D: drive using Windows Explorer

17.2 MEANING OF PRINT MANAGER

Print Queue Manager is a software only print management product. It is licensed per a single
print server running Windows Server or Workstation NT, 2000, XP, 2003, Vista, 2008.
Automatically Control and Manage print jobs and print queues from one central Administrative
Client. Set rules for Load Balancing, Disaster Recovery, and Print Broadcasting. Remotely
Control all live print traffic on an entire enterprise!

17.3 CONTROL PANEL IN WINDOWS 7

You can use Control Panel to change settings for Windows. These settings control nearly
everything about how Windows looks and works, and you can use them to set up Windows so
that it's just right for you.

1. On the Windows desktop screen, click the Start button.

2. Click Control Panel on the right-hand side of the Start Menu.
3. You may see a window similar to the following image. You may also see the expanded
version of the Control Panel, with icons for all the various utilities available in the
Control Panel.

Microsoft Windows 7 Control Panel

Tip: If you are having trouble finding a specific icon, there is a search box in the top right-hand
corner of the Control Panel window.

Practical Task

 How would you start and stop a windows service?

 How to access the windows system registry?
17.4 MEANING OF PAINT BRUSH
Windows comes with a basic, easy-to-use image creation program called Microsoft Paint.
Formerly known as Paintbrush, Paint allows users to use draw, paint and editing basic image
features without having to use advanced (and expensive!) software like Photoshop. Though Paint
has a reputation for being weak in power, it’s surprisingly rich in features if you know where to
find them.

17.5 USE MICROSOFT PAINT IN WINDOWS

Part 1:
Getting Around the Program

Launch Paint. Opening Paint, like other features, varies slightly across different versions
of Windows.

 Windows 10: Click the start button, then the magnifying glass icon. Type paint,
then select “Paint” when it appears in the search results.
 Windows 8: Swipe inward from the right side of the screen and select “Search.”
Type paint. When “Paint” appears in the search results, click it.
 Windows Vista and 7: Click the Start button, and then expand the “All Programs”
group. Open the “Accessories” menu and select “Paint.”
 Opening an image file: Paint can open up many different image types, including *.bmp, .gif,
.jpg/.jpeg, .tif/.tiff, .ico, and .png. To open a file in Paint, click “File,” then “Open.” Navigate to
the folder where your image file is stored and click “Open.”
 Understand the canvas. When Paint launches, you’ll see a white “canvas” appear on the
screen. Imagine this canvas as a piece of paper for you to draw or write on. You can
adjust the size of the canvas before you start creating your masterpiece.

 Windows 7 and later: On the Home tab, click “Resize.” Select “Pixels” and type the
desired size in the “horizontal” and “vertical” boxes. Or, if you’d rather adjust the size by
percentage, select “Percentage” and enter the percentage by which you’d like to increase
or decrease the current canvas size. For example, if you’d like to make your image 50%
of the size it is now, type 50 into each box. To double the current size, type 200 into each
box.

 Vista: Click “Image” and select “Attributes.” Enter your desired canvas size (in pixels) in
the Width and Height boxes.

Crop an image. With an image open in Paint, click the “Select” tool at the top of the screen.
Click once at the top left corner of the part of the image you want to preserve, and then drag the
mouse down toward the right until the dotted box encloses just the part of the image you want.
Let go of the mouse button, and then click “Crop.”
Resize an image. Click “Image,” then select “Resize/Skew” (if you’re using Windows 7
or later, just click “Resize” on the toolbar). Alternatively, you can use the keyboard
shortcut Ctrl + W to bring up the Resize/Skew dialog. Type a new size (in pixels, or by
percent, as you did when creating the canvas) to increase or decrease the image size.

Rotate an image. To flip an image upside down (or some other direction), use the Flip
and rotate tools.
  Windows 7 and later: On the toolbar, click “Rotate” and choose a direction in the
menu.
 Vista: In the “Image” menu, click “Flip/Rotate,” and select a direction to flip or
rotate your image.
 You can also press Ctrl + R to bring up the Rotate tool on any platform.

Zoom in and out. Click the magnifying glass icon to enable the Zoom tool. To zoom in,
click anywhere on your image with the left mouse button. To zoom out, click with the
right mouse button. Alternatively, you can use the keyboard shortcuts Ctrl + ⇞PgUp to
zoom in, and Ctrl + ⇟PgDn to zoom out.

Practical Task

 Make different shape in Ms-Paint view it in Zoom in and Zoom out.

 Select images using free form selection – selecting flower.

17.6 MEANING OF DIALOG BOX

A dialog box is a user interface element, a type of window that is used to enable communication
and interaction between a user and a software program. The dialog box appears when the
program either needs to give the user information in an urgent manner that involves interruption,
such as when an error occurs, or if the program requires immediate input or decision from the
user, such as when the program closes and needs to know if the changes made have to be saved
or not.
Dialog box keyboard shortcuts
If you press SHIFT+F8 in extended selection list boxes, you enable extended selection mode. In
this mode, you can use an arrow key to move a cursor without changing the selection. You can
press CTRL+SPACEBAR or SHIFT+SPACEBAR to adjust the selection. To cancel extended
selection mode, press SHIFT+F8 again. Extended selection mode cancels itself when you move
the focus to another control.

 CTRL+TAB (Move forward through the tabs)

 CTRL+SHIFT+TAB (Move backward through the tabs)
 TAB (Move forward through the options)
 SHIFT+TAB (Move backward through the options)
 ALT +Underlined letter (Perform the corresponding command or select the
corresponding option)
 ENTER (Perform the command for the active option or button)
 SPACEBAR (Select or clear the check box if the active option is a check box)
 Arrow keys (Select a button if the active option is a group of option buttons)
 F1 key (Display Help)
 F4 key (Display the items in the active list)
 BACKSPACE (Open a folder one level up if a folder is selected in the Save As or Open
dialog box)

17.7 MEANING AND TYPES OF TEXT BOX

A text box is a rectangular area on the screen where you can enter text. It is a common user
interface element found in many types of software programs, such as web browsers, email
clients, and word processors. When you click in a text box, a flashing cursor is displayed,
indicating you can begin typing. If you are using a tablet, tapping inside a text box may
automatically display the on-screen keyboard.

Characteris
Common Uses Examples
tics

Single-line, Entering short strings

editable

Multiple- Entering lengthy strings

line, editable

Multiple- Displaying EULAs, wizard

line, read- summaries, event logs, and other
only types of lengthy material for the
user to read
Single-line, Displaying text that the user might
read-only want to copy or horizontally scroll
(the size of the text might exceed
the allotted space)

Rich text, Displaying embedded objects and

read-only links

Rich text, Entering strings with font and

editable format properties

MEANING OF CHECK BOX

Check boxes are used when more than one option may need to be checked or as an easy way to enable or
disable a setting in a software program. Checking the box enables that setting and un-checking it disables
the setting.

Below is an interactive example of a check box. To select a check box or place a check in the check box
with a computer mouse, click the check box with left mouse button. To check a check box with a touch
screen tap your finger on the check box.

Check box 1
Check box 2
Check box 3
Check box 4
Check box 5
17.8 MEANING AND FEATURES OF SWIPE/SLIDE BOXES
Swipe boxes may refer to any of the following:

1. For any touch screen interface or interface that uses one or more of your fingers, swipe or slide
is a term that describes laying your finger on a screen and moving in any direction. For example,
with a Smartphone you may need to slide or swipe your finger from left-to-right, right-to-left, or
from low-to-high to unlock the phone.

2. A slide may also describe a slide in a slideshow.

3. When referring to a credit card a swipe refers to when the card is slid through the magnetic
card reader and a charge is made to the credit card account.

Main Features
The main features of swipe boxes are as under:
1. Swipe gestures for mobile
2. Keyboard Navigation for desktop
3. CSS transitions with j Query fallback
4. Retina support for UI icons
5. Easy CSS customization

17.9 LET’S SUM UP

The Windows Explorer lets us view, open, copy and manage our files and folders in the
Windows operating system. In Windows 8, the live tiles can be seen by clicking on the Windows
logo or clicking on the left bottom corner of the window.

17.10 CHECK YOUR PROGRESS

1. What is Windows Explorer? Write various points about the use of Windows Explorer.

2. Microsoft omitted calendar, address book, photo, video, and e-mail software from Windows 7,
how do I get these features back?

4. How to Change an Image Background in MS Paint?

5. How many buttons are there on a typical mouse?

6. What is difference between paint brush and Air brush?

7. Explain the following:

a. Dialog box
b. Check box
c. Text box
d. Swipe boxes
 UNIT-18: INTRODUCTION TO THE FUNCTION AND USE OF
SPREADSHEETS SOFTWARE
Learning objectives
1. To impart basic knowledge of Spreadsheet Software
2. To understand the concept of Range, using Formulas, Functions
3. To understand the use of databases functions in spreadsheet, Graphs and Data Validation
4. To know the functions of spreadsheet

CONTENTS:
18.1 MEANING AND DEFINITION OF SPREADSHEET SOFTWARE
18.2 DOCUMENTS CREATE IN MS EXCEL
18.3 USING RANGE IN EXCEL
18.4 USE OF FORMULAS IN EXCEL SHEET
18.5 FUNCTIONS OF SPREADSHEET
18.6 MEANING OF DATABASE FUNCTIONS
18.7 CHARTS AND GRAPHS IN EXCEL
18.8 LET’S SUM UP
18.9 CHECK YOUR PROGRESS

18.1 MEANING AND DEFINITION OF SPREADSHEET SOFTWARE

Spreadsheet software is a software application capable of organizing, storing and analyzing data
in tabular form. The application can provide digital simulation of paper accounting worksheets.
They can also have multiple interacting sheets with data represented in text, numeric or in
graphic form. With these capabilities, spreadsheet software has replaced many paper-based
systems, especially in the business world. Originally developed as an aid for accounting and
bookkeeping tasks, spreadsheets are now widely used in other contexts where tabular lists can be
used, modified and collaborated.

In a spreadsheet, spaces that hold items of data are called cells. Each cell is labeled according to
its placement (for example, A1, A2, A3...) and may have an absolute or relative reference to the
cells around it. A spreadsheet is generally designed to hold numerical data and short text strings.
Spreadsheets usually provide the ability to portray data relationships graphically. Spreadsheets
generally do not offer the ability to structure and label data items as fully as a database and
usually do not offer the ability to query the database. In general, a spreadsheet is a much simpler
program than a database program.

Overview of Spreadsheet

Below is a basic example of what a Microsoft Excel spreadsheet looks like, as well as all the
important features of a spreadsheet highlighted?
In the above example, this spreadsheet is listing three different checks, the date, their description,
and the value of each check. These values are then added together to get the total of $162.00 in
cell D6. That value is subtracted from the check balance to give an available $361.00 in cell D8.

18.2 DOCUMENTS CREATE IN MS EXCEL

Microsoft Office Excel helps small-business owners analyze price trends, collect demographic
data to improve your marketing efforts and produce customized reports for your bank or
investors. The foundation of Excel is a workbook. Each Excel workbook is a separate document,
within which you create one or several worksheets.

1. Open Excel by clicking "All Programs" in the Windows “Start” menu. Scroll through the list
of programs to find the Microsoft Office folder and click to open it. Locate Microsoft Excel in
this list and click on the program's name to open the application.

2. Place your cursor in the column and row where you want to enter your labels or numbers.
Users often leave one or two blank rows at the top of an Excel worksheet to use for notes or
instructions. The intersection of a column and a row is a cell. Excel displays the location of your
cursor each time you place it in a cell: Columns are identified by letters, and rows by numbers.

3. Create labels that help you identify the data in your worksheet. In a worksheet that contains
data for an entire year, you could enter the name of each month on the same row, starting with
January in column A and ending with December in column L. To type your labels in columns,
place your cursor in the first row that you are using and enter text in each row of the same
column.

4. Enter your numerical data below your row labels or beside your column labels. For Excel
spreadsheets, each data cell in your worksheet can contain text, numbers or formulae.

5. Place your cursor in an empty cell below your last column of numbers or at the end of a row of
numbers to insert formulas and calculate your numerical data. Click the “Sum” button on the
Excel toolbar to select all of the cells in that row or column and add them. Press "Enter" or click
the check mark in the Excel formula bar to put the formula into the worksheet.

6. Start a custom Excel formula by typing the equal sign on your keyboard. Click the first cell
that you want in the formula with your mouse, then type the arithmetic symbols on your
keyboard for multiply, divide, add or subtract. Click the next number that you need in the
formula. Continue selecting cells and typing arithmetic functions until you finish the formula

7. Save your document. Click the "File" tab at the top of your worksheet. Choose "Save" from
the menu. Type a name for your document in the dialogue box and confirm your action by
clicking "Save."

18.3 USING RANGE IN EXCEL

A range in Excel is a collection of two or more cells. This chapter gives an overview of some
very important range operations.

Cell, Row, Column

Let's start by selecting a cell, row and column.

1. To select cell C3, click on the box at the intersection of column C and row 3.

2. To select column C, click on the column C header.

3. To select row 3, click on the row 3 headers.

Practical Assignment
Create a MS Excel Document for maintaining a list of months of the year and also
using Range method.
Range Examples
A range is a collection of two or more cells.
1. To select the range B2:C4, click on cell B2 and drag it to cell C4.

2. To select a range of individual cells, hold down CTRL and click on each cell that you want to
include in the range.

18.4 USE OF FORMULAS IN EXCEL SHEET

The term 'Excel Formulas' can refer to any combination of Excel Operators and/or Excel
Functions. An Excel Formula is entered into a spreadsheet cell by typing in the = sign, followed
by the required operators and/or functions. This may be as simple as a basic addition (e.g.
"=A1+B1"), or it could be a complex combination of Excel Operators and multiple nested Excel
Functions.

For Example:
In cell C5 enter the number 20, now in cell E5 type the formula: =C5+5 then press the Enter key.
You will get the result. The formula says 5 are added to the value entered in the cell C5 as the
value is 20 the result is 25. See the image:
In a similar way other formulas can be created:
=C2*5 for multiplication, the value in the cell C2 is multiplied with 5.
=C2-5 for subtraction, 5 is subtracted from the value in the cell C2.
More formulas can be created by typing = in the cell then selecting the appropriate values and
typing correct mathematical symbol in between.

See the formula created to calculate the distance in the image given below:

See the formula created to calculate the phone bill in the image given below:

Practical Task

 Calculate the bill of various items while purchasing it’s from Book Stall and show the
Total amount of bill for payment.
 Calculate the total and percentage of the obtained marks of the students using formula.

18.5 FUNCTIONS OF SPREADSHEET

Every function has the same structure. For example, SUM (A1:A4). The name of this function is
SUM. The part between the brackets (arguments) means we give Excel the range A1:A4 as
input. This function adds the values in cells A1, A2, A3 and A4. It's not easy to remember which
function and which arguments to use for each task. Fortunately, the Insert Function feature in
Excel helps you with this.

To insert a function, execute the following steps.

1. Select a cell.
2. Click the Insert Function button.

The 'Insert Function' dialog box appears.

3. Search for a function or select a function from a category. For example, choose COUNTIF
from the Statistical category.

4. Click OK.
The 'Function Arguments' dialog box appears.

5. Click in the Range box and select the range A1:C2.

6. Click in the Criteria box and type >5.
7. Click OK.

Result. Excel counts the number of cells that are higher than 5.
Note: instead of using the Insert Function feature, simply type =COUNTIF (A1:C2,">5"). When
you arrive at: =COUNTIF (instead of typing A1:C2, simply select the range A1:C2.

18.6 MEANING OF DATABASE FUNCTIONS

The Excel Database Functions are designed to help you to work within a database (i.e. a large
number of organised data records), stored in Excel. The database functions perform basic
calculations, such as sum, average, count, etc, but they also use criteria arguments, that allow
you to only perform the calculation for a specified subset of the records in your database. Other
records in the database are ignored. All of the built-in Excel Database Functions are listed in the
table below. Selecting one of the function names will direct you to a full description of the
function with examples of use.

Excel Database Functions List

Database Functions
DAVERAGE Calculates the average of values in a field of a list or database, that satisfy
specified conditions
DCOUNT Returns the number of cells containing numbers in a field of a list or
database that satisfy specified conditions
DCOUNTA Returns the number of non-blank cells in a field of a list or database, that
satisfy specified conditions
DGET Returns a single value from a field of a list or database, that satisfy specified
conditions
DMAX Returns the maximum value from a field of a list or database, that satisfy
specified conditions
DMIN Returns the minimum value from a field of a list or database, that satisfy
specified conditions

DPRODUCT Calculates the product of values in a field of a list or database, that satisfy
specified conditions
DSTDEV Calculates the standard deviation (based on a sample of a population) of
values in a field of a list or database, that satisfy specified conditions
DSTDEVP Calculates the standard deviation (based on an entire population) of values in
a field of a list or database, that satisfy specified conditions
DSUM Calculates the sum of values in a field of a list or database, that satisfy
specified conditions
DVAR Calculates the variance (based on a sample of a population) of values in a
field of a list or database, that satisfy specified conditions
DVARP Calculates the variance (based on an entire population) of values in a field of
a list or database, that satisfy specified conditions
 Experience Assignment

1. Write the syntax of the following functions in Excel

(a) SUM, (b) AVERAGE (c) TODAY
2. Write any two function names in each of the following categories:
(a) Financial, (b) Math & Trig, (c) Statistical.

18.7 CHARTS AND GRAPHS IN EXCEL

Charts and graphs are used to make information clearer and easier to understand. A good picture
is worth a thousand numbers. The most common place for people to see charts and graphs is in
the news. News publishers use graphics all the time to show comparisons and explain important
trends for things such as weather, gas prices, crime rate, or who is winning an election and by
how much. Charts and graphs are also critical to engineers, scientists and financial analysts who
use them to help visualize large amounts of information, make better decisions, and
communicate their results to other people.

There are good reasons for learning to create graphs by hand, but there are also some great tools
that everyone ought to learn how to use at some point, such as Excel. The purpose of this article
is to highlight some of the common types of graphs and charts that you can create with Excel,
explain when you might use the different types, and provide a great set of resources for learning
about and teaching about charts and graphs.

Bar Graph
A bar graph is a graph that shows you information about two or more discrete objects, events,
locations, groups of people, etc. You can use the bar graph to make comparisons. For example, if
you count the number of students in your class who are girls and the number who are boys, you
could make a bar graph to compare the totals. One bar would represent the number of boys, and
another bar would represent the number of girls.

Example of a bar graph created with Excel.

Column Chart
A column chart in Excel is just a bar graph where the bars are displayed as columns. Instead of
the labels or categories listed on the left, they are listed on the bottom. The example below shows
how you can set up the data table for creating a column chart showing the number of apples
eaten in a particular month.
 Example of a column chart created using Excel

Pie Charts
A pie chart is a circular graph where the pieces of the pie are used to represent a percentage of a
whole. For example, if you took a survey of the students in your class and asked them each about
their favorite pizza, you could use the results to make a pie chart that would show what toppings
earned the most votes. In this case, each triangle would represent a different topping. The
triangle with the largest area would represent the topping that got the most votes, while the
toppings that got the least votes would be represented by smaller triangles.

Example of a pie chart in Excel

Line Graph
A line graph is great for showing continuous change over time. For example, you could use a
line graph to watch the changes in temperature in the month of March. If it is hotter one day than
on the day before, the line will go up. If it is cooler, it will go down. By analyzing the line graph,
you can get a better idea of the changes that took place as time went on. You can also easily
determine when the value you are graphing was highest or when it was lowest. Including 2 lines
on the same graph lets you visualize comparisons, such as the difference between the High and
Low temperatures for each day.
 Example of a line graph in Excel

Pictograph
A pictograph shows data using a series of pictures, where a picture represents a number. The
example below takes the same data used for the column chart but uses pictures of apples, where
one complete picture represents 5 apples eaten. Pictographs can be a fun way to display
information, and they are easy to create in Excel. You first create a bar graph or column chart
and then you edit the fill options for the bars or columns.

Example of a Pictograph created with Excel

Fill Settings for Creating a Pictograph Click to Enlarge

Practical Task

 Uses the Database Function for maintain the store keeping items while maintaining
stock and also show the graphs representation of stock items.
18.8 LET’S SUM UP
Spreadsheet software is a software application capable of organizing, storing and analyzing data
in tabular form. The application can provide digital simulation of paper accounting worksheets.
They can also have multiple interacting sheets with data represented in text, numeric or in
graphic form. With these capabilities, spreadsheet software has replaced many paper-based
systems, especially in the business world. Microsoft Office Excel helps small-business owners
analyze price trends, collect demographic data to improve your marketing efforts and produce
customized reports for your bank or investors. The foundation of Excel is a workbook. Each
Excel workbook is a separate document, within which you create one or several worksheets.

The Excel Database Functions are designed to help you to work within a database (i.e. a large
number of organised data records), stored in Excel. The database functions perform basic
calculations, such as sum, average, count, etc, but they also use criteria arguments, that allow
you to only perform the calculation for a specified subset of the records in your database. Other
records in the database are ignored. Charts and graphs are used to make information clearer and
easier to understand. A good picture is worth a thousand numbers. The most common place for
people to see charts and graphs is in the news. News publishers use graphics all the time to show
comparisons and explain important trends for things such as weather, gas prices, crime rate, or
who is winning an election and by how much. Microsoft Excel is a software program produced
by Microsoft that allows users to organize, format and calculate data with formulas using a
spreadsheet system. This software is part of the Microsoft Office suite and is compatible with
other applications in the Office suite.

18.9 CHECK YOUR PROGRESS

1. What is the main difference between (a) a column chart and (b) a bar chart?
2. What are the main features of MS Excel?
3. Differentiate between a worksheet and a workbook?
4. What are the different types of data that can be entered into worksheet cells?
5. Briefly explain any five different components of a chart?
6. Give the procedure to open and save the file in MS Excel.
 UNIT-19 DATA VALIDATION AND APPLICATION OF MS EXCEL IN
BUSINESS
Learning objectives
1. To understand the Data Validation
2. To understand the use of MS-Excel in Business Applications

CONTENTS:
19.1 DATA VALIDATION IN EXCEL
19.2 APPLICATIONS OF MS-EXCEL IN BUSINESS
19.3 LET’S SUM UP
19.4 CHECK YOUR PROGRESS

19.1 DATA VALIDATION IN EXCEL

Data validation means checking the accuracy and quality of source data before using, importing
or otherwise processing data. Different types of validation can be performed depending on
destination constraints or objectives. Data validation is a form of data cleansing. It allows you to
do the following:
 Make a list of the entries that restricts the values allowed in a cell.
 Create a prompt message explaining the kind of data allowed in a cell.
 Create messages that appear when incorrect data has been entered.
 Check for incorrect entries by using the Auditing toolbar.
 Set a range of numeric values that can be entered in a cell.
 Determine if an entry is valid based on calculation in another cell.
 Data validation can simply display a message to a user telling them what is allowed as
shown below:

o
 Data validation can also stop invalid user input. For example, if a product code fails
validation, you can display a message like this:

o
 In addition, data validation can be used to present the user with a predefined choice in a
dropdown menu:
 o
 This can be a convenient way to give a user exactly the values that meet requirements.

Data validation controls

Data validation is implemented via rules defined in Excel's user interface on the Data tab of the
ribbon.

Important limitation
It is important to understand that data validation can be easily defeated. If a user copies data from
a cell without validation to a cell with data validation, the validation is destroyed (or replaced).
Data validation is a good way to let users know what is allowed or expected, but it is not a
foolproof way to guarantee input.

Defining data validation rules

Data validation is defined in a window with 3 tabs: Settings, Input Message, and Error Alert:

The settings tab is where you enter validation criteria. There are a number of built-in validation
rules with various options, or you can select Custom, and use your own formula to validate input
as seen below:
The Input Message tab defines a message to display when a cell with validation rules is selected.
This Input Message is completely optional. If no input message is set, no message appears when
a user selects a cell with data validation applied. The input message has no effect on what the
user can enter — it simply displays a message to let the user know what is allowed or expected.

The Error Alert Tab controls how validation is enforced. For example, when style is set to
"Stop", invalid data triggers a window with a message, and the input is not allowed.

The user sees a message like this:

When style is set to Information or Warning, a different icon is displayed with a custom
message, but the user can ignore the message and enter values that don't pass validation. The
table below summarizes behavior for each error alert option.

Alert Style Behavior

Stop Stops users from entering invalid data in a cell. Users can retry, but must enter a
value that passes data validation. The Stop alert window has two options: Retry
and Cancel.
Warning Warns users that data is invalid. The warning does nothing to stop invalid data.
The Warning alert window has three options: Yes (to accept invalid data), No (to
edit invalid data) and Cancel (to remove the invalid data).
Information Informs users that data is invalid. This message does nothing to stop invalid data.
The Information alert window has 2 options: OK to accept invalid data, and
Cancel to remove it.
 Test Your Understanding

1. Can you test database manually, if yes; then how, explain with example?
2. How to test database procedures and triggers?

19.2 APPLICATION OF MS-EXCEL IN BUSINESS

Microsoft Excel is a software program produced by Microsoft that allows users to organize,
format and calculate data with formulas using a spreadsheet system. This software is part of the
Microsoft Office suite and is compatible with other applications in the Office suite.

1. Data entry and storage: At its most basic level, Excel is an excellent tool for both data entry
and storage. In fact, an Excel file’s size is only limited by your device’s computing power and
memory. Worksheets can contain at most 1,048,576 rows and 16,384 columns. So obviously
Excel can store a lot of data. Not only that, features such as Data Form make it easy for data to
be inputted and viewed, where users can create customized data entry forms tailored for their
specific business needs. This can be used to build and maintain customer mailing lists or
employee work shift lists.

2. Collection and Verification of Business Data: Businesses often employ multiple systems
(i.e. CRM, inventory) each with its own database and logs. All of which can be exported into
Excel for easy access. The program can also be used to clean up data, by removing incomplete or
duplicate entries; eliminating such data from the beginning is necessary as it can impact later
analysis and reporting.

3. Administrative and managerial duties: One aspect of managerial duties is creating and
outlining business processes. This aids in process optimization and is an effective tool for
organizing procedures and scenarios. Excel offers tools that allow users to create flow charts,
which can include text, pictures, and animations.

4. Accounting and budgeting: Excel even includes accounting and budgeting templates for easy
use. From there the software’s built in calculating and formula features are available to help you
organize and synthesize results.

5. Data Analysis: So you’ve been dumped with a giant pile of data and charged with drawing
insights from it. Not to worry as Excel can also help you manage and synthesize clear
communicable results from it. One of the best features to do this is called Pivot Tables. They
allow users to consolidate and focus on certain segments of data from a large data set, creating
concise snapshots that can be used as an interactive summary report. By applying filters or
swapping out data segments, the table can be effortlessly changed to display desired data fields.

6. Reporting + Visualizations: Data from both raw data sets and Pivot tables can even be used
create charts and graphs. This can be used for formal reports, presentations, or aid in one’s data
analysis. As they can provide another perspective on trends and performance. Excel again offers
 a variety of ready-made chart templates but also allows users to fine-tune details such as colors,
axis values, and text comments. Visual reporting can be used in all sectors of business. For
instance, marketing teams can use a column chart to report the efficacy of an ad campaign over
time and compare it to previous campaigns.

7. Forecasting: While reporting and reviewing results is an important aspect of any business,
forecasting and being prepared for various scenarios and changes is just as vital. Excel in
conjunction with a third-party software can be used when simulating financial projections by
using past data. Excel can also use a chart’s data set to create a formula which can be used to
calculate future values.

Practical Task

 Calculate the Salary of the employee working in the organization and using data
validation on Salary at the time of entry.

Test Your Understanding

Multiple Choice Questions
1. An entry in a spreadsheet cell representing wages or test scores is most likely a
A. Label B. Value D. Formula E. Calculation
2. Computer spreadsheet capability to allow a pie chart to be generated from data in
spreadsheet cells is termed as
A. Decoration B. Data Appearance C. Functions E. Charting
3. In a computer spreadsheet, value of formula (7-3)x(1+6)/4 is
A. 7 B.1.5 C. 2 D.12
4. In a computer spreadsheet, first part of number format describes
A. Positive Number B. Negative Number C. Zero Values D. Text Values

19.3 LET’S SUM UP

Validation is an automatic computer check to ensure that the data entered is sensible and
reasonable. It does not check the accuracy of data. For example, a secondary school student is
likely to be aged between 11 and 16. The computer canbe programmed only to accept numbers
between 11 and 16. Data validation is a feature available in Microsoft Excel. It allows you to do
the following: Make a list of the entries that restricts the values allowed in a cell. Create a
prompt message explaining the kind of data allowed in a cell. Create messages that appear when
incorrect data has been entered. Microsoft Excel is a software program produced by Microsoft
that allows users to organize, format and calculate data with formulas using a spreadsheet
system. This software is part of the Microsoft Office suite and is compatible with other
applications in the Office suite.
 19.4 CHECK YOUR PROGRESS
1. Name the different parts of MS-Excel window?
2. What is Database testing? Why database testing is important?
3. In database testing, what do we need to check normally?
4. In data base testing, what are the steps to test data loading?
5. What are the various kinds of data that you can enter in MS-Excel?
6. How can you start MS-Excel? How helpful in Business?
7. Give the procedure to open file in MS Excel.