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Finance for Middle Level

Officers
Discussion on
H.L. Mukunda,
Deputy Controller (Accounts & Costing), KPTCL
Date : 11
th
April, 2007

Management
"The conventional definition of
management is getting work
done through people, but real
management is developing
people through work.
Agha Hasan Abedi
Topics to share with you
Accrual vs Cash Basis
Capital and Revenue Items
Cash and Non-cash Items
Event and Transaction
Elements of Cost
Financial Statements
Auditing
Two Part Tariff
ACPS, ARR and CoS
Subsidy Issues
Energy Audit
Budgetary Control
Computer Awareness
Commercial Orientation
Double Entry System of Book Keeping
Assets, Liabilities, Income and Expenditure
Operative and Non-operative Accounts
Bank Reconciliation Statement
Capital Budgeting Techniques
Parties interested in Accounting Information
Owners or Shareholders
Prospective Investors
Debenture Holders
Financial Institutions
Creditors
Customers
Management
Employees
Government
Employees
Consumers
Stock Exchanges
Investment Analysts
Economists
Researchers
General Public
Accounting and Book-keeping
Accounting may be defined as the identifying,
measuring, recording and communicating
financial information.
Bierman and Derbin
According to J.R. Batliboi Book-keeping may be
defined as the science as well as the art of
recording business transactions under appropriate
accounts."
Double-Entry System of Accounting
Meaning :
The system of making two or double entries of equal
value in two different accounts in opposite sides in
the books of each of the contracting parties is
known as the double-entry system of accounting.
The double-entry system requires that the two
entries required for a transaction should be made
in two different accounts for the same value (i.e.,
for the same amount) and simultaneously (i.e., at
the same time).
Event and Transaction
Transaction : Every financial change which occurs in the
business is a transactions. In other words, a transaction refers
to any monetary or financial event or activity (i.e., an activity
having value measurable in terms of money) which changes the
financial position of the business.
Event : All events may not be transactions, whereas all
transactions are events. All events may not be measurable in
terms of money, but every transaction is measurable in terms of
money. An event may or may not cause a change in the financial
position of the business. On the other hand a transaction
necessarily causes a change in the financial position of the
business.
Accrual vs Cash Basis
Under Accrual Concept, revenues are accounted in that
year in which they accrue and are earned and not in
the year in which they are actually received. Similarly
expenses are accounted in the year in which they are
incurred, and not in the year in which they are actually
paid.
Under Cash basis of accounting, transactions are
recognized and accounted only when there is an
exchange of cash.
Capital and Revenue
Capital Expenditure and Revenue Expenditure :
Funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or
equipment is capital expenditure. On the other hand,
expenditure incurred for running and maintaining the
assets or purchasing goods for resale is revenue
expenditure.
Capital Receipt and Revenue Receipt :
Any receipt either in cash or kind meant for creation of
asset is a Capital Receipt, whereas the receipt from
trading or non-trading activities is a Revenue Receipt.
Cash and Non-Cash Expenditure
Revenue Expenditure involving cash
outgo is Cash Expenditure.
Examples are Salary and wages, Repair
expenses, Interest, etc., .
Revenue Expenditure charged to Profit
and Loss Account (ie., reckoned as an
expenditure) but not involving cash
outgo is Non-cash expenditure.
Examples are Deprecation and Return on
Equity or Profit.
Operative and Non-Operative Accounts
KPTCL and ESCOMs are adopting a policy of centralised
pooling of Revenue and providing funds from Central
point for meeting expenditure by Accounting Units.
All Cash receipts at Accounting Units invariably be
transferred to Corporate Office by the Units. The Bank
Account through which such transfer takes place is
called Non-Operative Bank Account ie., Account not
to be operated by Units except for remittances into the
Account.
For meeting expenditure by Accounting Units, the funds
are transferred from Corporate Office. The Units
maintain an Operative Bank Account to account such
receipts and make disbursement out of such amounts.
Classification of Transactions
Transaction in a business enterprise is
classified under any of the following
group :
Asset
Liability
Income
Expenditure
Financial Statements
Trading (Manufacturing) Account
Balance Sheet
Profit and Loss Accounts
Cash Flow Statement
Profit and Loss Account
Income and Expenditure of a Company during a
specified period are depicted here.
P&L Account indicates the financial performance of
the Company during the said period.
The difference between the Income and Expenditure
may be either Profit or Loss. This is normally referred
to as Bottom Line of the Companys P&L Account.
For each item of Income and Expenditure further
break-up details are disclosed in separate Schedules.
At present 16 schedules are there. (which may vary
depending on the extent of disclosure).
P / L A/c in T Form A sample
Expenditure Income (or Revenue)
Amount Amount
To Purchase of Power
To Employee Costs
To Repairs and Maintenance
Expenses
To Administration and General
Expenses
To Interest and Finance Charges
To Depreciation
To Prior Period Expenses (or
credits)
To Other Expenses
Profit (balancing figure)
By Revenue from Sale of power
to consumers
By Revenue from sale of power
to Hukkeri Society
By Revenue from inter-state
trading of power
By Wheeling Charges
By Open Access Charges
By Miscellaneous Income from
consumers
By Non-Tariff Income
Loss (balancing figures)
Total Total
Dr. Dr. Profit and Loss Account for the year ending 31
st
March, 2007
P / L A/c in Horizontal Form A sample
Particulars Amount
REVENUE :
Revenue from Sale of power to consumers
Revenue from sale of power to Hukkeri Society
Revenue from inter-state trading of power
Wheeling Charges
Open Access Charges
Miscellaneous Income from consumers
Non-Tariff Income
Total Revenue
EXPENSES :
Purchase of Power
Employee Costs
Repairs and Maintenance Expenses
Administration and General Expenses
Interest and Finance Charges
Depreciation
Prior Period Expenses (or credits)
Other Expenses
Less : Expenses Capitalised
Total Expenses
Net Profit or Net Loss
Profit and Loss Account for the year ending 31
st
March, 2007
Balance Sheet
Assets and Liabilities of a Company are depicted
here.
It indicates the financial position of the Company as
at the end of a period. The figures shown in Balance
Sheet are cumulative since the inception of the
Company.
There are 17 Schedules to the Balance Sheet giving
detailed information for each item of Asset or
Liability (No. of schedules may vary depending on
depiction).
Assets broadly include Fixed Assets, Investments,
Current Assets and Deferred Revenue Expenditure.
Contd.,
Balance Sheet
Under Liabilities the items of Equity Capital (Share
Capital or share Deposit), Reserves and Surplus,
Loans (Secured and Unsecured), Service Line and
Security Deposits from Consumers are shown.
Current Assets include Inventories, Sundry Debtors
(Receivables), Cash and Bank Balances, Loans and
Advances and Other Assets.
Current Liabilities include Power Purchase
Liabilities, Security Deposit from
Contractors/Suppliers, Bills payable and Provisions.
BALANCE SHEET in Horizontal Form A sample
Particulars Amount
SOURCES OF FUNDS :
Share Capital
Reserves and Surplus
Secured Loans
Unsecured Loans
Deposits from Consumers
TOTAL
APPLICATOIN OF FUNDS :
Fixed Assets Gross Block
Less Accumulated Depreciation
Net Block
Investments
Capital Work in Progress
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Other Assets
Total Current Assts
Less Current Liabilities & Prov.
Net Current Assets
Deferred Revenue Expenditure
TOTAL
Balance Sheet as at 31
st
March, 2007
BALANCE SHEET in T Form A sample
Capital and Liabilities Assets and Properties
Amount Amount
Share Capital
Reserves and Surplus
Secured Loans
Unsecured Loans
Deposits from Consumers
Fixed Assets Gross Block
Less Accumulated Depreciation
Net Block
Investments
Capital Work in Progress
Current Assets
Inventories
Sundry Debtors
Cash & Bank Balances
Loans & Advances
Other Assets
Total Current Assts
Less Current Liabilities & Prov.
Net Current Assets
Deferred Revenue Expenditure
Total Total
Balance Sheet as at 31
st
March, 2007
Cash Flow Statement
While the P&L Account is based on Accrual basis of
reckoning Income and Expenditure items, in Cash
flow statement the income actually received in cash
and expenses actually paid in cash are considered.
CFS is very vital in a situation where there is
significant variation in Income and Expenditure
figures between accrued and cash basis.
Depreciation being non-cash item of expenditure
is excluded from expenditure outgo in Cash flow
statement. Similar is the treatment for Net profit
(ROR/ROE) which remain with the Company.
Cash Flow Statement
Deposits from consumers, Augmentation charges, capital
receipts / grants received in cash, etc., which are not figured
in P&L Account are taken as Cash inflow items in CFA.
The sum of Depreciation and RoE along with above type of
receipts constitute Internal Resources of the Company.
The Debt Repayment (only principal amount) has to be made
normally out of such internal resources.
If there is residual amount out of Internal Resources after
such debt repayment the same would be available for meeting
Capital Expenditure.
On the other hand, if there is shortfall to make debt
repayment out of internal resources, the Company has to
borrow for repayment of existing debt (a debt trap position).
Revenue Items
Items of Revenue in KPTCL/ESCOMS P&L A/c are :
Subsidy from GoK is also taken as an item of Revenue while finalising
the Accounts. However, this item may be a gap filling balancing figure.
Revenue from Sale of Power to Consumers
Revenue from Inter-State sale of power
Wheeling Charges
Open Access Charges
Miscellaneous Income from Consumers
Non-Tariff or Other Income

Expenditure Items
Items of Expenditure in KPTCL/ESCOMS P&L A/c are :
Revenue
Expenses
capitalised
are taken as
a negative
item in P&L
Account
Net Profit or
Net Loss also
figure in P&L
A/c as
difference
between
Revenue and
Expenditure
Purchase of Power
Repairs and Maintenance Expenditure
Employee Costs
Administration and General Expenses
Depreciation
Interest and Finance Charges
Prior Period Expenses (or Credits)
Other Expenses
It is a statement prepared to reconcile the bank balance as per the cash book
with the bank balance as per the pass book.
Causes for disagreement :
Cheques issued but not presented
Cheques deposited but not collected
Cheques received but not presented to bank
Cheques issued but dishonoured
Cheques deposited but dishonoured by drawee bank
Direct deposits into bank account
Payment made by the bank on behalf of the customer
Interest / Dividend collected and credited by the banker
Interest on bank balance allowed by the banker
Bank commission, charges, interest on overdraft charged by the
banker
Wrong entries in the cash book or pass book
Bank Reconciliation Statement

Capital
Budgeting
Techniques

Capital Budgeting Techniques

Payback Period
Discounted Cash flow
Techniques
Net Present Value (NPV)
Internal Rate of Return (IRR)
Benefit-cost Ratio (BCR)
PAY BACK PERIOD
PBP =
Original Investments
________________
Annual Cash-inflows
Example :
Original Investments Rs.2,80,000
Average Annual cash-inflow
(savings after tax but before depreciation) Rs. 80,000
=
________
80000
280000
=
3.5 Years
NET PRESENT VALUE
Year Project A Project B
Initial Investment Rs.50000 Rs.50000
Cash-inflow 1
st
Year
Rs.15000 Rs.5000
2
nd
Year Rs.20000 Rs.15000
3
rd
Year Rs.25000 Rs.20000
4
th
Year Rs.15000 Rs.30000
5
th
Year Rs.10000 Rs.20000
Total Inflow Rs.85000 Rs.90000
Evaluation of Projects without using NPV method :
Project A : Rs.85000 - Rs.50000 = Rs.35000
Project B : Rs.90000 - Rs.50000 = Rs.40000
As the Net Cash Inflow is more in respect of Project B than Project A,
Project B is preferred and considered as financially viable.
NET PRESENT VALUE
Year Project A Project B Discount
Factor at 10%
Project A
PV
Project B
PV
Initial Investment Rs.50000 Rs.50000
Cash-inflow 1
st
Year
Rs.15000 Rs.5000 0.909 Rs.13635 Rs. 4545
2
nd
Year Rs.20000 Rs.15000 0.826 Rs.16520 Rs.12390
3
rd
Year Rs.25000 Rs.20000 0.751 Rs.18775 Rs.15020
4
th
Year Rs.15000 Rs.30000 0.683 Rs.10245 Rs.20490
5
th
Year Rs.10000 Rs.20000 0.620 Rs. 6210 Rs.12420
Total Inflow Rs.85000 Rs.90000 Rs.65385 Rs.64865
Evaluation using Net Present Value :
Project A : Rs.65385 - Rs.50000 = Rs.15385
Project B : Rs.64865 - Rs.50000 = Rs.14865
Based on NPV, Project A is preferred than Project B as the NPV of
future Cash flows is more in A than that of Project B
Procedure / Method of calculation :
First determine the NPV using some assumed
Discount factor.
By trial and error method change the discount
factor rate and rework the NPV until the
Original investment equate the Present Value.
The rate at which the Investment equates the
Present Value is the IRR of the project.
The IRR is compared to the cost of capital and
the project having higher difference is preferred
to the other projects.
Internal Rate of Return (IRR)
Benefit to Cost Ratio
(BCR or Profitability Index method)
BCR =
PV of future Cash inflows
__________________
Investments
Example :
Original Investments Rs.5000
NPV of future cash inflows Rs.5860
8000
=
________
5000
5860
= 1.17
Higher the BCR, the more desirable is the investment.
Project A Project B
Rs.
Present Value 30000 60000
Investments 20000 45000
Net Present Value 10000 15000
On NPV basis, Project B is feasible and preferred
Benefit to Cost Ratio 1.50 1.33
On BCR basis, Project A is feasible and preferred
Comparison NPV vs BCR

Budgetary
Control

Types of Budget :
Incremental Budgeting
Zero Based Budgeting (ZBB)
Rolling Budget
Flexible Budget
Monthly, Quarterly, Yearly

Budgetary Control
Capital Budget and Revenue Budget
Revenue Budget
Constituents Power Purchase Cost, Employee Costs, R&M Expenditure, A&G
Expenses, Interest and Other Expenses.
Importance of KERC Tariff Order KERC Order de facto Revenue Budget.
Capital Budget or Project Monitoring process :
Necessity of taking up future projects
Evaluation of proposed Capital Program
Sourcing of proposed capital works
Execution of Works
Monitoring of Works
Post Project Appraisal
Budgetary Control
Subsidy Issues
The policy of the GoK is to provide subsidy to
ESCOMs for mitigating the loss on account of
supplying power to certain category of consumers
(Ex :IP Sets, BJ/KJ).
Such loss occur due to charging such consumers at
tariffs below the cost of power.
Cross-subsidy element ie., amount available from
charging to certain categories at tariffs more than
the average cost, is taken into account for working
out the loss.
Subsidy is taken as an item of Revenue in P&L A/c to
finalise the accounts.
Two Part Tariff
Meaning : Distinguishes the total costs as
Fixed and Variable Costs. Tariffs are
determined taking Annual Fixed Cost into
considerationandVariableCostperUnit.
Basis : Marginal Costing Technique
principles.
Fixed Costs
Level of Activity (Like Sales, Production, Generation)
Cost
Total Fixed Cost
0
Variable Costs
Level of Activity (Like Sales, Production, Generation)
Cost
Total Variable Cost
0
Break Even Point
Level of Activity (Like Sales, Production, Generation)
Cost /
Income
Total Income
0
Total Costs
Fixed Costs
Break Even Point
Break Even Point Formula : {(FC) / (SP VC) }
Where FC : Total Fixed Cost, SP: Selling Price / unit and
VC: Variable Cost unit)
Profit Area
Loss Area
Even Fixed
Cost not
recovered
Two Part Tariff
Components Amount (Rs. Crs.)
Fixed Cost (FC) :
1. Interest on Loan Capital
2. Depreciation
3.Return on Equity
4. Operation and Maintenance Expenses
5. Interest on Working Capital
Total Fixed Cost
Fixed Cost per Unit (Total Fixed Cost / Net Energy sent
out)
Variable Cost (VC) :
1. Cost of Primary Fuel (Fuel Cost / Unit)
2. Cost of Secondary Fuel (Fuel Cost / Unit)
Variable Cost / Unit
Total Cost per Unit
ACPS, ARR and CoS
Average Cost of Power Supply (ACPS) :Total pooled
cost divided by Energy Sold gives the Average Cost of
PowerSupply.
AverageRealisation Rate(ARR):Itistheaveragerate
at which the revenue is realised per unit. (Realisation on
accrualbasisnotoncashbasisie.,Demandraised).
Cost to Serve (CoS) : It is the cost incurred to supply
power at specified voltage or to a specified class of
consumers.
If you cant measure it,
you cant manage it
Unless metering is complete, whatever may be the
level of accuracy in assessing the unmetered
sales, the figures are susceptible for manipulation
and lead to biased decisions.
Tackling of distribution loss based on such un-
authenticated figures may not yield expected
results.
Metering - Importance
Energy Audit
At Sector level
At Company level
At Zone / Circle / Division level
At Sub-division level
At Feeder Level
DTC Level
O&M Unit-wise
Aggregate
Technical
and
Commercial
Losses
Energy Audit
Concept :
In the context of Transmission and Distribution functions, simple meaning of
Energy Audit is keeping an account of Energy Input and the Energy Realised.
Importance :
With Reforms and Restructuring measures initiated in the power sector coupled
with intervention of Regulator and power purchase cost is steeply increasing, the
Energy Audit is becoming crucial aspect in the sector. .
Method and Purpose :
The Energy Audit can be carried out at DTC (Distribution Transformer Centre)
level, Feeder level, O&M Unit Level, Sub-division / Division / Circle / Zone /
ESCOM level depending on the requirement and focus.
Simply carrying out the Energy Audit without analysing the results and taking
further corrective action to identify the high loss areas and plugging the loss is of
no use. The results should be effectively used for short listing the DTCs / Feeders
having abnormal losses, negative losses, etc., for taking appropriate action.
DTC-wise Energy Audit
Concept :
The DTC-wise Energy Audit is becoming a key performance evaluation parameter
as it is the last point in our supply chain before energy reaches the consumers
installation. It is also construed as best micro-level management criteria as
the result would point out specific area of supply contributing to high loss
may be due to technical reasons or due to commercial loss by way of theft,
pilferage, metering inaccuracies, etc.,.
Steps :
1. Metering at DTC level is the key factor for carrying out DTC-wise energy
audit.
2. Input at DTC level is taken based on DTC meter reading.
3. Consumption as per billed data is taken as the energy sold (if all the
installations are metered)
4. If all the installations under the DTC are not metered, the consumption in
respect of unmetered installations has to be assessed based on some
reasonable realistic basis.
Contd.,
DTC-wise Energy Audit
Steps :
5. From the total energy input of the DTC, the sum of billed consumption and
the assessed consumption in respect of unmetered categories is deducted to
arrive at the energy loss.
6. The percentage of energy loss to the energy input is the DTC-wise Energy
Loss.
Energy Audit Results and Corrective Action :
After carrying out the Energy Audit in respect of all DTCs in a O&M Unit / Sub-
division, the list has to be arranged in descending order (using SORT function
of MS- EXCEL).
Keeping the allowable loss (say 2.5% in Urban DTCs and 5% in Rural DTCs) as
the basis, the installations under DTCs having loss above this level are to be
subjected to thorough verification either by physical checking or meter
calibration by the Meter Testing (MT) wing or both measures.
The results of DTCs having negative loss should also be analysed to ascertain the
reasons and correcting the problems.
Based on the report from MT wing after calibration action as suggested may be
initiated.
Aggregate Technical and Commercial
Loss (AT&C Loss)
Concept :
It represents the difference between units input and the units realised. It captures
both the energy loss and the impact of collection efficiency
Importance :
AT & C Loss is one of the best yardsticks to measure the efficiency of an ESCOM.
This can also be worked out for any Revenue Unit like Feeder, DTC, Sub-division,
Division, Circle, Zone.
Billing / Collection / Business Efficiency :
The percentage of energy billed (ie., input minus T&D Loss) is the Billing
Efficiency. The percentage of Revenue Collection to Revenue Demand is
Collection Efficiency. The product of Billing and Collection Efficiency is
Business Efficiency. The residual ie., 1 minus Business Efficiency is the AT&C
Loss (in%).
A T & C Loss
(Figures of KPTCL and ESCOMs )
Example
Actual
Energy Purchased (or Energy Input)
100 Units
31260 MUs
Energy Sold by ESCOM to Consumers (incl. sales
to Hukkeri Society )
78 Units (T& D Loss in Units 22)
21572 MUs
Revenue Demand (billed by ESCOM to Consumers)
78 Units (@ Re.1 / Unit)
Rs. 7,000 Crs.
Revenue Collection
65 Units (@ Re1 / Unit)
Rs. 6,300 Crs.
A T & C Loss
35 Units
=
37.90 %
A T & C
Losses
=
( 21572 )
_____________
( 31260 )
X
_______
( 7000 )
( 6300 )
1 -
X 100
T & D Loss { (100 minus 78 in % for Ex.) and ( 21572 / 31260 for Actuals) }
22.00 %
31.00 %
Billing Efficiency (ie., 100 minus T&D Loss)
78.00 %
69.00 %
Collection Efficiency {65 / 78 for Ex.) and ( 6300 / 7000 for Actuals)} 83.00 %
90.00 %
Business Efficiency (i.e., Billing Efficiency X Collection Efficiency)
65.00 %
62.10 %
A T & C Loss (100 minus Business Efficiency)
35.00%
37.90 %



Types of Audit
1. Statutory Audit
2. C&AG Audit
3. Internal Audit
4. Cost Audit
5. Management Audit
6. Periodical Audit
7. Special Audit
Internal Audit in KPTCL / ESCOMs
Internal Audit in KPTCL and ESCOMs cover the
following key areas :
Revenue Audit
Cash Audit
Voucher Audit
Audit of Turnkey Works
Audit of Projects (ie., Capital Works)
Material Audit (Stores, etc.,)
Audit of Accounts (Trial Balance, M(F) Accounts,
etc.,)
Auditing in EDP Environment
(Points listed out based on observations during Inspection by Revenue Improvement and
Loss Reduction Team constituted by MD, KTPCL)
Even under computerised scenario Registers like 6A, 6B Registers, Meter
Constant Register, Register of Appeal / Court / Vigilance / MT Cases,
Checking OB against Consumer Accounts before and after
computerisation, etc., are to be verified.
Though Audit Officers / staff are not required to understand the Billing
software fully, it is of utmost importance that they should be aware of
broad framework of the software.
In particular, the Audit Officer / Staff should be familiar with mode of
generating various Reports either through front end or back end
queries.
In respect of any key data required to be generated using software for
which no provision has been made, the Agency maintaining the
software may be appraised of the requirement and asked to develop
Reports or Queries for generating Reports.
Auditing in EDP Environment
Provision made in the Software for generating reports in respect of items
like Bills not issued, Arrears list, Nil Consumption, Installations with
remarks like continuous Door lock, Readings not furnished, etc., have
to be utilised fully by the Audit for analysing and pointing out
deficiencies, discrepancies, shortcomings.
Audit should adopt MBE (Management By Exception) approach wherein
instead of verifying voluminous data, they can generate Exceptional
Report or Sort the Data (using computer) to short list the items and
prioritize for detailed verification.
As key data relating to certain technical issues like Energy Audit,
Disconnections not attended, Disconnections only on paper (without
effecting it physically), Reading not furnished list of installations etc.,
can be generated easily using computer software, Audit can use such
data for pointing out lapses effectively.
Issues Normally Misunderstood
by Non-Finance Officers
Capital or Revenue Expenditure make no difference
Cash collection at Revenue Sub-divisions is our Income
Profit shown in P&L Account is available in cash with the Company
Deposits collected from consumers is also our Revenue
Augmentation charges collected is also our Revenue
Company can raise loan to whatever extent it desires
Non-capitalisation of an asset has no financial impact
As the Co.,.is making all payments in time, its financial health is good
Payment of Suppliers and Contractors Bills can be met out of Revenue
Collections.
Sufficient cash is available at Corporate Office for transfer to Unit
Offices for meeting expenditure within the budget allocation
Average Realisation Rate (ARR) means revenue realised ie., collected
per unit of energy sold.
Issues Normally Misunderstood
by Non-Finance Officers
Revenue Arrears written off would reduce the Companys burden
Transmission Cost will be recovered in full irrespective of the quantum
of energy handled/transmitted in the system
ESCOMs will earn profit if the entire revenue demand is collected
during a specified period (ignoring the cost & quantum energy
purhcase & sales)
Entire Depreciation is available as internal resources for taking up
capital works
Maintaining 100% collection efficiency i.r.o. revenue would solve all
financial problems (ignoring the huge accumulated past arrears)
Company is generating resources for meeting capital works program
(either through support from Govt. or out of internal resources)
e-mail of H.L. Mukunda : hl_mukunda@yahoo.com
Accounting Standards
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events occurring after the
Balance Sheet date
AS 5 Net profit or loss for the period, prior period
items and changes in Accounting policies.
AS 6 Depreciation Accounting
AS 7 Accounting for Construction contracts
AS 8 Accounting for Research and Development
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
Accounting Standards
AS 11 Accounting for the Effects of changes
Foreign Exchange rates
AS 12 Accounting for Government Grants
AS 13 Accounting for investments
AS 14 Accounting for Amalgamations
AS 15 Accounting for Retirement benefits in the
Financial Statements of Employees
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosure
AS 19 Leases
AS 20 Earnings per Share
Accounting Standards
AS 21 Consolidated Financial Statements
AS 22 Accounting for taxes on income
AS 23 Accounting for Investments in Associates in
Consolidated Financial Statements
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
Basic Accounting Terms
Equity : Means the claims against the assets of an enterprise
or rights in the assets of an enterprise. Owners equity refers
to owners capital and outsiders equity refer to liabilities of
an enterprise.
Capital : The amount of money or moneys worth invested by
the proprietor into his business at the time of the
commencement of business is called capital. Capital is also
defined as owners equity i.e., owners claims against the
assets of the business.
Assets : Means enough or sufficient economic resources
owned by a business concern for carrying on the business.
According to Finney and Miller Assets are future economic
benefits, the rights of which are owned or controlled by an
Organisation or individuals. Examples are land, building,
vehicles, furniture, goodwill, trade mark, bills receivable,
debtors, etc.,.
Basic Accounting Terms
Liabilities : Mean the claims or outsiders against the business
concern which bind the business concern to others.
Examples are loans borrowed, bank overdraft, creditors,
bills payable, etc.,.
Net worth : Means the excess of the total assets of a business
over its total liabilities at any particular point of time. It is
the net value of assets that belongs to the owner. It is also
called owners capital.
Debtor : A debtor is a person who owes money to the business.
He owes money to the business because he has received some
benefit from the business. A debtor constitutes an asset for
the business.
Basic Accounting Terms
Debt : The amount of a business transaction due from a person
(i.e., debtor) to the business is called a debt.
Creditor : A creditor is a person to whom the business owes
money. The business owes money to him, because he has
given some benefit to the business. A creditor constitutes a
liability for the business.
Solvent : A businessman is said to be solvent when he is able
to pay his liabilities in full. In other words, a businessman is
regarded as solvent when his assets exceed his liabilities.
Goods : Goods refers to merchandise, commodities, products,
articles, things in which a trader deals. In other words, they
refer to commodities or things meant for resale.
Basic Accounting Terms
Purchases : Goods purchased by a business are called
purchases. It may be cash or credit purchase.
Sales : Goods sold by a business are called sales. The sale of
goods may be cash sales or credit sales.
Inventory : Inventory or stock refers to be stock of finished
goods held for sale in the ordinary course of business, or the
stock of raw materials and work-in-progress held for
consumption in the production of finished goods for sale, or
stock of consumable stores held for use in the factory.
Basic Accounting Terms
Revenue : Revenue or income is the earning of a business
from the sale of goods or from the rendering of services to
customers during an accounting period. Examples are
Revenue from sale of goods, interest on investments, royalty
received, discount received, etc.,
Expenses : Expenses are the costs incurred in connection
with the earnings of revenue. In other words expense is the
cost of the things or services for the purpose of generating
income. Examples are repair expenses, cost of goods
purchased, salary and wages, interest, etc.,
Basic Accounting Terms
Loss : Loss refers to money or moneys worth given up without
getting any benefit in return. Loss occurs accidentally or
involuntarily. Examples are loss of goods by fire, loss of
machinery in accident, damages paid to others, etc.,.
Gain : Gain refers to revenue which is not generated through
routine regular business activities. They are of irregular in
nature. Examples are profit on sale of fixed asset, refund of
tax received, winnings in a court case, etc.,.
Profit : Profit is the excess of revenues over the expenses of a
given period of time, usually a year. Profit results in increase
in owners capital.
Basic Accounting Terms
Debit : Means an entry on the debit side or left-hand side of an
account (when used as a noun). When it is used as an
adjective, it is termed as debit side i.e., left hand side of an
account. When it is used as a verb, it is termed as to debit
which means to make an entry on the debit side of an
account.
Credit : Means an entry on the credit side or right-hand side of
an account (when used as a noun). When it is used as an
adjective, it is termed as credit side i.e., right hand side of an
account. When it is used as a verb, it is termed as to credit
which means to make an entry on the credit side of an
account.
Classification of Accounts
Types of Accounts :
Real Account
Examples : Tangible items like Buildings a/c, Cash a/c,
Goods a/c, and Intangible items like Goodwill a/c, Patent
a/c, Trade Marks a/c, etc.,
Personal Account
Examples : Natural personal accounts like James a/c, Devs
a/c, and Artificial personal accounts like Galaxy Bank a/c,
BESCOM a/c, etc.,.
Nominal (or Fictitious) Account
Examples : Revenues and incomes a/cs like Commission
earned, interest received, gain on sale of vehicle and
Expense accounts like salaries paid, discount allowed, bad
debts, etc.,
Golden Rules of Accounting
Two aspects of a transaction :
Debit aspect and Credit aspect.
These two aspects affect two different accounts.
Rules for Debit or Credit :
Real Account Debit what comes in and
Credit what goes out
Personal Account Debit the Receiver and
Credit the giver
Nominal Account Debit all expenses (and
losses) and credit all incomes (gains)
Books of Accounts
Journal
The book of original entry under the conventional method of
accounting is the journal. It means a day book or a daily
record.
Account
Refers to a summarised record of all the transactions relating to
a person, thing or a service which have taken place during a
given period of time.
Ledger
Means a book where the various accounts are kept.
Trial Balance
It is a schedule or list of balances, both debit and credit,
extracted from the accounts in the ledger and including cash
and bank balances from the cash book.
Trial Balance
It is a statement of ledger balances under
various heads of account.
All the Accounts can be classified under four
heads viz., Assets, Liabilities, Income and
Expenditure.
All Assets and Expenditure heads of account
show Debit balance.
All Liabilities and Income heads of account
show Credit balance.
Contd.,
Trial Balance
As per the Chart of Accounts being used in
KPTCL (more or less same at ESCOMs also)
the classification is as shown below :
Assets Debit Head 10 to 37
(except 12 series and certain heads of account)
Liabilities Credit Head 12 and 41 to 58
Income Credit Head 61 to 65
Expenditure Debit Head 70 to 83
(except credit head of account meant for capitalisation)
Basic Accounting Terms
Account : An account (or its abbreviation a/c) means a
summarised record of all the transactions relating to a
particular person, thing (i.e., asset) or a service (i.e., an
expense or an income) which have taken place during a given
period of time. It is a ledger record.
Entry : The record of a transaction in a book of accounts is
known as an entry.
CWIP : Refers to Capital Works In Progress. It is an
intermediary account in which the expenditure on on-going
works is initially booked and transferred to fixed asset
account (called capitalisation) when the related asset is
commissioned.
Basic Accounting Terms
Goodwill : Goodwill typically reflects the value of intangible
assets such as a strong brand name, good customer relations,
good employee relations and any patents or proprietary
technology. Goodwill is seen as an intangible asset on the
balance sheet because it is not a physical asset such as
buildings and equipment. .
Bottom Line : The net profit ie., profit after tax (normally called
as PAT or Profit After Tax) is known as Bottom Line of a
Company because it is depicted as the last line in its Profit &
Loss account.
Basic Accounting Terms
Carried down or c/d : It is written in a ledger account, at the
time of balancing it, at the end of an accounting period, to
indicate that the balance in that account has been carried
own to the next period.
Brought Down or b/d : It is written in a ledger account, at
beginning of the next accounting period, to indicate that the
opening balance in that account has been brought down from
the previous period.
Carried Forward or c/f : It is written at the bottom of the
page of a journal or ledger, to indicate that the totals of that
page have been carried forward to the next page.
Brought Forward or b/f : It is written at the top of the next
or subsequent page of a journal or ledger, to indicate that the
totals shown on the top of that page have been brought
forward from the previous page.
An Annual Report is presentation of the Companys
performance during a period to the Shareholders.
Contents :
Chairmans Statement
Directors Report
Financial Statements
Comments of C&AG of India
Auditors Certificate Observations of Statutory Auditor
and Management Reply
Disclosures
Others
Corporate Governance, Directors responsibility statement, Disclosure under
the Companies rules 1988 (i.e., Energy conservation, Technology
absorption, Foreign Exchange earnings and outgo, etc.,), Statement
pursuant to Sec.212 relating to Subsidiary, Managements discussion
and analysis on industry and key issues, Committees of the Board,
General Body meetings, etc.,
Annual Report
Some Accounting Terminologies
Net Worth : The net worth of an enterprise represents the excess
of book value of all assets over the outside liabilities. It
represents the interest of the shareholders in the enterprise.
It is normally equivalent to the net equity i.e., Share capital
plus Reserves plus Retained profits less Unabsorbed losses or
Expenses.
Earnings Per Share : The profit attributable to each share based
on the consolidated profit of the period after tax.
Contingent Liability : Liabilities which are dependent on a
condition which exists at the balance sheet date, where the
outcome will be confirmed only on the occurrence or non-
occurrence of one or more uncertain future events.
Some Accounting Terminologies
Generally Accepted Accounting Principles (GAAP) : Many
countries have got their own GAPP. These are ground rules
covering financial accounting, prescribed by Financial
Accounting Standard Board, USA, that attempt to strike a
balance between the criterion of relevance on one hand and
the criteria of objectivity and feasibility on the other.
Secured / Unsecured Loans : Liability secured on asset with
lender having legal right to proceeds from sale of that asset
on liquidation, up to the amount of the liability. Liability
without any such security is Unsecured Loan.
Distinctions One should invariably know
Charged to Revenue :
All items which are taken as expenditure in P&L Account for comparing
with the Revenue and arriving at profit or loss are stated to have
been Charged to Revenue. These items have to be invariably
considered for finalising the Accounts. Examples are Salaries,
interest, etc., which have to be absorbed by the Company invariably.
Appropriation of Profit :
Appropriation means distribution or taking out of profit earned.
Examples are Transfer to Reserves, Payment of Dividend, etc.,.
Appropriation of profit arises only when the Company has earned
profit. Other-wise there is no scope for appropriation.
Distinctions One should invariably know
Repairs and Maintenance Expenses :
Any expenditure on restoring an asset back up to the
level of output / efficiency / performance at which
it was, when it was first put to use is repairs
expenditure.
Any expenditure on maintaining the asset up to the
level of output /efficiency / performance at which it
was, when it was first put to use is maintenance
expenditure.
Both repairs and maintenance expenditure is revenue
expenditure only and charged to revenue in the
year in which it is incurred.
Distinctions One should invariably know
Additions :
Additions may bring into existence a new asset or
increase in the physical size of an asset through
expansion, extension, etc.,. Cost of additions shall
be capitalised.
Improvements :
An expenditure having the effect of extending the
useful life of an asset or increasing the output or
capacity or efficiency of an asset or decreasing
operating costs of an asset is Improvement. All
expenditure on improvements shall be capitalsied.
Distinctions One should invariably know
Replacements :
Substitution of one fixed asset by another,
particularly of an old asset by a new asset, or of an
old part by a new part is Replacement.
Expenditure on minor replacement shall be charged to
revenue as R&M Expenditure.
Major replacement expenditure shall be capitalised.
A broad criterion of distinguishing minor and major
shall be that replacement of any asset or part of the
asset for which a separate fixed asset record is
required shall be considered.
Capex, Debt, Depreciation, Profit Inter-related
There are two sources for funding capex. One is internal resources and
the other is external source.
Depreciation and Profit which are non-cash expenditure constitutes
Internal Resources.
Repayment of existing Debt is not an expenditure item chargeable to P&L
A/c, but involves cash outgo.
Repayment of existing debt has to be met out of internal resources
available from depreciation and profit.
After meeting repayment of existing debt obligation out of internal
resources, if any amount is left, it is available for funding capex.
If there is negative internal resource generation i.e., repayment of
existing debt is more than available internal resources, the shortfall has
to met out of fresh borrowings or it results in default in repayment of
debt. This situation is termed as debt trap.
To ascertain the capacity of the company to repay its existing debt,
normally Debt Service Coverage Ratio (DSCR) is calculated.

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