Accounting in Logistics and Supply Chain Sector-V1Final

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UNIT 20: Case Study
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Accounting in Logistics and Supply Chain Sector
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Course Design
Advisory Council
Chairman
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Dr Parag Diwan
Members
Dr Satya Sheet
VP Academic Affairs
Prof I M Mishra
Dean IIT Roorkee
Dr Ashish Bhardwaj
CIO
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Dr Anirban Sengupta
Dean
Mr M K Goel
Management Consultant
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Dr Shrihari
Dean
SLM Development Team

Wg Cdr P K Gupta
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Dr Joji Rao
Dr Neeraj Anand
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Dr K K Pandey
Print Production
Mr A N Sinha
Sr Manager Printing
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Mr Kapil Mehra
Manager Material
Author
S,
N Balwani
UP
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All rights reserved. No parts of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from Hydrocarbon Education Research & Society.
Course Code: MBAF-911D
(c)
Course Name: Accounting in Logistics and Supply Chain Sector

Version: January 2013
MPower Applied Learning Enterprise
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UNIT 20: Case Study
Contents
Block-I
Fundamentals of Accounting................................ ................................ ........................ 3
Unit 2
Generally Accepted Accounting Principles (GAAP)................................ ................... 17
Unit 3
Accounting Principles and Standards ................................ ................................ ........ 29
Unit 4
Accounting Equation ................................ ................................ ................................ .. 41
Unit 5
Case Studies................................ ................................ ................................ ................ 49
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Unit 1
Block-II
Accounts ................................ ................................ ................................ ...................... 55
Unit 7
Journal ................................ ................................ ................................ ........................ 67
Unit 8
Ledger ................................ ................................ ................................ ......................... 79
Unit 9
Subsidiary Books ................................ ................................ ................................ ........ 93
Unit 10
Case Studies................................ ................................ ................................ .............. 113
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Unit 6
Block-III
Trial Balance................................ ................................ ................................ ............. 119
Unit 12
Preparation of Trading, Profit & Loss Account and Balance Sheet ........................ 127
Unit 13
Depreciation Accounting................................ ................................ ........................... 141
Unit 14
Cash Flow Statements................................ ................................ .............................. 153
Unit 15
Case Studies................................ ................................ ................................ .............. 163
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Unit 11
Block-IV
Financial Aspects of Supply Chain Management ................................ .................... 169
Unit 17
Inventory Managements Techniques and Control................................ .................. 181
Unit 18
Cost Accounting ................................ ................................ ................................ ........ 193
Unit 19
EVA and Budgets................................ ................................ ................................ ...... 207
Unit 20
Case Studies................................ ................................ ................................ .............. 217
(c)
Unit 16
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Block-V
Corporate Financial Reporting................................ ................................ ................. 223
Unit 22
International Financial Reporting Standards ................................ ......................... 233
Unit 23
International Accounting Standards-I ................................ ................................ ..... 241
Unit 24
International Accounting Standards-II................................ ................................ .... 251
Unit 25
Case Study ................................ ................................ ................................ ................ 263
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Unit 21
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Glossary................................ ................................ ................................ ................................ .......... 265
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Notes
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UNIT 1: Fundamentals of Accounting
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BLOCK-I
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Detailed Contents
Classification of Accounting Principles
Basic Assumptions
Basic Accounting Principles
Accounting Process
Uses, Advantages or Role of Accounting
Limitations of Accounting
Introduction
Meaning of Accounting Equation
Calculation/Computation of Accounting Equation
Effect of Transactions on Accounting Equation
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UNIT 2: GENERALLY ACCEPTED ACCOUNTING
___________________
PRINCIPLES
(GAAP)
Introduction
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Introduction
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UNIT 5: CASE STUDIES
(c)
AND
UNIT 4: ACCOUNTING EQUATION
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Branches of Accounting
PRINCIPLES
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UNIT
3:
ACCOUNTING
STANDARDS
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UNIT
1: FUNDAMENTALS OF ACCOUNTING
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Introduction
___________________
Characteristics of Accounting
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Stages of Accounting
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Objectives of Accounting
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Accounting Information
___________________
Functions of Accounting
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Fundamentals of Accounting
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Objectives
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After completion of this unit, the students will be aware of the following
topics:
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Characteristics of Accounting Information
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Introduction
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Accounting is used as an information system by its users. The

users are of two types i.e., Internal and External. Accounting is
generally termed as the language of business. It records all the
transactions which can be expressed either in money or moneys
worth and have taken place during a particular period. It is also
termed as a science as the Transactions are recorded (which are of
economic nature) in a systematic manner and also an art of
analysing and interpreting the same i.e., the business transactions.
Accounting is defined by different authors and institutions. Some
of the most important definitions are as given below:
Robert N. Anthony
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Accounting system is a means of collecting, summarizing,

analyzing and reporting in monitory terms, information about the
business.
Accounting is the process of identifying, measuring and

communicating economic information to permit informed
judgements and decisions by users of information.
(c)
The American Accounting Association (AAA), 1966
Accounting is the art of recording, classifying and summarizing in

a significant manner and in terms of money, transactions and
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characteristics of accounting.
___________________
events which are, in part, at least, of a financial character, and

interpreting the results there of.
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Notes
Activity
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Write
an article on the
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American Institute of Certified Public Accountants, 1941
___________________
The following are the characteristics of accounting:
___________________
Recording of transactions of financial nature: Transactions

or events which are of economic/financial nature are only recorded
in accounting. Events/transactions which cannot be measured in
terms of money, are not at all recorded in accounting. For example,
efficiency or honesty of the employees cannot be recorded because
it cannot be measured in terms of money though it affects the total
profits of business. Similar is the case of a quarrel between the
factory workers and the factory production Manager which affects
the production, but it is not recorded in the books as it can neither
be measured in terms of money nor has any exchange or economic
value.
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Recording in definite (certain) units: Only such events are

recorded which are measured in terms of money, no other unit is
used to record such transactions, for example, if the publisher sells
10 books (copies) of Accounting to a bookseller and 20 copies of
Business Studies to another bookseller, then the publisher is
required to record these transactions only in terms of money. That
in the first case 10 No. of copies is to be multiplied by the price per
copy and if any discount (trade) is to be given, is deducted. The
recording is done for the net amount in the books of the business
and not in terms of 10 or 20 or so on the number of books only.
It is an art of classifying the data: Accounting is also an art of
classifying the data systematically. After all the transactions are
recorded properly, all such data are also classified under
appropriate heads, so that as and when data is analysed or
interpreted, correct results can be drawn if data of similar nature
is available at a particular place. This also saves the time and
avoids unnecessary wastage of money.
It is a science: Accounting is a science because every business
transaction is recorded in a systematic manner. This is done first
in the Journal which is the primary book of Accounting/Business.
This may further be sub-divided into various types of subsidiary
books such as cashbook for recording cash transactions only
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Accounting can be used for analyzing and interpreting

business transactions: As we know that the purpose of
accounting is not only recording of transactions but also of
analyzing and interpreting data for taking certain important
future decisions. This is also known as future forecasting. Thus, we
see that definition of accounting is changing rapidly because of
increase in its functions. i.e., from recording of transactions to
interpreting of economic events.
Notes
Activity
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whereas sales day book for recording credit sales of goods.

Purchases book for recording credit purchases of goods and returns
books for recording purchase returns and sales returns and other
subsidiary books such as Bills Receivable book, Bills Payable book,
etc.
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After knowing the characteristics of Accounting, one can list the

different stages of Accounting which are as follows:
Financial Transactions,
Recording of Transactions,
Classifying in different groups of transactions based as per the

nature of transactions,
Summarizing of transactions, and
Analyzing and interpreting the same.
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Table 1.1: Distinction between Book-keeping and Accounting

Basis of
Difference
Book-keeping
Accounting
Accounting
The objective of bookkeeping is to record

the transactions of
economic nature.
Whereas the objective of

accounting is not only the
recording of transactions but
also analyzing and interpreting
the data.
It is an art.
It is a science.
Scope
The scope of bookkeeping

is
very
limited.
The scope of accounting is very

wide.
Functions
Most of the functions

of book-keeping are
now-a-days
performed
by
machines.
Functions of accounting involve

expert human beings in the art
of analysis and interpretation.
Objective
Nature (Art
or science)
(c)
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Contd...
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Accounting
Process
Book-keeping is just
one
part
of
accounting process.
Accounting involves the entire

process of accounting that is
why it is said that accounting
begins where book-keeping
ends.
Rules to be
followed
Rules of accounting
are
followed
for
recording.
Along with rules, assumptions

and conventions are also there
to follow.
Net Results
Profit or loss
Net results of the

business cannot be
known from bookkeeping.
Whereas accounting is used to

find out net results of the
business.
Time
Transactions
immediately
recorded.
Transactions are generally

recorded after a gap of time or
at the end of a financial year.
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Notes
Activity
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Make
a report on the
objectives of accounting.
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Check Your Progress
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State whether True or False:

1.
Accounting is the language of business.
2.
Transactions or events which are of economic/financial

nature are only recorded in accounting.
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The basic objective of Accounting is to provide necessary

information to the persons interested in the business. As we know
that persons interested in the business are of two types: (a)
Internal users and (b) External users.
(c)
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(a) Internal users: These are the persons who manage the
business, i.e., management at all the levelstop, middle and
lower level.
(b) External users: External users are all persons other than
internal users such as Investors, creditors, Government. The
necessary information is supplied to the external users
through the following financial statements:
Profit & Loss Account/Statement and
Balance Sheet.
Whereas the internal users can obtain necessary information other

than the above statements from the records of the business. Thus,
the primary objectives of accounting are as given below:
1.
Maintenance of records of business.
2.
Calculation of profit or loss of the business.
3.
Presentation of the financial position of the business.
4.
To provide and make available the necessary and financial

information to the users.
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The above objectives can be explained in detail:
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Maintenance of records of business: The Primary objective

of accounting is to maintain proper records of business, i.e.,
every transaction which is of financial nature must be
recorded fully otherwise it is very difficult to remember all the
transactions because human memory is very short. Moreover,
correct and fair results of the business transactions cannot be
ascertained (calculated). So it is very much essential to keep
proper and complete records of all business transactions so
that records can be used as and when required/desired by the
persons interested in the business.
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1.
Calculation of Profit or Loss: As we know that one of the

most important objectives of business is to earn profit, and the
main objective of accounting is to maintain proper records of
all financial transactions in to order to calculate profit or loss
of the business. This can be done with the help of a financial
statement known as the Profit & Loss statement. This
statement is prepared for a particular period which can tell us
about the profit or loss of the business. If there is a profit, the
management can take important decisions relating to selling
price, output, etc. If two years results are known, then a
comparison can also be made. Similarly, if there is a loss, then
management can decide to discontinue the production of such
items. Thus, we see that it is a very important objective of
accounting, i.e., to provide information relating to profit or loss
of business. This statement is very useful to all the persons
interested, i.e., from management to creditors, investors,
government and society at large including employees of the
business. Thus, profit or loss statement is a measurement of
performance of the business.
3.
Presentation of financial position of the business: The

financial position of the business is presented through another
financial statement known as the Balance Sheet or Position
Statement. This is a statement of assets and liabilities of the
business. It tells about the owned capital as well as borrowed
capital (liabilities) along with different assets such as fixed
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assets and current and other assets. If total liabilities are

deducted from the total assets, then balance depicts the
owners capital (owned funds). As we know that the objective of
accounting is not only recording of financial events, make
available information relating to profit or loss of the business
but also provide full information regarding financial position of
the business. This is done through a financial statement. The
balance sheet is a mirror showing the financial solvency or
insolvency of the business. If assets are more than its
liabilities, it is a solvent otherwise in case of reverse, it is an
insolvent business.
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Notes
Activity
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Present
a draft on accounting
information.
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4.
___________________
To provide and make available the necessary and

financial information to the users: The major objective of
accounting is to provide and make available the necessary and
financial information to the users or the persons interested so
that, necessary and financial decisions and actions can be
initiated by the management/persons interested such as
owners, shareholders, debenture holders, creditors, investors,
government and others such as research scholars, etc.
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Thus, we see that the accounting can play a very important

role in depicting the financial results (profit/loss) of the
business as well as the financial position (solvency or
insolvency) of the business.
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As per Accounting Principles Board (APB), Accounting is defined

as follows:
Accounting is a service activity. Its function is to provide
qualitative information, primarily financial in nature about
economic activities that is intended to be useful in making economic
decisions.
Thus, it is clear from the above definition, that accounting
information is an important function of accounting. Accounting
information must also be of quality so that important financial
decisions can be taken by the users of accounting. Accounting
information is supplied through financial statements. Financial
statements are Profit & Loss account being income statement and
balance sheet being position statement.
1.
Information about profit or loss of the business.
2.
Information about financial position of the business.
Notes
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The information which is provided by these statements is as

follows:
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___________________
Information about Profit or Loss of the Business
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The Profit & Loss account which is also known as income

statement provides accounting information about profit earned or
loss suffered (incurred) during an accounting period. This
statement provides gross profit through trading account and net
profit through Profit & Loss account.
Gross profit = Sales Cost of Sales
Whether cost of sales is reasonable or not?
2.
Whether it can be reduced or not?
3.
Whether selling price can be increased or not?
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This information is very useful as it helps in deciding the following

questions:
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The Accounting information, thus available through trading

account helps us to resolve the above questions.
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Net profit is the profit earned after allowing all the expenses
relating to factory administration, financial, selling and
distribution. Thus, income statement makes available information
about net profit earned or net loss suffered. This also helps in
answering the following questions.
1.
Whether expenses are reasonable or not?
2.
Whether expenses can be reduced or not?
S,
Net profit is used as a basis for taxation purposes.
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Information about Financial Position of Business
(c)
The balance sheet also known as position statement tells about

financial health of the business. This statement tells about the
assets owned by the business including cash and bank balances.
These assets are total of liabilities owned by the business which
may be taken from the proprietor of the business or borrowed from
outsiders. The position statement helps in determining the
following questions:
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1.
Whether funds invested are safe and sound, means provides

reasonable return of income along with safety of funds?
2.
Whether return of income is adequate or not?
3.
It helps the investors, the creditors to arrive at a correct

decision regarding investment, lending of funds, etc.
4.
It helps in restoring confidence among the employees about

their provident fund being properly deposited with the cost as
per requirements.
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Characteristics of Accounting Information
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Accounting information consists of the following characteristics:
___________________
1.
Reliability: Whatever accounting information is supplied

must be reliable, means it must be free from all sorts of biases.
Otherwise the basic purpose of using accounting information is
defeated. Accounting information is reliable if following rules
are observed:
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(a) Principle of prudence is followed: It means the principle of

prudence, i.e., conservatism is followed and all losses are
taken into account while all prospective gains are left out.
In other words, accounting information tells about the
facts and does not give any wrong information about the
business.
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(b) Neutral Accounting information is free from all sorts of

biases because if information supplied is biased, it would
give misleading results.
(c)
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(c) Complete: Whatever accounting information is supplied,

must be complete in all respects. Otherwise incomplete
information may give us misleading results.
2.
Relevance: The accounting information should also disclose

other information which may be useful to the users of
information. This is in addition to the information which is
required by statutes under different Acts/Laws.
3.
Understandability: The accounting information provided,

must be in a form which is understandable to the users of
information. However, the information which can be useful
must also be given. Whatever is the requirement of disclosure
of information, must be followed strictly.
Comparability: The users should be able to compare the

accounting information as inter firm or intra firm comparison.
It is therefore necessary to use standardized accounting
policies consistently.
Notes
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___________________
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Various Users of Accounting Information
___________________
Following are the users of accounting information:

The owners: Whosoevers money is provided to the business,
such persons are known as owners of the business. Such
persons may be either the proprietor, the partners or the
shareholders. They are very much interested in knowing about
the profit or loss of the business and also the financial health
and wealth of the business.
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1.
___________________
Investors: Everyone who is either willing to invest in a

business as a partner or as a shareholder is always interested
to know about the safety of funds as well as adequate return
on investments.
3.
Creditors are interested to be satisfied about the credit

worthiness of the business before supplying goods or services.
Accounting information available through financial statements
thus proves useful and helpful.
4.
Government is interested in having certain other financial

information on the basis of which economic and taxation
policies are decided.
5.
Employees: Accounting information is useful to the employees

by telling them about their contribution which is regularly
deposited with the Government by their employers.
6.
Society: Accounting information is useful to the society. It

depicts general financial state of affairs in the society, i.e.,
standard of living, per capita income, national income, etc.
S,
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Check Your Progress
Fill in the blanks:

1.
................... is the profit earned after allowing all the

expenses relating to factory administration, financial,
selling and distribution.
(c)
2.
The ........................ also known as position statement

tells about financial health of the business.
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Notes
Activity
___________________
Prepare
an assignment on the
functions and branches of
___________________
accounting.
The main function of accounting is to record the business

transactions scientifically and systematically. Apart from this,
there are other functions of accounting which are as follows:
___________________
It depicts the true and fair picture of the financial position of

the company.
2.
It helps in ascertaining profit or loss of the business which is

the only primary aim of the business.
3.
It helps in future decision-making by different persons

interested in such accounting information.
___________________
4.
It depicts the earning capacity of the business.
___________________
5.
It satisfies all Government rules and regulations connected

with Accounting information such as all the companies are
required to prepare their statements as per requirements of
the Indian companies Act, 1956, amended up to date.
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1.
___________________
for
As we know that the objectives of accounting are recording of

business transactions and also make necessary information
available to the persons interested. The accounting is broadly
classified into three main branches, in order to achieve the above
objectives. The branches are:
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(a) Financial Accounting

(b) Cost Accounting
(c)
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(c)
Management Accounting
(a) Financial Accounting: It is mainly concerned with the

ascertainment of profit or loss made during a particular period
and also presents the financial position of the business.
(b) Cost Accounting: As the name suggests, this type of
accounting is mainly related with the ascertainment of the cost
of a product, so that the management can exercise its control
in order to minimize the costs and maximize the profits.
(c) Management Accounting: This type of accounting is a tool in
the hands of management for various functions; (i) to control
costs (ii) to take important future decisions (forecasting).
Notes
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Thus, we see that there are different branches of accounting, each

branch is assigned a different job.
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___________________
Check Your Progress
___________________
Fill in the blanks:
................... accounting is a tool in the hands of

management for various functions; (i) to control costs
(ii) to take important future decisions (forecasting).
___________________
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2.
................... is mainly concerned with the ascertainment

of profit or loss made during a particular period and
also presents the financial position of the business.
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Summary
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Accounting is generally termed as the language of business. It

records all the transactions which can be expressed either in
money or moneys worth and have taken place during a particular
period. It is also termed as a science as the Transactions are
recorded (which are of economic nature) in a systematic manner
and also an art of analysing and interpreting the same i.e., the
business transactions.
Lesson End Activity
No
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Collect more information on accounting and present it in the form

of a chart.
Keywords
S,
Accounting: It is the process of identifying, measuring and

communicating economic information to permit informed
judgements and decisions by users of information.
UP
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Cost Accounting: As the name suggests, this type of accounting is

mainly related with the ascertainment of the cost of a product.
External Users: All persons other than internal users such as
Investors, creditors, Government.
(c)
Financial Accounting: It is mainly concerned with the

ascertainment of profit or loss made during a particular period and
also presents the financial position of the business.
___________________
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Internal Users: These are the persons who manage the business,
i.e., management at all the levelstop, middle and lower level.
Notes
___________________
Management Accounting: This type of accounting is a tool in the

hands of management for various functions; (i) to control costs (ii)
to take important future decisions (forecasting).
___________________
___________________
___________________
Questions for Discussion
___________________
1.
Describe the characteristics of accounting.
___________________
2.
Explain the stages of accounting.
___________________
3.
Discuss the objectives of accounting.
___________________
4.
What do you understand by accounting information?
5.
Explain the characteristics of accounting information.
6.
Describe the functions of accounting.
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Books
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Further Readings
for
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed.,

Homewood, Illinois, Richard D. Irwin, 1995.
Bhattacharya S. K. and Dearden J. Accounting for Management
Text and Cases, New Delhi, Vikas, 1996.
No
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I &

II, Sultan Chand and Sons.
(c)
UP
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting,

5th ed. New Delhi, Sultan Chand, 1992.
Jawahar Lal, Cost Accounting, Vikas Publishing House, New
Delhi.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House,
New Delhi.
K K Verma, Financial Accounting and Analysis, Excel Books, New
Delhi.
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
Chand & Sons, New Delhi.
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
Web Readings
Notes
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www.accountingcoach.com/online-accounting-course/60Xpg01.html
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___________________
www.accsoft.ch/download/accountingconcepts.pdf
www.investopedia.com/university/accounting/
___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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(c)
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Notes
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(c)
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Notes
Activity
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
___________________
Write
an article on the
classification of accounting
___________________
principles.
Generally Accepted Accounting

Principles (GAAP)
___________________
___________________
Objectives
topics:
Basic Assumptions
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Introduction
UP
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S,
No
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Accounting is a medium of recording the transactions made in the

business that is why; accounting is termed as the language of the
business. All the persons interested in the business, such as the
owners/shareholders, the creditors, the government and the others,
get the necessary business information through accounting
because it is properly recorded, analyzed and summarized to the
extent that it can be understood by all. This is possible when all
the financial statements are prepared in accordance with generally
accepted accounting principles. If such uniform principles are not
adhered /followed, there would be a lot of difficulties and confusion
which makes comparison impossible, unreliable or dependence is
also reduced because, its acceptability is unsuitable for different
business houses, etc. The accountants, therefore, have suggested
the common concepts and conventions of accounting in order to
overcome the above mentioned difficulties and problems
enumerated earlier. Such accounting concepts and conventions are
known as basic accounting concepts and conventions as they have
been commonly accepted by the professional accounting world for
preparing financial statements and reports for external use based
on experience and practice.

All the accounting concepts and conventions are broadly classified
into three broad categories, such as:
(c)
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1.
Basic assumptions are like pillars on which the structure of

accounting is based
2.
Basic Principles and
3.
Modifying Principles.
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Notes
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___________________
In this unit, we will study the basic assumptions and the basic
principles. We will study the modifying principles in the next unit.
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Basic Assumptions
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Assumptions provide a base for accounting process without which

no enterprise can prepare its financial statements. The following
are the basic assumptions:
___________________
(a) Accounting entity/Business entity
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(b) Monetary unit/Money measurement concept

(c) Going concern
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(d) Periodicity.
Accounting Entity
(c)
UP
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S,
No
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for
It is also termed as Economic entity assumption which means that

economic unit/event can be known with a specific unit. For this
purpose business is considered as a distinct and separate entity
than its owners. Recording of every transaction is done whether it
is related to the owner/s or not. The business controls each and
every activity this is possible because of its separate entity hence,
it is also accountable. For example, when a business is started by
the owners, then cash/goods come in the business which results in
an increase in the capital of business and on the other hand, it
reduces private capital of the owners. Nowadays the concept of
business entity is becoming more and more popular because of
further division of accounting in different departments, so that the
responsibility of each department can be ascertained easily. This is
done in responsibility accounting. According to this accounting
entity, a distinction should be made between (1) Private/personal
and (2) those of another business entity. If it is not done, results
would not be accurate.
It would be rather confusing, uncertain, ambiguous, though it is
one of the most useful assumptions. Business and the owner/s
whether sole proprietor or partner/s are one in the eyes of law, but
Monetary Unit/Money Measurement Concept
Notes
on
/Sa
they are considered as separate entities from practical accounting

point of view. But in case of companies, the law recognizes legal
and separate entity from its owners, i.e., the shareholders.
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No
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Only such transactions are recorded in accounting that are of

monetary value or that can be measured in terms of money. The
transactions/events which cannot be measured in terms of money
are not at all recorded in accounting. For example, if there is
dispute between a manager and a worker which affects/does not
affect the business, it cannot be recorded unless and until it is
measured in terms of money. Likewise the health of the proprietor,
sale policy of the business, entrance of other competitors in the
business are such events which cannot be recorded in accounting
howsoever important it may be, because these cannot be measured
in terms of money. This is a peculiar feature of the Money
measurement concept but this can also be termed as limitation of
this concept which has attracted the attention of all the
accountants in the world. All the transactions which are recorded if
measured in money, at a present level, any increase/decrease after
recording is left out. To make accounting records relevant, simple,
understandable and of the same class or groups, they are brought
to a common unit of measurement i.e., Money. It makes possible
the preparation of financial statements. Had there been no
monetary unit assumption, it would have been difficult to record
business transactions; hence monetary unit concept is introduced.
Though it is assumed that the monetary unit is a stable unit in
value but in practice, this assumption is not correct as the money
value changes over a period of time.
S,
Limitations of Money Measurement
UP
E
There are certain limitations of this concept because of which the

scope of accounting is limited the limitations are as follows:
(c)
(i) Records only such events/transactions which can be expressed

in terms of money but as we know that there are certain
events which affect the business but cannot be measured such
as wealth of the proprietor etc. such events are responsible for
the success of the business but unable to record in the books of
accounts, the direct result is that whatever information is
gathered not correct and fair view of the either operational or
position of the business is not there.
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on
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(ii) There is no consideration for purchasing power of money

which is fluctuating. Again the result is that it is not a true
and fair view of the business.
Notes
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Going Concern Concept
___________________
It is assumed that every business would continue for a long period

or have an indefinite life unless it is likely to be sold or wound up
in the near future. This is also known as the concept of continuity.
Keeping this in view, recording of transactions in accounting and
division of expenses is done. In other words, it is seen whether
benefit from expenses is immediate or long-term. If it is
immediate, then it is to be treated as revenue or if it is long-term,
it is to be treated as capital, depending upon the nature of
expenses. This concept of going concern is considered better as
compared to short-term or temporary business. In other words, a
businessman charges depreciation on the historical (probable) costs
as well as expected life and not on the market value. This is also a
sound and fundamental basic principle of financial statement. This
concept helps the investors in providing necessary capital to the
business because of the assurance regarding the continuation of
the business for a long time. If this type of commitment is absent,
then it would be very difficult to procure funds for the business.
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Accounting Period Concept
(c)
UP
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S,
No
t
This is also known as time period assumption, and the economic

life is divided into different periods for preparing financial
statements. As per going concern concept the financial statements
must be prepared only when either it is sold or liquidated. But
practically it is very difficult to wait for such a long period, hence it
is agreed that economic life of a business must be reported over a
reasonable time period which is normally taken as one year, either
calendar year, financial year and or other year such as Deepawali,
Dussehra or Samvat year, etc. Though, sometimes, it may be less
than 12 months also i.e. monthly, quarterly or half yearly, etc.; but
such periods are termed as interim periods and reports for such
periods are called interim reports. Such reports are generally less
reliable than annual reports. So it is very much desired to have
relevant information, so that quick decisions can be taken. Thus,
we see that the idea of accounting period is quite helpful and
useful to all classes of users management, creditors, investors
and others.
Check Your Progress
Notes
Activity
................... means that economic unit/event can be

known with a specific unit.
2.
................... is also known as time period assumption,

and the economic life is divided into different periods
for preparing financial statements.
___________________
Make
a report on the basic
accounting principles.
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1.
on
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Fill in the blanks:
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2.
Revenue/Realization principle
3.
Matching principle
4.
Full disclosure principle
5.
Dual aspect principle and
6.
Objectivity principle.
Re
Cost principle
for
1.
pro
The Accountants have agreed on some principles which tell how

the transactions should be recorded and reported in the books of
the business. Important basic accounting principles are as given
below:
The above principles can be explained in detail one by one.

The Cost Principle: Every transaction should be recorded at
its actual (historical) cost or cost of its acquisition and not its
market price. For example, if a Machine is purchased for 1 lac
and its market price is 2.50 lacs, then recording of this
transaction is done at 1 lac being its actual cost/or cost of its
acquisition. Sometimes market price may be less than even
then recording would be at its actual cost because of the cost
principle, which is the basis of charging depreciation in future.
If there is any residual value of asset and the asset is sold,
then such amount is deductible from such value. If the asset is
having no residual value, such assets are not shown in the
Balance sheet though the existence of assets is very important
to the business. Thus, we see that the Balance sheets which
are based on cost concept/principle give us very wrong/
incorrect results for those investors who are interested to know
the real values of the assets. This principle of cost is applicable
(c)
UP
E
S,
No
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1.
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in case of fixed assets as well as the current assets. In the

words of Hendriksen, Expenses are using or consuming goods
and services in the process of obtaining revenues. Thus, it is
the amount that is spent with a view to produce or procures
goods or services to obtain revenue from the sale of such goods
or services. In spite of so many criticisms of this, the cost
principle is definite and reliable. So, it has an edge over other
principles. It also provides an objective and comparable data in
the financial statements.
___________________
___________________
___________________
___________________
___________________
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2.
___________________
Revenue Principle (Realization Principle): Only such

transactions are recorded in accounting which have actually
taken place not the ones which would take place in future.
This is based on revenue realization principle. For example, if
goods are sold or purchased by a trader, transaction is
recorded but if there is a contract or an agreement has taken
place, it would not be recorded unless and until the contract is
executed/complete/obligations/duties are performed as per
contract. However, there are certain exceptions to the sales
basis for revenue realization. In case of construction projects,
revenue is generally realized before the contract is complete.
Similarly in other cases, such as in case of sale by Instalment
method revenue is realized later though sale has taken place
earlier. Revenue is realized when cash is received. Sometimes
there may be defaults in payment of some instalments. Apart
from these exceptions, revenue is generally realized at the
time of sale when actually the title of ownership passes from
the seller to the buyer. This assumption is especially
important because it recognizes the assets, liabilities, incomes
and expenses as and when the transactions relating to these
take place. We can find out from the books of account how
much is due to creditors (liabilities) and how much the firm
owns (assets). Apart from this, one can also know about the
profit earned or loss suffered.
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Notes
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(c)
UP
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No
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3.
Matching Principle: As we all know that the business is a

going concern, so it is even more necessary to know its
operational results for a particular/fixed period. This period
may be of six months or one year. Profit or loss during this
period indicates the financial operational results of the
business, so it is necessary to put all financial records of the
expenses, revenues or incomes relating to a particular period,
so that matching between revenues and expenses can be
facilitated. This matching is termed as matching principle of

accounting. The equation can be written as:
on
/Sa
Notes
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___________________
Profit = Revenues Expenses
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___________________
___________________
___________________
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This principle of Matching is very much important for

ascertainment of correct amount of profit (income) which is a
measurement of performance. All expenses which can generate
revenues in the current accounting period are taken as
expenses. The matching of expenses with revenue is based on
accrual system of accounting. In accrual system, revenue is
recognized when sale is complete or services are rendered
rather than when cash is received. Similar rule is applicable in
the case of expenses, i.e., expenses are recognized, when assets
and services are put to generate revenues and not when cash
is paid.
The matching principle makes the following points clear:
Re
(a) When an item of expense is spent against revenue it will

be entered in the following period, result would be to show
it in the Balance sheet and in the following period, to be
treated as an expense.
for
(b) When an item of revenue is recorded in the Profit & Loss

account, all the expenses incurred whether paid for cash
on not should be recorded as the expenses.
Full Disclosure Principle: The objective of accounting is to

provide true and accurate information. This may be because of
law or social customs. All facts of assets must be disclosed
along with their valuations. Principle of disclosure means to
supply all information relating to economic activity of the
business completely to the owners, creditors and Investors
which can protect their interests. Disclosure does not mean
(c)
4.
UP
E
S,
No
t
(c) If any amount of revenue is received but either goods are

to be supplied in future or services are rendered in future,
the amount is not recognized as revenue in the current
year, the result is to be shown as liability in the balance
sheet but if any loss is there for which no revenue is
earned it is to be charged from the current Profit & Loss
account, for example in fire insurance premium. If goods
are lost, whatever is recovered from insurance company is
deducted from the cost of goods lost and the balance of loss
is charged from Profit & Loss account.
___________________
___________________
___________________
___________________
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only that information which is required up to the stage when

the Balance Sheet is prepared but after the preparation of
Balance Sheet also. For example, bad debts, destruction of any
machinery/building because of natural calamity, loan taken
within a week or so, after the Balance Sheet is prepared,
method of providing depreciation and Valuation of stock. All
such events affect the investors decisions. So such events must
be given compulsorily. The purpose of this principle is to
convey all material and relevant facts relating to the
operational result and the financial positions to the parties
using the financial statements.
on
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Notes
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Dual Aspect Principle: Every transaction of a business is

recorded at two places. That is why it is termed as Double
entry system of accounting. Every debit has a credit. For
example, when a business is started by a proprietor for cash,
then whatever comes in the business is debited and whosever
gives loan as giver is credited. Thus the following entry in the
Journal is passed:
for
Re
5.
pro
Financial Statement must be duly supported by footnotes. A

good accounting principle requires that all significant and
important information must be disclosed, apart from legal
requirements.
Cash a/c
Dr.
Or
No
t
Goods a/c
Dr.
To Proprietor's a/c
Or
To Capital a/c
(c)
UP
E
S,
Cash or Goods brought in as capital by the proprietor or partners.
As we know that only such events are recorded in financial

accounting which are related to economic activities or can be
expressed in money. These events may be either purchase or
sale of goods on cash or on credit, receipts or payments, etc.
Every transaction is recorded at two places that are why
double entry system is in vogue. In America, this system is
used in the form of equation. In the above example the owners
can bring cash or goods or both as capital. The Following
would be the equations:
Capital = Cash/Stock/Cash + Stock
If any loan is taken then
on
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Notes
Capital + Loan = Cash + Stock
___________________
OR
___________________
Total Liabilities = Total Assets
___________________
___________________
OR
In other words, we can say that
___________________
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Internal + External Liabilities = Fixed Assets + Current

Assets
du
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Thus, we see that the Principle of Dual aspect would provide

us all the rules required for recording all the transactions of a
business.
for
Re
Principle of Objectivity: All transactions which are recorded

must be duly supported, by documents as far as possible. Then
only the auditor would be able to verify the accounts: if it is
not, transactions must have substantial evidence which is free
from personal bias and is based on rational approach. As we
know that the cash is definite and verifiable while value is not.
The principles of Objectivity require that accounting data
should be verifiable and free from bias.
No
t
Check Your Progress

Fill in the blanks:
................... principle of Matching is very much

important for ascertainment of correct amount of profit
(income) which is a measurement of performance.
2.
................... is based on revenue realization principle.
3.
Principle of ................... means to supply all information

relating to economic activity of the business completely
to the owners, creditors and Investors which can protect
their interests.
UP
E
S,
1.
Summary
(c)
___________________
___________________
Equity or owners equity = All Assets Loans or

liabilities of outsiders
6.
le
All the persons interested in the business, such as the

owners/shareholders, the creditors, the government and the others,
___________________
___________________
___________________
le
get the necessary business information through accounting

because it is properly recorded, analysed and summarized to the
extent that it can be understood by all. This is possible when all
the financial statements are prepared in accordance with generally
accepted accounting principles. If such uniform principles are not
adhered /followed, there would be a lot of difficulties and confusion
which makes comparison impossible, unreliable or dependence is
also reduced because, its acceptability is unsuitable for different
business houses, etc.
___________________
___________________
___________________
___________________
___________________
___________________
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cti
on
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Notes
Lesson End Activity
du
___________________
Gather information about the GAAP. Present the information

collected in the form of a collage.
___________________
pro
___________________
Keywords
Re
Accounting Entity: It is also termed as Economic entity

assumption which means that economic unit/event can be known
with a specific unit.
for
Accounting Period Concept: This is also known as time period

assumption, and the economic life is divided into different periods
for preparing financial statements.
No
t
Going Concern Concept: It is assumed that every business would

continue for a long period or have an indefinite life unless it is
likely to be sold or wound up in the near future. This is also known
as the concept of continuity.
(c)
UP
E
S,
Monetary Unit Concept: Only such transactions are recorded in

accounting that are of monetary value or that can be measured in
terms of money.
The Cost Principle: Every transaction should be recorded at its
actual (historical) cost or cost of its acquisition and not its market
price.

1.
Describe the classification of accounting principles.
2.
Explain the basic assumptions of GAAP.
3.
Discuss the basic accounting principles.
Further Readings
Books
on
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Notes
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cti

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___________________

Delhi.
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New Delhi.
Re

Delhi.
for

Chand, New Delhi.
Web Readings
No
t
(c)
UP
E
S,
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on
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Notes
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(c)
UP
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S,
No
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Notes
Activity
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UNIT 3: Accounting Principles and Standards
___________________
Write
an article on the
modifying
accounting
___________________
principles.
Accounting Principles and

Standards
___________________
___________________
Objectives
topics:
cti
___________________
Accounting Standards in India
Accounting Process
pro
Modifying Accounting Principles
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Introduction
for
Basic accounting assumptions and principles provide different

rules for preparing certain financial statements which can provide
useful information to different interested persons.
No
t
In the previous unit, we studied the basic assumptions and the

basic accounting principles of accounting. In this unit, we will
study the modifying accounting principles.
Modifying Accounting Principles
UP
E
S,
The information is useful if it is relevant and reliable. Information

is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
statements, it is necessary, to modify certain assumptions and
principles. Cost benefits relationship, materiality, consistency,
conservatism. Timeliness and industry practice, etc., have to be
taken into account for making the information more useful. The
following are the important modifying principles;
Consistency: One thing must be kept in view, while recording
in the books of account i.e., whatever principle or method is
adopted in a year, must be adopted for the subsequent years
then only comparison of results is possible. For example, if
stock is valued using LIFO (Last In First Out) or FIFO (First
(c)
1.
___________________
___________________
___________________
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In First Out) or any other method, the same method must be

followed in subsequent years likewise is in case of depreciation
and if there is any change in the method of charging
depreciation it must be reported. Because of this, convention of
consistency occupies an important place in the field of
accounting. Consistent use of accounting principle and
conventions is necessary in achieving comparability. Though
the principle of consistency requires that a particular method
used, generally should not be changed unless otherwise
required and the user is informed accordingly. The Generally
Accepted Accounting Principles (GAAP) allow more than one
method of explaining similar operational results but in such
situations, financial statements are not comparable. This is
why the principle of consistency requires that the basis should
remain consistent with the previous accounting year. One can
conclude from the above that the principle of consistency does
not allow a firm to change its method under any situation. It
allows the firm to change its method if it is more useful or can
supply better information or results. This change must be
reported/disclosed in the financial statements by way of a foot
note with a view to inform the users about the lack of
consistency.
on
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Notes
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Conservatism [Prudence]: All financial statements are

prepared and presented as per law or conservatism and not for
a specific purpose. That is why it is termed as convention of
conservatism. This is a good and the safest policy. Accordingly
all possible losses are taken into account and all (probable)
(unrealized) profits/gains are left out. Likewise stock can be
valued either at cost or market price whichever is lower.
Similarly, provision for doubtful debts or provision for
depreciation can also be arranged as per the conservatism. It
can be a useful tool in such situations but if it is not used
properly, it may lead to unpleasant and unforeseen results.
For example, if a machine is purchased and the cost of
machine is charged as an expense, then profit as well as assets
would be underestimated.
(c)
UP
E
S,
No
t
2.
for
Re
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Nowadays conservatism has been replaced by prudence which

means the principle of conservatism is applied by the
accountants only in case of doubts or uncertainties with
prudence. The theme of the principle of conservatism is under-
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
Cost Benefit Principle: This principle says that the cost of

applying an accounting principle should not exceed its benefit.
It does not mean that to save cost, no information or very little
information should be given to the users. Certain minimum
levels of relevance and reliability must be reached for
information to be useful.
UP
E
S,
4.
No
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3.
statement of profit or assets rather than over-statement of

profit or assets.
Principle of Materiality: The American Accounting
Association defines the term materiality as, an item should be
regarded as material if there is reason to believe that
knowledge of it would influence the decision of informed
investor. In other words, materiality means only that
information should be used which influences the decision of
the investors, creditors, shareholders, etc. Though there may
be so much financial information, but only relevant must be
taken into account. This is very subjective. Likewise the
problem may be in case of allocation of costs/other expenses.
Moreover information material for one concern may not be
material for others so, an alert is required and care has to be
exercised while selecting or rejecting information. As per
principle of disclosure, all relevant and necessary information
(facts) must be disclosed whereas the Principle of Materiality
is an exception or modifying principle. It is because of this,
that the events or items not relevant or having an insignificant
effect, need not be given. The concept of Materiality is relative.
It is different for different enterprises. For example, the cost of
a component is very significant to a small company whereas it
is insignificant for a big company. Similarly nature of
transaction also affects the decision of the user of information.
Thus, it is clear from the above that the principle of
materiality is very much useful in the day-to-day working of
an organization.
le
For example, it is required under the Companies Act, 1956

that information regarding managerial remuneration
satisfying the overall ceiling of 11% of Net Profits should be
given. This increases the cost of providing information.
Timeliness: Information given must be relevant and reliable.
In order to be relevant the information must also be timely. If
information is not available or is provided after a long gap, it is
(c)
5.
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accounting standards of India.

___________________
___________________
on
/Sa
of no use. It is therefore desired that information must be

available for decision-making before it becomes redundant. Old
and late information hampers the ability of users on
application of different accounting principles.
Notes
Activity
___________________
Present
a report on the
6.
Substance over form: Means accounting treatment and its

presentation in financial statement should be as per substance
of the Transaction and not by its legal form alone. For
example, in case of a lease the lessor is funding the
transactions, hence he recognized the assets so financed as his
assets whereas the lessee recognized lease payments as hire
charges paid. In the First case, it is the legal form whereas in
the second case, it is the substance of the transaction.
7.
Variations in Accounting Practices: It means different

accounting practices, which are equally acceptable. As such
there is no single accounting practice which is applicable in all
cases. For example valuation of inventories, method of
charging depreciation, treatment of contingent liabilities etc.
In the above such cases, the Management is required to use
considerable judgment to select an appropriate/just practice.
8.
Industry Practice: Sometimes different industries use

different accounting principles and approaches to produce
realistic financial reporting. For example, it is a practice to
show investment at cost or market price whichever is lower.
Similarly, agricultural produce is shown at market price
because of certain practical difficulties. Thus, it is very much
clear from the above that Industry practice also plays a very
important role while applying certain accounting principles.
___________________
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No
t
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Check Your Progress
(c)
UP
E
S,
Fill in the blanks:
1.
................... is defined as an item should be regarded as

material if there is reason to believe that knowledge of
it would influence the decision of informed investor
2.
................... principle says that the cost of applying an

accounting principle should not exceed its benefit.
Accounting Standards in India

Indias accounting standards are explained in the following subsections:
Meaning of Accounting Standards
on
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Notes
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___________________
___________________
___________________
___________________
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It is a set of certain generally accepted rules, principles, concepts

and conventions issued by the Institute of Chartered Accountants
of India in consultation with other International Accounting
Bodies. The purpose of making uniform rules and principles is to
make the preparation and presentation of financial statement
easy, relevant, reliable, understandable and finally comparable. In
other words, Accounting standards are the basis of accounting
policies and practices to facilitate the recording of transactions and
events in such a way which can change them into financial
statements, to be used by the persons interested in getting the
correct and reliable information with a view to take future
decisions.
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Need for Accounting Standards
No
t
for
Re
Different business enterprises were having different modes of

recording the transactions and events and lack of uniform set of
rules created a lot of problems, such as comparison was not truly
possible but difficult also this was because of the nature of
business, diversified and complex economic situations. This also
made accounting information incomparable and less meaningful.
Therefore a need was felt to have certain minimum standards
which can are universally applicable, so that the financial
statements thus made, can be more reliable, comparable, relevant
and understandable. Keeping this in view, International
Accounting Standard Committee (IASC) was set up in 1973. The
objectives of this Committee were:
S,
(i) To formulate and publish in the public interest, accounting

standards to be observed in the presentation of financial
statements and also its world-wide acceptance, and
UP
E
(ii) To work for improvement and harmonization of regulation of

accounting standards and procedure relating to the
presentation of financial transactions.
Nature
(c)
The Institute of Chartered Accountants of India had set up

Accounting Standards Board on 22nd April, 1977 to formulate
accounting standards on a number of accounting issues, taking
into account the accounting standards developed by the
International Accounting Standard Committee, prevailing laws in
___________________
___________________
___________________
___________________
___________________
le
___________________
___________________
___________________
___________________
on
/Sa
India, business customs usages and conventions, etc. The

Accounting Standards made were not mandatory in the beginning
but after the amendment in the Sec 211(3C) of Companies Act,
1956 Accounting Standards out of 28 have been made mandatory.
The Auditor is required to give in his report to the shareholders
that accounts are prepared (drawn) in accordance with the
provisions relating to Accounting Standards in India.
Notes
___________________
Accounting Process
___________________
The basic accounting process is shown in the Figure 3.1.
___________________
The first thing that the accounting system takes on is the financial
transactions. A transaction is defined as an external event or
internal event which gives rise to a change affecting the operations
or finances of an organisation. Now there should be evidence that a
transaction has taken place. This evidence comes from the
documents that are used to support a transaction, like invoices,
receipts, cheques, bank statements, etc. For recording a
transaction, it must be analysed to determine its effects on the two
(or more) accounts and the reason why it affects those accounts. As
the original document cannot be used to write these details, a
standard document known as a voucher is used to accompany the
original document.
du
cti
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
Figure 3.1: Basic Accounting Process
___________________
___________________
___________________
___________________
___________________
cti
Once the vouchers are made for the day, they are entered into an
intermediate book known as Journal. Vouchers are normally
recorded in the order in which they occur. Journal entries contain
all relevant information pertaining to a transaction.
Notes
on
/Sa
Voucher is therefore the basic document of an accounting

transaction. Every voucher mentions the two (or more) accounts
that are being affected, the amount with which each account is
affected and the reason for the transaction (known as narration).
Each voucher is numbered and dated, so as to make referencing
easier.
le
No
t
for
Re
pro
du
This data from the journal has to be rearranged to assist in

analysis. For this the data is transferred to Accounts in the
General Ledger (the process is known as posting). In accounting
the term account is used to denote any item for which the
transactions affect the amount of that item. A general ledger is a
group of accounts, both permanent and temporary. In a manual
system a loosely bound book with the title general ledger could be
used where at least one side of a page is maintained for every
account. More pages are added as required if the number of
transactions in that particular account is high. In computers, the
records are kept in the databases and there is no limitation either
on the number of accounts or on the number of entries (accept the
limitation of storage space on the computer). Hence is it much
easier for the bigger companies to keep a computerised track of
their accounts than keeping a manual system.
There are five basic types of accounts: assets, liabilities, owners
equity, revenue and expenses.
(c)
UP
E
S,
Accounts can be represented as T-accounts, a sample of which is

shown in figure below:
Figure 3.2: T-account Example
___________________
___________________
___________________
___________________
___________________
___________________
A T-account is balanced only periodically (note that the rupee sign

is not shown in the T-account, as it is the normal book keeping
procedure). In the T-account in Figure 3.2 above, the left-hand side
is called the debit side and the right-hand side is called the credit
side. Therefore, to debit means to make an entry on the left-hand
side of the account and to credit means to make an entry in the
right-hand side of an account.
on
/Sa
Notes
Activity
___________________
Construct
a
summarized
report
on
the
uses,
___________________
advantages,
or
role
of
accounting.
___________________
le
___________________
Fill in the blanks:

1.
................... is a set of certain generally accepted rules,

principles, concepts and conventions issued by the
Institute of Chartered Accountants of India in
consultation with other International Accounting
Bodies.
2.
................... is defined as an external event or internal

event which gives rise to a change affecting the
operations or finances of an organisation.
___________________
Re
___________________
du
___________________
pro
___________________
cti
Check Your Progress
___________________

Useful in depicting financial results: Accounting is very
useful in depicting the financial results, i.e., profit or loss of
the business. If information relating to profit or loss of a
business is available, necessary decisions/future planning can
take place either correcting the situation or improving the
performance.
No
t
1.
for
The important uses/advantages of accounting are as given below:
Useful in showing financial positions of the business:

The main function/objective of accounting is to show the
financial position of the business, so that necessary steps can
be taken for arranging additional funds, if any required. This
also helps in depicting solvency of the business.
3.
Replacement of memory: It is very difficult to remember all

the events for a business man. That is why such events if are
of financial/monetary nature are recorded, which is one of the
foremost objectives of accounting. This recording is a
replacement of memory. One is not required to remember, but
is required to contact the accountant for necessary information
regarding any of the transactions.
(c)
UP
E
S,
2.
6.
Helpful to an insolvent person: If proper records are

maintained by the businessman, then it can be helpful to an
insolvent person in explaining certain things (events) which
have already taken place in the past.
Helpful in the sale of a business: If sometimes business is
closed down, it can get reasonable price if proper records are
maintained otherwise, it is very difficult to realize the assets
correct values and also difficult to pay off the liabilities.
8.
Helpful in detecting errors and frauds: If any error or

fraud is committed by any employee of the business, the same
can be detected early by maintaining proper books of accounts.
9.
Helpful in the valuation of goodwill: If proper record is

maintained it is very helpful in the valuation of goodwill of the
firm.
for
Re
pro
7.
No
t
10. Helpful in comparative study: If proper record is

maintained then accounting helps in comparing past
performances through its results, i.e., past can be compared
with the present and accordingly future decisions can be taken
regarding forecasting, planning, etc.
S,
UP
E
There are some limitations of accounting. These limitations are

described below:
Financial Accounting is not absolutely exact: The
transactions are recorded in accounting on actual basis, i.e., as
and when it takes place such as sales and purchases and
receipt or payment of cash, but sometimes estimates are also
taken in account in order to ascertain correct amount of profit
or loss such as depreciation of asset, bad debts, etc. Where
estimates are taken, such may also be different in different
(c)
1.
on
/Sa
Accounting records: It can be used as evidence in the court

of law. If there is any dispute regarding any business
transactions, then the statement which was recorded at the
time of transaction can be used as evidence in the court of law.
This is considered as a good proof/evidence by the court.
Notes
___________________
___________________
___________________
___________________
___________________
cti
5.
Helpful in calculating tax liabilities: Accounting is also

helpful in calculating correct liabilities relating to income-tax
and other taxes such as sales-tax, etc.
du
4.
le
___________________
___________________
___________________
___________________
___________________
le
___________________
___________________
Accounting results cannot give us correct value of the

business: As and when Balance sheet of a business is studied,
it cannot give us correct value of the assets/liabilities of the
business because, there are certain assets which are not meant
for resale but for use in the business where depreciation is
provided as a regular practice.
3.
Accounting is unable to disclose the full information

about the business: As we know only such transactions are
recorded which are of financial nature. The transactions which
are not of financial/economic nature are not at all recorded
such as honesty of the manager, Good health of workers,
quality of goods and efficiency of labour, etc. unless all such
items are taken into account, it cannot disclose the full
information of the business.
4.
Window-dressing: When exact accounting principles/

concepts or conventions are not strictly applied, it cannot give
the correct picture of the business.
___________________
___________________
___________________
___________________
___________________
___________________
for
Sometimes wrong conclusions are drawn: Sometimes

wrong statements are prepared because of different methods.
In case of stock valuation cost or market price whichever is
lower is taken, the figure of amount thus would be different in
different cases.
No
t
5.
Re
pro
___________________
cti
2.
du
___________________
on
/Sa
cases because of different nature of persons. The result will be

different amount of profit/loss. Since there is no uniformity in
the above estimates, the profit may vary in different cases and
cannot be treated as exact.
Notes
(c)
UP
E
S,
6.
Accounting figures are not at all affected by inflation: If

proper adjustments are not made, figures of profit or loss
ascertained would not be accurate because inflation is not
taken into account.
Sometimes figures which are worthless are also shown such as
preliminary expenses, discount on issue of shares/debentures,
etc. are shown.
Thus, we see that there are certain limitations of accounting also,

but if proper control is exercised, these limitations can be checked
properly.
Check Your Progress
Notes
on
/Sa
Fill in the blanks:
le
___________________
1.
............... can be used as evidence in the court of law.
2.
The transactions are recorded in accounting on

................... basis, i.e., as and when it takes place such
as sales and purchases and receipt or payment of cash.
___________________
___________________
___________________
cti
___________________
Summary
___________________
du
Basic accounting assumptions and principles provide different

rules for preparing certain financial, statements which can provide
useful information to different interested persons.
Re
pro
The information is useful if it is relevant and reliable. Information

is relevant if it can provide a basis for future forecasting and is free
from bias and errors. In order to prepare correct financial
statements, it is necessary, to modify certain assumptions and
principles. Cost benefits relationship, materiality, consistency,
conservatism. Timeliness and industry practice, etc., have to be
taken into account for making the information more useful.
for
Lesson End Activity
No
t
Make an informative presentation on the accounting principles and

standards.
Keywords
S,
Accounting Standards: It is a set of certain generally accepted

rules, principles, concepts and conventions issued by the Institute
of Chartered Accountants of India in consultation with other
International Accounting Bodies.
UP
E
Cost Benefit Principle: This principle says that the cost of

applying an accounting principle should not exceed its benefit.
Materiality: It is an item should be regarded as material if there
is reason to believe that knowledge of it would influence the
decision of informed investor
(c)
Transaction: It is defined as an external event or internal event

which gives rise to a change affecting the operations or finances of
an organisation.
___________________
___________________
___________________
___________________
le
on
/Sa
Voucher: It is therefore the basic document of an accounting

transaction.
Notes
___________________
___________________
___________________
___________________
1.
What are modifying accounting principles?
2.
Explain the Accounting Standards in India.
3.
Describe the concept of accounting process.
4.
Discuss the uses, advantages or role of accounting.
5.
Highlight the limitations of accounting.
___________________
___________________
___________________
___________________
Further Readings
pro
___________________
du
cti
___________________
Books
Re

for

No
t

Delhi.
(c)
UP
E
S,

Chand, New Delhi.
Web Readings
on
/Sa
Notes
Activity
le
UNIT 4: Accounting Equation
___________________
Make
a report on the meaning
and relevance of accounting
___________________
equation.
Accounting Equation
___________________
Objectives
___________________
topics:
cti
___________________
___________________
___________________
du
pro
Introduction
Re
The basic accounting equation is the foundation for the doubleentry bookkeeping system. For each transaction, the total debits
equal the total credits.
No
t
for
Every transaction which passes through books of accounts is

recorded at two places because of duality concept, i.e., every debit
has a credit. For example, as and when business is started by the
owner of the business, Cash or Goods are brought by the proprietor
as capital. So this very transaction has two aspects: one Cash or
Goods brought in are debited and whosoever has paid is to be
credited. Thus, we can say that
Capital = Total Assets (either in the form of Cash or
Goods or both)
UP
E
S,
Similarly, if a bank loan is raised/taken it has again two aspects

i.e., cash brought in is debited and bank is credited. In this case,
Cash is an asset and Bank is a liability. If it is put in accounting
equation then it is
Capital + Liabilities = Total Assets (Cash + Goods)
(c)
In the first case capital brought in by the owner is also termed as

owners equity in the accounting parlance (language) whereas in
the second case loan capital brought in is known as loan capital or
capital provided by the outsiders. If this relationship is put in the
___________________
___________________
___________________
equation form, it is known as accounting equation or the Balance

sheet equation. Thus we can say that
on
/Sa
Notes
Activity
___________________
Write
an article on the
le
C = A
calculation and computation of

___________________
accounting
equation.
Or C + L = A
___________________
Where C stands for owners equity, L stands for liabilities and A

stands for Total Assets. The above equation can also be expressed
in the following ways namely:
___________________
cti
___________________
___________________
C = AL
___________________
L = AC
du
___________________
A C L = Zero
___________________
___________________
Re
pro
Thus, it is clear from the above equations that owners equity

stands for capital paid + accumulated profits which are earned
during the period. The above point can be illustrated from the
following Balance Sheet of Ram Krishna Ltd.
Balance Sheet of M/s Ram Krishna Ltd.
As on 31-3-2006
Assets
Capital
Profits and Loss A/c
(Profits accumulated)
Loans
Current liabilities
Fixed Assets
Current Assets
No
t
for
Owners Equity and Liabilities
Check Your Progress
(c)
UP
E
S,
Fill in the blanks:

1.
Every transaction which passes through books of

accounts is recorded at two places because of .................
concept
2.
Capital + ................... = Total Assets (Cash + Goods)

As we know that the total Assets must be equal to owners equity +
outsiders capital. If there is any change in the amount of assets or
liabilities or owners equity, the capital is formed to change
accordingly. It may be either an increase in assets or decrease in
liabilities then it means an increase in capital in the first case

whereas decrease in the amount of capital in the second case.
Jan. 1, 2006 Business started with a capital of

transaction makes two things very clear:
Cash brought in by the proprietor is equal to 10,000 and
pro
(ii) Capital contributed by the proprietor (owner) is equal to

10,000. If it is put in an accounting equation form or
Balance Sheet equation form, it is like this
Assets = Capital
10,000 =
10,000 (Cash in hand)
Re
Jan. 2, 2006 the business purchased furniture for 1000. The

effect of this transaction would be reduction in the amount of
cash but a new asset in the form of furniture would be there,
thus without affecting the overall position of assets. If it is put
in Balance sheet equation form, it will appear as follows:
for
2.
Assets
Old Balance
Effect of transaction
New Balance
Furniture
Capital
10,000
10,000
1000
1000
9,000
1,000
10,000
Jan. 3, 2006 the business took a loan for 20,000 from SBI
New Delhi. The effect of this transaction would be increase in
the amount of cash as well as increase in liabilities also. If it is
put in equation form, it will appear as follows:
UP
E
S,
3.
No
t
Cash in
Hand
Assets
Cash in
+ Furniture = Capital + Liabilities
hand
Old Balance
9,000 +
1,000 =
10,000 +
Effect of
transaction
20,000 +
0 =
0 +
20,000
New
Balance
29,000 +
1,000 =
10,000 +
20,000
(c)
___________________
___________________
___________________
___________________
___________________
du
(i)
10,000. This
___________________
cti
1.
on
/Sa
Thus, we see that every transaction before it is recorded is

analysed to ascertain which account is debited and which account
is to be credited. The test of equality is kept in mind before
recording each and every transaction, which have taken place in
the books of M/s Producers (India) Ltd. during January, 2006.
Notes
le
___________________
___________________
___________________
___________________
effect of transaction on
___________________
accounting
equation.
___________________
Jan. 5, 2006 the business purchased goods for 12,000 for

cash. The effect of this transaction would be reduction in Cash
Balance but a new current asset in the form of goods or
merchandise would be there, thus without affecting the
overall position of assets. This would be clear from the
following equation:
on
/Sa
4.
Notes
Activity
___________________
Prepare
le
Assets
Cash
in
hand
___________________
= Capital + Liabilities
+ Furniture +
___________________
___________________
New
Balance
___________________
17,000 +
___________________
1,000 +
0 +
0 =
10,000 +
20,000
12,000 =
10,000 +
20,000
12,000 =
10,000 +
20,000
du
Old Balance 29,000 +

Effect of
12,000 +
transaction
___________________
Goods
=
(Merchandise)
cti
___________________
1000 +
pro
Check Your Progress
Fill in the blanks:
Assets must be equal to ................... + outsiders capital.
2.
If there is any change in the amount of assets or

liabilities or owners equity, the ................... is formed to
change accordingly.
for
Re
1.
(c)
UP
E
S,
No
t
It is clear from the above transactions how the accounting equation

is affected by different transactions. Net result remains unaffected
i.e., capital + liabilities = total assets. Only difference is in their
form i.e., there may be different assets in place of some assets if
assets are purchased for cash or on credit or if assets are sold then
assets may be changed accordingly.
Example: From the following transactions, make sure that
accounting equation is satisfied.
2006
April
April
April
April
April
April
April
April
April
April
1
2
4
7
12
15
18
21
27
30
Ashish commenced business with a capital of 25,000.

He purchased furniture for 15,000 for cash.
He purchased goods for 25,000 on credit.
He paid cartage 250.
Sold Goods for 7,500 costing 6,800 for cash.
Withdrew 2,500 for personal use.
Paid 20,000 to his supplier.
Rent due but not paid amounting to 600.
Introduced further capital of 10,000.
Took a loan from PNB of 50,000.
Solution:
Notes
Date
Transactions
Liabilities
25,000
+ 15,000 =
25,000 =
25,000
on credit
25,000 =
25,000
New equation
50,000 =
25,000
250 =
250
49,750 =
24,750
` 7,500 costing
+ 7,500 =
+700
` 6,800 for cash
6,800 =
New equation
50,450 =
25,450
2,500 =
2,500
47,950 =
22,950
April 1
Ashish commences business
April 2
Purchased furniture
for cash
Assets
25,000 =
___________________
___________________
___________________
Purchased Goods
Paid cartage
New equation
25,000
0
25,000
April 12 Sold Goods for
April 18 Paid to his supplier
20,000 =
New equation
New equation
25,000
(20,000)
5,000
600
600
22,350
5,600
10,000 = + 10,000
37,950 =
32,350
5,600
50,000 =
50,000
87,950 =
32,350
55,600
for
New equation
April 30 Took a loan from PNB
27,950 =
April 27 Introduced further Capital
25,000
April 21 Rent due but not paid

New equation
22,950
27,950 =
pro
New equation
Re
April 15 Withdrew for personal use
cti
___________________
du
April 7
___________________
15,000
New equation
April 4
= Capital
on
/Sa
Accounting Equation: Assets = Capital + Liabilities
No
t
Thus, we can say that the accounting equation is fully satisfied in

all the transactions.
S,
Example: Nishank had the following transactions. Show the effect

of the transactions on his assets, liabilities and capital using
accounting equation.
Commenced business with cash
UP
E
1.
1,00,000
2.
Purchased goods for cash
20,000
3.
Purchased goods on credit
40,000
4.
Sold goods for cash
30,000
5.
Sold goods on credit
25,000
6.
Furniture purchased for cash
10,000
7.
Building purchased for cash
50,000
(c)
le
8.
Rent paid
9.
Purchased T.V. for personal use
10.
Interest outstanding
2,500
12,000
1,000
___________________
___________________
___________________
___________________
___________________
le
Solution:
Notes
Transactions
Capital
___________________
1.
Business commenced with

cash
1,00,000
1,00,000
2.
Goods purchased for cash
1,00,000
3.
Goods purchased on credit
1,00,000
1,00,000
___________________
___________________
___________________
4.
Goods sold for cash
___________________
___________________
5.
Goods sold on credit
___________________
1,00,000
1,00,000
du
___________________
1,00,000
pro
___________________
6.
Furniture purchased for

cash
7.
Building purchased for

cash
8.
Rent paid
9.
T.V. Purchased for personal

use
for
Re
1,00,000
Total Assets
1,00,000
+ 20,000
20,000
1,00,000
40,000
1,40,000
40,000
1,40,000
1,00,000
+ 30,000
30,000
40,000
1,40,000
40,000
25,000
+25,000
40,000
40,000
1,40,000
+ 50,000
50,000
40,000
2,500
97.500
1,40,000
+ 10,000
10,000
1,40,000
2,500
40,000
12,000
1,37,500
12,000
85,500
40,000
Interest outstanding
1,000
1,000
New Equation
84,500
41,000
1,25,500
1,25,500
No
t
10.
Liabilities
cti
No.
on
/Sa
Accounting Equation: Assets = Capital + Liabilities
___________________
Summary
(c)
UP
E
S,
The basic accounting equation is the foundation for the doubleentry bookkeeping system.
Every transaction which passes through books of accounts is
recorded at two places because of duality concept, i.e., every debit
has a credit. For example, as and when business is started by the
owner of the business, Cash or Goods are brought by the proprietor
as capital. So this very transaction has two aspects: one Cash or
Goods brought in are debited and whosoever has paid is to be
credited.
In the first case capital brought in by the owner is also termed as
owners equity in the accounting parlance (language) whereas in
the second case loan capital brought in is known as loan capital or
capital provided by the outsiders.
Lesson End Activity
on
/Sa
Notes
With the help of internet, find out more practical problems on

accounting equation and try to solve them.
le
___________________
___________________
Keywords
___________________
___________________
___________________
cti
Double-entry Book Keeping: It is a set of rules for recording

financial information in a financial accounting system in which
every transaction or event changes at least two different nominal
ledger accounts.
du
Outsiders Capital: The value of investments minus operating

expenses that are held by company stockholders.
pro
Owners Equity: Total assets minus total liabilities of an

individual or company. For a company, it is also called net worth or
shareholders' equity or net assets.
Re
Total Assets: These are everything that a business or an

individual owns. Based inherently on the purchase value of an
item, total assets are listed on a balance sheet.
for
Explain the meaning of accounting equation.
2.
Discuss about the calculation/computation of accounting

equation.
3.
Describe the effect of transactions on accounting equation.
Further Readings
S,
Books
No
t
1.
UP
E

(c)

___________________
___________________
___________________
___________________
___________________
le

Delhi.
on
/Sa
Notes
___________________

New Delhi.
___________________
___________________

Delhi.
___________________

cti
___________________
___________________

Chand, New Delhi.
___________________
du
___________________
Web Readings
___________________
pro
___________________
(c)
UP
E
S,
No
t
for
Re
on
/Sa
Notes
le
UNIT 5: Case Studies
___________________
Case Studies
___________________
___________________
Objectives
___________________
After analysing these cases, the student will have an appreciation of the
concept of topics studied in this Block.
cti
___________________
du
Case Study 1: Rental Company Applies Accounting Concepts

to Transaction Processing in MAS200 with help from
Connective Values
pro
Sage Software and its channel partners provide second-to-none

technical (program) support for MAS90 and MAS200 (a robust
client/server edition of MAS90). But to operate their systems
effectively, users must also be able to apply underlying accounting
concepts to MAS90/200 transaction processing.
No
t
for
Re
After we implemented MAS200 for a rental company, they asked

us to provide ongoing technical and accounting support for their
system. There were 10-12 users of this system, ranging from the
companys CEO to line (entry) personnel. During implementation,
management - whose formal education included accounting and
finance - had attended Sage training in core applications (general
ledger, accounts receivable, accounts payable, payroll and bank
reconciliation). Line personnel tended to possess spotty
accounting education and limited experience with business
management systems. Turnover among these users was fairly
high. As part of our implementation, we wrote procedures for
many tasks, which helped bridge the gap when turnover occurred.
But issues kept arising among continuing personnel and new
hires that signalled the need for a better understanding of
accounting concepts in order to use MAS200 effectively.
(c)
UP
E
S,
As both CPAs and certified Sage partners, we were able to help

our client in a cost-effective, real time manner, combining asneeded site visits with real-time Citrix-based support. We
resolved specific MAS200 issues and provided training on the
accounting
concepts
involved,
including
inter-company
transactions; general/subsidiary ledger reconciliation; bank
reconciliation; inventory counts; sales/purchase order, credit card,
credit memo and payroll processing; payroll tax table updates;
sales tax treatment of customers and inventory items; balance
sheet/income statement treatment of large recurring journal
entries (like insurance premium payments); sales tax code
maintenance; and inventory assembly and unit of measure issues.
We also helped our client write procedures that formalized the
resolution of many of these problems.
Contd
___________________
___________________
___________________
___________________
___________________
le
___________________
Question:
___________________
Analyse the case and summarise it in your own words.
___________________
cti
___________________
on
/Sa
___________________
A better understanding of accounting concepts improved our

clients ability to use MAS200. Thanks to our remote support
capabilities, we were able to resolve both simple and complex
issues quickly while strengthening our clients accounting skills.
Often, we were able to handle incidents at the time they occurred
with one phone call. We did this without increasing the cost of our
services.
Notes
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
Case Study 2: General Accounting Files

Notes
on
/Sa
The Situation
le
___________________
A Fortune 500 diversified manufacturing corporation processes

thousands of journal entries and monthly reconciliations each
month.
___________________
___________________
The staff entering the journal entries is in seven different states,

and their outside auditors consistently raise red flags about
missing and incomplete documentation.
___________________
du
Our client came to us with two key objectives: ensure that each
documentation packet included several different components
(calculation worksheet, approval signature, and supporting
documentation) and that documentation for every journal entry
was accounted for.
cti
___________________
The Challenges
pro
The Solution
Re
Pickup: After each monthly close, National Scanning picks up

the journal entry documentation from each of the client locations.
An extract from their GL system is sent to us electronically that
lists every journal entry made. Processing each record is scanned
upon receipt and tagged by GL Account, Journal entry number,
date, and amount. The scanned records are output to an
encrypted DVD, which is loaded by the client onto their server for
access by all authorized employees.
for
Auditing: This is where the National Scanning accounting

records scanning services truly shine. Utilizing a combination of
advanced character recognition technology and a team of
document auditors, we confirm that the required documentation
(worksheet, approval signature, and supporting documentation) is
included in each entry.
S,
No
t
Defects are noted and a report is presented to management. The

listing of scanned documents is compared to the extract from the
client GL system, and missing documents are identified and
presented to management as well. The auditing process gives the
client the opportunity to find missing documentation or prepare a
replacement. The new documents are then sent to National
Scanning, where they are scanned along with the original
documents.
UP
E
This entire process takes just a few days. Typically, the final DVD
is sent to the client within a week of monthly close.
The Outcome
(c)
By auditing documents on the front end and saving them to a

secure server, our client can trust the integrity of their files. The
Director of Corporate Accounting remarked I feel so much better
knowing that when an auditor asks for information that it will be
there! Plus, accessing the files is so much easier it saves me and
my staff countless hours each week researching transactions.
Contd
___________________
___________________
___________________
___________________
___________________
le
on
/Sa
All and all, it is a very successful engagement (the client has been
with us for three years now!).
Notes
___________________
Question:
___________________
Study the case and recommend what could have done to better
solve the problem.
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
le
UNIT 6: Accounts
___________________
___________________
___________________
___________________
cti
___________________
___________________
Re
pro
du
___________________
(c)
UP
E
S,
No
t
for
BLOCK-II
___________________
___________________
___________________
le
Detailed Contents
UNIT
6: ACCOUNTS
___________________
Introduction
___________________
Traditional Classification
___________________
Classification of Accounts based on Accounting

___________________
Equation
Introduction
Meaning of Ledger
Importance of Ledger
Sub-division of Ledger
cti
___________________
Balancing of an Account
UNIT 9: SUBSIDIARY BOOKS
___________________
UNIT 7: JOURNAL
___________________
Introduction
___________________
Double Entry System of Accounting
___________________
Books of Business
Introduction
Need for sub-division of Journal
Types of Subsidiary Books
Cash Book with Bank and Discount Columns or

Three Columns Cash Book
pro
___________________
du
UNIT 8: LEDGER
UP
E
S,
No
t
for
Re
UNIT 10: CASE STUDY
(c)
on
/Sa
Notes
le
UNIT 6: Accounts
on
/Sa
Notes
Activity
Activity
___________________
D
Write
an article on the concept
of accounts.
___________________
Accounts
___________________
Objectives
___________________
topics:
cti
___________________
___________________
Meaning of an Account
Classification of Accounts based on Accounting Equation
pro
du
___________________
Introduction
Re
A record of financial transactions for an asset or individual, such

as at a bank, brokerage, credit card company, or retail store is
called an account. More generally, an arrangement between a
buyer and a seller in which payments are to be made in the future.
for
Meaning of an Account
No
t
An account is a summary of all relevant transactions relating to

one person at one place for a particular period. This is also known
as the condensed form of a statement. It records not only the
amount of transactions but also their effect and direction.
Generally, an account is in T form. Following is the form of an
account.
Form of Account
Dr.
J.F.
Amount
S,
Particulars
UP
E
Date
Date
Particulars
Cr.
J.F.
Amount
(c)
An Account contains 8 columns and is divided into two parts. The

left side of an account is termed as the debit side whereas right
side of an account is the credit side. Debit and credit are generally
represented by Dr. and Cr. The first four columns are of debit side
and other four columns are of credit side. As it is clear from the
above form of account that the entire space is divided in two equal
parts and column 1 is meant for date, column 2 for particulars,
___________________
___________________
___________________
traditional classification of
___________________
accounts.
column 3 for journal folio and column 4 for amount, etc. The same
procedure is carried out in case of other 4 columns. The account,
which involves receiving the goods/cash etc., is generally put on the
debit side whereas the account which involves giving/supplying
cash/goods etc. is put on the credit side.
on
/Sa
Notes
Activity
___________________
Prepare
a report on the
le
___________________
Types of Accounts
___________________
There are two types of classification: (1) Traditional classification

and (2) Classification of Accounts based on Accounting equation.
Also known as Modern classification. These are explained in the
following sections.
cti
___________________
___________________
___________________
du
___________________
___________________
As per traditional classification, account is classified into three

categories, namely:
pro
___________________
(a) Personal Accounts
Re
(b) Real Accounts
(c) Nominal Accounts
for
Personal Accounts
(c)
UP
E
S,
No
t
The transactions which involve Cash Receipts or Cash Payments

or transfer of assets from one person or institution to other persons
or institutions, are recorded in this category. This payment may be
against purchase of goods or services rendered or loans taken,
likewise receipts may be on account of sale of merchandise,
services enjoyed or loans given. Following principle is to be
applied, i.e., Debit the Receiver and Credit the Giver. For
exampleIf A has given a loan of 100 to B then B is the receiver,
hence to be debited and A is the giver, then he is to be credited.
Personal Accounts include three types of persons.
1.
Natural persons: Such as Mr. Rao or Mr. Reddy, Mrs.

Bhaskaran, Rama, krishna, Hari, Rekha, Hema Malini,
Madhu, Karina, Karishma, Madhuri, Jeenat, Jaya Prada,
Bipasha, Priyanka, Lara Dutta etc., who either buy or sell the
goods, or lend or borrow the money or render services.
2.
Legal entities: Such as companies, corporations or an

association of persons such as co-operative societies, etc.
3.
Accounts which deemed to be impersonal accounts, are

also personal Accounts: Such as outstanding expenses a/c,
on
/Sa
Notes
Real Account
du
pro
Debit whatever comes in, credit whatever goes out
Re
For example: If Ram purchases furniture from Ashish for

1000 for cash then Ram is getting furniture so in the books of
Ram, Furniture account is to be debited and cash account is to be
credited because it is going out. Coming text would be the journal
entry. In the books of Ram.
Particulars
Cr.
for
Dr.
L.F.
Furniture A/C
No
t
Dr.
To Cash A/C
Furniture purchase for cash
Real Accounts are meant for assets and properties which are of two
types:
Assets, which are used in the business such as land and
buildings, plant and machinery, furniture and fixture, etc.
2.
Assets/Goods, which are meant for resale.
S,
1.
UP
E
Assets can also be classified as:

(a) Tangible Assets
(b) Intangible Assets and
(c) Fictitious Assets
(a) Tangible Assets: These are such assets, which can be seen
and felt such as land and Buildings, Plant and
Machineries, Stocks, Furniture, etc.
(c)
___________________
___________________
___________________
___________________
___________________
All transactions involving tangible assets or goods are the subject

matter of this category. Such assets are cash, bank, furniture,
goods, etc. Following is the golden principle of passing the journal
entry relating to the above transactions:
S. No
___________________
cti
prepaid expenses a/c similarly accrued Incomes a/c or

unaccrued Incomes a/c because it represents a particular
person or group of persons. If something is added with these
accounts, they become personal accounts and if nothing is
added, then they are Nominal accounts. So it is important to
see whether something is added, also known as prefix, then it
is a personal otherwise if no prefix is there then it is a nominal
account.
le
UNIT 6: Accounts
___________________
___________________
___________________
___________________
le
___________________
___________________
on
/Sa
(b) Intangible Assets: These are such assets which can not be
seen but only felt such as goodwill and trade marks or
patents.
Notes
(c) Fictitious Assets: These are those assets which have no

value such as cost of establishment, preliminary expense,
etc.
___________________
___________________
___________________
cti
Nominal Accounts
___________________
___________________
All gains/profits/incomes and losses and expenses are recorded.

Following is the principle of passing the journal entry relating to
the above items in the books of the business:
___________________
Debit losses or expenses, credit gains/profits/incomes.
___________________
For example: Rent, interest, discount, commission, depreciation

etc. are recorded. If Ram pays 200 as rent to Hari. As Ram is
making a payment of rent and rent is an expense of the business,
so it is to be debited and as the payment is made in cash so cash is
going out, hence it is to be credited. Following journal entry would
be passed in the books of Ram:
Re
pro
du
___________________
S. No.
Particulars
Dr.
Cr.
L.F.
200
for
Rent A/c
To cash A/C
Rent of 200 paid
200
No
t
Similarly if Mr. Pal borrowed

10,000 from Smith and Smith
received
500 as interest, then in this case interest is a gain
(profit) income, hence it is to be credited and cash received to be
debited.
(c)
UP
E
S,
This may be depicted in the following form of journal entry:

In the books of Smith and Smith:
Dr.
S. No
Particulars
Cash A/c
To Interest a/c
Interest of 500 received
L.F.
Cr.
Table 6.1: Distinction between Personal and Impersonal Accounts

Impersonal Accounts
The subject matter is

persons
whether-natural,
Institutions or deemed to be
person. Such asName of an
Individual, Name of a firm
or a Company
The subject matter is

Assets and Goods as well as
income and expense such as
land and buildings rent,
interest, commission cash
in hand/at Bank or stock.
2. Rules for
debit and
credit
Debit the receiver

Credit the giver.
1.
2.
3.
4.
3. Balances of
Accounts
Balances
of
personal
accounts are shown in the
Balance sheet.
Balances of Assets are

shown in balance sheet
where balances of expenses
are in P&L a/c or trading
a/c as the case may be.
___________________
___________________
___________________
___________________
cti
Debit what comes in

Credit what goes out
Debit Expenses/Losses
Credit Income/Gains
___________________
du
1. Subject
matter
Notes
on
/Sa
Personal Account
pro
Basis of
Difference
Example: Classify the following accounts into Personal, Real, and

Nominal accounts.
Cash A/c
2.
Salary A/c
3.
5.
Dividend
Received A/c
Capital A/c
6.
Furniture A/c
7.
10. Drawings A/c
Purchases
A/c
11. Rams A/c
14. Mathura
Refineries A/c
15. Discount
A/c
Solution:
Name of Item
S,
No
t
Cash A/c
Salary A/c
Goods A/c
PN Bank A/c
Dividend Received A/c
Furniture A/c
Purchase A/c
Sales A/c
Capital A/c
Drawings A/c
Rams A/c
House Rent A/c (Drawings A/c)
Postage A/c
Mathura Refineries A/c
Discount A/c
UP
E
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
4.
PN Bank
A/c
Sales A/c
8.
12. House
Rent A/c
for
13. Postage A/c
Goods A/c
Re
1.
9.
Type of Account
Real A/c
Nominal A/c
Real A/c
Personal A/c
Nominal A/c
Real A/c
Real A/c
Real A/c
Personal A/c
Personal A/c
Personal A/c
Personal A/c
Nominal A/c
Personal A/c
Nominal A/c
(c)
Example: Classify the following under three types of accounts

(Personal, Real or Nominal Account):
(i) Drawings
le
UNIT 6: Accounts
___________________
___________________
___________________
___________________
___________________
(iii) Outstanding Salary

(iv) Depreciation
(v) Prepaid Insurance Premium
___________________
(vi) Loan
___________________
Solution:
Name of Item
___________________
___________________
___________________
Drawings
Cash
Outstanding Salary
Depreciation
Prepaid Insurance Premium
Loan
(i)
(ii)
(iii)
(iv)
(v)
(vi)
du
___________________
Type of Accounts
Personal A/c
Real A/c
Personal A/c
Nominal A/c
Personal A/c
Personal A/c
pro
(i)
(ii)
(iii)
(iv)
(v)
(vi)
___________________
on
/Sa
classification
of
accounts
___________________
based
on
accounting
equation.
___________________
(ii) Cash
cti
Notes
Activity
___________________
Present
le
Check Your Progress
Fill in the blanks:
Re
The transactions which involve Cash Receipts or Cash

Payments or transfer of assets from one person or
institution to other persons or institutions, are recorded
as ....................
for
1.
All transactions involving tangible assets or goods are

the subject matter of ....................
3.
All gains/profits/incomes and losses and expenses are

recorded as ....................
No
t
2.
(c)
UP
E
S,
Classification of Accounts based on Accounting

Equation
This classification is based on the nature of accounts. It is also
known as modern classification. Broadly speaking, the following
will be the types of accounts.
(a) Assets
(b) Liabilities
(c) Capital
Let us discuss the above types of accounts one by one.
(a) Assets: These accounts are related to all types of assets
whether tangible or intangible. Example Land and Building,
(b) Liabilities refer to such accounts, which create obligations for

the business for the outsiders. Such as creditors, bills payable,
long-term loans in the form of debentures and outstanding
liabilities, etc.
___________________
___________________
___________________
___________________
___________________
cti
(c) Capital refers to such accounts which are for the proprietor of
the business, example is Cash/Goods brought in as capital and
drawings, etc.
Notes
on
/Sa
Plants and Machinery, Furniture and fixture, all current

assetssuch as cash, Bank, Stock, Debtors, Bills receivable,
Goodwill, Patents a/c, etc.
le
UNIT 6: Accounts
du
As the capital is affected by expenses and profits, there will be two

more types of accounts as part of capital:
pro
(i) Expenses and

(ii) Incomes or Gains
Re
(i) Expenses refer to such accounts which show the amount which
is incurred/spent or lost in the process of earning Revenues, for
example: Purchases a/c, wages a/c, discount allowed, interest
paid/payable, rent paid/payable, goods lost in fire, etc.
Rules of Debit and Credit
No
t
for
(ii) Incomes refer to such accounts which are brought in by way of

sale of Goods or rendering of services by the business, for
example: Sales Discount received, Royalty, Interest received,
Dividend received, etc.
(I) In case of Traditional Type of Accounts

(i)
Personal Account: The rule of debit and credit is as

follows:
S,
Debit the Receiver

Credit the Giver
UP
E
(ii) Real Account: The rule of debit and credit is as follows:

Debit what comes in
Credit what goes out.
(c)
(iii) Nominal Account: The rule of debit and credit is as

follows:
Debit all expenses and losses
Credit all Gains profits or Incomes
___________________
___________________
___________________
___________________
___________________
le
___________________
on
/Sa
(II) In case of Modern classification of Account also known as

classification based on accounting equation.
Notes
Capital = Assets
___________________
___________________
___________________
Owned
___________________
Borrowed = Total Assets
cti
Thus Total Assets Borrowed = Capital
___________________
We also know that if there is a change on one side. The other side
is bound to be affected. This change occurs because of the concept
of dual aspect.
___________________
du
___________________
___________________
Technically, when some transaction is entered/recorded on the lefthand side of an account it is termed as debit whereas when some
transaction is recorded/entered on the right-hand side of an
account, it is termed as credit. Both debit and credit result, either
an increase or decrease depending upon the nature of an account.
Re
pro
___________________
Following are the rules for debit and credit

Assets
Increase in assets
Debit
Decrease is assets
Credit
for
(i)
(ii) Capital
No
t
(iii) Liabilities
(iv) Revenue
(c)
UP
E
S,
Income
(v) Expenses
Increase in capital
Credit
Decrease in capital
Debit
Decrease in liability
Debit
Increase in liability
Credit
Decrease in Revenue
Debit
Increase in Revenue
Credit
Increase in Expenses
Debit
Decrease in Expenses
Credit
Thus, it is clear from the above rules of debit and credit that,
(1) An increase in assets is recorded on the left-hand side of
Account and decrease in assets on the right-hand side.
(2) In case of Capital and liabilities: increase is recorded on the
right-hand side of an account whereas decrease is recorded on
the left-hand side of an account.
Notes
on
/Sa
All the above explained rules of Debit and Credit can be explained
in a Tabular Form.
le
UNIT 6: Accounts
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
pro
du
Example: From the following Decrease in the Accounts, write

down the side of account to be recorded along with the nature of
the account.
Cash withdrew by the owner
2.
Furniture a/c
3.
Rent a/c
4.
Interest a/c
5.
Bills Receivable
6.
Wages a/c
7.
Plant a/c
8.
Rent outstanding a/c
9.
Commission prepaid/paid in advance
No
t
10. Tushar (a customer)

11. Sneha (a Supplier)
(c)
UP
E
Solution:
S,
12. Loan a/c
for
Re
1.
___________________
___________________
___________________
le
process of balancing an
___________________
account.
___________________
___________________
cti
___________________
Every account is closed at the end of a month or year with a view

to ascertain the balance in an account. The procedure of balancing
of an account is very simple. From the total of the greater side the
total of smaller side is deducted, the remaining is the balance of an
account. For example, if the total of debit side is 10,000 and the
total of credit side is 7,500 and the balancing is done then it is
2,500 i.e., ( 10,000 7,500). After balancing the account, the
most important problem to be faced by a beginner is to know the
type of balance whether it is a debit balance or a credit balance.
The answer is very clear that is the balance represents the greater
side. In the given example as the debit side is greater than credit
side, hence it is the debit balance. Otherwise if the credit side is
greater than debit side, then it is a credit balance. The balancing of
an account is carried down to the next month/year as the case may
be and there balancing is carried forward/brought down for the
next month/year balancing for the first time when it is ascertained,
it is termed as closing balance and when balancing is brought
down, it is termed as opening balance.
on
/Sa
Notes
Activity
___________________
Develop
a draft on the
___________________
___________________
du
___________________
___________________
Re
pro
___________________
Notes:
for
Whatever is the opening balance, it is always written on the

reverse side of the closing balance. If closing balance is
written on the credit side of an account, then opening balance
is to be given on the debit side of that account. Similar is in
case of debit side having a closing balance, is to be given on
the credit side as opening balance. Whenever an account is
balanced, the total of both the sides become equal.
No
t
1.
(c)
UP
E
S,
2.
Balancing of account is done only in case of personal and real

accounts but not in case of Nominal accounts because their
balances are directly transferred to Profit & Loss account.
Check Your Progress

Fill in the blanks:
1.
................... accounts are related to all types of assets

whether tangible or intangible.
2.
................... refer to such accounts, which create

obligations for the business for the outsiders.
3.
................... refers to such accounts which are for the

proprietor of the business.
Summary
___________________
___________________
___________________
___________________
___________________
cti
This is also known as the condensed form of a statement. It records

not only the amount of transactions but also their effect and
direction. Generally, an account is in T form.
on
/Sa
Notes
A record of financial transactions for an asset or individual, such

as at a bank, brokerage, credit card company, or retail store is
called an account. More generally, an arrangement between a
buyer and a seller in which payments are to be made in the future.
le
UNIT 6: Accounts
___________________
___________________
du
Lesson End Activity
pro
Create an effective presentation on accounts and the forms and

types of accounts.
Keywords
Re
Account: It is a summary of all relevant transactions relating to

one person at one place for a particular period.
Fictitious Assets: These are those assets which have no value
for
Intangible Assets: These are such assets which can not be seen
but only felt
Nominal Accounts: All gains/profits/incomes and losses and
expenses are recorded.
No
t
Personal Accounts: The transactions which involve Cash

Receipts or Cash Payments or transfer of assets from one person or
institution to other persons or institutions, are recorded in this
category.
S,
Real Account: All transactions involving tangible assets or goods

are the subject matter of this category.
UP
E
Tangible Assets: These are such assets, which can be seen and
felt

Discuss the meaning of an account.
2.
Explain the types of accounts.
(c)
1.
3.
How are accounts classified based on accounting equation.
4.
Describe the Process of balancing of an account.
___________________
___________________
___________________
le
Further Readings
on
/Sa
Notes
___________________
Books
___________________

___________________

___________________
___________________
cti

___________________
___________________

du
___________________
___________________

Delhi.
pro
___________________

New Delhi.
Re

Delhi.
for

Chand, New Delhi.
Web Readings
No
t
(c)
UP
E
S,
on
/Sa
Notes
Activity
le
UNIT 7: Journal
___________________
Make
a report on the double
entry system of accounting.
___________________
Journal
___________________
Objectives
___________________
topics:
Meaning of Source Documents
Books of Business
cti
___________________
___________________
du
___________________
pro
Introduction
Re
Even when a business has a single owner we make a distinction

between the owner's assets and the assets of the business. For
example if the owner gives a van to the business this will count as
capital introduced, if the owner takes a salary this will be
accounted for as drawings.
No
t
for
All accounting transactions are first recorded in a journal. The

most common of these is the General Journal, sometimes also
known as the Book of Original Entry, because it is the first place a
transaction is entered into the books. Journal Entries are made
from source documents, which can be anything from receipts to
invoices to bank statements.
(c)
UP
E
S,
Double entry system is a system in which every transaction affects

at least two accounts. Under this system every debit has a credit.
Every transaction, which is in money or measured in terms of
money worth, is recorded. These transactions, as it is clear from its
very name are recorded in two accounts. These accounts are of
individuals or Institutions who either receive some benefit or
sacrifice something. If they receive then debit the benefit if it is a
sacrifice then credit the same. For example, Ram receives 100
from Shyam. Under this contract, Ram is the receiver. Hence Ram
a/c is to be debited and as Shyam pays, then his a/c is to be
credited.
___________________
___________________
___________________
Advantages of Double Entry System of Accounting

Notes
le
Complete record of transactions: Under this system,

recording of all transactions is done whether related to
personal or impersonal accounts.
2.
Ascertainment of profit or loss: Under this system of

accounting complete Profit & Loss account can be prepared by
which profit or loss of a particular period can be ascertained.
3.
Mathematical check on accuracy: Every debit has a credit,

so it is an accurate system as far as mathematical accuracy is
concerned which may be proved by preparing trial balance.
4.
Check for fraud: Scope of fraud is limited as it minimizes the

chances of fraud because of scientific system.
5.
Ascertainment and knowledge of financial position of

the business: Under this system it is possible to know the
financial position of the business at any time. For this purpose
Balance Sheet can be prepared any time.
___________________
___________________
___________________
___________________
___________________
6.
du
___________________
cti
1.
pro
___________________
Re
___________________
for
___________________
on
/Sa
As we know that double entry system of accounting is a systematic

and scientific system of accounting, so it offers a number of
advantages. The following are the most important advantages of
the system.
___________________
Possibility of full control over business: Under this system

full information is available which enables the management to
exercise full control over the business.
Easy accessibility of information: Under this system all
information is easily available and also accessible which is
very helpful and useful for the management.
8.
Possibility of comparative study: Under this system it is

possible to prepare comparative statement and also compare
the previous years results with the current years result and
take corrective steps as and when necessary to improve the
operational results.
9.
Reliable information: Under this system Information

received is reliable.
(c)
UP
E
S,
No
t
7.
Disadvantages of Double Entry System of Accounting

Double Entry
disadvantages:
System
of
Accounting
has
the
following
1.
It is suitable only for big business houses.
2.
It is expensive.
3.
Complete knowledge of accounting is essential.
4.
If any transaction is left, it is difficult to trace.
on
/Sa
Notes
Activity
le
UNIT 7: Journal
___________________
Prepare
a report on source
documents in accounting.
___________________
___________________
___________________
___________________
du
cti
Though the above mentioned are the defects of double entry

system of accounting, but the fact is that the defects are not of the
system but of the users. If proper care is taken, the system would
prove perfect, scientific and the best system of recording all
transactions of the business.
Check Your Progress
pro
Fill in the blanks:
................... is a system in which every transaction

affects at least two accounts.
2.
Under the double entry system, it is possible to prepare

................... statement and also compare the previous
years results with the current years result.
for
Meaning of Source Documents
Re
1.
No
t
Whenever recording of transactions is done in the books of the

business, it is on the basis of some documentary proof which is
called source documents. There are different types of source
documents, such as Goods purchased/Goods sold. The
documentary proof is cash memo receipt or Debit Note or Credit
Note, etc., depending upon buying or selling for cash or credit.
UP
E
S,
Thus, source document is the first record prepared for a business

transaction from where entries are made in the books of the
business. These documents are kept by the businessman till the
accounts are audited and tax is assessed. It is used as a legal
document in case if there is any disagreement.
Types of Source Documents

There are many types of source documents, which are used for
recording business transactions in the books of the business. The
following are widely used source documents:
Cash memo
2.
Debit or credit note
3.
Cheques
(c)
1.
___________________
___________________
___________________
___________________
___________________
books of business.
___________________
4.
Invoice
5.
Pay in slip
on
/Sa
Notes
Activity
___________________
Present
le
Meaning of Voucher
___________________
___________________
___________________
___________________
Books of Business
___________________
___________________
du
___________________
cti
As we know that the recording of Transactions is done with the

help of source documents as explained above. On the basis of
source documents, a detailed statement is prepared which is
termed as a voucher. We can know from the voucher, the no. of
accounts debited and credited.
pro
The books which are used in the business are generally classified
into two categories namely:
1.
Main books of the business i.e. Journal and Ledger Accounts.
2.
Subsidiary books. (These are explained in Unit 9)
Re
___________________
The Main Books of the Business (Journal)
No
t
for
The transactions, which take place in the business daily, are

recorded in a book, known as journal. It is the basic book of
original entry. Recording of transactions in the journal is done
according to the nature of transactions i.e., if personal account
then Debit the receiver and Credit the giver and if it is real
account then Debit what comes in, Credit what goes out and if it is
nominal accounts then Debit losses/expenses and Credit
incomes/gains. The recording of a transaction in the journal is
called journalizing.
(c)
UP
E
S,
Form of Journal: Following is the form of Journal required to

record the transactions:
There are five columns in a journal and every transaction is

recorded at two places. The first account is debited and second
account is credited. While recording in journal first account is
written as Debit very close to the line of particulars whereas
second account is written after leaving some space from the margin
in the particular column to make it distinct from the debit account.
Notes
on
/Sa
Note: Nowadays Dr/Cr or to is not written but the old practice is

adopted keeping in view the convenience.
le
UNIT 7: Journal
___________________
Narration: After recording of a transaction is over then a brief

summary of the transactions is given which is known as narration.
___________________
___________________
___________________
___________________
du
cti
The Memorandum Book or the Waste Book: The traders

generally note down the transactions in a book known as the
Memorandum book or the waste book or the rough book. This is
the book where the transactions are recorded briefly as and when
transactions take place. The purpose of maintaining this book is to
avoid slip-out of any transaction from memory. This book is
actually used before journalizing the transactions in the main book
of the business.
Form of the Waste Book
for
Goods sold for cash

Goods purchased from Rao
Rao was paid
Rent paid
Goods purchased from Reddy
Goods returned to Rao
Salaries paid
Interest paid
5,000
10,000
3,000
7,000
500
1,500
2,000
1,200
800
No
t
2006
July 1
July 4
July 5
July 8
July 12
July 15
July 21
July 25
July 31
Particulars
Re
Date
pro
That is why it is considered as an aid for the preparation of the

Journal.
S,
Journalizing: The transactions, which are briefly recorded in the

waste book or the rough book, are properly journalized in a book
known as the journal. All the transactions are recorded in a
systematic order and that too in a chronological order.
UP
E
Procedure of Journalizing: The procedure is very simple which

is as follows:
Ascertain which account is to be debited or credited? Once this
is clear, one can proceed with the actual journalisation i.e.,
passing of the Journal entry.
2.
After passing the Journal entry, write down the brief

summary of the transaction which is known as narration.
(c)
1.
3.
After narration one simple line is drawn to indicate that the

transaction is fully journalized and is over.
___________________
___________________
___________________
___________________
___________________
le
___________________
Date
___________________
___________________
___________________
___________________
___________________
Mr. Ram Reddy Started business with

Purchased furniture for cash
Goods purchased from Raja Rao
Goods Sold to Gundu Rao
Goods Returned to Raja Rao
Paid Rent
Cash sales
Cash purchases
cti
2006
April 1
April 2
April 5
April 7
April 12
April 15
April 20
April 27
___________________
Particulars
du
___________________
Date
pro
___________________
Transactio
n
Type of
Accounts
Reasons for
debit/credit
Business
started
(i) Cash
(ii) Capital
Real
Personal
Cash is to be debited as
the cash comes in
April 2
Furniture
purchased
(i) Furniture
(ii) Cash
Real
Real
Debit what comes in.

for
April 1
April 5
Goods
purchased
from R. Rao
(i) Goods
(ii) R. Rao
Real
Personal
Debit what comes in.

Credit the giver.
April 7
Goods sold to (i) G. Rao

Gundu Rao
(ii) Goods
Personal
Real
Debit the receiver

No
t
S,
Nature of
A/cs
Re
2006
UP
E
5000
1,500
4,000
2,500
500
750
3500
2000
Solution: Statement showing classification of transactions into

different Accounts along with reasons for debiting or crediting a
particular account.
___________________
(c)
on
/Sa
Example: Classify the following transactions into different types

of accounts. Also journalize them clearly indicating the reasons for
debiting or crediting a particular account.
Notes
April 12
Goods
Returned to
R. Rao
(i) R. Rao
(ii) Goods
Returned
Personal
Real
Debit the receiver

April 15
Rent paid
(i) Rent
(ii) Cash
Nominal
Real
Debit the expenses

April 20
Cash sales
(i) Cash
(ii) Sales
Real
Real
Debit what comes in

April 27
Cash
purchases
(i) Purchases Real

(ii) Cash
Real
Debit what comes in

Example: Journalize the following transactions with narration.

2006
Particulars
March 1
X brought capital into the Business
March 3
Purchased Furniture for cash
March 5
Purchases of Goods
March 10
Purchases of goods from M
20,000
4,000
15,000
10,000
Contd...
Sold goods to N
8,000
March 20
Cash Sales
10,000
March 22
Cash paid to M
10,000
March 31
Salaries paid
Notes
on
/Sa
March 15
le
UNIT 7: Journal
___________________
2,000
___________________
Solution:
___________________
Journal Entries
June 5
Cash a/c
To Ramu
Cash received from Ramu
Dr.
Purchases a/c
To cash a/c
Dr.
Hari
Dr.
2,500
1,000
___________________
___________________
1,000
4,000
4,000
Furniture a/c
To Raju
Furniture bought from Raju
Dr.
Office Stationery a/c

To cash a/c
Paid for office stationery
Dr.
500
Re
500
150
150
for
June 10
2,500
To Goods a/c (Sales A/c)

Goods sold to Hari
June 8
cti
L.F.
du
June 4
Particulars
pro
Date
2006
June 1
___________________
No
t
Compound Entries: Sometimes when a transaction involves more

than two accounts, then either we can pass separate entries, as
shown in illustration or a combined (Compound) entry because it
involves more than two accounts. For example, if a debtor is
allowed cash discount and he makes the payment. Then the
accounts involved are three, i.e., (1) Cash A/c (2) Discount A/c and
(3) The Debtors A/c
The following compound entry is to be passed:
UP
E
S,
Cash A/c
Discount A/c
To Debtors A/c
Debtor paid & was allowed discount.
Dr.
Dr.
Example: Journalize the following transactions with narration:

2006
Commenced business with cash

20,000/-,
(c)
Aug 1
40,000/- and Goods
___________________
___________________
___________________
___________________
Purchased goods 'From 'X' and Co. for

Cash 5,000/-,
___________________
Aug 5
Goods returned to 'X' Co.
Aug 10
Sold goods to 'Y' & Co.

him 20,000/-,
Aug 15
'Y' & Co. returned goods 500/-,
200/-,
___________________
___________________
___________________
30,000/- and cash received from
___________________
cti
Solution:
___________________
10,000/- Paid
on
/Sa
Aug 3
Notes
le
Journal Entries
___________________
du
___________________
Date
___________________
Aug 3
Purchases a/c
To X & Co.
Goods purchased from x
Dr.
X & Co.
To cash a/c
Paid cash
Dr.
Dr.
L.F.
40,000
20,000
60,000
10,000
10,000
5,000
5,000
for
Aug 3
Cash a/c
Dr.
Goods a/c
Dr.
To Capital a/c
business commenced with cash and goods
pro
2006
Aug 1
Re
___________________
Particulars
Cr.
If combined entry is passed

Purchases a/c
Dr.
To cash a/c
To X & Co.
Goods purchased from X and paid cash
No
t
Aug 3
Aug 5
(c)
UP
E
S,
Aug 10
X & Co.
Dr.
To Purchases Returns a/c
Goods returned to X
Cash a/c
Dr.
Y& Co.
Dr.
To sales a/c
Goods sold to Y and cash received from him
10,000
5,000
5,000
200
200
20,000
10,000
30,000
If separate entries are made then

Dr.
Aug 10
Y& Co.
To Sales a/c
Goods sold to Y
Dr.
Aug 10
Cash a/c
To Y & co.
Cash received from him
Dr.
Aug 15
Sales Return a/c

To Y & Co.
Goods returned by Y & Co.
30,000
30,000
20,000
20,000
500
500
Advantages of Journal
on
/Sa
Notes
The following are the main advantages of using the journal:
le
UNIT 7: Journal
___________________
(i)
It provides a permanent record of all transactions.
___________________
(ii) It provides a record in a chronological (date-wise) order which

saves time if some entries are checked later on.
___________________
___________________
___________________
du
cti
(iii) It reduces the possibility of error because both the columns

are totalled and must be equal. If there is any difference, it
can be searched out but if direct entries are passed in the
ledger account, the chances are there to commit error which is
very difficult to locate later on.
pro
(iv) If the journal is sub-divided into other subsidiary books then

it reduces the burden of the administration (office).
Limitations of Journal
Re
Though the journal is very useful but still it is not free from
criticisms, which are known as its limitations. If every transaction
is recorded (as discussed earlier) in the journal then it makes the
journal unwieldy because of the following:
The journal will be too big (long) to manage easily.
2.
It fails to provide certain other important information to the

business such as cash balance, etc.
for
1.
No
t
Nowadays the journal is sub-divided in different other books

because of its above mentioned limitations and it is used only for
such transactions which are very few or are not many.
UP
E
S,
Opening entry: The previous years balances are carried forward

to the new books of the current year. This is done by means of a
journal entry which is called as opening journal entry. In this entry
all the assets are debited and all liabilities along with owners
capital are credited. If the owners capital is not given, then the
difference between total assets and liabilities is termed as the
owners capital.
Thus, the opening entry would be:
Date
Dr.
Particulars
(c)
All Assets a/c

To all liabilities a/c
To Capital a/c
Assets and liabilities
Transferred
L.F.
Dr.
Cr.
___________________
___________________
___________________
___________________
___________________
le
___________________
on
/Sa
Example: Pass the necessary opening entry on 1st January, 2006

in the books of Gopinath.
Notes
Cash in hand
3,000
___________________
Cash at Bank
___________________
Stock in trade
___________________
Furniture & Fittings
___________________
Sundry Debtors
___________________
Sundry Creditors
___________________
Loan from Ganesh & Co.
___________________
Solution:
16,000
30,000
5,000
cti
21,000
18,000
du
9,000
___________________
Opening Journal Entries
pro
___________________
Date
Particulars
Cr.
3,000
16,000
30,000
5,000
21,000
18,000
9000
48,000
Check Your Progress
No
t
for
Re
1.1.2006 Cash in hand a/c

Dr.
Cash at Bank a/c
Dr.
Stock in trade a/c
Dr.
Furnitures Fittings a/c
Dr.
Sundry debtors a/c
Dr.
To Sundry creditors a/c
To Ganesh & Co. a/c
To Capital a/c
Opening entry in respect of assets and
liabilities. (Difference between Assets and
liabilities is equal to capital)
Dr.
L.F.
(c)
UP
E
S,
Fill in the blanks:

1.
Journal provides a record in a ................... order
2.
The previous years balances are carried forward to the

new books of the current year and is done by means of a
journal entry which is called as ...................
Summary
The most common of these is the General Journal, sometimes
also known as the Book of Original Entry, because it is the first
place a transaction is entered into the books. Journal Entries are
made from source documents, which can be anything from receipts
to invoices to bank statements. The books in which these
transactions are recorded first time are called the books of original
entries or records.
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
cti
When a transaction takes place in the business it is first roughly

written in the memorandum book chronologically for the memory
only. 'Journal' word is derived from French word 'Jour' which
means a day book. Journal is a primary book of original entries for
accounting data. If all the transactions of the business are recorded
in Journal it will be too bulky to manage. Therefore, now-a-days
original records are maintained in the subsidiary books. These
subsidiary books are also called sub-division of Journal.
le
UNIT 7: Journal
___________________
Lesson End Activity
du
___________________
pro
Make a journal of your last weeks expenses and classify them into
the various subsidiary books.
Keywords
Re
Journal: Journal is a primary book of original entries for

accounting data.
Memorandum Book: When a transaction takes place in the
business it is first roughly written in the memorandum book
chronologically for the memory only.
No
t
for
Subsidiary Books of Original Records: These subsidiary books

are also called sub-division of Journal.
1. What do you understand by books of original record?

2. Explain the concept of Journal.
3. List the rules of debiting & crediting in journal.
S,
4. Explain the various subsidiary books of original records.
UP
E
Further Readings
Books

(c)

___________________
___________________
___________________
le

on
/Sa
Notes
___________________

___________________

Delhi.
___________________
___________________

New Delhi.
cti
___________________
___________________

Delhi.
___________________
du
___________________

___________________
Web Readings
pro

Chand, New Delhi.
___________________
Re
(c)
UP
E
S,
No
t
for
on
/Sa
Notes
Activity
le
UNIT 8: Ledger
___________________
Write
W
an article on the
meaning and importance of
___________________
ledger.
Ledger
___________________
Objectives
___________________
topics:
cti
___________________
___________________
Meaning of Ledger
___________________
du
pro
Introduction
Meaning of Ledger
No
t
for
Re
Whenever any transaction takes place it is recorded first in the

primary books of the business i.e., The Journal, if it can be
measured in terms of money or Moneys worth. These journal
entries are then posted in different ledger accounts as per the
nature of the transaction concerned. The ledger account is the
main book of the business. It is a bound book which contains
number of accounts. Thus, the accounts are in a classified
summary of the transactions relating to a particular account. The
method or the process through which recording is done from
journal to ledger account is called the posting. Thus, it is very easy
for a person to know the current and exact position of an account
on a particular date.
UP
E
S,
Ledger is also called as a book of final entry because all

transactions are finally recorded in the ledger accounts. Journal of
a business is very useful but it does not reply the different queries
as how much amount is due from debtors, how much is to be paid
to creditors and what is the balance of a particular account etc. For
the reply of all these queries the ledger is prepared from the
Journal entries. Ledger is the set of accounts in which all types of
account (personal, real or nominal) are kept. There can be two
forms of ledger:
(c)
(a) Bound Ledger
(b) Loose Leaf Ledger
___________________
___________________
___________________
le
1.
Final position of an account: It is possible through an

account to know the final position regarding the balance which
is either outstanding or owing as the case may be.
2.
It makes the accounting exercise done as full and final as it is

difficult to know at once the same from the Journal.
3.
It saves a lot of time: As all the entries are available at one

place, it saves a lot of time which can be used for other useful
purposes.
4.
Indispensable: Nowadays, it has become indispensable i.e.,

there is no escape from it. It has to be maintained at all times,
whatever may be the cost.
___________________
___________________
___________________
___________________
___________________
cti
___________________
As we know that the ledger is a bound book. It offers many

advantages which are as follows:
du
sub-division of ledger.
___________________
on
/Sa
Notes
Activity
W ___________________
Prepare
___________________
pro
___________________
Re
Check Your Progress
Fill in the blanks:
................... is also called as a book of final entry

because all transactions are finally recorded in the
ledger accounts.
for
1.
2.
There can be two forms of ledger: these are ...................

ledger and ................... ledger.
(c)
UP
E
S,
No
t
It is not possible to have one ledger for all the accounts in big
business houses. It is possible only for a small businessman. Thus,
the ledger is sub-divided as per the convenience of the trade. The
following are the sub-divisions of a ledger:
1.
General Ledger: It is meant for all the accounts other than

debtors and creditors. In other words it is meant for real and
nominal accounts. It is also known as Impersonal Ledger or
Main Ledger.
2.
Debtors Ledger: It is meant for all the debtors to whom

goods are sold on credit. It is also known as sold ledger or
sales ledger.
4.
Creditors Ledger: It is meant for all the creditors from whom

goods are bought on credit. It is also known as bought ledger
or purchase ledger.
Private Ledger: It is meant for personal account of the
proprietor. i.e. the capital account, drawing account, current
account and final a/c (Trading and Profit & Loss a/c) and a
balance sheet.
Notes
on
/Sa
3.
le
UNIT 8: Ledger
___________________
___________________
___________________
___________________
___________________
cti
Balancing of Account
___________________
pro
du
Accounts are periodically balanced generally at the end of the

accounting period. The purpose of this balancing is to know the
financial position of the business. Balancing of an account means
that both the sides of an account are totalled and the difference
between them is termed as balance, which is written as balance c/d
at the side which is shorter and this amount is brought down in
the next accounting period thinking that it is a continuous process
till the account is finally closed.
Re
Table 8.1: Distinction between the Journal and the Ledger

Basis of
difference
The Journal
1. Primary
or
Principal Book
When the business is

small, it is the main book
but when the business is
large,
it
becomes
a
subsidiary book
It is the primary
Principal book.
2. Original/ Final
entry
It is the book of original

entry
It is the book of final entry.
3. Used daily
It is used daily to record

the
transactions
on
chronological order.
It is used periodically,
which may be weekly,
fortnightly or monthly.
Method of recording in the

Journal is known as
Journalization
Whereas
recording
accounts
posting.
or
for
No
t
At
a
time
Complete
information about a/cs
transactions
is
not
possible.
UP
E
5. Complete
Information
of
S,
4. Process/
Method
recording
The Ledger
process
of
in
ledger
is known as
Ledger provides/makes it
possible & provides full &
complete information.
Ruling of Ledger Account
(c)
An account, first of all is divided into two parts. The left-hand side
of as account is known as debit side whereas the right-hand side of
as account is termed as credit. Debit and credit are generally
represented by Dr. and Cr. Thus, every account contains 8
columns. The first four columns are of debit side and other four
___________________
___________________
___________________
___________________
le
columns are of credit side. Account is in form of T. Following is the

form of Account.
___________________
Form of Account
Name (Title)
Dr.
___________________
Date
___________________
Particulars
L.F.
on
/Sa
Notes
Page No.
Amount
( )
Date
___________________
L.F.
Amount
( )
cti
___________________
Particulars
Cr.
___________________
___________________
As it is clear from the above form of account that the entire space
is divided into two equal parts and Date, Particulars, Journal Folio
and Amount etc., are written in column 1, 2, 3 & 4 respectively.
The same procedure is adopted in case of other columns.
___________________
___________________
pro
du
___________________
Rules/Points to be kept in mind while posting into ledger account:

The following points are to be remembered while posting:
When one is going to post the journal entries first read out the
names of accounts involved.
2.
Now you can open respective accounts.
3.
Now if you want to post-see the side of the account concerned,

it may be either debit side or credit side.
for
Re
1.
No
t
After determining the side post the other account to that side
to which the account concerned represents.
4.
Never write/post the name of that account in which you are

going to post.
(c)
UP
E
S,
After keeping the above rules in mind, we can prepare the

following ledger accounts:
Example: Prepare the account of X & Co. from the following.
2006
Feb 1
Balance due from X & Co.
Feb 3
Cash sales to X & Co.
700
Feb 4
Bought furniture from X & Co.
250
Feb 6
Murthy returned goods to us
200
Feb 9
X & Co. Purchased goods from us
Feb 10 Return of goods from X & Co.
1,000
1,200
150
Feb 20 X & Co. settled his account by cheque and received discount 20
Solution:
Notes
on
/Sa
X & Co. Account
le
UNIT 8: Ledger
___________________
Dr.
Cr.
Particulars
2006
Feb 1
Feb 9
To balance b/d
To sales a/c
J.F.
Date
1,000
1,200
2006
Feb 4
Feb 10
Feb 20
Particulars
___________________
J.F.
By furniture a/c
By sales returns a/c
By Bank a/c
By Discount a/c
2,200
___________________
250
150
1780
20
2,200
___________________
___________________
cti
Date
Date
pro
Re
for
UP
E
July 17
July 18
July 19
July 22
July 23
July 24
July 25
July 26
July 27
July 29
July 30
July 31
July 31
July 31
No
t
July 3
July 5
July 6
July 8
July 10
July 12
July 14
July 15
Started business with

Cash
Bank
Bought furniture from M/s New Light
Bought furniture for the office
Sold furniture to Roop
Bought furniture
Returned furniture to M/s New Light
Roop returned furniture
Paid taxi fare
Sold furniture to Sanjay for Rs. 500
Less trade discount @ 10%
Received Commission
Paid to New light by cheque
Paid to Bank
Received a cheque for Rs. 500 from Roop and deposited the
same in Bank.
Paid Rent to Naresh
Roops cheque dishonoured.
Furniture taken for personal use
Received interest
Received dividend
Postage stamp paid
Paid house rent by cheque
Withdrawn from bank for office use
Salary paid
Taxes paid
S,
2006
July 1
Particulars
du
Example: The following were the transactions of Delite Furniture,

Delhi during July 2006
3,500
9,200
2,000
1,000
2,000
1,800
50
200
10
15
1,000
200
500
150
400
10
25
5
100
2,000
300
250
(c)
You are required to journalize the above transactions in the books

of M/s Delite Furniture and post them in their respective ledger
accounts.
___________________
___________________
___________________
___________________
___________________
le
Solution:
Notes
Date
___________________
July 3
___________________
___________________
July 5
___________________
___________________
July 6
___________________
July 8
July 10
Dr.
Dr.
Purchases a/c
To M/s New light a/c
Furniture bought
Dr.
July 14
(c)
UP
E
S,
July 17
July 18
July 19
July 22
2,000
2,000
Furniture a/c
Dr.
To Cash a/c
Furniture purchased for office use
1,000
Roop
To goods a/c
Furniture sold to Roop
2,000
Dr.
Purchases a/c
To Cash a/c
Furniture bought
Dr.
M/s New Light A/c

To goods (Return) A/c
(purchases return) Furniture
returned.
Dr.
1,000
2,000
1,800
1,800
50
50
Goods (Return) A/c (Sales Return) Dr.

To Roop
Roop Returned Furniture.
Trade Expenses A/c
To cash A/c
Taxi Fare Paid
Dr.
Sanjay
To Good A/c (Sales a/c)
Furniture sold for Rs. 500 less
trade discount @ 10%
Dr.
Cash A/c
To commission A/c
Commission Received
Dr.
M/s New Light A/c

To Bank A/c
New light was paid by cheque
Dr.
Bank a/c
To cash A/c
Bank paid
Dr.
Bank a/c
To Roop
A cheque was received from Roop
which was deposited in the bank.
Dr.
No
t
July 15
3,500
9,200
12,700
for
July 12
Cash a/c
Bank a/c
To capital a/c
Business started
cti
___________________
L.F.
du
___________________
Particulars
pro
2006
July 1
Re
___________________
on
/Sa
Journal Entries
___________________
200
200
10
10
450
450
15
15
1,000
1,000
200
200
500
500
Contd...
July 29
July 30
July 31
July 31
500
Cash A/c
To interest A/c
Interest received.
Dr.
Cash A/c
To Dividend A/c
Dividend Received.
Dr.
Postage Stamp A/c

(Trade Expenses)
To cash A/c
Postage Paid
Dr.
Drawings A/c
To Bank a/c
House rent paid by cheques
Dr.
Cash a/c
To Bank a/c
Withdraw for office use
Dr.
Salary a/c
Taxes a/c
To cash a/c
Salary & taxes paid
Dr.
Dr.
400
10
10
___________________
___________________
25
25
100
100
2000
2000
300
250
550
25665
No
t
25665
Nature of business: In the above illustration, it is clear that

the dealer is dealing in furniture, hence furniture purchased
& sold is considered as sale and purchase of goods.
2.
When the goods are sold or bought, sometimes one or the

other is returned or comes back. Treatment is on the lines of
goods returned.
3.
House rent paid is treated as drawings.
S,
1.
UP
E
___________________
___________________
Notes: Following points are to be kept in view while journalizing

the transactions in the journal:
(c)
___________________
___________________
400
Total
on
/Sa
___________________
500
Drawings A/c
Dr.
To Goods A/c
Furniture taken away for personal
use.
Notes
cti
July 27
Dr.
150
du
July 26
Roop
To Bank A/c
Roops cheque dishonoured.
150
pro
July 25
Dr.
Re
July 24
Rent a/c
To cash a/c
Rent paid to Naresh
for
July 23
le
UNIT 8: Ledger
___________________
___________________
___________________
le
Following are ledger accounts:

Cash Account
___________________
Dr.
Date
___________________
2006
July 1
July 17
July 26
July 27
July 31
___________________
___________________
___________________
___________________
Particulars
L.F. Amount Date

( )
To capital A/c
To commission
A/c
To interest A/c
To dividend A/c
To bank A/c
3,500
15
10
25
2,000
___________________
By office furniture A/c

By goods A/c
By Trade Expenses A/c
Bank A/c
By Rent A/c
By Postage stamp A/c
By salary A/c
By trade expenses A/c
By balance c/d
5,550
Aug. 1
To balance b/d
1,000
1,800
10
200
150
5
300
250
1,835
5,550
1,835
pro
___________________
Cr.
L.F. Amount
( )
du
___________________
2006
July 5
July 8
July 14
July 19
July 23
July 29
July 31
July 31
July 31
Particulars
cti
___________________
on
/Sa
Notes
Bank Account
Dr.
L.F.
To Capital A/c
To Cash A/c
To Roop
for
2006
July 1
July 19
July 22
Particulars
Re
Date
To balance b/d
No
t
Aug 1.
Amount Date
( )
2006
9,200 July 18
200 July 24
500 July 30
July 31
July 31
Cr.
Particulars
L.F. Amount
( )
By new light
By Roop
By Drawings
By Cash A/c
By Balance c/d
1,000
500
100
2,000
6,300
9,900
9,900
6,300
Capital Account
Dr.
(c)
UP
E
S,
Date
Particulars
2006
July 31 To Balance c/d
Cr.
L.F.
Amount Date
( )
Particulars
12,700 2006
July 1 By Cash A/c
July 1 By Bank A/c
12,700
L.F.
Amount
( )
3,500
9,200
12,700
Aug 1 By balance b/d
12,700
Goods Account
Cr.
Particulars
2006
July 3
July 8
L.F.
Particulars
2006
2,000 July 6
1,800 July 15
July 25
July 31
To M/s New light

To Cash A/c
To balance b/d
L.F.
By Roop
By Sanjay
By Drawings
A/c
By Balance c/d
3,800
Aug 1.
Amount
( )
2,000
450
400
950
3,800
950
Notes
___________________
___________________
___________________
___________________
___________________
cti
Date
Amount
Date
( )
on
/Sa
Dr.
le
UNIT 8: Ledger
___________________
M/s New Light Account
___________________
Cr.
Particulars
2006
July 10
July 18
July 31
L.F.
Amount
( )
Date
Particulars
2006
50 July 3
1,000
950
To Goods (Ret)
A/c
To bank A/c
To Balance c/d
L.F.
By Goods A/c
Amount
( )
___________________
2,000
___________________
pro
Date
du
Dr.
2,000
2,000
Aug 1
By Balance
b/d
Re
950
Office Furniture Account

Dr.
2006
July 5
Aug 1
Particulars
L.F.
Amount
( )
Date
Particulars
2006
1,000 July 31
To Cash A/c
To Balance b/d
1,000
L.F.
for
Date
By Balance c/d
Cr.
Amount
( )
1,000
Dr.
Date
Particulars
L.F.
Amount
( )
Date
2006
2,000 July 12
500 July 22
July 31
S,
2006
July 6 To Goods A/c
July 24 To Bank A/c
No
t
Roop
Cr.
Particulars
L.F.
By Goods (Ret.) A/c

By Bank A/c
By Balance c/d
200
500
1,800
2,500
Dr.
Date
To Balance b/c
Particulars
(c)
2006
July 12 To Roop
Aug 1.
To Balance
b/d
2,500
1,800
UP
E
Aug 1.
Amount
( )
L.F.
Goods (Return) A/c

Cr.
Amount
( )
Date
2006
200 July 10
July 31
200
150
Particulars
By new Light A/c

By Balanced c/d
L.F.
Amount
( )
50
150
200
___________________
Trade Expenses Account

Notes
Cr.
Date
___________________
2006
July 14
July 29
July 31
___________________
___________________
Particulars
L.F.
To cash a/c
To cash A/c
To cash a/c
___________________
Aug a
___________________
To Balance
a/c
Particulars
L.F.
2006
10 July 31 By balance c/d
5
250
265
265
265
265
___________________
Date
Amount
( )
cti
___________________
Amount
( )
on
/Sa
Dr.
le
___________________
du
Sanjay
Dr.
Date
Particulars
___________________
2006
July 15
Aug 1.
To Goods A/c
To Balance b/d
L.F.
Cr.
Date
Particulars
2006
450 July 31
By balance c/d
pro
___________________
Amount
( )
L.F.
Amount
( )
450
450
Commission A/c
Re
Dr.
Particulars
2006
July 31
To Balance c/d
Dr.
Particulars
No
t
Date
UP
E
S,
2006
July 23
Aug 1
(c)
L.F.
for
Date
Amount
( )
Cr.
Date
Particulars
2006
15 July 17
Aug 1.
By cash A/c
By Balance b/d
L.F.
15
15
Rent Account
Cr.
L.F.
To cash A/c
To Balance b/d
Amount
( )
Date
Particulars
2006
150 July 31
By Balance c/d
L.F.
Amount
( )
150
150
Drawings Account
Dr.
Date
Amount
( )
Cr.
Particulars
2006
July 25
July 30
To Goods A/c
To Bank A/c
Aug 1
To Balance b/d
L.F.
Amount
( )
Date
Particulars
2006
400 July 31
100
By Balance c/d
500
L.F.
Amount
( )
500
500
500
Note: Drawing A/c can be closed by way of transferring to Capital

A/c
Interest Account
Notes
Cr.
Date
Particulars
2006
July 31
To balance c/d
Amount
( )
L.F
Date
Particulars
2006
10 July 26
Aug. 1
By balance A/c
By Balance b/d
L.F.
Amount
( )
___________________
___________________
10
10
Cr.
Date
To balance c/d
Aug.1
L.F.
Amount
( )
By cash a/c
25
By Balance b/d
Salary Account
Dr.
25
Cr.
Particulars
2006
July 31
Aug 1
To cash a/c
To balance a/c
L.F.
Amount
( )
Date
Particulars
2006
300 July 31
By balance c/d
300
L.F.
Amount
( )
Re
Date
300
300
for
Check Your Progress

Fill in the blanks:
................... is meant for all the accounts other than

debtors and creditors.
2.
................... is meant for all the debtors to whom goods

are sold on credit.
No
t
1.
S,
Summary
UP
E
In modern accounting software or ERP, the general ledger works

as a central repository for accounting data transferred from all
sub-ledgers or modules like accounts payable, accounts receivable,
cash management, fixed assets, purchasing and projects.
Ledger is the set of accounts in which all types of account
(personal, real or nominal) are kept.
The process of transferring the entries from Journal to Ledger
accounts is called posting. In other words account-wise selection of
debit or credit items and recording them into the relevant side of
the relevant account is called posting.
(c)
___________________
___________________
du
2006
25 July 27
Particulars
pro
2006
July 31
Amount
( )
L.F.
___________________
cti
Dr.
Particulars
___________________
___________________
Dividend Account
Date
on
/Sa
Dr.
le
UNIT 8: Ledger
___________________
___________________
___________________
le
Lesson End Activity

Draw a sample of an account ledger.
___________________
___________________
Keywords
___________________
on
/Sa
Notes
Creditors Ledger: It is meant for all the creditors from whom

goods are bought on credit.
___________________
___________________
cti
Debtors Ledger: It is meant for all the debtors to whom goods are
sold on credit.
___________________
___________________
General Ledger: It is meant for all the accounts other than

debtors and creditors.
du
___________________
___________________
Ledger: It is also called as a book of final entry because all

transactions are finally recorded in the ledger accounts.
pro
___________________
Private Ledger: It is meant for personal account of the proprietor.
Re
1. Explain the meaning of ledger.

2. Discuss the importance of ledger.
for
3. Make a list of the sub-division of ledger.
Further Readings
No
t
Books

(c)
UP
E
S,

Delhi.
New Delhi.

Chand, New Delhi.
Notes
on
/Sa

Delhi.
le
UNIT 8: Ledger
___________________
___________________
___________________
___________________
___________________
cti
Web Readings
___________________
___________________
du
(c)
UP
E
S,
No
t
for
Re
pro
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 9: Subsidiary Books
___________________
Make
a report on the need for
sub-division of journal.
___________________
Subsidiary Books
___________________
Objectives
___________________
topics:
Cash Book
cti
___________________
___________________
du
___________________
pro
Introduction
Re
Subsidiary Books is a normal routine to record individually each

and every transaction which takes place in the business. As we
know it is first recorded in a book known as memorandum book
from where it is recorded in a book known as the journal being the
primary book of the business.
for
If all the transactions of the business are recorded in Journal it

will be too bulky to manage. Therefore, now-a-days original records
are maintained in the subsidiary books. These subsidiary books are
also called sub-division of Journal.
No
t
S,
It is possible to record each and every transaction in the primary

book of the business when the size of the business is very small but
it becomes difficult and impossible to record transactions in the
journal when the size of the business is large. This is because of
certain problems which are termed as limitations of the journal.
The journal will be too bulky and voluminous to manage

easily.
(c)
1.
UP
E
Though the journal is very useful but still it is not free from
criticisms which are known as its limitations. If every transaction
is recorded in the journal then it makes the journal unwieldy
because of the following:
2.
It fails to provide certain other important information to the

business such as cash balance, etc.
___________________
___________________
___________________
its characteristics, nature, its

___________________
kinds
and the balancing of
cash book.
___________________
___________________
3. It is difficult to handle the entire work of journalization by one

person as the work will be very heavy and large.
on
/Sa
Notes
Activity
___________________
Prepare
a draft on cash book,
le
4. It fails to provide details regarding sales tax and other

taxation.
5. It is also difficult to comply with the formalities connected with
each journal entry.
In order to overcome the above limitations of the journal, the need
for its sub-division arises. Therefore, it is advisable to sub-divide
the journal. This sub-division of the journal is termed as the use of
subsidiary books.
cti
___________________
___________________
___________________
du
___________________
___________________
Following are the subsidiary books:
pro
___________________
Cash book
2.
Purchases journal
3.
Sales journal
4.
Purchases returns journal
5.
Sales returns journal
7.
Bills receivable journal

Bills payable journal
The journal proper
No
t
8.
for
6.
Re
1.
Importance and Advantages of Subsidiary Books
(c)
UP
E
S,
These can be understood in the following manner:

1. Division of Labour: Use of subsidiary books reduces the work
load of the journal, i.e., the division of labour is reflected
clearly.
2. Maintenance of records systematically and accurately: It
also helps in maintaining records accurately and
systematically.
3. It saves time in locating any transaction.
4. Minimization of fraud: It reduces (minimizes) the chances of
fraud.
6. Serves as a ready reference: It serves as a ready reference. If

some information about credit sales or credit purchases is
required, it is easily available.
Notes
on
/Sa
5. Availability of information: It helps in providing more and

more details about all the transactions which otherwise would
not be possible with one journal.
le
___________________
___________________
___________________
___________________
It
helps
in
fixing
9. It helps internal check-work can be finished at the earliest.
pro
Now we would discuss all the books one by one. The first and most
important subsidiary book of the business is the cash book.
Cash Book
No
t
for
Re
Most of the transactions relate generally to receipts and payment

of cash. It may be either purchase of goods for cash or sale of goods
for cash or it may be either payment of expenses or receipts of
income. All such transactions are recorded separately in a book,
known as the Cash Book. This book is helpful in telling the
accurate balance of cash in hand or at Bank as and when one
desires to know. All cash transactions are directly entered into the
Cash Book and on the basis of Cash Book, ledger accounts are
prepared.
Characteristics of Cash Book
Following are the important characteristics of a cash book:

Only cash transactions are recorded in the cash book.
2.
Cash receipts are recorded on the debit side of the cash book.
3.
Cash payments are recorded on the credit side of the cash

book.
4.
All cash transactions are recorded in a chronological order.
UP
E
S,
1.
Nature of Cash Book
Whether Cash Book is a subsidiary book or a principal book of the

business: The Cash Book is both. It is a principal book of the
business because it is a part of ledger whereas it is a subsidiary
(c)
___________________
___________________
du
8. Helpful in fixing responsibility:

responsibility of each worker.
___________________
cti
7. Helpful in increasing efficiency: It increases the efficiency

of the workers as they work with speed and accuracy.
___________________
___________________
___________________
le
___________________
Kinds of Cash Book
___________________
The main Cash Books are of three types:
___________________
1.
Simple Cash Book with one column.
___________________
2.
Cash Book with discount column also known as two columns

Cash Book.
3.
Cash Book with Bank and discount column also known as

three columns Cash Book.
___________________
du
___________________
cti
___________________
on
/Sa
___________________
book of the business because all cash transactions are directly

recorded in it and on the basis of such record, ledger accounts are
prepared.
Notes
Apart from the above division of Cash Book, nowadays, one more
Cash Book is also used by big business houses which are termed as
Petty Cash Book. Now we shall discuss all the Cash Books one by
one.
___________________
pro
___________________
Re
Simple Cash Book: Also known as one column-Cash Book. This is

just like cash account where all the transactions relating to
receipts and payment are recorded. The following is the form of
simple cash book.
Dr.
for
Simple Cash Book
Particulars
L.F.
(Receipts)
Amount
( )
Date
Particulars
(Payments)
L.F.
Amount
( )
(c)
UP
E
S,
No
t
Date
Cr.
Balancing of Cash Book

The Cash Book is closed like other accounts and it is closed by
taking a balance if either receipts are more than payments and
generally it is there then it is a debit balance to be shown on the
credit side of the account as balance c/d and next month or year it
is shown on the debit side of the Cash Book as balance b/d.
Note: One thing which is every important to remember while
recording a transaction in the Cash Book is that no distinction is
adopted about capital or revenue nature of transactions i.e., all the
transactions are recorded in the Cash Book.
Notes
on
/Sa
Example: Enter the following transactions in the Cash Book of

Mr. Ashish Kumar for the month of June 2006 and find out its
closing balance.
le
___________________
___________________
Cash in hand
5,000
June
Furniture purchased for Cash
1,000
June
Good purchased for cash
3,000
June
Cash sales
2,800
June
Cartage paid
June
18
June
___________________
___________________
___________________
cti
June
___________________
Cash purchases
2,500
___________________
23
Cash sales
3,000
June
24
Rent paid
June
28
Paid to Rakesh
June
30
Received from Mukesh
June
30
Salaries paid
du
50
500
Receipts
2006
5,000 June 2
2,800 June 4
June 23 To Sale A/c

June 30 To Mukesh
3,000 June 7
2,500 June 18
June 24
June 28
June 30
June 30
13,300
July 1
To Balance b/d
2,500
___________________
pro
___________________
By Furniture A/c
By Goods
Purchases A/c
By Cartage A/c
By Purchases A/c
By Rent A/c
By Rakesh A/c
By Salaries A/c
By Balance c/d
L.F.
1,000
3,000
50
2,500
500
500
850
4,900
13,300
4,900
S,
Notes:
It is clear from the above Cash Book that all the receipts and
payments are properly recorded.
UP
E
(i)
Payments
for
To Balance b/d
To Sales A/c
Date
No
t
2006
June 1
June 5
L.F.
Re
Cash Book
Date
500
850
Solution:
(ii) It is just like an account.

Cash Book with Discount Columns (also known as Two
Columns Cash Book)
As the name suggests this Cash Book contains two additional
columns for amounts i.e. (i) for cash receipts or payments (ii)
Discount allowed or received.
(c)
___________________
le
___________________
Discount is of two types:
___________________
I.
Trade Discount
II.
Cash Discount
I.
Trade Discount: It is given for increasing the volume of sales

and it is adjusted in the invoice, hence no entry is passed in
the books of the business, as it is always deducted from the
catalogue price. It is usually allowed by a whole seller to a
retailer. For example, if the printed price of a book is 200
and 10% is offered as a Trade discount, then it is 20/- and
the net price would be 180/- i.e., ( 200 20) accordingly
entries are to be made by the seller as well as the buyer for
180 in their books.
II.
Cash Discount: It is given for prompt payment; hence it is

recorded in the Cash Book. When discount is given for prompt
payment, it is a loss, hence it is to be shown on the debit side
of the Cash Book whereas discount received is to expedite
payment to the outsiders, hence it is shown on the credit side
of the Cash Book.
___________________
___________________
cti
___________________
on
/Sa
___________________
The discount is an incentive given or received for prompt payment.

To record discount, one additional column on both the sides of the
Cash Book is added i.e. (4 + 4 + 2). The Cash Book is termed as
Cash Book with discount column because of recording of discount.
Notes
___________________
du
___________________
___________________
for
Re
pro
___________________
No
t
Note: No balance of discount columns is taken; simply the

total of both the sides is given.
Double Columns Cash Book
Dr.
L.F.
Discount
Cash
Date
Payment
L.F.
Discount Cash
(c)
UP
E
S,
Date Receipts
Cr.
Recording of Transactions in the Double Columns Cash Book

As and when some incentive is offered for prompt payment,
discount offered is a loss; hence it is shown on the debit side of the
Cash Book. For example, Roop owes 1000 to M/s Goyal Traders of
Muzaffar Nagar. The firm offers a discount of 1% if payment is
made within one month. Roop makes the payment within
stipulated time. So he is offered 10 as discount and he makes the
payment of 990 to the firm. The following entry is required to be
passed in the Journal if no Cash Book is used in the books of M/s

Goyal Traders.
Cr.
Date
Particulars
L.F.
Cash A/c
Dr.
Discount A/c
Dr.
To Roop
Cash received and discount allowed.
on
/Sa
Dr.
Notes
le
___________________
___________________
990
10
___________________
1000
___________________
pro
du
cti
If Cash Book is used, then both the accounts namely cash and
discount are to be recorded on the debit side of the Cash Book.
Similarly, if discount is received for making prompt payment then
such items are to be recorded on the credit side of the Cash Book,
i.e., amount received or paid in the Amount/Cash column and
discount allowed/received in the discount column.
___________________
Example: Enter the following transactions into a two columns

Cash Book:
2006
Balance of cash in hand
July 2
Cash sales
July 5
Received 1460 from Mr. Mukesh and allowed him a

discount of 40
July 10
Paid to Rakesh
July 11
Furniture purchased for cash
1,500
July 12
Cash sales
2,500
July 15
Cash purchases
July 21
Goods purchased from Sanjay
July 24
Goods sold to Ram Niwas
2,500
July 25
Paid to Sanjay in full settlement of his A/c
1,950
July 27
Received from Ram Niwas in full Settlement of his a/c
2,480
July 29
Salaries paid
2,000
July 30
Wages paid
July 31
Rent paid
550
1,000
for
970 in full settlement of his account
900
No
t
2000
S,
50
UP
E
Solution:
2,100
Re
July 1
500
Dr.
Date
(c)
2006
Particulars
(receipts)
July 1
To Balance
b/d
L.F.
Cr.
Cash
Discount Amount
Date
Particulars
(Payments)
L.F.
Cash
Discount Amount
2006
2,100 July
10
By Rakesh
30
970
Contd...
___________________
___________________
___________________
___________________
___________________
July 5
To Mukesh
___________________
July
12
To Sales a/c
___________________
July
27
To Ram
Niwas
40
___________________
20
550 July
10
By Furniture
a/c
1,460 July
15
By purchases
a/c
2,500 July
25
By Sanjay
2,480 July
29
By salaries a/c
___________________
___________________
___________________
___________________
Aug. 1 To balance b/d
___________________
9,090
July
30
By wages a/c
July
31
By Rent a/c
July
31
Balance c/d
50
900
1,950
2,000
50
500
1,220
80
9,090
du
60
___________________
1,500
on
/Sa
To Sales a/c
cti
July 2
Notes
le
1,220
Note: As it is clear from the above cash book that cash balance is
taken whereas in discount column-no balance is taken, it is simply
totalled which shows that if debit side is taken 60 is allowed as
discount which is a loss and on the other hand, if credit side is
taken then
80 which is received as discount hence it is a
profit/gain.
Re
pro
___________________
for
Example: From the following particulars, write out Cash Book of

Mr. V. Ratna and bring down the closing balance of cash in
hand:
2006
Cash in hand
840
July
Recorded from Wilson and Co.
180
(c)
UP
E
S,
No
t
July
July
Paid to Thomas and Bros.
July
10
Electricity Paid
150
July
12
Cash purchases
270
July
15
Cash sales
550
July
20
Goods purchased on credit from Devdanam
1,000
July
22
Goods sold on credit to Ramanathan
2,500
July
24
Received in full settlement of his A/c Ramanathan
2,450
July
25
Paid to Devadanam in full settlement of his A/c
July
27
Cartage paid
July
30
Rent paid
Solution:
65
980
12
153
50
50
Aug. To Balance
1
b/d
840
160
550
2,450
4,000
2006
July 7
July 10
July 12
July 25
July 27
July 30
July 31
Particular L.F
s
.
By Thomas
& Bros.
By
Electricity
A/c
By
Purchases
A/c
By
Devdanam
A/c
By Cartage
A/c
By Rent A/c
By Balance
c/d
2,370
Discoun Amou
t
nt
( )
( )
20
20
65
150
270
980
12
153
2370
___________________
___________________
___________________
___________________
___________________
___________________
Re
for
No
t
Important Points while Making Two Column Cash Book

These important points are discussed below:
Business started: As and when a business is commenced
with cash, then this amount is shown in the cash column of
the Cash Book as to capital account and if cash directly paid
to Bank, then in the Bank column. If balances are carried
down, then balances brought down and amount is written as
given in cash as well as Bank column.
2.
Cash paid to Bank: This item affects both the accounts

namely (i) Cash A/c and (ii) Bank A/c, hence it is written on
both the sides of Cash Book i.e., debit side as well as credit
side; in debit side to cash A/c in the Bank column whereas in
the credit side By Bank A/c in the cash column.
S,
1.
UP
E
___________________
4000
Note: Whenever two column cash book is used, it is not necessary

to have two columns meant for cash and discount only. The
columns may be used as 2 for cash and 2 for bank. This system of
cash book is adopted when the receipts and the payments are by
cheques and, the transactions with bank are in large numbers. The
bank account maintained by the business is of personal nature
(account). This two column (popularly) known as double column
cash book provides an opportunity to keep both the accounts
simultaneously i.e., the cash and bank. This is more convenient
and one is able to find out quickly both the balances at a glance.
(c)
Notes
on
/Sa
To Balance
b/d
To Willson
& Co.
To sales A/c
To
Ramanatha
n
Date
cti
Discoun Amoun
t
t
( )
( )
du
2006
July
1
July
3
July
15
July
24
Particular L.F
s
.
pro
Date
le
___________________
___________________
___________________
3.
Cash withdrawn from Bank: This transaction also affects

both the accounts of the Cash Book i.e., (i) Cash A/c and (ii)
Bank A/c. This also requires posting at both the sides of the
Cash Book. Though it is different from the earlier one i.e., on
the reverse side.
on
/Sa
Notes
Activity
___________________
Present
a draft of the cash
le
book with bank and discount

___________________
columns.
___________________
___________________
___________________
4.
Payment by cheque: When cheque is issued in lieu of cash,

then the account which ought to be credited is cash but as the
cheque is issued so Bank A/c is credited in place of cash. Thus
when it is directly put in the Cash Book, amount is entered in
Bank column on the credit side of the Cash Book.
5.
Receipts of cheques: When cheques are received from the

customers or outsiders, then Cash A/c can be put in the cash
column on the debit side of the Cash Book and follow them to
the principle as explained in term No.2 or better would be if
directly amount is shown in the Bank column on the debit side
of the Cash Book.
___________________
___________________
___________________
Re
pro
___________________
du
___________________
cti
Contra: As the transaction is posted on both the sides of Cash

Book, such entry is called Contra. This is indicated by the
capital word C.
Check Your Progress
for
Fill in the blanks:
................... is given for prompt payment, hence it is

recorded in the Cash Book.
2.
If Cash Book is used, then both the accounts namely

cash and discounts are to be recorded on the
................... side of the Cash Book.
No
t
1.
(c)
UP
E
S,
Cash Book with Bank and Discount Columns or Three

Columns Cash Book
This type of Cash Book is used by big business houses because (i)
there is large number of transactions and (ii) receipts and
payments are through cheques. Under this Cash Book three
columns meant for (A) Discount (B) Cash and (C) Bank, are shown
on both the sides of the Cash Book. Other columns remain as
usual. This Cash Book contains three columns; hence it is termed
as Three Column Cash Book.
Following is the form of Three Columns Cash Book.

Notes
Da
te
Partic
ulars
L.
F.
Ca
sh
( )
Discount
( )
Ba
nk
( )
Da
te
Particul
ars
L.
F.
Disco
unt
( )
on
/Sa
___________________
Ba
nk
( )
Cash
( )
le
___________________
___________________
___________________
cti
___________________
du
Example: From the following particulars, write up the Cash Book

of M/s K.K. of Chennai with Cash and Bank columns and bring
down the final balance:
2006
Cash in hand
Oct. 1
Cash at Bank
Oct. 5
Paid salary by cheque
Oct. 7
Paid to K.K. & Co. by cheque
Oct. 9
Received a cheque from B & Co.
Oct. 12
Bought goods for cash paid by cheque
Oct. 15
Received cash from M/s S. Chand
Oct. 17
Deposited cash into bank
Oct. 18
Sundry creditors were paid by cheque
1,250
Oct. 19
Received from debtors by cheque Which could not be sent

to bank
1,780
Oct. 20
B & Co. cheque dishonoured
2,500
Oct. 22
B & Co. paid cash
Oct. 24
R & Co. issued a cheque for

his account for
Oct. 27
Shyam Lal was paid

amounting to
Oct. 31
Deposited into the Bank
3,500
250
260
Re
2,500
750
1,500
No
t
for
1,450
2,500
470 in full Satisfaction of
500
395 in full Settlement of his A/c
400
2,200
S,
UP
E
Solution:
Date
To Balance
b/d
To B & Co.
To S.
(C)
Chand
(c)
2006
Oct.1
Oct.9
Oct.1
5
Oct.1
Particula L.
rs
F
Discou
nt
( )
___________________
___________________
___________________
100
pro
Oct. 1
___________________
Cas
h
( )
Ban
L.F Discou Cas
Particula
nt
k
h
.
Date
rs
( )
( )
( )
2006
100 3,500 Oct.5 By salaries
2,500 Oct.7 A/c
1,50
Oct.1 By K & Co.
0
2
By
1450
(C)
Oct.1 Purchase
1450
Ban
k
( )
250
260
750
___________________
___________________
___________________
___________________
___________________
30
7
A/c
1,78
0
Oct.1 By Bank
8
A/c
2,50 470
0 2,200 Oct.2 By S.
(C)
0
Creditors
Oct.2 By B & Co.
7
By Shyam
Oct.3 Lal
1
By Bank
A/c
By Balance
c/d
30 5,88 10,12
0
0
___________________
___________________
5 5,88 10,12
0
0
du
Petty Cash Book
___________________
1250
2,500
395
2,20
0 5,110
4,88
5
on
/Sa
___________________
To Cash
A/c
To
Debitors
(C)
A/c
To B & Co.
To R & Co.
To Cash
A/c
cti
7
Oct.1
9
Oct.2
2
Oct.2
4
Oct.3
1
Notes
le
This type of Cash Book is used in such concerns where small

payments are made daily and that too in large numbers. In such
situation, a fixed amount of cash in the beginning of the month is
given to a person who is known as petty cashier. After a fixed
period say a week or month, he is again reimbursed or paid back
the amount whatever he has spent at the end of week or period.
Such a system is known as imprest system which is becoming very
popular because of certain advantages.
___________________
Re
pro
___________________
1.
Time is saved (saving of time): As and when petty cashier is

appointed, it saves precious time of the head cashier.
Maintenance of efficiency: The efficiency of the business is
there because of such system.
(c)
UP
E
S,
No
t
2.
for
Advantages of Petty Cash Book: Following are the main

advantages of the Petty Cash Book:
3.
Minimizes the chances of fraud: It minimizes the chances

of fraud as the head cashier is in a position to exercise better
control and can inspect or check his accounts any time.
4.
It is convenient to prepare ledger accounts: It is very easy

to prepare ledger accounts as the totals are recorded.
5.
Saving labour & space: It also helps in saving the labour of

the head cashier along with a little space required for the
totals of various items.
Thus, this type of system (the Imprest System) is very useful. It

contains only one column to record receipt of cash to be taken from
the head cashier and other column to record payments of various
counts. All such payments are to be totalled to know the total
amount spent, so that necessary accounts are debited. The

following is the form of Petty Cash Book.
Particulars
Total Amount
Voucher No.
on
/Sa
___________________
Analytical Petty Cash Book

Receipts Date
Notes
le
___________________
Printing
& Stationery
Cartage
Postage
___________________
___________________
cti
___________________
Example: Enter the following transactions in Analytical petty

Cash Book:
___________________
___________________
Received cheque from Head Cashier
Jan.2
Paid for Postage and Telegram
Jan.3
Stationery purchased
Jan.14
Paid for cartage
Jan.18
Paid for travelling
Jan.27
Tea for guests
Jan.29
Office cleaning charges
Jan.30
Paid for carriage
Jan. 31
Telegram charges
100.00
___________________
5.00
___________________
8.00
7.00
Re
6.00
12.00
4.00
8.00
Voucher Total
Postage
Cartage
Stationary
No.
Amount telegram
Travelling
To cash a/c
By Postage &
telegram
By Stationery
By Cartage
Jan.1 By Travelling
8
By Tea for
Jan.2 guest
7
By office
15.00
5.00
12.00
4.00
8.00
8.00
65.00
35.00
23.00
UP
E
S,
Jan.2 cleaning
9
charges
Jan.3 By Carriage
0
By Telegram
Jan.3
1
15.00
5.00
8.00
7.00
6.00
No
t
2006
100.00 Jan.1
Jan.2
Jan.3
Jan.1
4
Particulars
100.00 Jan.3
1
By Balance
35.00
c/d
65.00
Total
Feb.1 To Balance
Feb.1 b/d
To Cash
(c)
100.00
for
Analytical Petty Cash Book

Receipts Date
100.00
___________________
15.00
pro
Jan.1
du
2006
Tea &
office
expenses
8.00
7.00
4.00
6.00
12.00
500
19.00
18.00
le
Purchases Day Book

Notes
___________________
Purchases Day Book
___________________
___________________
___________________
Date
Particulars
Invoice No.
L.F.
Amount ( )
II
III
IV
___________________
du
___________________
___________________
I.
Column is meant for date.
II.
Column is meant for writing details regarding name of

supplier, name of articles purchased & number i.e., quantities.
Re
III. Invoice No.
pro
___________________
cti
on
/Sa
___________________
All credit purchases are recorded in this book which is either used
for resale or Raw materials used for production. The purchases
which are made for cash are not at all recorded in this book.
Similarly the assets which are bought for running the business are
also not recorded such as machinery, furniture, etc. All these
assets and cash purchases are separately recorded in the journal
Cash Book. Following is the form of Purchases Day Book.
___________________
IV. Ledger Folio

V.
Amount of the purchase
for
Thus, all the credit purchases are totalled which give us the
amount of total credit purchases made during the period.
Sales Day Book
(c)
UP
E
S,
No
t
The goods which are sold on credit are recorded in this book but if
sales are made for cash or assets are sold either for cash or on
credit, these are not at all recorded in this book, but are recorded
either in the cash book or in the journal. The form of this book is
similar to that of purchases book.
Thus all the credit sales are totalled which give us the amount of
total credit sales made during the period.
Invoice: An Invoice is given to the buyer when sales are made on
credit. It is generally a bound invoice book which is serially
numbered in duplicate. Original copy is given to the buyer and
duplicate copy is retained. There after entries in the sales book are
made with the help of duplicate.
Purchase Returns Book
Form of Purchase Returns Book

L.F.
II
III
IV
for
Re
Debit Note: Whenever goods are returned to the supplier, a letter

which is known as the debit note is also sent along with returned
goods. The purpose of this note is to inform the supplier about this
deduction or debit given to his account. This note contains the
following particulars such as:
Name and address of the supplier
2.
Description of the goods returned
3.
Rate and total value
4.
Invoice no, along with date
5.
Signature
No
t
1.
Following is the specimen of a debit note -
S,
Debit Note
No. ..........................
UP
E
Place .......................
Date ........................
From
Name and address ....................................................

(of the sender) ....................................................
(c)
on
/Sa
du
Particulars
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Amount
( )
pro
Date
Debit
Note No.
Notes
cti
This book is also known as Returns Outward Book. This book

records all the returns to the suppliers which are made during the
period. The return is of goods or raw materials purchased from the
Suppliers and Return is on account of difference in quantity or
quality. This book is used when the returns are in sufficient
number. If returns are not much, then it may be recorded in the
Journal. The form of Purchase Returns Book is similar to that of
Purchase Day Book.
le
To name and address ....................................................

(of the supplier) ....................................................
___________________
___________________
___________________
le
___________________
on
/Sa
We are debiting your account with value of under mentioned goods

returned to you for reasons stated below:
Notes
Sales Returns Book
___________________
This is also known as Returns Inward Book. As and when goods

are returned by the customers, a credit note is issued and the entry
is made in this book. This book again contains the same columns
which a Purchases Returns Book contains. There is only one
difference i.e. in place of debit note No. the column is used to note
the credit note No. The form of sales Returns Book is as under:
___________________
___________________
cti
___________________
___________________
___________________
Date
Particular
II
___________________
Credit
Note No.
L.F.
Amount
( )
III
IV
pro
___________________
du
Sales Returns Book
___________________
Re
Credit Note: As and when goods are returned by the customers, a

credit note is being sent to him.
for
This note informs the customer that his account has been credited
for the goods returned and he is required to pay less from the
original amount outstanding in his account. It also contains the
following particulars.
(i) Name and address of the customer
No
t
(ii) Description of goods returned

(iii) Value
(iv) Signature
Following is the specimen of a credit note
(c)
UP
E
S,
Credit Note
No. .....................
Place .................
Date ..................
From
Name and Address
Bills Receivable Book

When bills are received from debtors and number of such bills
received is larger (big) then such bills are recorded in a separate
Notes
on
/Sa
book, known as bills Receivable Book. All such bills are totalled for
a particular period and are posted in the accounts of the debtors
from whom such bills are received. Following is the form of Bills
Receivable Book.
le
___________________
___________________
Bills Receivable Book
___________________
___________________
cti
Remarks
Amount of bill
( )
Cash Discount
allowed
L.F.
Where payable
Due date
Tenor or
Terms of Bill
Date of
Bill
Endorser(s)
Acceptor
Drawer
From Whom
Received
Date of Receipt
___________________
___________________
du
___________________
Bills Payable Book
Remarks
L.F.
Amount
( )
Where
payable
for
Due Date
Endorser
(s)
No
t
Acceptor
Drawer
Term
To Whom
Payable
Date
Bills Payable Book
Re
pro
Where either purchase is made for credit or loans are taken, then
Bills are issued which are termed as Bills Payable. The book in
which these bills are recorded is termed as Bills Payable Book. All
such Bills are totalled after a lapse of a certain period and are
posted in the accounts of the creditors to whom such bills are
issued. Following is the form of Bills Payable Book:
Check Your Progress

Fill in the blanks:
................... is also known as Returns Inward Book.
2.
Whenever goods are returned to the supplier, a letter

which is known as the ................... is also sent along
with returned goods.
UP
E
S,
1.
Summary
(c)
Subsidiary Books is a normal routine to record individually each

and every transaction which takes place in the business. As we
know it is first recorded in a book known as memorandum book
from where it is recorded in a book known as the journal being the
primary book of the business.
___________________
___________________
___________________
le
Lesson End Activity

Notes
on
/Sa
With the help of internet, gather information on subsidiary books

accounting.
___________________
___________________
___________________
Keywords
___________________
Cash Book: All cash transactions are directly entered into the
Cash Book and on the basis of Cash Book, ledger accounts are
prepared.
cti
___________________
___________________
Cash Discount: It is given for prompt payment; hence it is

recorded in the Cash Book.
___________________
du
___________________
Petty Cash Book: This type of Cash Book is used in such concerns
where small payments are made daily and that too in large
numbers.
___________________
pro
___________________
Re
Subsidiary Books: It is a normal routine to record individually

each and every transaction which takes place in the business.
for
Trade Discount: It is given for increasing the volume of sales and

it is adjusted in the invoice, hence no entry is passed in the books
of the business, as it is always deducted from the catalogue price.

1. Explain the need for sub-division of journal.
No
t
2. Describe the types of subsidiary books.

3. Discuss the concept of Cash Book.
4. Write short notes on:
(c)
UP
E
S,
(a) Petty Cash Book

(b) Purchases Book
(c) Sales Return Book
Further Readings
Books

Delhi.
___________________
___________________
___________________
___________________
___________________
cti

New Delhi.
Notes
on
/Sa

le
du

Delhi.
pro

Chand, New Delhi.
Re
Web Readings
(c)
UP
E
S,
No
t
for
___________________
___________________
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
le
___________________
Case Studies
___________________
___________________
Objectives
___________________
cti
___________________
___________________
Case Study 1: Profit vs. Cash Flow
___________________
pro
du
If you keep your business's books on the accrual method of

accounting, you'll have to make some adjustments to determine
your actual cash flow. These adjustments are necessary because
certain accrual accounting transactions are taken into account to
determine your accrual net profit, even though these expenses do
not currently require a cash outlay.
Re
The following example looks at the adjustments necessary to

convert the accrual profits of Bug Busters Exterminating Service
to its cash flow for its year ending December 31, 2011.
for
To convert its accrual profit to its cash flow profit, Bug Busters
will need balance sheets from the beginning and end of the period
it wishes to examine. In this case, Bug Busters will examine the
period starting on January 1, 2011, and ending on December 31,
2011. Below is the comparative balance sheet provided by Bug
Busters' accountant for December 31, 2011, and December 31,
2009:
Bug Busters Exterminating Service
Comparative Balance Sheets
No
t
12/31/08 12/31/2009
Cash
$17,845
$4,375
12,185
27,371
6,034
9,133
83,239
83,239
Less: Accumulated Depreciation (44,826)
(48,989)
Total Assets
$74,477
$75,129
Accounts Payable
$6,977
$7,630
Notes Payable (Bank Loans)
27,500
12,000
$34,477
$19,630
Accounts Receivable
Inventory
UP
E
S,
Property and Equipment
Total Liabilities
Stockholder's Equity
$40,000
$55,499
Total Liabilities and Equity
$74,477
$75,129
(c)
The conversion process also requires an income statement for the end of
the period under examination. The income statement of Bug
Busters Exterminating Service for the year ending December 31,
2011 is presented below. The income statement was prepared
using the accrual method of accounting.
Contd
___________________
___________________
___________________
Bug Busters Exterminating Service Income Statement

December 31, 2011
Notes
$267,189
on
/Sa
Sales
___________________
Less: Cost of Goods Sold
132,122
Gross Profit
___________________
$135,067
Less: Operating Expenses
___________________
(115,405)
Less: Depreciation
___________________
le
(4,163)
Net Profit
$15,499
___________________
Net Profit
___________________
+ Depreciation
du
___________________
cti
Bug Busters will have to adjust its accrual net profit to determine
its cash flow for the year. As a general rule, Bug Busters can
convert its accrual net profit using the following formula:
___________________
- Increases (or + Decreases) in Accounts Receivable
___________________
- Increases (or + Decreases) in Inventories

+ Increases (or - Decreases) in Accounts Payable
pro
___________________
- Decreases (or + Increases) in Notes Payable (Bank Loans)

= Net Cash Flow
Re
Using the formula above, Bug Busters can adjust its accrual net
profit to determine its cash flow for the year:
Adjustment Description
Net Profit--December 31, 2011

Add:
Depreciation
Amount
$15,499
4,163
for
Subtract: Increase in Accounts Receivable between 12/31/10 and 12/31/11 (15,186)

Subtract: Increase in Inventory between 12/31/10 and 12/31/11
Add:
Increase in Accounts Payable between 12/31/10 and 12/31/11
Subtract: Decrease in Notes Payable between 12/31/10 and 12/31/11
653
(15,500)
($13,470)
(c)
UP
E
S,
No
t
Net cash flow for the year ended December 31, 2011
(3,099)
Bug Busters' accrual net profit and the net cash flow for the year
ended December 31, 2011, report two entirely different results.
The income statement prepared using the accrual method of
accounting reports a profit of $15,499 for the year. However, in
terms of a cash flow, Bug Busters had a negative cash flow of
$13,470 for the same year. In other words, Bug Busters spent
$13,470 more than it collected during the year.
Question:
Analyse the case and make a comparative balance sheet for the
two years.
Source: http://www.wbsonline.com/resources/case-study-profit-vs-cash-flow/
Case Study 2: The Importance of Accounting Standards A

PricewaterhouseCoopers Case Study
on
/Sa
Notes
___________________
Accounting Standards
___________________
___________________
___________________
cti
___________________
du
Several of the SSAPs and FRSs are detailed in the context of a

fictional oil company (Global Oil). Further FRSs are expected as
business becomes more complex. How these different standards
are applied varies with the type of business conducted by a
company. As for any company the shareholders interests must be
protected. The following examples of SSAPs and FRSs
demonstrate the consideration that must be given in drawing up
financial accounts in order that interested individuals, such as
financial analysts, can clearly judge a companys performance and
position.
SSAP 12 Accounting for Depreciation
Re
pro
Companies invest in assets (such as machinery) in order to

produce goods or services to sell. These are known as fixed assets.
In the case of the gas or oil industry, an oil rig is a fixed asset
the company must own an oil rig to supply oil or gas. All
companies have some form of fixed assets although the
dependence on these assets varies with the type of business.
Another example could be machinery for manufacturing a car, or
a building in which employees work.
No
t
for
In this example, Global Oil has built an oil rig for 50m. In its
balance sheet, cash will be reduced by 50m and fixed assets will
increase by 50m. In 20 years time (the economic life); the
company knows that the oil rig will need to be replaced. By the
20th year, the value of the oil rig in the companys balance sheet
will be zero. Thus, the value of the oil rig will reduce each year by
a set amount (2.5m in this example). This is known as
depreciation and the annual depreciation figure is shown in the
profit and loss account.
SSAP 12 states that the economic life of a fixed asset should be
reviewed regularly and should be stated in the notes to the
accounts, together with how the rate of depreciation was
determined.
FRS 11 Impairment of Fixed Assets and Goodwill
S,
FRS 11 is a new standard and deals with any loss in value to a

fixed asset, for example through damage or downturn in the
economy. This is known as impairment.
UP
E
For example, if a pipeline from Global Oils oil rig is damaged, the
supply of oil or gas is reduced or stopped until repairs are made.
Thus the ability of the oil rig to produce oil or gas is less than
expected and the fixed assets value is reduced. Global Oil must
therefore make a general reduction in the value of the asset and
charge the loss to the profit and loss account.
FRS 11 states that all companies must reassess the value of their
fixed assets on a regular basis to establish whether the figure in
the balance sheet is a fair value.
(c)
le
Contd
___________________
___________________
___________________
___________________
___________________
le
FRS 1 Cash flow Statements

Notes
___________________
Question:
___________________
Analyse the case and summarise it briefly.
___________________
___________________
___________________
cti
on
/Sa
___________________
There are three main statements in a companys annual report

and accounts - the profit and loss account, the balance sheet and
the cash flow statement. For example, while Global Oil may be
highly profitable, without any cash it will be unable to pay its
employees or suppliers. Clearly, when Global Oil sells oil to its
customers, it needs to ensure it receives prompt payment. Cash is
the lifeblood of a business and it is therefore important for a
company to issue a cash flow statement. FRS 1 sets out the
format and contents of a companys cash flow statement.
___________________
Source: http://businesscasestudies.co.uk/pricewaterhousecoopers.html
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
le
UNIT 11: Trial Balance
___________________
___________________
___________________
___________________
cti
___________________
___________________
Re
pro
du
___________________
(c)
UP
E
S,
No
t
for
BLOCK-III
___________________
___________________
___________________
le
Detailed Contents
UNIT 13: DEPRECIATION ACCOUNTING
___________________
Classification of Final Accounts
___________________
Manufacturing Account
___________________
Balance Sheet
Meaning of Depreciation
Need of Depreciation
Methods for Providing Depreciation
UNIT 14: CASH FLOW STATEMENTS
Introduction
Meaning of Cash Flow Statement
Objectives of Cash Flow Statement
Classification of Cash Flow
pro
___________________
Introduction
cti
UNIT
12: PREPARATION OF TRADING, PROFIT &
___________________
LOSS ACCOUNT AND BALANCE SHEET
___________________
Introduction
du
UNIT
11: TRIAL BALANCE
___________________
Introduction
___________________
Meaning of Trial Balance

___________________
Types of Errors
___________________
on
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Notes
(c)
UP
E
S,
No
t
for
Re
on
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Notes
Activity
le
___________________
Prepare
meaning of a trial balance.
___________________
Trial Balance
___________________
Objectives
___________________
topics:
cti
___________________
___________________
Methods of Preparing Trial Balance
Types of Errors
___________________
du
pro
Introduction
for
Re
Every transaction which takes place in the business is recorded

either in the journal or in the subsidiary books. It is posted in the
concerned accounts. After posting is over, final accounts are
prepared in order to know the operational results of the business
during a particular or fixed period and also to depict financial
position of the business on a particular date. Final accounts can be
prepared only if information relating to balances of all accounts are
available. This function of supplying necessary and accurate
balances is performed by Trail Balance so it is very much
necessary to know the meaning of Trial Balance.
No
t
S,
Trial Balance is a statement which shows balances of all accounts

on a particular date. In other words, trial balance is a schedule or
list of balances whether debit or credit, extracted from the
accounts in the ledger including cash and bank balances from the
Cash Book.
UP
E
Preparation of a Trial Balance

It is very easy to prepare a Trial Balance. It contains three
columns which are as follows:
Particulars
2.
Amount (Dr.)
3.
Amount (Cr.)
(c)
1.
___________________
___________________
___________________
le
The above columns if put in a statement form, can be depicted as

given below:
___________________
Trial Balance as on____________________
___________________
Amount (Dr.)
Particulars
___________________
___________________
Amount (Cr.)
cti
___________________
on
/Sa
Notes
___________________
___________________
Methods of Preparing Trial Balance
du
___________________
By Balance Method
2.
By Total Method
3.
By Combined method i.e., Balance and total method
1.
Balance Method: Under this method as the name of method

suggests, the balance of each account is taken. This method is
very simple, easy to calculate, saves both time and labour.
That is why it is in vogue.
Total Method: Under this method, instead of taking balance
of each account, the total of both the sides of each account is
taken.
No
t
2.
Re
1.
for
___________________
pro
Generally speaking there is one method of preparing Trial Balance

i.e., by balance method. But as per Accountants, the following are
the methods of preparing Trial balance:
___________________
(c)
UP
E
S,
3.
Combined Method: Under this method, as it is clear from the

name of the method, both the above explained methods i.e.,
balance as well as total method is used. This method is not in
use because of wastage of time and labour.
Objects and Functions of Trial Balance

The main objectives of preparing a trial balance are to check the
arithmetical accuracy of all transactions. In every trial balance,
the total of debit balances must agree with the total of credit
balances. It is a proof of arithmetical accuracy of postings but it is
not a conclusive evidence of correctness of the books of accounts.
The other objects and functions of a trial balance are as under:
1.
It serves as a summary of all accounts.
2.
It helps in locating error if any.
3.
It acts as a base for the preparation of final accounts.
on
/Sa
Notes
le
___________________
Example: Prepare a trial balance from the following transactions:
___________________
2006
___________________
July 1
Ram commenced business with cash
10,000
July 3
Paid to bank
July 3
Bought goods for cash
500
July 5
Bought office furniture
400
July 10
Drew from bank for office
July 13
Goods sold to Shyam
July 15
Bought goods from Krishan
July 18
Trade expenses paid
July 19
Received cash from Shyam
___________________
8,000
du
600
cti
1,000
___________________
410
590
___________________
50
July 29
Krishan paid off in full settlement of his

account
July 31
Rent paid
July 31
Interest due on Capital
400
Re
Wages paid
100
500
for
Solution:
Trial Balance
As on July, 31, 2005
Amount (Dr.)
No
t
Particulars
Capital a/c
Cash a/c
Bank a/c
Purchases a/c
Amount (Cr.)
----
10,500
2,040
---
7,000
---
910
---
----
600
Office Furniture a/c
400
----
Trade Expenses a/c
100
----
50
----
Rent a/c
100
----
Interest on Capital a/c
500
----
10
10
11,110
11,110
UP
E
Wages a/c
S,
Sales a/c
Discount a/c
It is clear from the above trial balance that it is tallied and one can
conclude that the balances of all accounts are accurate
arithmetically but it is not a conclusive proof of correctness of
(c)
___________________
___________________
10
July 25
___________________
100
pro
allowed him discount
___________________
accounts because of certain errors which are not disclosed by the

trial balance.
on
/Sa
Notes
Activity
___________________
Make
a report on the types of
errors that can be made in trial
___________________
balance.
le
Check Your Progress

Fill in the blanks:
___________________
___________________
___________________
___________________
1.
Under ................... method, as the name of method

suggests the balance of each account is taken.
2.
Under ................... method, instead of taking balance of

each account, the total of both the sides of each account
is taken.
cti
___________________
du
___________________
Types of Errors
___________________
There are two types of errors. They are explained below.
pro
___________________
Errors which cannot be located by Trial Balance
Re
The following errors cannot be detected by the trial balance means

in spite of agreeing the totals of debit side and credit side, these
errors occur in the accounts. These are also known as clerical
errors.
(c)
UP
E
S,
No
t
for
(i) Error of Omission: These errors occur when any business

transaction is completely or partially omitted from the
recording in the books of original records. As goods, sold of
Rs.10,000 to Mr. Ram, is entered nowhere in the original books
then its effect will also not come on the ledger and trial
balance. Thus, such type of errors cannot be located by trial
balance.
(ii) Error of Commission: Such type of errors is found when one
account is debited or credited in the place of another account.
As cash received from Shyam Rs.1,000 has been credited in the
name of Ram. Such type of errors do not affect the agreement
of the totals of the debit and credit side of the trial balance but
they affect the result of the business.
(iii) Error of Principle: These errors occur when there is wrong
classification between the capital and revenue nature incomes
or expenditures. As the purchases of furniture of Rs.20,000 are
entered in the book of purchases while it should be in furniture
account. Such errors cannot be located by trial balance.
Notes
on
/Sa
(iv) Compensating Error: When two errors of the same account

occur and the effect of one error is compensated by the effect of
other error it is called compensating error. For example, if
purchase of Rs.10,000 from Ajay is credited only by Rs.1,000
while the purchases from Vijay for Rs.1,000 is credited by
Rs.10,000. Thus, such type of errors do not affect on the
agreement of the Trial Balance.
le
___________________
___________________
___________________
___________________
___________________
cti
Errors which can be located by Trial Balance
___________________
(ii) Balancing of an account of the ledger.

(iii) Wrong posting of any amount in any account.
pro
(i) Totals of the subsidiary books or ledger accounts.
du
The errors which affect the agreement of the totals of the Trial
balance can be located easily. These are also known as principle
errors. These errors may be relating to:
Re
(iv) Posting of any account may be in the wrong side of the

account.
(v) Balance of any account may be omitted in writing in the Trial
Balance.
for
(vi) Wrong total of the Trial Balance.
Check Your Progress
No
t
True or False:
1. If all the transactions are correctly made, then only the

total of trial balance will tally.
S,
2. When a transaction is omitted partially or completely to

be recorded in the subsidiary books, it is known as Error
of commission.
3. Compensating error is a type of principle error.
UP
E
4. Errors can also be rectified.
Summary
(c)
A Trial Balance is a statement which contain the debit and credit

balances of all the ledger accounts, prepared on a particular date to
verify whether the entries in the books of accounts are
arithmetically correct or not. If the trial balance agree i.e. the total
___________________
___________________
___________________
___________________
le
___________________
___________________
___________________
on
/Sa
of debit column is equal to the total of credit column of the trial

balance, it can be assumed that books of accounts are
arithmetically correct. If the trial balance does not agree, it means
mistakes have been done in recording the transaction.
Notes
Lesson End Activity
___________________
cti
On a chart, prepare the Performa of a trial balance. Also state the

components that are included in a trial balance.
___________________
___________________
___________________
Keywords
du
___________________
Balance Method: Under this method as the name of method

suggests, the balance of each account is taken.
___________________
___________________
pro
Combined Method: Under this method, as it is clear from the

name of the method, both the above explained methods i.e.,
balance as well as total method is used.
Re
Total Method: Under this method, instead of taking balance of

each account, the total of both the sides of each account is taken.
Trial Balance: It is the list of accounts taken from the ledger.
1.
What is meant by trial balance?

What are the types of trial balance? Explain.
(c)
UP
E
S,
No
t
2.
for
3.
How Trial Balance is prepared. Explain.
4.
Why there is disagreement of Trial Balance?
5.
What are the types of errors in trial balance?
6.
Prepare a Trial Balance from the following items:
(a) Amount due to Kishore

(b) Furniture
(c) Sales
(d) Purchases
(e) Returns Outward
(f) Office Expenses
(g) Overdraft
(h) Capital
(i) Due from Ram
(j) Outstanding
1500
1500
15000
22500
1500
3000
2250
9000
3000
750
Further Readings
Books
on
/Sa
Notes
le
___________________

___________________
___________________
___________________
cti

___________________
___________________
___________________

Delhi.
___________________
pro
du


New Delhi.
Re

Delhi.
for

Chand, New Delhi.
Web Readings
No
t
(c)
UP
E
S,
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
___________________
Prepare
a report on the final
accounts classification.
___________________
Preparation of Trading, Profit &

Loss Account and Balance Sheet
___________________
___________________
Objectives
topics:
Balance Sheet
Introduction
No
t
for
Re
The Profit & Loss account and the balance sheet are, together
popularly known as the final accounts. The Profit & Loss account
is prepared to show the financial results of a business and the
balance sheet is prepared to show the financial position. To
calculate the accurate amount of profit or loss, it is a must that
there should be recognition of the revenues and expenditures. If
there is a wrong recognition of expenses or revenues, results of the
business will also be wrong. Thus the distinction between the
capital and revenue items is very important.
The final accounts can be classified in the following categories:
S,
Trading and Profit & Loss Account
(c)
UP
E
In the Trading and Profit & Loss Account all those accounts are
disclosed which affect the profit or loss of the business. In other
words, all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left-hand
side, all the expenses incurred during a period and in the righthand side all the incomes earned during a period are disclosed.
This account contains two parts:
1.
Trading Account
2.
Profit & Loss Account
___________________
___________________
du
pro
cti
___________________
___________________
___________________
___________________
le
Trading Account
Notes
on
/Sa
Trading account is the comparison of sales and purchase. This

account is prepared to determine the amount of gross profit or
gross loss on sales. The proforma of Trading Account is given
below:
___________________
___________________
___________________
___________________
___________________
Dr.
Amount
( )
Particulars
___________________
To Opening Stock
___________________
-------
To Purchases
---------
Less: Returns
---------
To Wages & Salaries

To Carriage Inwards
To Freight
--------
Less: Returns
--------
By Closing stock
------
By Gross Loss (if any)
-------
Transferred to P/L A/c
-------------
-------
------
Re
To Cartage
By Sales
-------
pro
___________________
Cr.
Amount
( )
Particulars
du
___________________
cti
Proforma of Trading Account

In the Books of .
Trading Account
(for the year ending .)
___________________
-------
To Light Power & Heating in

factory
------
To Works Managers Salary
-------
for
To Factory Insurance
------
To Factory Rent & Taxes
-------
To Motive Power
------
To Factory Repairs
-------
To Factory Expenses
------
To Octroi duty
-------
To Custom Duty
------
To Manufacturing Exps.
-------
(c)
UP
E
S,
No
t
To Foremans Salary
To Consumable Stores
------
To Gross Profit
-------
Transferred to P/L A/c.
-----------
-------

Profit & Loss Account is the second part of Trading and Profit &
Loss Account. Trading Account shows the gross profit which is the
difference of sales and cost of sale. Thus the gross profit cannot
treated as net profit while the businessman wants to know how
much net profit he has earned from the operating activities during
a period. For this purpose Profit & Loss Account is prepared
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
cti
keeping in mind all the operating and non-operating incomes and

losses of the business. In the debit (left-hand side) side all the
expenses and losses are disclosed and in the credit side (right-hand
side) all the incomes are disclosed. The excess of credit side over
debit side is called net profit while the excess of debit side over
credit side shows net loss. Net profit increases the net worth of the
business; therefore, it is added to the capital of owner. Net loss
decreases the net worth of business so it is subtracted from capital.
The proforma of Profit & Loss Account is given below:
le
___________________
Proforma of Profit & Loss Account
___________________
Particulars
du
Particulars
To Gross Loss (if any) transferred
from Trading Account
By Gross Profit (transferred

from Trading Account)
To Staff Salaries
By Discount Received
To Office Rent
By Commission Received
To Rates & Taxes
By Dividend
To Office Lighting and Heating
By Interest Received
To Printing & Stationary
By Rent from Tenant
To Bank Charges
By Interest from Bank
To Insurance
By Interest on Drawings
To Telephone Charges
By Profit on Sale of Investment
To Legal Expenses
By Provision for Discount on

Creditors
To Repairs
By Bad Debts recovered
To Postage & Stamps
By Profit on Sale of Assets
To Trade Expenses
By Other Incomes
To Establishment Exps.
By Net Loss (if any) transferred to

Capital A/c
To Management Exps.
pro
Re
for
S,
Land & Buildings

Plant and Machinery
Furniture
UP
E
To Directors Fee
To Bank Charges
To Interest on Loan
To Interest on Capital
To Discount on B/R
To Sales Tax
(c)
To Depreciation on
To Stable Expenses
To Charity & Donations
___________________
___________________
No
t
To Audit Fees
Contd...
___________________
To Agents Commission
To Travelling Expenses
To Free Samples distributed
To Warehouse Expenses
To Packing Expenses
To Brokerage
___________________
To Distribution Expenses
___________________
To Delivery Van Expenses
To Provision for Bad and Doubtful

Debts
To Entertainment Expenses
manufacturing account.
___________________
___________________
___________________
___________________
___________________
To Carriage Cutward
To Loss on Sale of Assets
___________________
To Licence Fees
pro
___________________
on
/Sa
To Bad Debts
cti
du
To Advertisement
Notes
Activity
___________________
Write
an article on the
le
To Repairs of Assets & Motor Car

To Loss by Fire
To Conveyance Expenses
Re
To Net Profit (Transferred to

Capital A/c.)
Check Your Progress
for
Fill in the blanks:

................... account is prepared to determine the
amount of gross profit or gross loss on sales.
2.
................... depicts the gross profit which is the

difference of sales and cost of sale.
3.
................... is prepared keeping in mind all the

operating and non-operating incomes and losses of the
business.
(c)
UP
E
S,
No
t
1.
If in the business some goods are being manufactured along with
the trading activities, a manufacturing account is also prepared. In
the case of trading activities (selling and purchasing of goods) only,
the Trading and Profit & Loss Account is prepared to compute the
net profit which is discussed in the preceding pages. In case there
is a manufacturing unit in the business with the trading, such a
businessmans income statement will include:
2.
Trading Account
3.
Notes
on
/Sa
1.
___________________
___________________
___________________
The Proforma of Manufacturing Account is given here under:
___________________
Proforma of Manufacturing Account

(for the year ending )
___________________
Particulars
-----------
By Closing Stock
Raw Materials
Work-in-progress
___________________
-----------
To Stores Consumed
To Factory Rent
To Electricity
To Depreciation on Plant
To Repairs of Plant
To Works Managers Salary
To Coal and Fuel

To Other Factory exps.
Re
To Manufacturing Wages
To Carriage Inwards
To Factory Expenses
for
----------
pro
By Sale of Scrape
By Cost of Production
(Transferred to Trading A/c)
To Purchase of materials
Less returns
cti
___________________
du
Particulars
To Opening Stock
Raw Materials
Work-in-progress
No
t
Example: (Manufacturing, Trading and Profit & Loss A/c)
S,
From the following particulars of Mr. Amit Agrawal, prepare a

Manufacturing Account, Trading and Profit & Loss Account for the
year ended 31st March, 2008.
UP
E
Purchase of Raw Material

Return Inwards
39,58,500
21,000
Stock on 31 March, 2008:

st
Raw Materials
3,63,000
Work-in-Progress
3,00,000
Finished Goods
4,11,000
6,00,000
Factory Expenses
5,52,000
(c)
Productive Wages
General Office Expenses
le
90,000
___________________
___________________
___________________
le
Salaries 1,80,000
Notes
Selling Expenses
___________________
Purchase Expenses
30,000
on
/Sa
Distribution Expenses
___________________
2,10,000
1,80,000
Export Duty
___________________
90,000
Import Duty
60,000
___________________
Interest on Bank Loan
___________________
Stock on 1 April, 2007:
1,80,000
Raw Material
___________________
Work-in-Progress
___________________
___________________
Sales
___________________
Return Outwards
du
Finished Goods
Discount allowed
Sale of Scrap
Depreciation on Plant
pro
Carriage Inwards
___________________
cti
st
90,000
1,23,000
58,50,000
25,500
31,500
3,000
6,000
1,50,000
12,000
Re
Depreciation on Furniture
Solution:
1,20,000
for
(for the year ending 31st March, 2008)
Particulars
Particulars
To Opening Stock
Materials
No
t
Work-in-Progress
1,20,000
90,000
To Purchase less
Returns
(c)
UP
E
S,
(39,58,500- 25,500)
39,33,000
By Sale of Scrap
By Closing Stock:
Materials
3,63,000
Work-in-Progress
3,00,000
To Productive Wages
6,00,000
By Cost of
Production
To Factory Exps
5,52,000
(Transferred to
Trading A/c)
To Purchase Exps.
1,80,000
To Import Duty
60,000
To Carriage Inwards
30,000
To Depreciation on
Plant
To Repairs to Machines
6,000
50,76,000
1,50,000
30,000
57,45,000
57,45,000

(for the year ending 31st March, 2008)
Notes
Activity
on
/Sa
Particulars
Particulars
To Opening Stock of
Finished Goods
___________________
Present
a draft of an
assignment on balance sheet
and___________________
marshaling of its assets
and liabilities.
___________________
By Sales less
Returns
To Cost of Production
1,23,000
(Transfer from
Manufacturing A/c)
50,76,000
To Gross Profit c/d
10,41,000
(58,50,000 21,000)
58,29,000
By Closing Stock
4,11,000
___________________
To General Office Exps.
90,000
By Gross Profit b/d
10,41,000
To Depreciation on
Furniture
12,000
To Discount Allowed
9,000
25,500
To Interest on Bank Loan
pro
To Carriage Outwards
1,80,000
To Export Duty
90,000
2,10,000
To Distribution Expenses
30,000
To Net Profit (Transferred to

Capital A/c.)
2,14,500
10,41,000
for
10,41,000
Re
To Selling Expenses
Check Your Progress

Fill in the blanks:
If in the business some goods are being manufactured

along with the trading activities, a ................... account
is also prepared.
2.
The balance of a manufacturing account is transferred

to ................... Account.
S,
No
t
1.
Balance Sheet
After the determination of the net profit of the business through

the Trading and Profit & Loss Account, the businessman wants to
know the financial position of the business. For this purpose he
prepares a statement which is called the Balance Sheet. The
Balance Sheet depicts the financial position of the business on a
fixed date. A Balance Sheet is prepared with those balances of
Trial Balance which are left out (personal and real accounts) after
taking out the nominal accounts balances to prepare the Trading
and Profit & Loss Account. A Balance Sheet has two sides assets
UP
E
___________________
___________________
1,80,000
du
To Salaries
62,40,000
cti
___________________
62,40,000
(c)
le
___________________
___________________
___________________
le
___________________
Marshalling of Assets and Liabilities
___________________
on
/Sa
side and liabilities side. The assets and liabilities are shown in a
particular order.
Notes
Order of presenting the assets and liabilities in the balance sheet

is called marshalling of assets and liabilities. A balance sheet may
be prepared by marshalling the assets and liabilities in the
following orders:
___________________
___________________
cti
___________________
Balance Sheet prepared in Liquidity Order: Here liquidity

means conversion of assets into cash. When a Balance Sheet is
prepared on the basis of liquidity order, more easily convertible
assets into cash are shown first and those assets which cannot be
easily converted into cash are shown later and so on. In the case of
liabilities, first those liabilities are shown which are payable
earlier and then those liabilities are shown which are payable
later. The proforma of such a Balance Sheet is given below:
___________________
___________________
du
___________________
___________________
pro
___________________
Re
Proforma of Balance Sheet in Order of Liquidity

(as on .. )
Liabilities
Assets
Current Liabilities
Cash in Hand
Bank Overdraft
------
Cash at Bank
------
Short-term Loan
-----
Short-term Investment
------
Outstanding Expenses
-----
Prepaid Expenses
------
Unaccrued Income
-----
Bills Receivable
------
Bills Payable
-----
Accrued Incomes
------
Debtors
-----------
No
t
UP
E
S,
Long-term Liabilities
(c)
------
------
for
Sundry Creditors
Current Assets
Capital
-------
Closing Stock
(+) Net Profit
-------
Fixed Assets
-------
Land & Building
-----
-----
Plant & Machinery
-----
-----
Furniture
-----
Investments (Long-term)
-----
--------
Goodwill
------
--------
Patents & Trademarks
------
Livestock
------
() Drawings
-------
Long-term Loans
Contingent
Liabilities
-------
-------
Balance Sheet prepared in Permanency Order: Balance Sheet

prepared under this order is the reverse of the Balance Sheet
prepared in liquidity order. In this case first those assets are
Notes
on
/Sa
shown which are more permanent means fixed assets and then less
permanent assets (Current Assets) are shown. Similarly, first longterm liabilities (more permanent) are shown then less permanent
(short-term on current) liabilities are shown. The proforma of such
type of Balance Sheet is given below:
le
___________________
___________________
___________________
Proforma of Balance Sheet in Permanency Order

(as on . )
___________________
Assets
Long-term Liabilities
Fixed Assets
cti
Liabilities
___________________
___________________
Capital
------
Land & Building
-----
(+) Net Profit
------
Plant & Machinery
-----
------
Furniture
------
Long-term Loans
------
Long-term Investment
------
Goodwill
Current Liabilities
-----
___________________
-----
___________________
-----
pro
() Drawings
du
___________________
Patents & Trademarks
---------
------
Livestock etc.
Bank Overdraft
------
Current Assets
Bill Payable
------
Cash in Hand
Short-term Loan
------
Cash in Bank
-----
Outstanding Expenses
------
Short-term Investments
-----
Un-accrued Incomes
------
Bill Receivable
-----
Prepaid Expenses
-----
Accrued Incomes
-----
Debtors
-----
Closing Stock
-----
for
Re
Sundry Creditors
-----
No
t
------
-----
Example: (Manufacturing, Trading and Profit & Loss Account and

Balance Sheet)
S,
From the following Trial Balance of Mr. Aditya, prepare a Trading

Manufacturing and Profit & Loss Account and Balance Sheet as on
31st December, 2007.
UP
E
Trial Balance
(as on 31st December, 2007)
Particulars
Stock on 1.1.2007:
8,000
---
Work-in-Progress
20,000
---
Finished Goods
40,000
---
Manufacturing Wages
40,000
(c)
Raw Materials:
--Contd...
___________________
Purchases of Raw Materials

Notes
1,20,000
20,000
Carriage of Raw Materials
___________________
Salary of the Works Manager
___________________
Office Rent
___________________
Printing and Stationary
___________________
Bad Debts
___________________
Sales
Depreciation on Plant
___________________
Sundry Debtors
du
Plant and Machinery

___________________
Sundry Creditors
___________________
pro
Cash in Hand
___________________
Capital
---
12,000
---
8,000
---
8,000
---
4,000
---
4,000
---
---
2,40,000
1,20,000
---
80,000
---
8,000
---
20,000
---
---
1,20,000
20,000
---
---
1,72,000
5,32,000
5,32,000
cti
Land and Buildings
___________________
---
on
/Sa
Factory Rent
le
Raw Materials
Work-in-Progress
20,000
16,000
Finished Goods 40,000
for
Re
Closing stock on 31st December, 2007 were as follows:
No
t
Solution:
In the Books of Mr. Aditya

(for the year ended 31st December, 2007)
(c)
UP
E
S,
Particulars
To Opening Stock:
Raw Materials
8,000
Work-in-Progress 20,000
To Purchase of Materials
To Carriage on Raw
Materials
To Depreciation on Plant
To Manufacturing Wages
To Factory Rent
To Salary of Works Manager
Particulars
By Closing Stock:
Raw Material
20,000
28,000 Work-in-Progress 16,000
1,20,000 By Cost of Production
12,000 (Transfer to Trading A/c.)
8,000
40,000
20,000
8,000
2,36,000
36,000
2,00,000
2,36,000

(for the year ending 31st December, 2007)
To Office Rent
To Printing & Stationary
To Bad Debts
To Net Profit (carried to Capital
A/c)
40,000
2,00,000
2,40,000
40,000
40,000
2,80,000
8,000
4,000
4,000
___________________
2,80,000
By Gross Profit (brought
from Trading A/c)
3,16,000
Land and Buildings

Plant and Machinery
Sundry Debtors
Stock on 31st Dec., 2007:
Raw Materials
Work-in-Progress
Finished Goods
Cash in Hand
Amount
(Rs.)
1,20,000
80,000
20,000
20,000
16,000
40,000
20,000
3,16,000
No
t
Check Your Progress

Fill in the blanks:
................... means conversion of assets into cash.
2.
The outstanding expenses at the time of preparation of

final account are shown in the ................... side of the
balance sheet.
3.
Interest on Capital is added to the capital of owner in

the ................... side of the Balance Sheet ...................
UP
E
S,
1.
Summary
Final accounts include the Trading and Profit & Loss Account and
Balance Sheet. Trading and Profit & Loss Account is prepared to
calculate the net profit earned by business during a period and
(c)
___________________
___________________
pro
Re
Assets
for
1,96,000
1,20,000
40,000
40,000
Amount
(Rs.)
1,72,000
24,000
___________________
___________________
Balance Sheet
(as on 31st December, 2007)
Capital
(+) Net Profit
Sundry Creditors
___________________
By Sales
By Closing Stock
Finished Goods
24,000
40,000
Liabilities
___________________
Amount (Rs.)
cti
To Opening Stock:
Finished Goods
To Cost of Production
(Transfer from Manufacturing A/c)
To Gross Profit
(carried to P. & L. A/c)
on
/Sa
Amount
(Rs.)
du
Particulars
Notes
le
___________________
___________________
___________________
le
Balance Sheet of a business is prepared to disclose the financial

picture of the business.
on
/Sa
Notes
___________________
In this unit, we have learnt about the basic elements of balance

sheet that includes assets and liabilities and the purpose of
preparing balance is to ascertain the financial position of the
business concern as on a particular date.
___________________
___________________
___________________
We have also learned about the concept of assets and liabilities and
their classification. Assets can be classified as current assets and
fixed assets while liabilities are classified as current liabilities and
long term liabilities.
___________________
___________________
___________________
Lesson End Activity
___________________
du
cti
___________________
pro
Analyse the profit & loss account of HDFC bank for FY 2009-10
and make a balance sheet from it.
___________________
Re
Keywords
Financial Statements: These include the Trading and Profit &

Loss Account, and Balance Sheet of the business.
for
Gross Loss: It is the excess of cost of sales over sales.

Gross Profit: It is calculated by comparing the sales and cost of
sales. It is the excess of sales over cost of sales.
Net Loss: Excess of expenditures over revenues is called net loss.
No
t
Net Profit: It is the excess of revenues over expenses. It is

depicted by P&L A/c.
(c)
UP
E
S,

1.
What do you mean by Trading Account? Give the proforma of

Trading Account and explain why it is prepared.
2.
What is the importance of Balance Sheet? Give a form of

Balance Sheet in Liquidity order with imaginary examples.
3.
What do you mean by balance sheet? What is the purpose of

balance sheet?
4.
Discuss the concept of liability and its classification in terms of

long term liability and current liability.
5. Write short notes on the following:
on
/Sa
Notes
le
(a) Net Profit
___________________
(b) Manufacturing Accounts
___________________
___________________
Further Readings
___________________
Books
cti
___________________

du

pro

Re

Chand, New Delhi.
Web Readings
for
http://accounting4management.com/examples_of_trading_and_prof
it_and_loss_account_and_balance_sheet.htm
No
t
http://www.futureaccountant.com/funds-flow-cash-flow/studynotes/balance-sheet-information-derived-marshalling-assetsliabilities-vertical-horizontal-forms/f17l/
(c)
UP
E
S,
http://www.kkhsou.in/main/EVidya2/commerce/financial_
statement.html
___________________
___________________
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 13: Depreciation Accounting
___________________
Write
an article on the concept
and causes of depreciation.
___________________
Depreciation Accounting
___________________
Objectives
___________________
topics:
cti
___________________
___________________
du
___________________
pro
Introduction
No
t
for
Re
Depreciation means decrease in the value of assets. According to

W. Pickles, depreciation is permanent continuing diminution in the
quality, quantity or the value of an asset whereas J.R. Batliboi
says; the term depreciation represents loss or diminution in the
value of an asset consequent upon wear and tear, obsolescence,
affluxion of time or permanent fall in market value. Whereas the
Institute of Chartered Accountants of India defines depreciation as
follows: Depreciation is a measure of the wearing out,
consumption, or other loss of value of depreciable asset arising
from use, affluxion of time or obsolescence through technology and
market changes.
UP
E
S,
Depreciation is allocated so as to charge a fair proportion of the

depreciable amount in each accounting period during the expected
useful life of the asset. Depreciation includes amortization of assets
whose useful life is predetermined. According to International
Accounting standards committee, Depreciation is the allocation of
the depreciable amount of an asset over its estimated useful life.
Depreciation for the accounting period is charged to income either
directly or indirectly.
(c)
Thus, it is clear from the above definitions that depreciation is a

loss arising on account of circumstances, some of which are known
whereas others are not.
___________________
___________________
___________________
le
Causes of Depreciation
need
for
providing
___________________
depreciation.
___________________
As we know that every asset is having a working life and if it is

over, then life of the asset is wasted. As the asset is in use of the
business, the value of asset decreases and it must be charged from
the years relevant Profit & Loss account. The decrease in the
value of assets is because of the following causes:
on
/Sa
Notes
Activity
___________________
Prepare
a brief report on the
___________________
1. Normal wear and tear: It is a very important cause of

depreciation in case of tangible assets because of their use.
cti
___________________
___________________
2. Obsolescence because of new inventions, old assets may be

scrapped such machines become obsolete. Still they are capable
of being run physically.
___________________
du
___________________
3. On account of accidents such as loss by fire, earthquake or any

other natural calamity.
___________________
pro
___________________
4. Fall in market prices: Market conditions may change the

market prices of the current assets but not the book value.
Re
5. Effect of time etc.: Some assets have definite time life like
lease hold property. On the expiry of its term, such asset ceases
to exist.
for
Depreciation must be provided because of the following reasons:
(c)
UP
E
S,
No
t
1. Profits are divisible only after providing for depreciation as per

section 2005 of the Indian companies Act. The profits can be
distributed without providing for depreciation with the prior
permission of the central Government. Thus depreciation as we
know is the decrease in the value of assets, to be transferred to
Profit & Loss account in order to calculate the correct amount
of profit as well as the exact value of the assets.
2. Suitable provision for depreciation is must in order to put the
assets at the correct costs. If we show the assets and cost
without providing for depreciation which is due to normal wear
and tear, so the Balance Sheet having different assets without
providing for depreciation, would be incorrect and it cannot
depict the true and fair view of the financial position of the
business. Therefore, it is, therefore, necessary to provide for
depreciation.
Thus, we see that depreciation plays an important role in

ascertaining the correct amount of profit as well as depicting a true
and fair financial position of the business.
Notes
Activity
on
/Sa
3. Depreciation funds can be created for replacement of fixed

assets. After the expiry of life of the asset, replacement of such
asset is possible if it is properly provided for in the form of
depreciation fund created from Profit & Loss account.
le
___________________
Present
different methods for providing
___________________
depreciation
of assets to be
recorded in the books of
___________________
records.
___________________
cti
___________________
Calculation of Depreciation
___________________
du
Depreciation can be calculated if the following items of information

are available.
pro
1. Cost of the asset: including all expenses incurred for freight

carriage including erection charges.
Re
2. Scrap or residual value of the asset: It is estimated and

deducted from the original cost of the asset. Effective working
life of the asset is not the physical life of asset.
Check Your Progress

Fill in the blanks:
................... is a measure of the wearing out,

consumption or other loss of value of depreciable asset
arising from use, affluxion of time or obsolescence
through technology and market changes
2.
Depreciation includes ................... of assets whose

useful life is predetermined.
No
t
for
1.
UP
E
S,
There are various methods of allocating depreciation over the

useful life of the assets. The method of providing the depreciation
is selected on the basis of various factors as types of assets, nature
of business, circumstances prevailing in business, etc. These
methods are given below:
Fixed Instalment Method
(c)
Under this method, depreciation is a certain percentage of cost

which is calculated on the basis of the original cost-scrap value if
any divided by the number of years i.e., life of the asset. This can
be expressed like:
___________________
___________________
___________________
___________________
Original Cost ScrapValue

Life of the Asset
on
/Sa
Depreciation
Notes
___________________
___________________
Amount of Depreciation
___________________
le
Cost ScrapValue
Number of useful life i.e., No. of Years
This method is also known as fixed/original cost/straight line

method of depreciation.
___________________
cti
___________________
Characteristics of the Method
___________________
Fixed instalment method has the following characteristics:
___________________
(i)
___________________
du
___________________
The amount of depreciation remains uniform/fixed under this

method.
Merits of the System
pro
(ii) The value of the asset becomes zero at the end of its life.
___________________
(i)
Re
Following are the important merits of this method:

This method is very simple and easy to calculate.
(ii) The value of the asset becomes zero.
for
(iii) This method is suitable to such type of assets where physical

deterioration takes place automatically such assets are land
and buildings, lease hold properties, etc.
(iv) Suitable for all types of business whether small or big.
No
t
Demerits of the Method
(c)
UP
E
S,
In spite of so many merits, this method is not free from its

demerits. The following are its important demerits:
(i) Though the amount of depreciation remains constant, but the
amount of repairs and renewal if any increases with the
passage of time.
(ii) Loss of interest as the amount is not invested outside the firm.
(iii)If any other asset is purchased, then depreciation is separately
calculated.
(iv) No provision for replacement as the amount of deprecation is
retained in the business.
(v) This method is not scientifically recognized; hence income tax
rules do not allow business houses to use this method of
depreciation.
Accounting Entries
(i) For Depreciation of assets when depreciation account is not

maintained
2.
Depreciation a/c
To particular asset a/c
Depreciation on asset provided.
Dr.
Profit and Loss a/c

To Depreciation a/c
Balance transferred
Dr.
___________________
___________________
pro
Dr.
L.F.
Cr.
Re
Particulars
Cash a/c
To Asset a/c
Sale of scrap recorded
Dr.
for
Example: From the following transactions of a Thapar Oil Co.,

prepare machinery account for the year ending 31st December,
2006.
2006
Purchased a second hand machine for
January 1
Spent
June 30
Purchased additional machinery for
20,000
Sep 30
Repairs and renewals of machinery
2,000
Dec 31
Depreciate the machinery at 10% p.a. on original cost method.
No
t
January 1
40,000
10,000 on repairs for making it serviceable.
S,
Solution:
UP
E
Machinery Account
Date
To Balance a/c
To Bank (for repairs)
To Bank a/c
(c)
2005
Jan.1
Jan.1
June 30
Particulars
40,000
10,000
20,000
70,000
___________________
___________________
All the above two entries are passed every year except the year
when scrap is sold. If scrap or residual is sold the following entry is
to be passed.
Date
___________________
___________________
L.F.
du
Particulars
___________________
cti
S. No.
Notes
on
/Sa
Following entries are required to pass in the books of the owner of

assets.
le
Date
Particulars
2005
Dec. 31
Dec 31
By Depreciation
By Balance c/d
6,000
64000
70,000
___________________
___________________
___________________
le
Working Notes:
___________________
(i)
(ii)
___________________
___________________
on
/Sa
Notes
Depreciation on machine I for one year on 50,000 @ 10% p.a. =

Depreciation on machinery II for six months on 20,000 @ 10%
p.a. =
5,000
Total Depreciation =
6,000
1,000
(iii) Spent 2,000 in Sept 2006 as revenue expense to be debited to profit and
loss a/c.
___________________
___________________
cti
Sale of Asset: If the asset is disposed-off in the middle of the year,

the sale proceeds are to be credited in the asset account. If there is
any balance in the asset account, it may be either loss or profit to
be transferred to Profit & Loss account. For example if the above
machine written down value of which was 16,700 as on 31.12.05
is disposed of on 1st July 2006 for 13,500 then the machinery a/c
would be as follows:
___________________
___________________
___________________
___________________
pro
du
___________________
Machinery Account
Date
To Balance b/d
Date
16700
for
Re
1.1.06
Particulars
Particulars
1.7.06 By cash
(sale proceeds)
1.7.06 By Depreciation
A/c (For six months)
By P & L a/c
(Loss on a/c of sale)
16,700
13,500
825
2,375
16,700
Diminishing Value (Balance) Method
(c)
UP
E
S,
No
t
Under this method depreciation is calculated as a certain

percentage of the value i.e., written down value or diminishing
value but the rate of depreciation remains constant (fixed). The
amount of depreciation decreases every year with the passage of
time but the value of the asset never becomes zero. This method is
also known as written down value method. Rate of depreciation
can be determined on the basis of cash, scrap value and useful life
of the asset which is as follows:
s
R 1 n 100
c
Where,
R stands for rate of depreciation in %

S stands for scrap/salvage value
C stands for cost of asset
D stands for the useful life of the asset.
Merits
2. The amount of depreciation and repairs put same amount of

burden on Profit & Loss a/c.
3. No difficulty in calculating the amount of depreciation where
expansion or increase in the value of assets takes place.
___________________
___________________
___________________
___________________
___________________
cti
4. This method is scientific/systematic and is recognized under

income tax rules.
on
/Sa
Notes
1. It is very easy to calculate as compared to other methods.
le
___________________
___________________
Demerits
___________________
pro
du
5. It is suitable for assets having long life such as land and

building, plant and machinery, etc.
No attention is given towards interest on capital invested.
2.
Difficult to calculate because of reducing balance and fixed

rate of depreciation.
3.
Difficult to bring the value of asset as zero.
4.
No funds for replacement.
Re
1.
for
Accounting entries
Similar entries are passed as given in the first method of charging

depreciation i.e., fixed instalment method.
No
t
Change of Depreciation Method
The business concerns such as firms or companies, sometimes, are

interested to change the method of charging depreciation i.e., from
fixed instalment method to written down value or diminishing
balance method or vice versa.
(c)
UP
E
S,
The change may be effective from the year in which the decision is
taken. Though there is no problem except that the depreciation is
charged on the original cost or written down values, the cost or the
value is to be found out by applying the rate of depreciation of the
method asked to adopt, but if this change is effective from the back
date or retrospective year, then it poses some difficulties. If
patiently worked out, the problem can be sorted out. The following
illustration would help the reader to understand the mechanisms
explained.
___________________
___________________
le
Depletion Method
Notes
___________________
___________________
___________________
Depreciation Depreciable Cost
Annual Output
Lifetime Output ( Expected )
cti
___________________
on
/Sa
This is also known as production method. It is suitable for mining,

oil wells etc. At that time when mines are taken on a contract and
that too on rent which is divided by the total production. This can
be calculated with the following formula:
___________________
It is difficult to maintain the accounts of annual production. When

it becomes uneconomic, then it is a very difficult task.
___________________
___________________
Amortization
___________________
In the course of doing business, you will likely acquire what are
known as intangible assets. These assets can contribute to the
revenue growth of your business and, as such, can be expensed
against these future revenues. An example of an intangible asset is
buying a patent for an invention.
pro
___________________
du
___________________
for
Re
The term amortization is used in respect of intangible assets like

patents, copyrights, leasehold and goodwill which are recorded at
cost. Some intangible assets have limited useful life and are,
therefore, written off. The process of their writing off is called
amortization.
Calculating Amortization
(c)
UP
E
S,
No
t
The formula for calculating the amortization on an intangible asset

is similar to that one used for calculating straight-line
depreciation. You divide the initial cost of the intangible asset by
the estimated useful life of the intangible asset. For example, if it
costs 10,000 to acquire a patent and it has an estimated useful life
of 10 years, the amortized amount per year equals 1,000. The
amount of amortization accumulated since the asset was acquired
appears on the balance sheet as a deduction under the amortized
asset.
Formula
Initial cost useful life = amortization per year
10,000 10 =
1,000 per year
Check Your Progress
Notes
on
/Sa
Fill in the blanks:
le
___________________
1.
Straight Line Method is also known as ...................
2.
Diminishing
...................
3.
In ................... method, depreciation is calculated on

diminishing value but the rate of depreciation remains
constant.
Balance
Method
is
also
known
___________________
as
___________________
___________________
cti
___________________
___________________
___________________
du
Summary
for
Re
pro
According to W. Pickles, depreciation is permanent continuing

diminution in the quality, quantity or the value of an asset
whereas J.R. Batliboi says; the term depreciation represents loss
or diminution in the value of an asset consequent upon wear and
tear, obsolescence, affluxion of time or permanent fall in market
value. Whereas the Institute of Chartered Accountants of India
defines depreciation as follows: Depreciation is a measure of the
wearing out, consumption, or other loss of value of depreciable
asset arising from use, affluxion of time or obsolescence through
technology and market changes.
Lesson End Activity
No
t
Make a chart on the various methods for providing depreciation

and the formulas and the calculation for each method.
Keywords
UP
E
S,
Amortization: The term amortization is used in respect of

intangible assets like patents, copyrights, leasehold and goodwill
which are recorded at cost. The process of their writing off is called
amortization.
Depreciation: It is a measure of the wearing out, consumption, or
other loss of value of depreciable asset arising from use, affluxion
of time or obsolescence through technology and market changes
(c)
Diminishing Value (Balance) Method: Under this method

depreciation is calculated as a certain percentage of the value but
the rate of depreciation remains constant.
___________________
___________________
___________________
le
___________________
on
/Sa
Fixed Instalment Method: Under this method, depreciation is a

certain percentage of cost which is calculated on the basis of the
original cost-scrap value if any divided by the number of years
Notes
___________________
___________________
___________________
1. What do you understand by the term depreciation? What is the

need for providing for depreciation?
___________________
2. Discuss the reasons for depreciation.
___________________
3. Explain the methods for providing depreciation.
___________________
4. Write brief notes on the following:
du
cti
___________________
___________________
(a) Fixed Instalment Method
pro
___________________
(b) Diminishing Value (Balance) Method

(c) Amortization
Books
Re
Further Readings
for

No
t

(c)
UP
E
S,

Delhi.
New Delhi.
Delhi.
Chand, New Delhi.
Web Readings
on
/Sa
Notes
le
___________________
___________________
___________________
___________________
cti
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
du
___________________
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 14: Cash Flow Statements
___________________
Write
a report on the meaning
and the objectives of the cash
flow___________________
statement in accounting.
Cash Flow Statements
___________________
Objectives
___________________
topics:
Utility of Cash Flow Statement
cti
___________________
___________________
du
___________________
pro
Introduction
No
t
for
Re
Cash is considered one of the vital sources of the firm to meet day
to day financial commitments. The cash is considered to be as most
important source of life blood of the business. The day to day
financial commitments are met out only out of the available
resources. The cash resources are availed through two different
types of receipts viz. sales, dividends, interests known as regular
receipts and sale of assets, investments known as irregular
receipts of the business enterprise. To have smooth flow of
business enterprise, it should have ample cash resources for its
operations. The availability of cash resources is mainly depending
on the cash inflows of the enterprises. The smoothness in
operations of the enterprise is obtained through an appropriate
matching of cash inflows and cash outflows.
(c)
UP
E
S,
Cash flow statement is a statement which indicates the changes of

cash during an accounting period. The basis of cash flow statement
is cash and cash equivalents. CFS also shows the sources of inflow
of cash and applications or uses of outflow of cash during a
specified period (that may be a month or a year). To prepare CFS
the information are used from the analysis of the balance sheet
and the profit and loss account and the opening and closing
balances of the cash during a period are also used in it.
The cash flow statement is being prepared on the basis of extracted
information of historical records of the enterprise. Cash flow
statements can be prepared for a year, for six months, for quarterly
___________________
___________________
___________________
classification of cash flow.

___________________
___________________
and even for monthly. The cash includes not only means that cash
in hand but also cash at bank.
on
/Sa
Notes
Activity
___________________
Prepare
le
The following are the main motives of preparing the cash flow
statement:
1. To identify the causes for the cash balance changes in between
two different time periods, with the help of corresponding two
different balance sheets.
___________________
___________________
cti
2. To enlist the factors of influence on the reduction of cash

balance as well as to indicate the reasons though the profit is
earned during the year and vice versa
___________________
___________________
du
___________________
Check Your Progress
___________________
1.
pro
Choose the correct option:
___________________
How are cash flows denominated in terms of both

current assets and current liabilities?
Re
(a) Increase in current assets and decrease in current

liability
(b) Decrease in current assets and increase in current
liability
for
(c) Increase in current assets and increase in current

liability
(d) Both (a) and (b)
Cash position in the opening and closing comprises of:
No
t
2.
(a) Cash in hand

(b) Cash at bank
(c)
UP
E
S,
(c) Both cash in hand and cash at bank

(d) None of the above
Objectives of Cash Flow Statement

The objective of the cash flow statement is to provide the
information about the cash flows of a business to the various users
of the financial statements during an accounting period. Thus, it is
very important tool for the financial analysis used for the
followings purposes:
___________________
___________________
___________________
___________________
___________________
cti
2. Knowledge of Cash Inflow and Cash Requirements: This

statement is used to throw the light on the various sources of
cash from where the cash is generated during an accounting
period. The cash requirement in the coming time can also be
forecasted by the preparation of project CFS.
Notes
on
/Sa
1. Knowledge of Cash Position: CFS is prepared on the basis of

cash which indicates the changes in cash position of a concern
during a specified period. It also discloses the causes of such a
change of cash.
le
du
3. Knowledge of Short-term Solvency: CFS helps in the

analysis of short-term solvency of a company. Cash is more
relevant to meet the immediate obligations of a company.
pro
4. Help in Framing the Financial Policies: CFS may also be

used to get the help in framing the financial policies of a
business regarding the sources and uses of cash during a
period.
for
Re
5. Helpful in Dividend Policy: CFS helps the management of a

company regarding taking the decision of cash payment of
dividend such as, how much cash would be available for the
payment of dividend.
6. Helpful in Cash Budget: It provides the base to prepare the
cash budget regarding the receipts and payment of cash during
a particular period.
No
t
7. Useful for External Investors: CFS is very useful for the

external investors of a company. They use it to know the ability
of the company to repay the outsiders' obligations in short
period. On the basis of that they take the decision whether they
should give loan to the company or not.
UP
E
S,
8. Study of Sources and Uses of Cash from Various

Activities: Under the CFS all the activities of the business are
classified into three operating, investing and financial
activities. The sources and uses of cash from all these activities
are mentioned in the CFS. Thus we can study the trend of cash
inflow and outflow from CFS.
(c)

As per AS-3 (revised) the cash flow statement is prepared in a
manner reporting the cash flows into following categories:
___________________
___________________
___________________
___________________
___________________
1.
Cash Flow from Operating Activities: Cash flows from

operating activities are earned from the principal revenue
producing activities of an enterprise. Through these activities
the net profit or loss of the business is also determined.
Examples of such a flow from operating activities are given in
AS-3 (revised) as follows:
on
/Sa
Notes
le
___________________
___________________
___________________
___________________
(a) Cash receipts from the sale of goods and rendering of

services;
cti
___________________
___________________
(b) Cash receipts from royalties, fees, commissions and other

revenue;
___________________
du
___________________
(c) Cash payments to suppliers for goods and services;
___________________
(d) Cash payments to and on behalf of employees;
pro
___________________
(e) Cash receipts and cash payments of an insurance enterprise

for premiums and claims, annuities and other policy
benefits;
Re
(f) Cash payments or refunds of income taxes unless they can

be specifically identified with financing and investing
activities; and
(c)
UP
E
S,
No
t
for
(g) Cash receipts and payments relating to future contracts,

forward contracts, option contracts and swap contracts
when the contracts are held for dealing or trading purposes.
Figure 14.1: Diagrammatic Presentation of

Cash Flow from Operating Activities
Cash Flow from Investing Activities: Investing activities of

an enterprise include the purchase of fixed assets (as plant
and machinery, land and buildings, furniture and fixtures)
with an intention to generate the future incomes. On account
of being an important activity, a separate disclosure of the
cash flows from these activities is made. Examples of cash
flows arising from investing activities are in AS-3 (revised) as
follows:
___________________
___________________
___________________
___________________
___________________
du
cti
2.
Notes
on
/Sa
Some transactions, such as the sale of an item of plant, may give

rise to a gain or loss which is included in the determination of net
profit or loss. However, the cash flows relating to such transactions
are cash flows from investing activities.
le
pro
(a) Cash payments of acquired fixed assets (including

intangibles). These payments include those relating to
capitalized research and development costs and
self-constructed fixed assets;
Re
(b) Cash receipts from disposal of fixed assets (including

intangibles);
for
(c) Cash payments to acquired shares, warrants or debt

instruments of other enterprises and interests in joint
ventures (other than payments for those instruments
considered to be cash equivalents and those held for dealing
or trading purposes);
No
t
(d) Cash receipts from disposal of shares, warrants or debt

instruments of other enterprises and interests in joint
ventures (other than receipts from those instruments
considered to be cash equivalents and those held for dealing
or trading purposes);
S,
(e) Cash advances and loans made to third parties (other than
advances and loans made by a financial enterprise);
UP
E
(f) Cash receipts from the repayment of advances and loans

made to third parties (other than advances and loans of a
financial enterprise);
(c)
(g) Cash payments for future contracts, forward contracts,

option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
payments are classified as financing activities; and
___________________
___________________
___________________
___________________
___________________
le
(h) Cash receipts from future contracts, forward contracts,

option contracts and swap contracts except when the
contracts are held for dealing or trading purposes, or the
receipts are classified as financing activities.
on
/Sa
Notes
___________________
___________________
___________________
When a contract is accounted for as a hedge of an identifiable

position, the cash flows of the contract are classified in the same
manner as the cash flows of the position being hedged.
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
for
Re
pro
___________________

Cash Flow from Investing Activities
Cash Flow from Financing Activities: Under financial

activities those activities are included which are relating to the
size and composition of capital (equity and preferences) and
borrowing or loans. As per AS-3 (revised), the separate
disclosure of cash flows arising from financing activities is
important because it is useful in predicting claims on future
cash flows by providers of funds (both capital and borrowings)
to the enterprise. Examples of cash flows arising from
financing activities are:
(c)
UP
E
S,
No
t
3.
(a) Cash proceeds from issuing shares or other similar

instruments;
(b) Cash proceeds from issuing debentures, loans, notes, bonds
and other short or long-term borrowings; and
(c) Cash repayments of amounts borrowed.
on
/Sa
Notes
le
___________________
___________________
___________________
___________________
cti
___________________
___________________
Check Your Progress
Non-current assets sale cash inflow
(b)
Current asset sale cash outflow
(c)
Non-current assets sale cash outflow
(d)
None of the above
Re
(a)
Cash flow analysis is superior to the fund flow analysis

due to:
for
2.
Sale of plant and machinery falls under the category of:
(a)
Shorter span of cash recourses are considered
(b)
Real cash flows are taken into consideration
(c)
Both the opening and closing balances are considered
(d)
All the above
Summary
No
t
1.
pro
Choose the correct option:
___________________
du

Cash Flow from Financing Activities
(c)
UP
E
S,
Cash flow statement indicates sources of cash inflows and

transactions of cash outflows prepared for a period. It is an
important tool of financial analysis and is mandatory for all the
listed companies. The cash flow statement indicates inflow and
outflow in terms of three components: (1) Operating, (2) Financing,
and (3) Investment activities. Cash inflows include sale of assets or
investments, and raising of financial resources. Cash outflows
include purchase lo assets or investments and redemption of
financial resources.
___________________
___________________
___________________
le
Lesson End Activity

Notes
on
/Sa
With the help of internet, find out the schedule and format of the
various components of cash flow as stated in cash flow statement.
___________________
___________________
___________________
Keywords
___________________
Adjusted Profit & Loss A/c: Statement devised to determine the

cash from operations.
cti
___________________
___________________
Cash from Operations: Cash resources accrued in the business

operations.
___________________
du
___________________
Decrease in Working Capital: Decrease in Net working capital

i.e. Excess of current liabilities over the current assets Resources
side of the fund flow.
___________________
pro
___________________
Flow: Flow means changes occurred in between two different time

periods.
Re
Fund from Operations: Income generated from only operations.

Fund Loss in Operations: Loss incurred in the operations.
Fund: Fund means working capital.
for
Increase in Working Capital: Increase in Net working capital

i.e. Excess of current assets over the current liabilitiesApplications side of the fund flow.
No
t
Non-current Assets: Long-term assets.

Non-current Liabilities: Long-term financial resources.
(c)
UP
E
S,
Statement of Changes in Working Capital: Enlisting the

changes taken place in between the current assets and current
liabilities of two different time horizons.

1.
Data Ltd., supplies you the following balance on 31st Mar 2005
and 2006:
Liabilities
2005
2006
Share
capital
1,40,000
1,48,000
Bonds
24,000
12,000
Assets
2005
2006
Bank
balance
18,000
15,600
Accounts
Receivable
29,800
35,400
Contd...
Accounts
payable
20,720
Provision
for debts
1,400
1,600
Land
40,000
60,000
Reserves
and
Surpluses
20,080
21,120
Good will
20,000
10,000
23,680
Inventories
98,400
85,400
on
/Sa
Notes
___________________
___________________
___________________
2,06,400
2,06,200
2,06,400
2,06,200
___________________
Additional Information:
(b) Land was purchased for
cti
___________________
7,000 were paid during the
20,000.
pro
10,000 were written off on good will during the year.
(d) Bonds of
12,000 were paid during the course of the year.
You are required to prepare a cash flow statement.
Since everything has some utility, analyse the cash flow

statement analysis and explain its various utilities.
3.
Discuss the procedure of determining cash provided by

operating activities. Give suitable example to illustrate your
answer.
for
Re
2.
Further Readings
No
t
Books

S,

UP
E

Delhi.
New Delhi.
(c)
___________________
___________________
du
(a) Dividends amounting to

year 1996.
(c)
le
___________________
___________________
___________________
le
on
/Sa

Delhi.
Notes
___________________

___________________
___________________

Chand, New Delhi.
___________________
___________________
cti
Web Readings
___________________
www.accountingbase.com/CashFlow.html
___________________
www.kkhsou.in/main/EVidya2/management/cash_flow.html
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
le
___________________
Case Studies
___________________
___________________
Objectives
___________________
cti
___________________
___________________
Case Study 1: Kathryn Kennedys Trial Balance
___________________
$2,202.
Accounts Receivable
$1,002.
Pet Grooming Equipment
$2,300.
Office Equipment
$2,800.
Accounts Payable
$2,300.
Kathryn Kennedy, Capital
$2,804.
Kathryn Kennedy, Withdrawals
$ 500.
Revenues
$1,800.
for
Re
Cash
pro
du
Kathryn Kennedys pet grooming business has been operating for

one month. Kennedy prepared her financial records according to
accepted accounting procedures. At months end she had the
following accounts and balances:
Expenses
$ 900.
No
t
Kennedy prepared her trial balance for the month and ended up
with debit and credit balances of $8,304. She was pleased that her
trial balance did, in fact, balanceproving that she had kept
accurate records for the month. When she explained her pride to
her accountant, he indicated that even though the trial balance
was equal, she may have made errors.
Question:
S,
1. Write the answer to the case study describing the errors that
she made.
(c)
UP
E
Source: highered.mcgraw-hill.com/sites/dl/free/.../sample_chapter5.pdf
___________________
___________________
___________________
le
Case Study 2: Asian Pacific Community Counseling, Inc.

Notes
on
/Sa
Several years ago I received a call from the Executive Director of

this non-profit organization who's bookkeeper had just quit.
Payroll was approaching and they needed help that day to
calculate and prepare their payroll checks. We were able to do
that in a matter of a couple of hours. But they needed much more
help than that. They were receiving funding from several sources
and needed to maintain the integrity of their bookkeeping and
cost allocation plan (such as it was). After getting into the details
of how their books were organized we determined that changes
needed to be made to more reasonably allocate costs to cost
centers and to better manage unexpended balances so that a
closer monitoring of spending was possible. We ended up
becoming their full-charge bookkeeper handling daily
transactions, monitoring grant spending and providing on -going
financial reports for their executive director and Board of
Directors. We were able to essentially replace the full-time person
they had employed for many years with a flat, monthly fee that
not only saved the company over $12,000 in annual accounting
costs, but ended the situation at year-end of being required to
send grant funds back to the funder because of under-spending.
Better information with less hassle and headaches for a lower
cost. That's one of the advantages of using a professional, online
bookkeeping company that has the experience to do the job
efficiently and effectively.
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
Re
pro
___________________
Question:
for
Analyse and summarise the case.
(c)
UP
E
S,
No
t
Source: www.dailybalance.com/clients/testimonials/
Case Study 3: X & Co.

Notes
on
/Sa
From the following balances extracted from the books of X & Co.,
prepare a trading and profit and loss account and balance sheet
on 31st December, 1991.
le
___________________
___________________
$
Returns outwards
500
Bills receivables
4,500
Trade expenses
200
Purchases
39,000
Office fixtures
1,000
Wages
2,800
Cash in hand
500
Insurance
700
Cash at bank
4,750
Sundry debtors
30,000
Tent and taxes
1,100
Carriage inwards
800
Carriage outwards
1,450
Commission (Dr.)
800
Sales
60,000
Interest on capital
700
Bills payable
3,000
Stationary
450
Creditors
19,650
Returns inwards
1,300
Capital
___________________
___________________
___________________
cti
11,000
___________________
___________________
pro
Stock on 1st January
du
17,900
The stock on 21st December, 1991 was valued at $25,000.
(c)
UP
E
S,
No
t
for
Re
Source: http://accounting4management.com/examples_of_trading_and_profit_and_loss_
account_and_balance_sheet.htm
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
le
UNIT 16: Financial Aspects of Supply Chain Management
___________________
___________________
___________________
___________________
cti
___________________
___________________
Re
pro
du
___________________
(c)
UP
E
S,
No
t
for
BLOCK-IV
___________________
___________________
___________________
le
Detailed Contents
UNIT 18: COST ACCOUNTING
___________________
Supply Chain Accounting
___________________
Accounting and Logistics Cost: An Impediment to
Supply Chain Effectiveness
___________________
Consignment Accounting
___________________
UNIT
17:
INVENTORY
___________________
TECHNIQUES AND CONTROL
___________________
Introduction
MANAGEMENTS
Introduction
Scope of Cost Accounting in Chain Management
Functions of Cost Accounting
Essentials of Cost Accounting System
Costing Systems
Role of Cost in Cost Accounting
Elements of Cost
cti
du
UNIT
16: FINANCIAL ASPECTS OF SUPPLY
___________________
CHAIN MANAGEMENT
___________________
Introduction
on
/Sa
Notes
UNIT 19: EVA AND BUDGETS
___________________
Inventory Costs
___________________
Factors affecting Levels of Inventory
Economic Value Added (EVA)
Inventory Measures
Budget
Budgetary Control
Introduction
Re
pro
(c)
UP
E
S,
No
t
for
on
/Sa
Notes
Activity
le
___________________
Present
a detailed report on
the techniques used to boost
___________________
competitiveness
in the supply
chain
management
___________________
accounting.
Financial Aspects of Supply Chain

Management
___________________
Objectives
topics:
cti
___________________
___________________
SCMA in Practice: Sainsburys
Accounting and Logistics Cost: An Impediment to Supply Chain

Effectiveness
pro
du
Re
Introduction
No
t
for
Management accounting in supply chains (or supply chain

controlling (SCC)) is part of the supply chain management concept.
This necessitates the need for planning, monitoring, management,
and information provision of logistics and manufacturing processes
throughout the whole value chain. The goal of management
accounting in supply chains is the optimization of these processes.
Therefore, this strategy is a form of controlling, focused on the
support of management.
S,
We can examine eight key Supply Chain Management Accounting

(SCMA) techniques that can be used in specific supply chain
situations. These techniques are as follows:
UP
E
Open Book Accounting
This is where management accountants share cost information

about relevant processes in the supply chain, both within and
across organisations. The purpose is to identify non value adding
processes that could be withdrawn without detriment to the
customer or that could even enhance customer service.
(c)
___________________
Open book accounting promotes margin improvement through cost

reduction, which can be shared between partner organisations. If
___________________
___________________
___________________
le
___________________
on
/Sa
both supplier and customer share process cost information, they

are more likely to be successful in identifying non-value adding
processes.
Notes
___________________
Value Chain Costing
___________________
Value chain costing builds on Porters value chain analysis which

argues that competitive advantage in the marketplace results from
either better customer value for the same cost (a differentiation
strategy) or the same customer value for less cost (a cost leader
strategy).
___________________
cti
___________________
___________________
___________________
___________________
customer value can be enhanced
costs can be reduced or
differentiation can be achieved in the companys segment of

that value chain.
Re
___________________
pro
___________________
du
A series of activities, or links in a chain occur between a products

design and its distribution. Management accountants need to
identify where in the chain:
Target Costing
No
t
for
Here, management accountants must determine a target cost for a

newly designed product or service to satisfy customer need. The
target cost is reached by identifying a selling price for the product
or service, and then subtracting the amount of profit margin
required from that product or service by the companys overall
long-term margin requirements.
(c)
UP
E
S,
Target costing is usually implemented during the development and

design phases of the manufacturing or service process. If costs are
exceeded after the target cost has been set, management
accountants need to identify process changes to meet the target
cost.
Quality Costing
Quality costing is an important SCMA technique that aims to
improve supply chain quality, both in and across organisations. It
has two benefits to reduce quality costs and to increase the
quality offering to the ultimate customer. Quality costs are:
the cost of conformance (costs of prevention and costs of

appraisal)
the costs of non-conformance (costs of internal and external

failure).
Notes
on
/Sa
The intention is to reduce poor quality and waste by improved

preventative measures that minimise the recurrence of failure
costs and improve customer experience. Management accounting
has a significant role to play because organisations can be unaware
of the costs of failure.
le
___________________
___________________
___________________
Performance Measurement
___________________
___________________
du
cti
This needs to occur throughout the supply chain, and should

include both financial and non-financial measures. The balanced
scorecard can be extended to include supply chain partners,
because the objective is to create a far more competitive supply
chain than the alternative supply chain providers of that product
or service.
pro
The balanced scorecard has its greatest impact when it drives the
change process in support of the organisations strategic
intentions.
Make versus Buy (Outsourcing)
for
Re
The challenge for management accountants is how to extend the

traditional balanced scorecard (financial perspective, customer
perspective, internal perspective, innovation and learning
perspective) across supply chain members. This demands a sound
understanding of the key performance areas that will drive
competitive advantage.
S,
No
t
Traditional management accounting techniques such as make

versus buy are often used in a supply chain context, particularly
when identifying opportunities for outsourcing. However, caution
must be exercised, because outsourcing decisions must be made in
the strategic contexts of ultimate customer satisfaction and
preservation of the companys core competences that is, what it
must be able to do to survive.
UP
E
Outsourcing, where it occurs, should enhance the ultimate

customer proposition. Make versus buy accounting needs to take
this broader requirement into account.
Benchmarking
(c)
Management accountants can use benchmarking to compare

performance of one organisation against the best in class to provide
a particular product, process or service.
___________________
___________________
___________________
___________________
___________________
le
The technique can be extended to benchmark performance across

supply chains for example, different supplier performance or
different customer performance in terms of using a particular
product or service.
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
cti
Benchmarking is often used in conjunction with other SCMA

techniques for example, there are numerous examples of firms
using Activity-based costing and benchmarking together.
___________________
Activity-based Costing
___________________
This approach to costing focuses on processes rather than

functions. Finance professionals can only manage costs by
managing the activities that cause the costs. The key aspect is to
identify cost drivers and to allocate costs to an activity on the basis
of that cost driver.
du
___________________
___________________
pro
___________________
Re
Activity-based costing collects data that cuts across traditional

organisational functional boundaries. It can be used alongside
continuous improvement programmes such as Six Sigma or Kaizen
to create leaner and more responsive organisations and supply
chains.
No
t
for
Activity-based costing can also be used with open book accounting

and quality costing to remove non value adding processes. In terms
of supply chains, it is essential to undertake Activity-based
analysis, both inside and outside of traditional organisational
boundaries.
SCMA in Practice: Sainsburys

In practice, many of the techniques above are used together.
(c)
UP
E
S,
An example is Sainsburys use of Activity-based costing for

benchmarking suppliers as part of a value chain analysis.
Suppliers were analysed into three categories depending on the
volume they delivered and the strategic importance of their
products to Sainsburys. The three categories were core suppliers,
middle to large suppliers, and small suppliers. Activity-based
costing information was developed mainly with core suppliers
to provide benchmark data and to identify development
opportunities.
So management accountants should not think about SCMA
techniques in isolation, but should consider which could apply to
create value for the ultimate customer.
Check Your Progress
Notes
Activity
................... is where management accountants share

cost information about relevant processes in the supply
chain, both within and across organisations.
2.
................... builds on Porters value chain analysis

which argues that competitive advantage in the
marketplace results from either better customer value
for the same cost
___________________
du
................... is an important SCMA technique that aims

to improve supply chain quality, both in and across
organisations.
___________________
pro
3.
___________________
Create
a
draft
of
an
assignment on the accounting
and___________________
logistic cost as an
obstacle in the supply chain
___________________
effectiveness.
cti
1.
on
/Sa
Fill in the blanks:
Accounting and Logistics Cost: An Impediment to

Supply Chain Effectiveness
Re
Supply Chain Management (SCM) is one of the key drivers in

todays business world with offshore sourcing, foreign competition
and global markets.
No
t
for
The responsiveness required to keep the inbound supply chain

flowing with materials and products and to keep store shelves
filled is demanding. SCM requires reducing costs, increasing
inventory velocity and compressing cycle time; and these three
may not be compatible or consistent.
UP
E
S,
Doing all this-and doing it well-takes creativity and management

skill. However there is a factor that limits the design, development
and implementation of such supply chains. That factor is
accounting and how it recognizes and treats logistics costs.
Accounting is an impediment for logistics whether for supply chain
management, both international and domestic, for lean and for
outsourcing.
Generally accepted accounting principles create the foundation so
that every company reports its financial data the same way. This
financial snapshot is consistent then from firm to firm. This makes
analysis of the data and comparisons possible.
These accounting standards have a long history. They date back to
Henry Ford and the Model A. Companies then may have been
vertically integrated with a primary focus on domestic sales,
(c)
le
___________________
___________________
___________________
___________________
___________________
le
___________________
___________________
on
/Sa
sourcing and production. That business model has become nearly

extinct, especially for large companies. As a result, accounting
rules have not kept up with present business operations and
practices.
Notes
Some differences with supply chain management and accounting

are:
___________________
___________________
Process versus Transactions: SCM flows across the

organization. As a process, it flows across many of the
company departments and boundaries. Accounting is
transactions-oriented with its focus on identifying and
summarizing vertical sales and make-or-buy activities.
Organization Direction: Supply chain management is

horizontal and crosses departments and organization
boundaries. Transactions are vertical and are consistent with
organization silos.
Scope: SCM extends into suppliers and logistics service

providers to gain inventory velocity and to reduce cycle time.
Accounting stays within the company facilities and boundaries
and looks inward.
Outward or Inward: Supply chain management looks both

companyinward and outward to deal with suppliers,
transport firms, warehouses and other logistics service
providers. Collaboration is important to managing the
complex, global supply chain. Accounting is traditional and
focuses within the corporate boundaries.
___________________
___________________
No
t
for
___________________
pro
___________________
Re
___________________
du
cti
___________________
(c)
UP
E
S,
Continuous versus Discrete: SCM is ongoing. Product is

always flowing. Accounting looks at different summaries
which create supply chain disconnects. Logistics costs are
individually recognized, not recognized at all or recognized in
different places. For example, freight and warehouses show on
the income statement and are recapped monthly. Inventory
appears on the balance sheet and is presented annually. So
three key logistics elements are dissected and shown in
different financial reports. And nowhere does time, a vital
business driver and the action that creates inventory and
service, appear on any financial statement. To some extent
this view of logistics costs makes accounting obsolete for
supply chain management.
Notes
on
/Sa
Dynamic versus Static: Supply chain management is

constantly changing as suppliers, customers, plants and
warehouses, shipment sizes and order mix and as store
locations change. This contrasts with accounting which has the
historical perspective of what has already happening. As a
result, accounting does not understand changes in
transportation costs, for example, because of changes in the
distance inbound and outbound shipments must travel, or in
the shipment size or in the mix of commodities being shipped.
___________________
___________________
___________________
___________________
___________________
cti
le
pro
du
These differences make it difficult to develop meaningful

performance metrics for supply chain management that are
recognized in the board room and that are aligned with the
company strategic plan. Financial metrics, while commonly used,
have limited application to supply chain management performance
improvement.
for
Re
For example, inventory velocity, inventory turns and inventory

yield maximization are important to achieving the best returns on
inventory and on the capital that it represents. Cycle time, from
purchase order to sale or time within the total supply chain, are
measure of company performance with strong bottom line
implications. Yet none of these are part of traditional accounting
measures which are rooted in the past.
No
t
Todays business world is focused on the customer. The perfect

customer order is a key performance metric for gaining and
maintaining customers and for achieving deeper customer
penetration. But again, these are not standard financial measure.
(c)
UP
E
S,
Similarly developing unique supply chain programs that

differentiate by A vs. B vs. C inventory, or by customer or by
product family segment or other delineator are not supported by
accounting. Financial standards do not readily recognize such
stratifications. Sourcing right decisions are also restricted by
accounting which has blinders as to the potential impact of the
outsourcing decision on the company and transforming its
processes, operations and results.
___________________
___________________
___________________
___________________
___________________
Check Your Progress
Notes
Activity
___________________
Develop
an assignment on
consignment accounting.
___________________
................... is one of the key drivers in todays business

world with offshore sourcing, foreign competition and
global markets.
___________________
2.
SCM extends into suppliers and logistics service

providers to gain inventory velocity and to reduce
....................
___________________
___________________
du
___________________
cti
1.
___________________
___________________
on
/Sa
Fill in the blanks:
le
The word consignment can be generally defined as the act of

sending a quantity of goods by the manufacturers and producers of
one country or place to their agents in another at the risk of the
principals for the purpose of sale.
___________________
pro
___________________
for
Re
Goods so sent are known as consignment. The sender of the goods

is called the consignor. Generally the manufacturers or producers
are consignors. The person to whom goods are forwarded for the
purpose of sale is known as the consignee. The consignment can be
classified as:
Outward consignment.
Inward consignment.
No
t
It is called outward when the dispatch of a quantity of goods from

one country to another is made for the purpose of sale and is called
inward when the receipt of the quantity of goods is made for the
purpose of sale.
(c)
UP
E
S,
Difference between Consignment and Sale

The following are the main points of the difference between
consignment and sale.
1.
Transfer of Legal Ownership of the Goods: In case of sale,

the legal ownership of the goods sold is transferred to the
purchaser of goods. Whereas in case of a consignment of goods,
the legal ownership of the goods is not transferred to the
consignment but the ownership of the goods remains vested in
the consignor till the goods consigned are sold by the
consignee.
4.
on
/Sa
___________________
___________________
___________________
___________________
___________________
cti
Expenses Incurred: In consignment, expenses incurred by

the consignee in connection with the goods consigned to him
are usually borne by the consignor whereas in case of a sale,
expenses incurred after sale of goods are born by the
purchaser.
Notes
du
3.
Relationship between Consignor and Consignee: In case

of a sale of goods, the relationship between the seller and the
purchaser of the goods is that of a creditor and a debtor
whereas in case of a consignment the relationship between the
consignor and the consignee is that of a principal and agent,
because the consignee is to sell goods on behalf of the
consignor.
Risk Attached to the Goods: In case of consignment, risk

attached to the goods sold lies with the consignor till the goods
consigned are sold by the consignee. But in case of a sale, risk
attached to the goods sold is transferred to the buyer of goods.
pro
2.
le
Return of Goods: In case of consignment, return of goods is

possible if the goods are not sold by the consignee. But in case
of sale, return of goods is not possible as goods once sold are
not returnable.
6.
Requirement of Account Sale: In case of consignment,

account sale is required to be submitted periodically by the
consignee to the consignor. But in case of sales no account sale
is required to be submitted by the purchaser to the seller.
No
t
for
Re
5.
Check Your Progress

Fill in the blanks:
................... consignment is when the dispatch of a

quantity of goods from one country to another is made
for the purpose of sale.
2.
................... consignment is when the receipt of the

quantity of goods is made for the purpose of sale.
UP
E
S,
1.
Summary
(c)
Management accounting in supply chains (or supply chain

controlling (SCC)) is part of the supply chain management concept.
___________________
___________________
___________________
___________________
___________________
le
The goal of management accounting in supply chains is the

optimization of these processes. Therefore, this strategy is a form
of controlling, focused on the support of management.
on
/Sa
Notes
___________________
___________________
Activity-based costing collects data that cuts across traditional

organisational functional boundaries. It can be used alongside
continuous improvement programmes such as Six Sigma or Kaizen
to create leaner and more responsive organisations and supply
chains.
___________________
___________________
cti
___________________
___________________
Suppliers were analysed into three categories depending on the

volume they delivered and the strategic importance of their
products to Sainsburys. The three categories were core suppliers,
middle to large suppliers, and small suppliers. Activity-based
costing information was developed mainly with core suppliers
to provide benchmark data and to identify development
opportunities.
___________________
du
___________________
___________________
pro
___________________
Re
Lesson End Activity
for
Visit a supplier and analyse the supply management accounting

techniques adopted by him.
Keywords
No
t
Benchmarking: It is used to compare performance of one

organisation against the best in class to provide a particular
product, process or service.
(c)
UP
E
S,
Consignment Account: The consignment account is one which

shows what profit or loss is made out of the dealing of the goods
sent on consignment. It is the combination of the trading and profit
and loss account of any particular consignment.
Consignment: It is defined as the act of sending a quantity of
goods by the manufacturers and producers of one country or place
to their agents in another at the risk of the principals for the
purpose of sale.
Open Book Accounting: It promotes margin improvement
through cost reduction, which can be shared between partner
organisations.
___________________
___________________
___________________
___________________
___________________
cti
Value Chain Costing: It is built on Porters value chain analysis

which argues that competitive advantage in the marketplace
results from either better customer value for the same cost (a
differentiation strategy) or the same customer value for less cost (a
cost leader strategy).
Notes
on
/Sa
Quality Costing: It aims to improve supply chain quality, both in

and across organisations. It has two benefits to reduce quality
costs and to increase the quality offering to the ultimate customer.
le
___________________
du
___________________
How accounting in supply chain can boost competition?
2.
Inventory measures reflect in part, the success in structuring

supplier relationship to optimize inventory at the buying
company. Discuss the aptness of the statement with example
to justify your response.
pro
1.
Distinguish between a sales and consignment.
4.
Explain accounting and logistics cost: an impediment to supply

chain effectiveness.
Re
3.
for
Further Readings
Books
No
t

S,

UP
E

Delhi.
(c)

Chand, New Delhi.
___________________
___________________
___________________
le
Web Readings
Notes
on
/Sa
www.aamu.edu/academics/bpa/accountinglogistics/pages/default.as
px
___________________
___________________
www.agribusiness-mgmt.wsu.edu/.../IventoryMgmtControl. pdf
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 17: Inventory Managements Techniques and Control
___________________
Write
an article on the
inventory costs in supply chain
___________________
management.
Inventory Managements
Techniques and Control
___________________
___________________
Objectives
topics:
cti
___________________
Inventory Measures
pro
Inventory Costs
du
___________________
Introduction
No
t
for
Re
Inventory is the major source of cost in the supply chain and also
the basis for improving customer service and enhancing customer
satisfaction. For example, high inventory at retail outlets may help
in making the goods easily available to customers and also result
in a growth in sales, but it will also increase costs and bring down
profitability. These are two major issues in conflict with each other
that need to be resolved, in order to optimize the inventory carried
by the organization.
Inventory Costs
S,
Excess inventory is a cost burden to industry in terms of capital

tied up, the cost of obsolescence and the cost of servicing product in
the supply chain. However, having the right amount of inventory
to meet customer requirements is critical. Inventory management
is about two things: not running out, and not having too much.
UP
E
Essentially, inventory is a reserve system to prevent stockouts.

However, as important as it is to prevent such a stockout, you also
dont want to hold onto too much inventory because holding costs
can become a major encumbrance. So how do you balance the two
and what is the right amount? More importantly, when should you
reorder in order to prevent a stockout? The answer to this can be
determined by obtaining and applying the appropriate inventory
models in decision-making.
(c)
___________________
___________________
___________________
___________________
le
The heart of inventory decisions lies in the identification of

inventory costs and optimizing the costs relative to the operations
of the organization. As inventory is a necessary but idle resource,
stock levels and inventory costs in manufacturing need to be
minimized. Large holdings of inventory also cause long cycle times
which may not be desirable.
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
Re
pro
___________________
Figure 17.1: Cost of Inventory with Time
No
t
for
The total inventory held is additive in nature. Raw materials are

converted to finished goods through a number of incremental
processes. Regardless of the operating process, all production costs
incurred during a particular period to the jobs or products
produced during that time period are assigned to the inventory.
These processes also add to the cost of inventory held by the
organization. Therefore, the cost of inventory increases with time.
This is shown in Figure above.
Various costs that are associated with inventories are:
(c)
UP
E
S,
Average Inventory
Average inventory is defined as half the batch size plus safety
stock.
Average inventory = (Order quantity + Safety stock)/2
The assumption made is that at any point in time, the cycle stock
(stock planned to be used excluding safety stock) is on an average
half the recipient quantity i.e. it is half-way in-between the receipt
quantity and zero left. The practical implication of this is that it
reduces order quantity and the average cycle stock by half. If a
part is manufactured in smaller batches, the inventory goes down.
___________________
___________________
___________________
Holding (or Carrying) Costs
___________________
___________________
cti
The very fact that an item is held in stock accrues cost. These are
the real costs to hold inventory. Such costs are called inventory
holding costs or carrying costs. This broad category includes the
costs for:
du
Storage and Handling: This includes the total warehousing

facility. This is typically 6 per cent. It is estimated that the
total cost to the company is 35 per cent per annum of the value
of inventory held, or 3 per cent a month.
pro
1.
Notes
on
/Sa
Safety stock is determined from such factors as customer service

level required, demand variability and replenishment lead-time.
Once the customer service level required is agreed upon, safety
stock is calculated.
le
Insurance: Insurance accounts for a portion of the inventory

costs. Since it is better to be safe than sorry, companies
generally get the material insured. It generally works out to 1
per cent.
3.
Pilferage and Spoilage: This accounts for anything from 2

per cent upwards, depending on the industry and the type of
inventory that is being carried.
4.
Obsolescence and Deterioration: This is inventory which is

classified as being unfit to sell, or lying in the storage waiting
for the appropriate use. It is typically estimated to be about 1
per cent of the Inventory carrying cost.
5.
The Opportunity Cost of Capital: This is the cost to set-up

the warehousing facility. This is charged at the Lost
opportunity cost and not the interest rate. Typically rated at
25 per cent, this Lost opportunity cost is the return that
could have been obtained if the capital had been invested in
anything other than inventory.
UP
E
S,
No
t
for
Re
2.
In addition, there are some other charges that may among other
things include depreciation and taxes.
(c)
These costs increase proportionately with the increase in the

inventory level. Obviously, if the holding costs are high, the
organization should try to carry lower inventory and frequently
replenish the stock.
___________________
___________________
___________________
___________________
___________________
le
___________________
___________________
___________________
___________________
on
/Sa
Though holding costs are represented by a straight line, there are

some fixed and variable costs of holding inventory i.e. some of the
costs will not change by increase or decrease in inventory levels,
while some costs are dependent on the levels of inventory held. The
general breakdown for inventory holding costs has been shown in
Table 17.1.
Notes
Table 17.1: Fixed and Variable Holding Costs

Fixed costs
___________________
___________________
Variable cost
Capital costs of warehouse or store
Cost of capital in inventory
Cost of operating the warehouse or

store
Insurance on inventory value
Personnel costs
Losses due to obsolescence, theft and

spoilage
du
___________________
cti
___________________
___________________
Cost of renting warehouse or storage

space
pro
___________________
for
Re
Capital costs and costs of operating the warehouse including the

personnel are fixed, but interest costs of capital held in inventory
etc. are variable. The reason why the cost curve for holding
inventory is a straight line is that the contribution of the variable
costs in the total holding costs is much greater than that of the
fixed costs.
Ordering Costs
No
t
What is the real cost of placing and processing a purchase order?

The total cost includes the cost of purchasing, receiving, incoming
inspection and the accounts payable. Each of these departments
exists to satisfy continuous demand for material. We arrive at a
simple equation to calculate the Avg. cost per order as:
(c)
UP
E
S,
Avg. Cost per Order = Total Budget/Number of Orders placed per

year
Although it costs money to hold inventory, it also, unfortunately,
costs money to replenish inventory, either through the purchase
cycle or through the manufacturing cycle.
Inventory Ordering Costs are those costs that are incurred in the
purchase cycle are called procurement costs or inventory ordering
costs. Ordering costs have two components:
(a) One component that is relatively fixed, and
(b) Another component that will vary.
Table 17.2: Fixed and Variable Ordering Costs

Notes
Variable cost
Staffing costs (payroll, benefits, etc.)
Shipping costs
Fixed costs on IT systems
Cost of placing and order (phone,

postage, order forms)
Office rental and equipment costs
Running costs of IT systems
Fixed costs of vendor development
Receiving and inspection costs
on
/Sa
Fixed costs
le
___________________
___________________
___________________
___________________
Variable costs of vendor development
cti
___________________
The fixed and variable components of the ordering or procurement

costs are shown in Table 17.2.
___________________
___________________
pro
du
One major component of cost associated with inventory is the cost

of replenishing it. If a part or raw material is ordered from outside
suppliers, and places orders for a given part with its supplier three
times per year instead of six times per year, the costs to the
organization that would change are the variable costs, and which
would probably not are the fixed costs.
for
Re
There are costs incurred in maintaining and updating the

information system, developing vendors, evaluating capabilities of
vendors. Ordering costs also include all the details, such as
counting items and calculating order quantities. The costs
associated with maintaining the system needed to track orders are
also included in ordering costs. This includes phone calls, typing,
postage, and so on.
No
t
Though vendor development is an ongoing process, it is also a very

expensive process. With a good vendor base, it is possible to enter
into longer-term relationships to supply needs for perhaps the
entire year. This changes the when to how many to order and
brings about a reduction both in the complexity and costs of
ordering.
UP
E
S,
Clearly, the fixed costs related to procurement or order placement

are significantly greater than the variable costs associated with
placing orders.
Setup (or Production Change) Costs
(c)
Ordering costs are incurred in the purchase cycle, while setup costs
are incurred in the manufacturing cycle. Therefore, the set-up cost
is actually represented by the inventory ordering costs. These two
costs are considered to be exclusive.
___________________
___________________
___________________
le
For manufactured items, the equivalent cost is known as set-up. In

the case of subassemblies, or finished products that may be
produced in-house, the costs associated with changing over
equipment from producing one item to producing another is
usually referred to as setup costs.
on
/Sa
Notes
___________________
___________________
___________________
This includes all the costs that are not related to the order
quantity (the costs incurred to prepare the order paperwork,
processing and tracking the order operations, the cost of setting up
the
machine,
and
first
off
inspection).
This
total
ordering/processing cost is eventually passed on to the products.
___________________
cti
___________________
___________________
___________________
Set-up costs reflect the costs involved in obtaining the necessary

materials, arranging specific equipment setups, filling out the
required papers, appropriately charging time and materials, and
moving out the previous stock of materials, in making each
different product. If there were no costs or loss of time associated
in changing from one product to another, many small lots would be
produced, permitting reduction in inventory levels and the
resultant savings in costs.
du
___________________
___________________
Re
pro
___________________
Shortage or Stock-out Costs
(c)
UP
E
S,
No
t
for
No manufacturing facility can afford to keep sufficient stock to

meet every demand. Stock-outs occur at some point. Stock-outs
result in either a lost sale, or if the customer is prepared to wait, a
back order. Lost sale reflects the risk of losing the business to
competition. In addition, back orders cause additional costs, viz.
extra paperwork, the time spent handling this extra paperwork, a
system to handle the back orders, extra delivery notes, and
invoices, extra packing and delivery costs.
When the stock of an item is depleted, an order for that item must
either wait until the stock is replenished or be cancelled. There is a
trade-off between carrying stock to satisfy demand and the costs
resulting from stock-out. The costs that are incurred as result of
running out of stock are known as stock out or shortage costs.
Understanding the cost of a stock-out is critical to the
implementation of any inventory model. Unless these costs are
known, the organization cannot balance the costs (and risk) of
holding inventory with the loss of profits when an item is out of
stock.
Notes
Activity
on
/Sa
For a retailer, the costs include both the lost profits from the
immediate order because of cancellations, and the long-run costs if
stockouts reduce the likelihood of future orders. For a
manufacturer, these include the loss of production as well as
capacity. In addition, the ultimate consequence is that sales of
goods may be lost, and finally customers can be lost.
le
___________________
Prepare
an informative report
on the factors affecting the
___________________
levels
of inventory.
___________________
___________________
___________________
du
cti
If the unfulfilled demand for the items can be satisfied at a later

date (back order case), in this case, cost of back orders are assumed
to vary directly with the shortage quantity (in rupee value) and the
cost involved in the additional time required to fulfil the backorder
( / /year).
pro
However, if the unfulfilled demand is lost, the cost of shortages is

assumed to vary directly with the shortage quantity ( /unit
shortage). When this is related to the total cost of inventory, the
cost decreases increasingly with the increase in inventory, as this
cost is relatively fixed with respect to the value of the inventory.
Re
Frequently, the assumed shortage cost is little more than a guess,

although it is usually possible to specify a range of such costs.
Check Your Progress
for
Fill in the blanks:
Raw materials are converted to ................... through a

number of incremental processes.
2.
................... is defined as half the batch size plus safety

stock.
3.
................... are the real costs to hold inventory.
No
t
1.
S,

The factors affecting levels of inventory are as follows:
Production Rate: The production rate can be defined as
number of units manufactured over a period of time.
Production Rate = No. of Units Manufactured/time.
The time can be measured in days, weeks, or on an annual

basis. Production rate is also influenced by the demand for the
product, which could be either periodic (seasonal/cyclic) or a
constant.
(c)
UP
E
___________________
___________________
___________________
___________________
___________________
Lead-time: Lead-time is defined as time period from initiation

of an activity to its completion. For inventory management, we
need following lead times: Purchase lead-time, Manufacturing
lead-time and Delivery lead-time.
Rework/Scrap Rate: This rate is dictated by the efficiency of

the manufacturing process. It involves knowing the number of
defective units that are produced by a manufacturing unit. This
is a highly empirical rate and very much depends upon the skill
of the labour operating the machine and the accuracy offered by
the machine.
Excess inventory is the quantity of material in stock or on

order that is greater than the anticipated demand for an agreed
time period.
Obsolete inventory on the other hand is the inventory that

results from an unanticipated demand. This inventory typically
occurs due to model run outs, engineering change notes, or
supplier minimum/multiple order quantities. Companies tend
to be reluctant to write off this value as it is a loss in the books
of accounting, and so affects the profit.
inventory measures.
___________________
___________________
___________________
___________________
___________________
___________________
Re
___________________
pro
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du
cti
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on
/Sa
Notes
Activity
___________________
Create
le
for
Inventory Measures
No
t
Inventory measures reflect, in part, the success in structuring

systems to optimize the production rate, the lead time and the
scrap rate. Several aggregate performance measures can be used to
judge how well a company is able to control these factors and
utilizing its inventory resources.
Average Inventory Investment: The rupee value of a
companys average level of inventory is one of the most common
measures of inventory. The information is easily available and
it is easy to interpret. It represents the average investment of
the company. However, it does not take into account the
differences between companies. For example, a larger company
will generally have more inventory than a smaller company,
though it could be using its inventory more efficiently. This
makes it difficult for the company to make comparisons with
other companies.
Inventory Turnover Ratio: In order to overcome this

problem, inventory turnover ratio is used. This measure allows
(c)
UP
E
S,
for better comparison among companies. This is calculated as a

ratio of companys sales to its average inventory investment:
on
/Sa
Notes
le
___________________
Inventory turnover = annual cost of goods sold/average

inventory investment
___________________
___________________
___________________
___________________
du
cti
This is a measure of how many times during a year the inventory

turns around. It is the ratio of the cost of annual sales to the
average inventory level. The higher the inventory turns, the better
the firm uses its inventory assets. Another common measure is
days of supply. A firms days of supply is found by dividing the
average inventory level by the cost of one days sales.
Check Your Progress
pro
Fill in the blanks:
................... can be defined as number of units

manufactured over a period of time.
2.
................... is defined as time period from initiation of

an activity to its completion.
3.
................... rate is dictated by the efficiency of the

manufacturing process.
for
Re
1.
Summary
No
t
The heart of inventory decisions lies in the identification of

inventory costs and optimizing the costs relative to the operations
of the organization: When items should be ordered, how large the
order should be, and when and how many to deliver.
S,
The following costs are generally associated with inventories:

Holding (or carrying) costs, Cost of ordering, Setup (or production
change) costs, and Shortage or Stock-out Costs.
UP
E
Holding costs increase proportionately with the increase in the

inventory level. Obviously, if the holding costs are high, the
organization should try to carry lower inventory and frequently
replenish the stock.
(c)
Setup or ordering costs are involved in placing an order or setting

up the equipment to make the product. The ordering cost includes
the cost of purchasing, receiving, incoming inspection and the
accounts payable. The costs associated with changing over
equipment from producing one item to producing another are
usually referred to as setup costs.
___________________
___________________
___________________
___________________
___________________
le
Lesson End Activity

Notes
on
/Sa
Prepare a presentation on the inventory management techniques

and control in supply chain management.
___________________
___________________
___________________
Keywords
___________________
Average Inventory: Defined as half the batch size plus safety

stock.
cti
___________________
___________________
Excess Inventory: The quantity of material in stock or on order

that is greater than the anticipated demand for an agreed time
period.
___________________
du
___________________
Lead-time: Lead-time is defined as time period from initiation of

an activity to its completion. For inventory management, we need
following lead times: Purchase lead-time, manufacturing lead-time,
Delivery lead-time.
___________________
pro
___________________
Re
Obsolete Inventory: It is the inventory that results from an

unanticipated demand.
Production Rate: The production rate can be defined as number
of units manufactured over a period of time.
No
t
for
Rework/Scrap Rate: This rate is dictated by the efficiency of the

manufacturing process. It involves knowing the number of
defective units that are produced by a manufacturing unit. This is
a highly empirical rate and very much depends upon the skill of
the labour operating the machine and the accuracy offered by the
machine.
(c)
UP
E
S,

1.
What is consignment of goods? Is it the same as goods on

sale or return?
2.
Describe how the consignment account is maintained in the

books of (a) consignor (b) the consignee.
3.
If a consignment remains partly unsold (closing stock or

unsold stock) at the time of balancing the books, how do you
deal with it?
Further Readings
Books
on
/Sa
Notes
le
___________________

___________________
___________________
___________________
cti

___________________
___________________
___________________

Delhi.
___________________
pro
du


New Delhi.
Re

Delhi.
for

Chand, New Delhi.
Web Readings
No
t
www.management-hub.com/inventory-management-intro. html
shodhganga.inflibnet.ac.in/bitstream/10603/703/12/12_chapter6.pdf
(c)
UP
E
S,
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___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
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___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 18: Cost Accounting
___________________
Prepare
a report on the scope
of cost accounting in the chain
___________________
management.
Cost Accounting
___________________
Objectives
___________________
topics:
Objectives of Cost Accounting
Costing Systems
Elements of Cost
cti
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pro
du
___________________
Re
Introduction
No
t
for
Cost accounting involves the application of costing principle,

methods and techniques for ascertaining costs and their control by
comparing actual costs with the budget or standard. Cost
accounting is an art also, because it includes the ability and skill
with which a cost accountant has to apply his basic knowledge to
particular circumstances. It involves the use of various costing
techniques and methods such as marginal costing, standard
costing, budgetary control, etc. The applications of these
techniques help him in dealing with various problems such as cost
reduction, cost control, ascertainment of profitability, etc.
UP
E
S,
Cost accounting is also the practice of a cost accountant because he

has to make constant efforts in the field of cost accounting. Such
efforts include the information presentation to the top
management for the purpose of managerial decision-making and
keeping various records of business.
(c)
The scope of any subject refers to the various areas of study

included in that subject. As regards, the scope of cost accounting is
very wide and includes the following:
___________________
___________________
___________________
le
(i) Technique and Process of Costing: The technique of costing

involves two distinct steps, namely, (a) classification of costs
according to various elements and (b) allocation and
apportionment of the expenses which cannot be directly
charged to production. As a process, costing is concerned with
the routine ascertainment of cost with a formal and selected
procedure.
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
cti
(ii) Cost Control: Cost control is the guidance and regulation by

executive action of the costs of operating and undertaking.
This guidance and regulation is done by the executive who is
responsible for causing the deviation. This process will become
clear by enumerating the steps involved in any technique of
cost control. Cost control is exercised through a variety of
techniques such as inventory control, product control, quality
control, budgetary control, standard costing, etc.
___________________
___________________
du
___________________
___________________
pro
___________________
(c)
UP
E
S,
No
t
for
Re
(iii) Ascertainment of Cost: It deals with the collection and

analysis of expenses, the measurement of production at
different stages and linking up of production with the
expenses. To achieve the first step, costing has developed
different systems such as Historical or Actual Cost, Estimated
Cost and Standard Cost. For achieving the second step, costing
has developed different methods such as single or output
costing, job costing, contract costing, etc. Finally, for achieving
the last step costing has developed important techniques such
as, Marginal Costing, Standard Costing, Budgetary Control,
Total Absorption Costing and Uniform Costing.
(iv) Cost Audit: The terminology of ICMA, London, defines cost
audit, as the verification of the correctness of cost accounts
and of the adherence to the cost accounting plan. Cost audit
has a much wider role to play in an industry or organisation
than people could imagine. The aim of cost audit is to highlight
the shortcomings inherent in the cost accounting system.
(v) Budgetary Control: According to Heiser, budgetary control
can be defined as an overall blue print of a comprehensive
plan of operations and actions expressed in financial terms.
According to him, budgeting process involves the preparation
of a budget, comparison of budgeted and actual expenditure
and income, planning and coordinating for control, etc.
Objectives of Cost Accounting
___________________
Construct
a
written
assignment on the objectives
___________________
of cost
accounting.
___________________
___________________
___________________
for
Re
pro
du
cti
(i) Ascertainment of Cost: Ascertainment of cost is primary

objective of cost accounting in the initial stages of its
development. However, in modern times this has assumed the
secondary objective of cost accounting. Cost ascertainment
involves the collection and classification of expenditures at the
first instance. Those items of expenditures or expenses which
are capable of charging directly to the products manufactured
are allocated. Then the other expenses which are not capable
of direct allocation are apportioned on some suitable basis.
Thus the cost of production of goods manufactured is
ascertained. In this process, cost accounting involves
maintenance of different type of books to record various cost
elements. Cost of production is ascertained by using any of the
costing technique and method such as historical costing,
standard costing, marginal costing, job costing, unit costing,
etc.
Notes
Activity
on
/Sa
The objectives of cost accounting are ascertainment of cost, fixation

of selling price of product, proper recording and presentation of
cost data to the management for measuring efficiency and for cost
control. Following are the main objectives of cost accounting:
le
S,
No
t
(ii) Fixation of Selling Price: Every business enterprise aims at

maximising profit. The total cost of production constitutes the
basis on which selling price is fixed by adding a part of profit.
Cost accounting furnishes both the total cost of production as
well as cost incurred at each and every stage of production. No
doubt other factors are taken into consideration before fixing
of selling price such as market conditions, the area of
distribution, volume of sales, etc. But cost plays the
dominating role in the price fixation.
(c)
UP
E
(iii) Cost Control: At one time cost control was considered as

secondary objective of cost accounting. But in modern business
it constitutes the primary objective. Cost control is exercised at
different stages in an industry, viz., acquisition of materials,
recruiting of labour, during the production process and so on.
As such, we have material cost control, labour cost control,
production cost control, quality control and so on. However,
control over cost is exercised through the techniques of
budgetary control, historical costing and standard costing. The
___________________
___________________
___________________
___________________
___________________
functions of cost accounting.

___________________
___________________
___________________
(iv) Provide Various Policies: Cost data to a great extent helps

in formulating the various policies of a business or industry
and in decision-making. As every alternative decision involves
investment of capital outlay, costs play an important role in
decision-making of organisation. Therefore, availability of cost
data is a must for all levels of management.
cti
___________________
control techniques enable the management in knowing the

operating efficiency of a business organisation.
on
/Sa
Notes
Activity
___________________
Make
a detailed report on the
le
___________________
(v) Preparation of Accounts and Reports: The management of

every business or organisation constantly rely upon the reports
on cost data in order to know the level of efficiency relating to
purchase, production, sales and operating positions. Financial
accounts provide various information only at the end of the
year because closing stock value is available only at the end of
the year. But cost accounts provide the value of closing stock
time to time by a system of continuous stock verification.
Using the value of closing stock, it is possible to prepare final
accounts and know the operating results of the business or
industry.
___________________
du
___________________
___________________
Re
pro
___________________
Check Your Progress
for
Fill in the blanks:

Cost accounting involves the application of costing
principle, methods and techniques for ascertaining
costs and their control by comparing actual costs with
the ...................
(c)
UP
E
S,
No
t
1.
2.
................... is the guidance and regulation by executive

action of the costs of operating and undertaking.
3.
................... is defined as the verification of the

correctness of cost accounts and of the adherence to the
cost accounting plan.

According to Weltemer and Blocker, cost accounting is to serve
management in the execution of various policies and in comparison
of actual and estimated results in order that the value of each
policy may be appraised and changed to meet the future
conditions. Following are the main functions of cost accounting:
(a) To establish various cost centres in the business or industry.
(c) To prepare various reports on wastages, loss of labour, idle

capacity of machines so as to improve profitability of business
or industry.
___________________
Create
a draft on the
essentials of cost accounting
___________________
system.
___________________
___________________
___________________
cti
(d) To ascertain the cost of every product, job or process both in

terms of total cost and per unit cost of product.
Notes
Activity
on
/Sa
(b) To provide necessary data to the management for fixing the

selling price.
le
du
(e) To implement various cost control techniques such as

budgetary control, historical costing and standard costing.
pro
(f) To design suitable system for defining responsibilities and

controlling cost.
(g) To prepare cost schedules to assist management in decisionmaking.
Re
(h) To prepare cost statements and profit and loss account for
giving advice to management.
for
(i) To assist management in the valuation of closing stock of raw

materials and work-in-progress so that too much of capital is
not locked up in unnecessary inventories.
No
t
An ideal system of costing is that which achieves the objectives of a

costing system and brings all advantages of costing to the business.
The following are the main essentials of an ideal cost accounting
system:
Simplicity: The system of costing should be simple and plain
so that it may be easily understood even by a person of average
intelligence. Cost accounting system involves detailed analysis
of cost. To avoid complications in the procedure of cost
ascertainment an elaborate system of costing should be
avoided and every care must be taken to keep it as simple as
possible.
2.
Suitability to the Business: The cost accounting system

should be capable of adopting itself to the changing situations
of business. It must be capable of expansion or contraction
depending upon the needs of the business.
(c)
UP
E
S,
1.
___________________
___________________
___________________
___________________
___________________
Accuracy: The system of cost accounting must provide for

accuracy in terms of both ascertainment of cost and
presentation of cost data. Otherwise it will prove to be
misleading.
4.
Comparability: The records to be maintained must facilitate

comparison over a period of time. The past records must serve
as a basis to guide the future.
5.
Economical: The costs of production costing system must be

less. It must result in increased benefit when compared to the
expenses incurred in installing it.
6.
Uniformity: The various forms and documents used under

costing system must be uniform in size and quality of paper.
Printed forms must be used to avoid delay in the preparation
of various reports. This also reduces the unnecessary burden of
clerical staff. Forms of different colours can be used in
different documents or reports.
7.
Reconciliation of Cost and Financial Accounts: It

possible the cost and financial accounts should be interlocked
into one internal accounting scheme. The system of cost
accounts must be capable of reconciling with financial accounts
so as to check accuracy of both the system of accounts.
___________________
___________________
___________________
___________________
___________________
___________________
Promptness: An ideal costing system is one which provides

cost data in an analytical form to the management. So all the
departments of an industry must analyse and record the
relevant items of cost promptly in order to furnish cost
information on a regular basis to various levels of
management. This helps in checking up the progress of the
business activities on a regular basis.
(c)
UP
E
S,
No
t
8.
cti
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du
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pro
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Re
___________________
on
/Sa
3.
for
Notes
le
9.
Equity: The basis of apportioning overheads to products,

departments or jobs must be fair and equitable.
10. Duties and Responsibilities of the Cost Accountant:

Under a good system of cost accounting the duties and
responsibilities of the cost accountant should be clearly
defined. The cost accountant should have access to all works
and departments.
Check Your Progress
Notes
Activity
___________________
Make
a chart on the main
costing systems available for
___________________
chain
management.
The system of cost accounting must provide for

................... in terms of both ascertainment of cost and
presentation of cost data. Otherwise it will prove to be
misleading.
The basis of apportioning overheads to products,
departments or jobs must be ................... and
....................
___________________
___________________
du
2.
___________________
cti
1.
on
/Sa
Fill in the blanks:
Costing Systems
Re
pro
Costing systems defined an accounting system as an organisation

of forms, records and reports, closely co-ordinated to facilitate
business management through determining certain basic and
required information. A cost system is an aspect of the accounting
system designed specifically to provide information concerning
costs and efficiency. The following are main costing systems:
No
t
for
(i) Estimated Cost System: It is a system under which the

various elements of costs are estimated or predetermined for
recording the costs in the books of accounting. Estimated costs
are established on an average basis taking into account the
past performance. Estimated cost system helps in comparing
such cost with actual cost to know variations between
estimated cost and actual cost. Estimated cost serves as a
basis for selling price fixation. A major limitation of estimated
cost system is that estimated costs are seldom accurate.
Estimated costs only constitute statistical information and are
not recorded in the books.
UP
E
S,
(ii) Historical Cost System: A historical system is one which

accumulates actual costs after the operations have taken
place. So under historical cost system, cost of a product is
ascertained after they have been actually incurred. This
system is not so popular because it suffers from the following
limitations:
It is an expensive system as a large number of records and
forms are to be maintained under this system.
(c)
le
It does not provide any basis against which efficiency can

be measured.
___________________
___________________
___________________
___________________
___________________
As historical costs are recorded after the event takes place

it is not possible to rectify the defect until the inefficiency.
It does not facilitate preparation of tender and quotations.
on
/Sa
Notes
Activity
___________________
Give
a report on the role of
cost in cost accounting.
___________________
le
(iii) Standard Cost System: It is a system of cost accounting

which makes use of predetermined standards relating to
elements of cost. Having fixed the standard costs, they are
compared with actual costs to develop variances to know the
efficiency of industry or business. Standard cost system is
applicable where the production process is standardized.
Standard costs are recorded in the accounting books.
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
pro
___________________
The role of cost in cost accounting is the following:

It helps in fixation of pricing decisions.
2.
It helps to make or buy decisions in respect of cost

components.
3.
It helps in deciding whether an asset is to be bought or hired.
4.
It is useful in deciding the acquisition of permanent assets.
6.
for
5.
Re
1.
It helps in choosing from among various alternatives.

It helps in matters relating to replacement of fixed type of
equipment by a new one.
It helps in determining the optimum level of production
depending upon the behaviour of cost in relation to scale of
production.
8.
It helps in evaluating the incurrence of various elements of

cost on different projects or jobs.
9.
It helps in deciding whether to sell a product at a particular

stage of production and sell at the stage of its completion.
(c)
UP
E
S,
No
t
7.
10. It helps in deciding to shut down or continue the production

operation of a certain department.
Elements of Cost
The correct of interpretation of the term cost may also be
understood by having knowledge about basic elements of cost.
These elements have been shown in the following figure:
on
/Sa
Notes
le
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
Figure 18.1: Elements of Cost
The following is the brief description of these elements of cost:
Re
pro
(i) Direct Material: Direct material is material that can be

directly identified with each unit of the product. Direct
material can be conveniently measured and directly charged to
the product. For example, raw cotton in textile manufactures
sugarcane in sugar industry and leather for shoe-making
industry. The cost of direct material includes the following:
All type of raw materials issued from the store,
Raw materials specifically purchased for the specific job or

project,
Raw materials transferred from one cost centre to another

cost centre.
Primary packing material, like cartons, cardboard boxes

etc.
No
t
for
UP
E
S,
(ii) Indirect Material: They are those materials which do not

normally form a part of the finished product. It has been
defined as materials which cannot be allocated but which can
be apportioned to or absorbed by cost centres or cost units.
These are:
Stores used in maintenance of machinery, buildings etc.,
like lubricants, cotton waste, bricks and cements.
Stores used by the service departments i.e., nonproductive departments like Power house, Boiler house
and Canteen, etc.
(c)
Materials which due to their cost being small, are not

considered worthwhile to be treated as direct materials.
___________________
___________________
___________________
le
___________________
___________________
___________________
___________________
Direct labour engaged on the actual production of the

product.
Direct labour engaged in adding this manufacture by way

of supervision, maintenance and tool setting, etc.
Inspectors, analysts, etc. specially required for such

production.
cti
___________________
on
/Sa
(iii) Direct Labour: Direct labour is labour that can be identified

directly with a unit of finished product. All the labour charges
expended in altering the construction, composition,
confirmation or condition of the product is included in it. It
includes the payment of direct wages made to the following
groups of direct labour:
Notes
___________________
___________________
___________________
___________________
du
___________________
Re
pro
(iv) Indirect Labour: The wages of that labour which cannot be

allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour. In other
words, wages paid to labour which are employed other than or
production constitute indirect labour costs.
for
(v) Direct or Chargeable Expenses: They include all

expenditures other than direct material and direct labour that
are specifically incurred for a particular product or job. Such
expenses are charged directly to the particular cost account
concerned as part of the prime cost.
(c)
UP
E
S,
No
t
(vi) Indirect Expenses: Indirect expenses are expenses which

cannot be allocated but which can be apportioned to or
absorbed by cost centres or cost units as rent, insurance,
municipal taxes, salary of manager, canteen and welfare
expenses, power and fuel, cost of training for new employees,
lighting and heating, telephone expenses, etc.
(vii) Overheads: Overheads may be defined as the cost of indirect
materials, indirect labour and such other expenses including
services as cannot conveniently be charged direct to specific
cost units. Thus, overheads are all expenses other than direct
expenses. Overheads may be divided into following categories:
Factory or works overheads cover all indirect expenditure

incurred by the undertaking from the receipt of the order
until its completion is ready for dispatch either to the
customer or to the finished goods store.
Office and administrative overhead consists of all

expenses incurred in the direction, control and
administration of a factory.
Selling overheads comprise the cost of products or
distributors of soliciting and recurring orders for the
articles of commodities dealt in and of efforts to find and
retain customers.
Notes
on
/Sa
le
___________________
___________________
___________________
___________________
___________________
cti
Distribution overheads comprise all expenditure incurred

from the time the product is completed in the work until it
reaches its destination.
du
Check Your Progress
pro
Fill in the blanks:
................... an organisation of forms, records and

reports, closely
2.
................... is defined as an organisation of forms,

records and reports, closely co-ordinated to facilitate
business management through determining certain
basic and required information.
3.
................... is material that can be directly identified

with each unit of the product.
4.
................... are those materials which do not normally

form a part of the finished product.
No
t
for
Re
1.
Summary
UP
E
S,
Cost accounting is an important development in the field of

accounting. It is the process of accounting for costs. It embraces the
accounting procedures relating to recording of all income and
expenditure and the preparation of various statements and reports
with the object of ascertaining and controlling costs The objectives
of cost accounting are ascertainment of cost, fixation of selling
price of product, proper recording and presentation of cost data to
the management for measuring efficiency and for cost control.
(c)
Lesson End Activity

Prepare an informative presentation on cost accounting and the
elements of cost.
___________________
___________________
___________________
___________________
___________________
le
Keywords
Notes
on
/Sa
Cost Accounting: It involves the application of costing principle,

comparing actual costs with the budget or standard.
___________________
___________________
___________________
Cost Centre: It refers to a part of a factory for which costs are

accumulated separately.
___________________
Cost Unit: It is defined by the ICMA as a quantitative unit of

product or service in relation to which costs are ascertained.
cti
___________________
___________________
Costing Systems: Defined an accounting system as an

organisation of forms, records and reports, closely coordinated to
facilitate business management through determining certain basic
and required information.
___________________
du
___________________
___________________
___________________
pro
Direct Material: Material that can be directly identified with

each unit of the product.
Re
Indirect Labour: The wages of that labour which cannot be

allocated but which can be apportioned to or absorbed by, cost
centres or cost units is known as indirect labour.
Job Costing: This refers to a system of costing where the items of
direct costs are traced to specific jobs or orders.
No
t
for
Overheads: Defined as the cost of indirect materials, indirect

labour and such other expenses including services as cannot
conveniently be charged direct to specific cost units.
(c)
UP
E
S,
1. Cost accounting is becoming more and more relevant in the

emerging economic scenario in India. Explain this statement.
2. Cost accounting system that simply records costs for the
purpose of fixing sale price has accomplished only a small part
of its mission. Explain.
3. What is costing? What are the objectives of cost accounting?
4. Explain the importance
Management.
of
9. Write short notes on the following:

(a) Cost unit and cost centre
(b) Costing systems
(c) Role of cost in cost accounting
costing
in
supply
chain
Further Readings
Books
on
/Sa
Notes
le
___________________

___________________
___________________
___________________
cti

___________________
___________________
___________________

Delhi.
___________________
pro
du


New Delhi.
Re

Delhi.
for

Chand, New Delhi.
Web Readings
No
t
(c)
UP
E
S,
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 19: EVA and Budgets
___________________
Make
a report on the
economic value added and
the ___________________
method of its calculation.
EVA and Budgets
___________________
Objectives
___________________
topics:
Budget
Budgetary Control
cti
___________________
___________________
du
___________________
pro
Introduction
for
Re
In corporate finance, Economic Value Added or EVA, a registered

trademark of Stern Stewart & Co and of EVA Dimensions LLC, is
an estimate of a firms economic profit being the value created in
excess of the required return of the companys investors (being
shareholders and debt holders).
Calculating EVA
S,
No
t
EVA is the profit earned by the firm less the cost of financing the
firms capital. The idea is that value is created when the return on
the firms economic capital employed is greater than the cost of
that capital. This amount can be determined by making
adjustments to GAAP accounting. There are potentially over 160
adjustments that could be made but in practice only five or seven
key ones are made, depending on the company and the industry it
competes in.
UP
E
EVA is net operating profit after taxes (or NOPAT) less a capital
charge, the latter being the product of the cost of capital and the
economic capital. The basic formula is:
EVA
(r
c).K
NOPAT c.K
(c)
where:
r
NOPAT
, is the Return on Invested Capital (ROIC);
K
___________________
___________________
___________________
on
/Sa
C is the weighted average cost of capital (WACC);
Notes
le
___________________
K is the economic capital employed;
___________________
NOPAT is the net operating profit after tax, with adjustments and
translations, generally for the amortization of goodwill, the
capitalization of brand advertising and others non-cash items.
___________________
___________________
___________________
therefore
cti
EVA = net operating profit after taxes a capital

charge [the residual income method]
___________________
EVA = NOPAT (c capital), or alternatively
___________________
EVA = (r x capital) (c capital) so that
du
___________________
EVA = (r-c) capital [the spread method, or excess

return method]
___________________
___________________
pro
where:
r = rate of return, and
Re
c = cost of capital, or the Weighted Average Cost

of Capital (WACC).
for
NOPAT is profits derived from a companys operations after cash

taxes but before financing costs and non-cash bookkeeping entries.
It is the total pool of profits available to provide a cash return to
those who provide capital to the firm.
No
t
Capital is the amount of cash invested in the business, net of

depreciation. It can be calculated as the sum of interest-bearing
debt and equity or as the sum of net assets less non-interestbearing current liabilities (NIBCLs).
(c)
UP
E
S,
The capital charge is the cash flow required to compensate

investors for the riskiness of the business given the amount of
economic capital invested.
The cost of capital is the minimum rate of return on capital
required to compensate investors (debt and equity) for bearing
risk, their opportunity cost.
Another perspective on EVA can be gained by looking at a firms
return on net assets (RONA). RONA is a ratio that is calculated by
dividing a firms NOPAT by the amount of capital it employs
(RONA = NOPAT/Capital) after making the necessary adjustments
of the data reported by a conventional financial accounting system.
EVA = (RONA required minimum return) net investments
If RONA is above the threshold rate, EVA is positive.
Added Value = Price that the product/service is sold at cost of

producing the product
___________________
___________________
___________________
___________________
___________________
cti
Added Value can also be defined as the difference between a

particular products final selling price and the direct and indirect
input used in making that particular product.
Notes
on
/Sa
Added value: Added value in financial analysis of shares is to be

distinguished from value added. Used as a measure of shareholder
value, calculated using the formula:
le
pro
du
The difference is profit for the firm and its shareholders after all
the costs and taxes owed by the business have been paid for that
financial year. Value added or any related measure may help
investors decide if this is a business that is worthwhile investing
on, or that there are other and better opportunities (fixed deposits,
debentures).
for
Re
Market value added: Market Value Added (MVA) is the

difference between the current market value of a firm and the
capital contributed by investors. If MVA is positive, the firm has
added value. If it is negative, the firm has destroyed value. The
amount of value added needs to be greater than the firms
investors could have achieved investing in the market portfolio,
adjusted for the leverage (beta coefficient) of the firm relative to
the market.
The formula for MVA is:
No
t
MVA = V K
where:
MVA is market value added
S,
V is the market value of the firm, including the value of the firms
equity and debt
UP
E
K is the capital invested in the firm
(c)
MVA is the present value of a series of EVA values. MVA is

economically equivalent to the traditional NPV measure of worth
for evaluating an after-tax cash flow profile of a project if the cost
of capital is used for discounting.
Relationship to Market Value Added: The firms market value
added, or MVA, is the discounted sum (present value) of all future
expected economic value added:
___________________
___________________
___________________
___________________
___________________
its features and objectives.

___________________
MVA
K0
t
Note that MVA = PV of EVA.
EV A t
c)t
1 (1
on
/Sa
Notes
Activity
___________________
Write
an article on budget and
le
More enlightening is that since MVA = NPV of Free cash flow

(FCF) it follows therefore that the NPV of FCF = PV of EVA; since
after all, EVA is simply the rearrangement of the FCF formula.
___________________
___________________
___________________
Fill in the blanks:
................... is the profit earned by the firm less the cost

of financing the firms capital.
2.
................... is the amount of cash invested in the

business, net of depreciation.
3.
The capital charge is the ................... flow required to

compensate investors for the riskiness of the business
given the amount of economic capital invested.
___________________
___________________
du
1.
Budget
pro
___________________
Re
___________________
cti
Check Your Progress
___________________
(c)
UP
E
S,
No
t
for
Planning and control are the most important functions of Supply

Chain management. For assisting business management in these
two functions, the techniques of budgetary control and standard
costing are applied. Of course, budgeting is not something new to
government departments where every year, there is an attempt to
equate revenue with expenditure. In private life also, there is an
attempt to balance expenditure with earnings. In the business
world, a budget is the formal expression of the expected earnings
and expenditure for a particular period or future period. In a word,
budget has become an important tool of management in all
business activities today.
A budget is a predetermined detailed plan of action developed as a
guide for future operations. Budget also serves as a basis for
performance evaluation and control and budgetary control is a
system of controlling costs through budgets.
The word Budget is derived from a French word Bougette
representing leather pouch into which funds are appropriated to
meet the anticipated expenses. A budget is a plan and blueprint for
future management action. It is expressed in monetary terms. It is
Notes
on
/Sa
a financial or quantitative statement, prepared prior to a defined

period of time, of the policy to be pursued during that period for
the purpose of attaining a given objective. The following are some
of the important definitions:
le
___________________
___________________
Features of a Budget
___________________
The following are the main features of a budget:

A budget is prepared for a definite future period of time.
Generally, budgets are prepared for one year. However, in the
case of seasonal business like sugar, ice-cream, apparels, etc.,
there may be two budgets for each year.
___________________
The figures in the budget are expressed in monetary and

quantitative terms.
pro
2.
du
cti
1.
___________________
Budget is a plan for the operations and resources of the

business or firm.
4.
Budget is a tool for developing the cooperation, coordination

and control between the various departments.
5.
It shows how much profit or loss a business organisation is

expected to make and thereby reveals its profit potential.
6.
The budget proposal which is prepared by the budgetee is

revived and approved by an authority higher than the
budgetee.
7.
After the budget has been approved by the top management of

the organisation, the same cannot be altered except under
specified conditions, and
8.
It indicates the business policy which has to be followed so as

to achieve a given objective.
No
t
for
Re
3.
S,
Objectives of Budget
UP
E
The main objectives of budget are:

It directs the attention of all concerned to the attainment of a
common objective or goal.
2.
It contributes to coordinated efforts of all departments in order

to achieve an integrated goal.
3.
It aims at careful control over the performance and cost of

every function.
(c)
1.
___________________
___________________
___________________
___________________
___________________
4.
Budgets grow from bottom and are controlled from top-level,

and
5.
The budgets are compared with actual performance.
on
/Sa
Notes
le
___________________
___________________
___________________
Budgeting
___________________
Budgeting means the process of preparing budgets. In other words,

budgeting refers to the management action of formulating budgets.
Preparation of budgets involves study of business situations and
understanding of management goals as also the capacity of the
organisation.
cti
___________________
___________________
___________________
du
___________________
According to Welsch, Budgeting is the principal tool of planning

and control offered to management by accounting functions.
___________________
In the words of J. Batty, The entire process of preparing the

budgets is known as budgeting.
pro
___________________
Re
Rowland and Harr has defined budgeting as, Budgeting may be

said to be the act of building budgets.
Objectives of Budgeting
The main objectives of budgeting are:
for
1. To obtain more economical use of capital.

2. To bring about coordination between different functions of an
organisation.
No
t
3. To plan and control the earnings and expenditure of the

organisation.
4. To create a good business practice by planning for future.
(c)
UP
E
S,
5. To ensure the matching of sales with production.

6. To fix departmental responsibilities on different department
managers.
7. To prevent wastages or losses and reduce the expenditures, and
8. To ensure the
organisation.
availability
of
working
capital
in
the
Check Your Progress
Notes
Activity
1.
................... is a predetermined detailed plan of action

developed as a guide for future operations.
2.
Budgeting refers
...................
to
the
management
action
on
/Sa
Fill in the blanks:
le
___________________
Prepare
a chart for your
display
board
on
the
___________________
budgetary
control and its
objectives.
___________________
of
___________________
cti
___________________
Budgetary Control
___________________
Re
pro
du
Budgetary control is a system of planning and controlling costs. It

has been defined as the establishment of budgets relating the
responsibilities of executives to the requirements of a policy, and
the continuous comparison of actual with budgeted results, either
to secure by individual action the objective of that policy or to
provide a basis for its revision. In other words, budgetary control is
applied to a system of management and accounting control by
which all operations and output are forecasted as far ahead as
possible and actual results when known are compared with budget
estimates.
for
According to Wheldon, Budgetary control is the planning in

advance of the various function of a business, so that business as a
whole can be controlled.
No
t
In the words of Niles, Budgetary control is an important tool of

management. It is fact a tool of planning which reaches through
coordination into control and ties the three aspects firmly together.
It stimulates thinking in advance by requiring specific planning
and the anticipation of operating problems.
UP
E
S,
J.A. Scott has defined budgetary control as, The term budgetary
control is applied to the system of management control and
accounting in which all operations are forecast and so far as
possible planned ahead, and the actual results compared with the
forecast and planned ones.
In view of the above, the following steps are involved in budgetary
control:
Preparation of budgets for each function of the organisation.
2.
Measurement of actual performance at the end of the budget

period.
(c)
1.
___________________
___________________
___________________
___________________
3.
Calculation of the variances and analysing the reasons for

them.
4.
Revision of budgets in the light of changed circumstances, and
5.
Taking suitable or prompt action to achieve the desired

objective.
on
/Sa
Notes
le
___________________
___________________
___________________
___________________
Objectives of Budgetary Control
___________________
To incorporate the ideas of all levels of management in

preparing a budget.
___________________
2.
To lay down a plan to implement the policy of the organisation.
3.
To coordinate the activities of the departments of an

organisation.
4.
To provide sufficient working capital for effective operation of

the organisation.
5.
To control direct and indirect expenses of the organisation.
6.
To execute capital expenditures in the most profitable manner.
pro
1.
___________________
Re
___________________
for
___________________
du
cti
After defining the term budgetary control, it is necessary to

explain the objectives of it. The main objectives of a budgetary
control can be stated in the following way:
___________________
Check Your Progress
Fill in the blanks:

................... is the planning in advance of the various
function of a business, so that business as a whole can
be controlled.
2.
................... has defined budgetary control as, The term

budgetary control is applied to the system of
management control and accounting in which all
operations are forecast and so far as possible planned
ahead, and the actual results compared with the
forecast and planned ones.
(c)
UP
E
S,
No
t
1.
Summary
Budgetary control is a system of planning and controlling costs. It
has been defined as the establishment of budgets relating the
responsibilities of executives to the requirements of a policy, and
Notes
on
/Sa
the continuous comparison of actual with budgeted results, either

to secure by individual action the objective of that policy or to
provide a basis for its revision. In other words, budgetary control is
applied to a system of management and accounting control by
which all operations and output are forecasted.
le
___________________
___________________
___________________
Lesson End Activity
___________________
___________________
du
cti
Prepare an effective presentation to be presented in the class on

the concept and measures of economic value added and the basics
of budget.
Keywords
pro
Budgetary Control: Planning in advance of the various function

of a business, so that business as a whole can be controlled.
Re
Budgeting: The principal tool of planning and control offered to

management by accounting functions.
for
Market Value Added (MVA): It is the difference between the

current market value of a firm and the capital contributed by
investors.
No
t
1. What is budgetary control? Explain briefly the objectives of

budgetary control.
2. What is the purpose served by the introduction of a budgetary
control system in any organisation having manufacturing and
selling activities?
S,
3. Explain the concept of economic value added and market value

added.
UP
E
4. Describe the concept of budget and its objectives.
Further Readings
Books
(c)

___________________
___________________
___________________
___________________
___________________
le

on
/Sa
Notes
___________________

___________________
___________________

___________________

Delhi.
cti
___________________
___________________

New Delhi.
___________________
du
___________________

Delhi.
___________________
pro
___________________

Re

Chand, New Delhi.
Web Readings
for
(c)
UP
E
S,
No
t
on
/Sa
Notes
le
___________________
Case Studies
___________________
___________________
Objectives
___________________
cti
___________________
___________________
Case Study 1: Private Enterprises Inc.
___________________
pro
du
This publication presents an example of non-consolidated and

consolidated financial statements prepared in accordance with
pre-changeover accounting standards XFI Version and financial
statements restated in accordance with accounting standards for
private enterprises (ASPE). This example, Private Enterprises
Inc., is based on a number of assumptions that do not encompass
all aspects of financial reporting matters but include many of the
common concepts that would be encountered in a private company
environment.
for
Re
The comparisons provided in this example are not comprehensive

and do not attempt to cover all of the differences between the two
sets of standards. Readers should consult the text in ASPE and
pre-changeover accounting standards XFI Version to fully
understand the implications of preparing financial statements in
accordance with ASPE. It is important to note that the example of
financial statements restated in accordance with ASPE is not
illustrating the companys first set of financial statements in
accordance with ASPE and therefore does not reflect the
disclosures required by Section 1500, First-Time Adoption.
No
t
Private Enterprises Inc. is a private enterprise that has:

private operating subsidiaries;
defined benefit pension plans covering certain of its senior

management employees;
debt to service the expansion of operations;
previously issued preferred shares in an estate freeze; and
an investment in a private company subject to significant

influence and investments in equity
UP
E
S,
instruments that are quoted in an active market.
The following assumptions and/or decisions were made in

restating the non-consolidated statements in accordance with
ASPE:
Management made an accounting policy choice to account for
defined benefit pension plans using the immediate
recognition approach. For simplicity, it is assumed that the
actuarial valuation for accounting purposes in accordance
(c)
Contd
___________________
___________________
___________________
le
Instead of consolidating subsidiaries, management made an

accounting policy choice to account for subsidiaries using the
cost method.

income taxes using the future income taxes method. For
simplicity, refundable taxes were ignored.
The following assumptions and/or decisions were made in

restating the consolidated statements in accordance with
ASPE:

defined benefit pension plans using the immediate
recognition approach. For simplicity, it is assumed that the
actuarial valuation for accounting purposes in accordance
with pre-changeover accounting standards XFI Version
approximates the actuarial valuation for funding purposes.

income taxes using the future income taxes method. For
simplicity, refundable taxes were ignored.
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Re
Question:
pro
du
___________________
cti
___________________
on
/Sa
with pre-changeover accounting standards XFI Version

approximates the actuarial valuation for funding purposes.
Notes
Analyse the case and recommend a suitable solution.
(c)
UP
E
S,
No
t
for
Source: http://www.cica.ca/applying-the-standards/accounting-standards-for-privateenterprises/site-utilities/item49821.pdf
Case Study 2: New Lease Accounting Standard: Is your

organisation prepared to cope with the new standard?
on
/Sa
Notes
___________________
Introduction
A New Sri Lankan lease accounting standard has been developed
in a joint project between the International Accounting Standards
Board (IASB) and the Institute of Chartered Accountants of Sri
Lanka (ICASL) that could result in a complete overhaul of the
way in which leases are reported in financial statements,
commencing 1 January 2012.
___________________
___________________
___________________
cti
___________________
du
Industry projections estimate over $1.3 trillion would be

transferred to U.S. corporate balance sheets, with roughly 70%
being real estate leases. The impact on the Sri Lankan leasing
industry had not been quantified yet and the objective of this
paper is to enlighten the reader of the consequences arising from
the new standard to corporate financial statements.
pro
Presented below are the significant changes that are anticipated

in the new standard, some issues and impact they create, and
some of the ways the management accountant can add value to
the organisation in coping with these changes.
Synopsis of the standard reviewed
Re
A. What is the area of application of this standard?
for
This accounting standard would deal with the accounting

treatment that would be necessary for a leasing company (i.e. the
lessor) and the entity that had obtained the lease, (i.e. the lessee).
As it is common for any accounting standard, LKAS 17 also would
contribute to fulfil the accounting concept of consistency in
financial statements, with regard to accounting treatment of a
lease.
B. What is the scope of the standard?
S,
No
t
The standard excludes application to non-regenerative resources

and certain licensing agreements such as films, manuscripts,
patents etc. Also the standard cannot be applied as a basis of
measurement for property held by lessees that is accounted for as
investment property or for investment property provided by
lessors under operating leases or for biological assets held by
lessees under finance leases. Such exclusions would be dealt
under separate accounting standards.
Scope covers the following standards:
Determining whether an arrangement contains a lease

IFRIC 4
De-recognition of finance lease receivables LKAS 39
Embedded derivatives in lease contracts LKAS 39
Impairment
(c)
Leases LKAS 17
UP
E
le
LKAS 36 (for leased assets)
LKAS 39 (for recognised lease receivables)

Contd
___________________
___________________
___________________
___________________
___________________
Disclosures SLFRS 7
Investment property LKAS 40
on
/Sa
Notes
le
___________________
C. Definition of terms
___________________
The standard would define the following key terms inherent to

leases:
___________________
___________________
Lease; finance lease; operating lease; non-cancellable lease;

inception of a lease; commencement of the lease term; lease term;
minimum lease payments; fair value; economic life; useful life;
guaranteed residual value; unguaranteed residual life; initial
direct costs; gross investment in the lease; net investment in the
lease; unearned finance income; interest rate implicit in the lease;
lessees incremental borrowing rate of interest; contingent rent.
___________________
D. Regulatory framework for lease
___________________
cti
___________________
du
___________________
The leasing industry in Sri Lanka is regulated via the Finance

Leasing Act (FLA), No 56 of 2000, with the Central Bank of Sri
Lanka acting as its regulator. It is interesting to note that only
the finance leases that gets regulated under this statute (and not
the operating leases). However the hire purchase transactions are
regulated via the Consumer Credit (Amended) Act No 7 of 1990.
___________________
pro
___________________
Re
Impact on Management Accounting

Key issues arising from the standard which are relevant to
management accountants
for
1. Transfer of the right to use the assets: This is a common

area where the management accountant would be confused as
to the extent to which the right to use the asset had got
transferred. On the other end of the spectrum would be
contracts for services that provide the services provided by
assets, but does not substantially transfer the right to use the
asset.
(c)
UP
E
S,
No
t
This area of confusion usually drives the management

accountant to consider a contractual service for example a
vehicle hiring company that provides transportation services,
to be a lease. This mere arrangement to hire could be
distinguished easily when one examines the arrangement in
the light of the following section, i.e. transfer of risks and
rewards.
2. The locus of risks and rewards incidental to the right to

use: Together with the right to use the asset, what gets
transferred (or not transferred) would be the risks and
rewards arising from the leased asset. The difficulty of
identifying the locus would also be an issue for the
management accountant in the quest for disseminating the
appropriate management information to the management.
Question:
Recommend a suitable solution that can be adopted by the
company to cope with the new lease standard.
Source: http://www.cimaglobal.com/Documents/Our%20locations%20docs/Sri%20Lanka/
LKAS%2017%20_%20Leases%20V3.pdf
on
/Sa
Notes
le
UNIT 21: Corporate Financial Reporting
___________________
___________________
___________________
___________________
cti
___________________
___________________
Re
pro
du
___________________
(c)
UP
E
S,
No
t
for
BLOCK-V
___________________
___________________
___________________
le
Detailed Contents
on
/Sa
Notes
UNIT
21: CORPORATE FINANCIAL REPORTING
___________________
Introduction
___________________
Prescribed Format
___________________
Balance Sheet Grouping

___________________

___________________
UNIT 23: INTERNATIONAL ACCOUNTING

STANDARDS-I
UNIT
22: INTERNATIONAL FINANCIAL
___________________
REPORTING STANDARDS
___________________
Introduction
Introduction
Other Accounting Standards
International Accounting Standards
UNIT
24:
INTERNATIONAL
STANDARDS-II
UNIT 25: CASE STUDY
___________________
UP
E
S,
No
t
for
Re
pro
___________________
(c)
cti
___________________
International Financial Reporting Standards
Introduction
du
ACCOUNTING
on
/Sa
Notes
Activity
le
___________________
Write
an article on the
prescribed format for reports
and___________________
the mandatory reporting.
Corporate Financial Reporting
___________________
Objectives
___________________
topics:
cti
___________________
___________________
Prescribed Format
___________________
du
pro
Introduction
UP
E
S,
No
t
for
Re
The form of presentation of financial reports of non-corporate

business organisations suffers from non-conformity. Rigid rules
and regulations, as to the manner of presenting financial reports,
do not bind the individual businessman in a sole trading or the
partners in a firm. They enjoy a higher degree of individuality,
which is reflected in the myriad of forms in which financial reports
are prepared. In fact, there is no legal compulsion for these
organisations to present the financial reports at all. The reports
are prepared for the own use of the businessman and are made
available only to select groups, such as lenders of resources and to
tax authorities. Corporates, which are governed by their respective
acts, have not been given this latitude. The reasons are obvious in
corporate ownership is divorced from management. With a view to
ensure that the funds made available by the shareholders (a
majority of whom will not have a say in the day to day
management of the business) are properly utilised by the
managers, law has prescribed specific forms in which the financial
reports are to be prepared and presented.
Prescribed Format
(c)
The Companies Act, 1956 has laid down specific form in which
balance sheet of a company has to be presented and the period
within which it has to be laid before the shareholders. It has also
prescribed parameters for preparing profit and loss account.
Separate formats have been prescribed for banking and insurance
companies and companies engaged in the generation and supply of
___________________
___________________
___________________
le
on
/Sa
electricity by their separate acts. The annual reports are to be

signed by the managing director and at least one more director.
Notes
___________________
Mandatory Reporting
___________________
Section 210 of the Companies Act, 1956 stipulates that the board of
directors of every company should submit, before the annual
general meeting of the company, a duly audited profit and loss
account and balance sheet. These documents should be placed
before the meeting within six months of the expiry of the financial
year. Three copies of the annual reports as approved by the
shareholder are to be filed with the Registrar of Companies within
thirty days of the meeting in which they were approved. It may be
mentioned that the message conveyed by these statements are
similar to that of non-corporate reports, except for the greater
degree of disclosure, which are on the lines of the generally
accepted accounting principles.
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
pro
___________________
(c)
UP
E
S,
No
t
for
Re
The format for balance sheet is quite exhaustive with detailed

instructions as to how assets and liabilities are to be displayed.
The corporates can choose either horizontal form or vertical form of
presentation. Marshalling of assets and liabilities are done as per
the permanence preference method. Many of the items are to be
explained through detailed schedules. Explanatory notes are given
wherever necessary. Contingent liabilities are to be disclosed as a
footnote to the balance sheet. Contingent liabilities are probable
liabilities that may arise on the happening of an event. For
example, giving financial guarantee to the bank in respect of its
sister concerns fulfilment of a contract, is a contingent liability. As
long as the sister concern fulfils its obligations, no liability arises.
In the event of the sister concerns failure to fulfil the contract, the
guarantor company will be called upon to fulfil the commitment or
pay damages, as the case may be in terms of contract. A
summarized version of the profit and loss account and balance
sheet of Tata Steels Ltd. for the year 2008 is given in Table 21.1.

An examination of the prescribed format for corporate balance
sheet would reveal that liabilities are grouped into five major
blocks share capital, reserves and surpluses, secured loans,
unsecured loans and current liabilities and provisions and assets
are grouped into fourblock assets, investments, currentassets
and miscellaneous expenditure. A brief description of the groups is

given below.
on
/Sa
Notes
le
___________________
Liabilities
___________________
Share Capital
___________________
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
Format 21.1: Balance Sheet of Tata Steels Ltd.

for the year 2008
du
cti
The balance sheet should furnish details of the kinds of shares a

corporate has issued and the stages of the issue. After the coming
into force of the Companies Act, 1956, corporates can issue only
two kinds of shares equity and preference. The status of issue of
these capitals is to be indicated in the balance sheet under the
heads of authorised, issued, subscribed and paid up.
___________________
___________________
___________________
___________________
___________________
le
Authorised
Notes
on
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Also called nominal or registered share capital, it is the maximum

extent up to which a corporate can issue shares to the public, at a
particular point of time. It is the ceiling limit. Authorised capital is
specified in the Memorandum and Articles of Association of the
corporate. It is an enabling provision, in the sense that the entire
amount authorised need not be issued at one stroke. It can be (and
is usually) issued in parts, a number of times, till the limit is
exhausted. However, no company can issue shares in excess of the
authorised capital.
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
Issued
___________________
Issued share capital is that part of the authorised capital, which is

offered to the public for subscription. Nowadays, companies prefer
to raise funds through private placement. The offer to the public is
made through a document called prospectus. Prospectus is an
invitation to the public to offer for the issue. The issue may be any
size. But corporates are aware that small issues cost up to 10% of
the value of the issue compared to about 6% in case of larger
issues. Hence, they do not enter the market every now and then
with smaller issues.
for
Re
pro
___________________
du
___________________
Subscribed
(c)
UP
E
S,
No
t
It is that part of the issued capital, which has been agreed to be

taken up by the public. Subscription or offer by the public might be
for a number equal to the volume issued or for more or less. In a
bullish capital market, subscription will be more than the offer,
when it is called oversubscription. Usually, companies reserve a
right to accept excess subscription to an extent. Such options are
called green shoe options.
Called Up
A special feature of share issue is that the entire issue price is not
usually called upon to be paid in one lump sum. The subscribers
are required to remit, along with their application, a part of the
issue price. This is application money. When the application for
subscription is accepted by the corporate, the subscriber is asked to
pay another part of issue price. This is allotment money. The
balance of the issue price may be called up for payment in one or
more instalments these are calls and the money paid at each call
Notes
on
/Sa
is the call money. The called-up share of a corporate, therefore, is

that part of the issue price, which the investors have to pay. It
includes application money, allotment money and call money.
le
___________________
___________________
Assets
___________________
___________________
___________________
cti
Having acquainted with the nature of liabilities, let us have a

closer look at the segments of assets. Assets are classified into four
distinct categories fixed or block assets, investments or noncurrent assets, current assets and miscellaneous expenses to the
extent not written off.
___________________
___________________
du
Block Assets (Fixed Assets)
Re
pro
Fixed assets are fixed in time. That is, they have a fixed number of
useful years. Gross block is the original or historic value of all the
fixed assets that are in use as at the end of the accounting year. In
the balance sheet, it is shown in the inner column and depreciation
thereon up to that date is deducted therefrom.
Investments
for
Also called non-current assets, indicates investments of surplus

funds of the corporate outside the business. The investment may
be for a short-term or a long-term. It may be for treasury purposes,
when it is made with the sole objective of making profits on the
fluctuations in its prices.
No
t
Or investments are made in the stocks of subsidiaries for effective

control. Securities in which a company invests may be quoted in a
stock exchange or not. Market value of securities quoted is given as
a footnote below the investments.
S,
Current Assets
UP
E
These include cash, inventories, bills receivables, debtors, loans

and advances and prepaid expenses. In case of bills receivables and
debtors, it should be indicated whether they are good or doubtful
and a period-wise breakup of the outstanding such as debtors
outstanding for more than six months, less than six months, etc.,
has to be given.
(c)
Miscellaneous Expenses
It represents intangibles such as preliminary expenses, deferred

advertisement, issue expenses, discount on issue of shares, carried
___________________
___________________
___________________
profit and loss account.

___________________
forward loss balance of the previous years, etc., not written off.
These are to be written off from the future profits of the business
as per the admissible limitation periods.
on
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Notes
Activity
___________________
Make
a brief report on the
le
Additional Exposures
___________________
In addition to listing of assets and liabilities, a corporate balance

sheet also gives, by way of separate statements, details of fixed
assets brought forward, acquired and disposed during the year and
revaluation, if any, made, depreciation of the past years and the
year under consideration. In case the corporate has subsidiaries,
the audited financial reports of each of the subsidiaries are also to
be given as annexure. Efforts are on to incorporate the financial
data of subsidiaries into the financial statements of holding
companies. ICAI is shaping the requisite standard to give effect to
this. Further, list of executives entitled to monthly remuneration
in excess of certain amount should also to be furnished. An
auditors report, as to the compliance, by the corporate, of the
various legal requirements, is attached to the financial reports.
Directors report, another important document accompanying
corporate reports, spells out the performance of the unit, problems,
if any faced, the steps proposed to overcome the problems future
prospects and the recommendation for dividend to shareholders.
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
for
Re
pro
___________________
Check Your Progress
Fill in the blanks:

................... are probable liabilities that may arise on
the happening of an event.
2.
After the coming into force of the Companies Act, 1956,

corporates can issue only two kinds of shares
................... and ....................
3.
................... capital is that part of the authorised

capital, which is offered to the public for subscription.
(c)
UP
E
S,
No
t
1.

Law is not very severe on the format in which the profit and loss
account of a corporate has to be presented. Part II of Schedule VI
stipulates the requirements to be complied with by corporates
while preparing profit and loss account. One of the major
differences between a corporate and a non-corporate income
Notes
on
/Sa
statement is that in a non-corporate report, the value of the inputs

is given as costs. Incorporates, however, in addition to value,
quantitative information also has to be furnished. This
quantitative information may form part of the profit and loss
account or though a note attached thereto. Usually, companies
furnish quantitative data in a separate schedule.
le
___________________
___________________
___________________
___________________
Issue Expenses
___________________
pro
du
cti
Corporates have the privilege to invite the public to subscribe to

their share and debt capitals. For this purpose, a corporate has to
obtain the consent of the shareholders in a general meeting. The
procedure for issue needs elaborate arrangement. One or more
merchant bankers are engaged, depending upon the size of the
issue, to handle the issue.
Underwriting Commission
for
Re
Underwriting commission and brokerage payable by a company

differs inversely to the rating of the corporate by the investors.
Higher the rating, lower is the rate of the underwriting
commission. Law has fixed a ceiling of 5% on the share issues and
2.5% on bonds and debentures as underwriting commission. As
regards brokerage, which is payable on the amount devolved on
underwriters, the ceiling is 2.50% and 1.25% respectively.
Segmental Reporting
(c)
UP
E
S,
No
t
With increasing tempo of globalisation, the trend in Indian

corporates is to adopt international standards in financial
reporting. The Institute of Chartered Accountants of India has
issued standard on segmental reporting AS17. Indian corporates,
listed or proposed to be listed on the stock exchanges has to adopt
segmental reporting. Companies with multiple products or services
and those with area of operation extending beyond the boundaries
of the country would have to present separate financial report for
each of the activities and for each territory. Each segmental report
will contain information as to the sales, costs, assets and liabilities
pertaining to that segment.
___________________
___________________
___________________
___________________
___________________
Check Your Progress
Notes
___________________
1.
Underwriting commission and brokerage payable by a

company differs ................... to the rating of the
corporate by the investors.
2.
One of the major differences between a corporate and a

non-corporate income statement is that in a noncorporate report, the value of the inputs is given as
...................
___________________
___________________
___________________
___________________
___________________
du
cti
___________________
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Fill in the blanks:
___________________
le
Summary
___________________
Financial reporting in corporate organisations is regulated by the

laws under which the organizations are registered. As such, these
reports are more transparent compared to non-corporate financial
reports. The Companies Act, 1956 has prescribed a format in which
corporates are to present their balance sheet. For profit and loss
account, the act has laid down parameters to be followed. A
corporate can present its financial reporting in a horizontal T
form or in a vertical statement form. Details on each of the items of
balance sheet and profit and loss account are required to be
furnished as schedules or notes. The prescribed corporate balance
sheet follows the permanency method for marshalling assets and
liabilities.
No
t
for
Re
pro
___________________
Lesson End Activity

Make a presentation on the corporate financial reporting.
(c)
UP
E
S,
Keywords
Authorised Capital: It is the maximum extent up to which a
corporate can issue shares to the public, at a particular point of
time.
Contingent Liabilities: These are probable liabilities that may
arise on the happening of an event.
Issued Share Capital: It is that part of the authorised capital,
which is offered to the public for subscription.
Subscribed Capital: It is that part of the issued capital, which
has been agreed to be taken up by the public.
3.
4.
Why should law prescribe format for financial reporting to

corporates?
How are assets and liabilities of corporate organisations
marshalled?
___________________
___________________
___________________
___________________
___________________
cti
2.
Are non-corporate business organizations legally obliged to

prepare financial statements?
on
/Sa
Notes
1.
le
___________________
Describe the asset side of corporate balance sheet.
___________________
du
Further Readings
pro
Books

Re

for

Delhi.
No
t

New Delhi.
Delhi.
S,

UP
E

Chand, New Delhi.
Web Readings
220.227.161.86/19328sm_finalnew_cp3.pdf
(c)
www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
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Notes
le
UNIT 22: International Financial Reporting Standards
___________________
International Financial Reporting

Standards
___________________
___________________
___________________
Objectives
topics:
cti
___________________
___________________
IFRS 1: First-time Adoption
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
Re
pro
du
Introduction
No
t
for
International Financial Reporting Standards (IFRS) is fast

becoming the global accounting language. Over 100 countries have
now adopted IFRS and many more have committed to make the
transition in the next few years. The benefits of global standards
are widely acknowledged. For companies, however, the conversion
to IFRS is a major change both for the finance function and for the
wider business.
UP
E
S,
The International Accounting Standards Board (IASB) has

recognised the need for guidance. In 2003 it published IFRS1 Firsttime adoption of International Financial Reporting Standards
(IFRS 1). IFRS 1 covers the application of IFRS in a companys
first IFRS financial statements. It starts with the basic premise
that an entity applies IFRS for the first time on a fully
retrospective basis. However, acknowledging the cost and
complexity of that approach, it then establishes various
exemptions in areas where retrospective application would be too
burdensome or impractical.
(c)
___________________
___________________
___________________
___________________
international
financial
___________________
reporting
standards.
___________________
___________________
IFRS 1: First-time Adoption
IFRS 1 requires an entity to do the following in the opening IFRS

statement of financial position that it prepares as a starting point
for its accounting under IFRSs: (a) Recognize all assets and
liabilities whose recognition is required by IFRSs; (b) Not recognize
items as assets or liabilities if IFRSs do not permit such
recognition; (c) Reclassify items that it recognized under previous
GAAP as one type of asset, liability or component of equity, but are
a different type of asset, liability or component of equity under
IFRSs; and (d) Apply IFRSs in measuring all recognized assets and
liabilities.
cti
___________________
on
/Sa
International Financial Reporting Standards

Notes
Activity
___________________
Write
an article on the
le
___________________
___________________
du
___________________
___________________
___________________
pro
IFRS 2: Share-based Payment
for
Re
The objective of this IFRS is to specify the financial reporting by an

entity when it undertakes a share-based payment transaction. In
particular, it requires an entity to reflect in its profit or loss and
financial position the effects of share-based payment transactions,
including expenses associated with transactions in which share
options are granted to employees.
IFRS 3: Business Combinations
(c)
UP
E
S,
No
t
The objective of the IFRS is to enhance the relevance, reliability

and comparability of the information that an entity provides in its
financial statements about a business combination and its effects.
It does that by establishing principles and requirements for how an
acquirer (a) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; (b) recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and (c) determines what information
to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
IFRS 4: Insurance Contracts

The objective of this IFRS is to specify the financial reporting for
insurance contracts by any entity that issues such contracts
(described in this IFRS as an insurer) until the Board completes
the second phase of its project on insurance contracts. In
particular, this IFRS requires (a) limited improvements to
Check Your Progress
du
IFRS 1 requires an entity to do the following in the

opening IFRS statement of financial position that it
prepares as a ................... for its accounting under
IFRSs
cti
___________________
The objective of IFRS 2 is to specify the financial

reporting by an entity when it undertakes a
............................ payment transaction.
pro
2.
___________________
Prepare
a presentation on
non-current assets held for
sale___________________
and
discontinued
operations.
___________________
___________________
Fill in the blanks:

1.
Notes
Activity
on
/Sa
accounting by insurers for insurance contracts; (b) disclosure that

identifies and explains the amounts in an insurers financial
statements arising from insurance contracts and helps users of
those financial statements understand the amount, timing and
uncertainty of future cash flows from insurance contracts.
Re
IFRS 5: Non-current Assets Held for Sale and Discontinued

Operations
No
t
for
The objective of this IFRS is to specify the accounting for assets

held for sale, and the presentation and disclosure of discontinued
operations. In particular, the IFRS requires (a) assets that meet
the criteria to be classified as held for sale to be measured at the
lower of carrying amount and fair value less costs to sell, and
depreciation on such assets to cease; and (b) assets that meet the
criteria to be classified as held for sale to be presented separately
in the statement of financial position and the results of
discontinued.
IFRS 6: Exploration for and Evaluation of Mineral Resources
UP
E
S,
The IFRS (a) permits an entity to develop an accounting policy for

exploration and evaluation assets without specifically considering
the requirements of paragraphs 11 and 12 of IAS8. Thus, an entity
adopting IFRS 6 may continue to use the accounting policies
applied immediately before adopting the IFRS. This includes
continuing to use recognition and measurement practices that are
part of those accounting policies; (b) requires entities recognising
exploration and evaluation assets to perform an impairment test
on those assets, when facts and circumstances suggest that the
carrying amount of the assets may exceed their recoverable
amount; and (c) varies the recognition of impairment from that in
(c)
le
___________________
___________________
___________________
___________________
___________________
le
IAS 36 but measures the impairment in accordance with that

Standard once the impairment is identified.
on
/Sa
Notes
___________________
IFRS 7: Financial Instruments: Disclosures
___________________
The IFRS applies to all entities, including entities that have few
financial instruments (for example: a manufacturer whose only
financial instruments are accounts receivable and accounts
payable) and those that have many financial instruments (for
example: a financial institution most of whose assets and liabilities
are financial instruments).
___________________
___________________
cti
___________________
___________________
___________________
The objective of this IFRS is to require entities to provide

disclosures in their financial statements that enable users to
evaluate (a) the significance of financial instruments for the
entitys financial position and performance; and (b) the nature and
extent of risks arising from financial instruments to which the
entity is exposed during the period and at the end of the reporting
period, and how the entity manages those risks. The qualitative
disclosures describe managements objectives, policies and
processes for managing those risks. The quantitative disclosures
provide information about the extent to which the entity is exposed
to risk, based on information provided internally to the entitys key
management personnel. Together, these disclosures provide an
overview of the entitys use of financial instruments and the
exposures to risks they create.
du
___________________
___________________
for
Re
pro
___________________
No
t
IFRS 8: Operating Segments
(c)
UP
E
S,
Core principle an entity shall disclose information to enable

users of its financial statements to evaluate the nature and
financial effects of the business activities in which it engages and
the economic environments in which it operates.
This IFRS shall apply to (a) the separate or individual financial
statements of an entity: whose debt or equity instruments are
traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets),
or (ii) that files, or is in the process of filing, its financial
statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in
a public market; and (b) the consolidated financial statements of a
group with a parent: (i) whose debt or equity instruments are
traded in a public market (a domestic or foreign stock exchange or
an over-the-counter market, including local and regional markets),
Notes
on
/Sa
or (ii) that files, or is in the process of filing, the consolidated

financial statements with a securities commission or other
regulatory organisation for the purpose of issuing any class of
instruments in a public market.
le
___________________
___________________
Check Your Progress
___________________
Fill in the blanks:
cti
IFRS 6 ................... includes continuing to use

recognition and measurement practices that are part of
those accounting policies.
___________________
du
2.
The objective of this IFRS is to specify the accounting

for assets held for sale, and the presentation and
disclosure of discontinued operations.
pro
1.
___________________
Summary
UP
E
S,
No
t
for
Re
Accounting standards are, as we have already seen, prescribed

with the objective of ushering in a sense of conformity in
accounting practices. However, the rigidity with which the
standards are being implemented uniformly to all enterprises
without having regard to the differing nature of the enterprises,
requiring differential treatment, has raised many an eyebrow both
in the US and in India about the efficacy of these standards.
Accounting professionals feel that transparency should be built
into the standards to make these more realistic. It is the personal
view of the author that it would be highly impracticable to have
separate standards for each industry or each size of the enterprise
to meet their specific requirements. On the other hand, in the
name of transparency should any latitude be shown and the
standards relaxed, the purpose of the entire exercise of bringing
about comparability in financial reporting will be defeated and the
reliability of the accounting information will be back to square one.
Lesson End Activity
(c)
Make a detailed report on the International Financial Reporting

Standards of accounting. Enlist the objective of each reporting
standard.
___________________
___________________
___________________
___________________
___________________
le
Keywords
Notes
on
/Sa
Accounting Standards: An accounting standard is a guideline

for financial accounting, such as how a firm prepares and presents
its business income and expense, assets and liabilities.
___________________
___________________
___________________
International Financial Reporting Standards: 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.
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
1. Explain the IFRS 1: First-time Adoption
pro
___________________
2. Describe the concept of share-based payment standard.

3. Discuss about IFRS 3.
Re
4. What is the objective of IFRS 4?

5. Explain the exploration for and evaluation of mineral
resources.
for
Further Readings
Books
No
t

(c)
UP
E
S,

Delhi.
Chand, New Delhi.
Web Readings
Notes
on
/Sa
www.ifrs.org/
le
___________________
www.charteredclub.com/what-is-ifrs/
___________________
___________________
___________________
cti
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
du
___________________
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________
on
/Sa
Notes
Activity
le
UNIT 23: International Accounting Standards-I
___________________
Write
a report on the IAS 1 to
IAS 11.
___________________
International Accounting
Standards-I
___________________
___________________
Objectives
topics:
cti
___________________
___________________
Standards on Income tax, property, land, leases, revenue, and employee

benefits, etc.
pro
du
Introduction
for
Re
An older set of standards stating particular types of transactions

and other events should be reflected in financial statements. In the
past, international accounting standards (IAS) were issued by the
Board of the International Accounting Standards Committee
(IASC).
In this unit, you will study the IAS 1 to IAS 23.
No
t
IAS 1: Presentation of Financial Statements
UP
E
S,
The objective of this IFRS is to ensure that an entitys first IFRS

financial statements, and its interim financial reports for part of
the period covered by those financial statements, contain high
quality information that (a) is transparent for users and
comparable over all periods presented; (b) provides a suitable
starting point for accounting under International Financial
Reporting Standards (IFRSs); and (c) can be generated at a cost
that does not exceed the benefits to users.
IAS 2: Inventories
The objective of this Standard is to prescribe the accounting

treatment for inventories. A primary issue in accounting for
inventories is the amount of cost to be recognised as an asset and
carried forward until the related revenues are recognised. This
Standard provides guidance on the determination of cost and its
(c)
___________________
___________________
___________________
___________________
le
___________________
___________________
on
/Sa
subsequent recognition as an expense, including any write-down to

net realisable value. It also provides guidance on the cost formulas
that are used to assign costs to inventories. Inventories shall be
measured at the lower of cost and net realisable value.
Notes
___________________
IAS 7: Cash Flow Statements
___________________
The objective of this Standard is to require the provision of

information about the historical changes in cash and cash
equivalents of an entity by means of a statement of cash flows,
which classifies cash flows during the period from operating,
investing and financing activities. Cash flows are inflows and
outflows of cash and cash equivalents. Cash comprises cash on
hand and demand deposits. Cash equivalents are short-term,
highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of
changes in value.
cti
___________________
___________________
___________________
du
___________________
___________________
pro
___________________
Re
IAS 8: Accounting Policies, Changes in Accounting Estimates

and Errors
(c)
UP
E
S,
No
t
for
The objective of this Standard is to prescribe the criteria for

selecting and changing accounting policies, together with the
accounting treatment and disclosure of changes in accounting
policies, changes in accounting estimates and corrections of errors.
The Standard is intended to enhance the relevance and reliability
of an entitys financial statements and the comparability of those
financial statements over time and with the financial statements of
other entities. Accounting policies are the specific principles, bases,
conventions, rules and practices applied by an entity in preparing
and presenting financial statements. When an IFRS specifically
applies to a transaction, other event or condition, the accounting
policy or policies applied to that item shall be determined by
applying the IFRS and considering any relevant Implementation
Guidance issued by the IASB for the IFRS.
IAS 10: Events after the Balance Sheet Date

The objective of this Standard is to prescribe (a) when an entity
should adjust its financial statements for events after the reporting
period; and (b) the disclosures that an entity should give about the
date when the financial statements were authorised for issue and
about events after the reporting period.
Notes
on
/Sa
The Standard also requires that an entity should not prepare its
financial statements on a going concern basis if events after the
reporting period indicate that the going concern assumption is not
appropriate.
le
___________________
___________________
___________________
IAS 11: Construction Contracts
___________________
___________________
Re
pro
du
cti

treatment of revenue and costs associated with construction
contracts. Because of the nature of the activity undertaken in
construction contracts, the date at which the contract activity is
entered into and the date when the activity is completed usually
fall into different accounting periods. Therefore, the primary issue
in accounting for construction contracts is the allocation of contract
revenue and contract costs to the accounting periods in which
construction work is performed. This Standard shall be applied in
accounting for construction contracts in the financial statements of
contractors.
Check Your Progress

Fill in the blanks:
The objective of ................... Standard is to require the

provision of information about the historical changes in
cash and cash equivalents of an entity by means of a
statement of cash flows, which classifies cash flows
during the period from operating, investing and
financing activities.
2.
The objective of ................... Standard is to prescribe the

accounting treatment of revenue and costs associated
with construction contracts.
No
t
for
1.
S,
IAS 12: Income Taxes
(c)
UP
E

treatment for income taxes. For the purposes of this Standard,
income taxes include all domestic and foreign taxes, which are
based on taxable profits. Income taxes also include taxes, such as
withholding taxes, which are payable by a subsidiary, associate or
joint venture on distributions to the reporting entity. The principal
issue in accounting for income taxes is how to account for the
current and future tax consequences of (a) the future recovery
(settlement) of the carrying amount of assets (liabilities) that are
___________________
___________________
___________________
___________________
___________________
IAS 16 to IAS 23.

___________________
recognised in an entitys balance sheet; and (b) transactions and

other events of the current period that are recognised in an entitys
financial statements.
on
/Sa
Notes
Activity
___________________
Make
le
IAS 16: Property, Plant and Equipment
___________________

treatment for property, plant and equipment, so that, users of the
financial statements can discern information about an entitys
investment in its property, plant and equipment and the changes
in such investment. The principal issues in accounting for
property, plant and equipment are the recognition of the assets,
the determination of their carrying amounts and the depreciation
charges and impairment losses to be recognised in relation to
them.
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cti
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du
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pro
___________________
Re
Property, plant and equipment are tangible items that (a) are held
for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and (b) are expected to be
used during more than one period.
for
The cost of an item of property, plant and equipment shall be

recognised as an asset if, and only if (a) it is probable that future
economic benefits associated with the item will flow to the entity;
and (b) the cost of the item can be measured reliably.
IAS 17: Leases
(c)
UP
E
S,
No
t
The objective of this Standard is to prescribe, for lessees and

lessors, the appropriate accounting policies and disclosure to apply
in relation to leases. The classification of leases adopted in this
Standard is based on the extent to which risks and rewards
incidental to ownership of a leased asset lie with the lessor or the
lessee. A lease is classified as a finance lease if it transfers
substantially, all risks and rewards incidental to ownership. A
lease is classified as an operating lease if it does not transfer
substantially all risks and rewards incidental to ownership. Lease
payments under an operating lease shall be recognised as an
expense on a straight-line basis over the lease term unless another
systematic basis is more representative of the time pattern of the
users benefit.
IAS 18: Revenue

The primary issue in accounting for revenue is determining when
to recognise revenue. Revenue is recognised when it is probable
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
cti
that future economic benefits will flow to the entity and these
benefits can be measured reliably. This Standard identifies the
circumstances in which these criteria will be met and, therefore,
revenue will be recognised. It also provides practical guidance on
the application of these criteria. Revenue is the gross inflow of
economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in
increases in equity, other than increases relating to contributions
from equity participants.
le
___________________
pro
du
This Standard shall be applied in accounting for revenue arising

from the following transactions and events (a) the sale of goods; (b)
the rendering of services; and (c) the use by others of entity assets
yielding interest, royalties and dividends.
IAS 19: Employee Benefits
Employee benefits are all forms of consideration given by an entity

in exchange for service rendered by employees.
for
Re
The objective of this Standard is to prescribe the accounting and

disclosure for employee benefits. The Standard requires an entity
to recognise (a) a liability when an employee has provided service
in exchange for employee benefits to be paid in the future; and (b)
an expense when the entity consumes the economic benefit arising
from service provided by an employee in exchange for employee
benefits.
No
t
This Standard shall be applied by an employer in accounting for all

employee benefits, except those to which IFRS 2 Share-based
Payment applies.
S,
IAS 20: Accounting for Government Grants and Disclosure of

Government Assistance
(c)
UP
E
This Standard shall be applied in accounting for, and in the

disclosure of, government grants and in the disclosure of other
forms of government assistance. A government grant may take the
form of a transfer of a non-monetary asset, such as land or other
resources, for the use of the entity. In these circumstances, it is
usual to assess the fair value of the non-monetary asset and to
account for both grant and asset at that fair value.
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IAS 21: The Effects of Changes in Foreign Exchange Rates

Notes
on
/Sa
An entity may carry on foreign activities in two ways. It may have

transactions in foreign currencies or it may have foreign
operations. In addition, an entity may present its financial
statements in a foreign currency. The objective of this Standard is
to prescribe how to include foreign currency transactions and
foreign operations in the financial statements of an entity and how
to translate financial statements into a presentation currency. The
principal issues are which exchange rate(s) to use and how to
report the effects of changes in exchange rates in the financial
statements.
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cti
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___________________
This Standard does not apply to hedge accounting for foreign

currency items, including the hedging of a net investment in a
foreign operation. IAS 39 applies to hedge accounting.
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pro
___________________
Re
This Standard does not apply to the presentation in a statement of

cash flows of the cash flows arising from transactions in a foreign
currency, or to the translation of cash flows of a foreign operation
(see IAS 7 Statement of Cash Flows).
IAS 23: Borrowing Costs
(c)
UP
E
S,
No
t
for
Borrowing costs that are directly attributable to the acquisition,

construction or production of a qualifying asset form part of the
cost of that asset. Other borrowing costs are recognised as an
expense. Borrowing costs are interest and other costs that an
entity incurs in connection with the borrowing of funds.
An entity shall capitalise borrowing costs that are directly
attributable to the acquisition, construction or production of a
qualifying asset as part of the cost of that asset. An entity shall
recognise other borrowing costs as an expense in the period in
which it incurs them.
A qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale.
Check Your Progress
Notes
on
/Sa
Fill in the blanks:
le
___________________
The objective of ................... Standard is to prescribe the

accounting treatment for property, plant and
equipment, so that, users of the financial statements
can discern information about an entitys investment in
its property, plant and equipment and the changes in
such investment.
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cti
1.
___________________
du
3.
The objective of ................... Standard is to prescribe,

for lessees and lessors, the appropriate accounting
policies and disclosure to apply in relation to leases.
A lease is classified as a/an ................... if it transfers
substantially, all risks and rewards incidental to
ownership.
pro
2.
A lease is classified as a/an ...................if it does not

transfer substantially all risks and rewards incidental
to ownership.
5.
................... costs are interest and other costs that an

entity incurs in connection with the borrowing of funds.
for
Re
4.
Summary
UP
E
S,
No
t
In the past, international accounting standards (IAS) were issued

by the Board of the International Accounting Standards
Committee (IASC). The accounting standards are listed as: IAS 1:
Presentation of Financial Statements, IAS 2: Inventories, IAS 7:
Cash Flow Statements, IAS 8: Accounting Policies, Changes in
Accounting, Estimates and Errors, IAS 10: Events After the
Balance Sheet Date, IAS 11: Construction Contracts, IAS 12:
Income Taxes, IAS 16: Property, Plant and Equipment, IAS 17:
Leases, IAS 18: Revenue, IAS 19: Employee Benefits, IAS 20:
Accounting for Government Grants and Disclosure of Government
Assistance, IAS 21: The Effects of Changes in Foreign Exchange
Rates, and IAS 23: Borrowing Costs.
(c)
Lesson End Activity

Prepare a presentation on the accounting standards IAS 1 to IAS
23.
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le
Keywords
Notes
on
/Sa
Borrowing Costs: These are directly attributable to the

acquisition, construction or production of a qualifying asset form
part of the cost of that asset
___________________
___________________
___________________
Employee Benefits: These are all forms of consideration given by

an entity in exchange for service rendered by employees.
___________________
___________________
cti
International Accounting Standards: An older set of standards

stating how particular types of transactions and other events
should be reflected in financial statements. In the past,
International Accounting Standards (IAS) was issued by the Board
of the International Accounting Standards Committee (IASC).
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du
___________________
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pro

1.
Explain the accounting for Government Grants and disclosure

of Government assistance.
2.
Describe the effects of changes in foreign exchange rates.
3.
Discuss about the events after the balance sheet date.
4.
Write short notes on
Re
___________________
for
(a) IAS 7: Cash Flow Statements

(b) IAS 1: Presentation of Financial Statements
No
t
(c) IAS 11: Construction Contracts
Further Readings
(c)
UP
E
S,
Books

Delhi.

Delhi.
Web Readings
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___________________
___________________
du
___________________
www.ifrs.org/
UP
E
S,
No
t
for
Re
pro
(c)
___________________
cti

Chand, New Delhi.
Notes
on
/Sa

New Delhi.
le
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le
on
/Sa
Notes
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cti
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___________________
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(c)
UP
E
S,
No
t
for
Re
pro
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on
/Sa
Notes
Activity
le
UNIT 24: International Accounting Standards-II
___________________
Make
a report on the IAS 24
to 36.
___________________
International Accounting
Standards-II
___________________
___________________
Objectives
topics:
cti
___________________
___________________
Accounting Standards for related party disclosure, Investments in

Associates, Interests in Joint Ventures, and many more.
pro
du
Introduction
Re
The International Accounting Standards Board (IASB) is the

independent, accounting standard-setting body of the IFRS
Foundation.
for
In the previous unit, you studied IAS 1 to IAS 23. Now in this unit
you will study the remaining IAS 24 to IAS 41.
IAS 24: Related Party Disclosures
S,
No
t
The objective of this Standard is to ensure that an entitys

financial statements contain the disclosures necessary to draw
attention to the possibility that its financial position and profit or
loss may have been affected by the existence of related parties and
by transactions and outstanding balances with such parties.
UP
E
A party is related to an entity if (a) directly, or indirectly through

one or more intermediaries, the party: (i) controls, is controlled by,
or is under common control with the entity (this includes parents,
subsidiaries and fellow subsidiaries); (ii) has an interest in the
entity that gives it significant influence over the entity; or (iii) has
joint control over the entity; (b) the party is an associate (as
defined in IAS 28 Investments in Associates) of the entity; (c) the
party is a joint venture in which the entity is a venturer (see IAS
31 Interests in Joint Ventures); (d) the party is a member of the
key management personnel of the entity or its parent; (e) the party
(c)
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le
is a close member of the family of any individual referred to in (a)

or (d); (f) the party is an entity that is controlled, jointly controlled
or significantly influenced by, or for which significant voting power
in such entity resides with, directly or indirectly, any individual
referred to in (d) or (e); or (g) the party is a post-employment
benefit plan for the benefit of employees of the entity, or of any
entity that is a related party of the entity.
on
/Sa
Notes
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cti
IAS 26: Accounting and Reporting by Retirement
___________________
Benefit Plans
___________________
This Standard shall be applied in the financial statements of

retirement benefit plans where such financial statements are
prepared.
du
___________________
___________________
pro
___________________
for
Re
Retirement benefit plans are arrangements whereby an entity

provides benefits for employees on or after termination of service
(either in the form of an annual income or as a lump sum) when
such benefits, or the contributions towards them, can be
determined or estimated in advance of retirement from the
provisions of a document or from the entitys practices. The
financial statements of a defined contribution plan shall contain a
statement of net assets available for benefits and a description of
the funding policy.
IAS 27: Consolidated and Separate Financial Statements
(c)
UP
E
S,
No
t
Consolidated financial statements are the financial statements of a

group presented as those of a single economic entity.
The objective of IAS 27 is to enhance the relevance, reliability and
comparability of the information that a parent entity provides in
its separate financial statements and in its consolidated financial
statements for a group of entities under its control. The Standard
specifies (a) the circumstances in which an entity must consolidate
the financial statements of another entity (being a subsidiary); (b)
the accounting for changes in the level of ownership interest in a
subsidiary; (c) the accounting for the loss of control of a subsidiary;
and (d) the information that an entity must disclose to enable
users of the financial statements to evaluate the nature of the
relationship between the entity and its subsidiaries.
IAS 28: Investments in Associates
on
/Sa
Notes
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___________________
___________________
___________________
___________________
du
cti
This Standard shall be applied in accounting for investments in

associates. However, it does not apply to investments in associates
held by (a) venture capital organisations, or (b) mutual funds, unit
trusts and similar entities including investment-linked insurance
funds that upon initial recognition are designated as at fair value
through profit or loss or are classified as held for trading and
accounted for in accordance with IAS 39 Financial Instruments:
Recognition and Measurement. Such investments shall be
measured at fair value in accordance with IAS 39, with changes in
fair value recognised in profit or loss in the period of the change.
le
IAS 29: Financial Reporting in Hyper Inflationary Economies
for
Re
pro
The financial statements of an entity whose functional currency is

the currency of a hyper inflationary economy shall be stated in
terms of the measuring unit current at the end of the reporting
period. The corresponding figures for the previous period required
by IAS 1 Presentation of Financial Statements and any
information in respect of earlier periods shall also be stated in
terms of the measuring unit current at the end of the reporting
period. Measure of hyperinflation is the cumulative inflation rate
over three years is approaching, or exceeds, 100%.
IAS 31: Interests in Joint Ventures
UP
E
S,
No
t
This Standard shall be applied in accounting for interests in joint

ventures and the reporting of joint venture assets, liabilities,
income and expenses in the financial statements of venturers and
investors, regardless of the structures or forms under which the
joint venture activities take place. However, it does not apply to
venturers interests in jointly controlled entities held by (a) venture
capital organisations or (b) mutual funds, unit trusts and similar
entities including investment-linked insurance funds that upon
initial recognition are designated as at fair value through profit or
loss or are classified as held for trading and accounted for in
accordance with IAS 39 Financial Instruments: Recognition and
Measurement.
IAS 33: Earnings per Share
(c)
The objective of IAS 33 is to prescribe principles for the

determination and presentation of earnings per share (EPS)
amounts in order to improve performance comparisons between
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different enterprises in the same period and between different

accounting periods for the same enterprise. IAS 33 applies to
entities whose securities are publicly traded or that are in the
process of issuing securities to the public. [IAS 33.2] Other entities
that choose to present EPS information must also comply with IAS
33. [IAS 33.3] .If both parent and consolidated statements are
presented in a single report, EPS is required only for the
consolidated statements.
on
/Sa
Notes
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___________________
cti
___________________
___________________
IAS 34: Interim Financial Reporting
___________________
The objective of IAS 34 is to prescribe the minimum content of an

interim financial report and to prescribe the principles for
recognition and measurement in financial statements presented
for an interim period. For the purpose of the reporting, Interim
period is defined as a financial reporting period shorter than a full
financial year (most typically a quarter or half-year) and Interim
financial report is a financial report that contains either a
complete or condensed set of financial statements for a period
shorter than an enterprises full financial year.
du
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Re
pro
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IAS 36: Impairment of Assets
for
To ensure that assets are carried at no more than their recoverable

amount, and to define how recoverable amount is calculated.
(c)
UP
E
S,
No
t
IAS 36 applies to all assets except: inventories, assets arising from

construction contracts, deferred tax assets, assets arising from
employee benefits, financial assets, investment property carried at
fair value, certain agricultural assets carried at fair value,
insurance contract assets and assets held for sale.
Therefore, IAS 36 applies to (among other assets) land, buildings,
machinery and equipment, investment property carried at cost,
intangible assets, goodwill, investments in subsidiaries, associates
and joint ventures and assets carried at revalued amounts under
IAS 16 and IAS 38.
IASC has defined impairment as an asset is impaired when its
carrying amount exceeds its recoverable amount. Carrying amount
is the amount at which an asset is recognised in the balance sheet,
after deducting accumulated depreciation and accumulated
impairment losses. Recoverable amount is defined as the higher of
an assets fair value, less costs to sell (sometimes called net selling
price) and its value in use. Fair value is defined as the amount
Notes
Activity
on
/Sa
obtainable from the sale of an asset in a bargained transaction

between knowledgeable and willing parties. Value in use is the
discounted present value of estimated future cash flows expected to
arise from the continuing use of an asset and from its disposal at
the end of its useful life.
le
___________________
Prepare
IAS 37 to IAS 41.
___________________
___________________
Check Your Progress
___________________
Fill in the blanks:
cti
The objective of IAS 33 is to prescribe principles for the

determination and presentation of ......................
amounts in order to improve performance comparisons
between different enterprises in the same period and
between different accounting periods for the same
enterprise.
Re
pro
2.
................... applies to all assets except: inventories,

assets arising from construction contracts, deferred tax
assets, assets arising from employee benefits.
du
1.
___________________
IAS 37: Provisions, Contingent Liabilities and Contingent

Assets
S,
No
t
for
The objective of IAS 37 is to ensure that appropriate recognition

criteria and measurement bases are applied to provisions,
contingent liabilities and contingent assets and that sufficient
information is disclosed in the notes to the financial statements to
enable users to understand their nature, timing and amount. The
key principle established by the Standard is that a provision
should be recognised only when there is a liability, i.e., a present
obligation resulting from past events. The Standard thus aims to
ensure that only genuine obligations are dealt with in the financial
statements planned future expenditure, even where authorised
by the board of directors or equivalent governing body, is excluded
from recognition.
(c)
UP
E
IAS 37 excludes obligations and contingencies arising from

financial instruments carried at fair value (but IAS 37 does apply
to financial instruments carried at amortised cost), non-onerous
executory contracts, insurance company policy liabilities (but IAS
37 does apply to non-policy-related liabilities of an insurance
company), items covered by another IAS.
IA has defined Provision as a liability of uncertain timing or
amount. Liability has been defined as present obligation as a
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result of past events and settlement is expected to result in an

outflow of resources (payment). Contingent liability is defined as a
possible obligation, depending on whether some uncertain future
event occurs, or a present obligation but payment is not probable
or the amount cannot be measured reliably. Contingent asset is a
possible asset that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of
the enterprise.
___________________
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___________________
___________________
___________________
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cti
on
/Sa
Notes
IAS 38: Intangible Assets
___________________
The objective of IAS 38 is to prescribe the accounting treatment for

intangible assets that are not dealt with specifically in another
IAS. The Standard requires an enterprise to recognise an
intangible asset if, and only if, certain criteria are met. The
Standard also specifies how to measure the carrying amount of
intangible assets and requires certain disclosures regarding
intangible assets.
du
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Re
pro
___________________
(c)
UP
E
S,
No
t
for
IAS 38 applies to all intangible assets other than financial assets,

mineral rights and exploration and development costs incurred by
mining and oil and gas companies, intangible assets arising from
insurance contracts issued by insurance companies, intangible
assets covered by another IAS. Intangible asset is an identifiable
non-monetary asset without physical substance. An asset is a
resource that is controlled by the enterprise as a result of past
events. Thus, the three critical attributes of an intangible asset are
identifiability, control (power to obtain benefits from the asset) and
future economic benefits (such as revenues or reduced future
costs).
IAS 39: Financial Instruments Recognition and

Measurement
IAS 39 applies to all types of financial instruments except for the
following, which are scoped out of IAS 39: interests in subsidiaries,
associates, and joint ventures accounted for under IAS 27, IAS 28,
or IAS 31; however IASs 32 and 39 apply in cases where under IAS
27, IAS 28, or IAS 31 such interests are to be accounted for under
IAS 39 for example, derivatives on an interest in a subsidiary,
associate, or joint venture; employers rights and obligations under
employee benefit plans to which IAS 19 applies; contracts for
contingent consideration in a business combination; rights and
Notes
on
/Sa
obligations under insurance contracts, except IAS 39 does apply to

financial instruments that take the form of an insurance (or
reinsurance) contract but that principally involve the transfer of
financial risks and derivatives embedded in insurance contracts;
and financial instruments that meet the definition of own equity.
le
___________________
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___________________
IAS 40: Investment Property
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pro
du
cti
Investment property is property (land or a building or part of a

building or both) held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital appreciation or both.
Examples of investment property: land held for long-term capital
appreciation, land held for undecided future use, building leased
out under an operating lease, vacant building held to be leased out
under an operating lease and property that is being constructed or
developed for future use as investment property.
IAS 41: Agriculture
No
t
for
Re
The following are not investment property and, therefore, are

outside the scope of IAS 40: property held for use in the production
or supply of goods or services or for administrative purposes;
property held for sale in the ordinary course of business or in the
process of construction of development for such sale (IAS 2
Inventories); property being constructed or developed on behalf of
third parties (IAS 11 Construction Contracts); owner-occupied
property (IAS 16 Property, Plant and Equipment), including
property held for future use as owner-occupied property, property
held for future development and subsequent use as owner-occupied
property, property occupied by employees and owner-occupied
property awaiting disposal; and property leased to another entity
under an finance lease.
(c)
UP
E
S,
The objective of IAS 41 is to establish standards of accounting for

agricultural activity the management of the biological
transformation of biological assets (living plants and animals) into
agricultural produce (harvested product of the enterprises
biological assets). Biological assets are defined as living animals
and plants, agricultural produce as the harvested product from
biological assets and point-of-sale costs are commissions to brokers
and dealers; levies by regulatory agencies and commodity
exchanges and transfer taxes and point-of-sale costs do not include
transport and other costs necessary to get the assets to a market.
___________________
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___________________
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Accounting standards are, thus, the codified forms of generally

accepted accounting principles. Standards consist of detailed rules
to be adopted for treatment of various items in accounting, before
the periodic financial reports are presented to the concerned. The
main objective of setting up standards is to convey the same
meaning of any accounting concept to all people in the same sense
so that uniformity and comparability in financial reporting is
achieved. The accounting standard will be useful when it provides
for a generally understood and accepted measure of phenomenon of
the business and when it aims at reducing any manipulation of the
financial data.
on
/Sa
Notes
___________________
___________________
___________________
___________________
___________________
___________________
___________________
du
cti
___________________
Check Your Progress
___________________
pro
Fill in the blanks:

1.
The objective of ...................... is to establish standards

of accounting for agricultural activity.
2.
................... property (land or a building or part of a

building or both) held (by the owner or by the lessee
under a finance lease) to earn rentals or for capital
appreciation or both.
3.
The objective of IAS 38 is to prescribe the accounting

treatment for ...................... that is not dealt with
specifically in another IAS.
for
Re
___________________
(c)
UP
E
S,
No
t
Summary
In this unit, you studied the IAS 24: Related Party Disclosures,
IAS 26: Accounting and Reporting by Retirement, IAS 27:
Consolidated and Separate Financial Statements, IAS 28:
Investments in Associates, IAS 29: Financial Reporting in Hyper
Inflationary Economies, IAS 31: Interests in Joint Ventures, IAS
33: Earnings Per Share, IAS 34: Interim Financial Reporting, IAS
36: Impairment of Assets, IAS 37: Provisions, Contingent
Liabilities and Contingent Assets, IAS 38: Intangible Assets, IAS
39: Financial Instruments Recognition and Measurement, IAS
40: Investment Property, and IAS 41: Agriculture.
Lesson End Activity
on
/Sa
Notes
Prepare a presentation on the International Accounting Standards

from IAS 24 to IAS 41. Also, include the objectives of each
accounting standard.
le
___________________
___________________
___________________
Keywords
___________________
___________________
cti
Carrying Amount: It is the amount at which an asset is

recognised in the balance sheet, after deducting accumulated
depreciation and accumulated impairment losses.
pro
du
Contingent Asset: It is a possible asset that arises from past

events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise.
Re
Contingent Liability: It is defined as a possible obligation,

depending on whether some uncertain future event occurs, or a
present obligation but payment is not probable or the amount
cannot be measured reliably.
for
Fair value: It is defined as the amount obtainable from the sale of

an asset in a bargained transaction between knowledgeable and
willing parties.
No
t
Generally Accepted Accounting Principles (GAAP): Groups of

accounting standards that are widely accepted as appropriate e to
the field of accounting.
Investment Property: It is property (land or a building or part of
a building or both) held (by the owner or by the lessee under a
finance lease) to earn rentals or for capital appreciation or both.
S,
Liability: It has been defined as present obligation as a result of

past events and settlement is expected to result in an outflow of
resources (payment).
UP
E
Provision: It is defined as a liability of uncertain timing or

amount.
(c)
Recoverable Amount: It is defined as the higher of an assets fair

value, less costs to sell (sometimes called net selling price) and its
value in use.
___________________
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___________________
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le

Notes
on
/Sa
1. Explain the related party disclosures.
___________________
2. Discuss the accounting and reporting by retirement.
___________________
3. Describe the
economies.
___________________
___________________
financial
reporting
4. Write short notes on:
___________________
in
hyper
inflationary
cti
(a) IAS 34: Interim Financial Reporting
___________________
(b) IAS 36: Impairment of Assets
___________________
(c) IAS 38: Intangible Assets
___________________
(d) IAS 40: Investment Property
du
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pro
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Further Readings
Books
Re

for

Gupta, R. L. and Ramanathan, Advanced Accountancy, Volume I &
No
t
Hingorani, N. L. and Ramanathan, A. R., Management Accounting,

Delhi.
(c)
UP
E
S,

New Delhi.
K. K. Verma, Financial Accounting and Analysis, Excel Books,
New Delhi.
R. L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan
M. C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S.
Chand, New Delhi.
Web Readings
Notes
on
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www.ifrs.org/
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(c)
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on
/Sa
Notes
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(c)
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Notes
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UNIT 25: Case Study
___________________
Case Study
___________________
___________________
Objectives
___________________
After analysing this case, the student will have an appreciation of the
cti
du
Case Study: Decision Making Techniques A CIMA Case

Study
___________________
Ratio analysis
pro
Businesses generate a huge amount of data. Management

accountants can use a number of the companys key accounting
statements to extract greater meaning from this information.
for
Re
Prospect plc - Balance Sheet/Statement of Financial

Position as at 31 March 2012
No
t
The income statement sets out the total sales revenue and
subtracts the costs of generating that revenue to give operating
profit. This is the surplus earned by the normal operations of the
company and tells us most about underlying business
performance.
S,
To continue to use the earlier illustrative example, Prospect plc is

expanding rapidly as it builds a commercial property portfolio
consisting mainly of shops and offices. The company receives
rents and also benefits from any profits when it sells property and
sites.
(c)
UP
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Prospect plc - Summarised Income Statement for Year Ending

31 March 2012 (Against Previous Year for Comparison)
The balance sheet (or statement of financial position) shows the

wealth of a company at a particular date. It lists the company's
Contd
___________________
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___________________
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le
assets (what it owns) followed by its liabilities (what it owes) the

difference being the net assets. Assets may be current, such as
cash, or fixed, such as property or equipment. This value
represents the shareholders' equity the value in the company
that the shareholders actually own.
on
/Sa
Notes
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sales have increased by an impressive 50% in one year
however, profitability has halved
liquidity has weakened while gearing is more risky at nearly

50%.
du
___________________
Question:
pro
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cti
This looks as if Prospect plc has expanded very fast indeed but
how strong is its performance? Accounting ratios allow different
pieces of financial data to be compared. Analysing some key ratios
helps to explore behind the figures and offer strong clues for the
business to steer towards its objectives (previous year data in
brackets):
The chart shows every sign of a firm that has expanded too
quickly:
___________________
(c)
UP
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S,
No
t
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Analyse the case and recommend a suitable solution.
The result is a danger signal! Management accountants

investigate this sort of data in order to alert managers to
worrying trends, as well as to possible opportunities.
Source: http://dl.is.vnu.edu.vn/bitstream/123456789/272/1/NGUYEN%20THI%20
IM%20THOA.pdf
Glossary
on
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Notes
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Glossary
___________________
Account: It is a summary of all relevant transactions relating to one

person at one place for a particular period.
___________________
___________________
Accounting Entity: It is also termed as Economic entity assumption

which means that economic unit/event can be known with a specific unit.
___________________
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Accounting Period Concept: This is also known as time period

assumption, and the economic life is divided into different periods for
preparing financial statements.
___________________
du
Accounting Standards: An accounting standard is a guideline for

financial accounting, such as how a firm prepares and presents its
business income and expense, assets and liabilities.
Re
pro
Accounting Standards: It is a set of certain generally accepted rules,

principles, concepts and conventions issued by the Institute of Chartered
Accountants of India in consultation with other International Accounting
Bodies.
Accounting: It is the process of identifying, measuring and
communicating economic information to permit informed judgements and
decisions by users of information.
for
Adjusted Profit & Loss A/c: Statement devised to determine the cash
from operations.
No
t
Amortization: The term amortization is used in respect of intangible

assets like patents, copyrights, leasehold and goodwill which are recorded
at cost. The process of their writing off is called amortization.
Authorised Capital: It is the maximum extent up to which a corporate
can issue shares to the public, at a particular point of time.
Average Inventory: Defined as half the batch size plus safety stock.
S,
Balance Method: Under this method as the name of method suggests,

the balance of each account is taken.
UP
E
Benchmarking: It is used to compare performance of one organisation

against the best in class to provide a particular product, process or
service.
Borrowing Costs: These are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of
that asset
(c)
Budgetary Control: Planning in advance of the various function of a

business, so that business as a whole can be controlled.
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Budgeting: The principal tool of planning and control offered to

Notes
on
/Sa
management by accounting functions.
___________________
Carrying Amount: It is the amount at which an asset is recognised in

the balance sheet, after deducting accumulated depreciation and
accumulated impairment losses.
___________________
___________________
Cash Book: All cash transactions are directly entered into the Cash Book
and on the basis of Cash Book, ledger accounts are prepared.
___________________
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Cash Discount: It is given for prompt payment; hence it is recorded in

the Cash Book.
___________________
Cash from Operations: Cash resources accrued in the business

operations.
___________________
du
___________________
Combined Method: Under this method, as it is clear from the name of

the method, both the above explained methods i.e., balance as well as
total methods are used.
___________________
pro
___________________
Re
Consignment Account: The consignment account is one which shows

what profit or loss is made out of the dealing of the goods sent on
consignment. It is the combination of the trading and profit and loss
account of any particular consignment.
for
Consignment: It is defined as the act of sending a quantity of goods by

the manufacturers and producers of one country or place to their agents
in another at the risk of the principals for the purpose of sale.
No
t
Contingent Asset: It is a possible asset that arises from past events and
whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the
control of the enterprise.
Contingent Liabilities: These are probable liabilities that may arise on
the happening of an event.
(c)
UP
E
S,
Contingent Liability: It is defined as a possible obligation, depending

on whether some uncertain future event occurs, or a present obligation
but payment is not probable or the amount cannot be measured reliably.
Cost Accounting: As the name suggests, this type of accounting is
mainly related with the ascertainment of the cost of a product.
Cost Accounting: It involves the application of costing principle,
comparing actual costs with the budget or standard.
Cost Benefit Principle: This principle says that the cost of applying an
accounting principle should not exceed its benefit.
Cost Centre: It refers to a part of a factory for which costs are
accumulated separately.
Costing Systems: Defined an accounting system as an organisation of

forms, records and reports, closely coordinated to facilitate business
management through determining certain basic and required
information.
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Creditors Ledger: It is meant for all the creditors from whom goods are
bought on credit.
Notes
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Cost Unit: It is defined by the ICMA as a quantitative unit of product or

service in relation to which costs are ascertained.
le
Glossary
___________________
Decrease in Working Capital: Decrease in Net working capital i.e.
___________________
du
Debtors Ledger: It is meant for all the debtors to whom goods are sold
on credit.
Excess of current liabilities over the current assets Resources side of the
pro
fund flow.
Depreciation: It is a measure of the wearing out, consumption, or other

loss of value of depreciable asset arising from use, affluxion of time or
obsolescence through technology and market changes
Re
Diminishing Value (Balance) Method: Under this method

depreciation is calculated as a certain percentage of the value but the rate
of depreciation remains constant.
for
Direct Material: Material that can be directly identified with each unit
of the product.
Double-entry Book Keeping: It is a set of rules for recording financial
information in a financial accounting system in which every transaction
or event changes at least two different nominal ledger accounts.
No
t
Employee Benefits: These are all forms of consideration given by an

entity in exchange for service rendered by employees.
Excess Inventory: The quantity of material in stock or on order that is
greater than the anticipated demand for an agreed time period.
S,
External Users: All persons other than internal users such as Investors,
creditors, Government.
UP
E
Fair value: It is defined as the amount obtainable from the sale of an

asset in a bargained transaction between knowledgeable and willing
parties.
Fictitious Assets: These are those assets which have no value
(c)
Financial Accounting: It is mainly concerned with the ascertainment

of profit or loss made during a particular period and also presents the
financial position of the business.
Financial Statements: These include the Trading and Profit & Loss
Account, and Balance Sheet of the business.
___________________
___________________
___________________
le
Fixed Instalment Method: Under this method, depreciation is a certain

percentage of cost which is calculated on the basis of the original costscrap value if any divided by the number of years
on
/Sa
Notes
___________________
___________________
Flow: Flow means changes occurred in between two different time

periods.
___________________
Fund from Operations: Income generated from only operations.
___________________
Fund Loss in Operations: Loss incurred in the operations.
___________________
Fund: Fund means working capital.
___________________
General Ledger: It is meant for all the accounts other than debtors and
creditors.
du
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cti
___________________
Generally Accepted Accounting Principles (GAAP): Groups of

accounting standards that are widely accepted as appropriate e to the
field of accounting.
___________________
pro
___________________
Re
Going Concern Concept: It is assumed that every business would

continue for a long period or have an indefinite life unless it is likely to be
sold or wound up in the near future. This is also known as the concept of
continuity.
Gross Loss: It is the excess of cost of sales over sales.
for
Gross Profit: It is calculated by comparing the sales and cost of sales. It

is the excess of sales over cost of sales.
Increase in Working Capital: Increase in Net working capital i.e.
Excess of current assets over the current liabilities- Applications side of
the fund flow.
No
t
Indirect Labour: The wages of that labour which cannot be allocated

but which can be apportioned to or absorbed by, cost centres or cost units
is known as indirect labour.
(c)
UP
E
S,
Intangible Assets: These are such assets which cannot be seen but only
felt
Internal Users: These are the persons who manage the business, i.e.,
management at all the levelstop, middle and lower level.
International Accounting Standards: An older set of standards
stating how particular types of transactions and other events should be
reflected in financial statements. In the past, International Accounting
Standards (IAS) was issued by the Board of the International Accounting
Standards Committee (IASC).
International Financial Reporting Standards: 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.
Issued Share Capital: It is that part of the authorised capital, which is

offered to the public for subscription.
Job Costing: This refers to a system of costing where the items of direct
costs are traced to specific jobs or orders.
___________________
___________________
___________________
___________________
___________________
cti
Journal: Journal is a primary book of original entries for accounting

data.
Notes
on
/Sa
Investment Property: It is property (land or a building or part of a

building or both) held (by the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation or both.
le
Glossary
___________________
___________________
Ledger: It is also called as a book of final entry because all transactions

are finally recorded in the ledger accounts.
___________________
pro
du
Lead-time: Lead-time is defined as time period from initiation of an

activity to its completion. For inventory management, we need following
lead times: Purchase lead-time, manufacturing lead-time, Delivery leadtime.
Re
Liability: It has been defined as present obligation as a result of past

events and settlement is expected to result in an outflow of resources
(payment).
for
Management Accounting: This type of accounting is a tool in the hands

of management for various functions; (i) to control costs (ii) to take
important future decisions (forecasting).
Market Value Added (MVA): It is the difference between the current
market value of a firm and the capital contributed by investors.
No
t
Materiality: It is an item should be regarded as material if there is

reason to believe that knowledge of it would influence the decision of
informed investor
S,
Memorandum Book: When a transaction takes place in the business it

is first roughly written in the memorandum book chronologically for the
memory only.
UP
E
Monetary Unit Concept: Only such transactions are recorded in

accounting that are of monetary value or that can be measured in terms
of money.
Net Loss: Excess of expenditures over revenues is called net loss.
Net Profit: It is the excess of revenues over expenses. It is depicted by
P&L A/c.
(c)
Nominal Accounts: All gains/profits/incomes and losses and expenses

are recorded.
Non-current Assets: Long-term assets.
___________________
___________________
Non-current Liabilities: Long-term financial resources.

Notes
le
on
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Obsolete Inventory: It is the inventory that results from an

unanticipated demand.
___________________
___________________
Open Book Accounting: It promotes margin improvement through cost

reduction, which can be shared between partner organisations.
___________________
Outsiders Capital: The value of investments minus operating expenses

that are held by company stockholders.
___________________
___________________
cti
Overheads: Defined as the cost of indirect materials, indirect labour and

such other expenses including services as cannot conveniently be charged
direct to specific cost units.
___________________
___________________
Owners Equity: Total assets minus total liabilities of an individual or

company. For a company, also called net worth or shareholders' equity or
net assets.
du
___________________
___________________
pro
___________________
Personal Accounts: The transactions which involve Cash Receipts or

Cash Payments or transfer of assets from one person or institution to
other persons or institutions, are recorded in this category.
Re
Petty Cash Book: This type of Cash Book is used in such concerns where
small payments are made daily and that too in large numbers.
Private Ledger: It is meant for personal account of the proprietor.
for
Production Rate: The production rate can be defined as number of units

manufactured over a period of time.
Provision: It is defined as a liability of uncertain timing or amount.
No
t
Quality Costing: It aims to improve supply chain quality, both in and

across organisations. It has two benefits to reduce quality costs and to
increase the quality offering to the ultimate customer.
Real Account: All transactions involving tangible assets or goods are the
subject matter of this category.
(c)
UP
E
S,
Recoverable Amount: It is defined as the higher of an assets fair value,

less costs to sell (sometimes called net selling price) and its value in use.
Rework/Scrap Rate: This rate is dictated by the efficiency of the
manufacturing process. It involves knowing the number of defective units
that are produced by a manufacturing unit. This is a highly empirical
rate and very much depends upon the skill of the labour operating the
machine and the accuracy offered by the machine.
Statement of Changes in Working Capital: Enlisting the changes
taken place in between the current assets and current liabilities of two
different time horizons.
Subsidiary Books of Original Records: These subsidiary books are

also called sub-division of Journal.
Subsidiary Books: It is a normal routine to record individually each and
every transaction which takes place in the business.
Tangible Assets: These are such assets, which can be seen and felt
Notes
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/Sa
Subscribed Capital: It is that part of the issued capital, which has been
agreed to be taken up by the public.
le
Glossary
___________________
___________________
___________________
___________________
___________________
cti
The Cost Principle: Every transaction should be recorded at its actual

(historical) cost or cost of its acquisition and not its market price.
du
Total Assets: These are everything that a business or an individual

owns. Based inherently on the purchase value of an item, total assets are
listed on a balance sheet.
pro
Total Method: Under this method, instead of taking balance of each

account, the total of both the sides of each account is taken.
Re
Trade Discount: It is given for increasing the volume of sales and it is

adjusted in the invoice, hence no entry is passed in the books of the
business, as it is always deducted from the catalogue price.
for
Transaction: It is defined as an external event or internal event which

gives rise to a change affecting the operations or finances of an
organisation.
Trial Balance: It is the list of accounts taken from the ledger.
No
t
Value Chain Costing: It is built on Porters value chain analysis which

argues that competitive advantage in the marketplace results from either
better customer value for the same cost (a differentiation strategy) or the
same customer value for less cost (a cost leader strategy).
(c)
UP
E
S,
Voucher: It is therefore the basic document of an accounting transaction.
___________________
___________________
___________________
___________________
___________________
le
on
/Sa
Notes
___________________
___________________
___________________
___________________
cti
___________________
___________________
___________________
du
___________________
___________________
(c)
UP
E
S,
No
t
for
Re
pro
___________________

Accounting in Logistics and Supply Chain Sector-V1Final

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UNIT 20: Case Study

Accounting in Logistics and Supply Chain Sector

SLM Development Team

Course Code: MBAF-911D

Course Name: Accounting in Logistics and Supply Chain Sector

UNIT 20: Case Study

Fundamentals of Accounting................................ ................................ ........................ 3

Generally Accepted Accounting Principles (GAAP)................................ ................... 17

Accounting Principles and Standards ................................ ................................ ........ 29

Accounting Equation ................................ ................................ ................................ .. 41

Case Studies................................ ................................ ................................ ................ 49

Accounts ................................ ................................ ................................ ...................... 55

Journal ................................ ................................ ................................ ........................ 67

Ledger ................................ ................................ ................................ ......................... 79

Subsidiary Books ................................ ................................ ................................ ........ 93

Case Studies................................ ................................ ................................ .............. 113

Trial Balance................................ ................................ ................................ ............. 119

Depreciation Accounting................................ ................................ ........................... 141

Cash Flow Statements................................ ................................ .............................. 153

Case Studies................................ ................................ ................................ .............. 163

Financial Aspects of Supply Chain Management ................................ .................... 169

Inventory Managements Techniques and Control................................ .................. 181

Cost Accounting ................................ ................................ ................................ ........ 193

EVA and Budgets................................ ................................ ................................ ...... 207

Case Studies................................ ................................ ................................ .............. 217

Accounting in Logistics and Supply Chain Sector

Corporate Financial Reporting................................ ................................ ................. 223

International Financial Reporting Standards ................................ ......................... 233

International Accounting Standards-I ................................ ................................ ..... 241

International Accounting Standards-II................................ ................................ .... 251

Case Study ................................ ................................ ................................ ................ 263

Glossary................................ ................................ ................................ ................................ .......... 265

UNIT 1: Fundamentals of Accounting

Accounting in Logistics and Supply Chain Sector

Classification of Accounting Principles

Basic Accounting Principles

Uses, Advantages or Role of Accounting

Meaning of Accounting Equation

Calculation/Computation of Accounting Equation

Effect of Transactions on Accounting Equation

UNIT 5: CASE STUDIES

UNIT 4: ACCOUNTING EQUATION

UNIT 1: Fundamentals of Accounting

Characteristics of Accounting Information

Accounting is used as an information system by its users. The

Accounting system is a means of collecting, summarizing,

Accounting is the process of identifying, measuring and

The American Accounting Association (AAA), 1966

Accounting is the art of recording, classifying and summarizing in

events which are, in part, at least, of a financial character, and

Accounting in Logistics and Supply Chain Sector

American Institute of Certified Public Accountants, 1941

The following are the characteristics of accounting:

Recording of transactions of financial nature: Transactions

Recording in definite (certain) units: Only such events are

Accounting can be used for analyzing and interpreting

whereas sales day book for recording credit sales of goods.

UNIT 1: Fundamentals of Accounting

After knowing the characteristics of Accounting, one can list the

Classifying in different groups of transactions based as per the

Summarizing of transactions, and

Analyzing and interpreting the same.

Table 1.1: Distinction between Book-keeping and Accounting