Entrepreneurship
Basic Accounting and
Financial Statements
Understanding Business
Operations
Accounting
Systems
Accounting as
per Income Tax
Act
Tax authority
and creditors
Financial
Accounting
System
Preparation of
three basic
Accounting
Statements
External
stakeholders
Managerial
Accounting
System
Preparation of
plans, forecast,
and reports
Internal decision
makers
Reliability of Accounting
Data
(dont try to
memorize)
Balance Sheet
Assets
(application of fund)
Non-current assets
Assets as on a particular
date
Land and Buildings
Other Fixed Assets
Inventories
Goods in process
Sundry debtors
Cash
Total Assets
Owners Capital
Initial and subsequent investment
made by the owners in the business.
Net surplus or profit generated by
the business that has been
reinvested.
Funds raised through various rounds
of investment by Business Angel and
Venture Capitalists also form part of
equity capital.
https://www.youtube.com/watch?
v=VdJF8wMt4_U
EXPLANATIONS OF A FEW
TERMS
Entity: It is a specific area of accountability, a
clear-cut boundary for reporting (such as a firm)
Transaction: Any event that changes the financial
position of an entity
Book keeping: Recording of business transactions
Entry: Record in the books of accounts in respect
of a transaction.
Double-Entry: Two entries are made for every
transaction
owned by stockholders
Types of Account
- Personal: Debtors, Creditors, Capital Account of the
Owner (person or organization)
- Real Accounts: Assets of the firm (land, buildings,
cash, bank accounts, etc.) that continues to either
accumulate or reduce.
- Nominal Accounts: Expenses, Losses, Gains, and
Revenue (value becomes nil at the end of accounting
period)
Account
Form of an account:
Dr.
Cr
ACCOUNTING CONVENTIONS
1. Continuity or Going Concern
Convention
- The firm is an entity in itself.
2. Objectivity (or Verifiability)
- Acquisition cost is more verifiable than
replacement cost or resale value.
3. Materiality
- Minor items with small values are
assumed to be
consumed within a year and are expensed
off.
4. Conservatism
- Inventory is valued at cost or market
value,
whichever is lower.
6. Recognition
- The accrual basis rather than cash
basis
7. Matching and Cost Recovery
- Linking revenues (Sales) with expenses
(COGS)
- Assets are carried forward to recover
costs
of these assets in the future
8. Stable Monetary Unit
- Inflation is generally ignored.
Recognition of Transaction
Cash basis of accounting
revenue and expenses are
recognized when cash is
received and paid respectively.
Accrual basis of accounting
revenue, expenses, assets, and
liabilities are recognized when
the actual transaction takes
place irrespective of whether
cash is paid or received.
Chart of Accounts
A chart of accounts (COA) is a created list of the
accounts used by an organization to define each
class of items for which money or the equivalent is
spent or received. It is used to organize the finances
of the entity and to segregate expenditures, revenue,
assets and liabilities in order to give interested
parties a better understanding of the financial health
of the entity.
Normally defined by an identifier and a heading
explaining text title and coded by account type. The
starting point of a computerized accounting systems.
T-Accounts or
Ledger
The book which contains the
accounts.
- It is also called the Principal
Book.
- It contains various accounts
both personal, real, and
nominal
- Entries in the journals are
Nameinof
posted
theAccount
ledger.
Credit
or
Ledger
Journal
Financial
Journal
Date
Trial Balance
Description
Debit
Ap
ril
0 Cash
1
Contribution
to Capital
10000
0
Ap
ril
0 Computer
2
Cash
Bills
Payable
25000
Ap
ril
0 Cash
5
Term Loan
from Bank
50000
0
M
ay
0 Cash
1
Term loan
repayment
Credi
t
1000
00
1500
0
1000
0
10000
Ledger
Name of
Account
For example:
Sales
Debit
Changes in Inventories of
Finished Goods, Stock-inCredit Process and Stock-inTrade
Salaries
Interest or finance cost
5000
00
Depreciation and
amortization
1000
0
Total expenses
Profit before tax
1. Transactions
Financial transactions - sale or return of a product, purchase of supplies for business
activities, or other financial activity that involves the exchange of the companys assets, the
establishment or payoff of a debt, or the deposit from or payout of money to the companys
owners.
2. Journal entries
Transactions are listed in the journal, maintaining the journals chronological order following
the double entry principle. The journal is also known as the book of original entry.
3. Posting in ledgers (General ledger account)
The transactions are posted to the respective account that they impact.
4. Trial balance
At the end of the accounting period (which may be a month, quarter, or year depending on a
businesss practices), you calculate a trial balance.
many times your first calculation of the trial balance shows that the books arent in balance.
If thats the case, you look for errors and make corrections calledadjustments,which are
tracked on a worksheet.
Adjustments are also made to account for the depreciation of assets and to adjust for onetime payments (such as insurance) that should be allocated on a monthly basis to more
accurately match monthly expenses with monthly revenues.
6. Adjusting journal entries
You post any corrections needed to the affected accounts once your trial balance shows the
accounts will be balanced once the adjustments needed are made to the accounts.
7.
Financial statements
You prepare the balance sheet and income statement using the corrected account balances.
8. Closing the books
You close the books for the revenue and expense accounts and begin the entire cycle again
with zero balances in those accounts.
Adjustment Entries
Prepaid expenses or unearned
revenues
Accrued expenses and accrued
revenues
Non-cash expenses
Credit
for
decrea
se
Liability
Equities
Debit
for
decrea
se
Debit
for
Decrea
se
Credit
for
increas
e
Credit
for
increas
e
Balance Sheet
Owners Capital
General Journal
Journal
Date
Term loan from
bankDescription
Apr
Cash
Debit
100000
0
2
Computer
Cash
Bills Payable
25000
Apr
0
5
Cash
500000
Total liabilities
Fixed assets
Inventories
Cash
Total Assets
Salaries
50000
Interest
10000 or finance cost
0
1
Cash
Term loan
repayment
10000
Ma
y
0
2
Furniture
Bills Payable
5000
Sundry debtors
in Inventories
of Finished Goods,
15000
Stock-in-Process
and
10000
Stock-in-Trade
0
Ma
y
Goods in process
Credit
Cost
of materials
consumed
10000
Changes
0
Apr
Sundry creditors
Provisions
Depreciation and
amortization
5000
Total expenses
Profit before tax
Tax
Profit for the period
Debit
100000
Credit
10000
0
25000
15000
10000
500000
50000
0
10000
10000
5000
5000
Name of Account
Cash
Debit Credi
t
Op.
Bal
(1)
(2)
(3)
(4)
--1000
00
5000
00
(5)
(6)
5750
Name of Account
Shareholders
Fund
Debit
Credit
Op. Bal.
(1)
1500
0
--100000
100000
Name of Account
Fixed Assets
Debit
Credit
1000
0
Op.
Bal.
(1)
25000
----
General Ledger
Name of Account
Bills Payable
Name of Account
Term Loan
Debit
Credit
Debit
Credit
Op. Bal.
(1)
(2)
--10000
5000
Op. Bal.
(1)
--500000
15000
(2) 10000
490000
Balance Sheet as on
31.03.2014
Equity
100
Fixed assets
--
Reserves &
Surplus
--
Inventory
Bank loan
--
cash
95
Sundry
creditors
--
Sundry debtor
--
Total
100
100
Subscription to equity:
500
10
Interior
20
100
Bank loan
400
Asssembly line
500
Purchase
500
Sale in cash
600
Purchase
1000
Rent
50
700
700
Subscription to equity
100
Interest
60
Salary
50
Transportation
25
Attorney fee
10
Insurance
50
10,000
2,500
Balance Sheet
Liabilities
Capital
100000
Term Loan
490000
Bills Payable
Total Liabilities
15000
605000
Assets
Fixed Assets
30000
Cash
575000
Total Assets
605000
Expenses
Retained
Earnings
Debit
for
decrea
se
Debit
for
increa
se
Debit
for
Decrea
se
Credit
for
increa
se
Credit
for
decrea
se
Credit
for
increas
e
Journal
Date
Description
Debit
April 0
1
Cash
Sundry Debtors
Sales (revenue)
50000
50000
April 0
2
Rent
5000
April 0
5
Raw-materials
Cash
Sundry creditors
50000
May
0
1
Cash
10000
0
2
Cost of sales
Inventory
60000
3
0
Salary
Cash
10000
3
0
Interest to bank
Cash
10000
May
May
May
Credit
100000
Cash
Sundry creditors
4000
1000
10000
40000
Sales (revenue)
10000
60000
10000
10000
Journal
Date
Description
Debit
June 0
1
Computer
Cash
50000
June 0
2
Printer
Cash
Sundry creditors
15000
June 0
5
Raw-materials
Cash
Sundry creditors
40000
July
0
1
Cash
Sundry Debtors
Sales (revenue)
100000
100000
0
2
Cost of sales
Inventory
75000
3
0
Creditors
Cash
41000
July
July
Credit
50000
4000
11000
10000
30000
200000
75000
41000
Name of Account
Sales (Revenue)
Debit Credi
t
Op.
Bal
(1)
(2)
(3)
(4)
(5)
(6)
1000
00
1000
0
2000
00
3100
110000
60000
10000
5000
10000
85000
25000
5000
20000
Operating Profit
Operating profit: a profit from
business operations (gross profit
minus operating expenses) before
deduction of interest and taxes. The
profit earned from a firm's normal
core business operations. This value
does not include any profit earned
from the firm's investments (such as
earnings from firms in which the
company has partial interest) and
Minority Interest
In accounting terms, if a company owns a minority
interest in another company but only has a minority
passive position (i.e. it is unable to exert influence),
then all that is recorded from this investment are the
dividends received from the minority interest. If the
company has a minority active position (i.e. it is able
to exert influence), then both dividends and a percent
of income are recorded on the company's books.
Share of profit/loss of associate concern(s).
A non-current liability that can be found on a parent
company's balance sheet that represents the
proportion of its subsidiaries owned by minority
shareholders.
Source: Investopedia
Consolidated Profit
Operating profit
+ Other income
Profit before interest and
exceptional items
() Interest
+/() Exceptional items
() Amortization/impairment
Profit from ordinary activities
before tax
() Tax
Net profit
+/() Minority interest
+/() Share of profit from
associate companies
2014
2013
Net Sales
2,000
1,800
-900
-700
1,100
1,100
-400
-250
700
850
-100
50
400
-100
-200
-150
800
650
-250
550
-200
450
Interest Expense
Net Profit Before Taxes (Pretax
Income)
Taxes
Net Profit
Depreciation
Depreciationisan expense that is supposed to reflect the
loss in value of a fixed asset.
For example:
if a machine will completely wear out after ten year's use,
the cost of the machine is charged as an expense over
the useful life of tenyear rather than all at once, when
the machine is purchased.
Straight line depreciation charges the same amount to
expense each year. Accelerated depreciation charges
more to expense in early years, less in later years.
Depreciation is an accounting expense. In real life, the
fixed asset may grow in value or it may become worthless
long before the depreciation period ends.
Methods of Depreciation
Straight Line Depreciation
Reducing Balance
Depreciation
Units of Activity
Depreciation
Depreciation and
Amortization
10
0 100 100 100 100 100 100 100
Depreciation
during the year
10
Accumulated
depreciation
10 19
27
34
41
47
52
57
90 81
73
66
59
53
48
43
Year
Book Value
(Purchase Cost in
1st yr.) of Fixed
Assets
550,000
Salvage value
50,000
Depreciation
()
50,000
4,50,000
()50,000
()50,00
0
()50,00 ()50,0
0 00
550,000 4,95,00
0
4,45,50
0
4,00,95
0
3,60,85
5
Depreciation
()55,00
0
()49,5
00
(-)44,55
0
(-)40,09
5
(-)36,08
6
4,95,00 4,45,50
0
0
4,00,95
0
3,60,85 3,24,76
5Deprecia 9
t
on @ 1 i
0%
Accumulated depreciation in five years = 50,000+45,000+ =2,25,231
Depreciation at Accelerated
Pace
Depreciation rate for double
declining balance method
= Straightline depreciation
rate x 200%
Depreciation rate for 150%
declining balance method
= Straight line depreciation
rate x 150%
Sum-of-the-years'-digits
method
The digits of the years of residual useful life
of asset is added up.
Depreciation = (asset value salvage
value)*(remaining useful life)/(sum of the
digits)
Depn. Yr1 = (500,000-30,000)*10/
(1+2+3+4+5+6+7+8+9+10) i.e. [55]
2nd yr = 470,000*9/55
3rd Yr = 470,000*8/55
4th Yr = 470,000*7/55
Amortization
1. The paying off of debt with a fixed repayment
schedule in regular instalments over a period of time.
Consumers are most likely to encounter amortization
with a mortgage or car loan.
2. The spreading out of capital expenses for intangible
assets over a specific period of time (usually over the
asset's useful life) for accounting and tax purposes.
Amortization is similar to depreciation, which is used
for tangible assets, and to depletion, which is used
with natural resources. Amortization roughly matches
an assets expense with the revenue it generates.
Amortization
Amortization is an accounting term that refers
to the process of allocating the cost of an
intangible asset over a period of time. It also
refers to the repayment of loan principal over
time.
As a general rule, an asset should be
amortized over its estimated useful life, or the
maturity or loan period in the case of a bond
or a loan. If an intangible asset has an
indefinite life, such as goodwill, it cannot be
amortized.
Ref: http://www.investopedia.com