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ACCOUNTING PRINCIPLES

Dr.K.Ananthanarayanan Associate Professor Department of Civil Engineering IIT Madras

Financial Statements
Objectives: 1. To provide the economic activities of the enterprise to several group of people 2. To provide useful information to the creditors 3.To provide information to the investors

Accounting
Definition: Accounting is an art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the result thereof.

ART OF RECORDING
Two statements 1. Trading & Profit and loss account 2. Balance sheet

Groups interested
 Owner  Management  Potential Investors  Creditors  Employees  Government  Researchers-students

Accounting Principles
Main features: Usefulness Objectivity Feasibility Concepts: Duality- Going concern Accounting period-Historic Cost Money measurement- Revenue Recognition- matching Accrual- objectivity

Dual aspect concept


Purchase of good from several suppliers Sales to several customers on cash and credits Payments to suppliers and collection from customers, Payment of salaries to salesmen, Payment of taxes, rents Two aspects involved- receipts of goods and payment of cash

Example
Mr.Nithin, the proprietor of the business, starts his business with a cash Rs20,000 and building of Rs 50,000 this fact is recorded in two places: assets account and capital account
Capital Nithin 70000 = Assets building + cash 50000 + 20000

Accounting
* The business increases by borrowing Rs 20000 Capital+ Liability = Assets Nithin +Loan building + cash 70000+20000 50000 + 40000 *Pays for furniture Rs 5000 and purchase land on credit for Rs 8000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 70000+20000 +8000 50000 + 35000+ 5000+8000 If he pays expenses say Rs2000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 68000+20000 +8000 50000 + 33000+ 5000+8000

Capital + Liabilities
Proprietor's capital + Loan, Bank overdraft, Creditors, bills payable Outstanding expences

Assets
Building Land Machinery Furniture Stock in trade Debtor Bills receivable Bank cash

Problem
A limited company purchases a machinery for Rs1,60,000. Its estimated life is 5 years at the end of which it will have a scrap value of Rs12,440. The asset has to be depreciated at 40% on diminishing balance method. If the profits before depreciation are Rs1,00,000 per annum show what will be the amount of profits after depreciation under 1. straight line method 2.Diminishing balance method

Year

Straightline method Depreciation Profit after dep.

Diminishing Balance method Depreciation Profit after dep.

I Yr II Yr III Yr IV Yr V Yr. Total profit Total depre. Add Scrap value Cost of asset

29510 29510 29510 29510 29520 ------147560 12440 1,60,000

70490 70490 70490 70490 70480 352440 ------------

64000 38400 23040 13820 8300 ------147560 12440 1,60,000

36000 61600 76990 86180 91700 352440 -------------

Comments
Total depreciation, total profits is the same by both the methods over 5years 2. In the straight line method dep. and profit after dep. Are constant for each year 3. In the diminishing method dep. Charge is heavy in the earlier years resulting in reduction in the profits. 4. Uniform profit is assumed. In practice productivity of the assets diminishes, the profit also diminishes as the age of the asset increases. This method is preferred as it helps early recovery of the investment
1.

Manufacturing Accounts and Cost statements


Cost of materials consumed Direct labour cost Direct expenses Prime cost (direct cost) Factory overhead Gross work cost Network cost of production

Scheme of Manufacturing Concern


Manufacturing Account
Prime cost Direct material Direct Labour Direct expenses + Factory over heads Rent, Insurance, supervisors remuneration Plant repair, depreciation + work in progress at start - Work in progress at close Factory cost or network cost of production

Trading Account
Opening Stock of finished goods SALES

+ Networks of cost of production

+Closing Stock of finished goods + Gross profit

Profit and loss account


Administrative overheads office salaries, electricity, rent stationary and others + Selling overheads salaries in sales dept, commission etc + Distribution overheads Van expenses, Fright outward, Packing , Insurance + Net profit Gross profit

Problem Prepare a trading and P& L A/c


Stock: Finished goods Work in progress Raw material Chemicals Purchases raw materials Chemicals Factory wages Factory on cost Rs 40,140 3,000 25,920 1,170 4,27,860 37,110 4,68,000 36,000 Sales Trade discount (cr) Carriage outward Salaries Gen. expenses Cash discount Dr Depreciation Plant Office building Factory building Rs 12,00,000 10,200 6,960 67,200 54930 15,300 48,000 1,500 1,200