Description
This is a presentation describes how financial statements are prepared including balance sheet and profit & loss account.
Financial Statements
1. Profit & loss account 2. Balance Sheet
PROFIT & LOSS A/C
A Profit & Loss Account shows a company's earnings and expenses over a given period of time It exclusively summarizes revenue and expenses of the period and shows the net difference i.e., profit or loss of the period Revenue and expenses relate to a period and not to a point in time
Owner(s) Equity
= Contributed Capital + Retained Earnings
Retained earnings = Revenue – Expenses Profit & Loss a/c = A statement which computes the income generated by the business
Revenue is recognized when goods are delivered (or services are rendered)
Recognition and measurement of revenue and expense are based on the ideas of realization, accrual, and matching
REALISATION – Pertains to the recognition of revenue from a sale or provision of goods or services. Main Question : WHEN SHOULD WE RECOGNISE REVENUE? ACCRUAL – Pertains to the fact that income arises from events that change owner(s) equity and these may not change the funds position. MATCHING – Pertains to deduction of expenses of a particular period from the realised revenues of that period.
REVENUES
Broadly, it is the total amount realized from the sale of goods (or provision of services) together with earnings from interest, dividend, rents and other items of income • • Normally, generated out of business activities Results in inflow of assets (cash or receivable) and outflow of goods or services Usually related to a specific period i.e., revenue of one year cannot be included in revenue of the other year Leads to increases in owner(s) equity Different from „profit? or „net income? ‘Operating income’ Vs ‘non-operating income’
•
• •
EXPENSES
•
• •
The decrease in the value of the assets leading to the decrease in owner(s) equity Costs incurred in connection with the earning of revenue Resource consumed in relation to the revenues earned during an accounting period
•
• •
Expenses are incurred for the purpose of generating revenue or benefit It is related to a particular period. However, the payment of expenses can be made before the recognition of expense or afterwards Leads to decreases in owner?s equity
Profit & Loss A/c for the month ended 28.2.2009
Dr.
Particulars
To Vehicle Running ex a/c To Office Rent a/c To Salary a/c To Travelling Exp. To Depreciation a/c To Ins. Premium a/c To Phone charges To Interest a/c To Profit taken to B/S
Amount in Rs. Particulars
1,800 2,000 By Commission a/c 5,500 7,700 5,000 56 2,100 2,000 14,844 41,000
Cr. Amount in Rs.
41,000
41,000
7
ILLUSTRATION
During an accounting period Ramsons buys twelve units of inventory for Rs. 1,200. Another ten units are purchased on credit for Rs.1,000. Fifteen units of inventory were sold during the period on credit for Rs. 2,250. Five units of inventory were sold for cash for Rs.750 during the same period.
Horizontal and Vertical format of P&L Account
RAMSONS Profit & Loss Account (for an accounting period)
Expenses Cost of goods sold Rs Revenues Rs 3,000 3,000 Rs. 2,250 750 3,000 2,000 Sales
Profit for the period
Revenue of the period: 15 units sold on credit 5 units sold for cash Total revenue of the period
1,000
3,000
Less: Cost of goods sold (or expired cost of inventory)
Profit of the period
2,000
1,000
P & L A/c – HORIZONTAL Format
Tools India Ltd. Profit & Loss Account for the year ended December 31, 2006 Debit Schedule Cost of goods sold GROSS PROFIT 3 Amount 130 130 260 Personnel expenses Depreciation Other expenses OPERATING INCOME 4 5 6 49 11 28 42 130 Interest PROFIT BEFORE TAXES 7 12 30 42 Income tax provision NET PROFIT AFTER TAX 13 17 30 30 PROFIT BEFORE TAXES 42 30 OPERATING INCOME 130 42 GROSS PROFIT Sales net Other income Credit Schedule 1 2 Amount 255 5 260 130
P & L A/c – VERTICAL Format
Tools India Ltd. Profit & Loss Account For the year ended December 31, 2006 Schedule Sales Net Other income Total Revenue Cost of goods sold GROSS PROFIT Operating expenses: 3 1 2 Amount 255 5 260 130 130
Personnel
Depreciation
4
5
49
11
Other expenses
OPERATING PROFIT Interest PROFIT BEFORE TAX Income tax provision NET PROFIT AFTER TAX
6
28
42
7
12 30 13 17
SCHEDULES TO P & L A/c
Schedule 1: Sales (Rs Millions) Gross sales Less: Sales returns and allowances Sales discount 1.75 3.25 5.00 260.00
NET SALES
Net sales –Domestic Machine Tools group Watch group Tractor group 83 87 60
255.00
Lamp group
Dairy Machinery group TOTAL DOMESTIC SALES Export: Machine Tools Group
13
2 245.00 6
Watch Group
Others TOTAL EXPORT SALES
2
2 10.00
Schedule 2: Other Income
(Rs million)
Interest – banks Interest – staff and offices Export incentives
0.50 1.20 1.80
Sales agency commission Profit on sales of assets Dividend on trade investments Other miscellaneous income Total
0.50 0.30 0.20 0.50 5.00
Schedule 3: Cost of goods sold
(Rs million)
Inventory on January 1, 2000 Add: Purchase Freight-in Other direct material costs Total goods available Less: Raw material & semi finished inventory on Dec 31, 2000 Goods available for sale Less: Finished goods inventory on December 31, 2000 Cost of goods sold
81.00 110.00 10.00 15.00 216.00 71.00
145.00
15.00
130.00
Personnel Expenses Includes remuneration and other benefits to staff and workmen
Schedule 4: Personnel expenses
Rs Millions Salaries, wages and bonus House rent allowance Gratuity Contribution to provident fund Contribution to Employees State Insurance (ESI) Workmen and Staff Welfare expense Total 37.81 2.19 0.75 2.75 0.50
5.00 49.00
Schedule 5: Depreciation
Rs Millions
Fixed assets Tools and Instruments Patterns, Jigs and Fixtures Total
9.84 0.02 1.14 11.00
Schedule 6: Other Expenses Rs Millions Power and Fuel Rent Rates and Taxes Insurance Water and Electricity 3.10 0.50 0.40 0.50 0.60
Repairs to buildings
Repairs to machinery Printing and Stationery Advertisement and Publicity
0.20
0.80 0.90 2.40
Audit fees
Royalties Commissions paid Directors fees Provision for bad debts and advances Loss on assets sold or discarded Provision for warranty repairs Miscellaneous expenses Total
0.05
0.85 4.70 2.00 0.20 1.30 1.00 8.50 28.00
Schedule 7: Interest Rs. Million Debentures Fixed deposits Loans from Government Term loans from Banks/Financial Institutions Cash (packaging) credit from banks Others 0.58 1.50 5.00 0.42 3.50 1.00
Total
12.00
BALANCE SHEET
Balance Sheet is concerned with •Reporting financial position of an entity as of a particular point in time •Done by listing all the things of value owned by the entity as also the claims against these things of value •Position as represented by the balance sheet is valid only until another transaction is carried out by the entity •Allows comparisons with the past financial status • Also allows comparison between multiple entities
ASSETS & LIABILITIES
ASSETS Things of value possessed by an entity, which are measurable In monetary terms.
LIABILITIES - The amounts owed by an entity expressed in monetary terms, which represent legally enforceable claims by outsiders against its assets.
Net worth of the owner(s) of the entity = The value of assets owned by the entity less liabilities (or outsider?s claims) This is also known as “owner(s) equity”
BALANCE SHEET EQUATION
This idea, which is fundamental to accounting, could be expressed as an equality Assets = Liabilities + Owners Equity Owners Equity = Assets – Liabilities NOTE: Owner(s) claim is residual
OWNER(S) EQUITY
Revenues increase owner(s) equity and the expenses decrease owner(s) equity The owner(s) equity increases or deceases to the extent of profit or loss earned by the entity.
Owner(s) equity comprises two parts: Owners Equity = Contributed Capital + Retained Earnings
Owners equity on January 31, 2010 25,000
Less: Owners equity on January 1, 2010 Profit earned during the period
20,000 5,000
Classification OF Balance Sheet Items
• • • • Assets, liabilities, and capital are listed separately Usually grouped into sub-groups and listed in the order of their liquidity (length of time required for conversion into cash) Listed in the ascending or descending order of liquidity Prepared at the end of a specified period, usually, a year; referred to as „accounting period’, „fiscal year’, or „financial year’
Classification of Assets
Current Assets – Held for final transformation to cash at the earliest opportunity during the normal course of business. Example: Inventory Long Term/Fixed Assets – Held for use in the business. Sold only on liquidation. Example: Shop Premises
Assets may also be classified as tangible or intangible
CURRENT ASSETS
(Current literally means a flow) Assets which will normally be converted into cash with in a fiscal year or within an „operating cycle’ The operating cycle is the duration of time taken by a unit of cash to circulate through the business operations and return back as cash
Operating Cycle Concept
Work in Progress Inventory
Further processing, packaging, storage in warehouse
Finished Goods Inventory
Processing is done
CASH
Sold on credit
Raw Material Inventory
Accounts Receivable
CURRENT ASSETS CONTINUED..
Cash & Bank Balances Includes cheques or any other instrument that circulates as cash (promissory notes etc)
Marketable Securities Result of excess short-term cash valued at ‘lower of cost or market price’ Accounts Receivable Amounts owed to the company by debtors collection losses are called bad debts
CURRENT ASSETS CONTINUED..
Prepaid Expenses Expenses paid in advance such as rent, taxes, subscriptions and insurance Merchandise Inventory Merchandise goods held for sale to customers in the ordinary course of business Manufacturing Inventory Transformed into another product or assembled together into another product before being sold Classified as raw material (steel for a car-making unit) and components (tyres)
FIXED (long term) ASSETS
• • • • Are tangible, relatively long-lived items owned by the business To be used in the course of business Not possible to trace them in the value of the goods or services sold by the firm Benefit over several accounting periods to the extent of life of asset
•
Value of the asset is reduced proportionate to the expired life of the asset – depreciation
Intangible and Other Assets
• A non-physical resource or a legal right that represents an advantage to a company's position in the marketplace. (Example – „goodwill’. It reflects the ability of a firm to earn profits in excess of normal returns) Process of expiration of the cost of intangible asset (like patents) is called „amortization? “Other Assets” are assets which are not normally classified as current, fixed and intangible
• •
Investments
A ‘financial security’ is a piece of paper that proves ownership of equity, loan, and other similar investments. It is usually carried at cost price
Investments
Current Investments Readily Realizable
Long-term Investments Intention is to hold for more than a year
Deferred Assets
(Prepaid expenses)
• Special case of intangible assets
• Benefit of these expenses are expected over several future accounting periods and these expenses are deferred over a period of time. • They are considered as expenses in the normal course of business
• Example: Company Registration expenses • Sometimes business entities prepay their tax and adjust it in later years (like „prepaid expenses?)
Current Liabilities
Liabilities that are due within the accounting period Accounts Payable (Sundry Creditors) Arises in the normal course of business as a result of acquisition of goods or services on credit Accrued Liabilities (Expenses Payable) Expenses or obligations incurred in the previous accounting period but the payment would be made in the next period. Examples: Salaries due but not paid
Continued…
Bank Overdraft Short-term borrowing – ‘current account’ with the bank with a contract to permit overdrawing these accounts Up to a limit. It is a kind of flexible borrowing. Estimated Liabilities (Provisions) Liabilities are known but the amounts cannot be precisely determined. The principle of conservatism is followed. Example: Income taxes payable
Contingent Liabilities
These are no liabilities as of now as neither ‘the amount’ nor ‘the liability’ is certain As no Journal Entry can be passed for them they are shown as part of ‘notes’ to the balance sheet They become liabilities only on the happening of a certain event. Example: A claim against the company contested in a law court
Long-Term Liabilities
• Are for more than one accounting period
•
Cover almost all the liabilities not included in the current liabilities and provisions Long Term Liabilities
1. Secured (Asset Backing)
2. Unsecured (No asset backing)
Continued…
Debentures and Bonds
• Special instruments of borrowing used by registered companies under the State Companies Act
• Designated into standard units and one or more of those units are issued to lenders • Have standard form and legal backing
Owners Equity
Owners Equity Contributed Capital + Retained Earnings Capital Assets = Liabilities + Owners Equity Capital Reserve Example: Share Premium paid by stockholders
ILLUSTRATION
A Company has an authorized share capital (maximum amount of capital a company may raise without altering the deed of registration) of Rs. 200,000 divided into 15000 ordinary shares of Rs. 10 each and 500, 10% preference shares of Rs. 100 each The portion of the authorized capital, which is raised, is referred to as „issued capital?. If the Company offered to the public 7500 ordinary shares and 500 preference shares for cash the issue was fully subscribed
The company needed only part of the capital and hence chose to issue only one half of the total authorized ordinary shares
Issued capital
7500 ordinary shares of Rs. 10 each 500, 10% preference shares of Rs. 100 each
Rs.
75,000 50,000
Total
125,000
Subscribed, Called up and Paid up Capital
7500 ordinary shares of Rs.10 each 500, 10% preference shares of Rs.100 each Total
Rs.
75,000 50,000 125,000
Preference Shares
Have some preference over ordinary shares ? In case of liquidation the assets remaining after payments to creditors are distributed to preference shareholders first ? Are first paid their ‘prefixed’ dividend ? Usually redeemable after a specified period
Ordinary Shares
? Have residual claim against all the assets ? No preferential or fixed rights in either repayment of capital or profit distribution
Reserves and Surplus
• These are surpluses earned by the firm (not distributed as dividends) • Retained earnings normally arise out of profitable operations
• They are „earned capital’ for the firm • Limit of dividend is retained earnings
BALANCE SHEET FORMAT
LIABILITIES & ASSETS
LIABILITIES • Shareholders Funds • Loan Funds • Current Liabilities & Provisions • • • ASSETS Fixed Assets Investments Current Assets, Loans & Advances Fictitious Assets
•
BALANCE SHEET…contd.
LIABILITIES
• Shareholders Funds • Reserves & Surplus – P&L a/c – General Reserve – Specific Reserve • Loan Funds – Secured Loans – Unsecured Loans • Current Liabilities & Provisions – Bills Payable – Creditors – Unclaimed Dividend – Provision for Taxation – Proposed Dividend
•
ASSETS
Fixed Assets – Goodwill – Land and Building – Plant & Machinery – Furniture & Fittings – Patents, Trademarks, Designs, Copyrights – Livestock Investments Current Assets, Loans & Advances – Debtors – Stock-in-trade – Cash in hand/bank Fictitious Assets – Discount on Issue of Shares – Underwriting Commission
• •
•
Balance Sheet as on 04.01.2009
Liabilities Equity Profit/(Loss) Amt. (Rs) Assets 100,000 Furniture (2,800) Rent Deposit Phone Deposit Prepaid Insurance Bank Cash Amt.(Rs) 20,000 10,000 3,000 730 49,270 14,200
Total
97,200 Total
97,200 45
THANK YOU
doc_602723779.ppt
This is a presentation describes how financial statements are prepared including balance sheet and profit & loss account.
Financial Statements
1. Profit & loss account 2. Balance Sheet
PROFIT & LOSS A/C
A Profit & Loss Account shows a company's earnings and expenses over a given period of time It exclusively summarizes revenue and expenses of the period and shows the net difference i.e., profit or loss of the period Revenue and expenses relate to a period and not to a point in time
Owner(s) Equity
= Contributed Capital + Retained Earnings
Retained earnings = Revenue – Expenses Profit & Loss a/c = A statement which computes the income generated by the business
Revenue is recognized when goods are delivered (or services are rendered)
Recognition and measurement of revenue and expense are based on the ideas of realization, accrual, and matching
REALISATION – Pertains to the recognition of revenue from a sale or provision of goods or services. Main Question : WHEN SHOULD WE RECOGNISE REVENUE? ACCRUAL – Pertains to the fact that income arises from events that change owner(s) equity and these may not change the funds position. MATCHING – Pertains to deduction of expenses of a particular period from the realised revenues of that period.
REVENUES
Broadly, it is the total amount realized from the sale of goods (or provision of services) together with earnings from interest, dividend, rents and other items of income • • Normally, generated out of business activities Results in inflow of assets (cash or receivable) and outflow of goods or services Usually related to a specific period i.e., revenue of one year cannot be included in revenue of the other year Leads to increases in owner(s) equity Different from „profit? or „net income? ‘Operating income’ Vs ‘non-operating income’
•
• •
EXPENSES
•
• •
The decrease in the value of the assets leading to the decrease in owner(s) equity Costs incurred in connection with the earning of revenue Resource consumed in relation to the revenues earned during an accounting period
•
• •
Expenses are incurred for the purpose of generating revenue or benefit It is related to a particular period. However, the payment of expenses can be made before the recognition of expense or afterwards Leads to decreases in owner?s equity
Profit & Loss A/c for the month ended 28.2.2009
Dr.
Particulars
To Vehicle Running ex a/c To Office Rent a/c To Salary a/c To Travelling Exp. To Depreciation a/c To Ins. Premium a/c To Phone charges To Interest a/c To Profit taken to B/S
Amount in Rs. Particulars
1,800 2,000 By Commission a/c 5,500 7,700 5,000 56 2,100 2,000 14,844 41,000
Cr. Amount in Rs.
41,000
41,000
7
ILLUSTRATION
During an accounting period Ramsons buys twelve units of inventory for Rs. 1,200. Another ten units are purchased on credit for Rs.1,000. Fifteen units of inventory were sold during the period on credit for Rs. 2,250. Five units of inventory were sold for cash for Rs.750 during the same period.
Horizontal and Vertical format of P&L Account
RAMSONS Profit & Loss Account (for an accounting period)
Expenses Cost of goods sold Rs Revenues Rs 3,000 3,000 Rs. 2,250 750 3,000 2,000 Sales
Profit for the period
Revenue of the period: 15 units sold on credit 5 units sold for cash Total revenue of the period
1,000
3,000
Less: Cost of goods sold (or expired cost of inventory)
Profit of the period
2,000
1,000
P & L A/c – HORIZONTAL Format
Tools India Ltd. Profit & Loss Account for the year ended December 31, 2006 Debit Schedule Cost of goods sold GROSS PROFIT 3 Amount 130 130 260 Personnel expenses Depreciation Other expenses OPERATING INCOME 4 5 6 49 11 28 42 130 Interest PROFIT BEFORE TAXES 7 12 30 42 Income tax provision NET PROFIT AFTER TAX 13 17 30 30 PROFIT BEFORE TAXES 42 30 OPERATING INCOME 130 42 GROSS PROFIT Sales net Other income Credit Schedule 1 2 Amount 255 5 260 130
P & L A/c – VERTICAL Format
Tools India Ltd. Profit & Loss Account For the year ended December 31, 2006 Schedule Sales Net Other income Total Revenue Cost of goods sold GROSS PROFIT Operating expenses: 3 1 2 Amount 255 5 260 130 130
Personnel
Depreciation
4
5
49
11
Other expenses
OPERATING PROFIT Interest PROFIT BEFORE TAX Income tax provision NET PROFIT AFTER TAX
6
28
42
7
12 30 13 17
SCHEDULES TO P & L A/c
Schedule 1: Sales (Rs Millions) Gross sales Less: Sales returns and allowances Sales discount 1.75 3.25 5.00 260.00
NET SALES
Net sales –Domestic Machine Tools group Watch group Tractor group 83 87 60
255.00
Lamp group
Dairy Machinery group TOTAL DOMESTIC SALES Export: Machine Tools Group
13
2 245.00 6
Watch Group
Others TOTAL EXPORT SALES
2
2 10.00
Schedule 2: Other Income
(Rs million)
Interest – banks Interest – staff and offices Export incentives
0.50 1.20 1.80
Sales agency commission Profit on sales of assets Dividend on trade investments Other miscellaneous income Total
0.50 0.30 0.20 0.50 5.00
Schedule 3: Cost of goods sold
(Rs million)
Inventory on January 1, 2000 Add: Purchase Freight-in Other direct material costs Total goods available Less: Raw material & semi finished inventory on Dec 31, 2000 Goods available for sale Less: Finished goods inventory on December 31, 2000 Cost of goods sold
81.00 110.00 10.00 15.00 216.00 71.00
145.00
15.00
130.00
Personnel Expenses Includes remuneration and other benefits to staff and workmen
Schedule 4: Personnel expenses
Rs Millions Salaries, wages and bonus House rent allowance Gratuity Contribution to provident fund Contribution to Employees State Insurance (ESI) Workmen and Staff Welfare expense Total 37.81 2.19 0.75 2.75 0.50
5.00 49.00
Schedule 5: Depreciation
Rs Millions
Fixed assets Tools and Instruments Patterns, Jigs and Fixtures Total
9.84 0.02 1.14 11.00
Schedule 6: Other Expenses Rs Millions Power and Fuel Rent Rates and Taxes Insurance Water and Electricity 3.10 0.50 0.40 0.50 0.60
Repairs to buildings
Repairs to machinery Printing and Stationery Advertisement and Publicity
0.20
0.80 0.90 2.40
Audit fees
Royalties Commissions paid Directors fees Provision for bad debts and advances Loss on assets sold or discarded Provision for warranty repairs Miscellaneous expenses Total
0.05
0.85 4.70 2.00 0.20 1.30 1.00 8.50 28.00
Schedule 7: Interest Rs. Million Debentures Fixed deposits Loans from Government Term loans from Banks/Financial Institutions Cash (packaging) credit from banks Others 0.58 1.50 5.00 0.42 3.50 1.00
Total
12.00
BALANCE SHEET
Balance Sheet is concerned with •Reporting financial position of an entity as of a particular point in time •Done by listing all the things of value owned by the entity as also the claims against these things of value •Position as represented by the balance sheet is valid only until another transaction is carried out by the entity •Allows comparisons with the past financial status • Also allows comparison between multiple entities
ASSETS & LIABILITIES
ASSETS Things of value possessed by an entity, which are measurable In monetary terms.
LIABILITIES - The amounts owed by an entity expressed in monetary terms, which represent legally enforceable claims by outsiders against its assets.
Net worth of the owner(s) of the entity = The value of assets owned by the entity less liabilities (or outsider?s claims) This is also known as “owner(s) equity”
BALANCE SHEET EQUATION
This idea, which is fundamental to accounting, could be expressed as an equality Assets = Liabilities + Owners Equity Owners Equity = Assets – Liabilities NOTE: Owner(s) claim is residual
OWNER(S) EQUITY
Revenues increase owner(s) equity and the expenses decrease owner(s) equity The owner(s) equity increases or deceases to the extent of profit or loss earned by the entity.
Owner(s) equity comprises two parts: Owners Equity = Contributed Capital + Retained Earnings
Owners equity on January 31, 2010 25,000
Less: Owners equity on January 1, 2010 Profit earned during the period
20,000 5,000
Classification OF Balance Sheet Items
• • • • Assets, liabilities, and capital are listed separately Usually grouped into sub-groups and listed in the order of their liquidity (length of time required for conversion into cash) Listed in the ascending or descending order of liquidity Prepared at the end of a specified period, usually, a year; referred to as „accounting period’, „fiscal year’, or „financial year’
Classification of Assets
Current Assets – Held for final transformation to cash at the earliest opportunity during the normal course of business. Example: Inventory Long Term/Fixed Assets – Held for use in the business. Sold only on liquidation. Example: Shop Premises
Assets may also be classified as tangible or intangible
CURRENT ASSETS
(Current literally means a flow) Assets which will normally be converted into cash with in a fiscal year or within an „operating cycle’ The operating cycle is the duration of time taken by a unit of cash to circulate through the business operations and return back as cash
Operating Cycle Concept
Work in Progress Inventory
Further processing, packaging, storage in warehouse
Finished Goods Inventory
Processing is done
CASH
Sold on credit
Raw Material Inventory
Accounts Receivable
CURRENT ASSETS CONTINUED..
Cash & Bank Balances Includes cheques or any other instrument that circulates as cash (promissory notes etc)
Marketable Securities Result of excess short-term cash valued at ‘lower of cost or market price’ Accounts Receivable Amounts owed to the company by debtors collection losses are called bad debts
CURRENT ASSETS CONTINUED..
Prepaid Expenses Expenses paid in advance such as rent, taxes, subscriptions and insurance Merchandise Inventory Merchandise goods held for sale to customers in the ordinary course of business Manufacturing Inventory Transformed into another product or assembled together into another product before being sold Classified as raw material (steel for a car-making unit) and components (tyres)
FIXED (long term) ASSETS
• • • • Are tangible, relatively long-lived items owned by the business To be used in the course of business Not possible to trace them in the value of the goods or services sold by the firm Benefit over several accounting periods to the extent of life of asset
•
Value of the asset is reduced proportionate to the expired life of the asset – depreciation
Intangible and Other Assets
• A non-physical resource or a legal right that represents an advantage to a company's position in the marketplace. (Example – „goodwill’. It reflects the ability of a firm to earn profits in excess of normal returns) Process of expiration of the cost of intangible asset (like patents) is called „amortization? “Other Assets” are assets which are not normally classified as current, fixed and intangible
• •
Investments
A ‘financial security’ is a piece of paper that proves ownership of equity, loan, and other similar investments. It is usually carried at cost price
Investments
Current Investments Readily Realizable
Long-term Investments Intention is to hold for more than a year
Deferred Assets
(Prepaid expenses)
• Special case of intangible assets
• Benefit of these expenses are expected over several future accounting periods and these expenses are deferred over a period of time. • They are considered as expenses in the normal course of business
• Example: Company Registration expenses • Sometimes business entities prepay their tax and adjust it in later years (like „prepaid expenses?)
Current Liabilities
Liabilities that are due within the accounting period Accounts Payable (Sundry Creditors) Arises in the normal course of business as a result of acquisition of goods or services on credit Accrued Liabilities (Expenses Payable) Expenses or obligations incurred in the previous accounting period but the payment would be made in the next period. Examples: Salaries due but not paid
Continued…
Bank Overdraft Short-term borrowing – ‘current account’ with the bank with a contract to permit overdrawing these accounts Up to a limit. It is a kind of flexible borrowing. Estimated Liabilities (Provisions) Liabilities are known but the amounts cannot be precisely determined. The principle of conservatism is followed. Example: Income taxes payable
Contingent Liabilities
These are no liabilities as of now as neither ‘the amount’ nor ‘the liability’ is certain As no Journal Entry can be passed for them they are shown as part of ‘notes’ to the balance sheet They become liabilities only on the happening of a certain event. Example: A claim against the company contested in a law court
Long-Term Liabilities
• Are for more than one accounting period
•
Cover almost all the liabilities not included in the current liabilities and provisions Long Term Liabilities
1. Secured (Asset Backing)
2. Unsecured (No asset backing)
Continued…
Debentures and Bonds
• Special instruments of borrowing used by registered companies under the State Companies Act
• Designated into standard units and one or more of those units are issued to lenders • Have standard form and legal backing
Owners Equity
Owners Equity Contributed Capital + Retained Earnings Capital Assets = Liabilities + Owners Equity Capital Reserve Example: Share Premium paid by stockholders
ILLUSTRATION
A Company has an authorized share capital (maximum amount of capital a company may raise without altering the deed of registration) of Rs. 200,000 divided into 15000 ordinary shares of Rs. 10 each and 500, 10% preference shares of Rs. 100 each The portion of the authorized capital, which is raised, is referred to as „issued capital?. If the Company offered to the public 7500 ordinary shares and 500 preference shares for cash the issue was fully subscribed
The company needed only part of the capital and hence chose to issue only one half of the total authorized ordinary shares
Issued capital
7500 ordinary shares of Rs. 10 each 500, 10% preference shares of Rs. 100 each
Rs.
75,000 50,000
Total
125,000
Subscribed, Called up and Paid up Capital
7500 ordinary shares of Rs.10 each 500, 10% preference shares of Rs.100 each Total
Rs.
75,000 50,000 125,000
Preference Shares
Have some preference over ordinary shares ? In case of liquidation the assets remaining after payments to creditors are distributed to preference shareholders first ? Are first paid their ‘prefixed’ dividend ? Usually redeemable after a specified period
Ordinary Shares
? Have residual claim against all the assets ? No preferential or fixed rights in either repayment of capital or profit distribution
Reserves and Surplus
• These are surpluses earned by the firm (not distributed as dividends) • Retained earnings normally arise out of profitable operations
• They are „earned capital’ for the firm • Limit of dividend is retained earnings
BALANCE SHEET FORMAT
LIABILITIES & ASSETS
LIABILITIES • Shareholders Funds • Loan Funds • Current Liabilities & Provisions • • • ASSETS Fixed Assets Investments Current Assets, Loans & Advances Fictitious Assets
•
BALANCE SHEET…contd.
LIABILITIES
• Shareholders Funds • Reserves & Surplus – P&L a/c – General Reserve – Specific Reserve • Loan Funds – Secured Loans – Unsecured Loans • Current Liabilities & Provisions – Bills Payable – Creditors – Unclaimed Dividend – Provision for Taxation – Proposed Dividend
•
ASSETS
Fixed Assets – Goodwill – Land and Building – Plant & Machinery – Furniture & Fittings – Patents, Trademarks, Designs, Copyrights – Livestock Investments Current Assets, Loans & Advances – Debtors – Stock-in-trade – Cash in hand/bank Fictitious Assets – Discount on Issue of Shares – Underwriting Commission
• •
•
Balance Sheet as on 04.01.2009
Liabilities Equity Profit/(Loss) Amt. (Rs) Assets 100,000 Furniture (2,800) Rent Deposit Phone Deposit Prepaid Insurance Bank Cash Amt.(Rs) 20,000 10,000 3,000 730 49,270 14,200
Total
97,200 Total
97,200 45
THANK YOU
doc_602723779.ppt