Accounting in Logistics and Supply Chain Sector-V1Final
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logistics book...
Description
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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
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N Balwani
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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
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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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Block-IV
Financial Aspects of Supply Chain Management ................................ .................... 169
Unit 17
Inventory Management’s Techniques and Control................................ .................. 181
Unit 18
Cost Accounting ................................ ................................ ................................ ........ 193
Unit 19
EVA and Budgets................................ ................................ ................................ ...... 207
Unit 20
Case Studies................................ ................................ ................................ .............. 217
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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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Accounting in Logistics and Supply Chain Sector
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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 ___________________
Introduction
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UNIT 5: CASE STUDIES
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UNIT 4: ACCOUNTING EQUATION
___________________ Branches of Accounting
PRINCIPLES
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UNIT 3: ACCOUNTING STANDARDS
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UNIT 1: FUNDAMENTALS OF ACCOUNTING ___________________ Introduction ___________________ Characteristics of Accounting ___________________ Stages of Accounting ___________________ Objectives of Accounting ___________________ Accounting Information ___________________ Functions of Accounting
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Notes
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Notes
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UNIT 1: Fundamentals 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
Stages of Accounting
Objectives of Accounting
Accounting Information
Characteristics of Accounting Information
Functions of Accounting
Branches of Accounting
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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 money’s 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.”
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—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 ___________________ Write an article on the
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Accounting in Logistics and Supply Chain Sector
—American Institute of Certified Public Accountants, 1941
Characteristics of Accounting
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The following are the characteristics of accounting:
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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.
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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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UNIT 1: Fundamentals of Accounting
Stages of Accounting
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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
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Nature (Art or science)
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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.
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Rules to be followed
Rules of accounting are followed for recording.
Along with rules, assumptions and conventions are also there to follow.
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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.
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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 ___________________ 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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Objectives of 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.
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(a) Internal users: These are the persons who manage the business, i.e., management at all the levels–top, 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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Notes
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UNIT 1: Fundamentals of Accounting
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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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2.
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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 ___________________ Present a draft on accounting information. ___________________ ___________________ ___________________
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4.
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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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Accounting Information
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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.
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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?
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Net profit is used as a basis for taxation purposes.
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Information about Financial Position of Business
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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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Notes
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Accounting in Logistics and Supply Chain Sector
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Characteristics of Accounting Information
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Accounting information consists of the following characteristics:
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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.
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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.
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Various Users of Accounting Information
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Following are the users of accounting information: The owners: Whosoever’s 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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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.
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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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Functions of Accounting 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:
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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.
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4.
It depicts the earning capacity of the business.
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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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Branches of Accounting
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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
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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).
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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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UNIT 1: Fundamentals of Accounting
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Check Your Progress
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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 money’s 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
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Collect more information on accounting and present it in the form of a chart.
Keywords
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Accounting: It is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information.
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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 levels–top, 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).
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Questions for Discussion
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1.
Describe the characteristics of accounting.
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2.
Explain the stages of accounting.
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3.
Discuss the objectives of accounting.
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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
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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.
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
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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/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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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)
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Objectives After completion of this unit, the students will be aware of the following topics: Classification of Accounting Principles
Basic Assumptions
Basic Accounting Principles
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Introduction
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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.
Classification of Accounting Principles All the accounting concepts and conventions are broadly classified into three broad categories, such as:
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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:
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(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
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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
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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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UNIT 2: Generally Accepted Accounting Principles (GAAP)
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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.
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Limitations of Money Measurement
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There are certain limitations of this concept because of which the scope of accounting is limited the limitations are as follows:
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(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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(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
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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
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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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Fill in the blanks:
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
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Basic Accounting Principles
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2.
Revenue/Realization principle
3.
Matching principle
4.
Full disclosure principle
5.
Dual aspect principle and
6.
Objectivity principle.
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Cost principle
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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
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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.
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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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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:
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Notes
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
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Profit = Revenues – Expenses
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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:
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(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.
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(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
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(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 investor’s 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.
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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:
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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
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Or
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Goods a/c
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To Proprietor's a/c
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To Capital a/c
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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
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Notes
Capital + Loan = Cash + Stock
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OR
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Total Liabilities = Total Assets
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OR
In other words, we can say that
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Internal + External Liabilities = Fixed Assets + Current Assets
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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.
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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.
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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.
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Summary
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Equity or owner’s equity = All Assets – Loans or liabilities of outsiders
6.
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
All the persons interested in the business, such as the owners/shareholders, the creditors, the government and the others,
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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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Notes
Lesson End Activity
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Gather information about the GAAP. Present the information collected in the form of a collage.
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Keywords
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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.
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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.
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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.
Questions for Discussion 1.
Describe the classification of accounting principles.
2.
Explain the basic assumptions of GAAP.
3.
Discuss the basic accounting principles.
Further Readings Books
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Notes
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UNIT 2: Generally Accepted Accounting Principles (GAAP)
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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.
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
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Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
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www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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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 After completion of this unit, the students will be aware of the following topics:
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Accounting Standards in India
Accounting Process
Uses, Advantages or Role of Accounting
Limitations of Accounting
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Introduction
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Basic accounting assumptions and principles provide different rules for preparing certain financial statements which can provide useful information to different interested persons.
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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
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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
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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.
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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.
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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-
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Notes
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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.
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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.
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UNIT 3: Accounting Principles and Standards
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
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5.
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accounting standards of India. ___________________ ___________________
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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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Check Your Progress
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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 India’s accounting standards are explained in the following subsections:
Meaning of Accounting Standards
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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
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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
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(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
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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
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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.
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Figure 3.1: Basic Accounting Process
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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
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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.
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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, owner’s equity, revenue and expenses.
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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.
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Notes Activity ___________________ Construct a summarized report on the uses, ___________________ advantages, or role of accounting. ___________________
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Accounting in Logistics and Supply Chain Sector
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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.
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Check Your Progress
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Uses, Advantages or Role of Accounting 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.
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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)
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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
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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,
Limitations of Accounting
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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.
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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.
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4.
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UNIT 3: Accounting Principles and Standards
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________
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.
___________________ ___________________ ___________________ ___________________ ___________________ ___________________
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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.
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5.
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___________________
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2.
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___________________
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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)
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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
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Fill in the blanks:
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UNIT 3: Accounting Principles and Standards
___________________
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.
___________________ ___________________ ___________________
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___________________
Summary
___________________
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Basic accounting assumptions and principles provide different rules for preparing certain financial, statements which can provide useful information to different interested persons.
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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.
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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.
___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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Voucher: It is therefore the basic document of an accounting transaction.
Notes ___________________ ___________________
Questions for Discussion
___________________ ___________________
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
___________________
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cti
___________________
Books
Re
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.
for
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
No t
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
(c)
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S,
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 www.accountingcoach.com/online-accounting-course/60Xpg01.html 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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Notes Activity
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UNIT 4: Accounting Equation
___________________ Make a report on the meaning and relevance of accounting ___________________ equation.
Accounting Equation
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
cti
___________________ ___________________
Meaning of Accounting Equation
Calculation/Computation of Accounting Equation
Effect of Transactions on Accounting Equation
___________________
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Introduction
Meaning of Accounting Equation
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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)
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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 owner’s 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
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Notes Activity ___________________ Write an article on the
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Accounting in Logistics and Supply Chain Sector
C = A
calculation and computation of ___________________ accounting equation.
Or C + L = A
___________________
Where C stands for owner’s equity, L stands for liabilities and A stands for Total Assets. The above equation can also be expressed in the following ways namely:
___________________
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___________________ ___________________
C = A–L
___________________
L = A–C
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___________________
A – C – L = Zero
___________________ ___________________
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Thus, it is clear from the above equations that owner’s 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
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for
Owner’s Equity and Liabilities
Check Your Progress
(c)
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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)
Calculation/Computation of Accounting Equation As we know that the total Assets must be equal to owner’s equity + outsider’s capital. If there is any change in the amount of assets or liabilities or owner’s 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
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(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)
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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
+
0
=
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 +
0
Effect of transaction
20,000 +
0 =
0 +
20,000
New Balance
29,000 +
1,000 =
10,000 +
20,000
(c)
___________________ ___________________ ___________________ ___________________ ___________________
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(i)
10,000. This
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1.
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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
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UNIT 4: Accounting Equation
___________________ ___________________ ___________________ ___________________
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:
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4. Notes Activity ___________________ Prepare an assignment on the
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Accounting in Logistics and Supply Chain Sector
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
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Old Balance 29,000 + Effect of 12,000 + transaction
___________________
Goods = (Merchandise)
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___________________
1000 +
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Check Your Progress
Fill in the blanks:
Assets must be equal to ................... + outsider’s capital.
2.
If there is any change in the amount of assets or liabilities or owner’s equity, the ................... is formed to change accordingly.
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1.
Effect of Transactions on Accounting Equation
(c)
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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
+
0
+ 15,000 =
0
+
0
25,000 =
25,000
+
0
on credit
25,000 =
0
+
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
0
+
25,000
(–20,000) 5,000
–600
+
600
22,350
+
5,600
10,000 = + 10,000
+
0
37,950 =
32,350
+
5,600
50,000 =
0
+
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 =
0
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New equation
0
Re
April 15 Withdrew for personal use
cti
___________________
du
April 7
___________________
–15,000
New equation April 4
= Capital
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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)
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UNIT 4: Accounting Equation
8.
Rent paid
9.
Purchased T.V. for personal use
10.
Interest outstanding
2,500 12,000 1,000
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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
+
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___________________
1,00,000
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___________________ 6.
Furniture purchased for cash
7.
Building purchased for cash
8.
Rent paid
9.
T.V. Purchased for personal use
for
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1,00,000
=
Total Assets
0
=
1,00,000 + 20,000 – 20,000
0
=
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
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No.
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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 owner’s 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
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Notes
With the help of internet, find out more practical problems on accounting equation and try to solve them.
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UNIT 4: Accounting Equation
___________________ ___________________
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
Outsider’s Capital: The value of investments minus operating expenses that are held by company stockholders.
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Owner’s 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
Questions for Discussion
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
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. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
(c)
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
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Notes ___________________
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.
cti
___________________ ___________________
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
___________________
du
___________________
Web Readings
___________________
www.accountingcoach.com/online-accounting-course/60Xpg01.html
pro
___________________
www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
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S,
No t
for
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes
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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.
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___________________
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Case Study 1: Rental Company Applies Accounting Concepts to Transaction Processing in MAS200 with help from Connective Values
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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
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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 company’s 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)
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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…
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
Question:
___________________
Analyse the case and summarise it in your own words.
___________________
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___________________
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___________________
A better understanding of accounting concepts improved our client’s 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
___________________ ___________________
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___________________ ___________________
(c)
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___________________
Case Study 2: General Accounting Files Notes
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The Situation
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UNIT 5: Case Studies
___________________
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.
___________________
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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
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The Solution
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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…
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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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.
___________________ ___________________
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___________________ ___________________ ___________________
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___________________ ___________________
(c)
UP E
S,
No t
for
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pro
___________________
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Notes
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UNIT 6: Accounts
___________________ ___________________ ___________________ ___________________
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___________________ ___________________
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pro
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___________________
(c)
UP E
S,
No t
for
BLOCK-II
___________________ ___________________ ___________________
Accounting in Logistics and Supply Chain Sector
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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
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___________________
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UNIT 8: LEDGER
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UNIT 10: CASE STUDY
(c)
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Notes
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UNIT 6: Accounts
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Notes Activity Activity
___________________ D Write an article on the concept of accounts. ___________________
Accounts
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
cti
___________________ ___________________
Meaning of an Account
Traditional Classification
Classification of Accounts based on Accounting Equation
Balancing of an Account
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___________________
Introduction
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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.
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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
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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.
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Notes Activity ___________________ Prepare a report on the
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Accounting in Logistics and Supply Chain Sector
___________________
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.
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___________________ ___________________ ___________________
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___________________
Traditional Classification
___________________
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)
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S,
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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 example–If 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,
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Notes
Real Account
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‘Debit whatever comes in, credit whatever goes out’
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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.
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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.
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UNIT 6: Accounts
___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________
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(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.
___________________ ___________________ ___________________
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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:
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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)
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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 person’s whether-natural, Institutions or deemed to be person. Such as–Name 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.
___________________
___________________ ___________________ ___________________
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Debit what comes in Credit what goes out Debit Expenses/Losses Credit Income/Gains
___________________
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1. Subject matter
Notes
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Personal Account
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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. Ram’s 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 Ram’s A/c House Rent A/c (Drawings A/c) Postage A/c Mathura Refineries A/c Discount A/c
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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
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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
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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)
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___________________
Type of Accounts Personal A/c Real A/c Personal A/c Nominal A/c Personal A/c Personal A/c
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(i) (ii) (iii) (iv) (v) (vi)
___________________
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classification of accounts ___________________ based on accounting equation. ___________________
(ii) Cash
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Notes Activity ___________________ Present an assignment on the
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Accounting in Logistics and Supply Chain Sector
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)
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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.
___________________ ___________________ ___________________ ___________________ ___________________
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(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
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Plants and Machinery, Furniture and fixture, all current assets–such as cash, Bank, Stock, Debtors, Bills receivable, Goodwill, Patents a/c, etc.
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UNIT 6: Accounts
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As the capital is affected by expenses and profits, there will be two more types of accounts as part of capital:
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(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
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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
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(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
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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(II) In case of Modern classification of Account also known as classification based on accounting equation.
Notes
Capital = Assets
___________________ ___________________ ___________________
Owned
___________________
Borrowed = Total Assets
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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.
___________________
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___________________ ___________________
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.
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___________________
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)
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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
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All the above explained rules of Debit and Credit can be explained in a Tabular Form.
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UNIT 6: Accounts
___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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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)
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Solution:
S,
12. Loan a/c
for
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1.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Balancing of an Account process of balancing an ___________________ account. ___________________ ___________________
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___________________
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.
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Notes Activity ___________________ Develop a draft on the
___________________ ___________________
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___________________ ___________________
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___________________
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
___________________ ___________________ ___________________ ___________________ ___________________
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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.
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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.
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UNIT 6: Accounts
___________________ ___________________
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Lesson End Activity
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Create an effective presentation on accounts and the forms and types of accounts.
Keywords
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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.
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Tangible Assets: These are such assets, which can be seen and felt
Questions for Discussion 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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Further Readings
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Notes ___________________
Books
___________________
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.
___________________ ___________________
cti
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
___________________ ___________________
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
du
___________________ ___________________
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
pro
___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
for
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
No t
www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
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S,
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes Activity
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UNIT 7: Journal
___________________ Make a report on the double entry system of accounting. ___________________
Journal
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics: Double Entry System of Accounting
Meaning of Source Documents
Books of Business
cti
___________________ ___________________
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___________________
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Introduction
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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.
Double Entry System of Accounting
(c)
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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
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Accounting in Logistics and Supply Chain Sector
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.
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___________________
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1.
pro
___________________
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___________________
for
___________________
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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 year’s results with the current year’s 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.
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Notes Activity
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UNIT 7: Journal
___________________ Prepare a report on source documents in accounting. ___________________ ___________________ ___________________ ___________________
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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 year’s results with the current year’s 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 an assignment on the
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Accounting in Logistics and Supply Chain Sector
Meaning of Voucher
___________________
___________________ ___________________ ___________________
Books of Business
___________________ ___________________
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___________________
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.
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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.
___________________ ___________________ ___________________ ___________________
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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 Goods purchased for cash 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
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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.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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
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___________________
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. Credit what goes out.
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 Credit what goes out
No t S,
Nature of A/c’s
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 Credit what goes out
April 15
Rent paid
(i) Rent (ii) Cash
Nominal Real
Debit the expenses Credit what goes out
April 20
Cash sales
(i) Cash (ii) Sales
Real Real
Debit what comes in Credit what goes out
April 27
Cash purchases
(i) Purchases Real (ii) Cash Real
Debit what comes in Credit what goes out.
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 Goods purchased for cash
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
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Accounting in Logistics and Supply Chain Sector
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 year’s 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 owner’s capital are credited. If the owner’s capital is not given, then the difference between total assets and liabilities is termed as the owner’s 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.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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. Furniture’s 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 year’s 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 week’s 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
Questions for Discussion
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
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
(c)
Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
on /Sa
Notes ___________________
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.
cti
___________________ ___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi.
___________________
du
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
___________________
Web Readings
pro
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
___________________
Re
www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
UP E
S,
No t
for
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
on /Sa
Notes Activity
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UNIT 8: Ledger
___________________ Write W an article on the meaning and importance of ___________________ ledger.
Ledger
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
cti
___________________ ___________________
Meaning of Ledger
Importance of Ledger
Sub-division 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 Money’s 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
Accounting in Logistics and Supply Chain Sector
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
Importance of Ledger Notes Activity W ___________________ Prepare an assignment on the
___________________
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
Sub-division of Ledger 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/c’s 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
Accounting in Logistics and Supply Chain Sector
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 Roop’s 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
Accounting in Logistics and Supply Chain Sector
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
5
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
5
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 Roop’s 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
Accounting in Logistics and Supply Chain Sector
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.
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Accounting in Logistics and Supply Chain Sector
___________________
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)
___________________ ___________________
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2006 25 July 27
Particulars
pro
2006 July 31
Amount ( )
L.F.
___________________
cti
Dr. Particulars
___________________ ___________________
Dividend Account
Date
on /Sa
Dr.
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UNIT 8: Ledger
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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.
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___________________ ___________________
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
Questions for Discussion
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
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
(c)
UP E
S,
Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. 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.
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.
Notes
on /Sa
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi.
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UNIT 8: Ledger
___________________ ___________________ ___________________ ___________________ ___________________
cti
Web Readings
___________________
www.accsoft.ch/download/accountingconcepts.pdf
___________________
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www.accountingcoach.com/online-accounting-course/60Xpg01.html www.investopedia.com/university/accounting/
(c)
UP E
S,
No t
for
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pro
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
on /Sa
Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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___________________ ___________________
(c)
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S,
No t
for
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___________________
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Notes Activity
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UNIT 9: Subsidiary Books
___________________ Make a report on the need for sub-division of journal. ___________________
Subsidiary Books
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
Types of Subsidiary Books
Cash Book
cti
Need for sub-division of Journal
___________________ ___________________
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___________________
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
Need for sub-division of Journal
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,
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Accounting in Logistics and Supply Chain Sector
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
___________________ ___________________ ___________________
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___________________
Types of Subsidiary Books
___________________
Following are the subsidiary books:
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___________________
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
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8.
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6.
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1.
Importance and Advantages of Subsidiary Books
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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.
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UNIT 9: Subsidiary Books
___________________ ___________________ ___________________ ___________________
It
helps
in
fixing
9. It helps internal check-work can be finished at the earliest.
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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
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8. Helpful in fixing responsibility: responsibility of each worker.
___________________
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7. Helpful in increasing efficiency: It increases the efficiency of the workers as they work with speed and accuracy.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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.
___________________
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___________________
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___________________
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___________________
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
___________________
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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.
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UNIT 9: Subsidiary Books
___________________ ___________________
1
Cash in hand
5,000
June
2
Furniture purchased for Cash
1,000
June
4
Good purchased for cash
3,000
June
5
Cash sales
2,800
June
7
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)
___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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.
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___________________
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___________________
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
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___________________ ___________________
for
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___________________
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
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UNIT 9: Subsidiary Books
___________________ ___________________
990 10
___________________
1000
___________________
pro
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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
Double Columns Cash Book
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
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Accounting in Logistics and Supply Chain Sector
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
1
Cash in hand
840
July
3
Recorded from Wilson and Co.
180
(c)
UP E
S,
No t
July
July
7
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
Double Columns Cash Book
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
___________________ ___________________ ___________________ ___________________ ___________________ ___________________
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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
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UNIT 9: Subsidiary Books
___________________ ___________________ ___________________
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
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Accounting in Logistics and Supply Chain Sector
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.
___________________ ___________________ ___________________
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pro
___________________
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___________________
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
Three Columns Cash Book
___________________
Ba nk ( )
Cash ( )
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UNIT 9: Subsidiary Books
___________________ ___________________ ___________________
cti
___________________
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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:
Three Columns Cash Book
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
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Petty Cash Book
___________________
5
– 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
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Accounting in Logistics and Supply Chain Sector
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.
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Analytical Petty Cash Book Receipts Date
Notes
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UNIT 9: Subsidiary Books
___________________
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
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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
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2006
Tea & office expenses
– – –
– – 8.00 7.00 – – – 4.00 –
– – – – 6.00 12.00 – –
500
19.00
18.00
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Accounting in Logistics and Supply Chain Sector
Purchases Day Book Notes
___________________
Purchases Day Book
___________________ ___________________
___________________
Date
Particulars
Invoice No.
L.F.
Amount ( )
I
II
III
IV
V
___________________
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___________________
___________________
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.
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III. Invoice No.
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___________________
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___________________
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
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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.
I
II
III
IV
V
for
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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
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1.
Following is the specimen of a debit note -
S,
Debit Note
No. ..........................
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Place .......................
Date ........................
From
Name and address .................................................... (of the sender) ....................................................
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Particulars
___________________ ___________________ ___________________ ___________________ ___________________ ___________________ ___________________
Amount ( )
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Date
Debit Note No.
Notes
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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.
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UNIT 9: Subsidiary Books
To name and address .................................................... (of the supplier) ....................................................
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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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:
___________________ ___________________
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___________________ ___________________ ___________________
Date
Particular
I
II
___________________
Credit Note No.
L.F.
Amount ( )
III
IV
V
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Sales Returns Book
___________________
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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
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(ii) Description of goods returned (iii) Value
(iv) Signature Following is the specimen of a credit note
(c)
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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
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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.
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UNIT 9: Subsidiary Books
___________________ ___________________
Bills Receivable Book
___________________ ___________________
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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
___________________
___________________
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___________________
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
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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.
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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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Lesson End Activity Notes
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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.
___________________
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___________________
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.
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___________________
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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.
Questions for Discussion 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)
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(a) Petty Cash Book (b) Purchases Book (c) Sales Return Book
Further Readings Books 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.
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.
___________________ ___________________ ___________________ ___________________ ___________________
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Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
Notes
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
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UNIT 9: Subsidiary Books
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K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
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Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
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for
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________
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Notes
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UNIT 10: Case Studies
___________________
Case Studies
___________________ ___________________
Objectives
___________________
After analysing these cases, the student will have an appreciation of the concept of topics studied in this Block.
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___________________ ___________________
Case Study 1: Profit vs. Cash Flow
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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.
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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
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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
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Sales
___________________
Less: Cost of Goods Sold
132,122
Gross Profit
___________________
$135,067
Less: Operating Expenses
___________________
(115,405)
Less: Depreciation
___________________
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Accounting in Logistics and Supply Chain Sector
(4,163)
Net Profit
$15,499
___________________
Net Profit
___________________
+ Depreciation
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___________________
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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
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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)
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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
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Notes
___________________
Accounting Standards
___________________ ___________________ ___________________
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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 company’s performance and position. SSAP 12 Accounting for Depreciation
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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.
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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 company’s 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.
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For example, if a pipeline from Global Oil’s 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 asset’s 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’.
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UNIT 10: Case Studies
Contd…
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
FRS 1 Cash flow Statements Notes
___________________
Question:
___________________
Analyse the case and summarise it briefly.
___________________ ___________________ ___________________
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___________________
There are three main statements in a company’s 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 company’s cash flow statement.
___________________
Source: http://businesscasestudies.co.uk/pricewaterhousecoopers.html
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___________________ ___________________
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Notes
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UNIT 11: Trial Balance
___________________ ___________________ ___________________ ___________________
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___________________ ___________________
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for
BLOCK-III
___________________ ___________________ ___________________
Accounting in Logistics and Supply Chain Sector
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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
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___________________
Introduction
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UNIT 12: PREPARATION OF TRADING, PROFIT & ___________________ LOSS ACCOUNT AND BALANCE SHEET ___________________ Introduction
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UNIT 11: TRIAL BALANCE ___________________ Introduction ___________________ Meaning of Trial Balance ___________________ Types of Errors ___________________
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Notes
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UNIT 15: CASE STUDIES
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Notes Activity
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UNIT 11: Trial Balance
___________________ Prepare an assignment on the meaning of a trial balance. ___________________
Trial Balance
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
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___________________ ___________________
Meaning of Trial Balance
Methods of Preparing Trial Balance
Types of Errors
___________________
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Introduction
for
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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.
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Meaning of Trial Balance
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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
The above columns if put in a statement form, can be depicted as given below:
___________________
Trial Balance as on____________________
___________________
Amount (Dr.)
Particulars ___________________ ___________________
Amount (Cr.)
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Notes
___________________ ___________________
Methods of Preparing Trial Balance
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___________________
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.
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2.
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1.
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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:
___________________
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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.
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Notes
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UNIT 11: Trial Balance
___________________
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
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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
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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
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allowed him discount
___________________
accounts because of certain errors which are not disclosed by the trial balance.
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Notes Activity ___________________ Make a report on the types of errors that can be made in trial ___________________ balance.
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Accounting in Logistics and Supply Chain Sector
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
___________________
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___________________
Types of Errors
___________________
There are two types of errors. They are explained below.
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___________________
Errors which cannot be located by Trial Balance
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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)
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(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
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(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.
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UNIT 11: Trial Balance
___________________ ___________________ ___________________ ___________________ ___________________
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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.
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(i) Totals of the subsidiary books or ledger accounts.
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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.
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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
___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________ ___________________
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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)
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2.
for
Questions for Discussion
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
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UNIT 11: Trial Balance
___________________
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.
___________________ ___________________ ___________________
cti
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
___________________
___________________ ___________________
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
___________________
pro
du
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
Re
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
for
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
No t
www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________
___________________
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Accounting in Logistics and Supply Chain Sector
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Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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___________________ ___________________
(c)
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Notes Activity
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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 After completion of this unit, the students will be aware of the following topics:
Manufacturing Account
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.
Classification of Final Accounts
The final accounts can be classified in the following categories:
S,
Trading and Profit & Loss Account
(c)
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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
___________________ ___________________
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Classification of Final Accounts
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___________________
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Trading Account Notes
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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
-------------
-------
------
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To Cartage
By Sales
-------
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___________________
Cr. Amount ( )
Particulars
du
___________________
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Proforma of Trading Account In the Books of ……………. Trading Account (for the year ending …………….)
___________________
-------
To Light Power & Heating in factory
------
To Works Manager’s 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)
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To Foreman’s Salary
To Consumable Stores
------
To Gross Profit
-------
Transferred to P/L A/c.
-----------
-------
Profit & Loss Account 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
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Notes
___________________ ___________________ ___________________ ___________________ ___________________
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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:
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
___________________
Proforma of Profit & Loss Account
___________________
Particulars
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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
— — —
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___________________
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To Bad Debts
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—
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To Advertisement
Notes Activity ___________________ Write an article on the
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Accounting in Logistics and Supply Chain Sector
To Repairs of Assets & Motor Car To Loss by Fire To Conveyance Expenses
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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)
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1.
Manufacturing Account 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 businessman’s income statement will include:
Manufacturing Account
2.
Trading Account
3.
Profit & Loss Account
Notes
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1.
___________________ ___________________ ___________________
The Proforma of Manufacturing Account is given here under:
___________________
Proforma of Manufacturing Account 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 Manager’s 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
___________________
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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
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
90,000
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Salaries 1,80,000 Notes
Selling Expenses
___________________
Purchase Expenses
30,000
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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
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Finished Goods
Discount allowed Sale of Scrap Depreciation on Plant
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Carriage Inwards
___________________
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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
Manufacturing Account (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
Trading and Profit & Loss Account (for the year ending 31st March, 2008)
Notes Activity
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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)
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
Marshalling of Assets and Liabilities
___________________
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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
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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:
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
___________________ ___________________ ___________________
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
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Accounting in Logistics and Supply Chain Sector
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 Manufacturing Account (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
Trading and Profit & Loss Account (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.)
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Particulars
Notes
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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)
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S,
Questions for Discussion 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
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UNIT 12: Preparation of Trading, Profit & Loss Account and Balance Sheet
(a) Net Profit
___________________
(b) Manufacturing Accounts
___________________ ___________________
Further Readings
___________________
Books
cti
___________________
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
du
Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.
pro
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
Re
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. 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)
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S,
http://www.kkhsou.in/main/EVidya2/commerce/financial_ statement.html
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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___________________ ___________________
(c)
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S,
No t
for
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pro
___________________
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Notes Activity
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UNIT 13: Depreciation Accounting
___________________ Write an article on the concept and causes of depreciation. ___________________
Depreciation Accounting
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics:
cti
___________________ ___________________
Meaning of Depreciation
Need of Depreciation
Methods for Providing Depreciation
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”.
Meaning of Depreciation
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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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 year’s relevant Profit & Loss account. The decrease in the value of assets is because of the following causes:
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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.
___________________
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___________________
3. On account of accidents such as loss by fire, earthquake or any other natural calamity.
___________________
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___________________
4. Fall in market prices: Market conditions may change the market prices of the current assets but not the book value.
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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
Need of Depreciation Depreciation must be provided because of the following reasons:
(c)
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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
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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.
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UNIT 13: Depreciation Accounting
___________________ Present an assignment on the different methods for providing ___________________ depreciation of assets to be recorded in the books of ___________________ records. ___________________
cti
___________________
Calculation of Depreciation
___________________
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Depreciation can be calculated if the following items of information are available.
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1. Cost of the asset: including all expenses incurred for freight carriage including erection charges.
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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.
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for
1.
Methods for Providing Depreciation
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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
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Depreciation
Notes ___________________ ___________________
Amount of Depreciation
___________________
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Accounting in Logistics and Supply Chain Sector
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)
___________________
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___________________
The amount of depreciation remains uniform/fixed under this method.
Merits of the System
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(ii) The value of the asset becomes zero at the end of its life.
___________________
(i)
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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.
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Demerits of the Method
(c)
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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.
___________________ ___________________
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Dr. L.F.
Cr.
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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.
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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.
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1
Particulars
___________________
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S. No.
Notes
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Following entries are required to pass in the books of the owner of assets.
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UNIT 13: Depreciation Accounting
Date
Particulars
2005 Dec. 31 Dec 31
By Depreciation By Balance c/d
6,000 64000 70,000
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Working Notes: ___________________
(i) (ii)
___________________ ___________________
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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.
___________________ ___________________
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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:
___________________ ___________________
___________________ ___________________
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___________________
Machinery Account
Date
To Balance b/d
Date
16700
for
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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)
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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.
___________________ ___________________ ___________________ ___________________ ___________________
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4. This method is scientific/systematic and is recognized under income tax rules.
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Notes
1. It is very easy to calculate as compared to other methods.
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UNIT 13: Depreciation Accounting
___________________ ___________________
Demerits
___________________
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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.
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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)
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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.
___________________
___________________
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Accounting in Logistics and Supply Chain Sector
Depletion Method Notes
___________________ ___________________ ___________________
Depreciation Depreciable Cost
Annual Output Lifetime Output ( Expected )
cti
___________________
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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.
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___________________
for
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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)
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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
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Fill in the blanks:
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UNIT 13: Depreciation Accounting
___________________
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
___________________ ___________________ ___________________
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Summary
for
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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
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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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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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
___________________
Questions for Discussion
___________________ ___________________
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:
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___________________
___________________
(a) Fixed Instalment Method
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___________________
(b) Diminishing Value (Balance) Method (c) Amortization
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 t
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
(c)
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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 www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf
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Notes
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UNIT 13: Depreciation Accounting
___________________ ___________________
www.investopedia.com/university/accounting/
___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________
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___________________ ___________________
(c)
UP E
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No t
for
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pro
du
___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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___________________ ___________________
(c)
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No t
for
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pro
___________________
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Notes Activity
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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
___________________
After completion of this unit, the students will be aware of the following topics:
Utility of Cash Flow Statement
Classification of Cash Flow
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Meaning of Cash Flow Statement
___________________ ___________________
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___________________
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Introduction
No t
for
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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.
Meaning of Cash Flow Statement
(c)
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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.
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Notes Activity ___________________ Prepare an assignment on the
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Accounting in Logistics and Supply Chain Sector
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.
___________________ ___________________
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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
___________________ ___________________
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___________________
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
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(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
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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.
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UNIT 14: Cash Flow Statements
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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.
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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)
Classification of Cash Flow 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:
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Notes
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________ ___________________ ___________________
(a) Cash receipts from the sale of goods and rendering of services;
cti
___________________ ___________________
(b) Cash receipts from royalties, fees, commissions and other revenue;
___________________
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___________________
(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)
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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:
___________________ ___________________ ___________________ ___________________ ___________________
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cti
2.
Notes
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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.
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UNIT 14: Cash Flow Statements
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(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
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
(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.
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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
___________________ ___________________ ___________________
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___________________ ___________________
for
Re
pro
___________________
Figure 14.2: Diagrammatic Presentation of 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.
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Notes
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UNIT 14: Cash Flow Statements
___________________ ___________________ ___________________ ___________________
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:
___________________
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Figure 14.3: Diagrammatic Presentation of Cash Flow from Financing Activities
(c)
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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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Lesson End Activity Notes
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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.
___________________
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___________________
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)
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Statement of Changes in Working Capital: Enlisting the changes taken place in between the current assets and current liabilities of two different time horizons.
Questions for Discussion 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
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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
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
S,
Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.
UP E
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. 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.
(c)
___________________ ___________________
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(a) Dividends amounting to year 1996.
(c)
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UNIT 14: Cash Flow Statements
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi.
Notes ___________________
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.
___________________ ___________________
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Web Readings
___________________
www.accountingbase.com/CashFlow.html
___________________
www.kkhsou.in/main/EVidya2/management/cash_flow.html
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www.investopedia.com/university/accounting/
___________________
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
(c)
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Notes
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UNIT 15: Case Studies
___________________
Case Studies
___________________ ___________________
Objectives
___________________
After analysing these cases, the student will have an appreciation of the concept of topics studied in this Block.
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___________________ ___________________
Case Study 1: Kathryn Kennedy’s 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
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Cash
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Kathryn Kennedy’s pet grooming business has been operating for one month. Kennedy prepared her financial records according to accepted accounting procedures. At month’s 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, balance—proving 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
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Accounting in Logistics and Supply Chain Sector
Case Study 2: Asian Pacific Community Counseling, Inc. Notes
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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.
___________________ ___________________ ___________________ ___________________
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___________________ ___________________ ___________________
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Question:
for
Analyse and summarise the case.
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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.
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UNIT 15: Case Studies
___________________ ___________________
$ 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
___________________ ___________________ ___________________
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11,000
___________________ ___________________
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Stock on 1st January
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$
17,900
The stock on 21st December, 1991 was valued at $25,000.
(c)
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Source: http://accounting4management.com/examples_of_trading_and_profit_and_loss_ account_and_balance_sheet.htm
___________________ ___________________ ___________________
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Notes ___________________ ___________________ ___________________ ___________________
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Notes
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UNIT 16: Financial Aspects of Supply Chain Management
___________________
___________________ ___________________ ___________________
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BLOCK-IV
___________________ ___________________ ___________________
Accounting in Logistics and Supply Chain Sector
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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
MANAGEMENT’S
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
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UNIT 16: FINANCIAL ASPECTS OF SUPPLY ___________________ CHAIN MANAGEMENT ___________________ Introduction
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Notes
UNIT 19: EVA AND BUDGETS
___________________ Inventory Costs
___________________ Factors affecting Levels of Inventory
Economic Value Added (EVA)
Inventory Measures
Budget
Budgetary Control
Introduction
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UNIT 20: CASE STUDIES
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Notes Activity
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UNIT 16: Financial Aspects of Supply Chain Management
___________________ Present a detailed report on the techniques used to boost ___________________ competitiveness in the supply chain management ___________________ accounting.
Financial Aspects of Supply Chain Management
___________________
Objectives After completion of this unit, the students will be aware of the following topics:
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___________________
___________________
Supply Chain Accounting
SCMA in Practice: Sainsbury’s
Accounting and Logistics Cost: An Impediment to Supply Chain Effectiveness
Consignment Accounting
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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.
Supply Chain Accounting
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
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________
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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 Porter’s 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).
___________________
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___________________ ___________________ ___________________
___________________
customer value can be enhanced
costs can be reduced or
differentiation can be achieved in the company’s segment of that value chain.
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___________________
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A series of activities, or ‘links in a chain’ occur between a product’s design and its distribution. Management accountants need to identify where in the chain:
Target Costing
No t
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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 company’s overall long-term margin requirements.
(c)
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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.
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UNIT 16: Financial Aspects of Supply Chain Management
___________________
___________________ ___________________
Performance Measurement
___________________ ___________________
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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.
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The balanced scorecard has its greatest impact when it drives the change process in support of the organisation’s strategic intentions.
Make versus Buy (Outsourcing)
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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 company’s 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.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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 ___________________ ___________________ ___________________ ___________________ ___________________
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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.
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___________________ ___________________
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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: Sainsbury’s In practice, many of the techniques above are used together.
(c)
UP E
S,
An example is Sainsbury’s 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 Sainsbury’s. 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 Porter’s 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.
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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 today’s 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)
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UNIT 16: Financial Aspects of Supply Chain Management
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________
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 company–inward 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.
___________________ ___________________
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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.
___________________
___________________ ___________________ ___________________ ___________________
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UNIT 16: Financial Aspects of Supply Chain Management
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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
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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
Today’s 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 today’s 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 ....................
___________________ ___________________
Consignment Accounting
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___________________
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1.
___________________ ___________________
on /Sa
Fill in the blanks:
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Accounting in Logistics and Supply Chain Sector
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.
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___________________
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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)
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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 ___________________
___________________ ___________________ ___________________ ___________________
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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
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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.
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UNIT 16: Financial Aspects of Supply Chain Management
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
Accounting in Logistics and Supply Chain Sector
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 Sainsbury’s. 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.
___________________
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___________________ ___________________
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___________________
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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)
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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 Porter’s 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.
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UNIT 16: Financial Aspects of Supply Chain Management
___________________
Questions for Discussion
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___________________
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.
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1.
Distinguish between a sales and consignment.
4.
Explain accounting and logistics cost: an impediment to supply chain effectiveness.
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3.
for
Further Readings Books
No t
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.
S,
Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
UP E
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
(c)
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Web Readings Notes
on /Sa
www.aamu.edu/academics/bpa/accountinglogistics/pages/default.as px
___________________ ___________________
www.agribusiness-mgmt.wsu.edu/.../IventoryMgmtControl. pdf
___________________
www.accountingcoach.com/online-accounting-course/60Xpg01.html
___________________
www.accsoft.ch/download/accountingconcepts.pdf
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___________________ ___________________
(c)
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Notes Activity
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UNIT 17: Inventory Management’s Techniques and Control
___________________ Write an article on the inventory costs in supply chain ___________________ management.
Inventory Management’s Techniques and Control
___________________ ___________________
Objectives After completion of this unit, the students will be aware of the following topics:
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___________________
Factors affecting Levels of Inventory
Inventory Measures
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Inventory Costs
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___________________
Introduction
No t
for
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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 don’t 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)
___________________
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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 ___________________ ___________________ ___________________ ___________________
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___________________ ___________________
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___________________
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)
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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
___________________ ___________________
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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:
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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.
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Notes
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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.
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UNIT 17: Inventory Management’s Techniques and Control
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.
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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.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
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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
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Cost of renting warehouse or storage space
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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
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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:
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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
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Fixed costs
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UNIT 17: Inventory Management’s Techniques and Control
___________________ ___________________ ___________________ ___________________
Variable costs of vendor development
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The fixed and variable components of the ordering or procurement costs are shown in Table 17.2.
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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.
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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.
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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.
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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.
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Accounting in Logistics and Supply Chain Sector
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.
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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.
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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.
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Shortage or Stock-out Costs
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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
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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.
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UNIT 17: Inventory Management’s Techniques and Control
___________________ Prepare an informative report on the factors affecting the ___________________ levels of inventory. ___________________ ___________________ ___________________
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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).
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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.
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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
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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.
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Factors affecting Levels of Inventory 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.
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___________________ ___________________ ___________________ ___________________ ___________________
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. ___________________ ___________________ ___________________
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Notes Activity ___________________ Create an assignment on the
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Accounting in Logistics and Supply Chain Sector
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Inventory Measures
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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 company’s 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
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for better comparison among companies. This is calculated as a ratio of company’s sales to its average inventory investment:
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Notes
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UNIT 17: Inventory Management’s Techniques and Control
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Inventory turnover = annual cost of goods sold/average inventory investment
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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 firm’s days of supply is found by dividing the average inventory level by the cost of one day’s sales.
Check Your Progress
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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.
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Summary
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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.
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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.
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Accounting in Logistics and Supply Chain Sector
Lesson End Activity Notes
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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.
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Excess Inventory: The quantity of material in stock or on order that is greater than the anticipated demand for an agreed time period.
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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.
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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.
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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.
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Questions for Discussion 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
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Notes
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UNIT 17: Inventory Management’s Techniques and Control
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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.
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
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___________________ ___________________
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
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K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
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www.management-hub.com/inventory-management-intro. html shodhganga.inflibnet.ac.in/bitstream/10603/703/12/12_chapter6.pdf
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www.accountingcoach.com/online-accounting-course/60Xpg01.html
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Notes ___________________ ___________________ ___________________ ___________________
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Notes Activity
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UNIT 18: Cost Accounting
___________________ Prepare a report on the scope of cost accounting in the chain ___________________ management.
Cost Accounting
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics: Scope of Cost Accounting in Chain Management
Objectives of Cost Accounting
Functions of Cost Accounting
Essentials of Cost Accounting System
Costing Systems
Role of Cost in Cost Accounting
Elements of Cost
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Introduction
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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.
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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.
Scope of Cost Accounting in Chain Management
(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:
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Accounting in Logistics and Supply Chain Sector
(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.
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Notes ___________________ ___________________ ___________________ ___________________ ___________________
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(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.
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(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. ___________________
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(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
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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:
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UNIT 18: Cost Accounting
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(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.
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(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.
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control techniques enable the management in knowing the operating efficiency of a business organisation.
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Notes Activity ___________________ Make a detailed report on the
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Accounting in Logistics and Supply Chain Sector
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(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.
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Check Your Progress
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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 ...................
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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.
Functions of Cost Accounting 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. ___________________
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(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
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(b) To provide necessary data to the management for fixing the selling price.
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UNIT 18: Cost Accounting
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(e) To implement various cost control techniques such as budgetary control, historical costing and standard costing.
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(f) To design suitable system for defining responsibilities and controlling cost. (g) To prepare cost schedules to assist management in decisionmaking.
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(h) To prepare cost statements and profit and loss account for giving advice to management.
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(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.
Essentials of Cost Accounting System
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.
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___________________ ___________________ ___________________ ___________________ ___________________
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.
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Notes
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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 ....................
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Fill in the blanks:
Costing Systems
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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:
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(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.
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(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)
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UNIT 18: Cost Accounting
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.
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Notes Activity ___________________ Give a report on the role of cost in cost accounting. ___________________
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Accounting in Logistics and Supply Chain Sector
(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.
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Role of Cost in Cost Accounting
___________________
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.
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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.
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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:
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Notes
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UNIT 18: Cost Accounting
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Figure 18.1: Elements of Cost
The following is the brief description of these elements of cost:
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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.
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________ ___________________ ___________________
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.
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___________________
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(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
___________________ ___________________ ___________________ ___________________
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___________________
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(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)
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(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
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UNIT 18: Cost Accounting
___________________ ___________________ ___________________
___________________ ___________________
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
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1.
Summary
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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.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Keywords Notes
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Cost Accounting: It 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 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.
___________________
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___________________ ___________________ ___________________
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Direct Material: Material that can be directly identified with each unit of the product.
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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.
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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.
Questions for Discussion
(c)
UP E
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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
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UNIT 18: Cost Accounting
___________________
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.
___________________
___________________ ___________________
cti
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
___________________
___________________ ___________________
Jawahar Lal, Cost Accounting, Vikas Publishing House, New Delhi.
___________________
pro
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Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992.
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
Re
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
for
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
No t
www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
UP E
S,
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
___________________
___________________
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Accounting in Logistics and Supply Chain Sector
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Notes ___________________ ___________________ ___________________ ___________________
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___________________ ___________________
(c)
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Notes Activity
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UNIT 19: EVA and Budgets
___________________ Make a report on the economic value added and the ___________________ method of its calculation.
EVA and Budgets
___________________
Objectives
___________________
After completion of this unit, the students will be aware of the following topics: Economic Value Added (EVA)
Budget
Budgetary Control
cti
___________________ ___________________
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___________________
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Introduction
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Economic Value Added (EVA)
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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 firm’s economic profit – being the value created in excess of the required return of the company’s 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 firm’s capital. The idea is that value is created when the return on the firm’s 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
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Accounting in Logistics and Supply Chain Sector
___________________
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
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___________________
EVA = (r-c) × capital [the spread method, or excess return method]
___________________ ___________________
pro
where:
r = rate of return, and
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c = cost of capital, or the Weighted Average Cost of Capital (WACC).
for
NOPAT is profits derived from a company’s 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)
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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 firm’s return on net assets (RONA). RONA is a ratio that is calculated by dividing a firm’s 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
___________________ ___________________ ___________________
___________________ ___________________
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Added Value can also be defined as the difference between a particular product’s final selling price and the direct and indirect input used in making that particular product.
Notes
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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:
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UNIT 19: EVA and Budgets
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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
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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 firm’s 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 firm’s 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 firm’s market value added, or MVA, is the discounted sum (present value) of all future expected economic value added:
___________________ ___________________ ___________________ ___________________ ___________________
its features and objectives. ___________________
MVA
V
K0 t
Note that MVA = PV of EVA.
EV A t c)t 1 (1
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Notes Activity ___________________ Write an article on budget and
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Accounting in Logistics and Supply Chain Sector
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 firm’s 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.
___________________ ___________________
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1.
Budget
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___________________
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___________________
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Check Your Progress
___________________
(c)
UP E
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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
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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:
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UNIT 19: EVA and Budgets
___________________ ___________________
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.
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2.
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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.
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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.
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Notes
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________ ___________________
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
___________________ ___________________ ___________________
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___________________
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.”
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___________________
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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)
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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:
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UNIT 19: EVA and Budgets
___________________ Prepare a chart for your display board on the ___________________ budgetary control and its objectives. ___________________
of
___________________
cti
___________________
Budgetary Control
___________________
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pro
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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.
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Notes
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Accounting in Logistics and Supply Chain Sector
___________________ ___________________ ___________________ ___________________
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
___________________
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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
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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.
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UNIT 19: EVA and Budgets
___________________ ___________________ ___________________
Lesson End Activity
___________________ ___________________
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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.
Questions for Discussion
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)
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
___________________ ___________________ ___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996.
on /Sa
Notes ___________________
Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
___________________ ___________________
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.
cti
___________________ ___________________
Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
___________________
du
___________________
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi.
___________________
pro
___________________
R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
Re
M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
www.accountingcoach.com/online-accounting-course/60Xpg01.html
for
www.accsoft.ch/download/accountingconcepts.pdf www.investopedia.com/university/accounting/
(c)
UP E
S,
No t
www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
on /Sa
Notes
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UNIT 20: 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
___________________ ___________________
Case Study 1: Private Enterprises Inc.
___________________
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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 company’s 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…
___________________ ___________________ ___________________
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Accounting in Logistics and Supply Chain Sector
Instead of consolidating subsidiaries, management made an accounting policy choice to account for subsidiaries using the cost method.
Management made an accounting policy choice to account for 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:
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 with pre-changeover accounting standards – XFI Version approximates the actuarial valuation for funding purposes.
Management made an accounting policy choice to account for income taxes using the future income taxes method. For simplicity, refundable taxes were ignored.
___________________ ___________________ ___________________ ___________________ ___________________ ___________________
___________________ ___________________
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Question:
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du
___________________
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___________________
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with pre-changeover accounting standards – XFI Version approximates the actuarial valuation for funding purposes.
Notes
Analyse the case and recommend a suitable solution.
(c)
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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
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UNIT 20: Case Studies
LKAS 36 (for leased assets)
LKAS 39 (for recognised lease receivables) Contd…
___________________ ___________________ ___________________ ___________________ ___________________
Disclosures – SLFRS 7
Investment property – LKAS 40
on /Sa
Notes
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Accounting in Logistics and Supply Chain Sector
___________________
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; lessee’s incremental borrowing rate of interest; contingent rent.
___________________
D. Regulatory framework for lease
___________________
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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.
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Impact on Management Accounting Key issues arising from the standard which are relevant to management accountants
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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.
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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
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Notes
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Detailed Contents
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Notes UNIT 21: CORPORATE FINANCIAL REPORTING ___________________ Introduction ___________________ Prescribed Format ___________________ Balance Sheet Grouping ___________________ Profit & Loss Account ___________________
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
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___________________ International Financial Reporting Standards
Introduction
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ACCOUNTING
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Notes Activity
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UNIT 21: Corporate Financial Reporting
___________________ Write an article on the prescribed format for reports and___________________ the mandatory reporting.
Corporate Financial Reporting
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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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Prescribed Format
Balance Sheet Grouping
Profit & Loss Account
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Introduction
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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
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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
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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.
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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 concern’s 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 concern’s 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.
Balance Sheet Grouping 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 four–block assets, investments, current–assets
and miscellaneous expenditure. A brief description of the groups is given below.
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Notes
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UNIT 21: Corporate Financial Reporting
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Liabilities
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Share Capital
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Format 21.1: Balance Sheet of Tata Steels Ltd. for the year 2008
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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.
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Authorised Notes
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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.
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Issued
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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.
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Subscribed
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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
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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.
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UNIT 21: Corporate Financial Reporting
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Assets
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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.
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Block Assets (Fixed Assets)
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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
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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.
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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.
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Current Assets
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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
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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.
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Notes Activity ___________________ Make a brief report on the
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Additional Exposures
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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 auditor’s 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.
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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.
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Profit & Loss Account 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
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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.
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UNIT 21: Corporate Financial Reporting
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Issue Expenses
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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
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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
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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.
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Check Your Progress
Notes
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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 ...................
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Fill in the blanks:
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Summary
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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.
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Lesson End Activity Make a presentation on the corporate financial reporting.
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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.
Questions for Discussion
3. 4.
Why should law prescribe format for financial reporting to corporates? How are assets and liabilities of corporate organisations marshalled?
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Are non-corporate business organizations legally obliged to prepare financial statements?
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Notes
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UNIT 21: Corporate Financial Reporting
___________________
Describe the asset side of corporate balance sheet.
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Further Readings
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Books
Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
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Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
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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.
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Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi. K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi.
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R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Web Readings
220.227.161.86/19328sm_finalnew_cp3.pdf
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www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf www.accountingcoach.com/online-accounting-course/60Xpg01.html www.accsoft.ch/download/accountingconcepts.pdf
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Notes ___________________ ___________________ ___________________ ___________________
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Notes
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UNIT 22: International Financial Reporting Standards
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International Financial Reporting Standards
___________________ ___________________ ___________________
Objectives After completion of this unit, the students will be aware of the following topics:
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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
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Introduction
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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.
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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 company’s 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)
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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.
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International Financial Reporting Standards Notes Activity ___________________ Write an article on the
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IFRS 2: Share-based Payment
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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
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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
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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
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The objective of IFRS 2 is to specify the financial reporting by an entity when it undertakes a ............................ payment transaction.
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___________________ Prepare a presentation on non-current assets held for sale___________________ and discontinued operations. ___________________ ___________________
Fill in the blanks: 1.
Notes Activity
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accounting by insurers for insurance contracts; (b) disclosure that identifies and explains the amounts in an insurer’s 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.
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IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
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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
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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
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IAS 36 but measures the impairment in accordance with that Standard once the impairment is identified.
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Notes ___________________
IFRS 7: Financial Instruments: Disclosures
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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).
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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 entity’s 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 management’s 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 entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.
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IFRS 8: Operating Segments
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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
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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.
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Check Your Progress
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Fill in the blanks:
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IFRS 6 ................... includes continuing to use recognition and measurement practices that are part of those accounting policies.
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2.
The objective of this IFRS is to specify the accounting for assets held for sale, and the presentation and disclosure of discontinued operations.
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Summary
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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.
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Keywords Notes
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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.
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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.
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Questions for Discussion
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1. Explain the IFRS 1: First-time Adoption
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2. Describe the concept of share-based payment standard. 3. Discuss about IFRS 3.
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4. What is the objective of IFRS 4? 5. Explain the exploration for and evaluation of mineral resources.
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Further Readings Books
No t
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.
(c)
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Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. Hingorani, N.L. and Ramanathan, A. R., Management Accounting, 5th ed. New Delhi, Sultan Chand, 1992. 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.ifrs.org/
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www.charteredclub.com/what-is-ifrs/
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www.investopedia.com/university/accounting/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes ___________________ ___________________ ___________________ ___________________
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Notes Activity
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UNIT 23: International Accounting Standards-I
___________________ Write a report on the IAS 1 to IAS 11. ___________________
International Accounting Standards-I
___________________ ___________________
Objectives After completion of this unit, the students will be aware of the following topics:
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International Accounting Standards
Standards on Income tax, property, land, leases, revenue, and employee benefits, etc.
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Introduction
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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).
International Accounting Standards
In this unit, you will study the IAS 1 to IAS 23.
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IAS 1: Presentation of Financial Statements
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The objective of this IFRS is to ensure that an entity’s 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)
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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
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IAS 7: Cash Flow Statements
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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.
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IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
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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 entity’s 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.
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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.
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UNIT 23: International Accounting Standards-I
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IAS 11: Construction Contracts
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The objective of this Standard is to prescribe the accounting 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.
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IAS 12: Income Taxes
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The objective of this Standard is to prescribe the accounting 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
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IAS 16 to IAS 23. ___________________
recognised in an entity’s balance sheet; and (b) transactions and other events of the current period that are recognised in an entity’s financial statements.
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Notes Activity ___________________ Make an assignment on the
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Accounting in Logistics and Supply Chain Sector
IAS 16: Property, Plant and Equipment
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The objective of this Standard is to prescribe the accounting treatment for property, plant and equipment, so that, users of the financial statements can discern information about an entity’s 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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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.
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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)
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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 user’s benefit.
IAS 18: Revenue The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognised when it is probable
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Notes
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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.
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UNIT 23: International Accounting Standards-I
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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.
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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.
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This Standard shall be applied by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.
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IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
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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
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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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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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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
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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
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Fill in the blanks:
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UNIT 23: International Accounting Standards-I
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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 entity’s investment in its property, plant and equipment and the changes in such investment.
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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.
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A lease is classified as a/an ...................if it does not transfer substantially all risks and rewards incidental to ownership.
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................... costs are interest and other costs that an entity incurs in connection with the borrowing of funds.
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Summary
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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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Keywords Notes
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Borrowing Costs: These are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset
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Employee Benefits: These are all forms of consideration given by an entity in exchange for service rendered by employees.
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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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Questions for Discussion 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
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(a) IAS 7: Cash Flow Statements (b) IAS 1: Presentation of Financial Statements
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(c) IAS 11: Construction Contracts
Further Readings
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Books
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. Gupta, R.L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons. 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.
K K Verma, Financial Accounting and Analysis, Excel Books, New Delhi. R.L. Gupta, M. Radhaswami, Advanced Accountancy, Sultan Chand & Sons, New Delhi.
Web Readings
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www.ifrs.org/ www.investopedia.com/university/accounting/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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www.charteredclub.com/what-is-ifrs/
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M.C. Shukla, T.S. Grewal, S.P. Gupta, Advanced Accounts, S. Chand, New Delhi.
Notes
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Maheshwari, S. N., Advanced Accounting, Vikas Publishing House, New Delhi.
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UNIT 23: International Accounting Standards-I
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UNIT 24: International Accounting Standards-II
___________________ Make a report on the IAS 24 to 36. ___________________
International Accounting Standards-II
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Objectives After completion of this unit, the students will be aware of the following topics:
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Other Accounting Standards
Accounting Standards for related party disclosure, Investments in Associates, Interests in Joint Ventures, and many more.
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Introduction
Other Accounting Standards
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The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation.
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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
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The objective of this Standard is to ensure that an entity’s 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.
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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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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.
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IAS 26: Accounting and Reporting by Retirement
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Benefit Plans
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This Standard shall be applied in the financial statements of retirement benefit plans where such financial statements are prepared.
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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 entity’s 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)
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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
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Notes
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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.
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UNIT 24: International Accounting Standards-II
IAS 29: Financial Reporting in Hyper Inflationary Economies
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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
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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.
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IAS 34: Interim Financial Reporting
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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 enterprise’s full financial year.
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IAS 36: Impairment of Assets
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To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable amount is calculated.
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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 asset’s fair value, less costs to sell (sometimes called net selling price) and its value in use. Fair value is defined as the amount
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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.
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UNIT 24: International Accounting Standards-II
___________________ Prepare an assignment on the IAS 37 to IAS 41. ___________________ ___________________
Check Your Progress
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Fill in the blanks:
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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.
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................... applies to all assets except: inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits.
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IAS 37: Provisions, Contingent Liabilities and Contingent Assets
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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)
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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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Notes
IAS 38: Intangible Assets
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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.
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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
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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.
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UNIT 24: International Accounting Standards-II
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IAS 40: Investment Property
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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
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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.
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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 enterprise’s 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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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.
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Check Your Progress
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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.
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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
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Notes
Prepare a presentation on the International Accounting Standards from IAS 24 to IAS 41. Also, include the objectives of each accounting standard.
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UNIT 24: International Accounting Standards-II
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Keywords
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Carrying Amount: It is the amount at which an asset is recognised in the balance sheet, after deducting accumulated depreciation and accumulated impairment losses.
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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.
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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.
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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).
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Provision: It is defined as a liability of uncertain timing or amount.
(c)
Recoverable Amount: It is defined as the higher of an asset’s fair value, less costs to sell (sometimes called net selling price) and its value in use.
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Questions for Discussion Notes
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1. Explain the related party disclosures.
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2. Discuss the accounting and reporting by retirement.
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3. Describe the economies.
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financial
reporting
4. Write short notes on:
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in
hyper
inflationary
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(a) IAS 34: Interim Financial Reporting
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(b) IAS 36: Impairment of Assets
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(c) IAS 38: Intangible Assets
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(d) IAS 40: Investment Property
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Further Readings Books
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Anthony R. N. and Reece J. S. Accounting Principles, 6th ed., Homewood, Illinois, Richard D. Irwin, 1995.
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Bhattacharya S. K. and Dearden J. Accounting for Management– Text and Cases, New Delhi, Vikas, 1996. Gupta, R. L. and Ramanathan, Advanced Accountancy, Volume I & II, Sultan Chand and Sons.
No t
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.
(c)
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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.ifrs.org/
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UNIT 24: International Accounting Standards-II
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www.charteredclub.com/what-is-ifrs/
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www.investopedia.com/university/accounting/
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www.mca.gov.in/Ministry/notification/pdf/AS_6.pdf
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Notes
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UNIT 25: Case Study
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Case Study
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Objectives
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After analysing this case, the student will have an appreciation of the concept of topics studied in this Block.
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Case Study: Decision Making Techniques – A CIMA Case Study
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Ratio analysis
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Businesses generate a huge amount of data. Management accountants can use a number of the company’s key accounting statements to extract greater meaning from this information.
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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)
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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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Accounting in Logistics and Supply Chain Sector
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.
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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%.
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Question:
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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:
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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
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Notes
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Glossary
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Account: It is a summary of all relevant transactions relating to one person at one place for a particular period.
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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.
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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.
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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.
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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.
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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
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management by accounting functions.
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Carrying Amount: It is the amount at which an asset is recognised in the balance sheet, after deducting accumulated depreciation and accumulated impairment losses.
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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.
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Cash from Operations: Cash resources accrued in the business operations.
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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.
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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.
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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.
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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)
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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, methods and techniques for ascertaining costs and their control by 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”.
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Glossary
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Decrease in Working Capital: Decrease in Net working capital i.e.
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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
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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
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Diminishing Value (Balance) Method: Under this method depreciation is calculated as a certain percentage of the value but the rate of depreciation remains constant.
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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.
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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.
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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
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Notes ___________________ ___________________
Flow: Flow means changes occurred in between two different time periods.
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Fund from Operations: Income generated from only operations.
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Fund Loss in Operations: Loss incurred in the operations.
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Fund: Fund means working capital.
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General Ledger: It is meant for all the accounts other than debtors and creditors.
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Generally Accepted Accounting Principles (GAAP): Groups of accounting standards that are widely accepted as appropriate e to the field of accounting.
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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. 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.
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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)
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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 levels–top, 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.
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Journal: Journal is a primary book of original entries for accounting data.
Notes
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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.
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Glossary
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Ledger: It is also called as a book of final entry because all transactions are finally recorded in the ledger accounts.
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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.
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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
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Accounting in Logistics and Supply Chain Sector
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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.
___________________
Outsider’s Capital: The value of investments minus operating expenses that are held by company stockholders.
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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.
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Owner’s Equity: Total assets minus total liabilities of an individual or company. For a company, also called net worth or shareholders' equity or net assets.
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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.
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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.
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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)
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Recoverable Amount: It is defined as the higher of an asset’s 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
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Subscribed Capital: It is that part of the issued capital, which has been agreed to be taken up by the public.
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Glossary
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The Cost Principle: Every transaction should be recorded at its actual (historical) cost or cost of its acquisition and not its market price.
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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.
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Total Method: Under this method, instead of taking balance of each account, the total of both the sides of each account is taken.
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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.
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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 Porter’s 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)
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Voucher: It is therefore the basic document of an accounting transaction.
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