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Financial Statements
Objectives: 1. To provide the economic activities of the enterprise to several group of people 2. To provide useful information to the creditors 3.To provide information to the investors
Accounting
Definition: Accounting is an art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the result thereof.
ART OF RECORDING
Two statements 1. Trading & Profit and loss account 2. Balance sheet
Groups interested
Owner Management Potential Investors Creditors Employees Government Researchers-students
Accounting Principles
Main features: Usefulness Objectivity Feasibility Concepts: Duality- Going concern Accounting period-Historic Cost Money measurement- Revenue Recognition- matching Accrual- objectivity
Example
Mr.Nithin, the proprietor of the business, starts his business with a cash Rs20,000 and building of Rs 50,000 this fact is recorded in two places: assets account and capital account
Capital Nithin 70000 = Assets building + cash 50000 + 20000
Accounting
* The business increases by borrowing Rs 20000 Capital+ Liability = Assets Nithin +Loan building + cash 70000+20000 50000 + 40000 *Pays for furniture Rs 5000 and purchase land on credit for Rs 8000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 70000+20000 +8000 50000 + 35000+ 5000+8000 If he pays expenses say Rs2000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 68000+20000 +8000 50000 + 33000+ 5000+8000
Capital + Liabilities
Proprietor's capital + Loan, Bank overdraft, Creditors, bills payable Outstanding expences
Assets
Building Land Machinery Furniture Stock in trade Debtor Bills receivable Bank cash
Problem
A limited company purchases a machinery for Rs1,60,000. Its estimated life is 5 years at the end of which it will have a scrap value of Rs12,440. The asset has to be depreciated at 40% on diminishing balance method. If the profits before depreciation are Rs1,00,000 per annum show what will be the amount of profits after depreciation under 1. straight line method 2.Diminishing balance method
Year
I Yr II Yr III Yr IV Yr V Yr. Total profit Total depre. Add Scrap value Cost of asset
Comments
Total depreciation, total profits is the same by both the methods over 5years 2. In the straight line method dep. and profit after dep. Are constant for each year 3. In the diminishing method dep. Charge is heavy in the earlier years resulting in reduction in the profits. 4. Uniform profit is assumed. In practice productivity of the assets diminishes, the profit also diminishes as the age of the asset increases. This method is preferred as it helps early recovery of the investment
1.
Trading Account
Opening Stock of finished goods SALES