Prepared by:- CA Priyanka Satarkar

TYPES OF ACCOUNTS
PERSONAL ACCOUNTS
NOMINAL ACCOUNTS REAL ACCOUNTS

Personal Accounts
There are many people with whom the business deals. Some are suppliers & some are the buyers. The suppliers are called creditors wheareas the buyers or customers are called as Debtors.

RULE OF ACCOUNTING OF PERSONAL ACCOUNTS.

DEBIT the Receiver and CREDIT the Giver.

Nominal Accounts
These keep the records of Expenses and Incomes, of Profits and Losses.

RULE OF ACCOUNTING OF NOMINAL ACCOUNTS.

DEBIT all Expenses and Losses and CREDIT all Incomes and Profits.

REAL ACCOUNTS
These keep the record of Real things that the business owns & of the Real things that the business has to Pay.

RULE OF ACCOUNTING OF REAL ACCOUNTS.

DEBIT all Assets and CREDIT all Liabilities.

DOUBLE ENTRY BOOKKEEPING

It is very important that we remember that ANY TRANSACTION IN A BUSINESS HAS TWO PARTIES or TWO THINGS.

EXAMPLES:1. Aishwarya Rai gets an amount of Rs 1 Crore for the purpose of acting in a film. She is paid by cheque. The entry in her books would be:Bank Account To Fees received Dr 1,00,00,000

for acting

Cr

1,00,00,000

(THIS IS AN EXAMPLE OF A NOMINAL ACCOUNT SHOWING INCOME)

DOUBLE ENTRY BOOKKEEPING

EXAMPLES:2. Shahrukh Khan buys a new Santro Car and pays the amount by Cheque. He uses this car for the purpose of his profession as an actor. The entry in his books would be:Car A/c Dr 25,00,000

To Bank A/c

Cr

25,00,000

(THIS IS AN EXAMPLE OF A REAL ACCOUNT WHEREIN AN ASSET IS PURCHASED)

DOUBLE ENTRY BOOKKEEPING

EXAMPLES:3. Sunny Deol gives a loan of Rs 20 crores by cheque to his brother Bobby Deol for the production of a film. The entry in his books would be:Bobby Deol A/c Dr 20,00,00,000

To Bank A/c

Cr

20,00,00,000

(THIS IS AN EXAMPLE OF PERSONAL ACCOUNT SHOWING A PERSON BEING INVOLVED IN THE TRANSACTION)

ACCOUNTING CYCLE
BEGINS WITH A TRANSACTION

PREPARE A SOURCE DOCUMENT

IDENTIFY THE TRANSACTIONS THAT GET AFFECTED MAKE THE ENTRY IN THE JOURNAL WHICH IS THE BASIC BOOK OF ACCOUNTS

ACCOUNTING CYCLE (..contd)

THEN ENTER IN THE LEDGER MAKE CLOSING ENTRIES OR ADJUSTING ENTRIES PREPARE TRIAL BALANCE

PREPARE THE TRADING & PROFIT & LOSS A/c and BALANCE SHEET

SOURCE DOCUMENT
The source document is the original record of a transaction. During an audit, source documents are used as evidence that a particular business transaction occurred. Examples of source documents include: Cash receipts Customer invoices Supplier invoices

Purchase orders
Time cards Deposit slips

SOURCE DOCUMENT
At a minimum, each source document should include the date, the amount, and a description of the transaction. When practical, beyond these minimum

requirements source documents should contain the name and address of the other
party of the transaction.

ENTRIES IN JOURNAL
Mike Peddler opens a bicycle repair shop. He leases shop space, purchases an initial inventory of bike parts, and begins operations. Here are the general journal entries for the first month: Date Account Names & Explanation 9/1 Cash Capital Owner contributes 7500 in cash to capitalize the business. Debit Credit 7500 7500

ENTRIES IN JOURNAL
Date Account Names & Explanation 9/8 Bike Parts Accounts Payable Purchased 2500 in bike parts on account, payable in 30 days. Debit Credit 2500 2500

9/15

Rent Expenses Cash

1000 1000

Paid first month's shop rent of 1000.

ENTRIES IN JOURNAL
Date Account Names & Explanation Debit Credit

9/17

Cash

400

Accounts Receivable
Bike repair receipts Repaired bikes for 1100; collected 400 cash; billed customers for the balance.

700
1100

9/18

Repair Expenses
Bike Parts

275
275

275 in bike parts were used.

ENTRIES IN JOURNAL
Date 9/25 Account Names & Explanation Cash Accounts Receivable Collected 425 from customer accounts. Debit Credit 425 425

9/28

Accounts Payable Cash

500 500

Paid 500 to suppliers for parts

purchased earlier in the month.

Ledger Accounts
ACCOUNTS RECEIVABLE A/c

Date Particulars 17th To Cash Sept

Rs

Date 700 17th Sept

Particulars By Bike Repairs

Rs 1100

Ledger Accounts
CAPITAL ACCOUNT

Date Particulars

Rs

Date 1st Sept

Particulars By Cash

Rs 7500

TRIAL BALANCE
Particulars

Cash Accounts Receivable Inventory Parts 2225 Accounts 2000 Payable Capital 7500 Revenue 1100 Expenses 1275 TOTAL 10600 10600

Debit Credi (Rs) t(Rs) 6825 275

Trading & Profit & Loss A/c for the year ended 31st March..
Particulars To Expenses Rs Particulars 1275 By Revenues By Loss c/f to Capital A/c Rs 1100 175

1275

1275

Balance Sheet for the year ended 31st March..

LIABILITIES Rs ASSETS Rs

Capital A/c Less: Loss for year Long Term Liabilities Current Liabilities Accounts Payable

7500 (175) 7325 ----

FIXED ASSETS -------CURRENT ASSETS Inventory Parts 2225 Accounts Receivable 2000 275 Cash 6825
9325 9325

Importance of Financial Statements

IMPORTANCE TO OWNERS/ SHAREHOLDERS
IMPORTANCE TO MANAGERS IMPORTANCE TO CUSTOMERS IMPORTANCE TO SUPPLIERS IMPORTANCE TO LENDERS OR FINANCERS

IMPORTANCE TO GENERAL PUBLIC

RATIO ANALYSIS

Classification of ratios
ACCOUNTING RATIOS

TRADITIONAL CLASSIFICATION 1. PROFIT AND LOSS RATIOS 2. BALANCE SHEET RATIOS 3. COMPOSITE RATIOS

FUNCTIONAL CLASSIFICATION 1. PROFITABILITY RATIOS 2. TURNOVER RATIOS 3. SOLVENCY RATIOS

Profitability Ratios
1. ROI = Operating profit / Capital Employed 2. EPS = Net profit after tax and preference dividend Number of Equity shares 3. P/ E ratio = Market price per equity share/ EPS 4. GP Ratio = (Gross Profit/ Net Sales) x 100 5. NP Ratio = ( Net Profit / Net Sales ) x 100 6. Interest Coverage ratio = Income before interest and tax / Interest 7 Debt- Service coverage ratio =EBIT/ Interest +Principle

Turnover Ratio
1. Fixed Assets Turnover Ratio = Net Sales Net Fixed Assets 2. Debtors Turnover Ratio = Credit Sales Average Accounts Receivable 3. Creditors Turnover Ratio = Credit Purchases Average Accounts Payable 4. Inventory Turnover Ratio = Cost of Goods Sold Average Inventory

Solvency/ Liquidity Ratios

1. Current Ratio = Current Assets/ Current Liabilities 2. Liquid Ratio Liabilities = Liquid assets/ Current

3. Debt Equity Ratio = Debt/ Equity

Problems
1. The operating profit of A Ltd after charging interest on debentures and tax is a sum of Rs 10000. The amount of interest charged is Rs 2000 and tax provision made of Rs 4000. Calculate the interest coverage ratio 2. Calculate the Gross profit ratio from the following figures. Sales Rs 1,00,000; Purchases Rs 60,000; Sales Returns Rs 10,000; Purchase Returns Rs 15,000; Opening stock Rs 20,000 and Closing stock Rs 5,000

Problems
3. Calculate the EPS from the following data: Net profit before Tax Rs 1,00.000; Taxation is @ 50% of Net Profit. 10% Preference Share Capital of Rs 10 each is Rs 1,00,000. Equity Share Capital Rs 10 shares Rs 1,00,000 4. Credit sales for the year Rs 12,000, Bills receivable Rs 1000, Debtors Rs 1000. Calculate Debtors TO and debt collection period. 5. Current Assets are Rs 2,00,000. Current Liabilities are Rs 150,000 and Stock Rs 50,000 calculate the Current Ratio and Liquid Ratio