3276aktu Accounts

DR. A.P.J.
ABDUL KALAM
TECHNICAL UNIVERSITY
MBA Ist SEMESTER

NOTES IN EASY LANGUAGE
FINANCIAL
ACCOUNTING &
ANALYSIS
2023
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SYLLABUS
FINANACIAL ACCOUNTING & ANALYSIS
UNIT I Meaning and Scope of Accounting: Evolution and Users of Accounting,

Basic Accounting terminologies, Principles of Accounting, Accounting
Concepts & Conventions, Accounting Equation, Deprecation Accounting.
UNIT II Mechanics of Accounting: Accounting Standards and IFRS:

International Accounting Principles and Standards; Matching of Indian
Accounting Standards with International Accounting Standards, Double entry
system of Accounting, journalizing of transactions; Ledger posting and Trial
Balance.
UNIT III Presentation of Financial Statement: Preparation of final

accounts (Profit & Loss Account and Balance Sheet) according to companies
act 2013 (vertical format), Excel Application to make Balance sheet, Case studies
and Workshops, Preparation of Cash Flow Statement and its analysis.
UNIT IV Analysis of financial statement: Ratio Analysis- Solvency ratios,

Profitability ratios, activity ratios, liquidity ratios, Market capitalization ratios;
leverage Ratio, Detailed Analysis using excel application.
UNIT V Financial Statement Analysis and Recent Types of Accounting:

Common Size Statement; Comparative Balance Sheet and Trend Analysis of
manufacturing, Service & banking organizations, Case Study and Workshops
in analysing Balance sheet. Human Resource Accounting, Forensic Accounting,
Accounting for corporate social responsibility.
CONTENT
UNIT NAME OF CHAPTER PAGE

NO.
1 Meaning and Scope of Accounting 1.1
2 Mechanics of Accounting 2.1
3 Presentation of Financial Statement 3.1
4 Analysis of financial statement 4.1
5 Financial Statement Analysis and Recent Types 5.1

of Accounting
A unit of Realwaves (P) Ltd Unit 1
UNIT – 1 INTRODUCTION TO ACCOUNTING
DEFINITIONS
“Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are in part at least of
a financial character and interpreting the results thereof.”
FEATURES OF ACCOUNTING
(i) Recording of financial transactions only: Only those transactions and events
are recorded in accounting, which are of financial character. There are so many
transactions in the business, which are very important for business, but which
cannot be measured and expressed in terms of money and hence such transactions
will not be recorded. For example, the quarrel between the production manager and
the sales manager, resignation by an able and experienced manager, strike by
employees and starting of a new business by the other competitor etc. though these
events affect the earnings of the business adversely but as no one can measure the
effect of such events in terms of money, these will not be recorded in the books of
the business.
(ii) Recording: Accounting is the art of recording business transactions according
to some specified rules. In a small business where the number of transactions is
quite small, all transactions are first of all recorded in a book called “Journal”. But
in a big business where the number of transactions is
quite large, the journal is further sub-divided into various subsidiary books such as
(I) „Cash Book‟ for recording cash transactions; (II) „Purchases Book‟ for
recording credit purchases of goods; (III) „Sales Book‟ for recording credit sales of
goods; (IV) „Purchases Return Book‟ for recording the return of credit purchases;
(V) „Sales Return Book‟ for recording the return of credit sales, etc. the number of
subsidiary books to be maintained depends on the size and nature of the business.
(iii) Classifying: After recording the transactions in journal or subsidiary books,
the transactions are classified. Classification is the process of grouping the
transactions of one nature at one place in a separate account. The book in which
various accounts are opened is called “Ledger.”
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(iv) Summarizing: Summarizing is the art of presenting the classified data in a

manner, which is understandable and useful to management and other users of such
data. This involves the balancing of ledger accounts and the preparation of trial
balance with the help of such balances. Final accounts are prepared with the help
of trial balance, which include trading and profit & loss account and a balance
sheet. Trading account is prepared for calculating gross profit or gross loss during
the year. Profit and loss account is prepared to ascertain the net profit or net loss
during the year. Balance sheet is prepared to present the financial position of the
business.
ACCOUNTING CYCLE
OBJECTIVES / FUNCTIONS/ SCOPE OF ACCOUNTING

(i) To keep systematic record of business transactions: The main objective of
accounting is to keep complete record of business transactions according to
specified rules. Complete record of business transactions helps to avoid the
possibility of omission and fraud.
(ii) To calculate profit or loss: The second main objective of accounting is to
ascertain the net profit earned or loss suffered on account of business transactions
during a particular period. For this purpose Trading & Profit and Loss account of
the business is prepared at the end of each accounting period.
(iii) To ascertain the financial position of the business: For a businessman,

merely ascertaining profit & loss of the business is not sufficient. The businessman
must also know the financial health of the business. For this purpose, after
preparing the Profit and Loss account a statement called „balance sheet‟ is prepared
which shows the assets and their values on the one hand and the liabilities and
capital on the other hand.
(iv) To ascertain the progress of the business from year to year.
(v) To provide information’s to various parties: Another main objective of
accounting is to communicate the accounting information to various interested
parties like owners, investors, creditors, banks, employees and government
authorities etc. the information helps them in taking sound and judicious decisions
about the business entity.
1.1 NEED AND TYPES OF ACCOUNTING
Accounting is a systematic process of recording, analyzing, interpreting, and
communicating financial information about an organization or business. It plays a
crucial role in measuring the financial performance and position of a company, as
well as aiding in decision-making processes. The primary purpose of accounting is
to provide accurate and reliable information about the financial transactions and
activities of an entity.
Here are the main types of accounting:
1. Financial Accounting: Financial accounting focuses on recording and
reporting financial information to external stakeholders such as investors,
creditors, and regulators. It involves preparing financial statements,
including the income statement, balance sheet, and cash flow statement.
Financial accounting follows generally accepted accounting principles
(GAAP) or International Financial Reporting Standards (IFRS) to ensure
consistency and comparability of financial statements.
2. Managerial Accounting: Managerial accounting, also known as
management accounting, is concerned with providing financial information
for internal use within an organization. It involves analyzing costs, preparing
budgets, forecasting, and making informed business decisions. Managerial
accounting information helps managers and executives in planning,

controlling, and evaluating the performance of various departments or
projects.
3. Tax Accounting: Tax accounting involves preparing and filing tax returns
in compliance with the tax laws and regulations of a particular jurisdiction.
Tax accountants ensure that businesses accurately calculate their tax
liabilities and take advantage of any available tax deductions or credits. Tax
accounting requires knowledge of tax codes and legislation to ensure
compliance and minimize tax liabilities.
4. Auditing: Auditing is the examination and evaluation of financial records
and statements to determine their accuracy, reliability, and compliance with
applicable laws and regulations. Auditors provide an independent and
objective assessment of an organization's financial information. External
auditors are usually hired by companies to review their financial statements,
while internal auditors work within the organization to assess internal
controls and identify potential risks or areas for improvement.
5. Cost Accounting: Cost accounting involves tracking, analyzing, and
allocating costs associated with producing goods or providing services. It
helps businesses determine the cost of their products or services, evaluate
profitability, and make pricing decisions. Cost accounting methods include
job costing, process costing, and activity-based costing.
6. Forensic Accounting: Forensic accounting combines accounting,
investigative skills, and legal knowledge to analyze financial information for
legal purposes. Forensic accountants investigate financial fraud,
embezzlement, or disputes, and may be involved in litigation support, expert
witness testimony, or asset tracing.
7. Governmental Accounting: Governmental accounting focuses on financial
reporting and budgeting in the public sector. It includes accounting for
government agencies, municipalities, school districts, and other
governmental organizations. Governmental accounting often follows
specific accounting standards and regulations unique to the public sector.
1.2 EVOLUTION OF ACCOUNTING IN EASY LANGUAGE
1. Early Beginnings: Accounting has been around for thousands of years. In

ancient civilizations, people kept records of their livestock, crops, and other
possessions. These records helped them keep track of what they had and what they
owed to others.
2. Double-Entry System: In the 15th century, a Franciscan friar named Luca

Pacioli introduced the double-entry accounting system. This system balanced
debits (what came into the business) and credits (what went out) to keep track of
financial transactions. This was a fundamental shift and is still the basis of modern
accounting.
3. Industrial Revolution: With the rise of industrialization in the 18th and 19th
centuries, businesses became more complex. This complexity led to the
development of cost accounting, helping companies determine the cost of
production more accurately.
4. Computerization: In the 20th century, especially in the 1980s and 1990s,

computers revolutionized accounting. Spreadsheets and accounting software made
it easier to record and analyze financial data. This digital shift significantly
increased the efficiency and accuracy of accounting processes.
5. International Standards: With the globalization of business, there was a need

for standardized accounting principles worldwide. International Financial
Reporting Standards (IFRS) were developed to ensure that financial statements are
consistent, transparent, and comparable across international borders.
6. Technological Advances: In recent years, accounting has been transformed by

technologies like cloud computing, artificial intelligence, and big data. These
advancements have automated many accounting tasks, reducing errors and saving
time.
7. Focus on Analysis: Modern accounting is not just about recording numbers; it's
about providing insights. Accountants now use their expertise to analyze financial
data, helping businesses make informed decisions for the future.
1.2 USERS OF ACCOUNTING

Users of accounting refer to individuals, businesses, organizations, and
governments who rely on accounting information for various purposes. Accounting
is a systematic process of recording, analyzing, summarizing, and reporting
financial transactions and economic activities. The information generated by
accounting is used by different stakeholders to make informed decisions. Some of
the key users of accounting include:
1. Business Owners and Management: Business owners and management
use accounting information to assess the financial performance of their
companies. They make strategic decisions based on financial reports, such as
income statements, balance sheets, and cash flow statements.
2. Investors and Shareholders: Investors and shareholders rely on accounting
information to evaluate the financial health and profitability of a company
before making investment decisions. Financial statements help them gauge
the company's potential for growth and return on investment.
3. Creditors and Lenders: Creditors and lenders, such as banks and financial
institutions, use accounting information to assess the creditworthiness and
financial stability of borrowers. This helps them decide whether to grant
loans or extend credit to individuals or businesses.
4. Government Authorities: Government agencies use accounting
information to monitor economic activity, collect taxes, enforce regulations,
and formulate economic policies.
5. Employees: Employees may be interested in accounting information to
assess the financial health of their employers. Additionally, accounting
information is used for payroll processing, employee benefits, and other
financial matters within an organization.
6. Suppliers and Vendors: Suppliers and vendors may use accounting
information to evaluate the creditworthiness and payment history of their
customers.
7. Customers: Customers of a business may indirectly benefit from accounting

information as it helps ensure the financial stability of the company and its
ability to provide goods and services in the long run.
8. Non-profit Organizations and NGOs: Non-profit organizations use
accounting to manage their funds, report to donors and stakeholders, and
ensure compliance with relevant regulations.
1.3 CONCEPTS AND CONVENTIONS OF ACCOUNTING
Concepts
Accounting is a complex discipline that involves various concepts and principles to
record, analyze, summarize, and report financial transactions and economic
activities. Here are some fundamental concepts of accounting:
1. Entity Concept: The entity concept in accounting states that the business or
organization's financial transactions should be recorded separately from the
personal transactions of its owners. This principle ensures that the business's
financial affairs are treated as distinct and separate from the individuals who
own or operate it.
2. Going Concern Concept: The going concern concept assumes that a
business will continue to operate indefinitely unless there is evidence to the
contrary. This concept allows accountants to prepare financial statements
under the assumption that the business will continue its operations in the
foreseeable future.
3. Money Measurement Concept: The money measurement concept requires
that only transactions that can be measured in monetary terms are recorded
in the accounting system. Non-monetary events, no matter how significant,
may not be accounted for in the financial statements.
4. Cost Principle: The cost principle, also known as the historical cost
principle, dictates that assets should be recorded in the accounting records at
their original cost, representing the amount paid to acquire them. This
principle emphasizes objectivity and verifiability in financial reporting.
5. Matching Principle: The matching principle aims to match the expenses

incurred during a specific accounting period with the revenues generated in
the same period. This ensures that the financial statements accurately reflect
the relationship between revenue and expenses.
Conventions of Accounting
In accounting, conventions refer to the general practices and guidelines that have
been widely accepted and followed over time. These conventions help maintain
consistency, reliability, and comparability in financial reporting. Here are some
important conventions of accounting:
1. Conservatism Convention: This convention suggests that accountants
should adopt a conservative approach when dealing with uncertainties or
ambiguous situations. It means that potential losses should be recognized
immediately when they are probable, but potential gains should only be
recognized when they are certain.
2. Consistency Convention: The consistency convention requires that once a
specific accounting method or principle is adopted, it should be consistently
applied from one accounting period to another. Consistency enhances
comparability between financial statements of different periods, making it
easier for users to analyze trends.
3. Full Disclosure Convention: The full disclosure convention mandates that
all material and relevant information that could influence the decisions of
financial statement users should be disclosed in the financial statements or
accompanying footnotes. This convention promotes transparency and
ensures that users have access to all necessary information.
4. Matching Convention: The matching convention, also known as the
matching principle, suggests that expenses should be recognized in the same
accounting period as the revenues they helped generate. This ensures that the
financial statements accurately reflect the relationship between revenue and
expenses.
5. Time Period Convention: The time period convention assumes that the
complex and continuous business activities can be divided into specific and
meaningful time periods, such as months, quarters, or years. Financial

statements are prepared for these specific periods to provide timely
information to users.
1.4 BASIC ACCOUNTING TERMS
BALANCE SHEET
Balance sheet as on or as at …….
Liabilities Amt Assets Amt
Current liabilities: Current assets:
Bank overdraft Cash in hand
Bills payable Cash at bank
Sundry creditors Bills receivable
Outstanding expenses Short term investments
Unearned income Sundry debtors
Fixed liabilities: Closing stock
Long term loans Prepaid expenses
Reserves Accrued income
Capital Long term investments
Add: net profit Fixed assets:
Less: drawings Furniture
Less: income tax Loose tools
Less: life insurance Motor vehicle
premium Plant & machinery
Land & buildings
Patents
Goodwill
(1) Assets: Anything, which is in the possession or is the property of a business

enterprise including the amounts due to it from others, is called an asset. In other
words, anything, which will enable a business enterprise to get cash or a benefit in
future, is an asset. Thus, cash and bank balances, stock, furniture, machinery, land
& building, bills receivable, money owing by debtors etc. are all assets.
(i) Fixed assets: Fixed assets refer to those which are held for continued use in the
business for the purpose of producing goods or services and are not meant for
resale.
(ii) Current assets: Current assets are those assets which are meant for sale or
which the management would want to convert into cash within one year. For
example, „debtors‟ are expected to be converted into cash within a reasonable short
period, stock is continuously sold and bills receivables are also converted into
cash.
(a) Debtors: The term debtors represents those persons or firms to whom goods
have been sold or services rendered on credit and payment has not been received
from them. E.g., if goods worth Rs 10000 have been sold to Mohan on credit, he
will continue to remain the debtor of the business so long as, he does not make the
full payment.
(b) Stock: The term „stock‟ means the value of those goods which are lying unsold
at the end of accounting period. The stock may be of two types:
Opening Stock & Closing Stock. The term Opening Stock means the value of
goods lying unsold at the beginning of the accounting period whereas the term
Closing Stock means the value of goods lying unsold at the end of the accounting
period.
Types of stock: In case of a manufacturer, there can be Opening & Closing Stock
of three types:
(1) Stock of raw material: It includes stock of raw materials purchased for using
them in the products manufactured but still lying unused. E.g., the value of cotton
in case of cloth mills is the stock of raw material.
(2) Stock of work in progress: It is also termed as stock of partly finished goods.
It means goods in semi- finished form. Such goods need further processing for
converting into finished products.
(3) Stock of finished goods: It includes the stock of those goods which have been
completely processed and are ready for sale but are lying unsold at the end of the
accounting period.
(iii) Tangible and intangible assets: Tangible assets are those assets, which can
be seen touched. In other words, which have a physical existence such as land,
building, plant, furniture, stock, cash etc.
Intangible assets are those assets which do not have a physical existence and which
cannot be seen or felt. E.g., goodwill, patents, trademarks & prepaid expenses.
Intangible assets are also valuable assets. E.g., with the help of patents (know-
how) businessman is able to produce goods and his goodwill helps in attracting
customers easily. Therefore the intangible assets help the firm in earning profits as
much as the tangible assets.
(2) Liability: It refers to the amount, which the firm owes to outsiders (expecting
the amount owed to proprietors).
(i) Long term liabilities or fixed liabilities: These refer to those liabilities will fall
due for payment in a relatively long period (normally after more than one year).
e.g. Long terms loans & debentures etc.
(ii) Current liabilities: Current liabilities refer to those liabilities which are to be
paid in near future (normally within one year) e.g. bank overdraft, bills payable,
creditors, outstanding expenses and short term loans etc.
(iii) Creditors: The term creditors represents those persons or firms from whom
goods have been purchased or services procured on credit and payment has not
been made to them. E.g., if goods worth Rs 5000 are purchased from Govind on
credit, he will continue to remain the creditor of the firm so long as, the full
payment is not made to him.
(3) Capital: It refers to the amount invested by the proprietor in a business
enterprise. It is the amount with the help of which goods and assets are purchased
in the business.
(4) Goods: Goods are those things, which are purchased for resale. In other words,
goods are the commodities in which the business deals. E.g. if cloth merchant
purchases cloth, the cloth will be termed as „purchases‟. But if the same cloth
merchant purchases some furniture, say chairs and a sofa set for the seating of
customers, the furniture so purchased will not be termed as purchases, but will be
an asset of his business and in this case „Furniture A/c‟ will be debited instead of
„Purchases A/c‟.
(5) Purchases: The term purchases is used only for the purchase of „goods‟ in
which the business deals. In case of a manufacturing concern „goods‟ means
acquiring of raw material for the purpose of conversion into finished product and
then sale. In case of trading concern „goods‟ are those things, which are purchased
for resale. E.g., if a cloth dealer purchases cloth for sale, the cloth so purchased
will be called „goods‟. However, if the same cloth dealer purchases furniture for
seating the customers, such furniture will not be termed as goods, but it will be an
„asset‟.
The term purchases includes both cash purchases and credit purchases of
goods.
Purchase returns: When purchased goods are returned to the suppliers these are
known as purchase returns. Such returns are also termed as „returns outwards‟.
(6) Sales: The term „sales‟ is used only for those goods, which are purchased for
resale purchases. The term „sales‟ is never used for the sale of assets. E.g., if a
cloth dealer sells cloth, it will be termed as sales, but if the same cloth dealer sells
old furniture or a typewriter, it will not be termed as sales.
The term sales include both cash and credit sales.

Sales returns: Some customers might return the goods sold to them. These are
termed as sales returns or „returns inwards.‟
(7) Loss: When total expenses exceed the total revenues there is loss. e.g. If
revenues are Rs 100000 and expenses are Rs 120000, the loss will be Rs 20000.
Second, it refers to some fact or activity against which firm receives no benefit.
E.g. Loss due to fire, theft, accident etc.
(8) Profit: It is the excess of total revenues over total expenses of a business
enterprise for an accounting period. Profit increases the investment of the owners.
(9) Discount: It is a rebate or an allowance given by the seller to the buyer. It is of
two types:
(i) Trade discount: When discount is allowed by a seller to its customers at a

fixed percentage on the list or catalogue price of the goods it is called trade
discount. It is not recorded in the books of accounts as it is deducted in the invoice
or cash memo itself from the gross value of goods.
(ii) Cash discount: When discount is allowed to the customers for making prompt
payment it is called cash discount. E.g. if a seller allows 2% discount for payment
within a week it will be called cash discount. It is always recorded in the books of
accounts.
(10) Drawing: Any cash or value of goods withdrawn by the owner for personal
use or any private payments made out of business funds are called drawings.
1.5 ACCOUNTING EQUATION
MEANING OF ACCOUNTING EQUATION
An accounting equation is a statement of equality between the resource and the
resources which finance the resources and is expressed as follows:
Resource = Sources of Finance
Resources mean the Assets. The Assets refer to the tangible objected (e.g. Land
& Building, Plant & Machinery, Furniture, Investment, Stock, Debentures, Bank
Balance, Cash Balance) or Intangible (e.g. Patents, Trademarked, Copyright)
owned by an enterprise and carrying probable future benefits.
Sources of finance mean Equities and includes Internal Source (or Internal
equity) (i.e. Capital) and External Source (or External Equity) (i.e. Liabilities).
Capitals refer to the amount invested in an enterprise by its owners.
Liabilities are the financial obligations of an enterprise other than owner‟s funds.
Thus, the aforesaid accounting equation may be expressed as follows:
Total Assets = Total Equities

Or
Assets = Internal Equity + External
Equity
Or
Assets = Capital + Liabilities
Since the liabilities holders have a definite and prior claim against the assets, the
capital is also called a residual of assets over liabilities and may be expressed as
follows:
Capital = Assets - Liabilities
This equation is fundamental in the sense that it gives fundamental to the double
entry book keeping. The equation holds good for all transaction and events and at
all period of time since every transaction and event has two aspects.
Analysis of Transactions Using Accounting
Equation
An accounting equation may be developed by taking the steps given below:
Steps involved in developing an Accounting

Equation
Step 1 → Ascertain the variables (i.e., Assets, Liabilities or Capital) of an equation

affected by a transaction.
Step 2 → Find out the effect (in terms of increase or decrease) of a transaction on the
variables of an
Equation
Step 3 → Show the effect on the appropriation side of an equation and ensure that the
total of right hand Side is equal to the total of left hand side.
Accounting Equation to Record Capital Brought – in
Q1. (Preparation of accounting equation) From the following transactions,

prepare an accounting equation:
(i) Amit started business with cash Rs 1,00,000
(ii) He purchased goods worth Rs 20,000
(iii) He purchased furniture forth Rs 10,000
(iv) He sold goods costing Rs 9,000 for Rs 11,000
(v) He sold goods costing Rs 1,000 for Rs 600
SOLUTION
Transactions Assets = Liabilities + Capital
Cash + Stock + Furniture = Liabilities + Capital

(i) Started business 1,00,000 + 0 + 0 = 0 + 1,00,000
with cash Rs 1,00,000
New equation 1,00,000 + 0 + 0 = 0 + 1,00,000

(ii) Purchased goods
worth Rs 20,00 –20,000 + 20,000 + 0 = 0 + 0
New equation 80,000 + 20,000 + 0 = 0 + 1,00,000

(iii) Purchased
furniture for Rs 10,000 –10,000 + 0 + 10,000 = 0 + 0
New equation 70,000 + 20,000 + 10,000 = 0 + 1,00,000

(iv) Sold goods
costing Rs 9,000 +11,000 – 9,000 + 0 = 0 + 2,000
for Rs 11,000
New equation 81,000 + 11,000 + 10,000 = 0 + 1,02,000

(v) Sold goods costing
Rs 1,000 for Rs 600 +600 – 1,000 + 0 = 0 –400
New equation 81,600 + 10,000 + 10,000 = 0 + 1,01,600
1,01,600 = 1,01,600

(i) Naveen started a business with Rs 50,000
(ii) He purchased goods worth Rs 10,000
(iii) Commission received in advance Rs 5,000
(iv) Sold goods costing Rs 8,000 for Rs 10,000
(v) Additional capital introduced Rs 25,000
SOLUTION
Cash + Stock Commission received + Capital

in advance
(i) Started business 50,000 + 0 = 0 + 50,000
with cash Rs 50,000
New equation 50,000 + 0 = 0 + 50,000

(ii) Purchased goods
worth Rs 10,000 –10,000 + 10,000 = 0 + 0
New equation 40,000 + 10,000 = 0 + 50,000

(iii) Commission
received in advance +5,000 + 0 = 5,000 + 0
Rs 5,000
New equation 45,000 + 10,000 = 5,000 + 50,000

(iv) Sold goods +10,000 – 8,000 = 0 + 2,000
costing Rs 8,000
for Rs 10,000
New equation 55,000 + 2,000 = 5,000 + 52,000

(v) Introduced +25,000 + 0 = 0 + 25,000
additional capital
Rs 25,000
New equation 80,000 + 2,000 = 5,000 + 77,000
82,000 = 82,000

(i) Mr. Anil started a business with capital Rs 2,00,000
(ii) He purchased goods for Rs 20,000
(iii) Purchased machinery costing Rs 10,000 from Mr. Abdul on credit
(iv) Withdrew Rs 30,000 for personal use
(v) Sold goods costing Rs 4,000 for Rs 3,000
SOLUTION
Cash + Stock + Machinery = Creditors + Capital

(i) Started business 2,00,000 + 0 + 0 = 0 + 2,00,000
with cash Rs 2,00,000
New equation 2,00,000 + 0 + 0 = 0 + 2,00,000

(ii) Purchased goods –20,000 + 20,000 + 0 = 0 + 0
for Rs 20,000
New equation 1,80,000 + 20,000 + 0 = 0 + 2,00,000

(iii) Purchased 0 + 0 + 10,000 = +10,000 + 0
machinery costing
Rs 10,000 from Abdul
on credit
New equation 1,80,000 + 20,000 + 10,000 = 10,000 + 2,00,000

(iv) Drawings –30,000 + 0 + 0 = 0 – 30,000
Rs 30,000
New equation 1,50,000 + 20,000 + 10,000 = 10,000 + 1,70,000

(v) Sold goods costing +3,000 – 4,000 – 1,000
Rs 4,000 for Rs 3,000
New equation 1,53,000 + 16,000 + 10,000 = 10,000 + 1,69,000
1,79,000 = 1,79,000
Q4. (Preparation of accounting equation) OM Traders started a business with

cash Rs 1,21,000. In respect of his business, following transactions were recorded.
(Rs)
(a) Purchased goods on credit 32,500
(b) Paid wages 2,500
(c) Withdrew for personal use 21,600
(d) Paid to creditors in full settlement 32,000
(e) Purchased furniture for 2,510
(f) Telephone charges paid 18,000
Show an accounting equation on the basis of above transactions:
SOLUTION
Cash + Stock + Furniture = Creditors + Capital

Opening entry 1,21,000 + 0 + 0 = 0 + 1,21,000
New equation 1,21,000 + 0 + 0 = 0 + 1,21,000

(a) Purchased goods 0 + 32,500 + 0 = 32,500 + 0
on credit Rs 32,500
New equation 1,21,000 + 32,500 + 0 = 32,500 + 1,21,000

(b) Paid wages –2,500 + 0 + 0 = 0 – 2,500
for 2,500
New equation 1,18,500 + 32,500 + 0 = 32,500 + 1,18,500
(c) Withdrew for –21,600 + 0 + 0 = 0 – 21,600
personal use
Rs 21,600
New equation 96,900 + 32,500 + 0 = 32,500 + 96,900

(d) Paid to creditors –32,000 + 0 + 0 = –32,500 + +500
in full settlement
Rs 32,000
New equation 64,900 + 32,500 + 0 = 0 + 97,400

(e) Purchased furniture –2,510 + 0 + 2,510 = 0 + 0
for
Rs 2,510
New equation 62,390 + 32,500 + 2,510 = 0 + 97,400

(f) Telephone charges –18,000 + 0 + 0 = 0 – 18,000
paid Rs 18,000
New equation 44,390 + 32,500 + 2,510 = 0 + 79,400
79,400 = 79,400
Q5. (Preparation of accounting equation) Mr. Rahul started a business with cash
Rs 50,000. During the year the following transactions took place :
(i) He purchased goods for Rs 20,000
(ii) He purchased furniture for Rs 5,000
(iii) He purchased machinery for Rs 7,000
(iv) He purchased goods for Rs 2,000 from Mr. Lawaz
(v) He sold goods costing Rs 3,000 for Rs 4,000
(vi) He purchased goods for Rs 4,000 from Mr. Labeeb in cash
(vii) He sold goods to Khursheed costing Rs 8,000 at a loss of Rs 1,000 in
cash
Prepare an accounting equation
SOLUTION
Cash + Stock + Furniture + Machineary = Creditors + Capital
Started business with 50,000 + 0 + 0 + 0 = 0 + 50,000

cash Rs 50,000
New equation 50,000 + 0 + 0 + 0 = 0 + 50,000

(i) Purchased goods –20,000 + 20,000 + 0 + 0 = 0 + 0
for Rs 20,000
New equation 30,000 + 20,000 + 0 + 0 = 0 + 50,000
(ii) Purchased –5,000 + 0 + 5,000 + 0 = 0 + 0

furniture for Rs 5,000
New equation 25,000 + 20,000 + 5,000 + 0 = 0 + 50,000

(iii) Purchased –7,000 + 0 + 0 + 7,000 = 0 + 50,000
machinery for Rs
7,000
New equation 18,000 + 20,000 + 5,000 + 7,000 = 0 + 0

(iv) Purchased goods 0 + 2,000 + 0 + 0 = 2,000 + 50,000
from Mr. Lawaz for
Rs 2,000
New equation 18,000 + 22,000 + 5,000 + 7,000 = 2,000 + 50,000

(v) Sold goods costing +4,000 + 3,000 + 0 + 0 = 0 + 1,000
Rs 3,000 for Rs 4,000
New equation 22,000 + 19,000 + 5,000 + 7,000 = 200,0 + 51,000
(vi) Purchased goods –4,000 + 4,000 + 0 + 0 = 0 + 0
from Mr. Labeeb in
cash for Rs 4,000
New equation 18,000 + 23,000 + 5,000 + 7,000 = 2,000 + 51,000

(vii) Sold goods to +7,000 + 8,000 + 0 + 0 = 0 – 1,000
Khursheed costing Rs
8,000 at a loss of Rs
1,000 in cash
New equation 25,000 + 15,000 + 5,000 + 7,000 = 2,000 + 50,000
52,000 = 52,000
Q6. (Preparation of accounting equation) Aman commenced business with a

capital of Rs 75,000 on 1st April, 2013. The various transactions that took place
during the year were as follows:
(i) Purchased furniture worth Rs 7,000 for office use.
(ii) Bought Machinery for Rs 10,000
(iii) Purchased goods from Jitinder for Rs 5,000
(iv) Purchased goods from Hari in cash Rs 8,000

(v) Sold goods (costing Rs 4,000) at a profit of 25% on cost
(vi) Withdrew cash for private use Rs 2,000
(vii) Deposited into bank account Rs 1,000
(viii) Expenses paid Rs 2,000
Prepare an accounting equation to give effect to the above transactions.
SOLUTION
Cash +Furniture + Machinery + Stock + Bank = Creditors +Capital

Rs Rs Rs Rs Rs Rs Rs
Aman started 75,000 + 0 + 0 + 0 + 0 = 0 + 75,000
business with cash
Rs 75,000
New equation 75,000 + 0 + 0 + 0 + 0 = 0 + 75,000

(i) Purchased
furniture worth –7,000 + 7,000 + 0 + 0 + 0 = 0 + 0
Rs 7,000 for office
use
New equation 68,000 + 7,000 + 0 + 0 + 0 = 0 + 75,000

(ii) Bought
Machinery for –10,000 + 0 + 10,000 + 0 + 0 = 0 + 0
for Rs 10,000
New equation 58,000 + 7,000 + 10,000 + 0 + 0 = 0 + 75,000

(iii) Purchased
goods from 0 + 0 + 0 + 5,000 + 0 = 5,000 + 0
Jitinder
for Rs 5,000
New equation 58,000 + 7,000 + 10,000 + 5,000 + 0 = 5,000 + 75,000

(iv) Purchased
goods from Hari in
cash –8000 + 0 + 0 + 8,000 + 0 = 0 + 0

Rs 8,000
New equation 50,000 + 7,000 + 10,000 + 13,000 + 0 = 5,000 + 75,000

(v) Sold goods
(Costing Rs 4,000)
+5000 + 0 + 0 – 4,000 + 0 = 0 + 1,000
at a Profit of 25%
on cost
New equation 55,000 + 7,000 + 10,000 + 9,000 + 0 = 5,000 + 76,000

(vi) Withdrew
cash for private
–2,000 + 0 + 0 + 0 + 0 = 0 – 2,000
use
Rs 2,000
New equation 53,000 + 7,000 + 10,000 + 9,000 + 0 = 5,000 + 74,000

(vii) Deposited
into bank account
–1,000 + 0 + 0 + 0 + 1,000 = 0 + 0
Rs 1,000
New equation 52,000 + 7,000 + 10,000 + 9,000 + 1,000 = 5,000 + 74,000

(viii) Expenses
paid
–2,000 + 0 + 0 + 0 + 0 = 0 – 2,000
Rs 2,000
New equation 50,000 + 7,000 + 10,000 + 9,000 + 1,000 = 5,000 + 72,000
77,000 = 77,000

(i) Mr. Hemant started a business with cash Rs 20,000
(ii) He took bank loan Rs 1,00,000
(iii) He purchased goods for Rs 15,000
(iv) He sold 50% of goods at a profit of 20%
(v) He sold 10% of the remaining goods at a profit of 10%
SOLUTION
Cash + Stock = Bank Loan + Capital

Rs Rs Rs Rs
(i) Started business 20,000 + 0 = 0 + 20,000
with cash Rs 20,000
New equation 20,000 + 0 = 0 + 20,000

(ii) Bank Loan +1,00,000 + 0 = +1,00,000 + 0
Rs 1,00,000
New equation 1,20,000 + 0 = 1,00,000 + 20,000
(iii) Purchased –15,000 + 15,000 = 0 + 0
goods for Rs 15,000
New equation 1,05,000 + 15,000 = 1,00,000 + 20,000

(iv) Sold 50% of +9,000 – 7,500 = 0 + 1,500
goods at a profit of
20%
New equation 1,14,000 + 7,500 = 1,00,000 + 21,500

(v) Sold 10% of the +825 – 750 = 0 + 75
remaining goods at a
profit of 10%
New equation 1,14,825 + 6,750 = 1,00,000 + 21,575
1,21,575 = 1,21,575
Q8. (Preparation of accounting equation) Mr. Jon commenced his business on

1st April, 2013 by introducing capital of Rs 50,000. During the year, following
transactions had taken place Amount (Rs)
(a) Bought Furniture for cash 16,000
(b) Purchased goods for 20,000
(c) Sold goods (costing Rs 8,500) to Ram for cash 16,000
(d) Purchased goods from Mohan 11,000
(e) Introduced additional capital 13,000
(f) Commission received in advance 1,500
(g)
Paid to Creditors Rs 9,500 in full settlement
(h)
Bought Fax Machine for his personal use 8,000
(i)
Rent paid for the year 8,000
(j)
Payment for stationery 200
(k)
Sold goods (costing Rs 10,000) for Rs 12,000. Out of which Rs 1,000
received in cash
Show the above transactions in accounting equations
SOLUTION:
Cash +Furniture + Stock + Debtors +Income = Creditors +Capital

received in adavance
Rs Rs Rs Rs Rs Rs Rs
Commenced 50,000 + 0 + 0 + 0 = 0 + 0 + 50,000
business New
Balance 50,000 + 0 + 0 + 0 = 0 + 0 + 50,000
(a) Bought Furniture –16,000 + 16,000 + 0 + 0 = 0 + 0 + 0
for cash
New Balance 34,000 + 16,000 + 0 + 0 = 0 + 0 + 50,000
(b) Purchased goods
for Rs 20,000 –20,000 + 0 + 20,000 + 0 = 0 + 0 + 0
New Balance 14,000 + 16,000 + 20,000 + 0 = 0 + 0 + 50,000

(c) Sold goods
(costing
+16,000 + 0 – 8,500 + 0 = 0 + 0 + 7,500
for Rs 8,500) to
Ram for cash
New Balance 30,000 + 16,000 + 11,500 + 0 = 0 + 0 + 57,500

(d) Purchased
goods from Mohan 0 0 + 11,000 + 0 0 + 11,000 + 0
New Balance 30,000 + 16,000 + 22,500 + 0 = 0 + 11,000 + 57,500
(e) Introduced
additional capital +13,000 0 0 0 0 + 0 + 13,000
New Balance 43,000 + 16,000 + 22,500 + 0 = 0 + 11,000 + 70,500

(f) Commission
received in advance +1,500 0 0 + 0 +1,500 + 0 + 0
New Balance 44,500 + 16,000 + 22,500 + 0 = +1,500 + 11,000 + 70,500

(g) Paid to creditors
Rs 9,500 in full –9,500 + 0 + 0 + 0 0 –11,000 + 1,500
settlement
New Balance 35,000 + 16,000 + 22,500 + 0 = +1,500 + 0 + 72,000

(h) Bought Fax
Machine for his –8,000 + 0 + 0 + 0 0 + 0 – 8,000
personal use
New Balance 27,000 + 16,000 + 22,500 + 0 = +1,500 + 0 + 64,000

(i) Rent paid for the
year
–8,000 + 0 + 0 + 0 0 0 – 8,000
New Balance +19,000 + 16,000 + 22,5000 + 0 = 1,500 + 0 + 56,000

(j) Payment for
stationery –200 0 0 0 0 + 0 – 200
New Balance +18,800 + 16,000 + 22,500 + 0 = +1,500 + 0 + 55,800

(k) Sold goods
(costing Rs 10,000)
+1,000 + 0 –10,000 + 11,000 0 0 + 2,000
for Rs 12,000; Rs
1,000 in cash
New Balance +19,800 + 16,000 + 12,500 + 11,000 = +1,500 + 0 + 57,800
59,300 = 59,300
EXAM QUESTION
Q.1 Prove that the Accounting Equation is satisfied in the following transactions
and prepare the balance sheet of Ashirwad after final transaction:-
Ashirwad commenced business with cash 1,00,000

Bought goods from chouhan 25,000
1,00,000
Bought furniture on credit from suhani 10,000
Ashirwad invested additional capital 15,000
Paid salary 3,000
Paid cash to Suhani 5,000
Cash purchases 40,000
1.6 DEPRECIATION ACCOUNTING

Depreciation accounting is a method used in accounting to allocate the cost of
tangible assets (such as buildings, machinery, vehicles, etc.) over their useful lives.
This process reflects the gradual decrease in the value of these assets as they are
used over time. Depreciation is important for businesses because it helps in
spreading the cost of an asset over its useful life, matching the cost to the revenue
it generates.
Here's a breakdown of how depreciation accounting works:
1. Initial Cost: When a company buys a tangible asset, it records the initial cost of
the asset. This cost includes not only the purchase price but also other expenses
like delivery, installation, and any other costs directly attributable to getting the
asset ready for its intended use.
2. Useful Life: Every tangible asset has a limited useful life. For example, a
delivery truck might have a useful life of 10 years. The company estimates how
many years the asset will be useful before it becomes obsolete, worn out, or no
longer economically viable.
3. Residual Value: Residual value is the estimated value of the asset at the end of
its useful life. This value is subtracted from the initial cost to determine the total
amount that needs to be depreciated. Sometimes assets are depreciated down to
zero, meaning they have no residual value.
4. Depreciation Methods: There are several methods to calculate depreciation.

The most common ones include straight-line depreciation, declining balance
depreciation, and units of production depreciation.
 Straight-Line Depreciation: This method evenly spreads the cost of the
asset over its useful life.
The formula for straight-line depreciation is: (Initial Cost - Residual Value) /
Useful Life.
 Declining Balance Depreciation: This method allows for higher
depreciation in the earlier years and lower depreciation in the later years of
an asset's life.
 Units of Production Depreciation: This method links the depreciation
expense to the actual usage of the asset. The more the asset is used, the
higher the depreciation expense.
5. Recording Depreciation: The calculated depreciation is recorded as an expense
in the income statement. Simultaneously, the value of the asset on the balance
sheet is reduced by the same amount. This process continues over the asset's useful
life until its value on the balance sheet equals its residual value or zero.
By accounting for depreciation, businesses can accurately represent the true value
of their assets over time, providing a more accurate picture of their financial health
and helping with various financial analyses and decisions.
Q Explain the concept of depreciation. What is the need for charging

depreciation and what are the causes of depreciation?
Every business acquires fixed assets for its use in the business over a period of
time. As the benefits of these assets can be availed over a long period of time (due
to their regular use), there exists continuous wear and tear and consequently fall in
their value. This fall in the value of fixed assets (due to regular use or expiry of
time) is termed as depreciation.
A machinery that costs Rs 1,00,000 and its useful life of 10 years, its depreciation
will be calculated as:
1. To ascertain true net profit or net loss− correct profit or loss can be
ascertained when all the expenses and losses incurred for earning revenues
are charged to profit and loss account. Assets are used for earning revenues
and its cost is charged in form of depreciation from profit and loss account.
2. To show true and fair view of financial statements− If depreciation
is not charged, assets are shown at higher value than their actual value in the
balance sheet; consequently, the balance sheet does not reflect true and fair
view of financial statements.
3. For ascertaining the accurate cost of production− Depreciation on plant
and machinery and other assets, which are engaged in production, is
included in the cost of production. If depreciation is not included, cost of
production is underestimated, which will lead to low sale price and thus
leads to low profit.
4. Distribution of dividend out of profit− If depreciation is not charged,
which leads to overestimating of profit and consequently more profit is
distributed as dividend, out of capital instead of the profit. This leads to the
flight of scarce capital out of the business.
5. To provide funds for replacement of assets− Unlike other expenses,
depreciation is not a cash expense. So, the amount of depreciation charged
will be retained in the business and will be used for replacement of fixed
assets after its useful life.
6. Consideration of tax− If depreciation is charged, then profit and loss
account will disclose lesser profit as to when the depreciation is not charged.
This depicts reduced profit and thus the business will be liable for lesser tax
amount.
Below are given the causes for depreciation.
1. Constant use− Due to constant use of the fixed assets there exists normal
wear and tear that leads to fall in the value of fixed assets.
2. Expiry of time− With the passage of time, whether assets are used or not,
its effective life decreases. The natural forces like rain, weather, etc. lead to
deterioration of the fixed assets.
3. Obsolescence− Due to the fast technological innovations and inventions
today‟s assets may be outdated by tomorrow‟s sophisticated assets. This
leads to the obsolescence of fixed assets.
4. Expiry of legal rights− If an asset is acquired for a specific period of time,
then, whether the asset is put to use or not, its value becomes zero at the end
of its useful life. For example, if a land is acquired for Rs 1,00,000 for 25
years on lease, then each year its value depreciates by of its gross
th
value. At the end of the 25 year, the value of the lease will be zero.
5. Accident− An asset may lose its value and damage may happen to it due to
mishaps such as a fire accident, theft or a natural calamity. The loss due to
accident is permanent in nature.
6. Permanent fall in value− Generally, we do not record fluctuations in the
market price of the fixed assets in the books. However, if the fall in market
price is permanent, it is accounted, which leads to a fall in the value of fixed
assets in the books.
STRAIGHT LINE METHOD AND WRITTEN DOWN VALUE METHOD

OF DEPRECIATION
Straight Line method

It is a simple method of charging depreciation. Under this method, depreciation is
charged on the original cost of an asset, at a fixed rate of percentage. In this
method, amount of depreciation remains same from year to year and asset‟s value
becomes zero at the end of its useful life.
Amount of depreciation is calculated as under:
Advantages of Straight Line Method

1. It is simple to calculate.
2. Asset can be completely written off, i.e., asset can be depreciated until the
net scrap value is zero.
3. Same amount of depreciation is charged every year. Therefore, it helps in

easy comparison of Profit and Loss Account for different years.
4. It is used for assets that have low repairs and maintenance expenses and are
continuously used over a period of time.
Limitations of Straight Line Method

1. Burden of deprecation is more on profit and loss account in the later years,
when repair and maintenance costs increase, as asset becomes older.
2. Value of asset becomes zero in the books even if asset is still in usable
condition in business.
Uses of Straight Line Method

1. This method is useful where repairs and maintenance expenses on asset are
low.
2. It is also useful when an asset is continuously used from one year to another.
3. It is useful when the value of assets, such as patent, copyright, goodwill, etc.,
becomes zero
WRITTEN DOWN VALUE METHOD

This method is applicable where depreciation is charged on the diminishing
balance, i.e., book value of the asset. In this method, asset‟s value goes on
diminishing year after year and the amount of depreciation declines.
Rate of depreciation is calculated as follows:
Where,
R represents rate of depreciation
n represents expected useful life of the asset
s represents the scrap value
c represents the cost of the asset
Advantages of Written Down Value Method

1. It is based on the logical assumption that asset is used more in the earlier
years, so more cost is charged in form of depreciation.
2. It is suitable for the assets where repairs are more in the later years, as
depreciation is lesser and on a whole the combined burden of depreciation
and repairs exerts equal pressure on the net profit over years.
3. This method is accepted by the income tax authorities.
4. As more depreciation is charged in the earlier years, so the loss due to
obsolescence of the asset is reduced.
Limitations of Written Down Value Method

1. It is difficult to calculate and is a time consuming process.
2. The value of an asset cannot be zero, thus the asset cannot be completely
written off.
3. There arises shortage of funds for replacement of new asset. This happens
due to the fact that the amount of depreciation is retained and used in the
business. Consequently, at the end of the useful life of an old asset, business
finds it difficult to arrange funds for its replacement.
Uses of Written Down Value Method

1. It is useful when assets have long life.
2. It is useful for those assets that require more repair and maintenance costs in
the later years.
3. It provides easy calculation to provide depreciation of additional asset
purchased during a year.
Difference between Straight Line Method and Written Down Value Method
Basis of Difference Straight Line Method Written Down Method

Basis for calculation Depreciation is calculated on the Depreciation is calculated on the
original cost of an asset. reducing balance, i.e., the book
value of an asset.
Amount of Equal amount is charged each Diminishing amount of
depreciation year over the effective life of the depreciation (on the written down
asset. value of asset) is charged each year
over the effective life of the asset.
Book value of asset Book value of the asset becomes Book value of the asset can never
zero at the end of its effective life. be zero.
Suitability It is suitable for the assets like, It is suitable for assets that needs
patents, copyrights, land and more repairs and maintenance
buildings, etc., which have lesser costs in the later years like, plant
possibility of obsolescence and and machinery, car, etc.
lesser repair charges.

Effect of depreciation Unequal effect over the life of the
Equal effect over the life of the
and repair on profit asset, as depreciation remainsasset, as depreciation is high and
and loss account same over the years but repair
repairs are less in the initial years
cost increases in the later years.
but in the latter years the repair
cost increases and depreciation
cost decreases.
Recognition under It is not recognized under the It is recognized under the Income
Income Tax Act Income Tax Act. Tax Act.
METHODS OF RECORDING DEPRECIATION
Describe in detail two methods of recording depreciation. Also give the necessary
journal entries.
The two methods of recording depreciation are diagrammatically presented below.
1. Charging depreciation to Asset Account− Under this method, depreciation is

directly credited to the asset account and no separate account is prepared for
provision of depreciation. Under this method, the original cost of an asset and the
total amount of depreciation cannot be determined from the Balance Sheet, as the
Asset Account appears at its written down value.
Journal entries for depreciation are given below.

When depreciation is charged to Assets Account
Depreciation A/c Dr.
To Assets A/c
(Depreciation charged to Assets Account)
Closing of Depreciation Account
Profit and Loss A/c Dr.
To Depreciation A/c
(Depreciation transferred to Profit and Loss Account)
2. Creating Provision for Depreciation Account− Under this method,

depreciation is not credited to the Assets Account; in fact, it is credited to the
provision for Depreciation Account. At the year end, asset is shown at the original
cost in the Balance Sheet and total depreciation up to the date of Balance Sheet is
shown as Provision for Depreciation Account.
Journal entries for depreciation are:
Charging Depreciation
Depreciation A/c Dr.
To Provision for Depreciation A/c
(Depreciation charged)
Closing of Depreciation Account
Profit and Loss A/c Dr.
To Depreciation A/c
(Depreciation account is transferred to Profit and Loss Account)
When the asset is sold, the accumulated depreciation on that asset is credited to the
Asset Account by passing the following Journal entry:
Provision for Depreciation A/c Dr.
To Asset A/c
(Accumulated depreciation transferred to Assets Account)
Determinants of depreciation
1. Total cost of asset− The total cost of an asset is taken into consideration for
ascertaining the amount of depreciation. The expenses incurred in acquiring,
installing and constructing of assets and bringing the assets to their usable
condition are included in the total cost of asset.
2. Estimated useful life− Every asset having it‟s useful life other than it‟s
physical life, in terms of number of years, units, etc. are considered to
estimate the effective life of a fixed asset. For example, land has indefinite
life; however, if business acquires a piece of land on lease for 25 years, it‟s
useful life is considered to be 25 years.
3. Estimated scrap value− It is estimated as the net realisable value or sale

value of an asset at the end of it‟s effective life. It is deducted from the total
cost of an asset. For example, furniture is acquired at Rs 50,000 with it‟s
effective life of 10 years.
After 10 years, furniture will be sold at Rs 10,000. So, depreciation is charged as:
STRAIGHT LINE METHOD (SLM)
Illustration: 1
Calculate the rate of depreciation under straight line method (SLM) in each of the
following alternative cases:
Case Purchase Price of Expenses to be Estimated Expected Useful
Machine Capitalized Residual Value Life
(a) 80,000 20,000 40,000 4 years
(b) 17,000 3,000 2,000 10 years
Ans: (a) 15% (b) 9%
Illustration: 2
On 1st January 2010, X Ltd. purchased a second-hand machine for Rs 52,000 and
spent Rs 2,000 as shipping and forwarding charges, Rs 5,000 as import duty, Rs
500 as carriage inwards, Rs 1,500 as repair charges, Rs 500 as installation charges,
Rs 400 as brokerage of the middleman and Rs 100 for an iron pad. It was estimated
that the machine will have a scrap value of Rs 2,000 at the end of its useful life
which is 20 years. On 30th Sept 2010 repairs & renewals amounted to Rs 2,000.
On 1st July 2012, this machine was sold for Rs 30,600.
Required: Prepare the machinery account for the first three years.
Illustration: 3
Kumaran Brothers purchased a Machinery on 1.1.2010 for Rs 5,00,000. On
1.1.2012 the machinery was sold for Rs 4,00,000. The firm charges depreciation at
the rate of 15% per annum on Straight Line Method. The books are closed on 31"
March every year. Prepare Machinery account and Depreciation account.
WRITTEN DOWN VALUE OR DIMINISHING OR REDUCING BALANCE

METHOD
Illustration: 4
On 1.1.2009 a machine was purchased for Rs 1,00,000. On 30.9.2011 anew
machine was purchased for Rs 20,000 installation expenses being Rs 5,000.
Show the Machinery Account up to 31st Dec. 2012 assuming that the rate of
depreciation was 10% on written down value method.
Illustration: 5
A company whose accounting year is the calendar year purchased on 1st April,
2009 machinery costing Rs 30,000. It further purchased machinery on 1st October
2009 costing Rs 20,000 and on 1st July 2010, costing Rs 10,000. On January 2011
one third of the machinery which was installed on 1st April 2009 became obsolete
and was sold for Rs 3,0000.
Show how the machinery account would appear in the books of company. The
depreciation to be charged at 10% written down value method.
Illustration: 6
On 1st April, 2009 Ram Traders, Bhopal purchased machinery for Rs 50,000. On
1st October, 2009, they purchased further machinery costing Rs 10,000. On Is'
October, 2011 they sold for Rs 24,000 the machine purchased on 1st April, 2009
and bought another machine for Rs 12,000 on the same date. Depreciation was
provided on machinery @ 10% p.a. under diminishing Balance Method. The
financial year closes on every 31st March, prepare Machinery A/c. and
Depreciation A/c. for the years of 2009-10, 10-11 and 11-12.
Change in the Method of Depreciation
Illustration: 7
Rohan Son's purchased a machine for Rs 2,00,000 on January 1,2009. The machine
was depreciated at 10% p.a. under the written down value method. On January 1,
2012 the firm decided to change the method of depreciation from Diminishing
Balance method to Fixed Installment method without changing the rate with
retrospective effect from Jan. 1, 2009. Prepare machine account from 2009 to
2012.
Illustration: 8
A Ltd. purchased on 1-1-2007 a second hand plant for Rs 2,50,000 and
immediately spent Rs 50.000 on overhauling and installing it. On 1-7-2007.
Additional machinery costing Rs 2,00000 was purchased. On 1-7-2009, the plant
bought on 1-1-2007 became obsolete and was sold for Rs 50,000 on the same day a
new plant was purchased it a cost of Rs 4,00,000.
Depreciation was provided annually on 31st December every year at 10% p.a. on
original cost. However from 2010 the company changed this method and adopted
written down value method changing depreciation at 15%.
Show the plant account as it would appear in the books of the company for the year
2007 to 2011.
THANK YOU!
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DR. A.P.J.

MBA Ist SEMESTER

Welcome to the World of Knowledge – MORE EDUCATION

I have the pleasure of presenting this study material to you. It

The Institute is very exhaustive and wholly concept based. Also,

I wish you a very happy study time.

MBA & BBA CLASSES

UNIT I Meaning and Scope of Accounting: Evolution and Users of Accounting,

UNIT II Mechanics of Accounting: Accounting Standards and IFRS:

UNIT III Presentation of Financial Statement: Preparation of final

UNIT IV Analysis of financial statement: Ratio Analysis- Solvency ratios,

UNIT V Financial Statement Analysis and Recent Types of Accounting:

UNIT NAME OF CHAPTER PAGE

1 Meaning and Scope of Accounting 1.1

2 Mechanics of Accounting 2.1

3 Presentation of Financial Statement 3.1

4 Analysis of financial statement 4.1

5 Financial Statement Analysis and Recent Types 5.1

UNIT – 1 INTRODUCTION TO ACCOUNTING

(iv) Summarizing: Summarizing is the art of presenting the classified data in a

OBJECTIVES / FUNCTIONS/ SCOPE OF ACCOUNTING

(iii) To ascertain the financial position of the business: For a businessman,

accounting information helps managers and executives in planning,

1.2 EVOLUTION OF ACCOUNTING IN EASY LANGUAGE

1. Early Beginnings: Accounting has been around for thousands of years. In

2. Double-Entry System: In the 15th century, a Franciscan friar named Luca

4. Computerization: In the 20th century, especially in the 1980s and 1990s,

5. International Standards: With the globalization of business, there was a need

6. Technological Advances: In recent years, accounting has been transformed by

1.2 USERS OF ACCOUNTING

7. Customers: Customers of a business may indirectly benefit from accounting

5. Matching Principle: The matching principle aims to match the expenses

meaningful time periods, such as months, quarters, or years. Financial

(1) Assets: Anything, which is in the possession or is the property of a business

The term sales include both cash and credit sales.

(i) Trade discount: When discount is allowed by a seller to its customers at a

Total Assets = Total Equities

Assets = Internal Equity + External

Assets = Capital + Liabilities

Steps involved in developing an Accounting

Step 1 → Ascertain the variables (i.e., Assets, Liabilities or Capital) of an equation

Accounting Equation to Record Capital Brought – in

Q1. (Preparation of accounting equation) From the following transactions,

Cash + Stock + Furniture = Liabilities + Capital

New equation 1,00,000 + 0 + 0 = 0 + 1,00,000

New equation 80,000 + 20,000 + 0 = 0 + 1,00,000

New equation 70,000 + 20,000 + 10,000 = 0 + 1,00,000

New equation 81,000 + 11,000 + 10,000 = 0 + 1,02,000

New equation 81,600 + 10,000 + 10,000 = 0 + 1,01,600

Q2. (Preparation of accounting equation) From the following transactions,

Cash + Stock Commission received + Capital

New equation 50,000 + 0 = 0 + 50,000

New equation 40,000 + 10,000 = 0 + 50,000

New equation 45,000 + 10,000 = 5,000 + 50,000

New equation 55,000 + 2,000 = 5,000 + 52,000

New equation 80,000 + 2,000 = 5,000 + 77,000

Q3. (Preparation of accounting equation) From the following transactions,

Cash + Stock + Machinery = Creditors + Capital

New equation 2,00,000 + 0 + 0 = 0 + 2,00,000