AMITY UNIVERSITY HARYANA

AMITY BUSINESS SCHOOL

MBA-MODULE 2-ACCOUNTING FOR MANAGEMENT
1.COST OF GOODS SOLD AND INVENTORY
Merchandise inventory or simply inventory is the quantity of goods on hand and
available for sale at any given time.
The merchandise inventory on hand at the beginning of the accounting period is
called beginning inventory or opening inventory
The merchandise inventory on hand at the end of the accounting period is called
the ending inventory or closing inventory.
The ending inventory appears on the balance sheet as an asset. It will become
part of cost of goods sold in later period when it is sold.
This year’s beginning inventory was last year’s ending inventory.
Cost of goods available for sale is the sum of beginning inventory and net cost
of purchases.
Cost of goods sold is the cost to the seller of goods sold to customers. Cost of
goods sold is the largest item of expense for merchandise companies.
It is determined by computing the cost of (i) the beginning inventory, (ii) the net
purchases and, (iii) the ending inventory.

Inventories
Inventories include:
Raw materials inventory-consists of goods that are to be introduced into the
production process
Work-in-progress inventory
Finished goods inventory including stores and spares

Key relationships in the profit and loss account of a merchandising concern are
summarized as follows:
Net sales =gross sales – sales returns and allowances
Net purchases =gross purchases -purchase returns and
allowances-purchase discounts
Net cost of purchases =net purchase plus freight in
Cost of goods sold =beginning inventory +net cost of purchases -
ending inventory
Gross profit =net sales- cost of goods sold
Operating expenses =selling expenses + administrative expenses
Operating profit =gross profit- operating expenses i.e profit before
interest and taxes
Profit before tax =profit before interest and tax-interest expense
Net profit =profit before tax – income tax
Q.No.1:Calculate the cost of goods sold for M/s Vijay Electronics Limited
from the following data.
1. The merchandise inventory on January 1, 2020 was Rs 47,300
2. On December 31, 2020, the merchandise inventory was Rs 89,000
3. Purchases Rs 3,26,900
4. Purchase returns and allowances Rs 13,200
5. Purchase discounts Rs 1,400
6.Freight in Rs 28,100

Solution:
Vijay Electronics Limited: Profit & Loss Account(for the year ended
31st, Dec 2020
Cost of goods sold:
Merchandise inventory: Jan1, 2020 47,300
Purchases 3,26,900
Less: purchase returns and
allowances 13,200 14,600
Purchase discounts 1,400

--------
Net purchases 3,12,300
Freight In 28,100
--------- 3,40,400
 Net purchases cost 3,40,400
3,87,700
Cost of goods available for sale 89,000
Less: merchandise inventory Dec
31,2020
Cost of goods sold 2,98,700

Q.No.2 PREPARATION OF PROFIT AND LOSS ACCOUNT FOR A

MERCHANDISE BUSINESS
The following is a partial list of account balances of Raju Stationers for
the year ended March, 31, 2008.
sales 4,73,000
Sales returns and allowances 48,400
Sales discounts 4,300
Purchases 3,81,900
Purchases returns and allowances 15,600
Purchase discounts 1,100
Office salaries 6,300
Sales salaries 9,800
Stores rent 16,000
Freight in 9,300
Delivery expense 1,800
Advertisement expense 3,200

The beginning and ending merchandise inventory were Rs 23,100 and Rs

46,900 respectively.

Solution:
Profit and Loss Account for the year ended 31st March, 2008
particulars Rs Rs
Revenues from sales:
 Gross sales 4,73,000
Less: Sales returns and 48,400
allowances
Net sales 4,24,600
Cost of goods sold:
Beginning inventory 23,100
3,81,900
Purchases
Less: purchase returns and
allowances 15,600
16,700
Purchase discounts 1,100
3,65,200
3,74,500
Net purchases 9,300
------------
Freight in -----------
3,74,500
Net cost of purchases 3,97,600 3,50,700
46,900
Cost of goods available for sale 3,50,700
Less: ending inventory
Cost of goods sold
Gross Profit 73,900
Operating Expenses:
Office salaries 6,300
Sales salaries 9,800
Stores rent 16,000
Delivery expense 1,800
Advertisement expense 3,200
4,300 41,400
Sales discount
Total Operating expenses 41,400
Net profit 32,500

KEY FEATURES OF A CORPORATE FORM OF ORGANISATION

a) Separate legal existence: It is a separate legal entity distinct from its
members. It has most of the rights and obligations of an individual, it can
buy, sell or own assets, borrow money, and employ people, liable to pay
taxes, have contractual relationships.
b) Limited liability: Since it is a legal entity it is obliged to pay its debts
from its assets. The liabilities of members is limited to the amount they
have agreed to invest in the company less any amount already invested by
them.
c) Free transferability of ownership rights: The ownership rights of a
company, called shares can be freely transferred by one individual to
another. Transfer of shares do not affect the company’s business
operations.
d) Perpetual existence: A company continued to exist until it is dissolved by
a legal process. The death or incapacity of any of its members does not
affect the continued existence of the company.
e) Common seal: The actions of a company are authenticated by affixing its
common seal to a document.
f) Professional management: The shareholders of a company elect a board
of directors. The board appoints a chief executive and other individuals
to manage the business. The members do not take part in the day to day
activities of the company. The separation of ownership from management
enables the company to entrust the business to individuals who have the
necessary qualifications and experience.
g) Government regulations: A company may be a public company or a
private company. A public company is one in which shares may be held
by anyone. At least 7 members are required to incorporate a public
company whereas a private company requires two members.
Capital Stock: The capital stock of a company is divided into a number of
units called shares of stock or simply shares. Each share has a distinctive
number. The ownership of shares in a company is evidenced by a share
certificate that indicates the kind and number of shares as well as their
distinctive serial numbers. The share certificate is signed by the company
secretary and bears the seal. Many companies started keeping their shares in
electronic form to avoid handling of much of the paperwork associated with
the transfer of shares. These are known as demat shares.
Equity capital represents the residual equity in the company, since equity
shareholders can be paid only after all other claims have been paid.
Components of capital stock:
Authorised capital: The memorandum of association specifies the
maximum number of shares of stock that may be issued by a company and
the par value of each share. This number is called authorized capital.
Issued, subscribed and paid up capital::
Issued capital is the number of shares issued by a company
Subscribed capital is the number of shares taken up by the public
 Paid up capital is the amount of share capital that has been received by a
company

2.SHAREHOLDERS’ EQUITY
Shareholders’ equity represents the interests of the shareholders of a company
and equals the excess of the company’s assets over its liabilities.
Shareholders equity consists of three major components: share capital, retained
earnings and reserves.
Share capital represents the initial as well as later issues of capital by a
company,
Retained earnings are the accumulated profits that have not been distributed to
the shareholders but kept in the business.
Share capital section contains information about the kinds of shares, their par
value, and number of shares authorized and issued.
Shareholders’ Equity=Total Assets − Total Liabilities
Balance Sheet proforma
Liabilities Rs Assets Rs
Shareholders’ xxx Fixed Assets xxx
equity
Long-term debt xxx Investments xxx
Current xxx CA xxx
liabilities
xxx xxx

Shareholders’ equity FA
Long-term debt CA
Current liabilities
------------------ ----------------
Total Liabilities Total Assets
TA=TL
SE= TA-(long-term debt+ current liabilities)
FA=TA-CA
FA=TL-CA
CL=TA-(SE+LD)
Ex:
Shareholders’s equity
Share capital
10% preference shares, Rs 100 par value, 5000 Rs 5,00,000
shares
Equity shares, Rs 10 par value, 5,00,000 shares Rs 30,00,000
---------------
authorised and 3,00,000 shares issued and fully
paid up 35,00,000
-------------------------
Reserves and Surplus
Capital redemption reserve 4,00,000
Share premium 9,00,000
General reserve 10,00,000
Profit and loss appropriate account 17,00,000
40,00,000
------------
Total shareholders’ equity 75,00,000

3.HUMAN RESOURCE ACCOUNTING

Human resource accounting means accounting for people as the organizational
resources. It is the measurement of the cost and value of people to
organizations. It involves measuring costs incurred by a private firm and public
sectors to recruit, select, hire, train and develop employees and judge their
economic value to the organization.
Important aspects of HRA:
a) valuation of human resource
b) recording the valuation in the books of accounts
c) disclosure of the information in the financial statements of the business
Valuation of Human Resources:
1. Historical cost approach: This was first developed by William C Pyle
and assisted by R Lee Brummet and Eric G Flamholtz) and R G Bary
Corporation, a leisure foot ware manufacturer based in Columbia,
Ohio(USA) in 1967.
In this approach, actual cost incurred on recruiting, hiring, training and
developing the human resources of the organizations are capitalized and
amortized over the expected useful life of the human resources.
The amount spent by resources is maintained and a proportion of it is
written off to the income of the next few years during which human
resources will provide service. If the human resources are liquidated
prematurely, the whole of the amount not written off is charged to the
income of the year in which such liquidation take place. If the useful life
is recognized is to be longer than originally expected, revisions are
effected in the amortization schedule.
2. Replacement Cost Approach:
This was first suggested by Rensis Likert, developed by Eric G Flamhltz
on the basis of concept of replacement cost.
Human resources of an organisations are to be valued on the assumption
that new similar organization has to he created from scratch and what
would be the cost to the firm of the existing resources are required to be
replaced with other persons of equivalent talents and experience.
It takes into considerations all costs involved in recruiting, hiring,
training, and developing the replacement to the present level of
proficiency and familiarity with the organization.
3) Economic Value Method:
The payment made to the human resources till their retirement are calculated
and appropriately discounted to get their present economic value.

(4) Standard Cost Method:

This method is in improvement over replacement cost method. Under this
method the standard costs of recruitment, training and development are
developed and established every year to overcome complications in
calculations. There costs represent the value of human resources for accounting.
It is easy for implementation and control.
5.Total Cost Concept:
 Prof. Dasgupta N has suggested this approach. The other
approaches take into account only those persons who are
employed and ignore those who are unemployed. According to
him both employed and unemployed persons should be brought in
its purview for determination of the value of human resources of
the nation.
 Thus the preparation of the balance sheet of the nation, the system
should be such so that it fits and shows the human resources not
only a firm but also of the whole nation.
 According to him, the total cost incurred by an individual, the state
and organization to bring that individual upto the present position
should be taken as the value of a person on the day when he starts
serving the organization or become fit for appropriate
employment.
 It will include not only all expenses incurred by the individual for
his education and training but also by the organization on
recruitment, training, familiarizing and development human
beings employed in the organisation.
 The valuation can be done groupwise, if the number of employees
is large. The value thus, determined should be further adjusted at
the end of each year by organization on the basis of his age,
seniority, status, performance, experience, leadership, managerial
capabilities etc.
Ex: A firm has started hits business with a capital of Rs 5,00,000. It has
purchased fixed assets worth Rs 2,50,000 in cash. It has kept Rs 1,30,000 as
working capital and incurred Rs 1,20,000 on recruitment, training and
developing the engineers and a few workers. The value of engineers and
workers is assessed as Rs 4,00,000.
Show these items in the balance sheet.
Liabilities Rs Assets Rs
Capital 5,00,000 Fixed assets 2,50,000
Human assets 4,00,000 Human assets:
(i) Individual 4,00,000
value
(ii) Value of 1,20,000
firm’s
investment
 (iii) Current 1,30,000
assets(less
current
liabilities)
9,00,000 9,00,000

RECORDING AND DISCLOSURE IN FINANCIAL STATEMENTS

In India Human Resource Accounting has not been included so far as a system.
Indian Companies Act, 1956, does not provide any scope for furnishing any
significant information about resources in financial statements. Beyond it, there
is no rigid instruction on behalf of the companies act, 1956 to attach information
about the value of human resources and the results of their performance during
the accounting year in notes and schedules.
In India, a growing trend towards the measurement and reporting of human
assets, particularly in the public sector, is noticeable during the past few years.
The companies are:
BHEL(Bharat Heavy Electrical limited) is the first Indian company to publish
human resources accounts from 1974-75
SAIL(Steel Authority of India Limited)
SPIC(Southern petrochemical Industries Corporation Ltd)
In private sector:
Infosys
DSQ Software
Reliance Industries Ltd
ACC etc.