Financial Accounting Study Material

FINANCIAL ACCOUNTING
(Compiled by Prof. Prasad Bhat)
Compiled by Prof. Prasad Bhat Page 1

1. BUSINESS CONCEPTS
1. INTRODUCTION
 Every person carries out some kind of commercial / money activity. An employee gets
salary, bonus and he spend money to buy grocery, food, clothing, school fees etc.
 A trader purchases and sells goods to earn profits. A doctor treats his patients and earns
money, a lawyer advises his clients, a chartered accountant provides taxation guidance,
event manager plans grand parties etc.
 All such economic / monetary activities should be properly recorded to know whether
there is profit or loss, amount of savings, cash inflows and outflows etc.
2. BUSINESS TRANSACTIONS
 Business can be defined as any commercial / monetary activity carried on for the
purpose of earning profits.
 Following are the features of a business –
 commercial / economic activity,
 involving goods and / or services,
 having money value, and
 with profit motive
 Further, such business activities are performed through ‘transactions.’
 Transaction includes an exchange of goods and/or services having monetary value.
Transaction involves the following –
 purchase / sale of goods and services and money is paid / received immediately,
 purchase / sale of goods and services and money will be paid / received in the future,
 exchange of goods and services against goods and services (i.e., barter),
 providing money / funds as loans or advance,
 transfer of goods or services as a gift or donation etc.
Every business undertakes number of transactions. It depends upon the size of a business
entity. Each day numerous business transactions are carried out, in hundreds / thousands.
Whether a businessman can remember all transactions – not at all. Hence, all such business
transactions should be recorded in systematic manner. Recording of business transactions
in a systematic manner in the books of account is known as bookkeeping and accounting.

3. FORMS OF BUSINESS ORGANIZATIONS
 A business organisation is an establishment intended to carry commercial business by

producing goods or services and meet the customers’ needs.
 A business organization is a formal body / association created for carrying out business
activities. It is structured and operated in an authorized form of ownership.
 The focus of business organizations is the systematic management of men, material, and
machines for the purpose of earning huge profits.
 A business organization may consist of a single individual (sole proprietor), partnership
firm (two or more individuals), or a company form of organization.
 The different forms of business organizations are based on the size of the business,
funds involved and decision-making criteria. Success of every business is based on the
quality of decisions. Such decisions affect the ultimate objective – profits!
The various forms of business organizations are given below –
A) Sole Proprietor
 A business which is totally owned by an individual is known as sole proprietorship or
a sole trading concern. This is the most popular form of business organization. It is
the easiest mode of doing business. A single individual is the owner of business.
 Formation of sole proprietorship is simple. It does not require statutory registrations.
 The proprietor puts his own money in the business and controls entire operations of
a business and is liable for all financial burdens and debts.
 Sole proprietorship concerns include shops / retail business, home-based businesses,
individual consulting firms, commission agents, etc.
 No Separate Legal Entity: in case of sole proprietorship, there is no separate legal
entity. In the eyes of law, the owner and business are one and the same. If the owner
dies or becomes insolvent, the business dies.
 Unlimited Liability: the sole proprietor is the only person liable for the business. If the
financial obligations (liabilities) of the business cannot be paid out of its properties, a
sole owner shall use his personal property to repay the obligations of the business.
 Profits Sharing: there is no sharing of profits or losses, since the entire gain or loss
belongs to the sole proprietor.
 No Legal Formalities: to start sole proprietary business, no separate registration is
needed. However, very few legal formalities are needed, such as basic licenses.

B) Partnership Firm
 In a partnership firm, two or more individuals come together to start a business.
 Each individual partner gives his share of money, property, or experience and expects
some profits from the business. The partners are the joint owners of the business.
 Basically, partnership is defined as an agreement between persons who have agreed
to share profits of a business, carried on by all, or any of them acting for all.
 As per the Partnership Act, 1932, there should be minimum 2 partners and maximum
50 partners in a firm. All the partners share profits / losses in their pre-decided ratio.
 Partnership Agreement: a partnership firm is created on the basis of an agreement
between all the partners. The agreement (partnership deed) contains details of capital
contribution, rights and duties, profit sharing ratio etc.
 No Separate Legal Entity: a partnership firm is not a separate legal entity. In the eyes
of law, the partners and the business are one and the same. If all the partners die or
becomes insolvent, the business dies.
 Unlimited Liability: all partners are jointly and severally liable for the business debts.
If financial obligations (liabilities) of the business cannot be paid out of its properties,
all partners shall use their personal property to repay the obligations of the business.
 Profits Sharing: all the profits or losses of the business are shared by the partners in
their pre-decided ratio. If no ratio is fixed, the profits or losses are equally shared.
 Mutual Agency: every partner acts as the principal as well as agent of the firm. This is
known as doctrine of mutual agency. Partnership is based on good faith and trust.
Every partner must act in the best interests of the firm.
C) Joint Stock Company

 Post Industrial Revolution, trade, commerce and manufacture became highly complex
due to large scale of operations, huge funds requirements, manpower needs, rising
taxation etc. This gave rise to the concept of ‘Joint Stock Company’.
 A Joint Stock Company (i.e., a company) is a voluntary association, where capital is
contributed by a large number of people.
 A company is a body corporate and a legal entity having separate status and an
identity apart from its members.
 A company is created only through registration (incorporation) process carried out
under the Companies Act, 2013. A company can be described as an artificial person
created by law, having a common seal and perpetual succession.

 Today, a company is a professional and respected form of business organization. On
the basis of membership, it is classified under following categories –
o Public Limited Company – minimum 7 members and maximum unlimited,
o Private Limited Company – minimum 2 members and maximum 200 members,
o One Person Company (OPC) – only one individual member.
 Separate Legal Entity: due to registration, a company becomes an artificial person

having a separate personality which is distinct from the members constituting it.
Thus, a company is a separate legal entity having its own corporate name. Properties
and obligations are recorded in the name of company and not its members.
 Limited Liability: a company is separate legal entity and hence liability of its members
is limited to the amount unpaid on the shares held by them. If shares fully paid-up,
members’ liability is zero.
 Perpetual Succession: a company is a separate entity and it does not depend upon its
members. A company is created by law and it can be terminated only by law. A
company has perpetual life and continues forever, even it all members die or change.
 Transferability of Shares: the capital of a company is divided into parts called shares.
The shares are movable property and transferable from one person to another.
D) Limited Liability Partnership (LLP)

 Limited Liability Partnership (LLP) is a hybrid form of organization having features of
a partnership as well as a company
 In an LLP, there is benefits of limited liability (like a company) but allows its members
the flexibility of organizing their internal structure (like a partnership).
 Due to flexibility in its formation and operation, LLP is a suitable form of organization
for small enterprises.
 LLP is a body corporate, artificial legal person, having a legal entity separate from its
partners. It has perpetual succession and any change, death, insanity, retirement of
partners does not affect the existence of the LLP.
 LLP is a separate legal entity, liable to the full extent of its assets, with limited liability
of the partners. The liability is limited to their agreed contribution in the LLP.
 Every partner of a LLP is an agent of the LLP, but not of other partners. The liability of
the partners will be limited to their agreed contribution in the LLP.
 Every LLP is formed for carrying on a lawful business with a view to earn profit.

2. ACCOUNTING BASICS
1. INTRODUCTION
 Accounting is as old as money itself. People in all civilizations have maintained various
types of records of business activities. In India, accounting was practiced since centuries.
Kautilya’s book ‘Arthshastra’ clearly mentions existence of accounting and audit.
 Whether it is sole proprietor, partnership firm, company or even Government, everybody
keeps records of transactions to have adequate information about the economic activity.
 Accounting deals with measurement of monetary activities involving inflow and outflow
of funds, which helps in managerial decision-making process.
 Accounting is the language of business. It helps a business in finding out profits / losses
for a period as well as its financial position on a particular date.
 Accounting has its own established principles which are guided by certain concepts and
conventions.
2. MEANING OF ACCOUNTING
 As per the American Institute of Certified Public Accountants (AICPA), ‘ Accounting is the
art of recording, classifying, and summarising 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 result thereof.’
 Traditionally speaking, accounting is a process of systematically recording, classifying
and summarizing business financial transactions (also known as book-keeping).
 However, modern day functions of accounting include analysing and interpreting the
financial results of a business. Further, the present scenario consists of globalization of
business, multinational companies, separation of ownership & management. The scope
of accounting has increased to include communication of results to various stakeholders.
 We can say that the function of accounting is to provide quantitative information,
financial nature, about the economic entities, that is useful in economic decisions.
 Thus, accounting may be defined as the process of recording, classifying, summarising,
analysing and interpreting the financial transactions and communicating the results
thereof to the persons interested in such information.
 The entire process can be divided into two parts, viz. bookkeeping and accounting.

3. BOOK-KEEPING vs. ACCOUNTING
 In a business, each day there are hundreds/ thousands of business financial transactions.
Practically, it is not possible to remember all these transactions. Hence, it is necessary to
record these business transactions in detail and in a systematic manner.
 Recording of all business transactions in a proper manner in the various books of
account is called book-keeping. Book-keeping is the branch of knowledge which tells us
how to keep records of business transactions. It includes systematic record of various
business transactions.
 Book-keeping is the art of recording all money transactions, so that the financial position
of a business and its relationship to its owners and outside world can be ascertained.
 The main objective of business is to earn profits. In order to find the profit earned during
a period, simply recording of business transactions is not enough. Accounting involves
not only book keeping but also many other activities.
 Accounting is a system of recording business financial transactions that provide vital
information about business enterprises to facilitate decision making. Accounting is a
wider term than book-keeping.
 Differentiation between Book-Keeping and Accounting:
Sr. Book-Keeping Accounting

1 Book-keeping involves only Accounting includes recording
recording transactions transactions as well as its
analysis and interpretation
2 Maintenance of proper records Facilitate managerial decision
in systematic manner making through analysis
3 Repetitive, routine, clerical Analytical, thought process
4 Book-keeper’s knowledge level Accounting requires expert
is basic to moderate knowledge level
5 Book-keeping is a sub-set of Accounting includes book-
accounting; it complements keeping as well as process of
the accounting process. designing accounting system
6 Initial / first stage of recording Later stage of recording

4. OBJECTIVE / NEED / PURPOSE OF ACCOUNTING
1) Systematic Recording of Transactions – Basic objective of accounting is the systematic

recording the financial aspects of business transactions. These recorded transactions are
later classified and summarized logically for the preparation of financial statements and
for their analysis and interpretation.
2) Ascertainment of Financial Performance – Preparation of Profit & Loss (P&L) Statement

to know the financial results (profit or loss) of business operations for a particular period.
If Sales Revenue > Expenses = Profit
If Sales Revenue < Expenses = Loss
The P&L statement helps stakeholders to know the financial performance of the business
3) Ascertainment of Financial Position – Preparation of Balance Sheet to know the financial

position of a business as on a particular date. Balance Sheet is a statement of assets and
liabilities of a business at a particular point of time and helps in ascertaining the financial
health of the business Balance sheet shows the assets / property of a business as well as
the financial obligations (liabilities) of the business.
4) Rational Decision-making – Accounting communicates financial results of a business to

various stakeholders. Accounting helps stakeholders in taking rational decisions.
5) Planning & Forecasting – Accounting helps in planning and forecasting future events and
desired financial performance and financial position. Analysis of past data, identifying
trends and proper interpretation helps in better planning.
6) Taxation – Accounting records provides accurate information for computation of various

taxes and duties.
7) Cost Control & Reduction – Accounting helps to identify areas of expenses / cost control
and reduction. Such cost reduction helps in enhancing future profits.
8) Legal Compliance – Maintenance of proper accounting records and reports is needed as

per Companies Act, 2013. Hence, accounting serves to comply statutory requirements.
9) Communication of Financial Results – Various stakeholders have diverse interests in a

business concern. Hence, communication of true and fair financial results is vital for
good corporate governance practices.
10) Evidence – Accounts are admissible as documentary evidence in the Court of Law.
Hence, proper accounts can be used in case of suits relating to disputes, frauds etc.

5. FEATURES / NATURE OF ACCOUNTING
 Monetary Transactions – Accounting is concerned with recording business transactions

having monetary value. Transactions should be capable of expressing in money terms.
 Historical Nature – Accounting process starts only after a transaction or event has
occurred (i.e., in the past). Future events are not recorded in accounting process.
 Systematic Records – The business transactions are properly recorded, classified and
summarized into two financial statements – Profit & Loss Statement and Balance Sheet.
 Communicating Results – Since accounting is a language of business, financial
information shall be communicated to the interested parties (stakeholders).
 Legal Requirement – Accounting is a legal requirement. For a company, it is mandatory
to have proper accounting records of all monetary transactions of its business. As per
section 128 of the Companies Act, 2013, every company shall maintain proper books of
accounts and financial statements for every financial year, to show true and fair nature of
its financial performance and financial position.
6. PROCESS OF ACCOUNTING
a) Transaction – the first step of accounting is financial transaction where there is exchange
of benefits, goods, services, transfer of funds, borrowings, etc. Cash transaction refers to
a business deal where immediate payment is made or received. Credit Transaction is a
business deal where payment or receipt of money is postponed to a future date.
b) Document – every business transaction shall be supported by valid documents. Such

documents include bill, invoice, receipt, challan, delivery slip, note, voucher etc. Every
monetary business transaction is recorded on the basis of such documentary evidence.
c) Recording – this is the basic function of accounting. All business monetary transactions
are recorded in the books of account. Recording is done in a book called ‘Journal.’ A
Journal may further be divided into several subsidiary books according to the nature and
size of the business.
d) Classifying – classification is based on the systematic analysis of the recorded data, with
to group similar transactions at one place. This makes information compact and usable.
Such classification is done in a ‘Ledger’ book. In a ledger, all financial transactions of
similar nature are collected. E.g., transactions related to salary payments, rent received,
sales, purchases etc.

e) Summarising – at the end of accounting period (financial year) all the classified data is
summarized and reports are prepared. All the account balances are summarized and
listed in a report known as ‘Trial Balance’. Summarization deals with preparation and
presentation of records in a useful manner. This process leads to preparation of the
financial statements.
f) Finalization – at the end of accounting period (financial year), a summary of transactions

and account balances is prepared in the form of Trial Balance. On the basis of such Trial
Balance, the Financial Statements are prepared viz. Profit & Loss Statement and Balance
Sheet. In case of certain companies, Cash Flow Statement is also prepared.
g) Analysing – once financial statements (P&L Statement & Balance Sheet) are prepared,
the next step is analysis. Analysis means methodical study and understanding of given
financial statements. Financial Statements are simplified for better understanding.
h) Interpreting – once financial statements are studied & analysed, interpretation is needed.
Interpretation deals with explaining the meaning and significance of various financial
relationships. Proper analysis and interpretation will help end-users to make meaningful
judgement about the financial condition and profitability of the business operations.
i) Communicating – the entire process of accounting ends with proper communication

with the concerned parties. Financial statements should be transmitted to the end-users
for decision-making. Various accounting reports are prepared and distributed.
3. Recording
1. Transaction 2. Document
(Journal)
6. Financial
4. Classifying 5. Summarizing Statements
(Ledger) (Trial Balance)
(P&L / Bal. Sheet)
9.
7. Analysis 8. Interpretation
Communication

7. STAKEHOLDERS / USERS OF ACCOUNTING INFORMATION
 Stakeholders are those persons who are interested in a business or those parties who
are affected by a business (users of financial information).
 Stakeholders use the financial information of a business for decision-making purposes
 Accounting includes meaningful analysis and interpretation of financial statements for
the parties who require such financial information.
 It is a user-oriented approach. Various parties are interested in the financial information
and operating results of an enterprise.
 Stakeholders are classified into two categories, viz. internal users (Sr. 1-4) and external
users (Sr. 5-12). Following are various users of accounting information and their interest:
Sr. Stakeholders Need for Accounting Information

1 Existing Shareholders Money invested in company, need to
assess current and future profitability
2 Prospective Investors Plans to invest money in a company,
need to study financial position
3 Promoters / Board of Directors / Assess operational efficiencies and
Top Management profitability, for decision-making
4 Employees Assess job security, regular salaries and
increments, incentives
5 Bankers / Financial Institutions / Assess long-term solvency, ability to
Debenture-Holders repay loans along with interest
6 Suppliers of Goods & Services Assess short-term liquidity position,
(Creditors) continuity of business relationship
7 Buyers / Customers (B2B) Ensure regular supply of goods and
services, continuous availability
8 Government Payment of taxes and duties
9 Research Analysts To assess and advice investment
opportunities
10 Competitors Assess market share, profitability, threat
to survival
11 Society Corporate Social Responsibility (CSR)
12 Auditors Audit of financial statements

8. BRANCHES / SUB-FIELDS OF ACCOUNTING
A) Financial Accounting
 Financial Accounting covers the preparation and interpretation of financial statements
and communication to the users of accounts.
 It is historical in nature as it records transactions which had already been occurred.
 The last step of financial accounting is the preparation of Profit & Loss Statement and
Balance Sheet.
 Purpose of financial accounting is determination of financial performance for an
accounting period and financial position as on the given date.
B) Management Accounting
 Management Accounting is concerned with internal reporting to the top management
of a business unit.
 Top management requires accurate and timely information for planning, control and
decision- making.
 Management accounting includes different ways of grouping information, preparing
reports and disseminating vital facts as desired by managers.
C) Cost Accounting
 Cost Accounting deals with process of finding the cost, recording the cost, preparing
reports for managerial decisions.
 Information about various costs helps in cost control in the short-term and cost
reduction in the long-term
D) Social Responsibility Accounting

 Social Responsibility Accounting involves creating social awareness about the
undesirable by-products of economic activities.
 It is concerned with accounting for social costs incurred by the enterprise and social
benefits created.
E) Human Resource Accounting –

 Human Resource Accounting attempts to identify, quantify and report investments
made in human resources of an organisation
 It emphasizes on importance of human resources in company’s profit earning process

9. MERITS & DEMERITS OF ACCOUNTING
Sr. Merits / Advantages Demerits / Limitations

1 Systematic record of business Non-monetary transactions are
transactions (substitute to memory) not recorded
2 Knowledge of financial performance Only historical (original) cost is
of business for a period recorded. Current values ignored
3 Knowledge of financial position of Possibility of manipulation via
business as on particular date gimmicks / window-dressing
4 Comparison with other businesses Use of estimates / assumptions
as well as own performance reduces accuracy
5 Accurate computation of taxes and Accounting does not consider
duties payable to Government factors such as inflation
6 Admissible as evidence in Courts Subjective interpretations
7 Facilitates valuation of a business in Accounting principles may be
case of strategic decisions. conflicting with each other
8 Helps in managerial decision Possibility of mistakes in records
making, planning, forecasting. due to human error

3. ACCOUNTING TERMINOLOGY
1. FINANCIAL STATEMENTS
Financial Statements
Profit & Loss

Balance Sheet
Statement
Income Expenses Assets Liabilities Capital
2. TERMINOLOGY
1) Balance Sheet
 Balance Sheet is a statement showing assets, liabilities and capital of a business as
on a particular date.
 Balance Sheet depicts the financial position of a business as on a particular date.
 In India, financial year / accounting year starts on 1st April and ends on 31st March.
 Hence, generally, Balance Sheet is prepared as on 31st March, i.e., year-end.
 However, for companies which are listed on Stock Exchange, financial statements are
prepared and communicated every quarter-end (30 June, 30 Sept, 31 Dec, 31 March).
2) Assets
 assets denote property / ownership of a business
 used for business purposes
 have monetary value
 helps in generating sales revenue / profits
Assets
Based on Tangibility Based on Time Period
Tangible Assets Intangible Assets Non-Current Assets Current Assets

3) Tangible Assets are those assets which can be seen or physically touched. For example:
building, land, furniture, vehicles etc.
4) Intangible Assets are those assets which cannot be seen or physically touched, but they
are owned by a business and useful for generating revenue and profits. For example:
goodwill, patent, trademarks, copyrights and other Intellectual Property Rights (IPR) etc.
5) Non-Current Assets
 assets held for long-term purposes
 useful life of more than 12 months (i.e., greater than 1 year)
 not held for resale purpose in ordinary course of business
 non-current assets can be classified into fixed assets and long-term investments
 for example: machinery, equipment, goodwill, vehicles, patents, etc.
6) Fixed Assets
 used for long-term purposes (more than 12 months)
 held for carrying out the main operations of a business
 not held for resale purpose in ordinary course of business
 can be classified into tangible assets and intangible assets
7) Goodwill
 value of image, reputation, brand value of a business
 goodwill helps in customer acquisition and retention
 it facilitates premium pricing and adds to higher revenues and profit
 KFC, Nike, BMW, Starbucks etc.
8) Patent
 exclusive legal right to use certain invention, technology, manufacturing process etc.
 patent holder gets ultimate power to use his invention and nobody else can use it
 patent creates domination in the specific product market, thereby higher profits
 especially prominent in pharmaceutical and technology industry
9) Trademark
 exclusive legal right to use certain logo, pictures, design etc.
 customer identifies the logo with the quality / value of the product or service
 trademarks help in premium pricing and adds to higher revenues and profit

10) Copyright
 exclusive legal right to use creative work – literature, programs, music, films etc.
 nobody else can reproduce / imitate / copy the books, songs, music, etc.
 the copyright holder can sell or assign his creation and earn profits.
11) Royalty
 a holder of IPR (patent, trademark, copyrights etc.) may transfer his rights
 where such owner of IPR transfers his exclusive rights, he earns money for the same
 royalty is a contractual amount (money) received by the owner of IPR
 royalty is paid by a person for using the assets belonging to another person.
12) Investment
 investment is a cash outflow for buying monetary assets
 investment denotes such assets which are held not for business purposes
 purpose of investment is to earn interest, profit, dividend or other benefits.
 held for earning passive income / other income
 for example: long term investments in Bank FD, mutual funds, deposits etc.
13) Current Assets

 assets held for short-term purposes, held for day-to-day business operations
 supposed to be converted into money / cash upto 12 months (i.e., upto 1 year)
 example: cash, bank balance, inventory, debtors, bills receivables, prepaid expenses,
accrued income, short-term investments, short-term loans given etc.
14) Inventory / Stock

 material held for sale in ordinary course of business
 material used in business operations for manufacturing / trading activities
 includes raw material, work-in-progress, finished goods, spares etc.
 inventory or stock is a constituent of current assets
15) Debtors
 customers to whom goods / services are sold on credit
 customers from whom money is receivable by the business
 debtors are a constituent of current assets

16) Bills Receivables (B/R)
 bills receivables are similar concept to debtors, and it is a part of current assets
 persons / customers from whom money is receivable by the business
 a separate document known as ‘bill of exchange’ is created for higher safety of funds
17) Prepaid Expenses

 these are expenses which are paid in advance
 benefit of such expense will be received in future (next accounting year)
 prepaid expense is a constituent of current assets
18) Accrued Income

 these are incomes which are earned but not received yet
 for example: interest on Bank Fixed Deposit is receivable at end of financial year, but
received in the next year.
 accrued income is a constituent of current assets
19) Liability
 liability denote a financial obligation of a business
 amount payable (owed) to outsiders (money value)
 liability also known as ‘debt’ of a business owed to third parties
 classified into non-current liability and current liability
Liabilities
Based on Time Period
Non-Current Liabilities Current Liabilities
20) Non-Current Liability

 long-term liability
 payable after 12 months (i.e., later than 1 year)
 for example: Bank Loan, Borrowings from Financial Institution, Corporate Debentures,
Deposits Accepted from public / members, trade payable (beyond 1 year) etc.

21) Debentures
 debentures are a type of long-term borrowing from general public and other lenders,
 generally, debentures are secured by a collateral
 maximum tenure (maturity) of secured debentures is 10 years
 company pays annual interest and repayment (redemption) of funds are maturity
22) Deposits
 deposits are a type of medium-term borrowing from general public / members,
 generally, deposits are secured by a collateral
 maximum tenure (maturity) of deposits is 36 months
 company pays annual interest and repayment of funds are maturity
23) Current Liabilities

 liabilities which are payable within a short period of time,
 supposed to be paid upto 12 months (i.e., upto 1 year)
 for example: creditors, bills payable, outstanding (unpaid) expenses, bank overdraft,
short-term loans taken, provision for tax, proposed dividend etc.
24) Creditors
 suppliers from whom goods / services are purchased on credit
 suppliers to whom money is payable by the business
 creditors are a constituent of current liabilities
25) Bills Payable (B/P)

 bills payable are similar to creditors
 persons / suppliers to whom money is payable by the business
 a separate document known as ‘bill of exchange’ is created for commitment to pay
 bills payable (B/P) is a constituent of current liabilities
26) Outstanding (Unpaid) Expenses

 these are expenses which are incurred during the financial year, but not paid yet
 for example: unpaid salary, unpaid rent, unpaid electricity bill etc.
 outstanding expenses are a constituent of current liabilities

27) Bank Overdraft (BOD)
 short-term borrowing from a bank
 a businessman is allowed to withdraw additional funds over and above bank balance
 such additional funds are in the form of loan, which is repayable with interest
 bank overdraft is a constituent of current liabilities
28) Provisions
 expenses which are payable by a business, but the actual amount is not certain
 provision is a type of liability created for approximate amount
 example: provision for income tax, provision for employee compensation etc.
29) Proposed Dividend

 dividend means profits which are distributed by a company to its members
 once a company declares dividend, it becomes a commitment to pay within 30 days
 proposed dividend is a constituent of current liabilities
30) Contingent Liability

 a financial obligation relating to an existing event or future event which may or may
not arise, depending on occurrence or non-occurrence of uncertain future happening
 contingent liability is not recorded in a Balance Sheet
 contingent liability is recorded outside the Balance Sheet (notes to accounts), as a
part of disclosure requirements to investors
 Example: disputed cases pending in Courts, guarantees given to others etc.
31) Capital
 capital means the funds / money contributed by owner of a business
 in case of sole proprietor, capital is introduced by the single owner
 in case of partnership firm, capital is introduced by the partners
 in case of company, capital is contributed by multiple shareholders. In a company,
capital is classified into equity share capital and preference share capital.

32) Authorized Share Capital
 in a company, the total capital is divided into equal parts, each part known a ‘share’.
Every share has a face value, generally ₹ 10 / 5 / 2 / 1 or any number (except fraction)
 where a company is legally registered / incorporated, the Board of Directors decide
the maximum number of shares that can be issued by the company
 such maximum number of shares is known as ‘Authorized Share Capital’
 at any point of time, the total capital of a company cannot go beyond the authorized
share capital. However, a company may increase its authorized share capital through
approval from its shareholders.
 example: Auth. Capital ₹ 10,00,000 divided into 100000 shares of face value ₹ 10 each
33) Equity Share Capital

 in a company, the total capital is divided into equal parts, each part known a ‘share’.
Every share has a face value, generally ₹ 10 / 5 / 2 / 1 or any number (except fraction)
 every company has equity share capital, hence it is called common / ordinary capital
 equity shareholders are the real owners of a company, they share the risks and enjoy
the profits of the company. Dividend is optional at the decision of Board of Directors.
 for public limited company, equity shares can be listed on recognized stock exchange
via SEBI approval. Thereafter, shares are traded (buy / sell) on the stock exchange.
The price at which shares are traded is known as market price / value.
34) Preference Share Capital

 a company may have another type of share capital known as preference share capital
(although not mandatory)
 preference shareholders get priority over equity shareholders for dividend payments
as well as repayment of capital. Fixed rate dividend is paid every year, if profits.
 further, where a company has sufficient profits, dividend to preference shareholders
is always compulsory, whereas dividend to equity shareholders is always optional
35) General Reserves / Retained Earnings

 where a company earns profits, it may set-aside certain profits for future purposes
 such set-aside profits are known as ‘reserves’ or ‘retained earnings’
 reserves or retained earnings belong to equity shareholders of a company

36) Security Premium
 where a company issues / sells shares at a price, higher than its face value, the extra
amount received by the company is known as ‘premium’.
 such extra amount collected is recorded under the heading ‘security premium’
 example: face value ₹ 10 / share and IPO price ₹ 90, hence premium ₹ 80 per share
 security premium belongs to equity shareholders of a company
Financial Statements
Profit & Loss

Balance Sheet
Statement
Income Expenses Assets Liabilities Capital
37) Profit & Loss (P&L) Statement

 Profit & Loss (P&L) Statement shows the income and expenses of a business, for a
certain period of time
 Profit & Loss Statement depicts the financial performance of a business for a period
If Income > Expenses = Profit
If Income < Expenses = Loss

 In India, financial year / accounting year starts on 1st April and ends on 31st March.
 Hence, generally, P&L Statement is prepared for the year ended 31st March.
 However, for companies which are listed on Stock Exchange, financial statements are
prepared and communicated every quarter-end (30 June, 30 Sept, 31 Dec, 31 March).
38) Income
 income means sales, revenue, turnover or any other sources of earning money
 in the ordinary course of business, income represents an amount earned from sale of
goods, rendering of services, receipt of interest, commission, royalty, dividends etc.
 income can be classified into two parts – revenue from operations and other income

39) Revenue from Operations
 income earned from the primary / main activities of a business (goods & services)
 revenue from operations is the main source of income for a business
 it pertains to core business activities as well correlated to main business
 example: for stationery business, sale of books, notebooks, pens, pencils etc.
40) Other Income

 income earned from activities which are not related to the main business
 generally, other income is passive income, which are earned alongside main business
 example: for stationery business, rent received, interest on bank FD etc.
41) Expenses
 expenses include various costs relating to a business
 expenses are recorded for an accounting period, say a financial year
 total expenses are compared with total income to measure profit or loss
 as per Companies Act, 2013, total expenses are classified into various categories
42) Cost of Material Consumed

 cost of raw material used in business operations for an accounting period
 cost of raw material purchased includes its buying cost, duties, and taxes, carriage
inwards (transport cost)
 cost of raw material consumed requires adjustment with opening stock and closing
stock of material, to compute actual material used (consumed) during the year
 material consumed = opening stock (+) purchases (-) returns (-) closing stock
43) Purchases of Stock in Trade (SIT)

 trading means such goods which is bought for the sole purpose of re-selling as it is
 purchases of stock-in-trade means such goods which are purchased for resale
44) Changes in Inventory of Finished Goods, Work-in-Progress and Stock-in-Trade

 changes in inventory means difference between opening stock & closing stock
 changes in inventory (stock) = opening stock (-) closing stock
 opening stock means material in hand at the start of financial year, 1 st April
 closing stock means material in hand at the end of financial year, 31 st March

45) Employee Benefit Expenses
 employee benefit expenses include all costs incurred for workers and staff
 example: salary, wages, provident fund contribution, bonus, incentives, employees’
health insurance premium, pension, staff welfare costs etc.
46) Finance Cost

 basically, finance cost includes the interest paid on borrowings / loans
 finance costs include interest expense and bank charges
47) Depreciation and Amortization

 depreciation means reduction in value of tangible fixed assets due to usage, damage,
wear and tear, change in technology or passage of time
 amortization is reduction in value of intangible assets such as goodwill, patent etc.
 depreciation and amortization are non-cash expenses, i.e., there is no cash outflow
48) Other Expenses

 the last heading in expenses is other expenses, which are not covered above
 example: rent, electricity, advertisement, commission, printing, stationery, internet,
postage, insurance premium, telephone charges, repairs, maintenance, bad debts etc.
49) Bad Debts

 where a customer to whom we sold goods on credit commits default in payment, it is
known as bad-debts
 bad-debt is a loss due to non-receipt of money from customers
50) Net Profit / Net loss

 the difference between total revenue and total expenses during an accounting period.
 where difference is positive, it is known as net profit and where such difference is
negative, it is referred to as net loss. This is after deducting all expenses and tax.
51) Account (A/c)

 account is summarized record of all business transactions relating to a person, assets,
income or expense.
 all business transactions are recorded at one place relating to a particular head.
 example: Rent A/c, Salary A/c, Bank A/c, Cash A/c, Furniture A/c, Investment A/c etc.

52) Gross Profit
 gross profit is the difference between total income and total manufacturing expenses
during an accounting period.
 the aggregate cost of raw material consumed along with all the manufacturing costs
is known as ‘Cost of Goods Sold (COGS)’
 hence, gross profit = Total Income (-) COGS
 expenses related to administrative, marketing, selling, distribution, interest etc. is not
considered while computing gross profit.
53) Operating Profit

 operating profit is difference between total income and COGS as well as operating
expenses during an accounting period.
 operating profit = Total Income (-) COGS (-) Operating Expenses
 operating expenses include administrative, marketing, selling, distribution etc.
 operating profit is also known as Earnings / Profit before Interest and Tax (EBIT / PBIT)
3. TYPES OF EXPENDITURE
Sr. Revenue Expenditure Capital Expenditure

1 Expenditure for short-term benefits Expenditure for long-term benefits
(upto 1 year) (more than 1 year)
2 Day-to-day expenses, routine Non-recurring expenses
nature
3 Incurred for operating activities Incurred for creation of non-current
assets / fixed assets
4 Recorded in Profit & Loss Recorded in Balance Sheet
Statement
5 Generally, small amount expenses Generally, high value expenditure
6 E.g., rent paid, raw material bought, E.g., purchase of land, machinery,
salary, interest on loan, postage, long-term investment, acquiring
depreciation etc. patents etc.

4. ACCOUNTING CONCEPTS & CONVENTIONS
1. INTRODUCTION
 In previous chapters, we have understood the meaning of business transactions and

objectives of financial accounting.
 Accounting is known as the language of business. Every language in the world has its
own vocabulary and well-established rules of usage, to ensure proper communication.
 Similarly, accounting has also developed a set of its own rules, own terminologies, so
that people can understand all the financial statements in the same sense.
 In order to maintain uniformity and consistency in preparing and maintaining books of
accounts, certain rules or principles have been evolved.
 These principles are classified as Concepts and Conventions. These are basic principles
used in preparing and maintaining accounting records.
 The principles are rules and regulations adopted by an accountant while recording
business transactions. It consists of –
a) Concepts: are assumptions or conditions, followed during recording transactions
b) Conventions are customs and practices which guide accountants while preparing
accounting statements.
2. ACCOUNTING CONCEPTS
1) Business Entity Concept

 The essence of this concept is that a business is a separate entity and it is different
from the owner or proprietor.
 Thus, for the purpose of accounting, all the transactions should specifically relate to
the business operations only. Hence, personal transactions of the owner are not to be
recorded in the books of account of the business.
 This concept applies to all forms of organizations such as sole trader, partnership
firm, a company etc.
 Business entity concept helps in ascertaining profit / loss of a business as only the
business incomes and expenses are recorded and all personal expenses are ignored.
 This concept is the very basis of accounting rules and principles.

2) Going Concern Concept
 The fundamental assumption is that a business entity will continue for a long time.
There is no intention to clos the business in the near future.
 Assets and liabilities of a business are valued with an assumption that the business is
going to last till eternity
 Where an enterprise is going to wind-up soon, nobody will enter into any financial
transactions with such business.
 Every business is valued with respect to its future profit earning capacity. Such
assumption is called ‘going concern concept’.
3) Money Measurement Concept

 Accounting records only the transactions which can be expressed in money terms.
 An event or a transaction that cannot be expressed in money terms, is not recorded in
the books of account. Money is the common denominator for accounting purposes.
 For example: honesty of employees, dynamism of selling agents, integrity of cashier
cannot be recorded in the books of accounts.
 Money is common denominator in which all business transactions are expressed
4) Cost Concept
 Cost concept means that business transactions shall be accounted in the books at the
cost at which they have been acquired or actual amount paid for such benefit.
 An asset is recorded in accounting books at the price paid to acquire it i.e., at its cost
 The implication of this concept is that purchase of an asset is recorded in the books at
the price actually paid for it irrespective of its market value
 Example: a car is purchased by paying ₹ 200,000 and actual market price is ₹ 500,000,
then the transaction will be recorded at ₹ 200,000 only (actual cost paid).
5) Periodicity Concept (Accounting Period)

 Going concern principle assumes that a business will continue forever.
 However, financial statements shall be prepared at the end of certain period / interval,
known as accounting period (generally, one year)
 A Profit & Loss Statement and Balance Sheet should be prepared at the end of each
accounting year, so that financial performance and financial position is understood by
the stakeholders at regular intervals.

6) Dual Aspect Concept
 Dual Aspect concept is based on the principle that every transaction has a two-fold
effect, i.e., receiving a benefit and sacrificing some benefit (or cost)
 Hence, benefit received and benefit given should always match and balance
 Dual aspect concept is the origin of ‘Double Entry System’ of accounting
 Example: 5 kg rice purchased for ₹ 1000, i.e., benefit received is rice and benefit given
is ₹ 1000 to the shop-keeper.
 This dual aspect concept provides the following fundamental accounting equation –
Assets = Liabilities (+) Capital
 The above accounting equation states that the assets of a business are always equal
to the claims of owners (i.e., capital) and the outsiders (i.e., liabilities).
 The knowledge of dual aspect helps in identifying the two aspects of a transaction
which helps in applying the rules of recording the transactions in books of accounts.
 The two accounting effects are known as Debit and Credit. Basically, Debit and Credit
are increase and decrease in the value of assets, liabilities, expenses, income as per
the nature of the business transaction.
7) Accrual Concept
 Accrual concept recognizes all revenues and expenses as they are earned or incurred,
without money consideration to their actual receipts or payments.
 It means that revenues and expenses are recorded in the books of account even if
they are not received or paid in cash terms.
 Basically, accrual means some amount has become ‘due’ at the end of the accounting
period. A transaction is recorded whether cash is paid / received or not.
 Example: credit sales, credit purchases, electricity, office rent etc. are recorded even
though they are paid at a later date.
8) Matching Concept
 As per matching concept, the income for an accounting period is should be co-related
(matched) with the expenses for that period only.
 In other words, revenue and expenses incurred to earn the profits must belong to the
same accounting period. Otherwise, the profit / loss computed will be incorrect.
 Example: for computing profit or loss, income earned in 2020 cannot be compared
with expenses incurred in 2018, since there is no co-relation between them

9) Realization Concept
 Realization concept says that revenue from a business transaction should be included
in accounting records only when it is realized.
 The term realisation means creation of legal right to receive money. Thus, revenue
should be recorded in books of account on the date when ownership of goods and
services is transferred to customers either for cash or credit basis.
 Example: sales should be recorded in books when a TV is sold and delivered to a
customer. Simply, enquiry from a customer is not realization.
3. ACCOUNTING CONVENTIONS
Accounting Conventions refer to the common practices which are universally followed in
recording & presenting accounting information of a business entity. Basically, conventions
are followed like customs, practices, etc. in a society. Accounting conventions are evolved
through the regular and consistent practice over the years to facilitate uniform recording in
the books of accounts. Accounting conventions are the practical guidelines which facilitate
application of accounting practices.
1) Materiality
 As per Materiality principle, all matters and events which have a significant economic
effect on the business should be disclosed separately.
 Hence, any small, trivial, insignificant transaction should be recorded, but need not be
disclosed separately in books of accounts. The purpose of this principle is to reduce
the burden of the accountant.
 An item is material (important) or not will depend on the impact on decision-making
of users of financial statements (stakeholders).
 Example: envelopes, ball pens, erasers, stapler pins etc. can be recorded under the
heading ‘Stationery’, but valuation of raw material should be shown separately.
2) Consistency
 Consistency implies that an enterprise should follow the same accounting principles
and procedures from each accounting period to period.
 Consistency makes financial statements comparable and users can make meaningful
interpretation and facilitates decision-making.
 If there are any changes made in the accounting policies (e.g., rate of depreciation)
the accountant must disclose such changes separately.

3) Conservatism (Prudence)
 As per Conservatism / Prudence principle, assets and profits should not be overstated
and anticipated income should not be recognized.
 However, all anticipated liabilities and losses to be considered and provision for the
same should be made in the books.
 The golden rule is “Anticipate no profits, but provide for all anticipated losses”
 Conservative principle helps in ascertaining true profit. It is useful in case of doubts
and uncertainties. It avoids over-confidence of the investors.
 Example: inventory is shown at cost or market value, whichever is less.
4) Full Disclosure
 Full Disclosure principle requires that all material and relevant facts concerning
financial statements should be fully disclosed. The financial statements must reveal
all material information to all interested parties dealing with the enterprise.
 Disclosure should be full (complete) in all respects and fair for the benefit of users.
 Even vital information after Balance Sheet date, but before presentation of accounts
should be disclosed. Disclosure depends on the materiality of information.
 The Companies Act, 2013 also requires that P & L Statement and Balance Sheet of a
company should give a true and fair view of the state of affairs of the company. This
is even more important since the owners and management are separate.

5. ACCOUNTING RULES & PROCESS
1. INTRODUCTION
 Accounting process begins with creation of business transaction. A business transaction

is a monetary transaction, which involves exchange of goods, services or money.
 In an accounting period, an accountant records transactions as and when they occur.
 At the end of accounting period, the accountant summarizes the information recorded
and prepares the Trial Balance to ensure that double entry system has been maintained.
 When the recording aspect is complete, the accountant prepares financial statements
reflecting the financial performance and financial position of the business.
 Thus, the accounting process consists of three major parts:
i. recording of business transactions during an accounting period;
ii. summarizing of information at the end of the accounting period; and
iii. reporting and interpreting of the financial information.
2. PROCESS FLOW
1) Business Transaction – first step of accounting is financial transaction where there is

exchange of benefits, goods, services, transfer of funds, borrowings, etc.
2) Document – every business transaction shall be supported by valid documentary

evidence. E.g., bill, invoice, receipt, challan, delivery slip, note, voucher etc.
3) Recording – all business monetary transactions are recorded in the books of account.
Recording is done in a book called ‘Journal.’
4) Classifying – classification is based on the systematic analysis of the recorded data,

with to group similar transactions at one place. Classification is done in a ‘Ledger’
5) Summarising – at the end of accounting period (financial year) all the classified data
is summarized. All account balances are summarized in a ‘Trial Balance’.
6) Finalization – on basis of such Trial Balance, the Financial Statements are prepared
viz. Profit & Loss Statement and Balance Sheet. In case of certain companies, Cash
Flow Statement is also prepared.

3. ACCOUNTING EQUATION
 Recording of business transactions in the books of account is based on a fundamental

relationship called as ‘Accounting Equation.’
 Assets of a business are either financed by owners’ funds or by outsiders’ funds. This
relation expresses the equality of assets on the one side and capital and liabilities on the
other side.
 In mathematical form, Assets = Liabilities + Capital
Illustration:
 Ganesh Traders started a new business with own funds ₹ 3,00,000. The business has
assets (cash) and contributed by owners (capital). There are no outside funds.
Accounting equitation would be:
Assets (₹ 3,00,000 cash) = External Liabilties (Nil) + Owners’ Capital (₹ 3,00,000)
 Ganesh Traders acquired bank loan of ₹ 1,00,000. In this case, asset is increased
(cash) and liability is created (bank loan). The accounting equation would be:
Assets (₹ 4,00,000 cash) = Liabilties (₹ 1,00,000 bank loan) + Capital (₹ 3,00,000)
 Ganesh Traders purchased goods ₹ 2,00,000 on credit from Shiva Traders. This
transaction created a new asset in the form of inventory and created a new liability in
the form of creditors. The accounting equation would be:
Assets (₹ 4,00,000 cash + ₹ 2,00,000 inventory)
= Liabilties (₹ 1,00,000 bank loan + ₹ 2,00,000 creditors) + Owners’ Capital (₹ 3,00,000)
 Ganesh Traders paid ₹ 1,00,000 cash to Shiva Traders. Here, the asset (cash) would
reduce and liability (creditors) would also reduce. The accounting equation would be:
Assets (₹ 3,00,000 cash + ₹ 2,00,000 inventory)
= Liabilties (₹ 1,00,000 bank loan + ₹ 1,00,000 creditors) + Owners’ Capital (₹ 3,00,000)
 Ganesh Traders sold goods of ₹ 2,00,000 for ₹ 3,00,000 cash. There is reduction of
inventory, increase in cash and rise in profit. The accounting equation would be:
Assets (₹ 6,00,000 cash) = Liabilties (₹ 1,00,000 bank loan + ₹ 1,00,000 creditors)
+ Owners’ Capital (₹ 3,00,000 + ₹ 1,00,000 profit)

4. DOUBLE ENTRY SYSTEM OF ACCOUNTING
 As discussed earlier, one of the fundamental principles of accounting is the ‘Dual Aspect’
concept, which states that every transaction has two-fold effect.
 The Double Entry System of accounting is based on the dual aspect concept, which says
that every financial transaction has two effects, receiving a benefit and giving a benefit.
 The knowledge of dual aspect helps in identifying the two aspects of a transaction which
helps in applying the rules of recording the transactions in books of accounts.
 The two accounting effects are known as Debit and Credit, derived from Latin words
‘debere’ and ‘credere’ respectively. Basically, Debit and Credit are increase / decrease in
value of assets, liabilities, expenses, income as per nature of the business transaction.
 The Double Entry System of accounting was designed by Italian mathematician name
Luca De Bargo Pacioli, and he is known as the ‘Father of Accounting.’
5. MEANING OF ACCOUNT
 An Account (A/c) is a summary record of all business transactions relating to a person,

asset, liability, income or expense.
 All business transactions are recorded at one place relating to the particular head.
 Example: Rent A/c, Salary A/c, Bank A/c, Cash A/c, Furniture A/c, Investment A/c etc.
 Format of Account:
Name / Title of the Account
debit side (left) credit side (right)
Date Particulars Amount ₹ Date Particulars Amount ₹
 The left side of an account is called the debit side and right side is called the credit side.
 Amounts entered on the left side of an account, are called debits and amounts entered
on the right side of an account are called credits.
 To debit (Dr.) an account means to make an entry on the left side of an account and to
credit (Cr.) an account means to make an entry on the right side.
 Simply, the words debit and credit denote increase and decrease in the value of assets,
liabilities, expenses, income as per nature of the business transaction.
 In the Double Entry System of accounting, in every transaction, the debit amount must
equal the credit amount. Double Entry System of accounting is universally followed.

6. CLASSIFICATION OF ACCOUNTS – TRADITIONAL APPROACH
 As discussed earlier, for every business transaction, there is debit effect and credit effect.
 However, the debit and credit effects are based on the nature / type of account.
 Traditionally speaking, an account is classified into 3 types viz. Real Account, Personal
Account and Nominal Account.
Types of Accounts
Real Personal Nominal

Account Account Account
Natural Artificial Represent Expenses: Incomes:

Tangible Intangible
person: person: Person: Rent paid, Sales,
Assets: Assets:
Mr. Amit, ICICI Bank, Debtors, salary, tax, Services
Machinery, Goodwill,
Ms. Sapna Infosys Ltd. Creditors electricity, provided
Vehicle etc. Patent etc.
etc. etc. etc. etc. etc.
1) Real Accounts: represent the assets, which belong to a business. Further classified into:
a. Tangible Asset, which we can touch, see, e.g., land, building, inventory, cash,
machinery, vehicles, furniture, etc.
b. Intangible Asset, which we cannot see or touch, but can be measured in monetary
terms. E.g., Goodwill, patent, copyright, etc.
2) Personal Accounts include accounts of persons / parties with whom business deals.
a. Natural persons are human being such as Mr. Ram, Ms. Sita etc.
b. Artificial persons are companies, banks, firms etc. E.g., SBI, Tata Motors etc.
c. Representative persons are group of persons E.g., debtors, creditors etc.
3) Nominal Accounts are related to expenses, incomes, losses and gain of a business.
a. Expense account include rent paid, salary paid, commission paid, tax paid etc.
b. Income account include sale of goods, interest received, dividend received etc.
c. Loss account include loss by fire, loss by theft etc.
d. Gain account include profit on sale of investment etc.

Illustration – Classification of accounts into Real A/c, Personal A/c and Nominal A/c:
Sr. Account Name Nature of Transaction Nature of Account

1 Cash A/c Asset Real Account
2 Salary paid A/c Expenses Nominal Account
3 ICICI Bank A/c Artificial Person Personal Account
4 Machinery A/c Asset Real Account
5 Legal Fees A/c Expenses Nominal Account
6 Sale of Goods A/c Income Nominal Account
7 Debtors A/c Representative Person Personal Account
8 Dividend received A/c Income Nominal Account
9 Share Capital A/c Representative Person Personal Account
10 Building A/c Asset Real Account
11 Bad-Debts A/c Loss Nominal Account
12 Interest paid A/c Expenses Nominal Account
13 Equipment A/c Asset Real Account
14 Services Provided A/c Income Nominal Account
15 Commission paid A/c Expenses Nominal Account
16 SBI Loan A/c Artificial person Personal Account
17 Trademark A/c Asset Real Account
18 Tata Motors A/c Artificial person Personal Account
19 Laptop A/c Asset Real Account
20 Repairs A/c Expenses Nominal Account
21 Rent received A/c Income Nominal Account
22 Creditors A/c Representative Person Personal Account
23 Bank charges A/c Expenses Nominal Account
24 Loss by Fire A/c Loss Nominal Account
25 Goodwill A/c Asset Real Account
26 MBA College A/c Artificial Person Personal Account
27 Inventory A/c Asset Real Account
28 Discount given A/c Loss Nominal Account
29 Transport cost A/c Expenses Nominal Account
30 Prasad Bhat A/c Natural person Personal Account

7. GOLDEN RULES OF ACCOUNTING – TRADITIONAL APPROACH
 For every business transaction, there is debit effect and credit effect. However, the debit
and credit effects are based on the nature / type of account.
 Following are the Golden Rules of Accounting based on traditionally nature of accounts:
Nature of Account Debit (Dr.) Credit (Cr.)

Real Account ‘What Comes In’ ‘What Goes Out’
Personal Account ‘The Receiver’ ‘The Giver’
Nominal Account ‘All Expenses & Losses’ ‘All Gains & Incomes’
Debit: what comes in

Real Account
Credit: what goes out
Golden Rules
Debit: the receiver / debtor

Personal Account
Credit: the giver / creditor
Debit: all expenses and losses

Nominal Account
Credit: all incomes and gains
Illustrations of Golden Rules of Debit & Credit
Sr. Transaction Nature of 1st Debit Nature of 2nd Credit

A/c Affected A/c Affected
1 Cash received from Cash: Cash A/c Share Capital: Share Cap. A/c
share-holders Real A/c (what comes in) Personal A/c (the Giver)
2 Furniture purchased Furniture: Furniture A/c Cash: Cash A/c

by paying cash Real A/c (what comes in) Real A/c (what goes out)
3 Rent paid by cheque Rent paid: Rent A/c Bank: Bank A/c
Nominal A/c (expenses) Personal A/c (the Giver)
4 Sold goods to Ram Ram: Ram A/c Sales: Sales A/c

on credit basis Personal A/c (the Receiver) Nominal A/c (income)
5 Purchased material Purchases: Purchases A/c Amar: Amar A/c

on credit from Amar Nominal A/c (expenses) Personal A/c (the Giver)

6 Interest received by Bank: Bank A/c Interest recd. Interest A/c
cheque Personal A/c (the Receiver) Nominal A/c (income)
7 Loan taken from Cash: Cash A/c ICICI Bank Loan ICICI Loan A/c
ICICI Bank Real A/c (what comes in) Personal A/c (the Giver)
8 Insurance Premium Insurance: Insurance A/c Bank: Bank A/c

paid by cheque Nominal A/c (expenses) Personal A/c (the Giver)
9 Cheque recd. from Bank: Bank A/c Mohan: Mohan A/c

Mohan (debtor) Personal A/c (the Receiver) Personal A/c) (the Giver)
10 Commission Commission: Commission A/c Dealer: Dealer A/c

payable to Dealer Nominal A/c (expenses) Personal A/c (the Creditor)
8. CLASSIFICATION OF ACCOUNTS – MODERN APPROACH
As per modern thought process, an account is classified into five types viz. Asset Account,
Liability Account, Capital Account, Income Account and Expenses Account.
Types of Accounts
Asset A/c Liability A/c Capital A/c Expenses A/c Income A/c
Tangible / Non-Current Equity Capital, Purchases, Tax, Sales, Revenue,

Intangible Liability Preference Cap Wages etc. Turnover etc.
Non-Current & Reserves, Depreciation, Interest recd.

Current Liability
Current Assets Retained Profits loss by fire etc. Dividend recd.
1) Asset Accounts: represent the assets, which belong to a business. Further classified into:
a. Tangible Asset, which we can touch, see and Intangible Asset, which we cannot
see or touch, but can be measured in monetary terms.
b. Non-Current Asset, is long-term nature and Current Asset, short-term nature

2) Liability Accounts include financial obligations which are payable by a business.
a. Non-Current Liabilities are long term-nature, payable after 12 months.
b. Current Liabilities are short term-nature, payable within 12 months
3) Capital Account, represents the amount contributed by the owners of the business. In a
company, capital can be equity share capital and preference share capital.
4) Expenses Account are related to expenses and losses of a business. It includes expenses
related to the main business operations as well as other expenses.
5) Income Account are related to various incomes and gains of a business. Incomes include
revenue from main business operations as well as other incomes.
9. RULES OF ACCOUNTING – MODERN APPROACH
 For every business transaction, there is debit effect and credit effect. However, the debit
and credit effects are based on the nature / type of account.
 Following are the Modern Rules of Accounting based on nature of accounts:
Nature of Account Debit (Dr.) Credit (Cr.)

Asset A/c Increase in Asset Decrease in Asset
Liability A/c Decrease in Liability Increase in Liability
Capital A/c Decrease in Capital Increase in Capital
Expenses, Loss A/c Increase in Expenses, Loss Decrease in Expenses, Loss
Income, Gain A/c Decrease in Income, Gain Increase in Income, Gain
Modern Rules
Asset A/c Liability A/c Capital A/c Expense A/c Income A/c
Debit: Debit: Debit: Debit: Debit:

increase in asset decrease liability decrease capital increase expens decrease income
Credit: Credit: Credit: Credit: Credit:

decrease asset increase liability increase capital decrease expens increase income

Illustrations of Modern Rules of Debit & Credit

1 Cash received from Cash: Cash A/c Share Capital: Share Cap. A/c
share-holders Asset A/c (asset increase) Capital A/c (capital increase)
2 Furniture purchased Furniture: Furniture A/c Cash: Cash A/c

by paying cash Asset A/c (asset increase) Asset A/c (asset decrease)
3 Rent paid by cheque Rent paid: Rent A/c Bank: Bank A/c
Expense A/c (expense increase) Asset A/c (asset decrease)
4 Sold goods to Ram on Ram: Debtor: Ram A/c Sales: Sales A/c
credit basis Asset A/c (asset increase) Income A/c (income increase)
5 Purchased material on Purchases: Purchases A/c Amar: Creditor Amar A/c

credit from Amar Expense A/c (expense increase) Liability A/c (liability increase)
6 Interest received by Bank: Bank A/c Interest recd. Interest A/c

cheque Asset A/c (asset increase) Income A/c (income increase)
7 Loan taken from ICICI Cash: Cash A/c ICICI Loan ICICI Loan A/c
Bank Asset A/c (asset increase) Liability A/c (liability increase)
8 Insurance Premium Insurance: Insurance A/c Bank: Bank A/c

paid by cheque Expense A/c (expense increase) Asset A/c (asset decrease)
9 Cheque recd. from Bank: Bank A/c Mohan: debtor Mohan A/c
Mohan (debtor) Asset A/c (asset increase) Asset A/c (asset decrease)
10 Commission payable Commission: Commission A/c Dealer: Dealer A/c

to Dealer Expense A/c (expense increase) Liability A/c (liability increase)
10. RELATIONSHIP BETWEEN GOLDEN RULES & MODERN RULES
Golden Rules (Nature of Account) Modern Rules (Nature of Account)
Real Account Asset Account
Personal Account Liability Account
Capital Account
Nominal Account Expenses Account
Income Account

6. BOOKS OF ACCOUNTS
1. INTRODUCTION
 The accounting process begins with business transactions. A business transaction is a

monetary transaction, which involves exchange of goods, services or money.
 As discussed in earlier chapters, accounting involves various concepts, conventions,
rules, regulations and procedures for correct recording of business transactions.
 Hence, there should be proper recording of business transactions so that the financial
statements show true and fair view of the business.
 This chapter covers the various books of accounts and specific system to be followed for
recording transactions. It takes you through four stages of accounting cycle viz. Journal,
Ledger, Trial Balance and Financial Statements.
2. JOURNAL
 Whenever a business transaction takes place, its details should be recorded as per the
principles of double entry accounting. Based on nature of account, an accountant shall
record the proper debit and credit effects.
 The first record of business transaction is in a book known as ‘Journal.’
 The word journal is derived from French word ‘jour’, which means ‘a day.’ In a journal,
all daily business transactions are recorded in chronological order i.e., in order of time.
 When a transaction is recorded in a journal, it is known as journal ‘entry.’
 Journal is the book in which transactions are recorded for the first time. Journal is also
known as ‘Book of Original Record’ or ‘Book of Primary Entry’.
 Business transactions are classified into various categories of accounts such as assets,
liabilities, capital, income and expenses.
 Every business transaction affects two accounts. These are debited or credited according
to the rules of debit and credit, applicable to the specific accounts.
 Applying the principle of double entry, one account is debited and the other account is
credited. Every transaction can be recorded in journal.
 This process of recording transactions in the journal is’ known as ‘Journalising’.
 Journal serves the purpose of maintenance of permanent record of accounting, available
at one convenient place, maintained with the required data and description, date-wise, in
a chronological order, in the sequential order that the transactions keep taking place.

 Format of Journal:
Date Particulars Ledger Debit Amount Credit Amount

Folio
1) Paid rent paid for June 2023. Here, there is increase in Expense (rent), hence Rent
A/c is debited and decrease in Asset (Bank balance) and hence it is credited.
01 July 2023 Rent A/c Dr. 20,000
To Bank A/c 20,000
(Being rent paid for month
of June 2023)
2) Received cash by selling goods. Here, there is increase in Asset (Cash), so Cash A/c
is debited and increase in Income (Sale of Goods) and hence it is credited.
02 July 2023 Cash A/c Dr. 5,000
To Sales A/c 5,000
(Being goods sold for cash)
3) Furniture purchased on credit from Home Ltd. Here, there is increase in Asset
(furniture), so Furniture A/c is debited and increase in Liability, hence credited
16 Oct 2023 Furniture A/c Dr. 30,000
To Home Ltd. 30,000
(Being furniture purchased
on credit)
4) Depreciation on Furniture charged. Here, depreciation is a loss, hence debited and

decrease in value of Furniture, hence credited
30 Sep 2023 Depreciation A/c Dr. 1,500
To Furniture A/c 1,500
(Being deprecation charged
on furniture)
5) Money received by issue of equity shares. Here, there is increase in Asset (Bank),
hence it is debited and increase in Share Capital, hence it is credited
1 Jan 2024 Bank A/c Dr. 50,000
To Equity Capital A/c 50,000
(Being amount received by
issue of equity shares)

3. SUBSIDIARY BOOKS
 Generally, for a small business, a journal book is maintained in which all the transactions
are recorded, as per the nature of accounts.
 However, in case of big businesses, there are large number of transactions. Hence, the
single journal book may not be sufficient for systematic record. In modern book-keeping
practices, the journal is divided into a number of separate journals and a particular
journal is used for recording particular type of transactions.
 These are known as Special Journals or Subsidiary Books.
 Such books are known as Subsidiary Books, since they do not provide final accounting
information themselves but they simply help to prepare ledger accounts.
 Similar to journal, subsidiary books are also called as books of original entry or prime
entry because the transaction is first recorded in one of these books according to the
type of the transaction and then they are posted in the Ledger.
 Recording transactions of similar nature in respective subsidiary books greatly reduces
the work and facilitates convenience of journalizing every transaction.
 Following are the subsidiary books –
1) Purchases Book (also known as Bought Book, Invoice Book or Purchases Day Book)
2) Returns Outward or Purchases Returns Book
3) Sales Book (also known as Sold Book or Sales Day Book)
4) Returns Inward or Sales Returns Book
5) Cash & Bank Book
6) Bills Receivable Book
7) Bills Payable Book
8) Journal Proper
 Merits of Subsidiary Books

 Due to separate books, the duty of recording transactions can be divided among the
staff members. This helps to maintain books and keep then updated at all times.
 The Ledger Keeper can post the transactions at his convenience and thus the work of
writing up of subsidiary books is not held up.
 Duplication of work is avoided. This results in saving time, labour and stationery.
 Because of separate books for particular type of transactions the volume of business
in any one direction may be ascertained at a glance.
 Details are easily available, facilitates smooth references to any particular transaction.

 Details of Subsidiary Books:
1) Purchases Book is used for recording all purchases of goods only on credit basis.
Goods means articles meant for trading or the articles in which the business deals,
goods which are bought by a business for reselling. Hence, in a purchase book, items
such as machinery, computer, stationery, etc. are not recorded.
2) Purchase Returns or Returns Outward Book – When goods which are purchased by a
business are returned to the supplier, it is recorded in Purchases Returns Books.
Goods are returned due to reasons such as bad quality, excess quantity etc. Purchase
Returns books is also known as Returns Outward Book.
3) Sales Book is used for recording all sale of goods only on credit basis. Goods mean
the items meant for selling purposes, i.e., articles in which a business deals in. Hence,
credit sale of items other than goods are not recorded in Sales Book. E.g., sale of old
furniture, sale in investment, etc. are not entered in the Sales Book.
4) Sale Returns or Returns Inward Book – When good which are sold by a business are
returned by the customer, it is record in the Sales Return Book. The customer may
return the goods due to defect, wrong specification etc. Sales Returns book is also
known as Returns Inward Book.
5) Cash & Bank Book is used for recording all cash transactions i.e., all cash receipts and
all cash payments of the business. This book helps us to know the balance of cash as
well as bank balance, at any point of time. For example: goods purchased on cash,
goods sold and cheque received, rent paid by cheque, interest received in bank etc.
6) Bill Receivables Book – When goods are sold on credit and due date of payment is
agreed upon between seller and buyer, this is duly signed by both parties. A legal
stamped document is created, known as a ‘Bill of Exchange.’ For seller, it is recorded
in Bill Receivable Book, since he will receive money in future.
7) Bill Payable Book – When goods are purchased on credit and due date of payment is
agreed upon between seller and buyer, this is duly signed by both parties. A legal
stamped document is created, known as a ‘Bill of Exchange.’ For buyer, it is recorded
in Bill Payable Book, since he will pay money in future.

8) Journal Proper is used for recording all such transactions which are not recorded in
any of the above subsidiary books. In other words, there is no specific book for such
transactions. Examples of transactions recorded in Journal Proper –
a. machinery purchased on credit, (since it is not goods and not cash payment)
b. depreciation on furniture, vehicles (since it is a loss and non-cash basis)
c. sale of investments
d. outstanding expenses
e. bad debts losses etc.
4. LEDGER
 In above topics, we discussed about journal and subsidiary books, which are books of
original entry. Business transactions are recorded in a journal, in order of time, i.e., on a
day-to-day basis.
 Ledger is a principal book of records and contains all accounts of a business arranged in
an orderly manner. A book containing all ‘accounts’ is a ledger – a book of final entry.
 All transactions are transferred from Journal to Ledger, known as ledger posting.
 Basically, ledger is a book where the classification function of accounting is performed. It
is the ‘reference book of accounting system and is used to classify and summarise
transactions to facilitate the preparation of financial statements.
 In a ledger, different types of accounts relating to assets, liabilities, capital, income and
expenses are maintained. It is a permanent record of business transactions.
 Benefits of Ledger
 systematic record maintained in a ledger provides classified information on various
accounts like accounts of assets, persons, expenses, losses, gains, incomes, etc. Such
information provided by the ledger is useful for controlling function of a business.
 trial balance can be easily prepared on the basis of closing balance shown by ledger
 various statements of accounts can be prepared on the basis of balance shown by the
ledger accounts.
 ledger has great use to a businessman as it gives information about a particular
account at a glance and at one place. E.g., total salary paid in an year, total amount
recoverable from a debtor, total amount repayable towards bank loan, commission
receivable on goods sold etc.

 Format of Ledger
Asset Account
Debit side (left) Credit side (right)
Date Particulars Amt ₹ Date Particulars Amt ₹
1 April To balance b/d 10,000
30 May By Decrease in Asset 5,000
25 Aug To Increase in Asset 25,000
31 Mar By balance c/d 30,000
Total 35,000 Total 35,000
Liability Account
1 April By balance b/d 18,000
12 May To Decrease in Liab. 8,000
25 April By Increase in Liab. 13,000
31 Mar To balance c/d 23,000
Capital Account
1 April By balance b/d 15,000
08 Nov To Decrease in Cap. 10,000
06 June By Increase in Cap. 25,000
31 Mar To balance c/d 30,000
Income Account
10 May To Decrease in Income 5,000 04 Apr By Increase in Income 100,000
31 Mar To Closing balance 95,000
Total 100,000 Total 100,000
Expenses Account
02 Apr To Increase in Expense 55,000 11 Apr By Decrease in Expenses 5,000
31 Mar By Closing Balance 50,000

 Balancing of a Ledger Account:
 balancing of an account is the process of finding out the difference between the total
of debits and total of credits of an account.
 the process of ascertaining and writing the balance of each account in the ledger is
called balancing of an account. An account has two sides: debit and credit.
 at the end of financial year (i.e., 31st March), if the debit (left) side total is more than
the credit (right) side total, the closing balance is called a debit balance.
 at the end of financial year (i.e., 31st March), if the credit (right) side total is more than
the debit (left) side total, the closing balance is called a credit balance.
 The excess / balance amount is carried forward to next financial year. It is recorded as
‘balance carried down (c/d)’ at the end of the financial year.
 At the start of next financial year, the excess / balance carried forward from the last
financial year is recorded as ‘balance brought down (b/d)’
 If the debit side and the credit side totals are equal, the balance is zero and nothing is
carried down or carried forward to the next financial year.
 Asset Accounts always have a debit balance and recorded in Balance Sheet
 Liability Accounts always have a credit balance and recorded in Balance Sheet
 Capital Accounts usually has a credit balance and recorded in Balance Sheet
 Income Accounts are simply totalled, and recorded in P&L Statement
 Expenses Accounts are simply totalled, and recorded in P&L Statement

5. TRIAL BALANCE
 Basically, ‘Trial Balance’ is a list of the account names and their balances as on a given
point of time with debit balances in one column and credit balances in another column.
 In other words, Trial Balance is a statement in which the balances of all the ledgers are
compiled into debit balances and credit balances.
 Trial Balance is prepared at the end of accounting period, i.e., 31 st March.
 Trial Balance is prepared to ensure that the process of recording in journal and posting
in ledger of the transaction have been carried out accurately.
 If the journal entries and ledger postings are accurate, then the debit total and credit total
in the Trial Balance must tally / match thereby evidencing mathematical accuracy.
 It shall be noted that matching of Trial Balance only verifies arithmetical accuracy, and
not the accuracy of accounting principles, rules and regulations.
 Objectives of Trial Balance

a) Check arithmetical accuracy – arithmetical accuracy in ledger posting means writing
correct amount, in the correct account and on its correct side (debit or credit).
b) Facilitate preparing Financial Statements – the ultimate purpose of accounting is to
prepare financial statements i.e., Profit & Loss Statement and Balance Sheet of a
business enterprise at the end of an accounting year. Trial Balance contains balances
of all ledger accounts, which in-turn are reflected in the financial statements.
c) Helps in locating errors – If total of two columns of a Trial Balance matches, it is a
proof of arithmetical accuracy in the ledger posting. However, if such totals do not
tally it indicates that there is some mistake in the ledger accounts. Generally, a Trial
Balance is generally prepared at the end of the year. However, it can be prepared at
any time during the accounting year to check the accuracy of the posting.
d) Assists in comparison – Comparison of ledger account balances of one year with the
corresponding balances with the previous year helps the management taking some
important decisions. This is possible by using the Trial Balances of the two years.
e) Facilitates in Making Adjustments – While making financial statements, adjustments
regarding closing stock, prepaid expenses, outstanding expenses etc are to be made.
Trial balance helps in identifying the items requiring adjustments in preparing the
financial statements.

 Trial Balance – Illustration 1
Particulars Debit balance (₹) Credit balance (₹)

Equity Share Capital --- 10,00,000
Revenue from Operations --- 21,00,000
Machinery & Equipment 15,00,000 ---
Purchases of Raw Material 10,00,000 ---
Employee Benefit Expenses 8,00,000 ---
Other Income --- 1,00,000
Cash and Bank Balance 2,00,000 ---
Creditors & Bills Payable --- 3,00,000
Total 35,00,000 35,00,000
 Trial Balance – Illustration 2
Particulars Debit (₹) Particulars Credit (₹)

Land & Building 7,00,000 Equity Share Capital 9,00,000
Debtors & Bills Receivable 1,00,000 Creditors 3,00,000
Purchases of Raw Material 8,00,000 Sales Turnover 15,00,000
Cash & Bank balance 3,00,000 Dividend received 50,000
Long Term Investments 2,50,000 ICICI Bank Loan 2,00,000
Salaries & Wages 1,50,000 Discount received 25,000
Interest paid 25,000 Rent received 25,000
Administration expenses 1,00,000
Furniture 3,25,000
Transport expenses 1,50,000
General expenses 1,00,000
Total 30,00,000 Total 30,00,000

7. FINANCIAL STATEMENTS
1. INTRODUCTION
 Financial statements are formal and structured records that show financial activities of a
business. Financial Statements show the financial performance and financial position of
a business entity.
 They provide a summary of the financial transactions, and resources of the entity over a
specific period. These statements are crucial tools for assessing the entity's financial
health, profitability, and overall performance.
 Financial Statements facilitate financial analysis of past data as well as future projections
of a business. The main types of financial statements are:
1. Profit & Loss Statement (Income Statement): The primary objective of any business
is to earn profits. The income statement shows the revenues, expenses, and profits or
losses of an entity over a specific period, generally a year or a quarter. It shows how
much money the business earned (revenues) and the costs incurred to generate those
revenues (expenses). The difference between revenues and expenses is net income
or net loss. Profit & Loss Statement is considered as the most important document
for the various stakeholders.
2. Balance Sheet (Statement of Financial Position): Balance Sheet provides a summary

of an entity's financial position at a specific point in time. It lists a company's assets,
liabilities, and shareholders' funds.
3. Cash Flow Statement: Cash Flow statement tracks the inflows and outflows of cash
and cash equivalents (bank balance) during a specific period. It categorizes cash flows
into operating activities, investing activities, and financing activities, providing
insights into how cash is generated and used by the entity. Cash Flow Statement is
prepared to highlight the liquidity position of a business. It helps to understand the
various sources of funds (inflows) and utilization of funds (outflows).
 Each financial statement serves specific purpose and together provides a comprehensive
overview of an entity's financial performance, position, and liquidity. These statements
are essential for stakeholders’ decision-making. Financial statements are prepared as per
applicable accounting standards and generally accepted principles of accounting.

2. OBJECTIVES / IMPORTANCE OF FINANCIAL STATEMENTS
1) Provide Financial Information: The primary purpose of financial statements is to offer

relevant and reliable financial information about a company's performance, financial
position, and cash flows. This information is crucial for decision-making by various
stakeholders, such as investors, creditors, management, employees, and regulators.
2) Assessing Financial Performance: Financial statements allow stakeholders to assess
how well a company has performed over a specific period. Key components, such as
income, and profit margins, help in evaluating company's profitability and efficiency.
3) Evaluating Financial Position: Balance Sheet provides an overview of a company's
assets, liabilities, and capital as on a date. It helps stakeholders understand the
organization's financial health, solvency, and liquidity.
4) Facilitate Investment Decisions: Investors (existing and potential) rely on financial
statements to evaluate the company's potential for growth and profitability. These
statements provide insights into the company's historical financial performance and
can be used to make informed investment decisions.
5) Facilitate Credit Decisions: Lenders (Banks, Fin. Inst.) and creditors use financial
statements to assess a company's creditworthiness and ability to repay debt. They
analyze financial ratios and cash flow patterns to evaluate the risk associated with
lending money to the company.
6) Facilitate Regulatory Compliance: Financial statements are essential for complying
with various legal and regulatory requirements, such as tax reporting, auditing, and
disclosure standards.
7) Monitoring Operational Performance: Financial statements help company's top-level
management monitor its own performance and make informed decisions about
resource allocation, cost management, and business strategy.
8) Benchmarking & Comparisons: Stakeholders use financial statements to benchmark a
company's performance against its competitors, industry standards, or prior periods.
This comparison helps identify areas of improvement or potential areas of concern.
9) Assisting in Valuation: Financial statements are vital in determining the value of a
company. Valuation analysts and potential buyers use financial information to assess
the company's worth during mergers, acquisitions, or sales.
10) Disclosure of Information to Public: Listed companies are required to publish their
financial statements for transparency & accountability to shareholders and the public.

3. LIMITATIONS OF FINANCIAL STATEMENTS
Even though financial statements are useful for understanding financial performance and
position of a business, they have certain limitations that stakeholders should be aware of
while using them for decision-making and analysis.
Following are key limitations –
1) Historical Nature: Financial statements are based on past transactions and events.
They reflect the financial position and performance of the entity up to a specific date
in the past. They may not fully show future financial health of the organization.
2) Non-Financial Information: Basically, financial statements measure financial data and
may not provide complete picture of non-financial factors that impact an entity's
operations, such as customer satisfaction, employee morale, innovation, etc.
3) Based on Estimates: Preparation of financial statements involves making estimates
and judgments. These estimates can be subject to biases, errors, or assumptions,
which can affect the accuracy and reliability of the financial information.
4) Omission of Intangible Assets: Basically, financial statements do not include valuable
intangible assets like intellectual property, goodwill, or human capital. These assets
significantly contribute to a company's profits but may not reflected in Balance Sheet.
5) Non-Disclosure of Sensitive Information: Certain sensitive information, such as
pending legal disputes, or upcoming strategic initiatives, may not be disclosed in the
financial statements, which may pose as critical risks or opportunities.
6) Lack of Real-time Information: Financial statements are prepared at the end of
reporting periods (quarterly or annually). Important events in-between these dates,
may result in outdated information for decision-making.
7) Ignorance of Future Events: Financial statements do not account for future events or
changes that may impact the company's financial position and performance. Factors
like changes in the economic environment, technological advancements, or industry
disruptions are not reflected in the statements.
Despite these limitations, financial statements remain valuable tools for understanding an
entity's financial performance and position. To reduce such limitations, stakeholders often
use supplementary information, such as management discussions and analysis, footnotes
to the financial statements, and other non-financial parameters, to get comprehensive view
of the entity's overall health and prospects.

4. PROFIT & LOSS STATEMENT
 A Profit and Loss Statement (P&L), also known as ‘Income Statement’, is one of the three
primary financial statements.
 The P&L Statement is used to assess the financial performance of a business over a
specific period of time, i.e., a year or a quarter.
 The P&L Statement provides a summary of company's revenues, expenses, and profits
or losses during that period. It is a crucial tool for investors, creditors, management, and
other stakeholders to evaluate the company's profitability and operating efficiency.
 Key Components of a Profit and Loss Statement:
1. Revenue from Operations (Sales / Turnover): This section represents the total income
generated from a company's primary business activities. It includes revenue from
sale of goods or services, as well as other operating income, related to main business
2. Other Income: This section represents the income earned from activities which are
not related to main business. Generally, other income is a passive income, which is
earned alongside main business activities. Example – for a textile business, income
from interest on Bank Fixed Deposit is other income.
3. Cost of Material Consumed: Cost of raw material used in business operations for an
accounting period. This cost includes its buying cost, duties, and taxes, carriage
inwards (transport cost). Raw Material consumed = opening stock (+) purchases (+)
expenses on purchase (-) purchase returns (-) closing stock.
4. Purchases of Stock in Trade (SIT): Trading goods means the goods which are bought
for the sole intention of re-selling it. Purchases of stock-in-trade means such material
which is purchased for resale purposes.
5. Changes in Inventory of Finished Goods (FG), Work-in-Progress (WIP) and Stock-in-

Trade (SIT): Changes in inventory means difference between opening stock & closing
stock. In simple words, changes in inventory (stock) = opening stock (-) closing stock.
6. Employee Benefit Expenses: This head includes expenses incurred for workers and
employees. Example – salary, wages, bonus, incentives, employees’ health insurance
premium, pension, staff welfare costs, provident fund contribution, etc.

7. Finance Cost: Basically, finance cost means the interest paid on borrowings / loans.
Further, finance costs also include bank charges
8. Depreciation and Amortization: Depreciation means reduction in value of tangible

fixed assets. Amortization is reduction in value of intangible assets such as goodwill,
patent etc. Depreciation and amortization are non-cash expenses.
9. Other Expenses: The last section under expenses is ‘other expenses.’ Other expenses
include rent, electricity, advertisement, commission, printing, stationery, internet,
postage, insurance premium, telephone charges, repairs, maintenance, bad debts etc.
10. Profit Before Tax (PBT): Profit before Tax (taxable profit) is calculated by subtracting
all the expenses from the total income. It represents the profit earned by a company
before paying income tax.
11. Tax Expense: Tax expenses shows the income tax amount as computed as per the
provisions of the Income Tax Act, 1961.
12. Exceptional Items: Exceptional or Extraordinary items are transactions, events which
are non-recurring or non-operating. Basically, they are beyond company’s control.
Hence, these items are reported separately in P&L Statement. For Example: legal
settlements, refunds, losses from natural disasters, effects of war or terrorism etc.
13. Profit After Tax (PAT): Profit after Tax (net profit) is calculated by subtracting income
tax expense from Profit before Tax (PBT). Net profit belongs to the shareholders and
is available for payment of dividends.
14. Earnings per Share (EPS): Earnings per Share is financial parameter used to measure
a company's profitability on a per-share basis. EPS is a critical indicator for investors
and analysts as it helps them assess a company's earnings relative to the number of
outstanding shares. To calculate EPS, the formula is –
EPS = (Net Profit – Preference Dividends)

Number of Equity Shares Outstanding

 Significance / Importance of the Profit and Loss Statement:
1. Profitability Assessment: P&L Statement is a primary tool for evaluating a company's

profitability during a specific period. It helps stakeholders determine if the company's
operations are generating profits or incurring losses.
2. Performance Comparison: By comparing P&L Statements of different periods or with
industry benchmarks, stakeholders can assess company's financial performance.
3. Financial Decision-making: Investors and creditors use the P&L Statement to make
informed decisions about investing in or lending to the company.
4. Management Evaluation: Managers use P&L Statement to analyze cost structures,
identify areas of inefficiency, and make strategic decisions to improve profitability.
5. Financial Reporting: The P&L statement is a vital component of a company's financial
reporting, providing a clear picture of its financial performance to external parties.
Profit and Loss Statement of ABC Ltd. for the year ended 31st March 2023
Particulars Note No. Amount ₹
Income
Revenue from Operations (Net)
Other Income
Total Revenue / Income
Expenses
Cost of Material Consumed
Purchases of Stock in Trade (SIT)
Changes in inventories of FG, WIP and SIT
Employee Benefit Expenses
Finance Cost
Depreciation and Amortization Expenses
Other Expenses
Total Expenses
Profit / (loss) for the period before exceptional items
Adjustment for Exceptional Items
Profit / (Loss) Before Tax
Tax Expense
Profit After Tax
Earnings Per Share (EPS)

 Classification examples of items of the Profit and Loss Statement:
Revenue from Operations Other Income

 Sale of Goods  Rent received,
(depending on nature of business)  Interest received,
 Provision of Services  Commission received,
 Other Operating Revenue  Dividend received,
 Bad Debts Recovered,
 Discount received,
 Sale of Scrap,
 Royalty received etc.
Cost of Material Consumed Employee Benefit Expenses

(+) Opening Stock of Raw Material  Salary to Employees
(+) Purchases of Raw Material  Wages to Workers
(+) Expenses on Purchases  Staff Welfare Expenses
(carriage inwards, freight inwards)  Provident Fund Contribution
(-) Purchase Returns (defective)  Employees’ Insurance premium
(-) Closing Stock of Raw Material  Bonus to Workers
 Incentives to Employees etc.
Purchase of Stock in Trade Changes in Inventory

Purchases of Trading Goods (+) Opening Stock of FG / WIP / SIT
(+) Expenses on Purchases (-) Closing Stock of FG / WIP / SIT
(carriage inwards, freight inwards) = Changes in Inventory
Depreciation & Amortization Finance Cost

Depreciation of Tangible Assets Interest on Borrowings
(machinery, furniture, plant, vehicle etc) (bank loan, debentures, etc)
Amortization of Intangible Assets Bank Charges
(patent, goodwill, trademark etc) (processing fees, etc)
Other Expenses
Rent payment Audit Fees Bad Debts Transport cost
Electricity charges Carriage outwards Repairs Director sitting fees
Printing, Stationery Advertisement Maintenance Delivery charges
Insurance premium Sales promotion Royalty payment Power & Fuel cost
Postage, Telephone Commission payment Manufacturing cost Internet charges
Legal charges Discount given Travelling cost Etc. Etc. Etc.

5. BALANCE SHEET
 A Balance Sheet is one of the fundamental financial statements that provides a summary
of a company's financial position at a specific point in time.
 It presents a summary of the company's assets, liabilities, and shareholders' equity,
helping stakeholders assess the financial health and stability of the business.
 Key Components of a Balance Sheet:

1. Assets: Assets are the ownership / properties of a company. Assets are categorized
into two main types –
a) Non-Current Assets (Long-term Assets): Non-current assets are expected to be
held or used for more than 1 year. Non-Current assets used for business purposes
and not held for resale in the ordinary course. They include items like property,
plant, and equipment (PP&E), intangible assets, long-term investments, etc.
b) Current Assets: Current assets are short term assets which are expected to be
converted into cash or used within 1 year. Examples are cash, bank balance,
debtors, receivables, inventory, and short-term investments etc.
2. Liabilities: Liabilities represent the financial obligations of a company. It is amount

which a company owes to outsiders. They are categorized into two main types –
a) Non-Current Liabilities (Long-term Liabilities): Non-current liabilities long-term

obligations, that are not due within one year. These can include long-term loans
from banks and financial institutions, debentures, deposits etc.
b) Current Liabilities: Current liabilities are short-term obligations which are to be

paid within one year. Examples include creditors, payable, short-term borrowings,
outstanding expenses, bank overdraft etc.
3. Equity (Owner's Capital): Shareholders' equity represents the shareholders’ funds

invested in a company as on a particular date. It is classified into two parts –
a) Equity Share Capital: This is the actual amount of full paid-up equity shares
contributed by the members of a company.
b) Other Equity: Other equity includes retained earnings (past accumulated profits),
general reserve, security premium and other reserves of the company.

 Significance / Importance of the Balance Sheet:
1. Financial Position: A Balance Sheet provides a comprehensive view of a company's

financial position, showing the total value of its assets, the sources of funds (liabilities
and equity) used to finance those assets, and the relationship between the two.
2. Liquidity Assessment: By comparing current assets to current liabilities, stakeholders
can measure a company's short-term ability to meet its financial obligations.
3. Solvency Evaluation: Non-current assets and long-term liabilities in a Balance Sheet
help assess company's long-term solvency & capacity to meet long-term obligations.
4. Debt and Equity Mix: Balance Sheet shows the proportion of borrowed funds and
owned funds used to finance the company's assets, which is crucial for financial risk.
5. Investor Decision-making: Investors use Balance Sheet to understand a company's
financial health and make informed investment decisions.
6. Creditworthiness: Lenders and Creditors use Balance Sheet to evaluate a company's
creditworthiness and assess the risk of lending to or transacting with the company.
Balance Sheet of ABC Ltd. as on 31 st March 2023
PARTICULARS Note No. Amount ₹
ASSETS
Non-Current Assets
Property, Plant & Equipment (PPE)
Capital Work in Progress (CWIP)
Intangible Assets
Financial Assets
Investments
Trade Receivables
Other Financial Assets
Other Non-Current Assets
Total Non-Current Assets
Current Assets
Inventories
Financial Assets
Investments
Trade Receivables
Cash and Cash Equivalents
Other Bank Balances
Other Financial Assets
Other Current Assets
Total Current Assets
Total Assets

PARTICULARS Note No. Amount ₹
EQUITY & LIABILITIES
EQUITY
Equity Share Capital
Other Equity
Total Equity
NON-CURRENT LIABILITIES
Financial Liabilities
Borrowings
Trade Payables
Other Financial Liabilities
Provisions
Other Non-Current Liabilities
Total Non-Current Liabilities
CURRENT LIABILITIES
Financial Liabilities
Borrowings
Trade Payables Due to MSME
Trade Payables Due to Others
Other Financial Liabilities
Provisions
Other Current Liabilities
Total Current Liabilities
Total Equity and Liabilities

 Classification examples of items of the Balance Sheet:
Non-Current Assets – Property Plant Equip Non-Current Assets – Intangible Assets

 Factory Building, Land  Goodwill, Brand Value
 Plant & Machinery  Patents, Copyrights, Trademarks
 Furniture & Fixtures, Vehicles etc.  Software Licenses etc.
Non-Current Assets – Financial Assets Non-Current Assets – Other Fin. Assets

 Long Term Investment in Fixed Deposits  Security Deposits, Lease receivable
 Long Term Invt. Subsidiary & Associates  Subsidy receivable from Govt.
 Long Term Investment Mutual Funds etc.  Term Deposits against Bank Guarantee
Non-Current Assets – Other Assets Current Assets – Inventory

 Capital Advances  Raw Material, Finished Goods
 Loans granted  Work-in-Progress, Stock in Trade
Current Assets – Receivables Current Assets – Cash & Cash Equivalents

 Trade Debtors  Cash in Hand
 Bills Receivable  Bank Balances
Current Assets – Other Financial Assets Current Assets – Other Current Assets
 Security deposits  Prepaid Expenses
 Interest receivable  Accrued Income
Equity – Equity Share Capital Equity – Other Equity

 Authorized Share Capital  General Reserves, Retained Earnings
 Issued, Subscribed and Paid-up Capital  Security Premium, Other Reserves
Non-Current Liabilities – Borrowings Current Liabilities – Borrowings

 Loans from Bank / Financial Institutions  Bank Overdraft
 Debentures from Public  Cash Credit Facility
 Loans from Governments  Short-term Lease
Current Liabilities – Trade Payables Current Liabilities – Other Financial Liab.

 Creditors, Bills Payable  Unpaid Interest
 Due to MSME and other than MSME  Dividend payable

 Illustration / Example: Classify the following items into various categories / heads based
on Profit & Loss Statement, Balance Sheet and sub-heading.
Account Fin. Statement Nature / Head Sub-Heading

Land & Building Balance Sheet Non-Current Asset Property, Plant, Equip
Bank Loan
Cash in hand
Equity Capital
Sales Turnover
Debentures Balance Sheet Non-Current Liability Borrowings
Debtors
Closing Stock
Rent received Profit & Loss Income Other Income
Salary paid
Income tax paid
Sale of Scrap
Legal Expense
Goodwill
Bills Payable
Bonus to workers
Amortization
Contri to PF
Interest paid Profit & Loss Expenses Finance Cost
Prepaid expense
Gen. Reserves
Bank charges
Audit fees
Insurance premium
Creditors
Bank balance
Revenue Operations
Discount given
Bad Debts
Short-Term Invest
Patents
Discount received
5-year Bank FD

6. ADJUSTMENTS
 For every business entity, financial statements are prepared end of an accounting period,
i.e., end of financial year or end of a quarter etc.
 The Profit & Loss Statement and Balance Sheet should show a true and fair view of the
accounting information the financial year.
 Hence, all the relevant information / transactions / events should be recording while
preparing the financial statements.
 Hence, after preparation of trial balance, certain adjustments relating to the accounting
period have to be made in order to make the financial statements complete.
 These adjustments are needed for transactions which have not been recorded but which
affect the financial position and operating results of the business. In few cases, the actual
and exact amount is not available, and hence adjustments are to be made.
 Since, accounting is based on double entry principle, all adjustments are to be given
double effect, i.e., recorded at two places.
 Common examples of adjustments –

i. Unrecorded Income: Income earned for the period but not received yet. Example:
interest for quarter ending 31st March not received yet
ii. Income Received in Advance: Income relating to next period received in the current
accounting period
iii. Unpaid Expenses: Expenses were incurred during the period but not recorded in the
accounting books
iv. Prepaid Expenses: Expenses relating to the subsequent period paid in advance in the
current accounting period. A common example is insurance premium paid advance.
v. Closing Inventory / Stock at the end of accounting period
vi. Provision of depreciation and amortization
vii. Reserve for bad debts
viii. Provision for Income Tax
ix. Proposed Dividend etc.

ADJUSTMENTS - EFFECTS
CLOSING STOCK / INVENTORY OF FINISHED GOODS, WIP, STOCK-IN-TRADE

1) Balance Sheet under Current Assets under heading Inventory
2) Profit & Loss under the heading Changes in Inventory (subtract from opening stock)
CLOSING STOCK OF RAW MATERIAL (RM)

1) Balance Sheet under Current Assets under heading Inventory
2) Profit & Loss under the heading Cost of Material Consumed (subtract at the end)
DEPRECIATION
1) Balance Sheet – Subtract from Non-Current Assets
2) Profit & Loss under the heading Depreciation & Amortization
OUTSTANDING / UNPAID EXPENSES

1) Profit & Loss Statement – Add under respective Expenses
2) Balance Sheet – show under Current Liabilities – Other Current Liabilities
PROVISION FOR TAX

1) Profit & Loss Statement under the heading Tax Expense
2) Balance Sheet under Current Liability under heading Provisions
DIVIDEND ON EQUITY CAPITAL (Dividend = Equity Paid-Up Capital * Dividend Rate)

1) Balance Sheet under Other Equity: Subtract from current year profit
2) Balance Sheet under heading Other Current Liabilities
UNPAID / OUTSTANDING INTEREST ON BORROWINGS (Debentures, Loan, Deposits etc.)

1) Profit & Loss Statement under the heading Finance Cost
2) Balance Sheet under heading Other Financial Liabilities
TRANSFER TO GENERAL RESERVE

1) Balance Sheet under Other Equity: Subtract from current year profit
2) Balance Sheet under Other Equity: Add in General Reserves

PREPAID EXPENSES
1) Profit & Loss: subtract from respective expense
2) Balance Sheet under the heading Other Current Assets
ACCRUED INCOME
1) Profit & Loss: add in the respective income
2) Balance Sheet under the heading Other Current Assets
BAD DEBTS
1) Balance Sheet: Subtract from Debtors / Receivables (in Current Assets)
2) Profit & Loss: add under the heading Other Expenses
INCOME RECEIVED IN ADVANCE

1) Profit & Loss: Deduct from the respective Income head
2) Balance Sheet: under the heading other Current Liabilities

7. CASH FLOW STATEMENT
 Cash Flow Statement is an important financial statement that provides an overview of a

company's cash inflows and outflows over a specific period.
 Cash Flow Statement is essential for assessing the company's ability to generate cash,
meet its financial obligations, and understand the sources and uses of cash.
 It measures the liquidity position of the company over a period of time, accounting year.
 The Balance Sheet and Profit & Loss Statement provide a firm’s assets-liabilities and its
performance, respectively. However, both these statements fail to explain the changes
(with reasons) in the liquidity position of the firm.
 Cash Flow Statement discloses the changes in cash / bank position between two or more
periods. Cash Flow Statement provides reasons for such changes and also clarifies the
modes in which cash is generated as well as utilized by the firm during the period.
Classification of Cash Flow Statement
As per Accounting Standard, a Cash Flow Statement is classified into three main categories
of cash inflows and cash outflows. Such classification provides information that allows its
users to assess the impact of those activities on the financial position of the company. This
facilitates better utilization of financial statements by its users, viz. shareholders, creditors,
financial institutions. Following are the three activities under Cash Flow Statement –
1) Cash Flows from Operating Activities

Operating Activities are the primary / main revenue generating activities of a company.
Operating activities include cash effects of those transactions and events that enter into
the determination of net profit or loss. Cash receipts from selling goods and providing
services. Cost of goods sold and other operative expenses result in cash disbursements.
Following are examples of Cash Flows from Operating Activities:
a) Cash receipts from the sales of goods and the rendering of services:
b) Cash receipts from royalties, fees, commissions, and other revenues.
c) Cash payments to suppliers for goods and services;
d) Cash payments to and on behalf of employees;
e) Cash payments or refunds of income taxes; and
f) Changes in working capital

2) Cash Flows from Investing Activities
Investing Activities represent cash flows related to a company's investments in long-
term assets and long-term investments. It includes cash used for purchasing or selling
property, plant, and equipment (fixed assets), acquiring or selling other businesses, and
buying or selling investments in securities. The following are examples of cash flows
arising from investing activities:
a) Payment to acquire fixed assets (including intangibles);
b) Receipt from sale of fixed assets (including intangibles);
c) Payments to acquire shares of other companies, joint ventures etc.;
d) Receipts from sale of long-term investment, shares;
e) Payment towards long-term advances and loans made to third parties;
f) Receipts from repayment of long-term advances and loans made to third parties.
g) Interest received on investments; and
h) Dividend received on investments.
3) Cash Flows from Financing Activities

Financing activities show the cash flows related to a company's financing activities,
including transactions with shareholders and creditors. It includes cash received from
issuing shares or debentures, as well as cash paid for dividends, share buy-back, and
debt repayments. Financing activities are activities that result in changes in the size and
composition of the owner’s capital (including preference share capital) and borrowings
of the company. Following are examples of cash flows arising from financing activities:
a) Receipts from issuing shares or other similar instruments;
b) Receipts from issuing debentures, loans notes, bonds, long-term borrowing;
c) Repayments of amounts borrowed i.e., redemption of debentures, bonds etc.
d) Payments towards redeem preference shares;
e) Payment towards buy-back of equity shares;
f) Payment of Interest on Borrowings; and
g) Payment of Dividend on Share Capital.

Importance / Benefits / Merits Cash Flow Statement
1. Cash Management: Cash Flow Statement helps companies monitor their cash inflows
and outflows, allowing them to manage cash effectively and ensure sufficient liquidity
for daily operations.
2. Financial Health: Investors use Cash Flow Statement to evaluate company's financial
health. A company with positive operating cash flows and adequate cash reserves is
generally considered more financially stable.
3. Assessing Cash Generation: Cash Flow Statement provides inputs about a company's
ability to generate cash from core business activities. Ideally, cash flow from operating
activities should be positive which indicates a healthy and sustainable business model. A
net-positive cash flow denotes surplus day-to-day activities, which facilitates operating
capabilities. Surplus funds can be used for paying dividends and repaying loans, short-
term investments and less dependency on borrowed funds.
4. Investment Decisions: Investors use Cash Flow Statement to assess a company's capital
expenditure and investment decisions. Net-negative cash flow from investing activities
indicates higher capex, which results in future growth by increasing production capacity.
Long term investments signify surplus fund generation.
5. Financing Decisions: Cash Flow Statement reveals how the company raises capital and
manages its financing activities. It helps stakeholders understand the company's capital
structure and debt management practices.
6. Detecting Cash Flow Issues: A negative cash flow, especially in operating activities, may
signal potential financial problems or indicate that the company is relying on external
financing to fund its operations.
7. Comparing Profit & Cash Flows: Cash Flow Statement complements the P & L Statement
by providing inputs into the actual cash movements underlying reported profits. It helps
identify differences between reported profit and actual cash flow.
Hence, Cash Flow Statement is a crucial tool for assessing liquidity position of a company
and understanding its ability to generate and manage cash, necessary for sustainable
growth and financial stability.

Changes in Working Capital
Event Result Reason

Increase in Current Asset Cash Outflow Blockage of Funds
Decrease in Current Assets Cash Inflow Release of Funds
Increase in Current Liability Cash Inflow Release of Funds

Decrease in Current Liability Cash Outflow Blockage of Funds
Increase in Net Working Capital Cash Outflow Blockage of Funds

Decrease in Net Working Capital Cash Inflow Release of Funds
Illustrations:
Current Assets 2022-23 2021-22 Increase / Amount Inflow /

(current year) (last year) decrease (₹) Outflow
Inventory 1,50,000 1,25,000
Debtors 40,000 60,000
Bills Receivable 25,000 15,000
Advance given 10,000 15,000
Current Liabilities 2022-23 2021-22 Increase / Amount Inflow /

(current year) (last year) decrease (₹) Outflow
Creditors 85,000 75,000
Bills Payable 15,000 20,000
Outstanding Exp. 10,000 25,000
Bank Overdraft 20,000 40,000

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FINANCIAL ACCOUNTING

(Compiled by Prof. Prasad Bhat)

Compiled by Prof. Prasad Bhat Page 1

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 A business organisation is an establishment intended to carry commercial business by

The various forms of business organizations are given below –

Compiled by Prof. Prasad Bhat Page 3

C) Joint Stock Company

Compiled by Prof. Prasad Bhat Page 4

 Separate Legal Entity: due to registration, a company becomes an artificial person

D) Limited Liability Partnership (LLP)

Compiled by Prof. Prasad Bhat Page 5

Compiled by Prof. Prasad Bhat Page 6

 Differentiation between Book-Keeping and Accounting:

Sr. Book-Keeping Accounting

Compiled by Prof. Prasad Bhat Page 7

1) Systematic Recording of Transactions – Basic objective of accounting is the systematic

2) Ascertainment of Financial Performance – Preparation of Profit & Loss (P&L) Statement

If Sales Revenue > Expenses = Profit

If Sales Revenue < Expenses = Loss

3) Ascertainment of Financial Position – Preparation of Balance Sheet to know the financial

4) Rational Decision-making – Accounting communicates financial results of a business to

6) Taxation – Accounting records provides accurate information for computation of various

8) Legal Compliance – Maintenance of proper accounting records and reports is needed as

9) Communication of Financial Results – Various stakeholders have diverse interests in a

Compiled by Prof. Prasad Bhat Page 8

 Monetary Transactions – Accounting is concerned with recording business transactions

b) Document – every business transaction shall be supported by valid documents. Such

Compiled by Prof. Prasad Bhat Page 9

f) Finalization – at the end of accounting period (financial year), a summary of transactions

i) Communicating – the entire process of accounting ends with proper communication

Compiled by Prof. Prasad Bhat Page 10

Sr. Stakeholders Need for Accounting Information

Compiled by Prof. Prasad Bhat Page 11

D) Social Responsibility Accounting

E) Human Resource Accounting –

Compiled by Prof. Prasad Bhat Page 12

Sr. Merits / Advantages Demerits / Limitations

Compiled by Prof. Prasad Bhat Page 13

Profit & Loss

Income Expenses Assets Liabilities Capital

Based on Tangibility Based on Time Period

Tangible Assets Intangible Assets Non-Current Assets Current Assets

Compiled by Prof. Prasad Bhat Page 14

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13) Current Assets

14) Inventory / Stock

Compiled by Prof. Prasad Bhat Page 16

17) Prepaid Expenses

18) Accrued Income

Based on Time Period

Non-Current Liabilities Current Liabilities

20) Non-Current Liability

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23) Current Liabilities

25) Bills Payable (B/P)

26) Outstanding (Unpaid) Expenses

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29) Proposed Dividend