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Financial & Managerial Accounting 16th Sep13

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    The Accounting Equation This shows the relationship between economic

    Resources of a business & claims against thoseresources.

    Economic Resources = Claims

    Claims arise from: Creditors called Liability & from

    owners called Equity. So,Assets = Equity + Liabilty

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    Assets

    These are resources controlled by an entity as a result of Past activities

    & its expects to derive future benefits These are owned by a co.& realises it by getting cash or other assets

    Types of Assets:

    1. Liquid: Cash,.

    2. Current Assets: Bank deposits,Investments,Receivables/Sundry

    debtors- in

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    Liabilities

    A Liabilty is apresent obligation of a co.

    Arising from past events

    The settllement of whichwill result in outflow ofResources

    Liabilties are what a co.owes to someone and settlesthe same by giving a)cash b)other assets.

    Ex.:Bank Loans,Salarlies payable,Income Tax payableetc.

    They are result of a) Contract b) StatutoryRequirement

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    Equity The diff.between Assets and Liabilities is Equity

    This is the amount held by the owners /shareholders in theenterprise

    This Equity portion (also called Owners/shareholdersEquity) increase if

    1. Owners invest more money

    2. Co.Makes profit This portion goes down

    1. If Co.makes losses

    2. Amt.is withdrawn (dividend etc.) by owners

    Componants of Equity:

    1. Share capital

    2. Share premium

    3. Retained Profits or Reserves

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    Contd.

    Share Capital : This is the amount contributed by

    Shareholders/owners of the Co. Share Premium A/c: This is the amt.over & above the share

    capital given by SHs.Shown separately as Share PremiumA/c.

    Retained Earnings (Reserves ): This represnts the NetProfits made by an Entity not distributed to shareholdersbut kept in business

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    Other Terms

    Revenue/ Income : This represnts the amount charged to

    customers for a) Goods sold &or b) services rendered Expenses: These are generally the money spent by an

    entity for earning revenue

    Net profits: Represents Excess of Income /Revenue overExpenses.

    Net Loss: If Expenses are more than Income it represntsLoss

    Dividends: Distribution of money to shareholders basedon their holding is called Dividend payout.

    So if a co.makes more profits it increases Equity &if itmakes more losses or distibutes more dividend ,it reducesEquity.

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    Examples of the above1. On 1stApril A starts a Firm India Software & puts in

    Rs.1 lac cashBalance sheet of India SW as on 1st April

    Liabilities Rs. Assets Rs.

    Equity 100000 Cash/Bank 1000002. India software takes Rs.100000 loan from bankon 30th April 2013

    Equity 100000

    Creditors:Loan From Bank 100000 Cash/Bank 200000

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    Contd.3. It buys a car on 5th May 2013 for Rs.75000

    Equity 100000 Equipment (Car) 75000

    Creditors:

    Loan From Bank 100000 Cash/Bank 125000

    (200000-75000)

    Liabilities 200000 Assets 2000004. It buys Rs.10000 worth stationery for credit on 10th May2013- for which it has to pay that money on 15th May.

    Equity 100000 Equipment (Car)75000

    Creditors:

    Loan From Bank 100000 Cash/Bank 125000

    payable to Sta.vendor10000 Stationery 10000 Liabilities 210000 Assets 210000

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    Contd.5. It pays the Rs.10000 for stati. on the due dt.15th

    Equity 100000 Equipment (Car)75000Creditors:Loan From Bank 100000 Cash/Bank

    (125000-10000) 115000payable to Sta.vendor 0 Stationery 10000

    (10000-10000)Liabilities 200000 Assets 2000006. It sold Software and received Rs.25000 cash on 20th

    Equity 125000 Equipment (Car) 75000(100000+25000)Creditors:

    Loan From Bank 100000 Cash/Bank(115000 + 25000) 140000

    Stationery 10000

    Liabilities 225000 Assets 225000

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    Contd.

    7. On 1st June it pays Rs.20000 salary and Rs.10000rent.This will reduce cash & Equity

    Equity 95000 Equipment (Car) 75000

    (125000-20000-10000)

    Creditors:

    Loan From Bank 100000 Cash/Bank

    (140000 -20000-10000) 110000

    Stationery 10000

    Liabilities 195000 Assets 195000

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    Contd.

    8. On 30th

    June it sold Rs.30000 worth software but itwas on credit & money expected on 15th July

    Equity 125000 Equipment (Car) 75000

    (95000+ 30000)

    Creditors:Bank Lo 100000 Cash/Bank 110000Stationery 10000

    Receivable:Software 30000

    Liabilities 225000 Assets 225000

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    Contd.9. On 15th July it received for software sold earlier

    Equity 125000 Equipment (Car) 75000(95000+ 30000)

    Creditors:Bank Lo 100000 Cash/Bank 140000(110000+30000)

    Stationery 10000Receivable:Software 0(30000-30000)

    Liabilities 225000 Assets 22500010. On 31st July ,the promoters withdraws Rs.10000 from his equity

    Equity 115000 Equipment (Car) 75000(125000-10000)

    Creditors:Bank Lo 100000 Cash/Bank 130000(140000 -10000)

    Stationery 10000Receivable:Software 0

    (30000-30000)Liabilities 215000 Assets 215000

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    Financial Statements Fin.Sta.s provide information about an Entitys

    Revenues,Expenses,Assets ,Liabilities,capital etc. Complete set of Fin.Statements: a)P&L A/c b)Bal.Sheet

    c)Cash Flow sta. d) Notes to a/cs e) explanatory sta.s

    The main 3 Fin.stas. Are

    1. The P&L A/c reports the Financial performance ofan entityduring a period

    2. The Balance sheet represents the FinancialPosition of an entityat a point in time

    3. Cash flow sta.summarises cash inflows &outflowsresulting from Operations,investing & financingactivities during the period

    ( Do the above on Board )

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    Profit & Loss Account

    This sta.summarises the activities of an entity in aperiod by disclosing the revenues earned & expensesincurred.

    The expenses are given on the left side called the Debit

    side Income is given on the right side called credit side

    If Income (revenue) is higher ,it results in profit.Ifexpenses are higher ,it results in loss.

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    Balance sheet

    This has two sides like P&L sta.-namely Liabilties onthe left and Assets on the Right

    Liabilities depict Credit and Assets depict Debit

    This BS summarises the Assets ,Liabilties & capital

    (Equity) of an entity at a point in time

    It summarises the resources & claims to thoseresources by promoters(owners)& creditors(lendors)on a certain date

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    Cash Flow

    P&L sta.gives the effects of current operation on its

    fin.position, Bal.sheet shows Fin.Position on a givendt.but neither of it gives details of investments inassets during that period & how were they financed.

    The Cash Flow sta.summarises Major sources of cash

    receipts & cash payments in a period

    It also reports about the entitys investing & Financingactivities

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