understanding business finance

Understanding Business Finance

VentureBean Consulting Private Limited

Objective of the Presentation Target audience Ø Non-‐finance managers in middle and senior management func4ons Objec0ve Ø  Be6er understanding of commonly used finance terms Ø  Be6er understanding of some key accoun4ng concepts Ø  Be6er understanding of how Profit & Loss Account and Balance Sheet are

prepared for an en4ty Ø  Have the ability to prepare Profit and Loss Account and Balance Sheet for an en4ty Ø  Have the ability to understand the Annual Accounts of companies without any

anxiety Thereby, leading to be6er decision making using financial informa4on.

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Let’s Get Started To begin with, let us understand some concepts and meanings of some commonly used terms in Finance.

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Concept of Accounting Period

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Accoun0ng Period -‐  Profit and loss statement are prepared for a specific period of 4me – this period is

called the Accoun0ng Period

-‐  Usually the Accoun4ng Period is 1 year (Apr 1 to the next Mar 31)

-‐  Many companies also prepare their Accounts for Accoun4ng Periods of a Quarter and Half-‐Year


Profit & Loss Statement & Balance Sheet

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-‐  All events that generate Income for the company during the Accoun4ng Period are recorded as Revenues and all events that create Cost or Expenses required for genera4ng the Income during the Accoun4ng Period are recorded as Cost and Expenses

-‐  Income, Costs and Revenues during the Accoun4ng Period (say, April 1, 2014 to Mar 31, 2015) are depicted in a par4cular format, called Profit & Loss Account

-‐  The assets (that the company owns) and the liabili4es (that the company owes) as on a par4cular date (the last date of the accoun4ng period; in the above case, as at Mar 31, 2015) is depicted in a par4cular format, called Balance Sheet

-‐  Only transac4ons that have financial implica0ons are recorded in the Profit and Loss Account Statement and Balance Sheet

VentureBean Consulting Private Limited 6

Exercise 1: You are the Chief Financial Officer (CFO) of the company – Soaring Heights Pvt Ltd (SHPL). The company has made an offer to a new CEO to join the company on April 1, 2015, at a gross salary of Rs. 1 crore.

If you are preparing the accounts of the Company as on March 31, 2015, what is the accoun4ng entry that you would make to show the above

event of hiring the new CEO?


This event will not result in any accoun4ng entry as this has no financial implica4ons as on Mar 31, 2015

Exercise 1 -‐ Answer


Non-Financial Business Transactions

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Some more examples of significant business events which do not usually result in any accoun4ng entries at the 4me of the event are: 1.  Approval of the Board of Directors to invest in a new project 2.  Signing of Agreement for Sale to purchase a piece of land or building 3.  Signing of a Joint Venture Agreement or a MOU

However, as prudent accoun4ng norms, companies may disclose such events, if it considers them to be material, under “Notes to Accounts”, which form part of the Annual Accounts.

Can you iden4fy some more significant business events which do not result in any accoun4ng entries at the 4me of the event?


Exercise 2: SHPL has a policy of paying salaries on the last date of the month. The monthly net salary of the CEO is Rs. 5.5 lacs.

If you are preparing the accounts of the Company as on April 30, 2015, what is the accoun4ng entry that you would make to record this event?


This event will result in an expense of Rs. 5.5 lacs in the month of April 2015.

Exercise 2 -‐ Answer


Concept – Accounting Heads

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Accoun0ng Heads -‐  In accoun4ng, all financial entries are recorded under Accoun4ng Heads

-‐  The 6 most important Accoun4ng Heads are:

•  Long Term Liabili4es •  Current Liabili4es •  Fixed Assets •  Current Assets •  Revenues •  Costs

Each of these Accoun4ng Heads have sub-‐accoun4ng Heads.

Found in Balance Sheet

Found in Profit & Loss Statement


Typical Profit & Loss Statement

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Profit and Loss Statement for the Period Apr 1, ___ to Mar 31, ___

REVENUES

TOTAL OF REVENUES

COSTS

TOTAL OF COSTS

PROFIT / LOSS FOR THE PERIOD


Typical Profit & Loss Statement

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Profit and Loss Statement for the Period Apr 1, ___ to Mar 31, ___

REVENUES

TOTAL OF REVENUES

COSTS

TOTAL OF COSTS

PROFIT / LOSS FOR THE PERIOD

Main Accoun4ng Heads


Typical Balance Sheet

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Balance Sheet as at March 31, ______ LONG TERM LIABILITIES FIXED ASSETS

CURRENT LIABILITIES CURRENT ASSETS

TOTAL OF LIABILITIES TOTAL OF ASSETS

Total of Liabili4es = Total of Assets

The lei sid

e is the Liabili4e

s side

of th

e Ba

lance Sheet

The right side is the Assets side of the Balance Sheet


Typical Balance Sheet

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Balance Sheet as at March 31, ______ LONG TERM LIABILITIES FIXED ASSETS



Total of Liabili4es = Total of Assets

The lei sid

e is the Liabili4e

s side

of th

e Ba

lance Sheet

The right side is the Assets side of the Balance Sheet

Main Accoun4ng Heads


Balance Sheet - Sub-Accounting Heads

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Balance Sheet as at March 31, ______ LONG TERM LIABILITIES FIXED ASSETS Equity Share Capital Gross Fixed Assets Reserves & Surplus Accumulated Deprecia4on Bank Borrowings Net Fixed Assets

Long Term Investments

CURRENT LIABILITIES CURRENT ASSETS Sundry Creditors Inventories Provisions Cash & Bank Balance

Receivables Loans & Advances



P&L Statement - Sub-Accounting Heads

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Profit and Loss Statement for the Period Apr 1, ___ to Mar 31, ___ REVENUES COSTS Revenues from Opera4ons Cost of Goods Sold Non – Opera4onal Revenues Salaries

Electricity & Power Travel Expenses

TOTAL OF REVENUES TOTAL OF COSTS

Can you think of some more Sub-‐Accoun4ng Heads?


Definitions of Key Terms Balance Sheet – Snapshot of a Company’s financial posi4on at a par4cular date Assets – All that which a Company Owns Fixed Assets – Capital assets in nature that will be used for an extended period of 4me and are used for producing goods and services that have economic value Current Assets – Value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business Inventory – refers to the goods and materials that a business holds for the ul4mate purpose of sale or repair Receivables – amounts due from customers that are expected to be collected

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Definitions of Key Terms Liabili0es – All that with a Company Owes to someone Share Capital – Money contributed by shareholders Reserves and Surplus – The accumulated profit or loss that belongs to the shareholders Loans – Amount borrowed by the Company from a Bank or a Lender, which carries and interest rate and needs to be repaid within a certain period Current Liabili0es – Company’s obliga4ons or debts that are due within one year Creditors – Amounts owed to suppliers of goods and services purchased Provisions – A Liability whose value or 4me of payment is not crystalised at the 4me of drawing up the Balance Sheet, is classified as Provision

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Definitions of Key Terms Profit and Loss Account – Financial statement that summarises the revenues, costs and expenses incurred during a specific period of 4me Revenues – Income that a Company receives from its normal business ac4vi4es during a period, usually from sales of goods and services to customers Costs of Goods Sold – Value of money that has been used up to produce something that has generated Revenues during the same period Expense – Oullow of money to another person to pay for an item or service required to produce something that has generated Revenues during the same period Deprecia0on – Non-‐cash expense that is set aside to recreate fixed assets that lose value on account of use

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Definitions of Key Terms Net cash accruals – Surplus in Profit and Loss Statement during a period including all non-‐cash expenses

= PAT + all non cash expenses Dividend – Payment to shareholders out of the profits of the company Retained Earnings – The amount of money lei at the end a period aier paying dividend

= PAT – Dividend This is the amount that gets added to Reserves & Surplus at the end of the period

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Concept – Entity

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En0ty Concept -‐  Accounts are prepared for an en4ty – in the example that we took earlier, we were

preparing accounts for the corporate en4ty, SHPL -‐  The accounts reflect all transac4ons that are relevant from that en4ty’s point of

view -‐  This en4ty is different from the shareholders, suppliers, employees, government,

etc. -‐  All transac4ons that the en4ty has with the other stakeholders are accounted in

the financial statements


Concepts – Double Book Keeping

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Double Entry Book Keeping -‐  We follow double entry book keeping method, i.e., every transac4on will have two

(or more entries) to reflect changes under two (or more) accoun4ng heads – This is what makes the Balance Sheet, balance


Exercise 3: On April 1, 2015, the shareholders of SHPL has invested Rs. 1 cr as equity share capital of the company.

Can you iden4fy the accoun4ng entries that would be required to be made for this transac4on?


Exercise 3 -‐ Answer Balance Sheet as at April 1, 2015

LONG TERM LIABILITIES FIXED ASSETS

-‐ Equity Share Capital +1,00,00,000 Gross Fixed Assets


Cash & Bank Balance

-‐ Equity Share Capital +1,00,00,000

TOTAL OF LIABILITIES 1,00,00,000 TOTAL OF ASSETS 1,00,00,000

•  SHPL owes Rs. 10000000/-‐ has Equity Capital to the Shareholders and hence this would be shown under Long Term Liabili4es, which increases by Rs, 1,00,00,000/-‐

•  This amount when received by SHPL is credited to its Bank Account and as the Bank Balance is owned by SHPL this will be shown as an Asset, increasing the Bank Balance by Rs. 1,00,00,000/-‐

•  No4ce that there are 2 accoun4ng entries arising out of this transac4on and they impact both the Asset and the Liability side of the Balance Sheet for the same value (Rs. 1,00,00,000/-‐)


Exercise 4: SHPL wants to buy a laptop for the new CEO. The cost of the laptop is Rs. 1 lac. SHPL has decided to make full payment to the dealer on delivery of the laptop. The laptop was delivered on April 15, 2015.





Gross Fixed Assets

-‐ CEO Laptop +1,00,000


Cash & Bank Balance

-‐ CEO Laptop -‐1,00,000

TOTAL OF LIABILITIES 0 TOTAL OF ASSETS 0

•  Laptop is not going to get consumed for manufacture of product/service and generally can be used for an extended period of 4me. Hence, it is a fixed asset

•  As SHPL has bought the laptop (owns), the Fixed Assets of the company will increase by Rs. 1,00,000/-‐ •  As SHPL has decided to pay for the laptop on delivery, it will pay the amount from its bank account and hence its

Bank Balance will decrease by Rs. 1,00,000/-‐ •  No4ce that there are 2 accoun4ng entries arising out of this transac4on and both impact the Asset side of the

Balance Sheet only, for the same value (Rs. 1,00,000/-‐)


Exercise 5: Now, lets consider a different situa4on. SHPL wants to buy a laptop for the new CEO. The cost of the laptop is Rs. 1 lac. However, the dealer is offering a very a6rac4ve financing op4on where SHPL has to pay only 10% of the value of the laptop upfront and the balance 90% will be financed by the dealer which can be repaid by SHPL over the next 2 year on an EMI Scheme. The laptop was delivered on April 15, 2015





-‐ CEO Laptop Loan +90,000 Gross Fixed Assets

-‐ CEO Laptop +1,00,000


Cash & Bank Balance

-‐ CEO Laptop -‐10,000

TOTAL OF LIABILITIES +90,000 TOTAL OF ASSETS +90,000 •  Here again, as the Laptop (Fixed Asset) is now owned by SHPL, the Fixed Assets of the company will increase by Rs.

1,00,000/-‐ •  As SHPL has to pay only 10% upfront for the Laptop, it will pay this amount from its bank account and hence its

Bank Balance will decrease by Rs. 10,000/-‐ •  The Balance amount for the Laptop will be a Loan (it owes this money to the dealer) and hence, the Long Term

Liability of the company will increase by Rs. 90,000/-‐ •  No4ce that there are 3 accoun4ng entries arising out of this transac4on and these impact both the Asset and the

Liability side of the Balance Sheet •  Note that irrespec4ve of the way the Asset purchase is financed, once the Asset is in use by the Company, the

en4re value of the Asset is shown on the Books (Balance Sheet) of the Company


Exercise 6: On April 30, SHPL pays the April salary of Rs. 5.5 lacs to its CEO.






Cash & Bank Balance

-‐ CEO Salary -‐5,50,000


•  CEO’s salary will be an expense and hence will impact the “COST” Accoun4ng Head of the P&L Statement, which will increase by Rs. 5,50,000/-‐

•  As SHPL pays the salary from its Bank Account, the Bank Balance will decrease by Rs. 5,50,000/-‐ •  No4ce that there are 2 accoun4ng entries arising out of this transac4on and these impact the cost side of the P&L

Statement and Asset side of the Balance Sheet

Profit and Loss Statement for the Period Apr 1, 2015 to Apr 30, 2015

REVENUES COSTS

-‐ CEO Salary -‐5,50,000

TOTAL OF REVENUES

TOTAL OF COSTS


Exercise 7: (a) On April 1, 2015, SHPL has taken an office space of 5,000 sq. i. at a monthly rental of Rs. 2.5 lacs. The Company pays the monthly rent in advance on 5th of the month. (b) SHPL also paid a rental deposit equal to 10 months rent for the office space. This rental deposit was paid on April 1, 2015



Exercise 7 (a) -‐ Answer Balance Sheet as at April 30, 2015



Cash & Bank Balance

-‐ April Rent -‐2,50,000


•  Monthly rent will be an expense and hence will impact the “COST” Accoun4ng Head of the P&L Statement, which will increase by Rs. 2,50,000/-‐

•  As SHPL pays the rent from its Bank Account, the Bank Balance will decrease by Rs. 2,50,000/-‐ •  No4ce that there are 2 accoun4ng entries arising out of this transac4on and these impact the Cost side of the P&L

Statement and Asset side of the Balance Sheet


REVENUES COSTS

-‐ April Rent -‐2,50,000

TOTAL OF REVENUES

TOTAL OF COSTS


Exercise 7 (b) -‐ Answer Balance Sheet as at April 30, 2015



-‐ Rental Deposit +25,00,000

Cash & Bank Balance

-‐ Rental Deposit -‐25,00,000


•  Although the rental deposit is given by SHPL to the owner of the office space, as the rental deposit will be returned to SHPL when the office is vacated, the amount is s4ll owned by SHPL, and hence it is an Asset of SHPL

•  This rental deposit is shown under the Accoun4ng Head “Rental Deposit”, which is usually shown under the Sub-‐Accoun4ng Head “Loans and Advances” under “Current Assets”, which increased by Rs. 25,00,000/-‐

•  As SHPL pays the rental deposit from its Bank Account, the Bank Balance will decrease by Rs. 25,00,000/-‐ •  No4ce that there are 2 accoun4ng entries arising out of this transac4on and these impact only the Asset side of

the Balance Sheet


REVENUES COSTS

TOTAL OF REVENUES

TOTAL OF COSTS


Concept – Negative Cash Flow Transactions

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All nega0ve cash flow transac0ons are not cost -‐  Some transac4ons, like cash spent to produce a product, need not reflect as cost in

the period in which the product was manufactured. If the product is not sold in the accoun4ng period, such cash spent are accounted as inventory (current assets)

-‐  Similarly, cash spent to build an office building / factory are accounted as fixed assets and not costs

-‐  Cash given as deposit for taking premise on rent is accounted as deposits (current assets) and not costs (seen in the previous Exercise)

-‐  Cash spent on salaries and others for product development can be accounted as Intellectual Property (Intangibles) and not costs


Exercise 8: On April 10, 2015, SHPL enters into an agreement with Good Products Pvt Ltd (GPPL) for sub-‐contrac4ng manufacture of new genera4on mobile phones. GPPL agrees to supply each phone at a cost of Rs. 25,000/-‐ each On May 15, 2015, SHPL received 10 phones from GPPL. SHPL pays GPPL for the phone immediately on receipt of the phones During May 2015, SHPL sells 5 phones to customers, each priced at Rs. 40,000/-‐. The phones were sold on cash and carry basis.

Can you iden4fy the accoun4ng entries that would be required to be made for these transac4ons?


Exercise 8: Calcula0ons Revenue from sale of 5 phones @ Rs. 40,000/-‐ = Rs. 2,00,000/-‐ Amount paid to GPPL for purchase of 10 phones @Rs. 25,000/-‐ = Rs. 2,50,000/-‐

Now, let’s look at each of these transac4ons, one at a 4me.


Exercise 8 (a) – Phone Purchase Transac0on Balance Sheet as at May 31, 2015



Inventory

-‐ Phone Purchase +2,50,000

Cash & Bank Balance

-‐ Phone Purchase -‐2,50,000


•  When SHPL purchases 10 phones, it pays GPPL Rs. 2,50,000/-‐ for the phones and hence the Bank Balance of GPPL decreases by Rs. 2,50,000/-‐

•  Now SHPL has 10 phones in its “Inventory” under Accoun4ng Head “Current Assets” (these phones are meant to be converted into cash by selling them, so these are “Inventory” and not “Fixed Assets”); inventory increases by Rs. 2,50,000/-‐

•  No4ce that there are 2 accoun4ng entries arising out of this transac4on and these impact only the Asset side of the Balance Sheet

Profit and Loss Statement for the Period May 1, 2015 to May 31, 2015

REVENUES COSTS

TOTAL OF REVENUES

TOTAL OF COSTS


Exercise 8 (b) -‐ Sale Transac0on Balance Sheet as at May 31, 2015



Cash & Bank Balance

-‐ Phone Sales +2,00,000


•  Sales of phones is a “Revenue” transac4on and the amount received (Rs. 2,00,000/-‐) is an income for SHPL; Revenues increase by Rs. 2,00,000/-‐

•  As the sales are on cash and carry basis, SHPL receives Rs. 2,00,000/-‐ from customers, which is deposited into its bank account and hence the Bank Balance increases by Rs. 2,00,000/-‐


REVENUES COSTS


TOTAL OF REVENUES

TOTAL OF COSTS

Is that all? Have we accounted for all the effect of the sale transac4on? No!!

Now, we don’t have 5 phones in our Inventory!!


Exercise 8 (b) -‐ Sale Transac0on Balance Sheet as at May 31, 2015



Inventory

-‐ Cost of Goods Sold -‐1,25,000

Cash & Bank Balance



•  The value of the Goods that are sold is called “Cost of Goods Sold” or “COGS”; in this case COGS is Rs. 1,25,000/-‐ (for 5 phones only and not for 10 phones), which increases the Costs by Rs. 1,25,000/-‐

•  As 5 phones are not available in Inventory any longer, the Inventory reduces by Rs. 1,25,000/-‐


REVENUES COSTS

-‐ Phone Sales +2,00,000 -‐ Cost of Goods Sold

-‐1,25,000

TOTAL OF REVENUES

TOTAL OF COSTS

Now, let’s look at all the transac4ons together.


Exercise 8 -‐ Answer Balance Sheet as at May 31, 2015



Inventory



Cash & Bank Balance





REVENUES COSTS


-‐1,25,000

TOTAL OF REVENUES

TOTAL OF COSTS

No4ce that the Balance Sheet is not balanced – Why? How do you balance the Balance Sheet in this case?





Inventory



Cash & Bank Balance



TOTAL OF LIABILITIES TOTAL OF ASSETS +75,000


REVENUES COSTS


-‐1,25,000

TOTAL OF REVENUES

+2,00,000 TOTAL OF COSTS

-‐1,25,000

SURPLUS +75,000




-‐ Reserves & Surplus +75,000


Inventory



Cash & Bank Balance



TOTAL OF LIABILITIES +75,000 TOTAL OF ASSETS +75,000


REVENUES COSTS


-‐1,25,000

TOTAL OF REVENUES

+2,00,000 TOTAL OF COSTS

-‐1,25,000

SURPLUS +75,000


Concept – Non-Cash Expenses

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All costs do not affect cash flows -‐  Deprecia4on, amor4sa4on of expenses -‐  Normally, such transac4ons effect cash flows in a period different from the period

in which the costs are incurred -‐  For example, a company may incur nega4ve cash flow in Month 1 to set up an

office building, while the deprecia4on cost on the same building will affect the profitability statements in the subsequent months


Exercise 9: On April 1, 2015, SHPL buys a BMW 3 Series sedan for its CEO. The cost of the car is Rs. 45 lacs and the company buys the car by making 25% down payment and the balance in 60 EMIs of Rs. 50,000/-‐. The Company follows a policy of deprecia4ng its car assets over a period of 3 years on Straight Line Method.



Exercise 9 -‐ Answer Balance Sheet as at Mar 31, 2016


-‐ BMW Finance +33,75,000 Gross Fixed Assets

-‐ 1st Year EMI (BMW) -‐ 6,00,000 -‐ CEO Car +45,00,000

-‐ Deprecia4on -‐15,00,000


Cash & Bank Balance

-‐ CEO Car -‐11,25,000

-‐ 1st Year EMI (BMW) -‐6,00,000


•  No4ce that Deprecia4on is a non-‐cash expense

Profit and Loss Statement for the Period Apr 1, 2015 to Mar 31, 2016

REVENUES COSTS

-‐ Deprecia4on -‐15,00,000

TOTAL OF REVENUES

TOTAL OF COSTS


Preparing P&L Statement & Balance Sheet

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The exercises that we have done so far are examples of how accoun4ng entries are recorded. We take one transac4on at a 4me and visualise the business transac4ons clearly. Then we iden4fy the Major Accoun4ng Heads under which the transac4on would be recorded: •  Long Term Liabili4es •  Current Liabili4es •  Fixed Assets •  Current Assets •  Revenues •  Costs Once we have iden4fied the Major Accoun4ng Head, we then iden4fy the Sub-‐Accoun4ng Heads to record the transac4on.


Preparing P&L Statement & Balance Sheet

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Using the same method, we record all the financial transac4ons for the Accoun4ng Period under various Sub-‐Accoun4ng Heads. Once all the transac4ons are recorded under various Sub-‐Accoun4ng Heads, we sum the value of all the transac4ons under each Sub-‐Accoun4ng Head. The Summa4on for each Sub-‐Accoun4ng Head for the Accoun4ng Period, gives us the final values for the Balance Sheet and the Profit and Loss Account for the Accoun4ng Period.

Let us now created the Balance Sheet and the Profit and Loss Statement for SHPL for the Accoun4ng Period Apr 1, 2015, to Mar 31, 2016,

accoun4ng the transac4ons that we have seen in the previous exercises.


SHPL Transactions

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Date Transac0on Details

Apr 1, 2015 The shareholders of SHPL has invested Rs. 1 cr as equity share capital of the company.

Apr 1, 2015 SHPL has taken an office space of 5000 sq. i. at a monthly rental of Rs. 2.5 lacs. The Company pays the monthly rent in advance on 5th of the month. SHPL also paid a rental deposit equal to 10 months’ rent for the office space. This rental deposit was paid on April 1, 2015.

Apr 1, 2015 SHPL buys a BMW 3 Series sedan for its CEO. The cost of the car is Rs. 45 lacs and the company buys the car by making 25% down payment and the balance in 60 EMIs of Rs. 50,000/-‐. The Company follows a policy of deprecia4ng its car assets over a period of 3 years on Straight Line Method.

Apr 10, 2015 SHPL enters into an agreement with Good Products Pvt Ltd (GPPL) for sub-‐contrac4ng manufacture of new genera4on mobile phones. GPPL agrees to supply each phone at a cost of Rs. 25,000/-‐ each.

Apr 15, 2015 SHPL wants to buy a laptop for the new CEO. The cost of the laptop is Rs. 1 lac. The dealer is offering a very a6rac4ve financing op4on where SHPL has to pay only 10% of the value of the laptop upfront and the balance 90% will be financed by the dealer which can be repaid by SHPL over the next 2 year on an EMI Scheme. The laptop was delivered on April 15, 2015.

Apr 30, 2015 SHPL pays the April salary of Rs. 5.5 lacs to its CEO.

May 15, 2015 SHPL received 10 phones from GPPL. SHPL paid GPPL for the phone immediately on receipt of the phones.

May 2015 SHPL sells 5 phones to customers, each priced at Rs. 40,000/-‐. The phones were sold on cash and carry basis.


SHPL Transactions

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REVENUES COSTS

-‐ Phone Sales +2,00,000 -‐ April Rent -‐2,50,000

-‐ BMW Deprecia4on -‐15,00,000

-‐ CEO Salary -‐5,50,000


Balance Sheet as at Mar 31, 2016 LONG TERM LIABILITIES FIXED ASSETS Net Worth Gross Fixed Assets -‐ Equity Share Capital +1,00,00,000 -‐ BMW +45,00,000

-‐ CEO Laptop +1,00,000 -‐ BMW Deprecia4on -‐15,00,000

Loans -‐ BMW Finance +33,75,000 CURRENT ASSETS -‐ 1st Year EMI (BMW) -‐6,00,000 Inventory -‐ CEO Laptop Loan +90,000 -‐ Phone Purchase +2,50,000

-‐ Cost of Goods Sold -‐1,25,000 CURRENT LIABILITIES Loans & Advances

-‐ Rental Deposit +25,00,000 Cash & Bank Balance -‐ Equity Share Capital +1,00,00,000 -‐ Rental Deposit -‐25,00,000 -‐ April Rent -‐2,50,000 -‐ 1st Year EMI (BMW) -‐6,00,000 -‐ BMW Down payment -‐11,25,000 -‐ CEO Laptop -‐10,000 -‐ CEO Salary -‐5,50,000 -‐ Phone Purchase -‐2,50,000 -‐ Phone Sales +2,00,000

Summing up all transac4ons under each Sub-‐Accoun4ng Heads will give us the Profit and

Loss Statement and the Balance Sheet


SHPL Transactions Summation

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REVENUES +2,00,000 COSTS -‐24,25,000

-‐ Phone Sales +2,00,000 -‐ April Rent -‐2,50,000

-‐ BMW Deprecia4on -‐15,00,000

-‐ CEO Salary -‐5,50,000


SURPLUS -‐22,25,000

Balance Sheet as at Mar 31, 2016 LONG TERM LIABILITIES FIXED ASSETS Net Worth +77,75,000 Gross Fixed Assets +46,00,000 -‐ Equity Share Capital +1,00,00,000 -‐ BMW +45,00,000 -‐ Reserves & Surplus -‐22,25,000 -‐ CEO Laptop +1,00,000

-‐ BMW Deprecia4on -‐15,00,000 Loans +28,65,000 Net Fixed Assets +31,00,000 -‐ BMW Finance +33,75,000 CURRENT ASSETS -‐ 1st Year EMI (BMW) -‐6,00,000 Inventory +1,25,000 -‐ CEO Laptop Loan +90,000 -‐ Phone Purchase +2,50,000

-‐ Cost of Goods Sold -‐1,25,000 CURRENT LIABILITIES Loans & Advances +25,00,000

-‐ Rental Deposit +25,00,000 Cash & Bank Balance +49,15,000 -‐ Equity Share Capital +1,00,00,000 -‐ Rental Deposit -‐25,00,000 -‐ April Rent -‐2,50,000 -‐ 1st Year EMI (BMW) -‐6,00,000 -‐ BMW Down payment -‐11,25,000 -‐ CEO Laptop -‐10,000 -‐ CEO Salary -‐5,50,000 -‐ Phone Purchase -‐2,50,000 -‐ Phone Sales +2,00,000



SHPL Final Accounts

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REVENUES +2,00,000 COSTS -‐24,25,000

SURPLUS -‐22,25,000

Balance Sheet as at Mar 31, 2016 LONG TERM LIABILITIES FIXED ASSETS Net Worth +77,75,000 Net Fixed Assets +31,00,000

Loans +28,65,000 CURRENT ASSETS Inventory +1,25,000

CURRENT LIABILITIES Loans & Advances +25,00,000

Cash & Bank Balance +49,15,000



Assignment

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In the following slides, a set of transac4ons for a Company are given.

Can you record the accoun4ng entries for these transac4ons under the various Sub-‐Accoun4ng Heads of Balance Sheet and Profit and Loss

Account?

Further, can you create Profit and Loss Statement and Balance Sheet for the Corporate en4ty for the Accoun4ng Period?

The Profit & Loss Statement and the Balance Sheet of the en4ty is given in the last slide for you to compare your solu4on.

For any clarifica4on you can contact me at:

[email protected]


Assignment Transactions

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1.  Brought in Rs.2,50,000/-‐ cash as ini4al investment to start a Coffee Shop 2.  Purchased café furniture worth Rs.25,000/-‐ 3.  Purchased Coffee Beans worth Rs.75,000/-‐ 4.  Paid cash to Printo for prin4ng Coffee Shop sta4onery for Rs.5,000/-‐ 5.  Purchased café furniture worth Rs.50,000/-‐ by taking a 3 year loan from Kotak Bank, with

repayment star4ng aier 1 year. 6.  Interest paid to Kotak Bank during the year is Rs.500/-‐ per month 7.  Coffee Sale for the year – Rs. 6,75,000/-‐ 8.  Incurred Expenses on Interior Design—Rs.25,000/-‐ 9.  Brought in Rs. 5,00,000/-‐ as capital for business requirement 10. Salaries paid to staff during the year – Rs. 4,80,000/-‐ 11. Purchased Crockery Items for Café worth Rs.25,000/-‐ 12. Deposit for Café Premises paid to Landlord—Rs.1,00,000/-‐ 13. Rent paid for the Premises as follows:-‐

-‐ April to September each Rs. 40,000/-‐ per month -‐ October to March each Rs.45,000/-‐ per month

14. Electricity Charges paid from April to March each month Rs.5,000/-‐ 15. Water Charges paid from April to March each month Rs.5,000/-‐


Assignment Transactions (Contd...)

55

16.  License fees paid to Municipality Rs.25,000/-‐ 17.  License Deposit (Refundable)—Rs.25,000/-‐ 18.  Made arrangements for working capital from banks for Rs. 10,00,000/-‐ 19.  Expenses incurred for Making Coffee during the year – Rs. 6,73,000/-‐ 20.  Sold Coffee on 28th February on Credit of 60 days to important customer—Rs.30,000/-‐ in addi4on

to Cash sales made during the months ( as given in Item 7 above) 21.  Purchased Coffee Beans on 1st March worth Rs.30,000/-‐ on Credit for 40 days. 22.  Received Interest from Bank for Rs.25,000/-‐ deposited on behalf of Municipality @ 10% p.a. on

31st March. 23.  Brought in addi4onal cash of Rs.2,50,000/-‐ for the business 24.  Withdrew cash from Bank of Rs.25,000/-‐ to pay Municipal taxes 25.  Incurred expenses for repain4ng Kitchen for Rs.25,000/-‐ 26.  Purchased New Coffee Grinding Machine on Loan for Rs.55,000/-‐ from Kotak Bank on 1st March.

Interest on the same is @12% simple interest p.a., payable at the end of the month.


Assignment Solution – P&L and Balance Sheet

56

Profit & Loss Statement for the year ended Mar 31, ___

Income – Coffee Sales 7,05,000 Other Income 2,500 Total Income 7,07,500 Coffee Making Expenses 6,37,000 Salaries 4,80,000 Cafe Rent 5,10,000 Interior Design 25,000 Electricity Charges 60,000 Water Charges 60,000 License Fee 25,000 Kitchen Repain4ng 25,000 Municipal Taxes 25,000 Kotak Loan Interest 6,550 Total Expenses 18,53,550 Surplus -‐11,46,050

Balance Sheet as at Mar 31, ___

LONG TERM LIABILITIES FIXED ASSETS Capital 10,00,000 Fixed Assets 1,55,000 Reserves & Surplus -‐11,46,050 Equipment Loan -‐ Kotak Bank 1,05,000 Working Capital Loan 5,62,000 CURRENT LIABIITIES CURRENT ASSETS Creditors 30,000 Inventory 35,000 Loans & Deposits 1,25,000 Debtors 30,000 Cash & Bank Balance 2,05,950 Total 5,50,950 Total 5,50,950

understanding business finance

Business

accoun4ng entry

accoun4ng entries

accoun4ng periods

accoun0ng period prot

specic period

prot loss account

key accoun4ng concepts

prudent accoun4ng norms