29 Financial Statements - eGyanKosh

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Financial Statements

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Financial Management 16.1 INTRODUCTION Double Entry System This system was invented by an Italian merchant named Luco paiciali in 1494 A.D. According to this system every transaction has got a two fold aspect, i.e., one party giving the benefit and the others receiving the benefit. Every transaction is divided into two sides, debit and credit. One account is to be debited and another is to be credited. The rules for debiting and crediting are discussed in next section. Suppose the goods are sold to Mr. A for cash, two accounts are going to be created viz., the goods/sales a/c and cash account. This system of recording every transaction in two accounts is known as Double Entry System. The basic principle under this system is that for every debit there must be a corresponding credit or vice-versa. Before discussing the rules of debit and credit let us discuss how the accounts are classified. All accounts are broadly classified into two heads : (1) Personal; (2) Impersonal.

(a) Real; (b) Nominal.

Personal Account It deals with the accounts relating to persons and takes the following forms:

(i) Natural Person: The name of an individual, the suppliers and buyers, say, Ram, Shyam, etc.

(ii) Artificial Person or legal: Bank, the name of any Firm, Association, Club, etc. Notional Person or the Body.

(iii) Representative Personal Account: Outstanding liabilities for Rent, Salary, etc.

Real Account It stands for properties and assets which are broadly classified as tangible and intangible e.g., Plant, Cash, Land, Building, etc. Nominal / Fictitious Account It relates items which exist in name only. This account incorporates items relating to 'Expenses and Losses', and 'Incomes and Gains'. e.g., Rent, Salary, Dividend, Bad Debts, etc.

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Financial Statements SAQ 1

Classify the following accounts into Personal, Real and Nominal

(a) Cash Account Personal Real Nominal

(b) Wages Account (c) Building Account

(d) Calcutta Tramways Co. Account

(e) East Bengal Club Account

(f) Rent Account

(g) Capital Account

(h) Drawings Account

(i) Interest Account

(j) Trade Mark Account

(k) Dividend Account (l) Land Account (m) Goodwill Account

(n) Patent Account

(o) Bad Debt Account

(p) Bank Account (q) Discount Allowed (r) Interest Received (s) Discount Received

Form of an account

…………….Account Dr. Cr. Date Particulars L.F. Amount Date Particulars L.F. Amount

To Rs. By Rs.

Application of Golden Rule (i.e. rules for ascertaining ‘Debit’ and ‘Credit’): Debit = The receiver/the person takes the benefit Credit = The giver/the person scarifies the benefit

Debit = What comes in Credit = What goes out

Debit = All Expenses/losses Credit = All Incomes/gains

Personal Account

Real Account

Nominal Account

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Financial Management Besides the above the following principles can also be applied to debit and credit an account.

(1) Increase in Asset - Dr.

Decrease in Asset - Cr.

(2) Increase in Liability - Cr.

Decrease in Liability - Dr.

(3) Increase in Expense or loss - Dr.

Decrease in Expense or loss - Cr.

(4) Increase in income or profit - Cr.

Decrease in income or profit - Dr.

(5) Increase in Capital - Cr.

Decrease in Capital - Dr.

(6) Increase in Stock/Goods - Dr.

Decrease in Stock/Goods - Cr.

Q

Ascertain which account will be debited and credited from the following

transactions:

(i) Bought goods for cash.

(ii) Bought goods from A dc Co, on credit.

(iii) Returned goods to A & Co.

(iv) Sold goods for cash.

(v) Sold goods to B & Co. on credit.

(vi) B & Co returned goods. Journal book systematically records business transaction on the basis of a source document in a chronological (day by day) order for the first time. Therefore, it is also called the books prime or original entry.

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Financial Statements Standard Form of Journal : Performa of journals is as follows :

Amount (Rs.) Date Particulars L.F.

Dr. Cr.

In the particulars column we record the name of the account to be debited with the abbreviation ‘Dr’. The account to be credit is written with the ward ‘To’ prefixed to it. In the next line explanation of the transaction is recorded which is known as narration. The L.F. column or the Ledger Folio Column is not used at the time of recording the transactions but is filled at the time of posting of journal entries into accounts in Ledger book. The process or recording of business transactions in the Journal Book on the basis of rules of double entry system is called journalizing. For example, if the proprietor introduces Rs. 1,50,000 as additional capital on 01.01.2006, the journal entry for this transaction would be

Amount (Rs.) Date Particulars L.F.

Dr. Cr.

01.01.2006 Cash A/c To Capital A/c

(the amount of additional capital introduced by the proprietor)

1,50,000

1,50,000

Example 1

For the following transactions show the effect of transaction on accounts concerned and journalise the transactions :

( i) Started business with a capital of Rs. 7,500.

(i i) Opened a bank account with State Bank of India for Rs. 2,000.

(iii) Paid Commission to X for Rs. 300.

( iv) Purchased goods from K & Co. for cash Rs. 1,000.

(v) Purchased goods from Mr. Z for Rs. 2,000.

(vi) Goods returned to Mr. Z for Rs. 500.

(vii) Paid to Mr. Z in full settlement of Rs. 1,400.

(vi i i) Received interest on investments for Rs. 400.

(ix) Paid rent to landlord Mr. Y for Rs. 500.

(x) Withdrew cash for household expenses amounted to Rs. 600.

(xi) Sold goods to Mr. L for cash Rs. 2,500.

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Financial Management (xii) Sold goods to Mr. D on credit for Rs. 1,000.

(xi i i) Goods returned by Mr. D for Rs. 250.

(xiv) Received cash from Mr. D in full settlement for Rs. 700.

(xv) Paid carriage on goods purchased for Rs. 350.

(xvi) Paid carriage on goods sold for Rs. 800.

(xvii) Purchased furniture for office decoration for cash amounted to Rs.1000.

(xviii) Purchased furniture for re-sale for Rs. l,000.

(xix) Sold furniture out of those meant for re-sale Rs.1,500.

(xx) Paid rent out of personal cash for Rs. 400.

Solution

Effect of Transaction To be

1. Increase in Cash Increase in Capital

- Cash A/c - Capital

Dr. Cr.

2. Increase in Bank Decrease in Cash

- Bank - Cash A/c

Dr. Cr.

3. Increase in Expenses Decrease in Cash

- Commission A/c - Cash A/c

Dr. Cr.

4. Increase in Stock Decrease in Cash

- Purchase A/c - Cash A/c

Dr. Cr.

5. Increase in stock Increase in Liability

- Purchase A/c - Z A/c

Dr. Cr.

6. Decrease in Stock Decrease in Liability

- Returns Outward A/c - Z A/c

Dr. Cr.

7. Decrease in Liability Decrease in Cash

- Z A/c - Cash A/c

Dr. Cr.

8. Increase in Cash Increase in Income

- Cash A/c - Interest A/c

Dr. Cr.

9. Increase in Expense Decrease in Cash

- Rent A/c - Cash A/c

Dr. Cr.

10. Decrease in Liability Decrease in Cash

- Drawing A/c - Cash A/c

Dr. Cr.

11. Increase in Cash Decrease in Stock

- Cash A/c - Sales A/c

Dr. Cr.

12. Decrease in Stock Increase in Asset (i.e. Debtors)

- Sales A/c - D A/c

Dr. Cr.

13. Increase in Stock Decrease in Asset (i.e. owing by Creditors)

- Returns Inward A/c - D A/c

Dr. Cr.

14. Increase in Cash Decrease in Asset

- Cash A/c - D A/c

Dr. Cr.

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Financial Statements 15. Increase in Expenses Decrease in Cash

- Carriage Inward A/c - Cash A/c

Dr. Cr.

16. Increase in Expense Decrease in Cash

- Carriage Outward A/c - Cash A/c

Dr. Cr.

17. Increase in Furniture Decrease in Cash

- Furniture A/c - Cash A/c

Dr. Cr.

18. Increase in Stock Decrease in Cash

- Purchase A/c - Cash A/c

Dr. Cr.

19. Increase in Cash Decrease in Stock

- Cash A/c - Sales A/c

Dr. Cr.

20. Increase in expense Increase in Capital

- Rent A/c - Capital A/c

Dr. Cr.

In the books of ……………

Journal Entries

Date Particulars L. F. Debit (Rs.)

Credit (Rs.)

(i) Cash A/c Dr. 7,500 .

To Capital A/c 7,500

(Cash taken to start business)

(ii) Bank A/c Dr. 2,000

To Cash A/c 2,000

(iii) Commission A/c Dr. 300

To Cash A/c (Commission paid in cash)

300

(iv) Purchase A/c Dr. 1,000

To Cash A/c (Goods purchased from K & Co. for cash)

1,000

(v) Purchase A/c Dr. 2,000

To Z A/c (Goods purchased from Z on credit)

2,000

(vi) Z A/c Dr. 500

To Returns Outward A/c (Goods returned to Z)

500

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Financial Management 1,500

1,400

(vii) Z A/c Dr. To Cash A/c To Discount Received A/c (Cash paid to Z and, received discount)

100

(viii) 400

Cash A/c Dr. To Interest on Investment A/c (Interest received in cash)

400

(ix) Rent A/c Dr. To Cash A/c (Rent paid in cash)

500 500

(x) Drawing A/c Dr. To Cash A/c (Cash withdrawn for household expenses)

600

(xi) Cash A/c Dr. To Sales A/c (Goods sold for Cash)

2500 2500

(xii) D A/c Dr. To Sales A/c (goods sold to D on credit)

1,000 1,000

(xiii) Returns Inward A/c Dr. To D A/c (Goods returned by D)

250 250

xiv) Cash A/c Dr. Discount allowed A/c Dr. To D A/c (Cash received from D and allowed him discount )

700 50

750

(xv) Carriage Inward A/c Dr. To cash A/c (Carriage paid for goods purchased)

350 350

(xvi) Carriage Outward A/c Dr. To Cash (Carriage paid for goods sold)

800

800

(xvii) Furniture A/c Dr. To Cash A/c (Furniture purchased for cash )

1,000 1,000

(xviii) Cash A/c Dr. To Sales A/c

1,500 1500

(xix) Rent A/c Dr. To capital A/c (Rent paid out of personal cash)

400

400

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Before the actual preparation of Trial Balance, let discuss 'Ledger' and 'Ledger Posting' which are enumerated below: Ledger When the transactions are recorded from the primary books of accounts on permanent basis under double entry system in a summarised and classified form in different accounts and the same is posted in separate pages, it is called a ledger, (i.e. a book which contains records of all transactions permanently, in a summarised and classified form). Since all the transactions are recorded in this book on permanent basis, it is called the book of final entry. Practically; ledger is the principal book of accounts. As a result, all the necessary information relating to any account is available from the ledger: This is most important book of the business and hence is rightly called the king of all books. 16.3.1 Ledger Posting As soon as a transaction takes place, the same is recorded in the journal in the form of a journal entry. This entry is posted again in the respective ledger accounts under double entry principle from the journal. This is called ledger posting. The following example will make the principle clear: Example 2 : On 1. 1. 1985, X started business with .a capital of Rs. 4,000. Journal Entries (without narration)

Ledger Posting

Date Particulars F. N. Debit

(Rs.) Credit (Rs.)

1985 Jan. 1

Cash A/c Dr. To Capital A/c

4,000

4,000

Cash Account

Date Particulars L.F. Cash

(Rs.) Particulars L.F. Amount

(Rs.)

1985 Jan. 1

To Capital A/c

4,000

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Financial Management Capital Account

Date Particulars L.F. Amount (Rs.)

Date Particulars L.F Amount (Rs.)

1985 Jan. 1

1985 Jan.1

By Cash A/c

4,000

16.3.2 Sub-Division of Ledgers

Where transactions are extensive and numerous it becomes necessary to sub-divide ledger into separate books, although it varies from firm to firm depending on the nature and size of the business unit. The sub-division of ledger is :

Debtors Ledger

It contains the accounts of those customers or debtors to whom goods were sold on credit, i.e., for credit sales. It is also called Sold Ledger, Sales Ledger, etc.

Creditors Ledger

It contains the accounts of those suppliers or creditors from whom goods were purchased on credit, i.e. for credit purchases. It is also called Bought Ledger, Purchase Ledger, etc. General/Nominal Ledger It contains the ledger relating to Real and Nominal Accounts as well as the totals of Debtors and Creditors Ledger Accounts.

PREPARATION OF JOURNAL AND LEDGER

Example 3 Record the following transactions and post them into ledgers:

(i) Started business with a capital of Rs. 5,000.

(ii) Sold goods to Mr. X for Rs. 500

(iii) Received cash from Mr. X Rs. 450 in full settlement.

(iv) Purchased goods from Mr. T. for Rs. 1,700.

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Financial Statements (v) Paid to Mr T in full in cash Rs. 1,450.

(vi) Paid Salary lo Mr. Z Rs.300.

(vii) Purchased a plant Rs.1,000.

(viii) Sold goods for Rs.1,300.

(ix) Received interest Rs. 50.

(x) Deposited cash into bank Rs. 1,000.

(xi) Paid wages Rs. 100.

(xii) Withdrew cash from bank for personal use Rs. 200.

S. No. Particulars Debit Credit

(i) Cash A/c Dr. To capital A/c ( Business started with a capital of Rs. 5,000)

5,000 5,000

(ii) X A/c Dr. To sales (goods sold to Mr X)

500

500

(iii) Cash A/c Dr. Discount Allowed A/c Dr. To X Z/c (cash received from Mr X Rs. 450 in full settlement)

450 50

500

(iv) Purchased A/c Dr. To T A/c (Goods purchased from T)

1,500 1,500

(v) T A/c Dr. To Cash A/c To Discount Received A/c (Cash paid to T for s. 1,450 in full settlement)

300

300

(vi) Salary A/c Dr. To Cash A/c (salary paid in cash)

300 300

(vii) Plant A/c Dr. To Cash A/c (Plant purchased for cash)

1,000 1,000

(viii) Cash A/c Dr. To Sales A/c (goods sold for cash)

1,300 1,300

(ix) Cash A/c Dr. To Interest A/c (Interest received in cash)

50 50

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Financial Management

Cr.

(x) Bank A/c Dr. To Cash A/c (cash deposited into bank)

1,000 1,000

(xi) Wages A/c Dr. To cash A/c (wages paid in cash)

100 100

(xii) Drawing A/c Dr. To Bank A/c (Cash withdrawn from bank for personal use)

200 200

Ledger

Dr. Cash Account Cr.

Date Particulars LF Amount Date Particulars LF Amount

To

“ Capital A/c

“ X A/c

“ Sales A/c

“ Interest A/c

5,000

450

1,300

50

By

“ TA/c

“Salary A/c

“ Plant A/c

“ Bank A/c

“ Wages A/c

“ Balance c/d

1,450

300

1.000

1.000

100

2.950

6,800 6,800

To Balance b/d 2,950

Date Particulars LF Amount

Rs.


Rs.


Rs.


Rs.

To Balance

c/d

5,000

5,000

By Cash

A/c

By Balance

b/d

5,000

5,000

5,000

To Sales

A/c

500

500

By Cash

A/c

Discount

Allowed A/c

450

50

500

Date Particulars LF Amount Date Particulars LF Amount Date Particulars LF Amount Date Particulars LF Amount

To Balance

c/d

1,800 By x A /c

Cash A/c

500

1,300

To X A/c 50 By balance

c/d

50

1,800 1,800 50 50

By Balance

b/d

1,800 To

Balance

b/d

50

Dr. Sales Account Cr. Dr. Discount Allowed Account Cr. Cr.

Dr. Capital Account Cr. Dr. X Account Cr.

Dr. Sales Account Cr. Dr. Discount Allowed Account Cr. Cr.

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Dr. Discount Received Account Cr. Dr. Salary Account Cr.

Dr. Plant Account Cr Dr. Interest Account Cr.

Dr. Bank Account Cr. Dr. Wages Account Cr.

Date Particular s LF Amount Date Particulars LF Amount Date Particulars LF Amount Date Particulars LF Amount

To TA /c 1,500 By Balance

c/d

1,500 To

“ Cash A/c

“ Discount

Received

a/c

1,450

50

By Purchase

A/c

1,500

1,500 1,500 1,500 1,500

To Balance

b/d

1,500


To Balance

c/d

50 By TA/c 50 To Cash A/c

300 By Balance

c/d

300

50 50 300 300

To

Balance b/d

50 By Balance

b/d

50

To

balance b/d

300


To Cash

A/c

1

,000

To Balance

c/d

1,000 To Balance

c/d

50 By Cash

a/c

50

1,000 1,000 50 50

To Balance

b/d

1000 1,000 To balance

b/d

50

Date Particulars LF Amt Date Particulars LF Amt Date Particulars LF Amt Date Particulars LF Amt

To Cash A/c 1,000 By Drawing A/c

By Balance B/d

200

800

To Cash A/c

100 By Balance

c/d

100

1,000 1,000 100 100

To

Balance b/d

800

1,000 To

balance b/d

100

Dr. Purchase Account Cr. Dr. T Account Cr.

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Financial Management Dr. Drawing Account Cr.

Date Particulars L.F. Amount

Rs.

Date Particulars L.F. Amount

To Bank A/c 200 By Balance c/d 200

To balance b/d 200

Trial Balance Trial Balance is a statement which is prepared in a separate set of papers by taking up all the ledger accounts balances on a particular date in order to verify the arithmetical accuracy of the accounts in the ledger and putting the debits in one side and credits in another. No doubt it is a useful device and it helps to prepare the final account since it contains all the Personal, Real and Nominal accounts' Balances. As it is prepared by taking up the ledger accounts' balances, both debit and credit side of a trial balance must always be equal. In other words, it assures that (a) the balance (debit or credit) which is taken from different accounts are arithmetically correct; (b) the balances are taken and posted in the Trial Balance correctly rectify and (c) debits and credits of all transactions are recorded. One is to remember that Trial Balance is not a part of an account but a statement which is prepared to verify the arithmetical accuracy of ledger accounts.

Preparation of Trial Balance At first, close each of the individual accounts, one by one, by taking up their respective differences which will either show a debit balance (i.e. if debit total is greater than the credit total) or a credit balance (i.e. if credit total is greater than the debit total). The debit balances of the accounts are to be written in debit column whereas credit balances of the accounts are to be written on the credit column. The total of both columns must be equal. The following three methods may be followed at the time of its preparation viz. (1) Total Method; (2) Balance Method; and (3) Compound Method.

(1) Total Method: Under this method, Trial Balance is prepared by taking up the total of both debits and credits of all ledger accounts.

(2) Balance Method: Under this method, Trial Balance is prepared by taking up the balance of each ledger account only.

(3) Compound Method: It is the combination of above two methods. It is also known as Total-Cum Balance Method.

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Financial Statements Example 4

From the ledger prepared in Example 3 prepare trial balance using the methods discussed in Section 16.4.

Method 1 : Total Method

Head of Account L.F. Debit (Rs.)

Credit (Rs.)

Cash Account 6,800 3.850

Capital Account -- 5,000

X Account 500 500

Sales Account -- 1,800

Discount Allowed Account 50 --

Purchase Account 1,500 --

T Account 1,500 1,500

Discount Received Account -- 50

Salary Account 300 --

Plant Account 1,000 --

Interest Account -- 50

Bank Account 1,000 200

Wages Account 100 --

Drawing Account 200 --

12,950 12,950

Method 2 : Balance Method

Head of Account L.F. Debit (Rs.)

Credit (Rs.)

Cash Account 2,950 --

Capital Account -- 5000

Sales Account -- 1,800

Discount Allowed Account 50 --

Purchase Account 1,500 --

Discount Received Account --- 50

Salary Account 300 --

Plant Account 1,000 --

Interest Account -- 50

Bank Account 800 --

Wages Account 100 --

Drawing Account 200 --

6,900 6,900

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Financial Management Method 3 : Compound Trial Balance

As at / on ……………………………………..

Head of Account L. F. Total Balance

Debit Rs.

Credit Rs.

Debit Rs.

Credit Rs.

Cash Account 6,800 3,850 2,950 --

Capital Account -- 5,000 -- 5,000

X Account 500 500 -- --

Sales Account -- 1,800 -- 1,800

Discount Allowed Account 50 -- 50 --

Purchase Account 1,500 -- 1,500 --

T Account 1,500 1,500 -- --

Discount Received Account -- 50 -- 50

Salary Account 300 -- 300 --

Plant Account 1,000 -- 1,000 --

Interest Account -- 50 -- 50

Bank Account 1,000 200 800 --

Wages Account 100 -- 100 --

Drawing Account 200 -- 200 --

12,950 12,950 6,900 6,900

Trading Account is prepared to find out Gross Profit (or Loss) due to operation of business. The gross profit (or loss) is calculated by deducting the cost of goods sold from net sales. Cost of goods sold is ascertained as follows : Cost of goods sold = Adjusted Purchases + Direct expenses

Where adjusted purchases = Opening Stock

+ Net Purchase

– Closing Stock

+ Direct expenses

Gross profit is said to be made when the sale process exceed the cost of goods sold. Conversely, when sale proceeds are less than the cost of goods sold, Gross Loss is incurred. Direct expenses means all expenses directly connected with purchase of goods and bringing them in saleable condition. Trading account is a nominal account and is closed by transferring gross profit (or loss) to the Profit and Loss Account. Proforma of Trading Account appears as follows:

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Financial Statements Advantages of Trading Account: Preparation of Trading account involves following advantages:

• Provide information about gross margins

• Information about net purchase and stocks

• Direct expense ratio

• Efficiency of sales department

• Analysis of stocks

Trading Account for the year ending…………………..

Dr. Cr. Particulars Amount

(Rs.) Particulars Amount

(Rs.) To Opening Stock To Purchase Less : Purchase return To Direct Expenses Freight and Insurance Carriage Inwards Wages Octori Fuel power lighting and heating expenses Packing charges Duty on purchases To Profit and Loss A/c Balancing figure being Gross Profit

By Sales Less : Sales return By Closing Stock By Profit & Loss A/c (Balancing figure being Gross loss)

16.5.1 Trading Account Items Debit Side:

Opening Stock: In case of trading business the opening stock consists of different types of goods. In case of manufacturing concern opening stock consists of raw materials, work in progress and finished goods. The amount of opening stock is available in the Trial Balance.

Purchases: Purchases account in the trial balance shows gross total purchases. Purchases figure is adjusted for duty drawbacks, cash subsidies and modvatable excise duty. All these are subtracted from purchases to arrive at net purchase figure.

Purchase Return: Purchase return is the goods returned to the suppliers and the amount of purchase return is subtracted from purchases account.

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Financial Management Direct Expenses: The expenses directly attributable to the purchase of goods or to bring them to the saleable condition are known as direct expenses.

Credit Side

Sales: The balance of the sales account as shown in the trial balance shows the total sales. In case the sales tax is included in sales the same is to be subtracted from sales. Sales Return: Sales return account in trial balance shows the value of the goods returned by the customers during the year. Instead of recording it on the debit side of the trading account, it is deducted from sales account on the credit side to provide information about net sales during the period. Closing Stock : Normally, closing stock does not appear in trial balance. Value of the stock at the end of the year is given in the question and generally appears outside the trial balance. In case the closing stock is in trial balance it implies that the purchase figure has been adjusted for the closing stock and is called adjusted purchase and the closing stock will not be included on the credit side of the trading account, but will be recorded on the asset side of the balance sheet. In case the closing stock is appearing outside the trial balance the same is to be recorded on the credit side of the trading account. The closing stock has to be valued at the lower side of the cost price or market price. This account reveals the net result of the business unit during on accounting period which is ultimately transferred to capital account. Gross profit/loss is revealed by the trading account is transferred to Profit and Loss Account. All expenses and losses not transferred to trading account are taken to the debit side or debited to Profit and Loss. These expenses are called as indirect expenses. The broad category of indirect expenses are as follows:

(1) Office and administrative expense: These include salaries, printing and stationary, office rent, legal charges, audit fees, telephone expenses, insurance premium, etc.

(2) Selling and Distribution expenses: These include salesman’s commission, advertisement expense, carriage outward, depreciation and repair expenses of vehicle use for sales, bad debts, etc.

(3) Financial charges: These include interest on loans, interest on public deposits, interest on bank overdraft, interest on capital, etc.

(4) Depreciation: Fixed assets are to be depreciated at fixed percentage in order to provide for wear and tear during usage

(5) Miscellaneous expenses: These include donations, charity loss by fire, theft, etc.

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Financial Statements Since all the nominal accounts of a trial balance are closed by transferring to the Trading Account and Profit and Loss account, there remains personal and real accounts of the trial balance. The balance sheet is prepared by taking up all the personal accounts (Capital and Drawings) and real accounts (Assets) together with the results obtained from Profit and Loss Account. All the liabilities are shown on the left hand side and the assets on the right hand side.

(1) Fixed Assets and Current Assets: Asset, acquired for utilisation, and not for resale, are termed as fixed or permanent or non-current assets. Fixed assets are generally valued at cost less depreciation. These include items acquired for use in the operation of business for a relatively long period of time such as land and building, plant and machinery, furniture, motor car, etc.

Current assets refer to those items which are converted into cash during normal operating cycle of business. For example, conversion of cash into stock, into debtors, debtors into bills receivable and bills receivable into cash completes operating cycle of business. Generally, these items are converted into cash in the normal course of business within a short period of time. Besides, cash; bank balance; bills receivable; debtors and stocks the current assets also include short-term investments, prepaid expenses and accrued incomes.

(2) Tangible, Intangible and Fictitious Assets : Tangible assets have physical identity and include items which can be seen and touched like land and building, stock, cash, furniture, etc.

Intangible assets refer to those resources owned and used in the operation of business which do not have physical existence like goodwill, patents, trade marks, etc. Both tangible and intangible assets are necessary for the operation of business.

Fictitious Assets, really speaking, should not be termed as assets because no benefit is derived from these assets in future operations. These include debit balance of profit and loss account, deferred revenue expenditure, suspense account, discount of issue shares and debentures expenses related to formation of business, etc. and are written off over a period of time.

(3) Short-Term and Long-Term Liabilities: Short-term Liabilities refer to

those liabilities which are payable within a short period of time, ordinarily in a year. These include creditors, bills payable, outstanding expenses, Long-term liabilities due for settlement in short period of time are also termed as current liabilities.

Long-term liabilities are those obligations which are to be met after one year period like term loan, public deposits, debentures, etc.

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Financial Management (4) Contingent Assets and Contingent Liabilities : Contingent liability refers to an obligation to pay upon the happening and non-happening of an certain event. It is not an actual liability and, therefore, it is not recorded in the balance sheet. These liabilities appear as footnote to the balance sheet. These are not provided in the books because the amount is payable only on happening or- non-happening of a particular event.

Contingent asset refers to an asset the existence, value and ownership of which depends upon the occurrence or non-occurrence of a specific event or upon the performance or non-performance of a specified act." (Kohlar Dictionary for Accountants). For example, decisions in a pending court case about the ownership of property will determine the ownership issue. Whether the business entity will get the property or not depends upon the decision of the court. Till then, it is a contingent asset.

(5) Capital and Revenue Expenditure: Expenditure refers to cost

outlay during the period under consideration. If the benefit of an expenditure is confined to a short period of time normally a year, it is termed as revenue expenditure. Examples are: rent of building, salaries, insurance premium, wages, audit fees, etc. Revenue expenditure is, treated as an expense and charged to trading and profit and loss account of the current year.

On the other hand, if the benefit of an expenditure is to be received over a series of accounting years it is termed as capital expenditure. Amount incurred on purchase of fixed assets like land and building, plant and machinery, patents, trademark termed as capital expenditure because the benefit is to be received over a number of years. Amount incurred on initial repair of second-hand assets, installation of assets, extension or improvement of fixed assets also treated as capital expenditure and included in the cost of fixed assets. However, amount incurred to maintain fixed assets in working order is revenue expenditure and is debited to profit and loss account.

Some practical hints for preparing final accounts are as follows :

(1) Generally trial balance is given in the question. If only ledger balances are given and trial balance is not given, it is advisable to prepare trial balance to find out difference if any, in the trial balance. Difference in trial balance is transferred to suspense account and recorded in the balance sheet.

(2) All accounts which appearing the trial balance are to be recorded at one place at the time of preparing final accounts.

(3) Nominal accounts with debit balances are either debited to trading account or profit and loss account. Similarly, nominal account with credit balances are either credited to trading account or profit and loss account.

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Financial Statements (4) Real accounts in trial balance have debit balances and are recorded on assets side of balance sheet.

(5) Personal accounts with debit balances are recorded on asset side. Personal account with credit balances are recorded on liabilities side either as capital (if the amount is payable to owner(s) or as liabilities (in case the amount is due to outsiders).

(6) All accounts with debit balances appear either on the debit side of trading account profit and loss account or on the asset side of balance sheet. However, if account with debit balance is to be shown on opposite side, it is shown as deduction. For example, sales return account shows debit balance but is recorded on credit side of trading account and deducted from sales. All accounts with credit balances appear either on the credit side of trading account or profit and loss account or on liabilities side of balance sheet. However, if an account with credit balance is to be shown on opposite side, it is shown as deduction. For example, purchase return account with credit balance is deducted from purchases on debit side of trading account.

(7) If a particular information appears outside the trial balance, it means that has not been recorded in books. To complete double entry, it is recorded at two places at the time of preparation of final accounts. For example, information about closing stock given outside the trial balance, is recorded on credit side of trading account and assets side of balance sheet. However, if closing stock appears in trial balance, it is to be recorded at one place only and in that case, it is recorded on asset side of balance sheet only.

(8) Only business expenses are to be transferred to trading and profit and loss account. Personal expenses of the owner(s) are to be treated as drawings and subtracted from capital account. For example, income tax paid, life insurance premium, rent of residential building, etc. are treated as drawings and subtracted from capital account.

16.7.1 Difference between Trial Balance and Balance Sheet

Following are the points of difference between the Trial Balance and the Balance Sheet:

(1) Object: Trial balance is prepared to check the arithmetical accuracy of recording and Balance sheet is prepared to reveal the financial position of the business.

(2) Nature of Accounts Listed: Both trial balance and balance sheet list balances of ledger accounts. But trial balance is listing all types of accounts, namely, nominal, real and personal while balance sheet shows balances of real and personal accounts only.

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Financial Management (3) Net Profit/Loss: Trial balance does not contain information about net profit/loss. However details of capital account in the balance sheet provides information about net profit/loss.

(4) Classification and Listing of Accounts: In trial balance, all accounts are divided into two categories, namely, accounts with debit balances and accounts with credit balances. Debit accounts and credit accounts are listed separately. In balance sheet, balances of ledger accounts are divided into balances of assets, liabilities and capital. Assets are listed on one side and liabilities and capital on the other side.

(5) Necessity: Preparation of trial balance is not necessary but preparation of balance sheet is necessary to complete accounting process.

Distinction between Profit and Loss Account and Balance Sheet Profit and Loss account and balance sheet are distinguished on the following basis:

(1) Object: Profit and loss account is prepared to find out result of operation, result of business during an accounting period. Balance Sheet is prepared to portray the financial position of the business on the last day of "the accounting period.

(2) Nature of Account Listed: Profit and loss account records balances of nominal accounts. Balance sheet shows ledger balances of real and capital accounts.

(3) Nature: Profit and loss account is a nominal account prepared to know profit (or loss) earned during a period of time. Balance sheet is a statement containing ledger balances of real and personal accounts.

(4) Balance: Balance of profit and loss account shows net profit (or loss) and is transferred to capital account. Balance sheet records assets on right hand side and liabilities and capital on left hand side. Assets are always equal to sum of capital and liabilities and there is no balancing figure.

Permanence or Rigidity Preference Method

Under this method, the least liquid or fixed assets (e.g. Plant and Machinery, Land and Building, etc.) are placed at the top of the Balance Sheet whereas more liquid or Current assets (e.g. Cash, Bank, Debtors, etc.) are listed at the bottom of the Balance Sheet. (Investments, if any, are placed in between the fixed assets and current assets). That is, it is jut the opposite of the earlier method. In case of liabilities the same principle is followed. The outline of the Balance Sheet under Rigidity Preference Method and Liquidity Preference Method is presented.

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Financial Statements Under Performance or Rigidity Preference Method

Balance Sheet as ………….

Liabilities (Rs.) Assets (Rs.)

Capital Accounts Capital Accounts Current Accounts

Long Term Liabilities Debentures Loan on Mortgage

Current Liabilities Bank Overdraft Sundry Creditors Outstanding Expenses Income Received in Advance Bills Payable

Current Assets Cash Bills Receivable Sundry Debtors Prepaid Expenses Accrued Income Stock-in Trade Investment (with details) Furniture Plant and Machinery Land and Building Patent and Trade Marks Goodwill

Under Liquidity Preference Method

Balance Sheet as ………….

Liabilities (Rs.) Assets (Rs.)

Current Liabilities Sundry Creditors Bills Payable Bank Overdraft Outstanding Expenses Income Received in

Advance Long Term Liabilities Longs on Mortgage Debentures Capital Accounts Current Accounts Capital Accounts

Current Assets Cash Bills Receivable Sundry Debtors Prepaid Expenses Accrued Income

Stock-in Trade Investment (with details) Furniture Plant and Machinery Land and Building Patent and Trade Marks Goodwill

Example From the following particulars prepare a Balance Sheet as at 31.12.1992 as per Rigidity Preference Method.

Capital (7.1.92) Rs. 50,000; Drawings Rs. 3,000; Net Profit for the year Rs. 15,000; Closing Stock Ks. 6,000; Loan on Mortgage Its. 7,500; Bills Payable Rs. 2,500; Bills Receivable Rs. 4,000; Goodwill Rs. 6,000; Book Debts Ps. 4,000; Creditors Rs. 3,000; Plant & Machinery Rs. 21,000; Investments Rs. 9,000; Cash in hand Rs. 1,000; Cash at Bank Rs. 3,000; Land & Building Rs. 17,000.

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Financial Management ( i) Rigidity Preference Method :

Liabilities Amount (Rs.)

Amount (Rs.)

Asset Amount (Rs.)

Capital Account Capital

50,000 Fixed Assets Goodwil l

6,000

Add: Net Profit 15,000 Land and Building 17,000 Plant and

Machinery 20,000

65,000 Investment 9,000

Less: Drawings 3,000 62,000 Current Assets Long-term Liabilities Closing Stock 6,000

Loan on Mortgage 7,500 Bills Receivable 4,000

Current Liabilities Book-Debts , 9,000

Bil ls Payable 2,500 Cash at Bank 3,000

Creditors 3,000 Cash in hand 1,000

75,000 75,000

To determine net income of an accounting year revenue and other incomes are matched with cost of resources consumed (called expenses). For proper matching and to find out true income, these are matched on accrual basis. To determine net income on accrual basis, revenue and income earned during an accounting period (irrespective of inflow of cash) are compared with expenses incurred during the same period (irrespective of outflow of cash). Under double entry system of book-keeping, cost of resources consumed is not directly recorded. To calculate cost of goods sold, goods purchased are adjusted for stock left at the end of the period (closing stock) by passing a journal entry. Besides, closing stock adjustment, expense accounts also require adjustment at the end of the year. Expenses like wages, salaries, rent, interest, etc. are recorded on cash basis and require adjustment at the end of the year for amount due but not paid (called outstanding expenses) and amount paid but not due called prepaid expenses. The cost of fixed asset allocated to a particular accounting year (called depreciation) is adjusted at the end of the accounting year.

Sales are recorded in books when sale process is complete. It increases either cash or claim to cash in the form of debtors and bills receivable. However, other incomes, interest dividend, rent, etc. are recorded on receipt basis. To calculate true profit, amount received is adjusted for amount received but not earned (called unearned income) and amount earned but not received (called accrued income).

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Financial Statements Adjustments are made at the end of the accounting period by passing journal entries (called adjustment entries). Basic objective of passing these adjustment entries is to find out true profit on accrual basis and portray true and fair financial position of the business. Adjustment entries can be passed either before or after the preparation of trial balance, Generally, these adjustments are made after the preparation of trial balance.

The Double Account System is a method of presenting annual financial statements of public utility concerns (formed by Special Acts of Parliament) like tramways, railways, gas, water and electricity companies. It is a special method of presenting the Final Accounts rather than a special system of keeping accounts, Here, all accounts are also kept under the normal double entry system. The main objective of this system is to disclose how much capital has been raised and how such capital has been utilised in the acquisition of fixed assets. To achieve this, the Balance Sheet is prepared in two parts, the first being a statement of Receipts and Expenditure on Capital Account and the second, the General Balance Sheet.

16.9.1 Features of the Double Account System

(i) The conventional Balance Sheet is divided into two parts :(a) Receipts and Expenditure on Capital Account; and (b) General Balance Sheet.

(ii) Financial statements are prepared in greater detail, accompanied by a number of statistical data and statements.

(iii) Along with share capital and debentures, premium (or discount) on issue of shares and debentures are permanently retained in the books as capital items.

(iv) Long-term loans and debentures are treated as part of the capital acquired and are shown in the Receipts and Expenditure on Capital Account.

(v) Revenue Account is prepared in place of Profit and Loss Account. Likewise, Profit and Loss.

Appropriation Account is named as Net Revenue Account

(vi) Interest on loans and debentures are shown as appropriations in the Net Revenue Account.

(vii) Cost of replacement of an asset not involving any increase in capacity is charged to Revenue Account.

(viii) The fixed assets are shown at original cost in the Receipts and Expenditure on Capital Account. Depreciation is not shown as a deduction from the original cost of the assets but as an accumulated fund in the General Balance Sheet (Liabilities side).

(ix) Preliminary expenses on formation are treated as capital expenditure and shown in the Receipts Expenditure on Capital Account.

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Financial Management (x) Capital account appearing on the assets side of the General Balance Sheet, represents the total expenditure to date on assets which may or may not be in existence on the date of the Final Accounts.

(xi) General reserve, Sinking Fund, Investment Fluctuation Fund etc., are shown on the liabilities side of the General Balance Sheet.

The final accounts under the Double Account System normally consists of :

(a) Revenue Account;

(b) Net Revenue Account;

(c) Capital Account (Receipts and Expenditure on Capital Account); and

(d) General Balance Sheet. Revenue Account This account is similar to the Profit and Loss Account of a trading or manufacturing concern. It is debited with various items of expenses and credited with various items of incomes. Depreciation on fixed assets is charged by debiting the Revenue Account and crediting the Depreciation Fund Account. Generally, expenses are shown under the following broad headings :

(A) Generation;

(B) Distribution;

(C) Public Lamps;

(D) Rent, Rates and Taxes;

(E) Management Expenses;

(F) Law Charges;

(G) Depreciation;

(H) Special Charges.

Similarly, incomes are grouped as:

(1) Sale of energy for lighting;

(2) Sale of energy for power;

(3) Sale of energy under special contracts;

(4) Public lightings;

(5) Rental of meters;

(6) Rent receivable; and

(7) Transfer fees, etc.

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Financial Statements Statutory Form of Revenue Account under Indian Electricity Act, 1910 is given below :

Revenue Account for the year ended ………………

Particulars Rs. Particulars Rs.

(A) Generation To Fuel To Oil wastage, water To Salary of engineers To Wages and gratuities

To Repairs and maintenance

(B) Distribution To Salary of engineer To Wages and gratuities To Repairs (C) Public Lamps To Attendance and repairs To Renewals (D) Rent, Rates and Taxes To Rents payable To Rates and taxes (E) Management Expenses To Director's remuneration To Management To General establishment To Auditor of the company (F) Law Charges To Law charges (G) Depreciation

To Lease To Buildings To Plant To Mains To Meters, etc.

(H) Special Charges To Bad Debts

To Balance carried to Net Revenue Account

By Sale of energy for lighting By Sale of energy for power By Sale of energy under special contracts By Public lighting By Rental of meters By Rent receivables By Transfer fees By Other items By Miscellaneous receipts By Sale of ashes By Reconnection and disconnection fees

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Financial Management Net Revenue Account This is similar to the Profit and Loss Appropriation Account of a trading or manufacturing concern except the treatment of interest on debentures and loans. In the Net Revenue Account, it is treated as appropriation of profits. However, in ordinary cases, such interest is treated as a charge against profits and shown in the Profit and Loss Account. The balance of the Net Revenue Account is shown in the General Balance Sheet. The Statutory form of Net Revenue Account under the Indian Electricity Act, 1910 is given below :

Net Revenue Account for the year ended ……………….


To Balance from last year's Account

To Interest on loans

To Contingency reserve

To Interest on debentures

To Dividends

To Balance carried to General Balance Sheet

By Balance from last years Account

By Balance brought from Revenue Account

By Interest on Bank Account

By Balance carried to General Balance Sheet

Capital Account (Receipts and Expenditure on Capital Account) The main purpose of this account is to show total amount of capital raised and its application for acquisition of fixed assets for carrying on the business. As per the statutory forms (prescribed by the Indian Electricity Act, 1910) there are three columns on each side:

(i) one showing balance at the end of the previous year;

(ii) disclosing the amount received/spent during the year; and

(iii) balance at the end of the year.

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Financial Statements Statutory form of Capital Account under The Indian Electricity Act, 1910 is given below:

Receipts and Expenditure on Capital Account

for the year ended………….

Expenditure Expendi-

ture up to

end of

previous

year

(Rs.)

Expendi-

ture

during

the year

(Rs.)

Total

Expend-

iture

(Rs.)

Receipts Receipts

up to the

end of

previous

year

(Rs.)

Receipts

during

the year

(Rs.)

Total

receipts

(Rs.)

To Preliminary

Expenses

To Land

To Building

To Plant

To Mains

To Transformers,

motors, etc.

To Meters

To General stores

To Special items

Total Expenditure

To Balance of

Capital Account

carried to

General Balance

Sheet

By Ordinary

shares

By Preference

shares

By Debentures

By Loans

By Calls-in-

advance

By Other receipts

Total Receipts

By Balance of

Capital

Account

carried to

General

Balance sheet

General Balance Sheet

In the General Balance Sheet, all the remaining assets and liabilities, like current assets, current liabilities, reserves, etc., are shown along with the total of receipts (on the liability side) and the total expenditure (on the asset side).

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Financial Management The Statutory Form of General Balance Sheet under Indian Electricity Act, 1910 is given below:

General Balance Sheet as on ………………………..


To Capital Account To Sundry Creditors for Capital Expenditure To Sundry Creditors on Open Account To Net Revenue Account To Reserve Fund To Depreciation Fund To Special Items

By Sundry Debtors By Preliminary expenses By Securities By Special By Cash at bank By Cash in hand By Capital Account By Stores in hand

Treatment of Replacement of an Asset Under the Single Account System when an asset is replaced, the Cash Account is debited and the Asset Account is credited, and the difference is transferred to the Profit and Loss Account (being profit or loss on sale of asset). The Asset Account is reduced by its written down value. Similarly, when an asset is purchased, the Asset Account is debited and the Cash or Bank Account is credited and the Asset Account is increased by that amount. However, under the Double Account System when an asset is replaced, the original cost of the asset is not disturbed, instead it continues to appear in the Capital Account at the old figure. Under this system, the cost of replacement is treated in the books of accounts as under : (i) When no Extension or Improvement is involved :

In this case, the entire amount of cost of replacement is treated as revenue expenditure and is debited to Revenue Account.

(ii) When Extension or Improvement is Involved :

In this case, an amount equal to the present cost of replacement of the old asset is treated as revenue expenditure and is charged to the Revenue Account. However, this chargeable amount is reduced by

(a) sale proceeds of scrap of the old asset; and

(b) value of materials of old asset used in rebuilding the new asset.

The total cost of replacement plus the value of materials of old asset used in rebuilding the new asset minus the present cost of replacement of the old asset is capitalised.

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Financial Statements Some Important Provisions The students should note the following important matters which will affect the accounts of electricity companies as provided in the Sixth Schedule to The Electricity (Supply) Act. 1948. These are as follows:

(a) Depreciation on fixed assets

(b) Fixed assets and their prescribed life

(c) Contingency reserve

(d) Development reserve

(e) General reserve

(f) Appropriation of profits Depreciation on Fixed Assets As per the provision of Sec. 68 of The Electricity (Supply) Act, 1948, every fixed asset must be depreciation and for calculating depreciation, the life of each asset is to be taken as stated in the Seventh Schedule. Schedule VI provides for two methods of depreciation, viz:

(a) Compound Interest Method; and

(b) Strait Line Method.

Compound Interest Method Under this method, such an amount should be set aside annually as depreciation throughout the prescribed life of the asset concerned, as would, with 4% p.a. compound interest, produced by the end of the prescribed period an amount equal to 90% of the original cost of the asset. Straight Line Method Under this method, the depreciation is calculated by dividing 90% of the original cost of the asset by the prescribed period in respect of such an asset. All sums credited to the Depreciation Reserve may be invested either in the business or may be utilised for repayments of loans not guaranteed under Section 66 or for repayment of sums paid by the State Government under Guarantee as per Section 66. Assets Written Down to 10% of Cost No depreciation is allowed in respect of an asset which has been written-down to 10% (or less) of its original cost.

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Financial Management Obsolete Asset When a fixed asset is discarded or becomes obsolete it cannot be depreciated any more. In this case, the written-down value of such an asset is transferred to a special account. Any profit on sale of such assets is transferred to the Contingency Reserve Account. Contingencies Reserve Every electricity supply company is required to maintain a Contingencies Reserve. A sum equal to not less than 1/4% or not more than 1/2% of the original cost of fixed assets must be transferred from the Revenue Account to the Contingencies Reserve. The maximum amount in this account must not exceed 5% of the original cost of the fixed assets. The amount of Contingencies Reserve must be invested in trust securities.

With the prior approval of the State Government, the Contingencies Reserve can be utilised for the following purposes :

( i ) For meeting expenses or loss of profit due to accident, strikes or circumstances beyond the control of the management;

( i i) For meeting expenses on replacement or removal of plant or works other than expenses required for normal maintenance or renewals;

(iii) For paying compensation under any law for the time being in force and for which no other provision has been made.

Development Reserve An amount equal to income tax and super tax saved on account of Development Rebate allowed under Income Tax Act, 1961 has to be transferred to the Development Reserve Account. If, in any accounting year, the clear profit without considering special appropriations plus balance in the credit of Tariffs and Dividend Control Reserve is less than the required amount of Development Reserve, the shortfall may not be made good. In case of sale of the undertaking, this reserve should be handed over to the buyer.

General Reserve Section 67 of the Electricity Act, 1948 provides for the creation of the General Reserve by making appropriation from the Revenue Account after charging interest and depreciation. The amount of contribution shall be calculated @ 1/2% of the original cost of the fixed assets until the total of such reserve comes to 8% of the original cost of the fixed assets.

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Financial Statements Tariffs and Dividend Control Reserve It is created out of the disposable surplus of the electricity company (explained below). This reserve can be utilised whenever the clear profit is less than reasonable return. At the time of sale of the undertaking, this reserve should be handed over to the buyer. Appropriation of Profits The Electricity (Supply) Act, 1948 provides that an electricity company can not charge any rate as they like. They are entitled to charge such rates which give them a reasonable return. They must so adjust the rate that the amount of clear profit in any year does not exceed the reasonable return by more than 20%.

Disposal of Surplus The excess of clear profit over reasonable return to the extent of 20% of reasonable return has to be disposed of as under: (Any excess over 20% of reasonable return must be refunded to customers).

(i) 1/3 of the surplus (not exceeding 5% of reasonable return) at the disposal of the undertaking.

(ii) Of the balance, 1/2 is to be transferred to the Tariffs and Dividend Control Reserve.

(iii) The balance is to be transferred to the Consumer's Rebate Reserve for reduction of rates or for special rebate.

Calculation of Clear Profit

The Clear profit is the difference between the total income and total expenditure plus specific appropriations. The Clear profit is calculated as follows :

(A) Income from

(i) Gross receipts from sale of energy, less discount

(ii) Rental of meters and other apparatus hired to customers

(iii) Sale and repair of lamps and apparatus

(iv) Rent, less outgoings not otherwise provided for

(v) Transfer fees

(vi) Interest on investments, fixed and calls deposits and bank balances

(viii) Other taxable general receipts

Total Income . . . . .

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Financial Management (B) Expenditure

(i) Cost of generation and purchases of energy (ii) Cost of distribution and safe of energy

(iii) Rent, rates and taxes (other than taxes on income profits) (iv) Interest on load advanced by Board (v) Interest on loan taken from organization or institutions

approved by the State Government (vi) Interest on debentures issued by the licencee (vii) Interest on security deposits (viii) Legal charges

(ix) Bed debts (x) Auditor’s fees

(xi) Management expenses (xii) Depreciation (as per Schedule Seventh) (xiii) Other admissible expenses (xiv) Contribution to Provident Fund; gratuity, staff pension and

apprentice and other training schemes (xv) Bonus paid to the employees of the Undertaking. In case of

dispute, in accordance with the decision of the tribunal. In any other case, with the approval of the State Government

Total Expenditure . . . . Balance (A - B) . . . . Less : Specific Appropriations

(i) Past losses (i.e., excess of expenditure over income)

(ii) All taxes on income and profits

(iii) Amount written-off in respect of fictitious and intangible assets

(iv) Contribution to Contingency Reserve

(v) Contribution towards arrears depreciation (if any) (vi) Contribution to Development Reserve (vii) Other appropriation (special) permitted by

the State Government

Clear Profit . . . .

Reasonable Return : It means the sum of the following items :

(i) An amount calculated at (bank rate + 2%) on Capital Base as defined below.

(ii) Income from investments (except income from Contingency Reserve Investment).

(iii) An amount equal to 1/2% on loans advanced by the State Electricity Board.

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Financial Statements (iv) An amount equal to 1/2% on the amounts borrowed from organisations or institutions approved by the State Government.

(v) An amount equal to 1/2% on the amount raised through issue of debentures.

(vi) An amount equal to 1/2% on the balance of Development Reserve. (vii) Any other amount as may be permitted by the Central Government.

Capital Base : Capital Base means :

(i) Original cost of fixed assets available for use Less : Contribution, if any, made by the customers for

construction of service lines

(ii) the cost of intangible assets (iii) the amount of investments made compulsorily on account

of contingencies reserve

(iv) the original cost of work-in-progress (v) working capital which is equal to the sum of:

(a) 1/2 of the sum of stores, materials and supplies including fuel on hand at the end of each month of the accounting year;

(b) 1/ 2 of the sum of cash and bank balance and call and short term deposit at the end of each month of accounting year but does not exceed in aggregate an amount equal to 1/4 of the expenditure (already listed in previous page). . . . .

Deduct

(i) Accumulated deprecation on tangible assets and amounts written-off tangible assets Loan advanced by Electricity Board

(ii) Security deposits of customers held in cash.

(iii) Debentures issued by the undertaking

(iv) Amount standing to the credit of Tariffs and dividend control revenue.

(v) Loan borrowed from organisations or institutions approved by the State Government.

(vi) Balance of Development reserve.

(vii) Amount carried forward for distribution to consumers. . . . . .

Capital Base . . . . .

In this unit we have developed the method of preparation of financial statements starting from making entries in the journal, posting them into ledger and preparing trial balance from the ledger balances. Further we have

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Financial Management discussed how to prepare Trading Account, Profit and Loss Account and Balance Sheet. The Trading and Profit and Loss account summarises the revenue and expenses of an accounting period. The net profit after payment of dividends is transferred to capital account. Balance sheet is the statement of assets and liabilities and owners capital at a particular point of time. The double account system is a method of presenting annual financial statements of public utility concerns. It is a special method of presenting accounts rather than a special system of keeping accounts. In this system all accounts are kept under the normal double entry system, but the emotions in this method is to reveal how much capital has been raised and how such capital has been utilized in acquisition of fixed assets.

(1) What is meant by closing stock? Show its treatment in final accounts.

(2) Distinguish between the following :

(a) Fixed assets and current assets

(b) Tangible assets and Intangible assets

(c) Short-term liabilities and long-term liabilities

(d) Capital expenditure and revenue expenditure

(3) Explain adjustment entries.

(4) Define the following

(a) Outstanding expense

(b) Prepaid expense

(c) Unearned income

(d) Accrued income

(5) What is Balance Sheet?

(6) Discuss the Chief features of Double Account System.

(7) How would you treat the following items under Double Account System.

(a) Depreciation on fixed assets

(b) Repairs and renewals

(c) Expenditure on construction of new works in place of old works.

(8) Explain the following terms

(a) Clear profit

(b) Contingency reserve

(c) Tariff and dividend control reserve

(d) Development reserve

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29 Financial Statements - eGyanKosh

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