66346 31555 Basics of Accounts

8/8/2019 66346 31555 Basics of Accounts

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Basics of Accounting andBasics of Accounting and

FinanceFinance

-By

-Ravi Somani


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What is Accounting?

What is Accounting?

Identifying a business transaction

Preparation of Business Documents.

Recording of the transaction in the book of firstentry (Journal)

Sales or Purchase Module

Relevance with the banking operations

Posting in the ledger (Automatic in Software) Preparation of Trial Balance (System Generated)

Preparation of Profit and Loss Account andBalance Sheet


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Important terms in accountingImportant terms in accounting Debtors

Creditors Assets

Liabilities

Income Expenses

Account


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Important accountingImportant accounting

conceptsconcepts Dual Entity Money Measurement Concept

Accounting Period Concept

Going Concern Concept Conservatism Concept (Provisioning for NPA in

Banks)

Accrual Concept ( Accrual of interest income and

expenses in Banks)

Consistency Concept

Matching Concept


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Process of AccountingProcess of Accounting Types of business transactions

Cash and credit

DoubleEntry Principle in Accountancy

Debit and credit effect

Implications

Basic Categories of Accounts

Personal, Real and Nominal


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Golden Rules in AccountingGolden Rules in Accounting

To identify theeffect of a transaction on a accountthere are rules:

For Personal Account:Debit: the receiver

Credit: the giver

-For Real Account:

Debit: what comes in

Credit: what goes

out

-For Nominal Account:Debit: all expenses and losse

Credit: all incomes and gains


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Accounting StandardsAccounting StandardsWhat are accounting standards?

Who issues the accounting standards?

Why do we need Accounting Standards?

How many accounting standards are there?

Are the accounting standards mandatory?


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Recording of business transactionsRecording of business transactions

Syntel Technologies Issued 1000 shares of Rs.10 each at a premium ofRs.110 each. The amount was deposited in our bank account (SBI)

Raised a loan from Bank ofIndia Rs.25,000.

Purchased materials costing Rs.20000 cash down.

Purchased materials costing Rs.10000 on credit.

Manufacturing expenses incurred Rs.25000

Administration and selling expenses incurred Rs.15,000.

Sold goods for cash Rs.120000.

Sold goods on credit Rs.20000

Collection from customers Rs.10000. Payment to suppliers Rs.5000.

Outstanding wages of workers Rs.5000.

Interestpayable to the bank Rs.2500.


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Finalization of accountsFinalization of accounts

Refers to thepreparation of Profit and LossAccount and the Balance sheet as per thelegislative famework.

Adjusting entries are to bepassed.

The revised trial balance is generated.

Financial statements areprepared.

Relevance of Accrual Concept, Matching

Concept, Accounting Period Concept,Conservatism Concept at the time offinalization.


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Cash flow StatementCash flow Statement

What is cash flow statement?

Why cash flow statement?

AS3: Cash Flow Statements

How to prepare cash flow statement?

Cash from operating activities

Cash from financing activities Cash from investing activities

Change in cash and cash equivalents


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Ratio AnalysisRatio Analysis

Accounting ratios is an expression showing the relationshipbetween two figures of financial statement. Accountingratios may be expressed in terms of fractions like 1/2 ,1/3 orrates like two times, three times or percentage like 10%,20%, etc. Many times absolute figures do not help tounderstand the position of the concern & the final account& financial statements prepared there from may not revealenough information which will help in decision making.Therefore ratio analysis is employed as a tool to analysefinancial position & make logical inferences out of the same.

There are three types of ratio:-

1) Balance Sheet ratios.

2) Revenue Statement ratios.

3) Combined ratios.


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Important RatiosImportant RatiosBalance Sheet

Ratios

Revenue

Statement Ratios

Combined Ratios

i) Current ratio

ii) Quick ratio

iii) Proprietary ratio

iv) Debt Equityratio

i) Gross profit ratio

ii) Operating ratio

iii) Stock- turnover

ratioiv) Net profit ratio

i) Return on Investment

ii) Return on Proprietors

Fund

iii) Return of EquityCapital

iv) Earning per share

v) Price earning ratio

vi) Dividend Payout ratio

vii) Debt Service ratio

viii) Debtors turnover

ratio

ix) Creditors Turnover

ratio


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Current RatioCurrent Ratio

Current ratio = Current Asset/CurrentLiabilities

i It Indicates short term solvency or short term

financial strength of company.

i It shows whether the company is capable of payingoff its short term commitments easily out of its current

assets

i Too high & too low ratios not desirable. A high

current ratio indicates presence of idle funds whereaslow ratio indicates inadequacy offunds.


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Quick RatioQuick Ratio

Quick ratio = Quick Asset/Quickliabilities

i It Indicates immediate solvency / financial

strength of company.

i It shows whether the organization is in aposition to pay its liabilities within a very short

period of time out of assets which can realize

money quickly.


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Proprietory RatioProprietory Ratio

Proprietary Ratio = Share holdersFunds / Total Assets

Total Assets = Fixed Assets + Investments + Current

Assets.

i

It Indicates long term solvency or long term financialstrength of

company.

i Proprietors funds should be equal to atleast fixed assets

but it

may not be possible in all industries.


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Debt Equity RatioDebt Equity Ratio Debt Equity Ratio = Debt Funds / Equity Funds

i It Indicates borrowing capacity of organization

& emphasizes that more the borrowing, the more

is the rate of return for owners.

i However there should be a suitable

compromise as far as this ratio is concerned.

i In earlier years business should have more

owned funds whereas after establishment i.e. in

subsequent years business should resort to more

external funds.


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Gross Profit RatioGross Profit Ratio

Gross Profit ratio = GPX100/ Sales

i It shows the trading efficiency ofmanagement.

i It should be sufficient enough to cover operating and

non- operating expenses to assure final profits.


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Stock Turnover RatioStock Turnover Ratio

Stock Turnover Ratio = Cost of goods sold /

Average Stock

i It shows amount blocked in stock & how fast it

can be converted into sales & finally cash.

i It indicates efficiency of company in inventory

management.

i Sometimes too high ratio also indicates a

possibility of stock out.


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Return on Investment or capital employedReturn on Investment or capital employed

ROI = NP before tax & Interest/ Capital Employed

i It Indicates management efficiency in utilizing

shareholders & borrowed funds. & is a clear

index of earning capacity.

i Higher ratio indicates higher returns & hence

can attract additional funds from lenders.

i Higher earning power indicate more punctualrepayment of interest & principal amount.


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Return on Proprietors FundsReturn on Proprietors Funds

Return on net worth = NP after tax and interest / Net Worth

i It indicates profitability on proprietors funds and

efficiency of company in utilizing shareholders fund.

i It is used by share holders before investing additional

funds into business.

i Higher profitability attracts higher funds from

shareholders & can also increase market price of shares in

anticipation of higher dividends & bonus shares.


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Return on Equity CapitalReturn on Equity Capital

Ret on Eq,Capital = Pafter tax Pref Dividend /Equity Capital

i

It indicates earning for equity holders andmanagements efficiency in utilizing equity

capital.

i Dividend percentage is also determined on the

basis of above ratio after taking decisions of

retention of some portion of profit for expansion

of diversification schemes.


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Earnings per shareEarnings per share

EPS = (NP after tax - Pref Div) / No. of eq. Shares

i It indicates absolute earning per share which

affect a market prices of shares.

i High EPS encourages prospective investors.


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Price Earning RatioPrice Earning Ratio

Price Earning ratio = MPS / EPS

i It indicates market price as compared toearning per share.

i Lower ratio generally attracts investors for

purchase of share.


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Dividend Payout RatioDividend Payout Ratio

Dividend payout ratio = (DPSX100) / EPS

i It indicates extent of dividend declared out of

earnings.

i Lower ratio indicates greater portion kept for

self financing.

i Short terminvestors are always interested in

higher ratio & vice versa for long terms investors.


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Debt service coverage ratioDebt service coverage ratio

DSCR = (NP bef int tax and dep) / Interest +Instalment due in next year

i It indicates ability to meet current interest &

instalment due.

i it is an index of long term solvency.

i Higher ratio indicates more safety for lenders.


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Debtor Turnover ratio and collectionDebtor Turnover ratio and collection

periodperiod

Drs turnover ratio = Sales / Average receivables

i It indicates efficiency of company in

management of account receivables.

i Higher the index, better is the ratio & result.


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Creditors turnover ratio and averageCreditors turnover ratio and average

payment periodpayment period

Crs Turnover ratio = Purchase / Average Payables

It helps to know creditors velocity i.e. averageperiod offered by suppliers for making payment.

i Lower the turnover, better is the result as it

indicates more period offered by suppliers tomake payment.


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Importance of Ratios in financialImportance of Ratios in financial

statement analysisstatement analysis

Liquidity Position and working capitalfinancing

Minimum permissible bank finance

Profitability ratio

ROCE, dividendpayout ratio, pe ratio andthe investors preferences.


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ThankThank YouYou