MANAGERIAL ACCOUNTING

BDA

July 2019
 BALANCE SHEET
Goa Solutions Limited
Classify the following items into current assets, fixed assets, capital, retained earnings, long term
and current liabilities and prepare a balance sheet for Goa Solutions Limited as at March 31 2018.
Item Amount (Rs)
Land 250,000
Building 100,000
Plant and Machinery 50,000
Closing stock:
Raw Material 15,000
WIP 10,000
Finished Goods 25,000
Salary Payable 15,000
Wages Payable 13,000
Electricity Payable 2,000
Sundry Debtors 40,000
Bills Payable 60,000
Insurance Charges Paid 100,000
Marketable Securities (for one year) 60,000
Cash in Hand 25,000
Cash at Bank 35,000
Retained Profit for the year 20,000
Sundry Creditors 110,000
Capital and reserves 424,500
Additional Information 1. Use the Horizontal format for the balance sheet presentation
2. Provide for depreciation on plant and machinery and building at the rate of 10% per annum assuming it as first year of
depreciation and the company is formed in 2017 and this is the first year of reporting
3. Sundry Debtors include Rs 500 for goods supplied to a customer who has become insolvent. This amount is already
adjusted in the Profit and Loss account
4. Insurance charges for stock insurance were paid on September 30, 2017 for the whole year starting from 1st Oct 2017 and
half is already included in the profit and loss account as expenses.
 • Solution
Goa Solutions Ltd
Balance Sheet as at March 31, 2018
Amount (Rs) Amount (Rs)
Current Assets Current Liabilities

Cash in Hand & Bank 60,000 Bills Payable 60,000

Marketable Securities 60,000 Salary Payable 15,000

Gross, Accounts Receivable 40,000 Wages Payable 13,000

Less: Doubtful Debts 500 Electricity Payable 2,000

Net Accounts Receivable or
Sundry Debtors (Net) 39,500 Sundry Creditors 110,000
Raw-Material Inventory 15,000 Total Current Liabilities 200,000
WIP Inventory 10,000
Finish Goods Inventory 25,000
Total Inventory 50,000
Pre-paid Insurance 50,000
Total Current Assets 259,500 Long-Term Liabilities -
Non-Current Assets
Land 250,000
Gross, Plant and Machinery &
building 150,000 Owners Equity

Less: Accumulated Depreciation 15,000 Capital and reserves 424,500

Net, Plant and Machinery/Building 135,000 Retained Profit for the Year 20,000
Total Non-Current Assets 385,000 Total Owners Equity 444,500

Total Assets 644,500 Total Liabilities & Owners Equity 644,500

Note:
1. As the insurance charges paid were for one full year, hence we show half of the insurance charges paid as prepaid
insurance.
 Profit and Loss Statement
PROFIT AND LOSS STATEMENT
• A Profit & Loss Statement or Account shows a company's
earnings and expenses over a given period of time

• It summarizes revenue and expenses of the period and shows

the net difference i.e., profit or loss of the period

• It is a part of the final accounts drawn up at the end of the

accounting period

• It establishes the net earning of the business

• It indicates the efficiency of the company `s business

PROFIT AND LOSS STATEMENT
 Revenue and expenses relate to a period and not
to a point in time and it can be measured over the
selected time period

 It measures the income generated by the entity

with the use of assets in the accounting period

 The concern of the profit and loss account is the

income arising out of the assets, rather than the
assets themselves which are measured in the
Balance sheet.
 BALANCE SHEET EQUATION & PROFIT AND LOSS
 Assets = Liabilities + Net Worth (Owner`s equity)

 The amount of sales revenue realized increased owner(s) equity

 The amount of goods parted with, decreased the owner(s) equity

 How?

 Owner(s) Equity = Contributed Capital + Retained Earnings

 Retained earnings = Revenue – Expenses

 Hence Owner(s) Equity = Contributed Capital + (Revenue- Expenses)

 If revenue goes up Owner`s Equity goes up and if expenses go up

Owner(s) equity reduces

 (Revenue-Expenses) is referred to as Profit & Loss Account

MEASUREMENT OF PROFIT
 Profit is measured by comparing the revenue from
sales against the cost of resources parted for earning
that revenue in the specified accounting period
 The net difference in this comparison, represents the
net income or profit

Identify realized Identify related Match identified

revenues costs revenues and expired
costs and arrive at the
surplus or profit
PROFIT AND LOSS ACCOUNT
 Recognition and measurement of revenues
and expenses are based on the following
concepts:
 realization,
 accrual, and
 matching
REALIZATION CONCEPT OR PRINCIPLE
 Realization Concept or Principle:
 Process of converting non-cash resources and rights into
money

 Recognition of revenue from sale of assets for cash (or

specifically claims to cash)

 An entity will recognize revenue when:

• The entity has transferred physical possession of the asset.
• The entity has transferred legal title to the asset.
• The entity transferred significant risk and rewards of ownership to the
customer.
• The customer accepted the asset.
• The entity has a right to payment for the asset.
REALIZATION PRINCIPLE
 Two situations when revenue is recognized differently:

• In construction contracts percentage of completion method is used

based on the project completed which is indicated by the costs
incurred to date divided by the total costs estimated multiplied by
the revenue estimated from the contract.

• Long term Service or Maintenance contracts say for 5 years should

be recognised over the period specified and not the entire revenue
of 5 years in the first year itself.
ACCRUAL PRINCIPLE
 Accrual Principle
 Revenues are recognized when they are earned, and not when cash is
received.
 Expenses are recognized as they are incurred, and not when cash is
paid
 The net income for the period is determined by subtracting expenses
incurred from revenues earned.
 Example:
 Expenses incurred but not yet paid in current period should be
treated as
 accrual/accrued liabilities under current liabilities and also included

in P&L. example of this transaction : salary not paid for the month
 Expenses incurred in the following period but paid for in advance

should be treated as
 Prepaid expenses under current assets but not included in P&L

 Example insurance paid in advance

 ACCRUAL PRINCIPLE
 Points to note on the recognition of expenses:
 Normally, expenses represents resources consumed during the
current period.

 Expenses are recognized on the basis of a direct association

between the expenses incurred and revenues earned
 For example, the sales commissions should be accounted for in the period
when the products are sold, not when they are paid by the customer

 When the cost benefits several accounting periods, they should be

recognized on the basis of a systematic and rational allocation
method.
 For example, advertising expenses or a provision for depreciation should be
made over the estimated useful life of a fixed asset

 If the expenses are expected to have no certain future effect, they

should be written off or accounted as expenses in the current
accounting period
 for example damage to stock.
MATCHING REVENUES & EXPENSES
 The entire process of periodic earnings measurement, is a process
of matching expenses with revenues

 It means deducting from revenues of a period the cost of goods

sold or other expenses that can be identified with such realized
revenues, or of that period, on the basis of a cause and effect
relationship

 The expenses to be matched against the revenues of the period

will be all those costs expiring during the accounting period e.g
rentals

 Matching determines the profit or loss earned during the

accounting period
EXPENSE
 Hence expenses occurs when

 Decrease of assets
 e.g. stock reduction

 Costs incurred in connection with the earning of revenue

 e.g transportation costs

 Costs that have expired during an accounting period are

treated as expense
 e.g rent for the month

 Expenses are incurred for the purpose of generating

revenue or benefit
 e.g advertisements
ACCOUNTING PERIOD
 A convenient segment of time, to collect, summarize and report all
information on the material changes in owner(s) equity during the
period

 Realization, Matching and Accrual concept are applied in the

context of the accounting period

 Accounting period also called as financial year, fiscal year etc.

 Profit and Loss Account
Dr Reddys Laboratories
------------------- in Rs. Cr. -------------------
Apr`13 to Mar '14 April`12 to Mar '13

12 mths 12 mths

Income
Sales 9,728 8,434
Less Sales Discounts - -
Net Sales 9,728 8,434
Other Income 266 243

Total Income 9,994 8,676

Expenditure
Raw Materials 2,755 2,772
Power & Fuel Cost 258 283
Employee Cost 1,185 1,138
Other Manufacturing Expenses 79 59
Selling and Admin Expenses - -
Miscellaneous Expenses 2,804 2,297
- -
Total Expenses 7,081 6,549

Operating Profit (removed other income) 2,647 1,885

PBDIT 2,913 2,127
Interest 78 61
PBDT 2,835 2,066
Depreciation 381 313
Other Items Written Off - -
Profit Before Tax (PBT) 2,454 1,753

Tax 522 488

Reported Net Profit 1,932 1,265
 REVENUE-OPERATING INCOME Dr Reddys Laboratories (Rs Crores)
Apr`13 to April`12 to
Mar '14 Mar '13
 Total Income Income
 the total amount realized from the sale of
Sales 9,728 8,434
goods (or provision of services) together
with other income Less Sales Discounts - -

 Usually related to a specific period i.e., Net Sales 9,728 8,434

revenue of one year cannot be included
Other Income 266 243
in the revenue of the other year
 Generated out of business activities Total Income 9,994 8,676

 Income generated from Revenue or Expenses:

Sales from operations is usually referred Raw Materials 2,755 2,772
to as ‘operating income/profit’ and the
others as ‘other income’ or ‘non- Power & Fuel Cost 258 283

operating income’ Employee Cost 1,185 1,138

 Results in inflow of assets of one form Other Manufacturing
Expenses 79 59
(cash or receivable) and outflow of Selling and Admin
assets in another form (goods or stock) Expenses - -
Miscellaneous
 Other Income Expenses 2,804 2,297

 Bank interest, Dividend received Total Expenses 7,081 6,549

from investments etc
Operating Profit (removed
other income) 2,647 1,885
EXAMPLE
 Ramsons had opening balance of 10 units of the item
available for sale purchased earlier for Rs 100 each.
During an accounting period Ramsons buys twelve
units of inventory for Rs. 1,200. Another ten units are
purchased on credit for Rs.1,000.
 The items were purchased for sale to different
customers
 During the period 15 units of the new purchased stock
were sold on credit for Rs. 2,250. Further five units of
this purchase were sold for cash for Rs.750 during the
same period. Later 10 units (from the earlier stock
balance) were sold for Rs 1500 on customer approval
basis but were not confirmed as at the end of the
accounting period.
 Prepare the P&L statement for the company.
VERTICAL FORMAT OF P&L ACCOUNT
Revenue of the period: Rs.
15 units sold on credit 2,250
5 units sold for cash 750
Total revenue of the period 3,000
Less: Cost of goods sold or expired cost of inventory 2,000
Profit of the period 1,000

Horizontal Format of P&L Account

RAMSONS
Profit & Loss Account (for an accounting period)
Expenses Rs Revenues Rs
Cost of goods sold 2,000 Sales 3,000
Profit for the period 1,000
3,000 3,000
 EXAMPLE…
 Sachin starts his business on 1st April 2018 with a capital investment of Rs 200,000.
He took a 5 year loan of Rs. 100,000/- from bank @ 12% per annum interest for
purchasing plant & machinery, on the same day. The machine has a life of 10 years
with no scrap value. The machinery is accounted for in its books according to the cost
price only (ignoring interest cost). On 1st April, he also paid Rs. 60,000/-, three months
rent in advance. He paid insurance premium on 1st April 2018 for the machinery for Rs
6,000 which was for one year. Interest due on the bank loan for April was paid on 30th
April by cash.
 Sachin had written orders worth Rs. 2,00,000 in the month of March itself (even before
starting his business).
 He started the production accordingly in April; the total production cost was Rs.
1,20,000 (60% of sales value) paid in the month of April by cash ; Production cost is
for the total items produced in the month.
 Sales of items to its customers from 1-04-2018 till 30-04-2018 are as follows: Total
Sales = Rs. 95,000 consisting of Cash Sales 25,000 and Credit Sales to Rajesh Rs.
70,000
Prepare a Profit and Loss statement for the month of April 2018 with the
data given above:
 Further Questions:
 What will be the Sales value for March ?

 Is the cash inflow from bank borrowing considered as revenue?

 SOLUTION
 Sales for March will be?
 Nil – Because revenue is recognized only when goods are sold to the
customers and not on receiving the order or on incurring the production
cost
 Cash inflow from Bank borrowing will be revenue?
 This does not represent revenue but a Balance sheet item where
increase in cash is offset by an increase in liabilities .
• Interest (Rs. 1000) depreciation (Rs. 833/-) are expenses for April
• Rent expense for April will be Rs. 20,000/-
• P&L Account for April `18:

• Sales : Rs 95,000
• Expenses:
• Production Costs=0.6*95000=57000
• Rent=20,000
• Insurance = 500
• Depreciation=833
• Interest=1000
• Net Profit =15,667
EXAMPLE…
 Sachin starts his business on 1st April 2018 with a capital investment of Rs
200,000. He took a 5 year loan of Rs. 100,000/- from bank @ 12% per annum
interest for purchasing plant & machinery, on the same day. The machine has a life
of 10 years with no scrap value. The machinery is accounted for in its books
according to the cost price only (ignoring interest cost). On 1st April, he also paid
Rs. 60,000/-, three months rent in advance. He paid insurance premium on 1st April
2018 for the machinery for Rs 6,000 which was for one year. Interest due for April
was paid on 30th April by cash.
 Sachin had written orders worth Rs. 2,00,000 in the month of March itself (even
before starting his business).
 He started the production accordingly in April; the total production cost was Rs.
1,20,000 (60% of sales value) paid in the month of April by cash ;
 Sales of merchandise to its customers from 1-04-2018 till 30-04-2018 are as
follows: Total Sales = Rs. 95,000 consisting of Cash Sales 25,000 and Credit Sales
to Rajesh Rs. 70,000
Prepare a Balance sheet for the month of April 2018 with the data given
above. Assume the entire profit for the month is transferred to the
balance sheet.