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ACCOUNTING SEM 1 BBA

Intro to Corporate Accounting & Final Accounts Explained

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An Introduction to Corporate Financial Statements

For any company, the financial statements are the final, formal annual reports that summarize the results of its accounting process. These statements are the primary way management communicates financial information to the company’s owners (shareholders) and other external parties like investors, creditors, and the government.

The main financial statements include:

  1. Statement of Profit and Loss (P&L): Shows the company’s profitability over a period.

  2. Balance Sheet: Shows the company’s financial position (assets and liabilities) on a specific date.

  3. Cash Flow Statement: Shows the movement of cash (inflows and outflows).

These statements must be prepared according to the legal environment (the Companies Act, 2013), Accounting Standards (AS/Ind AS), and core accounting principles.

1. The Nature of Financial Statements

It’s important to understand what financial statements truly represent. They are not just a collection of exact facts, but a blend of the following:

  • Recorded Facts: They are based on data recorded in the accounting books, which is primarily based on historical cost (the original price paid). They do not reflect the current market value of assets.

  • Accounting Conventions: They follow established rules. For example, the convention of conservatism is why inventory is valued at “cost or market price, whichever is lower.” The materiality convention is why a small item like a ₹20 stapler is treated as an expense, even though it’s technically an asset.

  • Postulates (Assumptions): They are built on basic assumptions. The most important is the Going Concern postulate, which assumes the business will continue to operate for a long time. This is why we show assets at their cost, not their “break-up” or liquidation value.

  • Personal Judgments: They involve estimates. An accountant must use personal judgment to estimate the “useful life” of an asset for depreciation or to create a “provision for doubtful debts.”

2. Objectives of Financial Statements (Why We Prepare Them)

The primary goal of financial statements is to provide reliable information that helps users make informed economic decisions.

  • To show the company’s economic resources (Assets) and obligations (Liabilities).

  • To provide information on the earning capacity (Profitability) of the business.

  • To show how the company is generating and using cash (Cash Flow).

  • To allow shareholders to assess the effectiveness of management (stewardship).

  • To disclose the main accounting policies used to prepare the statements.

3. The New Format (Schedule III, Companies Act 2013)

To harmonize reporting, the Companies Act, 2013, requires all companies to prepare their Balance Sheet and P&L Statement in the specific vertical format prescribed in Schedule III.

Key features of this format include:

  • A clear distinction between Current and Non-Current items.

  • The terms “Sundry Debtors” and “Sundry Creditors” have been replaced with “Trade Receivables” and “Trade Payables.”

  • The “debit” balance of a P&L Account (a loss) is shown as a negative number under the “Surplus” heading.

4.  The Balance Sheet (Schedule III Format)

The Balance Sheet is presented vertically in this order:

Balance Sheet as at [Date]

ParticularsNote No.Amount (₹)
I. EQUITY AND LIABILITIES  
(1) Shareholders’ Funds  
(a) Share Capital  
(b) Reserves and Surplus  
(c) Money received against share warrants  
(2) Share application money pending allotment  
(3) Non-Current Liabilities  
(a) Long-term borrowings  
(b) Deferred tax liabilities (Net)  
(c) Other long-term liabilities  
(d) Long-term provisions  
(4) Current Liabilities  
(a) Short-term borrowings  
(b) Trade payables  
(c) Other current liabilities  
(d) Short-term provisions  
TOTAL EQUITY AND LIABILITIES  
   
II. ASSETS  
(1) Non-Current Assets  
(a) Fixed Assets:  
    (i) Tangible Assets  
    (ii) Intangible Assets  
(b) Non-current investments  
(c) Long-term loans and advances  
(d) Other non-current assets  
(2) Current Assets  
(a) Current investments  
(b) Inventories  
(c) Trade receivables  
(d) Cash and cash equivalents  
(e) Short-term loans and advances  
(f) Other current assets  
TOTAL ASSETS

5.  Key Balance Sheet Items Explained

(A) Share Capital

This is a key part of Shareholders’ Funds. The company must provide a detailed “Note to Account” that breaks down the Share Capital as follows:

  • Authorised Capital: The maximum amount of capital the company is legally allowed to issue, as stated in its Memorandum of Association.

  • Issued Capital: The portion of Authorised Capital that the company has offered to the public to subscribe to.

  • Subscribed Capital: The portion of Issued Capital that the public has actually applied for and agreed to buy. This is divided into:

    • Subscribed and Fully Paid up: Shares on which the company has called the full amount, and the shareholders have paid in full.

    • Subscribed but not Fully Paid up: Shares on which the company has either not called the full amount, or it has called the full amount, but shareholders have failed to pay (known as “Calls in Arrears”).

  • Shares Forfeited: The amount originally paid up on shares that have been canceled by the company due to non-payment of calls. This is added to the total Share Capital.

(B) Reserves and Surplus

This is the second part of Shareholders’ Funds. It represents the accumulated profits and gains of the company. It includes:

  • Capital Reserve: A reserve created from capital profits (e.g., profit on sale of a fixed asset).

  • Capital Redemption Reserve (CRR): A reserve created when the company buys back its own shares.

  • Securities Premium Reserve: The extra amount received over the face value of a share.

  • Debenture Redemption Reserve (DRR): A reserve set aside to repay debentures.

  • Revaluation Reserve: A reserve created if the company revalues its assets upwards.

  • Surplus (P&L Balance): This is the company’s retained earnings. The “debit” balance (a loss) is shown as a negative number.

(C) Proposed Dividend

This is the dividend recommended by the Board of Directors but not yet approved by the shareholders. As per AS-4, this is not a liability. It is shown only as a contingent liability in the “Notes to Accounts.”

(D) Trade Receivables & Payables

  • Trade Receivables: The new term for “Sundry Debtors.” It’s the amount the company is owed by its customers for goods or services sold on credit.

  • Trade Payables: The new term for “Sundry Creditors.” It’s the amount the company owes to its suppliers for goods or services purchased on credit.

6. The Statement of Profit and Loss (Schedule III Format)

This statement is also presented vertically. It begins with income and then lists all expenses to arrive at the profit.

Statement of Profit and Loss for the year ended [Date]

ParticularsNote No.Amount (₹)
I. Revenue from Operations (Net Sales)  
II. Other Income (e.g., Interest, Dividends)  
III. Total Revenue (I + II)  
   
IV. Expenses:  
(a) Cost of materials consumed  
(b) Purchases of Stock-in-Trade  
(c) Changes in inventories of finished goods, WIP, etc.  
(d) Employee benefits expense (Salaries, Wages)  
(e) Finance costs (Interest on borrowings)  
(f) Depreciation and amortization expense  
(g) Other expenses (Rent, Admin., Selling expenses, etc.)  
Total Expenses (IV)  
   
V. Profit before tax (III − IV)  
VI. Tax expense: (Current Tax & Deferred Tax)  
VII. Profit (Loss) for the period (V − VI)  
VIII. Earnings per Equity Share (Basic & Diluted)

7. Uses and Importance of Financial Statements

Financial statements are the primary source of information for all stakeholders:

  • Shareholders/Investors: To assess management’s performance (stewardship) and decide whether to buy, hold, or sell shares.

  • Lenders/Creditors (Banks): To decide whether to grant credit (loans) to the company. They check the company’s solvency.

  • Government & Tax Authorities: To form fiscal policies, collect taxes, and ensure compliance with laws.

  • Management: For internal planning, decision-making, and controlling the business.

  • Employees: To assess the company’s stability and profitability, which impacts their job security and potential for a bonus.

  • Stock Exchanges: To monitor the financial health of listed companies and protect investors.

8. Limitations of Financial Statements

Despite their importance, financial statements have several limitations:

  • They are Historical: They are based on historical cost, not the current market value. Inflation is often ignored.

  • They Involve Bias: They rely on personal judgments and estimates (e.g., useful life of an asset, doubtful debts), which can be subjective.

  • They are Aggregate: They show aggregate (total) data. Details that might be important for a decision are often hidden.

  • They Ignore Qualitative Information: They only show what can be measured in money. They do not show qualitative data like employee morale, customer satisfaction, or the quality of the management team.

  • They are only Interim Reports: They are a “snapshot” at a point in time (Balance Sheet) or for a period (P&L), but they don’t perfectly predict the future.

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From Journal Entries to Ledger Posting & Balancing

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The Accounting Process: From Journal to Ledger

The accounting process involves identifying, recording, and then summarizing financial transactions. The first two steps of this process are Recording (in a Journal) and Classifying (in a Ledger).

This guide covers the entire process, from understanding the Golden Rules of Accounting to creating journal entries and posting them to ledger accounts.

Part 1: The Journal (The Book of Original Entry)

In accounting, a Journal is the very first book where all day-to-day business transactions are recorded. Because it’s the first place transactions are entered, it is known as the ‘Book of Original Record’ or ‘Book of Primary Entry’.

The word “Journal” comes from the French word ‘Jour’, which means “day.” Transactions are recorded in chronological order (in the order they occur). The act of recording a transaction in the journal is called “Journalising”.

Golden Rules of Accounting (How to Debit and Credit)

To “journalize” a transaction, you must know what to debit (Dr.) and what to credit (Cr.). The rules for this are based on the three types of accounts:

  1. Personal Account

    • What it is: Accounts for all persons, firms, companies, and representative groups (e.g., Mr. Kamlesh’s A/c, SBI Bank A/c, Outstanding Salary A/c).

    • The Rule:

      • Debit the Receiver

      • Credit the Giver

  2. Real Account

    • What it is: Accounts for all assets and properties the business owns (e.g., Cash, Machinery, Furniture, Goodwill).

    • The Rule:

      • Debit What Comes In

      • Credit What Goes Out

  3. Nominal Account

    • What it is: Accounts for all expenses, losses, incomes, and gains (e.g., Salary A/c, Rent A/c, Interest Received A/c, Sales A/c).

    • The Rule:

      • Debit All Expenses and Losses

      • Credit All Incomes and Gains

How to Pass a Journal Entry (Proforma)

A journal entry is a systematic record of a transaction. The account to be debited is written first with “Dr.” at the end. The account to be credited is written on the next line, indented, and starts with the word “To”.

This is the standard format (or “proforma”) of a journal:

Proforma of a Journal

| Date | Particulars | L.F. | Amount (Dr.) | Amount (Cr.) |

| :— | :— | :— | :— | :— |

| (Date) | (Account to be Debited) …Dr. | | (Amount) | |

| | To (Account to be Credited) | | | (Amount) |

| | (Being the narration, or explanation of the entry) | | | |

  • L.F. (Ledger Folio): This column is used to write the page number of the Ledger book where this entry is posted.

Special Types of Journal Entries

1. Compound Journal Entry

A Compound Entry is a single journal entry that involves more than two accounts (e.g., more than one debit and/or more than one credit). This is used when two or more transactions of a similar nature happen on the same day.

  • Example: On Aug 10, you sold goods to ‘Y’ & Co. for ₹30,000 and received ₹20,000 in cash immediately.

  • Journal Entry

    DateParticularsL.F.Dr. (₹)Cr. (₹)
    Aug 10Cash A/c … Dr. 20,000 
     Y & Co.’s A/c … Dr. 10,000 
     To Sales A/c  30,000
     (Being goods sold and partial payment received)   

     

2. Opening Journal Entry

An Opening Entry is the very first entry passed in the journal at the beginning of a new financial year. Its purpose is to record all the closing balances of assets and liabilities from the previous year’s Balance Sheet. All Assets are debited, and all Liabilities and Capital are credited.

  • Example: Pass the opening entry on Jan 1, 2006, for Gopinath.

    • Cash: ₹3,000

    • Bank: ₹16,000

    • Stock: ₹30,000

    • Furniture: ₹5,000

    • Debtors: ₹21,000

    • Creditors: ₹18,000

    • Loan from Ganesh: ₹9,000

  • The Entry:

    Opening Entry – 1 Jan 2006

    DateParticularsL.F.Amount (Dr.) (₹)Amount (Cr.) (₹)
    2006    
    Jan 1Cash in Hand A/c … Dr. 3,000 
     Cash at Bank A/c … Dr. 16,000 
     Stock in Trade A/c … Dr. 30,000 
     Furniture & Fittings A/c … Dr. 5,000 
     Sundry Debtors A/c … Dr. 21,000 
     To Sundry Creditors A/c  18,000
     To Ganesh & Co. A/c  9,000
     To Capital A/c (Balancing Figure)  48,000
     (Being opening balances brought forward)   

Part 2: Subsidiary Books (The Sub-division of Journal)

If a business is large, it will have thousands of repetitive transactions (like sales, purchases, and cash payments). Recording every single one in the main Journal would make it too bulky and hard to manage.

To solve this, the Journal is sub-divided into special journals, which are called Subsidiary Books. Each book is used to record one specific type of repetitive transaction.

The 8 Key Subsidiary Books

  1. Cash Book: Records ALL transactions involving cash and bank (receipts and payments). It has both a debit and credit side and acts as both a journal and a ledger account.

  2. Purchase Book (Purchase Day Book): Records ONLY credit purchases of goods (the items you buy to resell).

  3. Sales Book (Sales Day Book): Records ONLY credit sales of goods.

  4. Purchase Return Book (Return Outward Book): Records goods returned to suppliers. This is often based on a Debit Note.

  5. Sales Return Book (Return Inward Book): Records goods returned by customers. This is often based on a Credit Note.

  6. Bills Receivable Book: Records all Bills of Exchange and Promissory Notes received from debtors.

  7. Bills Payable Book: Records all Bills of Exchange and Promissory Notes accepted (to be paid to) creditors.

  8. Journal Proper (or General Journal): This is the “real” journal. It is used to record all transactions that cannot be recorded in any of the other 7 subsidiary books.

What Goes into the Journal Proper?

The Journal Proper is used for all non-repetitive, non-cash, and non-goods transactions. This includes:

  • Opening Entries (as shown above)

  • Closing Entries (at the end of the year)

  • Adjustment Entries (e.g., for depreciation, outstanding salaries)

  • Rectification Entries (to correct mistakes)

  • Credit Purchase/Sale of Assets:

    • If you buy Goods on credit, it goes in the Purchase Book.

    • If you buy Furniture on credit, it goes in the Journal Proper. (Entry: Furniture A/c ...Dr. / To Supplier's A/c)

Part 3: The Ledger (The Principal Book of Accounts)

While the Journal records transactions as they happen, it doesn’t provide a complete picture of an account. A Journal doesn’t answer queries like:

  • How much is the total amount due from a specific debtor?

  • How much do we owe to a specific creditor?

  • What is the total balance of our Cash account?

To answer these, we prepare the Ledger. The Ledger is the principal book of accounts where all transactions from the journal are classified and grouped into individual accounts. It is a set of all accounts (Personal, Real, and Nominal).

 

 

Forms of Ledger

  1. Bound Ledger: The traditional method where the ledger is a single, bound notebook.

  2. Loose-Leaf Ledger: A more modern and flexible method where each account is on a separate, loose sheet. This allows for new pages to be added, old accounts to be removed, and accounts to be easily rearranged.

Part 4: Posting (From Journal to Ledger)

Posting is the process of transferring entries from the Journal (or Subsidiary Books) to their respective accounts in the Ledger.

If a journal entry debits the Rent Account, posting involves going to the Rent Account in the ledger and recording that amount on its debit side.

Proforma of a Ledger Account

A ledger account is presented in a “T” format, with a debit (Dr.) side on the left and a credit (Cr.) side on the right.

Dr. (Debit Side) Name of Account Cr. (Credit Side)

| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |

| :— | :— | :— | :— | :— | :— | :— | :— |

| | | | | | | | |

  • J.F. (Journal Folio): This column is used to write the page number of the Journal where the original entry is located.

Rules of Posting

  1. The word “To” is used before the account name written on the debit side of a ledger account.

  2. The word “By” is used before the account name written on the credit side of a ledger account.

  3. All accounts from the Journal are opened in the Ledger.

  4. If an account is debited in the Journal, the posting in the Ledger will be on the debit side of that account.

  5. If an account is credited in the Journal, the posting in the Ledger will be on the credit side of that account.

  6. Crucial Rule: The name of the account being posted is not written in the particulars. Instead, you write the name of the other account in the journal entry.

    • Example: For the entry Rent A/c Dr. To Cash A/c, when you post to the Rent A/c, you will write “To Cash A/c” on the debit side. When you post to the Cash A/c, you will write “By Rent A/c” on the credit side.

Part 5: Balancing an Account

At the end of an accounting period (e.g., a month or year), the businessman needs to know the final position of each account. Balancing is the process of totaling the debit and credit sides of an account to find the net difference.

How to Balance

  1. Total both the debit side and the credit side separately.

  2. Find the difference between the two totals.

  3. Write this “difference” on the side that has the smaller total, so the two totals become equal.

  4. Label this difference as “By Balance c/d” (carried down) if you wrote it on the credit side, or “To Balance c/d” if you wrote it on the debit side.

  5. Finally, carry this balance down to the opposite side of the account below the total, labeling it “To Balance b/d” (brought down) to start the next period.

Balancing Different Types of Accounts

  • Asset Accounts (Real Accounts): These are balanced and will almost always have a Debit Balance (e.g., Cash, Plant, Furniture).

  • Liability Accounts (Personal Accounts): These are balanced and will almost always have a Credit Balance (e.g., Creditors, Loans).

  • Capital Account (Personal Account): This is balanced and will have a Credit Balance.

  • Expense & Revenue Accounts (Nominal Accounts): These accounts are not balanced. They are simply totaled at the end of the year. The totals are then transferred to the Trading and Profit & Loss Account to find the net profit or loss.

Part 6: Comprehensive Example (Journal -> Ledger -> Balancing)

Let’s record the following transactions in a Journal and then post them into a Ledger.

Transactions:

  • Jan 1: Commenced business with cash ₹50,000

  • Jan 3: Paid into bank ₹25,000

  • Jan 5: Purchased furniture for cash ₹5,000

  • Jan 8: Purchased goods and paid by cheque ₹15,000

  • Jan 8: Paid for carriage ₹500

  • Jan 14: Purchased Goods from K. Murthy ₹35,000

  • Jan 18: Cash Sales ₹32,000

  • Jan 20: Sold Goods to Ashok on credit ₹28,000

  • Jan 25: Paid cash to K. Murthy in full settlement ₹34,200 (Discount = ₹800)

  • Jan 28: Cash received from Ashok ₹20,000

  • Jan 31: Paid Rent for the month ₹2,000

  • Jan 31: Withdrew from bank for private use ₹2,500

Journal

DateParticularsL.F.Amount (Dr.) (₹)Amount (Cr.) (₹)
Jan 1Cash A/c …Dr. 50,000 
 To Capital A/c  50,000
 (Commenced business with cash)   
Jan 3Bank A/c …Dr. 25,000 
 To Cash A/c  25,000
 (Cash paid in the Bank)   
Jan 5Furniture A/c …Dr. 5,000 
 To Cash A/c  5,000
 (Purchased furniture for cash)   
Jan 8Purchase A/c …Dr. 15,000 
 To Bank A/c  15,000
 (Purchased goods and paid by cheque)   
Jan 8Carriage A/c …Dr. 500 
 To Cash A/c  500
 (Cash paid for carriage charges)   
Jan 14Purchase A/c …Dr. 35,000 
 To K. Murthy  35,000
 (Goods purchased on credit)   
Jan 18Cash A/c …Dr. 32,000 
 To Sales A/c  32,000
 (Goods sold for cash)   
Jan 20Ashok …Dr. 28,000 
 To Sales A/c  28,000
 (Goods sold to Ashok credit)   
Jan 25K. Murthy …Dr. 35,000 
 To Cash A/c  34,200
 To Discount A/c  800
 (Cash paid to K. Murthy in full settlement)   
Jan 28Cash A/c …Dr. 20,000 
 To Ashok  20,000
 (Cash received from Ashok on Account)   
Jan 31Rent A/c …Dr. 2,000 
 To Cash A/c  2,000
 (Cash paid for rent)   
Jan 31Drawings A/c …Dr. 2,500 
 To Bank A/c  2,500
 (Cash withdrawn from bank for domestic use)   

Dr. Cash A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 1To Capital A/c 50,000Jan 3By Bank A/c 25,000
Jan 18To Sales A/c 32,000Jan 5By Furniture A/c 5,000
Jan 28To Ashok 20,000Jan 8By Carriage A/c 500
    Jan 25By K. Murthy 34,200
    Jan 31By Rent A/c 2,000
    Jan 31By Balance c/d 35,300
Total  1,02,000   1,02,000
Feb 1To Balance b/d 35,300    

Dr. Capital A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 31To Balance c/d 50,000Jan 1By Cash A/c 50,000
Total  50,000   50,000
    Feb 1By Balance b/d 50,000

Dr. Bank A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 3To Cash A/c 25,000Jan 8By Purchase A/c 15,000
    Jan 31By Drawings A/c 2,500
    Jan 31By Balance c/d 7,500
Total  25,000   25,000
Feb 1To Balance b/d 7,500    

Dr. Furniture A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 5To Cash A/c 5,000Jan 31By Balance c/d 5,000
Total  5,000   5,000
Feb 1To Balance b/d 5,000    

Dr. Purchase A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 8To Bank A/c 15,000Jan 31By Trading A/c 50,000
Jan 14To K. Murthy 35,000 (Total transferred)  
Total  50,000   50,000

Dr. Carriage A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 8To Cash A/c 500Jan 31By Trading A/c 500
Total  500 (Total transferred) 500

Dr. K. Murthy’s A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 25To Cash A/c 34,200Jan 14By Purchase A/c 35,000
Jan 25To Discount A/c 800    
Total  35,000   35,000

Dr. Sales A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 31To Trading A/c 60,000Jan 18By Cash A/c 32,000
 (Total transferred)  Jan 20By Ashok 28,000
Total  60,000   60,000

Dr. Ashok’s A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 20To Sales A/c 28,000Jan 28By Cash A/c 20,000
    Jan 31By Balance c/d 8,000
Total  28,000   28,000
Feb 1To Balance b/d 8,000    

Dr. Rent A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 31To Cash A/c 2,000Jan 31By P&L A/c 2,000
Total  2,000 (Total transferred) 2,000

Dr. Drawings A/c Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Jan 31To Bank A/c 2,500Jan 31By Balance c/d 2,500
Total  2,500   2,500
Feb 1To Balance b/d 2,500    

(Note: The Discount A/c would also be opened and its total transferred to the P&L A/c.)

📚 Keep Studying!

We hope these Financial Management and Accounting notes help you build a strong foundation for your BBA. LuNotes is your one-stop solution for all Lucknow University notes. Don’t forget to check out our notes for other subjects in your semester!

  • [Link to Principles of Management Notes]

  • [Link to Personality Development Notes]

  • [Link to Complete Computer application Notes]

Found a mistake? We work hard to ensure all notes are 100% accurate and as per the latest LU syllabus. If you spot an error or have a suggestion, please [click here to report it]. (You would link this text to a contact form or email).

By LuNotes – your trusted for Lucknow University Semester exam notes, crafted with love. ❤️

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Mastering Financial Statement Analysis for Better Insights

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What is Analysis & Interpretation of Financial Statements?

Financial statements (like the P&L Account and Balance Sheet) provide raw data about a company’s performance and position. By themselves, these numbers don’t tell the whole story. To get actionable insights, you need to analyze and interpret them.

  • Analysis of Financial Statements: This is the process of critically examining the financial data to find a company’s strengths and weaknesses. It involves classifying, rearranging, and comparing data to understand the relationships between different financial factors.

  • Interpretation of Financial Statements: This is the next step. Interpretation is the art of drawing conclusions from the analyzed data to judge the company’s profitability and financial soundness.

As the text says, the two are closely linked: Analysis is useless without interpretation, and interpretation is impossible without analysis.

The 9-Step Procedure for Analysis

  1. Determine the objective and extent of the analysis.

  2. Collect and study all required financial data. Rearrange it if necessary.

  3. Simplify the data by approximating figures (e.g., to the nearest thousand).

  4. Use analysis techniques (like ratios) to create relationships between items.

  5. Collect any additional, non-financial information that provides context.

  6. Rearrange the data into logical tables for comparison.

  7. Use the right tools to interpret the data and draw conclusions.

  8. Interpret the trends you find by considering the economic facts of the business.

  9. Present your conclusions in a clear, brief report for management.

Types of Financial Analysis

Financial analysis can be classified in two main ways:

1. Analysis According to Material Used

  • Internal Analysis: This is done by people inside the company, such as management or employees. They have access to all the internal books of account and related information, allowing for a very detailed analysis.

  • External Analysis: This is done by people outside the company, such as investors, creditors, or the general public. Their analysis is limited to the published financial statements (like the annual report).

2. Analysis According to Modus Operandi (Method)

This is the most common way to classify analysis techniques.

  • Horizontal (or Dynamic) Analysis: This method involves comparing the financial data of a company over several years. The data is placed side-by-side (horizontally) to see the trend. This helps you understand the company’s performance and growth over time.

  • Vertical (or Static) Analysis: This method involves analyzing the financial statements for a single period (one year). You compare each item on the statement to a common base. For example, you might see what percentage of “Total Assets” is “Cash” (on the Balance Sheet) or what percentage of “Total Sales” is “Gross Profit” (on the P&L).

Techniques of Financial Analysis (The Toolbox)

To analyze and interpret data, you can use several tools. The most common techniques for BBA and MBA students are:

  • Comparative Statements: (Horizontal Analysis) Comparing two or more years of statements side-by-side.

  • Common Size Statements: (Vertical Analysis) Expressing all items as a percentage of a common base (like Total Assets or Net Sales).

  • Trend Analysis: (Horizontal Analysis) Comparing items over several years to a single “base year” to see the long-term tendency.

  • Fund Flow Analysis: Analyzes the changes in a company’s working capital between two balance sheet dates.

  • Cash Flow Analysis: (As per AS-3) Shows the “inflow” and “outflow” of actual cash during a period.

  • Ratio Analysis: The most popular technique. It expresses the relationship between different accounting figures as a ratio (e.g., Current Ratio = Current Assets / Current Liabilities).

  • Break-even Analysis: A management tool that divides costs into “fixed” and “variable” to find the point where a company makes no profit and no loss.

Deep Dive 1: Comparative Financial Statements

This is a horizontal analysis tool. You place two years of data side-by-side and add two new columns:

  1. Absolute Change: The increase or decrease in the amount (in ₹).

  2. Relative Change: The absolute change expressed as a percentage (%). (Absolute Change / Base Year Amount) * 100

Comparative Balance Sheet

Illustration 1: The Balance Sheets of Kavita Ltd. for 2006 and 2007 are as follows. Prepare a Comparative Balance Sheet.

Solution:

Comparative Balance Sheet of Kavita Ltd.

As on 31st Dec. 2006 and 2007

Particulars2006 (₹)2007 (₹)Absolute Change (₹)Relative Change (%)
Assets    
Fixed Assets    
Land & Building4,0006,000+2,000+50.0%
Plant & Machinery2,0003,000+1,000+50.0%
Total Fixed Assets6,0009,000+3,000+50.0%
Investment1,2001,600+400+33.33%
Current Assets    
Debtors8001,000+200+25.0%
Stock1,6001,800+200+12.5%
Cash400600+200+50.0%
Total Current Assets2,8003,400+600+21.43%
TOTAL ASSETS10,00014,000+4,000+40.0%
Liabilities & Equity    
Equity & Reserves    
Equity Share Capital8,00010,000+2,000+25.0%
Capital Reserve3001,800+1,500+500.0%
Long-Term Liabilities    
10% Debentures1,2001,600+400+33.33%
Current Liabilities    
Creditors500600+100+20.0%
TOTAL LIABILITIES & EQUITY10,00014,000+4,000+40.0%

Interpretation:

  • The company has significantly increased its Fixed Assets (+50%) and Investments (+33.33%).

  • This growth was financed by issuing new shares (+25%) and debentures (+33.33%).

  • Reserves have grown by 500%, indicating strong profitability.

  • The financial position appears to be improving and growing.

Comparative Statement of Working Capital

This statement focuses only on the changes in Current Assets and Current Liabilities to see the change in net working capital.

Illustration 3: From the following, prepare a schedule of changes in working capital.

|

Schedule of Changes in Working Capital

Particulars2006 (₹)2007 (₹)Increase in Working Capital (₹)Decrease in Working Capital (₹)
Current Assets (CA)    
Cash in Hand10,00014,0004,000 
Cash at Bank14,00018,0004,000 
Book Debts24,00022,000 2,000
Inventory8,0006,000 2,000
Bills Receivable4,0003,000 1,000
Prepaid Expenses400600200 
Short-term Investments10,00016,0006,000 
Accrued Interest2,0001,200 800
(A) Total Current Assets72,40080,800  
     
Current Liabilities (CL)    
Accounts Payable16,00012,0004,000 
Notes Payable6,0004,0002,000 
Bank Overdraft8,0006,0002,000 
Outstanding Expenses600400200 
Provision for Bad Debts1,0001,400 400
(B) Total Current Liabilities31,60023,800  
     
Working Capital (A – B)40,80057,000  
Net Increase in Working Capital  16,200 
     
Totals  22,4006,200
   (Increase – Decrease = 22,400 – 6,200 = 16,200) 

(Note: An increase in CA increases WC. A decrease in CL also increases WC.)

Deep Dive 2: Common Size Statements

This is a vertical analysis tool. All items are expressed as a percentage of a common base, making it easy to see the structure of the statements.

  • For the Balance Sheet: The base is Total Assets (100%) and Total Liabilities + Equity (100%).

  • For the Income Statement: The base is Net Sales (100%).

Illustration 4: Convert the following statements for Rajeev Ltd. into Common Size Statements.

Income Statement (abridged)2007 (₹)2008 (₹)
Net Sales700900
Less: Cost of Goods Sold380430
Gross Profit320470
Less: Selling & Admin. Cost100144
Operating Profit220326
Less: Interest4034
Earning Before Taxes180292
Less: Taxes63103
Earning After Taxes117189
Balance Sheet (abridged)2007 (₹)2008 (₹)
Assets  
Plant804780
Cash108156
Debtors120130
Inventories168234
Total Assets1,2001,300
Liabilities & Equity  
Equity Share Capital480480
General Reserves192364
Long-term Loans364339
Creditors134104
Outstanding Expenses12–
Other Current Liabilities1813
Total Liabilities & Equity1,2001,300

Common Size Income Statement

For the year ended March 31
(Base: Net Sales = 100%)

Particulars2007 (%)2008 (%)
Net Sales100.0%100.0%
Less: Cost of Goods Sold54.3%47.8%
Gross Profit45.7%52.2%
Less: Selling & Admin. Cost14.3%16.0%
Operating Profit31.4%36.2%
Less: Interest5.7%3.8%
Earning Before Taxes (EBT)25.7%32.4%
Less: Taxes9.0%11.4%
Earning After Taxes (EAT)16.7%21.0%

(Interpretation: In 2008, the company became more financially stable. It relies less on debt (Loans dropped from 30.3% to 26.1%) and more on Owner’s Equity (which grew from 56% to 64.9% of total financing).)

Deep Dive 3: Trend Analysis

This is a horizontal analysis tool used for comparing data over many years (e.g., 4-5 years) to see the “tendency” or trend.

How it works:

  1. Choose a Base Year (usually the earliest year) and set all its values to 100%.

  2. Calculate the trend percentage for all other years by dividing that year’s value by the base year’s value.

  3. Formula: (Current Year Amount / Base Year Amount) * 100

Trend Percentage Analysis

(Base Year = 2004 = 100)

Assets2004 (%)2005 (%)2006 (%)2007 (%)
Cash100150200175
Debtors10020015075
Stock100150120140
Land & Building100125150150
Plant100125130150
Total Assets100128138145

(How to read this: In 2005, Cash was 150% of its 2004 level (it grew 50%). In 2007, Debtors fell to 75% of the 2004 level (a 25% drop from the base). This shows a strong growth in assets overall, but a potential issue with debtor collections in the final year.)

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What is Bank Reconciliation Statement (BRS) and its Preparation?

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What is a Bank Reconciliation Statement (BRS)?

A Bank Reconciliation Statement (BRS) is a statement prepared to match (reconcile) the bank balance as per the company’s Cash Book with the balance as per the Pass Book (or bank statement) on a specific date.

Here’s a simple breakdown:

  • Cash Book (Bank Column): This is the company’s own record. The business records all its bank transactions (deposits and payments) here. A debit balance (Dr.) is favorable (money in the bank).

  • Pass Book (Bank Statement): This is the bank’s record of the company’s account. It’s a copy of the customer’s account in the bank’s books. A credit balance (Cr.) is favorable.

In a perfect world, the Cash Book balance and the Pass Book balance would be identical. However, due to timing and errors, they often do not match. The BRS is the tool used to identify and explain these differences.

Why is a BRS Prepared? (Purpose & Importance)

A BRS is a vital financial control tool. Its main purposes are:

  1. To Find Errors: The reconciliation process helps in discovering errors made either by the business (in the Cash Book) or by the bank (in the Pass Book).

  2. To Detect Fraud: It can uncover fraudulent activities. For example, if a cashier records a deposit in the Cash Book but never actually deposits the cash into the bank, the BRS will highlight this.

  3. To Identify Delays: A BRS shows any undue delays in the clearance of cheques, helping the business manage its cash flow.

  4. To Verify Accuracy: It confirms the accuracy of the entries in both sets of books.

9 Common Causes of Difference

The balances in the Cash Book and Pass Book may differ for several reasons, which fall into two main categories:

A. Timing Differences (Transactions recorded at different times):

  1. Cheques issued but not yet presented: The business credits its Cash Book (balance down) as soon as it issues a cheque. However, the bank only debits the Pass Book (balance down) when the cheque is actually cashed by the recipient, which could be days or weeks later.

  2. Cheques deposited but not yet collected: The business debits its Cash Book (balance up) as soon as it deposits a cheque. The bank, however, only credits the Pass Book (balance up) after the cheque has been cleared (collected), which can take a few days.

B. Transactions Known to One Party (But not the other):

  1. Amount directly deposited by customers: A customer pays directly into the bank. The bank credits the Pass Book (balance up), but the business won’t know until it sees the statement.

  2. Bank Charges: The bank debits the Pass Book (balance down) for services like fees, overdraft interest, or commission. The business only finds out after seeing the statement.

  3. Direct Receipts by the bank: The bank collects dividends or interest on behalf of the business. The Pass Book is credited (balance up), but the business doesn’t know yet.

  4. Direct Payments by the bank: The bank pays expenses (like rent or insurance) on the company’s behalf as per standing instructions. The Pass Book is debited (balance down), but the business hasn’t recorded it yet.

  5. Dishonour of Cheques/Bills: A cheque you deposited bounces. The bank debits your Pass Book (balance down), but you may not know until you receive the intimation.

C. Errors:

  1. Errors committed by the Firm: The business might make a mistake in its own Cash Book (e.g., wrong amount, forgetting to record a transaction).

  2. Errors committed by the Bank: The bank might make a mistake in the Pass Book (e.g., debiting the wrong account, wrong amount).

How to Prepare a Bank Reconciliation Statement (Examples)

A BRS is simply a statement that starts with one balance, adds and subtracts the “causes of difference,” and arrives at the other balance.

Example 1: Starting with a Favorable Cash Book Balance

Illustration: XYZ Ltd. has a Cash Book (Dr.) balance of ₹1,54,300 on 31st March 2004. The Pass Book shows a different balance for these reasons:

  • (i) Cheques deposited but not yet credited: ₹75,450

  • (ii) Cheques issued but not yet presented: ₹80,760

  • (iii) Bank charges not in Cash Book: ₹1,135

  • (iv) Cheques received by bank directly: ₹1,35,200

  • (v) Insurance premium paid by bank (not in Cash Book): ₹15,400

Solution:

Bank Reconciliation Statement

as on 31st March, 2004

ParticularsAmount (₹)Amount (₹)
Bank balance as per the Cash Book (Dr.) 1,54,300
Add:  
Cheques issued but not yet presented80,760 
Cheques received by the bank directly1,35,2002,15,960
  3,70,260
Less:  
Cheques deposited but not yet credited75,450 
Bank charges not yet recorded in Cash Book1,135 
Insurance premium paid by the bank15,40091,985
Balance as per the Pass Book (Cr.) 2,78,275

Example 2: Starting with a Favorable Pass Book Balance

Illustration: Prepare a BRS as on March 31, 2007, from the following:

  • (a) Bank balance as per Pass Book: ₹9,800 (Cr.)

  • (b) Cheque deposited but not credited: ₹5,000

  • (c) Cheque issued but not presented: ₹7,000

  • (d) Cheque deposited dishonored (not in Cash Book): ₹2,000

  • (f) Cheque deposited and credited, but omitted in Cash Book: ₹4,000

  • (g) Cheque received and entered in Cash Book, but not sent to bank: ₹5,000

  • (j) Bank charges in Pass Book only: ₹100

  • (m) Direct payments by customers in Pass Book only: ₹8,000

Solution

Bank Reconciliation Statement

as on March 31, 2007

ParticularsAmount (₹)Amount (₹)
Bank balance as per Pass Book (Cr.) 9,800
Add:  
(b) Cheque deposited but not yet credited5,000 
(d) Cheque deposited dishonored (not in Cash Book)2,000 
(g) Cheque received but not sent to bank5,000 
(j) Bank charges in Pass Book only10012,100
  21,900
Less:  
(c) Cheque issued but not presented for payment7,000 
(f) Cheque deposited, omitted in Cash Book4,000 
(m) Direct payments by customers in Pass Book only8,00019,000
Bank balance as per Cash Book (Dr.) 2,900

The Adjusted Cash Book Method (A More Practical Approach)

The method above is used to reconcile, but a more practical approach for businesses is to first correct their own Cash Book for all the items they didn’t know about.

This is called the Adjusted Cash Book Method.

  • Step 1: Open the Cash Book (Bank Column) and record all the items that were only in the Pass Book (e.g., bank charges, direct deposits, dishonored cheques, interest).

  • Step 2: Calculate the new, “Adjusted Cash Book Balance.”

  • Step 3: Prepare a BRS using only the timing differences and bank errors.

Example: Adjusted Cash Book Method

Illustration: From the following, prepare an Adjusted Cash Book and then a BRS as on 31st March 2004.

  • Cash Book Balance (Dr.): ₹1,24,250

  • (i) Cheques deposited but not credited: ₹1,74,020

  • (ii) Cheques issued but not presented: ₹1,06,240

  • (iii) Error in Cash Book: carried forward as ₹45,720 instead of ₹45,270 (excess debit of ₹450)

  • (iv) Bank charges not recorded: ₹1,045

  • (v) Cheque from customer wrongly entered in cash column instead of bank column: ₹26,740

Solution:

Here is your properly structured and neatly formatted Step 1 (Adjusted Cash Book) and Step 2 (Bank Reconciliation Statement) exactly as required:

Step 1: Adjusted Cash Book (Bank Column Only)

Dr.                        Cr.

DateParticularsJ.F.Amount (₹)DateParticularsJ.F.Amount (₹)
Mar 31To Balance b/d 1,24,250Mar 31By C/F Error (Overcast) 450
Mar 31To Cash A/c (Omitted) 26,740Mar 31By Bank Charges 1,045
    Mar 31By Balance c/d (Adjusted) 1,49,495
 Total 1,50,990 Total 1,50,990
Apr 1To Balance b/d 1,49,495    

Step 2: Bank Reconciliation Statement

as on 31st March, 2004

ParticularsAmount (₹)Amount (₹)
Adjusted Bank balance as per Cash Book (Dr.) 1,49,495
Add:  
Cheques issued but not yet presented1,06,2401,06,240
  2,55,735
Less:  
Cheques deposited but not yet credited1,74,0201,74,020
Balance as per the Pass Book (Cr.) 81,715

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Depreciation in-depth : SLM vs. WDV explained fully

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What is Depreciation? (AS-6)

Depreciation is the gradual, permanent, and continuous fall or decrease in the value of a fixed asset. It’s a non-cash business expense that is “charged” against the profit of a company over the asset’s useful life.

According to Accounting Standard (AS) 6, depreciation is:

“A measure of the wearing out, consumption or other loss of value of a depreciable asset, arising from use, affluxion of time or obsolescence through technology and market changes.”

Simply put, you buy a machine for ₹1,00,000, and you plan to use it for 10 years. You can’t call the entire ₹1,00,000 an expense in Year 1. Instead, you spread that cost over the 10 years you use it. This process of spreading the cost is called depreciation.

What is a “Depreciable Asset”?

As per AS-6, an asset is depreciable only if it meets three conditions:

  1. It is expected to be used for more than one accounting period.

  2. It has a limited useful life. (This is why land is generally not depreciated).

  3. It is held by the business for use in production, supply of services, or for administrative purposes (i.e., it is not held for the purpose of resale).

Why is Depreciation Necessary? (Significance)

  1. To Ascertain Correct Profit: Depreciation is a cost of earning revenue. To find the true profit for a period, you must deduct all costs (including depreciation) from the revenues of that period.

  2. To Show a True Financial Position: If you don’t charge depreciation, your assets will be shown at their original cost in the Balance Sheet, which is misleading. Depreciation ensures assets are shown at their “true and fair” value.

  3. To Fund Asset Replacement: It creates a fund by setting aside a portion of profits each year, so you have money available to buy a new asset when the old one wears out.

  4. To Account for Wear and Tear: Assets (like machinery) lose value simply from being used.

  5. To Account for Obsolescence: An asset may become outdated due to new technology (e.g., an old typewriter is replaced by a computer) long before it physically breaks down.

recording” depreciation” (the” two” ways)

There are two main ways to record depreciation in the books:

  1. When Provision for Depreciation Account is NOT Maintained:

    • Depreciation is debited, and the Asset Account is credited.

    • Journal Entry: Depreciation A/c Dr. / To Asset A/c

    • In this method, the Asset Account in the Balance Sheet is always shown at its Written Down Value (Cost – Depreciation).

  2. When Provision for Depreciation Account IS Maintained:

    • Depreciation is debited, and a new account called “Provision for Depreciation” (or “Accumulated Depreciation”) is credited.

    • Journal Entry: Depreciation A/c Dr. / To Provision for Depreciation A/c

    • In this method, the Asset Account in the Balance Sheet is always shown at its Original Cost. The “Provision” is shown as a deduction from it.

Methods of Providing Depreciation

While there are many methods, the two most common methods required for BBA/MBA students are the Straight Line Method (SLM) and the Written Down Value (WDV) Method.

1. Straight Line Method (SLM)

This method is also known as the “Fixed Installment Method.”

  • What it is: A method where the depreciation is calculated on the Original Cost of the asset.

  • Key Feature: The amount of depreciation remains constant (fixed) every single year throughout the asset’s life.

  • Formula:

    $$Depreciation = \frac{(Original\;Cost – Estimated\;Scrap\;Value)}{Estimated\;Useful\;Life\;(in\;Years)}$$

✅ Merits of SLM

  • It is very simple and easy to calculate.

  • The asset’s value can be completely written off to zero (or its scrap value) at the end of its life.

❌ Demerits of SLM

  • It is unrealistic. The burden on the Profit & Loss account increases over the years (as repair costs go up, but the depreciation charge stays the same).

  • It is not recognized by income tax authorities in India for most assets.

Example: Straight Line Method (SLM)

Illustration: Mr. Ramesh purchased a second-hand machine for ₹24,000 on 1st April 2006. He spent ₹10,000 on its overhaul and installation. Depreciation is written off at 10% p.a. on the original cost. On 30th June 2008, the machine was sold for ₹19,000. Prepare the Machine Account (assuming accounts close on 31st Dec).

Solution:

Working Note:

  1. Original Cost of Machine = Purchase Price + Installation = ₹24,000 + ₹10,000 = ₹34,000

  2. Annual Depreciation (10% of Cost) = 10% of ₹34,000 = ₹3,400 per year

Machinery Account

Date Particulars Amount (₹) Date Particulars Amount (₹)
2006     2006    
Apr 1 To Cash A/c (Cost + Install) 34,000 Dec 31 By Depreciation A/c (9 months) 2,550
      Dec 31 By Balance c/d 31,450
  Total 34,000   Total 34,000
2007     2007    
Jan 1 To Balance b/d 31,450 Dec 31 By Depreciation A/c (Full Year) 3,400
      Dec 31 By Balance c/d 28,050
  Total 31,450   Total 31,450
2008     2008    
Jan 1 To Balance b/d 28,050 June 30 By Depreciation A/c (6 months) 1,700
      June 30 By Cash A/c (Sale) 19,000
      June 30 By P&L A/c (Loss on Sale) 7,350
  Total 28,050   Total 28,050

 

2. Written Down Value (WDV) Method

This method is also known as the “Diminishing Balance Method” or “Reducing Balance Method.”

  • What it is: A method where depreciation is calculated on the Written Down Value (Book Value) of the asset, which is the (Original Cost – All Previous Depreciation).

  • Key Feature: The rate of depreciation is constant (e.g., 10%), but the amount of depreciation decreases every year.

  • Result: The value of the asset can never become zero under this method.

✅ Merits of WDV

  • It is more logical. The depreciation is high in the early years (when the asset is most efficient) and low in the later years (when repair costs are high).

  • It is recognized by income tax rules in India.

❌ Demerits of WDV

  • The asset can never be fully written off to zero.

  • Calculating the rate (if not given) is complex.

Example: Written Down Value (WDV) Method

Illustration: Lakshmi Narain Co. Ltd. purchased machinery on 1st April 2006 for ₹45,000. It purchased another machine on 1st Oct 2006 for ₹30,000. Depreciation is charged at 10% p.a. on the WDV method. Accounts close on 31st Dec. Show the Machinery Account for 2006 and 2007.

Solution:

Machinery Account

Dr. Cr.

Date Particulars Amount (₹) Date Particulars Amount (₹)
2006     2006    
Apr 1 To Cash A/c (M1) 45,000 Dec 31 By Depreciation A/c (W.N. 1) 4,125
Oct 1 To Cash A/c (M2) 30,000 Dec 31 By Balance c/d 70,875
  Total 75,000   Total 75,000
2007     2007    
Jan 1 To Balance b/d 70,875 Dec 31 By Depreciation A/c (W.N. 2) 7,087.50
      Dec 31 By Balance c/d 63,787.50
  Total 70,875   Total 70,875
2008          
Jan 1 To Balance b/d 63,787.50      

Working Notes (W.N.)

You can provide the values or ask me to compute all depreciation workings (W.N. 1, W.N. 2, etc.), and I will complete this section cleanly.

If you want this in image form, PDF, or T-account style, I can generate that too.

  1. Depreciation for 2006:

    • On M1: ₹45,000 x 10% x (9/12) = ₹3,375

    • On M2: ₹30,000 x 10% x (3/12) = ₹750

    • Total = ₹4,125

  2. Depreciation for 2007 (Calculated on WDV):

    • WDV of M1 = (₹45,000 – ₹3,375) = ₹41,625

    • WDV of M2 = (₹30,000 – ₹750) = ₹29,250

    • Total WDV = ₹41,625 + ₹29,250 = ₹70,875

    • Total Depreciation for 2007 = 10% of ₹70,875 = ₹7,087.50

SLM vs. WDV: Key Differences

Basis of Difference Straight Line Method (SLM) Written Down Value (WDV) Method
Basis of Calculation Depreciation is charged on the Original Cost of the asset. Depreciation is charged on the Book Value (WDV) of the asset.
Amount of Depreciation The amount is constant (fixed) every single year. The amount decreases every year.
Asset Value The asset’s value can become zero at the end of its useful life. The asset’s value can never become zero.
Burden on P&L A/c Increases over time (Depreciation is fixed, but repair costs increase). Remains relatively constant (Depreciation is high when repairs are low, and vice versa).
Tax Recognition This method is not recognized by income tax rules. This method is recognized and preferred by income tax rules.
Suitability Best for assets with a fixed life and low repair costs, like leases or buildings. Best for assets with high repair costs in later years, like plant and machinery.

📚 Keep Studying!

We hope these Financial Management and Accounting notes help you build a strong foundation for your BBA. LuNotes is your one-stop solution for all Lucknow University notes. Don’t forget to check out our notes for other subjects in your semester!

  • [Link to Principles of Management Notes]

  • [Link to Personality Development Notes]

  • [Link to Complete Computer application Notes]

Found a mistake? We work hard to ensure all notes are 100% accurate and as per the latest LU syllabus. If you spot an error or have a suggestion, please [click here to report it]. (You would link this text to a contact form or email).

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IFRS, Ind AS, and AS Explained (Accounting Standards) Indepth

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An Introduction to Accounting Standards (IFRS, Ind AS, and AS)

For any business, it is essential that its financial statements are transparent, consistent, and reliable. This builds trust with investors, creditors, and customers. To achieve this, a set of rules and guidelines, known as Accounting Standards, are followed.

As an accounting or management student, you will hear three different terms: IFRS, Ind AS, and AS. Understanding the difference is the first step to mastering Indian accounting.

1. What are IFRS? (The Global Standard)

  • IFRS stands for International Financial Reporting Standards.

  • These are a single set of high-quality, global accounting standards issued by the International Accounting Standards Board (IASB) based in London.

  • The Goal: To create a common “accounting language” that companies around the world can use. This makes it easier to compare the financial statements of a company in India with a company in Germany or the USA.

2. What are Ind AS? (The New Indian Standard)

  • Ind AS stands for Indian Accounting Standards.

  • These are India’s own set of standards that are “converged with” IFRS. This means they are almost identical to IFRS, but with a few minor changes (called “carve-outs” and “carve-ins”) to make them more suitable for the Indian economy.

  • Who uses them? The Ministry of Corporate Affairs (MCA) has made Ind AS mandatory for large, listed companies in India (based on their net worth and turnover) in a phased manner.

3. What are Accounting Standards (AS)? (The Legacy Indian Standard)

  • AS stands for Accounting Standards.

  • These are the traditional accounting standards issued by the Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (ICAI).

  • Who uses them? Companies that are not required to adopt Ind AS (e.g., smaller, unlisted companies) continue to follow these Accounting Standards (AS).

In short: IFRS is the global standard. Ind AS is the new Indian version of IFRS for large companies. AS is the older, traditional Indian standard for smaller companies.

Understanding Accounting Standards (AS) in Detail

The text you provided is a detailed explanation of the older Accounting Standards (AS), which are still very relevant for all BBA and MBA students.

The Need for Accounting Standards (AS)

The main goal of AS is to remove variations in accounting treatment and bring uniformity. Without standards, two companies could record the same event differently, making their financial statements impossible to compare.

  • Example 1 (Inventory): If one company uses the LIFO (Last-In, First-Out) method for valuing its stock and another uses FIFO (First-In, First-Out), their profits will be different, even if their sales are the same. AS 2 (Valuation of Inventories) provides rules for this.

  • Example 2 (Depreciation): If one company uses the Diminishing Balance Method for depreciation and another uses the Fixed Installment Method, their reported profits and asset values will differ.

How Accounting Standards (AS) are Formulated in India

In India, the Accounting Standards are formulated by the Accounting Standard Board (ASB), which was set up by the ICAI in 1977.

The process is as follows:

  1. Identify Area: The ASB identifies a broad area (e.g., “Accounting for Fixed Assets”) that needs a standard.

  2. Form Study Group: A study group is formed with members from ICAI, government, and public sector units.

  3. Create a Draft: The group holds discussions and prepares an Exposure Draft (ED) of the proposed standard.

  4. Public Comment: The ED is circulated to outside bodies (like ICWAI, ICSI, CBDT) and the public for comments.

  5. Finalize: After considering all comments, the ASB finalizes the standard and submits it to the ICAI council.

  6. Issue Standard: The ICAI council approves and issues the final Accounting Standard.

List of Indian Accounting Standards (AS)

The ICAI has issued the following standards. (Note: Some standards like AS 8 and AS 6 have been withdrawn or merged, but this is the comprehensive list).

StandardTitleStandardTitle
AS 1Disclosure of Accounting PoliciesAS 17Segment Reporting
AS 2Valuation of InventoriesAS 18Related Party Disclosures
AS 3Cash Flow StatementAS 19Leases
AS 4Contingencies & Events After B/S DateAS 20Earnings Per Share
AS 5Net Profit/Loss, Prior Period ItemsAS 21Consolidated Financial Statements
AS 6Depreciation Accounting (Withdrawn)AS 22Accounting for Taxes on Income
AS 7Construction ContractsAS 23Investments in Associates
AS 8Research & Development (Withdrawn)AS 24Discontinuing Operations
AS 9Revenue RecognitionAS 25Interim Financial Reporting
AS 10Fixed Assets (Property, Plant, Equip.)AS 26Intangible Assets
AS 11Effects of Changes in Foreign ExchangeAS 27Financial Reporting of Joint Ventures
AS 12Accounting for Government GrantsAS 28Impairment of Assets
AS 13Accounting for InvestmentsAS 29Contingent Liabilities & Assets
AS 14Accounting for AmalgamationsAS 30Financial Instruments: Recognition
AS 15Employee BenefitsAS 31Financial Instruments: Presentation
AS 16Borrowing CostsAS 32Financial Instruments: Disclosures

Deep Dive: AS 1 (Disclosure of Accounting Policies)

AS 1 is the most fundamental standard as it deals with the policies a company follows when preparing its financial statements.

1. Fundamental Accounting Assumptions

AS 1 states that all financial statements are assumed to be prepared based on three key concepts. If they are not followed, a company must disclose it.

  • Going Concern: The business is assumed to be continuing its operations for the foreseeable future. It has no intention to liquidate or shut down.

  • Consistency: It is assumed that the accounting policies are consistent from one period to another. (e.g., if you use a depreciation method, you should use it consistently every year).

  • Accrual: Revenues and costs are recognized as they are earned or incurred, not when cash is received or paid. (e.g., You record a sale when it’s made, even if the customer will pay you next month).

2. Considerations in Selecting Accounting Policies

The goal is to present a true and fair view. To achieve this, management must consider three major principles when selecting a policy:

  • Prudence: Be cautious. This means you should not anticipate profits, but you should provide for all known liabilities and losses, even if the amount is just an estimate.

  • Substance over Form: The accounting treatment should be governed by the financial reality (the substance) of a transaction, not just its legal form.

  • Materiality: Financial statements must disclose all “material” items. An item is material if its knowledge might influence the decisions of the user (e.g., a loss of ₹100 is not material for a large company, but a loss of ₹10 Crore is).

3. Disclosure of Accounting Policies

  • Rule 1: All significant accounting policies adopted (e.g., “Depreciation is charged using the Straight-Line Method”) must be disclosed in one place.

  • Rule 2: Any change in an accounting policy that has a material effect must be disclosed. The company must also state the amount by which the change has affected the profit or loss.

📚 Keep Studying!

We hope these Financial Management and Accounting notes help you build a strong foundation for your BBA. LuNotes is your one-stop solution for all Lucknow University notes. Don’t forget to check out our notes for other subjects in your semester!

  • [Link to Principles of Management Notes]

  • [Link to Personality Development Notes]

  • [Link to Complete Computer application Notes]

Found a mistake? We work hard to ensure all notes are 100% accurate and as per the latest LU syllabus. If you spot an error or have a suggestion, please [click here to report it]. (You would link this text to a contact form or email).

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financial accounting full syllabus by lunotes.in lucknow university bba full syllabus all 4 units covered

Financial & Management Accounting – I (Solved) | Syllabus, Numerical & Notes for LU BBA Sem 1

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Hey, Lucknow University students!

“Financial Management and Accounting” (FMA) is a critical subject in your BBA 1st Semester. It builds the foundation for understanding how businesses track, manage, and report their money.

We’ve broken down the entire syllabus into easy-to-digest notes, covering everything from basic journal entries to complex financial statement analysis.

Just click on your desired topic below to access the notes and master the concepts!

 

Unit 1: Introduction to Accounting

  • Introduction to Accounting (Meaning, Objectives, Process, Branches) [View Notes]

  • Bases of Accounting (Cash vs. Accrual) [View Notes]

  • Users of Accounting Information [View Notes]

  • Ethical Issues in Accounting [View Notes]

  • Generally Accepted Accounting Principles (GAAP) [View Notes]

  • Introduction to Indian Accounting Standards (Ind AS) and IFRS [View Notes]

 

Unit 2: Recording & Final Accounts

  • Classification of Accounts [View Notes]

  • Recording and Posting of Transactions (Journal & Ledger) [View Notes]

  • Preparation of Trial Balance [View Notes]

  • Capital and Revenue (Income & Expenditure) [View Notes]

  • Preparation of Final Accounts (Sole Proprietorship: P&L Account and Balance Sheet) [View Notes]

  • Adjustment Entries (Inventory, Depreciation, Provisions, Accrued, etc.) [View Notes]

 

Unit 3: Asset Accounting & Corporate Accounting

  • Valuation of Inventories (Meaning & Significance) [View Notes]

  • Inventory Record Systems (Periodic vs. Perpetual) [View Notes]

  • Inventory Valuation Methods (FIFO, LIFO, Weighted Average) [View Notes]

  • Depreciation (Meaning, Methods: SLM & WDV) [View Notes]

  • Bank Reconciliation Statement (BRS) [View Notes]

  • Introduction to Corporate Accounting (Preparation of Company Financial Statements) [View Notes]

  • Contents of an Annual Report [View Notes]

 

Unit 4: Analysis of Financial Statements

  • Analysis of Financial Statements (Meaning, Types, Techniques) Trend Analysis [View Notes]

  • Ratio Analysis [View Notes]

  • Statement of Cash Flow (Indirect Method) [View Notes]

 

📚 Keep Studying!

We hope these Financial Management and Accounting notes help you build a strong foundation for your BBA. LuNotes is your one-stop solution for all Lucknow University notes. Don’t forget to check out our notes for other subjects in your semester!

  • [Link to Principles of Management Notes]

  • [Link to Personality Development Notes]

  • [Link to Complete Computer application Notes]

Found a mistake? We work hard to ensure all notes are 100% accurate and as per the latest LU syllabus. If you spot an error or have a suggestion, please [click here to report it]. (You would link this text to a contact form or email).

By LuNotes – your trusted for Lucknow University Semester exam notes, crafted with love. ❤️

Get Notified When New Notes Are Uploaded.