Module 1

Financial and Cost Accounting

 Account?
Accounting?
Accountancy?
 An account refers to assets, liabilities, income, expenses, and
equity, as represented by individual ledger pages, to which
changes in value are chronologically recorded with debit and
credit entries.
 Accounting is the systematic and comprehensive recording of
financial transactions pertaining to a business, and it also refers to
the process of summarizing, analyzing and reporting these
transactions to oversight agencies and tax collection entities.
 Accountancy the practices of recording, classifying and
reporting business transactions carried out on goods and services
in an organization. It’s valuable in providing feedback to
management with respect to the financial results and status of an
establishment.
Accounting:
 Accounting helps in knowing the true financial
position of the business.

 Accounting provides all valid financial

information to owners, banks, customers,
government and other outside parties to make
correct decisions.
 Objective of Accounting:
 Providing information to the users for decision
making
 Systematic Recording of transaction
 Ascertain the financial position of business
 To know the solvency position of firm
 Evaluates policies effectiveness
 Detection and Prevention of Errors
 Function of Accounting:
 Measurement
 Forecasting
 Decision making
 Comparison and Evaluation
 Control
 Government regulation and taxation
 Book Keeping :
“Book keeping is an activity concerned with recording and
classifying financial data related to business operation in order
of its occurrence.”
Process/Cycle of Accounting
Business Transactions

Journal Entries

Ledger Accounts

Trial Balance

Final Accounts

Trading Profit & Loss Balance

Account A/c Sheet
1.) Analysis of business transactions
2.) Documentation
3.) Recording
4.) Classifying
5.) Summarizing
6.) Bifurcating
 Business Transactions

Documentation &
Recording
Journal Entries

Classifying Ledger Accounts

Summarizing Trial Balance

Bifurcating Final Accounts

Trading Profit & Loss Balance

Account A/c Sheet
Branches of Accounting

Branches of Accounting
Financial Accounting

Cost Accounting

Management
Accounting
Social Responsibility
Accounting
 Basic Terms of Accounting
 Assets:
 Assets are resources owned and controlled by the
business enterprise.
 Eg: land, machinery, furniture, cash, bank balance,
stock, etc
 Liabilities:
 Liabilities are obligations of the business enterprise,
payable to outsiders & to owners of the business.
 Eg: Owner’s capital, Borrowings, Creditors, Payables
 Financial Position
 Total Assets = Total Liabilities
 Assets – Outside Liabilities = Owner’s Capital
 Financial position is said to be stronger if the
assets are more than outside liabilities.
Income:
 Business activities generate various types of revenues and
incomes.
 Thus income is what the firms earns
 Eg: Income from sales of goods, Fees from sale of
services, Interest and dividends on investments, Cash
discounts, Rent received, Gain from sale of investment
Expense:
 Many expenses are incurred in the course of business
activities.
 Eg: Raw material purchased, Wages and salaries, Power
and fuel, Office rent, Advertisement expense, Loss on
sale of investments
 Financial Performance
 Excess of income over expenses is known as net profit.
 Excess of expenses over income is known as net loss.
 Net profit is added and net loss is deducted from owner’s
capital.
Assets- Outside Liabilities = Owner’s capital
= Capital + Net Profit
 What is an Account?
 An account is a device to record business transactions.
 There are various accounts prepared for each asset,
liability, income and expenses.
 An account has two sides: Debit and Credit
 The left side of an account is known as debit (Dr).
 The right side of an account is known as credit (Cr).
 In any account, on one side increase is recorded and on
other side the decrease in the item is recorded.
 Types of Accounts
Nominal / temporary accounts:
 The accounts related to all incomes and expenses.
 Eg: Interest A/c, Rent A/c, Salary A/c, Etc.
 Rule:
“ Debit all expenses and losses & credit
all revenues, incomes & gains. ”
Personal accounts :
 Accounts of natural persons like Mr. Ramesh, Mr.
Suresh, etc.
 Accounts of legal persons like companies, banks,
government, etc.
 These persons are generally the buyers, sellers,
lenders, investors, etc. associated with the company.
 In short they are debtors or creditors.

“ Debit the receiver and credit the

giver.”
 Real / Permanent accounts
 These are accounts of various assets and goods.
 Eg: Buildings A/c, Machinery A/c, debtors’ A/c,
purchase A/c, Sales A/c.
“ Debit what comes in and credit
what goes out.”
 Basics of Accounting
For recording business transactions of business organization,
there are three approaches of accounting which are widely
accepted:
 Cash basis of accounting
Under the cash basis of accounting actual cash receipts and
actual cash payments are recorded. Credit transactions are not
recorded at all and are ignored till the cash is actually received
or paid.
 Accrual basis of accounting
On the accrual basis of accounting, the income whether
received or not but has been earned or accrued during the
period forms past of the total income of that period e.g., sales
made on credit will be included in the total sales of the period
irrespective of the fact when cash is actually realized.

 Mixed basis of accounting

Incomes are recorded on cash basis whereas expenses are taken
on accrual basis. The net income is ascertained by matching
expenses on accrual basis with income on cash basis.
 Accounting Principles
1. Business entity principle:
 Business is considered to be a separate entity from its
owners.
 Business transaction are recorded in the books of account
from the business point of view.
 Owners being regarded as separate from business are
considered as creditors of the business.
2. Money Measurement Principle:
 Transactions and events that can be measured in money
terms and recorded in the books of accounts of the
enterprise.

3. Accounting period principle:

 Life of an enterprise is broken into smaller periods so that its
performance is measured at regular intervals.
4. Full Disclosure Principle:
 All the significant information relating to economic affairs of
the entity should be fully disclosed in the financial statement.

5. Materiality Principle:
 Materiality refers to relative importance of an item or an
event.
 An item should be regarded as material if there is a reason to
believe that knowledge of it would influence the decision of
an informed investors.
6. Conservatism Principle:
 Do not anticipate a profit, but record all losses.
 It takes into consideration all prospective losses but not the
prospective profits.

7. Cost Concept :
 An asset is recorded in the books of account at the price paid
to acquire it.
8. Matching Principle:
 An objective of business is to determine profit periodically.
 It is necessary to match “revenue” of the period with the
“expenses” of the period to determine correct profit/loss for
the accounting period.

9. Duality Principle:
 Every transaction entered into by an enterprise has two
aspects – Debit and Credit
10. Revenue Recognition Concept:
 Revenue is recognized in the period in which it is earned
irrespective of the fact whether it is received or not.

11. Verifiable Objective Concept:

 Verifiable Objective concept holds that accounting should be
free from bias.
 All accounting transaction should be evidenced and
supported by business document.
 Basic Accounting Terms
 Capital
Capital = Assets – Liability
 Proprietor
 Drawings
 Liabilities
1. Non current Liabilities
2. Current Liabilities
 Creditors
 Credit Purchase
 Trade Payable
 Assets
1. Non Current Assets
2. Current Assets
3. Fictitious Assets
 Debtors
 Credit Sale
 Trade Receivable
 Receipt
1. Capital Receipt
2. Revenue Receipt
 Expenditure
1. Capital Expenditure
2. Revenue Expenditure
 Expense
1. Prepaid Expenses
2. Outstanding Expenses
 Income
Income = Revenue-Expense
 Discount
1. Trade Discount
2. Cash Discount
 Business Transaction
 Purchases
 Purchases return/ Return Outward
 Sales
 Sales Return/ Return Inward
 Voucher
 Bad Debts
 Balance Sheet
 Depreciation
 Entity
 Chapter:-
Accounting Equation
Introduction:At any point of time,the resources of a business entity must be
equal to the claims of the persons who have financed these resources.
The resources of a business unit,as we all know, is provided by its
owners and outsiders; the claims of the owners/proprietors are known as CAPITAL
while the claims of the outsiders ar called LIABILITIES.
In other words,the total assets of a business entity are equal to its
capital and liabilities.This fact can be expressed in the form of the following
equation:
Assets=Capital + Liabilities
Any business event or transaction taking place in the business affects this equation
in one way or the other ,but ultimate total of Asset side will always be equal to
total of Capital and Liabilities.
Accounting equation signifies that the assets of a business are always equal to the
total of its liabilities and capital (owner’s equity).
The equation reads as follows: A = L + C Where, A = Assets L = Liabilities C = Capital
The above equation can also be presented in the following forms as its derivatives
to enable the determination of missing figures of Capital(C) or Liabilities(L).
(i) A – L = C (ii) A – C = L
Since, the accounting equation depicts the fundamental relationship among the
components of the balance sheet, it is also called the Balance Sheet Equation.
As the name suggests, the balance sheet is a statement of assets, liabilities and
capital. At any point of time resources of the business entity must be equal to the
claims of those who have financed these resources.
The proprietors and outsiders provide the resources of the business. The claim of
the proprietors is called capital and that of the outsides is known as liabilities. Each
element of the equation is the part of balance sheet, which states the financial
position of the business on a particular date. When we analyse the transactions,
we actually try to know that how balance sheet of a business entity gets affected.
Asset side of the balance sheet is the list of assets, which the business entity owns.
The liabilities side of the balance sheet is the list of owner’s claims and outsider’s
claims, i.e., what the business entity owes.
The equality of the assets side and the liabilities side of the balance sheet is an
undeniable fact and this justifies the name of accounting equation as balance
sheet equation also.

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Q.No.
Problem
Q.1 Show the Accounting Equation on the basis of the following transactions and
prepare a Balance Sheet on the basis of the last equation.
Transaction 1: Manoj started business with Rs.50,000 as capital.
Transaction 2: Manoj purchased furniture for cash Rs.5,000.
Transaction 3: He purchased goods for cash Rs.30,000.
Transaction 4: He purchased goods on credit for Rs.20,000.
Transaction 5: Goods costing Rs.25,000 sold on credit for Rs.35,000.
Transaction 6: Rent paid Rs.3,000.

Q2 Show the Accounting Equation on the basis of the following transactions

and prepare a Balance Sheet on the basis of the last equation.
1. Mahesh commenced business with cash 1,00,000
2. Purchased goods for cash 70,000
3. Purchased goods on credit 80,000
4. Purchased furniture for cash 3,000
5.Paid rent2,000
6.Sold goods for cash costing Rs.45,000 at60,000
7. Paid to creditors 20,000
8.Withdrew cash for private use 10,000
9.Paidsalaries 5,000
10. Sold goods on credit (cost price Rs.60,000) Rs. 80,000
Q.3 Prepare an Accounting Equation from the following transactions in
the books of Mr. X for January, 2021 :-
1 Invested Capital in the firm Rs. 20,000
2 Purchased goods on credit from Das & Co. for Rs. 2,000
4 Bought plant for cash Rs. 8,000
8 Purchased goods for cash Rs. 4,000
12 Sold goods for cash (cost Rs. 4,000 + Profit Rs. 2,000) Rs. 6,000.
18 Paid to Das & Co. in cash Rs. 1,000
13,000+2,000+8,000=22,000 + 1,000
25 Paid salary Rs. 6,000
30 Received interest Rs. 5,000
31 Paid wages Rs. 3,000

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Q.4 Prepare the Accounting Equation on the basis of the following :
1.Started business with cash Rs.70,000.
2.Credit Purchases of Goods Rs.18,000.
3.Payments made to creditors in full settlement Rs.17,500.
4.Purchase of Machinery for Cash Rs.20,000.
Q.5 Mr.Rakesh started business as on 01.04.2021 with a capital of
Rs.1,50,000.During the year ,the following transactions took place:--
--Rs.
1.Furniture purchased for cash 20,000
2.Purchased goods from Mahesh on credit 25,000
3.Sold goods(costing Rs.10,000) to Mohan for cash 14,000
4.Additional Capital Introduced 20,000
5.Commission Received in Advance 02,000
6.Paid to creditor [Mahesh] Rs.22,500 in full settlement.
7.Sold goods [costing Rs.15,000]for Rs.18,000 out of which Rs.5,000
received in cash.
8.Depreciation on Furniture provided @10%.
Q.6 From the following information ,Calculate the Total Assets of the
business:-
Capital Rs.4,00,000 ;Creditors Rs.3,00,000;Revenue earned during the
period Rs.7,50,000;Expenses incurred during the period Rs.2,00,000 and
value of unsold stock Rs.2,00,000.
Q.7 Create an Accounting Equation on the basis of the following transactions
and show the resulting Balance Sheet:-- [Rs.]
1.Manu started business with Cash 5,00,000
2.Purchased a building from Sohan.Paid by 10,00,000
raising a loan from SBI
3.Paid interest on Loan Rs.20,000 and Installment of Rs.2,00,000.
4.Purchased goods from Sohan on Credit 1,00,000
5.Goods returned to Sohan costing 20,000
6.Sold goods costing Rs.40,000 for Rs.50,000 on credit to Ram.
7.Took goods of Rs.10,000 from business for personal use.
8.Accrued Interest 5,000
9.Commission Received in Advance 20,000
10.Cash Received From Ram 10,000

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Q.8 Mr.X commenced his cloth business on 01.04.2020 with a capital of
Rs.30,000.On 31st March,2021 his assets were Rs.50,000 and liabilities
were Rs.10,000.
Find out his Closing Capital and Profits Earned during the year.

Q.9 X started a business on 1st April,2020 with a capital of Rs.50,000 and a

Loan of Rs.25,000 borrowed from Y.
During 2020-21,he had introduced additional capital of Rs.25,000 and
had withdrawn Rs.15,000 for personal use.On 31st March,2021 his
assets were Rs.1,50,000.
Find out his capital as on 31.03.2021 and profit made or loss incurred
during 2020-21.

Q.10 On 31st March ,2021 ,the total assets and external liabilities were
Rs.1,00,000 and Rs.3,000 respectively.
During the year ,the proprietor had introduced additional capital of
Rs.10,000 and had withdrawn Rs.6,000 for personal use.He made a
profit of Rs.10,000 during the year .
Calculate the Capital as on 01.04.2020.

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 Chapter-
Journal Entries & Ledger Posting
Model Problems For Practice:-
Q.No. Reference
Problem
Q.1 Journalise the following transactions in the books of Mr. Roy
2012
April
1 He started business with a capital of – Plant Rs. 10,000, Bank
Rs. 8,000, Stock Rs. 12,000
2 Bought furniture for resale Rs. 5,000
Bought furniture for Office decoration Rs. 3,000
3 Paid rent out of personal cash for Rs. 2,000
8 Sold furniture out of those for resale Rs. 6,000
12 Paid Salary to Mr. X for Rs. 1,200
15 Purchased goods from Mr. Mukherjee for cash Rs. 3,000
18 Sold goods to Mr. Sen on credit for Rs. 8,000
20 Mr. Sen returned goods valued Rs. 1,000
22 Received cash from Mr. Sen of Rs. 6,500 in full settlement
28 Bought goods from Mr. Bose on credit for Rs. 5,000
30 Returned goods to Mr. Bose of Rs. 500 and paid to Mr. Bose
Rs. 4,000 in full settlement.
Q2 Pass Journal Entries In the Books of Vikash & Vaibhavi w.r.t the
following transactions:-
April[2012]
1 Mr. Vikas and Mrs. Vaibhavi who are husband and wife start
consulting business by bringing in their personal cash of Rs.
5,00,000 and Rs. 2,50,000 respectively.
10 Bought office furniture of Rs. 25,000 for cash. Bill No. - 2012/F/3
11 Opened a current account with Punjab National Bank by
depositing Rs. 1,00,000
15 Paid office rent of Rs. 15,000 for the month by cheque to M/s
Realtors Properties. Voucher No. 3
20 Bought a motor car worth Rs. 4,50,000 from Millennium Motors by
making a down payment of Rs. 50,000 by cheque and the
balance by taking a loan from HDFC Bank. Voucher No. M/12/7
25 Vikas and Vaibhavi carried out a consulting assignment for Avon
Pharmaceuticals and raise a bill for Rs. 10,00,000 as consultancy
fees. Bill No. B12/4/1 raised. Avon Pharmaceuticals have
immediately settled Rs. 2,50,000 by way of cheque and the
balance will be paid after 30 days. The cheque received is
deposited into Bank.
30 Salary of one receptionist @ Rs. 5,000 per month and one officer
@ Rs. 10,000 per month. The salary for the current month is
payable to them.
Q.3 Compound Journal Entries:
Pass the Journal Entries w.r.t. the Following transactions :-
(i) Started business with Cash Rs.50,000; Plant Rs.24,000; Stock Rs.4,000
(ii) Sold Goods for Cash Rs.8,000 and to Ms. Agarwal for Rs.10,000
(iii) Ms. Aggarwal settled her account less discount Rs. 600
Q.4 Journalize the following transactions in the books of Gaurav, post
them into ledger and prepare trial balance for June 2016 :
June 1: Gaurav started business with Rs. 10,00,000 of which 25%
amount was borrowed from wife.
June 4: Purchased goods from Aniket worth Rs. 40,000 at 20% TD
and 1/5th amount paid in cash.
June 7: Cash purchases Rs. 25,000.
June 10: Sold goods to Vishakha Rs. 30,000 at 30% TD and
received 30% amount in cash.
June 12: Deposited cash into bank Rs. 20,000.
June 15: Uninsured goods destroyed by fi re Rs. 5,500.
June 19: Received commission Rs. 3,500.
June 22: Paid to Aniket Rs. 25,500 in full settlement of A/c.
June 25: Cash stolen from cash box Rs. 1,000.
June 27: Received from Vishakha Rs. 14,500 and discount allowed
Rs. 200.
June 30: Interest received Rs. 2,400 directly added in our bank
account.
Q.5 Journalize the following transactions in the books of M/s Kothari &
Sons, post them into ledger and prepare trial balance for April
2016:
Apr. 1: Commenced business with Rs. 40,000.
Apr. 4: Bought goods for cash Rs. 4,000
Apr. 7: Sold goods Rs. 700
Apr. 10: Bought goods from M/s Bhandari Bros. Rs. 3,000 at 10%
trade discount.
Apr. 14: Purchased machinery of Rs. 5,000 from M/s Kirloskar Bros.
Apr. 16: Paid for transportation of machinery Rs. 500 & installation
charges Rs. 300 on it.
Apr. 20: Paid quarterly interest on borrowed amount of Rs. 5,000 at
12% p.a.
Apr. 24: Supplied goods to M/s Kunal & Sons Rs. 3,500.
Apr. 27: Paid to M/s Bhandari Bros. Rs. 2600 in full settlement of
account.
Apr. 28: M/s Kunal & Sons returned goods worth Rs. 300 & paid for
Rs. 1,200 on account.
Apr. 29: Received commission Rs. 250.
Apr. 30: Paid conveyance to manager Rs. 450.
Q.6 Journalise the following transactions in the books of a trader : [Year-2016]
Nov. 1 Mr. Dutta was declared insolvent and a sum of Rs. 5,600
would be received instead of Rs. 8,000.
Nov. 4 An old machinery was sold to Rakesh for Rs. 15,000.
Nov. 8 Goods costing Rs. 2,500 (sale price Rs. 3,000) withdrawn
from business for personal use.
Nov. 12 Purchased furniture from Vikas for shop Rs. 25,000.
Nov. 15 Deposited Rs. 80,000 in SBI account.
 Generally Accepted Accounting Principles (GAAP)
As per Indian Accounting Standards (Ind AS)

1. Going Concern Principle :

Definition: Assumes that a business will continue its operations for the foreseeable future without any intention to
liquidate or cease operations.

Example: If a company buys machinery, it spreads the cost over its useful life (depreciation) rather than expensing
it all at once. This is done under the assumption that the company will be in business long enough to use the
machinery over its life.

2. Accrual Basis of Accounting

Definition: Revenues and expenses are recorded when they are earned or incurred, not necessarily when cash is
received or paid.

Example: A company provides services in March but receives payment in April. Under the accrual basis, the
revenue is recorded in March, when the service was provided, not in April when the payment was received.

3. Consistency Principle

Definition: Once a company chooses a particular accounting method (such as for depreciation), it should use it
consistently in all subsequent periods, unless a justified reason exists to change it.

Example: If a company uses the Straight-Line Depreciation method for a piece of machinery in one year, it should
use the same method in subsequent years to ensure comparability of financial statements over time.

4. Materiality

Definition: Information is material if its omission or misstatement could influence the economic decisions of users.
Insignificant amounts can be disregarded.

Example: If a company purchases office supplies worth ₹2,000, this might be considered immaterial and expensed
immediately, rather than being capitalized and depreciated over time, due to its small size compared to the
company’s overall financial picture.

5. Prudence (Conservatism)

Definition: This principle emphasizes caution. Revenues should only be recognized when they are reasonably
certain, while expenses and losses should be recognized as soon as they are probable.

Example: If a company anticipates a potential legal settlement of ₹5,00,000, it records the expense as soon as it is
likely to occur, but it does not record a possible gain from another lawsuit until it is actually realized.

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 6. Matching Concept

Definition: Expenses should be recognized in the same period as the revenues they help to generate.
Example: A company sells products in March but pays for advertising to promote those products in February. The
advertising expense should be recorded in March (the same period in which the related sales revenue is
recognized), not February.

7. Full Disclosure Principle

Definition: Companies must disclose all relevant financial information in their financial statements and notes, so
users can make informed decisions.

Example: If a company is facing a lawsuit, it must disclose the potential financial impact in the notes to its
financial statements, even if no monetary judgment has been made yet, so that investors are aware of the risk.

8. Substance Over Form

Definition: Transactions should be recorded based on their economic reality, not just their legal form.

Example: A company enters into a sale-and-leaseback agreement for a building. Legally, the company sells the
building, but economically, it retains the risks and rewards of ownership. Therefore, it continues to record the
building as an asset on its balance sheet, despite the legal sale.

9. Historical Cost Principle

Definition: Assets and liabilities should be recorded at their original cost, except in cases where Ind AS requires a
different basis like fair value.

Example: A company purchases a piece of land for ₹50,00,000 in 2010. Even if the value of the land increases to
₹1 crore by 2024, it is still recorded in the financial statements at its historical cost of ₹50,00,000, unless
revaluation is required by Ind AS.

These principles guide companies in preparing financial statements that are accurate, consistent, and useful to
investors, regulators, and other stakeholders.

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 Nature of Accounting
Accounting is both an art and a science, as it involves systematically recording, classifying, summarizing,
and interpreting financial information to assist in decision-making.

1. Art of Recording, Classifying, and Summarizing Transactions :

Accounting is often referred to as an art because it requires professional judgment and interpretation of
financial data. Accountants must use their expertise to present financial information clearly and
effectively.
• Example: A company records all its financial transactions (like sales, purchases, expenses) in books of
accounts, classifies them into categories (like assets, liabilities, income, and expenses), and then
summarizes this data in the form of financial statements (like the balance sheet and profit and loss
account).

2. Science with Defined Rules and Principles:

Accounting follows a systematic and structured approach based on generally accepted principles and
standards (like Indian Accounting Standards). This makes it a science, as it relies on rules, methodologies,
and logical procedures.
• Example: The concept of double-entry accounting (where every debit has a corresponding credit) is an
established scientific rule that ensures the balance in financial records.

3. Information System:
Accounting is a part of the broader management information system, providing valuable financial data to
internal and external stakeholders.

Scope of Accounting
• Example: The accounting system of a business provides key financial reports to management for
internal decision-making and also to external parties like investors, tax authorities, and regulators.
The scope of accounting is broad and extends beyond just recording financial transactions. It includes
financial reporting, decision-making, and compliance with regulations.

1. Recording Financial Transactions:

Accounting involves documenting all financial transactions systematically to ensure an accurate and
permanent record.
• Example: Recording daily sales, purchases, and payments made by a retail store.
2. Classification of Transactions:
Once recorded, the transactions are classified into meaningful categories such as assets, liabilities,
revenues, and expenses.
• Example: A company separates its utility bills under the “expenses” category and its loan repayments
under “liabilities” to classify its financial data.

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3. Summarizing Financial Data:
After classification, the data is summarized in financial reports such as income statements, balance sheets,
and cash flow statements, which give a clear picture of the business’s financial health.
• Example: At the end of a financial year, a company prepares a profit and loss statement showing total
income and total expenses, resulting in net profit or loss.
4. Analysis and Interpretation:
Accountants analyse the summarized financial data to provide insights into the business’s performance,
helping stakeholders make informed decisions.
• Example: A business owner analyses financial statements to understand if the business is growing,
where costs are increasing, and how to improve profitability.

5. Reporting to Users:
Accounting helps in communicating the financial position of a business to various stakeholders (like
shareholders, creditors, and tax authorities) by generating reports.
• Example: A publicly listed company prepares an annual financial report to inform shareholders about its
profitability and financial position.

6. Budgeting and Forecasting:

Accounting helps in preparing budgets and making financial forecasts for the future. This assists
businesses in planning their activities and allocating resources efficiently.
• Example: A manufacturing company prepares a budget to estimate its production costs and sales targets
for the next financial year.

7. Auditing and Assurance:

Accounting also involves the verification and auditing of financial records by internal or external auditors
to ensure accuracy, transparency, and compliance with legal requirements.
• Example: An external auditor examines the financial statements of a company to provide assurance that
they are accurate and comply with accounting standards.

8. Taxation:
Accounting plays a crucial role in preparing and filing tax returns, calculating tax liabilities, and ensuring
compliance with tax laws.
• Example: A business prepares its GST returns based on accounting records, ensuring that it pays the
correct amount of tax to the government.
In conclusion, accounting is essential for businesses of all sizes, helping them record, analyse, and report
financial information for decision-making, compliance, and future planning. Its scope goes beyond simple
bookkeeping and plays a vital role in overall business management and strategy.

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Pass Journal Entries for the following Transactions :
1. Purchased office supplies for cash, ₹5,000.
2. Sold goods on credit to Mr. A for ₹10,000.
3. Paid rent by cheque, ₹15,000.
4. Received ₹8,000 in cash from Mr. B against the goods sold to him earlier.
5. Paid electricity bill in cash, ₹3,000.
6. Bought machinery on credit from XYZ Ltd., ₹50,000.
7. Received a loan from the bank, ₹1,00,000.
8. Paid wages in cash, ₹7,000.
9. Owner introduced additional capital in cash, ₹20,000.
10. Sold old furniture for cash, ₹2,000.
11. Paid for repairs of machinery, ₹3,500.
12. Purchased raw materials for ₹25,000 on credit from ABC Supplies.
13. Received interest on fixed deposits, ₹5,000.
14. Paid insurance premium by cheque, ₹12,000.
15. Received ₹50,000 from a debtor in full settlement of ₹55,000.
16. Issued a cheque for loan repayment of ₹10,000.
17. Paid salaries by bank transfer, ₹35,000.
18. Purchased land for ₹1,50,000, payment made by bank.
19. Received ₹10,000 in advance from a customer.
20. Paid for advertisement in cash, ₹4,000.
21. Purchased a laptop for office use for ₹30,000 by bank transfer.
22. Paid telephone bill in cash, ₹2,500.
23. Received commission from Mr. C, ₹6,000.
24. Paid legal fees by cheque, ₹8,000.
25. Borrowed ₹40,000 from a friend.
26. Sold goods for cash, ₹25,000.
27. Paid freight charges in cash, ₹1,200.
28. Purchased office furniture on credit, ₹18,000.
29. Paid dividends to shareholders, ₹50,000.
30. Paid income tax in cash, ₹15,000.
31. Received ₹8,000 as rent income.
32. Bought a delivery van for ₹60,000, payment made by bank.
33. Paid audit fees by cheque, ₹9,000.
34. Sold goods on credit to Mr. X, ₹12,000.
35. Paid for printing expenses in cash, ₹1,500.
1
36. Withdrew ₹20,000 from the bank for office use.
37. Received a cash gift of ₹5,000.
38. Owner withdrew ₹10,000 for personal use.
39. Paid interest on the loan, ₹6,000.
40. Issued a cheque for ₹25,000 as an advance for office rent.
41. Paid workers’ bonus in cash, ₹8,000.
42. Purchased shares of a company for ₹50,000.
43. Repaid ₹30,000 of the loan taken from Mr. Y.
44. Issued a cheque for the purchase of inventory, ₹40,000.
45. Paid for transportation of goods sold, ₹2,800.
46. Received a refund from the electricity department, ₹1,000.
47. Donated ₹3,000 to a charitable organization.
48. Paid ₹5,000 to a creditor as part payment.
49. Received ₹15,000 from Mr. Z against goods sold earlier.
50. Paid office cleaning charges in cash, ₹1,200.
51. Purchased a new printer for ₹7,000 by cheque.
52. Paid rent in advance for the next month, ₹12,000.
53. Sold old office equipment for ₹5,000 in cash.
54. Received a cheque for ₹10,000 from a debtor.
55. Paid interest on a bank loan by cheque, ₹4,000.
56. Paid postage and courier expenses, ₹1,200.
57. Purchased inventory worth ₹25,000, paid half in cash.
58. Received commission from Mr. P, ₹7,000.
59. Issued a cheque for telephone expenses, ₹1,800.
60. Paid ₹10,000 to Mr. Q as a loan repayment.
61. Received ₹15,000 from the sale of old machinery.
62. Paid office rent for two months in advance, ₹30,000.
63. Purchased a new air conditioner for ₹35,000 on credit.
64. Paid for office supplies by cheque, ₹2,500.
65. Received ₹20,000 as advance payment from a customer.
66. Paid bank charges of ₹500.
67. Received interest on investment, ₹12,000.
68. Issued a cheque for ₹15,000 for repair work on the office building.
69. Paid workers’ salaries by bank transfer, ₹40,000.
70. Received ₹5,000 as income from consultancy services.
71. Paid ₹3,000 for internet services in cash.

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72. Sold goods for ₹22,000 on credit to Mr. T.
73. Paid travel expenses for business in cash, ₹6,000.
74. Received a cheque for ₹30,000 from Mr. V against goods sold.
75. Issued a cheque to a supplier for ₹10,000.
76. Paid for vehicle maintenance by bank transfer, ₹4,500.
77. Received a cheque for ₹50,000 as loan from a partner.
78. Paid house rent for the owner’s personal house, ₹15,000.
79. Received ₹8,000 as rent from a tenant.
80. Paid for stationery in cash, ₹1,200.
81. Issued a cheque for property taxes, ₹14,000.
82. Purchased goods worth ₹20,000 and paid immediately.
83. Paid for office maintenance in cash, ₹2,800.
84. Received ₹12,000 as a donation.
85. Paid driver’s wages in cash, ₹4,000.
86. Purchased shares of another company for ₹1,00,000 by cheque.
87. Sold an old delivery van for ₹25,000.
88. Paid outstanding rent of ₹18,000.
89. Paid medical insurance premium for staff, ₹5,000.
90. Received ₹15,000 from the sale of unused office equipment.
91. Paid for an office renovation, ₹50,000 by bank transfer.
92. Paid water bill in cash, ₹800.
93. Purchased new office computers for ₹45,000 on credit.
94. Issued a cheque for ₹20,000 for loan repayment.
95. Paid for refreshments for staff, ₹2,000 in cash.
96. Received ₹12,000 for services rendered.
97. Paid for repairs of office equipment, ₹3,000.
98. Purchased advertising services for ₹8,000 by cheque.
99. Paid professional fees to a consultant, ₹10,000.
100. Received ₹50,000 as a grant from the government.

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 Inventory Valuation: Meaning, Scope, and Importance

Meaning of Inventory Valuation

Inventory valuation refers to the process of assigning a monetary value to a company’s inventory at the
end of a financial period. Inventory includes raw materials, work-in-progress, and finished goods held for
sale. The value assigned to inventory directly impacts the cost of goods sold (COGS), net income, and the
overall financial position of the business.

Inventory valuation must be accurate COGS, which impacts gross profit.

• Balance Sheet: As inventory is as it affects:

• Income Statement: Through

a current asset, its valuation affects the company’s financial health.

Scope of Inventory Valuation

1. Types of Inventory:

• Raw Materials: Goods purchased for production but not yet used.
• Work-in-Progress (WIP): Goods that are partially completed.
• Finished Goods: Products ready for sale but not yet sold.

2. Methods of Inventory Valuation:

• First In First Out (FIFO): Assumes that the goods first purchased or produced are the first ones sold,
leaving the latest purchased inventory on hand.

• Example: A company buys 100 units at ₹10 and 100 more at ₹12. If it sells 100 units, FIFO assumes the
sold units are from the ₹10 batch.

• Last In First Out (LIFO): Assumes that the most recently acquired goods are sold first, leaving the
earliest goods in inventory (not allowed under Ind AS).

• Example: A company buys 100 units at ₹10 and 100 more at ₹12. If it sells 100 units, LIFO assumes the
sold units are from the ₹12 batch.

• Weighted Average Cost: Goods are valued at an average cost that takes into account all units available
for sale during the period.

• Example: A company buys 100 units at ₹10 and 100 more at ₹12. The weighted average cost per unit is
₹11.

• Specific Identification: Directly assigns costs to each unique item of inventory, usually used for large or
expensive items like cars, machinery, or art.
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Inventory Valuation as per Ind AS
Ind AS 2 – Inventories governs the accounting treatment for inventories. The key aspects are:

1. Valuation of Inventory:

• Inventories are to be measured at the lower of cost and net realizable value (NRV).

• Cost: Includes purchase price, conversion costs (e.g., direct labor, factory overheads), and other costs
incurred to bring the inventory to its present location and condition.

• Net Realizable Value (NRV): Estimated selling price in the ordinary course of business, less the
estimated costs of completion and selling expenses.

2. Costs Included in Inventory:

• Direct Costs: Such as purchase price, transportation, import duties.

• Indirect Costs: Like factory overheads and storage, where appropriate.

• Excluded Costs: Storage costs (unless required in production), abnormal waste, administrative expenses
unrelated to production.

3. Prohibited Methods:

• LIFO: Not permitted under Ind AS 2, as it may distort the valuation of inventory and profitability
during inflationary periods.

4. Valuation Methods:

• FIFO and Weighted Average Cost methods are accepted under Ind AS 2.

5. Impairment:

• Inventories must be written down to NRV when they are impaired, meaning their market value or
usability has diminished.

Disclosure Requirements for Inventory under Ind AS 2

Companies must disclose the following in their financial statements:

1. Accounting Policy:

The inventory valuation method used (e.g., FIFO, weighted average) must be disclosed.

2. Carrying Amount:

The total carrying amount of inventories classified into raw materials, work-in-progress, finished goods,
and other categories.

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3. Cost of Goods Sold (COGS):

The amount of inventory recognized as COGS during the period should be disclosed.

4. Write-Downs and Reversals:

Any write-downs of inventory to NRV, as well as any reversals of previous write-downs, must be
disclosed along with the reason for such reversals.

5. Significant Changes:

Any significant changes in inventory policies or methods during the period should be disclosed, with their
impact on financial statements.

Applicability of Ind AS 2 (Inventories)

Ind AS 2 applies to all companies that carry inventory, except for certain exceptions, such as:

1. Work in Progress on Construction Contracts: Governed by Ind AS 11.

2. Financial Instruments: Governed by Ind AS 109.

3. Biological Assets: Governed by Ind AS 41 (such as crops, livestock).

It is applicable to large and mid-sized entities based on their turnover and net worth thresholds as
mandated by the Indian regulatory framework for Ind AS compliance. Smaller entities may follow Indian
GAAP unless specifically required to adopt Ind AS.

Importance of Inventory Valuation

1. Accurate Financial Reporting:

• Proper inventory valuation ensures accurate reflection of a company’s financial position in the balance
sheet and accurate profit measurement in the income statement.

2. Matching Principle:

• Inventory valuation ensures adherence to the matching principle, whereby the cost of inventory sold is
matched with the revenue it generates, thereby providing a more accurate view of profits.

3. Tax Compliance:

• Inventory valuation impacts the calculation of taxable income. Higher inventory values reduce COGS
and increase taxable income, and vice versa.

4. Business Decision-Making:

• Valuing inventory correctly helps businesses make informed decisions about pricing, production, and
purchasing. Overvaluation can mislead management into thinking they are holding too much profit, while
undervaluation may lead to under-pricing of goods.
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5. Liquidity Management:

• Since inventory is a current asset, it plays a critical role in managing a company’s working capital.
Proper valuation helps in understanding how quickly inventory can be turned into cash, aiding in liquidity
analysis.

6. Investor Confidence:

• Investors rely on accurate financial statements to make decisions. Over- or under-reporting of inventory
can distort financial results, misleading investors regarding the company’s performance.

Example of Inventory Valuation in Practice

A manufacturing company holds raw materials worth ₹5,00,000, work-in-progress of ₹2,00,000, and
finished goods of ₹10,00,000 at the year-end. According to Ind AS 2, the company evaluates the net
realizable value (NRV) of its inventory. Due to market conditions, the NRV of finished goods has
dropped to ₹8,50,000, while the other items remain the same.

The company will adjust its inventory as follows:

• Raw Materials: ₹5,00,000 (no change)

• Work-in-Progress: ₹2,00,000 (no change)

• Finished Goods: ₹8,50,000 (reduced from ₹10,00,000)

Thus, the company will record a loss of ₹1,50,000 on its inventory write-down and reflect this reduction
in its financial statements.

In conclusion, inventory valuation plays a critical role in ensuring accurate financial reporting,
compliance with accounting standards, and informed business decision-making. Adopting the correct
valuation method and complying with Ind AS 2 is essential for businesses to present a true and fair view
of their financial position and performance.

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 Accounting Fundamentals

In accounting, there are three main types of accounts: Personal Account, Real Account, and Nominal
Account. Each account type has its own rules, known as the Golden Rules of Accounting.

1. Personal Account
• These are accounts related to individuals, firms, companies, etc.
• Examples: Creditor, Debtor, Bank Account, Capital Account, Drawings Account, etc.

Golden Rule for Personal Account:

• Debit the Receiver.

• Credit the Giver.
Examples:
1. Received cash from Raj : Debit Raj’s account, Credit Cash.
2. Paid cash to Amit : Debit Amit’s account, Credit Cash.
3. Loan received from Bank : Debit Bank, Credit Loan account.
4. Capital introduced by the owner : Debit Cash, Credit Capital.
5. Paid salary to employee X : Debit Employee X, Credit Cash.
6. Received commission from John : Debit John, Credit Commission.
7. Paid insurance premium : Debit Insurance Company, Credit Cash.
8. Borrowed money from friend : Debit Friend’s account, Credit Loan.
9. Sold goods to Ram on credit : Debit Ram’s account, Credit Sales.
10. Paid rent to landlord : Debit Landlord, Credit Cash.
11. Paid interest on loan : Debit Loan, Credit Bank.
12. Purchased goods from supplier : Debit Purchase, Credit Supplier.
13. Dividend received from company : Debit Company’s account, Credit Dividend Income.
14. Loan paid back to Bank : Debit Loan, Credit Bank.
15. Owner withdrew cash for personal use : Debit Drawings, Credit Cash.
16. Received rent from tenant : Debit Tenant, Credit Rent Received.
17. Discount allowed to Rakesh : Debit Discount Allowed, Credit Rakesh.
18. Paid wages to worker : Debit Worker, Credit Cash.
19. Paid commission to broker : Debit Broker, Credit Cash.
20. Repayment to creditor : Debit Creditor, Credit Cash.

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2. Real Account
• These accounts are related to assets and properties, whether tangible or intangible.
• Examples: Machinery, Building, Cash, Furniture, Goodwill, Patents, etc.

Golden Rule for Real Account:

• Debit what comes in.

• Credit what goes out.
Examples:
1. Purchase of machinery for cash : Debit Machinery, Credit Cash.
2. Sold furniture for cash : Debit Cash, Credit Furniture.
3. Purchased a vehicle : Debit Vehicle, Credit Bank.
4. Purchased office equipment : Debit Office Equipment, Credit Cash.
5. Sold old machine : Debit Cash, Credit Machinery.
6. Bought land : Debit Land, Credit Cash.
7. Purchase of computers : Debit Computers, Credit Cash.
8. Sold old furniture : Debit Cash, Credit Furniture.
9. Bought a generator : Debit Generator, Credit Cash.
10. Purchased software : Debit Software, Credit Cash.
11. Cash deposited into the bank : Debit Bank, Credit Cash.
12. Purchased patent rights : Debit Patents, Credit Cash.
13. Sold building : Debit Cash, Credit Building.
14. Purchased air conditioner : Debit Air Conditioner, Credit Cash.
15. Sold company car : Debit Cash, Credit Car.
16. Purchase of inventory : Debit Inventory, Credit Cash.
17. Withdrawn money from bank : Debit Cash, Credit Bank.
18. Bought a new truck : Debit Truck, Credit Cash.
19. Sold old computer : Debit Cash, Credit Computer.
20. Purchased raw materials : Debit Raw Materials, Credit Cash.

2
3. Nominal Account
• These accounts are related to expenses, losses, incomes, and gains.
• Examples: Rent, Salary, Interest, Commission, Sales, Purchases, etc.

Golden Rule for Nominal Account:

• Debit all expenses and losses.

• Credit all incomes and gains.

Examples:

1. Paid rent : Debit Rent, Credit Cash.

2. Received interest : Debit Bank, Credit Interest Received.
3. Salary paid to staff : Debit Salary, Credit Cash.
4. Sales made : Debit Cash, Credit Sales.
5. Commission paid : Debit Commission, Credit Cash.
6. Discount received : Debit Cash, Credit Discount Received.
7. Wages paid : Debit Wages, Credit Cash.
8. Income from investments : Debit Bank, Credit Investment Income.
9. Interest on loan paid : Debit Interest, Credit Cash.
10. Commission received : Debit Bank, Credit Commission Income.
11. Advertising expense : Debit Advertising, Credit Cash.
12. Electricity bill paid : Debit Electricity Expense, Credit Cash.
13. Bad debts written off : Debit Bad Debts, Credit Debtors.
14. Repair expense : Debit Repairs, Credit Cash.
15. Dividend received : Debit Bank, Credit Dividend Income.
16. Carriage inward paid : Debit Carriage Inward, Credit Cash.
17. Purchase of goods : Debit Purchases, Credit Cash.
18. Bad debts recovered : Debit Cash, Credit Bad Debts Recovered.
19. Bank charges paid : Debit Bank Charges, Credit Cash.
20. Loss on sale of asset : Debit Loss on Sale, Credit Asset.

Summary of Golden Rules:

1. Personal Account: 2. Real Account: 3. Nominal Account:

• Debit the receiver • Debit what comes in. • Debit all expenses and losses.
• Credit the giver. • Credit what goes out. • Credit all incomes and gains.

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 Concept of Depreciation
Depreciation refers to the systematic allocation of the cost of a tangible asset over its useful life. Since
fixed assets like machinery, buildings, and vehicles have limited useful lives, their cost is gradually
written off as an expense over several accounting periods. Depreciation accounts for the wear and tear,
usage, and obsolescence of these assets.

Meaning of Depreciation :

• Definition: Depreciation is the reduction in the value of an asset over time due to factors like use, wear
and tear, and obsolescence.

• Purpose: It helps in matching the cost of the asset with the revenues it helps generate, thereby
complying with the matching principle in accounting.

• Non-Cash Expense: Depreciation does not involve an actual cash outflow but is an accounting entry
that reduces the book value of an asset and increases expenses on the income statement.

Accounting for Depreciation

• Journal Entry for Depreciation: The basic journal entry to record depreciation is:

• Depreciation Expense A/C — Debit

• Accumulated Depreciation A/C — Credit

• Methods of Depreciation:

1. Straight-Line Method (SLM):

The asset’s cost is evenly spread across its useful life.

• Formula: Depreciation = (Cost of Asset - Salvage Value) / Useful Life

• Example: A machine costing ₹10,00,000 with a 10-year useful life and ₹1,00,000 salvage value would
have annual depreciation of ₹90,000.

2. Written Down Value (WDV) Method:

A fixed percentage of depreciation is applied to the reducing balance (book value) of the asset.

• Formula: Depreciation = Book Value × Depreciation Rate

• Example: A machine costing ₹10,00,000 with a 10% depreciation rate would have first-year
depreciation of ₹1,00,000, leaving a balance of ₹9,00,000 for the next year’s calculation.

1
3. Units of Production Method: Depreciation is calculated based on the asset’s usage rather than
time.

• Formula: Depreciation per Unit = (Cost - Salvage Value) / Total Estimated Units

• Example: If a machine is expected to produce 1,00,000 units, depreciation per unit produced will be
₹(10,00,000 - ₹1,00,000) / 1,00,000 = ₹9 per unit.

Depreciation Policies

A depreciation policy is an internal guideline a company follows regarding how depreciation will be
applied. The choice of depreciation method depends on the nature of the asset and how it is used.

1. Consistency:

Companies should consistently apply the chosen depreciation method from period to period.

2. Useful Life and Residual Value:

Management must estimate the useful life and residual value (salvage value) of the asset based on
experience and industry standards.

3. Compliance:

Depreciation policies should comply with Indian Accounting Standards (Ind AS) and relevant tax
regulations.

Depreciation as per Ind AS

Indian Accounting Standards (Ind AS) provides specific guidance on depreciation under Ind AS 16 -
Property, Plant, and Equipment:

1. Depreciable Amount:

The depreciable amount is the cost of the asset minus its residual value.

2. Component-Based Depreciation:

If an asset has significant parts with different useful lives, each part should be depreciated separately.

3. Revaluation:

Assets can be revalued, and depreciation must then be based on the revalued amount.

4. Impairment Testing:

Assets should be reviewed for impairment (i.e., whether their carrying amount exceeds their recoverable
amount) under Ind AS 36. If an impairment loss is recognized, it may affect the future depreciation
calculation.

2
Change in Method of Depreciation

A change in the method of depreciation is permissible but only if it provides a more accurate reflection of
how the asset is used. When a company changes the depreciation method, it must:

1. Prospective Change:

Under Ind AS, changes in depreciation methods should be treated prospectively, meaning the new method
applies only to future periods. Past depreciation is not recalculated.

2. Justification:

The company must provide a valid reason for the change, like a shift in the pattern of usage of the asset.

3. Impact on Financial Statements:

The change could increase or decrease the depreciation expense, which in turn affects profits.

Disclosure of Depreciation

When depreciation is reported in financial statements, the following disclosures must be made:

1. Depreciation Method:

The chosen method of depreciation (SLM, WDV, etc.) should be disclosed in the financial statements.

2. Useful Life or Depreciation Rate:

The useful life or the depreciation rates used for each category of assets must be disclosed.

3. Change in Depreciation Method:

If the depreciation method is changed, this must be disclosed with reasons for the change and its financial
impact.

4. Depreciation Expense:

The total depreciation expense for the accounting period should be disclosed in the income statement.

5. Impairment Losses:

If any impairment losses related to fixed assets have been recognized, these must be disclosed separately
from depreciation.

6. Accumulated Depreciation:

The total accumulated depreciation up to the reporting date is shown in the balance sheet, reducing the
gross value of the assets.

3
Example of Change in Depreciation Method and Disclosure

If a company changes its method of depreciation from Straight-Line Method (SLM) to Written Down
Value (WDV) due to an increase in asset usage, the company will disclose the change in its financial
statements as follows:

• Disclose the reason:

The change was made because the asset is now used more heavily in the initial years.

• Quantify the effect:

Mention the financial impact of the change (i.e., how the depreciation expense changed due to the new
method).

• Treat the change prospectively:

Apply the WDV method from the period the change is made onward, without adjusting previous years’
accounts.

In summary, depreciation is a key accounting concept that allows businesses to allocate the cost of assets
over time, and changes in depreciation policies must be disclosed clearly to ensure transparency and
compliance with accounting standards like Ind AS.

4
NO. Transaction Explanation DR CR
1 Purchased office supplies for cash, ₹5,000 Office supplies (Real Account) are coming in, so it is debited. Cash Office Supplies Cash
(Real Account) is going out, so it is credited.
2 Sold goods on credit to Mr. A for ₹10,000 Mr. A (Personal Account) receives the goods, so his account is Debtors Sales
debited. Sales (Nominal Account) represents income, so it is credited. (Mr. A)

3 Paid rent by cheque, ₹15,000 Rent (Nominal Account) is an expense, so it is debited. Bank Rent Bank
(Personal/Real Account) is credited because money is going out.

4 Received ₹8,000 in cash from Mr. B against the Cash (Real Account) is coming in, so it is debited. Mr. B’s account Cash Debtors
goods sold to him earlier (Personal Account) is credited as he settles his dues. (Mr.B)
5 Paid electricity bill in cash, ₹3,000 Electricity expenses (Nominal Account) is an expense, so it is Electricity Cash
debited. Cash (Real Account) is going out, so it is credited. Expenses
6 Bought machinery on credit from XYZ Ltd., ₹50,000 Machinery (Real Account) is coming in, so it is debited. XYZ Ltd. Machinery Creditors (XYZ
(Personal Account) is the giver of goods, so they are credited Ltd.)

7 Received a loan from the bank, ₹1,00,000 Bank (Personal/Real Account) is receiving cash, so it is debited. Loan Bank Loan
(Personal Account) is credited as the giver.
8 Paid wages in cash, ₹7,000 Wages (Nominal Account) is an expense, so it is debited. Cash (Real Wages Cash
Account) is going out, so it is credited.
9 Owner introduced additional capital in cash, ₹20,000 Cash (Real Account) is coming in, so it is debited. Capital (Personal Cash Capital
Account) increases, so it is credited.
10 Sold old furniture for cash, ₹2,000 Cash (Real Account) is coming in, so it is debited. Furniture (Real Cash Furniture
Account) is going out, so it is credited.

11 Purchased a laptop for office use for ₹30,000 by bank Laptop (Real Account) is coming into the business, so it is debited. Laptop Bank
transfer Bank (Personal/Real Account) is going out, so it is credited.

12 Paid telephone bill in cash, ₹2,500 Telephone Expenses (Nominal Account) is an expense, so it is Telephone Cash
debited. Cash (Real Account) is going out, so it is credited. Expenses
13 Received commission from Mr. C, ₹6,000 Cash (Real Account) is coming in, so it is debited. Commission Earned Cash Commission Earned
(Nominal Account) is an income, so it is credited.
14 Paid legal fees by cheque, ₹8,000 Legal Fees (Nominal Account) is an expense, so it is debited. Bank Legal Fees Bank
(Real/Personal Account) is going out, so it is credited.
15 Borrowed ₹40,000 from a friend Cash (Real Account) is coming in, so it is debited. Loan (Personal Cash Loan from Friend
Account) is a liability and is credited as money is borrowed.

16 Sold goods for cash, ₹25,000 Cash (Real Account) is coming in, so it is debited. Sales (Nominal Cash Sales
Account) is income, so it is credited.

17 Paid freight charges in cash, ₹1,200 Freight Expenses (Nominal Account) is an expense, so it is debited. Cash Freight Cash
(Real Account) is going out, so it is credited. Expenses
18 Purchased office furniture on credit, ₹18,000 Office Furniture (Real Account) is coming into the business, so it is Office Creditors
debited. Creditors (Personal Account) is credited as the furniture is Furniture
purchased on credit.
19 Paid dividends to shareholders, ₹50,000 Dividends (Nominal Account) is an expense, so it is debited. Bank Dividends Bank
(Personal/Real Account) is going out, so it is credited.
20 Paid income tax in cash, ₹15,000 Income Tax (Nominal Account) is an expense, so it is debited. Cash (Real Income Tax Cash
Account) is going out, so it is credited.
21 Received ₹8,000 as rent income Cash (Real Account) is coming in, so it is debited. Rent Income (Nominal Cash Rent Income
Account) is credited as it is a source of revenue.

22 Bought a delivery van for ₹60,000, payment made by bank Delivery Van (Real Account) is coming into the business, so it is Delivery Van Bank
debited. Bank (Personal/Real Account) is going out, so it is credited.

23 Paid audit fees by cheque, ₹9,000 Audit Fees (Nominal Account) is an expense, so it is debited. Bank Audit Fees Bank
(Personal/Real Account) is going out, so it is credited.
24 Sold goods on credit to Mr. X, ₹12,000 Debtors (Mr. X) (Personal Account) is debited as goods are sold on credit. Debtors (Mr. Sales
Sales (Nominal Account) is credited because it’s income. X)

25 Paid for printing expenses in cash, ₹1,500 Printing Expenses (Nominal Account) is an expense, so it is debited. Cash Printing Expenses Cash
(Real Account) is going out, so it is credited.
26 Withdrew ₹20,000 from the bank for office use Cash (Real Account) is coming in, so it is debited. Bank Cash Bank
(Personal/Real Account) is going out, so it is credited.
27 Received a cash gift of ₹5,000 Cash (Real Account) is coming in, so it is debited. Gift Received Cash Gift Received
(Nominal Account) is credited as it is an income.

28 Owner withdrew ₹10,000 for personal use Drawings (Personal Account) is debited as the owner withdraws money. Drawings Cash
Cash (Real Account) is going out, so it is credited.

29 Paid interest on the loan, ₹6,000 Interest (Nominal Account) is an expense, so it is debited. Bank Interest Bank
(Personal/Real Account) is going out, so it is credited. Expenses

30 Issued a cheque for ₹25,000 as an advance for office rent Prepaid Rent (Real Account) is debited as it is an asset. Bank Prepaid Rent Bank
(Personal/Real Account) is going out, so it is credited.
31 Paid workers’ bonus in cash, ₹8,000 Bonus Expenses (Nominal Account) is an expense, so it is debited. Cash Bonus Cash
(Real Account) is going out, so it is credited. Expenses
32 Purchased shares of a company for ₹50,000 Investments (Real Account) is an asset, so it is debited. Bank Investments Bank
(Personal/Real Account) is going out, so it is credited.
33 Repaid ₹30,000 of the loan taken from Mr. Y Loan (Personal Account) is debited as the loan liability reduces. Bank Loan from Mr. Bank
(Personal/Real Account) is going out, so it is credited. Y

34 Issued a cheque for the purchase of inventory, Inventory (Real Account) is coming in, so it is debited. Bank Inventory Bank
₹40,000 (Personal/Real Account) is going out, so it is credited.
35 Paid for transportation of goods sold, ₹2,800 Transportation Expenses (Nominal Account) is debited as an Transportation Cash
expense. Cash (Real Account) is credited as it is going out. Expenses
36 Received a refund from the electricity department, Cash (Real Account) is coming in, so it is debited. Electricity Expenses Cash Electricity Expenses
₹1,000 (Nominal Account) is credited because the original expense is reduced.

37 Donated ₹3,000 to a charitable organization Donation Expenses (Nominal Account) is debited as an expense. Donation Cash
Cash (Real Account) is credited as it is going out. Expenses

38 Paid ₹5,000 to a creditor as part payment Creditors (Personal Account) is debited as the liability reduces. Cash (Real Creditors Cash
Account) is credited as
39 Received ₹15,000 from Mr. Z against goods sold earlier Cash (Real Account) is debited because it is coming in. Debtors (Mr. Z) Cash Debtors (Mr. Z)
(Personal Account) is credited because the amount receivable from Mr. Z
is reduced.
40 Paid office cleaning charges in cash, ₹1,200 Office Cleaning Expenses (Nominal Account) is debited as it is an expense. Office Cleaning Cash
Cash (Real Account) is credited as it is going out. Expenses

41 Purchased a new printer for ₹7,000 by cheque Printer (Real Account) is debited as it is an asset coming into the business. Printer Bank
Bank (Personal/Real Account) is credited as the payment is made from the
bank.
42 Paid rent in advance for the next month, ₹12,000 Prepaid Rent (Real Account) is debited as it is an asset. Bank Prepaid Rent Bank
(Personal/Real Account) is credited as the payment is made from the bank.

43 Sold old office equipment for ₹5,000 in cash Cash (Real Account) is debited as it is coming in. Office Equipment (Real Cash Office Equipment
Account) is credited as the asset is going out of the business.

44 Received a cheque for ₹10,000 from a debtor Bank (Personal/Real Account) is debited as the cheque is deposited. Bank Debtors
Debtors (Personal Account) is credited as the receivable from the debtor is
reduced.
45 Paid interest on a bank loan by cheque, ₹4,000 Interest Expenses (Nominal Account) is debited because it is an expense. Interest Bank
Bank (Personal/Real Account) is credited as the payment is made through Expenses
the bank.
46 Paid postage and courier expenses, ₹1,200 Postage and Courier Expenses (Nominal Account) is debited as it is an Postage and Cash
expense. Cash (Real Account) is credited as the asset is going out. Courier Expenses

47 Purchased inventory worth ₹25,000, paid half in cash Inventory (Real Account) is debited as it is coming into the business. Cash Inventory Cash Creditors
(Real Account) is credited for the portion paid in cash, and Creditors
(Personal Account) is credited for the portion remaining
unpaid.

48 Received commission from Mr. P, ₹7,000 Cash (Real Account) is debited as it is coming into the business. Cash Commission Income
Commission Income (Nominal Account) is credited as it is revenue for the
business.
49 Issued a cheque for telephone expenses, ₹1,800 Telephone Expenses (Nominal Account) is debited as it is an expense. Telephone Bank
Bank (Personal/Real Account) is credited as the payment is made through Expenses
the bank.
50 Paid ₹10,000 to Mr. Q as a loan repayment Loan (Personal Account) is debited as the liability is reduced. Bank Loan (Mr. Q) Bank
(Personal/Real Account) is credited as the payment is made through the
bank.
51 Received ₹15,000 from the sale of old machinery Cash (Real Account) is debited as it is coming into the business. Machinery Cash Machinery
(Real Account) is credited as the asset is being sold.

52 Paid office rent for two months in advance, ₹30,000 Prepaid Rent (Real Account) is debited because it’s an advance payment Prepaid Rent Bank
for future expenses, thus considered an asset. Bank (Personal/Real
Account) is credited as the payment is made.

53 Purchased a new air conditioner for ₹35,000 on credit Air Conditioner (Real Account) is debited as it is an asset coming into the Air Conditioner Creditors
business. Creditors (Personal Account) is credited as the purchase is on
credit.
54 Paid for office supplies by cheque, ₹2,500 Office Supplies (Real Account) is debited as they are assets being added to Office Supplies Bank
the business. Bank (Personal/Real Account) is credited
because the payment is made via cheque.

55 Received ₹20,000 as an advance payment from a customer Cash (Real Account) is debited as it is coming into the business. Cash Advance from
Advance from Customer (Personal Account) is credited because the Customer
liability to provide goods or services is now created.

56 Paid bank charges of ₹500 Bank Charges (Nominal Account) is debited as it is an expense for the Bank Charges Bank
business. Bank (Personal/Real Account) is credited because the bank
balance is reduced.
57 Received interest on investment, ₹12,000 Bank (Personal/Real Account) is debited as cash is coming in. Interest Bank Interest Income
Income (Nominal Account) is credited as it is income for the business.

58 Issued a cheque for ₹15,000 for repair work on the office Repair Expenses (Nominal Account) is debited because it’s an expense. Repair Bank
building Bank (Personal/Real Account) is credited as the payment is made via Expenses
cheque.
59 Paid workers’ salaries by bank transfer, ₹40,000 Salaries Expense (Nominal Account) is debited as it is an expense for the Salaries Bank
business. Bank (Personal/Real Account) is credited because the payment is Expense
made through a bank transfer.
60 Received ₹5,000 as income from consultancy services Bank (Personal/Real Account) is debited as money is received. Bank Consultancy
Consultancy Income (Nominal Account) is credited as it is revenue for the Income
business.
61 Paid ₹3,000 for internet services in cash Internet Expenses (Nominal Account) is debited as it is an expense. Cash Internet Expenses Cash
(Real Account) is credited as the asset is going out of the business.

62 Sold goods for ₹22,000 on credit to Mr. T Debtors (Personal Account) is debited as the amount is receivable from Debtors (Mr. Sales
Mr. T. Sales (Nominal Account) is credited as it represents revenue for the T)
business.
63 Paid travel expenses for business in cash, ₹6,000 Travel Expenses (Nominal Account) is debited because it is an expense. Travel Expenses Cash
Cash (Real Account) is credited as the asset is reduced.

64 Received a cheque for ₹30,000 from Mr. V against goods Bank (Personal/Real Account) is debited as money is received. Debtors Bank Debtors (Mr. V)
sold (Personal Account) is credited as the amount receivable
from Mr. V is reduced.

65 Issued a cheque to a supplier for ₹10,000 Creditors (Personal Account) is debited as the liability is reduced. Bank Creditors Bank
(Personal/Real Account) is credited as the payment is made (Supplier)
through the bank.

66 Paid for vehicle maintenance by bank transfer, ₹4,500 Vehicle Maintenance Expenses (Nominal Account) is debited as it is an Vehicle Bank
expense. Bank (Personal/Real Account) is credited as the payment is made Maintenance
via bank transfer. Expenses
67 Received a cheque for ₹50,000 as a loan from a partner Bank (Personal/Real Account) is debited as the cash is coming into the Bank Loan from Partner
business. Loan from Partner (Personal Account) is credited because it
creates a liability.
68 Paid house rent for the owner’s personal house, Drawings (Personal Account) is debited as the owner is withdrawing for Drawings Cash/Bank
₹15,000 personal use. Cash/Bank (Real/Personal Account) is credited as money is
going out.
69 Received ₹8,000 as rent from a tenant Cash (Real Account) is debited as it is coming into the business. Rent Cash Rent Income
Income (Nominal Account) is credited as it represents income.

70 Paid for stationery in cash, ₹1,200 Stationery (Real Account) is debited as it is an asset being purchased. Cash Stationery Cash
(Real Account) is credited as it is going out.
71 Issued a cheque for property taxes, ₹14,000 Property Tax Expense (Nominal Account) is debited as it is an expense. Property Tax Bank
Bank (Personal/Real Account) is credited as the payment is made by Expense
cheque.
72 Purchased goods worth ₹20,000 and paid immediately Purchases (Nominal Account) is debited as it is an expense. Cash/Bank Purchases Cash
(Real/Personal Account) is credited as the asset is going out.

73 Paid for office maintenance in cash, ₹2,800 Office Maintenance Expense (Nominal Account) is debited as it is an Office Maintenance Cash
expense. Cash (Real Account) is credited as the asset is going out. Expense

74 Received ₹12,000 as a donation Cash (Real Account) is debited as it is coming into the business. Donation Cash Donation Income
Income (Nominal Account) is credited as it represents
income.

75 Paid driver’s wages in cash, ₹4,000 Wages Expense (Nominal Account) is debited as it is an expense. Cash Wages Expense Cash
(Real Account) is credited as the asset is going out.

76 Purchased shares of another company for ₹1,00,000 by Investment (Shares) (Real Account) is debited as it is an asset. Bank Investment Bank
cheque (Personal/Real Account) is credited as the payment is made by cheque. (Shares)

77 Sold an old delivery van for ₹25,000 Cash (Real Account) is debited as money is coming in. Delivery Van (Real Cash Delivery Van
Account) is credited as the asset is going out.

78 Paid outstanding rent of ₹18,000 Rent Payable (Personal Account) is debited as the liability is reduced. Rent Payable Cash
Cash/Bank (Real/Personal Account) is credited as the payment is made.

79 Paid medical insurance premium for staff, ₹5,000 Medical Insurance Expense (Nominal Account) is debited as it is an Medical Bank
expense. Bank (Personal/Real Account) is credited as the payment is made Insurance Expense
by bank.
80 Received ₹15,000 from the sale of unused office Cash (Real Account) is debited as money is coming in. Office Cash Office Equipment
equipment Equipment (Real Account) is credited as the asset is sold.
81 Paid for an office renovation, ₹50,000 by bank transfer Office Renovation Expense (Nominal Account) is debited as it is an Office Renovation Bank
expense. Bank (Personal/Real Account) is credited as the payment is made Expense
via bank transfer.
82 Paid water bill in cash, ₹800 Water Expenses (Nominal Account) is debited as it is an expense. Water Cash
Cash (Real Account) is credited as the asset is going out. Expenses

83 Purchased new office computers for ₹45,000 on credit Office Computers (Real Account) is debited as it is an asset coming into Office Creditors
the business. Creditors (Personal Account) is credited as the purchase is on Computers
credit.
84 Issued a cheque for ₹20,000 for loan repayment Loan (Personal Account) is debited as the liability is reduced. Bank Loan Bank
(Personal/Real Account) is credited as the payment is made via cheque.

85 Paid for refreshments for staff, ₹2,000 in cash Staff Refreshments Expense (Nominal Account) is debited as it is an Staff Refreshments Cash
expense. Cash (Real Account) is credited as the asset is going out. Expense

86 Received ₹12,000 for services rendered Cash (Real Account) is debited as money is coming into the business. Cash Service Income
Service Income (Nominal Account) is credited as it represents income.

87 Paid for repairs of office equipment, ₹3,000 Repairs Expense (Nominal Account) is debited as it is an expense. Cash Repairs Cash
(Real Account) is credited as the asset is going out. Expense

88 Purchased advertising services for ₹8,000 by cheque Advertising Expense (Nominal Account) is debited as it is an expense. Advertising Bank
Bank (Personal/Real Account) is credited as the payment is made by Expense
cheque.
89 Paid professional fees to a consultant, ₹10,000 Professional Fees (Nominal Account) is debited as it is an expense. Bank Professional Bank
(Personal/Real Account) is credited as the payment is made via bank. Fees

90 Received ₹50,000 as a grant from the government Bank (Personal/Real Account) is debited as money is coming in. Grant Bank Grant Income
Income (Nominal Account) is credited as it is income for the business.
91 Paid for repairs of machinery, ₹3,500 Repairs Cash
92 Purchased raw materials for ₹25,000 on credit from Raw Materials Creditors (ABC
ABC Supplies Supplies)

93 Received interest on fixed deposits, ₹5,000 Bank Interest Received

94 Paid insurance premium by cheque, ₹12,000 Insurance Bank
Premium
95 Received ₹50,000 from a debtor in full settlement of Cash Debtor
₹55,000 Doscpimt Allowed

96 Issued a cheque for loan repayment of ₹10,000 Loan Bank

97 Paid salaries by bank transfer, ₹35,000 Salaries Bank
98 Purchased land for ₹1,50,000, payment made by bank Land Bank

99 Received ₹10,000 in advance from a customer Bank Advance from

Customer
100 Paid for advertisement in cash, ₹4,000 Advertisement Cash
 Cash Flow Statement

1. Introduction to Cash Flow

Cash flow refers to the movement of money in and out of a business over a specific period. It
includes cash received from sales, investment income, and cash spent on operations, investments, or
financing activities.

Key Definitions:

 Cash Inflows: Money that comes into the business (e.g., revenue from sales, interest income,
and loans).

 Cash Outflows: Money spent by the business (e.g., expenses, salaries, and loan repayments).

 Net Cash Flow: The difference between cash inflows and outflows during a particular period.

Categories of Cash Flow:

1. Operating Activities: Cash generated or used in the core business operations, including sales,
services, wages, and inventory costs.

2. Investing Activities: Cash related to the acquisition or disposal of assets like property,
equipment, or investments.

3. Financing Activities: Cash from or used for financing, including issuing shares, borrowing, or
repaying loans.

Purpose of a Cash Flow Statement:

A Cash Flow Statement is a financial report that summarizes cash inflows and outflows over a
reporting period. It helps stakeholders understand the liquidity, financial health, and ability of the
business to generate cash.

2. Introduction to Ind AS (Indian Accounting Standards)

Ind AS stands for Indian Accounting Standards, which are set by the Institute of Chartered
Accountants of India (ICAI) and adopted by the Ministry of Corporate Affairs (MCA) to converge with
the International Financial Reporting Standards (IFRS).

Key Points:

 Ind AS aims to bring transparency, reliability, and comparability to financial reporting in India.

 Ind AS 7 specifically deals with Cash Flow Statements, prescribing the presentation of cash
flows from operating, investing, and financing activities.

Significant Aspects of Ind AS:

 Accrual vs. Cash Basis: Ind AS emphasizes the accrual method for accurate financial
reporting, but Cash Flow Statements require cash-based accounting.

 Fair Presentation: Financial statements under Ind AS should present a true and fair view of a
company’s financial performance and position.
  International Comparability: Ind AS aligns with IFRS to ensure global comparability of
financial data.

3. Importance of Cash Flow Analysis

Understanding and managing cash flow is crucial for business survival and growth. Here are the key
reasons why cash flow analysis is important:

a. Liquidity and Solvency

 Liquidity: Cash Flow Statements help assess a company’s ability to meet short-term
obligations and operational needs.

 Solvency: Long-term viability of a business is evaluated through cash generated from

operations relative to debt obligations.

b. Decision-Making

 Internal Management: Helps management decide on investing in new projects, expansion,

or managing day-to-day operations.

 External Stakeholders: Investors, creditors, and analysts use cash flow data to gauge
financial health, risk, and returns.

c. Planning and Forecasting

 Cash flow data is essential for budgeting and forecasting future cash needs, anticipating
shortages, and planning for funding requirements.

d. Financial Stability and Risk Management

 Healthy cash flow indicates financial stability. Monitoring cash flow helps identify and
mitigate financial risks before they escalate.

4. When is a Cash Flow Statement Mandatory?

Cash Flow Statements are legally and regulatory mandatory for certain entities in India, especially
under Ind AS guidelines:

a. For Listed Companies

 All companies listed on stock exchanges are required to prepare and disclose Cash Flow
Statements as part of their annual financial reporting.

b. For Specific Types of Companies

 Public Limited Companies

 Holding and Subsidiary Companies

 Companies with Net Worth of ₹250 Crore or More (Under Ind AS guidelines)

c. Under the Companies Act, 2013

 Section 129 of the Companies Act requires all companies, except small companies and one-
person companies, to include a Cash Flow Statement in their financial statements.

d. For Entities Adopting Ind AS

  Companies meeting the Ind AS applicability criteria, such as net worth thresholds, must
follow the standards, including Ind AS 7 for Cash Flow Statements.

5. Structure of the Cash Flow Statement (As per Ind AS 7)

A detailed breakdown of how a cash flow statement is structured:

a. Cash Flow from Operating Activities

 Direct Method: Lists specific cash receipts and payments (e.g., cash from customers, cash
paid to suppliers).

 Indirect Method: Adjusts net profit by adding back non-cash items (e.g., depreciation) and
changes in working capital.

b. Cash Flow from Investing Activities

 Purchases and sales of assets (e.g., property, equipment, investments).

 Cash flows from acquisitions and disposals of subsidiaries.

c. Cash Flow from Financing Activities

 Cash from issuing shares, raising debt, or repaying loans.

 Dividend payments to shareholders.

6. Practical Applications of Cash Flow Analysis

a. Assessing Company Performance

 Use cash flow statements to compare periods, identify trends, and evaluate efficiency.

 Determine if a company generates sufficient cash from operations to fund its growth.

b. Valuation

 Free Cash Flow (FCF) analysis is critical for valuing companies.

 Understanding Discounted Cash Flow (DCF) analysis, a common valuation technique.

c. Risk Assessment

 Identifying cash flow problems can indicate deeper financial distress.

 Cash flow volatility analysis helps assess risk.

d. Strategic Planning

 Cash flow analysis helps businesses make informed strategic decisions, such as investing in
new projects, mergers, or acquisitions.
Classification the list o activities

1. Purchase of machinery for ₹5,00,000

2. Cash received from the sale of old equipment

3. Cash paid to suppliers for raw materials

4. Dividends paid to shareholders

5. Cash received from issuing equity shares

6. Interest paid on a long-term loan

7. Cash received from customers for goods sold

8. Repayment of a bank loan

9. Rent paid for office premises

10. Proceeds from the sale of investments

11. Purchase of land for setting up a new office

12. Cash received as royalty income from patents

13. Cash paid to employees for salaries

14. Payment of income tax for the current year

15. Proceeds from a government grant related to business operations

16. Repayment of bonds issued earlier

17. Dividend income received on investments

18. Proceeds from issuing debentures

19. Cash advances given to a supplier for a future purchase

20. Repayment received for a loan previously advanced to a third party

 Ratio Analysis
Meaning
Ratio analysis is a quantitative method of analyzing financial data
from a company's financial statements to evaluate its performance,
liquidity, profitability, efficiency, and solvency. It involves calculating
financial ratios that provide insights into a company's operational
efficiency and financial health.
Benefits of Ratio Analysis
1. Performance Evaluation: Helps assess a company’s financial and
operational performance over time.
2. Decision-Making Tool: Provides vital information for managerial
decision-making regarding investments, budgeting, and operations.
3. Comparative Analysis: Facilitates comparisons with industry peers,
benchmarks, or historical performance.
4. Financial Health Monitoring: Identifies financial strengths and
weaknesses for corrective actions.
5. Simplification: Converts complex financial data into simple,
understandable ratios.
Usage of Ratio Analysis in Various Fields
1. Financial Management: To assess profitability, liquidity, and
solvency for efficient resource allocation.
2. Investment Analysis: Used by investors to decide where to allocate
funds based on risk and return.
3. Credit Analysis: Creditors and banks use it to evaluate a company’s
ability to repay loans.
4. Operational Management: Helps managers measure efficiency and
productivity in resource utilization.
5. Auditing and Compliance: To ensure the financial statements are
consistent with standards.

Page 1 of 9
Types of Ratios, Their Usage, Formulas, Examples, and
Interpretation
Liquidity Ratios
Used to assess the company’s ability to meet short-term obligations.
Current Ratio
Formula: Current Ratio = Current Assets / Current Liabilities
Example: If Current Assets = ₹1,00,000 and Current Liabilities =
₹50,000:
Current Ratio = 1,00,000 / 50,000 = 2
Interpretation: A ratio of 2:1 indicates strong liquidity. The company
has ₹2 of assets for every ₹1 of liability.
Quick Ratio (Acid-Test Ratio)
Formula: Quick Ratio = Quick Assets (CA - Inventory) / Current
Liabilities
Example: If Quick Assets = ₹80,000 and Current Liabilities =
₹50,000:
Quick Ratio = 80,000 / 50,000 = 1.6
Interpretation: A ratio above 1 is ideal, showing sufficient liquid
assets to cover short-term obligations.
Profitability Ratios
Used to evaluate a company's ability to generate profit.
Gross Profit Margin
Formula: Gross Profit Margin = (Gross Profit / Net Sales) × 100
Example: If Gross Profit = ₹40,000 and Net Sales = ₹1,00,000:
Gross Profit Margin = (40,000 / 1,00,000) × 100 = 40%
Interpretation: Indicates 40% of sales revenue contributes to
covering operating expenses and profit.

Page 2 of 9
Net Profit Margin
Formula: Net Profit Margin = (Net Profit / Net Sales) × 100
Example: If Net Profit = ₹20,000 and Net Sales = ₹1,00,000:
Net Profit Margin = (20,000 / 1,00,000) × 100 = 20%
Interpretation: Indicates that 20% of sales revenue is retained as
profit.
Solvency Ratios
Used to measure the company’s ability to meet long-term obligations.
Debt-to-Equity Ratio
Formula: Debt-to-Equity Ratio = Total Debt / Shareholders’ Equity
Example: If Total Debt = ₹1,50,000 and Equity = ₹50,000:
Debt-to-Equity Ratio = 1,50,000 / 50,000 = 3
Interpretation: A ratio of 3:1 indicates high leverage, which may pose
risks.
Interest Coverage Ratio
Formula: Interest Coverage Ratio = EBIT / Interest Expense
Example: If EBIT = ₹40,000 and Interest = ₹10,000:
Interest Coverage Ratio = 40,000 / 10,000 = 4
Interpretation: The company earns 4 times its interest obligations,
which is favorable.
Efficiency Ratios
Evaluate how efficiently resources are being utilized.
Inventory Turnover Ratio
Formula: Inventory Turnover Ratio = Cost of Goods Sold (COGS) /
Average Inventory
Example: If COGS = ₹1,00,000 and Average Inventory = ₹25,000:
Inventory Turnover Ratio = 1,00,000 / 25,000 = 4

Page 3 of 9
Interpretation: Indicates inventory is sold and replaced 4 times during
the year.
Asset Turnover Ratio
Formula: Asset Turnover Ratio = Net Sales / Total Assets
Example: If Net Sales = ₹2,00,000 and Total Assets = ₹1,00,000:
Asset Turnover Ratio = 2,00,000 / 1,00,000 = 2
Interpretation: Shows efficient use of assets to generate revenue.
Market Ratios
Used to evaluate the market perception of a company.
Price-to-Earnings (P/E) Ratio
Formula: P/E Ratio = Market Price per Share / Earnings per Share
(EPS)
Example: If Market Price = ₹200 and EPS = ₹20:
P/E Ratio = 200 / 20 = 10
Interpretation: A P/E of 10 implies investors are willing to pay ₹10
for every ₹1 of earnings.
Dividend Yield
Formula: Dividend Yield = (Dividend per Share / Market Price per
Share) × 100
Example: If Dividend = ₹5 and Market Price = ₹100:
Dividend Yield = (5 / 100) × 100 = 5%
Interpretation: Indicates an annual return of 5% from dividends.

Page 4 of 9
Usage of Ratios- Practical Approach
Ratio Type Usage
Liquidity Ratios Assess a company’s ability to
meet short-term obligations and
evaluate financial flexibility.
Profitability Ratios Measure efficiency in generating
profit and assess operational
effectiveness.
Solvency Ratios Determine financial stability,
ability to service long-term debt,
and risk exposure.
Efficiency Ratios Analyze how effectively the
company uses its assets and
manages its operations.
Market Ratios Evaluate a company’s market
value and investor perception.

Ratio Analysis: Comparative Analysis of Two Companies

Analysis of two companies using various financial ratios. The ratios
highlight their financial performance, efficiency, and stability,
providing valuable insights for stakeholders.

Page 5 of 9
Tabular Presentation of Ratios
Ratio Formula Company Company Interpretation
A B
Current Current 2.5 1.8 Company A
Ratio Assets ÷ has better
Current liquidity (2.5
Liabilities > 1.8),
indicating
stronger
short-term
financial
stability.
Quick (Current 1.8 1.2 Company A
Ratio Assets - has better
Inventory) ÷ immediate
Current liquidity (1.8
Liabilities > 1.2),
suggesting
more liquid
assets to
cover short-
term debts.
Gross (Gross Profit 45% 50% Company B
Profit ÷ Net Sales) is more
Margin × 100 efficient at
generating
gross profit
from sales,
with a higher

Page 6 of 9
 margin (50%
> 45%).
Net Profit (Net Profit ÷ 20% 18% Company A
Margin Net Sales) × retains more
100 profit from
sales (20% >
18%),
suggesting
better control
over
expenses.
Debt-to- Total Debt ÷ 1.0 0.8 Company B
Equity Shareholders’ is less
Ratio Equity leveraged (0.8
< 1.0),
implying
lower
financial risk
and greater
stability.
Interest EBIT ÷ 6 5 Company A
Coverage Interest has higher
Ratio Expense interest
coverage (6 >
5), indicating
better ability
to pay
interest
obligations.

Page 7 of 9
Inventory COGS ÷ 3 4 Company B
Turnover Average manages
Ratio Inventory inventory
more
efficiently (4
> 3),
suggesting
faster stock
movement.
Asset Net Sales ÷ 1.5 1.2 Company A
Turnover Total Assets uses assets
Ratio more
effectively to
generate
revenue (1.5
> 1.2).
P/E Ratio Market Price 15 12 Company B
per Share ÷ has a lower
EPS P/E ratio (12
< 15),
indicating
that its stock
may be
undervalued
or less
expensive.
Dividend (Dividend 3% 4% Company B
Yield per Share ÷ offers a
Market higher

Page 8 of 9
 Price) × 100 dividend yield
(4% > 3%),
which may
attract
income-
focused
investors.

Conclusion
Based on the analysis:
- Company A is better positioned with higher liquidity, net
profitability, and operational efficiency.
- Company B excels in gross profitability, solvency, and shareholder
returns.

Stakeholders can prioritize these findings to make informed

decisions.

Page 9 of 9
1. Meaning of Cost Accounting
Definition:
Cost accounting is a branch of accounting that focuses on recording, analyzing, and
controlling costs associated with producing goods or services. It helps businesses
determine the cost of operations, identify inefficiencies, and make data-driven
decisions.
Example:
A car manufacturing company tracks the cost of raw materials (steel, tires), labor
costs (assembly line workers), and overhead costs (factory rent, electricity) to
determine the cost per unit of a car. This information helps them decide the selling
price and profit margins.

2. Application of Cost Accounting

Key Applications:
1. Cost Control: Identifying cost inefficiencies and reducing unnecessary expenses.
• Example: A bakery analyzes the cost of ingredients and finds a cheaper supplier
for sugar.
2. Pricing Decisions: Setting competitive yet profitable prices for products or
services.
• Example: A smartphone company calculates the total production cost of a phone
to determine its retail price.
3. Profitability Analysis: Measuring profit margins of different products or
business units.
• Example: A retail chain identifies that clothing generates higher profit margins
than electronics.
4. Budgeting and Forecasting: Creating budgets and predicting future costs for
better financial planning.
• Example: A hospital uses cost accounting to budget for new medical equipment.
5. Performance Evaluation: Assessing departments or employees based on cost
efficiency.
 • Example: A logistics company evaluates which transportation route incurs the
least fuel cost.

3. Systems of Cost Accounting

1. Job Costing:
• Costs are tracked for each job or project individually.
• Example: A construction company tracks expenses for building each house in a
project.
2. Process Costing:
• Used when products are mass-produced, and costs are assigned to processes.
• Example: A beverage company calculates costs for manufacturing soft drinks in
bulk.
3. Activity-Based Costing (ABC):
• Costs are allocated based on activities or services provided.
• Example: A consultancy firm allocates overheads like office rent based on hours
spent on client projects.
4. Batch Costing:
• Costs are calculated for a batch of similar products.
• Example: A bakery determines the cost for producing a batch of 100 cakes.
5. Standard Costing:
• Involves setting a standard cost for materials, labor, and overhead and comparing
it with actual costs.
• Example: A manufacturing firm sets a standard labor cost of $20 per hour and
compares it with the actual cost.

4. Cost Components
Cost components are the building blocks of total costs. They include:
1. Direct Costs:
• Costs directly attributable to a product.
• Example: Raw materials and wages of workers directly assembling a car.
2. Indirect Costs:
• Overhead costs not directly linked to production.
• Example: Factory lighting, maintenance, and salaries of administrative staff.
3. Fixed Costs:
• Costs that remain constant irrespective of production levels.
• Example: Rent for a factory building.
4. Variable Costs:
• Costs that vary with production levels.
• Example: Cost of raw materials.
5. Semi-Variable Costs:
• A combination of fixed and variable costs.
• Example: Electricity bills (fixed service charges + variable usage charges).

5. Functional, Purpose, and Behaviours of Cost Accounting

A. Functional Aspects:
• Production: Tracking costs related to manufacturing.
• Example: Tracking the cost per unit in a textile factory.
• Marketing: Assessing the cost of advertising, promotions, and sales.
• Example: Evaluating the return on investment for a digital marketing campaign.
• Administration: Monitoring costs incurred in management and administration.
• Example: Calculating office expenses like utilities and salaries.

B. Purpose:
1. Planning and Budgeting:
• Helps organizations allocate resources efficiently.
• Example: A hotel chain plans a budget for opening a new branch.
2. Cost Reduction:
• Aids in identifying areas to cut unnecessary expenses.
• Example: A food delivery service switches to eco-friendly yet cheaper packaging.
3. Decision Making:
• Provides data to support strategic business decisions.
• Example: A company decides to outsource production after analyzing cost-benefit
data.
C. Behavior of Costs:
1. Fixed Costs:
• Remain unchanged within a production range.
• Example: Factory rent stays constant whether 1,000 or 10,000 units are produced.
2. Variable Costs:
• Fluctuate with production volume.
• Example: Increased production leads to higher raw material costs.
3. Mixed Costs:
• Partially fixed and partially variable.
• Example: A company vehicle’s lease cost (fixed) and fuel cost (Variable)
Meaning of Break-Even Analysis
Definition:
Break-even analysis is a financial tool used to determine the level of sales or
production at which total revenue equals total costs, resulting in no profit or loss. It
helps businesses understand the minimum performance needed to avoid losses.
Formula:
Example:
A toy manufacturer has:
• Fixed costs = ₹50,000
• Selling price per toy = ₹200
• Variable cost per toy = ₹100

BEP = ₹50,000 / (₹200 - ₹100) = 500 toys.

This means the company needs to sell 500 toys to break even.

3. Importance of Break-Even Analysis

1. Helps in Setting Sales Targets:
• Determines the minimum sales required to avoid losses.
• Example: A new restaurant calculates how many meals need to be sold daily to
cover rent and salaries.
2. Supports Pricing Decisions:
• Assists in deciding the selling price to achieve profitability.
• Example: A furniture company uses break-even analysis to price a new sofa set.
3. Facilitates Cost Management:
• Identifies the impact of fixed and variable costs on profitability.
• Example: A clothing retailer evaluates the feasibility of reducing fixed costs like
store rent.
4. Aids in Decision-Making:
• Guides decisions on scaling production, launching products, or shutting down
operations.

Page 1 of 9
 • Example: A small bakery decides to continue operations after analysing that
increasing sales slightly will cover costs.
5. Risk Assessment:
• Helps assess the financial risk associated with business decisions.
• Example: An e-commerce startup estimates how many units of a new product
need to sell to recover its marketing investment.

4. Basic Example on Break-Even Analysis

Scenario:
• Fixed Costs = ₹40,000
• Selling Price per Unit = ₹500
• Variable Cost per Unit = ₹300

Step-by-Step Calculation:
1. Contribution Margin per Unit:
Contribution = Selling Price - Variable Cost
₹500 - ₹300 = ₹200
2. Break-Even Point (Units):
BEP = Fixed Costs / Contribution Margin
BEP = ₹40,000 / ₹200 = 200 units

Interpretation:
The company needs to sell 200 units to cover all costs. Selling more than 200 units
will result in a profit.

Page 2 of 9
5. Decision-Making in Break-Even Analysis

Break-even analysis supports several key business decisions:

1. Launch of New Products:
• Assess whether expected sales justify the costs of launching.
• Example: A startup analyzes if selling 1,000 units of a new gadget will cover
development and marketing costs.
2. Make or Buy Decisions:
• Decide whether to produce internally or outsource.
• Example: A clothing brand evaluates whether to manufacture its own fabric or
buy from suppliers.
3. Scaling Operations:
• Determine if increasing production will lead to profitability.

• Example: A food delivery service considers expanding to a new city based on

estimated sales to cover additional costs.
4. Shutdown Decisions:
• Analyze whether to continue operations during losses.
• Example: A cinema evaluates whether low ticket sales during off-seasons justify
keeping the theater open.
5. Profitability Analysis for Multiple Products:
• Evaluate the break-even point for different products to focus on the most
profitable ones.
• Example: A retail store compares BEP of electronics versus clothing to allocate
more shelf space to the higher-margin category.

Break-even analysis is a critical tool for businesses to make informed decisions. By

understanding the break-even point, cost structure, and sales targets, MBA students
can apply these principles to optimize business strategies effectively.

Page 3 of 9
Examples of Methods of Costing with Numbers

1. Job Costing

Definition: Used to calculate the cost of a specific job or order. Costs are tracked
individually for each job.
Example:
A furniture manufacturer receives two orders:
• Job A: 5 custom chairs.
• Job B: 10 custom tables.
Particulars Job A (₹) Job B (₹)
Direct Material Cost 5,000 15,000
Direct Labor Cost 2,500 5,000
Overhead Costs 2,000 4,000
Total Job Cost 9,500 24,000

Interpretation:
• Cost per chair for Job A = ₹9,500 / 5 = ₹1,900.
• Cost per table for Job B = ₹24,000 / 10 = ₹2,400.

2. Batch Costing

Definition: Used to calculate costs for a batch of identical products.

Example:
A bakery produces a batch of 100 cupcakes.
Particulars Amount (₹)
Direct Material Cost 2,000
Direct Labor Cost 1,500
Overhead Costs 500
Total Batch Cost 4,000

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Interpretation:
• Cost per cupcake = ₹4,000 / 100 = ₹40.

3. Process Costing

Definition: Used in industries with continuous production where costs are assigned
to processes.
Example:
A textile company processes cotton through three stages: Spinning, Weaving, and
Finishing.
Process Cost (₹)
Spinning 30,000
Weaving 25,000
Finishing 20,000
Total Process Cost 75,000

Interpretation:
• Total cost for producing 1,000 meters of fabric = ₹75,000.
• Cost per meter = ₹75,000 / 1,000 = ₹75.

4. Unit Costing
Definition: Used to calculate the cost per unit of production.
Example:
A bottled water company produces 2,000 bottles.
Particulars Amount (₹)
Total Production Cost 50,000
Units Produced 2,000
Cost per Unit 50,000 / 2,000 = ₹25

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Interpretation:
Each bottle costs ₹25 to produce.

5. Activity-Based Costing (ABC)

Definition: Allocates costs based on activities required to produce goods.

Example:
A consulting firm works on two projects: Project X and Project Y. Overhead costs
are allocated based on hours spent.
Activity
Particulars Project X Project Y
Hours Worked (Total 200) 120 80

Overhead Cost (₹50,000) ₹30,000 ₹20,000

Interpretation:
• Overhead allocated to Project X = ₹30,000.
• Overhead allocated to Project Y = ₹20,000.

These numerical examples clarify how different costing methods work in practical
scenarios.

Detailed Example: Activity-Based Costing (ABC) vs. Traditional Absorption Costing

Scenario:

A manufacturing company produces Product A and Product B. The company incurs

overhead costs and uses two different approaches—Activity-Based Costing (ABC)
and Traditional Absorption Costing—to allocate these costs.

Page 6 of 9
Step 1: Company Information
1. Production Details:
• Units of Product A = 1,000
• Units of Product B = 500
2. Direct Costs (per unit):
Particulars
Particulars Product A (₹) Product B (₹)
Direct Material 50 60
Direct Labor 30 40

3. Overhead Costs:
Total overheads = ₹100,000
Particulars Product A (₹) Product B (₹)
Machine Hours: Total= 5,000 hours 3,000 2,000
Setup Costs: Total = ₹40,000 10 setups 30 setups

Overheads are driven by two activities:

Step 2: Traditional Absorption Costing
In traditional costing, overheads are allocated based on a single basis such as machine
hours.
1. Overhead Rate (per machine hour):
2. Overheads Allocated:
Particulars Product A (₹) Product B(₹)
Machine Hours 3,000 2,000
Overheads Allocated 3,000 × ₹20 = ₹60,000 2,000 × ₹20 = ₹40,000

3. Total Cost per Unit:

Particulars Product A (₹) Product B (₹)
Direct Material 50 60
Direct Labor 30 40
Overheads (Traditional) 60,000 / 1,000 = 60 40,000 / 500 = 80
Total Cost per Unit 50 + 30 + 60 = 140 60 + 40 + 80 = 180

Page 7 of 9
Step 3: Activity-Based Costing (ABC)
In ABC, overheads are allocated based on activities and their respective cost drivers.
1. Activity Costs and Drivers:
Activity Overhead Cost (₹) (Product A) (Product B)
Machine Operations 60,000 Machine Hours 3000 Machine Hours 2000
Setup Costs 40,000 Number of Setups 10 Number of Setups 30

2. Cost per Driver Unit:

Activity Overhead Cost (₹) Driver Usage Cost per Driver Unit (₹)
Machine Operations 60,000 5,000 hours ₹60,000 ÷ 5,000 =
₹12/hour
Setup Costs 40,000 40 setups ₹40,000 ÷ 40 =
₹1,000/setup

3. Overheads Allocated:
Activity Product A (₹) Product B (₹)
Machine Operations 3,000 × ₹12 = ₹36,000 2,000 × ₹12 = ₹24,000
Setup Costs 10 × ₹1,000 = ₹10,000 30 × ₹1,000 = ₹30,000
Total Overheads ₹36,000 + ₹10,000 = ₹24,000 + ₹30,000 =
₹46,000 ₹54,000

4. Total Cost per Unit:

Particulars Product A (₹) Product B (₹)
Direct Material 50 60
Direct Labor 30 50
Overheads (ABC) 46,000 / 1,000 = 46 54,000 / 500 = 108
Total Cost per Unit 50 + 30 + 46 = 126 60 + 40 + 108 = 208

Step 5: Comparison of Results

Costing Method Product A (₹) Product B (₹)
Traditional Costing 140 180
Activity-Based Costing 126 208

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Insights from the Comparison:
1. Traditional Costing:
• Allocates overheads uniformly based on machine hours, which ignores the actual
activities driving the costs.
• Product A appears more expensive than it should be, while Product B seems
cheaper.
2. Activity-Based Costing (ABC):
• Allocates overheads based on specific activities (machine hours and setup costs),
providing a more accurate cost distribution.
• Product B’s higher setup costs are captured, showing it is more expensive to
produce than previously indicated.
Conclusion:
• Traditional Costing is simpler but less accurate for businesses with diverse
products and complex processes.
• ABC provides more accurate cost allocation and better insights for pricing and
decision-making.
For example, based on ABC, the company might reconsider the pricing strategy for
Product B or work to reduce setup costs.

Page 9 of 9
GST INTRODUCTION &
BASIC CONCEPTS

OVERVIEW OF GST

Faculty of Management Studies

Event No. 13

December 18, 2024

What is GST?
One Tax
For

Manufacturing

Trading

Services
 Difference Between Direct and Indirect Taxes in India

Aspect Direct Taxes Indirect Taxes

Definition Taxes levied directly on the Taxes levied on goods and
income or wealth of an services, collected indirectly
individual or entity. from consumers.
Examples Income Tax, Corporate Tax, GST, Customs Duty, Excise
Wealth Tax (abolished in Duty (replaced by GST for
2015). most goods).
Imposition Imposed on individuals, Imposed on the production,
companies, or entities. sale, or consumption of goods
and services.
Incidence & Impact Both incidence and impact fall Incidence and impact fall on
on the same person different persons (collected
(taxpayer). from consumers by sellers).
Tax Burden Transfer Cannot be shifted to others; Can be shifted to others,
borne by the taxpayer. typically passed on to the end
consumer.
Nature of Tax Progressive in nature (higher Generally regressive (same
income = higher tax rate). rate applied regardless of
income level).
Collection Authority Collected by the Central Board Collected by authorities like
of Direct Taxes (CBDT). GST Council and Customs
Department.
3
Filing Requirement Taxpayers file returns Indirect taxes are filed
annually (e.g., ITR for periodically (e.g.,
Income Tax). monthly GST returns).
Tax Rates Rates vary based on Rates are usually fixed for
income slabs or corporate goods/services (e.g., 5%,
profits. 12%, 18%, 28% under
GST).
Purpose Targets income and Targets consumption to
wealth directly for equity. generate revenue for
government expenses.
Compliance Taxpayer needs to Paid by
calculate and pay directly businesses/vendors, who
to the government. pass the tax burden to
consumers.

4
 TAXES SUBSUMED IN GST

Additiona
Central State Central
l Excise
Excise Duty VAT/Sales Sales
Duties
Tax Tax

Additional
duties of
Service Luxury Entertain
CENTRAL LEVY Customs STATE LEVY
Tax Tax ment Tax
(CVD &
SAD)

Surchar
Excise Duty Surcharge Octori &
levied - s &
ges &
Entry Tax
Special Cesses. Cesses.
CASCADING EFFECT IN EARLIER TAX
REGIME
GUJARAT MAHARASHTRA

WHOLESALE RETAIL
MFG CONSUMER
TRADER TRADER

- Credit of Excise – Not available

- Credit of Central Sales Tax (CST) – Not
available
- Cascading effect of multiple tax regime
- Same applies to supply chain within
State
MULTIPLE REGISTRATIONS

Excise

Entertain Service
ment Tax Tax

REGISTRATION
Value
Central
Added
Sales Tax
Tax

Luxury
Entry Tax
Tax
DIFFERENT POINTS OF TAXATION

WHOLESALE RETAIL
MFG CONSUMER
TRADER TRADER

EXCISE DUTY on Trading on Trading

on CST / VAT
CST / VAT
Manufacturing
or
SERVICE TAX
On Provision of
Services
LACK OF UNIFORMITY
No Entry Tax

Entry
Tax

@ NIL @
% 4%

Value Added Tax

e.g. on Sugar
GOODS VS. SERVICES DILEMMA?

License Sale of Food

Software in In Restaurant
CD

Sale

Services
Manufacturing
BENEFITS OF GST (1/2)

• Reduction in Cascading of Taxes Decrease in

Inflation
• Overall Reduction in Prices

Ease of Doing
• Common National Market
Business
• Benefits to Small Taxpayers

• Self-Regulating Tax System Decrease in

“Black”
• Non-Intrusive Electronic Tax System Transactions

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BENEFITS OF GST (2/2)

• Simplified Tax Regime More informed

• Reduction in Multiplicity of Taxes consumer

• Consumption Based Tax Poorer States

• Abolition of CST to Gain

• Exports to be Zero Rated

• Protection of Domestic Industry Make in India
– IGST

12
SALIENT FEATURES OF GST

• The GST would be applicable on the supply of goods or

services.
• It would be a single GST on any item out of which 50%
will go to Central Govt and 50% will go to State Govt /
Union Territory.
 Central tax (CGST) and State tax (SGST) / Union territory tax
(UTGST).

• The GST would apply on all goods or services or both

other than alcoholic liquor for human consumption and
five petroleum products.

13
SALIENT FEATURES OF GST (Cont’d…)
Destination-based Consumption Tax

 The tax would accrue to the State which has jurisdiction over the
place of consumption which is also termed as place of supply.

 Levied at all stages right from manufacture up to final consumption

with credit of taxes paid at previous stages available as setoff.

 In a nutshell, only value addition will be taxed and the burden of tax
is to be borne by the final consumer.

 Exports would be tax-free and imports taxed at the same rate as

integrated tax (IGST) levied on inter-State supply of like domestic
products

14
SALIENT FEATURES OF GST (Cont’d…)
• Tax payers with an aggregate turnover in a financial year
up to INR 20 Lacs would be exempt from tax in case of
Services and INR 40 Lacs in case of Goods.

 For special category states specified in Article 279A,

the threshold exemption shall be INR 10 Lacs.
 Tax payers making inter-State supplies or paying tax
on reverse charge basis shall not be eligible for
threshold exemption.

• Small taxpayers with an aggregate turnover in a financial

year up to INR 150 lakhs shall be eligible for composition
levy.

15
SALIENT FEATURES OF GST (Cont’d…)

• An Integrated GST (IGST) would be levied and collected

by the Centre on inter-State supply of goods and
services.

• HSN code shall be used for classifying the goods under

the GST regime.

• For Services, Service Accounting Codes (SAC) shall be

used

• Exports and Supplies to SEZs shall be treated as zero-

rated supply. No tax is payable on exports but ITC
related to the supply shall be refunded to exporters.

16
SALIENT FEATURES OF GST (Cont’d…)

• Import of goods/services would be subject to IGST in addition

to Basic Customs duty.

• Laws and procedures for levy and collection of CGST/SGST

would be harmonized to the extent possible.

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NEITHER GOODS NOR SERVICES

• The following would not constitute a supply of

Goods or Services (Schedule –III of the Act)
 by an employee to employer
 Services by any Court or Tribunal
 Functions performed by Members of Parliament /
State legislature / Panchayats / Municipalities / other
local authorities.
 Duties performed by Constitutional functionary.
 Duties performed by Chairperson / Member / Director
in a body of CG/SG/local authority, who is not deemed
to be an employee before commencement of this
clause.
NEITHER GOODS NOR SERVICES (Cont’d…)

 Funeral, burial, crematorium/mortuary service,

including transportation of deceased
 Sale of land
 Actionable claims, other than lottery, betting and
gambling
GST Rates
• Rates: 0% (on essential items, rice/wheat)
• 5%: (on items of mass consumption )
• 12%/18% : (standard rates covering most manufactured items
and Services)
• 28% : (on Consumer Durable Goods, Pan masala, tobacco and
aerated drinks etc.)
• Basic philosophy behind these rates are that, to the extent
possible, the current combined rate of tax levied on individual
goods by the Central and the State Governments should be
maintained in GST
• Uniform GST rate not possible at this stage as luxury goods
and goods consumed by poorer sections of society cannot be
taxed at the same rate
• Rates will be notified by Government on recommendations of
GST Council.
MULTIFOLD IMPACT OF GST ON BUSINESSES

Cash Flows

Accounting Business Processes

IT Systems

Marketing Supply Chain

Product Pricing
ECONOMIC ADVANTAGES

Global
Organized
Outlook
Business
(Aligned to Global Tax
Systems – Canada & Operations
Malaysia)

Reduction in
Channelization
“Black”
of Revenue
Transactions

Widening of
Tax Net
FEEDBACK

23
 THANK
YOU
ANY QUESTIONS?
Chintan Popat
(C.A., C.S., C.M.A.(Final), C.P.A.-Aus
M.B.A., B.com (Hons), PG. EXIM)

Office : 314-16, Kalp Business Hub,

Above SBI
Bank, Bahucharaji Road, Karelibaug,
Vadodara 390018
Mail : [email protected]
Cell : +91 97253 21700

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