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All About ACCOUNTING..!!

0

ACCOUNTING

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What is accounting?

The language of business.

A means to communicate financial information.

A way to convey information about a business to users.

What is ACCOUNTING?

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What is Need of ACCOUNTING?

Managers, investors, and other internal groupswant the answers to two important questions:

How well did the

organization perform?

Where does the

organization stand?

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What is Need of ACCOUNTING?

Accountants answer these questionswith two major financial statements:

Income Statement

Balance Sheet

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Balance Sheet

The balance sheet (also called statement of

financial position or statement of financialcondition) is a snapshot of the financial status

of an organization at a point in time.

What is Balance Sheet?

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Balance Sheet

What is Balance Sheet?

Assets = Equities

Assets are economic resources that are expectedto benefit future activities of the organization.

Equitiesare the claims against, or interests in,the assets of the organization.

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Income Statement

What is Income Statement?

The income statement measures

the performance of an organizationby matching its accomplishments

(revenue from customers, which

is usually calledsales) and itsefforts (cost of goods soldand

other expenses).

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Revenues

What is Revenue?

Revenues are increases in ownership

claims arising from the delivery

of goods or services.

Revenues must be earned.

Revenues must be realized.

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What is Expenses

Expenses

Expenses are decreases in

ownership claims arisingfrom delivering goods or

services or using up assets.

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What is Profit

Profits

Profits (orearnings orincome) are

the excess of revenues over expenses.

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Who users accounting information?

Owners

Managers

Investors (including potential)

Analysts on their behalf

Creditors (including potential)

Government (tax assessment)

Regulators

Customers

Who are Users of Accounting?

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Accounting has two main divisions:

Financial accounting

Primarily prepared for users external to the company.

Revenues, earnings, assets, etc.

Management accounting

Primarily for internal purposes

Costing, budgeting, net present value, etc.

Types of ACCOUNTING?

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Management Accounting is comprised of two words Management

and Accounting.

It is the study of managerial aspects of accounting.

The emphasis of management accounting is to redesign accounting in

such a way that it is helpful to the management in formulation of

policy, control of execution and appreciation of effectiveness.

Management accounting is a system that helps management in

carrying out their functions more efficiently.

What is MANAGEMENT ACCOUNTING?

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GAAP

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General Accepted Accounting Principle is a technical term that encompasses

the conventions, rules and procedures necessary to define accepted accounting

practices at a particular time.

GAAP are common set of accounting principles, standards and procedures that

companies use while preparing their financial statement.

Accounting Principle can be classified into two categories:

1. Accounting Concepts

2. Accounting Conventions

What is GAAP?

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Accounting Concepts may be considered as traditions which guide the accountants

while preparing the accounting statements

Accounting Conventions:-

1. Consistency

2. Full Disclosure

3. Conservation

4. Materiality

What is Accounting Conventions?

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Accounting Concepts may be considered basic assumptions or conditions upon

which the science of accounting is based.

Accounting Concepts:-

1. Separate Legal Entity 9.Realisation Concept.

2. Money Measurement

3. Going Concern

4. Cost Concept

5. Accounting Period

6. Dual Aspect

7. Matching Concept

8. Accrual concept

What is Accounting Concept?

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Inventory

Valuation

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Inventory is stock of goods, its includes raw material, work in progress,

consumables, finished goods, spares.

The investment in inventory is very high in a undertaking. About 90% of the

working capital is invested in inventory. Therefore a proper planning is

required for purchase, issue & vendor selection.

The purpose of inventory management is that neither there should be over-

stocking nor there should be under-stocking of inventory.

Overstocking=Reduction in liquidity

Under stocking = Stoppage in production cycle.

What is Inventory ?

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Inventory

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Mueller Hardware has a storage barrel full of nails.

The barrel was restocked three times with 100 pounds of nails

being added at each restocking.

The first batch cost Mueller 100/-, the second batch cost

Mueller 110/-, and the third batch cost Mueller 120/-.

The barrel was never allowed to empty completely and

customers have picked all around in the barrel as they bought

nails from Mueller

At the end of the accounting period, Mueller weighs the barrel

and decides that 140 pounds of nails are on hand

What is the cost of the ending inventory?

Example of Inventory Valuating

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The methods from which to choose are varied, generally consisting

of one of the following:

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

Weighted-average

Example of Inventory Valuating

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CALCULATIONS: With first-in, first-out, the oldest cost is matched against

revenue and assigned to cost of goods sold. Conversely, the most

recent purchases are assigned to units in ending inventory. For

Mueller's nails the FIFO calculations would look like this:

FIFO

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CALCULATIONS: Last-in, first-out is just the reverse of FIFO; recent costs

are assigned to goods sold while the oldest costs remain in inventory:

LIFO

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CALCULATIONS: The weighted-average method relies on average unit

cost to calculate cost of units sold and ending inventory

Average Cost

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Valuation of inventory bears direct relation on the determination of income

of the company.

If all the material are purchased at same rate there will be no problem in

valuation of inventory. But because of different market condition the

valuation of inventory can be done in different ways.

There are many methods of valuing inventory, the most important being;

1. FIFO

2. LIFO

3. AVERAGE COST

4. BASE STOCK

What is Inventory Valuation

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First In First Out

This method assumes that oldest material is issued first and at its

original rate at which it is received.

Ie. Unit cost are apportioned to cost of production according to their

chronological order.

This method is beneficial in case of falling price

What is FIFO?

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First In First Out- Advantages

1. Rational

2. Material cost correctly ascertained

3. Useful when price are falling

4. Simple to understand

5. Closing stock value in balance sheet is more realistic

Advantages of FIFO?

f

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First In First Out- Disadvantages

1. Possibility of more clerical error

2. Sometimes more than one price has to be use to value one issue

3. In case of frequent price fluctuation the pricing becomes different

Disadvantages of FIFO?

h O ?

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Last In First Out

In this method issue is done in the reverse order of purchase.

Material received last in the stores is issued first

More appropriate in rising price

Also known as replacement cost method

What is LIFO?

Wh i LIFO ?

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Last In First Out (Advantage)

No profit No loss as material are issued at cost price

Production Cost represents recent cost

Suitable in rising price

What is LIFO?

Wh t i LIFO ?

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Last In First Out (Disadvantage)

May result in clerical error as every time issue is made price may be

revised

Comparison between different jobs is difficult

The stock in hand is valued at price which is not current market price

More than one price can be used for valuing issue of material of single

requisitions.

What is LIFO?

E l

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Discuss the effect of adopting LIFO and FIFO on profit with the help of

following figures

Jan-1 Opening Balance-10 units @ 30/-

Jan 10 Purchased 10 unit @ 33/-

Jan 12 Issued 10

Jan 31 Closing Balance-10 unit

Feb-3 Purchase-10 unit @36/-

Feb-12 Issued-10 units

Feb-28 Purchased-10 units @ 40/-

Example

A M th d

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The principle on which average method is based is that all of

the material in the stores is mixed up and cannot be issued

from any particular lot

Types of Average Stock Method

1. Simple Average method

2. Weighted average method

Average Method

Si l A M th d

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Simple Average method

Price is calculated by dividing total of the prices of material in

the stock with the number of prices used in the total

Eg 1000units purchased @ 10/-

2000units purchased @ 11/-


Then the issue price of next issue will be

10+11+12/3 = 11

Simple Average Method

W i ht d A M th d

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Weighted Average method

Price is calculated by dividing total cost of materialin the stock

with the total quantity of material

Eg 1000units purchased @ 10/-



Then the issue price of next issue will be

(1000*10)+(2000*11)+(3000*12)/(1000+2000+3000)

= 11.33/-

Weighted Average Method

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Inventory

Management

What is Inventory Management ?

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Inventory Management:-

The investment in inventory in most of the manufacturing, wholesale,

retail trade is very high. In industries like sugar, the raw material cost is

as high as 68.75% and in steel industry also it count to about 65.33%.

About 90% of working capital is invested in inventory management.

Inventory Management will determine

What to purchase

How much to purchase

From where to purchase

When to purchase

Where to store

What is Inventory Management?

Objective of Inventory Management ?

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Objectives of Inventory Management:-

1. To ensure continuous supply of materials, spares & finished goods so thatproduction should not suffer at any time & customer demand should also be

met.

2. To avoid over-stocking & under-stocking of inventory.

3. To maintain investment in inventory at optimum level

4. To maintain material cost at minimum, so that cost of production is minimum.

5. To eliminate duplication in ordering or replenishing stock.

6. To minimize losses due to wastage & damage.

7. To ensure perpetual inventory control

8. To facilitate furnishing of data for short-term & long-term planning & control of

inventory

Objective of Inventory Management?

Tools of Inventory Management ?

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Tools of Inventory Management:-

1. Determination of stock level.

2. Determination of safety stock.

3. Determination of EOQ.

4. A.B.C Analysis.

5. Preparation of inventory report

6. Perpetual Inventory system

7. JIT Control System

Tools of Inventory Management?

Determination of Inventory level ?

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Determination of Inventory level:-

An efficient inventory management requires that a firm should maintain an optimum

level of inventory where inventory cost is minimum, at the same time there

should be no stock out. Various stock level are fixed for this.

(a) Minimum Level :- This represent the quantity which must be maintained in

hand at all times. Minimum level depends on:-

Lead time

Rate of consumption]

Nature of material

MINIMUM STOCK LEVEL=REORDER LEVEL-(NORMAL CONSUMPTION

*NORMAL REORDER LEVEL)

Determination of Inventory level?


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Re-order level -When the quantity of the material reaches a certain figure

then fresh order is sent to get the material again. The order is sentbefore the material reaches the minimum level. Reorder level is fixed

between minimum & maximum level. It depends on following factors :-

Rate of consumption

Lead time

Maximum quantity of material required in a day.

Nature of material

RE-ORDER LEVEL= (MAXIMUM CONSUMPTION * MAXIMUM

REORDER PERIOD)



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Maximum level It is that quantity of the material beyond which a firm

should not exceed its stock. If stock reaches beyond this level it is overstocking. Maximum level depends on following factors :-

Rate of consumption

Lead time

Maximum quantity of material required in a day.

Nature of material

Availability of capital for purchase of material.

Availability of space for storing the material

Cost of maintaining the stores.



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Availability of material at any point of time.

Restrictions imposed by the government.

This possibility of change in fashions will also affect the maximum level.

MAXIMUM STOCK LEVEL = RE-ORDER LEVEL + RE-ORDER QUANTITY

(MINIMUM CONSUPTION * MINIMUM RE-ORDERING PERIOD)

Average stock level- The average stock level is average of minimum stock &

maximum stock.

Danger level-It is that level beyond which the material should not fall in any case.

DANGER LEVEL= (AVERAGE CONSUMPTION * MAXIMUM RE-ORDER

PERIOD FOR EMERGENCY PURCHASE)


Determination of Safety Stock ?

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Safety Stock Safety stock is a buffer to meet some unanticipated

increase in usage. The usage of inventory cannot be perfectlyforecasted. It fluctuates over a period of time. The demand for

material may fluctuate & delivery of inventory may also be delayed

& in such a situation the firm can face a problem of stock-out. The

stock out can prove costly by effecting in smooth working of

concern.

In order to protect against this situation firm usually maintains some

stock this stock is known as safety stock.

Determination of Safety Stock?

Inventory Order Cycle

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Inventory Order Cycle

Demandrate

TimeLeadtime

Leadtime

Orderplaced

Orderplaced

Orderreceipt

Orderreceipt

In

ventory

Level

Reorder point, R

Order quantity, Q

0

Determination levels ?

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From the following information, calculate minimum stock

level, maximum stock level and reorder level :-

Max Consumption-200 units per day

Min Consumption-150 units per day

Normal Consumption-160 units per day

Re-order period-10-15 days

Re-order quantity-1600 units

Normal re-order period-12 days

Determination levels?

Determination of EOQ ?

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Economic order quantity is the level of inventory that minimizes the

total inventory holding costs and ordering costs. The frameworkused to determine this order quantity is also known as Wilson EOQ

Model. The model was developed by F. W. Harris in 1913. But still R.

H. Wilson is given credit for his early in-depth analysis of the model.

Ordering cost are the cost which is associated with the purchasing or

ordering of material. E.g. Cost of staff posted for ordering of goods,

transportation expenses, inspection cost. This cost is also called

buying cost. The planning commission of India has estimated these

cost between 10% to 20%.

Carrying cost are the cost of holding the inventory. E.g. Cost of capital

invested, storage cost, insurance cost, loss if material due to

deterioration, cost of spoilage

Determination of EOQ?

Determination of EOQ ?

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Underlying assumptions

(a) The ordering cost is constant.

(b) The rate of demand is constant

(c) The lead time is fixed

(d) The purchase price of the item is constant i.e. no discount is

available

EOQ is the level of the inventory where ordering cost and carrying

cost remains equal.

Determination of EOQ?

EOQ Cost Model

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EOQ Cost Model

Order Quantity, Q

Annualcost ($)

Ordering Cost =

CoD

Q

Carrying Cost =

CcQ

2

Total Cost

Slope = 0

Minimumtotal cost

Optimal orderQopt

Determination of Total Cost ?

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cost function: EOQ is the level of the inventory where ordering cost and

carrying cost remains equal.

Total Cost = purchase cost + ordering cost + holding cost

Purchase cost=(purchase unit price annual demand quantity.)

Purchase cost =(PD)

Ordering cost: This is the cost of placing orders: each order has a fixed cost C,

and we need to order D/Q times per year.

Ordering cost=C D/Q

Holding cost: the average quantity in stock (between fully replenished and

empty) is Q/2,

Holding cost = H Q/2

Determination of Total Cost?

Determine EOQ

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Find out EOQ from following information

Annual usage-6000units

Cost of material per unit-20/-

Cost of receiving and placing order-60/-

Annual carrying cost of one unit- 10% of inventory value

Determine EOQ

EOQ Analysis

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A manufacturing company uses 6400unit of material per

year. The unit cost is 6/-, and the carrying cost is 25% ofunit cost. If the cost of procurement is 75/- determine

1. EOQ

2. Number of order per annum

3. Time period between two consecutive order.

EOQ Analysis

EOQ Analysis

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X ltd produces a product which has a monthly demand of

4000 units. The product requires a component X which ispurchased at 20/-.For every finished product, one unit of

the component is required. The ordering cost is 120/-

per order and the holding cost is 10%p.a

You are required to calculate

1. EOQ

2. If the minimum lot size to be supplied is 4000unit, what

is extra cost, the company has to incur

EOQ Analysis

EOQ Analysis (Decision making)

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An Enterprise requires 90000 units of a component in a

year. The cost per unit is 3/-.Ordering cost id 6/- per unit

1. What is EOQ

2. What should the firm do if the supplier offers discount as

below

At 4500 units Discount offered is 2%

At 6000 units Discount offered is 3 %

EOQ Analysis (Decision making)

ABC Analysis

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Usually a firm has to maintain several types of inventories. It is not

desirable to keep the same degree of control on all the items. The

firm should pay maximum attention to those items whose value is

the highest. The firm should, therefore, classify inventories to

identify which items should receive the most effort in controlling.

The firm should be selective in its approach to control investment in

various types of inventories. This analytical approach is called the

ABC analysis and tends to measure the significance of each item of

inventories in terms of its value.

C a ys s

ABC Analysis

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ABC analysis helps to concentrate more effort on category A since

greatest monetary advantage will come by controlling these items.

The control on C category items are kept under minimum control.

The control on B category items are moderate.

Like ABC control VED analysis is also used in few industries forcontrolling inventory

V Vital without which production will stop.

E Essential Which is essential for production.

D Desirable Without which there will be no effect on

production but is desirable for production.

y

Perpetual Inventory System

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Perpetual Inventory System may be defined as a system of records

maintained by the controlling department, which reflects the physical

movement of stock & their current balance.

Procedure of Perpetual Inventory System

1. The up to date position in stores ledger and bin cards should be made to

know the current balances of the stores.

2. The stores are selected in rotation for checking the items physically.

3. The stores which are not checked are marked.

4. Physical stock checking is done & tallied with the records.

5. Final report is signed by cost accountant.

p y y

All Ab ACCOUNTING !!

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Analysis of

Financial

Statement

All Ab ACCOUNTING !!What is Analysis of Financial Statement?

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FINANCIAL ANALYSIS is the process of critically examining in detail accounting

information given in the financial statement.

FINANCIAL ANALYSIS is largely a study of relationship among the various

financial factor in a business as disclosed by a single set of statement and a study of

trend of these factors.

FINANCIAL INTERPRETATION is closely related to financial analysis.

Interpretation is thus drawing of inference & stating what the figures in the financial

statement really mean.

The analysis & interpretation of financial statement is to determine the significance

& meaning of the financial statement data.

y

All Ab t ACCOUNTING !!Objective of Financial Analysis.!

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(1)To assess the present & future earning capacity or profitability of the concern

(2)To assess the operating efficiency of the concern as a whole & variousdepartments.

(3)To assess the short term & long term solvency of the concern.

(4) To have a comparative study in regard to one firm with another or one

department with another.

(5) For forecasting & preparation of budget.

(6)To assess the stability of the firm

(7) For decision making.

j y

All Ab t ACCOUNTING !!What is Ratio Analysis ?

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RATIO is the arithmetical expression of the relationship of one number to

another. It may be defined as the indicated quotient of two mathematicalexpression.

FINANCIAL RATIO is the relationship between two accounting figures

expressed mathematically.

FINANCIAL RATIO ANALYSIS is a technique of analysis & interpretation of

the financial figures in the financial statement. It is the process ofestablishing & interpretation various ratios for decision making.

y

All Ab t ACCOUNTING !!What is Ratio Analysis ?

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A single ratio in itself does not convey much of sense. To make ratio useful it ha

s to be further interpreted. The interpretation of ratio can be made in followingways:

Single absolute ratio

Group ratio

Historical Comparison

Inter-firm Comparison

y

All About ACCOUNTING !!3. Classification of Ratios!!

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Ratios

Traditional Functional Significance

Balancesheet

P&L A/c Mixed Liquidity Solvency Primary SecondaryTurnover Profitability

All About ACCOUNTING !!What is Traditional Classification?

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Balance sheet Ratio deals with the relationship between two balance sheet

figures. e.g. Current ratio, Liquidity ratio, Debt-equity ratio, Capital Gearing ratio.

Profit & Loss Account Ratio deals with the relationship between two profit &

loss figures. e.g. Gross Profit Ratio, Operating Ratio, Net Profit Ratio.

Mixed Ratio exhibit the relationship between the figures of profit & loss account

and balance sheet. E.g. Stock turnover ratio, Debtors Turnover ratio, Creditor

Turnover ratio.

All About ACCOUNTING !!What is Functional Classification?

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Liquidity Ratio deals with the ratios which measures the short-term solvency or

financial position of a firm. This ratio are calculated upon the short-term payingcapacity of a concern. E.g. Current ratio, Liquid ratio, Absolute liquid ratio.

Solvency or Leverage Ratio Long-term solvency ratio conveys a firms ability to

meet the interest cost & repayment schedules of its long-term obligations .e. g.

Debt-Equity Ratio, Coverage Ratio, Capital Gearing ratio, Proprietary Ratio.

Activity or Turnover Ratio are calculated to measure the efficiency with which

the resources of a firm are employed. They indicate the speed with which assets are

being converted into sales. E.g. Stock turnover ratio, Debtors turnover ratio, Creditor

turnover ratio.

Profitability Ratio measures the result of the business operations or overall

performance & effectiveness of the firm. E.g. Gross profit ratio, Net profit ratio,

Return on capital

All About ACCOUNTING !!What is Significance Classification?

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Primary Ratio deals with the ratios which are of prime importance to a concern.

E.g. Return on capital.

Secondary Ratio are ratio which support the primary ratio. E.g. the relationship

of operating profit to sales or the relationship of sales to total assets of the firm.

All About ACCOUNTING !!

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Liquidity Ratio

All About ACCOUNTING !!What is Liquidity ratio?

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Liquidity Ratio deals with the ratios which test the ability of a concern to meet its

current obligation as & when due.

The short term obligation are met by realizing amounts from current, floating or

circulating assets. To measure liquidity following ratios should be calculated:-

1. Current Ratio

2. Liquid Ratio

3. Absolute Liquid Ratio

All About ACCOUNTING..!!What is Current ratio?

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Current Ratio may be defined as the relationship between current assets &

current liability. This ratio is also known as working capital ratio.

Current ratio is current assets to current liability

Interpretation of current ratio:

A relatively high current ratio indicate that the firm is liquid & has ability to pay itscurrent liability. Where as a relatively low current ratio indicate that the firm is

not liquid. A ratio of 2:1 is referred as s bankers rule of thumb or a standard

for the current ratio.

All About ACCOUNTING..!!Calculate Current ratio?

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Stock-60000/- Debtors-70000/-

Cash-20000/- Bills Receivables-30000/-

Prepaid Expenses-10000/- Land & Building-100,000/-

Goodwill-50000/- Creditors-20000/-

Bills Payable-15000/- Tax Payable-18000/-

Outstanding Expenses- 7000/- Bank Overdraft-25000/-

Debenture-75000/-

All About ACCOUNTING..!!What is Liquidity ratio?

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Liquidity Ratio is a more rigorous test of liquidity than the current ratio. Current

assets include inventory & prepaid expenses which are not easily convertibleinto cash within a short period.

Quick ratio is Liquid assets to Current liability

Interpretation of Quick ratio:

A relatively high liquid ratio indicate that the firm is liquid & has ability to pay its

current liability. Where as a relatively low liquid ratio indicate that the firm is not

liquid. A ratio of 1:1 is referred a standard for the liquid ratio.

All About ACCOUNTING..!!What is Absolute Liquidity ratio?

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Absolute Liquidity Ratio is the most rigorous test of liquidity.

Quick ratio is Absolute liquid assets to Current liability

Interpretation of Quick ratio:

A relatively high ratio indicate that the firm is liquid & has ability to pay its current

liability. Where as a relatively low ratio indicate that the firm is not liquid. A

ratio of .50:1 is referred a standard for the absolute liquid ratio.


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Solvency Ratio

All About ACCOUNTING..!!What is Solvency Ratio?

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Solvency Ratio may be defined as the ratio which test the ability of concern to

meet long-term obligation.

The following ratio serve the purpose of determining the solvency of the

concern:

1. Debt-Equity

2. Fixed Asset to Net worth

3. Capital Gearing Ratio

All About ACCOUNTING..!!What is Debt-Equity Ratio?

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Debt-Equity Ratio , also known as External-Internal Ratio is calculated to

measure the relative claims of the outsider

Debt-Equity Ratio is Outsiders Fund to Shareholder Fund

Outsiders Fund is external equity & includes all debt & liability to the outsiders,

whether long term or short term. E.g. Debenture, Bank loan, Mortgages or

other current liability.

Shareholders Fund consist of equity share capital , Preference share capital,

Capital reserve, Revenue reserve and reserves representing accumulated profit

& surplus like reserves for contingencies, sinking fund etc.

IF CURRENT LIABILITY IS NOT INCLUDED IN DEBT-EQUITY, THE RATIO IS NAMED

AS LONG-TERM DEBT TO SHAREHOLDERS FUND.


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Interpretation of Debt-Equity Ratio

The debt-Equity ratio is calculated to measure the extent to which debt financing

has been used in the business. The ratio indicate the proportionate claims of

owner & the outsider against the firms assets.

A ratio of 1:1 is considered as a satisfactory ratio although there cannot be any rule

of thumb

A low ratio is considered as favorable from the long-term creditors point of view

because a high proportion of owners fund provide more margin. A high ratio

provide a less margin of safety for them at the time of liquidation.


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The following figure relate to the liability side of a company:

50000, Equity share of 10/-each, fully paid-500000/-

20000, 9% Preference Shares of 10/- each, fully paid-200000/-

General Reserve-50000/-

Share Premium-25000/-

Profit & Loss A/c-125000/-

7% Debenture-140000/-

Montage Loan-60000/-

Creditor-129000/-

Bills Payable-74500/-

Find Debt-Equity & Comment on this ratio

All About ACCOUNTING..!!What is Fixed Asset to Net Worth Ratio?

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Fixed Asset to Net Worth Ratio, is calculated to measure the relationship

between Fixed assets of the company &shareholders Fund.

Fixed Asset to Net Worth Ratio is Fixed Assets (After Depreciation) to

Shareholders Fund.

Shareholder's fund is same as net worth.

INTERPRETATION OF THE RATIO:

This ratio indicates the extent to which shareholders fund are sunk into Fixed asset.

Generally the fund for fixed assets should be financed from shareholders fund.

If the ratio is less than 100% that implies that the owner has put part of his fund in

working capital & if the ratio is more than 100% it implies that owner has not

got sufficient fund to finance fixed asset.

60% to 65% is considered satisfactory.

All About ACCOUNTING..!!What is Capital Gearing Ratio?

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Capital Gearing Ratio, establishes the relationship between fixed interest bearing

security &Shareholders fund.

Capital Gearing Ratio is Fixed Interest Bearing Security to Shareholders

Fund.


A Company is said to be highly geared if the major shares of the total capital is in

the form of fixed interest bearing securities or if this ratio is more than 1.

If this ratio is less than 1, it is said to be low geared.

If it is exactly 1, it is said to be evenly geared.


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Profitability

Ratio

All About ACCOUNTING..!!What is Profitability Ratio?

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Profitability Ratio may be defined as the ratio which test the profit making

capacity of the company and indicates overall performance of the company

The following ratio serve the purpose of determining the profitability of

the concern

Net Profit Ratio

Gross Profit Ratio

Return on Capital Employed

Return on Fixed Assets

Earning Per Share

Price Earning Ratio

All About ACCOUNTING..!!What is G.P & N.P Ratio?

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Gross-Profit Ratio measures the relationship of gross profit to net sales. The

ratio should be expressed in percentage.

Interpretation of G.P ratio This ratio indicates the extent to which selling price of

goods per unit may decline without resulting in losses on operations of a firm. It

reflects the efficiency with which a firm produces its products.

Net-Profit Ratio measures the relationship of net profit to net sales. The ratio

should be expressed in percentage.

Interpretation of N.P ratio This ratio indicates the firms capacity to face adverse

economic conditions such as price competition ,low demand etc. Higher the

ratio better the profitability.

All About ACCOUNTING..!!What is Operating Ratio?

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Operating Ratio measures the relationship between cost of goods sold and other

operating expenses on the one hand and sales on the other. In other words, itmeasures the cost of operations per rupee of sales. The ratio should be

expressed in percentage.

OPERATING RATIO IS OPERATING COST DIVIDED BY NET SALES

OPERATING COST IS COST OF GOODS SOLD PLUS OPERATING EXPENSES.

Operating expense consist of:-

1. Administrative & office expenses.

2. Selling & Distribution expense

Operating ratio indicate the percentage of net sales that is consumed by operating

cost. Higher the ratio less favorable it is for the company.

All About ACCOUNTING..!!What is Return on capital?

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Return on Capital also known ROI is the relationship between net profit before

tax and the proprietors fund. The ratio should be expressed in percentage.


This ratio is one of the most important ratios used for measuring the overall

efficiency of a firm. This ratio indicates how well the resources of a firm are

used, higher the ratio better it is for the firm. This ratio should be used for

trend analysis & inter-firm comparison.

All About ACCOUNTING..!!What is Return on Equity capital?

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Return on equity Capital :Equity shareholders are the real owner of the

company. The rate of dividend varies with the availability of profit. Thereforereturn on capital employed is the relationship between profit of the company

available to equity shareholders and equity share capital.

This ratio is more meaningful to the equity shareholders who are interested to know

the profit earned by the company

Higher the ratio better it is for the company.


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Turnover Ratio

All About ACCOUNTING..!!What is Turnover Ratio?

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Turnover Ratio may be defined as the ratio which measures the efficiency or

effectiveness with which a firm manager its resources & assets. This ratio isalso known as activity ratio.

The following ratio serve the purpose of determining the activity level of

the concern

1. Inventory Turnover ratio

2. Debtor Turnover ratio

3. Creditor Turnover ratio

4. Fixed Asset Turnover ratio

All About ACCOUNTING..!!What is Stock Turnover Ratio?

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Stock Turnover Ratio also known as stock velocity. It would indicate whether

inventory has been efficiently used or not.

Inventory turnover ratio indicates the number of times the stock has turned over

during a period of time & evaluate the efficiency with which the firm is able to

manage the inventory.

INVENTORY TURNOVER RATIO IS COST OF GOODS SOLD TO AVERAGE

INVENTORY

Inventory turnover ratio measures the velocity of conversion of stock into sales.

Higher ratio indicates efficient management, as it indicates stock is converted into

sales in less time & hence less capital is blocked in inventory.

Low ratio indicates high investment in inventory. Accumulated , obsolete & slow

stock.

All About ACCOUNTING..!!What is Debtor Turnover Ratio?

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Debtor Turnover Ratio indicates the velocity of debt collection by a firm. Also it

indicates the number of times debtors are turned over during a year.

Debtor turnover ratio is Credit Sales to Average Debtor.

Trade Debtor is Sundry Debtors & Bills Receivable.

Debtor velocity indicates the number of times the debtors are turned over during a

year.

Higher the value of debtor turnover the more efficient is the management of

debtors. But a very high ratio ratio indicates inability of firm to sell.

Average collection period represent the number of days for which a firm has to waitbefore receivables are converted into cash.

All About ACCOUNTING..!!What is Creditor Turnover Ratio?

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Creditor Turnover Ratio indicates the velocity of debt payment by a firm. Also it

indicates the number of times Creditors are turned over during a year.

Creditor turnover ratio is Credit Purchase to Average Creditor.

Trade Creditor is Sundry Creditors & Bills Payable.

Creditor velocity indicates the number of times the creditor are turned over during a

year.

All About ACCOUNTING..!!Reverse Journey to balance sheet

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From the following information, Draw up the balance sheet

Current Ratio=2.5

Liquid ratio=1.5

Net working capital=300,000/-

Stock turnover ratio (Cost of sales/closing stock) =6 times

Gross profit ratio=20%

Fixed asset ratio=2 times

Average debt collection period=2 month

Fixed assets : Shareholders Net worth=1:1

Reserve: Share Capital= 0.5 : 1


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Accounting forTransportation undertaking


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Transportation companies may be divided into

(a) Railway

(b) Roadways

(c) Shipping

(d) Airways

Transportation companies carry goods & passengers for one place to another

against some fare which they collect either at the point of boarding or on the

way or at the point of unloading or destination

All About ACCOUNTING..!!Railway Transportation ?

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The station master or the booking clerk of each station prepares a statement

showing the total number of tickets sold to different station which must agreewith the opening & closing balances of tickets.

A summary is made at the end of each week with the total amount of sales so

realized which will be forwarded to the cashier of the respective division.

Total collection are added up to find out total of each division & zone.

The divisional cashier deposits the total collection into bank

For Income from other sources like advertisement a separate account is prepared


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For purchase & issue of coal, petrol, diesel etc separate account is prepared.

At the same time account for wages & salary, lubricants, engineering goods, tyres

etc separate account is prepared.

At the end of the year, after making distinction between revenue & capital

expenditure, Final account is prepared.

Capital and Revenue Accounts.- The accounts of a railway presented in such a

form as to facilitate a review of the finances of the railway as a commercial

undertaking are known as "Capital and Revenue Accounts". The Capital and

Revenue Accounts of a railway are compiled every year and included in the

Annual Report of the railway. The various processes of accounting followed inRailway Accounts Offices lead up to these accounts.


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After the books for a financial year have been closed and after the final accounts current have been submitted, the following accounts and returns should be comp

iled

(a) The Capital and Revenue Accounts (Section II of the Annual Report-Financial Statements).

(b) The Finance Accounts.

(e) The Debt Head Report.

(d) Statement of Voted and Charged Expenditure.

(e) Appropriation Accounts and connected Returns

All About ACCOUNTING..!!Airways Transportation ?

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After the books for a financial year have been closed and after the final accounts current have been submitted, the following accounts and returns should be comp

iled

(a) The Capital and Revenue Accounts (Section II of the Annual Report-Financial Statements).

(b) The Finance Accounts.

(e) The Debt Head Report.

(d) Statement of Voted and Charged Expenditure.

(e) Appropriation Accounts and connected Returns

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