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Code D A Case Study to understand Accounting Terminology, Principles and Process: A warm up exercise to learn Accounting & Finance

cases Amar was young mechanic living in a village called Rampur. He had agriculture land near his house. He thought, that his land being on main road & village youth are purchasing bikes from nearby district, let me build a small shed in a corner of the land and start selling bikes to the village He also decided to bring welding machine, lathe and necessary tools that he can provide autorepairing service to the village [1] He owned the land used for shed, but the value of piece of land was 50,000. He put 100,000 in constructing the shed, 10,000 for electrical fittings, 15,000 for furniture, 40,000 for machines & 5000 for tools. He deposited 100,000 with bike manufacturer. He possesses wonderful technical invaluable skill. He gave name to his enterprise as M/s. Amar Enterprise (firm). During the year, which ended on 31/3/2007, firm purchased 20 bikes at price of 60,000 each & sold 18 bikes at price of 70,000 each. He also had attended 100 service calls for auto repairing during the year, and for each service call he used to charge Rs, 250/. He estimated on the basis of past experience, that due to his business activity additional electricity amounting to 12,000 was consumed. He estimated that each of the assets he owned for the firm would last for 10 yea As per accounts he earned profit of 171,500. [2] At the beginning of the next year, his friend Akbar wanted to join as partner in the firm. Both agreed to value business at 400,000. However, book value as per account was 298,500. Next year, incidentally same kind of transactions took place, however 20 of the service call were not paid as they were granted credit for three months. But the partners thought that all machines & furniture be sold. Machines were sold for 35,000, and furniture for 5000. The

accounts were closed on 31/03/2008, 10 of the service call were unpaid. After revised estimate they thought that the remaining assets would not last more than 8 year. [3] In the third year of business, beginning 01/04/2008, they decided to expand business. Keeping existing firm as continued in the village, they also incorporated a Private Limited Company, named as Amar Auto Private Limited. The company started same line of business in nearby town. The premises were rented at monthly rent of 2000/. While in the beginning of the year, optimist promoters bought one automatic machine at price of 500,000 for the firm and second machine for the company. Both the enterprise took loan of 400,000 from SBI. An annual insurance for business property was taken on 01/06/2008 by paying annual premium of 6000. Amar owned property other than invested in both businesses, while Akbar had nothing except what is invested in the business. 2 of the debtors, who were given service on credit, were not traceable. [4] The third year took dramatic turn, as Nano car was available at price of the bike, no bike was sold during the year either from the firm in the village or from the company in the town. And there was no hope to the promoters that business will run, equally bank also lost hope that either business has now any prospects. On 31/03/2009, there was no sign that business will run further. [5]

Financial Statement for Amar Enterprise Balance Sheet as on 31st March 2008 Liabilities Long term Capital* Reserve* Provisions* Debenture Rs
421,500 329,938 Nil Nil

Assets Fixed Assets Goodwill -Amortization Land Building(Shed) - Depreciation Furniture -Depreciation -Sale Electrical Fittings

Rs
101500 -12688 88813 50000 90000 -11250 78750

13500- Nil 1687.50 -11813 9000 -1125 36000 -4500 -31500 7875 Nil

Secured Loan Short Term

Nil Bank CC/OD Creditors (Bills Nil Payable)

Machinery -Depreciation -Sales Current Assets Loan & Advance (Deposits with M/S) Debtors (Bills 5000 -2500 receivables) - Paid Inventory (Cl. Stock) Bank & Cash

100000

2500

240000 183500

Total Liabilities 751,483 Total Assets * Liabilities towards owner

751,483

TOTAL ASSETS = TOTAL LIABILITIES FixedAssets + Current Assets Current Liabilities + Non Current Assets + Non Current Liabilities + Capital + Retained Earning (Reserve) Rs. 751,483 Rs. 751,483 -------------------------------------------------------------Total Assets Total Liabilities

Dr.

Profit & Loss Account for the year ended 31st March 2008 Particulars Amount(Rs.) Particulars 120,000 To Opening stock By Sales To Purchase To Expenses - Electricity
1,200,000

Cr. Amount(Rs.)
1,260,000

12,000

By Closing 240,000 Stock By Services 25,000 By Profit on 3,500 sale of machinery

18563 - Depreciation - Loss on sale of 6813 F&F 12,688 - amortization

To Profit & Loss A/c 158,438


1528500 1528500

Income Statement: Particulars Sales (Revenue) - Cost of Sales Opening Stock (+) Purchases (-) Closing Stock 120,000 1,200,000 - 240,000 -------------------Gross Margin - Operating Expenses 205,000 - 12,000 -------------------193,000 3,500 -38,064 -------------------158,437 NIL 158,437 Amount (Rs.) 1285,000 1,080,000

EBIDTA (Operating Profit) Non-operating income (-)Non-Operating Expenses

Net Income (-) Dividend Retained Earnings

Working Notes:
Dr. Cash Account for the year ended 31.03.2008 Cr.

Particulars To bal b/d To sales To services To machine sales To F&F sales To Debtors paid

Amount(Rs.) 73000 1260000 20000 35000 5000 2500

Particulars By Electricity By Creditors

Amount(Rs.) 12000 1200000

By Cash a/c 1395500

183500 1395500

Financial statements for the year ended 31.03.2007


Balance Sheet as on 31.03.2008 Liabilities Capital Owner's Capital Reatained earnings
320,000

Assets Land Shed -Depreciation


171,500 Electrical Fitting 100,00 0 10,000 10,000 - 1,000 15,000 - 1,500 50,000

90,000

-Depreciation F&F -Depreciation Creditors -Creditors paid


1,200,000 1,200,000 Nil

9,000 13,500

Machine -Depreciation Tools (-) W/D Deposit with M/s Inventory

40,000 - 4,000 5,000 - 5,000

36,000

Nil

100,000 120,000

Cash Total Liabilities


491,500 Total Assets

73,000 491,500

Dr. Particulars To purchases To electricity to Depreciation to tool written off Profit

Profit and loss account for the year ended 31.03.2008 Amount(Rs.) Particulars 1,200,000 By sales 12,000 By Services 16,500 5,000 By closing stock 171,500

Cr. Amount (Rs.) 1,260,000 25,000 120,000

1,405,000 Dr. Particulars To Capital To sales To services Cash Account Amount (Rs.) Particulars 270,000 By Shed BY Electrical 1,260,000 Fitting 25,000 By F&F By Machine BY Tools By deposit By electricity By creditors By balance carried down (c/d) 1,555,000

1,405,000 Cr. Amount (Rs.) 100,000 10,000 15,000 40,000 5,000 100,000 12,000 1,200,000

73,000 1,555,000

Assumptions:
1. 2. 3. 4. . Purchases are made for credit. Loose tools worth Rs. 5000 have been written off. Deposits to bike manufacturer are for a period longer than one year. Service calls provided have been treated as part of core business and hence included in sales in Income statement 5. Furniture and machinery is sold on the last date of the month. 6. Credit for the service calls is for the period of February to March. 7. Goodwill is expected to be amortized over 8 years

A Mini Case Name: Lijosh Jose 75 Your Roll No. 2012PGP065

A Doctor after finishing his study; started practicing from 1.4.2009. He invested amount equal to number in the above box multiply by 1000. He purchased dispensary items worth 50% of his investment and equipment for 250. During the year he provided service to 1600 patients. From each patient he charged uniform fee of 50. Generally a patient pay the service fee in cash, but patients number as mentioned in box have not paid the amount till end of the year. Half of the amount he thinks will not be recoverable. He employed one assistant at monthly salary of 200/. Generally salary is paid on the last day of month. Doctor assumes that electric consumption would be 100 per month, while the bill is actually settled in the subsequent month. At the end of year on 31.3.2010, he found that half of the dispensary items are in stock. He assumes that half of the stock will be of expired drugs having no saleable value. Doctor received an offer of employment at salary of 3000 per month. The employer also offered that, on doctors investment

incurred in his dispensary, employer would pay 5% interest annually. Should he accept the offer? Submit your answer by email before 4/8/2009, section A or B, Number in the box, profit, and cash at the end, should he accept the offer? [Prepare for your understanding: Opening & closing B/s, P & L A/c]

Solution: Balance Sheet as on 31.03.2010 Liabilities


Capital

Amount
75000

Assets
Equipment Debtors - Bad debts Closing Stock Cash

Amount
250 3750 9375 110000

O/S electrical 100 expenses P/L(Profit) Total Liabilities 46400 121500

Total Assets

12150

Profit and Loss Account for the Year ended 31.03.2010 Particulars
To Purchases To Bad debts To salary To electricity Paid during the year 1100 +o/s 100 By Profit

Amount(Rs.)
37500 1875 2,400 1,200

Particulars

Amount(Rs.)

To Sales 80000 To Closing Stock 9375 - Written off

46,400 89375

89375

Working Notes: Dr. Particulars To capital a/c To services Cash Account Amount(Rs.) 75,000 76,250 Particulars By purchases By equipment By salary By electricity By cash c/d Cr. Amount(Rs.) 37,500 250 2,400 1,100 1,10,000 1,51,250

1,51,250

Calculation of Income while receiving an offer of employment : Salary Earning on interest Total Amount Rs.36000 Rs. 3750

--------------Rs. 39,750

Conclusion: As he earns less money by accepting employment he should not accept the offer of employment. Reason: From the above calculations, we can see that when doctor starts practicing he makes a profit of Rs. 46,400 and if he accepts employment he earns Rs. 39,750.