Chapter-7

Accountancy

Learning Objectives:



Balance Sheet
A balance sheet presents a picture of the companys finances at the end of the financial year, and
the assets which it has acquired and which have not yet been consumed within the business.
A balance sheet has a special section called liabilities. This shows how much money has been
borrowed or invested and where it came from. The term balance means that all the money
invested or borrowed must be accounted for in another section, called assets.
Key aspects on a balance sheet
Fixed assets is there enough money secured in items which could be sold to raise capital?
Cash in bank is there enough to cover a short-term crisis?
Net current assets/liabilities if this figure is negative, the business hasnt enough money to pay
all the creditors in a reasonable time
Shareholders funds are these increasing? Shareholders want their investment to grow.
A balance sheet can be presented according to two basic formats:
Horizontal balance sheet
Vertical balance sheet
The balance sheet equation is usually stated as:
Assets = Debt (liabilities) +Equity
(uses of finance = sources of finance)


Debits and Credits
Assets
Increase (+) => debit
Decrease (-) => credit
Equity/Liabilities
Increase (+) => credit
Decrease (-) => debit
P&L accounts
Revenue => credit
Cost => debit


Classification of assets and liabilities

1. Fixed asset those assets which are acquired and held permanently in the business and are
used for the purpose of earning profits are called fixed assets e.g. - Land and Building, Furniture,
Machinery etc.
2. Current Assets assets which can be converted into cash within one year e.g. -B/R, stock,
debtors, cash etc.
3. Tangible assets definite assets that can be seen, touched and have volume. Example-
machinery, cash, stock etc.
4. Fictitious Assets which are fictitious in nature like debit balance of Profit and Loss a/c etc.
5. Intangible Assets which cannot be seen, touched and have no volume. Example goodwill,
patent right etc.
6. Fixed liability which is payable only on the termination of the business such as capital which
is a liability to the owner.
7. Long term liability- payable within 5 to 10 years Example Long term loans.
8. Current liability payable within a year Example B/P, short-term loan, creditors etc.


Sample Balance Sheet

Assets
Cash Rs. 4000
Accounts receivable Rs. 10000
Land Rs. 200000

Total assets Rs.214000

Liabilities
Accounts payable Rs. 50000
Notes payable Rs.150000

Total Liabilities Rs.200000

Owners Equity
Capital stock Rs. 11000
Retained earnings Rs. 3000
$140
Total liabilities
and owners equity Rs.214000


2. Company XYZ Balance Sheet

ASSETS:
Current Assets:

Cash: Rs. 20,000/-
Account Receivables: Rs. 5,000/-
Office Stationery: Rs. 5,000/-
Office rent: Rs. 18,000/-

____________________________________________
Total Current Assets: Rs. 48,000/-


Fixed Assets:
Machinery: Rs. 49 ,900/-
Accumulated depreciation Rs. 700/-

________________________________________
Net Fixed Assets: Rs. 49,200/-
______________________________________________

Total Assets: Rs. 97,200/-

LIABILITIES and EQUITY:

Liabilities:

Accounts payable: Rs. 3,000/-
Utilities payable: Rs. 2,500/-
Unearned Revenue: Rs. 800/-
Interest payable: Rs. 200/-
Notes Payable: Rs. 15,000/-

_______________________________________
Total Liabilities: Rs. 21,500/-

Common Stock: Rs. 73,500/-
Retained Earnings: Rs. 2,200/-

______________________________________________

Total Equity & Liabilities Rs. 97,200/- $200


Example: GAIL India Balance Sheet

Balance Sheet of GAIL India ------------------- in Rs. Cr. -------------------
Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds
Total Share Capital 1,268.48 1,268.48 1,268.48 1,268.48 1,268.48
Equity Share Capital 1,268.48 1,268.48 1,268.48 1,268.48 1,268.48
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 22,959.32 20,356.00 17,984.86 15,530.52 13,501.15
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Networth 24,227.80 21,624.48 19,253.34 16,799.00 14,769.63
Secured Loans 3,479.75 2,566.00 1,973.00 1,446.00 1,100.00
Unsecured Loans 4,884.77 2,323.35 0.00 34.38 100.13
Total Debt 8,364.52 4,889.35 1,973.00 1,480.38 1,200.13
Total Liabilities 32,592.32 26,513.83 21,226.34 18,279.38 15,969.76
Mar '13 Mar '12 Mar '11 Mar '10 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds
Gross Block 31,091.25 26,257.88 22,099.54 21,037.67 17,603.98
Less: Accum. Depreciation 11,383.80 10,400.26 9,695.97 9,106.57 8,553.66
Net Block 19,707.45 15,857.62 12,403.57 11,931.10 9,050.32
Capital Work in Progress 8,977.82 7,942.45 5,846.15 2,640.51 2,426.33
Investments 3,719.00 3,548.93 2,582.52 1,763.01 1,737.27
Inventories 1,535.33 1,419.74 855.11 631.70 601.41
Sundry Debtors 2,551.34 1,904.48 1,833.00 1,295.04 1,503.34
Cash and Bank Balance 2,357.94 931.33 2,131.35 121.73 133.25
Total Current Assets 6,444.61 4,255.55 4,819.46 2,048.47 2,238.00
Loans and Advances 5,835.31 7,480.13 6,359.75 7,800.99 6,833.03
Fixed Deposits 0.00 0.00 0.00 4,049.78 3,322.90
Total CA, Loans & Advances 12,279.92 11,735.68 11,179.21 13,899.24 12,393.93
Deffered Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 10,297.01 8,211.34 6,724.61 7,024.42 5,661.24
Provisions 1,794.86 4,359.51 4,060.50 4,930.06 3,976.85
Total CL & Provisions 12,091.87 12,570.85 10,785.11 11,954.48 9,638.09
Net Current Assets 188.05 -835.17 394.10 1,944.76 2,755.84
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 32,592.32 26,513.83 21,226.34 18,279.38 15,969.76

Contingent Liabilities 18,695.27 19,270.72 13,467.19 13,539.33 11,581.19
Book Value (Rs) 191.00 170.48 151.78 132.43 116.44




Source : Dion Global Solutions Limited






Economic Viability
Economic viability is a crucial element for any organization. It judges that the proposed project
will be:-
economically, i.e. money wise possible and
capable of earning monetary reward from the market.
The ability to generate income and the possibility of investing the required amount is based
upon:
a) Knowing well the description and use of the product / service.
b) Work out the financial inputs in terms of raw material resources required.
c) Decide the market size for the product.
d) Work out its costing pattern.
e) Determine the market size for the product.
f) Study in depth the market trends and the states of competition.
g) Work out selling arrangements and modes.

A balance sheet showing sound financial position may help the entrepreneur to get loans from
banks and financial institutions, to get good work force and to get good projects etc. for his
business.
(Ref.: C.B. Gupta, Entrepreneurship and Small Business)


Expected Costs
The amount of cost that has been expected or projected for a particular decision alternative or
agreement.
For example, expenditures for after-service repairs under product warranty are expected costs.
Proper matching of revenue and expenses requires that the estimated costs of providing these
warranties be recognized as an expense in the period of sale rather than of a later period when the
warranty costs may actually be paid.

A Sales Director who is in need to decide whether to install a new computer-based contact
management and sales processing system. The sales department currently has only a few
computers, and its salespeople aren't computer savvy. Extensive employee training will be
required to upgrade any system. The company is likely to experience a drop in sales during the
transition period.
While total expenses, including equipment, installation and training costs, lost productivity, are
estimated to be Rs 95,800, the company's analysis reveals the new computer system would
increase sales capacity, enhance efficiency and customer service and retention--financial benefits
the company pegs at Rs 2,50,000 annually. Based on the cost-benefit estimates, the company
would see a return on its investment in eight months.

Decision Making
Decision = choice made from available alternatives
Decision Making = process of identifying problems and opportunities and resolving them.
Decision making can be regarded as the mental processes resultingin the selection of a course of
action among several alternatives. Every decision making process produces a final choice. The
output can be an action or an opinion of choice.

Categories of Decisions
Programmed Decisions
Situations occurred often enough to enable decision rules to be developed and applied in the
future. These are made in response to recurring organizational problems
Nonprogrammed Decisions
They are in response to unique, poorly defined and largely unstructured, and have important
consequences to the organization.

Components for Decision Making
Certainity
All the information the decision maker needs is fully available
Risk
Decision has clear-cut goals, good information is available and future outcomes associated with
each alternative are subject to chance
Uncertainty
Managers know which goals they wish to achieve information about alternatives and future
events is incomplete managers may have to come up with creative approaches to alternatives.
Ambiguity
By far the most difficult decision situation goals to be achieved or the problem to be solved is
unclear alternatives are difficult to define information about outcomes is unavailable

Eight Steps of Decision Making
Identification of problem
Identification of decision Criteria
Allocating weight to criteria
Develop alternatives
Analysis of Alternatives
Selection of alternatives
Implementation of the best alternatives
Evaluation of decision effectiveness

Step 1 - Identifying a Problem
Problem - discrepancy between an existing and a desired state of affairs
It must be such that, it exerts pressure to act and the manager is unlikely to characterize a
situation as a problem unless she/he has resources necessary to act.
Step 2 - Identifying Decision Criteria
Decision criteria - whats relevant in making a decision
Step 3 - Allocating Weights to the Criteria
Decision maker must weight the criteria to give them appropriate priority in the decision
Step 4 - Developing Alternatives
Viable alternatives must be listed that could resolve the problem without evaluating them.
Step 5 - Analyzing Alternatives
Each alternative is evaluated against the criteria
Step 6 - Selecting an Alternative
Choosing the best alternative from among those considered
Step 7 - Implementing the Alternative
Implementation - conveying the decision to those affected by it and getting their commitment to
it. Participation in decision-making process inclines people to support the decision.The decision
may fail if it is not implemented properly
Step 8 - Evaluating Decision Effectiveness
Determine whether the problem is resolved

Source: Prentice Hall, 2002





Questions:
What is a Balance Sheet? Why it is prepared?