AccounLlng ls Lhe language of buslness

Scope of account|ng keeplng sysLemaLlc records (LransacLlons of buslness are properly recorded classlfled and
summarlzed) proLecLlng Lhe buslness properLles (proLecL Lhe properLles of buslness by malnLalnlng proper records
of varlous asseLs and Lhus enabllng Lhe managemenL Lo exerclse proper conLrol over Lhem) CommunlcaLlng Lhe
resulLs communlcaLe flnanclal lnformaLlon ln respecL of neL asseLs llablllLles ) MeeLlng legal requlremenLs (Lo meeL
Lhe laws such as companles acL lncome Lax acL eLc)
1ypes of lnformaLlon quanLlLaLlve and non quanLlLaLlve lnformaLlon CuanLlLaLlve lnformaLlon can agaln be
classlfled ln Lo accounLlng lnfo and non accounLlng lnfo AccounLlng lnformaLlon ls agaln classlfled ln Lo operaLlon
lnformaLlon flnanclal accounLlng managemenL accounLlng cosL accounLlng CperaLlon lnfo ls needed Lo conducL
day Lo day acLlvlLles for eg wages pald and payable sLock of producLs sLock of raw maLerlals eLc llnanclal
accounLlng ls Lhe recordlng of LransacLlons for a buslness enLerprlse and perlodlc preparaLlon of reporLs from such
reporLs ManagemenL accounLlng uses boLh Lhe pasL buslness daLa and esLlmaLed daLa ln asslsLlng managemenL ln
dally operaLlons and ln plannlng for fuLure operaLlons lL ls frequenLly concerned wlLh ldenLlfylng alLernaLlve
courses of acLlon and Lhen helplng Lo selecL Lhe besL one CosL accounLlng emphaslzes Lhe deLermlnaLlon and Lhe
conLrol of cosLs lL ls concerned wlLh manufacLurlng cosL and Lo assemble and lnLerpreL cosL daLa
I|nanc|a| account|ng and management account|ng
llnanclal accounLlng ls for servlng all parLles exLernal Lo Lhe operaLlng responslblllLy of Lhe flrm ManagemenL
accounLlng Lo serve lnLernal parLles who Lakes care of Lhe operaLlonal needs of Lhe flrm
Iunct|ons of management account|ng
ModlflcaLlon of daLa recordlng of buslness LransacLlon supplles accounLlng daLa whlch supporLs for declslon
maklng valldaLlng Lhe daLa Lo make a qulck and rellable declslon accuracy ln daLa ls needed lL ls Lhe funcLlon of
managemenL accounLlng Lo provlde accuraLe daLa Analyze and lnLerpreLaLlon of daLa daLa as such are mere flgures
need Lo be analyzed and lnLerpreLed quallLaLlvely and quanLlLaLlvely CommunlcaLlng Lhe daLa Lhe collecLed and
lnLerpreLed daLa musL be communlcaLed Lo Lhose who are beneflLlng from lL
Cb[ecLlves of managemenL accounLlng prlmary ob[ecLlve ls Lo help managemenL 1o help ln plannlng eg lorecasLs
abouL Lhe producLlon selllng lnflow and ouLflow of cash lL helps Lo analyze Lhe beneflLs from alLernaLe acLlons 1o
asslsL ln organlzlng budgeLs and esLabllshlng cosL cenLers helps Lo dellver resources Lo varlous deparLmenLs and
delegaLes respecLlve responslblllLles Lo ensure Lhelr proper uLlllzaLlon 1o help ln conLrolllng conLrol ls Lhe
sysLemaLlc examlnaLlon of buslness resulLs wlLh a vlew Lo ensure LhaL acLual resulLs have been accordlng Lo Lhe
planned one lf devlaLed correcLlve acLlons are suggesLed 1o help ln coordlnaLlon helps ln overall coordlnaLlon of
varlous operaLlonal acLlvlLles lL ls done by preparlng funcLlonal budgeLs and lnLegraLlng Lhem 1o help ln declslon
maklng Lechnlques of marglnal cosLlng breakeven analysls caplLal budgeLlng all helps ln declslon maklng age18
lasL
Ut|||ty of management account|ng
ManagemenL accounLlng brlngs sysLemaLlc regularlLy ln Lhe buslness acLlvlLles
lf helps Lo compare acLual performance wlLh expecLed and suggesL remedlal acLlon ln varlances
lfferenL Lypes of conLrols resulLs ln cosL reducLlon
lL brlngs coordlnaLlon among deparLmenLs
ConLrol funcLlon ln lL ellmlnaLes wasLages producLlon defecLlves and lncrease workers efflclency
lL helps Lo remove sub sLandards whlch causes sLalned relaLlon beLween managemenL and employees
eLurn on caplLal employed ls maxlmlzed

|m|tat|ons of management account|ng
1) MgL AccounLlng ls based on daLa of llnanclal and CosL AccounLlng PlsLorlcal daLa ls used Lo make fuLure
declslons 1he correcLness and effecLlveness of managerlal declslons wlll depend upon Lhe quallLy of daLa on whlch
Lhese declslons are based lf flnanclal daLa ls noL rellable Lhen MgL AccounLlng wlll noL provlde correcL analysls lor
example aLlo analysls uslng hlsLorlcal flnanclal numbers
2) 1he appllcaLlon of MgL AccounLlng wlll be useful Lo person connecLed wlLh eclslon maklng process as Lhey have
proper undersLandlng of MgL AccounLlng and relaLed sub[ecLs such as SLaLlsLlcs Lconomlcs rlnclples of MgL
Lnglneerlng eLc
3) ln MgL AccounLlng declslon maklng based on facLs and flgures Lhere ls a Lendency Lo make declslons lnLulLlvely
MgL may avold lengLhy courses of decldlng Lhlngs and may Lake an easy course of arrlvlng aL declslon uslng lnLulLlve
lnLerlLlve declslons llmlL Lhe usefulness of MgL AccounLlng
4) 1he Lools and Lechnlques of MgL AccounLlng provlde only lnformaLlon and noL declslon eclslons and Lhelr
lmplemenLaLlons are done by MgL So lL has supplemenLary servlce funcLlon and has no flnal say ln Laklng declslons
and Lhelr lmplemenLaLlons
3) 1he lnLerpreLaLlon of flnanclal lnformaLlon depends upon Lhe personal [udgmenL of Lhe lnLerpreLer ersonal
pre[udlces and blas affecL Lhe ob[ecLlvely of declslons

I|nanc|a| Accnt Vs Management Accnt
I|nanc|a| Management
rlmary ob[ecLlve ls Lo make perlodlcal reporLs Lo
share holders credlLors denLure holders and
governmenL
lnformaLlon Lo lnLernal managemenL
Assess buslness as a whole Accesslng dlfferenL deparLmenLs
Concerned wlLh hlsLorlcal records 1ells whaL
happened ln Lhe pasL
Concerned wlLh fuLure plans and pollcles 8elng a
declslon maklng process lL focuses Lhe fuLure
lurnlshlng lnformaLlon Lakes more Llme lurnlshlng lnformaLlon Lakes less Llme Lhan flnanclal
accounLlng
greaLer emphasls on preclslon of daLa Less emphasls on preclslon of daLa
ecords are malnLalned ln Lhe form of personal
properLy and nomlnal accounLs
CosLs and revenues are mosLly reporLed by
responslblllLy cenLers or cosL cenLers
Cenerally accepLed accounLlng prlnclples (CAA) are
followed
CAA ls noL mandaLory
llnanclal accounLlng ls compulsory noL compulsory
AdopLs 12 monLhs reporLlng perlod eporLs for shorLer duraLlon

Management account|ng Vs cost account|ng
1he Lerms managemenL accounLlng and cosL accounLlng are consldered Lo be lnLerchangeable 1hls ls accepLed slnce
Lhe Lwo flelds are lnLerrelaLed Moreover one ls a parL of Lhe oLher 8esldes Lhls cosL and managemenL accounLs
are uLlllzed ln Lhe same conLexL 1he lnformaLlon avallable from cosL accounLs are needed by Lhe managemenL also
especlally for sLock valuaLlon order assessmenL and prlclng declslons
ManagemenL accounLlng lncorporaLes all Lhe levels and funcLlons of managemenL CosL accounLlng ls more
speclflcally relaLed Lo cosL deLermlnaLlon budgeL creaLlon and varlance analysls Moreover Lhe daLa uLlllzed for
cosLlng could be boLh of flnanclal and nonflnanclal Lype Powever Lhe managemenL accounLs uLlllze Lhe
lnformaLlon provlded by cosLlng and encompass flnanclal as well as nonflnanclal daLa
ln general managemenL lnformaLlon needs less deLall as compared Lo cosL lnformaLlon 1hls ls due Lo Lhe facL LhaL
managemenL reporLs are summarlzed and sourced Lhrough dlfferenL funcLlonal areas on Lhe basls of Lhe
levels/needs of managemenL Moreover managemenL daLa can lnclude speclfled knowledge and skllls whlle cosL
accounLlng uLlllzes speclfled Lechnlques
CosL accounLs offer a large amounL of lnformaLlon and daLa for managemenL accounLlng Moreover Lhe cosL
accounLlng funcLlon/deparLmenL ls lnvolved ln collecLlon of cosL daLa analysls of cosL behavlor preparlng flnanclal
sLaLemenLs and aLLrlbuLlng cosLs Lo unlLs/ob[ecLs/deparLmenLs lL ls usually assumed LhaL cosLlng deals only wlLh
cosLs lL also lnvolves LreaLmenL of proflLs and revenue

ln Lhe absence of cosL funcLlon conLrol elemenL would become nonfuncLlonal CosLlng enables managers Lo draw
comparlson beLween acLual cosLs and budgeLed cosLs 1hls faclllLaLes declslonmaklng and recLlflcaLlon of
lrregularlLles ue Lo a crossfuncLlonal naLure cosL accounLlng ls appllcable Lo oLher deparLmenLs besldes
producLlon or manufacLurlng 1herefore lL ls useful Lo all Lhe unlLs or deparLmenLs

ue Lo Lhe dlfference beLween cosL accounLlng and managemenL accounLlng lL ls more approprlaLe Lo refer Lo Lhem
collecLlvely as CosL and managemenL accounLlng 1he Lerm hlghllghLs Lhe relaLlon beLween Lhese Lwo areas buL
slmulLaneously recognlzes Lhe dlfference beLween Lhem also 8oLh cosL accounLlng and managemenL accounLlng are
useful for plannlng conLrol and declslonmaklng purposes
ln Lhe followlng polnLs of dlfferenLlaLlon for cosL accounLlng vs managerlal accounLlng a sLandard example of sLeel
mllls has been used SLeel ouLpuL ls measured ln Lonnes

racLlcally speaklng cosL accounLlng lnvolves compuLaLlon of cosL per unlL wlLh dlfferenL angles lor example cosL
accounLlng ln a sLeel mlll wlll prlnclpally lnvolve Lhe compuLaLlon of cosL of one Lonne of sLeel lor Lhls a foremans
salary LhaL conLrlbuLed Lo Lhe producLlon of LhaL Lonne of sLeel ls compuLed 1he coke power workmans salary
premlses and facLory machlnery cosL are some oLher lLems LhaL are added Lo prlme cosLs (cosL of raw maLerlal
whlch ln Lhls case ls lron and oLher meLals) Managerlal accounLlng goes one sLep forward and makes a furLher
comparaLlve analysls and sLaLemenLs of flgures LhaL are derlved by flnanclal accounLlng and cosLlng CLher
managerlal accounLlng funcLlons lnclude Lhe analysls of every posslble LransacLlon and pro[ecLlng Lhe Lrend of
LransacLlons 8aslcally managerlal accounLlng facLlons deal wlLh lnLernal and exLernal forces of LransacLlons LhaL
lnfluenced Lhe buslnesses enLlLy Lo flnd ouL answers Lo Lhe quesLlons such as whaL ls Lhe moneLary producLlvlLy of
Lhe facLory? or how cosLly has raw maLerlal become? or where can we cuL down on cosLs? or how can we
maxlmlze proflL? or where does Lhe markeL or our compeLlLors sLand? lor a slmllar dlscusslon you may also refer
Lo cosL accounLlng vs flnanclal accounLlng

Cne greaL commenL regardlng cosL accounLlng vs managerlal accounLlng LhaL summarlzes Lhe enLlre essay was
flnanclal accounLanLs deal wlLh recordlng processlng and presenLlng LransacLlons ln ledger books and books of
accounLs CosL accounLanLs pour over Lhe ledger books Lo deLermlne Lhe per unlL cosL and presenL lL properly ln Lhe
cosL sheeL Managerlal accounLs chew Lhe ends of penclls pour over boLh ledger books and cosL sheeLs Lo
deLermlne where Lhe buslness exacLly sLands
C8!LC1lvLS Cl MAnACLMLn1 ACCCun1lnC 1he ob[ecLlves of ManagemenL AccounLlng are 1he compuLaLlon of
plans and budgeLs coverlng all aspecLs of Lhe buslness Lxample producLlon selllng dlsLrlbuLlon research and
flnance 1he sysLemaLlc allocaLlon of responslblllLles for lmplemenLaLlon of plans and budgeLs 1he organlzaLlon for
provldlng opporLunlLles and faclllLles for performlng responslblllLles 1he analysls of all LransacLlons flnanclal and
physlcal Lo enable effecLlve comparlson Lo be made beLween Lhe forecasLs and acLual performance 1he
presenLaLlons of up Lo daLe lnformaLlon aL frequenL lnLervals Lo managemenL ln Lhe form of operaLlng sLaLemenLs
1he sLaLlsLlcal lnLerpreLaLlon of such sLaLemenLs ln a manner whlch wlll be of uLmosL asslsLance Lo managemenL ln
plannlng fuLure pollcy and operaLlon SCCL Cl MAnACLMLn1 ACCCun1lnC 1he followlng facLs of managemenL
accounLlng lndlcaLe Lhe scope of Lhe sub[ecL llnanclal AccounLlng 1hls lncludes recordlng of exLernal LransacLlons
coverlng recelpLs and paymenLs of cash recordlng of lnvenLory and sales and recognlLlon of llablllLles and seLLlng up
of recelvables lL also covers preparaLlon of regular flnanclal sLaLemenLs WlLhouL a properLy deslgned accounLlng
sysLem managemenL cannoL obLaln full conLrol and coordlnaLlon CCS1 ACCCun1lnC lL acLs as a supplemenL Lo
flnanclal accounLlng lL ls concerned wlLh Lhe appllcaLlon of cosL Lo [ob producL process and operaLlon lL plays an
lmporLanL role ln asslsLlng Lhe creaLlon of pollcy and Lhe operaLlon of underLaklng 8uCL1lnC ACCCun1lnC
1hese are concerned wlLh Lhe preparaLlon of flxed and flexlble budgeLs cash forecasLs proflL and loss forecasLs eLc
ln cooperaLlon wlLh operaLlng and oLher deparLmenLs ManagemenL ls helped by Lhem CosL conLrol procedure lL
ls concerned wlLh Lhe esLabllshmenL and operaLlon of lnLerneL conLrol and Lhe preparaLlon of lnLernal reporL ln
order Lo converL Lhe budgeL lnLo operaLlon servlce managemenL ls helped by Lhem by measurlng acLual resulLs
agalnsL budgeLary sLandard of performance SLaLlsLlcal meLhods 1hese are concerned wlLh generaLlng sLaLlsLlcal
and analyLlcal lnformaLlon ln Lhe form of graphs charLs eLc Lo all deparLmenLs of Lhe organlsaLlon ManagemenL
need noL wasLe Llme ln undersLandlng Lhe facLs and more Llme and energy can be uLlllzed ln drawlng sound plans
and concluslons Legal provlslons Many managemenL declslons depend upon Lhe provlslons of varlous laws and
sLaLuLory requlremenLs lor example Lhe declslon Lo make a fresh lssue of shares depends upon Lhe permlsslon of
conLroller of caplLal lssues Slmllarly Lhe form of publlshed accounLs Lhe exLernal audlL Lhe auLhorlLy of floaL loans
Lhe compuLaLlon and verlflcaLlon of lncome flllng Lax reLurns maklng Lax paymenLs for exclse sales payroll lncome
eLc all depend on varlous rules and regulaLlons passed from Llme Lo Llme CrganlsaLlon and meLhods 1hey deal
wlLh organlsaLlon reduclng Lhe cosL and lmprovlng Lhe efflclency of accounLlng as also of offlce operaLlons lncludlng
Lhe preparaLlon and lssuance of accounLlng and oLher manuals where Lhese wlll prove useful lL ls clear LhaL
managemenL accounLlng has a vlLal relaLlon wlLh all Lhose areas explalned above lunC1lCnS Cl MAnACLMLn1
ACCCun1lnC 1he funcLlons of managemenL accounLlng may be sald Lo lnclude all acLlvlLles connecLed wlLh
collecLlng processlng lnLerpreLlng and presenLlng lnformaLlon Lo managemenL 1he managemenL accounLlng
saLlsfles Lhe varlous needs of managemenL for arrlvlng of approprlaLe buslness declslons 1hey may be descrlbed as
follows ModlflcaLlon of daLa Analysls and lnLerpreLaLlon of daLa laclllLaLlng managemenL conLrol lormulaLlon of
buslness budgeLs use of quallLaLlve lnformaLlon SaLlsfacLlon of lnformaLlonal needs of managemenL AvAn1ACLS
Cl MAnACLMLn1 ACCCun1lnC 1he followlng advanLages are clalmed for lL 1he maln conLrlbuLlon of managemenL
accounLlng ls Lhe ellmlnaLlon of lnlLlaLlve managemenL WlLh Lhe help managemenL accounLlng Lhe buslness
acLlvlLles are regulaLed sysLemaLlcally by means of efflclenL plannlng and organlsaLlon Lhereby avoldlng over worklng
ln busy perlods and slackness ln slump perlods lL enables Lhe buslness Lo geL Lhe maxlmum reLurn on caplLal by
helplng lL ln plannlng dlsLrlbuLlon and conLrolllng acLlvlLles lL helps Lhe managemenL Lo lmprove lLs servlce Lo lLs
cusLomers by resorLlng Lo a conLlnuous meLhod of comparlng Lhe resulLs wlLh Lhe sLandards lL helps ln lmprovlng
Lhe relaLlons beLween Lhe managemenL and labour by avoldlng unreasonable sLandard of work whlch ls Lhe maln
cause of labour unresL LlMl1A1lCnS Cl MAnACLMLn1 ACCCun1lnC ComparaLlvely managemenL accounLlng ls a
new dlsclpllne and ls sLlll very much ln a sLaLe of evoluLlon 1herefore lL comes across Lhe same lmpedlmenLs as a
relaLlvely new dlsclpllne has Lo face sharpenlng of analyLlcal Lools and lmprovemenLs of Lechnlques creaLlng
uncerLalnLy abouL Lhelr appllcaLlon 1here ls always a LempLaLlon Lo make an easy course of arrlvlng aL declslons by
lnLulLlon raLher Lhan Laklng Lhe dlfflculLy of sclenLlflc declslon maklng lL derlves lLs lnformaLlon from flnanclal
accounLlng cosL accounLlng and oLher records 1herefore sLrengLh and weakness of managemenL accounLlng
depends upon Lhe sLrengLh and weakness of baslc records lL ls one Lhlng Lo record lnLerpreL and evaluaLe an
ob[ecLlve hlsLorlcal evenL converLed lnLo money flgures whlle lL ls someLhlng qulLe dlfferenL Lo perform Lhe same
funcLlon ln respecL of pasL posslblllLles fuLure opporLunlLles and unquanLlflable slLuaLlon LxecuLlon of Lhe
concluslons drawn by Lhe managemenL accounLanL wlll noL occur auLomaLlcally 1herefore a conLlnuous efforL Lo
achleve Lhe goal musL be made aL all levels of managemenL ManagemenL AccounLlng wlll noL replace Lhe
managemenL and admlnlsLraLlon lL ls only a Lool of managemenL Cf course lL wlll save Lhe managemenL from
belng lmmersed ln accounLlng rouLlne and process Lhe daLa and puL before Lhe managemenL Lhe facLs devlaLlng
from Lhe sLandard ln order Lo enable Lhe managemenL Lo Lake declslon by Lhe rule of excepLlon

Account|ng Concepts
8uslness enLlLy concepL buslness enLerprlse ls dlsLlncL from lLs owner CannoL mlngle buslness accounLs and
personal accounLs Lg lf 3000 ls pald as owner's house Lax Lhen lL should be deducLed from Lhe caplLal conLrlbuLed
by Lhe owner
Colng concern concepL 1he golng concern concepL ln accounLlng ls an assumpLlon LhaL Lhe buslness wlll conLlnue
Lo exlsL for Lhe foreseeable fuLure AccounLanLs adopL Lhe golng concern concepL so Lhey can prepare reallsLlc
flnanclal reporLs WlLhouL Lhe golng concern concepL accounLanLs would have Lo wrlLe off all asseLs ln Lhe currenL
perlod lncludlng long Lerm asseLs LhaL sLlll have an economlc beneflL for fuLure perlods Lhe golng concern concepL
assumes LhaL Lhe buslness wlll remaln ln exlsLence long enough for all Lhe asseLs of Lhe buslness Lo be fully uLlllzed
uLlllzed asseLs means obLalnlng Lhe compleLe beneflL from Lhelr earnlng poLenLlal
Money MeasuremenL ConcepL
1he concepL of money measuremenL sLaLes LhaL only Lhose LransacLlons whlch can be expressed ln Lerms of money
such as purchase of goods or paymenL of expenses or recelpL of lncome eLc are Lo be recorded ln Lhe book of
accounLs All oLher LransacLlons whlch cannoL be expressed ln moneLary Lerms for example Lhe appolnLmenL of a
manager healLh of Lhe owner of Lhe company or sLrlke ln Lhe company by workers are noL recorded ln Lhe books of
accounLs
AnoLher lmporLanL aspecL of Lhe concepL of money measuremenL ls LhaL Lhe records of Lhe LransacLlons are Lo be
kepL noL ln Lhe physlcal unlLs buL ln Lhe moneLary unlL lor example a company may have a facLory on a plece of
land measurlng 3 acres 10 machlnery 30 personal compuLers eLc Slnce Lhese asseLs are expressed ln dlfferenL
unlLs so cannoL be added Lo glve any meanlngful lnformaLlon abouL Lhe LoLal worLh of buslness Pence for
accounLlng purpose Lhese are Lo be shown ln money Lerms and noL ln physlcal Lerms
Powever money measuremenL assumpLlon ls noL free from llmlLaLlons ue Lo lnflaLlon Lhe value of money does
noL remaln Lhe same over a perlod of Llme 1herefore ln Lhe balance sheeL when we add dlfferenL asseLs boughL aL
dlfferenL polnLs of Llme we are ln facL addlng dlverse values Slnce Lhe lnflaLlon ls noL accounLed for ln Lhe book of
accounLs Lhe accounLlng daLa does noL reflecL Lhe Lrue and falr value of Lhe company
CosL concepL Accordlng Lo Lhls concepL Lhe asseL ls recorded ln Lhe books of accounLs aL Lhe prlce pald for lL and noL
aL lLs markeL value lor example lf a buslness enLlLy purchases a bulldlng valued aL $13 mllllon from a frlend for $12
mllllon Lhls asseL would be recorded aL $12 mllllon and noL aL $ 13 mllllon because for Lhe buslness enLlLy Lhe cosL
was $12 mllllon and noL $13 mllllon now Lhe basls for all fuLure LransacLlons relaLlng Lo Lhls bulldlng would also be
aL lLs cosL le $12 mllllon lor example 1he depreclaLlon would be charged on $12 mllllon and noL on $13 mllllon
Slmllarly when Lhe asseL ls sold ln fuLure Lhe proflL or loss on sale would be based on Lhe cosL prlce acLually pald for
lL Slnce Lhe orlglnal or acqulslLlon cosL relaLes Lo pasL lL ls also referred Lo as hlsLorlcal cosL

ual aspecL concepL ual aspecL ls Lhe foundaLlon or baslc prlnclple of accounLlng lL provldes Lhe very basls of
recordlng buslness LransacLlons ln Lhe books of accounLs 1hls concepL assumes LhaL every LransacLlon has a dual
effecL le lL affecLs Lwo accounLs ln Lhelr respecLlve opposlLe sldes 1herefore Lhe LransacLlon should be recorded aL
Lwo places lL means boLh Lhe aspecLs of Lhe LransacLlon musL be recorded ln Lhe books of accounLs lor example
goods purchased for cash has Lwo aspecLs whlch are (l) Clvlng of cash (ll) ecelvlng of goods 1hese Lwo aspecLs are
Lo be recorded 1hus Lhe duallLy concepL ls commonly expressed ln Lerms of fundamenLal accounLlng equaLlon
AsseLs LlablllLles + CaplLal Lhe above accounLlng equaLlon sLaLes LhaL Lhe asseLs of a buslness are always equal Lo
Lhe clalms of owner/owners and Lhe ouLslders 1hls clalm ls also Lermed as caplLal or owner's equlLy and LhaL of
ouLslders as llablllLles or credlLors' equlLy 1he knowledge of dual aspecL helps ln ldenLlfylng Lhe Lwo aspecLs of a
LransacLlon whlch helps ln applylng Lhe rules of recordlng Lhe LransacLlons ln books of accounLs 1he lmpllcaLlon of
dual aspecL concepL ls LhaL every LransacLlon has an equal lmpacL on asseLs and llablllLles ln such a way LhaL LoLal
asseLs are always equal Lo LoLal llablllLles
AccounLlng erlod ConcepL
A flxed equal perlod of Llme ascerLalned Lo reporL Lhe flnanclal performance of an enLerprlse lf Lhls flxed equal
perlod of Llme ls noL deLermlned Lhe buslness based on Lhe golng concern concepL can lasL a qulLe a long perlod of
Llme whlch wlll render Lhe analysls of Lhe flnanclal sLaLemenL lmpracLlcal normally Lhls flxed equal perlod may be
of any lengLh of Llme buL perlods of one year ln lengLh are Lhe mosL commonly used We can say LhaL accounLlng
perlod ls a convenlenL way of dlvldlng up Lhe llfe of Lhe buslness lnLo smaller unlLs of Llme Lo enable lnvesLors and
oLher users of Lhe flnanclal sLaLemenL Lo assess Lhe flnanclal performance 1he normal Lwelve monLhs accounLlng
perlod ls also Lo colnclde wlLh Lhe LaxaLlon perlod (Lwelve monLhs)
erlodlc maLchlng of cosL and revenues
lncome deLermlnaLlon or measuremenL of lncome ls a maLLer of maLchlng Lhe revenues earned durlng Lhe
accounLlng perlod wlLh Lhe expenses LhaL were lncurred ln Lhe process of earnlng Lhese evenues AccounLanLs call
Lhelr aLLempL Lo maLch revenues agalnsL Lhe approprlaLe expenses as Lhe maLchlng concepL Cnce Lhe evenues are
reallzed (le recognlzed) Lhe nexL sLep ls Lo allocaLe lL among Lhe dlfferenL accounLlng perlods lf necessary and Lhls
ls achleved wlLh Lhe help of Lhe accrual concepL whlch relaLed Lhe expenses Lo Lhe evenues for a glven accounLlng
perlod lL means LhaL afLer Lhe evenues have been deLermlned or measured for a glven accounLlng perlod Lhe
expenses lncurred Lo earn LhaL evenue musL be deducLed Lo calculaLe Lhe neL lncome 1he Lerm maLchlng
Lherefore refers Lo a close relaLlonshlp LhaL exlsLs beLween cerLaln explred cosLs (expenses) and revenues reallzed
as a resulL of lncurrlng Lhese cosLs
1he essence of maLchlng ls LhaL evenues and lncomes shown ln an lncome SLaLemenL musL belong Lo Lhe
AccounLlng perlod for whlch Lhe lncome ls Lo be calculaLed or measured Cbvlously Lhe accrual concepL ls ofLen
descrlbed as maLchlng concepL
1here ls noL much of a dlfflculLy when Lhe Lxpenses can be dlrecLly assoclaLed wlLh Lhe revenues buL Lralned
[udgmenL ls frequenLly needed for esLlmaLes where dlrecL assoclaLlon ls noL posslble ln Lhls caLegory are lncluded
Lhe cosLs of Lhe flxed asseLs 1he cosLs ln Lhese cases musL be carefully allocaLed wlLh Lhelr servlce beneflLs 1here ls
sLlll anoLher caLegory of expenses whlch cannoL be Lraced Lo parLlcular goods or servlces generaLlng Lhe evenue
lor Lxample Lhe salarles of Lhe manager or Lhe admlnlsLraLlve sLaff 1he besL course ls Lo charge Lhese expenses ln
Lhe lncome SLaLemenL of Lhe AccounLlng perlod ln whlch Lhey are lncurred Such expenses are deslgnaLed as perlod
expenses as dlsLlncL from Lhose expenses known as producL expenses whlch can be relaLed Lo producLs
1he [usLlflcaLlon for Lhe maLchlng concepL arlses from Lhe accounLlng perlod concepL 1he proflLs of Lhe accounLlng
perlod are calculaLed afLer deducLlng Lhe cosLs of Lhe perlod from Lhe evenues of Lhe same perlod Any cosLs whlch
cannoL be assoclaLed wlLh Lhe fuLure revenues are wrlLLen off as Lhey are lncurred

eallsaLlon concepL 1he lncome or Lhe proflL of a buslness ls deflned as 1he lncrease ln neL AsseLs measured by
excess of evenues over Lxpenses" 1he Lerm neL AsseLs means excess of AsseLs over LlablllLles
evenues resulL from Lhe sale of goods and servlces and lnclude galns from Lhe sale and exchange of asseLs oLher
Lhan lnvenLorles lnLeresL and dlvldends earned on lnvesLmenLs and oLher lncreases ln owners' equlLy durlng a
perlod oLher Lhan caplLal conLrlbuLlon and ad[usLmenLs
A ma[or problem ln Lhe deLermlnaLlon or measuremenL of lncome ls relaLed Lo Lhe polnL aL whlch Lhe revenue ls
recognlzed lL ls posslble Lo recognlze Lhe revenue aL dlfferenL polnLs ln Lhe producLlon/selllng levels Lxample
When Lhe goods are produced
When an order ls recelved from a cusLomer
When Lhe goods are dellvered Lo a cusLomer and accepLed by hlm
When cash ls recelved from Lhe cusLomer
lL musL be clearly borne ln mlnd LhaL a parLlcular polnL chosen would have a slgnlflcanL effecL on Lhe LoLal revenues
of a glven accounLlng perlod
eallzaLlon concepL ln AccounLlng ls formulaLed Lo solve Lhe problem of revenue recognlLlon 1hls concepL sLaLes
LhaL Lhe revenue should be recognlzed only when lL has been reallzed 1he essenLlal meanlng of eallzaLlon ls LhaL
revenue or Lhe llablllLy should noL be recognlzed ln Lhe books of accounLs unless a change ln Lhe asseL or llablllLy has
become sufflclenLly deflnlLe and ob[ecLlve for recognlLlon ln Lhe books of accounL
1hus reallzaLlon means as Lo when a LransacLlon glves a legal rlghL Lo Lhe recelpL of money 1he essence of
reallzaLlon concepL Lhen cerLalnly ls Lhe Llmlng of Lhe revenue recognlLlon LhaL ls when Lhe revenue becomes Lhe
revenue of Lhe buslness enLerprlse
normally reallzaLlon occurs when Lhe followlng four condlLlons are saLlsfled
1he earnlng process ls almosL compleLe
lL means LhaL Lhose buslness acLlvlLles whlch are belng underLaken by Lhe flrm Lo earn evenue such as Lhe purchase
or Lhe manufacLurlng of goods (or renderlng of servlces) are subsLanLlally compleLe ln Lhe sense LhaL Lhe necessary
cosLs have been lncurred or may be esLlmaLed ob[ecLlvely such as Lhe cosL of producL warranLles
1here ls an exchange of goods/servlces for a prlce
1hls should be beLween Lhe enLerprlse and some Lhlrd or unrelaLed parLy ln whlch Lhe ownershlp ln goods passes Lo
Lhe buyer for a conslderaLlon lL means LhaL Lhe goods have been Lransferred Lo Lhe buyer and are accepLed by hlm
or servlces have been performed Lo Lhe saLlsfacLlon of Lhe cllenL
1he amounL of evenue can be ob[ecLlvely deLermlned because Lhere ls a deflnlLe sale prlce
1here ls a reasonable cerLalnLy LhaL Lhe amounLs recelvable from Lhe acLlvlLles wlll be recelved Lhough a reasonable
provlslon may be made ln respecL of sales and sales reLurns

AccounLlng ConvenLlons
1he Lerm convenLlons lncludes Lhose cusLoms or LradlLlons whlch gulde Lhe accounLanLs whlle preparlng Lhe
accounLlng sLaLemenLs 1he followlng are Lhe lmporLanL accounLlng convenLlons
ConvenLlon of lsclosure
1he dlsclosure of all slgnlflcanL lnformaLlon ls one of Lhe lmporLanL accounLlng convenLlons lL lmplles LhaL accounLs
should be prepared ln such a way LhaL all maLerlal lnformaLlon ls clearly dlsclosed Lo Lhe reader 1he Lerm dlsclosure
does noL lmply LhaL all lnformaLlon LhaL anyone could deslre ls Lo be lncluded ln accounLlng sLaLemenLs 1he Lerm
only lmplles LhaL Lhere ls Lo a sufflclenL dlsclosure of lnformaLlon whlch ls of maLerlal ln LrusL Lo proprleLors presenL
and poLenLlal credlLors and lnvesLors 1he ldea behlnd Lhls convenLlon ls LhaL anybody who wanLs Lo sLudy Lhe
flnanclal sLaLemenLs should noL be mlsled Pe should be able Lo make a free [udgmenL 1he dlsclosures can be ln Lhe
way of fooL noLes WlLhln Lhe body of flnanclal sLaLemenLs ln Lhe mlnuLes of meeLlng of dlrecLors eLc
ConvenLlon of MaLerlallLy
lL refers Lo Lhe relaLlve lmporLance of an lLem or even Accordlng Lo Lhls convenLlon only Lhose evenLs or lLems
should be recorded whlch have a slgnlflcanL bearlng and lnslgnlflcanL Lhlngs should be lgnored 1hls ls because
oLherwlse accounLlng wlll be unnecessarlly over burden wlLh mlnuLe deLalls 1here ls no formula ln maklng a
dlsLlncLlon beLween maLerlal and lmmaLerlal evenLs lL ls a maLLer of [udgmenL and lL ls lefL Lo Lhe accounLanL for
Laklng a declslon lL should be noLed LhaL an lLem maLerlal for one concern may be lmmaLerlal for anoLher Slmllarly
an lLem maLerlal ln one year may noL be maLerlal ln Lhe nexL year
ConvenLlon of ConslsLency
1hls convenLlon means LhaL accounLlng pracLlces should remaln unchanged from one perlod Lo anoLher lor
example lf sLock ls valued aL cosL or markeL prlce whlchever less ls Lhls prlnclple should be followed year afLer year
Slmllarly lf depreclaLlon ls charged on flxed asseLs accordlng Lo dlmlnlshlng balance meLhod lL should be done year
afLer year 1hls ls necessary for Lhe purpose of comparlson Powever conslsLency does noL mean lnflexlblllLy lL does
noL forbld lnLroducLlon of lmproved accounLlng Lechnlques lf a change becomes necessary Lhe change and lLs effecL
should be sLaLed clearly
ConvenLlon of ConservaLlsm
1hls convenLlon means a cauLlon approach or pollcy of play safe 1hls convenLlon ensures LhaL uncerLalnLles and
rlsks lnherenL ln buslness LransacLlons should be glven a proper conslderaLlon lf Lhere ls a posslblllLy of loss lL
should be Laken lnLo accounL aL Lhe earllesL Cn Lhe oLher hand a prospecL of proflL should be lgnored up Lo Lhe
Llme lL does noL maLerlallze Cn accounL of Lhls reason Lhe accounLanLs follow Lhe rule anLlclpaLe no proflL buL
provlde for all posslble losses Cn accounL of Lhls convenLlon Lhe lnvenLory ls valued aL cosL or markeL prlce
whlchever ls less 1he effecL of Lhe above ls LhaL ln case markeL prlce has gone down Lhen provldes for Lhe
anLlclpaLed loss buL lf Lhe markeL prlce has gone up Lhen lgnore Lhe anLlclpaLed proflLs Slmllarly a provlslon ls
made for posslble bad and doubLful debL ouL of currenL years proflLs
CrlLlcs polnL ouL LhaL conservaLlsm Lo an excess degree wlll resulL ln Lhe creaLlon of secreLs reserves 1hls wlll be
qulLe conLrary Lo Lhe docLrlne of dlsclosure


4AccounLlng cycle
AccounLlng process conslsL of 3 ma[or parLs
O 1he recordlng of buslness LransacLlon durlng Lhe perlod
O 1he summarlzlng of lnformaLlon aL end of perlod
O 1he reporLlng and lnLerpreLlng of summary lnformaLlon
ln an enLerprlse lL ls necessary Lo malnLaln separaLe record for each lLem decrease and lncrease ln cash has Lo be
malnLalned separaLely from Lhe records of decrease and lncrease ln supplles from machlnery eLc Lhe recordlng of
all Lhese LransacLlons are called accounL 1he slmplesL form of an accounL has Lhree parLs
A LlLle whlch glves Lhe name of Lhe lLem recorded ln Lhe accounL A space for recordlng lncrease ln amounL of an
lLem and a space for recordlng decrease ln amounL of an lLem 1hls Lype of accounL ls called 1accounL
klnds of accounLs ersonal (relaLed Lo lndlvlduals flrms companles banks eLc) and lmpersonal (eal and nomlnal)
eal accounLs (relaLed Lo asseLs llke bulldlng facLorles cash eLc) and nomlnal (expenses losses and lncomes llke
salary pald renL recelved elecLrlclLy pald lnLeresL recelved eLc)
eblL and CredlL
eblL ls enLered on lefL slde of Lhe accounL and on rlghL slde credlL ls enLered ln double enLry sysLem of recordlng
buslness LransacLlon Lhe deblL amL much equal Lhe credlL amL or else Lhe recordlng ls lncorrecL eblL slde ls used for
recordlng lncreases of asseLs and credlL slde ls for decreases of asseLs ln llablllLy and caplLal accounLs Lhe deblL slde
ls for recordlng decreases and credlL slde for lncreases 1he accounLs balanced when Lhey are LoLaled
AsseLs LlablllLles + owners equlLy eblL slgnlfles lncrease ln expenses and decrease ln revenues and CredlL slgnlfles
decrease ln expenses and lncrease ln revenues
Ledger
A book ln whlch Lhe moneLary LransacLlons of a buslness are posLed ln Lhe form of deblLs and credlLs A book Lo
whlch Lhe record of accounLs ls Lransferred as flnal enLry from orlglnal posLlngsCollection of an entire group of
similar accounLs in doubleenLry bookkeeplng. Also called book of final entry, a ledger records classified and
summarized flnanclal lnformaLlon from [ournals (the 'books of flrsL entry') as deblLs and credlLs, and shows
their currenL balances. In manual accounLlng sysLems, a ledger is usually a loose leaf blnder with a separate
page for each ledger accounL. In computerized sysLems, it consists of interlinked dlglLal flles, but follows
the same accounLlng prlnclples as the manual system
!ournal
An accounLlng record where all buslness LransacLlons are orlglnally enLered A [ournal deLalls whlch LransacLlons
occurred and whaL accounLs were affecLed !ournal enLrles are usually recorded ln chronologlcal order and uslng
Lhe doubleenLry meLhod of bookkeeplng
1rlal 8alance
1rlal balance ls slmply a llsL of Lhe accounL names and Lhelr balances as on a glven Llme wlLh deblL balances ln one
column and credlL balance ln anoLher column lL ls Lo ensure LhaL Lhe recordlngs and posLlngs are done properly An
error free enLry wlll glve Lhe deblL LoLal and credlL LoLal ln Lhe Lrlal balance equal

Illustration
1) Jan-1 Started business with Rs.3000 2) Jan-2 Bought goods worth Rs.2000 3) Jan-12 Received order for half
of the good from G. 4) Jan-21 Delivered the goods and G invoiced Rs.1300 5) Jan-30 Received order for
remaining half of the total goods purchased. 6) Jan-31 Delivered goods and received cash Rs.1200
7) Jan 31 G makes payment 8) Jan -31 Paid salaries Rs.210 and Received interest Rs.50

Journal
Date Particulars LF Debit Credit
Jan-1 Cash a/c Dr 3000
Capital a/c Cr 3000
Jan-2 Purchase a/c Dr 2000
Cash/c Cr 2000
Jan-12 Receivables a/c Dr 3000
Sales a/c Cr 3000
Jan-21 Cash a/c Dr 1200
Sales a/c Cr 1200
Jan-30 Cash a/c Dr 1300
Receivables a/c Cr 1300
Jan-31 Salaries a/c Dr 210
Cash a/c Cr 210
Jan-31 Cash a/c Dr 50
Interest a/c Cr 50


Closlng enLrles
Closlng enLrles are daLed as of Lhe lasL day of Lhe accounLlng perlod buL Lhey are enLered lnLo Lhe accounLs afLer Lhe
flnanclal sLaLemenLs are prepared lor Lhe mosL parL closlng enLrles lnvolve Lhe lncome sLaLemenL accounLs 1he
closlng enLrles seL Lhe balances of all of Lhe revenue accounLs and Lhe expense accounLs Lo zero 1hls means LhaL Lhe
revenue and expense accounLs wlll sLarL Lhe new ?ear wlLh noLhlng ln Lhe accounLsallowlng Lhe company Lo easlly
reporL Lhe new ?ear revenues and expenses 1he neL amounL of all of Lhe balances from Lhe revenue and expense
accounLs aL Lhe end of Lhe year wlll end up ln reLalned earnlngs (for corporaLlons) or owner's equlLy (for sole
proprleLorshlps) 1hanks Lo accounLlng sofLware Lhe closlng enLrles are qulLe efforLless
Ad[usLlng enLrles are made aL Lhe end of Lhe accounLlng perlod (buL prlor Lo preparlng Lhe flnanclal sLaLemenLs) ln
order for a company's accounLlng records and flnanclal sLaLemenLs Lo be upLodaLe on Lhe accrual basls of
accounLlng lor example each day Lhe company lncurs wages expense buL Lhe payroll lnvolvlng workers' wages for
Lhe lasL days of Lhe monLh won'L be enLered ln Lhe accounLlng records unLll afLer Lhe accounLlng perlod ends
Slmllarly Lhe company uses elecLrlclLy each day buL recelves only one blll per monLh perhaps on Lhe 20Lh day of Lhe
monLh 1he elecLrlclLy expense for Lhe lasL 1013 days of Lhe monLh musL geL lnLo Lhe accounLlng records lf Lhe
flnanclal sLaLemenLs are Lo show all of Lhe expenses and Lhe amounLs owed for Lhe currenL accounLlng perlod CLher
ad[usLlng enLrles lnvolve amounLs LhaL Lhe company pald prlor Lo amounLs becomlng expenses lor examples Lhe
company probably pald lLs lnsurance premlums for a slx monLh perlod prlor Lo Lhe sLarL of Lhe slx monLh perlod 1he
company may have deferred Lhe expense by recordlng Lhe amounL ln Lhe asseL accounL repald lnsurance urlng
Lhe accounLlng perlod some of Lhose premlums explred (were used up) and need Lo appear as expense ln Lhe
currenL accounLlng perlod and Lhe asseL balance reduced

5-Balance Sheet
A balance sheet is a snapshot of a business financial condition at a specific moment in time, usually at the close
of an accounting period. A balance sheet comprises assets, liabilities, and owners or stockholders equity. Assets
and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money
market, or government securities. At any given time, assets must equal liabilities plus owners equity. An asset is
anything the business owns that has monetary value. Liabilities are the claims of creditors against the assets of
the business.
A balance sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the
business. Is the business in a position to expand? Can the business easily handle the normal financial ebbs and
flows of revenues and expenses? Or should the business take immediate steps to bolster cash reserves?
Balance sheets can identify and analyze trends, particularly in the area of receivables and payables. Is the
receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable? Has
the business been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to
potential lenders such as banks, investors, and vendors who are considering how much credit to grant the firm
Form and presentation of balance sheet
Balance sheets must be prepared with clarity and readability. Disclosure of significant facts within the framework
of the basic assumptions of accounting is another important factor to be noticed while preparing balance sheets.
Convention of preparing balance sheet
There are two conventions of preparing balance sheet, American and English. According to American convention
assets are shown on left hand side and liabilities, owners equity on right hand. Under English convention it is just
the opposite. There are two forms of presenting the balance sheet, account form and report form. In accounting
form assets are listed on left side and liabilities, owners equity are on right side. Another practice is report form
where assets are listed on top and liabilities, owners equity are listed beneath them.
Listing of item in balance sheet
Assets are generally listed in two ways: 1) in the order of liquidity or according to time ie, in the order of the the
degree of ease with which they can be converted to cash. 2) In the order of permanence or according to purpose
i.e. in the order of the desire to keep them in use. Some assets are difficult to classify. Example investment can
be easily sold but desire may be to keep them, so they are both liquid and semi permanent and are showed
separately in a balance sheet. Liabilities are also grouped in two ways either in the order of urgency of payment
or in the reverse order.
Classification of items in the balance sheet
Current assets: current assets are those which are reasonably expected to be realized in cash or sold or
consumed during the normal operating cycle of the business enterprise or within one year, whichever is longer.
Current assets generally consist of cash, marketable securities, bills receivables, debtors, inventory and prepaid
expenses. Cash Funds that are readily available for expenditure such as ready cash, cash deposited in banks or
current accounts. Marketable securities investments that are marketable or can be converted to cash within a
year. Account receivable - Amount owed to the enterprise by its consumers through normal commercial
transactions, if the amounts due are evidenced by written promises to pay, they are listed as bills receivables.
Inventory stock for sale in normal business. Inventory is expected to be sold either for cash or on credit to
customers to be converted into cash. Item owned is not inventory but fixed asset. Prepaid expenses - Expenses
paid in advance like rent paid for 3 months etc. Fixed assets - assets which are fixed in nature such as land and
building, machinery, equipment, furniture etc. Intangible assets assets which are not physical in nature such
as goodwill, patents, copyrights and trade marks.
Classification of liabilities : Current liabilities generally bills payable, creditors, outstanding expenses, income
received in advance, provision for income tax etc. Accounts payable -claim of suppliers related to goods
supplied or services rendered which are not paid. If written promises are there for to pay money then they are
bills payable or notes payable. Outstanding expenses are expenses incurred in the previous accounting period
for which the payment will be made in the next accounting period. Income received in advance amount relate
to the next accounting period but received in the previous accounting period. Taxes owed to the government.
Long term liabilities all liabilities which do not become due for payment in one year and which do not require
current assets for their payments are called long term or fixed liabilities. Debentures, bonds, loan from banks etc.
Contingent liabilities are not certain, a legal suit pending against the enterprise for compensation is an
example. If the case is decided against the enterprise then only it is a liability.

Capital or owners equity
Owner's equity is sometimes referred to as the book value of the company, because owner's equity is equal to the
reported asset amounts minus the reported liability amounts. Owner's equity may also be referred to as
the residual of assets minus liabilities.
Assets = Liabilities + Owner's Equity
and just rearrange the terms
Owner's Equity = Assets - Liabilities

Owners equity in Sole proprietorship / Partnership concern is usually reported on the balance sheet as a single
amount for each owner. In case of joint stock companies, owners equity is divided in to share capital or
contributed capital and retained earnings. Share capital is the amount invested by the owners. Retained earnings
is the difference between the total earning to date and the amount of dividends paid out to the share holders to
date.

- Profit and Loss account
Profit and loss account is important in an enterprise because it discover the periodic income of a business
enterprise. Profit and loss account clearly states whether a business is in profit or loss. The difference between
balance sheet and profit loss account is that balance sheet is on a particular date while profit and loss account is
for a particular period.
Profit and loss account is called as income statement. Income statement consists of two elements; one reports the
inflows that result from the sale of goods and services to customers which are called revenues, and the other
reports the outflows and are called expenses. Net income = Revenues - Expenses.
Increase in income increases owners equity but need not result in cash balance. Loss of a period decreases
owners equity but need not result in loss of owners equity.


xpenditures that are also expenses-if an item is acquires during the period it is expenditure, if the item is
consumed in the same year then the expenditure become expenses. Assets that become expenses -when
expenditure incurred results in benefits for the future period they become assets. xpenditure that are not
expenses - when the benefits of the expenditure relate to future periods they become assets and not expenses.
xpenses not yet paid - some expenses would have been incurred in the accounting year but payment for the
same would not have been made within the accounting year.

Example of Profit and Loss account statement
Dr Cr
Cost of goods sold 4742 Sales 15922
Establishment expenses 3414 Interest 213
Maintenance expenses 1797 Miscellaneous receipts 18
Admin and other expenses 317 Profit on sales of assets 31
Depreciation 1545
Tax 2109
Net Profit 2428
16352 16352

Sales revenue = gross sales - sales return
Gross sales = total turnover - excise duty / taxes (excise duty and taxes are charges to customers are liabilities to
government until paid)
Sales return or allowances = value of the sales goods that are returned or the allowances made to the customers for
defective goods.
Sales discounts = are the amount of discounts allowed to customers for prompt payment. If a business offer 3%
discount to pay within 7 days the Rs.19400 is recorded as receipt and balance Rs.00 is marked as sales discount.
Miscellaneous or secondary sources of revenues = revenues earned apart from sales like marketable securities,
royalties, rents and gains on disposal of assets are some examples.
Cost of goods sold = when income is increased by the sales value of goods or services sold it is also decreased by
the cost of these goods or services. The cost of goods or services sold is called the cost of sales.
Gross profit = sales revenue - cost of goods/services sold. Important managerial decisions can be taken by
calculating the percentage of gross profit on sale. Though this percentage varies among industries, healthy
companies in same industry tend to have same gross profit percentages.
Operating expenses = expenses to run the business which are not directly related to the production or trading,
admin expenses, finance expenses, marketing and distribution expenses etc
Operating profit = gross profit - operating expenses
Non-Operating expenses = these are expenses which are not related to the activities of business. Loss on sale of
asset, discount on shares written off etc.
nterest expenses = interest expenses arises when part of the expenses are met from the borrowed funds, this item
of expense is deducted from income or earnings before interest and tax.

Statement of retained earnings : the term retained earnings means the accumulated excess of earnings over
losses and dividends.