Generally, there are 3 parts of the final accounts of any business organization: 1.

Trading Account and Manufacturing account 2. Profit and Loss Account and 3. Balance sheet. Trading Account: It summaries all the transactions occurred during a trading/manufacturing period which have direct relationship to the goods dealt in by the business. Like Purchases, opening stock, all direct expenses (wages, processing/manufacturing expenses, inward transportation, Power & Fuel etc), sales, closing stock and any other direct income. The balancing figure is Gross Profit/Gross Loss. Profit and Loss Account: It takes in to account those revenue and expenditure items which are related to management of the business. These expenses are directly related to conduct of the business other than manufacturing and trading expenses. Like selling & distribution expenses, Outward transportation, advertisement expenses, Administrative expenses, Interest and other financial expenses, Depreciation etc. Other indirect income (income on investments, commission received, interest received etc.) The balancing figure is Net Profit/Net Loss. Balance Sheet: It shows position of Assets and Liabilities as on a particular date. Liabilities: Sources of funds for the business Capital and Unsecured Loans (From Family members & Relatives, Friends that are of long term nature): Owned funds infused in the business. Creditors: Suppliers provided the goods on credit. Bank finance: Cash credit limit and Term Loans. Advance received from the customers. Other Current Liabilities: Taxes and duties payable, Dues to auditors and employees etc. Assets: Uses of the funds Fixed Assets: Land, Building, Plant & Machineries, Vehicles, Furniture and all other assets of long term nature. Cash and Bank Balances. Investment in marketable securities: Shares. Debtors/Receivables: To whom goods sold in credit. Closing Stock: Raw material, Finished Goods. Advance payment of taxes. Advance payment to suppliers. Pre paid expenses. Non current assets: Long term loans and advances to sister or allied or associate firms, Long term investments etc.

Current Assets: That to be realized with 12 months. Other than fixed assets and non current assets. Current Liabilities: That to be paid within 12 months. Like: Creditors, Cash Credit limit/ Overdraft facility, Installments of term loan to be paid in 12 months, Advance received from the customers, Other Current Liabilities.

Sr 1

Generally, we calculate the below detailed ratios Ratio Formula Benchmark Current Ratio Current Assets /Current 1.33:1 Liabilities

Gearing Ratio

Total Outside Liabilities /Tangible Net Worth= TOL/TNW

3.00:1

3 4

Interest Coverage Ratio PBDIT Margin

PBDIT/ Interest Expenses PBDIT / Sales X 100

1.50:1

Net Profit Margin

Net Profit / Sales X 100

DSCR

PBDIT / Interest on Term Loan & Installments for current year

1.50:1

Interpretation It determines capacity of the company to meet the short term liabilities. Ratio at 1.33 or above is good and below 1.33 shows that the company may face liquidity crunch for short term that may hamper business growth of the company. It shows level of promoters contribution to the business compared to outside liabilities. Ratio below 3.00 is good and above 3.00 reflects uncomfortable position. It shows interest paying capacity of the company. To understand level of profit margin. It varies from industry to industry. In trading unit is will be lower and in manufacturing units it will be higher compared to trading firm. To understand level of profit margin. It varies from industry to industry. In trading unit is will be lower and in manufacturing units it will be higher compared to trading firm. DSCR to be calculated for the term loan facility only. It shows long term repayment capacity of the company. Ratio above 1.50 is good and below 1.50 shows inability to repay term loan installments on due date.

1. 2. 3. 4. 5.

Short Notes: Total outside Liabilities: In Liability side Other than capital and unsecured loans from friends, family members and relatives. Tangible Net Worth: In Liability Side - Capital and unsecured loans from friends, family members and relatives. PBDIT: Profit before Depreciation, Interest and Taxes. How to calculate PBDIT = Net Profit + Depreciation + Interest + taxes. Unsecured loans also known as Quasi Capital Have a look on scanned copy of the balance forwarded to you: PBDIT: Net Profit: Rs 3,27,090.00 Depreciation: Rs 4,087.00 Interest: Rs 1,65,597.00 Taxes: Rs 2,500.00 Total : Rs 4,99,274.00 Sales Rs 1,79,61,103.00 PBDIT Margin = 499274 / 17961103 X 100 = 2.80% Net Profit Margin = 327090 / 17961103 X 100 = 1.82%

Current Liabilities Corporation Bank CC Limit: Rs 1135634.00 Sundry Creditors: Rs 4356304.00

Total Current Liabilities: Rs 5491938.00

Current Assets: Commercial Taxes: Rs 2000.00 Deposits: Rs 8500.00 Closing Stock: Rs 4284179.00 Prepaid Insurance: Rs 993.00 Debtors/ Receivables: Rs 2313390.00 Cash and Bank Balance: Rs 232400.00 Interest on RD: Rs 13400.00 Total Current Assets: Rs 6854862.00

Current Ratio = Current Assets / Current Liabilities = 6854862/5491938 = 1.25:1 Gearing Ratio: Capital; Rs 1384011.00 Unsecured Loans: Rs 424374.00 Tangible Net Worth Capital + Unsecured Loans. Rs 1808385.00 Outside Liabilities Corporation Bank CC Limit: Rs 1135634.00 Sundry Creditors: Rs 4356304.00 Total Outside Liabilities: Rs 5491938.00 Gearing Ratio = Total Outside Liabilities / Tangible Net Worth = 5491938/1808385 = 3.04

Interest Coverage Ratio PBDIT: Rs 499274.00 Interest Expenses: Rs 165597.00 Interest Coverage Ratio = PBDIT/ Interest Expenses = 499274/165597 = 3.01