Accounts 1 Unit PDF

Accounts 1 Unit 1  The American Institute of Certified Public Accounts (AICPA) defined Accounting as “Accountancy is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are in part of at least a financia...

Accounts 1 Unit 1  The American Institute of Certified Public Accounts (AICPA) defined Accounting as “Accountancy is the art of recording classifying and summarizing in a significant manner and in terms of money transactions and events which are in part of at least a financial characters and interpreting the result there of” Again in 1966, AICPA defines Accounting as “The process of identifying, measuring and communicating economic information to permit; informed judgement and decisions by the uses of accounts”. 2  There is difference between the terms “Book keeping” and “Accounting”. Book keeping is merely concerned with orderly record keeping and recording business transactions and Financial Accounting is border in scope than book keeping. Accounting involves analysis and judgements at different stages such as recording of transactions, classification, summarization and interpretation 3 Introduction to financial accounting Financial accounting is the process of recording, summarizing, and reporting the financial transactions of a business to provide an accurate picture of its financial position. It is essential for businesses, investors, regulators, and other stakeholders who need reliable information for decision-making. 4 Key Concepts of Financial Accounting 1. Financial Statements: a. Income Statement (Profit & Loss Statement): Shows revenues, expenses, and profits over a period. b. Balance Sheet: Provides a snapshot of assets, liabilities, and equity at a specific point in time. c. Cash Flow Statement: Tracks the inflows and outflows of cash over a period. 5 2. Double-Entry Accounting: Every transaction affects at least two accounts, following the principle that total debits must always equal total credits. This ensures that the accounting equation remains balanced: 3. Accrual vs. Cash Accounting: Accrual Accounting: Revenues and expenses are recognized when they are earned or incurred, regardless of when cash is exchanged. Cash Accounting: Revenues and expenses are recognized only when cash is received or paid. 6 4. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS): These are frameworks that govern how financial accounting should be performed. GAAP is primarily used in the U.S., while IFRS is used internationally. In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily followed by all companies) 7 5. The Accounting Cycle: Transaction Analysis: Identifying the financial impact of business activities. Journal Entries: Recording transactions chronologically in the accounting journal. Ledger Posting: Summarizing journal entries into accounts. Trial Balance: Ensuring debits equal credits. Financial Statements Preparation: Creating financial reports for a specific period. Closing Entries: Resetting temporary accounts (revenues and expenses) to zero at the end of the period. 8 6. Key Users of Financial Information: Internal Users: Management and employees for operational decisions. External Users: Investors, creditors, regulators, and the public for assessing the business’s financial health. Importance of Financial Accounting Ensures transparency and helps build trust with external stakeholders. Assists in decision-making, providing data for both internal management and external investors. Ensures regulatory compliance and provides a record for tax purposes 9 Introduction to Management Accounting Management accounting, also known as managerial accounting, focuses on providing information to internal users (managers and executives) to aid in decision-making, planning, and control. Unlike financial accounting, which is governed by external reporting standards (like GAAP or IFRS), management accounting is more flexible and is tailored to meet the needs of a business's internal operations. 10 2. Types of Information Provided: Cost Data: Breaks down how much it costs to produce goods or services. Performance Metrics: Helps assess the efficiency and effectiveness of different departments or segments of the business. Budgets and Forecasts: Used for planning future operations and setting financial targets. Variance Analysis: Compares actual results to budgets or standards to determine the reasons for any differences. 11 3. Key Tools in Management Accounting: Cost-Volume-Profit (CVP) Analysis: Helps managers understand the relationship between costs, sales volume, and profits. It assists in determining break-even points and the impact of changes in costs or prices. Budgeting: Involves creating detailed financial plans for income and expenditure, which serve as a guide for business operations. Standard Costing: Involves comparing actual costs to predetermined or "standard" costs to analyze performance. Activity-Based Costing (ABC): Allocates overhead and indirect costs to specific activities that drive those costs, providing a more accurate picture of product and service profitability. Key Performance Indicators (KPIs): Quantifiable metrics used to evaluate how well an organization or department is achieving its objectives. 12 4. Cost Classifications: Fixed Costs: Costs that do not change with production levels (e.g., rent, salaries). Variable Costs: Costs that fluctuate with production levels (e.g., raw materials, direct labor). Direct Costs: Costs that can be directly traced to a specific product or service (e.g., materials). Indirect Costs (Overhead): Costs that are not directly traceable to a specific product or service but are necessary for operations (e.g., utilities, administrative expenses). 13 5. Decision-Making in Management Accounting: Make or Buy Decisions: More cost-effective to produce a product in-house or outsource it. Pricing Decisions: Involves determining the appropriate price for products or services based on cost data and market factors. Capital Budgeting: Evaluates the profitability and financial impact of long-term investments such as new machinery or expansion projects. Product Mix Decisions: Helps determine which products to produce and in what quantities to maximize profit. 14 Performance Measurement: Balanced Scorecard: A performance measurement tool that evaluates an organization from multiple perspectives, including financial, customer, internal processes, and learning/growth perspectives. Return on Investment (ROI): Measures the profitability of an investment or project by comparing the net gain to the initial investment. Profitability Analysis: Examines the profitability of different products, services, or business segments to identify areas of strength and weakness. 15 Comparative Focus: Financial Accounting is retrospective, focusing on historical data and meeting regulatory requirements. Management Accounting is forward-looking, helping managers plan and make decisions to achieve future business goals. 16 Importance of Management Accounting 1. Improves Decision-Making 2. Supports Strategic Planning 3. Enhances Operational Control 4. Promotes Cost Control 17  Introduction to Cost Accounting Cost accounting is a branch of accounting that focuses on capturing and analyzing the costs associated with producing goods or services. Purpose of Cost Accounting: The primary goal of cost accounting is to determine the actual cost of production or services rendered. It helps businesses identify inefficiencies, manage resources, and establish cost control measures. It provides detailed insights into the costs involved in each step of production, enabling businesses to set prices, plan budgets, and make decisions regarding production processes. 18 Classification of Costs: Direct Costs: Costs that can be directly attributed to the production of goods or services (e.g., raw materials, direct labor). Indirect Costs: Costs that are not directly tied to production but are necessary for operations (e.g., rent, utilities, administrative expenses). Fixed Costs: Costs that remain constant regardless of production volume (e.g., factory rent, salaries of permanent staff). Variable Costs: Costs that fluctuate with production levels (e.g., raw materials, wages of temporary workers). Semi-Variable Costs: Costs that have both fixed and variable components (e.g., utility bills that have a basic fixed charge and additional charges based on usage). 19 Types of Costing Methods: Job Costing: Costs are assigned to specific jobs or projects, commonly used in industries like construction, custom manufacturing, and consulting, where each job is different. Process Costing: Costs are averaged over units produced, used in industries like chemicals, oil, and food processing, where production is continuous and products are identical. Activity-Based Costing (ABC): Allocates overhead costs based on activities that drive costs, providing more accurate costing by tracing costs to specific products or services. Standard Costing: Uses pre-determined or standard costs for products or services, which are compared to actual costs to determine variances and efficiency. Marginal Costing: Focuses on the additional or incremental costs of producing one more unit, helping businesses make decisions about production levels and pricing. 20  Key Concepts of Cost Accounting Purpose of Cost Accounting: The primary goal of cost accounting is to determine the actual cost of production or services rendered. It helps businesses identify inefficiencies, manage resources, and establish cost control measures. It provides detailed insights into the costs involved in each step of production, enabling businesses to set prices, plan budgets, and make decisions regarding production processes. 21  Classification of Costs: Direct Costs: Costs that can be directly attributed to the production of goods or services (e.g., raw materials, direct labor). Indirect Costs: Costs that are not directly tied to production but are necessary for operations (e.g., rent, utilities, administrative expenses). Fixed Costs: Costs that remain constant regardless of production volume (e.g., factory rent, salaries of permanent staff). Variable Costs: Costs that fluctuate with production levels (e.g., raw materials, wages of temporary workers). Semi-Variable Costs: Costs that have both fixed and variable components (e.g., utility bills that have a basic fixed charge and additional charges based on usage). 22 Types of Costing Methods: Job Costing: Costs are assigned to specific jobs or projects, commonly used in industries like construction, custom manufacturing, and consulting, where each job is different. Process Costing: Costs are averaged over units produced, used in industries like chemicals, oil, and food processing, where production is continuous and products are identical. Activity-Based Costing (ABC): Allocates overhead costs based on activities that drive costs, providing more accurate costing by tracing costs to specific products or services. Standard Costing: Uses pre-determined or standard costs for products or services, which are compared to actual costs to determine variances and efficiency. Marginal Costing: Focuses on the additional or incremental costs of producing one more unit, helping businesses make decisions about production levels and pricing. 23 Cost Accounting Systems: Traditional Cost Accounting: Relies on direct costs and simple allocation of indirect costs, often using a single overhead rate. Activity-Based Costing (ABC): A more detailed and accurate method that allocates costs based on activities and resource consumption rather than a simple overhead rate. Cost Control and Reduction: Cost Control: Refers to the process of monitoring costs to ensure they do not exceed a pre-determined level. This includes budgeting, setting cost standards, and implementing cost-saving measures. Cost Reduction: Involves actively finding ways to reduce costs, such as improving production efficiency, outsourcing, or using cheaper raw materials. 24 Cost Analysis and Decision-Making: Break-Even Analysis: Determines the level of sales or production at which total revenues equal total costs, meaning the business neither makes a profit nor incurs a loss. Cost-Volume-Profit (CVP) Analysis: Examines the relationship between cost, sales volume, and profit, and helps in decision-making regarding pricing, production levels, and product mix. Make or Buy Decisions: Analyzes whether it is more cost-effective to produce a component in-house or purchase it from an external supplier. Product Mix Decisions: Helps in determining the most profitable combination of products or services to produce and sell. 25 Variance Analysis: In cost accounting, variance analysis involves comparing actual costs with standard or budgeted costs to identify the reasons for any differences. Key variances include: Material Variance: Differences in the cost or quantity of materials used. Labor Variance: Differences in labor costs, often due to changes in wage rates or productivity. Overhead Variance: Variances in the allocation of indirect costs like utilities or administrative expenses. Overhead Allocation: Overheads are indirect costs that cannot be directly attributed to a product or service. Cost accounting assigns overheads to products or services based on certain allocation methods, ensuring that the full cost of production is understood. 26  Importance of Cost Accounting 1.Enhanced Decision-Making: By providing a detailed breakdown of costs, managers can make better decisions regarding pricing, budgeting, and production efficiency. 2.Cost Control: Cost accounting enables businesses to monitor and manage their costs, leading to better resource allocation and improved profitability. 3.Profitability Analysis: Cost accounting helps in determining the profitability of individual products, services, or projects, guiding businesses on where to 27 focus their efforts. 4. Budgeting and Forecasting: Cost accounting provides the data necessary for preparing accurate budgets and forecasts, helping businesses plan for future growth and manage resources effectively. 5. Performance Measurement: Regular cost analysis, variance analysis, and break-even analysis help managers evaluate the performance of departments or production processes, allowing for corrective actions when needed. 28 29 30  Generally accepted accounting principles (GAAP) GAAP comprise a set of accounting rules and procedures used in standardized financial reporting practices. By following GAAP guidelines, compliant organizations ensure the accuracy, consistency, and transparency of their financial disclosures. Publicly traded companies, businesses operating in regulated industries, registered non-profit groups, government agencies, and organizations that receive federal funding awards from the U.S. government are required to follow GAAP 31 GAAP encompasses: Basic accounting principles/guidelines Accounting Standards usually issued by the premier accounting body of the country Industry-specific accounting practices to cover unusual scenarios In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) 32  Types of business entity Sole trader Partnership Limited liability company Sole trader. An individual may enter into business alone, either selling goods or providing a service. Such a person is described as a sole trader. For accounting purposes business is seen as being separate from the person’s other interests and private life. Disadvantages If the business is not successful and the sole trader is unable to meet obligations to pay money to others, then creditors may ask a court of law to authorise the sale of the personal possessions, and even the family home, of the sole trader. Cost of bank borrowing will be high because the bank fears losing its money. 33 Partnership Sole trader may expand is to enter into partnership with one or more people. Persons to whom money is owed by the business may ask a court of law to authorise the sale of the personal property of the partners in order to meet the obligation. Even more seriously, one partner may be required to meet all the obligations of the partnership if the other partner does not have sufficient personal property, possessions and cash. For accounting purposes the partnership is seen as a separate economic entity, owned by the partners Partner may wish to be sure that they are receiving a fair share of the partnership profits. Other persons requesting accounting information, such as HM Revenue and Customs, banks who provide finance and individuals who may be invited to join the partnership 34 Limited liability company 1. Private limited company: The private limited company is prohibited by law from offering its shares to the public, so it is a form of limited liability appropriate to a family- controlled business. ‘Limited’ (abbreviated to ‘Ltd’) 2. Public limited company: is permitted to offer its shares to the public. In return it has to satisfy more onerous regulations. Where the shares of a public limited company are bought and sold on a stock exchange, the public limited company is called a listed company because the shares of the company are on a list of share prices. 35  Accounting Principles Accounting Accounting Concepts Conventions a) Business entity a) Disclosure b) Going Concern b) Materiality c) Money Measurement c) Consistency d) Cost Concept d) Conservatism e) Accounting period f) Duel aspect g) Accrual Concept h) Matching Cost i) Realisation 36 a) Business Entity Concepts: According to Entity concept, business is treated as a unit of entity separate from its Owner, Creditors and Management etc. Accounts are kept for business entity as distinguished form a person associated with it. All business transactions are recorded in the books of Accounts from the point of view of business only. Every type of business organisation is treated as separate Accounting entity The overall effect of adopting this concept is 1. Only the business transactions are reported and not the personal transactions of the owners. 2. Profit is the property of business unless distributed to the owners. 3. The personal assets of the owners are not considered while recording and reporting the assets of the business entity. 37 b. Going Concern: Business transactions are recorded on the assumption that the business will continue for a long time. There is neither the intention nor the necessity to liquate the particular business in near future. When an enterprise liquidates a branch or one division or one segment of its business, the ability of the enterprise to continue as a going concern is not imparted. In case of enterprise going to liquidate or become insolvent. Then the enterprise cannot be considered as a going concern. 38 c) Money Measurement Concept: Money is common denominator in terms of which the exchange ability of goods and services are measured. Non monetary events like public political contract, location of business; certain disputes, efficient sales force etc. can not be recorded in the books of Accounts even through these have great effects Drawback: Money has time value the value of money decreases over time 39 d) Cost Concepts: According to cost concept the various assets acquired by enterprise should be recorded on the basis of actual cost incurred, rather than their current market value. As per cost concept Fixed Assets are shown at cost less depreciation charged from year to year. e) Accounting Period Concept: life of the business is divided into appropriate parts or segments of analysing the results shown by the business. Each part divided is known as an accounting period. Usually 12 months 40 f) Duel Aspect Concept: one entry is debited and the other credited One entry consists of debit to one or more accounts and another effect consist of credit to some other one or more accounts. However, the total amount debited is always equal to the total amount credited. Therefore at any point of time total assets of a business are equal to its total liabilities. Liabilities to outsider are known as liabilities, liabilities to the owner are referred to as capital. Assets referred to valuable things owned by the 41 g. Accrual Concept: This accounting concept states that revenue is recognised when they are earned and when they are not received similarly, cost are recognised as and when they are incurred and not when they are paid. This concept implies that the income should be measured as difference between revenues and expenses rather that the difference between cash received and disbursements. In other words, the revenue earned and expenses incurred are entered into the company's journal regardless of when money exchanges hands. 42 h. Matching Cost Concept: The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month). Eg: In 2018, the company generated revenues of $100 million and thus will pay its employees a bonus of $5 million in February 2019. Even though the bonus is not paid until the following year, the matching principle stipulates that the expense should be recorded on the 2018 income statement as an expense of $5 million. 43 i. Realisation Concept: helps accountants understand when they can recognize and record a payment received by their client as revenue. According to this principle, accountants can record revenue when their clients complete a service or deliver a product to a customer 44  Accounting Conventions: The term ‘Convention’ denotes customs or traditions or practice based on general agreement between the accounting bodies which guide the accountant while preparing the financial statements. a. Disclosure: According to convention of full disclosure, accounting must disclose all the material facts and informations so that interested parties after reading such accounting report can get a clear view of the state of affairs of the business. 45 b. Materiality The term material means “relative importance”, Accounding to the convention of materiality; account should report only what is material and ignore insignificant details while the preparing the final accounts. Materiality will differ or changed with nature, size and tradition of the business. What is material for one enterprise may be immaterial for another enterprise. c. Consistency: This accounting convention state that ones a particular accounting practice, method or policy is adopted to prepare accounts, statements and Reports. It should be continued for years together and should not charge unless it is forced to change it. 46 d. Conservatism Financial Statements are usually drawn up on a conservative basis. Their are two principles which stem directly from conservatism. 1. The accountant should not anticipate income and should provide all possible losses, and 2. Faced with the choice between two methods of valuing an asset the accountant should choose a method which leads to the lesser value. It is also called “Principles of prudence”. Therefore, provision for bad and doubtful debts is also permitted and made every year 47  Transaction (1) Investment by share holders Balance Sheet of ATCPL as on January 1 2016 Liabilities Amou Assets Amoun nt t (lakh) (lakh) Capital 10 Cash 10 10 10 Capital is Liability for the company as per separate Entity Concept 48  Transaction (2) Deposit in Bank Balance Sheet of ATCPL as on January 1 2016 Liabilities Amou Assets Amoun nt t (lakh) (lakh) Capital 10 Cash 3 Cash in Bank 7 10 10 49  Transaction (3) Purchase of Toys for Cash Balance Sheet of ATCPL as on January 1 2016 Liabilities Amoun Assets Amount t (lakh) (lakh) Capital 10 Cash 1 Cash at bank 7 Inventory of Finish 2 Goods 10 10 50  Transaction (3) Purchase of Toys for Cash Balance Sheet of ATCPL as on January 1 2016 Liabilities Amoun Assets Amount t (lakh) (lakh) Capital 10 Cash 1 Cash at bank 7 Inventory of Finish 2 Goods 10 10 51  Indian Accounting Standards Indian Accounting Standards (Ind ASs) are Standards prescribed under Section 133 of the Companies Act, 2013. 52  Financial statements The objective of financial statements is to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions. Financial statements also show the results of the management’s stewardship of the resources entrusted to it. To meet this objective, financial statements provide information about an entity’s: a) assets; b) liabilities; c) equity; d) income and expenses, including gains and losses; e) contributions by and distributions to owners in their capacity as owners; and f) cash flows. 53  Complete set of financial statements 1. Balance sheet as at the end of the period ; 2. Statement of profit and loss for the period; 3. Statement of changes in equity for the period; 4. Statement of cash flows for the period; 5. Notes, comprising significant accounting policies and other explanatory information; 6. (a) Comparative information in respect of the preceding period as specified in paragraphs 38 and 38A; and 7. Balance sheet as at the beginning of the preceding period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements in accordance with paragraphs 40A–40D. 54  Many entities present, outside the financial statements, a financial review by management that describes and explains the main features of the entity’s financial performance and financial position, and the principal uncertainties it faces. Such a report may include a review of: a) the main factors and influences determining financial performance, including changes in the environment in which the entity operates, the entity’s response to those changes and their effect, and the entity’s policy for investment to maintain and enhance financial performance, including its dividend policy; b) the entity’s sources of funding and its targeted ratio of liabilities to equity; and c) the entity’s resources not recognised in the balance sheet in accordance with Ind ASs. 55  Many entities also present, outside the financial statements, reports and statements such as environmental reports and value added statements, particularly in industries in which environmental factors are significant and when employees are regarded as an important user group. Reports and statements presented outside financial statements are outside the scope of Ind ASs. 56  General features Presentation of True and Fair View and compliance with Ind Ass An entity whose financial statements comply with Ind ASs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with Ind ASs unless they comply with all the requirements of Ind ASs. An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material. 57  When an entity departs from a requirement of an Ind AS in accordance with paragraph 19, it shall disclose: that management has concluded that the financial statements present a true and fair view of the entity’s financial position, financial performance and cash flows; that it has complied with applicable Ind ASs, except that it has departed from a particular requirement to present a true and fair view; the title of the Ind AS from which the entity has departed, the nature of the departure, including the treatment that the Ind AS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework, and the treatment adopted; and for each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement. 58  Going concern An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties. 59 Accrual basis of accounting: An entity shall prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Materiality and aggregation An entity shall present separately each material class of similar items. An entity shall present separately items of a dissimilar nature or function unless they are immaterial except when required by law 60 Offsetting An entity shall not offset assets and liabilities or income and expenses, unless required or permitted by an Ind AS. Frequency of reporting An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements: a) the reason for using a longer or shorter period, and b) the fact that amounts presented in the financial statements are not entirely comparable. 61 Comparative information An entity shall present, as a minimum, two balance sheets , two statements of profit and loss, two statements of cash flows and two statements of changes in equity, and related notes. Consistency of presentation An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless: a significant change in the nature of the entity’s operations or a review of its financial statements, an Ind AS requires a change in presentation 62 Balance Sheet The balance sheet shall include line items that present the following amounts: 1. Property, plant and equipment; 2. Investment property; 3. Intangible assets; 4. Financial assets (excluding amounts shown under (5), (8) and (9); 5. Investments accounted for using the equity method; 6. Biological assets within the scope of Ind AS 41 Agriculture; 7. Inventories; 8. Trade and other receivables; 9. Cash and cash equivalents; 63 10. the total of assets classified as held for sale and assets included in disposal groups classified as held for sale in accordance with Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations; 11. Trade and other payables; 12. Provisions; 13. Financial liabilities (excluding amounts shown under 11) and (12)); 14. Liabilities and assets for current tax, as defined in Ind AS 12, Income Taxes; 15. Deferred tax liabilities and deferred tax assets, as defined in Ind AS 12; 16. Liabilities included in disposal groups classified as held for sale in accordance with Ind AS 105; 17. Non-controlling interests, presented within equity; and 18. Issued capital and reserves attributable to owners of the parent. 64  An entity shall present additional line items (including by disaggregating the line items listed above), headings and subtotals in the balance sheet when such presentation is relevant to an understanding of the entity’s financial position. When an entity presents current and non-current assets, and current and noncurrent liabilities, as separate classifications in its balance sheet, it shall not classify deferred tax assets (liabilities) as current assets (liabilities). 65 Current/non-current distinction An entity shall disclose the amount expected to be recovered or settled after more than twelve months for each asset and liability line item that combines amounts expected to be recovered or settled: Current Asset/Liability - No more than twelve months after the reporting period, Non-current assets/liability - More than twelve months after the reporting period. 66 Current assets An entity shall classify an asset as current when: a) It expects to realise the asset, or intends to sell or consume it, in its normal operating cycle; b) It holds the asset primarily for the purpose of trading; c) It expects to realise the asset within twelve months after the reporting period; or d) The asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period. An entity shall classify all other assets as non- current. 67 The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be twelve months. Current assets include assets (such as inventories and trade receivables) that are sold, consumed or realised as part of the normal operating cycle even when they are not expected to be realised within twelve months after the reporting period. Current assets also include assets held primarily for the purpose of trading (examples include some financial assets that meet the definition of held for trading in Ind AS 109) and the current portion of non-current financial assets. 68 Current liabilities An entity shall classify a liability as current when: a) It expects to settle the liability in its normal operating cycle; b) It holds the liability primarily for the purpose of trading; c) The liability is due to be settled within twelve months after the reporting period; or d) It does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification. An entity shall classify all other liabilities as non-current. 69 Information to be presented either in the balance sheet or in the notes a) items of property, plant and equipment are disaggregated into classes in accordance with Ind AS 16; b) Receivables are disaggregated into amounts receivable from trade customers, receivables from related parties, prepayments and other amounts; c) Inventories are disaggregated, in accordance with Ind AS 2, Inventories, into classifications such as merchandise, production supplies, materials, work in progress and finished goods; d) Provisions are disaggregated into provisions for employee benefits and other items; and e) Equity capital and reserves are disaggregated into various classes, such as paid-in capital, share premium and reserve 70 Statement of Profit and Loss The statement of profit and loss shall present a) Profit or loss; b) Total other comprehensive income; c) Comprehensive income for the period, being the total of profit or loss and other comprehensive income. An entity shall present the following items, in addition to the profit or loss and other comprehensive income d) profit or loss for the period attributable to: 1. non-controlling interests, and 2. owners of the parent. 71 b) comprehensive income for the period attributable to: 1. non-controlling interests, and 2. owners of the parent 72 Information to be presented in the profit or loss section of the statement of profit and loss (a) Revenue, presenting separately interest revenue calculated using the effective interest method; (aa)Gains and losses arising from the derecognition of financial assets measured at amortised cost; (b) finance costs; (ba) impairment losses (including reversals of impairment losses or impairment gains) determined in accordance with Section 5.5 of Ind AS 109; (c) share of the profit or loss of associates and joint ventures accounted for using the equity method; (ca) if a financial asset is reclassified out of the amortised cost measurement category so that it is measured at fair value through profit or loss, any gain or loss arising from a 73 (cb) if a financial asset is reclassified out of the fair value through other comprehensive income measurement category so that it is measured at fair value through profit or loss, any cumulative gain or loss previously recognised in other comprehensive income that is reclassified to profit or loss; (d) tax expense; (e) [Refer Appendix 1] (ea) a single amount for the total of discontinued operations (see Ind AS 105) 74  An entity shall disclose the following, either in the balance sheet or the statement of changes in equity, or in the notes: (a) for each class of share capital: i. the number of shares authorised; ii. the number of shares issued and fully paid, and issued but not fully paid; iii. par value per share, or that the shares have no par value; iv. a reconciliation of the number of shares outstanding at the beginning and at the end of the period; v. the rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital; vi. shares in the entity held by the entity or by its subsidiaries or associates; and vii. shares reserved for issue under options and contracts for the sale of shares, including terms and amounts; and (b) a description of the nature and purpose of each reserve within equity. 75  Assume that Michael McBryan, an experienced auto mechanic, opens his own automotive repair business, Overnight Auto Service. A distinctive feature of Overnight’s operations is that all repair work is done at night. This strategy offers customers the convenience of dropping off their cars in the evening and picking them up the following morning 76  The Company’s First Transaction McBryan officially started Overnight on January 20, 2011. On that day, he received a charter from the state to begin a small, closely held corporation whose owners consisted of himself and several family members. Capital stock issued to 77  Purchase of an Asset for Cash: On January 21, Overnight purchased the land from the city for $52,000 cash. This transaction had two immediate effects on the company’s financial position: first, Overnight’s cash was reduced by $52,000; and second, the company acquired a new asset—Land. 80,000- 52000=28,000 78  Purchase of an Asset and Financing Part of the Cost On January 22, Overnight purchased the old garage building BUILDING 36,000= 28,000- from Metropolitan Transit Authority CASH 6000+ 6000=22,000 for $36,000. Overnight made a cash Notes payable 6000 CASH FOR down payment of $6,000 and 30,000 PURCHASE OF issued a 90-day non-interest- BUILDING bearing note payable for the 79 Purchase of an Asset on Account On January 23, Overnight purchased tools and automotive repair equipment from Snappy Tools. The purchase price was $13,800, due within 60 days. After this purchase, Overnight’s financial position is depicted below. Purchased on credit from Snappy Tools Purchased tools on credit 13,800 13,800. Both 30,000 and 13,800 are owed by people outside of company so they are clubbed together as liabilities (43,800) 80  Sale of an Asset After taking delivery of the new tools and equipment, Overnight found that it had purchased more than it needed. Ace Towing, a neighboring business, offered to buy the excess items. On January 24, Overnight sold some of its new tools to Ace for $1,800, a price equal to Overnight’s cost.2 Ace made no down payment but agreed to pay the amount due within 45 days. This transaction reduced Overnight’s tools and equipment by $1,800 and created a new asset, Accounts Receivable, for that same amount. A balance sheet as of January 24 appears below Tools and equipment 13,800- Ace will pay 1800(sold to Ace)= 12,000 after 45 days 81 Collection of an Account Receivable On January 26, Overnight received $600 from Ace Towing as partial settlement of its account receivable from Ace. This transaction caused an increase in Overnight’s cash but a decrease of the same amount in accounts receivable. This transaction converts one asset into another of equal value; there is no change in the amounts of total assets 600 cash received Ace Towing partial settlement of form Ace Towing 600 So 1800-600= 1200 added to cash so 20,000+600=22,600 82 Payment of a Liability On January 27, Overnight made a partial payment of $6,800 on its account payable to Snappy Tools. This transaction reduced Overnight’s cash and accounts payable by the same amount, leaving total assets and the total of liabilities plus owners’ equity in balance. Overnight’s balance sheet at January 27 6800 cash payment to to Both Total assts Accounts payable of Snappy Tools so 22,600- and liability Snappy Tools paid 6,800, 6800 = 15 123,800- So 13,800 -6,800 = 7000 6,800=117,000 83 Earning of Revenue: McBryan had acquired the assets Overnight needed to start operating, and he began to provide repair services for customers. Rather than recording each individual sale of repair services, he decided to accumulate them and record them at the end of the month. Sales of repair services for the last week of January were $2,200, all of which was received in cash. Earning of revenue represents the creation of value by Overnight. It also represents an increase in the financial interest of the owners in the company. As a result, cash is increased by $2,200 and owners’ equity is increased by the same amount. To distinguish owners’ equity that is earned from that which was originally invested by the owners, the account Retained Earnings is used in the owners’ equity section of the balance sheet. The balance sheet in Exhibit 2–9 , as of January 31, Cash increased Any profit from operations 15,800+2,200 = will be added to Owner's 18,000 equity 84  Payment of Expenses: In order to earn the $2,200 of revenue Overnight had to pay some operating expenses, namely utilities and wages For January, he owed $200 for utilities and $1,200 for wages to his employees, a total of $1,400, which he paid on January 31. Paying expenses has an opposite effect from revenues on the owners’ interest in the company— their investment is reduced. Of course, paying expenses also results in a decrease of cash. The January 31 balance sheet. Profit reduce after Cash reduced after paying 119,200- paying expenses expenses 18,000 -1,400 2,200 = 2,200-1400=800 =16,600 117,800 85 86