FAMA_Session_20_on__17th_Sep.pdf

Financial and Management Accounting (FAMA) Semester 3 Aug 2024- Dec 2024 Financial and Management Accounting Session 20 17th Sep 2024 Announcement Training on the Financial Database PROWESS will be held on 20th Sep (Friday) from 10 am to 12 noo...

Financial and Management Accounting (FAMA) Semester 3 Aug 2024- Dec 2024 Financial and Management Accounting Session 20 17th Sep 2024 Announcement Training on the Financial Database PROWESS will be held on 20th Sep (Friday) from 10 am to 12 noon by representatives of the company Please bring your laptop for the training. Location for the training session will be informed No FAMA class will be held on 20th Sep. Accounting Entries Accounting for o Depreciation Accounting for Depreciation Revenue generation process of any business reduces value of its long-term assets Only fixed assets are depreciated Depreciation accounts for the part of the cost of the asset which is used in the business every year. So, depreciation is a non-cash charge that represents a reduction in the value of assets due to wear and tear, age, or obsolescence It is a reduction of the business profit  Accounting for Depreciation Depreciation Accounting Charging the amount by reducing the respective A provision for depreciation account called fixed asset Accumulated Depreciation is maintained Depreciation amount reduced from the Amount credited to the fixed asset Cumulative depreciation account Shown as a reduction directly in the Balance shown in the Balance Sheet liabilities side or preferred to be shown on asset side (with a negative sign) below the fixed assets Fixed Assets Always shown at cost Entry under 1st method (Year 1)  Milind Co., purchased a Machine for Rs. 1,00,000 by issuing cheque and which has a useful life of 10 years with the salvage value after 10 years becoming nil. Account for depreciation under both the methods. Assume straight line method of depreciation.  Solution: Date Account Value (Rs) Value (Rs) 1st April `23 Machinery Account Debit 1,00,000 Bank Account Credit 1,00,000 (Being purchase of Machinery ) Depreciation entry at end of year: 31st Mar`24 Depreciation (Expense) Account (Debit) 10,000 Machinery Account (Credit) 10,000 (Being reduction in the value of machine on account of depreciation) The Balance for the Machine in the balance sheet shall be shown at Rs. 90,000 after Year 1, Rs. 80,000 after Year 2 etc Entry under 2nd method (Year 1)  Under this method, the journal entries will be same with a slight difference that instead of crediting the Machinery account we will credit “Provision for Depreciation Account or Accumulated Depreciation A/c.” As a result the entry becomes: Date Account DR/CR Amount Amount 1st April `23 Machinery Account Debit 1,00,000 Bank A/c Credit 1,00,000 (Being Purchase of Machinery) Depreciation entry at end of year: 31st Mar `24 Depreciation (Expense) Account (Debit) 10,000 Accumulated Depreciation Account (Credit) 10,000 (Being provision made for depreciation for the year) Here, the Machinery account in the balance sheet will stand at Rs. 100,000 for all the 10 years … In the second method, the Accumulated Depreciation account shall increase by Rs. 10,000 every year  Depreciation entries when part of asset is sold Example Use Accumulated depreciation method A company purchases 5 machines for Rs. 10,000 each having an average life of 5 years with a salvage value of zero for each machine Assuming straight line depreciation method, the amount of depreciation expense would be Rs 10,000 every year for all machines Depreciation value for each machine= (10000)/5)=2,000 per machine Depreciation for 5 machines = 2,000x5 = 10,000 At the end of year 2,one machine was sold for Rs. 8,000 by cash Year 1 Machinery Account (Debit) 50,000 Bank Account (Credit) 50,000 (Being machinery purchased) Depreciation Account (Debit) 10,000 Accumulated Depreciation (Credit) 10,000 (Being depreciation on the block charged at 20%)  Journal Entries – Year 2 Year 2 Depreciation Account (for 5 (Debit) 10,000 machines) Accumulated Depreciation (Credit) 10,000 (Being depreciation on the block charged for the 2nd year at 20%) Year 2 Bank Account (Debit) 8,000 Other Income (Profit) (Credit) 2,000 Accumulated Depreciation (Debit) 4,000 Machinery Account (Credit) 10,000 Profit (Income) on sale of machinery Value of Machinery sold in books = 10,000-4,000=6,000 Value at which sold =8,000 Profit on sale of machinery=2,000  Methods of Depreciation Depreciation Methods Straight Line Method Written Down Value Depletion Method Method  Straight Line Method Depreciable cost of the asset is proportionately allocated as expense against the profits during each year of the useful life of asset. A company acquires a machinery at the beginning of operations for Rs 10,000. It is expected that the machine will last 10 years and will have no salvage value at the end of its useful life. Annual depreciation will be 1,000 (10,000/10). Written down value at the end of 1st year will be 9,000 (10,000- 1,000) Depreciation @ 10% per annum: Straight-line Method Annual Accumulated Remaining Book Year Cost Depreciation Depreciation Value 0 10000 - - - 1 10000 1000 1000 9000 2 10000 1000 2000 8000 3 10000 1000 3000 7000 4 10000 1000 4000 6000 5 10000 1000 5000 5000 6 10000 1000 6000 4000 7 10000 1000 7000 3000 8 10000 1000 8000 2000 9 10000 1000 9000 1000 10 10000 1000 10000 0 Written Down Value Method: @20% per annum Assumed Life of the asset is fixed and a Original Annual Accumulated Remaining Year certain rate applied to the written Cost Depreciation Depreciation Book Value down value of the asset at the 0 10000 - - 10000 beginning of each year 1 10000 2000 2000 8000 2 10000 1600 3600 6400 The amount of expiration of the 3 10000 1280 4880 5120 cost of the asset is higher during 4 10000 1024 5904 4096 the initial years 5 10000 819 6723 3277 6 10000 655 7379 2621 7 10000 524 7903 2097 The terminal depreciation will be 8 10000 419 8322 1678 taken as Rs1,342 i.e. Rs 268 (the 9 10000 336 8658 1342 depreciation for the period) plus Rs 1074 ( the terminal value of the 10 10000 268+1074 8926 0 asset) Final Year depreciation = 268+1074=1342  Approaches of Depreciation Method Depreciation Methods Written Straight Line Down Value Method Method Annual Annual Year Cost Depreciation Depreciation 0 10000 - - Uniform Accelerated Approach Approach 1 10000 1000 2000 2 10000 1000 1600 Expires the cost Larger amounts are 3 10000 1000 1280 uniformly over the expired during the initial years of life of the assets 4 10000 1000 1024 useful life of the assets e.g. SLM e.g WDV 5 10000 1000 819 6 10000 1000 655 Popular as it is an easy Principle of Conservatism 7 10000 1000 524 method to follow 8 10000 1000 419 9 10000 1000 336 10 10000 1000 1342 Depreciation & Profit Measurement Depending on the method used for charging depreciation, we have a different amount of charge for annual depreciation every year. Difference is only in terms of annual apportionment Total at end of life of year should equal the cost of the asset The net effect of the methods is therefore in terms of showing less or more profit in any particular year Which Method will show higher profits in early years?  Profit Measurement under Different Depreciation Methods Earnings Written Profit Before Straight line Earnings Before down value under Profit under Year Depreciation depreciation Depreciation (say depreciation written Straight line (say Rs.5000/- for 10 years Rs.5000/- per annum) (20%) for 10 down per annum) years value 1 5,000 1,000 4,000 5,000 2,000 3,000 2 5,000 1,000 4,000 5,000 1,600 3,400 3 5,000 1,000 4,000 5,000 1,280 3,720 4 5,000 1,000 4,000 5,000 1,024 3,976 5 5,000 1,000 4,000 5,000 819 4,181 6 5,000 1,000 4,000 5,000 655 4,345 7 5,000 1,000 4,000 5,000 524 4,476 8 5,000 1,000 4,000 5,000 419 4,581 9 5,000 1,000 4,000 5,000 336 4,664 10 5,000 1,000 4,000 5,000 1342 3,658 50,000 10,000 40,000 50,000 10,000 40,000  Example… EXTRACT OF BALANCE SHEET AS A trader buys a delivery van for Rs. 100,000 on 1st April 2023 by issuing ON 31st March 2024 a cheque. Assume that the van will have to be discarded as junk as the Assets Rs. end of ten years with zero value (salvage value =0). Value is reduced Fixed Assets (or Non-Current over the 10 years by the same amount every year (straight line method) Assets). What is the Accounting Entry for the Purchase of Delivery Van and for Depreciation using accumulated depreciation for the first year? Date Account DR/CR Amount Amount Gross Fixed Assets : Vehicle 100,000 1st April `23 Vehicle A/c Debit 1,00,000 Less: Accumulated depreciation -10,000 Net Fixed Assets: Vehicle 90.000 Bank A/c Credit 1,00,000 (Being Purchase of Delivery Van) Other Non-Current 0 Assets(advances, investments etc) Depreciation entry at end of year: Total Non – Current Assets 90,000 31st Mar Depreciation Account (Expense) (Debit) 10,000 `24 Extract of Profit and Loss A/c for the year Ending 31st March 2024 Accumulated Depreciation Account (Credit) 10,000 Explanation Amount (Rs) (Being provision made for depreciation for the year) Here, the Gross Vehicle account in the balance sheet will stand at Rs. Expenses: 100,000 for all the 10 years … Depreciation 10,000 Net Vehicle account will have a balance of Rs 90,000 at end of first year Accumulated Depreciation will be Rs 10,000 for the first year In the Profit and Loss Statement the Depreciation Expense will be Rs 10,000  Example… EXTRACT OF BALANCE SHEET AS ON 31st March 2025 What is the Journal Entry for the Purchase of Delivery Van and for Assets Rs. Depreciation using straight line method for depreciation for the second Fixed Assets (or Non-Current year? Assets) Date Account DR/CR Amount Amount Depreciation entry at end of year: Gross Fixed Assets : Vehicle 100,000 Less: Accumulated depreciation -20,000 31st Mar Depreciation Account (Expense) (Debit) 10,000 `25 Net Fixed Assets: Vehicle 80.000 Accumulated Depreciation Account (Credit) 10,000 Other Non-Current 0 Assets(advances, investments etc) (Being provision made for depreciation for the year) Total Non – Current 80,000 Assets Here, the Gross Vehicle account in the balance sheet will stand at Rs. Extract of Profit and Loss A/c for the year 100,000 for all the 10 years … Ending 31st March 2025 Accumulated Depreciation will be Rs 20,000 (10,000 for 1st Year and 10,000 for the 2nd Year) Explanation Amount (Rs) Net Vehicle account will be Rs 80,000 In the Profit and Loss Statement the Depreciation expense will remain Expenses: at Rs10,000 Depreciation 10,000  Example… EXTRACT OF BALANCE SHEET AS A trader buys delivery van for Rs. 100,000 on 1st April 2023 by issuing a ON 31st March 2024 cheque. Assume that the van will have to be discarded as junk as the end of Assets Rs. five years with zero value. Value is reduced over the 10 years by using the Fixed Assets (or Non-Current Written Down Value Method at 20% per year. What is the Accounting Assets) Entry for the Purchase of Delivery Van and for Depreciation using accumulated depreciation for the first year? Date Account DR/CR Amount Amount Gross Fixed Assets : Vehicle 100,000 1st April `23 Vehicle A/c Debit 1,00,000 Less: Accumulated depreciation -20,000 Net Fixed Assets: Vehicle 80.000 Bank A/c Credit 1,00,000 (Being Purchase of Delivery Van) Other Non-Current 0 Assets(advances, investments etc) Depreciation entry at end of year: Total Non – Current Assets 80,000 31st Mar Depreciation Account (Expense) (Debit) 20,000 `24 Extract of Profit and Loss A/c for the year Ending 31st March 2024 Accumulated Depreciation Account (Credit) 20,000 Explanation Amount (Rs) (Being provision made for depreciation for the year) Here, the Gross Vehicle account in the balance sheet will stand at Rs. Expenses: 100,000 for all the 10 years … Depreciation 20,000 Net Vehicle account will have a balance of Rs 80,000 Accumulated Depreciation will be Rs 20,000 for the first year In the Profit and Loss Statement the Depreciation Expense will be Rs 20,000 Written Down Value Method: @20% per annum Assumed Original Annual Accumulated Remaining Year Cost Depreciation Depreciation Book Value 0 100000 - - 100000 1 100000 20000 20000 80000 2 100000 16000 36000 64000 3 100000 12800 48800 51200 4 100000 10240 59040 40960 5 100000 8190 67230 32770 6 100000 6550 73790 26210 7 100000 5240 79030 20970 8 100000 4190 83220 16780 9 100000 3360 86580 13420 10 100000 13420 100,000 0  Example… EXTRACT OF BALANCE SHEET AS ON 31st March 2025 What is the Journal Entry for the Purchase of Delivery Van and for Assets Rs. Depreciation using accumulated depreciation for the second year? Fixed Assets (or Non-Current Assets) Date Account DR/CR Amount Amount Depreciation entry at end of year: Gross Fixed Assets : Vehicle 100,000 Less: Accumulated depreciation -36,000 31st Mar Depreciation Account (Expense) (Debit) 16,000 `25 Net Fixed Assets: Vehicle 64.000 Accumulated Depreciation Account (Credit) 16,000 Other Non-Current 0 Assets(advances, investments etc) (Being provision made for depreciation for the year) Total Non – Current 64,000 Assets Here, the Gross Vehicle account in the balance sheet will stand at Rs. Extract of Profit and Loss A/c for the year 100,000 for all the 10 years … Ending 31st March 2025 Accumulated Depreciation will be Rs 36,000 (20,000 for 1st Year and 16,000 for the 2nd Year) Explanation Amount (Rs) Net Vehicle account will be Rs 64,000 In the Profit and Loss Statement the Depreciation expense will be Expenses: Rs16,000 Depreciation 16,000  Depletion Method It is suitable in cases of depreciating assets, such as mines, quarries, and oil exploration, where the depreciation is based upon pace of extraction of deposits Depletion is computed by multiplying the units of output for the year with the rate of depletion of resources Example:If a mine with estimated minerals of 50,000 tons is purchased for Rs. 1,00,000, the rate of depletion of the mineral resource will be: Rs. 2 per ton of output (Rs. 1,00,000 / 50,000 tons) So if the output in year 1 is 10,000 tons, the depreciation (depletion) to be charged for that year would be Rs. 20,000 When will the value of the mine be zero in the accounts if 10,000 tons is mined every year ? 5 years  Change in Method of Depreciation A method of depreciation selected has to be applied consistently A change in the method of depreciation requires adherence to the Indian Accounting Standard 8 (Ind AS 8) and approval of the external auditors. Whenever there is a change in depreciation policy it results in influencing not only the amount of current depreciation but it will also affect the accumulated depreciation and hence needs rewriting of the past figures of various items also A change in depreciation method is done in one of the following condition For compliance of accounting standards For more appropriate presentation of the financial statement  Reserves A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation. Unlike provisions, reserves are the appropriations or divisions of profit to strengthen the financial position of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.  XYZ Limited Balance Sheet as at 31 March 2024 (all figures are in Rs. ‘000) Assets Rs. Liabilities & Shareholders’ Equity Rs. Current Assets Current Liabilities Cash 500 Notes payable 600 Marketable Securities 200 Accounts payable 1,000 Notes/Bills receivable 300 Accrued Liabilities 800 Accounts receivable 1,000 Income Tax payable 400 Less: estimated loss on collection 100 900 Bank overdraft 200 Prepaid expenses 500 Total Current Liabilities 3,000 Merchandise inventory (FG) 1,100 Long term Liabilities Current Assets Total 3,500 Debentures 1,000 Fixed Assets Long term loans 2,000 Land 2,000 Long term Liabilities 3,000 Buildings, plant and machinery: 3,000 Shareholder’s Equity Less: Accumulated depreciation 1,000 2,000 Ordinary share capital 2,000 Property Plant and Equipment 4,000 Capital Reserves 500 Intangible Assets Reserves & Surplus 1,500 Goodwill 1,500 Share holders equity 4,000 Deferred Expenditure 1,000 Intangible Assets e.g Patents 2,500 Total Assets 10,000 Total Liabilities & Shareholders’ Equity 10,000  Balance Sheet as on 31st March 2015 and 31st March 2014 ------------------- in Rs. Cr. ------------------- 31st Mar 15 31st Mar-14 Dr. Reddy`s Laboratories 12 mths 12 mths EQUITIES AND LIABILITIES SHAREHOLDER'S FUNDS Equity Share Capital 85 85 Total Share Capital 85 85 Reserves and Surplus 10,549 9,244 Total Reserves and Surplus 10,549 9,244 Total Shareholders Funds 10,634 9,329 NON-CURRENT LIABILITIES Long Term Borrowings 939 902 Deferred Tax Liabilities [Net] 129 125 Other Long Term Liabilities 26 5 Long Term Provisions 50 34 Total Non-Current Liabilities 1,143 1,065 CURRENT LIABILITIES Short Term Borrowings 2,186 1,763 Trade Payables 716 842 Other Current Liabilities 1,237 1,029 Short Term Provisions 540 480 Total Current Liabilities 4,679 4,114 Total Capital And Liabilities 16,456 14,508 ASSETS NON-CURRENT ASSETS Tangible Assets 3,129 2,694 Intangible Assets 120 55 Capital Work-In-Progress 488 576 Fixed Assets 3,738 3,324 Non-Current Investments 1,760 1,740 Long Term Loans And Advances 554 536 Other Non-Current Assets 1 - Total Non-Current Assets 6,053 5,600 CURRENT ASSETS Current Investments 2,102 1,066 Inventories 1,723 1,592 Trade Receivables 4,712 4,562 Cash And Cash Equivalents 901 665 Short Term Loans And Advances 866 829 OtherCurrentAssets 99 194 Total Current Assets 10,403 8,908 Total Assets 16,456 14,508 Reserves – Classification Reserves Revenue Capital Reserve Reserve General Specific Reserve Reserve e. g. workmen compensation reserve Revenue Reserve These reserves are created out of the revenue profits General reserves (or free reserves) Created to add financial strength Ensures funds to meet future expenses or contingencies Example: Contingency Reserve, dividend payments, bonus shares Specific Reserves Created for some specific purpose Examples: Workmen Compensation Reserve, Statutory reserve, debenture redemption reserve Capital Reserve These reserves are created out of capital profits and arise due to non-operational activities of any business Examples: Premium on issues of shares/debentures, Sale of a Division/company etc. As they are not earned through regular business hence these reserves are often not available for distribution among the shareholders as dividends. Bonus shares can be issued out of this balance. Accounting Information Flow Journal Ledger Book Trial Balance Adjustments Balance Sheet Adjusted Trial and Profit and Balance Loss Account