Cost + Profit = Sales

Sales - Cost = Profit

 Revenue – Expenditure = Net Income

 Revenue Equation

 This is nothing but Profit and loss Account

 Classification of expenditure

Capital Revenue
long term benefits Short term benefits
More than one year Less than one year
Appears on asset side Appears on debit side
of Balance Sheet of Profit and loss
account
Capital Expenditure takes place only
when the following two conditions
are satisfied :
1. The ownership is established with
documentary evidence or otherwise.
2. The owner has been given the
possession of the asset.
The payment has nothing to do with
the incurrence of capital expenditure;
whether payment is made or not .
Revenue Expenditure :
Revenue expenditure takes place
when the benefit of the expenditure is
exhausted, consumed, used up,
finished or over within a given period
not exceeding one year.
Capital Expenditure

Land
Buildings
Plant and Machinery
Furniture
Office Equipments
Vehicles
Goodwill
Patent/Copyrights
 Revenue Cost

Variable Cost Fixed Cost

Direct Cost Indirect Cost

Volume Based Time Based

 Direct Costs
Materials consumed
Labour
 Carriage inwards/Freight

 Other direct expenses

 Examples of Indirect Revenue
Expenses
Office Rent Office Expenses/General Exp
Administrative Exp. Sundry Exp.
Telephone Charges/ Rent, Rates & Taxes
Insurance Printing & Stationary
Audit Fees Postage
Internet expenses Interest
Bank Charges Commission Paid
Discount Allowed Advertisement
Bad Debts Carriage Outwards
Depreciation
 Revenue Incomes
Interest received
Discount received
Commission received
Other incomes
 Vertical presentation

Revenue Income …….

Less: Cost /(revenue) …….

Net income …….

 Profit and Loss Account
( in vertical form)

Revenue Income (Sales) ……..

Less: Direct Expenses/ ……..
Variable Cost
Gross Profit/ Contribution ……..
Less: Indirect Expenses: ……..
Administration Costs ……..
Selling and distribution costs .…….

Net Profit/ Income …….

 Profit Volume Ratio

Gross Profit / Contribution

= X 100
Sales
 Profit Volume Ratio
 Operational Efficiency/ inefficiency
 Mostly remains constant unless variable
cost changes or selling Price changes.
 Subject to assumptions P/V ratio always
remains same.
 It is not time based.
 Negative Contribution - alarming situation
 Decrease in P/V ratio - Serious Attention
 Profit and Loss Account
 Summary of the business operations
conducted during a given period usually a
year.
 It is revenue in nature.
 It shows the gross revenue i.e. income
generated during a year, as against the
direct and indirect expenses incurred
during the period for generation of revenue
during that period.
 It follows the matching principle.
 Balance Sheet
 Financial Statement of affairs at the end of
the accounting year.

 Financial position on the last day of the

accounting year.

 Result of business operations conducted

during the accounting year.
 Balance Sheet
 Two parts - Assets side
Liabilities side

 It is a snap shot of business conducted

during a period and represents a financial
status of assets on hand and liabilities
payable/ outstanding on the last date of
accounting year.
 Asset Side of Balance Sheet
 All the Capital Expenditure which have yet to be
used/ enjoyed in the business appears on the
asset side
 Real Accounts
 Assets yet to be used in business operations
 Assets on hand at the end of the accounting
period.
 Shows the benefits and services which are yet
to be availed from others. These are known as
representative personal accounts / personal
accounts.
Liabilities Side of Balance Sheet
 Benefits which have been used/ availed in
business but not been paid for
 Persons from whom services are availed but
not yet paid for
 Liabilities for Capital Expenditure which have
not been paid as on the date of Balance sheet
 Shows Owners Fund for which the Company is
liable to account for
 Consists only of personal accounts
 Specimen
Profit & Loss Account for the year ended as on ……
To Salaries ………… By Gross Profit …………
To Office Rent ………… By Interest Received …………
To Office Expenses/General Exp ………… By Discount Received …………
Administrative Exp. ………… By Commission Received …………
Sundry Exp. ………… By Bad Debts Recovered …………
To Telephone Charges/Rent …………
To Rates & Taxes …………
To Insurance …………
To Printing & Stationary …………
To Audit Fees to Postage &
Telegram …………
To Interest …………
To Bank Charges …………
To Commission Paid …………
To Discount Allowed …………
To Advertisement …………
To Bad Debts …………
To Carriage Outwards …………
To Depreciation …………
To Nett Profit …………
________ ________
Total ………… Total …………
________ ________
 Balance Sheet of ……. Co. Ltd.
As at …………
(Format as per Schedule VI Brief Synopsis of Format)
1. Share Capital 1. Fixed Assets
Authorised Capital Goodwill
Issue Capital Land and Building
Subscribed Capital Plant and Machinery
Called up Capital Furniture and Fixtures
Less Calls in Arrears
Add Share forfeited
2. Investments
2. Reserves and Surplus In Govt. Securities
Capital Reserve In Shares and Debentures
Capital Redemption Reserve
Share Premium Account
3. Current Assets, Loans and Advances
A – Current Assets
Other Reserves
Interest Accrued on Investments
P and L App. A/c
Stores and Spares
Loose Tools
Stock
3. Secured Loans Work-in-progress
Debenture
Sundry Debtors
Other Secured Loans
Cash in Hand
4. Unsecured Loans Cash at Bank
Fixed Deposits B – Loans and Advances
Short Term Loans and Advances Advances and Loans to Subsidiaries
5. Current Liabilities and Provision Bills of Exchange
A - Current Liabilities Advance Tax etc.
Bill Payable Balance with customs
A Unclaimed Dividend
B - Provisions
4. Miscellaneous Expenditure
Provision for Taxation Preliminary Expenses
Proposed Dividend Underwriting Commission
Other Provisions Discount on Shares and Debentures
Profit and Loss A/c (Dr.)
__________ __________
Total …………….. Total ………………….
__________ __________
Contingent Liabilities
(As a foot note; Not Added)
1 Share Capital
.

Authorized Capital
Issued Capital
Subscribed Capital
Called up Capital
Less Calls in Arrears
Add shares forfeited
2.Reserves and Surplus
General Reserve
Capital Reserve
Capital Redemption Reserve
Share Premium Account
Other Reserves
P and L Appropriation Account
3.Secured Loans
Debentures
Other Secured Loans

4.Unsecured Loans
Fixed Deposits
Short Term Loans and
Advances
Current Liabilities and Provisions

A - Current Liabilities
Creditors for supplies
Bill Payable
Unclaimed Dividend

B - Provisions
Provision for Taxation
Proposed Dividend
Other Provisions
 FIXED ASSETS
 Goodwill
Land and Building
Plant and Machinery
Furniture
Office Equipments
Motor Vehicles
2. Investments

In Govt. Securities

In Shares and Debentures of

other companies or associate
companies
Current Assets, Loans and
Advances
A – Current Assets
Raw Materials
Work-in-progress
Finished goods
Bills receivables
Sundry Debtors
Cash in Hand
Cash at Bank
B – Loans and Advances
Prepaid Expenses
Advances and Loans to
Subsidiaries
Bills of Exchange
Advance Payment of Tax
Balance with customs
4.Miscellaneous Expenditure

Preliminary Expenses
Underwriting Commission
Discount on Shares and
Debentures
Profit and Loss A/c (Dr.)
 Vertical Form
Name of the Company…………
Balance Sheet at as ………..

Schedule No. Figures as at Figures as at

the end of the end of
Current Previous
Financial Year Financial Year
1 2 3 4 5

I. Sources of Funds
(1) Shareholders Funds
(a) Capital
(b) Reserves and Surplus
(2) Loan Funds :
(a) Secured Loans
(b) Unsecured Loans
Total
II. Applications of Funds
(1) Fixed Assets :
(a) Gross Block
(b) Less Depreciation
(c) Net Block
(d) Capital Work-in Progress
(2) Investments
 Vertical Form
Name of the Company…………
Balance Sheet at as ………..

Schedule No. Figures as at Figures as at

the end of the end of
Current Previous
Financial Year Financial Year
1 2 3 4 5

(3) Current Assets, Loan and Advances :

(a) Inventories
(b) Sundry Debtors
(c) Cash and Bank Balances
(d) Other Current Assets
(e) Loans and advances
Less : Current Liabilities and Provisions
(a) Liabilities
(b) Provisions
(4) (a) Miscellaneous Expenditure to the
extent not written off or adjusted
(b) Profit and Loss Account

Total
 Vertical Form
Profit and Loss A/c for the year ending ………………

Amount
Rs.

Sales ………………

Less : Cost of Sales ………………

Gross Profit ………………

Less : Administration and Selling Expenses ………………

Operating Profit (EBIT OR PBIT) ………………

Less : Interest ………………

Profit before Tax (PBT OR EBT) ………………

Less : Tax ………………

Profits after Tax (PAT OR EAT) ………………

 Amount
Rs.

Material Consumed :

Opening Stock at the beginning of the period/year ………………

Add : Purchases during the period/year ………………

Less : Closing Stock at the end of the period/year ………………

………………
Treatment of Revenue Expenditure
Paid

Rent Reduces cash or bank

balance
Staff Salaries
Office expense
OR
Telephone Expenses
Internet Expenses
Conveyance expenses Not Paid
Travelling expenses Appears as an liability
Electricity Expenses on the Liabilities side
of Balance Sheet

Revenue Expenditure

Debit side of Profit and Loss Account

Treatment of Capital Expenditure
Paid

Land Reduces cash or bank

Building balance

Plant and Machinery

OR
Furniture
Motor Vehicles
Office Equipment Not Paid
Patents / Copyrights Appears as an liability
on the Liabilities side
of Balance Sheet

Capital Expenditure

Appears on the asset side of Balance Sheet

 Treatment of Revenue Expenditure
Paid
Reduces Cash/
Bank Balance

Revenue Expenditure

Liability
Not Paid appears on the
liabilities
side of B/S
Appears on the expenses
side of Profit and Loss A/c
 Treatment of Revenue Expenditure
Paid
Reduces Cash/
Bank Balance

Revenue Expenditure

Liability
Not Paid appears on the
liabilities
side of B/S
Appears on the expenses
side of Profit and Loss A/c
 Treatment of Capital Expenditure
Paid
Reduces Cash/
Bank Balance

Capital Expenditure

Liability
Not Paid appears on the
liabilities
side of B/S
Appears on the asset side of
Balance Sheet
 Treatment for Advance Payments
Reduces Cash/
Bank Balance

Amt paid in advance

Appears as on
Before the incurrence of asset on the
assets side of B/s
(services/benefits
yet to be availed
Revenue Exp. Capital Exp. received)
 Treatment for Owners Funds
Increases Cash/
Bank Balance

Capital introduced by
Owners/Shareholders

Appears on the
liabilities side of
Balance Sheet
 Loan Availed
Asset appears
at asset value on
the asset side of
B/s

Loan availed for an

asset
Loan Amount
appears as an
liability on the
liabilities side of
B/s
Repayment of Loan/Outstanding Liability

Reduces
Cash/Bank
balance

Repayment of
Loan/Outstanding
expenses
Reduces the
liability item on
liabilities side of
B/s
 Chart Showing Capital
Employed and Net Worth
Net Worth Equity Share Capital

Shareholders Funds Preference Share Capital

Capital Employed

Owners Funds Reserves (of all kinds)

Equity Profit and loss A/c

Proprietors Funds Less : Deferred Revenue Exp.

Less : Loss on Profit and Loss A/c

Debentures / Long term Loans

Debt
(both secured and unsecured)
 Rules of Debit and Credit
Name of the Debit Credit
Account

Real What comes in What goes out

Accounts

Nominal All Expenses All incomes and

Accounts and Losses gains

Personal The receiver of The giver of

Accounts benefit benefit
1. The left hand side of the Profit
and Loss Account is known as
the debit side.
2. The right hand side of the Profit
and Loss Account is known as
the credit side
3. The Assets side of the Balance
Sheet is known as the debit
side.

4. The Liabilities side of the

Balance Sheet is known as the
credit side.
The Profit and Loss Account contains
only the nominal accounts.

The Assets side of Balance Sheet

contains only the real accounts and
personal accounts.

The Liabilities side of Balance Sheet

contains only the personal accounts.
The Trading Account is a real account;
however since it records the outgoing goods
at the selling prices i.e. sales (which includes
profit); the Trading Account reveals Gross
Profit.

The Gross Profit is transferred to Profit and

Loss Account credit side; from where all
operating expenses (administration and
selling expenses) are deducted to arrive at
the Net Profit.
The net profit in the case of a company is
shown on the liabilities side under the heading
Profit and Loss Account Balance.

The balance in the Profit and Loss account

belongs to the shareholders and the business
being a separate business entity is liable to
account for the shareholders’ funds; and
therefore the Profit and Loss account balance is
shown on the liabilities side.
Fixed Cost

= Sales x Profit volume Ratio - Profit

 Fixed Cost
 Breakeven Point =
( in Value) Profit volume ratio

Profit for given sales

= Sales x Profit Volume Ratio – Fixed Cost

Sales Required Fixed Cost + Desired Profit
to earn a given =
Profit Profit volume Ratio
 Fixed Cost
 Breakeven Point =
(in Units) Contribution per unit

 Sales Required Fixed Cost + Desired Profit

to earn a given =
profit (units) Contribution per unit
 Leverages

Operating Leverage Financial Leverage

Contribution EBIT
EBIT EBT

Operation Risk /Business Risk Financial Risk

Higher the ratio – Higher the risk involved

Lower the ratio – lower the risk involved
 Leverages
Leverage means a change in sales
causing a disproportionately greater
change in operating profits or profits after
interest.
There are three types of leverages :
1. Operating leverage.
2. Financial leverage
3. Combined leverage
 Operating Leverage
Operating leverage occurs when a change in the
level of sales causes a disproportionately larger
change in the operating profits.
Operating leverage indicates the business risk or
operating risks.
Operating leverage results because of the existence
of Fixed costs in the total operating costs.
The fixed operating costs do not change with the
change in volume of sales.
Therefore, Operating leverage is given by the ratio
of Contribution/EBIT.
The higher the ratio , higher the operating risks.
Lower the ratio , lower will be the operating risks
 Financial Leverage
1. Financial leverage is the tendency of the residual
net income to vary disproportionately with the
operating profits.
2. Financial leverage, therefore, indicates the
financial risks undertaken by the business concern.
3. Financial leverage results because of the existence
of debt content in the total capital of the company.
4.. Financial leverage results from the existence of
fixed financial costs.
5. Financial leverage is given by the following formula :
EBIT/EBT.
6.. Higher the ratio , higher the financial risks. Lower
the ratio, lower the financial risks. Higher the
financial leverage, higher the returns to the
 Interest

Tax on Income
Profit
(EBIT) Dividend

Retained Earnings
 Working Capital :
 Current Assets – Current Liabilities

 It is a circulating capital which is

always in rotation; passing through current
assets and current liabilities in a
continuous flow.
 This is the capital which should
always be kept in rotation at any given
point of time during a given period or year
to achieve a particular level of output.
 Working Capital Cycle

Debtors/
Cash
Receivables

Finished
Creditors
goods

Work in
Raw Materials
progress
 Working capital should be adequate
enough to enable the concern to achieve its
targeted production and sales. It should be
sufficient enough (not more or not less) to
meet the needs of business.

 High amount of working capital

adversely affects the return on investment;
as it leads to holding unproductive and idle
assets which do not contribute in any
manner to serve the business goals.
 On the other hand a low level of
working capital will deprive the concern
to achieve its production level; thereby
missing the sales and missing the profits.

 Hence the working capital should

be adequate enough to meet the needs of
the business enterprise.
Management of Accounts Receivables :
On one side of the coin you have On the other side of the coin you
the following advantage have the following disadvantages

Increase in Credit Terms 1. Additional Funds are blocked for

a longer period- resulting in loss
of return on the funds blocked
(B)
Increase in Sales 2. Risk of Bad Debts increases with
the increase in Sales Volume (C)
3. Increase in Collection Charges
(D)
Increase in Profits (A) 4. Tax Impact on additional Profits.
(E)
As long as the increase in profits (A) is greater than the total of (B) + (C)
+ (D) + (E); it is advisable to extend more credit. However, if the figure is
 Net Profit Ratio
Net Profit
Net Profit Ratio = x 100
Sales
 Ratio indicates the net income earned by the
concern during a given period.
 expressed in percentage, it indicates how much
a concern has made net profit per rupee of
Sales.
 Gross profit ratio is more important than a net
profit ratio.
Gross Profit Ratio

Gross Profit
= X 100
Sales

This ratio indicates the operational

efficiency or inefficiency
Net Profit Ratio

Net Profit
= X 100
Sales

This Ratio indicates how much the

company is earning per rupee of
sales revenue
Operating Ratio

Cost of Goods Sold + Operating Expenses

= X 100
Sales

This ratio indicates the extent of

operating cost incurred by the
company in generating per rupee of
sales revenue.
Current Ratio

Current Assets
=
Current Liabilities

This ratio indicates whether the company

has got the ability to meet its short term
obligations on time. It shows the liquidity
position of the company
 Liquidity Ratio
Liquid Assets
=
Immediate Liabilities

 Liquid Assets = Current Assets – Stock

 Immediate Liabilities = Current Liabilities –
Bank Overdraft
 This ratio indicates whether the company
has got the adequate liquidity to meet its
immediate liabilities on time.
 Debtors Turnover Ratio
( Average Collection Period)

Debtors
= x 365 days/ 12 months/
52 weeks
Credit Sales

This ratio indicates the extent to which the

company grants credit to its customers.
Creditors Turnover Ratio
( Average payment Period)

Creditors
= x 365 days/ 12 months/
52 weeks
Credit Purchases

This ratio indicates the extent to which the

company enjoys credit from its suppliers
and others.
Debt Equity Ratio

Debt
=
Equity

This ratio indicates the debt raising

capacity of the company.
 Fixed Assets Turnover Ratio

Turnover
=
Fixed Assets

 This ratio indicates whether the fixed

assets have been effectively used
 Stock Turnover Ratio

Cost of Goods Sold

=
Average Stock

 This ratio indicates the number of times

the stock has been rotated in business.
 Proprietary Ratio
Proprietary Ratio
= Owner’s Funds
Total Assets
This ratio indicates the extent of owner’s
moneys involved in the total assets of the
company.
When expressed in percentage it gives
the extent of ownership of the assets.
Earning Per Share

Profit After Tax – Preference Dividend

=
Number of Equity Shares

 This ratio indicates how much has been

earned by one share of the company.
 Return on Shareholders Funds
or Net Worth Ratio
Return on Shareholders Funds :
Net Profit (after tax)
= x 100
Shareholders Funds

It the measure of the return accruing to

the shareholders on their Funds invested in
the business enterprise.
 Return on Equity Capital
Return on Equity Capital :

Net Profit — Dividend to Preference Shareholders

= x 100
Equity Share Capital (Paid) up

It measures what the shareholders are

getting on the original share capital
contributed by them.
 Return on Capital Employed
Return on Capital Employed :

Net Profit before Interest and Taxes

= x 100
Capital Employed

It indicates the return on Funds which are

used in the business. This Funds comprises of
the owners funds and borrowed funds.
 Return on Total Resources /
Total Assets
Return on Total Assets :
Net Profit ( after tax)
= x 100
Total Assets

It indicates the utilization of the assets

used. Whether the assets are giving adequate
returns.
 Capital Gearing Ratio
Capital Gearing Ratio :

Fixed Interest bearing securities +

Fixed dividend bearing shares
=
Equity Shareholders Funds

It explains how gears are used in the

business.
 Investors Ratios

1. Earnings per share :

Net Profit available to Equity Shareholders
EPS =
Number of Equity Shares

2. Dividend Yield Ratio :

Dividend paid per equity Share
=
Market price per equity share
 Investors Ratios
3. Price Earning Ratio
Market Price per share
PE Ratio =
EPS

4. Dividend Payout Ratio

Dividend per Share

=
Earnings per Share