Financial Statements:

Basic Concepts II
On June 1, 20XX, Manish starts his business of computers in a small town with Rs. 6,00,000. He has a personal
saving of Rs. 5,00,000 and he take a loan of Rs 1,00,000 from a bank at a interest of 12% computed on
monthly basis. He has to repay the loan in 12 equal installments of Rs. 8,885 payable in the first week of
every month. First installment is to be paid in July 20XX. He hired a show room at a monthly rent of Rs.
25,000. He paid an advance rent for two months on June 1. He opened a bank account and put Rs. 5,00,000 in
the bank.
On June 2, He purchased furniture of Rs. 1,20,000, payment was made by cheque. The expected life of this
furniture is five year. He appointed Kuber for his assistance at a salary of Rs. 8,000. p.m., Salary is to be paid
on first day of the next month. On June 5, he purchased 20 computers @ Rs. 30,000 per computer from Rohit
and Co., a firm of his acquaintance. He paid Rs.3,00,000 by cheque and promised to may rest of the money
within two months.
During the month he sold 12 computers @ Rs. 40,000 each. Eight computers were sold for cash, while
remaining four were sold on credit of one month. The amount is expected to realize is July. The received cash
is deposited into bank.
•He paid Rs. 1, 50, 000 to the supplier by cheque.
•His other expenses for the month are:
•Relating to business: Rs. 6,000
•Household expenses: Rs. 10,000.
•How much profit did Manish earn during first month of his business?
 Preparation of Income Statement
• Accrual Basis of Accounting
• Matching Concept
• expenditure and expense
• Direct Matching vs. Period Cost
 If loan is treated is Corporate Loan

Manish Computer Business

Balance Sheet on June 1, 20XX
Liabilities Amount Assets Amount
Equity 5,00,000 Cash 50,000
Bank Loan 1,00,000 Bank 5,00,000
Advance Rent 50,000
6,00,000 6,00,000
Manish Computer Business
Balance Sheet on June 1, 20XX
If loan is treated is Personal Loan
Liabilities Amount Assets Amount
Equity 6,00,000 Cash 50,000
Bank 5,00,000
Advance Rent 50,000
6,00,000 6,00,000
 Profit and Loss account of Manish Computer Business
For the month ended on June 30, 20XX.
(Amount Rs.)

Sales (12 computers) 4,80,000

Cost of Goods Sold (12 computers) 3,60,000
Gross Margin 1,20,000
Expenses:
Rent (one month) 25,000
Salary (one month) 8,000
Interest on Bank Loan (if loan is treated as Corporate Loan) 1,000
Other Business Expenses 6,000
Depreciation 2,000
Profit for the month 78,000
 Cash Account
Receipts Amount Payments Amount
Equity 5,00,000 Deposited into Bank 5,00,000
Deposited into Bank 3,20,000
Loan 1,00,000 Rent 50,000
Sales (8 ×40000) 3,20,000 Business Expenses 6,000
Household Exp. 10,000
Total Receipts 9,20,000 Total Payments 8,86,000
Balance 34,000

Bank Account
Receipts Amount Payments Amount
Deposits (On Opening) 5,00,000 Payment to Supplier 3,00,000
Payment to Supplier 1,50,000
Deposits (Sales) 3,20,000 Furniture 1,20,000
Total Receipts 8,20,000 Total Payments 5,70,000
Balance 2,50,000
 Manish Computer Business
Balance Sheet on June 30, 20XX
Liabilities Amount Assets Amount
Equity 5,68,000 Cash 34,000
Loan 1,00,000 Bank 2,50,000
Unpaid Salary 8,000 Debtors (4×40,000) 1,60,000
Creditors(6,00,000- 1,50,000 Stock (8×30,000) 2,40,000
4,50,000) Furniture 1,18,000

O/S Interest on Loan 1,000 Advance Rent 25,000

8,27,000 8,27,000
 Cash Flow Statement of Manish Computer Business
For the month ended on June 30, 20XX.
Opening Cash Balance nil
Cash from Operation:
Cash inflow from Sales 3,20,000
Cash paid to Supplier (4,50,000)
Operating Expenses Paid (Rent + Business Expenses) (56,000) (1,86,000)
Cash From Investment Activities:
Furniture Purchased (1,20,000)
Cash from Financing Activities:
Equity Investment 5,00,000
Drawings (10,000)
Loan 1,00,000 5,90,000
Closing Balance (34,000+2,50,000) 2,84,000
 Practice Case 1: Rachana Boutique
Rachana runs a boutique in the town. She started her business on January 1, 2013 with capital of Rs. 3,
00,000 totally financed from her own savings. She hired a showroom at a monthly rent of Rs. 8,000 and paid a
security deposit of Rs. 50,000; which is refundable at time of the termination of the tenancy without interest. The
rent will increase by 10% every year. Rent for a month is paid in the third week of the month. She also purchased
furniture of Rs. 1,50,000; the useful life of the furniture is 10 years. She paid insurance premium of Rs. 4,800 on
June 1, 2014. The insurance policy covers all type of risk for two years.
Initially, Rachana employed two girls for her assistance at showroom but with increase in the volume of the
business she employed one more girl since October 1, 2015. All the girls are paid a monthly salary of Rs. 4,000.
Salary for a month is paid in the first week of the next month. She employs professional tailors who are paid on
the piece rate basis.
Till March 31, 2015, Rachana did not maintain any proper record; except the recodes of receivables and
payables. On this date she had to collect Rs. 85, 000 from debtors and had to pay Rs. 65,000 for dress materials
and Rs. 8,500 for tailoring charges. She had a bank balance of Rs. 1, 20, 000 and cash in hand of Rs. 6, 850.
She provides the following information regarding the stock on this date:
Item Cost (Rs.) Estimated Net
Realizable Value (Rs.)
Dress Materials 25,000 28,000
Dresses 75,000 1,20,000
She started keeping proper accounting records since April 1, 2015. During the financial year 2015-20XX,
she purchased dress materials of 5,60,000 and paid Rs. 5,50,000 to suppliers. Tailoring charges paid during the
year are Rs. 1,82,000 and Rs. 6,700 are still payables on March 31, 20XX towards this. Dresses of Rs.
10,55,000 were sold. Amount receivable in regards to the dresses sold is Rs. 72,600 on March 31, 20XX. Other
expenses paid during the year are Rs. 16,000. Rachana has withdrawn Rs. 48,000 from the Boutique’s bank
account for personal expenses during the year. Cash in hand on March 31, 20XX is Rs. 5,186. The following
information is obtained regarding the closing stock:
Prepare the Income Statement of Rachana Boutique for financial year ended on March 31, 20XX and the
Balance Sheet on that date. Item Cost (Rs.) Estimated Net
Realizable Value (Rs.)
Dress Materials 32,000 36,000
Dresses 84,000 80,000
 Joy & Co.
You are given the balance sheet of Joy & Co. on April 1, 2015 and its receipts and payments
for the year 2014-15:
Balance Sheet As on April 1, 2015
Receipts and Payments
For the Year 2014-15
Receipts:   Additional Information:
From Sales and Debtors 11,32,000 Balance on Mach 31, 20XX:
Commission 12,000 Sundry Debtors: 2, 80,000
TOTAL 11,44,000 Sundry Creditors: 1, 22,000
Inventory 6,30,000
Payments:   Operating Expenses paid in advance
For Purchase and Creditors 7,22,000 21,000
Operating Expenses 1,12,000 Building was purchased on April 1,
Loan Refunded 1,25,000 2010. Its expected life is 20 years.
Interest on Loan paid 32,000
Computer Purchased for Office on July 1, 50,000
Prepare Balance sheet of Joy & Co. as
2007) on March 31, 20XX.
(Expected life 5 year)
Insurance (on July 2007, for one year) 12,000
Owner’s Household Expenses 20,000
TOTAL 10,73,000
Liabilities Amount Assets Amount
Owner’s Equity 8,00,000   Land 5,00,000
Retained Earnings 5,20,000 13,20,000 Building 8,00,000  
Loan 5,25,000 Accum. Dep. 1,20,000 6,80,000
Sundry Creditors 1,25,000 Debtors 2,20,000
Outstanding Operating Expenses 32,000 Insurance Prepaid 3,000
    Inventory 5,32,000
    Cash and Bank 67,000
  20,02,000   20,02,000