44. Ans. Q.45. Ans. 0.46. Ans. 47. Ans. Q.48. Ans. Q.49. Ans. ‘What is ‘income received in advance’ ? ‘An income which is received by the firm though it is not earned by it till the end of accounting period, is called Income received in advance, e.g., advance commission received, etc. What is a current ratio ? Currentratio measures the numerical relationship between current assets and current liabilities of an enterprise. Itis expressed as Current Assets Current Ratio = Curent Ass What isa liquid ratio/quick ratio/ acid test ratio? Liquid ratio is a relationship of liquid assets with current liabilities ofa firm. Its measured as, suid Ratio = _tisuid Assets Uauid Ratio = Current Liabilities How will you test the short-term solvency position of an enterprise ? Short-term solvency of any enterprise can be tested by computing current ratio and liquid ratio, The standard current ratio is 2: 1 and standard liquid ratio is 1: 1 What is gross profit ratio ? Gross Profit ratio measures the percentage relationship between gross profit and net sales of a firm during an accounting period. tis calculated as Gross Profit Gross Profit Ratio = SrossProfi 100 =..% ‘What is Net Profit Ratio ? Net Profit ratio measures the percentage relationship between net profit and net sales of a firm during an accounting period. itis computed as NP Ratio = Net Profit x 19 Net Sales Comprehensive Project 2 1, Name of the Project : A study of the business of ‘Antivirus Computer Classes’. 2. Objectives of the Project : (i) To know whether the business of “Antivirus Computer Classes’ is a success or failure. (if) To know whether the bank will agree to grant loan to the business. 3, Period of Study : Year ending 31st March 2015, 4. Analytical tools used : Ratio Analysis 5. Source Material : The Project Statement of “Antivirus Computer Classes’ PROJECT STATEMENT : M/s Antivirus Computer Classes (On Ast April, 2014 Mr. Roop Narain Vijayvergia decided to open a computer training centre ‘Anti Virus Computer CClasses'.For this purpose he built the first floor of his house at a cost of €3,50,000 and decided to invest 2,50,000 asa further capital in the proposed business. He wanted to start with 30 computers costing € 25,000 each. He approached HDFC Bank and secured a loan to the extent of 80% of the cost of computers @ 10% p.a. The loan was payable in 4 annual instalment along with Interest due. The remaining amount of cost of computers in paid by him. Accountancy ~ 12 (9)The transactions during the financial year 2014-15 were : z Purchases of Computers 7,50,000 Security Deposited for electric connection with electricity board 20,000 Security Deposited with VSNL for telephone and Internet connection 0,000 Purchased Furniture 40,000 Fees received from students 6,50,000 Bought computer stationery 1,10,000 Sale of computer stationery 1,60,000 Wages paid 90,000 Salaries paid 1,25,000 Electricity charges 47,500 Advertisement 22,000 Postage and Call 9,500 General Expenses 6,000 Insurance Premium 4,600 Bought Printer Machine 30,000 He withdrew % 12,000 per month as drawing and repaid the annual instalment of bank loan along with interest due on 31st March, 2015. Assume all transactions took place through HDFC Bank. You are required to (2) Journalise these transactions after considering the following information : (0) Depreciate building by 5% and computer and Furniture @ 10% p.a. (i) Salary unpaid & 9,000 (iil) Advertisement include unissued material worth & 4,000. (iv) Insurance prepaid € 1,500. (W) Stock of computer stationery & 19,500. (2) Post them into Ledger and prepare Trial Balance. (3) Prepare financial statements for the year ended 31st March, 2015. (4) Me. Roop Narain wishes to expand his business further so he approached his banker for further loan. What ratios shouldhisbanker considerbefore providingloan considering that similar firmsearn 60%as Gross Profitand 25%asNet Profit? Sol. The Project work is (Planning) (i) To prepare accounting record of Mr. Roop Narain for the accounting year 2014-15. (if) To prepare Trial Balance and his Trading and Profit and Loss Account and Balance Sheet, (ii) To calculate profitability ratios. (iv) To know whether he will get further bank loan or not. Necessary data is given to complete the Project Work. Execution of Project Work (1) Preparation of Journal, Ledger and Trial Balance. (2) Preparation of financial statements for the year ending 31st March, 2015. (3) Computation of gross profit ratio, net profit ratio and operating ratio to assess profitability, (4) Computation of short term and long term solvency ratios to know whether loan be given by bank or not. Accountancy ~ 12 (20)In the Books of Mr. Roop Narain Vijayvergi ie) Journal Date Partai te] eR) | eR 2018 rer01 | Building Ae or 350.000 Bank Ne or 2,50,000 ToCapial ale 590,000 (For capital investedin business) recor [Bankare be 600.000 ToBankLoan 00,000 (Forloan taken from HOFC Bank Le, 80% of £70,000), (Computers Aje o 1,50,000 To Bank Ne 750,000 (For 30 computers purchased @ & 25,000 each) peor [ Elecricty Board Oe 20,000 Vsnt ale or 50,000 ToBank Ne 70,000 (or securty deposited) Furniture A/c De 0,000 ToBank Ne 40,000 (or furiture purchased) Bank Ne De 650.000 To Fees from Students A/c 550,000 (For fee receive from computer classes during year) Purchases Ae oe 1,10,000 ToBark Ne 410,000 (For stationery purchased fr compute) ‘Bank Ne oe 160,000 ToSales fe 1160,000 (or compute stationery sold) Wages Ne Dr 90,000 Salaries Ne oe 125,000 Electrity Charges Ae or “47500 ‘Advertisement Ale or 223000 Postage and Call A/c or 9.500 General Expenses Ale or 6.000 Insurance ale or ‘4500 To Bank Ne ao (For expenses pai) Printer Machine Ae or 30,000 ToBank Ne 30,000 (For printer purchased) Drawings Ale De s4ao00 ToBank Ne 144,000 (For rowing made dutng year) Interest on Bank Loan Ne or 0,000 To BankLoan Ale 60,000 (orinterest due as bank oan Le. 10% of ®6 0,000), Bank Loan Ale o 20000 ToBank Ne 210,000, (For festnetalmenton loan pa along with interest @ 108 on loan ie. 150,000 + € 60,000) atthe [Depreciation Ne Be 96,500 endof | ToBulding Ale 37500 theyear | To Computers Ale 75/000 ToFurnture Ae 4000 (For depreciation provided on tangible xed assets) Accountancy ~ 12 enSalaries Ae ‘To Salaries Outstanding A/e 3,000 {For salary due but not paid) ‘Stock of Advertisement Ale Dr 4,000 ‘To Advertisement A/c 4,000 {For stock of advertisement materi!) Prepaid Insurance Ale Dr 11500 To insurance A/c 1,500 {For insurance prepaid) ‘Closing Stock A/c DF 19500 To Purchases A/c 19,500 {For stock of stationery purchased for computers left) Grand Total '3859,100 | 38,59,00 2) Ledger Accounts or. Building A/c cr. Date’ Particulars we] = ate Particulars uw pote 2015 ‘Apr. 01 | To Capital Ale +3,50,000 | Mar. 31 | By Depreciation A/e 37,500 Mar. 32 | By Balance fd 3,32,500 350,000 350,000 201s. ‘pr 01 | To Balance b/d 3,32,500 Dr. Bank A/c cr. Date Particulars a Date Particulars a 2014 2015, ‘Apr. 01 | To Capital A/c 2,50,000 | Mar. 31. | By Computers A/c 7,50,000 To Bank Loan Afe ,00,000 ‘by Electricty Board (Security) 20,000 ‘To Fees from Students A/c 6,50,000 ‘By VSNL (Security) 50,000 To Sales Me 160,000 ‘By Furniture A/e 40,000 ‘By Purchases A/c 1.20,000 By Wages A/c 90,000 By Salaries A/c 1.,25,000 ‘5y Electricity Charges Ae 47,500 By Advertisement A/c 22,000 ‘By Postage and Call A/c 9,500 ‘By General Expenses A/c 6,000 ‘By Insurance Ae 4,800 ‘By Printer Machine 30,000 By Drawing Ale 3.44,000 ‘By Bank Loan Ae 2,20,000 By Balance c/d 2,400 36,60,000, 36,60,000 201s ‘spr. 01_| To Balance b/d 1.400 or. Capital A/c cr. Date Particulars a Particulars i. 2015 2018 Mar. 32 [To Balance c/é 6,00,000 | apr. 01 | By Building a/c 3,50,000 By Bank Ale 2,50,000 6,00,000 6,00,000 2015 ‘apr. 01 | By Balance b/d 6,00,000 Accountancy ~ 12 @)Dr. Bank Loan A/c cr ‘ate Pariculars a Parla me 215 2a ‘Mar. 31 | To Bank Ae ‘npr 01 | ay Bank Ne +6,00,000 Mar. 31 | To Balance c/a Mar. 31 | ay interest Ne 60,000 50.000 2015 or.01 | ay Balance b/d 450.000 Dr. Computers A/c cr. Date Particles a a Paris mI 201 2015 prot | To Bank ve 750,000 | Mar. 31 | By Depreciation Ae 75,000 Mar. 31 | By Balance «fa 6.75.00 750,000 750,000) 201s prot | ToBalance b/d 6.750000 Dr. Electricity Board A/c cr. Date Panta Te] & owe Parties mm 2018 2015 or.01 | To Bank Ave 70,000] Mar 31 | By Balance fs 20,000 2018 or.01_| To Salonce b/é 20,000 Dr. VSNL A/c cr. Date Parmeular Tle | ome Paral rad 2018 2015 ‘pr.01 | To Bank A/c 50,000] Mar. 31 | ay Balance c/a 50,000 2015 or. 01 | to Balance b/s 0,000 Dr. Furniture A/c cr. Date Particles a a Paroles mI 2018 2015 ‘rer. 01 | to Bank ale 40,000 | Mar. 31 | 8y Depreciation Ae 4000 mar 31 | By Balance e/d 35,000 20,000 20,000 2015 or.01 | ToBalance b/a 36,000 br. Fees from Students A/c cr Date Pareles a Parts ad pois [To Tading Ale 50000]2014 | By Bank Ale 550000 Dr. Purchases A/c E Date Partcula a a Paria Teens! 201s 2014 | To Bank We 1,10,000 | Mar. 31 | By closing Stock A/c 19,500 Mar. 31 | ay Troding Ale 30,500 310,000 310,000 Accountancy ~ 12 23)Dr. Sales A/c cr. Dae Particulars a Parteua m=] 2015 Er} Mar. 21 | To Trading Ale 3,60,000 By Bank A/c e000 Dr. Wages A/c cr. Date Paris a Partculrs mS 2015, 2015 Mar 31. | To Bank Ale 0,000 | Mar. 31 | By Trading A/c 90,000 Dr. Salaries A/c cr. Date Particulars Te] * | ae Particular iesleae 21s 2015 To Bank Ae 125,000 | Mar. 31 | By Profit and Loss A/c 1.34,000 To Salaries Outstanding Ne on 134,000 134,000 Dr. Electricity Charges A/c cr. Date Particulars a Parteulae m=] 2015 2014_| To Bank Ale 447500 _| Mar. 31 | By Profit and Loss Ale 47500 Dr. Advertisement A/c cr. Date Particles a Partears =e 2015 2014 | To Bank Aye 22,000 mar. 31 | by stock of Advertisement A/e +4000 Mar. 31 | by profit and Loss Ale 15,000 223000 22,000 Dr. Postage and Call A/c cr. Date Partials a Particulars iiri[ea 2015 2014 | To Bank Ae 3500 _ | mar. 31 | By Profit and Loss Ale 500 Dr. General Expenses A/c cr. ae Particulars a Pareears iei[eae 201s 2015 To Bank Ale 6000 _ | Mar. 31 | ay Profit and Loss Ale 6,000 or. Insurance A/c cr. Date Particle a Partai =e 201s 2015 To Bank Ae 4500 | war. 31 | ay Prepaid Insurance Ve 44500 Mar. 31 | By Profit and Loss Ale 3,100 3500 500) Dr. Printer Machine A/c cr. Date Panicle Te] ed] ome Parseulare TT 2018 2015 ‘apr 01 | To Bank Ale 30,000 | Mar. 31 | ey Balance c/a 30,000 30,000 30,000 201s or.01 | ToBalanceb/a 30,000 Accountancy ~ 12 esDr. Drawings A/c cr Date Partie Th] * | ome Partulars 7 201 2015 ‘To Bank Ae 148,000 | Mar. 31 | By Balance e/d 188,000 201s, ‘apr 01 | to Balance b/d 1,48,000 Dr. Interest on Bank Loan A/c cr Dae Parle TA] ® | ome Perseus mS Mar 31 [To Bank Loan Ale 60,000 _| Mar. 31 [By Profit and Loss Ale 60,000 Dr. Salaries Outstanding A/c cr Dae Parle Th]? | ome Paral TF 201s 2015 Mar 21 | To Glance c/a 3,000 | mar. 31 | ay Salaries Ale 3,000 201s 01 | oy Balance b/d 3,000 Dr. Stock of Advertisement A/c cr Date Paris Th] =| ome Partulas TI ® 2015 2015 ‘Mar. 31 | To Advertisement Ae 000 | mar. 31 | By Balance «/a 2,000 201s, ‘apr ot | to Balance b/ +000 Dr. Prepaid Insurance A/c cr. Date Paris Th] ® | ome Partulas Tm _® ‘Mar 31 | To insurance Ale TSOO] Mar. 31 | By Balance e/a 500 20s, ‘ape 01 [To Balance b/d 14500 Dr. Closing Stock A/c cr Dae Parseuare Te] ome Parseulare mS 2015 2015 Mar. 31 | To Purchases A/e THOT] Mar. 31 | By Balance c/d 19500 2015 Ape 01 | 1o Balance 6/8 19,500 Dr Depreciation A/c er. Date Pericles a Parieuars ies ae 2015 201s Mar. 21 | to aullaing A/c 17500 | war3t | ey Prost and Loss Ne 96,500 Mar 21 | 10 Computer We 75,000 ‘Mar. 31 | To Furniture Ae 000 Accountancy ~ 12 (25)‘rial Balance ‘95 at March 31, 2015 37 Wo Name of edger Accounts De Balance | Cr Balance z z 7 | autaing 332500 - 2 | eank 1.400 - 3. | capital =| 500,000 4. | Bank toan =] 430,000 5. | Computers 675,000 - 6. | etectsty Board 20,000 - 7 | vss. 50,000 - 8. | Furniture 36,000 - 9. | Fees rom students =| 630,000 10. | Purchases 90,500 - 11. | sales =] 160,000 12. | wages 90,000 - 2. | solares 1,34,000 - 14. | electricity charges 147500 - 15, | Adverisement 18,000, - 16. | Postage and Call 9500 - 17. | General expences 6,000 - 18, | insurance 3,100, - 19. | printer Machine 30,000 - 20. | orawings 2,44,000 . 21, | Interest on Bank Loan 60,000 - 22. | Depreciation 96,500 - 23, | salaries Outstanding =| 9.000 24, | stock of Adverosement 000 : 25, | Prepaid insurance 1.500 - 26,_| Cosing Stock of Goods (31-03-2015) 19500 7 Teal 18,59,000| 18,69,000 8) Financial Statements Trading and Profit and Loss A/c Dr. for the year ending March 31, 2015 cr. Partials z Parielans z To Purchases {90500 | By Sales A/c 160,000 To Wages 30,000 | By Fees fom Students 650,000 ToGross Profit e/d 629500 Tota [80000 total [#0000 ToSatares 334,000 | By Gross Prot b/d 29500 Totlectrity Charges 147500 ToAdvertsement 18,000 To Postage and Call 9.500 ToGeneral Expenses 6,000 ‘To Insurance 3100 To lnterst on Bank Loan 60,000 To Depreciation Building 37500 Computers 75,000 Furniture 14000 | 95,500 ‘To Net Profit transferred to Capital Ae 2,54,900 total [639500 tera! [639,500 Accountancy ~ 12 @)Balance Sheet as at 31st March, 2015 Ubiities z Tessie z Salary Outstanding 9300 | Bank 7400 BankeLoan 450,000 | prepaid insurance 1.500, Capital 1500,000 Closing Stock 193500, ‘Add Net Profit 2,54,300 Stock of Advertisement 4,000 Building 3,50,000 Less: Drawings 720800] Less: Depreciation 117500 | 332,500 Computers 750,000 Less: Depreciation 75,000 | 675,000 Forniture less: Depreciation ‘400 | 36000 Printer Machine 30.000 Electricty Board (Security Deposit) 20,000 VSNL (Security Deposit) 50,000 total [THES seal [7769600 (4) Banker should consider the following ratios before providing loan Proftabil () Gross Profit Ratio = GIOSSProfit x 499 = 629,500 0 Sales eed 8,10,000 1005 77.71%6 Wi) Net Profit Ratio = NEtProft 199 = 2,54,900 , (i) Ne Profit Ratio = NELEFOF 99 = 254-900 x 109 = 31.46% Win Operating tao = Ctl Snes Operating Pens), sop where (0) CostofSales = Sales ~ Gross Profit = 810,000 ~6,29,500 = 1,80,500 (b) Operating Expenses = Salaries + Electricity Charges + Advertisement + Postage + General Expenses + Insurance + Interest + Depreciation = 1,34,000 + 47,500 + 18,000 + 9,500 + 6,000 + 3,100 + 60,000 + 96,500 %3,74,600 Operating Ratio = ( 5,585,100 Boron *100 = 68.53% Comments : 19. The Gross Profit Ratio of Mr. Roop Narain is 77.71% against industry standard of 60% which is quite good. 19. The Net Profit Ratio of firm is 31.46% against industry standard of 25%. Its also good. Solvency Ratios : (Short-term Solvency Ratios Current Ratio = _Current Assets (@) Current Rat = rent abilities where Current Assets Bank + Prepaid Insurance + Stock of Stationery + Stock of Advertisement = 400 + 1,500 + 19,500 + 4,000 = @ 26,400 Current Liabilities = Outstanding Salaries + Instalment of Bank Loan (to be paid next year) = 9,000 + 1,50,000 = 1,59,000 26,400 9.4734 Thus, Curent Ratio = 4252405 = Accountancy ~ 12 en(b) Debt Equity Ratio = Long-TermLoan _ Bank Loan (after 1 year repayment) Owner Fund (Owner Fund = 3,00,000 S10 50eee Conclusion at. Ans. a2 Ans. a3. Ans. a4 Ans. as. Ans. a6. Ans. a7 Ans. as. Ans. Qs. Ans. Q.10. Ans. Qi Ans. Qi. Ans. Short-term solvency is very poor as current ratio is hardly 0.17 : 1 against standard ratio of 2:1. Debt Equity Ratio indicates that long-term borrowing is only 0.42 : 1 against standard ratio of 2:1. So loan can be granted by bank but firm should improve its short-term liquidity position as the current ratio is very poor. VIVA QUESTIONS ‘What is an “accounting entity concept” ? ‘According to this concept, a business is treated as a separate entity. It is quite distinct from its owner, ‘What is money measurement concept ? According to this concept, only those transactions are recorded in the books of accounts which can be measured in terms of money. Under which accounting principle, the caliber or quality of the management not disclosed in the balance sheet? Money measurement principle. ‘What is a cash book ? ‘A.cash book is a special journal or a subsidiary book in which all cash transactions are recorded directly, i.e, ‘without recording transactions in the journal. Is cash Book a book of original entry ? Yes, Cash Book's a book of original entry since all cash transactions of the firm are first recorded in the Cash Book. Is cash book a journal or a ledger ? Cash Book is both a Journal and a Ledger. It is journal as all cash and bank transactions are first of all recorded init, Ibis a ledger also as whenever Cash Book is prepared, cash and bank accounts are not opened again in the ledger. ‘What is the difference between cash account and cash book ? Cash account i a part of ledger accounts while cash book is part of subsidiary books. Entries which are recorded in the cash book do not appear in journal Purchase of funiture on credit should be recorded in purchase book or Journal proper? Journal proper. ‘What is meant by financial statements ? Financial Statements refer to two statements, namely an Income statement (e., Trading and Profit and Loss Account) and a Balance Sheet. What isa Debt Equity Ratio ? Debt equity ratio measures the relationship between long-term debts and Owners’ Capital/Shareholders’ Fund/ Net Worth. It is measured as Long-Term Loan Shareholders’ Fund/Net Worth ‘The standard ratio is 2: 1. Lower ratio is considered better. ‘What is operating ratio ? Debt Equity Rati Operating ratio measures the percentage relation between cost of sales and operating expenses to net sales during an accounting period. ‘State whether payment of long-tem loan will result Decrease. \rease, decrease or no change in Debt-Equity ratio. Accountancy ~ 12 (20)