Accounting Ratios

What are Ratios?

• Ratio is a mathematical number that measures the relationship
between two accounting numbers . It is called "Financial Ratio"
• It can be expressed as fraction proportion or percentage in between
two accounting figures .
• The use of different types of accounting ratios to evaluate the
financial performance of a business is called Ratio Analytics .
• Ratio expresses "quantitative " relationship between two items or
group of items .
 Types of Ratios

Balance Sheet Ratio Income Statement Combined/Mixed

Ratio Ratio

Current Liquid Gross Operating Net Profit Return on Return on

Ratio Ratio Profit Ratio Expense Ratio Capital Investment
Ratio Employed
Balance Sheet Ratios

CURRE
LIQUID
NT
RATIO
RATIO
Current Ratio
• The current ratio (also referred to as the working capital ratio) is a
formula that helps companies to measure their ability to pay off their
short-term liability dues within a year.
• It aims to show how they can maximize their current assets to settle
their short-term debts to creditors.
• It is calculated by dividing the total value of the current assets of a
business by the value of its current liabilities.
• The ideal current ratio is 2:1 which indicates that Current Assets are
twice the Current Liabilities. It measures short term solvency of
business enterprises
How Is the Current Ratio Calculated?
Current Ratio = Current Assets
Current Liabilities

• To calculate the current ratio, divide the company’s current assets by

its current liabilities.
• Current assets are those that can be converted into cash within one
year, while current liabilities are obligations expected to be paid
within one year.
• Both current assets and current liabilities are listed on a company’s
balance sheet.
 EXAMPLES OF

Current Assets Current Liabilities

(1)Sundry Debtors (1)Sundry Creditors
(2) Loose Tools (2)Bill Payable
(3) Bill Receivable (3)Bank Overdraft
(4) Cash and Bank Balance (4)Income Received in Advance
(5) Investment in Marketable Securities (5)Short Term Loan
(6) Short term Loans and Advances (6)Provision for Taxation
(7) Stock and Inventories (7) Outstanding Expenses
(8) Prepaid Expenses etc. (8) Unclaimed dividend etc.
Question 1: Calculate the Current Ratio. Mention whether it's ideal or not.
Liabilities Amount (₹) Assets Amount (₹)
Capital 1,00,000 Goodwill 25,000
Creditors 50,000 Closing Stock 55,000
Loan Taken 80,000 Debtors 1,00,000
Prepaid Income 20,000 Loose Tools 20,000
Provident Fund 50,000 Machinery 1,00,000
3,00,000 3,00,000

• Current Assets = Closing Stock + Debtors+ Loose

Tools
= 55,000+1,00,000+ 20,000
= ₹1,75,000
• Current Liabilities = Creditors + Loan Taken+ Prepaid Income
= 50,000+80,000+ 20,000
= ₹1,50,000
• Current Ratio = Current Assets / Current Liabilities
= 1,75,000/1,50,000
= 7:6
Ideal Current Ratio: 2:1. Therefore, it's not at ideal current ratio.
 Question 2:
Case I: Case II:
Current Ratio is 3:1 and Current Liabilities Current Ratio is 2:5 and Current Assets are
are ₹33,000. Find out the Current Assets. ₹80,000. Find out the Current Liabilities.

Current Ratio=Current Assets/Current Liabilities Current Ratio = Current Assets/Current Liabilities

3/1 = Current Assets/ 33,000 2/5 = 80,000/ Current Liabilities

Current Assets = 3 x 33,000 Current Liabilities = (80,000 x 5)/2

= ₹99,000 = ₹2,00,000
 Liquid Ratio (Quick/ Acid-Test Ratio)
• Liquid ratio is a financial metric that assesses a company's capability
to meet its short-term debts usings its liquid assets

• It is calculated by dividing a company's liquid assets by its current

liabilities

• The liquid ratio reveals whether a company possesses sufficient

liquid assets to address its short-term obligations. A higher ratio
signifies improved liquidity and better financial health
 Liquid Ratio = Liquid Assets/ Quick Assets
Current Liabilities

• Liquid assets = Currents Assets - (Stock + Prepaid Expenses)

(Liquid assets include Cash balance, Bank balance, Debtors, Bills Receivable & Market
Securities.
Prepaid expenses, Advance taxes, etc. are excluded as they cannot be converted into cash.
Stock is excluded since it is uncertain as to when and how much it will rise. )

• Liquid Liabilities =Current Liabilities - (Overdraft + Advance Received)

 The following list outlines what various liquid ratio vales
generally suggest:
• 1.00 or higher = Indicates good quality and the ability to cover short-term
debts
• 0.50 - 0.99 = Suggests fair liquidity, with potential difficulties in covering
short –term debts
• Below 0.5 = Represents poor liquidity, indicating possible financial
challenges

Note: The ideal liquid ratio can differ based on the industry and the size of the
company. Therefore, comparing a company's liquid ratio with that of its peers and
relevant industry benchmark is critical.
Question 1. Calculate Liquid Ratio
Liabilities Amount(₹) Assets Amount(₹)
5000 Equity Shares (₹100 each) 5,00,000 Land & Building 5,00,000
8% 2000 Pre Shares(₹100 each) 2,00,000 Plant & Machinery 6,00,000
9% 4000 Debentures(₹100 each) 4,00,000 Debtors 2,00,000
Reserves 3,00,000 Stock 2,40,000
Creditors 1,50,000 Cash and Bank 55,000
Bank Overdraft 50,000 Prepaid Expenses 5,000
16,00,000 16,00,000
• Liquid Ratio = Liquid Assets/Liquid Liabilities
• Liquid Assets = Cash and Bank + Debtors
= 55,000 + 2,00,000
= ₹ 2,55,000
• Liquid Liabilities = Creditors = 1,50,000
• Liquid Ratio = 2,55,000/1,50,000
= 1.7 : 1
LIQUID RATIO IS 1.7:1
Question 2.
Calculate the Quick Ratio from the following :-

Working Capital : ₹1,00,000

Current Assets : ₹2,00,000
Stock : ₹30,000
Prepaid Expenses : ₹25,000

• Quick Assets = Current Assets – Stock – Prepaid Expenses

= 2,00,000 – 30,000 – 25,000
= 1,45,000
• Quick Liabilities = Currents Assets – Working capital
= 2,00,000 – 1,00,000
= 1,00,000
• Quick Ratio = Quick Assets/ Quick Liabilities
= 1,45,000/1,00,000
= 1.45 : 1
QUICK RATIO IS 1.45:1
Gross Profit
Ratio
Analysis of Financial Statement- Ratio Analysis
 Meaning
Ratio is a mathematical number that measures the relationship between two accounting
figures. It is also called as “Financial Ratio”. Gross Profit Ratio is a part of Income Statement
ratio/ Turnover or Margin Ratio.

Gross Profit Ratio: This ratio measures relationship between Gross Profit
and Net sales. It is calculated to measure the efficiency of production
department. It is usually expressed in the form of percentage.
Application:
● It is a financial metric that helps a company assess its
profitability from its core business operations
● Creditors and lenders may use GP Ratio to assess a
company’s creditworthiness
● It can help companies make informed decisions about
scaling production, entering new markets, or launching
Derivation of Gross
Profit Ratio (Formula)

Gross Profit = Net Sales - Cost of Goods sold

● Net sales = Sales - Sales Return
● Cost of goods sold = Opening stock +
Purchase + Direct Expense - Closing stock
Q1) From the following information calculate Gross Profit ratio

Items (₹)

Sales 3,40,000
Sales Return 20,000
Opening stock 58,000
Closing stock 62,000
Cost of goods sold 2,40,000
Answer:
Net sales = Sales - Sales Return
= 3,40,000-20,000
= 3,20,000₹
Gross Profit = Net sales - Cost of goods sold
=3,20,000 - 2,40,000
= 80,000₹
Gross Profit ratio= Gross Profit / Net Sales * 100
= 80000/320000*100
=25%
Q2) calculate gross profit ratio

₹
Inventory in the beginning of the year 600,000
Net purchases 900,000
Inventory in the end of the year 2,00,000
Operating expense 94000
Wages 50,000
Custom duty 12000
Work managers salary 5000
Net sales 16,40,000
 Answer
Cost of goods sold= Opening stock+ Purchase + direct expense - closing stock - goods outflow
at cost
=600,000+900,000+142000-2,00,000
=14,42,000
Gross profit = Sales- Cost of goods sold
= 16,40,000-14,42,000
=198000
Gross Profit ratio= Gross Profit/ Net Sales*100
= 198,000/1640000*100
=12%
Note: Operating expense won't be considered in cost of goods sold since it is not a direct
expense and cannot be used to find Gross Profit.
Q3) Find the Gross profit ratio
Particulars Amount
Credit sales 500000
Cash sales 40000
Sales Return 6000
Purchase 60000
Purchase Return 3000
Decrease in Inventory at cost due to fire 7000
Opening stock 600,000
Wages 12000
Net sales= Credit sales + Cash Net Sales 534000
Sales - Sales Return
=500,000+40,000-6000 - COGS
=5,34,000₹ Opening stock 6,00,000
Purchase 57000
Gross Profit= Gross Profit/
Net sales*100 Direct Expenses 12000
=122000/534000*100
Goods outflow at cost (7000)
=23%
Closing stock (250,000) (412000)
Gross profit 1,22,000
Q4)
If company A has Sales of ₹5,20,000 with the cost of goods sold being
4,00,000₹
and Company B has Sales of ₹800,000 with Cost of goods sold being
6,90,000₹
And Company C has sales of ₹10,00,000 and Cost of goods sold being
₹11,20,000
If Mahesh has to grant a loan of ₹7,00,000 to one of these companies, which
company would be most preferred?
Company A
Gross profit = Net sales- Cost of goods sold
=5,20,000-4,00,000
=1,20,000₹
Gross profit ratio = Gross Profit / Net Sales * 100
=120000/520000*100 =23%

Company B
Gross Profit =Net sales- Cost of goods sold
=8,00,000-6,90,000 =1,10,000
Gross profit ratio = Gross Profit / Net sales *100
=1,10,000/8,00,000*100=14%
Company C
Company C is suffering a Gross loss since Cost of goods sold is greater than Net Sales

On the basis of Gross Profit Ratio, Mahesh will lend a loan to Company A having 23% as Gross Profit ratio
Q5) Calculate Gross profit Ratio
Credit Sales = 3,00,000
Cash Sales = 25% of total sales
Purchases = 3,20,000
Excess of Closing inventory over opening inventory= 40000
Opening stock =100,000
Total sales = x

Cash sales = 0.25x

Credit sales= 3,00,000

Cash sales + credit sales= Total Sales

300000= x-0.25x

x= 400,000(Total Sales)

Closing stock = 100000 + 40000= 1,40,000

Cost of goods sold = Opening stock + Purchase + Direct expense - closing stock

=100000+ 320000- 1,40,000

=2,80,000

Gross Profit = Sales- Cost of goods sold

=400000-280000= 120,000₹

Gross Profit Ratio = Gross Profit/ Net Sales*100

= 120,000/ 400,000 *100=30%

Q6)
Compute Gross Profit Ratio
Revenue from operations = 4,00,000
Gross profit = 25% on cost
Answer
If cost of goods sold(100) + Gross Profit(25) = Sales(125)
Gross Profit = 25/125*400000
= ₹80000
Gross Profit ratio= Gross Profit/ Net Sales*100
=80000/400000*100
= 20%
Net Profit Ratio
What is net profit ratio?
• The net profit ratio is the ratio of the profit after taxes to the net sales of a
company. . If the value of this ratio is negative, then it indicates the net loss
ratio.
• Net profit ratio, also known as net profit margin, measures a company's
financial performance or profitability after taxes. The net profit ratio reveals
the remaining profit after deducting production costs, financing and
administration from sales and income taxes. You can use the net profit ratio
to determine the financial value of a company and its overall
performance. It is a good measure for comparing the results of a business
with its competitors.
• As companies mention the net profit ratio as a percentage rather than an
amount, it is possible to compare the profitability of two businesses even if
their sizes are different. With the help of the net profit ratio, investors can
evaluate whether a company's management is generating enough profit
from the sales.
Net Profit Ratio Formula
• It can be calculated by dividing the net profit by net sales over a given period of time and can
be expressed in percentage by multiplying the ratio by 100.
• The formula to calculate the net profit ratio is as follows:
• Net Profit Ratio = (Net Profit / Net Sales) x 100
• In this formula,
• Net Profit = Operating Profit – (Direct Cost + Indirect Expenses),
• Net Sales = Sales – Returns
• This formula can be modified for use by a non-profit organization by replacing net profit in
the formula with net assets.
• The net profit ratio, however, is not an indicator of cash flow as it includes many non-cash
expenses like amortization, depreciation and accrued expenses. (Cash Flow - Cash flow refers
to the net balance of cash moving into and out of a business at a specific point in time. )
Question 1
• Let us assume that ABC company has sales of Rs. 10,00,000 and sales
returns of Rs. 5,00,000. Its direct costs are of Rs. 1,00,000 and indirect
costs are of Rs. 2,00,000. Then, what is the company's net profit
ratio?
 Answer 1:

• The formula is Net Profit Ratio = (Net Profit / Net Sales) x 100
• However, to find this out, we need to find out the net sales of the company,
• The formula for this is,
• Net Sales = Sales - Returns
• = 10,00,000 – 5,00,000
• = Rs. 5,00,000
• Next is finding out Net Profit, the formula for which is,
• Net Profit = Operating Profit – (Direct Cost + Indirect Cost)
• = 5,00,000 – (1,00,000 + 2,00,000)
• = 5,00,000 – 3,00,000
• = 2,00,000
• Now Net Profit Ratio = (Net Profit / Net Sales) x 100
• = (2,00,000 / 5,00,000) x 100
• = 0.4 x 100
• = 40%
Question 2:
• Calculate the net profit ratio form the following data:
Direct expenses : 50000
Indirect Expenses: 40000
Cost of Goods sold: 100000
Sales: 200000
Answer 2:
Sales 200000
Less: Cost of goods sold 100000
=Gross Profit 100000
Less: Direct + Indirect Expenses(50000+40000) 90000
Net Profit 10000

Net Profit Ratio = Net Profit / Net Sales X 100

= 10000/ 200000 X 100 = 5%

Question 3:
Raj Limited Company has a gross profit of Rs. 6,70,000.
Calculate Net Profit Ratio from the following information given below:
Sales: 30,00,000
Salaries: 70,000
Rent: 90,000
Interest on Debentures: 90,000
Answer 3:
Gross Profit 6,70,000
Less:
Administrative Expenses( salaries + rent 1,60,000
= 90,000+70,000)
Interest on Debentures 90,000 2,50,000
Net Profit 4,20,000

Net Profit Ratio = Net Profit X 100

Net Sales

= 4,20,000/30,00,000 X 100
= 14%
Question 4:
• Gross Profit of Karan Limited for the year ended 31st March, 2023 is
6,60,000. Calculate the net profit ratio from the following
information:
• Sales: 21,60,000
• Advertising Expenses: 75,000
• Product and packaging expenses: 50,000
• Administrative Expenses: 2,60,000
Answer 4:
Gross profit 6,60,000
Less:
Advertising Expenses: 75,000
Product and packaging expenses: + 50,000
= 1,20,000
(Selling and Distribution Expenses)
Administrative Expenses 2,60,000 3,80,000
Net profit 2,80,000

Net Profit Ratio = Net Profit X 100

Net Sales

= 2,80,000/ 21,60,000 X 100

=12.97%
Question 5:
• Calculate the net profit ratio from the following data:

• Cost of goods sold: 2,00,000

• Sales: 5,40,000
• Insurance: 1,00,000
• Wages: 20,000
• Income Tax: 75,000
Answer 5:
Sales 5,40,000
Less: Cost of goods sold 2,00,000
= Gross Profit 3,40,000
Less:
Wages (Direct Expenses) 20,000
Insurance (Indirect expenses) + 1,00,000 1,20,000
Net Profit 2,20,000

Net Profit Ratio = Net Profit X 100

Net Sales

= 2,20,000/ 5,40,000 X 100

=40.74%

Note: Income Tax is a personal liability of an individual (a partner in a partnership firm or a sole trader) paid
off from business capital and not the liability of the firm or organization and hence, is counted as drawings. It
will therefore, not be included in the calculation of net profit ratio.
Question 6:
• M/s Sudarshan Traders is a Partnership Firm in which Ram and Krishna
are partners sharing profits in the ratio 3:2. Ram withdraws goods
worth Rs. 30,000 and Krishna’s drawings are 800 per month.
• Gross Profit for the year ended 31st March, 2021 is Rs. 1,20,000.
• Sales: Rs. 4,00,000
• Sales Return: Rs. 20,000
• Direct expenses: Rs. 20,000
• Indirect Expenses: Rs. 40,000
Answer 6:
Gross Profit 1,20,000
Less:
Direct expenses 20,000
Indirect expenses 40,000 60,000
Net Profit 60,000

Net Profit Ratio = Net Profit X 100

Net Sales
Net Sales = Sales – Sales Return
= 4,00,000 – 20,000 = 3,80,000
= 60,000 / 3,80,000 X 100 = 15.79%

Note: Drawings made by both the partners are personal liabilities paid off from business capital and not the
liability of the business. It will therefore, not be included in the calculation of net profit ratio.
Operating Profit Ratio
 Operating Profit
What is Operating Profit?
Operating profit is the net income derived from core operations of the
company. It is the amount of money that a company has left over after
meeting its operating costs but before paying its taxes.
It is also known as Earnings before interest and taxes (EBIT).

The formula for calculating Operating profit is :

Operating Profit = Gross Profit - Operational Expenses
 Operating Profit Ratio
Operating Profit Ratio is the ratio used to define a relationship between
operating profit and net sales.
It shows the financial sustainability of a company’s basic operations prior to
any financial or tax related repercussions.

Formula for calculating operating profit ratio is

Operating Profit Ratio = ___________________
Operating Profit x 100
Net Sales
Q1. Calculate Operating Profit Ratio from the following information:

Sales = Rs 4,60,000
Sales Returns = Rs 76,000
Gross Profit = Rs 2,40,000
Administrative Expenses = Rs 40,000
Distribution Expenses = Rs 80,000
Solution:
Operating Profit = Gross Profit – Operating Expense
= Gross Profit – (Administrative Exp. + Distribution Exp.)
= 240000 – (40000 + 80000)
= Rs 120000
Net Sales = Sales – Sales Returns
= Rs 460000 – Rs 76000
= Rs 3,84,000
Operating Profit Ratio = ___________________
Operating Profit x 100
Net Sales
= ____________
120000 X 100
384000
= 31.25%
Q2. From the following information compute operating profit ratio for M/s ABC.Ltd:

Sales = Rs 8,00,000
Cost of Goods sold = Rs 3,60,000
Office Expenses =Rs 80,000
Finance Expenses = Rs 60,000
Selling and Distribution Expense = 7.5% of sales
Solution:
Gross Profit = Sales – Cost of goods sold
= 800000 – 360000
= Rs 4,40,000
Selling and Distribution Expenses = 7.5% x 800000
= Rs 60000
Operating Profit = Gross Profit – Operating Expense
= 440000 – (80000 + 60000 + 60000)
= Rs 2,40,000
Operating Profit Ratio = ___________________
Operating Profit x 100
Net Sales
= _________
240000 x 100
800000
= 30%
Q3. From the following information calculate operating profit ratio:
Opening stock Rs 10,000
Purchases Rs 1,20,000
Revenue from operations Rs 4,00,000
Returns from revenue from operations Rs 20,000
Selling Expenses Rs 70,000
Administrative Expenses Rs 50,000
Closing Stock Rs 60,000
Solution:
Cost of goods sold = Opening stock + Purchases – Closing stock
= 10000 + 120000 – 60000
= Rs 70,000
Gross Profit = Net Sales – Cost of goods sold
= (400000 – 20000) – 70000
= Rs 3,10,000
Operating Profit = Gross Profit – Operating Expenses
= 310000 – (70000 + 50000)
= Rs 1,90,000
Operating Profit Ratio = _____________________
Operating Profit x 100
Net Sales
= ___________
190000 x 100
380000
= 50%
Q4. From the following data find Operating profit ratio for M/s XYZ.ltd for the year 2023-24:

Dr Trading Account for the year ended 31st March 2024 Cr

Particulars Rs Particulars Rs
To Opening Stock 140000 By Sales 500000
To Purchases 290000 By Closing Stock 130000
To Gross Profit b/d ?

Dr Profit and Loss Account for the year ended 31st March 2024 Cr
Particulars Rs Particulars Rs
To Distribution Expense 20000 By Gross Profit b/d ?
To Office Expenses 80000
Solution :
Gross Profit = (500000 + 130000) – (140000 + 290000)
= Rs 2,00,000

Operating Profit = Gross Profit – Operating Expense

= 200000 – (20000 + 80000)
= Rs 1,00,000

Operating Profit Ratio = ___________________

Operating Profit x 100
Net Sales
= _________
100000 x 100
500000
= 20%
Q5. Calculate Operating profit ratio from the following data:
Sales = Rs 10,00,000
Sales Returns = Rs 2,00,000
Dr Profit and Loss Account for the year ended 31st March 2024 Cr
Particulars Rs Particulars Rs
To Administrative Expenses 1,50,000 By Gross Profit b/d 560000
To loss on sale of machinery 1,00,000

To discount on issue of shares 40,000

To Interest on loan for working 2,00,000

capital
Solution:
Net Sales = 10,00,000 – 2,00,000
= Rs 8,00,000
Gross Profit = Rs 5,60,000
Operating Profit = Gross Profit – Operating Expenses
= 5,60,000 – (1,50,000 + 2,00,000)
= Rs 2,10,000
Operating Profit Ratio = ____________________
Operating Profit x 100
Net Sales
= _________
210000 x 100
800000
= 26.25%
Note : Loss on sale of machinery and discount on issue of shares are non operating
expenses and hence are not taken into consideration while calculating operating profit.
Q6. Calculate operating profit ratio :
Sales = Rs 3,20,000
Returns = Rs 40,000
Gross Profit Ratio = 36%
Operating Expenses = Rs 28,000
Solution:
Net Sales = Sales – Returns
= 320000 – 40000
= Rs 2,80,000
Gross Profit Ratio = ______________
Gross Profit x 100
Net Sales
36 = ______________
Gross Profit x 100
280000
Gross Profit = 280000 x 36
_______________
100
= Rs 100800
Operating Profit = Gross Profit – Operating Expenses
= 100800 – 28000
= Rs 72800
Operating Profit Ratio = _______________
Operating Profit x 100
Net Sales
= ________
72800 x 100
280000
Operating Ratio
Operating Ratio
• The term operating ratio refers to the efficiency of a company's management by
comparing the total operating expense of a company to net sales. The operating
ratio shows how efficient a company's management is at keeping costs low while
generating revenue or sales. The smaller the ratio, the more efficient the company is
at generating revenue vs. total expenses.
• Formula : Operating Ratio = *100
• Where,
• Cost of goods sold= Opening stock+Purchases+Wages-Closing Stock
• Operating expenses : 1.Office and Administrative expenses
2. Selling and Distribution Expenses
3.Finance Expenses (Excluding interest on loans and debentures)
Example 1)
• Tech Company A
• Opening Stock = ₹10,00,000
• Purchases = ₹20,00,000
• Closing Stock = ₹5,00,000
• Operating Expenses (Other than COGS) = ₹8,00,000
• Net Sales = ₹50,00,000
• Step 1: Calculate COGS:
• Cost of goods sold= Opening stock+Purchases+Wages-Closing Stock
Example 1) cont.
• COGS=10,00,000+20,00,000−5,00,000=₹25,00,000
Step 2: Calculate Operating Ratio:
• Operating Ratio = *100
• Operating Ratio=25,00,000+8,00,000/50,00,000×100
=33,00,00050,00,000×100
=66%
Interpretation: Tech Company A has an Operating Ratio of 66%,
meaning 66% of its sales are used to cover operating costs, including
COGS and other expenses.
Example 2)
• Example 3: Manufacturing Company C
• Opening Stock = ₹25,00,000
• Purchases = ₹60,00,000
• Closing Stock = ₹20,00,000
• Operating Expenses (Other than COGS) = ₹15,00,000
• Net Sales = ₹1,20,00,000
• Step 1: Calculate COGS:
• Cost of goods sold= Opening stock+Purchases+Wages-Closing Stock
Example 2) cont.
• COGS=25,00,000+60,00,000−20,00,000=₹65,00,000
• Step 2: Calculate Operating Ratio:
• Operating Ratio = *100

• Operating Ratio=65,00,000+15,00,000/1,20,00,000×100
• =80,00,000/1,20,00,000×100
• =66.67
• Interpretation: Manufacturing Company C has an Operating Ratio of
66.67%, showing that about two-thirds of its revenue goes toward covering
operating costs.
Example 3)
• Company: DEF Ltd.
• COGS = ₹6,00,000
• Operating Expenses = ₹3,00,000
• Sales = ₹17,00,000
• Sales Return = ₹2,00,000
• Step 1 : Calculate Net Sales
• Net Sales = Sales – Sales Return
• Net Sales = 17,00,000 – 2,00,000 = ₹15,00,000
Example 3) cont.
• Step 2 : Calculate Operating Ratio
• Operating Ratio = *100

• Operating Ratio = 6,00,000 + 3,00,000 / 15,00,000 * 100

• = 9,00,000 / 15,00,000 * 100
• = 60 %
• Interpretation: DEF Ltd. Has Operating Ratio of 60%, showing that
60% of its revenue goes towards covering operating costs.
Example 4)
• Company: ABC Corps.
• COGS = ₹4,50,000
• Operating Expenses = ₹2,50,000
• Sales = ₹15,00,000
• Sales Return = ₹3,00,000
• Step 1 : Calculate Net Sales
• Net Sales = Sales – Sales return
• Net Sales = 15,00,000 – 3,00,000 = ₹12,00,000
Example 4) cont.
• Step 2 : Calculate Operating Ratio
• Operating Ratio = *100
• Operating Ratio = 4,50,000 + 2,50,000 / 12,00,000 * 100
• = 7,00,000 / 12,00,000 * 100
• = 58.33%
• Interpretation: ABC Corps. has Operating Ratio 58.33%, which means
that nearly 60% of their revenue goes in covering operating costs.
Example 5)
• Company: XYZ Inc.
• Opening Stock = ₹1,50,000
• Purchases = ₹8,00,000
• Closing Stock = ₹2,00,000
• Operating Expenses = ₹3,00,000
• Net Sales = ₹15,00,000
• Step 1 : Calculate COGS
• Cost of Goods Sold = Opening Stock + Purchases + Wages – Closing
Stock
Example 5) cont.
• COGS = 1,50,000 + 8,00,000 – 2,00,000 = ₹7,50,000
• Step 2 : Calculate Operating Ratio
• Operating Ratio = *100
• Operating Ratio = 7,50,000 + 3,00,000 / 15,00,000 * 100
• = 10,50,000 / 15,00,000 * 100
• = 70%
• Interpretation: XYZ Ltd. has Operating Ratio 70% which shows that,
nearly three-fourth of their revenue goes in covering operating costs.
Example 6)
• Company: PQR Ltd.
• Opening Stock = ₹2,00,000
• Purchases = ₹12,00,000
• Closing Stock = ₹3,00,000
• Operating Expenses = ₹5,00,000
• Sales Revenue = ₹25,00,000
• Sales Discounts = ₹50,000
• Step 1 : Calculate Net Sales
• Net Sales = Sales Revenue – Sales Discounts
Example 6) cont.
• Net Sales = 25,00,000 – 50,000 = ₹24,50,000
• Step 2 : Calculate COGS
• Cost of Goods Sold = Opening Stock + Purchases + Wages – Closing
Stock
• COGS = 2,00,000 + 12,00,000 – 3,00,000 = ₹11,00,000
• Step 3 : Calculate Operating Ratio
• Operating Ratio = *100
Example 6) cont.
• Operating Ratio = 11,00,000 + 5,00,000 / 24,50,000 * 100
• = 16,00,000 / 24,50,000 * 100
• = 65.31%
• Interpretation: PQR Ltd. has Operating Ratio 65.31% which shows
that nearly 70% of their revenue goes in covering their operating
costs.
Return on Capital
Investment
Return On Capital Employed
• Return on Capital Employed (ROCE) is a financial ratio used to measure the
efficiency and profitability of a company’s capital investments. The formula
for ROCE is:
• ROCE = Net Profit before Interest and Tax / Net Capital
Employed
• Net Capital Employed = Total Assets-Current Liabilities
=Fixed Assets + Current Assets – Current
Liabilities
This ratio indicates whether share holders fund is efficiently
used or not
This ration should be higher than ROI.
Example 1)
The capital employed for ABC Company is ₹4,00,000.
Assuming that earnings before interest and taxes figure
of ABC Company is ₹30,000, what is the ROCE?
Net Profit before Interest and Tax = ₹30,000
Net Capital Employed= ₹4,00,000
ROCE = Net Profit before Interest and Tax / Net Capital
Employed
• ROCE = ₹30,000 / ₹4,00,000 = 0.075 = 7.5%
Example 2)
• Suppose Company ABC Ltd. has EBIT(Net Profit before Interest
and Tax) of Rs 300 Crore in a financial year.
• On the other hand, Company XYZ Ltd has an EBIT of Rs 250
crore in the same financial year.

Company ABC Ltd. seems a better investment as it has a higher

EBIT than Company XYZ Ltd. However, it would be best to look
at ROCE to determine which company is a better investment.
• Suppose the capital employed by Company ABC Ltd. is Rs 900
Crore and that of Company XYZ Ltd. is Rs 700 Crore.
Example 2 (cont.)
ROCE = Net Profit before Interest and Tax / Net Capital
Employed

ROCE (Company ABC Ltd) = 300 / 900 = 0.333.

ROCE (Company XYZ Ltd) = 250 / 700 = 0.357.

Now by Comparing ROCE of both companies we find out

that Company XYZ Ltd. Is a better investment.
Example 3)
• Nitin Bhatt customizes cars for celebrities and movie sets. During the
year, Nitin had an operating profit of ₹100000 Nitin reported
₹100000 of total assets and ₹25000 of current liabilities on the
balance sheet for the year.

• Net Capital Employed = Total Assets-Current Liabilities

• ROCE = Net Profit before Interest and Tax / Net Capital
Employed
Example 3) cont.

ROCE = ₹100000/(100000-25000)
ROCE = 1.33

As you can see Nitin has a return of 1.33. In other words, for every
Rupee invested in employed capital, Nitin earns ₹1.33.
Example 4)
• Let’s understand ROCE with another example. Suppose
company DEF Ltd. has an equity capital of Rs 500 crore
and a debt capital of Rs 300 crore. It generates an EBIT
of Rs 150 Crore.

ROCE = EBIT / Capital Employed (Total Equity + Total

Debt).
ROCE = 150 / 800 = 0.1825 or 18.25%.
Example 5)
• Tech Company A
• EBIT = ₹10,00,000
• Total Assets = ₹50,00,000
• Current Liabilities = ₹10,00,000
• Net Capital Employed = Total Assets-Current Liabilities
• Capital Employed=50,00,000−10,00,000=₹40,00,000
calculate ROCE:
• ROCE = Net Profit before Interest and Tax / Net Capital
Employed
Example 5) cont.
• ROCE = 1000000/4000000
• =0.25 OR 0.25%

• Interpretation: Tech Company A earns a 25% return on its capital. It

efficiently uses its ₹40,00,000 capital to generate profits, making it
attractive for investors.
Example 6)
• Manufacturing Company B
• EBIT = ₹5,00,000
• Total Assets = ₹80,00,000
• Current Liabilities = ₹20,00,000

• Net Capital Employed = Total Assets-Current Liabilities

• Capital Employed=80,00,000−20,00,000=₹60,00,000
• ROCE = Net Profit before Interest and Tax / Net Capital
Employed
Example 6) cont.
• ROCE = 500000/6000000
• = 0.0833 OR 8.33%

• Interpretation: Manufacturing Company B earns an 8.33% return on

capital, which is lower than Tech Company A. This indicates that it’s
less efficient at turning its capital into profit, and it may need to
improve its operational efficiency.
Return On Investment
Return on Investment (ROI)
• Return on Investment (ROI) is a financial metric used to evaluate the
profitability of an investment or project. It measures the return or gain
generated by an investment, compared to its initial cost.
• Formula for ROI is:
• Return on Investment = Net profit (before tax) / Capital Employed * 100
• Where, Capital Employed = Fixed Assets + Current Assets – Current
Liabilities
• ROI is widely used to assess the effectiveness of investments, compare
different investment opportunities, and make informed decisions.
Example 1)
Q) A company reports:
• Net profit before tax = ₹1,50,000
• Capital Employed = ₹5,00,000
Calculate ROI.
Ans) WE know that,
ROI = Net profit before tax / Capital Employed
= 1,50,000 / 5,00,000
= 30%
Example 2)
Q) GHI Inc. reports:
• Net profit before tax = ₹2,50,000
• Capital Employed = ₹12,50,000
Calculate ROI.
Ans) We know that,
ROI = Net profit before tax / Capital Employed * 100
= 2,50,000 / 12,50,000 * 100
= 20%
Example 3)
Q) DEF Ltd. Reports:
• Net profit before tax = ₹1,00,000
• Total Assets = ₹8,00,000
• Current Liabilities = ₹1,00,000
Ans) We know that,
Capital Employed = Total Assets – Current Liabilities
= 8,00,000 – 1,00,000
= ₹7,00,000
Example 3) cont.
Now,
ROI = Net profit before tax / Capital Employed * 100
= 1,00,000 / 7,00,000 * 100
= 14.29%
Example 4)
Q) STU Inc. reports:
• Net profit before tax = ₹2,00,000
• Total Assets = ₹10,00,000
• Current Liabilities = ₹2,00,000
Calculate ROI.
Ans) We know that,
Capital Employed = Total Assets – Current Liabilities
= 10,00,000 – 2,00,000
= ₹8,00,000
Example 4) cont.
Now,
ROI = Net profit before tax / Capital Employed * 100
= 2,00,000 / 8,00,000 * 100
= 25%
Example 5)
Q) A company ABC Ltd. Has current assets ₹10,00,000 and fixed assets
₹20,00,000. The company’s current liability is ₹8,00,000. The
company’s this year’s net profit before tax is ₹4,50,000. Calculate ROI.
Ans) Here, Current Assets = ₹10,00,000
Fixed Assets = ₹20,00,000
Therefore, Total Assets = Fixed Assets + Current Assets
= 20,00,000 + 10,00,000
= ₹30,00,000
Example 5) cont.
We know that,
Capital Employed = Total Assets – Current Liabilities
= 30,00,000 – 8,00,000
= ₹22,00,000
Now,
ROI = Net profit before tax / Capital Employed * 100
= 4,50,000 / 22,00,000 * 100
= 20.45%
Example 6)
Q) XYZ Corp.’s Current Assets and Fixed Assets are valued at ₹2,00,000
and ₹16,00,000 respectively. It is currently liable for ₹3,00,000. It’s net
profit before tax is ₹2,50,000. Calculate ROI.’
Ans) Here, Current Assets = ₹2,00,000
Fixed Assets = ₹16,00,000
Therefore, Total assets = Fixed Assets + Current Assets
= 16,00,000 + 2,00,000
= ₹18,00,000
Example 6) cont.
We know that,
Capital Employed = Total Assets – Current Liabilities
= 18,00,000 – 3,00,000
= ₹15,00,000
Now,
ROI = Net profit before tax / Capital Employed * 100
= 2,50,000 / 15,00,000 * 100
= 16.67%
CONVERT BALANCE SHEET INTO VERTICAL
BALANCE SHEET
 Converting Trading And
Profit & Loss Accounts to
Vertical Balance Sheet
 MEANING
• A Vertical Balance Sheet is the representation of a
company’s assets, liabilities, and shareholder’s equity in
a report format where all the items are listed from top
to bottom in a single column. Also, the line of items
under each category is shown in the descending order
of their liquidity.
• A vertical balance sheet allows the reader to compare the statistics on
the balance sheet for a single time. For example, you can compare
your current assets and current liabilities total to evaluate a
company’s liquidity as of the balance sheet date.
DIFFERENCE BETWEEN VERTICAL
& HORIZONTAL BALANCE SHEET
Basis Vertical Balance Sheet Horizontal Balance Sheet

It is a report format where the It demonstrates the assets and

balance sheet items are depicted in a liabilities side by side. Thus, it is a
single column beginning with the four-column representation of assets,
Definition assets, followed by the liabilities and liabilities, and equity, where the first
equity, while recording the items in two columns are for assets, and their
the order of their decreasing liquidity figures, and the other two columns
period. show liabilities and their numbers,
respectively.

It has four columns: the first one

It has three columns: the first one represents asset items; the second
shows particulars, i.e., the assets, one depicts the corresponding asset
Format liabilities, and equity; the second one values; the third column is for
mentions the note no. for each item; liabilities; and the fourth one
and the third one represents their mentions the respective liability
amounts. amounts.
 Basis Vertical Balance Sheet Horizontal Balance Sheet

Represents An immediate outline of the firm’s financial An organized record of assets and liabilities
condition

Focuses on Liquidity of assets, liabilities, and equity Changes in assets, liabilities, and equity over
different accounting periods

It helps in determining the growth or downfall

Facilitates immediate comparison and analysis of the company and financial trend analysis
Use of the company’s liquidity status and whether over the period; also, it aids in gauging the
its assets are funded from liabilities or equity material errors and accounting irregularities in
the books.
 ADVANTAGES
•Clarity and Simplicity: The vertical format presents information in a straightforward, linear fashion.
This makes it easier to read and understand, especially for people who are not as familiar with financial
statements.

•Ease of Comparison: The vertical arrangement allows for easy comparison of different line items, as
they are listed in a single column. This can simplify the process of identifying trends or discrepancies.

•Space Efficiency: In some cases, the vertical format may make better use of space, particularly on
smaller screens or in printed reports. It can reduce the need for horizontal scrolling or pagination.

•Consistency in Presentation: Many modern accounting software packages and financial reporting
tools default to a vertical format, which can ensure consistency across different reports and systems.

•Focus on Key Sections: With the vertical format, it’s easier to focus on key sections such as total
assets, total liabilities, and shareholders' equity. The clear delineation of these sections can make it
easier to assess the financial position of the organization.
•Alignment with Financial Statements: In some financial reporting frameworks and
standards, such as those used in certain countries or industries, the vertical balance
sheet aligns better with the overall presentation of financial statements.

•Ease of Use in Analysis: Financial analysts and accountants may find it easier to
perform vertical analysis (common-size analysis) with a vertical balance sheet, as the
format naturally aligns with the analysis of individual line items as a percentage of total
assets.

•Standardization: Many regulatory and reporting bodies prescribe or favor a vertical

format for consistency and standardization in financial reporting.
 DISADVANTAGES
•Limited Detail: The vertical format might oversimplify the presentation, potentially omitting important details or
subtleties that could be more apparent in other formats.

•Lack of Comparative Analysis: It can be harder to compare line items directly with previous periods or
between different entities when all figures are in a single column.

•Less Emphasis on Relationships: Vertical balance sheets might not highlight the relationships between
different categories of assets and liabilities as effectively as other formats, such as the horizontal or side-by-side
balance sheets.

•Potential for Confusion: For those not familiar with the vertical layout, it might be less intuitive compared to
formats where assets and liabilities are shown side-by-side, which can aid in immediate comparison.

•Data Overload: If there are many line items, the vertical format might become unwieldy and harder to read,
especially in cases of large and complex organizations.
 REAL WORLD APPLICATION

• 1. Financial Reporting: Businesses use a vertical balance sheet to

provide stakeholders (investors, creditors, management) with a clear
view of assets, liabilities, and equity. This format presents information
in a way that's easy to compare and analyze.
• 2. Decision-Making: By converting trading and profit and loss
accounts into a vertical balance sheet, management can assess the
financial health of the business. It helps in making informed decisions
regarding budgeting, investments, and financial strategies.
• 3. Compliance and Transparency: For compliance with accounting
standards and regulations, a vertical balance sheet ensures that financial
statements are prepared consistently and transparently, aiding in audits
and regulatory reviews.
• 4. Investment Analysis: Investors use vertical balance sheets to evaluate a
company's financial stability and performance. The clear layout helps in
assessing liquidity, solvency, and overall financial health, which are crucial
for making investment decisions.
• 5. Creditworthiness Assessment: Lenders and credit agencies review
vertical balance sheets to assess a company’s ability to meet its obligations.
It helps in determining credit risk and setting appropriate credit terms.
 EXAMPLES

• 1. Amazon: The company often posts strong revenues and operating

profits in its P&L. However, the vertical balance sheet reveals
Amazon’s strategy of reinvesting profits heavily into assets like R&D
and logistics infrastructure, leading to minimal short-term profits but
strong long-term growth.
• 2. Tesla: Tesla’s P&L showed strong revenue growth in 2021, but its
vertical balance sheet at the time revealed significant debt and
liabilities that reflected its capital-intensive business model.
 EXAMPLES

• 3. Delta Airlines: In the post-pandemic recovery phase, Delta Airlines

reported losses in its P&L. However, analyzing its vertical balance
sheet showed that the airline had enough cash reserves and access to
financing to weather the downturn.
• 4. Apple: Apple’s balance sheet displays its substantial cash reserves
and limited liabilities compared to its equity. While its P&L shows
profitable operations, the vertical balance sheet demonstrates its
strong financial health, with cash reserves serving as a safety net
during downturns.
BREAKDOWN
OF THE
PROCESS
Step 1: Start with the profit & loss
result

• The Net Profit from the Profit and Loss Account will be added to the
capital section of the balance sheet (under Equity).
• If there's a Net Loss, it will be deducted from the capital.
Step 2: List Assets

• Include all the assets, such as:

• Fixed Assets (e.g., machinery, buildings).
• Current Assets (e.g., cash, debtors, stock, prepaid expenses).
Step 3: List liabilities

• Include all liabilities, such as:

• Current Liabilities (e.g., creditors, outstanding expenses).
• Long-Term Liabilities (e.g., loans).
Step 4: Capital/ Equity

• Add the opening capital and adjust for net profit or net loss. Also,
consider drawings or any additional capital introduced.
 SAMPLE
QUESTIONS
Q1] Convert the given Trading and Profit And Loss A/c into a
vertical balance sheet:
Trading And Profit And Loss A/C for the year ended 31st March, 2022
Particulars Amount (₹) Particulars Amount (₹)

To Opening Stock 2,50,000 By Sales 14,00,000

To Purchases 8,50,000 By Closing Stock 2,00,000

To Wages 2,00,000

To Carriage Inward 50,000

To Gross Profit c/d 3,50,000

Total 17,00,000 Total 17,00,000

To Office Expenses 1,75,000 By Gross Profit b/d 3,50,000

To Selling Expenses 1,20,000

To Interest on Loan 30,000

To Net Profit c/d 25,000

Total 3,50,000 Total 3,50,000
Solution: Vertical Balance
Sheet
Sr. No. Particulars Amount (₹) Amount (₹)

1 Sales 14,00,000

2 (-) Cost of Goods Sold

Opening Stock 2,50,000

(+) Purchases 8,50,000

(+) Wages 2,00,000

(+) Carriage Inward 50,000

13,50,000

(-) Closing Stock (2,00,000) 11,50,000

3 Gross Profit 2,50,000

4 Operating Expenses

Office Expenses 1,75,000

Selling Expenses 1,20,000

Interest on Loan 30,000

5 Total Operating Expenses 3,25,000

6 Net Profit 25,000

 Q.2) Convert following Trading and Profit and Loss Account into vertical statement.
Books of Deepak Ltd:
Trading and Profit & Loss Account for the year ended 31st March 2018

Particulars Amount (₹) Particulars Amount (₹)

To Opening Stock 3,00,000 By Sales 16,00,000

To Purchases 9,00,000 By Closing Stock 1,50,000

To Direct Expenses 1,00,000

To Wages 1,00,000

To Gross Profit c/d 3,50,000

Total 17,50,000 Total 17,50,000

To Admin Expenses 1,50,000 By Gross Profit b/d 3,50,000

To Depreciation 75,000

To Selling Expenses 1,00,000

To Net Profit c/d 25,000

Total 3,50,000 Total 3,50,000

Solution: Vertical Income Statement
Sr. No. Particulars Amount (₹) Amount (₹)

1 Sales 16,00,000

2 (-) Cost of Goods Sold

Opening Stock 3,00,000

(+) Purchases 9,00,000

(+) Direct Expenses 1,00,000

(+) Wages 1,00,000

14,00,000

(-) Closing Stock (1,50,000) 12,50,000

3 Gross Profit 3,50,000

4 Operating Expenses

Admin Expenses 1,50,000

Depreciation 75,000

Selling Expenses 1,00,000

5 Total Operating Expenses 3,25,000

6 Net Profit 25,000

 Q.3) Convert following Trading and Profit and Loss Account into vertical statement.

Trading and Profit & Loss Account for the year ended 31st March 2023

Particulars Amount (₹) Particulars Amount (₹)

To Opening Stock 4,00,000 By Sales 20,00,000

To Purchases 10,00,000 By Closing Stock 2,50,000

To Direct Expenses 2,00,000

To Wages 1,50,000

To Freight Inward 1,00,000

To Gross Profit c/d 3,00,000

Total 21,50,000 Total 21,50,000

To Office Expenses 2,00,000 By Gross Profit b/d 3,00,000

To Selling Expenses 1,50,000

To Finance Charges 40,000

To Net Profit c/d 10,000

Total 3,00,000 Total 3,00,000
 Solution: Vertical Income Statement

Sr. No. Particulars Amount (₹) Amount (₹)

1 Sales 20,00,000

2 (-) Cost of Goods Sold

Opening Stock 4,00,000

(+) Purchases 10,00,000

(+) Direct Expenses 2,00,000

(+) Wages 1,50,000

(+) Freight Inward 1,00,000

18,50,000

(-) Closing Stock (2,50,000) 16,00,000

3 Gross Profit 4,00,000

4 Operating Expenses

Office Expenses 2,00,000

Selling Expenses 1,50,000

Finance Charges 40,000

5 Total Operating Expenses 3,90,000

6 Net Profit 10,000

COMPARATIVE BALANCE

SHEET
DEFINITIO
N:

According to Faulke,
“Comparative Balance Sheet
is the study of the trend of the
same items and compared
items in two or more Balance
Sheet of same business
enterprise of different dates.”
MEANING
:
• A comparative balance sheet is a financial statement that presents the
financial position of a company at two or more points in time. This side-by-
side comparison helps in analyzing changes in financial metrics and
evaluating the company’s performance over time.
• A financial report that presents the financial position of a company at
multiple points in time, typically at the end of consecutive fiscal periods
(e.g., years, quarters). It displays the figures for assets, liabilities, and
equity for each period in separate columns, enabling users to compare the
company’s financial status across those periods.
KEY
ASPECTS:
❖Temporal Comparison: Shows financial data for
multiple periods, such as two or more years or
quarters.
❖Components:
o Assets: Includes current and non-current
assets.
o Liabilities: Includes current and long-term
liabilities.
• Equity: Includes shareholders’ equity components
like common stock and retained earnings.
PURPOSE
:
o Trend Analysis: Helps identify financial trends and changes in the
company’s financial position.
o Performance Evaluation: Allows assessment of financial
performance over time.
o Decision-Making: Assists investors, management, and analysts in
making informed decisions based on financial trends and changes.
o Financial Health Assessment:Analyze changes in current
assets and current liabilities to assess the company’s liquidity and
ability to meet the short-term obligations.
IMPORTANT
NOTE:
⮚ If a company’s comparative balance sheet shows a
significant increase in total assets but a smaller increase in
liabilities, this could indicate improved financial health and
growth potential. Conversely, if liabilities are growing at a
faster rate than assets, it might signal potential financial
strain or increased leverage.
⮚ By leveraging a comparative balance sheet, stakeholders
can gain deeper insights into the company's financial
dynamics, make better-informed decisions, and strategize
effectively for the future.
POINTS TO CONSIDER WHILE PREPARING
COMPARATIVE BALANCE SHEET:
✔The present financial and
liquidity position (study
working capital).

✔The financial position of the

business in the long term.

✔Profitability of the business.

STEPS TO PREPARE
COMPARATIVE BALANCE SHEET:
❑Determine the absolute value of assets and liabilities related to the
accounting periods.
❑Determine absolute changes in the items of the balance sheet
relative to the accounting periods in question.
Formula for Absolute Change = Current Year – Previous Year

❑Calculate the percentage change in assets and liabilities by

comparing current year values with values of previous accounting
periods.
Formula for Percentage Change = Absolute Change/Previous Year * 100
ADVANTAGES OF COMPARARTIVE
BALANCE SHEET:
1) Comparison – It is effortless to compare the figures for the current year with the
previous years as it gives both the years’ figures in one place.
2) Trend Indicator – It shows the company’s trend by putting several years’ financial
figures in one place like an Increase or Decrease in profit, current assets, current
liabilities, loans, reserves & surplus, or any other items that help investors make the
decision.
3) Ratio Analysis:The comparative balance sheet’s financial ratio of two years of two
companies can be derived to analyze the company’s financial status.
4) Compare performance with the Industry Performance – Helps to compare one
company’s performance with another company or the industry’s average performance.
5) Helps in Forecasting – It also helps in forecasting because it provides the past trend
of the company based on which the management can forecast the company’s financial
position.
DISADVANTAGES OF
COMPARATIVE BALANCE SHEET:
1. Uniformity in Policy and Principles – Comparative balance sheets will not give the
correct comparison if two companies have adopted different policies and accounting
principles while preparing the balance sheet or if the same company has adopted other
accounting methods in two additional years.
2. Inflationary Effect is not Considered – While preparing the comparative balance
sheet, the inflation effect is not considered. Therefore, only a comparison with other
balance sheets will not give the correct picture of the company’s trend.
3. Market Situation and Political Conditions not Considered – While preparing the
comparative balance sheet, marketing conditions, political environment, or any factor
affecting the company’s business are not considered. Therefore, it does not give the
correct picture every time.
4. Misleading Information – Sometimes, it gives misleading information, thus,
misguiding the person who reads the comparative balance sheet.
PRACTICAL
SOLUTION:
It is widely used in the
corporate world.Public
limited companies publish it
in their annual reports.

Here is an example of TCS

company’s comparative
balance sheet .
Q1] From the balance sheet of Surya Limited, prepare a
comparative balance sheet as on 31st March,2022 and
31st March, 2023:
LIABILITIES 31-03-22 31-03-23 ASSETS 31-03-22 31-03-23
RS RS. RS RS.

Equity share capital 160000 200000 Land 64000 80000

12% preference 64000 64000 Building 48000 72000

shares
Reserves and surplus 80000 112000 Plant and Machinery 58400 138400

15% debentures 48000 40800 Stock 120000 88000

Creditors 40000 64000 Debtors 102400 112000

Bills payable 8000 4800 Bank 27200 29600

Provision for taxation 20000 34400

420000 520000 420000 520000

 Solution: Comparative balance sheet of Surya Limited
as on 31st March 2022 and 31st March 2023
Percentage change
Particulars
31-03-22 (Rs) 31-03-23 (Rs) Absolute change (Rs) (Rs)
1. Sources of funds
a.Equity share capital 1,60,000 2,00,000 40,000 25% increase
b. 12% preference shares 64,000 64,000
c. Reserves and surplus 80,000 1,12,000 32,000 40% increase
A. Net worth 3,04,000 3,76,000 72,000 23.68% increase
Borrowed funds 48,000 40,800 -7,200 (15% ) decrease
Secured loan-15% debentures 48,000 40,800 -7,200 (15%) decrease
B. Total borrowed funds (A+B) 3,52,000 4,16,800 64,800 18.41% increase
2. Application of funds
A. Fixed assets- land 64,000 80,000 16,000 25% increase
building 48,000 72,000 24,000 50% increase
plant and machinery 58,400 1,38,400 80,000 137% increase
1,70,400 2,90,400 1,20,000 70.42% increase
(Continued:)
B. Working capital
current assets- stock 120000 88000 -32000 (26.67%) decrease
debtors 102400 112000 9600 9.375% increase
bank 27200 29600 2400 8.82% increase
less: current liabilities
creditors 40000 64000 24000 60% increase
bills payable 8000 4800 -3200 (40%) decrease
provision for taxation 20000 34400 14400 50% increase
working capital
(current assets- current liabilities) 181600 126400 -55200 (30.40% decrease)
Total funds applied (A+B) 352000 416800 64800 18.41% increase
Q.2] From the Balance Sheet of David Ltd. as on 31st March,2017 and 31st
March,2018,Prepare Comparative Balance Sheet.
Liabilities 31.03.2017 31.03.2018 Assets 31.03.2017 31.03.2018
(Rs.) (Rs.)
Balance sheet (Rs.) 31st March,2018
as on 31st March,2017 and (Rs.)

Equity Share Capital 3,00,000 3,00,000 Land and Building 2,50,000 2,70,000

12% Preference Share 1,00,000 1,00,000 Plant and Machinery 2,10,000 2,05,000
Capital

Reserves and Surplus 60,000 90,000 Investments 30,000 40,000

Secured Loans 50,000 50,000 Stocks 30,000 28,000

Creditors 20,000 18,000 Debtors 25,000 30,000

Bills Payable 15,000 13,000 Cash 5,000 4,000

Provision For Taxation 5,000 6,000

5,50,000 5,77,000 5,50,000 5,77,000

SOLUTION: In the books of David Ltd.,
Comparative Balance Sheet As On 31st March,2017 and 31st March,2018

Particulars 31.03.2017 31.03.2018 Absolute Percentage

(Rs.) (1) (Rs) (2) Change (3) Change (4)
[ 3 X100]
[2-1] [1 ]
I. Sources Of Funds

A. Owners Funds

a. Equity Share Capital 3,00,000 3,00,000 Nil Nil Nil

b. Preference Share 1,00,000 1,00,000 Nil Nil Nil

Capital

c. Reserves And 60,000 90,000 30,000 50.00% Increase

Surplus

Net Worth 4,60,000 4,90,000 30,000 6.52% Increase

B. Borrowed Funds

Secured Loans 50,000 50,000 Nil Nil Nil

Total Funds 5,10,000 5,40,000 30,000 5.88% Increase

Available(A+B)
 In the Books Of David Ltd.,
Comparative Balance Sheet As on 31st March 2017 and 31st March 2018 (continued)

Particulars 31.03.2017 31.03.2018 Absolute Percentage

(Rs.) (1) (Rs) (2) Change (3) Change (4)
[2-1] [ 3 X100]
[1 ]

II Application Of
Funds

A. Fixed Assets

Land And 2,50,000 2,70,000 20,000 8.00% Increase

Building

Plant and 2,10,000 2,05,000 (5,000) (2.38%) Decrease

Machinery

Total Fixed 4,60,000 4,75,000 15,000 3.26% Increase

Assets

B. Investments 30,000 40,000 10,000 33.33% Increase

 In the Books Of David Ltd.,
Comparative Balance Sheet As on 31st March 2017 and 31st March 2018
(continued) Particulars 31.03.2017 31.03.2018 Absolute Change (3) Percentage
(Rs.) (1) (Rs) (2) [2-1] Change (4)
[ 3 X100]
[1 ]

C. Working Capital

Current Assets

Stocks 30,000 28,000 (2,000) (6.67%) Decrease

Debtors 25,000 30,000 5,000 20.00% Increase

Cash 5,000 4,000 (1,000) (20.00%) Decrease

Total Current Assets 60,000 62,000 2,000 3.33% Increase

Less:Current Liabilities

Creditors 20,000 18,000 (2,000) (10.00%) Decrease

Bills Payable 15,000 13,000 (2,000) (13.33%) Decrease

Provision for Taxation 5,000 6,000 1,000 20.00% Increase

Total Current Liabilities 40,000 37,000 (3,000) (7.50%) Decrease

Working Capital(current Assets less 20,000 25,000 5,000 25.00% Increase

current liabilities)

Total Funds Applied(A+B+C) 5,10,000 5,40,000 30,000 5.88% Increase

WORKING NOTES:

Here ,year 2017 is the Previous Year and year 2018 is the Current year.
Absolute change = Amount of Absolute change X 100
Amount of Previous Year

E.g; Calculation of Percentage change for Reserves And Surplus

= 30,000 X 100= 50%
60,000
Similarly, calculation for Absolute Change and Percentage change in other Items
can be done.
Q3] Prepare Comparative Balance Sheet for
the year ended 31-03-22 and 31-03-23
Particulars 31-03-2022 (₹) 31-03-2023(₹)

Current Liabilities 30,000 24,000

Fixed Assets 1,20,000 1,50,000

Loan 34,000 51,000

Share Capital 60,000 72,000

Reserve and Surplus 24,000 30,000

Current Assets 28,000 27,000

SOLUTION:
Comparative Balance Sheet as on 31st March, 2022 and 31st March, 2023
31-03-2022 31-03-2023 Absolute Change Percentage
Particulars
(₹) (₹) (₹) Change
I. Sources of Funds
(a) Share Capital 60,000 72,000 12,000 20% Increase
(b) Reserve and Surplus 24,000 30,000 6,000 25% Increase
(A) Net Worth 84,000 1,02,000 18,000 21% Increase
(B) Borrowed Funds
- Loan 34,000 51,000 17,000 50% Increase
Total Funds Available (A+B) 1,18,000 1,53,000 35,000 30% Increase
II. Application of Funds
(A) Fixed Assets 1,20,000 1,50,000 30,000 25% Increase
(B) Working Capital
(a) Current Assets 28,000 27,000 -1,000 -3.57% Decrease
(b) Current Liabilities 30,000 24,000 -6,000 -20% Decrease
Working Capital
-2,000 3,000 5,000 -250% Decrease
(Current Assets - Current Liabilities)
Total Funds Applied (A+B) 1,18,000 1,53,000 35,000 29.66% Increase
COMPARATIVE INCOME
STATEMENT
WHAT IS A COMAPRATIVE INCOME
STATEMENT?

• A comparative income statement is a financial document

that presents the income and expenses of a business over
multiple accounting periods side by side.
• This format allows stakeholders, such as investors and
analysts, to easily compare financial performance across
different time frames, typically two or more years.
 QUESTION 1
• Prepare a comparative income statement from the following information for the
firm XYZ Co. For the year 2018 and 2019 . Also find the gross profit.

31.3.2018(₹) 31.2.2019(₹)
Particulars
Direct expenses 4,000 5,000
Closing Stock 7,000 10,000
Purchases 28,000 35,000
Sales 50,000 57,000
Opening stock 10,000 13,000
Return outwards 1,000 1,000
Furniture 50,000 60,000
 SOLUTION 1
Particulars 2018(₹) 2019(₹) Absolute % change
Change(₹)

Sales 50,000 57,000 7,000 14% increase

Less: Returns 1,000 1,000 nil nil

Net sales 49,000 56,000 7,000 14.285% increase

Less: COGS 35,000 43,000 8,000 22.857% increase

Gross Profit 14,000 13,000 1,000 7.14% decrease

 WORKING NOTE 1
• COGS: Opening stock+ Purchases+ Direct expenses - closing
stock

• COGS(2018)= 10,000+ 28,000+ 4,000- 7,000

= 35,000
• COGS(2019)=13,000+ 35,000+ 5,000- 10,000
= 43,000
 QUESTION 2
• From the following information prepare a comparative income statement for the
firm RAJ BROTHERS & Co. For the year 2019 and 2020
Particulars 31.03.2019(₹) 31.03.2020(₹)

Non-operating income 13,000 12,000

Opening Stock 9,900 10,000
Cost of sales/COGS 60,000 85,000
Sales 2,30,000 3,10,000
Operating expenses 26,000 32,000
Non-operating expenses 4,000 6,000
Closing Stock 12,000 13,900
Provision for tax 15,300 19,900
 SOLUTION 2
Particulars 2019(₹) 2020(₹) Absolute % change
change(₹)
Sales 2,30,000 3,10,000 80,000 34.78 % increase
Less: COGS 60,000 85,000 25,000 41.66% increase
Gross profit 1,70,000 2,25,000 55,000 32.35% increase
Less: Operating expenses 26,000 32,000 6,000 23.07% increase
Operating net profit 1,44,000 1,93,000 49,000 34.027% increase
Add: Non-operating income 13,000 12,000 1,000 7.69% decrease
Less: Non-operating expenses 4,000 6,000 2,000 50% increase
Net Profit before tax 1,53,000 1,99,000 46,000 30.065% increase
Less: Provision for tax 15,300 19,900 4,600 30.065% increase
Net Profit after tax 1,37,700 1,79,100 41,400 30.065% increase
 WORKING NOTE 2
• Absolute change = coloumn2- coloumn1

• % change= Absolute change x100

Value of previous years

Note : Ignore the values of the opening and closing stock here
because the value of COGS is already given
Question 3
Cost of goods sold (Trading Account)
In the books of ________
Sales 2,12,000
Purchases 1,00,000
Opening Stock 20,000
Wages 12,000
Fuel and Power 13,000
Goods withdrawn by proprietor for 2,000
personal use
Goods Lost by fire 5,000
Goods lost by theft 3,000
Closing stock 35,000
Question 3 Solution
In the books of ________
Particulars Amount Amount
Sales 2,12,000
Less: COGS
Opening stock (add) 20,000
Purchases (add) 1,00,000
Wages (add) 12,000
Fuel and Power (add) 13,000 1,45,000
Goods withdrawn by proprietor (2,000)
for personal use (less)
Goods lost by fire (less) (5,000)
Goods lost by theft (less) (3,000) (10,000)
1,35,000
Closing stock (less) (35,000) (35,000)
Cost of goods sold 1,00,000
Gross Profit (Sales – COGS) 1,12,000
Question 4
Comparative Income Statement
In the books of _______
Particulars 31.3.2018 31.3.2019
Sales 4,00,000 6,50,000
Sales returns 500 2,500
Opening stock 20,000 20,000
Purchases 1,00,000 1,50,000
Manufacturing expenses 10,000 11,000

Carriage inwards 5,000 2,000

Closing stock 20,000 25,000
Operating expenses 40,000 50,000
Other income 10,000 5,000
Other expenses 2,000 4,000
Provision for Tax 50,500 88,100
Question 4 Solution In the books of _______
Comparative Income Statement
Particulars 31.3.2018 31.3.2019 Change Absolute change

Sales 4,00,000 6,50,000 2,50,000 62.5%

Less: returns 500 2,500 2,000 400%
Net Sales 3,99,500 6,47,500 2,48,000 62.1%
Less: COGS
Opening stock - (20,000) (20,000) 0 0%

purchases - (1,00,000) (1,50,000) 50,000 50%

manufacturing -expenses

carriage inwards - (10,000) (11,000) 1,000 10%

closing stock- (5,000) (2,000) (3000) (60%)

20,000 25,000 5,000 25%

COGS (1,15,000) (1,58,000) 43,000 37.4%

Gross profit 2,84,500 4,89,500 2,05,000 72.1%
Less: operating expenses (40,000) (50,000) 10,000 25%

Net Operating Profit 2,44,500 4,39,500 1,95,000 79.8%

Less: other expenses (2,000) (4,000) 2,000 100%

Add: other incomes 10,000 5,000 (5000) 50%

Net profit before tax 2,52,500 4,40,500 1,88,000 74.5%

Less: provision for tax (50,500) (88,100) 37,600 74.5%

Net profit after tax 2,02,000 3,52,400 1,50,400 74.5%

QUESTION 5) Construct a Comparative Income Statement for the firm Blue Bell Ltd. For the 2 years 2020 as 2021. Find
Gross Profit for the years 2020 and 2021.

PARTICULARS 31.03.2020 31.03.2021

Provision For Tax 30% 30%
Sales (Net) 4,00,000 5,00,000
Opening Stock 1,00,000 1,00,000
Closing Stock 2,00,000 2,50,000
Net Purchases 2,50,000 3,00,000
Interest On Investment 10,000 12,000
Salary To Managers 20,000 25,000
Export Duty 60,000 80,000
Non operating Expenses 10,000 12,000
Interest On Loan 3,000 4,000
Interest On Dividend 11,000 10,000
Motive Power 10,000 10,000
Import Duty 5,000 5,000
Here,
1. COGS= Opening Stock+ Purchases+ Direct Expenses- Closing Stock
2. Operating Expenses= Office And Administrative Expenses+ Selling And Distribution Expenses+ Financial Expenses
(Financial Expenses- Those used to generate finance in business eg. Interest On Loan, Interest On Bank Overdraft)

PARTICULARS 31.03.2020 31.03.2021 ABSOLUTE CHANGE PERCENTAGE

CHANGE
Sales 4,00,,000 5,00,000 1,00,000 25%
Less: COGS 1,65,000 1,65,000 NIL NIL
Gross Profit 2,35,000 3,35,000 1,00,000 42.55%
Less: Operating Expenses 83,000 1,09,000 26,000 31.32%
Operating Net Profit 1,52,000 2,26,000 74,000 48.68%
Add: Non Operating Incomes (Interest On 11,000 10,000 (1,000) (9.09%)
Dividend)
Less: Non Operating Expenses 10,000 12,000 2,000 20%
Net Profit Before Tax 1,53,000 2,24,000 71,000 46.40%
Less: Provision For Tax 45,900 67,200 21,300 46.40%
Net Profit After Tax 1,07,100 1,56,800 49,700 46.40%
QUESTION 6) IN THE BOOKS OF ------------------------

PARTICULARS 31.03.2018 31.03.2019

Sales 25,000 9,00,500
Returns 3,000 4,500
Purchases 3,00,000 4,25,000
Manufacturing Expenses 20,000 15,000
Wages 10,000 8,000
Carriage Inwards 5,000 8,000
Goods Lost By Theft 1,000 500
Goods Lost By Fire 4,000 1,000
Goods Withdrawn By Proprietor For 2,000 4,000
Personal Use
Opening Stock 20,000 30,000
Closing Stock 30,000 45,000
Advertisement 50,000 45,000
Carriage Outward 5,000 10,000
Export Duty 8,000 12,000
PARTICULARS 31.03.2018 31.03.2019

Salaries 80,000 95,000

Rent 22,000 12,000

Insurance 20,000 15,000

Depreciation 45,000 50,000

Interest On Loan Taken 7,000 7,500

Interest On Bank Overdraft 3,000 3,500

Dividend Received 8,000 10,000

Loss Due To Fire 4,000 1,000

Loss Due To Theft 1,000 500

Bad Debts 2,000 3,200

Loss On Sale Of Assets 25,000 10,000

Other Expenses 8,000 5,000

Provision For Tax 25% 25%

SOLUTION 6) IN THE BOOKS OF ----------------------
PARTICULARS 31.03.2018 31.03.2019 ABSOLUTE CHANGE PERCENTAGE CHANGE

Sales 8,25,000 9,00,500 75,500 9.15%

Less: Returns (3,000) (4,500) 1,500 50%
Net Sales 8,22,000 8,96,000 74,000 9%
Less: COGS
Opening Stock - (20,000) (30,000) 10,000 50%
Purchases - (3,00,000) (4,25,000) 1,25,000 41.67%
Manufacturing Expenses - (20,000) (15,000) (5,000) (25%)
Wages - (10,000) (8,000) (2,000) (20%)
Carriage Inwards - (5,000) (8,000) 3,000 60%
Goods Lost By Theft - 1,000 500 (500) (50%)
Goods Lost By Fire - 4,000 1,000 (3,000) (75%)
Goods Withdrawn By Proprietor 2,000 4,000 2,000 100%
For Personal Use -
Closing Stock - 30,000 45,000 15,000 50%
COGS 3,18,000 4,35,000 1,17,500 37%
PARTICULARS 31.03.2018 31.03.2019 ABSOLUTE CHANGE PERCENTAGE CHANGE
Gross Profit (Net Sales – 5,04,000 4,60,000 (43,500) (8.6%)
COGS)
Less: Operating Expenses

1. Selling And Distribution

Expenses
* Advertisement (50,000) (45,000) (5,000) (10%)
* Carriage Outward (5,000) (10,000) 5,000 100%
* Export Duty (8,000) (12,000) 4,000 50%
2. Office And
Administration Expenses

* Salaries (80,000) (95,000) 15,000 18.75%

* Rent (22,000) (12,000) (10,000) (45.5%)
* Insurance (20,000) (15,000) (5,000) (25%)
* Depreciation (45,000) (50,000) 5,000 11.12%
PARTICULARS 31.03.2018 31.03.2019 ABSOLUTE CHANGE PERCENTAGE CHANGE

3. Financial Expenses

* Interest On Loan (7,000) (7,500) 500 7.14%

* Interest On Bank (3,000) (3,500) 500 16.67%

Overdraft

Total Operating Expenses (2,40,000) (2,50,000) 10,000 4.17%

Net Operating Profit (Gross 2,64,000 2,10,500 (53,500) (20.3%)

Profit- Total Operating
Expenses)

Less: Other Expenses

* Bad Debts (2,000) (3,200) 1,200 60%

* Loss On Sale Of Fixed (25,000) (10,000) (15,000) (60%)

Assets

* Loss Due To Fire (4,000) (1,000) (3,000) (75%)

* Loss Due To Theft (1,000) (500) (500) (50%)

PARTICULARS 31.03.2018 31.03.2019 ABSOLUTE CHANGE PERCENTAGE CHANGE

Add: Other Incomes

* Dividend Received 8,000 10,000 2,000 25%

Net Profit Before Tax (Net 2,40,000 2,05,800 (34,200) (14.25%)

Operating Profit- Other
Expenses+ Other Incomes)

Less: Provision For Tax (25%) 60,000 51,450 (8,550) (14.25%)

Net Profit After Tax 1,80,000 1,54,350 (25,650) (14.25%)

 COMMON SIZE
STATEMENT
A066,A043,A044,A083,A104.
BALANCE SHEET.
MEANING & DEFINITION

Common size statement is a form of analysis and interpretation

of the financial statement. It is also known as vertical analysis. A
common-size balance sheet is a financial statement that presents
each item on the balance sheet as a percentage of total assets.
For the liabilities, each liability is being calculated as a ratio of the
total liabilities
This approach allows for easy comparison between companies of
different sizes or between different time periods for the same
company. It highlights the relative size of each asset, liability, and
equity component, making it easier to analyze a company's
financial structure , capital allotment and identify trends.
KEY POINTS & EXAMPLE
 KEY POINTS of a Common-Size Balance Sheet:-
- Assets: Each asset item (e.g., cash, inventory, property) is expressed as a percentage of total assets.
- Liabilities: Each liability (e.g., accounts payable, long-term debt) is shown as a percentage of total assets.
- Equity :Each equity component (e.g., common stock, retained earnings) is also represented as a percentage of
total assets.

 EXAMPLE-
• If a company's total assets are ₹10,00,000, and it has:-
- Cash: ₹2,00,000
- Inventory: ₹3,00,000
- Accounts Payable: ₹1,50,000
- Long-term Debt: ₹2,50,000
- Equity: ₹3,00,000
• The common-size balance sheet would show:-
- Cash: 20% of total assets
- Inventory: 30% of total assets
- Accounts Payable: 15% of total assets
- Long-term Debt: 25% of total assets
- Equity: 30% of total assets
ADVANTAGES

 Common size statement balance sheet provides a standardized picture of a

company’s financial situation.
 Gives a better understanding of a company’s overall balance sheet structure.
 Since the relative size of each item on the balance sheet is highlighted, identifying
trends and patterns becomes easier.
 Provides a more detailed picture of a company’s financial health as compared to
the traditional balance sheet.
 Assists investors, analysts, and financial professionals in making better investment
decisions.
 Aids in the identification of potential areas of concern or opportunity.
 ADVANTAGES
 It is very easy to compare inter-firm as well as intra-firm performance
and financial position, helping in corporate evaluation and ranking.
 Allows quick comparison across line items, identifying patterns,
spotting significant changes in a company’s financial statement.
 Seeing the ratios of various line items as a part of total assets or total
revenue of a company.
 A company will be able to quickly assess whether it has borrowed
too much money, whether the assets it owns are not liquid enough,
or whether it has enough cash on hand to meet current demands.
REAL LIFE APPLICATIONS
Comparative Analysis: Investors can easily compare different
companies' financial structures by looking at the percentage of debt
or equity compared to total assets, no matter their size.
Trend Analysis: Companies can track their financial health over time
by monitoring changes in the balance sheet items. For instance, if
current liabilities increase, it may show a growing dependence on
short-term debt.
Investment Decisions: Analysts use common size balance sheets to
check a company’s financial stability. A high cash percentage suggests
good liquidity and resilience during downturns.
REAL LIFE APPLICATIONS
Credit Analysis: Lenders evaluate a company's debt level by looking at
its debt-to-total-assets ratio, helping determine if it has too much
debt.
Mergers and Acquisitions: When considering acquisitions, companies
can use common size balance sheets to assess potential targets'
financial health and structure, aiding decision-making.
DISADVANTAGES
Loss of Detail: By converting figures to percentages, specific dollar
amounts are obscured, which may hide important financial details.
Limited Context: Percentages can be misleading without context; a high
percentage might not indicate a positive trend if total assets or liabilities
are low.
Comparative Limitations: While useful for comparison, it may not
adequately account for differences in company size, industry norms, or
market conditions.
Potential Misinterpretation: Users might misinterpret percentage
changes as significant when they are based on small dollar amounts,
leading to poor decision-making.
DISADVANTAGES
Potential Misinterpretation: Users may misread percentage changes as significant
despite small dollar amounts.
Difficulty in Analysis: Analysts might struggle to assess the absolute value of assets
or liabilities, which is crucial for certain analyses.
Neglect of Cash Flow: It doesn’t provide insights into cash flow, vital for
understanding liquidity.
Static Snapshot: Represents only a single point in time, missing important trends or
patterns.
Impact of Accounting Policies: Different accounting practices can create
inconsistencies in comparative analysis.
Limited Use for Small Companies: For smaller firms, percentage analysis may not
yield meaningful insights.
 Common Size Income Statement
Common size analysis displays each line item of In case of Balance Sheet; Total Funds Available
your financial statement as a percentage of a are considered as 100 and all figures are
base figure. expresses as a percentage of this total.
Percentage of each individual item shows its For example: If the Total Fund available in
relation to its respective total i.e., Total Assets Balance Sheet is ₹16,00,000 and Building is `
or Total Liabilities or Total Net Sales. ₹4,00,000.
A common size income statement is an income Formula used to calculate the percentage value
statement whereby each line item is expressed of the building is:
as a percentage of revenue or sales. Amount of Building/Total Fund Available*100
In the common size income statement, the sales = 4,00,000/16,00,00*100
figure is assumed to be 100, and all figures are
expressed as a percentage of this total. = 25%

Parija Mehta
 Why do we use a
Common Size Income Statement?
• A common size income statement makes it easier
to see what's driving a company’s profits.
• The common size percentages also help to show
how each line item or component affects the
financial position of the company.
• As a result, the financial statement user can more
easily compare the financial performance to the
company's peers.
• The importance of common size analysis in
accounting lies in the power of percentages to help
you find out whether your business is growing
profitably and compare it to the competition.

Parija Mehta
 How do we use a
Common Size Income Statement?
• Common size analysis displays each line item of your
financial statement as a percentage of a base figure to
help you determine how your company is performing
year over year, and compared to competitors.
• You can use it to see how your business stacks up
percentage-wise with another business, irrespective of
size.
• The common size percentages help to highlight any
consistency in the numbers over time–whether those
trends are positive or negative.
• Large changes in the percentage of revenue as
compared to the various expense categories over a
given period could be a sign that the business model,
sales performance, or manufacturing costs are
changing.

Parija Mehta
PRACTICAL ACTIVITY
Q.1 Prepare Common Size Income Statement for the year ended 31/03/23 and 31/03/2024

PARTICULARS 31.03.2023 31.03.2024

Net Sales 12,00,000 15,00,000

Less : Cost of Sales 7,00,000 8,00,000

Gross Margin 5,00,000 7,00,000

Research and Development Expenses 45,000 54,000

Selling, General and Administrative 52,000 56,000

Expenses
Total Operating Expenses 97,000 1,10,000

NET INCOME 4,03,000 5,90,000

Shrawani Behere
ANS. 1) Common Size Income Statement for 31/03/23 and 31/03/2024
Particulars 31.03.23 Amt(₹) Percentage( % ) 31/03/24 Amt(₹) Percentage( % )

Net Sales 12,00,000 100% 15,00,000 100%

Less :Sales Cost 7,00,000 58.3% 8,00,000 53.33%

Gross Margin 5,00,000 41.7% 7,00,000 46.67%

Expenses:

• Research and 45,000 3.75% 54,000 3.6%

Development
• Selling, General & 52,000 4.33% 56,000 3.73%
Administrative
Total Operating 97,000 8.08% 1,10,000 7.33%
Expenses
NET INCOME 4,03,000 33.6% 5,90,000 39.34%

Shrawani Behere
 Q2.PREPARE COMMON SIZE INCOME STATEMENT
PARTICULARS 2016 2017
GROSS SALES 725000 815000
LESS:SALES RETURNS 25000 15000

NET SALES 700000 800000

COST OF SALES 895000 615000

GROSS PROFIT 105000 185000

OPERATING EXPENSES:
SELLING AND DISTRIBUTION EXPENSES 23000 24000
ADMINISTRATIVE EXPENSES 12700 12500

TOTAL EXPENSES 35700 36500

OPERATING INCOME 69300 148500
OTHER INCOME 1200 8050

70500 156550
NON OPERATING EXPENSES 1750 1940
NET PROFIT DURING THE YEAR 68750 154610

Carissa Gomes
 SOLUTION: COMMON SIZE INCOME STATEMENT
PARTICULARS 2016 % 2017 %
GROSS SALES 725000 815000
LESS: SALES RETURN 125000 15000
NET SALES 700000 100% 800000 100%
LESS: COST OF SALES 595000 85% 615000 77%
GROSS PROFIT 105000 15% 185000 23%
OPERATING EXPENSES:
SELLING AND ADMIN EXPENSES 23000 3.2% 24000 3%
ADMINISTRATIVE EXPENSES
12700 1.81% 12500 1.56%
TOTAL EXPENSES 35700 5.1% 36500 4.56%
OPERATING INCOME 69300 9.9% 148500 18.56%
OTHER INCOMES 1200 0.17% 8050 1.00 %
TOTAL INCOME 70500 10.07% 156550 19.56%
NON OPERATING EXPENSES 1750 0.25% 1940 0.24%
NET PROFIT DURING THE YEAR 68750 9.82% 154610 19.32%

Carissa Gomes
Prepare common size income statement for the year
ended 31.03.2019 and 31.03.2020 from the following
information

Maria Hakim
Particulars 2019 (Rs.) 2020 (Rs.)
Gross Sales 40,500 45,800
(-) Returns (500) (2,500)
Net Sales 40,000 43,300
(-) Cost of goods sold (18,500) (20,000)
Gross Profit 21,500 23,300
(-) Operating Expenses
Administration Expenses 2,200 2,500

Sales Expenses 5,000 5,600

Total Expenses 7,200 8,100
Income From Operations 6,000 9,000
(+) Non-Operating Income 1,500 2,200
Total Income 7,500 11,200
(-) Non-Operating Expense (1,250) (2,000)
Net Profit 6,250 9,200
Maria Hakim
Solution :

Maria Hakim
Particulars 2019 (Rs.) % 2020 (Rs.) %
Gross Sales 40,500 45,800
(-) Returns (500) (2,500)
Net Sales 40,000 100% 43,300 100%
(-) Cost of goods sold (18,500) 46.25% (20,000) 46.18%

Gross Profit 21,500 53.75% 23,300 53.81%

(-) Operating Expenses

Administration 2,200 5.5% 2,500 5.77%

Expenses
Sales Expenses 5,000 12.5% 5,600 12.93%
Total Expenses 7,200 18% 8,100 18.70%
Income From 6,000 15% 9,000 20.78%
Operations
(+) Non-Operating 1,500 3.75% 2,200 5.08%
Income
Total Income 7,500 18.75% 11,200 25.86%
(-) Non-Operating (1,250) 3.125% (2,000) 4.61%
Expense
Net Profit 6,250 15.625% 9,200 21.24%
 4) Prepare Common Size Income Statement for the years ended 31/3/17 & 31/3/18.
Particulars 31/3/17 31/3/18
Gross Sales 15,00,000 22,00,000
Less: Returns 1,50,000 2,00,000
Net Sales 13,50,000 20,00,000
Less: Cost of Sales 8,50,000 11,00,000
Gross Profit 5,00,000 9,00,000
Less: Operating Expenses
- Marketing Expenses 1,00,000 2,00,000
- Repairs 50,000 1,50,000
Total Expenses 1,50,000 3,50,000
Add: Income
- Operating 75,000 95,000
- Non-operating 40,000 50,000
Total Income 1,15,000 1,45,000
Net Profit 4,65,000 6,95,000

Sonia Rajpurohit
 Particulars 31/3/17 Percentage 31/3/18 Percentage
Gross Sales 15,00,000 22,00,000
Less: Returns 1,50,000 2,00,000
Net Sales 13,50,000 100% 20,00,000 100%
Less: Cost of Sales 8,50,000 62.97% 11,00,000 55%
Gross Profit 5,00,000 37.03% 9,00,000 45%
Less: Operating Expenses
- Marketing Expenses 1,00,000 7.4% 2,00,000 10%
- Repairs 50,000 3.7% 1,50,000 7.5%

Total Expenses 1,50,000 11.11% 3,50,000 17.5%

Add: Income
- Operating 75,000 5.55% 95,000 4.75%
- Non-operating 40,000 2.96% 50,000 2.5%

Total Income 1,15,000 8.5% 1,45,000 7.25%

Net Profit 4,65,000 34.44% 6,95,000 34.75%
Sonia Rajpurohit
 Cash Flow Statement
A cash flow statement can be defined as statement which summarizes
sources of cash inflows and uses of cash outflows of a firm during a
particular period of time, say a month, or a year.
Importance of Cash flow Statement:
1) Useful in Short term financial planning and decision making : Cash flow statement provides
importance of uses of cash and equivalents for a specific period, which is useful of management
plan, operating, financial and investment requirement of the business enterprise.

2) Helps is analysis of liquidity positions : Cash flow statement is prepared on monthly basis or
quarterly basis which helps to find out liquidity in a better way. Analysis of liquidity is important
for banks and financial Institutions as it shows the ability of the business to pay its Current
liabilities.

3) Help in efficient cash management : Cash flow statement gives information relating to
surplus or deficit of cash which helps the business enterprise to decide on the short term
investment of surplus and arrange short term credit of deficit.
4) Helps is comparative study: A Comparison of Cash Flow statement with
cash budget will indicate the extent to which cash resources of business
were generated and used according to cash budget. Causes of different
between the Cash flow statement and Cash Budget can be analyzed and
necessary corrective measures can be taken.

5) Helps in study of Receipts and Payments: Cash Flow Statement gives the
speed at which Cash is generated from debtors, stock and other current
asset and the speed at which current liabilities are paid off. This enables the
management to find the true position of Cash in future.

6) Helpful in dividend declaration : Before declaring dividend the

management goes through the Cash Flow statement ascertain the position
of cash generated from operating activities which can be used for payment
of dividend.

7) Tools of Planning: Cash Flows statement can be used for projecting future
investing and financial plans by the management of a business enterprise.
 OPERATING ACTIVITIES

Operating Activities are those activities which occur in the business on day-to-day
or usual basis. However, adjustment of non cash/ non operating items is
important.
Explanation for (+) and (-) in Cash flow statement:-
THUMB RULE :- If present in P/L but not in Cash Flow (Reverse it). Otherwise:
Cash in = (+); Cash Out = (-)

Explanation for Adding Depreciation

Let Depreciation amount be ‘X’
Net Profit= Gross Profit + Income – Expenses – X
However, depreciation is a non cash expense so while calculating cash
flows, why should we subtract it?
Therefore, we add the value of depreciation to cancel its effect on net profit.

Explanation for Adding Interst Paid

Interest paid is NOT AN OPERATING ITEM; this means that it does not
constitute as a recurring business activity. But we have subtracted it in P/L.
So, to cancel its effect, we add it
Net Profit(+int. paid)= Gross Profit + Income – Expense – Interest Paid (+int.
paid)
Explanation for adding loss on sale:-
What is loss on sale of Asset?
Loss on Sale = Cost- Total Depreciation till date – Bank.
But is money going out of the bank A/c. Is our bank balance decreasing? NO. So, why should we subtract it. To cancel out
this effect, we add it back. Thus, it is added.

ADD INCREASE IN LIABILITIES because:

For eg. The adjustment is- further creditors 100 need to be added. What are the 2 effects in income statement? Creditors
are added and inventory is added. If inventory is added, then Gross Profit decreases. If gross Profit increases, then net
profit decreases. However, in cash flow statement, we only record all cash related items. Why should this increase be
seen. To reverse it, it is added. The same is applicable to the remaining adjustments.

However, for easy remembrance, we can create a rule:-

Increase in liability- add
Increase in asset- less

Decrease in liablitiy- less

Decrease in asset- add
 INVESTING ACTIVITIES

Investing activities refers to treatment of cash flow from purchase or sale of Assets.
• If an asset/Investment is sold, cash comes in, so it is added.
• When it is purchased, cash goes out and hence subtracted.
• After the following adjustment, the total is posted to the outer column.

INVESTING ACTIVITIES DO NOT INCLUDE ANY ISSUE OF SHARES OR LOANS. THE ASSETS IN INVESTING ACTIVITIES DON’T
GENERATE INCOME OR PROVIDE ANY SUBSTANTIAL FINANCIAL BENEFIT TO THE BUSINESS.

Diff between in investing and financing

•Investing cash flows
• Represent the cash spent on long-term investments that can increase a company's profitability or
efficiency over time. These investments can include property, plant, and equipment, as well as
stock or securities in other companies.
•Financing cash flows
•Represent the cash received from investors, creditors, and owners, and the cash paid out to
 FINANCING ACTIVITIES

Activities which substantially affect the financial position of the business are a part of financial activities. The format in itself is
very simple.

1. Money coming in is added

2. Money going out is deducted.

Redemption- Redemption of shares/debentures occurs when a business takes back share/debentures and pays those holding it.
For example, On 5th July 2002, business issued debentures to Ram worth 50,000. On 5 th July 2024, business REDEEMED the
debentures i.e. ‘took back ownership’. In simple words, it purchased the debentures back from Ram for 50,000. Cash is going out
so minus.
USES OF CASH FLOW
STATEMENT

PARTH SHAH A119

1. CASH FLOW STATEMENT HELPS TO KNOW
LIQUIDITY POSITION OF BUSINESS

It refers to a company’s ability to convert

assets into cash.
2.Helps to find out why net profit has gone up
even though cash balance is decreased

This Photo by Unknown Author is licensed under CC BY-NC

3. Helps to find out reason for high
cash balance even if there is net
loss

This Photo by Unknown Author is licensed under CC BY

4. Identifies how to meet working capital needs by
the fund generated from
current operation

This Photo by Unknown Author is licensed under CC BY-SA

5. Answer many questions like , did the firm uses
external sources of finance to meet its needs
of fund?

This Photo by Unknown Author is licensed under CC BY

6. Answer many questions like , did
the firm sell any of its non current
asset?
Q. From the following Balance Sheet of Gangashakti Traders as on 1st April 2023 & 31st
March 2024, prepare the cash flow statement.

Liabilities 1st April 2023 31st March 2024 Assets 1st April 2023 31st March 2024
Capital 1,60,000 1,93,000 Stock 25,000 30,000
Trade Payables 27,000 35,000 Trade Receivables 35,000 45,000
Long Term Loan 75,000 95,000 Cash 12,000 28,000
Investments 65,000 75,000
Equipments 90,000 100,000
Land 35,000 45,000
2,62,000 3,23,000 2,62,000 3,23,000

Additional Information:
1. Depreciation charged on Equipments Rs. 32,500
2. Interest on Investments recieved Rs. 20,000
3. Interest on Long Term Loan paid Rs. 12,500
Particulars Rs. Rs.

A) Cash flow from Operating Activities

Closing Capital 1,93,000
Opening Capital 1,60,000
33,000
Add: Depreciation on Equipments 32,500
65,500
Less: Interest on Investments 20,000
45,500
Add: Increase in Current Liabilities- Trade Payables 8,000
53,500
Less: Increase in Current Assets- Stock 5,000
Less: Increase in Current Assets- Trade Recievables 10,000
Net Cash from Operating Activities (A) 38,500
Net Cash from Operating Activities (A) 38,500

B) Cash flow from Investing Activities

Less: Purchase of Investments 10,000
Less: Purchase of Equipments 10,000
Less: Purchase of Land 10,000
Net Cash from Investing Activities (B) -30,000

C) Cash flow from Financing Activities

Add: Long Term Loan borrowed 20,000
Less: Interest on Long Term Loan paid 12,500
Net Cash from Financing Activities (C) 7,500
Net Increase in Cash and Cash Equivalents (A+B+C) 16,000
Add: Cash Equivalent at the beginning of period 12,000
Cash Equivalent at the end of Period 28,000
 Q. From the following extracts of final accounts of M/s ABC and Co., prepare the cash flow
statement. Balance Sheet as on _____

Liabilities 1st April 2023 31st March 2024 Assets 1st April 2023 31st March 2024
Plant and
Capital 70,000 70,000 Machinery 50,000 91,000
Secured Loan 0 40,000Closing Stock 15,000 40,000
Creditors `14,000 39,000Debtors 5,000 20,000
Prepaid General
Taxes Payable 1,000 3,000 Expenses 2,000 4,000
Profit and Loss
A/c 7,000 10,000Cash 20,000 7,000

92,000 1,62,000 92,000 1,62,000

 Trading And Profit and Loss Account for the year ended
Dr 2023-24 Cr

Particulars Amount (Rs.) Amount(Rs.) Particulars Amount(Rs.) Amount(Rs.)

To Opening Stock 15,000By Sales 1,00,000

To Purchases 98,000By Closing Stock 40,000
To Gross Profit c/d 27,000
1,40,000 140000

To General Expenses 11,000By Gross Profit c/d 27,000

To Depreciation 8,000
To Taxes 4,000
To Net Profit c/d 4,000
27,000 27,000

To Dividend 1,000By Balance b/f 7,000

To Balance c/f 10,000By Net Profit b/d 4,000
11,000 11,000
Particulars Amount(Rs.) Amount(Rs.)
Cash Flow from Operating Activities: Net Profit for
the year 4,000
Non-Cash/Non-operating items
Add: Depreciation on Plant and Machinery 8,000
Add: Taxes (Profit and Loss) 4,000
Less: O/s in the beginning + Amount in P/l for the
year – O/s at the end = amount paid as Tax 2,000
Less: Increase in prepaid expenses 2,000
12,000
Working capital Adjustment
Add: Increase in Creditors 25,000
37,000
Less:
Increase in Stock 25,000
Increase in debtors 15,000

(40,000)
Particulars Amount (Rs.) Amount(Rs.)
Cash Outflow from Operating Activities (A) 3000

Cash flow from Investing Activities

Less: Purchase of Land 49,000

Net cash used in Investment Activities (B) 49,000

Cash Flow from Financial Activities

Add: Secured Loan 40,000

Less: Dividend 1,000

Net Cash from Financing Activities(C) 39,000
Net decrease in Cash and Cash Equivalents (C-B-A) 13,000
Add: Cash of Beginning (Opening Balance) 20,000
Cash at the end (Closing Balance) 7,000
 Fund Flow Statement
What is a fund low statement?

 Fund Flow is a comprehensive financial statement that tracks the movement of funds
within an organization over a specific period.

 It encompasses both cash and noncash items and provides insights into the changes
in a company’s financial position.

 Fund flow statements is typically is used to assess long term financial stability and
the allocation of funds for various activities within the organization.
Aspect Cash Flow Statement Fund Flow Statement

Scope Deals only in cash transactions. Encompasses cash and noncash items.

Timing Reports cash position at a specific point Analyzes changes over a longer time
in time frame.

Investor Focus Attracts short term investors and traders Valuable for long term investors and
analysts

Investment Decisions Aids in short term investment decisions Useful for strategic long term investment
choices

Regulatory Requirements Mandatory under Indian Accounting Not mandatory in India

Standards

Components Operating, investing and financing Various sources and application of funds
activities

Inclusion of non cash items Exclude depreciation and similar items Incorporate noncash items for a holistic
view
Both cash flow statements and fund flow
statements are important financial reports, but
the cash flow statement is often preferred for
several reasons.

Here are four advantages of a cash flow

statement over a fund flow statement:
Real-Time Financial Health: A cash flow
statement provides a real-time view of a
company’s liquidity. It tracks the actual cash
coming in and going out, offering a clear picture
of the company's ability to meet
Real-Time short-term
Financial Health: A cash flow statement provides a
obligations and manage day-to-day
real-time operations.
view of a company’s liquidity. It tracks the actual cash
coming in and going out, offering a clear picture of the
company's ability to meet short-term obligations and manage
day-to-day operations. Real-Time Financial Health: A cash flow
statement provides a real-time view of a company’s liquidity. It
tracks the actual cash coming in and going out, offering a clear
picture of the company's ability to meet short-term obligations
and manage day-to-day operations.
Direct Cash Management: It helps
management make more informed decisions
about cash management. By highlighting areas
where cash is being generated or used, the
statement helps in planning for future cash
Detailed Operational Insights: The cash flow statement breaks
needs and avoiding liquidity problems.
down cash flows into operating, investing, and financing
activities. This detailed view helps in understanding how cash is
generated from core business operations versus external
financing or investment activities.
is generated from core business
operations versus external
financing or investment activities.
Detailed Operational Insights:
The cash flow statement breaks
down cash flows into operating,
investing, and financing activities.
This detailed view helps in
understanding how cash is
generated from core business
operations versus external
financing or investment activities.
Investment and Financing Decisions: Investors
and lenders use cash flow statements to
evaluate a company's ability to generate cash,
which is critical for assessing its capacity to pay
dividends, service debt, or fund new projects.
The cash flow statement directly addresses
these concerns more effectively than a fund
flow statement.
In summary, while a fund flow
statement provides insights into the
changes in financial position and how
funds are utilized, the cash flow
statement offers a more precise and
actionable view of cash management
and operational liquidity.
TITLE
Meaning of Computerized
Accounting System
• A computerized accounting system is an accounting information
system that processes the financial transactions and events as per
Generally Accepted Accounting Principles (GAAP) to produce reports
as per user requirements.
Concept of Computerized
Accounting System
• The use of software to manage, store, and process accounting
transactions and financial records. - Components: Software,
hardware, databases, and people. - Transition from manual to digital
accounting for better efficiency and accuracy.
• It further helps in automatic document production – fast and accurate
invoices, credit notes, purchase orders, printing statements and
payroll documents are all done automatically.
 Trading and Profit and Loss Account
In the books of
Dr. Trading account for the year ending Cr. Dr. PROFIT AND LOSS ACCOUNT Cr.
Particulars Amount Amount Particulars Amount Amount
Particulars Amount Amount Particulars Amount Amount To stationery 500 By Gross Profit b/d 23000
To Opening Stock 10000 By Sales 45000 To Bad debts 200
To Purchases 25000 To interest 300 By Interest Received 500
(less) returns -3000 22000 To rent 2000
To Wages 5000 To Carriage Outward 500
To Gross Profit 23000 To Net Profit
(transferred to pnl) By closing Stock 15000 Ram 10000
Shyam 10000 20000
60000 60000 23500 23500
 Balance Sheet

Balance sheet As on 31st March 2019

Liabilities Amount Amount Assets Amount Amount
CapitalA/c: Building 140000
Ram 100000 Furniture 80000
Add:Net Profit 10000 110000 Debtors 28000
Shyam 100000 Bils Recievable 40000
Add:Net Profit 10000 110000 Prepaid Rent 2000
Creditors 20000 Cash 2000
Bills Payable 60000 Bank 8000
300000 300000
 Types of
Computerized
Accounting • Ready to Use Accounting Software:
System QuickBooks, Xero, etc.

• Commercial Accounting Software:

ERP clouds, Tally, Microsoft, etc.

• Cost Organization Software:

CRM software, OM, etc.
 Key Features of Computerized
Accounting Systems
1. Automation of Accounting Tasks: Transactions, invoices, and payroll
processing.
2. Real-Time Data Access: Instant access to financial data for decision-
making.
3. Integration with Other Business Tools: Links with CRM, ERP, and
inventory management systems.
4. Customizable Reports: Generate financial statements, balance
sheets, and profit/loss reports.
5. Data Security and Backup: Secured access and protection against
data loss.
 Additional Features of
Computerized Accounting
Systems
1. Scalability: Easily scales as the business grows.
2. Audit Trail: Provides detailed records of all transactions for auditing
purposes.-
3. Multi-User Access: Multiple users can access the system
simultaneously with role-based permissions.
4. Error Reduction: Minimizes human errors in calculations and data
entry.
 Importance of Computerized
Accounting Systems
i. Improved Accuracy: Automates complex calculations, reducing
manual errors.
ii. Efficiency: Faster data processing and report generation.
iii. Cost-Effectiveness: Reduces paperwork and manual labor, saving
time and money.
iv. Compliance and Auditing: Simplifies regulatory reporting and audit
compliance.
 Importance of Computerized
Accounting Systems
i. Integration :These systems can integrate with other business
applications such as inventory management, customer relationship
management (CRM), and payroll, providing a cohesive view of the
business operations.
ii. User-Friendly Features: Modern software often comes with user-
friendly interfaces and tools such as dashboards, visualizations, and
customizable reports that make it easier for users to manage and
understand their financial data.
iii. Reduction in Fraud Risk: Incorporates features like user access
controls and automated alerts to detect and prevent fraudulent
activities.
 Conclusion
Computerized accounting systems are essential for modern businesses
due to their automation, accuracy, and efficiency.
The features such as real-time data access and scalability make it a
must-have tool.
Despite challenges, computerized accounting greatly enhances the
financial management and decision-making process of any
organization.
10.4.1:Creation of Accounting
Documents
The components used in the Accounting software
include:

1)Formation of accounting documents

2)Recording of transactions
3)Preparation of Trial Balance and Financial Statement
 Recording of
Transactions
Preparation of
Formation of
Trial Balance
Accounting
and Financial
Document
Statement

Creation of
Accounting
Documents
1.Formation of Accounting Documents:

• Computer software provides efficient convenient

tools for creating a wide range of essential accounting
documents.
• This includes the generation of detailed cash memos,
accurate vouchers, organized receipts, and
professional invoices, meeting the diverse needs of
your accounting processes and enhancing overall
productivity.
 2.Recording of transactions:

• Computerized accounting software serves as a reliable

tool for meticulously documenting and organizing
various day-to-day business transactions, such as
sales, purchases, and expenses.
• By leveraging this advanced technology, companies
can seamlessly track financial activities and maintain
comprehensive records, while also reducing the
reliance on traditional
 3) Preparation of Trial Balance and
Financial Statement:

• Following the recording of transactions, the data is

automatically transferred into the ledger through the
software, streamlining the bookkeeping process.
• Vouchers are then created based on the recorded
data in the computer system.
• Subsequently, the trading and profit and loss account,
as well as the balance sheet, are automatically
prepared, providing a comprehensive overview of the
company's financial position and performance.
 Input (data)

Processing (Accounting)

Output (Reports)

Input represents data from source documents, like sales receipts,

bank deposit slips, purchases orders etc. Computerized accounting
systems require that data inputs be arranged in specific formats.
Transaction with missing dates, account numbers or other critical
information are not accepted by the system.
Outputs are the reports generated for decision making. These may
be like statements of debtors, creditors, inventory, tril balance,
income statement, balance sheet and so on.
10.8: Practical Activity
• Practical on Application of accounting software - Creation of
Company, Accounts group, Accounting Entries and generation of
reports (Balance Sheet, Profit & Loss A/c, Day Book etc).
Step 1: To create a company after entering the tally
software
c
Step 2 : The company creation window, display on the
screen as shown below in the image.
• Examples of ledger accounts:
• Examples of ledger accounts:
• After making the necessary ledgers, we
move on further to pass journal entries
• After passing all the journal entries, We get
the following trading account
And the following balance sheet:
The given Daybook, which gets generated on its
own, after passing journal entries:
The Ratio Analysis:
 Components of
computerized accounting
systems
The following components form the computerized
accounting system:

• Hardware
• Software
• Company personnel
Hardware
• Hardware comprises of electronic equipments that includes
computers, hard disks, monitors, printers and the network that
connects with them. Most modern accounting system require a
network, the system of electronic linkages which allows many
computers to the main computer or server which stores the
program and data, with right communication of hardware and
software, one can perform all the work on site. In a computerized
accounting system, the hardware components work together to
ensure the system operates efficiently and reliably. These
components work together to support the functionality of
computerized accounting systems, ensuring data accuracy, security,
and accessibility.
Software
Accounting software automates tasks such as bookkeeping, invoicing,
payroll, and financial reporting, which simplifies the accounting process
and reduces the likelihood of errors. Software is a set of instructions
and Programme that can direct and perform desired task as
required by users. Accounting software accepts, edits and stores
transactions and data and generates reports as per the
requirement. Computerized accounting software typically includes
components such as General Ledger (GL), Accounts Payable (AP),
Accounts Receivable (AR), Payroll Management, Expense Management,
Inventory Management, Financial Reporting, Bank Reconciliation, Tax
Management, Customer Relationship Management (CRM) Integration,
User Access Control, Data Backup and Security, Integration Capabilities,
and Automation Tools.
 Company personnel
Personal/Humanware is the people who dealt with computer and
software and play an important role in effective implementation of
Computerized Accounting System. Management of a
Computerized Accounting System requires careful planning of
data and access to the data. Security is sought by setting
passwords, codes, etc. at different stage which gives them more
safety of data.
Components of computerized accounting personnel include:
1.Accounting Users such as accountants and bookkeepers who perform
daily financial tasks.
2.System Administrators and IT Support who manage and maintain the
software.
3.Finance Professionals like analysts and auditors who analyze data,
ensure compliance, and support decision-making.
Introduction to Accounting Software Photo of certain types of accounting software

Accounting software helps businesses

manage financial transactions, maintain
records, and generate reports. As
businesses grow, manual accounting
processes become more complex and
time-consuming, which is why using
software is essential. Accounting
software simplifies tasks like
bookkeeping, payroll management, and
tax filing.
Types of Accounting Software
Commercial Off-the-Shelf
Spreadsheets
(COTS)
● Examples: Microsoft Excel, Google
● Examples: QuickBooks, Tally ERP
Sheets ● COTS software is pre-built and
● These are the simplest forms of
designed for general business
accounting software, used for smaller
use. It's widely available and
businesses or personal accounting.
often comes with features for
They allow you to input data,
bookkeeping, invoicing, and
perform calculations, and create
reporting.
simple financial reports. ● Advantages: Easy to use,
● Advantages: Low cost, high flexibility.
● Disadvantages: Requires manual affordable for small and
medium enterprises (SMEs).
input, prone to errors. ● Disadvantages: Limited
customization.
Types of Accounting Software
Enterprise Resource Planning (ERP) Software Custom Accounting Software

● Examples: SAP, Oracle NetSuite ● Examples: Tailor-made solutions for specific

● ERP systems are advanced, integrated industries
platforms that manage all aspects of a ● Some companies need unique features that
business, including accounting. They're used can only be achieved with custom-built
by larger businesses with complex needs. software.
● Advantages: Highly comprehensive, can be ● Advantages: Fully customized to business
customized to specific industries. needs.
● Disadvantages: Expensive, complex to ● Disadvantages: Expensive and time-consuming
implement. to develop.
Comparison of Accounting Software
Basis of Spreadsheet COTS ERP Systems Custom
Distinction Software Software

Cost Low costs Moderate

Costs

Ease of Use Easy to use Easy to

Moderate
use

Customizatio Limited
n Customizatio
n Availabilty

Scalability Low
COMPARISON BETWEEN MANUAL ACCOUNTING
AND COMPUTERIZED ACCOUNTING
BASIS OF DIFFERENCE MANUAL ACCOUNTING COMPUTERIZED
ACCOUNTING
1.MEANING Manual accounting is the system In this system of computerized
in which we maintain physical accounting, we use computer and
register of journal and ledger for different accounting software for
keeping the records of each digital record of each business
business transactions. transactions.

2.CALCULATION MAKE TOTAL OF All calculations are done We record transactions manually
manually. in the database. All the
calculations are automatically
done by computer system.
3.LEDGER ACCOUNTS They are prepared by posting Once a voucher is entered on the
transactions in appropriate ledger accounting system it will
manually with the help of automatically be printed.
journal.
BASIS OF DIFFERENCE MANUAL ACCOUNTING COMPUTERIZED
ACCOUNTING
4.ADJUSTMENT ENTRIES RECORD Both adjustment journal entries and Only adjustment entries will be
its posting in the ledger accounts passed in the computerized
will be done manually one by one. accounting system, posting in the
Ledger accounts will be done
automatically.
5.FINANCIAL STATEMENTS We have to make the financial We need not prepare financial
statements manually by carefully statement manually; financial
transferring trial balance’s figures in statements will be generated
to Trading, Profit and Loss A/c and automatically. It will also
balance sheet. automatically change after each
voucher entry in the system.

6.APPLICATION Used in small companies where the Used in medium-sized and large
number of transactions to be corporations where the number of
recorded are less. transactions to be recorded are
more.
BASIS OF DIFFERENCE MANUAL ACCOUNTING COMPUTERIZED
ACCOUNTING
7. CLOSING THE BOOKS After year end , accountants Financial reports are auto
prepare financial statements for generated for the accounting
the accounting period. Balances period. The balances are
are manually carried forward to automatically carried forward to
next year. next year.

8.DATA SAFETY Though it is free from cyber With trusted digital accounting
threats, the book can be stolen software, chances of cyber
easily. attacks are minimal.
9.TIME TAKEN It is a time taking process. The process of accounting is
much faster, more reliable, and
easy.
BASIS OF DIFFERENCE MANUAL ACCOUNTING COMPUTERIZED
ACCOUNTING
10.MARGIN OF ERROR Since the accounting is done The accounting through software
manually, so there is a chance of is automated and has very less
human error in calculations. chance of error and the
transactions are precisely
recorded.

11.EDITABLE It is difficult to edit reports or Any changes can be performed

make changes because whole easily as it’s easy to edit things in
page has to be re-entered. a computer system
12.SPACE REQUIREMENT With time, as the number of You can store as much data as
books increases more space is you want on the computer.
required for storage.
THANK YOU

BOOK KEEPING PROJECT

GROUP 2