Accounting With Tally

Tally An account package

Date:
M.E.S. scheme, G.P.W sector 10 By: Mohit Bansal

Syllabus
Practical: 1. Tally fundamentals (learning how to use of tally processing transaction in tally). 2. Report generation (creating statement like invoice, bill, profit & loss a/c). 3. Features of tally (company creation etc). 4. Recording of transaction. 5. Budgeting system, scenario mgt & variable analysis. Use tally for posting, ration analysis. 6. Cash flow statement & fund flow statement. Analysis & managing inventory. 7. Point of sale, taxation, payroll accounting systematically. Administration & other utility.

Theory: 1. Accounting in computer. 2. Introduction & reports. 3. Business organization (different area like school, college, shop, factory etc). 4. Double entry system of book keeping. 5. Budgeting system. 6. Scenario mgt. 7. Variance analysis. 8. Costing system, understanding ratios analysis of financial statement. 9. Inventory basics. 10. 11. in tally. POS, TDS, TCS, FBT, VAT, service tax processing in tally. Interface in different language, processing in payroll, functions

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What is management control system?

Tally
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Introduction of accounts:

Accounts include accounting which forms the basis for preparation of financial statement. An account is to identifying recording interpreting presenting the business transactions. For running a business successfully a businessman needs to make financial statement like trading, profit & loss a/c, balance sheet etc. to know the profit & loss of the company these statements provide a ratio like gross profit,

net profit ratio, stock turnover ratio, & liquid turnover ratio. There is different type of business transactions. These are:1. 2. 3. 4. Payment. Receipts. Sale. Purchase.

Tally is the account package. It is very helpful & useful for accounts person. In tally one has to enter only vouchers. Rest of the books/reports is prepared by tally. It automatically generates ledgers prepaid trial balance, profit & loss a/c and balance sheet. It has also provision for preparing a/c with inventory, taxes, vat, C.S.T are calculated by it. Tally is very to understand & operate by the person with accounts knowledge. However Non accounts person can also learn & became successful tally users. They must try to understand the fundamentals of the accounts.

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Principle of accounts:
Real A/c: Debit what comes in. Credit what goes out. 2. Nominal A/c: Debit all expenses/losses. Credit all income/gains. 3. Personal A/c: Debit the receiver.

Credit the giver.

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1. 2.

Classification of accounts:
Personal Account : Impersonal Account : a) Real a/c b) Nominal a/c.

Personal Account: Classification of personal accounts:

The accounts which relates to an individual firm company or an institution are called personal accounts.

1. Natural Personal Accounts - Accounts of natural persons means the accounts of human beings. For e.g. Mohans account, Johans account. 2. Artificial Personal Accounts - The accounts do not have physical existence as human being but they works as personal accounts. For e.g. any firms account. Any bank account.

Real Account:

The account of all those whose value can be measured in terms of money and which are properties of the business are termed as real account such as, cash a/c, furniture a/c, goodwill a/c, etc.

Classification of real accounts:

1. Tangible Real Account - Tangible account is the accounts of those things which can be touched, felt, measured, sold, etc. For e.g. cash a/c , furniture a/c. 2. Intangible Real Account - These accounts represent such things which cant be touched but of course their value can be measured in terms of money. For e.g. goodwill, patents a/c.

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Example:

Nominal account:

These accounts include the accounts of all expenses & income.

a) Relating to express are salaries, rent paid, bad debts etc. b) Relating to income are commission received, not-received etc.

Modes of Accounting:
1. Journal - A journal is a book in which business transactions are entered in chronological. 2. Vouchers - A vouchers is a document containing details of financial transactions.

3. Account - An account is a statement of transaction affecting any particulars. Assets/liabilities, expenses or income. 4. maintain.

Ledger

- Ledger is a book in which all accounts are

Accounting System:
1. Single Entry System - Single entry system is concerned only with one side of transaction as either you pay someone or your services from someone. 2. Double Entry System - Based on a fact that a single transaction has a double sided affair. Two accounts are affected by a transaction. One account received a benefit is (Dr) and the other person or the account who give something to the business is (Cr).

Book Keeping:
1. It is difficult to remember the various financial payment & receipts taking place during the period of time. 2. In modern form of business organization the control of business rest with different person and the result are to be reported to the owners. 3. The financial information is required for the purpose of costing, budgeting, forecasting & planning. 4. Book keeping records are to be submitted to various government agencies like income tax, sale tax authority for taxation purpose.

Book keeping is that branch of knowledge which tells us how to keep a record of financial transaction. The need for recording such transaction arises because:-

Process of Book Keeping:

1. Identification of Transactions: All transactions & events in nature related to the entity & have all documentary evidence identify for recording non financial activity are to be ignored. 2. Recording at first stage: Financial transactions and events identify at first step one are recorded in the book of original entry (journal/sub journal).

3. Posting in the ledger: All transaction recorded in the book of original entry relating to person, party, property, expenses, income, loss or gain are posted in the respective a/c maintain in the ledger. Ledger a/c provides latest information at a glance. 4. Preparation of trial balance: All the balances of all on a separate list with Dr. & Cr. columns. The list of balances is known as trial balance. It is prepared to cheek with metical accuracy of the book. If trial balance does not tally it indicates existence of errors which are located & rectify.

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Objects of Book Keeping:

To have a permanent record of each transactions of the business. 2. To show the financial effect on the entity of each transaction recorded. 3. To ascertain the combined effect of all the transaction on the financial on the particular date. 4. To disclose the factor responsible for earning profit or suffering loss in a given period. 5. The amt. recoverable by the business from other and payment able to other. 6. 7. 8. 9. Determination of text liability of the business. Prevention of errors and frauds. Protection of assets. Measure of exercising the system of control.

Journal:

The basic book of accounting is called journal preciously it is a book of prime entry which means day book. Trader records his totally daily transaction in it. The process of recording the transaction into journal is called journalizing. The journalize following the two functions: 1. To analysis each transaction into Dr. & Cr. So as to enable that is posting in the ledger. 2. To arrange transaction chronologically.

Need of journal - Journal is needed and useful in the following aspects.

1. 2. 3. Convenient recording of transaction. Maintaining & preventing the identification & transaction. Maintaining permanent record of transaction.

Vouchers:

Every transaction to be recorded in the books of accounts must be back by some documentary evidence which is known as vouchers. E.g. receipts pay in slips, invoices, Dr. & Cr.

Objectives of Financial Accounting:

1. To keep systematical record of business transaction According to specific rules complete record of business is maintained to avoid any kind of fraud entries first made in journal subsidiary book and then posted into ledger. 2. To calculate profit or loss - Financial accounting is helpful to ascertain whether the companies earning profit or suffering losses. 3. To provide information to various parties - The other objectives of accounting are to communicate the accounting information to different parties who have interest. Their owner employees, bank, creditors. 4. Helpful to management - so it is useful to management is many ways comparison of current year and last year and last year performance can be made. It helps to identify the weak case corrective decision can be takes accordingly. Future course of action can be decided. 5. To know the financial position of the business with the help of balance sheet - We can know the financial position of the business as it shown in the balance sheet within (asset/liabilities).

Assumption:
1. Going concern - In the ordinary course accounting assumes that the business will continue to exist and carry in its operations for an

indefinite period in future. The entry is assumed to remain in operation sufficiently long to carry out its objects & plans. The value attached to the assets will be on the basis of its current worth. The assumption is that the fixed assets are not intended for resale. 2. Consistency - There should be uniformity in accounting process & policies from are period to another. Material changes if any should be disclosed even though there is improvement in techniques. A change of method from one period to another will affect the result of the trading materially. 3. Accrual concept - Accounting attempts to recognize non cash events & circumstances as they occur. Accrual is the concerned with the future cash receipts & payments. It is an accounting process of recognizing assets, liabilities or income for amount expected to be receipts or paid in future. E.g. purchase & sale of goods & services. Interest, rent, wages, & salaries.

Financial Relicense:
1. Conventions - The conventions of relevance emphasis the fact that only. Such information should be made available by accounting as is relevant and useful for achieving objectives. 2. Objectivity - The conventions of objectivity emphasis that accounting information should be expresses by standards which are commonly acceptable.

E.g. stock of good, lying unsold at the end of the year should be valued at
its cost price not at a higher price even if it is lightly to be so that a higher price in future.

3. Feasibility - The convention of feasibility emphasis the time labor and cost of analyzing accounting information should be compare benefit arising of it.

E.g. the cost of oiling & greasing the machinery is so small that is break
up per unit produced will be meaningless and will amount to wastage of labor & time of the accounting staff.

Concept:

1. Accounting period - Though accounting practice believe in continuing entity concept. That is life of the business is perpetual but still it has to report the result of activity under taken in specific period. Thus accounting attempts to present the gain or loss earned or suffered by the business during the period under review. Normally it is calendar year (1 January to 31 December) but in other cases it may be financial year (1st April to 31 march) or any other period depending upon the convenience of the business concerned.
st st st

2. Realization This concept emphasis that profit should be considered only when realized. The question is at what stage profit should be deemed to have acquired at the time of receiving order, at the time of its execution or at the time of receiving of cash? For answering these questions the accounting is in conformity with law (sales and goods act) and recognize the principle of law i.e. the revenue earned only when the good are transferred. It means that profit is deemed to have acquired when property in goods passes to buyers. 3. Matching - Though the business is a continue job, yet its continuity is artificial split into several accounting years for determining its periodic results the profit is the measure of the economic performance of a concerned and as such it increases prop writers equity. Since profit is an excess of revenue over expenditure it becomes necessary to bring together revenue and expenses relating to the period under review. 4. Entity According to this concept the task of measuring income and wealth is undertaken by accounting for an identifiable unit or entity the entity so identified is treated different and distinct from its owner or contributors. 5. Stable Monitory Unit Accounting assumes that the purchasing power of monitory unit stays the same throughout, thus ignoring the effect of rising or falling purchasing power of the monitory unit due to deflation or inflation. 6. Cost - This concept is closely related to the Going Concern concept according to this an asset is recorded in the book at the price at which it was acquired i.e. at its cost price this cost serves the basis for the accounting of this assets during the subsequent period. 7. Conservatism This concept emphasis that profit should never be over stated or anticipated. 8. Dual Extent Concept This concept may be stated as for every debt. There is a credit. Every transaction should have two sided effect to the same extent of same amount.

Inventory:

It consist of raw materials and other items available for sales, or in the process of being made ready for sale in other words inventory is the money invested by an organization in raw materials ,work in progress and finished goods for expected future sale. The funds invested in inventory cant be used for other purposes until cash is received on sale of goods. Inventory is a current asset as it is converted into cash on sale.

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1. 2. 3.

Types of Inventories:
Raw materials Work in progress. Finished goods.

Cash Book:

In any business perhaps the largest number of transactions of one nature must relate to cash and bank it is so because every transaction must ultimately result in cash transaction now if every cash transaction is to be recorded in journal it will involve amount of labor in debiting or crediting cash or bank accounts in the ledger for each transaction. It is the cash book, to record such transactions.

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Features of Cash Book:

Only cash transactions are recorded in the cash book. It performs the role of both journal and ledger. 3. Receipts are recorded on the debt side and payment on the credit side. 4. 5. It records only one aspect of the transaction i.e. cash and bank. Transactions are recorded in chronological order.

6. Cash column must have debit balance and where as bank column may have debit on credit balance depending whether bank balance is deposited or over draft. 7. Non cash aspect of transaction is posted in ledger required no posting because cash amount is in the cash book itself.

8. Format of cash book is just like ledger i.e. having two sides L.H.S. and R.H.S. debit and credit side respectively. 9. Unlike any other account or book. Cash book is balanced daily.

10. Cash book most show debit balance always, it cannot have credit balance because no one can pay more. Double entries completed by means of posting in the ledger to the respective account.

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Business Organization:
1. 2. 3. Service Organization Trading Organization Manufacturing Organization

Business organization performs a variety of transactions and can be classified as follows:

The basic description of business organization such as sole proprietorship, partnership limited company is not relevant to this discussion as decision or legal entities are based on other consideration.

Service Organization - Service is defined as worked done for other in lieu of a

payment or a price. Service does not have a physical form and organization providing services is called a service organization.

Nature of Service Organization:

1. Service organization provides their service at the point of consumption by the customer. 2. Services are perishable so the pressure on the service organization to provide services is more than that on manufacturing organization or a trading organization.

3. Customer interaction is greater in service organization than in manufacturing or trading organization. 4. In a service organization, services are usually provided by people. So service organization is more labor intensive then manufacturing organization. 5. Customer Goodwill is an intangible assets for service organization which can be destroyed quickly there is often no way to correct bad services.

Uses of Accounting in Service Organization:

1. The organization maintain regular book of account. More services organization does not deal in inventory and therefore do not need to maintain inventory record. 2. They do not follow a standard price of policy for all customers at all time. 3. In a service organization the focus is an environment is on effective utilization of human resources.

Trading Organization - An organization involved in the process of buying and

selling is called trading organization. Trading is defined as an exchange of goods for a fixed market rice traders act as chance that provides goods produced by the manufacturer at a convenient place, price, pack and time to the consumer.

Nature of Trading Organization:

1. The actual market price established and is valid for a short period based on the current supply and demand. 2. The value of the product is determined by the customer expectation of the quality. 3. The customer of expectation of convenience in relation to the actual amount paid for it. 4. The traders deal with goods they repack them if necessary but do not process them. 5. Different customer may be changed different prices by weighing the percentage of discount in the price list.

Use of Accounting in Trading Organization: -

The traders must keep track of stock availability, customer requirement and market changes. The accountant in a trading organization has to maintain inventory records apart from regular accounting.

Manufacturing Organization - The process of transferring raw materials into

physical goods for consumer or for further processing by others in the channel is called manufacturing. The success of a manufacturing organization depend on it ability to carry out this process effectively and profitability. Manufacturing organization can be classified according to the production process undertaken: 1. These may range from extremely complex process to simple one.

2. Compare to service and trading organization a manufacturing organization must considered more facilities its define style of functioning. The questions that the manufacturer would want answers for: 1. Should product be standard one or customer side one?

2. What will be the number of order and order volume based on the above combination? 3. What will be the time required by the production team from the receipt of order to production considering available resources. 4. What will be the requirement life cycle as agreed by both the customer and manufacturer? After finding suitable answers to these questions the manufacturer may decide to: 1. 2. Produce goods and stock them to sales. Produce goods against customer orders.

3. Keep Sub components at a strategic location to assemble. The final product and deliver to it customer in time.

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Nature of Manufacturing Organization:

The production cycle and market cycle need not match.

2. Usually the entire cycle of procurement, production, distribution and realization is longer to others. 3. For higher level of standardization is possible.

4.

Scientific method can be used to reduce the production cost which forms a major part of the total cost of the products.

o Accounting Organization:

in

the

Manufacturing

1. A company needs to account for inventory like raw material WIP, finished goods to arrive at the profile made forth time. 2. Changes in the inventory valuation method change the profit made during the period. 3. Accounting in manufacturing organization required more planning preparation and scheduling as compared to accounting in trading and service organization. 4. Calculating cost of sales in relatively complex in manufacturing organization as compared to trading and services.

Accounting System:

An effective accounting system must support the management in making these decisions. As the process of decision making changes the accounting system must also change and evolve to meet both internal and external needs.

Benefits of Accounting on Computer:

1. Result in generation of timely reports in desired format and resolves real time enquiry needs quickly and accurately to enable faster decision making. 2. Facilitates knowledge sharing between accountants across different location of an organization. 3. Support financial planning tools such as budget and performance reports which in terms facilitate control and evaluation of the business process.

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Factors Contributing to Change:

Changing Business needs. Change in technology. Better business process. Competitive Advantage.

o Challenges associated with Accounting on Computers:

1. Capturing Business accounting needs - The frequently asked questions of accounting on computers is whether it can address all the accounting needs of the business and the operational requirements of accounts. 2. Implementation - It is assumed that the process of implementing accounting system on the computer is a time consuming affair. 3. Rigidity - Accounting on computer is often believed to introduce business. Processes are usually force fitted to suit the needs of the computerized accounting system rather than the other way around. 4. Security - The data in accounting on computer must be protected against physical and ethical security threats.

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Solutions:
Able to identify & addresses business accounting requirement. Simple to implement, configure & use. 3. Able to generate instant reports to keep the managers to take quick business decisions. 4. Able to adapt to constant charges in business needs.

5. Able to update real time data of all relevant records and eliminate duplication.

The security threats of data violation and data loss can be protected against by insuring: 1. 2. Regular Data backup. Logical assess control.

3.

Integrity of data at different stages such as data entry, storage, and process output & so on.

Points to remember in Accounting System:

1. Accounting on computer facilitates knowledge sharing between accountants across different location of an organization. 2. The data pertaining to accounts on computer needs to be protected against security threats. 3. Regular data backup and logical assess control can save guard from security threats of data violation and data loss.

Features of Tally:
1. A leading account package - The first version of tally was released in 1988 and proved continuous development in recognized as one of the leading accounting packages across the globe with our quarter million customer. Tally market share is more than 90%. 2. No Accounting Codes - Unlike other computerized packages that required numeric codes tally pioneer the No Accounting Codes Concept. 3. Complete Business Solution - Tally provides a comprehensive solution to the accounting and inventory needs of business. The package comprises of financial accounting and book keeping and inventory accounting. 4. Flexible & Easy to use - Tally is very flexible and tally can adapt to any business needs rather than the using trying to change the way of business in run to adapt to the package. 5. Multi-platform availability - Tally is available on Windows 95, 98, ME 2000 it runs on a single PC or network and is on a network scores excess by any combination of platforms.

Components of Tally
1. Title Bar - Displays the version numbers, system data, time, and tally serial number. 2. Gateway of tally - Displays menu screen, reports and except the choices and options you select to view data as you required. 3. also.

Calculator Facility - In tally they display the calculator facility

4. Button Tool Bar - Displays button that provide quick interaction daily only buttons relevant to the current tasks will be visible. 5. Tally Clock - While tally processes the data a clock appears on the screen it indicates that the request being processed. Once this clock disappears perform the next action. 6. Quitting Tally (Ctrl + Q) - You can exist the program from any tally screen but tally required all screen to be closed before it shut down.

Types of Cash Book:

1. Single Column Cash Book - In this all cash receipts are recorded on the left (Dr) hand side and all cash payment are recorded on the right (Cr) hand side. 2. Double Column Cash Book - In this cash book there are two columns one is for cash and another is for discount cash column is meant for recording cash receipts and payments while discount column is meant for to recording discount receipts and allowed. The discount column on the (Dr) side represents the discount allowed while discount column on the (Cr) side represents the discount receipts. 3. a) b)

Three Column Cash Book -

This type of cash book contains:

Discount column for discount receipts are allowed. Cash Column for cash received and cash payment.

c) Bank column for money deposited and money withdraw from the bank.

4. Cash Receipts and Payment Book or Journal - In practice cash receipts and cash payments book may be employed respectively to record cash receipts and payments especially when the cash transactions are made.

Ledgers:

Ledger may be defined as a book which contains summarized and classified forms and a permanent record of every transaction. Personal account in a ledger shows how much money the firm owes to its creditors and how much it has to be recovered from its debtors. The real account shows the value of property and also the value of stock. The nominal account reflected the sources of income and also the amount spent on various items.

Posting of Entries: Posting of Account (Dr) In Journal Entries:

1. Identify in the ledger the account to be debited. 2. Enter the date of transaction in the date column of the Dr Side of the account. 3. Write the name of the account which has been CR in the respective entries. 4. 5. Mark the page no of the Journal where the entries exist. Enter the amount in the amount column in the Dr Side.

The Process of transferring the information contains in the journal to a ledger is called Posting.

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Posting the Account (Cr) in Journal Entries: Identify in the ledger the account to be credited. 2. Enter the date of transactions in the column of the Cr side of the account. 3. Write the name of the account which has been Dr in the respective entries. 4. 5. Mark the page number of the Journal where the entries excise. Enter the amount in the amount column in the Cr side.

Advantages of Journal Entries:

1. It reduces the possibilities of errors it can be compare to see that both Dr and Cr side are equal. 2. Journal provides an explanation of transactions so that it is possible to understand the entry properly. 3. Journal Provides a chronological (Date wise) records of all transactions.

Disadvantages of Journal Entries:

1. The journal will become very heavy if transactions are record in a particular book. 2. Firms may like check the cash balance every day in hand. They usually records transactions directly in separate book. Therefore it is necessarily of journalizing cash transaction in the journal. 3. By recorded different classes transactions in different book, book keeping, and accounting become easier and systematic since then the entries can often be made in totals.

Financial Statements:
1. 2. 3. Balance sheet. P & L account. Schedules & notes forming part of a P/L account.

Financial statements are prepared and presented for their external users of accounting information. In India a complete set of financial statements includes:

Financial statements are the means of communications accounting information which is generated in this various accounting process to the external users of accounts. The external user includes: 1. 2. Investors. Employees.

3. 4. 5. 6. 7.

Lenders. Suppliers & other trade creditors. Customers. Agencies. Public at large.

Nature Of financial Statement:

1. Financial statements relate to a pass period and these are historical documents. 2. term. The statements are financial in nature i.e. express in monetary

3. Financial statements indicate financial position through balance sheet and profitability through P/L account.

Purpose & significance of financial analysis:

1. Judging the earning capacity or profitability - On the basis of financial statement the earning capacity of the business concern may be computed. In addition to this the future earning capacity of the concern may be forecasting. 2. Judging the managerial efficiency - The financial statement analysis help to pin point the areas where in the managers have shown better efficiency and the areas of inefficiency. 3. Judging the short & long term solvency of the concern - On the basis of financial statement the solvency of the concern may be judged. Debentures, holders and lenders judge the ability of the company to the principle and interest as most of the companies raised a position of their capital requirement by issuing debentures and raising long term loans. 4. Interfirm Comparison - On the basis of financial statements a comparative study may be undertaken for comparing various firms for various points of view.

5. Making forecast & preparing Budget - Past financial statement analysis keeps a great deal in assessing development in the future specially the next year.

Limitations of Financial Statements:

1. Persons like share holders, investors are more interested in knowing the likely position in the future. 2. Financial statements are the outcome of accounting with the personal judgment. Stock valuation treatment of deferred revenue expenditure, provision of depreciation extra is based on personal judgments and therefore is not free from bias. 3. The profit and the loss position or the financial positions excludes things which cannot be expressed or recorded in monetary terms. These statements do not include very important assets namely human resource in its position statement. 4. The number of parties interested in the financial statement is large and their interest different/ the financial statement cannot meet the purpose of all parties interested in them.

Ratio Analysis: -

Ratio is an arithmetic relation between two related or interdependent items. Ratio analysis is the process of determining relationship between figures of the financial statement and absolute figure often doesn't convey much meaning. E.g. A shopkeeper earns a profit of Rs 50,000 and another and earns 40,000 Rs which one is more efficient? We may be tempted to say that the one who earns higher profit is running his shop better. In fact to answer the questions we must how much it the capital employed by each shopkeeper. Suppose we ascertain that A has employed a capital of Rs 4, 00,000 B has employed a capital of Rs 3, 00,000.

Advantages of ratios:
1. Useful in analysis of financial statements - Accounting ratios are useful to understand the financial position of concern. One may quickly receive the relationship without working-out the ratio but that nearly

means that the ratio has roughly worked out is the mind e.g. when we see that a small business has earned a rather least profit. Thus accounting ratios are an extremely useful device for analyzing. 2. Useful in judging the operating expenses of business Accounting ratios are essential for understanding the faire of their firm. Specially the operation efficiency. Accounting ratios are also helpful and useful for diagnosis of the financial help of the business concern. This is done by calculating liquidity, solvency and profitability ratio. 3. Useful for forecasting purposes - Accounting ratios are also very useful for forecasting purposes. 4. Useful in locating the weak spots of the business Accounting ratios are of great assistant in locating the weak spots in the business even though the overall performance may be quite good. Management can then play the attention to the weakness and take remedial action. e.g. if the firms finds that increase in distribution expenses more than the proportionate result achieved there can be examined in detail and debt to remove any wastage that may be there. 5. Useful in comparison performance - A firm would like to compare its performance with that of other firm and its industries are general. The comparison is called interfirm comparison. If the performance of different units belonging to the same firm is to be compared it is called intrafirm comparison.

Limitations of Ratio Analysis:

1. Give false results if the ratios are based on in correct accounting data - Accounting ratios are based on accounting data. Therefore they can be only as correct as accounting data on which they are based. 2. Different meaning is put on different term - Elementary and sub element of financial statements is not uniquely defined. A firm may work out ratios on the basis of profit after interest and income tax; another firm may consider profit before interest but after income tax. A third firm may consider profit before interest and income tax. Therefore the ratios that will be worked out will be different and will not be comparable. Before comparison is made one may see that the ratios have been worked out on the same basis. 3. Not comparable if difference firms followed different firm policy - E.g. one firm may charge depreciation not the straight line basis and the other diminishing value. Such differences will not make some of

the accounting ratios strictly uncomfortable unless adjustment for different accounting policies followed is made. 4. Price level changes - Changes in the price level of may comparison of figure for various years difficult. E.g. the ratio of sales to fixed assets in year 2008 would be much higher than in 2004 due to rising prices. 5. Results may be misleading in the absence of absolute data Ratio sometimes gives a misleading picture in the absence of absolute data from which such ratios are derived eg. One firm produces 1000 units in one year and 2000 in next year and the other firm produces 6000 units in one year and 8000 units in next year. 6. Ignores qualitative factors - Accounting ratios are as a matter of fact tools of quantitative analysis. But sometime it is quite possible that the qualitative factors may override the quantitative aspects. 7. Difficult to forecast future on the basis of past facts Accounting ratios are worked out on the basis of past facts and figures. Thus the ratios can not reflect current conditions. Hence it is not desirable to use them for forecasting current and future events because past events may be quite different from the future events. 8. No single standard ratio for comparison - Another important to keep in mind is that there is almost no single standard ratio. There is almost no standard for comparison. Circumstances differ from firm to firm and the nature of each industry. 9. Ratio may be worked out for insignificant and unrelated figure - Accounting ratios may be worked out for any two figures even if they are not significantly related.

Classification of ratios:

Ratios can be classified from various points of view. In reality the classification depends on the objective and available data. Ratios may be based on figures in balance sheet in the profit and loss account or in both. Thus they may be worked out on the basis of figures contained in the financial statement and therefore may be classified as follows: 1. Income Statement Ratio - These ratios are calculated on the basis of items of income statement only. E.g. G/P ratio, Stock turnover ratio.

2. Position Statement Ratios - These ratios are calculated on the basis of figure on position of statement only.E.g. Current ratio, Debt equity ratio 3. Inter Statement or Composite Ratio - These ratios are based on figures of income statement as well as position statement. E.g. fixed asset turnover ratio and net profit to capital employed. The above classified however are rather crude and unsuitable because analysis of position statement and income statement cannot be carried out in isolation. They have to be studied together to determine the profitability and the financial position of the business. Anyone including the management which is interested in acquiring knowledge about the business is concerned with these two aspects. Ratios as tools for establishing true profitability and financial position of a company as under. 1. 2. 3. 4. Profitability ratio Turnover ratio. Liquidity ratio. Solvency ratio.

Profitability

ratio - The main object of business concerns to earn profit. In

general terms efficiency in business is measure by profitability. Profit as compared to the capital employed indicated profitability of the concern. Thus profitability is of the almost importance of a concern. If a concern goes on losing his financial condition will definitely be bad, sooner or later. 1. Gross profit sales - This ratio shows the relationship of sales with direct cost such as purchases, manufacturing cost. Gross profit sales = (Gross profit/net sales) x 100. 2. Operating profit ratio - Operating profit is given by net profit before adjustment of non operating income and expenses and finance charges. Operating profit ration = (operating profit/net sales) x 100. 3. Net profit ratio: - A ratio of net profit to sales is called Net Profit Ratio. Net profit is derived by deducting administrative and marketing expenses, finance charges and making adjustments for non operating expenses and incomes. Net profit ration = (Net profit/Net sales) x 100.

Net profit is taken in two ways.

a) Profit before tax x 100. b) Profit after tax 100. = (Net profit before tax/net sales) = (Net profit after tax/net sales) x

4. Operating ratio - This ratio measure the extent of cost incurred for making the sale. In other words this ratio matches cost of goods sold + other operating expenses on the one hand with net sales on the other. Operating ratio = [(all operating exp. + cost of goods)/net sales] x 100. 5. Expenses ratios - Expenses ratios are calculated to ascertain the relationship that exists between operating expenses and volume of sales. These ratios are calculated dividing the sales into each individual operating expense.

Ratios of material uses to sales:

a) Direct material cost to sale ratio. = (direct material cost/net sales) x 100. b) Direct factory cost ratio. = (Direct factory cost/Net sales) x 100. c) x 100. Direct labor cost ratio. = (Direct labor cost net sales

d) Selling & Distribution exp. Ratio. = (selling & distribution exp. /Net sales) x 100. e) Office and administration ratio. = (office and admin. Exp. /Net sales) x 100.

Turnover

ratio - Profit depends on the ratio of turnover and margin. Turnover

ratio also term as performance or activity ratio judge how well facilities at the disposal of the concern are being used. The ratio is usually calculated on the basis of sales or cost of sales turnover ratio of each type of assets should be calculated separately.

a)

Capital turnover ratio = (sale/capital employed).

b) Fixed asset turnover ratio or ratio of sales to fixed assets = (Sales/fixed assets). c) Net working capital turnover ratio = (cost of sales/net working capital). Note: - Net working capital = (Net assets Net liabilities.) d) Stock or inventory turnover ratio = (cost of goods sold/avg. stock invitatory). Cost of goods sold = (opening stock + purchases + direct exp - closing stock). Or Cost of goods sold = sales G.P. Avg. stock invitatory = (opening balance + closing balance.)/2 1. Debtor turnover ratio or Receivable turnover ratio - This ratio establish the relationship b/w net credit sales and avg. debtors of the year. a) Debtor turnover ratio = (Net credit sales/avg. account receivable) Or Debtor turnover ratio = (Total sales/accounts receivable). 2. Avg. collection period or Debtor days - This ratio deals with the same subject and shows the number of days for which normally sales remain uncollected it indicates the extent to which the debts have been collected in time. Net credit sales per day = (total credit sales /365) Avg. collection period = (day in a year/debtors turnover) Or Avg. collection period = (month in a year/ debtor turnover)

3. Credit turnover ratio/accounts payable ratio - This ratio is calculated roughly as a debtor turnover ratio it indicated the velocity with which the payment of credit purchases are made to creditors. The term accounts payable includes creditors and bills payable. Credit turnover ratio = (total purchases/avg. accounts payable)

Liquidity ratio (short term solvency):

1. Current ratio/working capital ratio - This ratio is used to access the short term financial position of the business concern. Current ratio = (Current asset/Current liabilities) 2. Quick/liquid ratio/acid test ratio - liquid ratio is worked out to test the short term liquidity of the firm in its correct form. Liquid assets include: Cash, bill receivable and marketable securities, Debtors Quick ratio = (liquid asset/ current liabilities)

Solvency ratio - The term solvency implies ability of a concern to meet its long
term in debts and thus solvency ratio conveys a concerns ability to meet its long term obligations. Some important solvency ratios are: 1. Debt equity ratio - The debt equity ratio is worked to ascertain soundness of the long term policies of the firm. Debt equity Ratio = Deb. (long term loans)/equity (shareholders funds). 2. Interest coverage ratio - When a business borrows money the lender is interested in finding out whether the business would earn sufficient profits to pay the interest charges. Interest coverage Ratio = Net profit before interest & tax/Interest on fixed loan or debtness. 3. Debt to total fund ratio - It is normally sufficient to measure current assets against current liabilities for assessing the short term financial soundness of a corporation. The debt to total funds ratio is a measure for long term financial soundness. Debt to total fund ratio = debt/(equity + debt) 4. Fixed assets ratio: the ratio of long term loans to fixed assets is important and another aspect of long term financial policies. Fixed assets ratio = (Share holder funds + long term loans)/net fixed assets 5. Proprietary ratio - This ratio is established the relationship between proprietors fund and total assets. Proprietor fund means share

capital plus reserves and surplus. Both of capital and revenue nature loss should be deducted. Proprietary ratio = proprietor funds/total assets

Fund flow statements:

The balance sheet discloses the financial state position of the business on a particular date. It is merely a statement of the assets and liabilities. It may depict the effect of various transactions in a particular period and show the resources position after transactions in a particular period the balance sheet at the end of the period quite different from the balance sheet at the beginning of the year. But how the changes have come about is not reflected in the balance sheet. The analysis method which discloses these changes clearly is called front flow statements. In short fund flow statement is a statement which is prepared to disclose the changes in the financial data of balance sheet of two periods. The statement is report on major financial operations that is changes flow or movements during the period. It changes is known by various other names like: 1. OR 2. Statement of source and application fund Statement of changes in financial positions.

Meaning of funds:

In a narrow sense the word fund is synonymous with cash. In this sense the fund flow statement is simply a statement of cash receipts and disbursement. Such a statement is called Cash flow statement. It portraits the inflow and outflow of cash during a period and consequently the balance in hand. The term funds however broader than cash. It means working capital that is a difference between current asset and current liabilities or the excess of current asset over Current Liabilities. For example: The current asset is 5,00,000. The total of Current liability is 3,00,000. Then the working capital or fund would be 2,00,000. Therefore in accounting funds and working capital is used in same sense.

Meaning of flow:

The term flow means changes in funds or changes in working capital. According to working capital the concept of funds the terms of flow of funds refer to the movement of funds as a flow in and out of working capital area. All flow of funds passes throw working capital. The working capital flow arises when the net effect of transactions is to increase or decrease in working capital means flow of funds. Some of these transactions may increase a working capital while other may decrease the working capital. While some may not make any change in working capital. If the transaction increases the working capital it is term to be a source of funds & if the transaction decreases the working capital it is termed to be a application of funds.

Objectives of front flow statement:

The basic objective of front flow statement is to indicate where funds came from and where they were used between two balances sheet dates. It is used widely by financial managers and credit granting institutions. Fund flow statement is prepared to know the periodic increase or decrease of working capital of business concern. It also enables the management to know with reasons the basic causes of the change in the net working capital. Fund flow statement highlights the sources in the financial structure of the firm between the 2 balance sheet dates. 1. How much funds have been generated from recurring and non recurring activities? 2. How much funds have been raised from external sources? 3. Where did the profit go? 4. How was it possible to distribute dividend in excess of current earning or in the presence of net loss for the period? 5. Why are the net current assets up even though there was a net loss for the period? 6. How was expansion in plant and equipment financed? 7. How was increase in working capital financed?

1. It reveals the net results of operations during a year in terms of cash - The figure is better than the figure of profit and thus the statement gives a better view of profitability since profit as such is subject to a rather personal decision of management. E.g. deciding the amount of depreciation, If the amount of depreciation is reduced, the profit will increase. Profit can be decreased by increasing the amount of depreciation.

Uses and advantages of fund flow:

2. Information of funds inflow is a location of resources - Utilization of funds depends upon the information of fund inflows. The traditional financial statement, the balance sheet and profit and loss accounts don not provide such information. 3. It acts as a processing the budgetary location - Since funds are the basis for carrying on operation. The fund flow statement prepared on the estimated basis for the next period.

4. It helps in borrowing operation - These days lending institutions such as banks, ICFI, IDPI etc before extending any loan to any business. One has to satisfy themselves about the ability of the company to repay the loan and the investment.

Cash flow statement:

In this the focus is on movement of cash and bank balances rather than on net working capital. Hence any change in working capital does not necessarily mean change in cash: cash flow statement is prepared to show the impact of various transactions on the cash position of the firm. it may be defined as a summary of receipts and disbursement (payment) reconciling the opening cash/ bank balance with the closing balance of the concern period with information about various items appearing in the balance sheet and profit and loss account. The transaction which the cash position of the entity is known as "inflow of cash" and those which the cash position is known as "Outflow of cash".

Objectives of cash flow:

1. Highlight cash flow from recurring activities - CFS aims at highlighting the cash generating from recurring activities. P/L account indicates net profit which is derived after adjustment of many non cash items.

2. Planning - Cash is the center of all financial decision. Once the volume of internally generated cash becomes known, it becomes easy to plan that how much cash should be raised from outside sources to cover the cash required in various investment projects. 3. Cash flow information helps to understand liquidity - Liquidity is the ability of the business to pay current liabilities as and when they become due. Bank and financial institutions mostly prefer generally CFS to analyze liquidity.

4. Dividend decisions - Dividend once declared by the company becomes a current liability and should be paid within 42 days of declaration. 5. Prediction of sickness - Continuous cash loss is a symptom of sickness. Presently many CFS rating are used for financial analysis.

6. Comparison with budget - A comparison of the Cash flow Statements for the previous year with the budget (prepared before year commenced) for the year would indicate to what extent the resources of the concern were generated and apply according to the plan.

o Difference between cash flow statement and fund flow statement:

Cash Flow Statements 1. It is based on narrow concept i.e. cash is equal to fund. 2. It recognizes cash basis of accounting. 3. It is useful for short term financial planning. 4. It highlights only the causes of cash variations. 5. It analysis an increase in a current liability or decrease in a current asset (other than cash) results in increase in cash. Fund Flow Statements 1. It is based on a broader concept i.e. fund is equal to working capital. 2. It is prepared on the accrual (future effects) basis of accounting. 3. It is useful for long term financial planning. 4. It discloses all causes of overall working capital variant. 5. In this increase in current liabilities or decrease in current asset results in increase of working capital.

o Budget

Budgetary control:

- A budget is prepared to have effective utilization of fund and for the realization of objectives as effectively as possible. An analysis of this definition reveals the following essentials of a budget: 1. 2. 3. 4. It is a plan expressed in monitory terms. It is related to a definite future period. It is approved by the management for implementation It also shows capital to be employed during the period

Thus a budget fixes a target in terms of rupees against which the actual performance is measured.

Budgetary

control - It is applied to a system of management and accounting control by which all operation and output are forecasted as far as possible and actual results when known are compared with the budget estimates.

Essential of budgetary control:

1. The establishment of budget for each functional and section of the organization. 2. Executive responsibility in order to perform the specific task. 3. Continuous comparison of the actual performance with that of the budget so as to achieve the desired result as given in the budget. 4. Revision of budget in the light of changed circumstances.

Budget, Budgeting and Budgetary control:

"Budgets are the individual objectives of department etc. Budgeting may be said to be the act of building budgets." "Budgeting control embraces all this and in addition includes the science of planning the budgets to affect an overall management tool for the business planning and control."

Objectives of budgetary control:

Budgetary control is planned to assist the management in the allocation of responsibilities and authority to aid in making estimate and plan for future and to develop basis of measurement or standards with which to evaluate the efficiency of operations. The general objectives of budgetary control are as follows: 1. Planning - A budget is a plan of the policy to be perused during the defined period of time to attain a given objective. A budget as a plan of action achieves the following purpose. a. The budget serves as a mechanism through which management's objectives and policies are affected. b. It is a bridge through which communication is established between the top management and the operatives who are to implement the policies of the top management. c. The most profitable course of action is selected from the various available alternatives. 2. Co-ordination - The budgetary control co-ordinates the various activities of the firm and secures co-operation of all concerned so that the

common objective of the firm may be successfully achieved. It is also helpful in co-coordinating the policies, plans and actions.

3. Control - Budgetary control makes possible continuous comparison of actual performance with that of the budget so as to report the variations from the budget to the management of corrective action. Thus budgeting system integrates key managerial function as it links top management's planning function with the control function performed at all levels in the management hierarchy. A more accurate budget can be developed for those activities where direct relationship exists between inputs & outputs. The relationship between inputs and outputs becomes the basis of developing budgets and exercising control.

Organization for a budgetary control

Sales manager: Sales budget including advertising, selling and distribution cost. Production manager: Production and plant utilization budget. Purchase manager: Material budget. Personnel manager: Labor budget. Accountant: Cost and Master Budget.

Chief executive is the head of the budgetary control system (BCS). He delegates his power/authorities to the budget officer, who sees that all the budgets are coordinated and drawn in time. The other managers will prepare the budgets as assigned to them. The chief executive should appoint a budget officer who should be given the specific duty of administrating the budget. As in who will deal with the preparation and co-ordination of budget involving figure, he will usually be a person with accounting knowledge. He should also have a technical knowledge of the business. He is to make sure that budgets are being prepared according to the budget manual. His function is to give advice to the line manager. The budget controller is assisted by the budget committee which includes general manager or chief executive, Sales manager, Work managers, Accountant or budget controller, personnel manager and departmental managers. The functional mangers will prepare the budget and submit the report to the committee for approval. It is the duty of the budget committee to make necessary adjustments in the budget, Co-ordinate all the budget and finally approve the budgets. The budget committee is thus an advisory committee as it examines budget, records and recommends corrective actions for discrepancies between actual budgets if required.

Duties of budget controller:

1. To create co-ordination among managers and provide guidance. 2. To revise and amend the budget manual as and when required. 3. To prepare budget programs and issue instruction for proper executions of each program. 4. To revise and scrutinize the budget received from various budget departments. 5. To prepare summary budgets in consultation with budget committee and place all information and budgets before the budget committee.

Analysis of variances:

Control is the very important function of management through control, management ensures that performance of the organization confirms to its plans and objectives. Analysis of variances is helpful in controlling the performance and achieving the profits that have been planned. The deviation of the actual loss or profit or sale is known as variances. When actual cost is less than standard cost or actual profit is better than standard profit is known as favorable variance and such a variance is usually a sign of efficiency of the organization. On the other hand when actual cost is more than standard cost or actual profit or turnover, it is called unfavorable/adverse variance and is usually an indication of inefficiency of an organization, The favorable/unfavorable variance are also known as debit/credit variance respectively. Variances of different items of cost provide the key to cost control because they disclose whether and to what extent standards set have been achieved. Another way of classifying the variance may be controllable or uncontrollable variances. If a variance is due to inefficiency of cost center, it is said to be controllable variance. Such a variance can be corrected by taking a suitable action. for e.g. if actual quantity of material uses more than the standard quantity the firm concerned would be responsible for it nut if excessive use is due to defective supply of material and wrong setting of standards, the purchasing department or the cost account department is responsible for it. On the other hand uncontrollable variances do not relate to an individual or department but it arises due to external reasons like an increase in the price of material. This type of variances is not controllable and no particular individual can be held responsible for it. There are number of reasons that give rise to variances and the analysis of variance will help to locate the reason & person or department responsible for a particular variance. The manager may not pay attention to items or departments proceeding according to standards laid down; it is only in case of unfavorable items that the management has to exercise control. This type of management technique is known as managements are exceptions. This type of technique as considered as an efficient way of exercising control because management devotes limit time to every item. The deviation of total actual cost from total standard costing is known as total cost variances. It is a net variance which is the aggregate of all variances relating to various elements of cost both favorable and unfavorable analysis of variances may be done in respect of each element of cost and sales.

Cost and sales variance:

1. 2. 3. 4. Direct material variances. Direct labor variances. Overhead variances. Sales variances.

o In case of material the following may be variances:

1. 2. 3. 4. 5. Material Material Material Material Material cost variance. price variance. usage variance / Quantity. mixed variance. yield variance.

Computer Input and output devices:

Input device -

A hardware device that sends information into the CPU. Without any input devices a computer would simply be a display device and not allow users to interact with it, much like a TV. Below is a listing of different types of computer input devices. 1. 2. 3. 4. 5. 6. 7. Digital camera Joystick Keyboard Microphone Mouse Scanner Web Cam

Output device - Any peripheral that receives and/or displays output

from a computer. Below are some examples of different types of output devices commonly found on a computer. 1. 2. 3. 4. 5. 6. Monitor. Printer Projector Sound card Speakers Video card

Printer - An external hardware device responsible for taking

computer data and generating a hard copy of that data. Printers are one

of the most used peripherals on computers and are commonly used to print text, images, and/or photos. The image to the right is a visual example of the Lexmark Z605 Inkjet printer and is an example of what a printer may look like. Types of printers 1. 2. 3. 4. 5. Dot Matrix printer Inkjet printer Laser printer Thermal printer LED printer

Printer interfaces 1. 2. 3. 4. 5. 6. Firewire MPP-1150 Parallel port SCSI Serial port USB