Reading Balance Sheet

8/13/2019 Reading Balance Sheet

1/36

INTRODUCTION

1

I. SET I. SOME ASPECTS OF ACCOUNTING

Estimated time: 10 minutes

Summary

There is no set of detaied !ues t"at is uni#e!sa$ a%!eed u&on fo! d!a'in%

up t"e finan(ia statements of a )usiness ente!&!ise. As a !esut* )aan(e s"eets

of different business enterprises (especially if t"e$ a!e f!om diffe!ent (ount!ies+

ma$ differ in detail from ea(" other. T"e )asi( &!in(i&es a!e a'a$s t"e same*however, and a )aan(e s"eets "a#e somet"in% in (ommon.

A((ountants d!a'in% u& )aan(e s"eets a!e sometimes !e,ui!ed to ma-e

ud%ements a)out moneta!$ #aues. T"e criteria t"e$ ("oose a!e im&o!tant*

)ut it is e#en mo!e #ita t"at t"e a((ountants s"oud )e consistent in usin%

t"em.

A((ountin% fi%u!es a!e not si%nifi(ant in t"emse#es. T"e$ a!e si%nifi(ant on$

'"en compared 'it" ot"e! simia! sets of fi%u!es. T"e si%nifi(an(e /o!mate!iait$+ of a((ountin% fi%u!es de&ends #e!$ mu(" on t"e date o! time

&e!iod to '"i(" t"e$ !efe!.


2/36

\ ANS3ER

Introduction

I. SET 4. 35AT IS A 6A7ANCE S5EET8


Summa!$

A )aan(e s"eet is a statement of t"ose assets and ia)iities of a )usiness

ente!&!ise t"at (an )e %i#en a #aue in te!ms of mone$ it s"o's )ot" t"e

assets and "o' t"e assets a!e finan(ed t"e fi%u!es a!e estimates* not s(ientifi(

fa(ts.

T"e ia)iities indi(ate '"at mone$ "as )een made a#aia)e to t"e ente!&!ise*

and f!om '"e!e.

T"e assets s"o' "o' t"e ente!&!ise "as used t"e mone$ made a#aia)e to it.

Tota assets must a'a$s e,ua tota ia)iities to (!edito!s and s"a!e"ode!s.

E#e!$ )aan(e s"eet must in(ude t"e name of t"e ente!&!ise and t"e date

to '"i(" t"e fi%u!es in t"e )aan(e s"eet !efe!.

T"e )aan(e s"eet is one of t"e finan(ia statements of a (om&an$ and needs

to )e su&&o!ted )$:

/a+ t"e &!ofit and oss a((ount /in(ome statement+

/)+ t"e sou!(es and uses of funds statement ;funds fo' statement+


3/36

T5E IN. T?PES OF ASSETS AND T5EIR 7I@UIDIT?


Summa!$

T"e assets of a )usiness ente!&!ise a!e usua$ isted on a )aan(e s"eet in

t'o main %!ou&s: fied and (u!!ent.

Fied assets a!e a(,ui!ed fo! on%=te!m use in t"e ente!&!ise* do not #a!$ %!eat$

f!om da$ to da$* and a!e on$ inf!e,uent$ (on#e!ted into (as" du!in% t"e

ife of t"e ente!&!ise.

Cu!!ent assets %ene!a$ in(ude (as"* a((ounts !e(ei#a)e and in#ento!ies

t"at 'i )e (on#e!ted into (as" du!in% t"e o&e!atin% ($(e of t"e )usiness

t"e$ a!e i-e$ to #a!$ (ontinua$.

T"e!e is aso a t"i!d %!ou& of assets (assified as in#estments '"i(" a&=

&ea! in t"e )aan(e s"eet ot Indian Com&anies in te!ms of S("edue


4/36

TABLE O ASSETS L!STE" S#$E%AT!#ALL&

Fied assets

/east i,uid+

7and

6uidin%s

Pant and ma("ine!$

Fitu!es and fittin%s

Moto! #e"i(es

Cu!!ent assets =

@ui(- assets

/most i,uid+

Cas" in )an-s

Cas" in "and

Ma!-eta)e se(u!ities /in#estmentsB

A((ounts !e(ei#a)e /o! de)to!s o!

(ustome!s a((ounts+ De&osits

Em&o$ee a((ounts /ad#an(es to

em&o$ees+

Ot"e! a((ounts outstandin% P!e&aid

e&enses /!ent &aid in ad#an(e* et(.+

In#ento!ies

/o! sto(-s+

Finis"ed &!odu(ts

3o!- in &!o%!ess /semi=finis"ed

&!odu(ts+

Ra' mate!ias


5/36

The investment side of the behnce sheetassets

4. SET .


6/36

at (ost

o!

(u!!ent

ma!-et

#aue*

'"i("e#e!

is t"e

o'e!

at (ost o!#auation

at (ost ess

de&!e(iation

25


7/36

T5E FUNDING SIDE OF T5E >

6A7ANCE S5EET=7IA6I7ITIES

>. SET 9. CURRENT 7IA6I7ITIES AND FIED

7IA6I7ITIES


Summa!$

A (om&an$s ia)iities a!e usua$ isted on a )aan(e s"eet in t"!ee main

%!ou&s: (u!!ent ia)iities fied ia)iities and s"a!e"ode!s funds /o! o'ne!s

e,uit$.

T"e s"a!e"ode!s a!e t"e o'ne!s of t"e (om&an$. On t"e )aan(e s"eet t"e

funds t"e$ &!o#ide a!e s"o'n se&a!ate$ f!om t"ose of outside!s '"o "a#eoaned mone$ to t"e (om&an$.

Cu!!ent and fied ia)iities a!e to%et"e! !efe!!ed to as outside ia)iities.

Fied ia)iities !e&!esent t"e (om&an$s on%=te!m finan(e* and in(ude items

on '"i(" inte!est is &a$a)e* su(" as on%=te!m oans f!om finan(ia

institutions.

Cu!!ent ia)iities !e&!esent t"e (om&an$s s"o!t=te!m finan(e* and in(ude

items i-e s"o!t=te!m oans* )an- o#e!d!afts and t!ade a((ounts &a$a)e /t!ade(!edito!s+.

Inte!est a'a$s "as to )e &aid on )an- oans )ut most ot"e! (u!!ent ia)iities


8/36

%o* to read a ba+ance sheet

IMPORTANT NOTE

T"e )aan(e s"eet !e(o!ds actua+ ia)iities not finan(ia (ommitments.

T"us* if a (om&an$ "as ente!ed a (ont!a(t fo! &u!("ases o#e! ten $ea!s

t"is finan(ia fa(t 'i not a&&ea! on t"e )aan(e s"eet. 5o'e#e!* t"e

(ommitment s"oud )e !e#eaed in t"e notes to t"e finan(ia statements.


9/36

The fundin, side of the ba+ance sheet+iabi+ities

>. SET . S5ARE5O7DERS FUNDS

Estimated time : 19 minutes

Summa!$

3"en a (om&an$ is fo!med* it needs mone$ to (a!!$ on its a(ti#ities a %ood

dea of t"is mone$ usua$ (omes f!om t"e s"a!e"ode!s* '"o )u$ s"a!es in

t"e (om&an$.

T"e mone$ '"i(" t"e s"a!e"ode!s &ut into t"e (om&an$ in t"is 'a$ is des(!i)=

ed on t"e )aan(e s"eet as t"e (a&ita issued and su)s(!i)ed.

In !etu!n* at t"e dis(!etion of t"e di!e(to!s* t"e (om&an$ ma-es &a$ments

to s"a!e"ode!s /&a$s di#idends+ out of t"e &!ofits made )$ t"e (om&an$

I n addition to t"e (a&ita su)s(!i)ed* s"a!e"ode!s funds aso in(ude (a&ita

!ese!#e and !e#enue !ese!#e* '"i(" !e&!esent &!ofits !etained in t"e )usiness

and not &aid to s"a!e"ode!s. /Ca&ita !ese!#e and !e#enue !ese!#e 'i )e

(onside!ed in mo!e detai in t"e net set.+


10/36


>. SET 2. CAPITA7 RESER


11/36

T5E O0 minutes

Summa!$

To unde!stand t"e finan(ia st!u(tu!e of a (om&an$* it is im&o!tant to -no'

t"e 'a$ in '"i(" t"e assets eu!!ent and fied+ a!e finan(ed )$ t"e

s"a!e"ode!s funds and t"e outside ia)iities.

6$ (om&a!in% t"e )aan(e s"eet fi%u!es fo! #a!ious %!ou&s of assets and

ia)iities 'e (an dete!mine '"et"e! o! not t"e (om&an$ is so#ent and

i,uid.

T"e ente!&!ise is so#ent if assets a!e %!eate! t"an outside ia)iities. It is i,uid

if it (an meet its (u!!ent ia)iities out of (u!!ent assets. Cu!!ent assets ess

(u!!ent ia)iities is -no'n as net 'o!-in% (a&ita.

Gea!in% !efe!s to t"e !atio of s"a!e"ode!s funds to )o!!o'ed mone$ /oan(a&itaB. Gea!in% of 1 is +o* )e(ause fou!=fift"s /J0 &e! (ent+ of t"e assets

a!e finan(ed )$ s"a!e"ode!s funds and on$ one=fift" /40 &e! (ent+ )$

)o!!o'ed mone$. 6$ (ont!ast a !atio of 1: is hi,h %ea!in% /"i%" )o!!o'in%+.


12/36

. SET K. SOURCES AND USES OF FUNDS


!%'OTA)T )OTE

The sources and uses of funds statement !e#eas t"e -e$ finan(ia mana%ement

de(isions for t"e a((ountin% &e!iod.

Summa!$

T"e sou!(es and uses of funds statement is de#eo&ed )$ (om&a!in% t"ecurrent )aan(e s"eet 'it" t"at of t"e &!e#ious &e!iod and usin% some ot"e!data.

T"e sou!(es and uses of funds statement s"o's t"e ("an%es t"at "a#e ta-en&a(e in t"e &e!iod )et'een t"e t'o )aan(e s"eets in te!ms of ne' funds

a#aia)e to t"e )usiness and "o' t"e$ "a#e )een used it s"o's '"e!e ne'mone$ "as (ome f!om /sou!(es+ and "o' it "as )een used /uses+.

Sou!(es of ne' funds ma$ )e an$ of t"e foo'in%:

L net &!ofit /afte! de&!e(iation+

L de&!e(iation

L ne' s"a!e (a&ita issued and su)s(!i)ed

L sae of fied assets

L ne' oans.

De&!e(iation is not ea(t$ a sou!(e of ne' funds )ut it !edu(es t"e net &!ofit

fo! t"e &e!iod. Sin(e no mone$ fo! de&!e(iation a(tua$ ea#es t"e )usiness*t"e sou!(es of funds is net &!ofit )efo!e de&!e(iation* '"i(" is t"e same as

net &!ofit afte! de&!e(iation* &us de&!e(iation.

T"e uses of funds ma$ )e an$ of t"e foo'in%:

L &a$ment of di#idends

L &u!("ase of fied assets

L !e&a$ment of oans o! (a&ita

L in(!ease in net 'o!-in% (a&ita.

Sou!(es of funds a'a$s e,ua uses. An$ funds not used fo! t"e s&e(ia&u!&oses a)o#e !esut in ("an%es in net 'o!-in% (a&ita /(u!!ent assets ess(u!!ent ia)iitiesB.

/1


13/36

PANE7 E

$O*SE$OL" *TE)S!LS LT".0a+ance sheet at 1 'ecember 12//

A!T 1 'ec312/.

1 'ec312/4

$s3 $s3

Fied assets

Good'i* at (ost

7and* at (ost6uidin%s* at (ost

Pant* ma("ine!$* et(.* at (ost

Manufa(tu!in% toos* at (ost

T!ans&o!t* at (ost

Fu!nitu!e and fittin%s* at (ost

Less6 de&!e(iation /e(udin% %ood'i+

Tota fied assets

Investments

Ma!-eta)e se(u!ities /ma!-et #aue 4*110+

7urrent assets

In#ento!ies /at (ost o! ma!-et #aue* '"i("e#e! ist"e o'e!+: Finis"ed &!odu(ts 3o!- in &!o%!essRa' mate!ias Ot"e! su&&ies

A((ounts !e(ei#a)e

De&osits

1*000 1*000

1*00 1*0011*000 11*000

9*>00 *000

>*900 *400

1*400 1*400

4*400 4*400

49*J00 42*400

*00 2*440

41*400 1K*KJ0

8198:: 1K*KJ0

4*000

4K*900

1*400

90*00000

4J*4001*J00

9*0001*000

J1*>00 J1*>00 J2*000 J2*000


14/36

PANE7S

STEEL 'O"*#TS LT".

0a+ance sheet at 1 'ecember 12// 1

'ec3 12/.

A!T

$s3

Fied assets

Patent !i%"ts* at (ost

F!ee"od and and )uidin%s* at (ost

Pant* ma("ine!$ and e,ui&ment* at (ost

Less6 de&!e(iation

Tota fied assets Investments

Ma!-eta)e se(u!ities* at (ost: /ma!-et #aue at >1 De(. J2: 290+

/ma!-et #aue at >1 De(. JJ: 190+

7urrent assets

In#ento!ies /at (ost o! ma!-et #aue* '"i("e#e! is t"e o'e!+:

Ra' mate!ias and su&&ies 3o!- in &!o%!ess Finis"ed

&!odu(ts

Custome!s a((ounts /ao'an(e "as )een

made fo! dou)tfu de)ts+ Ad#an(es to em&o$ees Ad#an(e in(ome

ta Ot"e! !e(ei#a)es and &!e&aid e&enses

Cas" in )an-s and in "and Totaf (u!!ent assets Tota

assets

8,553 7,967

36,852 31,728

45,405 39,695

14,920 13,233

30,485 26,462

84,160 10,520

81,000 60,002

8,000 6,000

2,810 3,755

2,000 1,807

890 890

178,860 82,974

5,400 7,675

1,767 1,437

4,625 5,052

120 109

80 350

906 75

10,791 9,263

191 190

22,774 23,617

1 'ec3 12//

$s3

0 0

30,925 26,902

J>9

110

11*2K4 1*1

J*24K

54,534 50,629

K*J9


15/36

LIA0ILITI!

$s3

$s3

hareho+ders; funds

Ca&ita aut"o!ised 400*000

Ca&ita issued and su)s(!i)ed in o!dina!$

s

"

a

!

e

s

o

f

R

s

.

1

0

e

a

(

"

C

a

&

i

t

a

!

e

s

e

!

#

e

Re#enue !ese!#e

Tota s"a!e"ode!s funds

Fied +iabi+ities

7oan f!om finan(ia institution at 10 &e! (ent

!e&a$a)e 4001 /se(u!ed on &ants

and ma("ine!$+ De)entu!es at K &e! (ent*

!e&a$a)e 1KK9

/se(u!ed on t"e !ea estate+

Tota fied ia)iities

Tota outside ia)iities

7urrent +iabi+ities

6an- o#e!d!aft T!ade a((ounts

&a$a)e Ot"e! a((ounts &a$a)e

P!o#ision fo! taation P!o#ision fo!

a((!ued e&enses Inte!est due on

fied ia)iitiesTota (u!!ent ia)iities

Tota ia)iities

1 'ec3 12/. 1 'ec3 12//

100,000

8,440

11,300

120,000

8,440

17,566

119,740 146,006

50,000

8,00

50,00

0

58,000 58,000

236,860 140,974356,600 286,980


16/36

LIA0ILITI! 31 Dec.

1987

31 Dec.

1988

$s3 Rs.

hareho+ders; funds

Ca&ita aut"o!ised K*000 Ca&ita

issued and su)s(!i)ed in o!dina!$

s"a!es of Re. 1 ea(" Ca&ita

!ese!#e Re#enue !ese!#e

Tota s"a!e"ode!s funds

Fied +iabi+ities

7,873 8,000

14,393 13,856

3,294 5,399

25,560 27,255

Go#e!nment oan se(u!ed on a+t

(u!!ent and fied assets at 9 &e! (ent

&e! (ent de)entu!es 1KJ9K0

Tota fied ia)iities

7urrent +iabi+ities

6an- o#e!d!aft T!ade a((ounts &a$a)e

Ot"e! a((ounts &a$a)e P!o#ision fo!

taation P!o#ision fo! a((!ued

e&enses Inte!est due on fied ia)iities

Tota (u!!ent ia)iities

Tota ia)iities

9,500

3,500

1>*000

6,832 4,858

7,179 7,810

1,127 962

93 628

400 386

343 230

15,974 14,874

50,62954,534

J*900

5,000

3,50


17/36

MEASURING SO7


18/36

Measuring solvency and tiqukOty

9. SET 11. 7I@UIDIT?


Summa!$

T"e (u!!ent !atio and t"e ,ui(- !atio a!e t'o measu!es of i,uidit$:

(u!!ent !atio (u!!ent assets : (u!!ent ia)iities

,ui(- !atio ,ui(- assets : (u!!ent ia)iities

T"e (u!!ent !atio measu!es %ene!a i,uidit$ )ut t"e ,ui(- !atio measures

immediate i,uidit$.

If t"e (u!!ent !atio is o'e! t"an 1:1 /e.%. 0.9: 1* '"i(" (an aso )e e&!essed

as 1:4+* (u!!ent ia)iities e(eed (u!!ent assets. T"is %ene!a$ s"o's t"at

t"e!e is a "i%" finan(ia !is- )e(ause* in )usiness* (as" is mo!e im&o!tant

t"an &!ofit.

If t"e (u!!ent !atio is too "i%" /&e!"a&s >:1 o! mo!e+ t"is ma$ mean t"at t"e

(om&an$ "as mo!e mone$ t"an it (an effi(ient$ use. T"e!e is no "a!d and

fast !ue a)out a !atio )ein% too "i%"* )ut '"en it !ises (ontinua$ o#e! time

t"e situation s"oud )e eamined.

It s"oud )e !emem)e!ed t"at* '"en (a(uatin% (u!!ent !atio* (u!!ent assets

s"oud )e ta-en as in(usi#e ot ma!-eta)e se(u!ities


19/36

PROFITA6I7IT?

. SET 14. T5E PROFIT AND 7OSS ACCOUNT


Summa!$

A )aan(e s"eet s"o's assets and "o' t"e$ a!e finan(ed at a &a!ti(ua! date

it needs to )e su&&emented )$ a do(ument s"o'in% a(ti#it$: saes* (osts*

&!ofit o! oss made du!in% t"e finan(ia $ea! to t"e date of t"e )aan(e s"eet.

Su(" a do(ument* '"i(" is usua$ atta("ed to t"e )aan(e s"eet* is -no'n

as a &!ofit and oss a((ount fo! in(ome statement+.

Fou! diffe!ent t$&es of &!ofit a!e %i#en in t"e &!ofit and oss a((ount: %!oss

&!ofit* o&e!atin% &!ofit* &!ofit )efo!e ta* and net &!ofit afte! ta.

A (om&an$ %ene!a$ %ets &!ofits f!om t"e sae of %oods and se!#i(es. Some

of t"is mone$* "o'e#e!* "as to )e s&ent on !a' mate!ias* 'a%es and fa(=

to!$ o#e!"ead (osts fo! &!odu(in% t"e %oods and se!#i(es. T"e diffe!en(e

)et'een t"e mone$ !e(ei#ed f!om saes and t"e (ost di!e(t$ in#o#ed in &!o=

du(in% t"e items sod /t"e (ost of saes+ is -no'n as t"e %!oss &!ofit.

T"us: sa+es = cost of sa+es < ,ross profit =>#L

Additiona e&enses a!e in(u!!ed in !unnin% t"e )usiness ente!&!ise as a '"oe*

e.%. offi(e staff* statione!$* tee&"one ("a!%es* sates fo!(e* and so on t"ese


20/36

How to reed e balance sheet

C5EC

A separate statement, the statement of revenue reserve (or retained earn+

ins-, records the earned surplus brouht forward, plus the net profit for the

year, less the dividends paid. The balance is the fiure for revenue reserve

which is carried forward to the net year on the balance sheet. Any other

chares noted in this statement of revenue reserve must be investiated and

are probably eplained in the notes to the financial statements.

!s your answer

riht/ #hec0

1 company

3


21/36

3

owns

owes

does not

we

4

profit

5)o

6balancesheet


22/36

%o* to read a bdbnce stmt

. SET 1>. T3O MEASURES OF PROFITA6I7IT?


Summa!$

T"e!e a!e t'o usefu measu!es of t"e &!ofita)iit$ of a )usiness ente!&!ise:

!etu!n on (a&ita em&o$ed and !etu!n on s"a!e"ode!s funds t"e$ a!e usua$

e&!essed as &e!(enta%es:

&!ofit inte!est onRetu!n on (a&ita em&o$ed )efo!e ta fied ia)iities 100

(a&ita em&o$ed

net &!ofit afte! ta 100Retu!n on s"a!e"ode!s funds sna!e"ode!s funds

T"e fi%u!es fo! &!ofit 'i )e o)tained f!om t"e &!ofit and toss a((ount and

t"e fi%u!es fo! (a&ita em&o$ed and s"a!e"ode!s funds f!om t"e )aan(e

s"eet.

Ca&ita em&o$ed is %ene!a$ defined as tota assets ess (u!!ent ia)iities.

T"is is t"e same as s"a!e"ode!s funds &us on%=te!m ia)iities.

A finan(ia !atio is i-e t"e finan(ia tem&e!atu!e of a )usiness it is "eat"$

'"en it (om&ies 'it" no!ma a((e&ted !atios fo! t"e indust!$ '"i(" a!e usua$

&u)is"ed ea(" $ea! )$ ("am)e!s of (omme!(e indust!ia asso(iations o! the


23/36

!s(

Qa

5o' o !ead a ba+ance sheet

. SET 1. T5E


24/36

ASSESSING

2T5E 6A7ANCE S5EET

2. SET 19. RE7IA6I7IT?


Summa!$

A )aan(e s"eet offe!s usefu info!mation )ut "o' (an 'e dete!mine t"at

t"e data a!e !eia)e8 3e must ("e(- t"e inte!na (onsisten($ of t"e )aan(e

s"eet 'it" t"e asso(iated finan(ia statements: t"e &!ofit and oss a((ount*

t"e sou!(es and uses of funds statement* t"e audito!s (e!tifi(ate and t"e

notes to t"e finan(ia statements.

T"e )aan(e s"eet and asso(iated finan(ia statements s"oud s"o':

1. t"e name of t"e (om&an$ and t"e date. It is im&o!tant in assessin% a

(om&an$s &!esent finan(ia &osition to see t"e +atest )aan(e s"eet=

t"at is* one '"i(" is not mo!e t"an si mont"s od

4. se&a!ate totas fo! t"e (u!!ent and fied assets and ia)iities

>. t"e )asis on '"i(" t"e assets "a#e )een #aued

. t"e di!e(to!s si%natu!e* '"i(" indi(ates t"e acceptance of !es&onsi)iit$fo! t"e &u)is"ed fi%u!es* and a (ea! (e!tifi(ate f!om an inde&endent*

&!ofessiona$ ,uaified audito!.


25/36

AssessDi, the ba+ance sheet

13 SET 1. 7IMITATIONS


Summa!$

3"en 'e a!e ma-in% an$ assessment of a (om&an$s &osition* 'e must )e

a'a!e t"at t"e )aan(e s"eet (an %i#e on$ a imited &i(tu!e of t"e (om&an$s

state of affai!s. T"e %!eatest imitation of t"e info!mation (ontained on a

)aan(e s"eet is t"at it is (on(e!ned on+E 'it" t"in%s t"at (an )e e&!essed

in moneta!$ te!ms.

A (om&an$s &!esent finan(ia &osition /as !efe(ted in its atest )aan(e s"eet+

is im&o!tant in dete!minin% its futu!e &otentia. E,ua$ im&o!tant* "o'e#e!*a!e fa(to!s su(" as t"e natu!e of t"e (om&an$s &!odu(ts /es&e(ia$ in !eation

to e&e(ted te("noo%i(a de#eo&ments+* t"e s-i and mo!ae of mana%ement

and staff* t"e a(ti#ities of (om&etito!s* and %ene!a e(onomi( (onditions. Su("

info!mation must )e ta-en into a((ount aon% 'it" t"e )aan(e s"eet fi%u!es

in assessin% t"e futu!e &!os&e(ts of a )usiness ente!&!ise.

T"e )aan(e s"eet is aso imited )e(ause t"e fi%u!es '"i(" a&&ea! on it a!e

on$ estimates and not s(ientifi( fa(ts. T"e -e$ a((ountin% (on(e&t is not

a)soute a((u!a($ )ut !at"e! mate!iait$ it is #e!$ diffi(ut to #aue assets

ea(t$. Fu!t"e!mo!e* uness s&e(ia infation a((ountin% te("ni,ues a!eado&ted /see t"e te("ni(a note in A&&endi A+* a )aan(e s"eet assumes

t"at t"e #aue of mone$ !emains un("an%ed o#e! time* '"i(" is (e!tain$ not

t


26/36

APPENDI A

Te("ni(a note on infation a((ountin%

T"is te("ni(a note is desi%ned to %i#e $ou )ot" a %ene!a idea of t"e )asi(

(on(e&ts of infation a((ountin% and t"e o&&o!tunit$ to foo' t"!ou%"* i!

eam&es A=5* some of t"e (om&eities of t"e (om&utations !e,ui!ed. T"

eam&es a!e mo!e diffi(ut t"an an$t"in% in t"e &!o%!amme itsef* )ut '"e!$ouma-e use of '"at $ou "a#e ea!ned f!om t"e &!o%!amme in$ou! 'o!-B

$ou ma$ find it "e&fu to !efe! to t"is te("ni(a note.

Fi!st !ead t"e int!odu(to!$ se(tion. T"en stud$ ea(" eam&e (a!efu$. ?ou

'i find an e&anation of t"e fi%u!es in t"e e&anato!$ notes.

Infation

Infation is a (onstant in(!ease o#e! time in t"e %ene!a e#e of &!i(es '"i("

affe(ts finan(ia mana%ement de(isions and a((ountin% info!mation.

A((ountin% see-s to measu!e e(onomi( e#ents and ("an%es o#e! time usin%

moneta!$ units* )ut du!in% infation t"e !ea #aue of su(" units (onstant$

("an%es. As on% as t"e !ate of infation is sma* it is &!a(ti(a to i%no!e it

"o'e#e!* '"en t"e ("an%e )e(omes mate!ia /sa$* o#e! >0 &e!(ent &e! $ea! I

t"en a((ountin% data f!om one $ea! to t"e net a!e not (om&a!a)e and (a!

)e miseadin%.

Fo! instan(e* in Eam&e 6 t"e &!ofit and oss a((ount s"o's a &!ofit of Rs400 '"i(" ma$ "a#e en(ou!a%ed mana%ement to &a$ a di#idend of Rs 10f

fo! t"e $ea!. 5o'e#e!* '"en adusted fo! infation* t"e &!ofit of Rs 400

)e(omes a oss of Rs J> T"us t"e di#idend of Rs 100 !edu(es t"e e,uit$B

%o* to read a ba+ance sheet AppendiA


27/36

Ete!na finan(ia !e&o!tin% LGPPA met"od

Fo! GPPA* a t"e items in a finan(ia statement a!e (a(uated at a (onstant

moneta!$ #aue usin% a %ene!a &!i(e inde &!o#ided )$ t"e %o#e!nmentstatisti(s offi(e. T"us:

=a@ t"e (ost of fied assets is adusted fo! &!i(e ("an%es f!om t"e date of

&u!("ase to t"e date of t"e )aan(e s"eet and de&!e(iation is (a(uatedon t"e )asis of t"e adusted fied asset (ost

ib@ t"e o&enin% and (osin% in#ento!ies a!e adusted fo! &!i(e ("an%es f!om

t"e date of &u!("ase and t"e (ost of %oods sod is adusted

a((o!din%$

/c@ a &!ofit and oss a((ount items /ot"e! t"an (ost of saes and de&!e(iation

a)o#e+ a!e adusted to (u!!ent &!i(e e#es

/d+ t"e net moneta!$ 'o!-in% (a&ita /de)to!s ess (!edito!s+ is adusted fo!

&!i(e=e#e ("an%es du!in% t"e $ea!.

T"e te("ni,ue fo! t"ese adustments is o)e(ti#e )ut t"e %ene!a &!i(e indema$ not !efe(t !ea ("an%es in fied assets o! in#ento!$ (osts t"us* GPPA

adustment ma$ not !efe(t !ea &!ofita)iit$ ("an%es. Fu!t"e!mo!e* t"e GPPAde&!e(iation ("a!%es ma$ not &!o#ide fo! !e&a(ement of fied assets

a((o!din%$* t"e finan(ia statements &!odu(ed ma$ )e miseadin% and of itte#aue.

Ete!na finan(ia !e&o!tin% LCCA met"od

Unde! t"e CCA met"od* mo!e s&e(ifi( estimates o! &!i(e indi(es /(om&uted)$ t"e %o#e!nment statisti(s offi(e+ a!e used fo! fied assets and de&!e(iation

/to'a!ds !e&a(ement (ost+* in#ento!ies and (ost of saes /to'a!ds ("an%esin (ost of mate!ias+. T"e te("ni,ue of CCA does* t"e!efo!e* !efe(t mo!e

s&e(ifi( &!i(e=e#e ("an%es )ut it is mo!e su)e(ti#e t"an t"e GPPA met"odand it "as t'o mao! imitations:

/a+ 'it" te("noo%i(a ("an%e* fied assets ma$ 8of a(tua$ )e !e&a(ed 'it"

identi(a e,ui&ment t"us t"e (om&a!a)e !e&a(ement (ost of od

e,ui&ment ma$ )e i!!ee#ant

/)+ oss of &u!("asin% &o'e! of (as" o! nea! (as" assets ma$* o! ma$ not*

)e in(uded as a !ee#ant adustment.

O#e!a* t"e CCA met"od &!o#ides an indi(ation of t"e (ost of !e&a(in% fiedassetsand in#ento!ies and is mo!e !ee#ant t"an t"e GPPA met"od. 5o'e#e!*

it is (om&e and diffi(ut fo! non=a((ountants to unde!stand.

Ete!na finan(ia !e&o!tin% &!a(ti(e

Some (om&anies in (ount!ies 'it" mode!ate infation ma$ revalue fied i

to ma!-et #aue e#e!$ fi#e $ea!s t"is in(!eases assets and shareholders9/!e#auation !ese!#e+ and !edu(es t"e &!ofita)iit$ /due to in(nde&!e(iation ("a!%es+. Some (ount!ies !e,ui!e infation a((ountin%* unda

GPPA and CCA met"ods to )e s"o'n as (om&a!ati#e data on normal ftistatements.

H

Count!ies 'it" "i%" infation /o#e! >0 &e! (ent &e! $ea!+ "a#e int!odu#a!iet$ of measu!es to !edu(e t"e ta )u!den on infationa!$ &!ofits "o'

'"e!e su(" ta a's diffe! si%nifi(ant$ f!om %ene!a$ a((e&ted a((oi&!in(i&es* t"e #aue of t"e !esutin% &!ofit and oss a((ounts and )a

s"eets is ,uestiona)e.

inte!na=finan(ia !e&o!tin%

Fo! inte!na finan(ia !e&o!ts '"e!e infation is "i%" /o#e! >0 &e! (ent &e! \t!aditiona standa!d (ostin% and )ud%eta!$ (ont!o s$stems )e(ome ess i

)e(ause t"e$ a!e )ased on t"e fase assum&tion of (onstant &!i(e e#es*affe(ts man$ inte!na mana%ement de(isions* &a!ti(ua!$ t"ose )ase

e#auatin% &!ofita)iit$ and t"e finan(in% of 'o!-in% (a&ita needs.

To dea 'it" t"ese &!o)ems* mana%ement needs td fo!e(ast s$stemat

t"e on%=te!m infationa!$ effe(ts on in#ento!ies* fied assets and de&!e(i%

and ot"e! (osts* as t"e$ affe(t &!ofita)iit$ and finan(in%. 3it" "i%" infte

one $ea! ma$ )e too on% to maintain a sin%e standa!d (ost o! )ud%etfo! t"e eistin% (ost and )ud%eta!$ (ont!o s$stems. T"us* it ma$ )e ne(e

to set u& indi(es of &!i(e ("an%es and to adust t"e "isto!i(a (ost s$s

,ua!te!$ 'it" (om&ute!ised a((ountin% s$stems su(" (om&-

adustments a!e feasi)e.

Con(usion

A (om&anies must modif$ t"ei! t!aditiona a((ountin% and (ont!o te("n

fo! "i%" infation /o#e! >0 &e! (ent &e! $ea!+ fo! )ot" &u)is"ed fina

statements and inte!na !e&o!tin%* )ut on$ mana%ement (an de(ide* )

usefuness of t"e !esut* '"at de%!ee of (om&eit$ is ustified.


28/36

%o* to reed a ba+ance sheet AppendiA

A sim&ified eam&e of t"e CCA /Cu!!ent Cost A((ountin%+ met"od of

infation a((ountin% is %i#en in Eam&es A to 5. T"e eam&e uses t"!ee

diffe!ent &!i(e indi(es: e,ui&ment* mate!ias and t"e %ene!a &!i(e e#e. T"e

GPPA /Gene!a Pu!("asin% Po'e! A((ountin%+ met"od 'oud )e simia! )ut

'oud use on$ one %ene!a &!i(e inde.

Eam&e A

BALA)#E S$EET

12//

%istorica+ cost

12// 7urrentcost

A!T

Fied assets

Cost#auation Less6

A((umuatedde&!e(iation

J00

4J0

1*

940 K>> /E. D+

7urrent assets

Cas"

A((ounts !e(ei#a)e

In#ento!$Tota assetsLIA0ILITI! AN' O&N!$;

!UIT" =shareho+ders; funds@

100900

00

100 900 9001*000

/E. 5I 1*100

4*0>>

1*940

7urrent +iabi+ities

A((ounts &a$a)e 00 00

Fied +iabi+ities

7on%=te!m oan 940 940

O*ners; eGuitE

Ca&ita

Re#auation !ese!#e

Re#enue !ese!#e

100

900

100

2K

00 412

/Note+1*11>

Tota ia)iities and

o'ne!s e,uit$

1*940 4*0>>

!p+anatorE notes

1. T"e )aan(e s"eet s"o's "o' t"e tota assets in(!ease f!om 1*9404*0>> )e(ause t"e (om&an$ !e#aued fied assets /940 to K>> and tin#ento!$ /00 to 9001.

4. Ea!ned su!&us is !edu(ed )$ 4J> /Eam&e 6+ /f!om 900 to 412+ dueinfation adustments.

>. Re#auation !ese!#e is in(!eased f!om 0 to 2K '"i(" (onsists of !e#aufied assets 1> /Eam&e D+ and in#ento!$ 100 /Eam&e 5I* and &!eand oss a((ounts adustments 4J> /Eam&e G+.

1//


29/36

%o* to read a ba+ancesheet

Appendi A

Eam&e 6

'O!T A)" LOSS A##O*)T12// %istorica+ cost

12// 7urrent

cost

Saes 4*900 4*900

Cost ot saes 1*J00 1*J00

>ross profit 200 200

Sein%* administ!ati#e

and %ene!a e&enses

>00 >00

Operatin, profit

Cu!!ent (ost a((ountin%

adustments

= 4J> Notes+

AdHusted operatin, profit 00 112

In(ome ta 400 400

Net profit =+oss@ 400 /J>1

STATE%E)T O E:E)*E ESE:E

O&enin% )aan(e 00 00

Net &!ofit /oss+ 400 /J>

00 >12

Less6 Di#idends &aid

Cosin% )aan(e

100

900

100412 /E. A+

Explanatory notes

1. T"e &!ofit and oss a((ount s"o's "o' t"e &!ofit ot 400 is !edu(ed to

a oss of /J>+ )$ CCA adustments:

De&!e(iation in(!ease 1>> /E. D+

Cost of saes in(!ease 490 /E. E+

Moneta!$ 'o!-in% (a&ita in(!ease 40 /E. F+

Su)tota 0>

Less6 Gea!in% adustment=of fset of inf ationa!$

osses )$ t"e de) t: e,ui t$ / on%= te!m ia) i it ies :

s"a!e"ode!s funds+ st!u(tu!e 140 /E. G+

Net CCA adustment /a)o#e+ 4J>

4. T"e (osin% )aan(e ot t"e statement of ea!ned su!&us is !edu(ed f!om900 to 412 )$ t"e CCA adustment of 4J>.

Eam&e C

'!#E !)"!#ES

12/- 12/.

!nd of A vera,e !nd of Avera,e

E,ui&ment Eear Eear

490 400 00 >00

Mate!ias 400 400 900 00

Gene!a &!i(e e#e 420 100 >00 400

Explanatory notes

1. T"ese a!e &!i(e indi(es fo! e,ui&ment* mate!ias and %ene!a &!i(e ("an%es

fo! t"e $ea!s 1KJ and 1KJ2 s"o'in% indi(es at t"e end of t"e $ea! and

a#e!a%e indi(es.

4. T"e indi(es (ome f!om %o#e!nment statisti(a !e&o!ts and a!e used to

adust "isto!i(a (osts to current (osts in Eam&es D to 5.

>. Assum&tions "a#e )een made so t"at on$ t"e end=of=$ea! and a#e!a%eindi(es fo! ea(" $ea! a!e used. 5o'e#e!* ot"e! mo!e (om&e assum&=tions (oud )e made.

190191

%o* to read a ba+ance Appendi


30/36


AppendiA

Eam&e D

A";*ST%E)T O !. T"e indi(es (ome f!om Eam&e C.

. T"e detaied adustments fo! CCA a!e:

/a+ 1KJ &u!("ases = Cost:

00 /5O VH W X =1*400 /CO 400

/a#e!a%e J4+

A((umuated de&!e(iation:

40I5C W 6V . Q/CC+ 400 /a#e!a%eJ4+

ib@ 1KJ2 &u!("asesLCost:

400 /5O 33Ji 4 /CO. >00 /a#e!a%eJ>+

A((umuated de&!e(iation:

Qmum 00 /end J>1 ( .Y.0 /5C+ ========================== 9> /CO

>00 /a#e!a%e J4+

/d Re#auation !ese!#e:

Cu!!ent (ost net )oo- #aue /1*=9>>+ K>> /CO

5isto!i(a (ost net )oo- #aue /J00=4J0+ 940 /5O

Re#auation !ese!#e 1> B!3 A@

id@ De&!e(iation 1KJ2:Cu!!ent (ost: 40 &e! (ent 1* 4K> /CO

5isto!i(a (ost: 40 &e! (ent J00 10 /5O

De&!e(iation in(!ease 1>> B!30@


31/36

%o& to read a ba+ance sheet Appendi A

Eam&e EH

#OST O SALES A";*ST%E)T

%istorica+ cost

Cosin% in#ento!$ 900 /5O

O&enin% in#ento!$ /&!e#ious )aan(e s"eet+ 190 /5O

Tota in(!ease /in(uded in t"e (a(uation of

t"e (ost of saes+ >90 /5O

7urrent cost at 12/. prices

ni Cf+Cosin% in#ento!$ 900 900 /end J>+

00 /CO

. . *(Y 00 /a#e!a%e J>+O&enin% in#ento!$ 190 400 end J4+

>00 ICC+

Cost of saes L #oume in(!ease 100

Cost ot saes L &!i(e in(!ease 490 B!3 0@

Tota in(!ease /in(uded in t"e (a(uation ot

t"e (ost of saes+ >90

!p+anatorE note

T"e (ost of saes adustment s"o's t"e in(!ease in in#ento!$ ot >90 /900=190+

is ana$sed into a #oume in(!ease ot 100 and a &!i(e in(!ease of 490. T"is

&!i(e in(!ease ot 490 is due to intation and t"e!efo!e is adusted on t"e in(ome

statement /Eam&e 6+ as an infationa!$ effe(t.

Eample

%O)ETA& =O7!)> #A'!TAL A";*ST%E)T (%=#-

%istorica+ cost 12/.

A((ounts !e(ei#a)e

A((ounts &a$a)e

7tosin, M3C

O&enin% M3C /P!e#ious )aan(e s"eet+

Tota ("an%e

7urrent cost at 12/. prices

Cosin% M3C : 100 Q00 A#e!a%e J2+Q

:: /end J2+ 400 /a#e!a%e J2+ O&enin%

M3C: 90 420 /end J+

M3C #oume in(!ease >0

M3C &!i(e in(!ease 40 J!3 0@

Tota ("an%e 90

!p+anatorE note

T"e moneta!$ 'o!-in% (a&ita adustment s"o's "o' t"e net (!edit ao'ed"as in(!eased du!in% t"e $ea! to 100 /900=00+ f!om 90 /on t"e &!e#ious

)aan(e s"eet+. T"is in(!ease of 90 is ana$sed as a #oume in(!ease of >0and a &!i(e in(!ease of 40. T"e &!i(e in(!ease of 40 is due to infation and

is adusted on t"e &!ofit and oss a((ount J!amp+e J+ as an infationa!$ effe(t.

900 /5O

00 I 5O

100

50 (HO

50

2 /CO

>2 /CO


32/36


AppendixA

Eample >

>EA!)> A";*ST%E)T

Net assets a!e finan(ed )$:

Liabi+ities

7on%=te!m oan

Less6 Cas"

Net on%=te!m ia)iit$ finan(in%

O*ners; eGuitE =shareho+ders; funds@

Ca&ita

A((umuated &!ofit /)efo!e adustment+

Re#auation !ese!#es /)efo!e %ea!in%

adustment+:

Fied assets

in#ento!$

Net on%=te!m e,uit$ finan(in%

Explanatory notes

1. The earin ad?ustment shows how financin net assets with lon+tern

debt (42@- rather than euity (1,113- (i.e. with lon+term liabilities rathe

than shareholders9 funds- enables the company to pass on part (3@ pe

cent- of the inflationary loss to lon+term creditors.

2. !n this case the earin effect shows how the debt euity (lon+tern

liabilities shareholders9 funds- structure (42@ 1,113- of the company

enables it to offset inflationary losses to the etent of about 3@ per cent

thus, only C@ per cent of the 4@3 inflationary ad?ustments (depreciatior

133, cost of sales 2D@, monetary wor0in capital 2@- is appropriate *

the company and a earin ad?ustment of 12@ (3@ per cent of 4@3- ii

deducted to show a net chare to the income statement of 21

(4@3+12@-.

P!o&o!tion of infationa!$ ("an%es finan(ed )$

on%=te!m ia)iities /de)t+ !at"e! t"an o'ne!s

e,uit$:

i 1*11> 40+ 42.>K &e! (ent = a&&!oimate$ >0 &e! (ent

Tota infationa!$ adustments 0> B!30@

Gea!in% adustment >0 &e! (ent of 0>

/a&&!oimate$+ 140 B!3 0@

Net ("a!%e to in(ome statement 4J> /f. 0@

520 (fx. A

100 (fx. A

420

100 (fx. A)

500 (fx.

)41

3

10

0 513

J!3

A)


33/36

!"# $%


34/36


APPENDI 6

Eam&e 5

!):E)TO& A";*ST%E)T

Cosin% in#ento!$ 00 J!3 A@

Cost ("an%e f!om a#e!a%e 1KJ2 to end 1KJ2

n . Ann 900 /end J>+Cost: 00 00 /a#e!a%e J>1

900 B!3 A@

Less6 5isto!i(a (ost /see a)o#e+ 00

Re#auation !ese!#e 100 J!3 A@

!p+anatorE note

T"e in#ento!$ adustment s"o's "o' t"e 1KJ2 (osin% in#ento!$ of 00 #aued at

a#e!a%e (ost to! t"e $ea! is !e#aued 'it" $ea!=end indi(es )$ 100 /900=00+*

'"i(" is (!edited to t"e !e#auation !ese!#e /Eam&e A+.

accountin

accountin concepts

accounts payable

accountin period

accounts receivable

accrual

accumulated

depreciation

administrative

epense

aein

amortisation

G7OSSAR?

T"e %ossa!$ in(udes te!ms used in t"is )oo- and ot"e! a((ountin% an%ua

'"i(" $ou mi%"t (ome a(!oss in t"e (ou!se of $ou! 'o!-. Ate!nati e&!essions

a!e %i#en in &a!ent"eses afte! t"e main ent!$.

t"e te("ni,ue of &!e&a!in% finan(ia statements f!om )oo--ee&in% !e(o! /)ased

on a((ountin% (on(e&ts su(" as t"ose %i#en )eo'+.

/a((ountin% &!in(i&es+ &!a(ti(a !ues '"i(" ena)e )oo--ee&in% !e(o!ds

t!ansa(tions to )e (on#e!ted into finan(ia statements. T"e !ues in(ui (on(e&ts

of (ost* (onsisten($* (onse!#atism* (om&a!a)iit$* %oin% (on(ef a((ountin%

&e!iod* mat("in%* &!ofit !eaisation* mate!iait$* et(.

/(!edito!s+ mone$ o'ed )$ a )usiness. A((ounts &a$a)e a&&ea! on t )aan(e

s"eet unde! (u!!ent ia)iities.

t"e time inte!#a f!om t"e date of one )aan(e s"eet to t"e net. T"e &e!i ot t"e

&!ofit and oss a((ount /usua$ one $ea!+.

/see (ustome!s a((ounts+

/ia)iit$* (!edito!* &a$a)e* (u!!ent ia)iit$+ an a((ountin% (on(e&t: in(o! and

e&ense fo! t"e a((ountin% &e!iod* '"et"e! to! (as" o! (!edit* must I in(uded.

Re#enues must )e mat("ed 'it" a&&!o&!iate e&enses to &!o#i1 a meanin%fu

net in(ome fi%u!e fo! an a((ountin% &e!iod* !e%a!dess of '"i (as" ma$ "a#e

)een e("an%ed.

a tota amount )$ '"i(" o!i%ina (ost of a fied asset s"o'n on t"e )aan s"eet

"as )een !edu(ed to ta-e into a((ount dete!io!ation and o)soes(en( Fo!

eam&e* (onside! a 'ate! 'o!-s t"at (osts 1 miion 3CU. Ea(" $e

de&!e(iation ot 90*000 3CU is !e(o!ded a%ainst it. Afte! fi#e $ea!s a((umuated

de&!e(iation 'oud )e 9 90*000 3CU* o! 490*000 3CU. T. main &u!&ose ot

de&!e(iation is to "e& set &!i(es so as to a((umuate a fu! t"at (an )e used to

!e&a(e assets.

(ost of di!e(tin% and (ont!oin% a )usiness. T"is in(udes di!e(to!s fees* off

saa!ies* offi(e !ent* i%"tin%* "eatin%* e%a tees* audito!s fees* a((ountii

se!#i(es* et(. It is not a !esea!("* a manufa(tu!in%* a saes o! a dist!i)utii

e&ense.

an ana$sis a((o!din% to time ea&sed afte! t"e )iin% date /o! due date+ "e&

mana%ement dete!mine "o' to (oe(t )is and to dis(i&ine (ustomei

tsimia! to de&!e(iation+ t"e &!o(ess of '!itin% off t"e (ost of an intan%it asset*

su(" as a ease o! &atent* o#e! its usefu ife. T"e a((ountin% &!o(e to!

amo!tisation is simia! to t"e &!o(ess ot de&!e(iation fo! fied asset

198


35/36


APPENDI 6

Eam&e 5

!):E)TO& A";*ST%E)T

Cosin% in#ento!$ 00 =!3 A@

Cost ("an%e f!om a#e!a%e 1KJ2 to end 1KJ2

Ann 900 /end J>+

00 /a#e!a%e J>+

900 B!3 A@

Less6 5isto!i(a (ost /see a)o#e+ 00

Re#auation !ese!#e 100 Z A@

!p+anatorE note

T"e in#ento!$ adustment s"o's "o' t"e 1KJ2 (osin% in#ento!$ of 00 #aued

at a#e!a%e (ost to! t"e $ea! is !e#aued 'it" $ea!=end indi(es )$ 100

/900=00+* '"i(" is (!edited to t"e !e#auation !ese!#e /Eam&e A+.

G7OSSAR?

T"e %ossa!$ in(udes te!ms used in t"is )oo- and ot"e! a((ountin% an%ua

'"i(" $ou mi%"t (ome a(!oss in t"e (ou!se of $ou! 'o!-. Ate!nat!

e&!essions a!e %i#en in &a!ent"eses afte! t"e main ent!$*

accountin t"e te("ni,ue of &!e&a!in% finan(ia statements f!om )oo--ee&in% !e(o!/)ased on a((ountin% (on(e&ts su(" as t"ose %i#en )eo'+.

accountin concepts /a((ountin% &!in(i&es+ &!a(ti(a !ues '"i(" ena)e )oo--ee&in% !e(o!ds

t!ansa(tions to )e (on#e!ted into finan(ia statements. T"e !ues in(ui

(on(e&ts of (ost* (onsisten($* (onse!#atism* (om&a!a)iit$* %oin% (on(ei

a((ountin% &e!iod* mat("in%* &!ofit !eaisation* mate!iait$* et(.

accountF payable /(!edito!s+ mone$ o'ed )$ a )usiness. A((ounts &a$a)e a&&ea! on t

)aan(e s"eet unde! (u!!ent ia)iities.

t"e time inte!#a f!om t"e date of one )aan(e s"eet to t"e net. T"e &e!i

of t"e &!ofit and oss a((ount /usua$ one $ea!+.

/see (ustome!s a((ounts+

/ia)iit$* (!edito!* &a$a)e* (u!!ent ia)iit$+ an a((ountin% (on(e&t: in(o!

and e&ense fo! t"e a((ountin% &e!iod* '"et"e! to! (as" o! (!edit* must I

in(uded. Re#enues must )e mat("ed 'it" a&&!o&!iate e&enses to &!o#i

a meanin%fu net in(ome fi%u!e fo! an a((ountin% &e!iod* !e%a!dess of '"i

(as" ma$ "a#e )een e("an%ed.

a tota amount )$ '"i(" o!i%ina (ost of a fied asset s"o'n on t"e )aan

s"eet "as )een !edu(ed to ta-e into a((ount dete!io!ation and o)soes(en(

Fo! eam&e* (onside! a 'ate! 'o!-s t"at (osts 1 miion 3CU. Ea(" $ de&!e(iation of 90*000 3CU is !e(o!ded a%ainst it. Afte! fi#e $ea!s

accountin period

accounts

receivable accrual

accumulated

depreciation

administrative

epense

aein

amortisation


36/36

a((umuated de&!e(iation 'oud )e 9 90*000 3CU* o!

490*000 3CU. Ti main &u!&ose of de&!e(iation is to "e&

set &!i(es so as to a((umuate a fui t"at (an )e used to

!e&a(e assets.

(ost of di!e(tin% and(ont!oin% a )usiness. T"is in(udes

di!e(to!s fees* offt saa!ies* offi(e !ent* i%"tin%* "eatin%*

e%a fees* audito!s fees* a((ountii se!#i(es* et(. It is

not a !esea!("* a manufa(tu!in%* a saes o! a dist")utii e&ense.

an ana$sis a((o!din% to time ea&sed afte! t"e )iin% date /o! due date+

"e& mana%ement dete!mine "o' to (oe(t )is and to dis(i&ine (ustomei

/simia! to de&!e(iation+ t"e &!o(ess of '!itin% off t"e (ost of an intan%it

asset* su(" as a ease o! &atent* o#e! its usefu ite. T"e a((ountin% &!o(e

fo! amo!tisation is simia! to t"e &!o(ess of de&!e(iation fo! fied asset:

12/ i

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