noc18-ce39 Lec 28-Bidding (Part-7)

noc18-ce39 Lec 28-Bidding (Part-7)


Good morning namaskar and welcome to the course
once again. In the previous lecture I introduce you to
the concepts of accounting. We also learned the various steps that we
undertake in order to prepare various financial statements such as balance sheet and profit
and loss accounts. In this class we are going to learn how with
every transactions your assets and liabilities are changing. And as a matter of fact it is changing your
balance sheet. We will try to do this in an informal manner
not in the same manner in which an accountant prepares these statements. So we will try to understand this with the
help of some small transactions. So, let us move to these transactions. We call these as transactions 1, 2, 3 and
4, before every transactions we will discuss few statements. So let us say there is a company ABC trading
company who has opened this company. So let say there is a person David who after
graduating from IIT Delhi wanted to a start a construction company, but before starting
the full phased construction company. You wanted to start with the trading first,
he had been saving some money every month from his scholarships. Now David got his scholar degree on June 30th,
on July 1st David withdrew rupees 100,000 from his bank and announced the formation
of the ABC trading company with this amount as the initial capital. Now this I am calling it as transaction 1
or T1, what has happened David has withdrawn 100,000 from his saving account and has opened
a company called ABC trading company. Now if I have to draw the balance sheet corresponding
to this transaction how it would look like. Before that you have to understand balance
sheet is basically a statement which is giving the details of the assets that the company
owns and the liability that the company goes. Now if you look at each of these accounting
statements you will find that these statements are specific to a particular company. So you have to look for whom you are keeping
this accounts. So remember right now we are dealing with
the accounting a statement of ABC trading company, not for debit. So we are entering all the transactions in
perspective of ABC trading company. So the first transaction that has taken place
is David withdrew 100,000 from his saving account and started the formation of ABC trading
company. So now if you look at the balance sheet as
of July 1 how it would look like, what would you expect under asset column and what would
you expect under liability column. So as far as the assets are concern the company
has cash asset 100,000 has been withdrawn and is now in the account book of ABC trading
company in the form of a cash. So 100,000 cash is coming as an asset for
ABC trading company, now what is the liability you will find that the liability is again
100,000 which is basically in the form of initial capital. David has supplied this initial capital to
the ABC trading company, so that means the company ABC owes this 100,000 to Mr. David. ( efer time: 04:09) So what I show, I show under assets like this
cash before this formation it was 0. Now 100,000 has been added, so my total cash
becomes 100,000. So, this is my total asset 100,000, what is
there in the liability, I had 0 capital before the formation of this company, I added 100,000,
so my total liability is again equal to 100,000. So this is known as a balance sheet of the
ABC trading company as on July 1. Now remember every time you prepare this balance
sheet you will write as of what date, because basically this is a snapshot as on that date
how much asset the company owns and how much liability the company owes, so that is what
is shown in the balance sheet as on that particular date. So in this case you found that due to this
1 transaction you can record some values under assets and other values under liability column. And in this case you will find that asset
is in the form of cash and liability is in the form of initial capital and both are matching. Now let us look at other transactions, this
part recording it under different T-accounts we will come little later. We move to the second transactions it says
just when David was about to start trading his seniors told that he was being terribly
old fashion, how could he run a business without a bank loan. So 100,000 came from his own saving, but his
friends advised why do not he approach a bank so that they can get some loan. So, on July 2nd David went to the bank feeling
a little nervous but the bank manager recognized him, he said you are the recipient of president
medal this year. The nation is proud of you, well If you want
only rupees 50,000 here it is cash. So ABC trading company receive 50,000 in cash
as bank loan. Now we have to see how this transaction is
changing the composition of assets and liability, as far as asset is concern 50,000 has also
increase in the form of cash. So now the total asset will become earlier
it was 100,000 now you have added 50,000 again in the form of cash. So the total asset is 150,000, this as far
as assets are concerned when it comes to the liability how does it look like. Now further liability has increased 100,000
was given to the company by Mr. David. Now this 50,000 is coming as bank loan, so
100,000+50,000 there also you will find liability is 150,000. So if you look at the balance sheet of ABC
trading company as on July 2. It will be something like this cash initially
it was 100,000, you added 50,000. So, total cash becomes 150,000 and initial
capital was 100,000. Now you took a bank loan 50,000, so total
is 150,000, so you can see at any point of time you will find the assets and liabilities
both are matching. Now I will tell you how to record these transactions
in different t-account also, as I told you T-account is also sometimes known as ledger. In order to visualize a t-account you can
extend this line like this. So that now you can see diagrams something
like this. And it will give you a feel of T, so you can
see giving you a feel of T something like this. Now whenever assets increase if you remember
the convention of recording transactions I told you in the previous lecture that increase
in asset is shown under the debit side. So when the company received 100,000 from
Mr. David how I can show it. I will show it in cash book and I will show
this transaction in the debit side because my cash has increased from 0 to 100,000. So there is an increase of asset, so I am
recording it under debit side. So, this is what exists shown here. You can see I am writing the cash T-account
you can see here the transaction number 1 T1 and I have added this 100,000. And this is under capital, so Mr. David provided
the capital equivalent to 100,000 in the form of cash. So I am showing it under debit side. Now I also told you in the previous lecture
that increase in liability is to be recorded in credit side. So initial capital in the form of cash has
increase the liability of company from 0 to 100,000. So you can see I am recording this under credit
side, so you can see every transaction is getting reflected in at least to T-accounts. So T1 transaction you can see it is getting
reflected at 2 places 1 in the cash and the other in the liability account. Now when it comes to the bank loan transaction
T2 this will also get reflected in 2 T-accounts. The first one if you look at the cash 50,000
has been added, so you can see in it has increased your asset and so you can see it is recorded
in the debt side. On the other hand it has also increase the
liability bank account, so you will find you can write it here under liability. Bank loan I am having a separate T-account,
so this reference number T2 in the form of cash 50,000, increase in liability I am writing
it in credit side. So, it is written like this. Now I go to the third transaction on July
3rd David bought a small shop building for rupees 25,000 paying cash normally nobody
would expect you to pay cash. So that pleasantly surprises the seller, his
seniors in the municipality helped him to register the building purchase quickly in
the ABC trading company’s name. Now this is the transaction how it will get
recorded that we have to understand. So, the company purchased small building for
rupees 25,000, so this will reduce the cash. So if you remember earlier I had 150,000 cash
now 25,000 is gone. So this 25,000 is gone but you have added
a new asset building asset, again equivalent to 25,000. So, what has happened you the form of asset
has changed initially it was in cash form which was known as current asset, cash is
a form of current asset. We receive these things in detail it has transferred
or it has transformed into fixed assets buildings. So, building we considered as fixed asset,
so you will find the total asset still remains same only they form had changed, cash has
decreased from 150,000 to 125,000 and your fixed asset have increased from 0 to another
125,000. So, your balance sheet would look something
like this as on remember July 3. So, you can see cash was 150,000 I reduced
it by 125,000, so your cash is now 125,000 and building has been added initially it was
0. Now you are adding 125,000 so total is 125,000. The composition of liability remains unchanged,
no change in the capital, no change in the bank loan. So this is still same 150,000, so this is
how your balance sheet look like. Now how do I show it in the T-accounts, so
cash if you look at the cash T-accounts. It would be you can see it is written in the
credit side why because this has reduced your cash assets. So, any decrease in asset we are showing it
in the credit side, so you can see I have shown it here, there is no change in the capital
liability. So, there is nothing. There is no change in bank loan, so no change
here, you have added one more T-account which is building T-account and you can see here. I am showing it as transaction T3 cash and
you are writing it in debit side why I am writing I ton the debt side. Because this is increase of asset, so increase
of asset, so increase of asset I am showing it in the debit side. Now let us go to the transaction 4, given
is lack of experience. David decided to make a small start, on July
4th he bought rupees 10,000 worth of cement as usual paying cash. How it will change your balance sheet, what
will happen you have added some stock for 10,000. So cement you purchase this is a stock this
stock again an asset. So, 10,000 worth stock you purchase, so this
will reduce your cash. So, initially you had 125,000 cash, now 10,000
is gone to buy the cement. So now my cash will become 115,000 and 10,000
I will add stock. So if you look at the balance sheet this is
how it will look. There is no change in the building stock has
been added from 0 to 10,000. So, this is 10,000 cash will further come
down from 125,000 t0 150,000 if you added it up it is 150,000. What has happened again the transformation
of one form of asset has been into another form if you look at the liability column there
is no change. Because bank loan remains same, your initial
capital remains same. So you find these 2 values are still matching. Now how does this affect your T-accounts,
it will be like this, only thing that we are adding is a stocks. So we will have a separate account for a stock. ( refer time: 14:57) You can see here I am
adding a separate T-account for a stock, you can see increase in asset I am showing it
in the debit side. So you have added the cement stock worth 10,000,
so it is entered in the debit side. Transaction 5 fortune favor David on 4th evening
the government decontrolled cement. David promptly sold his entire stock of cement
on July 5 for rupees 12,000 for cash. Now what will happen 12,000 you have earned,
so your cash will go up, so increase in asset I will show it in debit side right, as far
as recording in cash book is concerned. But before that if you look at the balance
sheet what will be the impact of this transaction 12,000 you have earned right. You had purchased this stock for 10,000, so
2,000 basically the profit that the company has earned, now how do we account this profit. You will be surprise to note this particular
balance sheet which is as on July 5 what is representing here is building there is no
change you purchase it for 25,000 stock, 10,000 you purchase and all a stock you have sold
it out. So this is 0, this selling of stock has resulted
in 12,000 cash to the company earlier it was 115,000 now you have added 12,000. So, this 127,000, so total is 152,000. Now if you look at the liability side capital
there is no change bank loan there is no change. Now there is 1 entry in this row we are calling
it as retained earnings and this is initially it was 0. You have added 2000. This is basically the profit, so if you added
it up you are getting 152,000 now one thing which may be looking very odd to you is how
come this profit is getting under liabilities. Now remember for whom you are maintaining
the account, you are maintaining the account for ABC trading company, who had supplied
you the capital. Mr. David has supplied you the capital, who
had given you the loan?, some bank had had given you the loan right. So obviously when the capital is not yours
when you had taken loan from someone, so profit also belongs to them. So in the profit belongs to them this is again
your added liability, so what you see here is in addition to 150,000 because you earn
this profit. This also is part of your liability. So, the company now owes 152,000, now if this
whole money is to be retained we are calling it as retained earning see your earning profit. Now it is up to the company’s management
how to impress this profit, whether you would like to keep all money with you. In that case we are calling it as retained
earnings whole amount or else you would like to give some money back to your investors
in this case Mr. David. So, that we are calling it as appropriation
of profits, may be you can give them back in form of some dividend or in some other
form. So remember this is also the liability of
measures ABC trading company right. If you would have incurred loss that you would
have entered in asset side, if you are earning profit that is your liability right, so this
is how you have to interpret right now we move to the next set of transactions. But before that how this is affecting the
T-book or T-account that also we need to see. So, you can see before that you can prepare
the income statement or profit and loss account it is very simple. You made a sales of rupees 12,000, see this
a trading company and you did not incur any manufacturing expenses. This is written as 0, you purchase the stock
for rupees 10,000, so this is your profit. So, informal manner you can show this profit
and loss statement like this, how much was your sales how much money you really incurred
in procurement of those goods. And enter how much did you make the money
right, so this is what it is you can see very clearly I am showing it between 1st July to
5th July. When it came to balance sheet I was giving
a form date here 1st July, 2nd July, 3rd July, but when you talk of income statements sometimes
which is also known as profit and loss statement. You are showing the old period. Let us move further on July 10th David got
married to his old school mate, rest of the July David was holidaying. Now after they came back from holidays they
started Mr. and Mrs. David company, this is a newcomer, so on August 1st David put in
rupees 50,000 cash as capital and persuaded his wife to give an interest-free cash loan
of rupees 75,000. So based on this can you now prepare the balance
sheet and you can show what are the assets of the company and what are the liabilities. Now remember we are doing the accounting for
Mr. and Mrs. David Company not for either Mr. David nor for Mrs. David it is for Mr.
and Mrs. David Company. So, what are the assets, assets are cash 50,000
contributed by Mr. David, 75,000 contributed by Mrs. David. So, total cash asset is 125,000, when it comes
to liability it is again 125,000 that is in the form of capital and loan from Mrs. David. So this is now your balance sheet would look
like as of August 1st. This for Mr. and Mrs. David company now, so
cash increase from 0 to 125,000. So this 125,000, total is 125,000, capital
it was 0 initially. So after the formation of the company 50,000
was contributed by Mr. David, 75,000 was contributed by Mrs. David. So total it is 125,000, you can see assets
and liabilities both are equal. Now if you have to enter these in different
T-accounts how it will be done, how it will be done. I will show you little later, on August 3rs
Mr. and Mrs. David Company bought office furniture for rupees 10,000 paying cash. So how it will change your balance sheet,
now cash will get reduced right by 10,000, there would not be any change in the liability. So, if you look at the balance sheet as on
August 3rd it would be like this cash 125,000-10,000 it is coming to be 115,000, furniture there
was 0 stock here earlier you added 10,000. So you can see you are still having 125,000
and there is no change in the liability side is it clear. So you can see at any point of time you can
look at the balance sheet my total assets and total liabilities are matching. On August 10 David bought rupees 55,000 worth
of bricks on credit, agreeing to pay the seller in 2 weeks. Now remember this is not a cash transaction,
no cash, this is on credit. And Mr. and Mrs. David company promised to
pay the seller in 2 weeks time. So, cash has not exchange its hand right. So, how do I show it, first I will tell you
how to prepare the balance sheet right. So, what is the asset now you will find cash
there is no change, furniture there is no change. But you added another stocks of bricks worth
50,000 right, when it comes to liability I will show you how it changes. So, let see cash this was earlier we have
purchase this bricks for 50,000, so a stock is 50,000 it was 0 earlier, furniture there
is no change. Cash there is no change 115,000, so my total
asset now is 175,000, now when I look at the liabilities you can see capital there is no
change, loan there is no change. Now I have added another row called creditors,
creditors are the entity who have provided you services, but you have not paid them right
now. You will be paying them and Mr. and Mrs. David
company has promise them to pay in 2 weeks time. So till the time you pay them this is and
added liability. So, you can see 50+75+50 this adding up to
175,000, so both the matching as on August 10 right. Now let us move further David’s luck still
held, brick prices went up sharply since government banned the Brick Kiln in New Delhi. David sold his entire stock on August 15 for
rupees 60,000. The buyer promised to pay in a week right,
how does this affect your balance sheet now what will happen you will have an entity called
detour, who are your detour, detour are the entity to whom you have provided some services
or to whom you have sold some goods. But they have not yet pay to you, so there
your assets, they are the company’ assets because today or tomorrow they are going to
pay you right. So, what I will show, in assets column is
like this, I have detour it was 0 earlier, I added 60,000 here. All my stocks were sold out whatever bricks
I had I sold it out all. So, this stock is now 0, there is no change
in cash, there is no change in furniture. So if you added it up it is coming to be 185,000,
what is happening in liability side there is no change in capital, there is no change
in loan creditors, there is no change. Because I am yet to pay them, you can see
this transaction has added another 10,000 why because you purchase the stock for 50,000
and you sold it for 60,000. So, you made a profit of 10,000. Now this 10,000 is not yours money not the
company’s money you owe it to your investors Mr. and Mrs. David, so this is also a liability
as for as the Mr. and Mrs. David company is concerned. So, I am merging the whole profit is coming
as retained earnings, so I am showing it in the liability column and if you added it up
the whole 10,000+50,000+75,000+50,000 you are getting 185,000. So, here also you can see your assets and
liabilities are matching. The brick purchaser turned out to be reliable
and paid rupees 60,000 promptly on August 22nd. David who had been quite nervous heaved a
sigh of relief because he had done this transaction on non-cash basis for the first time. And his purchaser proof to be very reliable
and he paid rupees 60,000 promptly as promised, how this will change. The composition of assets and liabilities
we will show you the next slide. So, 60,000 cash you have receives, so this
cash asset is going off from 115,000 to 175,000 there is no change in furniture. Stock is all depleted it is 0, detours 60,000
was there, now they have paid you back, so this is 0. So, what you find this is still 185,000, so
what has happened detour which was asset here has been converted into cash form right. So this is how assets would look like there
is no change in the liability. You can see still it is 185,000 and all these
entries remain unchanged. David under pressure to keep his word now
that his detour had done, so paid the amount due to the brick supplier on August 23rd. So he also has to keep his promise because
remember he had taken this stock on credit, so whatever 50,000 worth stock he had purchase
from this person he has uhhh refund he has returned his money on 23rd of August. So, how it will reflect in the balance sheet,
this is how it will look like, cash you have given 50,000. So this will come down from 175,000 now it
is 125,000 there is no change in furniture, there is no change in stock, there is no change
in detours. So, your total asset is 125,000, you can see
creditors it was initially 50,000 now you have given the money back to them. So, this is 0 if you add all these you are
getting 135,000. So, this is how you during the or making changes in the balance
sheet. Now what about me? Said Mrs. David now that you are earning a
lot how about repaying my loan. David after much thought paid rupees 25000
on August 31, if I pay the entire loan people will think that I am an easy target. So that is the reason he could not repay the
entire amount how it will affect the balance sheet. You can see here cash will further come down
from 125,000 because 25,000 is being repaid to Mrs. David. So, the total cash now remaining is under
1000 for the company, furniture no change, stock no change, detours no change. So, this is coming out to be 110,000 now you
can see loan amount has come down, so 75,000 it was there initially, now it is come down
to 50,000, capital is still 50,000, creditors nil right retained earning no change. So, total is 110,000, so this is the balance
sheet as on August 31st right, now if for the same period from 1st August to 31st August. If you want to plot the income statement or
show the profit and loss sta statement how it will look like there was a sales for rupees
60,000. You did trading no expense where incurred
in manufacturing, so this is 0, material was worth rupees 50,000. So, you made a profit of rupees 10,000, so
you can see from all these transactions how assets and liability change and how your balance
sheet changes. This was an informal way of understanding
the balance sheet, what you have to understand here is that with every transactions your
balance sheet changes. Now whenever a company enters into transaction
it affects multiple T-accounts, at the time of preparation of balance sheet and profit
and loss account you also have to cater for adjustment entries right once you have catered
for adjustment entries you can prepare the initial trial balance. You can find out the balance sheet or rather
the profit and loss account and subsequently you can draw the balance sheet. So, these are the various ways in which you
can understand the balance sheet and the profit and loss account. In the next lecture we will tell you the formal
way the manner in which an accountant prepares balance sheet, what are the steps that they
follow. Because if they have to follow the method
which we followed in this class. We will find that it will be a hell of a task,
so they have a different way which may be slightly difficult to understand. But we will try to do the accounting thing
using the same small example and you will be able to understand the formal way in which
these statements are prepared. So, we stop at this particular point and see
you other time in the next class thank you.

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