Chapter 10 Corporate accounts

--->  Balance Sheet is one such financial statement that will help you to check the financial health of a firm. It has two sides, Liabilities payable and Assets owned.

--->  The starting point for accounting is a business transaction, say, the purchase of raw material. Such a transaction is evidenced by a document called ‗voucher‘

--->   Purchase book- record purchase of raw material on credit

--->  Cash book-record Payment of rent

--->  Sales book-record Credit sale

--->  Journal-all other

--->  The trial balance is normally the basis for the preparation of financial statements called Profit & Loss Account and Balance Sheet.

--->  Balance sheet : Shows the financial position of the firm at a given point of time in terms of assets and liabilities.

--->  Profit and loss statement: Reflects the performance of the firm over a period of time.

--->  Assets/resources owned by the firm are shown at their acquisition cost and not at current market value/current worth.

--->  At any given point of time, the total assets and the total liabilities should be equal. This equality is called ―balance sheet equation or ―accounting equation.

--->  External liability-holders have first claim on the assets of the firm and owners have a residual claim. It is for this reason owners' capital is known as Risky Capital.

--->  Preparation of a P & L account is based on the Matching Principle.

--->   Ratios

            Liquidity ratio

Quick ratio= (Current asset-inventory) / Current Liabilities

                        Current Ratio=Current asset/ Current Liabilities       

            Financial leverage ratio

                        Debt ratio = Total debt /Total asset

                        Debt to equity ratio =Total debt/ Total equity

            Profitability ratio

                        Gross Profit margin = (Sales-Cost of goods Sold)/Sales

                        Return on asset = Net Income / Total Asset