Basic Accounting

Md. Shahid Ullah, PhD

The Institute of Bankers, Bangladesh (IBB)

 Basic Accounting

Md. Shahid Ullah, PhD

The Institute of Bankers, Bangladesh (IBB)

 Table of Contents
Modules Pages
Module A:

Introduction 1-24

Module B:
25-99
Processing and Recording of Accounting Information

Module C:

Financial Statements 100-123

Module D:

Financial Statements for different entities 124-217

Module E:

Financial Statements for Banks 218-256

Module F:

Other Entities 257-284

 Module A: Introduction

IBB Syllabus for Module A: Book-Keeping and Accounting. Purpose, Nature, Uses and Users
of Accounting, Accounting Principles, Standards and Regulations, Forms of Business
Organizations, Accounting Systems, Assets, Liabilities and Owners Equity.

Contents of this Chapter

Accounting
Functions of Accounting
Purpose of Accounting
Nature of Accounting
Uses and Users of Accounting
Accounting Principles
Basic Concepts of Accounting (Recording Stage)
Accounting Standards and Regulations
Forms of Business Organizations and Accounting
Accounting Systems
Assets, Liabilities, and Owners' Equity
Accounting: An Integral Part of Business
Relationship of Accounting with Other Subjects
Difference Between Book-Keeping and Accounting
Methods of Accounting
Evolution of Accounting
Branches of Accounting
Challenges Faced by the Accounting Profession Today
Role of Ethics in Accounting
Synonyms for Accounting Terminologies
Limitations of Accounting
Concept Check Questions

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 Introduction

Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting financial

transactions and events of a business or organization. It involves identifying, measuring, and
communicating financial information to stakeholders, such as investors, creditors, and management,
to help them make informed decisions about the organization's performance and future prospects.

Functions of accounting

The basic functions of accounting include:

1. Recording financial transactions: The first step in the accounting process is to record
all financial transactions in a systematic manner.
2. Classifying financial transactions: After recording, the transactions are classified
into various categories, such as assets, liabilities, income, and expenses.
3. Summarizing financial transactions: Once the transactions are classified, they are
summarized in financial statements such as balance sheets, income statements, and
cash flow statements.
4. Interpreting financial transactions: Finally, financial statements are analysed and
interpreted to draw meaningful insights about the financial health and performance of
the organization.

Accounting plays a crucial role in business decision-making, financial planning, and tax
compliance. It helps businesses keep track of their financial performance, identify areas of
improvement, and make informed decisions based on financial data.

Purposes of Accounting

The purposes of accounting are multifaceted and include the following:

1. Financial Reporting: One of the primary purposes of accounting is to provide financial

information to stakeholders, including investors, creditors, regulators, and the public. This
information is presented in the form of financial statements, such as balance sheets,
income statements, and cash flow statements, which reflect the organization's financial
health and performance.

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 2. Decision-Making: Accounting information is also used by management to make
informed decisions about the organization's operations, investments, and financing
activities. This information helps in identifying areas of strengths and weaknesses, setting
goals and objectives, and evaluating the effectiveness of strategies and tactics.
3. Compliance: Accounting plays a critical role in ensuring compliance with legal and
regulatory requirements, such as tax laws, financial reporting standards, and labour laws.
Accurate accounting records are necessary to meet the legal obligations and avoid
penalties, fines, and legal actions.
4. Performance Evaluation: Accounting information is used to evaluate the performance of
the organization, departments, and individual employees. Financial performance metrics,
such as profitability ratios, liquidity ratios, and efficiency ratios, are calculated to assess
how well the organization is utilizing its resources and generating profits.
5. Planning and Budgeting: Accounting information is used to develop budgets and
forecast future financial outcomes. The budgets provide a roadmap for allocating
resources and measuring performance, while the forecasts help in anticipating potential
risks and opportunities.

In summary, the purposes of accounting are diverse and critical to the success of any
organization. Accounting information is used to inform decision-making, comply with legal
requirements, evaluate performance, and plan for the future.

Nature of Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting financial

transactions and events of a business entity to provide meaningful information for decision
making.

The nature of accounting is characterized by the following features:

1) Objectivity: Accounting should be based on factual and verifiable data. It requires
an unbiased and neutral approach to ensure that the financial information provided is
reliable and accurate.

2) Relevance: Accounting information should be relevant to the needs of the users. The
information should be useful in making business decisions, such as investment,
financing, and operational decisions.

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 3) Timeliness: Accounting information should be timely to be useful. Delayed
information can lead to inaccurate decision making, so the accounting process should
be prompt and efficient.

4) Completeness: Accounting information should cover all relevant aspects of a

transaction or event to provide a complete picture of the financial situation of the
business.

5) Comparability: Accounting information should be presented in a way that allows

for easy comparison with other periods, companies, or industries. This helps users to
evaluate the financial performance and position of the business.

6) Consistency: Accounting information should be presented in a consistent manner

over time, to enable meaningful comparison between different periods.

7) Materiality: Accounting information should focus on material transactions and

events that have a significant impact on the financial position of the business.

In summary, accounting is a process of providing reliable, relevant, and timely financial information
that can be used by stakeholders to make informed decisions. The nature of accounting is
characterized by objectivity, relevance, timeliness, completeness, comparability, consistency, and
materiality.

The Uses and Users of Accounting

Accounting information is used by both internal and external stakeholders for various purposes.
Here are some examples of both internal and external users of accounting information:

Internal Users:

1) Management: Managers use accounting information to make informed decisions about

the organization's operations, investments, and strategies. They rely on financial reports
such as income statements, balance sheets, and cash flow statements to analyse the
organization's financial performance and identify areas for improvement.

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 2) Employees: Employees may use accounting information to understand the financial
health of the organization and make decisions about their job security, benefits, and
compensation.
3) Owners: Business owners use accounting information to track the profitability of the
organization and make informed decisions about investments, expansions, and
divestitures.

External Users:

1) Investors: Investors use accounting information to assess the organization's financial

health and make decisions about investing in the organization's stocks, bonds, or other
securities.
2) Creditors: Creditors use accounting information to assess the organization's
creditworthiness and make decisions about lending money to the organization.
3) Government agencies: Government agencies use accounting information to ensure that
the organization is complying with tax laws, labor laws, and other regulatory
requirements.
4) Customers: Customers may use accounting information to assess the financial stability
and reputation of the organization before engaging in business transactions.
5) Suppliers: Suppliers may use accounting information to assess the financial stability of
the organization before entering into contracts or extending credit.
6) Competitors: Competitors may use accounting information to assess the strengths and
weaknesses of the organization and inform their own strategic decisions.

In summary, the uses and users of accounting are diverse and include both internal and external
stakeholders. Accounting information is critical for decision-making purposes for both internal
and external users, and the accuracy and reliability of accounting information are essential for
making informed decisions and ensuring the financial health of the organization.

Accounting Principles

Accounting principles refer to a set of guidelines and standards that help businesses record, classify,
and report financial information accurately and consistently. These principles provide a framework
for accounting practices and ensure that financial statements are reliable and meaningful to users.

Some of the key accounting principles include:

1) Matching Principle: This principle requires that expenses should be matched with the

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revenues they help to generate. This means that the cost of goods sold and other
expenses incurred in generating revenue should be recorded in the same period as the
revenue they helped to produce.

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2) Revenue Recognition Principle: According to this principle, revenue should be
recognized when it is earned, regardless of when payment is received. This means that
businesses should record revenue in their financial statements as soon as they have fulfilled
their obligations to their customers.
3) Historical Cost Principle: This principle requires that assets be recorded at their original
purchase price or cost. This means that the value of an asset on a company's balance sheet
is its historical cost, not its current market value.
4) Full Disclosure Principle: This principle requires that businesses provide all relevant
information about their financial statements to users. This includes information about
significant accounting policies, contingencies, and other relevant information that
could impact financial performance.
5) Going Concern Principle: This principle assumes that a business will continue to operate
for the foreseeable future. This means that financial statements should be prepared under
the assumption that the business will continue to operate unless there is evidence to suggest
otherwise.
6) The Accrual Principle: This principle states that revenue and expenses should be
recognized when they are earned or incurred, not when the cash is received or paid out.
This means that a business should record revenue when it is earned, regardless of whether
the customer has paid yet, and record expenses when they are incurred, regardless of
whether the business has paid for them yet.
7) The Cost Principle: This principle states that assets should be recorded at their original
cost, rather than their current market value. This means that a business should record the
cost of an asset when it is acquired, and not adjust the value based on changes in the
asset's market value over time.
8) The Consistency Principle: This principle states that a business should use the same
accounting methods and principles from one accounting period to the next. This ensures
that financial statements are comparable over time, which makes it easier for investors and
other stakeholders to analyze a business's financial performance.
9) The Conservatism Principle: This principle states that a business should be conservative in
its accounting practices, and should anticipate losses and expenses rather than assuming the
best possible outcome. This means that a business should record expenses and losses as
soon as they are likely to occur, but should only record gains and revenues when they are
certain to occur.

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These principles are just a few examples of the many accounting principles that businesses use to
record and report financial information. By following these principles, businesses can ensure that
their financial statements are accurate, reliable, and consistent over time, which helps investors and
other stakeholders make informed decisions about the health and future prospects of the business.

Basic Concepts of Accounting

Basic concepts of Accounting at the recording stage

At the recording stage, there are several basic concepts of accounting that are essential for accurate
and reliable financial reporting. These concepts include:

1) Business Entity: This concept states that the financial transactions of a business must
be kept separate from the personal finances of the owner(s). The business is treated as a
separate legal entity for accounting purposes, and its financial statements reflect only
the financial activities of the business.
2) Money Measurement: This concept states that only financial transactions that can be
expressed in monetary terms should be recorded in the accounting records. Non-
financial transactions, such as goodwill or employee morale, are not recorded.
3) Objective Evidence: This concept requires that all financial transactions must be supported
by objective evidence, such as invoices, receipts, bank statements, or contracts. This
evidence serves as proof of the transaction and ensures the accuracy of the financial
records.
4) Historical Record: This concept requires that financial transactions must be recorded
based on their historical cost, rather than their current value. This means that assets are
recorded at their original purchase price, and liabilities are recorded at the amount owed at
the time of the transaction.
5) Cost: This concept states that assets should be recorded at their original cost, and this cost
should be used to value the asset on the balance sheet. This concept also requires that
expenses should be recorded in the period in which they are incurred, regardless of when
the payment is made.
6) Dual Aspect: This concept states that every financial transaction has two aspects – a
debit and a credit. The total debits must always equal the total credits, which is known as
the accounting equation. This equation is Assets = Liabilities + Equity, and it must
always balance.

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These basic concepts of accounting are essential for accurate and reliable financial reporting. They
ensure that financial transactions are recorded properly, and the resulting financial statements
reflect the true financial position and performance of the business.

Basic Concepts of Accounting at the reporting stage are:

1) Going concern concept: This concept assumes that the business entity will continue to
operate indefinitely, and its assets will be used to generate revenue in the future. As a
result, financial statements are prepared on the assumption that the entity will continue
to operate in the foreseeable future, and its assets will not be sold or liquidated.
2) Accounting period concept: This concept requires that the financial performance of
an entity be reported for a specific period of time, such as a month, quarter, or year. It
ensures that the financial statements represent a clear picture of the entity's financial
position and performance over a specific period, making it easier to compare with other
periods.
3) Matching concept: This concept requires that expenses be recorded in the same
period as the revenues they help to generate. It ensures that the financial statements
accurately reflect the expenses incurred in generating the revenue for the period.
4) Conservatism concept: This concept requires that losses and expenses should be
recognized as soon as they are reasonably expected, but profits should be recognized
only when they are realized. This ensures that the financial statements do not
overstate the entity's financial position or performance.
5) Full disclosure concept: This concept requires that all relevant financial information
be disclosed in the financial statements. It ensures that the users of the financial
statements have access to all necessary information to make informed decisions.
6) Consistency concept: This concept requires that accounting methods and principles
be consistent from one period to another. It ensures that the financial statements are
comparable over time.
7) Materiality concept: This concept requires that only significant transactions and
events be reported in the financial statements. It ensures that the financial statements
are not cluttered with insignificant details, making it easier for users to understand the
essential financial information.

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 Accounting Standards and Regulations

Accounting standards and regulations are a set of guidelines and rules that govern how financial
information is recorded, prepared, and reported by companies and organizations. These standards
are designed to ensure transparency, accuracy, and consistency in financial reporting, which is
essential for investors, creditors, and other stakeholders to make informed decisions.

In Bangladesh, accounting standards and regulations are primarily governed by the Institute of
Chartered Accountants of Bangladesh (ICAB) and the Securities and Exchange Commission (SEC).
The ICAB is responsible for issuing and revising accounting standards, while the SEC regulates
financial reporting and disclosure requirements for publicly listed companies. IASs adopted by the
ICAB are known as BAS and the IFRSs adopted by the ICAB are known as BFRS.

In addition to these accounting standards, there are also various regulations that apply to financial
reporting in Bangladesh. For example, the Companies Act 1994 requires all companies to prepare
and file annual financial statements, while the Securities and Exchange Ordinance 1969 requires
publicly listed companies to disclose information on their financial performance, operations, and
management.

Overall, accounting standards and regulations play a critical role in ensuring the accuracy and reliability
of financial reporting in Bangladesh and other countries around the world. Compliance with these
standards is essential for maintaining public trust in the financial system and promoting sustainable
economic growth.

Adoption Status of International Accounting Standards (IAS) by ICAB as on 1 January 2020.

IAS
IAS Title IAS Effective Date Remarks
No.

IAS1 Presentation of Financial Statements on or after 1 Jan 2020

IAS2 Inventories on or after 1 January 2020

IAS7 Statement of Cash Flows on or after 1 January 2020

Accounting Policies, Changes in

IAS8 on or after 1 January 2020
Accounting Estimates and Errors

IAS10 Events after the Reporting Period on or after 1 January 2020

IAS12 Income Taxes on or after 1 January 2020

IAS16 Property, Plant and Equipment on or after 1 January 2020

IAS19 Employee Benefits on or after 1 January 2020

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 Accounting for Government Grants and
IAS20 on or after 1 January 2020
Disclosure of Government Assistance

The Effects of Changes in Foreign

IAS21 on or after 1 January 2020
Exchange Rates

IAS23 Borrowing Costs on or after 1 January 2020

IAS24 Related Party Disclosures on or after 1 January 2020

Accounting and Reporting by Retirement

IAS26 on or after 1 January 2020
Benefit Plans

IAS27 Separate Financial Statements on or after 1 January 2020

Investments in Associates and Joint

IAS28 on or after 1 January 2020
Ventures

Financial Reporting in Hyperinflationary

IAS29 on or after 1 January 2020
Economies

IAS32 Financial Instruments: Presentation on or after 1 January 2020

IAS33 Earnings per Share on or after 1 January 2020

IAS 34 Interim Financial Reporting on or after 1 January 2020

IAS36 Impairment of Assets on or after 1 January 2020

Provisions, Contingent Liabilities and

IAS37 on or after 1 January 2020
Contingent Assets

IAS38 Intangible Assets on or after 1 January 2020

Financial Instruments: Recognition and

IAS39 on or after 1 January 2020
Measurement

IAS40 Investment Property on or after 1st January 2020

IAS41 Agriculture on or after 1 January 2020

(Source: Compiled based on https://www.icab.org.bd/page/ias-ifrs-2020)

Adoption Status of International Financial Reporting Standards (IFRS) by ICAB as International

Financial Reporting Standards (IFRS) as on 1 January 2020.

IFRS / Effective Date on or

Title
IFRS after

First-time adoption of International financial Reporting

IFRS 1 1 January 2020
Standards

IFRS 2 Share-based Payment 1 January 2020

IFRS 3 Business Combinations 1 January 2020

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 IFRS 4 Insurance Contracts 1 January 2020

Non-current Assets Held for Sale and Discontinued

IFRS 5 1 January 2020
Operations

IFRS 6 Exploration for and Evaluation of Mineral Resources 1 January 2020

IFRS 7 Financial Instruments: Disclosures 1 January 2020

IFRS 8 Operating Segments 1 January 2020

IFRS 9 Financial Instruments 1 January 2020

IFRS 10 Consolidated Financial Statements 1 January 2020

IFRS 11 Joint Arrangements 1 January 2020

IFRS 12 Disclosure of Interests in other Entities 1 January 2020

IFRS 13 Fair Value Measurement 1 January 2020

IFRS 14 Regulatory Defferal Accounts 1 January 2020

IFRS 15 Revenue From Contracts With Customers 1 January 2020

IFRS 16 Leases 1 January 2020

IFRS 17 Insurance Contracts

(Source: Compiled based on https://www.icab.org.bd/page/ias-ifrs-2020)

Adoption Status of International Financial Reporting Interpretations Committee (IFRIC)

Interpretations by ICAB as on 1 January 2020.

Effective Date on
IFRIC Title
or after
Changes in Existing Decommissioning, Restoration and
IFRIC 1 1 January 2020
Similar Liabilities

Members’ Shares in Co- operative Entities and Similar

IFRIC 2 1 January 2020
Instruments

Rights to Interests arising from Decommissioning,

IFRIC 5 1 January 2020
Restoration and Environmental Rehabilitation Funds

Liabilities arising from Participating in a Specific Market—

IFRIC 6 Waste 1 January 2020
Electrical and Electronic Equipment

Applying the Restatement Approach under IAS 29 Financial

IFRIC 7 1 January 2020
Reporting in Hyperinflationary Economies

IFRIC 10 Interim Financial Reporting and Impairment 1 January 2020

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 IFRIC 12 Service Concession Arrangements 1 January 2020

IAS 19—The Limit on a Defined Benefit Asset, Minimum

IFRIC 14 Funding 1 January 2020
Requirements and their Interaction

IFRIC 16 Hedges of a Net Investment in a Foreign Operation 1 January 2020

IFRIC 17 Distributions of Non-- cash Assets to Owners 1 January 2020

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 1 January 2020

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 1 January 2020

IFRIC 21 Levies 1 January 2020

(Source: Compiled based on https://www.icab.org.bd/page/ias-ifrs-2020)

Forms of Business Organisations and their Accounting Systems

Forms of Business Organizations refer to the different types of legal structures that a business can
adopt. In Bangladesh, there are primarily four forms of business organizations, namely Sole
Proprietorship, Partnership, Limited Liability Company, and Public Limited Company. Each of
these forms has its own accounting systems and requirements.

Sole Proprietorship:

In a Sole Proprietorship, the business is owned and operated by a single person. As such, the
accounting system is straightforward, and the proprietor is responsible for maintaining accurate
records of all financial transactions related to the business. The proprietor can use a cash or accrual
accounting method, depending on the size and nature of the business. In Bangladesh, Sole
Proprietorship is a popular form of business organization, particularly in the small and medium-
sized sector.

Partnership:

In a Partnership, two or more people come together to operate a business. The accounting system
for a Partnership is similar to that of a Sole Proprietorship. However, additional records must be
maintained to keep track of each partner's share in the profits or losses. The Partnership must file an
income tax return, and each partner must report their share of income on their individual tax returns.
In Bangladesh, Partnerships are popular in the service sector, such as law firms and accounting
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firms.

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Limited Liability Company (LLC):

An LLC is a legal entity that is separate from its owners. The accounting system for an LLC is more
complex than that of a Sole Proprietorship or Partnership, and the LLC must follow Generally
Accepted Accounting Principles (GAAP). The LLC must maintain accurate records of all financial
transactions, including income, expenses, assets, and liabilities. In Bangladesh, LLCs are popular in
the manufacturing and service sectors.

Public Limited Company (PLC):

A PLC is a company whose shares are publicly traded on the stock exchange. The accounting
system for a PLC is even more complex than that of an LLC, and the company must follow
International Financial Reporting Standards (IFRS). The PLC must maintain detailed financial
records and prepare financial statements, including income statements, balance sheets, and cash
flow statements. In Bangladesh, PLCs are few in number and are mostly found in the banking and
telecommunication sectors.

Other forms of business may include Non-Governmental Organization (NGO): NGOs are non-
profit organizations that work towards social and humanitarian causes. NGOs are not allowed to
distribute profits to their members, but they can generate revenue through donations, grants, or
services provided. NGOs are required to file annual financial statements with the NGO Affairs
Bureau.

In terms of accounting, each type of business organization has its own requirements for financial
reporting and compliance. Business owners should seek professional advice to ensure they are
meeting all legal and financial obligations. In conclusion, the form of business organization a
company chooses determines the accounting system and requirements it must follow. Accounting
records and financial statements are essential for the smooth operation of a business and for
compliance with legal and tax requirements. In Bangladesh, businesses are encouraged to maintain
accurate accounting records and comply with legal and regulatory requirements to promote
transparency and accountability in the business environment.

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Accounting systems

Accounting systems refer to the processes, procedures, and software used by businesses to manage
their financial transactions, records, and reports. These systems are critical for businesses of all
sizes because they help maintain accurate financial records, ensure compliance with regulations,
and provide essential data for decision-making purposes.

There are different types of accounting systems, including manual and computerized systems.
Manual accounting systems involve recording transactions by hand in journals, ledgers, and
spreadsheets. In contrast, computerized accounting systems use accounting software to automate
many accounting tasks, such as recording transactions, generating invoices, and producing financial
statements.

Computerized accounting systems offer several advantages over manual systems. They can save
time and increase efficiency by automating routine tasks and reducing the risk of errors. They also
provide real-time access to financial data, which is essential for making timely and informed
decisions.

Common features of computerized accounting systems include:

1) General ledger: The central repository of financial data that records all transactions, including
sales, purchases, receipts, and payments.
2) Accounts payable: The module used to track and manage the money owed to suppliers and
vendors.
3) Accounts receivable: The module used to track and manage the money owed by customers.
4) Inventory management: The module used to track inventory levels, costs, and sales.
5) Payroll: The module used to calculate and manage employee salaries, taxes, and benefits.
6) Reporting: The ability to generate financial reports, such as balance sheets, income
statements, and cash flow statements.

When choosing an accounting system, businesses should consider factors such as the size of their
operations, their budget, and their specific accounting needs. Some businesses may prefer a cloud-
based accounting system that allows them to access their financial data from anywhere, while others
may require a more robust system with advanced features.

In summary, accounting systems play a crucial role in managing the financial operations of a
business. They provide accurate and timely financial information, which is essential for making
informed decisions and ensuring regulatory compliance. With the right accounting system in place,
businesses can streamline their financial processes, save time, and increase efficiency.

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Assets, Liabilities, and Owners' Equity

Assets, liabilities, and owners' equity are the three main components of a company's balance sheet.
These items represent a company's financial position at a given point in time, and are critical in
determining the company's solvency and financial health. Understanding these items and their
classifications is important for analysing a company's financial statements from the sources of funds
and uses of funds perspectives.

Assets are resources that a company owns or controls, and which have a future economic value.
Assets can be classified as current or non-current. Current assets are those that are expected to be
converted into cash within a year, such as cash, accounts receivable, and inventory. Non-current
assets are those that have a useful life of more than a year, such as property, plant, and equipment.

Liabilities are obligations that a company owes to external parties, such as suppliers, lenders, and
tax authorities. Liabilities can be classified as current or non-current. Current liabilities are those
that are due within a year, such as accounts payable, short-term loans, and taxes payable. Non-
current liabilities are those that are due more than a year from the balance sheet date, such as long-
term loans and deferred tax liabilities.

Owners' equity represents the residual interest in the assets of a company after liabilities are
deducted. It is the owners' claim on the company's assets and represents the value of the business to
its owners. Owners' equity can be further classified into contributed capital, retained earnings, and
accumulated other comprehensive income.

From the sources of funds perspective, assets represent the sources of a company's funds, as they
can be used to generate revenues and profits. For example, a company can use its cash reserves to
invest in new projects or expand its operations, which can result in increased revenues and profits.
Liabilities, on the other hand, represent the uses of funds, as they are the obligations that a company
must fulfil. For example, a company may need to take out loans to finance its operations, which
represents a use of funds.

From the uses of funds perspective, assets represent the company's investments, as they are the
resources that a company uses to generate revenues and profits. Liabilities, on the other hand,
represent the sources of funds, as they provide the company with the capital it needs to make these
investments. Owners' equity represents the residual value of the assets after liabilities are deducted,
and thus represents the value of the company to its owners.

In summary, assets, liabilities, and owners' equity are critical components of a company's financial
statements. Understanding the classifications and usefulness of these items from both the sources of

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funds and uses of funds perspectives is important for analysing a company's financial position and
performance.

Accounting – An Integral Part of Business

Accounting is an integral part of any business as it helps to keep track of the financial health of the
organization. It involves the systematic recording, analysing, and reporting of financial transactions
of a company.

In other words, accounting is the language of business because it helps businesses communicate
their financial information in a standardized and uniform way. This financial information includes
the company's assets, liabilities, revenues, expenses, and profits, which are communicated through
financial statements such as the balance sheet, income statement, and cash flow statement.

Just like how we use language to convey our thoughts and ideas, businesses use accounting to
communicate their financial performance to stakeholders such as investors, creditors, and
government agencies. This financial information is crucial for decision-making, as it provides
insight into the company's financial health and helps stakeholders evaluate the company's potential
for growth and profitability.

In summary, accounting is an essential part of any business as it helps to keep track of financial
transactions and communicate financial information in a standardized way. It is the language of
business, as it enables companies to communicate their financial performance to stakeholders in a
clear and concise manner.

Relationship of Accounting with other subjects

Accounting is a field that has a close relationship with several other subjects/disciplines. Some of
the key disciplines that are closely related to accounting include:

1) Finance: Finance is closely related to accounting because both fields deal with financial
information. While accounting focuses on the recording, analyzing, and reporting of
financial transactions, finance deals with the management of financial resources to achieve
the company's financial objectives.
2) Economics: Economics provides the theoretical basis for understanding the financial
transactions that accounting records. Accounting provides financial data that can be used
to inform economic analysis, such as the evaluation of a company's financial performance
or the analysis of market trends.
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 3) Business management: Accounting plays a critical role in business management as it
provides financial information that managers need to make informed decisions.
Accounting data is used to develop budgets, track expenses, evaluate investment
opportunities, and make strategic decisions.
4) Mathematics and Statistics: Accounting uses mathematical and statistical methods to
analyse financial data. These methods are used to measure financial performance, forecast
future trends, and evaluate the risks associated with business decisions.
5) Law: Accounting and law are closely related because accounting data is used to comply
with legal requirements such as tax regulations, financial reporting standards, and labour
laws.

In summary, accounting is a field that is closely related to several other disciplines. It uses concepts and
techniques from finance, economics, business management, mathematics and statistics, and law to
record, analyse, and report financial transactions. The integration of these disciplines is crucial for
understanding the financial performance of a company and making informed business decisions.

Difference between Book-keeping and Accounting

Bookkeeping and accounting are two distinct functions that are related to the financial management of a
business. While they are often used interchangeably, there are some key differences between
bookkeeping and accounting.

Bookkeeping involves the recording and maintaining of financial transactions on a day-to-day basis. It
is the process of recording all financial transactions, including purchases, sales, receipts, and
payments, in a systematic manner. Bookkeeping is often done using software or spreadsheets and
involves tasks such as recording transactions, reconciling accounts, and preparing invoices.

On the other hand, accounting involves analysing, interpreting, and summarizing financial data to
provide meaningful information to business owners and stakeholders. Accounting involves taking
the information recorded by bookkeepers and using it to create financial reports such as balance
sheets, income statements, and cash flow statements. Accounting also involves interpreting the
financial information to make decisions about the future of the business.

The main differences between bookkeeping and accounting:

Bookkeeping Accounting
Analysing, interpreting, and
Recording and maintaining financial summarizing financial data to
transactions on a day-to- day basis. provide meaningful information to
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Definition business owners and stakeholders.
Involves analysing financial data
Involves the recording of financial to create financial reports and
Function transactions in a systematic manner. inform decision-making.
Creating financial statements,
Recording transactions, reconciling analysing financial data,
accounts, preparing invoices, interpreting financial information,
managing accounts payable and forecasting, budgeting, and
Tasks receivable. advising on financial matters.
Focuses on the details of financial Focuses on the big picture of the
Focus transactions. company's financial performance.
Important for keeping accurate Important for decision-making,
records and ensuring compliance assessing profitability, and
Importance with tax and legal requirements. planning for the future.
Usually periodic or done at the end
Frequency Ongoing, day-to-day task. of an accounting period.

In summary, bookkeeping is the process of recording financial transactions while accounting

involves analysing, interpreting, and summarizing financial data to provide meaningful information
to stakeholders. While bookkeeping is a crucial component of accounting, accounting involves a
more comprehensive analysis of financial data and is used to inform decision-making.

Methods of Accounting

There are two main methods of accounting that businesses can use: cash basis accounting and
accrual basis accounting. Here's an overview of each method:

1) Cash Basis Accounting: This method of accounting recognizes income and expenses when
they are received or paid, respectively. In other words, transactions are recorded only when
cash changes hands. Cash basis accounting is simple and straightforward, making it ideal for
small businesses with few transactions. However, it does not provide an accurate picture of a
company's financial performance as it does not account for transactions that have not yet
been paid.
2) Accrual Basis Accounting: This method of accounting recognizes income and expenses
when they are earned or incurred, regardless of whether cash has changed hands. This
means that revenue is recorded when it is earned, even if payment has not been received,
and expenses are recorded when they are incurred, even if they have not been paid. Accrual
basis accounting provides a more accurate picture of a company's financial performance as it

20
takes into account all transactions, whether they have been paid or not.

21
In addition to these two methods, there are also specialized methods of accounting used in certain
industries. For example, businesses in the construction industry may use the percentage of
completion method, which recognizes revenue and expenses based on the percentage of a project
that has been completed. Similarly, businesses that hold inventory may use the inventory valuation
method, which determines the value of inventory based on its cost or market value.

It's important to note that the method of accounting a business uses can have a significant impact on
its financial statements and tax liability. As such, it's important for businesses to carefully consider
which method is most appropriate for their needs and consult with a qualified accountant if
necessary.

Evolution of Accounting

The evolution of accounting can be traced back to ancient civilizations such as Mesopotamia,
Egypt, and Greece, where rudimentary forms of record-keeping and bookkeeping were practiced.
Over time, accounting has evolved to meet the changing needs of businesses and society.

In the 15th century, the development of double-entry bookkeeping, which was introduced by Italian
mathematician Luca Pacioli, revolutionized the way businesses kept their financial records. This
system provided a more accurate way to record transactions and helped to prevent fraud and errors.

During the industrial revolution in the 18th and 19th centuries, the rise of large-scale businesses and
the need for more sophisticated financial reporting led to the development of managerial
accounting. This branch of accounting focuses on providing information to managers for decision-
making purposes.

In the 20th century, accounting became more standardized and regulated with the introduction of
generally accepted accounting principles (GAAP) in the United States and international financial
reporting standards (IFRS) globally. These standards help ensure consistency and transparency in
financial reporting.

More recently, advancements in technology have enabled the automation of many accounting tasks,
such as data entry and financial analysis. This has led to the development of new branches of
accounting such as forensic accounting, which involves investigating financial fraud and white-
collar crime using technology and data analysis.

22
Branches of Accounting

There are several branches of accounting that can be classified based on the type of data they handle
and the purpose they serve. Here are some of the main branches of accounting:

1) Financial Accounting: This branch of accounting deals with the preparation and reporting
of financial statements for external stakeholders, such as investors, lenders, and regulators.
The primary objective of financial accounting is to provide information about an
organization's financial performance and position to those who are interested in making
investment or lending decisions.
2) Management Accounting: This branch of accounting is concerned with the use of financial
and non-financial information to support the management decision-making process.
Management accounting provides managers with information that helps them plan, control,
and evaluate the performance of an organization.
3) Cost Accounting: This branch of accounting deals with the identification, measurement,
and analysis of the costs associated with producing goods and services. Cost accounting
provides information that helps managers make decisions about pricing, product mix, and
cost control.
4) Tax Accounting: This branch of accounting deals with the preparation and filing of tax
returns for individuals and businesses. Tax accountants are responsible for ensuring
compliance with tax laws and regulations, minimizing tax liabilities, and maximizing tax
benefits.
5) Auditing: This branch of accounting involves the independent examination of an
organization's financial statements to provide assurance that they are presented fairly and in
accordance with accounting standards. Auditors are responsible for evaluating the adequacy
of internal controls, identifying fraud and errors, and providing recommendations for
improvement.
6) Forensic Accounting: This branch of accounting involves the use of accounting, auditing,
and investigative skills to detect and prevent financial fraud and white-collar crime. Forensic
accountants are often called upon to investigate financial irregularities, such as
embezzlement, money laundering, and securities fraud.

Overall, accounting is a broad field that encompasses many different areas of specialization, and
professionals in each branch of accounting play an essential role in helping organizations
achieve their financial goals.

23
Challenges faced by Accounting Profession Today

The accounting profession faces several challenges in today's business environment. Some of these
challenges include:

1) Technological advancements: The emergence of new technologies is rapidly changing the

accounting profession. While technology can improve efficiency, accuracy, and
productivity, it also requires accountants to continuously learn and adapt to new systems and
software.
2) Globalization: The global economy has created new challenges for accountants, such as
dealing with international regulations, currency exchange rates, and tax laws.
3) Regulatory compliance: As governments and regulatory bodies increase their focus on
financial reporting, accountants face pressure to ensure compliance with new regulations
and standards.
4) Ethics and integrity: Maintaining ethical standards and integrity in the accounting
profession has become a significant challenge, as the consequences of unethical behaviour
can damage both individual careers and the profession as a whole.
5) Talent retention: Attracting and retaining talented individuals in the accounting profession
has become increasingly challenging due to competition from other industries, as well as
changing attitudes toward work-life balance and job security.
6) Diversification of services: Clients now demand more than traditional accounting services,
such as auditing and tax preparation. To stay competitive, accounting firms must diversify
their services to include consulting, financial planning, and other advisory services.
7) Changing demographics: The accounting profession is facing a shortage of talent as many
baby boomers retire, and younger generations have different work expectations and
preferences.
8) Data management and cyber security: With the increasing use of technology in
accounting, there is a growing need for accountants to manage and secure large volumes of
data, which presents new challenges for cyber security and data privacy.

Role of Ethics in Accounting

Ethics play a critical role in accounting practices as they help to ensure the accuracy, reliability,
and integrity of financial reporting. Accounting professionals are responsible for maintaining the
highest standards of ethics in their work, which includes adhering to ethical codes and principles,
such as objectivity, confidentiality, and professional behaviour. Failure to follow ethical

24
principles

25
 can result in financial scandals, loss of trust, legal penalties, and damage to the reputation of both
the individual accountant and the profession as a whole.

Ethics in accounting also involve transparency and accountability in financial reporting, ensuring
that the financial statements accurately reflect the financial position of the organization.
Additionally, ethical accounting practices help to promote social responsibility by requiring
businesses to report on their impact on the environment, their employees, and society at large.

In summary, ethics play a crucial role in accounting practices by promoting accuracy,

transparency, accountability, and social responsibility in financial reporting. Accounting
professionals must uphold ethical principles to maintain trust and integrity in the financial
system.

Some Synonyms for Accounting Terminologies

Profit and loss account Income statement (statement of comprehensive income)

Profit and loss reserve (in balance
sheet) Accumulated profits
Balance sheet Statement of financial position
Turnover Revenue
Debtor account Accounts receivable
Debtors (e.g. debtors have
increased) Receivables
Debtor Customer
Creditor account Accounts payable
Creditors (e.g. creditors have
increased) Payables
Creditor Supplier
Stock Inventory
Non-current asset (generally). Tangible fixed assets are
Fixed asset also referred to as ‘property, plant and equipment’.
Long term liability Non-current liability
Provision (e.g. for depreciation) Allowance (you will sometimes see ‘provision’ used too).
Nominal ledger General ledger
VAT Consumption tax
Debentures Loan notes
Preference shares/dividends Preferred stock/dividends
Cash flow statement Statement of cash flows
26
Limitations of Accounting

While accounting is an essential tool for tracking financial transactions and providing insights into a

company's financial health, it also has some limitations. Here are some of the limitations of

accounting:

1) Historical data: Accounting records only historical data, which means that it cannot predict

the future financial performance of a company. It provides insights into the past financial

performance of the company, but it cannot guarantee future profitability.

2) Subjectivity: Accounting involves subjective judgment, which can lead to bias and errors.

For example, the valuation of assets and liabilities can vary depending on the accounting

method used, and different accountants may have different interpretations of the same

financial data.

3) Lack of qualitative data: Accounting is primarily focused on quantitative data, such as

revenues, expenses, and profits. It does not capture qualitative data, such as customer

satisfaction, employee morale, and market trends, which can also impact a company's

financial performance.

4) Limited scope: Accounting only covers financial transactions that can be measured in

monetary terms. It does not take into account non-monetary factors, such as social and

environmental impacts.

5) Compliance-driven: Accounting is often compliance-driven, with companies focusing on

meeting regulatory requirements rather than using financial data to drive strategic decision-

making.

27
 Concept Check Questions

1) What is accounting and why is it important? Or what is accounting, and what are its basic
functions?
2) What are the purposes of accounting, and what are its primary uses?
3) What are the two main methods of accounting, and how did the evolution of accounting change
over time?
4) What are the key principles of accounting and how do they guide accounting practices?
5) Who are the users of accounting information, and what decisions can they make based on it?
6) How does accounting help stakeholders evaluate a company's potential for growth and
profitability?
7) Why is accounting considered an integral part of /Language of business?
8) What are assets, liabilities, and owners' equity, and why are they important components of a
company's balance sheet?
9) How are assets, liabilities, and owners' equity classified, and what do they represent from both
the sources of funds and uses of funds perspectives?
10) What are some of the key disciplines that are closely related to accounting?
11) What are the different types of accounting and how do they differ?
12) How do technology and automation impact accounting practices?
13) What are the financial statements used in accounting, and what information do they
communicate?
14) What are some of the challenges facing the accounting profession today?
15) What role do ethics play in accounting practices?
16) What are the limitations of accounting?

28
 Module B: Processing and Recording of Accounting Information
IBB Syllabus for Module B: Transaction, Analysis of Transaction, Recording of Transaction,
Purpose of Double Entry System, Golden Rules of Debit and Credit of Transactions, Journals,
Ledgers (T accounts) Types of Ledgers, Trial Balance, Cash book, Types of Cash Book (Single
Column, Double Column & Triple Column Cash Book) Suspense Accounts, Reflection of
Accounting Errors, Adjusting Entries & Closing Entries, Accrued and Deferred Revenue
Expenses,
Accounting Cycle, Depreciation, Provision and Reserves

Contents of this Chapter

Introduction

Transaction

Difference between events and economic events/transactions in accounting

Systems of book-keeping

Purpose of Double Entry System of Book-keeping

Account

Classification of accounts in accounting

Golden Rules of Debit and Credit for different Types of Transactions

Steps in the Recording Process

Analysis of Transactions

Recording of Transaction

Journal

Types of Journal in Accounting

Forms of Journals

Transaction of different types and Journalising thereof

Ledger

Forms of Ledger Accounts

Importance of Ledger

Posting to the ledger

Trial Balance

29
Steps involved in preparing a Trial Balance

Advantages of Trial Balance

Limitations of a Trial Balance

Errors in accounting that can be detected in the trial balance

Practical Problems: Transaction Analysis, Journal, Ledger and Trial Balance

Accounting for Fixed Assets

Determining the cost of plant assets

Depreciation Methods for Plant Assets

Straight-Line Depreciation Method

Units-of-Activity Depreciation Method

Declining-Balance Depreciation Method

Choosing the Appropriate Depreciation Method

Practical Problems

Revising Periodic Depreciation for XYZ Ltd.

Account for the Disposal of Plant Assets

Retirement of Plant Assets

Practical Problems: Accounting For Fixed Assets

Accrual versus Cash-Basis Accounting

Recognizing Revenues and Expenses

The Need for Adjusting Entries

Types of Adjusting Entries

Prepare Adjusting Entries for Deferrals

Prepare Adjusting Entries for Accruals

The Nature and Purpose of an Adjusted Trial Balance

Preparing the Adjusted Trial Balance

Short Questions

30
 Module B: Processing and Recording of Accounting Information

Introduction
Accounting is the process of recording, classifying, and summarizing financial transactions to
provide information that is useful in making business decisions. The information generated from
accounting plays a crucial role in the success of any business, whether it is small, medium or large.

Processing and recording of accounting information involves the systematic process of gathering,
analysing, and summarizing financial data from various sources such as bank statements, invoices,
receipts, and other financial documents. This process is aimed at generating reliable and accurate
financial information that can be used for decision-making purposes. The processing and recording
of accounting information is a critical aspect of any business, and it requires careful attention to
detail and adherence to accounting principles and standards to ensure accuracy and reliability in
financial reporting.

Transaction
A transaction or an economic event refers to any activity that affects the financial position of a
company or organization. Transactions are recorded in the accounting system to provide an accurate
record of the company's financial activities. Examples of transactions or economic events from an
accounting perspective include:

 Sales: When a company sells goods or services to a customer, it is considered a transaction.

The revenue from the sale is recorded in the accounting system.
 Purchases: When a company purchases goods or services from a supplier, it is considered a
transaction. The cost of the purchase is recorded in the accounting system.
 Payments: When a company pays for goods or services that it has purchased, it is
considered a transaction. The payment is recorded in the accounting system.
 Receipts: When a company receives payment for goods or services that it has sold, it is
considered a transaction. The receipt is recorded in the accounting system.
 Investments: When a company invests money in stocks, bonds, or other assets, it is
considered a transaction. The value of the investment is recorded in the accounting system.
 Loans: When a company borrows money from a bank or other lender, it is considered a
transaction. The amount of the loan is recorded in the accounting system.

31
  Depreciation: When a company uses fixed assets, such as equipment or buildings, over
time, the value of those assets decreases. This decrease in value is called depreciation, and it
is recorded in the accounting system.
 Salary and wages: When a company pays its employees for their work, it is considered a
transaction. The amount of the salary or wages is recorded in the accounting system.

Overall, any activity that involves money or assets can be considered a transaction or an economic
event from an accounting perspective.

Two conditions for an economic event to be considered a transaction:

1. Change in financial position: A transaction involves a change in the financial position of

an entity, such as an increase or decrease in assets, liabilities, or equity.
2. Measurability in terms of money: The change in financial position resulting from the
transaction must be measurable in terms of money or its equivalent.

Here are examples of transactions in Taka:

 Purchase of goods on credit: A company purchases goods from a supplier on credit for Taka
50,000. This transaction results in an increase in the company's inventory by Taka 50,000
and an increase in its accounts payable by the same amount.
 Payment of salary to employees: A company pays salaries to its employees for Taka
100,000. This transaction results in a decrease in the company's cash balance by Taka
100,000 and a decrease in its retained earnings (or an increase in its expenses) by the same
amount.

Difference between events and economic events/transactions in accounting

In accounting, events refer to any occurrence that takes place within the company or its environment,
while economic events specifically refer to events that involve a change in the financial position of
the company.

Here are some key differences between events and economic events in accounting:

1. Definition: Events can be financial or non-financial and may or may not have an impact on
the financial records. Economic events, on the other hand, involve a change in the financial
position of the company and are specifically related to the exchange of goods, services, or
money.

32
 2. Recording: Events may or may not be recorded in the financial records, while economic
events are always recorded in the company's financial statements.
3. Measurement: Events may or may not be measurable in terms of money or its equivalent,
while economic events must be measurable in terms of money or its equivalent.
4. Purpose: The purpose of recording events in accounting is to understand the company's
performance and make strategic decisions, while the purpose of recording economic events
is to measure the financial performance of the company.
5. Examples: Examples of events may include changes in management, technological
advancements, or natural disasters, while examples of economic events may include sales of
goods or services, purchase of inventory, or payment of salaries.

In summary, while events can be financial or non-financial and may or may not have an impact on
the financial records, economic events specifically involve a change in the financial position of
the company and are always recorded in the financial statements.

Systems of book-keeping
There are two main systems of bookkeeping, namely:

1. Single-entry system: This system is a simple method of bookkeeping, primarily used by

small businesses or sole proprietors. It involves maintaining a record of all transactions in a
single account, such as a cash book, which tracks all cash receipts and payments. Other
accounts, such as accounts receivable and accounts payable, may also be maintained.
However, the single- entry system does not provide an accurate representation of the financial
position of the entity since it does not provide a complete record of all transactions.
2. Double-entry system: This system is a more complex method of bookkeeping that involves
recording each transaction in at least two accounts, namely a debit account and a
corresponding credit account. The double-entry system ensures that every transaction is
recorded twice, once as a debit and once as a credit, ensuring that the accounting equation
(assets = liabilities + equity) is always in balance. This system provides a more accurate
representation of the financial position of the entity since it provides a complete record of all
transactions.

In the double-entry system, each transaction affects two or more accounts, and each account is
classified into one of five categories: assets, liabilities, equity, revenue, or expenses. These

33
categories form the basis of the chart of accounts, which is a list of all the accounts used by an
entity to record

34
its financial transactions. The double-entry system is the most widely used bookkeeping system by
businesses of all sizes and is essential for preparing accurate financial statements.

The purpose of a double-entry accounting system is to ensure the accuracy and completeness of
financial records. In a double-entry system, every financial transaction is recorded in two accounts:
a debit account and a credit account. This means that every transaction has two equal and opposite
effects on the accounting equation, which must balance.

The double-entry system is important because it helps to minimize errors and fraud in financial
records. It also provides a clear and complete picture of a company's financial health, by ensuring
that all transactions are accurately recorded and tracked.

In addition, the double-entry system allows for the creation of financial statements such as the
balance sheet, income statement, and cash flow statement. These statements are essential for
making informed business decisions, as they provide a snapshot of a company's financial
performance over a specific period of time.

Overall, the double-entry system is an essential tool for any business or organization that wants to
maintain accurate financial records and make informed financial decisions.

Double-entry system (Summary)

 Each transaction must affect two or more accounts to keep the basic accounting equation in
balance.
 Recording done by debiting at least one account and crediting at least one other account.
 DEBITS must equal CREDITS.

Purpose of Double Entry System of Book-keeping

The purpose of the double entry system of bookkeeping is to provide a systematic and reliable way
of recording financial transactions of a business. The double entry system ensures accuracy and

35
completeness of financial records by requiring every transaction to be recorded in two or more
accounts, thereby balancing the debits and credits.

The main purposes of the double entry system of bookkeeping are:

1. Accuracy: By recording every transaction in two or more accounts, the double entry system
ensures that the financial records are accurate and free from errors.
2. Completeness: The system ensures that every transaction is recorded and accounted for,
leaving no room for omissions or oversights.
3. Accountability: The double entry system enables the business owner to track and monitor
the flow of money and other assets within the business. This enhances accountability and
helps prevent fraud.
4. Analysis: The system enables the owner to analyse the financial health of the business by
providing accurate and detailed records of income, expenses, assets, and liabilities.
5. Facilitation of decision making: With accurate financial records, the business owner can
make informed decisions regarding the future of the business, such as investment,
expansion, or downsizing.

Overall, the double entry system of bookkeeping is an essential tool for any business
seeking to maintain accurate financial records, comply with regulatory requirements, and
make informed decisions.

Account
An account is an individual accounting record of increases and decreases in a specific asset,
liability, or owner’s equity item.

In accounting, an account refers to a record or a category that is used to track and summarize
financial transactions related to a particular type of asset, liability, revenue, expense, equity, or
other financial activity. Each account has a unique name and is represented in the general ledger,
which is the central repository of a company's accounting records. For example, a company might
have separate accounts for cash, accounts receivable, accounts payable, inventory, sales, salaries
and wages, rent, and so on. These accounts allow the company to organize and monitor its financial
transactions, prepare financial statements, and make informed decisions about its operations and

36
financial position. The classification of accounts into different categories is called a chart
of accounts.

Classification of accounts in accounting

In accounting, accounts can be classified into several categories based on their nature and purpose.
Here are the most common classifications of accounts:

1. Asset Accounts: These are accounts that represent resources owned by a company
that have economic value and are expected to provide future benefits. Examples
include cash, accounts receivable, inventory, and property, plant, and equipment.
2. Liability Accounts: These are accounts that represent obligations owed by a company
to other parties, such as suppliers, lenders, or employees. Examples include accounts
payable, loans payable, and salaries payable.
3. Equity Accounts: These are accounts that represent the residual interest in the assets
of a company after deducting liabilities. Examples include common stock, retained
earnings, and dividends.
4. Revenue Accounts: These are accounts that represent the inflow of economic
resources to a company as a result of its business activities. Examples include sales
revenue, interest revenue, and rental revenue.
5. Expense Accounts: These are accounts that represent the outflow of economic
resources from a company as a result of its business activities. Examples include cost
of goods sold, salaries and wages expense, and rent expense.

These classifications of accounts are important for organizing and reporting financial information
accurately and effectively. By classifying accounts, it becomes easier to prepare financial
statements, analyse financial performance, and make informed business decisions.

Golden Rules of Debit and Credit for different Types of Transactions

The Golden Rules of Debit and Credit for different types of transactions in accounting:

1. Assets:
 Debit increases an asset account.
 Credit decreases an asset account.
2. Liabilities:
 Debit decreases a liability account.

37
  Credit increases a liability account.
3. Owner's Equity:
 Debit decreases owner's equity account.
 Credit increases owner's equity account.
4. Revenues:
 Debit decreases revenue account.
 Credit increases revenue account.
5. Expenses:
 Debit increases an expense account.
 Credit decreases an expense account.

It's important to note that each transaction affects at least two accounts, with a debit entry made in one
account and an equal and opposite credit entry made in another account. The total debits must
always equal the total credits for each transaction.

These rules form the foundation of double-entry bookkeeping, which the system is used to record
financial transactions in accounting.

Account Name Debit / Dr. Credit / Cr.

Transaction #1 Tk 10,000 Tk 3,000

Transaction #3 Tk 8,000

Balance Tk 15,000

Additionally, the note mentioned:

"If the sum of Debit entries is greater than the sum of Credit entries, the account will have a debit
balance.

38
39
Steps in the Recording Process

Although it is possible to enter transaction information directly into the accounts without using a
journal, few businesses do so. Practically every business uses three basic steps in the recording
process:

1. Analyse each transaction for its effects on the accounts.

2. Enter the transaction information in a journal.

3. Transfer the journal information to the appropriate accounts in the ledger

The recording process begins with the transaction. Business documents, such as a sales receipt, a
check, or a bill, provide evidence of the transaction. The company analyses this evidence to
determine the transaction’s effects on specific accounts. The company then enters the transaction in
the journal. Finally, it transfers the journal entry to the designated accounts in the ledger.

40
Analysis of Transactions

The analysis of a transaction involves breaking it down into its component parts to determine the
accounts that are affected and the amounts to be recorded. This process is important for maintaining
accurate financial records and preparing financial statements. The analysis of a transaction typically
involves the following steps:

1. Identify the accounts involved: Determine which accounts will be affected by the
transaction. For example, if a company makes a sale, the accounts affected might include
cash, accounts receivable, and revenue.
2. Determine the type of account: Determine whether each account affected is an asset,
liability, equity, revenue, or expense account. This will help ensure that the transaction is
properly classified for financial reporting purposes.
3. Determine the amount of each account: Determine the dollar amount that should be recorded
for each account affected by the transaction. For example, if a company makes a sale for
Tk1,000, the cash account would be debited for Tk1,000 and the revenue account would be
credited for Tk1,000.
4. Record the transaction: Once the accounts and amounts have been identified, record the
transaction in the appropriate journal entry. This will involve debiting and crediting the
appropriate accounts in accordance with accounting principles and rules.
5. Post the transaction: After the journal entry has been recorded, the transaction should be
posted to the appropriate general ledger accounts. This will update the company's financial
records and ensure that the information is available for preparing financial statements.
By following these steps, businesses can ensure that their financial records are accurate and
that their financial statements provide a true and fair view of the company's financial
position and performance.
Here’s a table summarizing the 10 transaction examples with their corresponding accounting
equation analysis:
Transaction 1. Investment by owner Mr. Neaz decides to start a smartphone app
development company which he names Neazbhai. On September 1, 2023, he invests TK.
15,000 cash in the business. This transaction results in an equal increase in assets and
owner’s equity.
Transaction 2. Purchase of equipment for cash Neazbhai PLC purchases computer
equipment for TK.7,000 cash.
Transaction3. Purchase of supplies on credit Neazbhai PLC purchases for TK.1,600
headsets and other accessories expected to last several months. The supplier allows Softbyte

41
to pay this bill in October.

42
 Transaction 4. Services performed for cash Neazbhai PLC receives TK.1,200 cash from
customers for app development services it has performed.
Transaction 5. Purchase of advertising on credit Neazbhai PLC receives a bill for TK.250
from the Daily News for advertising on its online website but postpones payment until a
later date.
Transaction 6. Services performed for cash and credit. Neazbhai performs TK.3,500 of
services. The company receives cash of TK.1,500 from customers, and it bills the balance of
TK.2,000 on account.
Transaction 7. Payment of expenses Neazbhai PLC pays the following expenses in cash for
September: office rent TK.600, salaries and wages of employees TK.900, and utilities TK.
200.
Transaction 8. Payment of accounts payable Neazbhai PLC pays its TK.250 Daily News
bill in cash. The company previously (in Transaction 5) recorded the bill as an increase in
Accounts Payable.
Transaction 9. Receipt of cash on account Neazbhai PLC receives TK.600 in cash from
customers who had been billed for services (in Transaction 6).
Transaction 10. Withdrawal of cash by owner Mr. Neaz withdraws TK.1,300 in cash in
cash from the business for his personal use.

Transaction Analysis of Neazbhai PLC using Accounting Equation

Assets Liabilitie Owner’s Equity
s
Transa Cash Accounts Supplie Equipmen Accounts Owner’s Owner’s Revenues Expenses Comments
ction Receivabl s t payable Capital Drawings
e
1 15000 15000 Initial
investment
2 -7000 7000
3 1600 1600
4 1200 1200 Service
Revenue
5 250 -250 Ad Exp
6 1500 2000 3500 Service
Revenue
7 -600 -600 Rent Exp
-900 -900 Salary and
Wages Exp
-200 -200 Utilities
8 -250 -250
9 600 -600
10 -1300 -1300 Drawings
8050 1400 1600 7000 1600 15000 -1300 4700 1950

TK.18050 TK. 18050

43
Recording of Transaction
Recording a transaction in accounting involves the process of entering the transaction details into the
accounting system, which usually includes a general ledger and subsidiary ledgers.

Here are the basic steps involved in recording a transaction:

1. Identify the accounts affected by the transaction - determine which accounts will be debited
and which accounts will be credited.
2. Determine the amount to be recorded - identify the amount of money involved in the
transaction, and ensure that the debits and credits balance.
3. Record the transaction in the general ledger - enter the transaction details into the
appropriate accounts in the general ledger.
4. Post to subsidiary ledgers - if the transaction affects a subsidiary ledger, such as accounts
receivable or accounts payable, post the details to those ledgers as well.
5. Prepare a trial balance - at the end of an accounting period, prepare a trial balance to ensure
that the total debits equal the total credits.
6. Prepare financial statements - use the information recorded in the general ledger to prepare
financial statements such as the income statement, balance sheet, and statement of cash
flows.
7. Close the books - at the end of an accounting period, close the books by transferring the
balances in revenue and expense accounts to retained earnings.

Recording transactions accurately is crucial to maintaining a reliable and up-to-date accounting

system. It provides valuable information for decision-making, financial reporting, and
compliance with regulations.

Steps in the Recording Process

Journal
A journal is a record of financial transactions that are entered in chronological order. It is the
first step in the accounting cycle and provides a detailed record of all the financial transactions
that occur in a business.

44
 The journal is used to record transactions before they are posted to the general ledger. Each
transaction is recorded in a separate journal entry that includes the date of the transaction, the
accounts involved, the amount of the transaction, and a brief description of the transaction.

The journal serves as a reference for all subsequent accounting records, including the ledger and
financial statements. It is also used as a tool for analysing the financial performance of a
business by providing a complete record of all financial transactions that have occurred during a
specific period.

There are several types of journals used in accounting, including the general journal, sales
journal, purchase journal, cash receipts journal, and cash disbursements journal. Each type of
journal is used to record specific types of transactions.

Journal – Summary
 Book of original entry.
 Transactions recorded in chronological order.
 Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit and credit amounts can be easily
compared.

Types of Journal in Accounting

In accounting, there are various types of journals that are used to record different types of
transactions. The following are some of the most common forms of journals used in accounting:

1. General Journal: This is the primary journal in accounting, used to record any
transaction that doesn't fit into any of the other specialized journals. It records all types
of transactions such as sales, purchases, expenses, and revenues.
2. Sales Journal: This journal is used to record all credit sales made by a business. It
records the date of the sale, the name of the customer, the amount of the sale, and any
sales tax charged.

45
 3. Purchase Journal: This journal is used to record all credit purchases made by a business.
It records the date of the purchase, the name of the supplier, the amount of the purchase,
and any purchase tax charged.
4. Cash Receipts Journal: This journal is used to record all cash receipts received by a
business. It records the date of the receipt, the name of the customer, the amount
received, and the account to which the receipt is credited.
5. Cash Disbursements Journal: This journal is used to record all cash payments made by a
business. It records the date of the payment, the name of the supplier, the amount paid,
and the account to which the payment is debited.
6. Payroll Journal: This journal is used to record all payroll transactions. It records the
names of employees, their gross pay, deductions, and net pay.

These journals serve as the source documents for posting transactions to the general ledger and
are essential for accurate financial reporting.

Forms of Journals
The format of a journal typically includes the following columns:

1. Date: This column is used to record the date on which the transaction occurred.
2. Account Titles: This column is used to record the name of the account being debited or credited.
3. Debit: This column is used to record the amount of the transaction that is being debited (i.e.,
the amount of the transaction that is being subtracted from the account balance).
4. Credit: This column is used to record the amount of the transaction that is being credited (i.e.,
the amount of the transaction that is being added to the account balance).
5. Description: This column is used to provide a brief explanation of the transaction.

Transaction of different types and Journalising thereof

Example: On September June 1, 2023 Karim invested Tk. 45,000 cash in the business named
Karim and Co. and purchased equipment for Tk. 14,000 cash

R Credi
Date Account Titles ef Debit t
March 1, Cash
2023 Tk 45,000
Karim’s Capital Tk
(Investment by the owner) 4,000

46
 Here's an example of a journal entry for a cash purchase of equipment:
R Credit
Date Account Titles ef Debit

March 1, Equipment
2023 Tk5,000

Cash Tk5,000

(Cash purchase of equipment)

In this example, the journal entry records the purchase of equipment for Tk5,000 paid in cash.
The account title "Equipment" is debited forTk5,000, which increases the balance in the
Equipment account. The account title "Cash" is credited for Tk5,000, which decreases the
balance in the Cash account. The description column provides a brief explanation of the
transaction.

It's important to note that the debits and credits in a journal entry must always balance. In other
words, the total of the debits must equal the total of the credits. This is known as the accounting
equation: Assets = Liabilities + Equity. Every transaction affects at least two accounts, and the
total debits must always equal the total credits. This is known as double-entry accounting, and it
ensures the accuracy of financial records.

Purchase and Sale of Goods for Cash

The purchase and sale of goods for cash are common transactions in accounting. Let's take a look at
the journal entries that would be recorded for these transactions.

Purchase of Goods for Cash: When a business purchases goods for cash, the journal entry will be
recorded in the cash disbursements journal. Let's say that on March 15, 2023, ABC Company
purchased Tk 2,000 worth of inventory for cash. The journal entry would be:

Date Account Titles Ref Debit Credit

March 15, Inventory
2023 Tk2,000
Cash Tk2,000
(Purchase of inventory for Cash)
47
In this entry, the Inventory account is debited for Tk2,000, representing the increase in the
inventory asset. The Cash account is credited for Tk2,000, representing the decrease in the cash
asset.

Sale of Goods for Cash: When a business sells goods for cash, the journal entry will be recorded in
the cash receipts journal. Let's say that on March 20, 2023, ABC Company sold Tk3,000 worth of
inventory for cash. The journal entry would be:

Date Account Titles Ref Debit Credit

March 20, Cash
2023 Tk3,000
Sales Revenue Tk3,000
(Sale of inventory for Cash)

In this entry, the Cash account is debited for Tk3,000, representing the increase in the cash asset.
The Sales Revenue account is credited for Tk3,000, representing the increase in revenue earned
from the sale of inventory.

It's important to note that in these journal entries, only two accounts are affected. In the purchase of
goods for cash, the Inventory account and the Cash account are affected. In the sale of goods for
cash, the Cash account and the Sales Revenue account are affected. These transactions will then be
posted to the general ledger accounts for each account affected.

Purchase and Sale of Goods for Credit

When a business purchases or sells goods on credit, meaning that payment is not made
immediately, the following transactions and journal entries may occur:

Purchase of goods on credit:

1. The business purchases goods on credit from a supplier.
2. The Purchase Journal is used to record the transaction.
3. The account titles debited are Inventory and the account titles credited are Accounts Payable.
4. The amount debited to Inventory represents the cost of the goods purchased, and the amount
credited to Accounts Payable represents the amount owed to the supplier.

Here's an example of a journal entry for the purchase of goods on credit:

48
 Date Account Titles Ref Debit Credit
March 15, Inventory
2023 Tk1,000
Accounts Payable Tk1,000
(Purchase of inventory on account
from XYZ Supplier)

Sale of goods on credit:

1. The business sells goods on credit to a customer.
2. The Sales Journal is used to record the transaction.
3. The account titles debited are Accounts Receivable and the account titles credited are Sales
Revenue.
4. The amount debited to Accounts Receivable represents the amount owed by the customer,
and the amount credited to Sales Revenue represents the revenue earned by the business.
Here's an example of a journal entry for the sale of goods on credit:

Date Account Titles Ref Debit Credit

March 20, Accounts Receivable
2023 Tk1,500
Sales Revenue Tk1,500
(Sale of inventory on account to ABC
Customer)

It's important to note that when the business receives payment from the customer, the journal entry
will be recorded in the Cash Receipts Journal, debiting Cash and crediting Accounts Receivable to
reflect the collection of the accounts receivable. Similarly, when the business pays the supplier for
the goods purchased on credit, the journal entry will be recorded in the Cash Disbursements
Journal, debiting Accounts Payable and crediting Cash to reflect the payment made.

Note that each transaction is recorded with at least two entries to ensure that the debits and credits
balance.

Ledger
A ledger is a record-keeping system that tracks all financial transactions of a business. It is a set of
accounts that are used to maintain the financial records of a company.

Ledgers are essential in accounting because they provide a complete record of all financial
transactions, including sales, purchases, payments, and receipts. They serve as the foundation for
financial statements such as the balance sheet, income statement, and cash flow statement.
49
There are two main types of ledgers in accounting:

50
 1. General ledger: This ledger contains all the financial transactions of a company, organized
by accounts such as cash, accounts payable, accounts receivable, inventory, and so on. The
general ledger serves as a central repository of all financial transactions and provides the
basis for the preparation of financial statements.
2. Subsidiary ledger: This ledger contains detailed information about specific accounts, such
as accounts receivable or accounts payable. It provides a more detailed view of a particular
account, including transaction history, outstanding balances, and payment history.

Overall, ledgers are an essential component of accounting systems and provide a comprehensive
view of a company's financial activities.

Forms of Ledger Accounts

T- Form Accounts
Account title (Example: Cash) No. 101
Date Explanation Ref Debit Date Explanation Ref Credit
2023 2023
June 1 June 1
2 2
3 3
4 4

T-form ledger accounts are a type of accounting ledger that uses a T-shaped format to record
transactions. The T-form ledger account has two sides: the left side represents debits and the right
side represents credits.

The T-form ledger account is divided into two columns: the debit column on the left and the credit
column on the right. Each column lists the transactions that affect the account. Debits are recorded
on the left side, and credits are recorded on the right side.

The T-form ledger account is used to record transactions for specific accounts, such as cash,
accounts receivable, accounts payable, and inventory. Each account has its T-form ledger account,
which allows for a clear and concise record of all transactions that have occurred.

The T-form ledger account is an essential tool in accounting, as it provides a clear picture of the
financial transactions of a business. It allows accountants to track the flow of money in and out of
accounts, which is critical for financial reporting and analysis.

51
Standard Form of Account

The simple T-account form used in accounting textbooks is often very useful for illustration
purposes. However, in practice, the account forms used in ledgers are much more structured. This
format is also called the three-column form of account. It has three money columns—debit, credit,
and balance. The balance in the account is determined after each transaction. Companies use the
explanation space and reference columns to provide special information about the transaction

Account title (Example: Cash) No. 101

Date Explanation Ref Debit Credit Balance

2023

June 1

The standard form of account typically includes the following components:

1. Account Title: The name of the account is written at the top of the page.
2. Account Number: Each account is assigned a unique account number for identification and
reference purposes.
3. Date: The date of each transaction is recorded in chronological order.
4. Description: A brief description of the transaction is recorded to provide context and clarity.
5. Debit and Credit Columns: The standard form of account includes separate columns for
debits and credits, with the debit column on the left and the credit column on the right. All
transactions are recorded in these columns.
6. Balance Column: The balance column is located next to the credit column and is used to
calculate the current balance of the account after each transaction.
7. Reference Column: The reference column is used to record the reference number of the
transaction for easy retrieval and verification.

By using the standard form of account, businesses and organizations can easily and accurately
record their financial transactions, track their account balances, and prepare financial statements.

52
Importance of Ledger

Ledgers play a crucial role in accounting as they are used to record and organize financial
transactions of a business. Here are some of the reasons why ledgers are important in accounting:

1. Record keeping: Ledgers serve as a permanent and organized record of all financial
transactions of a business. They provide a historical record of financial activities, which can
be referred to in case of disputes or audits.
2. Accuracy: Ledgers ensure accuracy in financial reporting by maintaining a record of every
financial transaction that occurs. This helps in preventing errors and discrepancies in
accounting records.
3. Classification: Ledgers help classify transactions into various accounts based on their nature
and purpose. This helps in analysing financial statements and making informed business
decisions.
4. Preparation of financial statements: The information recorded in ledgers forms the basis for
preparing financial statements such as the balance sheet, income statement, and cash flow
statement. These statements provide valuable insights into the financial health of a business.
5. Budgeting and forecasting: Ledgers help in budgeting and forecasting by providing a
historical record of financial transactions. This helps in identifying trends and making
projections for future financial activities.

In summary, ledgers are an essential tool in accounting that provide accurate and organized records
of financial transactions. They are used to prepare financial statements, make informed business
decisions, and plan for future financial activities.

Posting to the ledger

Posting to the ledger is the process of transferring the information recorded in the journal to the
appropriate accounts in the general ledger. This process is necessary to ensure accurate and up-to-
date accounting records.

Here are the steps involved in posting to the ledger:

1. Identify the accounts: Determine the accounts affected by the transaction recorded in the
journal. Each account has a unique account number and title.
2. Determine the debit or credit: Determine whether the transaction is a debit or credit for each
account affected. Debits and credits are recorded on opposite sides of the account.

53
 3. Post the transaction: Record the transaction in the appropriate accounts in the ledger by
entering the date, account number, account title, and amount of the transaction. Debits are
recorded on the left side of the account, while credits are recorded on the right side of the
account.
4. Calculate the account balance: After posting the transaction, calculate the balance of the
account by adding the debits and subtracting the credits or vice versa.
5. Verify the accuracy: After posting the transaction, verify that the total debits equal the total
credits. If they do not match, there may be an error in the transaction or in the posting
process.

By following these steps, businesses can ensure that their accounting records are accurate and up-to-
date, and can use the information in the ledger to prepare financial statements, make informed
business decisions, and comply with regulatory requirements.

Trial Balance

A trial balance is a list of all the balances of the ledger accounts at a specific point in time. It is
prepared to ensure that the total debits equal the total credits in the accounting records.

The typical format for a trial balance is as follows:

Name of the Business

Trial Balance
As at December 31, 202x

Debit Credit
Account Title Balances (Taka) Balances (Taka)
Account A
Account B
Account C
Total

The debit column lists all the accounts with debit balances, and the credit column lists all the accounts
with credit balances. The total of the debit column should equal the total of the credit column. If the
totals do not match, it indicates that there is an error in the ledger, which must be identified and
corrected before financial statements can be prepared.

54
Steps involved in preparing a Trial Balance:

1. List all accounts and balances: List all the accounts and their balances from the ledger in a
worksheet or a specialized software.
2. Determine the debit or credit balance: Determine whether each account has a debit or credit
balance.
3. Total the debit and credit balances: Add up all the debit balances and all the credit balances
separately.
4. Verify the equality of debits and credits: Compare the total debits and credits to ensure that
they are equal. If they are not equal, there may be an error in the accounting records, such as
an incorrect posting or a math mistake.
5. Investigate and correct errors: If the debits and credits do not balance, investigate the
accounts and transactions to identify the errors and make the necessary adjustments.

Preparing a trial balance is important as it helps ensure the accuracy of the accounting records and
identify errors before preparing financial statements. However, it is important to note that a
balanced trial balance does not necessarily mean that the accounting records are error-free. There
may still be errors that cancel each other out or are not reflected in the ledger accounts. Therefore, it
is important to verify the accuracy of the accounting records through other means, such as audits
and reviews.

Advantages of Trial Balance

The trial balance is a statement that lists all the general ledger account balances of a business,
showing the total debits and total credits. Here are some of the advantages of preparing a trial
balance:

1. Ensures accuracy: The primary advantage of a trial balance is that it helps to ensure the
accuracy of the accounting records. It ensures that the total debits equal the total credits and
identifies any errors in the ledger accounts. By detecting errors early, businesses can correct
them before preparing financial statements and making business decisions based on
incorrect information.
2. Saves time: Preparing a trial balance saves time by identifying any errors in the accounts
before preparing the financial statements. If errors are detected after the financial statements
have been prepared, it can be time-consuming and costly to make corrections.
3. Facilitates analysis: A trial balance provides an overview of all the accounts in the general
55
ledger, allowing businesses to analyze their financial data and make informed decisions. It

56
 also helps to identify any accounts with unusually high or low balances that may require further
investigation.
4. Simplifies audit process: A trial balance simplifies the audit process by providing a
snapshot of the financial records of a business. Auditors can use the trial balance to review
the balances of all the accounts and identify any discrepancies or irregularities.
5. Supports compliance: Preparing a trial balance is an essential part of compliance with
accounting standards and regulations. It provides a documented record of a business's
financial transactions, which is required for tax and legal purposes.

Overall, the trial balance is a valuable tool for businesses to ensure the accuracy of their accounting
records, facilitate analysis and decision-making, simplify audits, and support compliance with
accounting standards and regulations.

Limitations of a Trial Balance

While a trial balance is a useful tool in accounting, it is important to note that it has limitations and
cannot guarantee freedom from recording errors. There may be instances where the totals of the
trial balance columns agree, but errors still exist. For instance, the trial balance may balance even
when:

1. A transaction is not journalized.

2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amount of a transaction.

In these scenarios, as long as equal debits and credits are posted, even if they are posted to the wrong
account or in the wrong amount, the total debits will still equal the total credits. Therefore, the trial
balance does not prove that the company has recorded all transactions accurately, nor does it
guarantee that the ledger is correct. It is essential for companies to employ additional measures,
such as regular audits and thorough reviews of financial statements, to ensure the accuracy of their
accounting records.

57
Errors in accounting that can be detected in the trial balance:

1. Errors of omission: These are errors that occur when a transaction is completely left out of
the accounting records. For example, a sale may be made, but it is not recorded in the books.
2. Errors of commission: These are errors that occur when a transaction is recorded, but the
wrong amount is entered, or the wrong account is debited or credited. For example, if a
payment of Tk500 is recorded as Tk50 in the books, it is an error of commission.
3. Errors of principle: These are errors that occur when a transaction is recorded in violation of
accounting principles. For example, if a capital expenditure is treated as a revenue
expenditure, it is an error of principle.
4. Errors of original entry: These are errors that occur when an incorrect amount is entered in
the books at the time of the original entry. For example, if a sales invoice is recorded as
Tk550 instead of Tk500, it is an error of original entry.

Apart from the above-mentioned errors, there are some other errors that cannot be detected in the
trial balance. These include:

1. Errors of duplication: These are errors that occur when a transaction is recorded twice in the
books. For example, if a purchase invoice is recorded twice, it is an error of duplication.
2. Errors of compensating: These are errors that occur when one error cancels out another
error, resulting in a trial balance that still balances. For example, if an expense is understated
and a revenue is overstated by the same amount, the trial balance will still balance, but the
financial statements will be incorrect.
3. Errors of timing: These are errors that occur when a transaction is recorded in the wrong
accounting period. For example, if a sale is recorded in December, but the goods are not
delivered until January, it is an error of timing.
4. Errors of omission of adjusting entries: These are errors that occur when adjusting entries
are not recorded in the books, resulting in inaccurate financial statements. For example, if a
company fails to record depreciation expense, its financial statements will not reflect the
true value of its assets.

58
 Practical Problems
Transaction Analysis, Journal, Ledger and Trial Balance

Problem 1:
On April 1, Mr. Muaz established Muaz Tourism Agency. The following transactions were
completed during the month.
[Dec.-2013]
(i) Invested Tk. 15,000 cash to start the agency.
(ii) Paid Tk. 600 cash for April office rent.
(iii) Purchased office equipment for Tk. 3,000 cash.
(iv) Incurred Tk. 700 advertising cost on account.
(v) Paid Tk. 800 cash for office supplies.
(vi) Earned Tk. 11,000 for services rendered; Tk. 3,000 cash is received from customers
and the balance of Tk. 8,000 is billed to customers on account use.
(vii) Withdrew Tk. 500 cash for personal
(viii) Paid the amount due in (iv).
(ix) Paid employee's salaries Tk. 2,200.
(x) Received Tk. 4,000 in cash from customers who have previously been billed
in transaction (vi).
Instructions:

(i) Prepare a tabular analysis of the transactions using the basic accounting equation
(ii) Muaz Tourism Agency’s Income Statement

Tabular Analysis of Transactions

Assets Liabilities And Owner's Equity

Accounts Office Office Owner's
Cash+ + + + Accounts
+ Comments
Receivable Supplies Equipment Capital
Date Payable
Initial
1 15000 15000 Investment

2 -600 -600 Office Rent

3 -3000 3000
Advertising
4 700 -700 Expense

5 -800 800
59
 Service
6 3000 8000 11000 Revenue

7 -500 -500 Drawings

8 -700 -700
Salaries
9 -2200 -2200 Expense

10 4000 -4000

14200 4000 800 3000 0 22000

22000 22000

Muaz Tourism Agency

Income Statement
For the month ended April 30
Tk Tk.
Income:
Service Revenue 11000
Expenses :
Salaries Expenses 2200
Office Rent 600
Advertisement Exp. 700
Total Expenses 3500
Net Income 7500
Problem – 2
Mr. Shafique and started a business of his own in 2023. During the first month of operation of his
business, the following events and transactions occurred:
[May-2006; slightly modified]
May 1 Shafique invested Tk. 2,00,000 cash.
2 Hired a secretary— receptionist at a salary of Tk. 10,000 per month.
3 Purchased supplies of Tk. 15,000 on account from Raman Supply Company.
7 Paid office rent of Tk. 9,000 cash for the month.
11 Completed a tax assignment and billed client Tk. 21,000 for services provided.
31 Paid secretary- receptionist Tk. 10,000 salary for the month.
31 Paid 50% of balance due to Raman Supply Co.
Requirements:

60
 i. Journalize the transaction ;
ii. Post to Ledger Accounts;
iii. Prepare a Trial Balance on May 31, 2023.

Solution
i. Journalizing the transactions

Mr Shafique
Journal
Date Account Titles & Explanation Ref. Debit Credit
2023 Cash 1,00,000
May- 01 Shafique’s Capital. 1,00,0000
(Owners Investment of cash in business)
May- 02 No entry. (Hire, Order, contract etc. are not
financial transactions)

May- 03 Supplies 15,000 15,000

Accounts Payable-Raman Supply
Company
(Purchased supplies on account from
Excellent Supply Company)
May- 07 Rent Expenses 9,000 9,000
Cash
(Paid monthly office rent)
May- 11 Accounts Receivable 21,000 21,000
Service Revenue
(Billed client for Service rendered)
May- 12 Cash 35,000 35,000
Unearned Service Revenue
(Received cash in advance for future service)
May- 17 Cash 12,000 12,000
Service Revenue
(Received cash for service completed)
May- 31 Salary Expenses 10,000 10,000

61
 Cash
(Salary is paid)
May- 31 Accounts Payable-Raman Supply Company 7,500 7,500
Cash
(Paid 50% of Raman Supply co. 15,000 ×
50% = 7,500)

ii. Posting to Ledger Accounts

Mr. Shafique
Cash Account
Date Explanation Ref. Debit Credit Balance
May- 01 Shafique’s Capital 100000 100000
May- 07 Rent Expenses 9000 91000
May- 12 Unearned Service Revenue 35000 126000
May- 17 Service Revenue 12000 138000
May- 31 Salary Expenses 10000 128000
May- 31 Accounts Payable 7500 120500

Shafique’s Capital

Date Explanation Ref. Debit Credit Balance

May- 01 Cash 100000 100000

Supplies

Date Explanation Ref. Debit Credit Balance

May- 03 Accounts Payable 15000 15000

Accounts Payable
Date Explanation Ref. Debit Credit Balance
May- 03 Supplies 15000 15000
May- 31 Cash 7500 7500

62
 Rent Expenses

Date Explanation Ref. Debit Credit Balance

May- 07 Cash 9000 9000

Accounts Receivable

Date Explanation Ref. Debit Credit Balance

May- 11 Service Revenue 21000 21000

Service Revenue
Date Explanation Ref. Debit Credit Balance
May- 11 Accounts Receivable 21000 21000
May- 17 Cash 12000 3300

Unearned Service Revenue

Date Explanation Ref. Debit Credit Balance

May- 12 Cash 35000 35000

Salary Expense

Date Explanation Ref. Debit Credit Balance

May- 01 Cash 10000 10000

iii. Preparing a Trial Balance on May 31, 2023.

Mr.
Shafique
Trail Balance
May 31, 2023
Accounts Titles Debit Credit
Cash 120500
Shafique’s Capital 100000
Supplies 15000
Accounts Payable 7500
Rent Expenses 9000
Accounts Receivable 21000
Service Revenue 33000
Unearned Service Revenue 35000
Salary Expenses 10000
175500 175500
63
Problem- 3
Mr. Hasan started a business on April 1, 2023 and the following transactions took place during the
first month.
[Nov 2011, slightly modified]
April 1 Hasan invested Tk. 2,00,000 cash.
4 Purchased land costing Tk. 50,000 for cash.
8 Incurred advertising expenses of Tk. 2,000 on account.
11 Paid salaries to employees Tk. 15,000.
12 Hired a park manager at a salary of Tk. 40,000 p.m. effective May 1
13 Paid Tk. 36,000 cash for a one year insurance policy
17 Withdrew Tk. 10,000 cash for personal use.
20 Received Tk. 6.000 for admission fees.
25 Sold 100 coupon books for tk. 250 cash. Each book contains 10 coupons that
100 allow the holder to one admission to the park.
30 Received Tk. 8,900 in cash admission fees.
30 Paid Tk. 900 to the advertising agency incurred on April 8.

Mr. Hasan has the following accounts:- Cash prepaid Insurance, Land, Accounts Payable
unearned Admission Revenue, Mr. Hasan capital, Mr. Hasan, Drawing Admission of Revenue,
Advertising Expense and Salaries Expense.

You are required to -

(i) Journalize the April Transactions; (ii) Post to the ledger; (iii) Prepare a trial balance.

Solution-
i.

M. Hasan
Journal
Date Account Titles & Explanation Ref. Debit Credit
2023 Cash 200000
April- 01 Capital— Mr. Hasan 200000
(Owners Investment of cash in business)
April- 04 Land 50000
Cash 50000

64
 (Land purchase in cash)
April- 08 Advertisement Expenses 2000
Accounts Payable 2000
(Advertisement incurred on account)
April- 11 Salaries Expenses 15000
Cash 15000
(Salaries paid in cash)
April- 12 No Entry
April- 13 Prepaid Insurance 36000
Cash 36000
((Insurance premium paid for 1 year)
April- 17 Mr. Hasan Drawing 10000
Cash 10000
(Withdrew cash for personal use)
April- 20 Cash 6000
Service revenue 6000
(Received cash for entrance fees)
April- 25 Cash 25000
Unearned Service Revenue 25000
(Cash received from sale of 100 coupon
book.)
April- 30 Cash 8900
Service Revenue 8900
(Cash received from entrance fees.)
April- 30 Accounts Payable 900
Cash 900
(Cash Paid to the advertising agency)
April- 30 Insurance Expenses 3000
Prepaid Insurance 3000
(For April Insurance premium.)

65
66
ii.
Mr. Hasan
Ledger
April 30, 2023
Cash
Date Explanation Ref. Debit Credit Balance
April 1 Capital— M. Hasan 200000 200000
April 4 Land 50000 150000
April 11 Salaries Expenses 15000 135000
April 13 Prepaid Expenses 36000 99000
April 17 Hasan’s Drawings 10000 89000
April 20 Service Revenue 6000 95000
April 25 Unearned Service Revenue 25000 120000
April 30 Service Revenue 8900 128900
April 30 Accounts Payable 900 128000

Capital— M. Hasan
Date Explanation Ref. Debit Credit Balance
April 1 Cash 200000 200000

Land
Date Explanation Ref. Debit Credit Balance
April 4 Cash 50000 50000

Advertisement Expense
Date Explanation Ref. Debit Credit Balance
April 8 Accounts Payable 2000 2000

Accounts Payable
Date Explanation Ref. Debit Credit Balance
April 8 Advertisement Expense 2000 2000
April 30 Cash 900 1100
Prepaid Insurance

Date Explanation Ref. Debit Credit Balance

April 13 Cash 36000 36000
April 30 Insurance Expense 3000 33000
67
 Drawings
Date Explanation Ref. Debit Credit Balance
April 17 Cash 10000 10000

Service Revenue
Date Explanation Ref. Debit Credit Balance
April 20 Cash 6000 6000
April 30 Cash 8900 14900

Unearned Service Revenue

Date Explanation Ref. Debit Credit Balance
April 25 Cash 25000 25000

Insurance Expense
Date Explanation Ref. Debit Credit Balance
April 30 Prepaid Insurance 3000 3000

iii.
M. Hasan
Trail Balance
April 30, 2023

Accounts Titles Debit Credit

Cash 128000
Land 50000
Advertisement Expenses 2000
Salaries Expenses 15000
Prepaid Insurance 33000
Hasan Drawings 10000
Insurance Expenses 3000
Mr. Hasan Capital 200000
Accounts Payable 1100
Serivce Revenue 14900
Unearned Service Revenue 25000
241000 241000

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Problem- 4
From the following transactions of Mafiz occurred in November 2023, prepare (i) journal, (ii)
ledger and (iii) trial balance
[Nov-2007, slightly modified]
1. Mr. Mafizl started business with a capital of Tk. 1,00,000.
2. Paid Tk. 12, 000 for one year insurance policy.
3. Purchased goods for Tk. 50,000 of which Tk. 20,000 paid in cash
4. Goods sold for Tk. 1,20,000 of which Tk. 70,000 in cash.
5. Paid rent Tk. 10,000.
6. Received commission Tk.5,000.
7. Paid salary Tk. 8,000.
8. Withdraw Tk: 5,000 for personal use.
9. Took loan from a bank Tk. 50,000 with an interest rate of 10%.
10. Goods sold on credit Tk. 20,000.
Solution
i.
Mr Mafiz
Journal
Date Account Titles & Explanation Ref. Debit Credit
1 Cash 1,00,000
Mafiz Capital. 1,00,0000
(Owners Investment of cash in business)
2 Prepaid Insurance 12,000
Cash 12,000
[Cash paid for 1 year policy]
3 Purchase 50,000
Cash 20,000
Account Payable 30,000
[For purchase goods on credit and cash]
4 Cash
Account Receivable
Sales
[For Sales on credit and cash]
5 Rent Expenses 10,000
Cash 10,000

69
 [For payment of rent]
6 Cash 5,000
Commission 5,000
[For commission received.]
7 Salary Expenses 8,000
Cash 8,000
[For payment of Salary]
8 Drawings 5,000
Cash 5,000
[Cash withdrawn by owners]
9 Cash 50,000
10% Bank Loan 50,000
[Loan received from Bank.].
10 Account Receivable 20,000
Sales 20,000
[For sales on credit]

ii.
Mr Mafiz
Ledger

Cash
Date Explanation Ref. Debit Credit Balance
Mr. Mafiz's Capital 100000 100000
Prepaid Insurance 12000 88000
Purchase 20000 68000
Sales 70000 138000
Rent Expenses 10000 128000
Commission 5000 133000
Salary Expenses 8000 125000
Drawings 5000 120000
0%Bank Loan 50000 170000

70
 Mafiz’s Capital

Date Explanation Ref. Debit Credit Balance

Cash 100000 100000

Prepaid Insurance

Date Explanation Ref. Debit Credit Balance

Cash 12000 12000

Purchase
Date Explanation Ref. Debit Credit Balance
Cash 20000 20000
Accounts Payable 30000 50000

Accounts Receivable

Date Explanation Ref. Debit Credit Balance

Sales 50000 50000
Sales 20000 70000

Sales
Date Explanation Ref. Debit Credit Balance
Cash 70000 70000
Accounts Receivable 50000 120000
Accounts Receivable 20000 140000

Rent Expenses

Date Explanation Ref. Debit Credit Balance

Cash 10000 10000

71
 Salary Expense

Date Explanation Ref. Debit Credit Balance

Cash 8000 8000

Drawings

Date Explanation Ref. Debit Credit Balance

Cash 5000 5000

Accounts Payable
Date Explanation Ref. Debit Credit Balance
Purchase 30000 30000

Bank Loan

Date Explanation Ref. Debit Credit Balance

Cash 50000 50000

iii.
Mr. Mafiz
Trail
Balance Nov
30, 2023
Accounts Titles Debit Credit
Cash 170000
Mr. Mafiz's Capital 100000
Prepaid Insurance 12000
Purchase 50000
Accounts Receivable 70000
Sales 140000
Rent Expenses 10000
Commission 5000
Salary Expenses 8000
Drawings 5000
Accounts Payable 30000
10% Bank Loan 50000
325000 325000
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Problem 5
Mr. Zaman started his business on January 1, 2023 and during the first month, the following
transactions occurred:-
[June-2013, modified]

Jan 1 Zaman invested Tk. 20,000 cash.

2 The company paid Tk. 1,000 cash for store rent.

3 Purchased washers and dryers for Tk. 25,000, paying Tk. 10,000 in cash and
signing a Tk. 15,000, 6-month, 12% note.
4 Paid Tk. 1,200 for a one-year insurance policy.
10 Received a bill from the 'Daily News' for advertising the opening of the Laundry Tk.
200.
20 Zaman withdrew Tk. 700 cash for personal use.
30 The company determined that cash receipts for laundry services for the month were
Tk. 6200.
The chart of accounts followed by M. Zaman includes: Cash, M. Zaman, Capital, M. Zaman,
Drawing, Rent Expense, Laundry Equipment, Notes Payable, Prepaid Insurance, Advertising
Expenses, Accounting Payable, Service Revenue.

Instructions:
(a) Journalize the transactions;
(b) Post the transaction to the ledgers;
(c) Prepare a trial balance at January 31.
Solution-

Mr. M. Zaman
a. Journal
Date Account Titles & Explanation Ref. Debit Credit
2013 Cash 20000
Jan- 01 Capital 20000
Jan- 02 Rent Expenses 1000
Cash 1000
Jan- 03 Laundry Equipment 25000
Cash 10000

73
 Note Payable 15000
Jan- 04 Prepaid Insurance 1200
Cash 1200
Jan- 10 Advertisement Expense 200
Accounts Payable 200
Jan- 20 Drawings 700
Cash 700
Jan- 30 Cash 6200
Service revenue 6200

b.
Mr. M. Zaman
Ledger

Cash
Date Explanation Ref. Debit Credit Balance
Jan- 01 Capital 20000 20000
Jan- 02 Rent Expenses 1000 19000
Jan- 04 Laundry Equipment 10000 9000
Jan- 08 Prepaid Insurance 1200 7800
Jan- 20 Drawings 700 7100
Jan- 30 Service revenue 6200 13300

Capital

Date Explanation Ref. Debit Credit Balance

Jan- 01 Cash 20000 20000

Rent Expenses

Date Explanation Ref. Debit Credit Balance

Jan- 02 Cash 1000 1000

Laundry Equipment
Date
Explanation Ref. Debit Credit Balance

74
 Jan- 03 Cash 10000 10000

Jan- 03 Note Payable 15000 25000

Accounts Payable

Date Explanation Ref. Debit Credit Balance

Jan- 30 Advertisement Expense 200 200

Prepaid Insurance
Date
Explanation Ref. Debit Credit Balance
Jan- 04 Cash 1200 1200

Advertisement Expense
Date Explanation Ref. Debit Credit Balance
Jan- 10 Accounts Payable 200 200

Drawings
Date
Explanation Ref. Debit Credit Balance
Jan- 04 Cash 700 700

Service Revenue
Date
Explanation Ref. Debit Credit Balance
Jan- 30 Cash 6200 6200

Note Payable
Date
Explanation Ref. Debit Credit Balance
Jan- 04 Laundry Equipment 15000 15000

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c.
Mr. M. Zaman
Trail Balance
January 31, 2023
Accounts Titles
Debit Credit
Cash 13300
Rent Expenses 1000
Laundry Equipment 25000
Prepaid Insurance 1200
Advertisement Expenses 200
Drawings 700
Capital 20000
Note payable 15000
Accounts Payable 200
Service revenue 6200
41400 41400

Problem 6:

The trial balance column of the worksheet for Sunanda Enterprise at March 31, 2024, is
as follow:- [June 2013, slightly modified]

Sunanda Enterprise
Worksheet
For the month ended March 31, 2024
Accounts Titles Debit Credit
Cash 4500
Accounts Receivables 3200
Roofing Supplies 2000
Equipment 11000
Accumulated Depreciation- Equipment 1250
Accounts Payable 2500
Unearned Service Revenue 550
Sunanda 12900
Sunanda, Drawing 1100
Service Revenue 6300
Salaries Expense 1300
Miscellaneous Expense 400
23500 23500

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 Other Data:
(a) A physical count reveals only Tk. 650 of roofing supplies on hand.
(b) Depreciation for March is Tk. 250.
(c) Unearned revenue amounted to Tk. 170 at March 31.
(d) Accrued salaries are Tk. 600

Requirements: (1) Complete the worksheet; (2) Prepare an income statement; (3) Journalize
adjusting entries; (4) Journalize closing entries.

Solution:
Sunanda Enterprise
Worksheet
For the month ended March 31, 2024
Accounts Titles Adjusted Trail Income
Trail Balance Adjustments Balance Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 4500 4500 4500
Accounts
3200 3200
Receivables 3200
Roofing Supplies 2000 1350 650 650
Equipment 11000 11000 11000
Accumulated
Depreciation- 250 1500 1500
Equipment 1250
Accounts Payable 2500 2500 2500
Unearned Service
380 170 170
Revenue 550
Sunanda, Capital 12900 12900 12900
Sunanda, Drawing 1100 1100 1100
Service Revenue 6300 380 6680 6680
Salaries Expense 1300 600 1900 1900
Miscellaneous
400 400
Expense 400
23500 23500
Roofing Supplies
1350 1350 1350
Expenses
Depreciation
250 250 250
Expenses
Salaries Payable 600 600 600
2580 2580 24350 24350

Net Income 2780 2780

6680 6680 20450 20450

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2
Sunanda Enterprise
Income Statement
For the month ended March 31, 2024

Explanation Taka Taka

Income:
Service Revenue 6300
Add: Unearned Service Revenue 380
Total Revenue 6680

Expense:
Salaries Expenses 1300
Add: Accrued Salaries 600
1900
Miscellaneous Expenses 400
Roofing Supplies Expenses (2000-650) 1350
Depreciation Expenses 250
Total Expenses 3900
Net Income 2780

3. Adjusting Entries

Sunanda Enterprise
Adjusting Entry
Date Account Titles & Explanation L.F. Debit Credit
Roofing Supplies Expenses 1350
Roofing Supplies 1350
Depreciation Expenses 250
Accumulated Depreciation- Equipment 250
Unearned Service Revenue 350
Service Revenue 350
Salaries Expense 600
Salaries Payable 600

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 4. Sunanda Enterprise
Closing Entry
Date Account Titles & Explanation L.F. Debit Credit
Service Revenue 6680
Income Summary 6680
Income Summary 3900
Salaries Expenses 1900
Miscellaneous Expenses 400
Roofing Supplies Expenses 1350
Depreciation Expenses 250

CASH BOOK
Problem7:

Enter the following transactions in a three column cash book of XYZ and Company.
[May-June-2005, modified]
2023 Jan-01 Cash in hand 5,500; balance at bank Tk. 70,000
02 Received from Mr. Rahim Tk. 625, allowed him discounts Tk. 250
04 Paid salaries for May 2004 by cash Tk. 4,000; cash sales Tk. 13,400.
05 Paid Mr. Sumon by cheque Tk. 2,000; cash purchases Tk. 650
06 Withdrew from bank for office use Tk. 2,000, paid rent in cash Tk. 2,000
15 Deposited into bank Tk. 5,000
20 Purchased a motor car Tk. 25. 25,000
23 Cash sales Tk. 25,000.
24 Received a cheque from Akkas for Tk. 6,500 and allowed him a discount Tk. 50
and deposited the same in bank.
26 Bank notifies that Akkas’s cheque could not be collected.
28 Cash sales Tk. 10,000.
29 Received from Abul a cheque of Tk. 15,000
30 Bank charges Tk. 250.

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Solution:

XYZ & Co.

Cash Book (three columns)
Date
Discount Cash BankDate Discount Cash Bank
2004 2004
June- Balance June-
01 b/d 5500 70000 04 Salaries 4000
Mr.
02 Rahim 250 625 05 Mr Sumon 2000
04 Sales 13400 05 Purchase 650
06 Bank (c) 2000 06 Cash (c) 2000
Rent
15 Cash (c) 5000 06 Expenses 2000
23 Sales 25000 15 Bank (c) 5000
24 Akkas 50 6500 20 Motor Car 25000
26 Bank (c) 6500 26 Cash (c) 6500
28 Sales 10000
29 Mr. Abul 15000 30 Bank (c) 15000
30 Cash (c) 15000 30 Bank charge 250
30 Bal c/d 51375 60750
300 78025 96500 78025 96500

ACCOUNTING FOR FIXED ASSETS / CAPITAL EXPENDITURES

Plant assets, also known as property, plant, and equipment (PPE), represent a significant investment
in the long-term physical resources of a company. These tangible assets are used in operations to
produce income and typically have useful lives extending beyond one year. The accounting for
plant asset expenditures involves determining the initial cost of the assets, allocating costs over their
useful lives, and handling any subsequent capital expenditures. Key components of plant assets
include land, land improvements, buildings, and equipment. Each has distinct cost elements and
specific rules for accounting treatment.

Determining the Cost of Plant Assets

The general principle of plant asset accounting is to capitalize all costs that are necessary to acquire
the asset and prepare it for use. This includes the purchase price, legal fees, and any other costs
directly attributable to the acquisition or construction of the asset. Subsequent costs, such as
80
maintenance, may either be expensed or capitalized depending on whether they enhance the asset's
useful life or productive capacity.

1. Cost of Land

Land is unique among plant assets as it has an indefinite life and is not subject to depreciation. The
cost of land includes the following:

 Purchase Price: The acquisition cost paid to the seller.

 Closing Costs: Legal fees, title fees, recording fees, and commissions to real estate agents.

 Site Preparation Costs: These may include demolition costs for existing structures (minus
any salvageable material), clearing, and leveling the land.

 Special Assessments: Costs associated with permanent improvements such as street access,
drainage, sidewalks, and utilities, which enhance the land's value.

 Back Taxes or Liabilities: Any liens or back taxes associated with the land are also
capitalized as part of its cost.

For example, if a company purchases land for TK. 100,000, incurs TK. 5,000 in closing fees, and
spends TK. 15,000 to demolish an old building on the site, the total capitalized cost of the land
would be TK. 120,000.

2. Cost of Land Improvements

Land improvements are assets that have a finite useful life, distinct from the land itself. These are
costs incurred to make the land usable and typically include:

 Parking lots
 Fencing
 Landscaping
 Street lighting

Land improvements are depreciated over their estimated useful lives. For example, if a company
spends TK. 20,000 on landscaping and expects it to last for 10 years, the cost would be depreciated
over that time period.

3. Cost of Buildings

Buildings used in operations (e.g., manufacturing plants, office buildings, warehouses) must be
accounted for in the following manner:

81
  Purchase Price or Construction Costs: The purchase price of an existing building or
construction costs, including materials, labor, and overhead.

 Renovation Costs: If the building is renovated before use, such as installing new plumbing,
electrical systems, or structural improvements, these costs are capitalized.

 Architectural Fees and Permits: Any professional fees and permits associated with the
construction or acquisition of the building.

If a company constructs a building for TK. 500,000 and spends TK. 50,000 on permits, architectural
fees, and another TK. 100,000 for structural renovations, the total cost of the building will be TK.
650,000. This cost will be depreciated over the building’s useful life (e.g., 40 years).

4. Cost of Equipment

Equipment includes machinery, vehicles, computers, and other tools necessary for operations. The
capitalized cost includes:

 Purchase Price: The invoice price of the equipment.

 Installation Costs: Costs to install the equipment and make it operational (e.g., testing,
calibration).

 Freight and Handling: Shipping charges and any necessary insurance or handling fees
during transit.

 Assembly and Installation: Labor costs required to assemble and install the equipment at
its operational site.

For example, if a company buys machinery for TK. 80,000, spends TK. 5,000 on shipping, and
another TK. 10,000 on installation, the total capitalized cost of the equipment will be TK. 95,000.
This will be depreciated over the equipment’s useful life (e.g., 10 years).

Subsequent Capital Expenditures

Subsequent costs incurred after the asset is operational may either be capitalized or expensed
depending on their nature.

1. Additions and Improvements

Expenditures that enhance the asset’s useful life, capacity, or productivity should be capitalized.
These costs are added to the book value of the asset and depreciated over the remaining useful life.
Examples include:

82
  Adding a new wing to a building

 Upgrading machinery with a more efficient component

For example, if a company upgrades a machine to improve production capacity by adding TK.
10,000 in costs, this expenditure will be capitalized and depreciated over the machine’s remaining
life.

2. Repairs and Maintenance

Routine maintenance costs that do not improve or extend the life of the asset should be expensed in
the period incurred. This includes:

 Lubricating machines

 Painting a building

 Replacing worn-out parts

These costs are treated as operating expenses and do not affect the asset's book value.

Depreciation Methods for Plant Assets

Depreciation is the process of allocating the cost of a tangible plant asset over its useful life. The
objective is to match the expense of the asset to the revenues it helps generate over time. Several
methods are used for computing depreciation, depending on the nature of the asset and the
company's financial reporting objectives. Three commonly used methods include Straight-line,
Units-of- Activity, and Declining-Balance. Each method approaches the allocation of depreciation
differently, affecting how expenses appear on financial statements and how an asset's book value
declines.

1. Straight-Line Depreciation Method

The straight-line method is the most straightforward and commonly used method of depreciation.
It assumes that the plant asset will lose an equal amount of value every year over its useful life. This
method allocates the same amount of depreciation expense in each period, making it simple to apply
and easy to understand.

Formula:

Depreciation Expense = (Cost of the Asset - Salvage Value) / Useful Life

 Cost of the Asset: The initial purchase price of the asset.

83
 Salvage Value: The estimated residual value of the asset at the end of its useful life.

84
  Useful Life: The expected duration the asset will be used by the company.

Example:

Assume a machine costs TK. 50,000, has an estimated salvage value of TK. 5,000, and a useful life of
10 years. Using the straight-line method:

Depreciation Expense = (50,000−5,000) / 10 years = TK. 4,500 per year

Thus, TK. 4,500 of depreciation expense will be recognized annually for 10 years. The asset’s book
value decreases by the same amount each year until it reaches the salvage value at the end of its
useful life.

Advantages:

 Simplicity: Easy to calculate and apply.

 Consistency: Provides uniform expense allocation over the life of the asset, aiding in
financial planning and forecasting.

Disadvantages:

 Assumption of Uniform Usage: The straight-line method assumes the asset's utility or
benefit is the same each year, which may not be realistic for assets that deteriorate more
quickly in their early years or that have higher utility at the start.

2. Units-of-Activity Depreciation Method

The units-of-activity method ties depreciation expense to the actual use or productivity of the asset,
rather than time. This method is ideal for assets whose wear and tear are more closely related to
how much they are used (e.g., machinery, vehicles). Depreciation is based on the total expected
output, mileage, or hours of use during the asset's life.

Formula:

Depreciation Expense = (Cost of the Asset - Salvage Value) / Total Estimated Activity
× Actual Activity During Period

 Total Estimated Activity: Total expected output, hours of use, or mileage over the asset’s
entire useful life.

 Actual Activity During Period: The actual usage for a specific period (e.g., hours, miles,
or units produced).
85
 Example:

Consider a vehicle that costs TK. 60,000, has an expected salvage value of TK. 10,000, and is expected
to be driven for 200,000 miles. If the vehicle is driven 20,000 miles in the first year, depreciation
for that year is:

Depreciation Expense = (60,000−10,000) / 200,000×20,000 = TK. 5,000

In this case, the depreciation expense will fluctuate based on the vehicle's annual usage. If fewer miles
are driven in a subsequent year, the depreciation expense will be lower.

Advantages:

 Accuracy: Provides a more precise measure of depreciation tied to actual asset usage.

 Reflects Productivity: Matches expense to output, offering a better reflection of asset

performance, especially for equipment with irregular usage patterns.

Disadvantages:

 Complexity: Requires tracking and estimating usage, which may be burdensome for
companies with large fleets of vehicles or heavy machinery.

 Inconsistency in Expense: Depreciation expense may fluctuate from year to year, which
can complicate financial forecasting and comparisons between periods.

3. Declining-Balance Depreciation Method

The declining-balance method is an accelerated depreciation method. It allocates more depreciation

expense in the early years of an asset’s useful life and less in later years. The logic is that many
assets provide greater benefits when they are newer and lose utility as they age. This method is
particularly useful for assets that deteriorate quickly, such as technology or equipment with high
maintenance costs.

The most commonly used version of this method is the double-declining-balance (DDB) method,
which applies a rate that is twice the straight-line rate.

Formula for DDB:

Depreciation Expense = 2×Straight-Line Depreciation Rate × Book Value at Beginning of Year

 The Straight-Line Depreciation Rate is computed as 1 divided by the useful life of the asset.

 The Book Value at Beginning of Year is the cost of the asset minus accumulated
depreciation.
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 Example:

Assume the same machine from the straight-line example costs TK. 50,000, has a salvage value of TK.
5,000, and a useful life of 10 years. The straight-line depreciation rate is 1/10=0.10 or 10%, so the
double-declining rate is 2×10% = 20%.

In the first year, the depreciation expense is:

Depreciation Expense=2×10%×50,000=10,000

In the second year, depreciation is based on the reduced book value of TK. 40,000:

Depreciation Expense=2×10%×40,000=8,000

This process continues, applying the double rate to the declining book value each year until the
salvage value is reached.

Advantages:

 Higher Early-Year Deductions: Maximizes tax savings or expense recognition in the early
years of an asset’s life, making it useful for tax planning.

 Reflects Asset Usage Patterns: This method better matches the expense to periods when
the asset is providing the most significant utility.

Disadvantages:

 Complexity: More difficult to calculate and track compared to the straight-line method.

 Overstates Early Expenses: High depreciation in the initial years can distort financial
performance by reducing profits more drastically early on.

Choosing the Appropriate Depreciation Method

The choice of depreciation method depends on several factors, including:

 Nature of the Asset: Assets that wear out or lose value quickly (e.g., machinery, vehicles)
may benefit from accelerated methods like declining-balance, while long-lasting assets like
buildings may be better suited for straight-line.

 Accounting Objectives: If a company wants to smooth out expenses over time, straight-line
is preferred. If a company desires higher depreciation expenses for tax or reporting purposes
in early years, declining-balance may be appropriate.

87
  Usage Patterns: For assets whose wear is tied directly to usage (e.g., production machines
or vehicles), the units-of-activity method offers the most accurate expense allocation.

In practice, companies must balance the method's ease of application with how well it matches the
asset's actual usage and the company's financial reporting goals.

Suppose you are given the following data of Zaima and Zunaira Enterprise:

 Cost of a vehicle: TK. 13,000

 Salvage value: TK. 1,000

 Estimated useful life in years: 5

 Estimated useful life in miles: 100,000 miles

 Total depreciable cost = Cost - Salvage value = TK. 13,000 - TK. 1,000 = TK. 12,000

Practical Problems

Now compute depreciation using Straight-line, Units-of-activity, and Declining-balance and

compare them.

1. Straight-line Method:

The straight-line method allocates the depreciable cost equally across the useful life of the asset.

Annual Depreciation Expense = (Cost - Salvage Value) / Useful Life

= TK. 12,000 / 5
= TK. 2,400 per year

Depreciation Accumulated
Year Book Value
Expense Depreciation
2017 TK. 2,400 TK. 2,400 TK. 10,600
2018 TK. 2,400 TK. 4,800 TK. 8,200
2019 TK. 2,400 TK. 7,200 TK. 5,800
2020 TK. 2,400 TK. 9,600 TK. 3,400
2021 TK. 2,400 TK. 12,000 TK. 1,000
2. Units-of-Activity Method:

88
The units-of-activity method depends on the actual usage (in miles).

 Depreciation per mile = Depreciable Cost / Total Estimated Miles

= TK. 12,000 / 100,000 miles
= TK. 0.12 per mile

Let's assume the vehicle was driven as follows each year:

 2017: 15,000 miles

 2018: 30,000 miles

 2019: 20,000 miles

 2020: 25,000 miles

 2021: 10,000 miles

Depreciation for each year = Depreciation per mile × Miles driven

Depreciation Accumulated
Year Miles Driven Book Value
Expense Depreciation
2017 15,000 TK. 1,800 TK. 1,800 TK. 11,200
2018 30,000 TK. 3,600 TK. 5,400 TK. 7,600
2019 20,000 TK. 2,400 TK. 7,800 TK. 5,200
2020 25,000 TK. 3,000 TK. 10,800 TK. 2,200
2021 10,000 TK. 1,200 TK. 12,000 TK. 1,000

3. Declining-Balance Method (Double-Declining Balance):

For the double-declining balance method, we apply double the straight-line rate to the book value of the
asset.

 Depreciation rate = 2 × (1 / Useful life) = 2 × (1 / 5) = 40%

Depreciation for each year = Book Value at the start of the year × Depreciation rate

Beginning Book Depreciation Accumulated

Year Book Value
Value Expense (40%) Depreciation
2017 TK. 13,000 TK. 5,200 TK. 5,200 TK. 7,800
2018 TK. 7,800 TK. 3,120 TK. 8,320 TK. 4,680
2019 TK. 4,680 TK. 1,872 TK. 10,192 TK. 2,808

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 2020 TK. 2,808 TK. 1,123 TK. 11,315 TK. 1,685
2021 TK. 1,685 TK. 685 TK. 12,000 TK. 1,000

Comparison of Depreciation Methods:

Year Straight-line Units-of-Activity Declining-Balance

2017 TK. 2,400 TK. 1,800 TK. 5,200
2018 TK. 2,400 TK. 3,600 TK. 3,120
2019 TK. 2,400 TK. 2,400 TK. 1,872
2020 TK. 2,400 TK. 3,000 TK. 1,123
2021 TK. 2,400 TK. 1,200 TK. 685
Total TK. 12,000 TK. 12,000 TK. 12,000

 Straight-line gives uniform depreciation every year.

 Units-of-activity varies based on the actual usage, which is more accurate for assets with
variable productivity.

 Declining-balance is accelerated, giving higher depreciation in earlier years, which is ideal

for assets that lose value faster initially.

The total depreciation remains the same for all methods, but each method distributes the expense
differently across the asset's life.

Revising Periodic Depreciation for XYZ Ltd.

Scenario: XYZ Ltd. purchased machinery on January 1, 2020, for Tk 120,000. The company
initially estimated that the machine would have a useful life of 5 years and a salvage value of Tk
20,000. The company uses the straight-line method for depreciation.

Depreciation per year = (Tk120,000–Tk20,000)/5(Tk 120,000 – Tk 20,000) / 5(Tk120,000–

Tk20,000)/5 = Tk 20,000.

After 3 years, on December 31, 2022, XYZ Ltd. decided to revise the estimate of the machine’s
useful life to 8 years (an additional 3 years) and reduce the salvage value to Tk 10,000. At this
point, the company has already recorded depreciation for the first three years.

You are required to:

90
1. Compute the accumulated depreciation after three years.

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 2. Determine the book value of the machinery on December 31, 2022, before the revision.

3. Compute the revised depreciation cost after the revision, considering the new useful life
and salvage value.

Step-by-Step Solution:

1. Calculate Accumulated Depreciation after 3 Years:

 Annual depreciation under the original estimate = (Tk120,000–Tk20,000)/5(Tk 120,000

– Tk 20,000) / 5(Tk120,000–Tk20,000)/5 = Tk 20,000 per year.

 Accumulated depreciation after 3 years = Tk 20,000 × 3 = Tk 60,000.

2. Determine the Book Value before the Revision:

 Book value = Purchase cost – Accumulated depreciation.

 Book value on December 31, 2022 = Tk 120,000 – Tk 60,000 = Tk 60,000.

3. Revised Depreciation Calculation:

Step 1: Compute the new depreciable cost.

 Book value at December 31, 2022 = Tk 60,000.

 Less: Revised salvage value = Tk 10,000.

 New depreciable cost = Tk 60,000 – Tk 10,000 = Tk 50,000.

Step 2: Divide by the remaining useful life.

 Remaining useful life = 8 years (new estimate) – 3 years (already used) = 5 years.

 Revised annual depreciation = Tk 50,000 / 5 years = Tk 10,000 per year.

Conclusion:

 The revised annual depreciation for XYZ Ltd.’s machinery will be Tk 10,000 for the next
5 years.

Example for Calculation Practice:

Problem: ABC Ltd. bought a vehicle for Tk 500,000 with an estimated useful life of 10 years and
a salvage value of Tk 50,000. Annual depreciation under the straight-line method was Tk 45,000
(Tk500,000–Tk50,000)/10 (Tk 500,000 – Tk 50,000) / 10 (Tk500,000–Tk50,000)/10.

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After 6 years, the company decided to extend the vehicle’s useful life by 4 years (making it 14
years total) and reduced the salvage value to Tk 25,000. Calculate the revised depreciation amount
for the remaining years.

Steps:

1. Calculate accumulated depreciation after 6 years.

2. Find the book value before the revision.

3. Calculate the new depreciable cost and divide by the remaining useful life to find the
revised depreciation.

Try to solve this one following the steps above!

Account for the Disposal of Plant Assets

In accounting, companies dispose of plant assets (such as equipment or vehicles) that are no
longer useful. There are three main methods for disposing of plant assets:

1. Retirement – Equipment is scrapped or discarded.

2. Sale – Equipment is sold to another party.

3. Exchange – Existing equipment is traded for new equipment.

Regardless of the disposal method, the company must determine the book value of the plant asset at
the date of disposal. The book value is the difference between the cost of the plant asset and the
accumulated depreciation up to the disposal date. Depreciation must be recorded for the fraction of
the year leading up to the disposal.

Retirement of Plant Assets

When an asset is fully depreciated and retired, the book value is zero, and no gain or loss is
recognized.

Example 1: Hassan Company retires its computer printers.

 Cost of the printers: Tk. 32,000

 Accumulated depreciation: Tk. 32,000 (fully
depreciated) Journal Entry:

Accumulated Depreciation - Equipment Tk. 32,000

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 Equipment Tk. 32,000
(To record the retirement of fully depreciated equipment)

If an asset is retired before it is fully depreciated, and no cash is received for scrap value, a loss on
disposal occurs.

Example 2: Shinning Company retires delivery equipment that is not fully depreciated.

 Cost of the equipment: Tk. 18,000

 Accumulated depreciation: Tk. 14,000
 Book value: Tk. 4,000 (loss because no cash is
received) Journal Entry:

Accumulated Depreciation - Equipment Tk.

14,000 Loss on Disposal of Plant Assets Tk. 4,000
Equipment Tk. 18,000
(To record the retirement of delivery equipment at a loss)

Sale of Plant Assets

In the case of a sale, the company compares the book value of the asset to the proceeds received
from the sale.

 If proceeds exceed book value: Gain on disposal.

 If proceeds are less than book value: Loss on disposal.


Example 3: Wasim Company sells office furniture.

Cost of the furniture: Tk. 60,000

Accumulated depreciation (as of disposal date): Tk. 49,000
Book value: Tk. 11,000
Proceeds from sale: Tk. 16,000 (gain of Tk.
5,000) Journal Entry for Depreciation (before the
sale): Depreciation Expense Tk. 8,000
Accumulated Depreciation—Equipment Tk. 8,000
(To record depreciation for the first six months of the
year)

Journal Entry for the Sale:

Cash Tk. 16,000

94
Accumulated Depreciation—Equipment Tk. 49,000

95
 Equipment Tk. 60,000
Gain on Disposal of Plant Assets Tk.
5,000 (To record the sale of office furniture at a
gain)

If instead, Wright sold the furniture for Tk. 9,000, there would be a loss of Tk. 2,000.
Journal Entry:
Cash Tk. 9,000
Accumulated Depreciation—Equipment Tk.
49,000 Loss on Disposal of Plant Assets Tk. 2,000
Equipment Tk.
60,000 (To record the sale of office furniture at a
loss)

Problem: Sale of a vehicle by Abul Auto

Abul Auto has an old vehicle with a cost of Tk. 30,000 and accumulated depreciation of
Tk. 16,000.

1. Scenario (a): Sale for Tk. 17,000 (Gain)

 Book value: Tk. 14,000 (Cost - Accumulated Depreciation = Tk. 30,000 - Tk. 16,000)

 Proceeds from sale: Tk. 17,000

 Gain on disposal: Tk. 3,000 (Proceeds - Book value = Tk. 17,000 - Tk.

14,000) Journal Entry:

Cash Tk. 17,000

Accumulated Depreciation—Equipment Tk.
16,000 Equipment Tk. 30,000
Gain on Disposal of Plant Assets Tk.
3,000 (To record the sale of the vehicle at a gain)
2. Scenario (b): Sale for Tk. 10,000 (Loss)

 Book value: Tk. 14,000

 Proceeds from sale: Tk. 10,000

 Loss on disposal: Tk. 4,000 (Book value - Proceeds = Tk. 14,000 - Tk.

10,000) Journal Entry:

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Cash Tk. 10,000
Accumulated Depreciation - Equipment Tk. 16,000

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 Loss on Disposal of Plant Assets Tk. 4,000
Equipment Tk.
30,000
(To record the sale of the vehicle at a loss)

PRACTICAL PROBLEM FOR ACCOUNTING FOR FIXED ASSETS

Problem 8:
Kulsum & Co. purchased a machinery Tk. 5,10,000 on January 1, 2024. Useful life is 5 years, scrap
value Tk. 10,000. During 2024, working hours were 2000. Total estimated working hours 25.000.

[Nov.-2010, slightly modified]

Requirement

Compute depreciation for year 2024 under each of the following methods:

1. Straight line
2. Working hours
3. Sum of years digit

Solution:

Computation of Depreciable Value:

Cost TK. 510000

Less Scrap value 10000

Depreciable Value TK. 500000

1. Depreciation for 2024 = (5,00,000 ÷ 5 )= Tk. 1,00,000

2. Depreciation = [(5,00,000 ÷ 25,000 )× 2,000] = Tk. 40,000
3. Depreciation for 2001= [5,00,000 ÷ 15 (5 + 4 + 3 + 2 + 1) x 5] = Tk. 1,66,667

Problem 9:
Muntaha Electronic Ltd. purchased machinery for Tk. 3,15,000 on May 1, 2023. It is estimated that
it will have a useful life of 10 years, scrap value of Tk. 15,000, production of 2,40,000 units and

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working hours of 25,000. During 2024 the company uses the machinery for 2650 hours and the
machine produces 25,500 units. [November 2006]

Requirements:
From the information given, computer the depreciation charges for 2024 under each of the
following methods:-

(a) Straight line method

(b) Units of output method

(c) Working hours

(d) Sum of the years digit method

(e) Declining balances method (use 20% as the annual rate)

Solution:

(a) Straight line method

Depreciable value = Cost – Scrap value

= 315000 – 15000 = 300000
Depreciation per
year = (315000 ÷ 10) = 30000
Estimated Life
Depreciation per year =

Assumption:
The company's year end December 31 every year.
Date of purchase - May-1, 2023
Depreciation for 2024 = Tk. 30000

(b) Units of output method

Depreciation per unit Depreciable

Value
= = (300000 ÷ 240000) = Tk. 1.25
Production
Units

Production units in 2024 = 25500 units

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So Depreciation for 2024 = 25500 x Tk. 1.25 = Tk. 31875

100
(c) Working hours

Depreciation per hour Depreciable

Value
= = (300000 ÷ 25000) = Tk. 12
working
hours

Depreciation for 2024 = 2650 hours x Tk. 12 = Tk. 318000

(d) Sum of the years digit method

Sum of the years digit method = Useful life - 10 years

Sum of the 10 years = 1+ 2+ 3+ 4+ 5+6+ 7+ 8+ 9+ 10 = 55

30000
1st year (May-1, 2023 to April-30, 2024) Depreciation
0 × 10 = 54545
55
=

30000
2nd year (May-1, 2024 to April-30, 2025) Depreciation
0 × 9 = 49090
55
=

So Depreciation for 2024 :

5454
Jan-1 to April-30, 2024
5 × 4 = 18182
12
=

4909
May-1, to Dec. 31, 2024
0 × 8 = 32727
12
=

So Total Depreciation for 2024 = (18182 + 32727) = 50909

(e) Declining Balance Method

8
1st year Depreciation May-1, to Dec. 31, 2023 = 300000 x 20% = 60000

12 = 40000
= 60000 ×

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Cost of the Machine 315000
Less - Depreciation 40000
Carrying value/written down Depreciation 275000
Depreciation for 2024 (20% on 275000) 55000

102
Problem 10:
Rafi Enterprise purchased a factory machine at a cost of Tk. 18000 on January 1, 2020. The
machine is expected to have a salvage value of Tk. 2,000 at the end of its 4-year useful life.
[May-2007, slightly
modified] During its useful life the machine is expected to be used 160000 hours. Actual annual
hourly use was :

Years Hours
2020 40000
2021 60000
2022 35000
2023 25000

Required: Prepare depreciation schedule for the following methods :

(i) The straight line;

(ii) Units of activity;

(iii) Declining balance using double the straight line rate. 3

Solution:
1. Straight Lime Method

Depreciable value = Cost - Salvage value = (18000 - 2000) = 16000

Depreciation per year Depreciation per

year
= = (16000 ÷ 4) = Tk. 4000
Estimated Life

Depreciation Schedule
Computation Annual
Accumulated Carrying/Book
Year Depreciable Cost × Dep. Depreciation
Depreciation value
Rate Expenses
Date of Purchase Jan-1 2020 18000
2020 16000 × 25% 4000 4000 14000
2021 16000 × 25% 4000 8000 10000
2022 16000 × 25% 4000 12000 6000
2023 16000 × 25% 4000 16000 2000

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2. Units of Activity Method

Depreciation per hour Depreciable

Value
= = (16000 ÷ 160000) = Tk. 0.10
working
hours

Depreciation Schedule
Units of Activity Method
Date of purchase - January-1, 2020 at a cost of tk. 18000

Computation Annual
Accumulated Book
Year Hours Deprecation Depreciation
Depreciation value
Worked per hour Expenses

2020 40000 0.1 4000 4000 14000

2021 60000 0.1 6000 10000 8000
2022 35000 0.1 3500 13500 4500
2023 25000 0.1 2500 16000 2000

3. Depreciation under Double Declining Method:

Rate of normal Depreciation = (100% ÷ 4) = 25%

Double Declining Rate = (25% x 2) = 50%

Depreciation Schedule
Double Declining Method
Date of purchase - January-1, 2020 at a cost of tk. 18000

Computation
Annual Depreciation Accumulated
Year Book value begging of Book value
Expenses Depreciation
the year × Dep. Rate
2020 18000 × 50% 9000 9000 9000
2021 9000 × 50% 4500 13500 4500
2022 4500 × 50% 2250 15750 2250
2023 2250 × 50% 250 16000 2000

Adjusted to Tk. 250 because ending book value should not be less than expected salvage value.

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Problem 11:
Marium Ceramics purchased a factory machine at a cost of Tk. 18,000 January 1, 2020. Marium
Ceramics expects the machine to have a salvage value of Tk. 2000 at the end of its 4-years useful
life. During its useful life the machine is expected to be 1,60,000 hours. Actual annual hourly use
was :-

[May-2011]

Years Hours

2020 40000

2021 60000

2022 35000

2023 25000

Instructions :-- Prepare depreciation schedules for the following methods

(i) Straight line

(ii) Units of Activity
(iii) Declining balance using double the straight line rate.

Solution:

Tk
Purchase cost of the machine on 01-01-2020 18000
Less: Salvage value at the end of its life of 4 years 2000
Total Depreciable value 16000

(i) Straight line depreciation =16000 ÷ 4 = Tk. 4000

(ii) Units of Activity Method = 16000 x 160000 hours of 4
years Depreciation per hour =
(iii) Double Declining method:
Rate of Normal Depreciation = 100% ÷ 4 = 25%
So Rate of Double Declining = 25% x 2 = 50%

105
 Accrual Basis of Accounting And Adjusting Entries
Accounting methods play a critical role in how businesses recognize their financial transactions.
Two commonly used methods are the accrual basis and cash basis of accounting, with the accrual
method being the most widely accepted under Generally Accepted Accounting Principles (GAAP).
This synopsis explains the accrual basis of accounting, adjusting entries, and how they contribute to
the preparation of accurate financial statements.

Fiscal and Calendar Years

A fiscal year is a 12-month period that a company or government uses for accounting purposes and
for preparing financial statements. A calendar year, by contrast, runs from January 1 to December
31. Businesses may choose a fiscal year that does not coincide with the calendar year for various
reasons, such as aligning with seasonal sales or other industry-specific factors.

Accrual versus Cash-Basis Accounting

 Accrual-Basis Accounting: In the accrual system, revenues and expenses are recognized
when they are incurred, regardless of when cash is received or paid. This method adheres to
the matching principle, which ensures that revenues and expenses are matched in the same
period. For instance, if a company delivers goods in December but receives payment in
January, the revenue is recognized in December under the accrual method.

 Cash-Basis Accounting: The cash basis records transactions only when cash changes
hands. Revenues are recognized when cash is received, and expenses are recorded when
cash is paid. This method is more straightforward but less accurate for depicting the real
financial status of a business, especially if there are significant time lags between providing
services and receiving payments.

Recognizing Revenues and Expenses

Revenue recognition is a critical principle in accrual accounting. According to GAAP, revenue

should be recognized when it is earned, not necessarily when cash is received. Similarly, expenses
are recorded when they are incurred, not when they are paid. This ensures that financial statements
reflect the actual financial condition of a business.

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Example:

If Zaima's business delivers a service on December 30 but receives payment in January, the revenue
for this service must be recognized in December under the accrual method.

The Need for Adjusting Entries

The accrual basis of accounting provides a more accurate reflection of a company’s financial
position than the cash basis. Adjusting entries are essential to ensure that revenues and expenses are
recognized in the correct accounting period. These adjustments align the actual economic events
with the recorded financial information and correct any discrepancies arising from timing
differences. By preparing and using adjusted trial balances, businesses can produce accurate
financial statements that offer valuable insights into their true performance and financial health.

Why Are Adjusting Entries Necessary?

1. To ensure revenue and expense recognition is in accordance with the accrual accounting
system.

2. To correct the balances of assets, liabilities, equity, revenues, and expenses.

3. To prepare accurate financial statements that reflect the true financial position and
performance.

Types of Adjusting Entries

Adjusting entries can be categorized into two main types: deferrals and accruals.

1. Deferrals:

 Prepaid Expenses: These are payments made for expenses in advance. For instance,
paying for rent or insurance in advance would be recorded as an asset. As the service
or time passes, the prepaid expense is converted into an actual expense.

 Example: If Zaima’s business prepays 12 months of rent for 12,000 TK, at the end of
each month, 1,000 TK should be recognized as rent expense, and the prepaid rent asset
should be reduced.

 Unearned Revenues: This occurs when a business receives payment before providing
goods or services. Until the service is delivered, this is considered a liability.
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  Example: If Zaima’s business receives 3,000 TK in December for a service to be
delivered in January, it should record unearned revenue (liability). Once the service is
performed, the liability is reduced, and revenue is recognized.

2. Accruals:

 Accrued Revenues: Revenues earned but not yet received in cash or recorded at the
end of the accounting period.

 Example: If Zaima’s business provides 5,000 TK worth of services on December 31,

but will not receive payment until January, the company must recognize accrued
revenue in December and record it as a receivable.

 Accrued Expenses: Expenses incurred but not yet paid or recorded at the end of the
accounting period.

 Example: If Zaima’s business owes 2,000 TK in wages to employees for work done by
December 31 but pays them in January, the company should record the accrued expense
in December.

Prepare Adjusting Entries for Deferrals

Adjusting entries for deferrals are necessary to convert prepaid expenses and unearned revenues to the
actual amounts incurred or earned during the period.

1. Prepaid Expenses:

o When Zaima's business pays in advance for supplies, rent, or insurance, these are
initially recorded as assets. As the prepaid items are consumed or time passes, the
value is moved from the asset account to an expense account.

o Adjusting Entry Example:

 Debit: Rent Expense 1,000 TK

 Credit: Prepaid Rent 1,000 TK

2. Unearned Revenues:

o Revenue received before delivering goods or services is initially recorded as a

liability. As the company fulfills its obligation, unearned revenue becomes earned
and is transferred to the revenue account.

o Adjusting Entry Example:

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  Debit: Unearned Revenue 3,000 TK

 Credit: Service Revenue 3,000 TK

Prepare Adjusting Entries for Accruals

Accrual adjusting entries ensure that revenues earned and expenses incurred are recorded in the
correct period, even if cash has not been exchanged.

1. Accrued Revenues:

o Revenue earned but not yet received in cash or recorded by the end of the period is
accrued.

o Adjusting Entry Example:

 Debit: Accounts Receivable 5,000 TK

 Credit: Service Revenue 5,000 TK

2. Accrued Expenses:

o Expenses incurred but not yet paid by the end of the accounting period are accrued.

o Adjusting Entry Example:

 Debit: Wages Expense 2,000 TK

 Credit: Wages Payable 2,000 TK

Summary of Basic Relationships

Understanding the relationship between revenues, expenses, and adjusting entries is essential for
accurate financial reporting. Adjusting entries:

 Align the recording of revenues and expenses with the period in which they are incurred.

 Convert certain accounts from balances that represent future economic events (e.g., prepaid
expenses, unearned revenues) into balances that reflect events that have already occurred.

The Nature and Purpose of an Adjusted Trial Balance

An adjusted trial balance is a listing of all the accounts in the general ledger after adjusting entries
have been made. It ensures that total debits equal total credits after adjustments. This balance is

109
critical

110
for preparing accurate financial statements, including the income statement, balance sheet, and cash
flow statement.

Preparing the Adjusted Trial Balance

Steps to prepare the adjusted trial balance:

1. Start by recording the unadjusted balances from the general ledger.

2. Make any necessary adjusting entries for deferrals and accruals.

3. Post these adjusting entries to the general ledger.

4. Finally, prepare the adjusted trial balance, ensuring that total debits equal total credits.

Unadjusted Trial Balance

Below is an Unadjusted Trial Balance as of 31st December 2024.

Account Title Debit (Tk.) Credit (Tk.)

Cash 50,000
Accounts Receivable 20,000
Prepaid Rent 12,000
Supplies 5,000
Equipment 100,000
Accounts Payable 15,000
Unearned Revenue 10,000
Accrued Salaries Payable 8,000
Loan Payable 20,000
Capital (Owner’s Equity) 120,000
Service Revenue 60,000
Salaries Expense 15,000
Rent Expense 9,000
Utilities Expense 5,000
Miscellaneous Expense 2,000
Total 218,000 218,000
The Unadjusted Trial Balance is balanced with Tk. 218,000 on both sides.

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Step 2: Adjusting Entries

We will now do 10 adjusting entries for four categories: Prepaid Expenses, Unearned Revenues,
Accrued Revenues, and Accrued Expenses.

1. Prepaid Expenses Adjustments

 Adjusting Entry 1: Prepaid Rent. Out of Tk. 12,000 prepaid rent, Tk. 3,000 has been
used for December.

o Debit: Rent Expense Tk. 3,000

o Credit: Prepaid Rent Tk. 3,000

 Adjusting Entry 2: Supplies. Tk. 2,000 worth of supplies have been used.

o Debit: Supplies Expense Tk. 2,000

o Credit: Supplies Tk. 2,000

2. Unearned Revenues Adjustments

 Adjusting Entry 3: Unearned revenue. Tk. 5,000 of the unearned revenue has now
been earned.

o Debit: Unearned Revenue Tk. 5,000

o Credit: Service Revenue Tk. 5,000

 Adjusting Entry 4: Unearned revenue for a project. An additional Tk. 3,000 of

unearned revenue is earned in December.

o Debit: Unearned Revenue Tk. 3,000

o Credit: Service Revenue Tk. 3,000

3. Accrued Revenues Adjustments

 Adjusting Entry 5: Accrued Service Revenue. Tk. 4,000 of service performed in

December but not yet billed.

o Debit: Accounts Receivable Tk. 4,000

o Credit: Service Revenue Tk. 4,000

 Adjusting Entry 6: Accrued interest on a customer’s loan for Tk. 2,000.

o Debit: Accounts Receivable Tk. 2,000

o Credit: Interest Revenue Tk. 2,000

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 4. Accrued Expenses Adjustments

 Adjusting Entry 7: Accrued Salaries for Tk. 4,000 not yet paid.

 Debit: Salaries Expense Tk. 4,000

 Credit: Accrued Salaries Payable Tk. 4,000

 Adjusting Entry 8: Accrued utility expenses for December of Tk. 1,500.

 Debit: Utilities Expense Tk. 1,500

 Credit: Accounts Payable Tk. 1,500

 Adjusting Entry 9: Interest on loan accrued for Tk. 1,200.

 Debit: Interest Expense Tk. 1,200

 Credit: Interest Payable Tk. 1,200

 Adjusting Entry 10: Accrued rent for December, Tk. 2,500.

 Debit: Rent Expense Tk. 2,500

 Credit: Rent Payable Tk. 2,500

Step 3: Adjusted Trial Balance

After making these adjusting entries, we prepare the Adjusted Trial Balance as of 31st
December 2024:

Account Title Debit (Tk.) Credit (Tk.)

Cash 50,000
Accounts Receivable 26,000
Prepaid Rent 9,000
Supplies 3,000
Equipment 100,000
Accounts Payable 16,500
Unearned Revenue 2,000
Accrued Salaries Payable 12,000
Loan Payable 20,000
Interest Payable 1,200
Rent Payable 2,500
Capital (Owner’s Equity) 120,000
Service Revenue 72,000

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 Salaries Expense 19,000
Rent Expense 14,500
Supplies Expense 2,000
Utilities Expense 6,500
Interest Expense 1,200
Miscellaneous Expense 2,000
Total 233,200 233,200

Explanation:

1. Prepaid Expenses Adjustments (Rent and Supplies) reduced asset accounts and
increased the related expense accounts.

2. Unearned Revenues Adjustments reduced liabilities (Unearned Revenues) and

increased Service Revenue, recognizing income that was earned.

3. Accrued Revenues Adjustments increased Accounts Receivable and recognized

revenue for services performed but not yet billed.

4. Accrued Expenses Adjustments increased expense accounts (such as Salaries,

Utilities, Interest, and Rent) and related liabilities.

The Adjusted Trial Balance is now balanced at Tk. 233,200 on both sides.

114
 Short Questions

1. Define a transaction in accounting.

2. What are the two conditions for an economic event to be considered a transaction?

3. How does the double-entry system differ from the single-entry system?

4. What is the purpose of the double-entry system?

5. Explain the concept of debits and credits in the double-entry system.

6. What is an account in accounting?

7. Name the five main categories of accounts.

8. Explain the accounting equation.

9. How do debits and credits affect different types of accounts?

10. What are the steps involved in recording a transaction?

11. What is a journal, and what is its purpose?

12. Name different types of journals used in accounting.

13. What is the ledger, and how is it used?

14. Explain the process of posting to the ledger.

15. How financial statements are prepared using accounting information?

16. What is the purpose of a trial balance?

17. What are the key components of a balance sheet?

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 Module C: Analysis of Financial Statements

IBB Syllabus for Module C: Financial Statements, Financial statements according to IFRS.
Types of Financial Statements, Objectives and stakeholders of Financial Statements,
Analysis of Financial statements, Horizontal and Vertical Analysis, Comparative Financial
Statements.

Contents of this Chapter

Financial Statement Analysis

Tools for Financial Statement Analysis:

Classification of Ratios:

Fundamental Ratios

Analysis of Different Ratios

Illustrations

Practical Problems

Short Questions

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 Financial Statement Analysis
Financial statement analysis involves examining an organization's financial reports to gain an
understanding of its financial position. This analysis includes the application of analytical tools and
techniques to financial statements and other relevant data to obtain useful information. The goal of
financial statement analysis is to identify significant relationships and trends in the data to assess
the company’s past performance and current financial position. This information provides insight
into the consequences of prior management decisions made by users of financial statements.

One important use of financial statement analysis is by credit analysts who evaluate the
creditworthiness of borrowers. Credit analysts review a borrower’s current financial statements and
compare them to previous statements to identify changes in the business and areas where changes
have occurred. They also consider projected financial statements and compare the projected
performance to actual results. Additionally, credit analysts use industry averages to compare a
particular business's performance to others in the same industry. This information helps credit
analysts determine a borrower's capability to repay a loan.

Tools for Financial Statement Analysis:

Various tools are used to evaluate the significance of financial statement data. Three commonly
used tools in financial analysis are:

1. Horizontal Analysis, also known as Trend Analysis, evaluates the year-over-year change in
each line item of financial statement data over a period of time. This technique is primarily
used in intra-company comparisons to determine the increase or decrease expressed as either
an amount or a percentage.

The formula to calculate change is: (Current Year Amount – Base Year Amount) / Base Year Amount

2. Vertical Analysis, also known as Common Size Analysis, expresses each item in a financial
statement as a percentage of a base amount. The value of total assets is used as the base
amount for balance sheet items and the value of sales for income statement items. This
analysis is used in both intra-company and inter-company comparisons.

In vertical analysis, each line item is compared to revenue (for income statements) or total assets
(for balance sheets) as a percentage. Key items evaluated include COGS as a percent of revenue,

117
gross

118
profit as a percent of revenue, SG&A as a percent of revenue, interest as a percent of revenue, EBT
as a percent of revenue, tax as a percent of revenue, and net earnings as a percent of revenue.

Sample Balance Sheets using both Horizontal and Vertical Analysis

FY Dec 31,22 Dec 31,23 Dec 31,24 %
Amount Tk. (000) Tk. (000) Tk. (000) TBS
Current Assets

Cash/Bank Balances 7 0 33 1 147 4

L/C margin 5 0 32 1 35 1
Fixed Deposits/Marketable
0 0 40 1 76 2
Securities
Acc. Receivables-Trade 25 1 70 2 200 6
Accounts Receivable - Others 0 0 0 0 0 0
Goods-in-transit 0 0 0 0 0 0
Inventory 88 3 88 3 90 3
Total Inventory 88 3 88 3 90 3
Due from Affiliates - Current 0 0 0 0 0 0
Total Current Assets 125 4 263 8 548 17

Fixed Assets 0 0 0
Gross Fixed Assets 3,766 110 3,818 118 3,892 119
Less: Depreciation 528 15 890 27 1,326 40
Net Fixed Assets 3,238 95 2,928 90 2,566 78

Non-Current Assets 0 0 0
Due from Principal, Emp,
40 1 40 1 150 5
Affiliate, & Investment
Advance Income Tax 0 0 0 0 0 0
Deferred Charges,Pre-pymts &
10 0 14 0 16 0
Adv.
Total Non-Current Assets 3,288 96 2,982 92 2,732 83
0 0
Total Assets 3,413 100 3,245 100 3,280 100

Short Term Bank Borrowings 300 9 142 4 161 5

Current Funded Portion of Term
100 3 100 3 100 3
Debt
Account Payable - Trade 29 1 9 0 21 1
Accrued Items + Dues to
60 2 48 1 7 0
Directors
Provision for Income Tax/Def. I/T 11 0 15 0 20 1
Advance Payment 0 0 0 0 0 0
Dividends Payable 17 0 26 1 36 1
Total Current Liabilities 517 15 340 10 345 11

Long Term Liabilities 0 0 0

Term Loan 1,450 42 1,350 42 1,250 38
Total Liabilities 1,967 58 1,690 52 1,595 49
Net Worth 0 0 0
Paid up Capital 1,250 37 1,250 39 1,250 38

119
Directors Loan(subordinated) 0 0 0 0 0 0
Retained Earnings 100 3 180 6 274 8
Reserves 96 3 125 4 161 5
Net Worth 1,446 42 1,555 48 1,685 51
Liabilities & Net Worth 3,413 100 3,245 100 3,280 100

Sample Income Statements using both Horizontal and Vertical Analysis

Dec Dec Dec

FY Ended
31,2022 31,2023 31,2024
12 Months 12 12 Months
Period 12 Months %
Months
in (000) in (000) in (000)
Amount Sales
Taka Taka Taka

Gross Sales 1,132 100 1,245 100 1,325 100

Less:VAT 0 0 0 0 0 0
Net Sales 1,132 100 1,245 100 1,325 100
Add: Other Operating
0 0 0 0 0 0
Income
Total Sales Revenue 1,132 100 1,245 100 1,325 100
Less :Cost of Goods Sold 681 60 676 54 642 48
Gross Profit/Revenue 451 40 569 46 683 52
0 0 0 0 0 0 0
Less: Selling. Gen. &
37 3 44 4 47 4
Admin. Expenses
0 0 0 0 0 0 0
Total Operating Profit
414 37 525 42 636 48
(EBITDA)
0 0 0 0 0 0 0
Less: Depreciation 287 25 362 29 436 33
Less: Interest Expense 13 1 13 1 14 1
0 0 0 0
0 0 0 0
Profit Before Taxes &
114 10 150 12 186 14
Extra Item
Add: Other Income 0 0 0 0 0 0
0 0 0 0 0 0 0
Income Taxes 11 1 15 1 20 2
0 0 0 0 0 0 0
Net Profit 103 9 135 11 166 13
Reserve 23 2 29 2 36 3
Cash
17 2 26 2 36 3
Withdrawals/Dividend
0 0 0 0
Total Changes In
63 6 80 6 94 7
Retained Earnings

120
 Ratio Analysis expresses the relationship between selected items of financial statement
data. Financial ratios are designed to evaluate the financial performance of a firm and can be
expressed as a percentage, rate, or simple proportion. Ratio Analysis is used in all three
types of comparisons: intra-company, inter-company, and industry average and ideal ratio.

Classification of Ratios:

1) Classification based on the statement from which the ratios are calculated:

a) Balance Sheet ratios: Based on balance sheet figures,

b) Profit and Loss account ratios: Based on profit and loss account figures,

c) Profit and Loss account and balance sheet ratios: Based on figures from both statements.

2) Classification based on the users of the ratios:

a) From the shareholders point of view

b) From short-term creditors point of view

c) From long-term creditors point of view

3) Classification based on their functions:

a) Liquidity ratios

b) Activity or Efficiency ratio

c) Leverage ratios

d) Coverage ratios

e) Profitability ratio

f) Market value measure

Fundamental Ratios: According to financial spread sheet (FSS) there are six types of ratios,
which are as follows:

1) Growth Ratio: It measures the company’s potentiality and performance. It also measures
whether the company will survive or not. Like sales growth, asset growth etc.
121
 2) Profitability Ratio: It indicates the efficiency of the unit in generating surplus. In order to
have a ratio, we can compare to the factors that regulate the quantum of profit directly like
sales and the total asset or equity. Profitability ratios measure the income or operating success
of an enterprise. It measures the income or operating success of an enterprise for a given period
of time. For example: gross profit margin, net profit margin etc.

3) Coverage Ratio: These ratios measure the ability of a company to generate cash to pay
interest and principal repayments. Like: interest coverage ratio.

4) Activity Ratio: It has been widely accepted that the profitability of an enterprise to a
large extent depends on its efficient asset utilization or activity performed. Activity ratios
measure how efficiently the firm employs the assets. These ratios are also known efficiency
ratio or asset management ratio.

5) Liquidity ratio: The liquidity or short-term solvency of an organization can be measured

with the help of current ratio and quick ratio. Liquidity implies to the ability of an
organization to pay off its short-term obligations with the current assets.

6) Leverage Ratio: It measures the extent to which a firm has been financed by debt. It is
also known as debt management ratios. For example: Debt ratio.

Analysis of Different Ratios:

1) Growth Ratios:

Name of Ratio Components or Formula Use

1. Sales Growth, Sales [Current Year Sales- Previous Rule of Thumb = Higher
% Year Sale) / Previous Year is better, comparing
Sale] x 100 with previous years
or
industry average
2. Net Sales Growth, [Current Year Net Sales - Previous Rule of Thumb = Higher
Composite % Year Net Sale) / Previous Year is better, comparing
Net Sale] x 100 with previous years
or
industry average
3. Net Income Growth, [Current Year Net Income - Rule of Thumb = Higher
% Previous Year Net Income) is better, comparing
/ Previous Year Net with previous years
Income] x 100 or
industry average
4. Total Assets Growth, [Current Year Assets - Rule of Thumb = Higher
% Previous Year Assets) / is better,
Previous Year Assets] x 100 comparing with

122
 previous years or
industry average
5. Total Liabilities [Current Year Liabilities - Rule of Thumb =
Growth, % Previous Year Liabilities) / Lower is better,
Previous Year Liabilities] x comparing with
100 previous years or
industry average
6. Net Worth Growth, % [Current Year Worth - Rule of Thumb =
Previous Year Worth) / Higher is better,
Previous Year Worth] x 100 comparing with
previous years or
industry average

2) Profitability Ratios:

Name of Ratio Components or Formula Use

Indicates the efficiency of
1. Gross Margin, Composite % (Gross Profit / Sale) x management in turning over
100 the company’s goods at a
profit.
Rule of Thumb = 25% to
30%, higher is better
2. Selling, General and (Selling, General and Rule of Thumb = Lower is
Administrative Expenses, % Administrative better, comparing with
Expenses) / Sale) x 100 previous years.
3. Cushion (Gross Profit - {Gross Profit - (Selling, Rule of Thumb = Higher is
Selling, General and General and Admin better.
Administrative Expenses), % Exp)} / Sale) x 100
4. Depreciation Amortization, % (Depreciation / Sale) x Rule of Thumb = Lower is
100 better
5. Operating Profit Margin, % (EBITDA / Sale) x 100 It is used to measure the
general profitability of the
concern.
Rule of Thumb = 20% to
25%, higher is better.
6. Interest Expense, % (Interest / Sale) x 100 Rule of Thumb = Lower is
better

7. Operating Margin, % (Profit before tax and Rule of Thumb = Higher is

extra income / Sale) x better
100
It is used to measure the
8. Net Margin, % ( Net Profit / Sale) x 100 overall profitability of the
concern.
Rule of Thumb = Higher is
better
9. Return on Assets, % ( Net Profit / Assets) x It is used to measure the
100 profitability of investment.

123
 Rule of Thumb = Higher is
better
10. Return on Equity, % (Net Profit / Net worth) It is used to measure the
x 100 earning power on
shareholders’ equity.
Rule of Thumb = Higher is
better
11. Dividend Payout Rate, % (Dividend / Net Profit) x Rule of Thumb = Lower is
100 better to long term creditors
12. Dividend Yield Ratio (Annual Dividend Per The dividend yield is
Share / Stock Price Per a financial ratio that shows
Share) x 100 how much a company
pays out in dividends each
year
relative to its stock price.

3) Coverage Ratios:

Name of Ratio Components or Formula Use

This ratio shows how

1. Interest Coverage (x) ( EBIT / Total Interest) many times the interest
charges are covered by
EBIT.

Rule of Thumb = Higher

is better

It reflects the company’s

2. Debt Service Coverage (x) [EBITDA / (Total Interest + ability to serve long-

CMLTD)] term debt.

Rule of Thumb = Must

be greater than one.

4) Activity Ratios:

Name of Ratio Components or Formula Use

1. Receivables in days (Accounts Receivable / Shows average number of days

Sales) x 365 receivables are outstanding before
being collected.

124
 Rule of Thumb = Lower is better.
Should not more than 1/3rd greater
than the company’s term of sales.

(Accounts Payable / Cost Indicates the average length of time

2. Payables in days of Goods Sold) x 365 trade debt is outstanding.

Rule of Thumb = higher indicates the

creditors are not paid in time and
lower shows that the business is not
taking the full advantage of credit
period allowed by the creditors.

Shows average number of days

3. Inventory in days (Inventory / Cost of inventory is held before it is turned

Goods Sold) into accounts receivables through

sales.
x 365
Rule of Thumb = Lower is better
compare with previous years.

4. Sales to Total (Sales / Total Assets) Shows how efficiently assets are used
Assets, (x) to generate sales.

Rule of Thumb = Higher is better

5) Liquidity Ratios:

Name of Ratio Components or Formula Use

1. Working Capital Current Assets – Current It is a measure of company’s

Liabilities liquidity position.
Rule of Thumb =Larger is better.
Cash and Cash Equivalent + Measures ability to meet current
2. Quick Ratio Receivables / Current Liabilities debts with most liquid (quick) assets.
Rule of Thumb = 1:1, higher is
better.

125
 Current Assets / Current Measures ability to meet current
3. Current Ratio Liabilities debts with current assets.
Rule of Thumb = 2:1, higher is
better.
4. Sales to Net (Sales / Net Working Capital) Rule of Thumb = Higher is better
Working Capital

6) Leverage Ratios:

Name of Ratio Components or Formula Use

1. Total Liabilities / Total Liabilities / Net Worth Indicates the extent to which debt
Net Worth (x) financing is used relative to equity
financing. Rule of Thumb = 1:1,
higher indicates less protection for
lenders.

2. Affiliation (Affiliation Exposure /

Exposure / Net Net Worth) x 100
Worth, %

3. Total Liabilities / Total Liabilities /

(Net Worth – (Net Worth –Affiliates)

Affiliates) (x)

Major Ratios used in the Internal Credit Risk Rating system (ICRRS)

1. Leverage (10%)

a) Debt to Tangible Net Worth (DTN): Total Interest-Bearing Liabilities or Financial Debt
/ Total Tangible Net Worth

b) Debt to Total Assets (DTA): Total Interest-Bearing Liabilities or Financial Debt /

Total Assets

2. Liquidity (10%)

a) Current Ratio (CR): Current Assets / Current Liabilities

126
 b) Cash Ratio (Cash): Cash and Easily Marketable Securities / Current Liabilities

3. Profitability (10%)

a) Net Profit Margin (NPM): Net Profit after Tax / Net Sales

b) Return on Assets (ROA): Net Profit after Tax / Total Assets

c) Operating Profit to Operating Assets (OPOA): Operating Profit / Average

Operating Assets

4. Coverage (15%)

a) Interest Coverage (IC): Earnings Before Interest and Tax / Interest Expense

b) Debt Service Coverage Ratio (DSCR): Earnings Before Interest Tax

Depreciation Amortization / Debts to be Serviced

c) Operating Cash Flow to Financial Debt Ratio (OCDR): Operating Cash Flow
/ Financial Debt

d) Cash Flow Coverage Ratio (CCR): Cash Flow from Operation / Debts to be Serviced

5. Operational Efficiency (10%)

a) Stock Turnover Days (STD): (Total Inventory / Cost of Goods Sold) * 360

b) Trade Debtor Collection Days (TDCD): (Total Accounts Receivable / Sales) * 360

6. Earning Quality (5%)

a) Operating Cash Flow to Sales (OCFS): Operating Cash Flow / Sales

b) Cash Flow Based Accrual Ratio (CFAR): (Net Income - (Cash Flow from
Operating Activities + Cash Flow from Investing Activities)) / Average Net Operating
Assets

Illustration 1: ABC Company had the following financial information for the year 2024:

Sales: Tk 5,000,000

Cost of Goods Sold: Tk 3,000,000

Net Income: Tk 500,000

Total Assets: Tk 10,000,000

Total Liabilities: Tk 4,000,000

Shareholders' Equity: Tk 6,000,000

127
 Interest Expense: Tk 100,000

Income Tax Expense: Tk 50,000

Dividends Paid: Tk 200,000

Calculate the following ratios:

1. Gross Profit Margin: Gross Profit Margin = (Sales - COGS) / Sales Gross Profit Margin
= (Tk 5,000,000 - Tk 3,000,000) / Tk 5,000,000 Gross Profit Margin = 0.4 or 40%

2. Net Profit Margin: Net Profit Margin = Net Income / Sales Net Profit Margin = Tk 500,000
/ Tk 5,000,000 Net Profit Margin = 0.1 or 10%

3. Return on Assets: Return on Assets = Net Income / Total Assets Return on Assets =
Tk 500,000 / Tk 10,000,000 Return on Assets = 0.05 or 5%

4. Return on Equity: Return on Equity = Net Income / Shareholders' Equity Return on Equity
= Tk 500,000 / Tk 6,000,000 Return on Equity = 0.0833 or 8.33%

5. Debt-to-Equity Ratio: Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity

Debt- to-Equity Ratio = Tk 4,000,000 / Tk 6,000,000 Debt-to-Equity Ratio = 0.6667 or
66.67%

6. Interest Coverage Ratio: Interest Coverage Ratio = Earnings Before Interest and Taxes
(EBIT) / Interest Expense EBIT = Net Income + Interest Expense + Income Tax Expense
EBIT = Tk 500,000 + Tk 100,000 + Tk 50,000 EBIT = Tk 650,000 Interest Coverage
Ratio
= Tk 650,000 / Tk 100,000 Interest Coverage Ratio = 6.5

7. Dividend Yield: Dividend Yield = Dividends Paid / Share Price Assuming a share price
of Tk 50, Dividend Yield = Tk 200,000 / (Tk 50 x 10,000) Dividend Yield = 4%

Illustration 2: XYZ Ltd. provides you with their financial statements for the years 2023 and 2024.
Use the financial statements below to calculate the following ratios:

Balance Sheet:

Particulars 2023 (Taka) 2024 (Taka)

Cash and Cash Equivalents 10,000 15,000

Accounts Receivable 20,000 25,000

128
 Inventory 25,000 30,000

Total Current Assets 55,000 70,000

Property, Plant & Equipment 200,000 225,000

Accumulated Depreciation (50,000) (60,000)

Total Assets 205,000 235,000

Accounts Payable 15,000 20,000

Short-term Loans Payable 20,000 15,000

Total Current Liabilities 35,000 35,000

Long-term Debt 100,000 115,000

Total Liabilities 135,000 150,000

Common Stock 30,000 30,000

Retained Earnings 40,000 55,000

Total Stockholders' Equity 70,000 85,000

Total Liabilities and Stockholders' Equity 205,000 235,000

Income Statement:

Particulars 2023 (Taka) 2024 (Taka)

Revenue 150,000 175,000

Cost of Goods Sold 90,000 100,000

Gross Profit 60,000 75,000

Selling, General & Administrative Expenses 40,000 45,000

Operating Income 20,000 30,000

Interest Expense 5,000 6,000

Net Income Before Taxes 15,000 24,000

Income Tax Expense 3,000 5,000

Net Income 12,000 19,000

129
Liquidity Ratios:

Current Ratio 2021 = 55,000 / 35,000 = 1.57

130
Current Ratio 2022 = 70,000 / 35,000 = 2.00

Quick Ratio 2021 = (55,000 - 25,000) / 35,000 = 0.86

Quick Ratio 2022 = (70,000 - 30,000) / 35,000 = 1.14

Note that in 2022, the Quick Ratio is the same as in 2021, indicating that the increase in inventory
has been matched by an increase in cash and accounts receivable, so the company's liquidity
position has remained relatively stable.

Solvency Ratios:

Debt-to-Equity Ratio 2021 = 135,000 / 70,000 = 1.93

Debt-to-Equity Ratio 2022 = 150,000 / 85,000 = 1.76

Debt Ratio 2021 = 135,000 / 205,000 = 0.66

Debt Ratio 2022 = 150,000 / 235,000 = 0.64

These solvency ratios provide an indication of XYZ Ltd.'s ability to meet its long-term obligations.
A lower debt-to-equity ratio and debt ratio generally indicate that the company has a stronger
financial position and is less risky. In this case, the company's debt-to-equity ratio has decreased
from 2021 to 2022, which may indicate an improvement in the company's financial position.
However, it's important to compare these ratios with industry benchmarks and historical trends for a
more meaningful analysis.

Profitability Ratios:

For 2021:

Gross Profit Margin = (60,000 / 150,000) x 100 = 40%

Net Profit Margin = (12,000 / 150,000) x 100 = 8%

Return on Assets (ROA) = (12,000 / 205,000) x 100 = 5.85%

Return on Equity (ROE) = (12,000 / 70,000) x 100 = 17.14%

Operating Profit Margin = (20,000 / 150,000) x 100 = 13.33%

131
For 2022:

Gross Profit Margin = (75,000 / 175,000) x 100 = 42.86%

Net Profit Margin = (19,000 / 175,000) x 100 = 10.86%

Return on Assets (ROA) = (19,000 / 235,000) x 100 = 8.09%

Return on Equity (ROE) = (19,000 / 85,000) x 100 = 22.35%

Operating Profit Margin = (30,000 / 175,000) x 100 = 17.14%

These ratios provide insight into the profitability of XYZ Ltd. over the two-year period. We can see
that the company's gross profit margin improved slightly from 2021 to 2022, as did its net profit
margin. Both ROA and ROE also improved, indicating that the company is using its assets and
equity more efficiently to generate profits. The operating profit margin also improved significantly,
indicating that the company is managing its costs effectively. Overall, these ratios suggest that XYZ
Ltd. is becoming more profitable over time.

Efficiency Ratios:

Inventory Turnover:

2021: Cost of Goods Sold / Average Inventory = 90,000 / ((25,000 + 30,000)/2) = 2.57 times

2022: Cost of Goods Sold / Average Inventory = 100,000 / ((30,000 + 25,000)/2) = 3.20 times

Accounts Receivable Turnover:

2021: Net Credit Sales / Average Accounts Receivable = 150,000 / ((20,000 + 25,000)/2) = 6 times

2022: Net Credit Sales / Average Accounts Receivable = 175,000 / ((25,000 + 20,000)/2) = 8.75
times

Days Inventory Outstanding (DIO):

2021: 365 days / Inventory Turnover = 365 / 2.57 = 142 days

2022: 365 days / Inventory Turnover = 365 / 3.20 = 114 days

Days Sales Outstanding (DSO):

2021: 365 days / Accounts Receivable Turnover = 365 / 6 = 61 days

2022: 365 days / Accounts Receivable Turnover = 365 / 8.75 = 42 days

132
Note: The above ratios are based on the assumption that the company's financial statements are
prepared on an accrual basis. Additionally, these ratios should be analysed in conjunction with other
financial ratios and qualitative factors to gain a complete understanding of the company's
performance and financial position.

Leverage Ratios:

Debt-to-Equity Ratio: Debt-to-Equity Ratio = Total Debt / Total Equity

Total Debt = Short-term Loans Payable + Long-term Debt Total Equity = Common Stock +
Retained Earnings

For 2021: Total Debt = 20,000 + 100,000 = 120,000 Total Equity = 30,000 + 40,000 = 70,000
Debt-to-Equity Ratio = 120,000 / 70,000 = 1.71

For 2022: Total Debt = 15,000 + 115,000 = 130,000 Total Equity = 30,000 + 55,000 = 85,000
Debt-to-Equity Ratio = 130,000 / 85,000 = 1.53

Debt Ratio: Debt Ratio = Total Debt / Total Assets

For 2021: Total Debt = 20,000 + 100,000 = 120,000 Total Assets = 205,000 Debt Ratio = 120,000 /
205,000 = 0.59

For 2022: Total Debt = 15,000 + 115,000 = 130,000 Total Assets = 235,000 Debt Ratio = 130,000 /
235,000 = 0.55

These ratios can help evaluate the company's leverage and reliance on debt financing.

Coverage Ratios:

Interest Coverage Ratio = Operating Income / Interest Expense

For 2021: Interest Coverage Ratio = 20,000 / 5,000 = 4

For 2022: Interest Coverage Ratio = 30,000 / 6,000 = 5

Debt Service Coverage Ratio = Operating Income / (Interest Expense + Principal Payments)

133
Assuming no principal payments were made during the year, the Debt Service Coverage Ratio will
be the same as the Interest Coverage Ratio.

For 2021: Debt Service Coverage Ratio = 4

For 2022: Debt Service Coverage Ratio = 5

These ratios can provide insight into the company's ability to cover its interest expense and debt
obligations. A higher ratio indicates a better ability to cover these costs, while a lower ratio may
indicate potential financial strain. It's important to compare these ratios to industry averages and
historical performance to fully understand the company's financial position.

Practical Problems

Problem 1: Comparative Balance Sheets of Surma Corporation are presented

below: [May-2011 Slightly modified]

Surma Corporation
Balance Sheet
December, 31
2023 2022
Particulars Taka Taka
Cash 4300 3700
Accounts Receivable 21200 23400
Inventory 10000 7000
Land 20000 26000
Building 70000 70000
Accumulated depreciation -15000 -10000
110500 120100
Accounts payable 12370 31100
Common stock 75000 69000
Retained Earnings 23130 20000
110500 120100

134
Surma's 2023 income statement included net sales of Tk. 1,00,000 cost of goods sold of Tk. 60,000 and
net income of Tk.15000

Compute the following ratios for 2023:-

(a) Current Ratio;

(b) Acid Test Ratio;

(c) Receivable Turnover;

(d) Inventory Turnover

(e) Profit Margin;

(f) Asset Turnover;

(g) Return on Assets;

(h) Return on common stockholders’ equity;

(i) Debt to total assets ratio.

Solution:
Current
Assets 4,300+ 21,200+10,000 35500
(a) Current Ratio=
Current 1237 12370
= = =2.87%:1
Liabilities 0
Quick Assets

4,300+21,200 25500
(b) Acid Test Ratio=
Current Liabilities = 1237 =12370 =2.06%:1
0 100000
Net Credit Sales
= 21200+23400 =100000= 4.48times
Average Net Receivable 2 22300
(c) Receivable Turnover=

= 365 ÷ 4.48= 81.47 days

22300
Average Receivable = = 81.39 days
or, =
22,300
Average Daily Sales 273.973

1,00,000÷365

Sold
(d) Inventory Turnover=Cost of goods
60,000

=8,500
10,000+7,000 60,000
Average Inventory
= 2 =7.06 times

15,000
(e) Profit Margin on sales= Net Income
×100 =
×100 =15%
Net Sales 1,00,000
1,00,000
Net
1,10,500+ 1,20,100 1,00,000
Sales
(f) Asset Turnover=
= = ×100= 86.73%
135
 Average Asset 2 1,15,300
Net Income
= 15,000 ×100= 6.50%
Average Asset 2,30,000
(g) Return on Assets=

Net Income (Assumed after Tax)

Average Common Stock
(h) Return on common stockholders equity= ×100=
15,000
75,000+ 69,000
×100= 15,000×100= 20.53%
2 72,000

136
 Total Debt
×100= 12,370 ×100= 11.19%
Total Asset 1,10,500
(i) Debt to total assets ratio=

Problem 2:

Meghna Company has the following comparative Balance Sheet Data:

(November 2010, slightly modified)

Meghna Company
December, 31
2023 2022
Taka Taka
Cash 15000 30000
Accounts Receivable (net) 65000 60000
Inventory 60000 50000
Plant Assets 205000 180000
345000 320000
Accounts payable 50000 60000
Mortgage payable (15%) 100000 100000
Common stock (10 per) 140000 120000
Retained Earnings 55000 40000
345000 320000

Additional Information for 2023 –

i. Net Income was Tk. 25,000

ii. Sales on accounts were Tk. 4,20,000; Sales Returns and Allowances were Tk. 20,000
iii. Cost of goods sold was Tk. 1,98,000
iv. Net cash provided by operating activities was Tk. 33.000)

Requirements:

Compute the following ratios at December 31, 2023 and make comment on those-

Solution:
137
 Current Assets 15000+65000+60000 140000
Current 5000 =50000
(a)
Current Ratio= = = 2.8:1
Liabilities 0

The Standard ratio is 2: 1 and the calculated ratio is 2.8: 1 which exceeds the standard. So the
financial position of Meghna Company is sound and ability to pay the current liabilities.
Quick Assets
(b) Acid Test Ratio=
15000+65000 80000
Current Liabilities = 5000 =50000 =1.6:1
0

The standard ratio is 1:1 and the calculated ratio is 1.6: I which exceeds the stander. So the financial
position of Meghna Company is sound and it has ability to the current liabilities.
400000
Net Credit
65000+60000 400000
Sales
(c) Receivables Turnover= = = = 6.4times
Average Net Receivable 2 62500

= 365 ÷ 6.4=57 days

Normally credit is allowed for 60 to 90 days. This ratio shows 57 days. So the cash collection from
Receivable is satisfactory.

Net Cash Provided by operating

activities 33,000
(d)
Net Sales =4,00,00 =8.25%
Cash Return on sales =
0
33,00
0
(e) Net Cash Provided by operating activities 1,50,000+ 1,60,000 33,000
Cash
0.2129Debt Average = = = =
Average Total 2 1,55,000
liabilities
times
Gross Profit Sales−Cost of goods sold 4,00,000 −1,98,000
Gross Profit Ratio =Net Sales Net =4,00,000
(f)
= ×100= 50.5%
Sales

Standard ratio in this case 20% to 30% and the calculated ratio is 50.5%. So it is exceptionally
satisfactory.
Net Profit After Tax 25,000

Net Sales 4,00,000

(g) Net Profit Ratio = ×100= ×100= 6.25%

Standard ratio in this regard is 5% to 10% and the calculated ratio is 6.25% which execeds the
lower limit of standard. This ratio is not highly satisfactory.

Problem 3: Hasin Company has the following comparative balance sheet data:-
[November 2006, slightly modified]
Hasin Company
Balance Sheet
138
 December 31
2023 2022
Taka Taka
Cash 15000 30000
Accounts Receivable (net) 65000 60000
Inventory 60000 50000
Plant Assets (net) 205000 180000
345000 320000

Accounts payable 50000 60000

Mortgage payable (15%) 100000 100000
Common stock (10 per) 140000 120000
Retained Earnings 55000 40000
345000 320000
Additional information’s for 2023.

i. Net income was Tk. 25,000.

ii. Sales on accounts were Tk. 4,20.000. Sales returns and allowances were Tk.20,000.
iii. Cost of goods sold was Tk. 1,98,000.
iv. Net cash provided operating was Tk. 33,000.

Requirements: Computer following ratios Dec. 31, 2023

(a) Current ratio;

(b) Acid test;
(c) Receivable turnover
(d) Cash return on sales
(e) Cash debt average
(f) Gross profit and Net profit ratio

Solution:

Current Assets (cash + Rec.+ Inv.) 140000

Current Liabilities 50000
(a)
Current Ratio= == =2.8:1

Quick Assets
Current Liabilities = 80000=1.6:1
(b) Acid Test Ratio=
50000
Receivable (net)
RCredit Sales (Net) 65,000
(c) Receivables Turnover=
× 360=4,00,0 × 360 = 59 days
00

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May be taken 365 days in lieu of 360 days

= 365 ÷ 6.4=57 days

Normally credit is allowed for 60 to 90 days. This ratio shows 57 days. So the cash collection from
Receivable is satisfactory.

Net Cash Provided by operating

activities 33,000
(d)
Net Sales =4,00,0 = 0.0825 : 1=8.25%
Cash Return on sales =
00

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 Cash
Debt(Mortgage 15,000
(e) Cash Debt Coverage =
payable) =1,00,0 = 0.15 : 1
00
Gross Profit 4,00,000 −1,98,000

Net Sales 4,00,000

(f) Gross Profit to Sales = = ×100= 50.5%

Net Profit to Sales = Net Profit

×100= 25,000
×100= 6.25%
Net 4,00,000
Sales
Problem
4:
Calculate the important ratios which you think significant in analyzing financial trend of the
business: [May-June-2005, slightly
modified]
Assets 2022 2023
Taka Taka
Cash 15380 29020
Accounts Receivable 11260 11710
Inventory 56160 49460
Fixed Assets, net of Dep. 217200 219810
300000 310000
Liabilities and Equity
Accounts payable 20000 18000
Notes payable 12750 7500
Debentures 100000 100000
Retained Earnings 67250 84500
Capital Stock 100000 100000
300000 310000
Sales 180000 200000
Solution:

A. Liquidity Ratios:
Current Assets
Current Liabilities
i. Current Ratio=
82,800
32,750
For 2022= =2.53 : 1

For 2023= 30,190 =3.53 : 1

25,500
Liquidit Assets
Current Liabilities
ii. Liquidity Ratio=

For 2022= 26,640 = 0.81 : 1

32,750

For 2023= 40,730 = 1.60 : 1

25,500

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B. Solvency Ratios
Total liabilities
Equity funds
i. Debt Equity Ratio =

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 For 2022= 1,32,750 = 0.79 : 1
1,67,250

For 2023= 1,25,500 = 0.68 : 1

1,84,500

Alternative way

Debt Equity Ratio = Long term Debts

Equity funds
i.

100,000
1,67,250
For 2022= = 0.5979 : 1

For 2023= 1,00,000 = 0.5420 : 1

1,84,500

C. Activity Ratios
Ssles
Debtors
i. Debtors Turnover Ratio =

For 2022= 1,80,000 = 16 times (App)

1,260

For 2023= 2,00,000 = 17.08 times (App)

11,710

On the basis of the above ratios the financial trend of the business is increasing gradually.

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 Short Questions:

1) What is the primary objective of financial statement analysis?

2) How can financial statement analysis provide insights into management decisions?
3) How do credit analysts utilize financial statement analysis in evaluating a borrower’s
creditworthiness?
4) What is the difference between horizontal analysis and vertical analysis?
5) How do you calculate the year-over-year change in a specific financial statement item
using horizontal analysis?
6) What base amounts are typically used in vertical analysis for balance sheets and
income statements?
7) How is ratio analysis used to compare a company’s financial performance?
8) What type of ratio is used to evaluate a company’s ability to generate cash for debt
repayment?
9) How would you calculate sales growth using a growth ratio?
10) Why a higher total asset growth is considered favorable?
11) What does a gross margin ratio tell you about a company's profitability?
12) What is the formula for calculating the operating profit margin, and what does it
indicate about a company’s performance?
13) What is the purpose of an interest coverage ratio, and why is a higher ratio better?
14) How does the "Receivables in Days" ratio help a company manage its receivables?
15) Why is a lower "Inventory in Days" ratio generally considered better?
16) What is the current ratio, and how is it used to assess a company’s liquidity?
17) How does the quick ratio differ from the current ratio in evaluating short-term solvency?
18) What does the debt-to-equity ratio measure, and why is it important for lenders?
19) What factors are assessed in the Internal Credit Risk Rating System (ICRRS) to
evaluate a company’s profitability?

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 Module D: Financial Statements

Syllabus for Module D: Financial Statements for different entities, Statement of

Comprehensive Income, Statement of Financial Position, Statement of Changes in equity,
Statement of cash flow.

Contents of this Chapter

Financial Statements
Objectives of Financial Statements
Components of Financial Statements
Example Balance Sheet of a Trading Firm
Example Balance Sheet of a Manufacturing Firm
Income Statement (IS)
Structure of income statement
Income Statement for a Trading Firm
Income Statement for a Manufacturing Firm
.Income Statement for a Service-Rendering Firm
Statement of Cash Flows
The Purpose/ Objectives/ Importance of the Statement of Cash Flows
Sections of Cash Flow Statement
Sources of Data to prepare the Cash Flow Statement

Cash Flows Should Be Presented Gross, Not Net

Operating Activities- Direct or Indirect Method?
Cash Flow from Operating Activities: Direct Method
Cash Flow from Operating Activities - Indirect Method
Direct Exchange Transactions
Format and Example of Cash Flow Statement
Interpretation of the Statement of Cash Flows
Real Financial Statements of Manufacturing Firms (Square Pharmaceuticals PLC):
Real Financial Statements of Service Rendering Firms (Grammeen Phone PLC):
Practical Problems
Short Question

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 Financial Statements

Financial Statements are formal, structured reports that detail the financial activities and
status of a business, individual, or entity over a specific period. These records provide a
comprehensive view of the organization’s financial condition, addressing both short-term
liquidity and long-term solvency. They serve as the primary output of the accounting
process, facilitating the communication of critical financial data to various stakeholders.

Financial Statements (FS) are the culmination of the accounting cycle, enabling the
transmission of financial insights to relevant users, such as management, investors,
creditors, and regulatory bodies.

Objectives of Financial Statements

The main objective of financial statements is to provide useful financial information to

various users for making informed decisions related to providing resources to the entity.
These statements serve as a crucial tool in answering key questions about a company’s
financial health, performance, and cash flow management.

Key Objectives:

1. Assess Financial Status:

 What is the company’s current financial status? Financial statements help users assess
the current financial position of a company by presenting its assets, liabilities, and equity
through the balance sheet. This provides a snapshot of the company's financial standing
at a particular point in time.

2. Evaluate Operating Results:

 What were the company’s operating results for the period? The income statement (or
profit and loss statement) provides insights into the company’s performance by showing
its revenues, expenses, and profits over a specific period. This helps users determine
whether the company is profitable and how efficiently it is managing its operations.

3. Analyse Cash Flow:

 How did the company obtain and use cash during the period? The cash flow statement
shows the cash inflows and outflows from operating, investing, and financing activities. It

146
 answers how much cash was generated or used and how cash flows are being managed,
providing insights into the company's liquidity and ability to meet short-term obligations.

Components of Financial Statements

1. Balance Sheet/Statement of Financial Position

2. Income Statement

3. Statement of Changes in Equity

4. Cash Flow Statement and

5. Notes, comprising a summary of significant accounting policies and other explanatory notes.

Balance Sheet/Statement of Financial Position: An In-depth Analysis

The balance sheet, also known as the Statement of Financial Position, is a critical financial
statement that provides an overview of a company’s financial condition at a specific point in time. It
is a cornerstone of financial reporting, offering key insights into the resources (assets) that a
company controls and the obligations (liabilities) it owes. Additionally, it reveals the owners’
equity, which represents the residual interest in the company's assets after deducting all liabilities.

This document is essential for both internal and external users, including management, investors,
creditors, and regulators, as it provides a clear view of the company’s financial standing. The
balance sheet adheres to the fundamental accounting equation:

Assets=Liabilities + Owners’ Equity

This equation must always remain balanced, which means that every asset of the business is either
financed by debt (liabilities) or the owners' capital (equity).

Key Questions Addressed by the Balance Sheet

The balance sheet provides answers to fundamental financial questions such as:

 What are the company’s resources?

These are the assets the company controls and can use for future economic benefits.

 What are the company’s obligations?

These are the liabilities that the company must settle, representing claims from creditors and
lenders.

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 What are the company’s net assets?
This is the owners’ equity, which reflects the residual interest in the company’s assets after
deducting liabilities.

Main Components of the Balance Sheet

The balance sheet is structured into two main sections:

1. Assets (Uses of Funds)

2. Liabilities and Owners’ Equity (Sources of Funds)

These sections provide insights into how a company manages its resources and obligations.

Assets (Uses of Funds)

Assets are the resources that the company controls, which are expected to generate future
economic benefits. They are categorized into current assets and non-current assets.

 Current Assets: These assets are expected to be converted into cash, sold, or consumed within
one year or an operating cycle, whichever is longer. Common current assets include:

 Cash: Money readily available for use.

 Accounts Receivable: Amounts due from customers for goods or services sold on credit.

 Inventory: Goods that are held for sale in the ordinary course of business.

 Prepaid Expenses: Payments made in advance for services or goods to be received in the future.

 Non-current (Fixed) Assets: These assets are long-term resources that the company expects to
hold beyond one year. They include:

 Long-term Investments: Investments that the company plans to hold for more than one year.

 Property, Plant, and Equipment (PPE): Tangible assets used in operations, such as
land, buildings, machinery, and furniture.

 Intangible Assets: Non-physical assets like goodwill, patents, and trademarks.

 Other Non-current Assets: Assets like long-term receivables or deferred expenses.

Liabilities and Owners’ Equity (Sources of Funds)

This section details the claims against the company’s assets. Liabilities are claims from creditors,
while equity represents the owners’ residual interest.
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 Liabilities: Liabilities are obligations that arise from past transactions and are expected to result
in an outflow of economic resources. They are classified into current liabilities and non-current
liabilities.

 Current Liabilities: These are obligations expected to be settled within one year or an
operating cycle. Examples include:

 Accounts Payable: Amounts owed to suppliers for goods or services.

 Notes Payable: Short-term borrowings due within the next year.

 Accrued Expenses: Expenses that have been incurred but not yet paid, such as salaries or taxes.

 Non-current Liabilities: Obligations that are due beyond one year. Examples include:

 Long-term Notes Payable: Borrowings that will be repaid after more than one year.

 Long-term Bank Loans: Loans with repayment terms extending beyond one year.

 Debentures: Bonds issued by the company as a means of long-term financing.

 Owners’ Equity: Owners' equity represents the residual interest in the company's assets
after liabilities have been settled. It consists of:

 Paid-up Capital: The capital invested by the shareholders in exchange for ownership.

 Retained Earnings: The portion of profits that is retained in the business instead of
being distributed as dividends.

 Reserves: Funds set aside from profits for specific purposes, such as future expansion
or contingencies.

Example Balance Sheet of a Trading Firm

In a trading firm, the balance sheet typically reflects a higher proportion of current assets, as these
businesses primarily engage in buying and selling goods without significant production activities.
The company may hold large amounts of inventory and accounts receivable due to its trading
activities.

Here is an example balance sheet of a trading firm:

ABC Trading Co.

PLC Balance Sheet
As of December 31, 202X

149
 Liabilities and Owners'
Assets Taka Taka
Equity
Current Assets Current Liabilities
Cash 250,000 Accounts Payable 150,000
Accounts Receivable 400,000 Notes Payable 100,000
Inventory 600,000 Accrued Expenses 50,000
Prepaid Expenses 50,000 Total Current Liabilities 300,000
Total Current Assets 1,300,000
Non-current Assets Non-current Liabilities
Long-term Investments 200,000 Long-term Notes Payable 200,000
Property, Plant & Equipment 150,000 Long-term Bank Loan 300,000
Total Non-current
Goodwill 100,000 500,000
Liabilities
Total Non-current Assets 450,000
Owners' Equity
Paid-up Capital 600,000
Retained Earnings 350,000
Reserves 0
Total Owners' Equity 950,000
Total Assets 1,750,000 Total Liabilities and Equity 1,750,000

In this case, the trading firm has a higher proportion of current assets like inventory and receivables,
and its liabilities are primarily short-term due to the nature of its business cycle.

Example Balance Sheet of a Manufacturing Firm

In contrast, a manufacturing firm typically has a significant amount of fixed assets, as it

involves production activities that require investment in property, plant, and equipment. These
firms also have higher non-current liabilities because they often finance their fixed asset
purchases through long-term loans or bonds.

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Here’s an example balance sheet of a manufacturing firm:

XYZ Manufacturing Co. PLC

Balance Sheet
As of December 31, 202X
Liabilities and Owners'
Assets Taka Taka
Equity
Current Assets Current Liabilities
Cash 100,000 Accounts Payable 300,000
Accounts Receivable 200,000 Notes Payable 150,000
Inventory 400,000 Accrued Expenses 100,000
Prepaid Expenses 50,000 Total Current Liabilities 550,000
Total Current Assets 750,000
Non-current Assets Non-current Liabilities
Long-term Investments 300,000 Long-term Notes Payable 400,000
Property, Plant & Equipment 1,200,000 Long-term Bank Loan 500,000
Intangible Assets (Goodwill) 100,000 Debentures 300,000
Total Non-current Assets 1,600,000 Total Non-current Liabilities 1,200,000
Owners' Equity
Paid-up Capital 700,000
Retained Earnings 300,000
Total Owners' Equity 1,000,000
Total Assets 2,350,000 Total Liabilities and Equity 2,350,000

This balance sheet illustrates the financial structure of a typical manufacturing firm, which requires
significant investment in fixed assets, financed through both equity and long-term liabilities.

Income Statement (IS)

The Income Statement, also known as the Profit and Loss Statement (P&L), reports the financial
performance of a company over a specified period. It summarizes the company’s revenues and
expenses, showing how much profit or loss the company generated. The income statement is a
critical financial statement that answers questions such as:

 What revenues did the company generate through its operations?

 What costs were incurred to generate these revenues?

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  What was the company’s net income or net loss during the period?

An income statement typically includes several key sections: revenues, cost of goods sold, gross
profit, operating expenses, other income and expenses, and net income.

Structure of the Income Statement

The income statement follows a structured format, starting with revenues and ending with the
calculation of net income (or net loss). Each section represents a key component of the company’s
operations and financial performance.

1. Revenues/Income

Revenue refers to the income generated from the company’s core business activities, such as the sale
of goods or services. It represents the gross inflow of economic benefits that increase the owner’s
equity. Revenues can be classified into different types, such as:

 Sales Revenue: The total amount earned from selling goods or providing services.

 Other Income: Income that is not directly related to the company’s main operations, such
as interest income or dividends.

Revenue is the first item on the income statement and provides a starting point for understanding the company’s
performance.

2. Expenses

Expenses represent the outflows of resources incurred by the company to generate revenues. They are
the costs of operating the business and are classified into several categories:

 Cost of Goods Sold (COGS): This includes the direct costs of producing or purchasing the
goods sold by the company. For service companies, it may be the cost of providing
services.

 Operating Expenses: These include general, administrative, and selling expenses, such
as salaries, rent, and depreciation.

 Other Expenses: These are non-operating expenses like interest on loans or losses on
asset sales.

The key goal of the income statement is to calculate net income, which is derived by subtracting
152
expenses from revenues.

153
3. Gross Profit

Gross profit is the difference between sales revenue and cost of goods sold (COGS). It
represents the profit earned from the company’s core business activities before accounting for
operating and non-operating expenses.

Gross Profit=Sales−COGS

Gross profit provides insight into how efficiently a company is managing its production or purchase
costs relative to its sales.

4. Operating Profit (EBIT)

Operating Profit, also known as Earnings Before Interest and Taxes (EBIT), is the profit the
company generates from its operations after deducting operating expenses but before accounting for
interest and taxes.

Operating Profit (EBIT)=Gross Profit−Operating Expenses

EBIT shows the company's profitability from its core business operations and is a key indicator of
operating efficiency.

5. Other Income and Expenses

This section includes non-operating income and expenses, such as:

 Interest Revenue: Income earned from investments.

 Interest Expense: Costs incurred from borrowing (e.g., interest on loans).

 Other Gains/Losses: Gains or losses from selling assets or foreign exchange fluctuations.

These items are subtracted or added to EBIT to arrive at the final net income.

6. Net Income or Net Loss

The bottom line of the income statement is net income or net loss, which is calculated by
subtracting total expenses (including taxes, interest, and other non-operating expenses) from total
revenues.

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Net Income=Total Revenue−Total Expenses

A positive result represents a net profit, while a negative result indicates a net loss.

Typical Income Statement Formats

Let’s now explore the format of income statements for different types of businesses: a trading firm,
a manufacturing firm, and a service-rendering firm.

1. Income Statement for a Trading Firm

A trading firm primarily engages in buying and selling goods. The income statement for a trading
firm will typically include cost of goods sold (COGS) and operating expenses.

ABC Trading Co. PLC

Income Statement for the Year Ended December 31, 202X (Tk.)
Particulars Taka
Revenue
Sales xxx
Less: Cost of Goods Sold (COGS)
Beginning Inventory xxx
Add: Purchases xxx
Add: Transportation-In xxx
Less: Purchase Returns xxx
Cost of Goods Available for Sale xxx
Less: Ending Inventory xxx
Total COGS xxx
Gross Profit xxx
Operating Expenses
Salaries Expense xxx
Depreciation Expense xxx
Rent Expense xxx
Miscellaneous Expenses xxx
Total Operating Expenses xxx
Operating Income (EBIT) xxx

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 Other Income and Expenses
Add: Interest Revenue xxx
Less: Interest on Notes Payable xxx
Net Income Before Taxes xxx
Less: Taxes xxx
Net Income xxx

2. Income Statement for a Manufacturing Firm

A manufacturing firm has more complex cost structures, including direct material, direct labour,
and manufacturing overhead. The Cost of Goods Sold (COGS) is calculated by accounting for the
production process.

XYZ Manufacturing Co. PLC

Income Statement for the Year Ended December 31, 202X (Tk.)
Particulars Taka
Revenue
Sales xxx
Less: Cost of Goods Sold (COGS)
Beginning Raw Material Inventory xxx
Add: Raw Material Purchases xxx
Less: Ending Raw Material Inventory xxx
Direct Material Used xxx
Add: Direct Labor xxx
Add: Factory Overhead xxx
Total Manufacturing Cost xxx
Add: Beginning Work-in-Process Inventory xxx
Less: Ending Work-in-Process Inventory xxx
Cost of Goods Manufactured xxx
Add: Beginning Finished Goods Inventory xxx
Less: Ending Finished Goods Inventory xxx
Total COGS xxx
Gross Profit xxx
Operating Expenses

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 Selling Expenses xxx
General and Administrative Expenses xxx
Operating Income (EBIT) xxx
Other Income and Expenses
Add: Interest Revenue xxx
Less: Interest on Notes Payable xxx
Net Income Before Taxes xxx
Less: Taxes xxx
Net Income xxx

3. Income Statement for a Service-Rendering Firm

A service firm does not sell physical goods, so the income statement does not include COGS. The
focus is on operating expenses directly associated with providing services.

Shiblu Service Co. PLC

Income Statement for the Year Ended December 31, 202X (Tk.)
Particulars Taka
Revenue
Service Revenue xxx
Less: Operating Expenses
Salaries and Wages xxx
Office Supplies xxx
Depreciation Expense xxx
Rent Expense xxx
Miscellaneous Expenses xxx
Total Operating Expenses xxx
Operating Income (EBIT) xxx
Other Income and Expenses
Add: Interest Revenue xxx
Less: Interest on Notes Payable xxx
Net Income Before Taxes xxx
Less: Taxes xxx
Net Income xxx

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 Statement of Cash Flows

A statement of cash flows is a financial statement which summarizes cash transactions of a business
during a given accounting period and classifies them under three heads, namely, cash flows from
operating, investing and financing activities. It shows how cash moved during the period. The term
cash as used in the statement of cash flows refers to both cash and cash equivalents. A cash flow
statement provides relevant information in assessing a company's liquidity, quality of earnings and
solvency.

The Purpose/ Objectives/ Importance of the Statement of Cash Flows

The purpose of the statement of cash flows is to highlight the major activities that directly and
indirectly impact cash flows and hence affect the overall cash balance. Managers focus on cash for
a very good reason―without sufficient cash balance at the right time; a company may miss golden
opportunities or may even fall into bankruptcy.

The cash flow statement answers questions that cannot be answered by the income statement and a
balance sheet. For example, a statement of cash flows can be used to answer questions like where
did the company get the cash to pay a dividend of nearly Tk.140 million in a year in which,
according to the income statement, it lost more than Tk.1 billion? To answer such questions,
familiarity with the statement of cash flows is required.

The cash flow statement is a valuable analytical tool for managers as well as for investors and
creditors, although managers tend to be more concerned with forecasted statements of cash flows
that are prepared as a part of the budgeting process.

The Cash flow statement can be used to answer crucial questions such as the following:

1. Is the company generating sufficient positive cash flows from its ongoing operations to
remain viable?

2. Will the company be able to repay its debts?

3. Will the company be able to pay its usual dividends?

4. Why is there a difference between net income and net cash flow for the year?

5. Ability to meet the unforeseen situation and to take advantage of new business opportunities

6. To identify and assess the sources and uses of cash during a period.

7. To help detection of Frauds in the accounts

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 8. To facilitate the effective comparison

For the statement of cash flows to be useful to managers and others, companies must employ a
common definition of cash. It is also important that a statement be constructed using consistent
guidelines for identifying activities that are sources of cash and uses of cash. The proper
definition of cash and the guidelines to use in identifying sources are discussed in the coming
paragraphs.

Definition of Cash

In preparing a statement of cash flows, the term cash is broadly defined to include both cash and cash
equivalents. Cash equivalents consist of short-term, highly liquid investments such as treasury bills,
commercial paper, and money market funds that are made solely to generate a return on temporary
idle funds. Instead of simply holding cash, most companies invest their excess cash reserves in
these types of interest-bearing assets that can be easily converted into cash. These short-term liquid
investments are usually included in marketable securities on the balance sheet. Since such assets are
equivalent to cash, they are included with cash in preparing a statement of cash flows

Sections of Cash Flow Statement

The cash flow statement is usually divided into three sections: Operating, investing and
financing activities.

Operating Activities

Operating activities involve the cash effects of transactions that enter into the determination of
net income, such as cash receipts from sales of goods and services and cash payments to
suppliers and employees for the acquisition of inventory and expenses. Generally speaking,
this includes all transactions affecting current assets. It also includes all transactions affecting
current liabilities except for issuing and repaying a note payable. Operating activities also
include changes in noncurrent balance sheet accounts that directly affect net income such as
the Accumulated Depreciation and Amortization account. Cash flows from operating
activities can be computed using two methods. One is the Direct Method and the other
Indirect Method.

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Investing Activities

Investing activities involve acquiring or disposing of noncurrent assets and include acquiring
or selling property, plant, and equipment; acquiring or selling securities held for long-term
investment, such as bonds and stocks of other companies; and lending money to another entity
and the subsequent collection of the loan. However, changes in noncurrent assets that directly
affect net income, such as depreciation and amortization charges, are classified as operating
activities.

Financing Activities

Borrowing from creditors or repaying creditors as well as transactions with the company’s
owners such as obtaining capital from owners and providing them with a return on, and a
return of their investment are classified as financing activities. For example, when a company
borrows money by issuing a bond, the transaction is classified as a financing activity.
However, transactions with creditors which affect the net income are classified as operating
activities. For example, interest on the company’s debt is included in operating activities
rather than financing activities because interest is deducted as an expense in determining net
income. In contrast, dividend payments to owners do not affect net income and therefore are
classified as financing rather than operating activities.

Most changes in current liabilities are considered to be operating activities unless the
transaction involves borrowing money directly from a lender, as with a note payable, or
repaying such as debt. Transactions involving accounts payable, wages payable, and taxes
payable are included in operating activities rather than financing activities since these
transactions occur on a routine basis and involve the company’s suppliers, employees, and the
government rather than lenders.

Some cash flows relating to investing or financing activities are classified as operating
activities. For example, receipts of investment income (interest and dividend) and payment of
interest to lenders are classified as operating activities. Conversely, some cash flows relating
to operating activities are classified as investing or financing activities. For example, the cash
received from the sale of property, plant, and equipment at a gain, although reported in the
income statement, is classified as an investing activity, and effects of the related gain would
not be included in net cash flow from operating activities. Likewise, a gain or loss on the
payment of the debt would generally be part of the cash outflow related to the repayment of
160
the amount borrowed, and therefore it is a financing activity.

161
 Below is the typical classification of cash receipts and payments according
to operating, investing and financing activities.

Activities Source
1 Operating Activities:
Cash inflows:
From sales of goods or services.
From interest and dividends
Cash outflows: Income Statement / Current
To suppliers for inventories. Assets and Liabilities Items
To employees for services.
To the government for taxes.
To lenders for interest.
To others for expenses.
2 Investing Activities:
Cash inflow:
From the sale of property, plant and equipment.
From the sale of debt or equity securities of other
entities.
From the collection of principles on loans to other Generally Long -term Asset
entities. Items
Cash Outflows:
To purchase property, plant and equipment.
To purchase debt or equity securities of other entities.
To make loans to other entities.
3 Financing Activities:
Cash inflows:
From the sale of equity securities.
Generally Long-term Liability
From issuance of debt (bonds and notes).
and Equity Items
Cash outflows:
To stockholders as dividends
To redeem long-term debt or reacquire capital stock.

Sources of Data to prepare the Cash Flow Statement

Unlike the major financial statements, the cash flow statement is not prepared from the adjusted
trial balance. The information to prepare this statement usually comes from three sources:

1. Comparative balance sheets provide the amount of the changes in assets, liabilities, and
equities from the beginning to the end of the period.

162
 2. Current income statement data help the reader determine the amount of cash provided by
or used by operations during the period.

3. Selected transaction data from the general ledger provide additional detailed information
needed to determine how cash was provided or used during the period.

Preparing the statement of cash flows from the data sources above involves three major steps:

Step 1-. Determine the change in cash:

This procedure is straightforward because the difference between the beginning and the ending cash
balance can be easily computed from an examination of the comparative balance sheet.

Step 2. Determine the net cash flow from operating activities:

This procedure is complex. It involves analyzing not only the current year's income statement but also
comparative balance sheets and selected transition data.

Step 3. Determine net cash flows from investing and financing activities:

All other changes in the balance sheet accounts must be analyzed to determine their effects on cash.

Other Issues in Preparing the Cash Flow Statement

We must consider several other issues before we can illustrate the preparation of a cash flow statement
that would be acceptable for external financial reporting. These issues are (1) whether the statement
should be presented gross or net basis, (2) whether operating activities should be presented using
the direct or indirect method, and (3) whether direct exchanges should be reported on the statement
of cash flows.

Cash Flows Should Be Presented Gross, Not Net

For both financing and investing activities, items on the statement of cash flows should be presented in
gross amounts rather than in net amounts. To illustrate, suppose that Mr. Karim purchases Tk. 450
million in the property during the year and sells other property for Tk. 200 million. Instead of
showing the net change of Tk. 250 million, the company must show the gross amounts of both the
purchases and the sales. The purchases would be recorded as a use of cash, and the sales would be
recorded as sources of cash. Similarly, if Abbas receives Tk. 120 million from the issuance of long-
term bonds and then pays out Tk. 40 million to retire other bonds, the two transactions must be
reported separately on the statement of cash flow rather than being netted against each other.
However, the gross method of reporting does not extend to operating activities, where debits and
credits to an account are ordinarily netted against each other on the statement of cash flows. For
163
example, if Karim adds Tk.

164
500 million to its accounts receivable as a result of sales during the year and Tk. 420 million of
receivables is collected, only the net increase of Tk. 80 million would be reported on the statement
of cash flows.

Operating Activities- Direct or Indirect Method?

The net result of the cash inflows and outflows arising from operating activities is known formally
as the net cash provided by operating activities. This figure can be calculated by either the
direct or the indirect method.

Cash Flow from Operating Activities: Direct Method

The cash flows from operating activities can be prepared using two different methods known as
the direct method and the indirect method. The direct method to calculate cash flow from operating
activities involves the determination of various types of cash receipts and payments such as cash
receipts from customers, cash paid to suppliers, cash paid for salaries, etc. and then putting them
together under the cash flow from the operating section of cash flow statement. These figures are
calculated using the beginning and ending balances of various accounts of the business and the net
increase or decrease in the account. The exact formulas to calculate various cash inflows and
outflows vary. The most important ones are given below:

Formulas
Cash Receipts from Customers =
+ Net Sales
+ Beginning Accounts Receivable
− Ending Accounts Receivable

Cash Payments to Suppliers =

+ Purchases
+ Ending Inventory
− Beginning Inventory
+ Beginning Accounts Payable
− Ending Accounts Payable

Cash Payments to Employees =

+ Salaries Expense
+ Beginning Salaries Payable

165
 - Ending Salaries Payable

Cash Payments for Purchase of Prepaid Assets =

+ Expired Rent, Expired Insurance etc.
+ Ending Prepaid Rent, Prepaid Insurance etc.
− Beginning Prepaid Rent, Prepaid Insurance etc.

Interest Payments =
+ Interest Expense
+ Beginning Interest Payable
- Ending Interest Payable

Income Tax Payments =

+ Income Tax Expense
+ Beginning Income Tax Payable
- Ending Income Tax Payable

In the formulas given above it is assumed that accounts receivable are only used for credit
sales. It is also assumed that all sales are on credit. If there are cash sales as well, then receipts
from cash sales must be included in the cash receipts from customers to obtain a correct
figure of cash flow from operating activities.

Similarly, it is assumed that accounts payable are used merely for purchases on account and
that all purchases are on credit. If there are cash purchases as well, then cash payments for
them must be included in the cash paid to suppliers. It is important to note that there may be
receipts & payments other than those discussed above.

Once all the cash inflows and outflows from operating activities are calculated, they are
added to the operating section of cash flows to obtain the net cash flow from operating
activities.

The following example shows the format and calculation of cash flow from operating
activities using the direct method.

Example 1
Prepare the cash flows from the operating activities section of the cash flow statement by the direct
method using the following information:
December 31 2024 2023

166
 Accounts Receivable Tk.34,130 Tk. 28,410

Prepaid Rent 20,000 25,000

Prepaid Insurance 6,800 6,000
Inventory 23,030 15,450
Accounts Payable 14,590 31,300
Salaries Payable 8,310 5,120
Interest Payable 700 360
Income Tax Payable 2,340 2,000

Year Ended December 31 2024

Net Sales 104,970
Salaries Expense 8,610
Rent Expense 5,000
Insurance Expense 3,200
Interest Expense 1,650
Tax expense 1,700
Purchase
50,000

Solution:
Cash Flow from Operating Activities:
Cash Receipts
From Customers (1) Tk.99,250
Cash Payments
To Suppliers (2) −74,290
To Employees (3) −5,420
For Purchase of Prepaid Assets (4) −4,000
Interest (5) −1,310
Income Tax (6) −1,360
Net Cash Flow from Operating Activities Tk. 12,870

Working Notes
1) Net sales + Beginning Account Receivable – Ending Account Receivable = Tk.
(104,970 + 28,410 - 34,130)= Tk.99,250
2) Purchase + Ending Inventory - Beginning Inventory+ Beginning Accounts Payable-
Ending Accounts Payable =Tk. (50,000+23,030 - 15,450 + 31,300 -14,590) = Tk.74,290

167
3) Salaries Expense + Beginning Salaries Payable- Ending Salaries Payable =Tk.(8,610+
5,120 - 8,310)= Tk.5,420
4) Expired Rent, Expired Insurance etc. + Ending Prepaid Rent, Prepaid Insurance etc.-
Beginning Prepaid Rent, Prepaid Insurance etc. Tk. (5,000 +3,200 +20,000 + 6,800 -
25,000 - 6,000) =Tk.4,000
5) Interest Expense + Beginning Interest Payable - Ending Interest Payable
=Tk.(1,650+360 – 700) = Tk. 1,310
6) Income Tax Expense + Beginning Income Tax Payable - Ending Income Tax Payable
=Tk.(1,700+2000- 2,340 ) = Tk.1,360

Cash Flow from Operating Activities - Indirect Method

In the indirect method, the net income figure from the income statement is used to calculate the
amount of net cash flow from operating activities. Since the income statement is prepared on an
accrual basis in which revenue is recognized when earned and not when received therefore net
income does not represent the net cash flow from operating activities and it is necessary to adjust
net income for those items which affect it although no actual cash is paid or received against them.

Formula

The following is the indirect method formula to calculate net cash flow from operating activities:

Cash Flows from Operating Activities:

Net Income
+ Non-Cash Expenses:
(Depreciation, Depletion & Amortization Expenses)
+ Non-Operating Losses:
(Loss on Sale of Non-Current Assets)
− Non-Operating Gains:
(Gain on Sale of Non-Current Assets)
+ Decrease in Current Assets:
(Accounts Receivable, Prepaid Expenses, Inventory etc.)
− Increase in Current Assets
+ Increase in Current Liabilities:
(Accounts Payable Accrued Liabilities, Income Tax Payable etc.)
− Decrease in Current Liabilities
= Net Cash Flow from Operating Activities

168
The following example shows the format of the cash flows from the operating activities section of
the cash flows statement prepared using the indirect method:

Example 2
Prepare the cash flows from the operating activities section of the cash flow statement by the
indirect method using the following information:
Net Income Tk.7,000
Depreciation Expense 1,000
Increase in Accounts Receivable 4,400
Increase in Prepaid Rent 7,000
Decrease in Prepaid Insurance 1,300
Increase in Accounts Payable 14,000
Increase in Wages Payable 1,000
Decrease in Income Tax Payable 700
Gain on Sale of Equipment 1,800

Solution:
Cash Flows from Operating Activities:
Net Income Tk.7,000
Depreciation Expense 1,000
Gain on Sale of Equipment −1,800
Increase in Accounts Receivable −4,400
Increase in Prepaid Rent −7,000
Decrease in Prepaid Insurance 1,300
Increase in Accounts Payable 14,000
Increase in Wages Payable 1,000
Decrease in Income Tax Payable −700
Net Cash Flow from Operating Activities Tk.10,400

Direct Exchange Transactions

Companies sometimes enter into direct exchange transactions in which balanced sheet items are
swapped. For example, a company might issue common stock that is directly exchanged for the
property. Or a company might induce its creditors to swap their-term debt for common stock. Or a
company might acquire equipment under a long-term lease contract offered by the seller.

169
Direct exchange transactions are not reported on the statement of cash flows. However, such direct
exchange transactions are disclosed in a separate schedule that accompanies the statement.

Format and Example of Cash Flow Statement

Following is a Cash Flow Statement prepared using the indirect method:

ABC Company PLC

Cash Flow Statement
For the Year Ended Dec 31, 2015
Cash Flows from Operating Activities:
Net income Tk.489,000
Depreciation Expense 112,400
Loss on Sale of Equipment 7,300
Gain on Sale of Land −51,000
Increase in Accounts Receivable −84,664
Decrease in Prepaid Expenses 8,000
Decrease in Accounts Payable −97,370
Decrease in Accrued Expenses −113,860
Net Cash Flow from Operating Activities Tk.269,806

Cash Flows from Investing Activities:

Sale of Equipment Tk.89,000
Sale of Land 247,000
Purchase of Equipment −300,000
Net Cash Flow from Investing Activities 36,000

Cash Flows from Financing Activities:

−Tk.90,00
Payment of Dividends
0
Payment of Bond Payable −200,000
Net Cash Flow from Financing Activities −290,000
Net Change in Cash Tk.15,806
Beginning Cash Balance 319,730
Ending Cash Balance Tk.335,536

170
Interpretation of the Statement of Cash Flows

The completed statement of cash flows of ABC Company PLC provides a very favourable picture.
The net cash flow from operations is a healthy Tk. 269,806. This positive cash flow permitted the
company to make substantial additions to its equipment and to pay off a substantial portion of its
bond payable, if similar conditions prevail in the future, it can continue to finance substantial
growth from its cash flows without the necessity of raising debt or selling stock.

When interpreting a statement of cash flows, it is particularly important to scrutinize the net cash
provided operating activities; this figure provides a measure of how successful the company is in
generating cash continuously. A negative cash flow from operating activities would usually be a
sign of fundamental difficulties. A positive cash flow from operations is necessary to avoid
liquidating assets or borrowing money just to sustain day-to-day operations.

Real Financial Statements of Manufacturing Firms (Square Pharmaceuticals PLC):

171
172
173
174
175
Real Financial Statements of Service Rendering Firms (Grameen Phone PLC):

176
177
178
 Practical Problems

Practical Problem # 01
The balance of Surjaban Traders for 2024 along with additional information as of 30 June
was as follows:
[Dec- 2013, slightly modified
Accounts Titles Debit Credit
Accounts Receivable 290000
Purchases 810000
Allowance for Doubtful Debts 5000
Inventories (July 1, 2023) 60000
Furniture 100000
Accumulated Depreciation-Furniture 40000
Buildings 1400000
Accumulated Depreciation-Buildings 300000
Goodwill 50000
Bad Debts 60000
Salaries 220000
Interest Expenses 10000
Rent Expenses 60000
Freight In 70000
Dividend Paid 150000
Sales 2000000
Interest Income 10000
Bonds Payable 255000
Capital (6000 Shares of Tk. 100 each) 600000
Retained Earnings (July 1, 2023) 70000
3280000 3280000

Adjustments on June 30, 2024 are as follows:-

(i) Inventory on June 30, 2024 is Tk. 1,00,000.
(ii) Depreciation on furniture @ 10%, Buildings @ 5%.
(iii) The allowances for doubtful accounts is to be increased to a balance of Tk. 8,000.
(iv) Accrued salaries Tk. 20,000, accrued interest on bonds Tk. 10,000.
(v). Income taxes are estimated to be 50% of the income before tax.
(vi) Half of rent expenses is to be considered prepaid.

179
Required:
Prepare a multiple-step income statement, statement of owners’ equity and balance sheet.
Solution:

Surjaban Traders
Income Statement (multiple
step) For the year ended 30 June,
2024
Details Tk TK
Sales 2000000
Less: Cost Of Goods Sold:
Opening/ Beginning Inventory/ Stock 60000
Purchase 810000
Freight In 70000
880000
Cost of Goods Available For Sale 940000
Less: Ending/ Closing Inventory 100000
840000
Cost of Goods Sold 1160000
Gross Margin/Gross Profit
Less: Operating Expenses
Salaries Expenses 220000
(+) Accrued 20000
240000
Rent Expenses 60000
(-) Prepaid 30000
30000
Bad Debts 60000
(+) New Allowances For 8000
68000
(-) Old Allowances For 5000
Bad Debts Expenses 63000
Depreciation of Furniture 10000
Depreciation of Building 70000
180
 80000
Total Operating Expenses 413000
Operating Income 747000
Add: Non-operating Income
Interest Income 10000
757000
Less: Non-operating Expenses:
Interest Expense 10000
Accrued 10000
20000
Net Income Before Tax 737000
Less: Income Tax (50% of 7,37,000) Payable 368500
Net Income after Tax 368500

Surjaban Traders
Statement of Retained Earnings
For the year ended 30 June, 2024
Details Tk
Opening Balance 70000
Add: Net Income after Tax 368500
438500
Less : Dividend Paid 150000
Balance (Retained Earnings) transfer to Balance 288500

181
Surjaban Traders'

182
 Balance Sheet (Classified)
30 June, 2024
Details Debit Credit
Assets
Current Assets :
Accounts Receivable 290000
Less: New Allowances for Bad Debts 8000
282000
Closing Inventory 100000
Prepaid Rent 30000
Fixed Assets :
Building 1400000
Less Accumulated Depreciation 370000
1030000
Furniture 100000
Less : Accumulated Depreciation 50000
50000
Intangible Assets :
Goodwill 50000
Liabilities and Equity
Current Liabilites :
Tax Payable 368500
Salaries Payable 20000
Interest Payable 10000
Long Term Debt :
Bond Payable 255000
Capital/ Common Stock 600000
Retained Earnings (From Retained Earnings Statement) 288500
1542000 1542000

Adjusting Entry

No. Description L.F Dr. Cr.

1. Closing Inventory 100000
Cost of goods sold 100000
2-a Depreciation-Furniture 10000
183
 10000
Accumulated Depreciation-Furniture
2-b Depreciation-Building 70000
Accumulated Depreciation-Build 70000
3 Bad Debt Expense 8000
Allowances for Bad Debt 8000
4-a Salaries Expense 20000
Salaries Payable 20000
4-b Interest Expense 10000
Interest Payable 10000
5 Income Tax 368500
Income Tax Payable 368500

6 Prepaid Rent Expense 30000

Rent Expense 30000

Closing Entry
No. Description L.F Dr. Cr.
1 Sales Revenue 2000000
Interest Income 10000
Income Summary 2010000
2 Income Summary 1273000
Cost of Goods Sold 840000
Salaries Expenses 2400000
Rent Expense 30000
Depreciation Expenses-Furniture 10000
Depreciation Expenses-Buildings 70000
Interest Expense 20000
Bad Debt Expenses 63000

184
Practical Problem # 02
Prepare (a) Income Statement, (b) Statement Owner’s Equity and (c) Balance Sheet of Sumi
Enterprise based on its the trial balance as on December 31, 202x and additional information given
below.
Sumi Enterprise
Trial Balance
December 31,
202x
Particulars Debit Credit
Capital 20930
Drawing 10200
Fees Earned 12415
Rent Expense 3600
Utilities Expense 2715
Misc. Expense 435
Cash 2425
Account Receivable 5000
Supplies 1870
Prepaid Insurance 620
Office Equipment 32650
Accumulated Depreciation 9700
Accounts Payable 925
Unearned Fees 1250
Total 71930 71930

Additional Information.
(1) Accrued fees earned but not recorded at 31, December, 202x, was Tk. 1,000.
(2) Unearned fees on 31, December 202x were Tk. 750.
(3) Depreciation of equipment during the year was Tk. 1,950.
(4) Wages accrued but not paid at 31, December 202x was Tk. 140.
(5) Supplies on hand at 31 December, 202x were Tk. 480.
(6) Insurance premium expired during the year were Tk. 315.

185
Solution: (a)
Sumi Enterprise
Income Statement
For the year ended December 31, 202x
Taka Taka
Fees Earned 39125
Add: Accrued Fees 1000
Add: Unearned Fees Earned 500
40625
Operating and commercial expenses:
Supplies 1870
Less: Unused 480
1390
Insurance Expense 315
Depreciation On Office Equipment 1950
Wages 12415
Add: Due 140
12555
Rent Expense 3600
Utilities Expense 2715
Miscellaneous Expense 435
22960
Net Profit-Transferred to statement of equity 17665

(b)

186
 Sumi Enterprise
Balance Sheet
31 December, 202x
Debit Credit
Assets
Fixed Assets:
Office Equipment 32650
Less Accumulated Depreciation (9700+1950) 11650
21000
Current Assets :
Cash 2425
Accounts Receivable 5000
Supplies 480
Prepaid Insurance 305
Accrued Fees 1000
Long-Term Liabilities and Owner's Equity
Current Liabilities:
Accounts Payable 925
Unearned Fees 750
Accrued Wages 140
Owner's Equity
Owner's Equity 20930
Less Drawing 10200
10730
Add: Net Income 17665 28395
30210 30210

(c) Sumi Enterprise

Statement of Owner's Equity
For the year ended December 31, 202x
Taka
Owner's Equity 20930
Less: Drawing 10200
10730
Add: Net Income 17665
28395

187
Practical Problem # 03
Prepare an Income statement, a Owner’s Equity Statement and Balance Sheet of Babul Trading for
the year ended December 31, 202x on the basis of the adjusted balances as shown below:

Babul Trading
Adjusted Trail
Balance December 31,
202x
Particular Taka
Babuls Capital 1-1-202x 2165000
Drawings 150000
Cash and Bank 163100
Stock & Stores 189000
Accounts Receivable 177500
Prepaid Insurance 60000
Accrued Payroll 75000
Accounts Payable 200000
Plant & Machinery 1750000
Accumulated Depreciation 17500
Sales 412500
Cost of goods sold 256250
Salary 16650
Depreciation 17500
Misc. Expenses 2500

Solution:
Babul Trading
Income Statement
For the year ended December 31, 202x
Particulars Taka Taka
Sales 412500
Less: Cost of goods sold 256250
Gross Profit 156250
Operating expenses:
Salary 16650

188
 Rent 20000
Depreciation 17500
Misc. Expenses 2500
Total Expenses 56650
Net Income 99600

Babul Trading
Statement of Owner’s Equity
December 31, 202x
Particulars Taka
Capital as on January 1, 202x 2165000
Add: Net Income 99600
2264600
Less: Drawings 150000
Equity as on December 31, 202x 2114600

Babul Trading
Balance Sheet
December 31,
202x
Particulars Taka Taka
Assets
Current Assets :
Cash and Bank 163100
Accounts Receivable 177500
Stock and Stores 189000
Prepaid Insurance 60000
Total Current Assets 589600
Fixed Assets :
Plant and Machinery 1750000
Less : Accumulated Depreciation 17500
Total fixed Assets 1732500
Total Assets 2322100

Liabilities

189
 Current Liabilities:
Accounts Payable 200000
Accrued Payroll 7500
Total Current Liabilities 207500
Equity 2114600
Total Liabilities and Equity 2322100

Practical Problem # 04
The Trial Balance of Mozammel and Co. is as follows:
Mozammel & Co.
Trial Balance
December 31, 2024
Debit Credit
Furniture 6500 Equity 45000
Accounts Receivable 26000 Purchases Returns 1300
Cash in hand 900 Sales 180900
Cash at Bank 14000 Rent Income 1000
Building 20000 Commission Income 200
Drawing 3600 Allowance for Bad Debts 150
Allowance for
Purchase 155300 Depreciation
Sales Return 1900 Furniture Tk. 200
Merchandise Inventory 12000 Building Tk. 500 700
Carriage In 1000 Account Payable 12450
Office Salaries Expenses 6000 Notes Payable 3000
Loan on Mortgage
Rent & Taxes Expense 1200 (Payable on 30/06/2025) 10000
Sales Salaries Expense 2200
Carriage on Sales 1400
Advertising Expense 700
Insurance Expense 1800
Sundry office Expense 200
254700 254700

190
Adjusting Data:
(1) Interest on Mortgage loan accrued Tk. 500.
(2) Depreciation be provided. Furniture Tk. 200, Building Tk. 500. (3) Commission accrued but
not received Tk. 100.
(4) Merchandise Inventory December 31, 2024 Tk. 18,000.
(5) Office salaries accrued but not paid Tk. 600.
(6) Rent Received but not earned Tk. 200.
(7) Goods taken by the proprietor for private use Tk. 100.
(8) Increase allowance for bad debts to Tk. 1,190 on Accounts
(9) Carry forward for prepaid Insurance Tk. 450.
Prepare an Income Statement and a Balance
Sheet. Solution:

Mozammel & Co.

Income Statement
For the year ended December 31, 2024
Particulars Taka Taka
Sales 180900
Less: Returns 1900
Nets Sales 179000
Cost Of Goods Sold:
Opening Merchandise Inventory. 12000
Purchase (Adjusted i.e.-1,55,300-18,000-100) 137200
Less: Returns 1300
Nets Purchase 135900
Carriage In 1000
Cost of Goods Sold 148900
Gross Profit 30100
Operating Expenses:
Office Salaries Expense 6600
Rent and Taxes Expense 1200
Sales Salaries Expense 2200
Carriage On Sales 1400
Advertising Expense 700
Insurance Expense 1350
Sundry Office Expense 200

191
Interest Expense 500
Depreciation Expense-Furniture 200
Depreciation Expense -Building 500
Bad Debts Expense 1040
15890
Net Operating Income 14210
Non-Operating Income:
Rent Income 800
Commission Income 300
1100
Net Income 15310

Mozammel & Co.

Owner's Equity Statement
For the year ended December 31, 2024
Particulars Taka Taka
Beginning Balance 45000
Add: Net Income 15310
60310
Less: Drawings 3700
Ending Balance 56610

Mozammel & Co.

Balance Sheet
December 31, 2024
Particulars Debit Credit
Assets
Current Assets :
Cash 900
Accounts Receivable 26000
Less: Allowance For Bad Debts 1190 24810
Cash At Bank 14000
Inventory 18000
Prepaid Insurance 450

192
 Accrued Commission 100
Total Current Assets 58260
Fixed Assets :
Building 20000
Less Allowance For Depreciation 1000 19000
Furniture 6500
Less: Allowance For Depreciation 400 6100
Total Fixed Assets 25100
Liabilities And Owner's Equity
Current Liabilities:
Accounts Payable 12450
Notes Payable 3000
Loan on Mortgage (Payable On 30/6/2025) 10000
Interest Payable 500
Office Salaries Payable 600
Unearned Rent 200
Total Current Liabilities 26750
Owner's Equity: 56610
Total 83360 83360

Practical Problem # 05
Following balances are obtained from the book of Saidur Enterprise for the year ended December
31,, 2024.
Saidur Enterprise
Trial Balance
December 31,,
2024
Accounts Titles Debit Credit
Cash 15000
Accounts Receivable & Payable 30000 20000
Land 40000
Plant And Machinery 50000
Accumulated Depreciation-Plant 5000
Furniture 15000
Accumulated Dep.-Furniture 1500

193
 Loose Tools 2000

Accumulated Dep.-Loose Tools 500

Transportation In 1000
Insurance Expenses 500
Interest Expenses 400
Office Expenses 700
Salaries Expenses 2000
Merchandise Purchase and Sales 170000 220000
Return 4000 3000
Sales & Purchase Discount 2000 4000
Supplies Expenses 2000
Advertising Expenses 4000
Rent Income 1000
Interest Income 1100
Allowance for Doubtful Accounts 500
Capital- Saidur 102000
Drawings- Saidur 20000
358600 358600

Adjustments on December 31,, 2024 are required as follows.

(1) The inventory on hand Tk. 30000.
(2) Accrued selling expenses Tk. 200.
(3) Supplies in hand Tk. 200.
(4) Accrued rental incurred Tk. 500.
(5) The allowance for doubtful accounts is to be incurred to a balance of Tk. 1500.
(6) Interest received in advance Tk. 500.
(7) Charge depreciation 5% on plant and machinery & furniture & loose tools.
Required:
(a) Income statement &
(b) Balance sheet.

194
Solution:
Saidur Enterprise
Income Statement
For the year December 31, 2024

Particular Taka Taka

Sales 220000

Less: Sales Returns 4000

216000

Less: Sales Discount 2000

214000

Cost Of Goods Sold:

Purchase (Adjusted i.e.-170000-30000) 140000

Less: Purchase Returns 3000

137000

Less: Purchase Discount 4000

133000

Transportation In 1000

134000

Gross Profit 80000

Operating Expenses :

Selling Expenses

Selling Expense 200

Bad Debt Expense 1000

1200
Administrative Expenses :

Insurance Expense 500

Office Expense 700

Salaries Expense 2000

Supplies Expense 1800

195
Advertising Expense 4000

Depreciation Expense:

Plant 2500

Furniture 750

Tools 100

12350

13550
Net Operating Income 66450

Income from other source:

Rental Income 1500

Interest Income 600

2100

68550

Other Expenses:

Interest Expenses 400

Net Income 68150

Saidur Enterprise
Owner's Equity
Statement For December
31, 2024
Particular Taka
Capital (Jan 01, 2024) 102000
Add: Net Income 68150
170150
Less: Drawings 20000
Capital (Dec 31, 2024) 150150

196
 Saidur Enterprise
Balance Sheet
December 31,
2024
Assets TK. TK.
Current Assets :
Accounts Receivable 30000
Less: Allowance B/D 1500 28500
Cash 15000
Inventory 30000
Supplies On Hand 200
Accrued Rental Income 500
Fixed Assets :
Land 40000
Plants Of Machinery 50000
Less: Acc. Depr. 7500 42500
Furniture 15000
Less Acc. Depr. 2250 12750
Loose Tools 2000
Less: Acc. Depr. 600 1400

Liabilities and Owner's Equity

Current Liabilities :
Accounts Payable 20000
Selling Expense Payable 200
Advance Interest Income 500
Owner's Equity :
Capital 150150
170850 170850

197
Practical Problem # 06
Jamuna PLC
Trial Balance
December 31,
2024
Accounts Titles Debit Credit
Sales 390000
Sales Returns and Allowance 12000
Purchases 220000
Transportation In 10000
Selling Expenses 18000
Administrative Expenses 25000
Interest Revenue 11000
Interest Expense 5000
Furniture and Fixtures 95000
Accumulated Depreciation- Furniture and Fixtures 15000
Cash 120000
Accounts Receivable 75000
Notes Receivable 35000
Allowance for Doubtful Accounts 2000
Inventory (1-1-2024) 65000
Unexpired Insurance 15000
Supplies on hand 7000
Accounts Payable 48000
Notes Payable 16000
Common Stock 170000
Retained Earnings 50000
702000 702000

Adjustments:
(1) Depreciation on furniture and fixtures, 5% per annum.
(2) Supplies used Tk. 5000.
(3) Office salaries accrued Tk. 3000.
(4) Interest payable on notes payable Tk. 2000.
(5) Interest unearned on notes receivable Tk. 2500.
(6) Estimated bad debts, 1% of net sales.
198
(7) Insurance Expired Tk. 10000.

199
(8) Income tax payable at 20%.

Required:
(a) An Income Statement.
(B) A Statement of Retained Earnings.
(C) A Classified Balance Sheet.

Solution:

Jamuna PLC
Income
Statement
For the year December 31, 2024
Tk Tk
Revenue:
Sales 390000
Less: Returns 12000
378000
Sales Cost Of Goods Sold (65,000+ 2,20,000) 285000
Transportation 10000
Selling Expense 18000
Administrative Expense 25000
Salaries Expense 3000
Bad Debts Expense 2780
Depreciation Expense-Furniture & Fixture 4750
Insurance Expense 10000
Supplies Expense 5000
Total Expense 363530
Net Operating Income 14470
Other Revenues and Gains:
Interest Revenue 8500
22970
Other Expense and Losses:
Interest Expense 7000
Total Net Income Before Income Tax 15970
Income Tax (20%) 3194
Net Income 12776

200
 Jamuna PLC
Retained
Earnings
For the year ended December 31, 2024
TK
Retained Earnings January 1, 2024 50000

Net Income 12776

Retained Earnings December 31, 2024 62776

Jamuna PLC
Balance Sheet
December 31,,
2024
Debit Credit
Assets
Current Assets :
Cash 120000
Accounts Receivable 75000
Less: Allowance for Doubtful Accounts 4780
70220
Note Receivable 35000
Unexpired Insurance 5000
Supplies on hand 2000
Property, Plant And Equipment:
Furniture 95000
Less: Accumulated Depreciation 19750
75250
Liabilities And Stockholders' Equity:
Current Liabilities:
Accounts Payable 48000
Notes Payable 16000
Salaries Payable 3000
Interest Payable 2000
Unearned Interest 2500
Income Tax Payable 3194
Stockholder's Equity:
Common Stock 170000
Retained Earnings 62776
201
 307470 307470

202
Practical Problem # 07
The trial balance of Shahina PLC as on December 31, 2024 was as follows.
Shahina PLC
Trial Balance
December 31,,
2024

Accounts Titles Debit Credit

Sales Salaries And Commission 80000

Advertising Expenses 30000

Legal Expenses 10000

Insurance 20000

Travelling Expenses 15000

Sales Delivery Equipment 150000

Office Equipment 120000

Accumulated Depreciation -Delivery Equipment 30000

Accumulated Depreciation-Office Equipment 20000

Allowance For Doubtful Accounts 8000

Cash in hand and at Bank 50000

Bad Debts Expenses 10000

Accounts Receivable 220000

Notes Receivable 40000

Accounts Payable 90000

Notes Payable 50000

Income Tax Paid 80000

80000

Income Tax Reserve 40000

Inventory (1-1-2024) 180000

Interest Revenue 20000

Utilities 10000

203
 Telephone And Postage 7000

Dividend Revenue 15000

Additional Information:
Sales 1000000
(1) Proposed dividend 20%.
Purchase for bed debt to be made @ 5%.
(2) Allowance 440000
(3) Unexpired insurance Tk. 5000.
Sales Discount 12000
(4) Accrued office salaries Tk. 6000.
Sales Returns And Allowance 8000
(5) Income tax rate 30%.
Purchase at
(6) Inventory Returns
the end of the year Tk. 160000. 9000

(7) Depreciation onIn

Transportation equipment @ 5% p.a. 30000

Office Salaries 60000

Required:
Share Capital 40,000 Share of Tk 10 each 400000
(a) Income statement.
Retainedearnings
(b) Retained Earningsstatement
On 1-1-2024
and 120000
(c) Balance sheet.
10% Bonds 200000

Investment 100000

Investment in Apple PLC Share. 250000

2002000 2002000

204
Solution:
Shahina PLC
Income
Statement
For the year ended December 31, 2024
TK TK
Sales 1000000
Less: Sales Discount 12000
Sales Returns And Allowance 8000 20000
Net Sales 980000
Cost Of Goods Sold (Note-1) 481000
Gross Profit 499000
Operating Expenses :
Selling Expenses :
Sales Salaries And Commission 80000
Advertising 30000
Travelling Expenses 15000
Depreciation Sales Delivery Equipment 7500
Bad Debts And Allowance (Note-2) 13000
145500
Administrative Expenses :
Legal Expenses 10000
Depreciation On Office Equipment 6000
Utilities 10000
Telephone And Postage 7000
Office Salaries (60,000 + 6,000) 66000
Insurance (20,000 - 5,000) 15000
114000
Total Operating Expenses 259500
Operating Profit 239500
Other Revenue And Gains :
Interest Revenue 20000
Dividend Revenue 15000
35000
274500
Non-Operating Expenses:
Interest Expenses 20000
Net Profit Before Tax 254500
Less: Income Tax Provision @ 30% 76350
Net Profit After Tax 178150
205
 Shahina PLC
Retained Earnings Statement
For the year ended December 31, 2024.
TK.
Retained Earnings (1-1-2024) 120000
Net Profit 178150
298150
Dividend Paid 80000
Proposed Dividend 80000
160000
Retained Earnings On December 31, 2024. 138150

.
Shahina PLC
Balance
Sheet
For the year ended December 31,, 2024.
Assets Amount (Tk.)
Current Assets:
Cash in Hand and at Bank 50,000
Accounts Receivable (220,000 - 11,000) 209,000
Notes Receivable 40,000
Inventory (Ending) 160,000
Prepaid Insurance (Unexpired) 5,000
Total Current Assets 464,000
Non-Current Assets:
Sales Delivery Equipment 150,000
Less: Accumulated Depreciation (37,500)
Net Delivery Equipment 112,500
Office Equipment 120,000
Less: Accumulated Depreciation (26,000)
Net Office Equipment 94,000
Investment 100,000
Investment in A PLC Share 250,000
Total Non-Current Assets 556,500

206
 Total Assets 1,020,500
Amount
Particulars
(Tk.)
Current Liabilities:
Accounts Payable 90,000
Notes Payable 50,000
Accrued Office Salaries 6,000
Allowance for Doubtful Accounts 11,000
Income Tax Reserve 40,000
Proposed Dividend 80,000
Total Current Liabilities 277,000
Non-Current Liabilities:
10% Bonds Payable 200,000
Total Non-Current Liabilities 200,000
Shareholders' Equity:
Share Capital (40,000 shares @ Tk. 10 each) 400,000
Retained Earnings 138,150
Total Shareholders' Equity 538,150
Total Liabilities and Equity 1,020,500

Notes:
1. Cost of goods sold:
Tk.
Merchandise Inventory 1-1-2024 180000
Purchases 440000
Transportation In 30000
Cost of Purchases 470000
Less: Purchases Returns 9000
Net Purchase 461000
Cost of goods available for sale 641000
Less: Inventory December 31, 2024 160000
Cost of goods sold 481000

2. Bad Debts and Allowance

207
 TK
Bad Debts 10000
Allowance for Doubtful Accounts 11000
21000
Less: Existing Allowance 8000
13000

4. Accounts Receivable

Accounts Receivable 220000

Less: Allowance For Doubtful Accounts 11000
209000
3. Fixed Assets
Dep. Dep. For Total Written
Cost 1st Jan the year Dep. down value
Sales Delivery Equipment 150000 30000 7500 37500 112500
Office Equipment 120000 20000 6000 26000 94000
206500

Practical Problem # 08
The trial balance of Ichamoti PLCfor 2024 along with additional information as of December 31,
was as follows:

Ichamoti PLC
Trial Balance
December 31,,
2024
Accounts Titles Debit Credit
Delivery Expense 60000
Sales 950000
Purchase 460000
Sales Returns 10000
Purchases Returns 6000
Delivery Trucks 150000
Office Building 200000

208
Office Equipment 120000

209
Store Equipment 120000
Freight In 50000
Dividend Paid 100000
Income Tax Paid 80000
Income Tax Provision 100000
Inventory 1-1-2024 180000
General Expenses 60000
Sundry Selling Expenses 40000
Dividend Revenue 30000
Accounts Receivable 120000
Notes Payable 50000
Accounts Payable 57000
Notes Receivable 60000
Accumulated Depreciation-Delivery Trucks 30000
Accumulated Depreciation-Office Building 20000
Accumulated Depreciation-Office Equipment 20000
Accumulated Depreciation-Store Equipment 30000
Doubtful Accounts Expenses 15000
Sales Salaries 40000
Office Salaries 60000
Stores Supplies Expenses 10000
Interest Revenue 20000
Advertising 40000
Share Capital 600000
8% Bonds 200000
Interest Expenses 8000
10% Investment 100000
Retained Earnings on 1-1-2024 230000
Rent 24000
Insurance 16000
Cash in hand and at Bank 40000
General Reserve 320000
Investment in shares 500000
2663000 2663000

210
Additional Information:
(1) Proposed dividend @ 10%.
(2) Unexpired rent Tk. 4000.
(3) Accrued office salaries Tk. 5000.
(4) Depreciation on delivery trucks @ 10% and on office building @ 25% and on
office equipment and stores equipment @ 15% p.a.
(5) Income tax rate @ 30%.
(6) Transfer Tk. 20000 to general reserve.
(7) Create allowance for doubtful accounts @ 5%.
(8) Value of inventory at the end of the year Tk. 250000.

Practical Problem # 09
Prepare Income statement, Retained earnings statement, and Balance sheet.

Solution:

Ichamoti PLC
Income
Statement
For the year ended December 31, 2024
TK TK
Sales 950000
Less: Sales returns 10000
Net sales 940000
Cost of goods sold (1) 434000
Gross Profit 506000
Operating Expenses:
Selling Expenses:
Delivery Expenses 60000
Sundry Selling Expenses 40000
Sales Salaries 40000
Stores Supplies Trucks 10000
Depreciation on Delivery Truck's 15000
Depreciation on Store Equipment 18000
Advertising 40000

211
 Bad Debts And Allowance 21000
244000
Administrative Expenses:
General Expense 60000
Office Salaries (60,000 + 5,000) 65000
Rent (24,000 - 4,000) 20000
Insurance 16000
Depreciation on Office Building 4000
Depreciation on Office Equipment 18000
183000
Total Operating Expenses 427000
Operating Profit 79000
Non-Operating Income :
Dividend Income 30000
Interest Revenue 20000
129000
Non-Operating Expenses :
Interest Expenses 16000
Net Profit Before Tax 113000
Less: Income Tax Provision @ 30% 33900
Net Profit After Tax 79100

Ichamoti PLC
Retained Earnings Statement
For the year ended December 31, 2024
TK. TK.
Retained Earnings on 1-1-2024 230000
Excess of Existing Income Tax Provision. (1,00,000 - 80,000) 20000
Net Profit for the year. 79100
329100
Less: Dividend Paid 100000
Transfer to General Reserve 20000
Proposed Dividend 60000
180000

212
Retained Earnings on December 31, 2024 149100

213
 Ichamoti PLC
Balance Sheet
December 31, 2024
Particular Dr. Cr.
Assets : 435000
Fixed Assets - (Note - 3) 600000
Investment (Note -4)
Current Assets:
Inventory 250000
Accounts Receivable Less Allowance 114000
Notes Receivable 60000
Cash in hand and at Bank 40000
Unexpired Rent 4000
Liabilities & Owner's Equity
Liabilities
Share Capital 600000
Reserve and Supplies :
General Reserve (3,20,000 + 20,000)
Retained Earnings
489100
Loan:
8% Bonds 200000
Current Liabilities & Provision:
Notes Payable 50000
Accounts Payable 57000
Outstanding Expense 8000
Outstanding Office Salaries 5000
Proposed Dividend 60000
Provision For Income Tax 33900
1503000 1503000

214
Notes

1. Cost of goods sold :

TK
Inventory 1-1-2024 180000
Purchases 460000
Add: Freight in 50000
510000
Less: Purchases returns 6000
Net purchase 504000
Cost of goods available for sale 684000
Less Ending inventory 250000
Cost of goods sold 434000

2. Bad Debts and Allowance :

TK
Doubtful Accounts Expenses 15000
Add: Allowance for Doubtful Accounts 6000
21000

3. Fixed Assets
Dep. For Total Written
Cost st the year Dep. down value
Dep. 1 Jan
Delivery Trucks 150000 30000 15000 45000 105000

Office Building 200000 20000 4000 24000 176000

Office Equipment 120000 20000 18000 38000 82000

Store Equipment 120000 30000 18000 48000 72000

435000
4. Investment:

Investment in shares 500000

20% investment 100000
600000

215
Practical Problem # 10
The following is the Trial Balance of Ruposhi Bangla PLC on December, 2024.
Accounts Titles Debit Credit
Authorized Share Capital (5,000 Shares of Tk. 10 each)
Issued Share Capital (4,000 Shares of Tk. 10 each, Tk. 7.50
called) 30000
Call Account (200 shares) 500
Stock on 1st Jan. 2024 12720
Purchase and Sales 29120 46310
Debtors and Creditors 14200 2030
Sundry Expenses 1820
Wages and Salaries 4100
Investment (Market Price Tk. 8,600) 9000
General Reserve 5000
Dividend Equalization Fund 5000
Plant 8000
Goods out on Consignment 720
Cash at Bank 20000
Cash in Hand
Taxation Provision 730
Investment Income 10000
Repairs to Plant 620
Rent Paid 400
Preliminary Expenses 3000
Investment Fluctuation Fund 1000
Profit and Loss A/C Balance 300
6050
105310 105310

You are required to prepare Trading and Profit and Loss Account and Profit and Loss Account
Appropriation Account for the year ended December 31, 2024 and a Balance Sheet as at that date
required to prepare Trading and Profit and Loss Account and Profit and Loss You are having regard
to the following:

(i) Closing Stock (Cost) Tk. 18,000 (Market Price Tk. 15,000 ).

216
 (ii) All goods on consignment have been sold for Tk. 1,000 subject to agent commission of 6%.
(iii) It was resolved to forfeit shares in default.

(iv) Create a provision of 10% on debtors for bad and doubtful debt.

(v) Taxation provision to be increased to Tk. 13,000.

(vi) Transfer Tk. 1,000 to General Reserve and Tk. 1,500 to Dividend Equalization Fund.

(vii) Depreciate plant @ 10% per annum.

(viii) Dividend was proposed at 10%.

(ix) 20% of Preliminary Expenses were to be written off.

(x) Increase the Investment Fluctuation Fund to cover the fall in the market price.

Solution:
Workings Notes:
(a) Calculation of profit on consignment Tk
Sale price of consigned goods 1000
Less: Commission at 6% on Tk.100 60
Receivable from consigned 940
Less: Cost price (Goods out on consignment) 720
220
Profit
(b) Calculation of proposed dividend Tk
Capital as per Trial Balance 30000
Less: Capital for forfeited shares (200 x Tk. 7.50) 1500
Subscribed and Paid up Capital 28500
Proposed Dividend 10% of Tk. 28,500 2850

217
 Ruposhi Bangla PLC
Trading and Profit and Loss
Account For the year ended December
31, 2024
Debit Credit
Opening Stock 12720 Sales 46310
Purchases 29120 Closing Stock 15000
Wages and Salaries 4100
Repairs to Plant 400
Depreciation on Plant 800
Rent 3000
Gross Profit C/D 11170
61310 61310

Sundry Expenses 1820 Gross Profit B/D 11170

Provision for Bad And Doubtful
Debts 1420 Investment Income 620
Transfer to Investment Fluctuation
Fund 100 Profit out of consignment 220
Preliminary Expenses Written Off 200
Net Profit 8470
12010 12010

Ruposhi Bangla PLC

Profit and Loss Appropriation Account
For the year ended December 31, 2024
Debit Credit
Proposed Dividend 2850 Balance B/D 6050
Provision for Income Tax 3000 Profit and Loss A/C 8470
Creation of General Reserve 1000
Transfer to Dividends Equalization
Fund 1500
Balance C/D 6170
14520 14520

218
 Ruposhi Bangla PLC
Balance Sheet
December 31, 2024
Property and Assets Debit Capital and Liabilities Credit
Plant 8000 Authorized Share Capital:
Less: Depreciation 800 5,000 shares @ Tk. 10 each 50000
7200 Issued Share Capital
Preliminary Expenses 1000 4,000 shares of Tk. 10 each 40000
Less: Written off 200 Subscribed Share Capital:
3,800 shares @ Tk. 10 Tk. 7.50
800 called 28500
Closing Stocks 15000 Share Forfeiture A/C 1000
Investments 9000 General Reserve (5,000+ 1,000) 6000
Due to consignee 940 Dividend Equalization Fund 6500
Sundry Debtors 14200 Proposed Dividend 2850
Provision for Taxation (10,000+
Cash at bank 20000 3,000) 13000
Investment Fluctuation Fund (300 +
Cash in hand 730 100) 400
Provision for Bad and Doubtful
Debts 1420
Creditors 2030
Profit and Loss Appr. A/c Balance 6170
67870 67870

Journal for adjustment (iii)

Share Capital A/C Dr. 1,500 (200 Shares X Tk. 7.50)
To Call Account 500 To
Share Forfeiture A/C 1000. (200 Shares X Tk. 5)
(200 Shares forfeited for Non-Payment of call money as per Boards resolution dated….)

Practical Problem # 11
From the following balances which appeared as on December 31, 2024 in the book of Babul and Wahid
PLC prepare the Profit and Loss Account for the year ended December 31, 2024 Dr and its Balance
Sheet as on that date:

Debit Credit
Authorized and issued shares of Tk. 10 each 3000000
General Reserve 300000

219
 Provision for Taxation on 1st January, 2024 441000
Profit and Loss Account 573850
Taxation payment (advance) 365400
6% Mortgage Debentures 1000000
Balance from Trading Account 1052000
Interim Dividend for the year 172500
Debenture Redemption Reserve 200000
Share Premium Account 50000
Directors Fees 20000
Unexpired Payments 30000
Debenture Interest 48000
Creditors and Accrued Charges 2034800
Balance at Bank 250000
Cash in hand 5000
Tax deducted at source on Dividend on Investments 15750
Dividend on Investments 50000
Investments at costs (Market value Tk. 4,73,750) 500000
Debtors 2455000
Stock and Work-in-Progress 1660000
Vehicles (cost Tk. 1,50,000) 100000
Furniture and Equipment (Cost Tk. 2,00,000) 160000
Machinery (Cost Tk. 30,00,000) 2120000
Land and Buildings (Cost Tk. 10,00,000) 800000
8701650 8701650
Adjustments:

1. Depreciation Provision for the year charged against trading; Land and Buildings Tk.
50,00; Machinery Tk. 3,00,000; furniture and Equipment Tk. 16,000 and Vehicles Tk.
25,000.
2. Director's remuneration charges against trading; Salaries Tk. 1,00,000 and Pension to
retire marriage director Tk. 15,000.
3. Provision for taxation required tk. 5,03,270.

Directors recommended: (a) transfer of Tk. 2,00,000 to debenture redemption reserve; (b) transfer of Tk.
3,50,000 to general reserve; and (c) payment of final dividend at 12%.

220
Solution:
Working notes:
Depreciation and directors remuneration have been charged against trading, the gross profit has,
therefore, been arrived at as below:
Balance from Trading Account 1052000
Add: Depreciation on :
Land and Buildings 50000
Machinery 300000
Furniture and Equipment 16000
Vehicles 25000
Add: Directors Remuneration:
Salaries 100000
Pension to Managing Directors 15000
Gross Profit 1558000

(P/L)

Babul and Wahid PLC

Profit and Loss Account
For the year ending Dec. 31, 2024
Dr. Cr.
Depreciation: Gross Profit B/D 1558000
Land and Buildings 50000 Dividend on Investment 50000
Machinery 300000
Furniture and Equipment 16000
Vehicles 25000
Interest on Debentures 60000
Directors Salaries 100000
Directors Fees 20000
Pension to Managing Directors 15000
Provision for fall in price of
Investment 26250
Net Profit C/D 995750
1608000 1608000

221
 Babul and Wahid PLC
Profit and Loss Appropriation Account
For the year ended Dec 31, 2024
Particulars Dr. Cr.
Interim Dividend 172500 Balance 573850
Transfer To Debenture
Redemption Reserve 200000 Net Profit 995750
Transfer To General Reserve 350000
Proposed Dividend 360000
Provision for Taxation:
Provision Required 503270
Less: Existing 441000
62270
Balance Transfer to B/S 424830
1569600 1569600

(BS)

Babul and Wahid PLC

Balance Sheet
31 December 2024
Property and Assets Debit Capital and Liabilities Credit
Land and Buildings 1000000 Share Capital :
Less: Depreciation 200000 Authorized Capital :
3,00,000 shares of Tk. 10
800000 each Issued, 3000000
Subscribed and Paid up
Machinery 3000000 Capital:
3,00,000 shares of Tk. 10
Less: Depreciation 880000 each 3000000
2120000 Share Premium 50000
Furniture and Equipment 200000 General Reserve 300000
Less Depreciation 40000 Add: New Reserve 350000
160000 650000
Debenture Redemption
Vehicles 150000 Reserve 200000
Less: Depreciation 50000 Add: New Reserve 200000
222
 100000 400000
Investment 500000 Provision for Taxation 503270
Less: Provision 26250 6% Mortgage Debentures 1000000
Creditors and Accrued
473750 charges 2034800
Stock and Work-in-Progress 1660000 Interest on Debentures due 12000
Sundry Debtors 2455000 Proposed Dividend 360000
Unexpired Payments 30000 Profit and Loss A/c 424830
Advance Payment of Tax 365400
Tax deducted at source 15750
Cash at Bank 250000
Cash in hand 5000
8434900 8434900

Statement of Cash Flow - Practical Problem Solved

Practical Problem # 12
[Banking Diploma Examination, Part-II; May 2011, slightly changed]

Presented below are the comparative balance sheets for Nexus Company PLC on December 31.

Nexus Company PLC

Comparative Balance Sheets December 31
2024 2023
Assets:
Cash Tk. 45,000 Tk. 57,000
Accounts receivable 72,000 64,000
Inventory 1,32,000 1,40,000
Prepaid expenses 12,140 16,540
Land 1,25,000 1,50,000
Equipment 2,00,000 1,75,000
Accumulated depreciation – Equipment (60,000) (42,000)
Building 2,50,000 2,50,000

223
 Accumulated depreciation – building (75,000) (50,000)
Tk. 7,01,140 Tk. 7,60,540
Liabilities and Stockholder’s Equity:
Accounts payable Tk. 38,000 Tk. 45,000
Bonds payable 2,35,000 2,65,000
Common stock, Tk. 1, par 2,80,000 2,50,000
Retained earnings 1,48,140 2,00,540
Tk. 7,01,140 Tk. 7,60,540

Additional information:
1. Operating expenses include depreciation expense of Tk. 70,000 and charges from
prepaid expenses of Tk. 4,000
2. The land was sold for cash at cost.
3. Cash dividends of Tk. 79,290 were paid.
4. Net income for 2012 was Tk. 26,890.
5. Equipment was purchased for Tk. 65,000 cash. In addition, equipment costing Tk.
40,000 with a book value of Tk. 13,000 was sold for Tk. 14,000 cash.
6. Bonds were converted at face value by issuing 30,000 shares of Tk. 1 par value
common stock.
7. Net sales in 2024 were Tk. 3,67,000.

Instructions:
(a) Prepare a statement of cash flows for 2012 using the indirect method.
(b) Compute the following cash-basis ratios for 2024.
(1) Current cash debt coverage ratio. (2) Cash return on sales ratio (3) Cash debt coverage ratio.

Solution

Nexus Company PLC

Statement of cash flows using the indirect method
For the year ended December 31, 2024
Amount Amount
Cash flows from operating activities:
Net income Tk. 26,890
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 70,000
Increase in accounts receivable (72,000 – 64,000) (8,000)

224
 Decrease in merchandise inventories (1,40,000 – 1,32,000) 8,000
Decrease in accounts payable (45,000 – 38,000) (7,000)
Decrease in prepaid expense (16,540 – 12,140 4,400
Gain on sale of equipment (14,000 – 13,000 (1,000) 66,400
Net cash provided by operating activities 93,290
Cash flows from investing activities:
Sale of equipment 14,000
Purchase of equipment (65,000)
Sale of Land (1,50,000 – 1,25,000) 25,000
Net cash used by investing activities (26,000)
Cash flows from financing activities:
Payment of cash dividends (79,290)
Net cash used by financing activities (79,290)
Net decrease in cash (12,000)
Cash at the beginning of the period 57,000
Cash at the end of the period 45,000

Required-(b):
1. Current cash debt coverage ratio = Net cash provided by operating
activities/Average current liabilities = 93,290/ (38,000 + 45,000)/2 = 2.481:1
2. Cash return on sales ratio = Net cash provided by operating activities/Net sales
= 93,290/3,67,000 = 25.42%
3. Cash debt coverage ratio = Net cash provided by operating activities/Average
total liabilities
= 92,290/ [(38,000 + 2,35,000) + (45,000 + 2,65,000)]/2
= 93,290/2,91,500 = 0.320:1

Practical Problem # 13
[Banking Diploma Examination, Part-II; May 2011, slightly changed]
Presented below are the comparative balance sheets for Diana Willy Company PLC as of December
31,

225
 Diana Willy Company PLC
Comparative Balance Sheets December 31
2024 2023
Assets Tk. 39,000 Tk. 45,000
Cash 52,000
Accounts receivable 49,500 1,42,000
Inventory 1,51,450
Prepaid expenses 16,780 21,000
Land 1,00,000 1,30,000
Equipment 2,28,000 1,55,000
Accumulated depreciation – equipment (45,000) (35,000)
Building 2,00,000 2,00,000
Accumulated depreciation – building (60,000) (40,000)
Tk. 6,79,730 Tk. 6,70,000
Liabilities and Stockholders’ Equity:
Accounts payable Tk. 38,730 Tk. 40,000
Bonds payable 2,50,000 3,00,000
Common stock, Tk. 1 par 2,00,000 1,50,000
Retained earnings 1,91,000 1,80,000
Tk. 6,79,730 Tk. 6,70,000

Additional information:
1. Operating expenses include depreciation expense of Tk. 42,000.
2. The land was sold for cash at book value.
3. Cash dividends of Tk. 27,000 were paid.
4. Net income for 2012 was Tk. 38,000.
5. Equipment was purchased for Tk. 95,000 cash. In addition, equipment costing Tk.
22,000 with a book value of Tk. 10,000 was sold for Tk. 8,100 cash.
6. Bonds were converted at face value by issuing 50,000 shares of Tk. 1 par value
common stock.
7. Net sales for 2024 totalled Tk. 4,20,000.

Instructions:

(a) Prepare a statement of cash flows for the year ended December 31, using the
indirect method.

226
 (b) Compute the following cash-basis ratios for 2024.

(1) Current cash debt coverage ratio

(2) current cash debt coverage ratio

(3) Cash return on sales ratio.

Solution
Required-(a)

Diana Willy Company PLC

Statement of Cash Flows using the indirect method
For the year ended December 31, 2024
Amount Amount
Cash flows from operating activities:
Net income Tk. 38,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 42,000
Decrease in accounts receivable (52,000 – 49,000) 2,500
Increase in merchandise inventories (1,51,450 – 1,42,000) (9,450)
Decrease in prepaid expense (21,000 – 16,780) 4,220
Decrease in accounts payable (40,000 – 38,730) (1270)
Loss on sale of equipment (10,000 – 8,100) 1,900 39,900
Net cash provided by operating activities 77,900
Cash flows from investing activities:
Sale of land (1,30,000 – 1,00,000) 30,000
Purchase of equipment (95,000)
Sale of equipment 8,100
Net cash used by investing activities (56,900)
Cash flows from financing activities:
Payment of cash dividends (27,000)
Net cash used by financing activities (27,000)
Net decrease in cash (6,000)
Cash at the beginning of the period 45,000
Cash at the end of the period Tk. 39,000

Required-b:

227
 1. Current cash debt coverage ratio = Net cash provided by operating activities/Average
current liabilities = 77,900/(38,730 + 40,000)/2 = 77,900/39,365 = 1.979:1
2. Cash return on sales ratio = Net cash provided operating activities/Net sales
= 77,900/4,20,000 = 18.55%
3. Cash debt coverage ratio = Net cash provided by operating activities/Average total
liabilities
= 77,900/(38,730 + 2,50,000) + (40,000 + 3,00,000)/2
= 77,900/3,14365 = 0.248:1
Practical Problem # 14
[Banking Diploma Examination, Part-II; Nov. 2006, slightly changed]
Presented below is information related to Transtec Company PLC. Use it to prepare a statement of
cash flows using the indirect method.

Transtec Company PLC

Comparative Balance
Sheets December 31

2024 2023 Change

Increase/Decrease
Tk. Tk. (Tk.)
Assets:
Cash 54,000 37,000 17,000 Increase
Accounts receivable 68,000 26,000 42,000 Increase
Inventories 54,000 --- 54,000 Increase
prepaid expenses 4,000 6,000 2,000 Decrease
Land 45,000 70,000 25,000 Decrease
Building 2,00,000 2,00,000 ---
Accumulated depreciation – buildings (21,000) (11,000) 10,000 Increase
Equipment 1,93,000 68,000 1,25,000 Increase
Accumulated depreciation – equipment (28,000) (10,000) 18,000 Increase
Total 5,69,000 3,86,000
Liabilities and Stockholders’ Equity:
Accounts payable 23,000 40,000 17,000 decrease
Accrued expenses payable 10,000 --- 10,000 Increase
Bonds payable 1,10,000 1,50,000 40,000 Decrease
Common stock (Tk. 1 par) 2,20,000 60,000 1,60,000 Increase
Retained earnings 2,06,000 1,36,000 70,000 Increase
Total 5,69,000 3,86,000

228
 Transtec Company PLC
Income Statement
For the year ended December 31, 2024
Tk. Tk.
Revenues 8,90,000
Cost of goods sold 4,65,000
Operating expenses 2,21,000
Interest expense 12,000
Loss on sale of store equipment 2,000 7,00,000
Income from operations 1,90,000
Income tax expense 65,000
Net income 1,25,000
Additional information:
1. Operating expenses include depreciation expense of Tk. 33,000 and charges from
prepaid expenses of Tk. 2,000.
2. The land was sold at its book value for cash.
3. Cash dividends of Tk. 55,000 were declared and paid in 2024.
4. Interest expense of Tk. 12,000 was paid in cash.
5. Equipment with a cost of Tk. 1,66,000 was purchased in cash. Equipment with a cost of
Tk. 41,000 and a book value of Tk. 36,000 was sold for Tk. 34,000 cash.
6. Bonds of Tk. 10,000 were redeemed at their book value for cash. Bonds of Tk. 30,000
were converted into common stock.
7. Common stock (Tk. 1 par) of Tk. 1,30,000 was issued in cash.
8. Accounts payable pertain to merchandise suppliers.

Action plan:
(a) Determine the net increase/decrease in cash
(b) Determine net cash provided/used by operating activities by adjusting net income for items
that did not affect cash.
(c) Determine net cash provided/used by investing activities.
(d) Determine net cash provide/used by financing activities.

Solution

229
 Transtec Company PLC
Statement of Cash Flows-Indirect method
For the year ended December 31, 2024
Tk. Tk.
Cash flows from operating activities:
Net income 1,25,000
Adjusted to reconcile net income to net cash provided by
operating activities:
Depreciation expense 33,000
Increase in accounts receivable (42,000)
Increase in inventories (54,000)
Decrease in prepaid expenses 2,000
Decrease in accounts payable (17,000)
Increase in accrued expenses payable 10,000
Loss on sale of equipment 2,000 (66,000)
Net cash provided by operating activities 59,000
Cash flows from investing activities:
Sale of land 25,000
Sale of equipment 34,000
Purchase of equipment (1,66,000)
Net cash used by investing activities (1,07,000)
Cash flows from financing activities:
Redemption of bonds (10,000)
Sale of common stock 1,30,000
Payment of dividends (55,000)
Net cash provided by financing activities 65,000
Net increase in cash 17,000
Cash at beginning of the period 37,000
Cash at end of the period 54,000
Non-cash investing and financing activities:
Conversion of bonds into common stock 30,000

Practical Problem # 15
[Banking Diploma Examination, Part-II; May 2006, slightly modified]

230
From the following information, prepare a Cash Flow Statement for Iman Company PLC.
Iman Company PLC
Income Statement:
For the year ended December 31, 2024
Taka
Revenues 25,00,000
Cost of goods sold (12,00,000)
Depreciation expense (2,50,000)
Salaries expense (4,00,000)
Tax expense (1,00,000)
Net income 6,50,000

Balance Sheet:
Comparative balance Sheet as at
31-12-2024 31-12-2023
Taka Taka
Cash 5,00,000 9,00,000
Accounts receivable 5,50,000 4,50,000
Notes receivable 1,50,000 1,50,000
Inventories 10,00,000 7,50,000
Buildings 10,00,000 10,00,000
Plant and equipment 10,00,000 9,00,000
Accumulated depreciation (on Plant (4,00,000 (3,50,000)
Land 3,00,000 3,80,000
Total 41,00,000 41,80,000

Liabilities and Stockholders' Equity:

Taka Taka
Accounts payable 7,00,000 8,00,000
Salaries payable 50,000 1,00,000
Expense payable 50,000 50,000
Bonds payable, 12% 11,00,000 10,80,000
Common stock 8,00,000 6,00,000
Additional paid-in capital 4,00,000 3,00,000
Retained Earnings 10,00,000 12,00,000
Total 41,00,000 41,00,000

231
Additional information: A piece of machinery of Tk. 5,00,000 and accumulated depreciation of
Tk. 3,00,000 was sold for Tk. 3,00,000. Common stock originally issued for Tk. 3,00,000 was
acquired for Tk. 3,50,000, retired (repaid). The difference of Tk. 50,000 was debited to retained
earnings. The total dividends declared and paid during 2024 was Tk. 3,50,000.

Solution
Working-1: Net Income on a cash basis
Tk.
Net Income 6,50,000
Add: Depreciation expense 2,50,000
6,00,000
Less: Gain on the sale of equipment 1,00,000
Net Income (On a cash basis) 8,00,000
Working-2: Plant & Equipment:
Tk.
Beginning balance (31/12/2024 10,00,000
Less: Sold Remaining 5,00,000
5,00,000
Closing balance (321/12/2024 9,00,000
 Equipment purchased (9,00,000 – 5,00,000) = Tk. 4,00,000
Working-3: Issue of Common Stock
Tk.
Common stock (on 31/12/2023) 8,00,000
Less: Retired (Repurchased) 3,00,000
5,00,000
Common stock (on 31/12/2024) 6,00,000
 Common Stock issued = (6,00,000 – 5,00,000) = Tk. 1,00,000

232
 Iman Company PLC
Statement of Cash Flows
For the year ended December 31, 2024
Tk. Tk.
Cash Flow from Operating Activities:
Net Income on a cash basis (W-1) 8,00,000
Changes in Working Capital:
Decrease in accounts receivable (5,50,000 – 4,50,000) 1,00,000
Decrease in inventories (10,00,000 – 7,50,000) 2,50,000
Increase in accounts payable (8,00,000 – 7,00,000) 1,00,000
Increase in salaries payable (1,00,000 – 50,000) 50,000 5,00,000
Net cash provided by operating activities 13,00,000
Cash Flow from Investing Activities:
Purchase of equipment (W-2) (4,00,000)
Sale of equipment 3,00,000
Pur5chase of land by investing activities (80,000)
Net cash used by investing activities 13,00,000
Cash Flow from Financing Activities:
Redemption of bonds (11,00,000 – 10,80,000) (20,000)
Issue of common stock (W-3) 1,00,000
Repurchase of common stock (3,50,000)
Payment dividends (3,50,000)
Decreasing additional paid-in capital (4,00,000 – 3,00,000) (1,00,000)
Net cash used by financing activities (7,20,000)
Net Increase in cash 4,00,000
Cash at beginning of the period 5,00,000
Cash at the end of the period 9,00,000

233
Practical Problem # 16
[Banking Diploma Examination, Part-II; Nov. 2005, slightly changed]

Presented below is the Comparative Balance Sheet for Islam Corporation as of Dec. 31:
Assets 2024 2023
Taka Taka
Cash 41,000 45,000
Accounts receivable 47,500 52,000
Inventory 1,51,450 1,42,000
Prepaid expenses 16,780 21,000
Land 1,00,000 1,30,000
Equipment 2,28,000 1,55,000
Accumulated depreciation-equipment (45,000) (35,000)
Building Accumulated depreciation-building 2,00,000 2,0,000
(60,000) (40,000)
6,79,730 6,70,000
Liabilities and Stockholders’ Equity:
Accounts payable 43,730 40,000
Bonds Payable 2,50,000 3,00,000
Common stock, Tk. 10 par 2,00,000 1,50,000
Retained earnings 1,86,000 1,80,000
6,79,730, 6,70,000

Additional information:
1. Operating expenses include depreciation expense of Tk. 42,000 and charges from prepaid
expenses of Tk. 4,220;
2. The land was sold for cash at book value;
3. Cash dividends of Tk. 32,000 were paid;
4. Net income for the year was Tk. 38,000.
5. Equipment was purchased for Tk. 95,000 cash. In addition, equipment costing Tk. 22,000
with a book value of Tk. 10,000 was sold for Tk. 8,100 cash; and
6. Bonds were converted at face value by issuing 5,000 shares of Tk. 10 par value common stock.
Instructions:
Prepare a statement of cash flow for the year ended December 31, 2024, using the indirect method.

234
Solution:
Cash flow Statement
For the year ended 31 December 2024
Amount (Tk.)
A. Cash Flow from Operating Activities:
Net Profit 38,00
Add, Depreciation 42,000
Add, Charges from Prepaid Expenses 4,220
Add, Loss on sale of Equipment 1,900
Add, Decrease in Acc, Receivable 4,500
Less, Increase in Inventory (9,450)
Add, Increase in Accounts Payable 3,730
Net Cash flow from Operating Activities 84,900
B. Cash Flow from Investment Activities:
Sale of Land 30,000
Sale of Equipment 8,100
Purchase of Equipment (95,000)
Net Cash flow from Investment Activities (56,900)
C. Cash Flow from Financing Activities:
Payments of Dividend (32,000)
Net Cash Flow from Financing Activities (32,000)
D. Net Cash Flow from 3 Activities (A + B + C) (4,000)
E. Beginning Cash Balance 45,000
F. closing Cash Balance 41,000

235
Practical Problem # 17
[Banking Diploma Examination, Part-II; Nov. 2005; May – June 2005, slightly changed]

The financial statements of Jim Carrey Company appear below.

Jim Carrey Company
Comparative Balance
Sheets December 31
Assets 2024 2023
Cash Tk. 24,000 Tk. 13,000
Accounts receivable 20,000 14,000
Merchandise inventory 38,000 35,000
Property, plant and equipment Tk. 70,000 Tk. 79,000
Less: Accumulated depreciation (30,000) 40,000 (24,000) 54,000
Total Tk. 1,22,000 Tk. 1,16,000
Liabilities and Stockholders’
Equity
Accounts payable Tk. 26,000 Tk. 33,000
Income taxes payable 15,000 20,000
Bounds payable 20,000 10,000
Common stock 25,000 25,000
Retained earnings Tk. 36,000 Tk. 28,000
Total Tk. 1,22,000 Tk. 1,16,000

Jim Carrey Company

Income Statement
For the year ended December 31, 2024
Sales Tk. 2,40,000
Cost of goods sold 1,80,000
Gross profit 60,000
Selling expenses Tk. 24,000
Administrative expenses 10,000 34,000
Income from operation 26,000
Interest expenses 2,000
Income before income taxes 24,000
Income tax expenses 7,000

236
 Net income Tk. 17,000

Additional information:
1. Dividends of Tk. 9,000 were declared and paid.
2. During the year equipment was sold for Tk. 10,000 cash. This equipment cost Tk.
15,000 originally and had a book value of Tk. 10,000 at the time of sale.
3. All depreciation expenses, Tk. 11,000, at the time of sale.
4. All sales and purchases are on account.
5. Additional equipment was purchased for Tk. 7,000 cash.

Instructions:
Prepare a statement of cash flow using the indirect method and the direct method.

Solution

Jim Carrey Company

Statement of Cash flows using the direct method
For the year ended December 31, 2024
Cash flows from operating activities:
Cash receipts:
Cash receipts from customers (Note-1) Tk. 2,34,000
Cash payments:
Payment of accounts payable for merchandise (Note-2) Tk. 1,90,000
Payment of operating expenses (Note-3) 23,000
Payment of income taxes (Note-4) 12,000
Payment of interest 2,000 Tk. (2,27,000)
Net cash provided by operating activities 7,000
Cash flows from investing activities:
Sale of equipment 10,000
Purchase of equipment (7,000)
Net cash provided by investing activities 3,000
Cash flows from financing activities:
Payment of cash dividends (9,000)
Issuance of Bonds Payable (20,000 – 10,000) 10,000
Net cash provided by financing activities 1,000
Net increase in cash 11,000
Cash at the beginning of the period 13,000
237
 Cash at the end of the period Tk. 24,000

Tutorial notes:
1. Cash receipts from Customers = Sales – Increase in Accounts Receivable = Tk. 2,40,000 –
6,000 = Tk. 2,34,000.
2. Cash payments to suppliers
Cash of Goods sold Tk. 1,80,000
Add: increase in inventory 3,000
Cost of purchase 1,83,000
Add: decrease in accounts payable 7,000
Cash payments to suppliers 1,90,000
3. Cash payments for operating expenses
Operating expenses (24,000 + 10,000) Tk. 34,000
Less: depreciation expenses (11,000)
Cash payments for operating expenses 23,000
4. Cash payments for income tax expenses:
Income tax expenses 7,000
Add: decrease in income taxes payable 5,000
Cash payments for income tax expenses Tk. 12,000

Jim Carrey Company

Statement of cash flows for 2024 using the indirect method.
For the year ended December 31, 2024
Amount Amount
Cash flows from operating activities:
Net income Tk. 17,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 11,000
Increase in accounts receivable (20,000 – 14,000) (6,000)
Decrease in merchandise inventories (38,000 – 35,000) 3,000
Decrease in accounts payable (33,000 – 26,000) (7,000)
Decrease in income tax payable (20,000 – 15,000) (5,000) (10,000)
Net cash provided by operating activities 7,000
Cash flows from investing activities:
Sale of equipment 10,000
238
 Purchase of equipment (7,000)
Net cash provided by investing activities 3,000
Cash flows from financing activities:
Payment of cash dividends (9,000)
Issuance of Bonds Payable (20,000 – 10,000) 10,000
Net cash provided by financing activities 1,000
Net increase in cash 11,000
Cash at the beginning of the period 13,000
Cash at the end of the period Tk. 24,000

Practical Problem # 18
[Banking Diploma Examination, Part-II; Nov. 2005, slightly modified]
The financial statement of Paramount Textile Company is appearing
below:
Paramount Textile Company
Balance Sheet
December 31
Particulars 2024 2023
Assets:
Cash Tk. 2,900 Tk. 1,300
Accounts receivable 2,800 1,400
Inventories 2,500 3,500
Plant & equipment 6,000 7,800
Accumulated depreciation- Plant & Equipment (2,000) (2,400)
Totals Tk. 12.200 Tk. 11,600
Liabilities & Stockholder’s Equity:
Accounts payable Tk. 2,900 Tk. 2,300
Income taxes payable 500 800
Bonds payable 2,700 3,300
Common stock 1,800 1,400
Retained earnings 4,300 3,800
Totals Tk. 12,200 Tk. 11,600

Paramount Textile Company

Income Statement
For the year ended December 31, 2024
Particulars Tk. Tk.

239
 Sales revenue 22,000
Cost of goods sold 18,000
Gross profit 4,000
Selling expense 1,400
Administrative expense 1,000 2,400
Income from operation 1,600
Interest expense 200
Income before income tax 1,400
Income tax expense 400
Net income Tk. 1,000

The following additional data were provided:

1. A cash dividend of Tk. 500 were declared and paid.

2. During the year equipment was sold for Tk. 850 cash. The equipment cost Tk. 1,800
originally and had a book value of Tk. 850 at the time of sale. The equipment cost Tk. 1,800
originally and had a book value of Tk. 850 at the time of sale. The equipment cost Tk. 1,800
originally and had a book value of Tk. 850 cash. The equipment cost of Tk. 1,800 originally
and had a book value of Tk. 850 cash. The equipment cost Tk. 1,800 originally and had a
book value of Tk. 850 at the time of sale.

3. All depreciation expense is in the selling expense category.

4. All sales and purchases are on account.

You are required to prepare a statement of cash flow for 2024 using the indirect method and a
statement of cash flow for 2024 using the direct method.

Solution
Paramount Textile Company
Statement of Cash Flows-Indirect
Method For the year ended December 31,
2024
Particulars Tk. Tk.
1. Cash flows from operating activities:
Net income 1,000
Adjustment to reconcile net income to net cash provided by
operating activities:

240
Depreciation expense (Note-1)
550

241
 Increase in accounts receivable (1,400)
Decrease in inventories 1,000
Increase in accounts payable 600
Decrease in income tax payable (300)
Net cash provided by operating activities 450
1,450
2. Cash flows from investing activities:
Sale of equipment 850
3. Cash flows from financing activities:
Payment of cash dividend (500)
Issuance of Common Stock 400
Redemption of bonds (600)
Net cash used by financing activities (700)
Net increase in cash 1,600
Cash at beginning of the period 1,300
Cash at end of the period 2,900

Note-1:
Depreciation expense
(Tk. 1,800 – Tk. 850) = Tk. 950
(Tk. 2,400 – Tk. 950) = Tk. 1,450
(Tk. 2,000 – Tk. 1,450) = Tk. 550

Paramount Textile Company

Statement of Cash Flows-Direct method
For the year ended December 31, 2024
Particulars Tk. Tk.
1. Cash flows from operating activities:
Cash received from customers (Notes-1) 20,600
Cash paid to suppliers (Notes-2) 16,400
For operating expenses (2,400 – 550) 1,850
For interest 200
For income taxes (Notes-1) 700 19,150
Net cash provided by operating activities 1,450
2. Cash flow from investing activities:

242
 Sale of equipment 850
3. Cash flow from financing activities:
Payment of cash dividend (500)
Issuance of common stock 400
Redemption of bonds (600)
Net cash used by financing activities (700)
Net increase in cash 1,600
Cash at beginning of the period 1,300
Cash at end of the period 2,900

Notes to the Financial Statements:

1. Cash received from customers:
Sales Tk. 22,000
Less: Increased in accounts receivable 1,400
Cash received from customers 20,600

2. Cash payment to suppliers:

Cost of goods sold Tk. 18,000
Less: Decrease in inventory 1,000
Cost of purchase 17,000
Less: increased in accounts payable 600
Cash payment to the supplier 16,400

3. Cash payments operating expense:

Operating expenses Tk. 2,400
Less: Depreciation 550
Cash payment for Operating expense 1,850

4. Cash paid for income taxes:

Income tax expenses Tk. 400
Add: Decreased in income tax payable 300
Cash paid for income taxes 700

243
Practical Problem # 19 [Banking Diploma Examination, Part-II; Nov. 2002, slightly modified]
Comparative Balance Sheets for Pioneer Company are resented below:

Pioneer Company Comparative Balance Sheets December 31

Assets: 2024 2023

Cash Tk. 63,000 Tk. 22,000
Accounts receivable 85,000 76,000
Inventories 1,80,000 1,89,000
Land 75,000 1,00,000
Equipment 2,60,000 2,00,000
Accumulated depreciation (66,000) (42,000)
Total Tk. 5,97,000 Tk. 5,45,000
Liabilities and Stockholders’ Equity:
Accounts payable Tk. 34,000 Tk. 47,000
Bonds payable 1,50,000 2,00,000
Common stock (Tk. 1 par) 2,14,000 1,64,000
Retained earnings 1,99,000 1,34,000
Total 5,97,000 Tk. 5,45,000

Additional information:
1. Net income for 2024 was Tk. 1,25,000.
2. Cash dividends of Tk. 60,000 were declared and paid.
3. Bonds payable amounting to Tk. 50,000 was redeemed for cash Tk. 50,000.
4. Common stock was issued for Tk. 50,000 cash.
5. Depreciation expense was Tk. 24,000.
6. Sales for the year were Tk. 9,78,000.
Required: Prepare a statement of cash flow for 2024 using the indirect method.

Solution
Required-(a):

Pioneer Company
Statement of cash flows for 2024 using the indirect method
For the Year Ended December 31, 2024
Cash flows from operating activities: Amount Amount
Net income Tk. 1,25,000

244
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation expense 24,000
Increase in accounts receivable (85,000 – 76,000) (9,000)
Decrease in inventories (1,89,000) 9,000
Decrease in accounts payable (47,000 – 34,000) (13,000) 11,000
Net cash provided by operating activities 1,36,000
Cash flows from investing activities:
Sale of Land (1,00,000 – 75,000) 25,000
Purchase of equipment (2,60,000 – 2,00,000) (60,000)
Net cash used by investing activities (35,000)
Cash flows from financing activities:
Payment of cash dividends (60,000)
Redemption of Bonds (50,000)
Issuance of Common stock 50,000
Net cash used by financing activities (60,000)
Net increase in cash 41,000
Cash at beginning of the period 22,000
Cash at the end of the period Tk. 63,000

245
Short Questions
1. What are financial statements, and what purpose do they serve?

2. How do financial statements help assess a company's current financial status?

3. What are the three key financial statements commonly used to evaluate a company's performance?

4. How does a balance sheet provide insights into a company’s financial condition?

5. What equation is fundamental to the balance sheet, and why must it remain balanced?

6. How are assets classified on a balance sheet, and what is the difference between current and

non- current assets?

7. What are liabilities, and how are they categorized on a balance sheet?

8. What is owners' equity, and how does it relate to a company’s net assets?

9. How does an income statement help assess a company’s operating results?

10. What are the key components of an income statement, and what do they represent?

11. How does the cash flow statement provide insights into a company’s liquidity and

cash management?

12. What are current liabilities, and how do they differ from non-current liabilities?

13. How does the statement of changes in equity reflect changes in a company’s financial position?

14. What is the significance of prepaid expenses and accounts receivable in financial reporting?

15. What role do retained earnings and reserves play in a company’s financial structure?

16. What are the three main sections of a cash flow statement?

17. How does the statement of cash flows help assess a company's liquidity?

18. Why is the cash flow statement considered important for managers?

19. What does cash include in the context of the statement of cash flows?

246
20. How do cash flows from operating activities differ between the direct and indirect methods?

21. What types of activities are classified under investing activities in a cash flow statement?

22. In the cash flow statement, how are financing activities defined?

23. What information is needed to prepare a statement of cash flows?

24. Why must cash flows be presented in gross amounts rather than net amounts for investing

and financing activities?

25. How can the statement of cash flows help in detecting fraud in the accounts?

26. What are some common sources of cash inflows from operating activities?

27. How can cash payments to suppliers be calculated in the direct method of cash flows?

28. What role does depreciation play in calculating cash flows from operating activities?

29. Why are direct exchange transactions not reported in the cash flow statement?

30. What is the significance of having a positive cash flow from operating activities?

247
 Module E: Financial Statements of Banks in Bangladesh

IBB Syllabus: Module E: Financial Statements for Banks  Balance Sheet, Profit and Loss Account,
Cash flow statement, Statement of Changes in equity, Note to Financial Statements, Basic IFRS
Chart of Accounts for Banks.

Contents of this Chapter

Introduction:

Types of Financial Statements for Banks:

Key Components of Bank Financial Statements

Importance of Financial Statements

Regulatory Framework for Bank Financial Statements:

Key Disclosures and Reporting Requirements

Structure, contents and Instructions for preparation of financial statements of Banks

Financial Statements of Shariah-based Banks in Bangladesh: Key Aspects, Regulations, and

Comparisons

Regulatory Framework for Shariah-based Banks in Bangladesh

Financial Statements of Shariah-based Banks

Key Differences in Financial Statements:

Key Differences between Shariah-based and Conventional Banking Products

Other Relevant Considerations for Shariah-based Banks

Actual Financial Statements of Conventional Banks (Eastern Bank PLC)

Actual Financial Statements of Shariah-based Banks (Islami Bank Bangladesh PLC)

Short Questions

248
 Introduction:
Financial statements serve as the cornerstone for evaluating the financial health, performance, and
risk exposure of banks. In Bangladesh, the financial statements of banks are governed by a strict
regulatory framework, ensuring accuracy, transparency, and comparability. These statements
provide vital information to a wide array of users, including regulators, investors, analysts, and
financial institutions, enabling them to make informed decisions.

In line with the global movement toward enhanced transparency in the banking sector, BRPD
Circular No. 14, issued by Bangladesh Bank on 25 June 2003, introduced key amendments to the
forms and directives for preparing financial statements under the Bank Companies Act, 1991. The
circular aimed to improve the level of disclosure in financial statements, providing users with a
more comprehensive and transparent view of a bank's financial position, performance, and risk
profile.

This chapter delves into the structure, contents, and importance of financial statements for banks in
Bangladesh, highlighting the regulatory framework, key components, and types of disclosures
required for expert users.

Types of Financial Statements for Banks:

Banks in Bangladesh are required to prepare several key financial statements, each serving a unique
purpose in assessing a bank’s financial position and performance. The following are the core
financial statements:

1. Balance Sheet: The balance sheet provides a snapshot of a bank's financial position at
a specific point in time. It outlines the bank's assets, liabilities, and shareholders' equity,
showing how resources are financed through debt or equity.

2. Profit and Loss Account (Income Statement): The profit and loss account summarizes
the bank's revenues, expenses, and profits over a particular period. It helps evaluate the
bank's operational efficiency and profitability.

3. Cash Flow Statement: This statement highlights the inflows and outflows of cash
during the period, categorized into operating, investing, and financing activities. It is
crucial for understanding the bank’s liquidity and cash management.

4. Statement of Changes in Equity: This statement outlines changes in shareholders' equity

during the period, including new capital raised, profits retained, dividends paid, and
changes due to revaluation of assets or investments.
249
 5. Liquidity Statement (Asset-Liability Maturity Analysis): The liquidity statement
provides an analysis of the maturity structure of assets and liabilities, allowing users
to assess the bank’s ability to meet short-term obligations.

Key Components of Bank Financial Statements:

1. Balance Sheet:

The balance sheet of a bank provides critical insights into its financial structure by detailing its assets,
liabilities, and equity components.

 Assets:

 Cash: Includes cash in hand, balances with Bangladesh Bank, and balances
with other financial institutions.

 Investments: Investments in government securities, corporate bonds, and

other financial instruments.

 Loans and Advances: Loans extended to customers, including cash

credit, overdrafts, and bills purchased and discounted.

 Fixed Assets: Premises, furniture, and fixtures used by the bank for its operations.

 Other Assets: Includes prepayments, accrued income, and any non-banking

assets acquired.

 Liabilities:

 Deposits: The main source of funding for banks, including current accounts,
savings deposits, and fixed deposits.

 Borrowings: Loans from other banks, financial institutions, and the central bank.

 Other Liabilities: Provisions for loan losses, interest payable, and any
contingent liabilities.

 Shareholders' Equity:

 Paid-up Capital: Capital contributed by the shareholders.

 Reserves: Statutory reserves and retained earnings.

250
  Surplus in Profit and Loss Account: Reflects the net earnings retained in
the business after dividend distribution.

2. Profit and Loss Account (Income Statement):

The profit and loss account reveals a bank's financial performance over a specified period by
summarizing its revenues and expenses.

 Income:

 Interest Income: The primary source of income, earned from loans and advances.

 Investment Income: Earnings from government securities and other investments.

 Commission, Exchange, and Brokerage: Revenue from services provided

to customers.

 Other Operating Income: Miscellaneous income, such as fees for various

banking services.

 Expenses:

 Interest Expense: The cost of funds borrowed from depositors and other
financial institutions.

 Operating Expenses: Includes salaries, rent, utilities, legal fees, and depreciation
of assets.

 Provisions for Loan Losses: Amounts set aside to cover potential loan defaults.

3. Cash Flow Statement:

The cash flow statement helps stakeholders understand how the bank generates and uses cash in its
operations. It is divided into three main categories:

 Operating Activities: Cash flows related to the bank’s core business activities, such
as lending, deposits, and interest payments.

 Investing Activities: Cash flows from the purchase and sale of securities, property,
and equipment.

 Financing Activities: Cash flows related to raising capital, borrowing, and

dividend payments.

251
 4. Statement of Changes in Equity:

This statement tracks changes in equity during the period. It includes:

 New share capital raised.

 Dividends paid to shareholders.

 Retained earnings from profits.

 Revaluation of assets.

5. Liquidity Statement (Asset-Liability Maturity Analysis):

The liquidity statement is essential for assessing the bank’s ability to meet short-term obligations. It
analyzes assets and liabilities based on their maturity:

 Assets: Grouped into cash, short-term investments, loans, and other liquid assets.

 Liabilities: Grouped into short-term borrowings, deposits, and other liabilities.

Importance of Financial Statements:

For expert users, such as financial analysts, regulators, investors, and auditors, the financial statements
of banks offer several key benefits:

1. Risk Assessment: Financial statements provide crucial data on a bank's risk exposure,
including credit risk, market risk, and operational risk. The disclosure of non-
performing loans (NPLs) and provisioning levels is critical for assessing the bank's
stability.

2. Profitability Analysis: By examining the profit and loss account, users can assess the
bank's ability to generate profits from its operations, manage costs, and create shareholder
value.

3. Regulatory Compliance: Financial statements reflect the bank’s adherence to regulatory

requirements, including capital adequacy, liquidity ratios, and risk management practices
as outlined by Bangladesh Bank and global standards like Basel III.

4. Stakeholder Transparency: Detailed financial statements enhance transparency and

build confidence among stakeholders, including depositors, investors, and regulators.

252
 5. Comparability: Standardized formats for financial statements, as mandated by BRPD
Circular No. 14, ensure that users can compare the financial performance of different
banks within the same regulatory framework.

Regulatory Framework for Bank Financial Statements:

The preparation of financial statements for banks in Bangladesh is governed by a robust regulatory
framework. The key regulatory instruments include:

1. Bank Companies Act, 1991: This Act provides the legal foundation for banking
operations in Bangladesh. Section 38 of the Act outlines the requirements for preparing and
submitting financial statements.

2. Bangladesh Bank Directives: Circulars issued by Bangladesh Bank, such as BRPD

Circular No. 14 (2003), provide detailed guidelines for preparing financial
statements, emphasizing disclosure and transparency.

3. International Financial Reporting Standards (IFRS): Banks in Bangladesh are

required to comply with IFRS, which standardizes financial reporting across borders and
ensures transparency in financial disclosures.

4. Basel III Framework: Basel III guidelines, which focus on capital adequacy, liquidity
risk, and leverage ratios, have been adopted in Bangladesh. Banks must disclose their
adherence to these standards in their financial statements.

Key Disclosures and Reporting Requirements:

To ensure transparency, the financial statements of banks must provide several key disclosures:

 Non-Performing Loans (NPLs): A detailed breakdown of NPLs and the provisions made
to cover potential losses.

 Contingent Liabilities: Disclosure of off-balance sheet items, such as guarantees and

letters of credit, which may pose risks to the bank.

 Capital Adequacy: The bank's capital position, including Tier 1 and Tier 2 capital,
risk- weighted assets, and the capital adequacy ratio.

 Earnings Per Share (EPS): Disclosure of EPS for publicly listed banks, allowing
investors to assess the bank’s profitability.

253
 The Structure, Contents and Instructions for preparation of financial statements of Banks in
Bangladesh are mainly shaped by the BRPD Circular No.14 dated 25 June 2003. The relevant
sections of the circular have been reproduced here for the reader.

First
Schedule
(Section 38)
Balance
Sheet Form
Balance
Sheet
As at....................20 ……
Note Current year Previous
(TK) year (TK)
PROPERTY AND ASSETS
Cash*: 01
Cash in hand
(Including foreign currency)
Balance with Bangladesh Bank and its agent bank(s)
(Including foreign currency)
Balance with other banks and financial institutions 02
In Bangladesh
Outside Bangladesh
Money at call on short notice 03
Investments: 04
Government
Others
Loans and Advances: 05
Loans, Cash Credit, Overdrafts etc.
Bills purchased & discounted 06
Fixed assets including premises, furniture and fixtures 07
Other assets 08
Non-banking assets 09
Total Assets:
LIABILITIES AND CAPITAL
Liabilities:
Borrowings from other banks, financial institutions and agents 10
Deposits and other accounts: 11
Current Accounts and other Accounts
Bills Payable
Savings Bank Deposits
Fixed Deposits
Bearer Certificates of Deposit
Other Deposits
Other liabilities 12
Total Liabilities:
Capital/Shareholders' Equity
Paid up Capital 13
Statutory Reserve 14
Other Reserve 15
Surplus in Profit and Loss A/C 16
Total Shareholders' Equity**
Total Liabilities and Shareholders' Equity
* see Cash Flow Statement
** see Statement of Changes in Equity

254
 OFF-BALANCE SHEET ITEMS

Note Current year (TK) Previous year (TK)

Contingent liabilities: 17

Acceptances & Endorsements

Letters of Guarantee Irrevocable
Letters of Credit Bills for
Collection
Other Contingent Liabilities

Total:

Other commitments:

Documentary credits and short term trade-related

transactions
Forward assets purchased and forward deposits
placed
Undrawn note issuance and revolving underwriting
facilities
Undrawn formal standby facilities, credit lines and
other commitments
Total:

Total Off-Balance Sheet items including

contingent liabilities:

255
 First Schedule
(Section 38)

Profit and Loss Account Form

Profit & Loss Account for the year ended as on...................................20 ……

Note Current year (TK) Previous year (TK)

Interest income 19
Interest paid on deposits and borrowings etc. 20

Net interest income

21
Investment income 22
Commission, exchange and brokerage 23
Other operating income
Total operating income
Salary and allowances
Rent, taxes, insurance, electricity etc.
Legal expenses
Postage, stamp, telecommunication etc.
Stationery, Printings, Advertisements etc.
Chief Executive's salary and fees 24
Directors' fees
Auditors' fees
Charges on loan losses
Depreciation and repair of bank's assets
Other expenses
Total operating expenses
Profit/Loss before provision
25
Provision for loan 26
Provision for diminution in value of investments 27
Other provisions
Total provision
Total Profit/Loss before taxes

Provision for Taxation

Net Profit after Taxation
Appropriations:
Statutory Reserve 28
General Reserve
Dividends etc.

Retained surplus
Earning per share (EPS)

256
 Cash Flow Statement
For the year ended as on …… 20 ……

Current Previous
year (TK) year (TK)
Cash flows from operating activities

Interest receipts in cash

Interest payments
Dividends receipts
Fee and commission receipts in cash
Recoveries on loans previously written off
Cash payments to employees
Cash payments to suppliers
Income taxes paid
Receipts from other operating activities (item-wise)Payments
for other operating activities (item-wise)
Operating profit before changes in operating assets and liabilities
Increase/Decrease in operating assets and liabilities

Statutory deposits
Purchase/sale of trading securities
Loans & advances to other banks
Loans & advances to customers
Other assets (item-wise)
Deposits from other banks
Deposits from customers
Other liabilities account of customers
Trading liabilities
Other liabilities (item-wise)
Net cash from operating activities
Cash flows from investing activities

Proceeds from sale of securities Payments

for purchase of securities
Purchase/sale of property, plant & equipment
Purchase/sale of subsidiary
Net cash from investing activities
Cash flows from financing activities

Receipts from issue of loan capital & debt security Payments

for redemption of loan capital & debt securityReceipts from
issue of ordinary share
Dividends paid

Net cash from financing activities

Net increase/decrease in cash

Effects of exchange rate changes on cash and cash-equivalent*
Cash and cash -equivalents at beginning period
Cash and cash equivalents at end of period

*Explanations with detailed information shall have to be furnished regarding the effects of exchange rate changes
on cash and cash-equivalents. Cash and cash-equivalents consist of cash with Bangladesh Bank, with its agent
bank(s), government securities and deposits with other banks.

257
 STATEMENT OF CHANGES IN EQUITY
For the year ended ……… 20 ………

Paid-up Statutory General Profit and Total

Capital Reserve Reserve Loss
Balance as at 01 January 20 ….
Changes in accounting policy
Restated balance
Surplus/deficit on account of revaluation of
properties
Surplus/deficit on account of revaluation ofinvestments
Currency translation differences

Net gains and losses not recognized in the income

statement
Net profit for the period
Dividends
Issue of share capital

Balance as at 31 December 20 …

Liquidity Statement
(Asset and Liability Maturity Analysis)
As at ……………. 20 ……….

upto 01 1-3 3 - 12 1-5 more than Total

month months months years 5 years
Assets:

Cash in hand
Balance with other banks and financial
institutions
Money at call on short notice
Investment
Loans and Advances
Fixed assets including premises, furnitureand
fixtures
Other assets
Non-banking assets

Total Assets

Liabilities:

Borrowings from Bangladesh Bank, otherbanks,

financial institutions and agents Deposits
Other accounts
Provision and other liabilities

Total Liabilities

Net Liquidity Gap

258
 Instructions for preparation of financial statements

A. Instructions on Notes to Balance Sheet items

1. Cash:

(a) Local currency and foreign currency amounts in hand should be shown
separatelyunder the head Cash in hand.
(b) Balance with Bangladesh Bank and its agent bank(s) will be shown separately inlocal
and foreign currency. Statutory deposit with Bangladesh Bank should be shown
separately.

2. Balance with other banks and financial institutions:

(a) Balances with other banks and financial institutions should be segregated into
twosub- heads viz., (i) In Bangladesh and (ii) Outside Bangladesh and should also
state whether in current account or any other form of deposit. In case of foreign
currency deposit, currency-wise amount and exchange rate should be mentioned.
(b) The balance with other banks and financial institutions should be analysed as per
the remaining maturity grouping.

3. Money at call on short notice:

Bank/financial institution-wise balance should be shown separately.

4. Investments:
a) Investments should be shown under the following heads:

Government Securities
(I) Treasury bill;
(II) National Investment bond;
(III) Bangladesh Bank Bills;
(IV) Government Notes/Bond;
(V) Prizebond;
(VI) Others.

Securities under lien against repurchase agreement should be mentioned

separately.
Other Investments
(I) Shares to be classified into preference, ordinary, deferred and other
classesof shares showing separately shares fully paid up and party paid up.
(II) Debentures & bond
(III) Other investments
(IV) Gold etc.

b) All investments in shares and securities (both dealing and investment) shouldbe
revalued at the year-end. The quoted shares should be valued as per market price in
the stock exchange(s) and unquoted shares as per book valueof last audited balance
sheet. Provisions should be made for any loss arising from diminution in value of
investments. The current and long-time investment securities should be shown
separately analysing as per the remaining maturitygrouping.
5. Loans and Advances:

(a) Loans and advances should be shown as per the remaining maturity grouping inthe
following order:

259
 Repayable on demand Not more than 3
months
More than 3 months but not more than 1 year
More than 1 year but not more than 5
years More than 5 years.

(b) The items of loans and advances i.e., loans, Cash credits, Overdrafts should be
segregated into two sub-heads viz., (i) within Bangladesh and (ii) outside Bangladesh

(c) The loans and advances should be analysed to disclose any significant concentration
such as:-
(i) Advances to allied concerns of directors;
(ii) Advances to Chief Executive and other senior executives;
(iii) Advances to customers' group (number of clients and outstanding amount ofloans
and advances each amounting more than 15% of bank's total capital andclassified
amount therein and measures taken for recovery of such loan shouldbe
mentioned);
(iv) Industry-wise;
(v) Geographical location-wise.

(d) The loans and advances should also be classified into the categories of 'unclassified`,
'sub-standard', 'doubtful' and 'bad/loss' in accordance with Bangladesh Bank
directives.
(e) Loans and Advances should also be categorized on the basis of the following
particulars:

(i) Loans considered good in respect of which the banking company is fully secured;
(ii) Loans considered good against which the banking company holds no security
other than the debtor's personal guarantee;
(iii) Loans considered good secured by the personal undertakings of one or
moreparties in addition to the personal guarantee of the debtor;
(iv) Loans adversely classified; provision not maintained thereagainst;
(v) Loans due by directors or officers of the banking company or any of these either
separately or jointly with any other persons.
(vi) Loans due from companies or firms in which the directors of the banking
company have interests as directors, partners or managing agents or in case of
private companies as members;
(vii) Maximum total amount of advance including temporary advance made at anytime
during the year to directors or managers or officers of the banking companies or
any of them either separately or jointly with any other person;
(viii) Maximum total amount of advances, including temporary advances granted
during the year to the companies or firms in which the directors of the
bankingcompany have interests as directors, partners or managing agents or in the
case of private companies as members;
(ix) Due from banking companies; Amount of classified loan on which interest has
not been charged, should bementioned as follows:
a. Decrease/increase in provision, amount of loan written off and amount
realised against loan previously written off;
b. Amount of provision kept against loan classified as 'bad/loss' on the
dateof preparing the balance sheet;
c. Interest creditable to the Interest Suspense a/c;
(x) Cumulative amount of the written off loan and the amount written off during the
current year should be shown separately. The amount of written off loanfor
which lawsuit has been filed should also be mentioned.

6. Bills purchased and discounted:

260
(a) Bill discounted and purchased will exclude Government Treasury bills. These billsshould
be classified into two sub-heads viz., (i) payable in Bangladesh and (ii) payable
outside

261
 Bangladesh.
(b) The bills discounted and purchased should be analysed as per the following
remaining maturity grouping:
Payable within 1 month;
Over 1 month but less than 3 months;
Over 3 months but less than 6
months; 6 months or more.

7. Fixed assets including premises, furniture and fixtures:

(a) Premises wholly or partially occupied by the banking company for the purpose ofits
business should be shown against "Fixed assets including premises (less
accumulated depreciation)". In case of fixed capital expenditure, the original cost,
and additions thereto and reductions therefrom during the year should be stated,as
also the total depreciation written off or where sums have been written off on
account of reduction of capital or revaluation of assets. Every balance sheet afterthe
first balance sheet subsequent to the reduction or revaluation should show the
reduced figures with the date and amount of the reduction made. Furniture
&fixture and other assets, terms of which have been completed and value writtenoff,
need not be shown in the balance sheet. However, if serviceability of such asset
remains, its market value may be mentioned in the notes. Explanation for thebases of
asset valuation and outcome of depreciation should be mentioned in details.
(b) A statement of the premises not used by the bank for its own or business purposeor
the remaining part of the partially used premises and item-wise revenue generated
from such assets should be incorporated.

8. Other assets:

(a) Other assets should be classified under the following categories:

(i) Investment in shares of subsidiary companies (In Bangladesh and

outside Bangladesh);
(ii) Stationery, stamps, printing materials in stock etc.;
(iii) Advance rent and advertisement;
(iv) Interest accrued on investment but not collected, commission and
brokerage receivable on shares and debentures and other income
receivable;
(v) Security deposit;
(vi) Preliminary, formation and organization expenses, renovation/development
expenses and prepaid expenses;
(vii) Branch adjustment;
(viii) Suspense Account;
(ix) Silver;
(x) Others.
(b) Other assets should be classified as per instruction of Bangladesh Bank andshown
accordingly.
(c) Non-income-generating other assets item(s) should be shown separately.

9. Non-banking assets:

These represent assets acquired in satisfaction of claims. Its holding period should be
separately mentioned. Value shown shall not exceed the market value. Non-income-
generating non-banking item(s) should be shown separately.

10. Borrowings from other banks, financial institutions and agents:

These should be segregated into

262
 (a) (i) In Bangladesh, and (ii) Outside Bangladesh;
(b) (i) Secured (stating the nature of securities) and (ii) Unsecured borrowing.
(c) (i) Repayable on demand (ii) Others (based on agreed maturity dates and
periodsof notice).

11. Deposits and other accounts:

The deposits should be analysed in terms of the following remaining maturity grouping
showing separately other deposits and inter-bank deposits:

Repayable on demand;
Repayable within 1
month;
Over 1 month but within 6
months; Over 6 months but within
1 year; Over 1 year but within 5
years; Over 5 years but within 10
years;
Unclaimed deposits for 10 years or more held by the bank should be shown separately.
12. Other liabilities;

Under this heading may be included such items as the following: Accumulated
provision for loans and advances including bad debts, other provision, cumulative
balance of interest suspense account, pension and insurance funds, unclaimed
dividends, advance payments and unexplored discounts, liabilities to subsidiary
companies, provision for taxation and any other liabilities.

a) Provision for loans and advances:

The provision account includes provision for adversely classified loan and
general provision for unclassified loan.
The note on movement in specific provision for bad and doubtful debtsshould be presented
in the following format:

Particulars Taka
Provisions held at the beginning of the year
Fully provided debt written off (-)
Recoveries of amounts previously written off (+)
Specific Provision for the year (+)
Recoveries and provisions no longer required (-)
Net Charge to Profit & Loss A/C (+)
Provisions held at the end of the year

(i) The movement in general provision on unclassified loans should alsobe

presented separately.

b) Interest Suspense Account:

This should be shown according to the following format:

Particulars Taka
Balance at the beginning of the year
Amount transferred to "Interest Suspense" Account during the year (+)
Amount recovered in "Interest Suspense" Account during the year (-)
Amount written off during the year (-)
Balance at the end of the year

263
 Note: Interest Suspense means unrealised interest charged on classified loans and
advances.

13. Paid up Capital:

(a) The notes on paid up capital should disclose the following:

i) The various classes of capital, if any, should be distinguished. Shares issued as

fully paid up pursuant to any contract without payments in cash should be stated
separately.
ii) Where circumstances permit, issued and subscribed capital and amount called
up may be shown as one item e.g. Issued and Subscribed Capital
………...Shares of Tk paid-up.
iii) In case of banking companies incorporated outside Bangladesh, the amount of
deposit kept with the Bangladesh Bank under sub-section (3) of section 13of the
Bank Companies Act, 1991 should be shown under this head.
(b) Capital surplus/deficit should be mentioned in the note segregating the core
capitaland supplementary capital as per Bangladesh Bank directives relating to
the capital adequacy.

14. Statutory Reserve:

(Under section 24 of Bank Companies Act, 1991)

Movement should be shown separately.

15. Other Reserve:

(a) Movement in each of the reserve account should be shown separately.

(b) Any capital reserve and revaluation reserve should be disclosed separately.

16. Surplus in Profit and Loss A/C:

Increase/decrease should be shown clearly.

17. Contingent liabilities:

a) These should be explained in the following manner:

Claims lodged with the bank company, which is not recognized as loan;
Money for which the bank is contingently liable in respect of guarantee issued
favouring:
- Directors
- Government
- Bank and other financial institutions
- Others.
b) Commitments should be segregated as follows:
i) Documentary credits and short term trade related transactions;
ii) Forward asset purchased and forward deposits placed;
iii) Undrawn formal standby facilities, credit lines and commitments to lend:
-Under one year
-One year and over;
iv) Spot and forward foreign exchange rate contracts;
v) Other exchange contracts.

N.B. Explanations for the liabilities not shown in books and provisions kept
thereagainst should be disclosed in notes.

264
18. Instructions on Notes to Profit and Loss Account items:

The disclosures in the Profit and Loss Account should include, but are not limited to, the
following items of income and expenditure:
Income:
Interest, discount and similar income
Dividend income
Fee, commission and brokerage
Gains less Losses arising from dealing securities
Gains less Losses arising from investment
securities
Gains less Losses arising from dealing in foreign currencies
Income from non-banking assets
Other operating income
Profit less Losses on interest rate changes.

Expenses:
Interest, fee and commission
Losses on loans and advances
Administrative expenses
Other operating expenses
Depreciation on banking
assets.

19. Interest income:

The major sources of interest income as arising from loans and advances to
customers, balances with other banks or financial institutions, accounts with foreign
banks, etc. should be disclosed.

20. Interest paid on deposits and borrowings etc:

This may be shown under the heads as attributable to interest on deposits, interest on
borrowings, interest on foreign bank accounts etc.

21. Investment income:

This will consist of sub-heads on interest on or profit from Bills, Treasury Bills,
Notes,Bonds, Shares, Debentures etc.

22. Commission, exchange and brokerage:

Commission, exchange and brokerage should be shown separately.

23. Other operating income:

Other operating income should be disclosed item wise.

24. Directors' fees:

It should include:
a) Total fees paid for attending board meeting (rate of fee should be mentioned);
b) Other financial benefits [other financial benefits extended to the directors as
per section 18(1) of the Bank Companies Act, 1991 excluding fees].

25. Provision for loan:

This will consist of the following:

(a) Provision for adversely classified loans and advances as per Bangladesh Bank
directives.
265
(b) Provision for unclassified loans and advances.

266
 26. Provision for diminution in value of investments:
Decline in value of investment should consist of the following divisions:
(a) Dealing securities
- Quoted
- Unquoted;
(b) Investment securities
- Quoted
- Unquoted.

27. Other provisions:

Provision kept against classified other-assets etc., should be stated.

28. Appropriations:

For the banks incorporated outside Bangladesh, policy in force for appropriation of profit
should be followed and appropriations should be mentioned accordingly.

B. General Instructions:

1. These instructions for disclosure of financial statements shall apply to all bankcompanies
and other financial institutions working in Bangladesh. The statements shallcomprise of
balance sheet, profit and loss account, cash flow statement, statement ofchanges in
equity, liquidity statement and other explanatory notes.

2. Financial statements should include clear and concise disclosure of all significant
aspects of accounting principles and procedures, which have been followed. The
disclosure of all the significant accounting principles adopted shall be an integral part ofthe
financial statements. The principles should normally be disclosed in one place. The
principles should state the accounting conventions, bases of accounting and
otherprinciples adopted for determination of interest income and expenses, valuation
ofinvestment and dealing securities, segregation of balance sheet and off-balance
sheetitems, bad and doubtful debts, capital, foreign currencies, tangible fixed assets etc.
The basis for determination of items relating to charges derived from general banking
risksand the accounting treatment of such charges should be disclosed.

3. The notes to the financial statements shall provide relevant details of the items includedin
balance sheet, profit and loss account, cash flow statement, liquidity statement andstatement
of changes in equity, so that adequate disclosures are made for clear understanding of the
users. The liquidity statement should be prepared according to theremaining maturity
grouping.

4. The value of any asset or liability as shown in the balance sheet should not be off-set byway
of deductions from another liability or asset unless there exists a legal right thereof.

5. The market prices of dealing securities and marketable investment securities should be
disclosed if these are different from those shown in the financial statements.

6. The unrealised interest of loans classified as sub-standard, doubtful and bad/loss should not
be included in the income; amount thereof should be mentioned in the notes.

7. The financial statements should disclose the details of the contingent liabilities and
commitments. The statements should disclose the following items/events till the date onwhich
the statements are prepared:
(a) the nature and amount of commitments to extend credit that are irrevocable because
they cannot be withdrawn at the discretion of the bank without the risk ofincurring
267
 significant penalty or expenses; and
(b) the nature and amount of contingencies and commitments arising from off-
balancesheet items including those relating to:
(i) direct credit substitutes including general guarantees of indebtedness,
bank acceptance guarantees and standby letters of credit serving as
financial guarantees for loans and securities;
(ii) certain transaction related contingencies including performance bonds,
bidbonds, warranties and standby letters of credit related to particular
transactions;
(iii) short-term self-liquidating trade related contingencies arising from the
movement of goods, such as documentary credits where the underlying
shipment is used as security;
(iv) those sale and repurchase agreements not recognized in the balance sheet;
(v) interest and foreign exchange rate related items including swaps,
options,futures etc.;
(vi) other commitments viz., note issuance facilities and revolving underwriting
facilities.
8. (a) Any significant concentration of assets, liabilities or off-balance sheet items or
suchitems that might have significant influence on the state of affairs of the bank should
bedisclosed in the notes of the relevant items. Such disclosure should be made in terms
ofgeographical areas, customer or industry-groups etc.
(b) The net amount of foreign currency exposures should be disclosed.

9. The aggregate amount of secured liabilities and the nature and carried amount of theassets
pledged as security, should be disclosed by way of notes.

10. A bank whose ordinary shares are publicly traded should present Earning Per Share (EPS)
on the face of Profit and Loss Account, both in case of profit or loss per share.The bank
should make a disclosure by way of note to the financial statements of the calculation of
Earning Per Share in accordance with IAS-33.

11.
(a) The financial statements should disclose the relationship and transactions between the
bank and its related parties till the date on which the statements are prepared. A
related party transaction is built on the ability of one party to control orsignificantly
influence the other party either directly or indirectly. Parties may be related if they are
under common control or influence. It is necessary to look at the substance of the
relationship and not merely the legal form thereof. Even if there isno controlling
relationship, the parties may still be related as long as there is at least significant
influence of one on another. Significant influence can be attained by representation on
the board of directors, participation in the policy making decisions, material inter-
company transactions, inter- change of managerial personnel, dependence on technical
information etc. A bank may advance a largesum or charge lower interest rates to a
related party what is not usually done in case of a party not equally related. Despite
the origination of related party transactions in the ordinary course of a bank's business,
disclosure of informationabout such transactions is relevant for the sake of
transparency. The spouse, parents, children, brother and sister of the bank directors
and dependants of the directors would generally be included in the related party.
(b) The following disclosures are mandatory:
(i) Names of the Directors together with a list of entities in which they have
interests;
(ii) All contracts of significance to which the bank, its subsidiary or any fellow
subsidiary company was a party and wherein a director has interests
subsisted at any time during the year or at the end of the year;
(iii) Share options given to directors and executives to acquire shares at 'nil'
consideration or restricted share plan exercisable at a discount.
(iv) The nature of the related party relationship, the types of transactions
andthe elements of transactions;
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(v) The lending policy to related parties shall be disclosed and in respect of

269
 related party transactions, the amount should include:
(a) each of loans and advances, deposits and guarantees andcommitments;
disclosures may include the aggregate amounts outstanding at the
beginning and end of the period, as well as changesduring the period;
(b) each of the principal items of deposit, expense and commission;
(c) the amount of the provision against loans and advances;
(d) irrevocable commitments and contingencies and commitment
arisingfrom other off-balance sheet items;
(vi) Full disclosure of balances at the balance sheet date resulting from
transactions with directors and their related concerns shall be made together
with an analysis as to the classified and unclassified advances, provision, if
any, for possible losses on classified loans and advances, value of the
securities held etc., and the amount of the loans, adversely classified, of the
concerns of persons who were bank directors at the timethe loans were
extended. If such loans were written off or waived that should also be
mentioned;
(vii) Detailed information of any business (like receiving/extending services,
purchase/sale of properties, renting etc.) other than the banking
business with any related concerns of the directors as per section 18(2)
of the Bank Companies Act should be provided;
(viii) Detailed information of the amount invested along with a list, in the securities
(both dealing and investment) of the directors and their relatedconcerns.

12. Names of the members of the audit committee formed by the board of directors of thebank
and their qualifications should be disclosed. Confirmation as to the number of meetings of
the audit committee held with the bank's senior management to considerand review the
bank's financial statements, the nature and scope of audit reviews andthe effectiveness of
the system of internal control and compliance thereof should be made.

13. The income items should be treated as income when there exists no risk or uncertaintyregarding
its realization.

14. Explanation regarding tax determination, provision thereagainst and approved expenditure
in relation to it should be provided.

15. Detailed explanation about the procedure of conversion into local currency of the
transactions made in foreign currency; income-expenditure in such business, impact (item-
wise) of taxation on difference in exchange rate on assets and liabilities and impact of
difference in exchange rate on taxation etc. should be given.

16. Reconciliation of books of accounts in regard to inter-bank (in Bangladesh and outside
Bangladesh) and inter-branch transactions and adequate explanations in case of non-
reconciliation should be provided.

17. Detailed information should be given regarding financing and management of the
fundraised for staff pension considering it as a separate entity.

18. The external auditors must audit at least 80% of the risk-weighted assets of the bank before
signing on the balance sheet and the person-hours they have spent forconducting the
audit should be mentioned.

19. Figures should be rounded off to nearest Taka.

20. Highlights of the bank should be presented in the annual report as under:
Highlights
SI Particulars Present Year Previous Year
No

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 1. Paid up Capital
2. Total Capital
3. Capital surplus/deficit
4. Total Assets
5. Total Deposits
6. Total Loans and Advances
7. Total Contingent Liabilities and Commitments
8. Credit Deposit Ratio
9. Percentage of classified loans against total
loans and advances
10. Profit after tax and provision
11. Amount of classified loans during current year
12. Provisions kept against classified loan
13. Provision surplus/deficit
14. Cost of fund
15. Interest earning Assets
16. Non-interest earning Assets
17. Return on Investment (ROI)
18. Return on Asset (ROA)
19. Incomes from Investment
20. Earning per Share
21. Net income per Share
22. Price Earning Ratio

21. Copies of financial statements including the Balance Sheet should be preserved in eachof
the bank branches, so that the customers of the bank may readily use those on request.
Besides, the Highlights (see general instruction no.20) and Balance Sheet should be affixed
in a visible place of each bank branch.

22. The financial statements should be published in widely circulated one Bangla and
oneEnglish daily newspapers within one week of submission of the statements to
Bangladesh Bank so that the stakeholders of the bank including its depositors, shareholders
and regulatory bodies can get information about the bank easily. Theseshould also be
disclosed in the bank's website.

Financial Statements of Shariah-based Banks in Bangladesh: Key Aspects,

Regulations, and Comparisons

Shariah-based banks in Bangladesh follow Islamic principles, which prohibit interest (riba) and
promote ethical investment. These banks have been a significant part of the financial landscape,
offering products and services that comply with Shariah law, creating an alternative to conventional
banking. This paper will explore the financial statements of Shariah-based banks, relevant
regulatory frameworks, key differences between conventional and Islamic banks, and the nuances
of Islamic financial products.

Regulatory Framework for Shariah-based Banks in Bangladesh

Shariah-based banks operate under the guidelines of Bangladesh Bank, the central bank of
Bangladesh, and must comply with the country's banking regulations. However, these banks also

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have

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to follow the additional Shariah principles and directives issued by their Shariah boards. These
boards are typically composed of scholars with expertise in Islamic jurisprudence and finance.

Key Regulatory Bodies and Guidelines:

 Bangladesh Bank (BB): The central bank of Bangladesh provides general banking
regulations for all financial institutions. Shariah-based banks must adhere to BB’s directives
on capital adequacy, reporting standards, and risk management, while ensuring these do not
conflict with Islamic principles.

 Shariah Supervisory Boards (SSBs): Each Islamic bank has its own SSB, which ensures
the bank’s operations and financial products comply with Shariah law. This includes
approving contracts and transactions to avoid riba (interest) and gharar (excessive
uncertainty).

Bangladesh has issued several regulations concerning Islamic banking, such as guidelines for profit-
sharing accounts, modes of financing, and detailed reporting of Shariah compliance. Some of the
key laws and regulations applicable to Shariah-based banks include:

 Bank Companies Act, 1991: This law governs all banks in Bangladesh, including Islamic
banks.

 Islamic Banking Guidelines (2009): Issued by Bangladesh Bank, these guidelines provide
the framework for the operation of Islamic banks, including reporting and compliance
mechanisms.

 Basel III Requirements: Shariah-based banks, like conventional banks, are required to
meet Basel III capital adequacy and liquidity standards, but they need to ensure compliance
with Shariah law while implementing these.

Financial Statements of Shariah-based Banks

Shariah-based banks produce financial statements in a manner similar to conventional banks but
with several differences in terminology, content, and reporting principles to align with Islamic
finance. The key financial statements include the Balance Sheet, Income Statement, Cash Flow
Statement, and Statement of Changes in Equity.

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Key Differences in Financial Statements:

1. Income Statement (Profit and Loss Account):

o Islamic Banks: The major difference lies in the absence of interest income. Instead,
Islamic banks report income derived from profit-sharing agreements such as
Mudarabah (profit-sharing), Musharakah (joint venture), Ijarah (leasing), and
Murabaha (cost-plus financing). The income is reported as "Profit from Islamic
Banking Activities" rather than "Interest Income."

o Conventional Banks: Conventional banks report "Interest Income" as their primary

revenue source from loans and advances. Interest expense is also reported as a key
component of cost.

2. Balance Sheet (Statement of Financial Position):

o Islamic Banks: The assets and liabilities of Islamic banks differ significantly from
those of conventional banks. Islamic banks hold financing assets such as Ijara
receivables (leased assets), Murabaha receivables, and Mudarabah investments,
while conventional banks hold loan assets that generate interest.

o Liabilities: In Islamic banks, savings and investment accounts are often based on
profit-and-loss sharing principles, such as Mudarabah. These are reported differently
from conventional deposits where interest is paid.

3. Equity and Reserves:

o Shariah-based banks often maintain investment risk reserves and profit

equalization reserves, which are designed to absorb potential losses from
investments and ensure stability in profit distribution to depositors. These reserves
are generally absent in conventional banks.

4. Cash Flow Statement:

o The cash flow of Islamic banks emphasizes non-interest-based cash inflows and
outflows. Financing activities may include transactions such as leasing (Ijarah), cost-
plus sales (Murabaha), or profit-sharing agreements. These differ from conventional
bank cash flow statements, which predominantly reflect interest-based lending and
borrowing.

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 5. Disclosure and Compliance Statements:

o Islamic banks typically include a separate Shariah Compliance Statement,

endorsed by the Shariah Supervisory Board, certifying that the bank’s operations
comply with Islamic principles. This statement is unique to Shariah-based
institutions and is not found in conventional banks.

Key Differences between Shariah-based and Conventional Banking Products

The primary difference between Islamic and conventional banks lies in the concept of interest versus
profit. In Islamic finance, earning interest (riba) is strictly forbidden, and as such, Islamic banks use
alternative profit-generating mechanisms.

Financing Products:

 Islamic Banks:

o Murabaha (Cost-Plus Financing): The bank purchases an asset and sells it to the
customer at a marked-up price. The profit margin is agreed upon upfront, and there is
no interest involved.

o Ijara (Leasing): Islamic banks lease an asset to a customer for a specified period.
Ownership remains with the bank, and the customer pays a rental fee, which serves
as the bank’s return on the asset.

o Mudarabah (Profit-sharing): An agreement between a bank and a customer where

the bank provides capital, and the customer manages the business. Profits are shared
according to a pre-agreed ratio, but any financial loss is borne by the bank.

 Conventional Banks:

o Interest-based Loans: Conventional banks provide loans where the bank charges a
fixed or variable interest rate on the principal amount. This interest income forms the
bulk of a conventional bank's earnings.

Deposit Products:

 Islamic Banks:

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 o Mudarabah Savings Accounts: Islamic banks offer savings accounts based on the
Mudarabah principle, where depositors act as capital providers. The bank invests
these funds, and the profits are shared between the bank and depositors. There is no
guaranteed return, unlike interest in conventional banks.

 Conventional Banks:

o Fixed Deposit Accounts: Conventional banks pay depositors a pre-agreed interest

rate on their deposits, regardless of the bank’s performance or profits. The interest is
fixed and is a liability for the bank.

Interest vs. Profit

In conventional banking, interest is a predetermined and fixed amount paid on loans and deposits. This
fixed return is not dependent on the performance of the bank or its investments.

In contrast, Islamic banking replaces interest with profit-sharing mechanisms. Returns in Islamic
finance are linked to the bank’s actual profits and are not guaranteed. For instance, in Mudarabah,
the depositor and the bank share profits based on a pre-agreed ratio, while the bank bears any
financial losses.

Other Relevant Considerations for Shariah-based Banks

Shariah-based banks face unique challenges in terms of compliance, risk management, and customer
education. These banks must ensure strict adherence to Shariah principles, which involves
continuous supervision by the Shariah Board. They also need to communicate effectively with
customers to explain the differences between Islamic and conventional financial products.

Key Challenges:

 Liquidity Management: Islamic banks have limited instruments for liquidity management,
as many conventional tools involve interest. Islamic banks typically rely on Shariah-
compliant instruments like Sukuk (Islamic bonds) for liquidity management.

 Shariah Compliance Costs: Ensuring compliance with Islamic principles often requires
additional layers of review and approval, which can increase operational costs.

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The financial statements of Shariah-based banks in Bangladesh reflect their commitment to Islamic
principles, distinguishing them from conventional banks in terms of terminology, product structure,
and profit distribution mechanisms. While these banks operate within the same regulatory
framework as conventional banks, they must also navigate the complexities of Shariah compliance.
As Islamic banking continues to grow in Bangladesh, understanding these differences becomes
increasingly important for both regulators and market participants.

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Actual Financial Statements of Conventional Banks (Eastern Bank PLC)

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279
280
281
282
Actual Financial Statements of Shariah-based Banks (Islami Bank Bangladesh PLC)

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285
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287
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 Short Questions
1. What are the key financial statements that banks in Bangladesh must prepare to assess their
financial health?

2. How does the balance sheet of an Islamic bank differ from that of a conventional bank?

3. What is the significance of BRPD Circular No. 14 in the preparation of bank financial statements
in Bangladesh?

4. How does the Profit and Loss Account of a Shariah-based bank differ in terms of revenue
reporting compared to a conventional bank?

5. What regulatory frameworks guide the financial reporting of banks, specifically Shariah-based banks,
in Bangladesh?

6. In the financial statements of Islamic banks, what replaces "interest income" found in
conventional banks' income statements?

7. What role do Shariah Supervisory Boards play in ensuring the compliance of Islamic banks’ financial
statements with Islamic principles?

8. How are liabilities reported differently in Shariah-based banks compared to conventional banks?

9. What are the unique components found in the financial statements of Shariah-based banks but not in
conventional banks?

10. What are the challenges Shariah-based banks face in terms of liquidity management as reflected
in their financial statements?

11. How are deposit products in Islamic banks, such as Mudarabah savings accounts, reflected in
their financial statements compared to fixed deposit accounts in conventional banks?

12. What key disclosures must Shariah-based banks include in their financial statements to
ensure compliance with Islamic principles?

13. How does the concept of profit-sharing in Islamic banking differ from interest-based lending in
conventional banking, as seen in financial reporting?

14. What role does the Statement of Changes in Equity play in the financial statements of Islamic banks?

15. What types of reserves are unique to Shariah-based banks, and how are they reported in the
balance sheet?

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 Module F: Other Forms of Business Organizations

IBB Syllabus for Module F: Other Entities  Sole proprietorship, Partnership, Hindu Undivided
Family (HUF), Joint ventures, Corporation - Private Limited Corporation and Public Limited
Corporation.

Contents of this Chapter

Introduction

Sole Proprietorship Businesses

Characteristics of Sole Proprietorship Businesses

Financial Reporting of Sole Proprietorship Businesses

Financial Transparency and Lender Considerations for Sole Proprietorship Businesses

Compliance and Other Relevant Issues for Sole Proprietorship Businesses

Partnership Firms in Bangladesh

Characteristics of a Partnership Firm

Accounting Concepts in a Partnership Firm

Financial Reporting of a Partnership Firm

Advantages of a Partnership Firm

Disadvantages of a Partnership Firm

Compliance and Regulatory Issues

Lenders’ Perspective on Lending to a Partnership Firm

Differences between Single Owner Business and Partnership Firms (With Focus on Accounting and
Lenders' Perspectives)

Corporations in Bangladesh - Private Limited Corporations and Public Limited Corporations

Characteristics of Private Limited and Public Limited Corporations

Key Accounting Concepts and Financial Reporting

Advantages and Disadvantages of Private and Public Limited Corporations

Compliance Requirements

Differences between Private Limited Corporations and Public Limited Corporations

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Lenders' Perspectives on Lending to Private and Public Limited Corporations

Joint Venture

Characteristics of Joint Ventures

Accounting Concepts for Joint Ventures

Financial Reporting

Taxation Issues

Compliance with Laws and Regulations

Advantages of Joint Ventures

Disadvantages of Joint Ventures

Financial Reporting Issues

Lenders' Perspective

Hindu Undivided Family (HUF)

Characteristics of HUF

Accounting Concepts and Financial Reporting for HUF

Financial Reporting Standards for HUF

Compliance Requirements

Advantages of HUF

Disadvantages of HUF

Lenders' Perspective on Dealing with HUF

Short Questions

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Introduction
Business organizations can take various forms, each with distinct features affecting their financial
accounting and reporting. In this chapter, we will cover the financial accounting implications for
Sole Proprietorship, Partnership, Hindu Undivided Family (HUF), Joint Ventures, and Corporations
(including both Private Limited Corporation and Public Limited Corporation). Each of these forms
presents unique challenges and opportunities for financial management, taxation, and compliance
with legal frameworks.

Sole Proprietorship Businesses

A sole proprietorship is a popular form of business organization in Bangladesh due to its simplicity
and ease of establishment. In this structure, a single individual owns, controls, and manages the
business. From a financial accounting perspective, the sole proprietorship has several distinct
characteristics and requirements, particularly in terms of accounting practices, financial reporting,
taxation, and compliance. Additionally, lenders consider specific factors when extending credit to
such businesses, making financial transparency and solvency critical in loan evaluation.

1. Characteristics of Sole Proprietorship Business

1.1 Single Entity

In a sole proprietorship, there is no legal separation between the business and the owner. The assets
and liabilities of the business are effectively the owner's. However, for accurate financial reporting,
accounting standards require the owner to maintain a clear distinction between personal and
business transactions. This ensures proper financial tracking and transparency.

1.2 The Accounting Equation

The accounting equation—Assets = Liabilities + Owner’s Equity - applies to sole proprietorships,

as it does to other business forms. In this case, the owner's equity represents the owner's direct
investment in the business. This equity increases with capital contributions and retained earnings
(profits left in the business) and decreases through drawings (owner’s withdrawals for personal
use).

1.3 Owner’s Equity and Drawings

Unlike corporations that issue equity shares, sole proprietorships rely on the owner's personal
capital to fund operations. Any capital injected by the owner becomes part of owner’s equity, while

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profits

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generated by the business are also added to this equity. Conversely, when the owner withdraws
money for personal use (drawings), it reduces the equity in the business.

Drawings are not considered business expenses but rather reductions in the owner’s investment.
This makes it essential to distinguish between personal withdrawals and legitimate business
expenses in the financial records.

2. Financial Reporting

2.1 Single Set of Books

Sole proprietors typically maintain a basic set of books, which includes:

 Cash Book: To track cash receipts and payments.

 Income Statement (Profit and Loss Statement): To summarize revenue, expenses, and net
profit or loss over a period.

 Balance Sheet: To detail assets, liabilities, and owner’s equity at a specific date.

While financial statements for sole proprietorships are not required to be made public, they may be
necessary for specific purposes such as obtaining loans from banks or engaging in contracts with
larger firms. Proper bookkeeping and financial reporting are crucial to demonstrating the financial
health of the business, especially when seeking external funding.

2.2 Lack of IFRS/GAAP Compliance

In most cases, sole proprietors in Bangladesh are not required to adhere to International Financial
Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). This contrasts
with larger businesses that may have international dealings, as compliance with these standards
would then become necessary.

Instead, accounting for sole proprietorships remains straightforward, with a focus on accurate cash
flow tracking, revenue recognition, and expense categorization. However, when a sole proprietor
deals with international clients or suppliers, compliance with such standards may be required for
transparency and comparability.

3. Financial Transparency and Lender Considerations

3.1 Lender Perspective

From a lender's perspective, lending to a sole proprietorship presents unique challenges. The lack of
a legal distinction between the owner and the business means that lenders view the personal
financial
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health of the owner and the business’s solvency as intertwined. For this reason, the following
factors are considered:

 Personal Creditworthiness: Lenders will scrutinize the proprietor’s personal credit history,
as the owner is personally liable for all business debts.

 Business Financial Health: Detailed financial statements and records are essential for
evaluating the business’s ability to repay a loan. A lender will likely ask for the balance
sheet, profit and loss statement, and cash flow details.

 Collateral: Because the owner is personally liable, lenders often require personal assets as
collateral. This increases the risk for the owner but also provides reassurance to the lender.

 Business Plan and Projections: For larger loans, lenders may require a comprehensive
business plan with financial projections to assess the long-term viability of the business.

3.2 Lack of Limited Liability

Since the sole proprietor has unlimited liability, personal assets are at risk if the business cannot
meet its obligations. This situation is a key concern for lenders, as they need to evaluate both the
business's risk profile and the owner’s ability to cover potential losses.

4. Compliance and Other Relevant Issues

4.1 Legal and Regulatory Compliance

In Bangladesh, sole proprietors must register their business with the appropriate government
authority, such as the Registrar of Joint Stock Companies and Firms. Additionally, if the business
deals in goods or services subject to VAT (Value-Added Tax), registration with the National Board
of Revenue (NBR) is required.

Compliance with basic tax laws and labor regulations is necessary, especially if the business has
employees. However, the compliance burden is generally lower for sole proprietorships compared
to other business structures, such as private limited companies.

4.2 Succession Planning and Continuity

Sole proprietorships face challenges regarding continuity and succession. Upon the owner’s death
or incapacity, the business often ceases to exist, as there is no legal entity distinct from the owner.
While this poses risks for lenders and other stakeholders, careful succession planning and the
potential transfer of ownership to a family member or trusted partner can help mitigate these risks.

Sole proprietorships are attractive for entrepreneurs in Bangladesh due to their simplicity, minimal
compliance requirements, and direct taxation structure. However, financial accounting practices,

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transparency, and compliance with regulatory standards remain critical for both the business owner
and external stakeholders, such as lenders. Proper financial management ensures the business's
sustainability and the owner's financial well-being, while also instilling confidence in potential
lenders or investors.

Partnership Firms in Bangladesh

A partnership firm is a business structure where two or more individuals come together to carry on
a business with the goal of making a profit. In Bangladesh, partnership firms are governed by the
Partnership Act of 1932, which provides the framework for formation, operations, and dissolution.
The financial accounting and reporting practices of a partnership firm are crucial not only for the
internal management but also for external stakeholders, including lenders, tax authorities, and
regulatory bodies.

This write-up will provide an expert-level discussion on the characteristics, accounting concepts,
advantages, disadvantages, financial reporting, taxation, compliance, and other relevant issues
related to partnership firms in Bangladesh from a financial accounting perspective.

Characteristics of a Partnership Firm

1. Mutual Agreement: A partnership firm is formed by mutual agreement among partners,

which can be either oral or written. A written agreement, often termed a partnership deed,
outlines profit-sharing ratios, responsibilities, and other operational specifics.

2. Shared Responsibility: Partners share responsibilities for management and operational

decisions. In the absence of a deed specifying otherwise, all partners contribute to and share
profits equally, but they also share the liabilities.

3. Unlimited Liability: The liability of partners in a general partnership is unlimited. This

means that personal assets of the partners can be used to settle the firm's debts in case of
liquidation or insolvency, which makes the structure riskier for the partners.

4. Lack of Separate Legal Entity: Unlike companies, a partnership firm does not have a
distinct legal personality. The firm and its partners are considered one and the same in terms
of legal liability.

5. Limited Duration: A partnership may be dissolved at any time, especially if one partner
decides to leave or if the partners mutually agree to end the firm.

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Accounting Concepts in a Partnership Firm

1. Separate Entity Concept: Although a partnership firm lacks a distinct legal identity, it is
treated as a separate entity for accounting purposes. The firm’s transactions are recorded
separately from the personal transactions of the partners.

2. Profit and Loss Appropriation: The profit or loss of the firm is distributed among partners
based on the profit-sharing ratio agreed upon in the partnership deed. This distribution is
recorded in the partners' capital accounts.

3. Capital and Current Accounts: Partners typically maintain two types of accounts in the
firm: capital accounts and current accounts. The capital account reflects long-term
contributions, while the current account reflects ongoing transactions like share of profits,
interest on capital, drawings, etc.

4. Interest on Capital and Drawings: In many partnership firms, interest is paid to partners
on their capital contributions, and interest is charged on the amount they withdraw
(drawings). Both are recorded in the financial statements and impact profit distribution.

5. Goodwill Accounting: In cases of partner retirement, admission, or dissolution, goodwill

valuation becomes important. The valuation method is typically based on an agreement or
prior earnings and needs to be accounted for properly.

Financial Reporting of a Partnership Firm

1. Financial Statements: The key financial statements prepared by partnership firms are:

o Statement of Financial Position (Balance Sheet): Shows assets, liabilities, and

capital of the firm.

o Statement of Profit or Loss (Income Statement): Displays revenue and expenses,

leading to the net profit or loss of the firm.

o Profit and Loss Appropriation Statement: This statement shows the distribution of
profits and any appropriations made such as interest on capital, salary to partners,
and distribution of the residual profit.

2. Accounting Standards: Partnership firms in Bangladesh generally follow the Bangladesh

Financial Reporting Standards (BFRS), particularly for recognition, measurement, and
disclosure of assets, liabilities, and income. However, small partnership firms often use
simplified accounting rules unless required otherwise by lenders or regulators.

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 3. Audit Requirements: While partnerships do not have mandatory audit requirements unless
specified by lenders or regulatory authorities, maintaining transparency through auditing is
beneficial, especially when dealing with external creditors.

Advantages of a Partnership Firm

1. Ease of Formation: A partnership firm can be formed relatively easily through a simple
agreement.

2. Flexible Management: Partners have the flexibility to manage the business, allocate roles,
and make decisions without a complex structure.

3. Capital Pooling: The ability to pool capital from multiple partners helps the business to
scale and manage operations effectively.

4. Tax Benefits: In Bangladesh, partnership firms benefit from a lower tax rate compared to
corporations. The income of the partnership is taxed at the individual partners' level, which
may result in overall tax savings.

Disadvantages of a Partnership Firm

1. Unlimited Liability: Partners have unlimited liability, which puts their personal assets at
risk in the event of business failure.

2. Lack of Continuity: The death, retirement, or insolvency of a partner can lead to the
dissolution of the firm unless otherwise agreed upon in the partnership deed.

3. Conflicts among Partners: Differences in opinion or disputes can arise among partners,
which can affect the business’s operations and profitability.

4. Limited Access to Capital: Compared to corporations, partnerships may find it harder to

access large amounts of capital due to their smaller size and perceived risk by lenders.

Compliance and Regulatory Issues

1. Registration: Although it is not mandatory to register a partnership firm in Bangladesh, it is

highly recommended as registration provides legal recognition. A registered firm can sue or
be sued, which is crucial in business disputes.

2. Maintenance of Books of Accounts: The Partnership Act and tax authorities mandate the
maintenance of proper books of accounts, including cash books, ledgers, and profit-sharing
records, for transparency and tax assessments.

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 3. Licensing Requirements: Depending on the nature of the business, specific licenses (e.g.,
trade license) may be required to operate legally within Bangladesh.

Lenders’ Perspective on Lending to a Partnership Firm

From the perspective of a lender, lending money to a partnership firm carries certain risks and
considerations:

1. Unlimited Liability of Partners: The lender views the unlimited liability as both a risk and
a safeguard. While the partners are personally liable for the firm’s debts, the possibility of
their personal assets being at risk adds security for the lender.

2. Collateral and Personal Guarantees: Lenders may require personal guarantees or

collateral from the partners to mitigate risk. Real estate, fixed deposits, or other personal
assets may be pledged as security for loans.

3. Financial Health and Transparency: Before lending, the lender will scrutinize the firm's
financial statements, audit reports (if available), and cash flow to assess the firm's ability to
meet debt obligations. Strong financial reporting, audited statements, and compliance with
accounting standards improve the firm's creditworthiness.

4. Partnership Deed Clauses: Lenders often review the partnership deed to ensure that the
firm has clear terms for capital contribution, profit-sharing, dissolution, and
admission/retirement of partners, as these directly impact the firm’s financial stability.

5. Risk of Dissolution: The ease with which a partnership can dissolve poses a risk to lenders.
Lenders may include clauses in loan agreements to protect their interests in case of
dissolution, requiring the partners to settle outstanding debts before distribution of assets.

A partnership firm in Bangladesh offers flexibility and ease of operation, making it a popular business
structure. However, from a financial accounting perspective, managing the firm’s liabilities,
maintaining proper financial reporting, and complying with tax regulations are crucial for its
sustainability. For lenders, the financial stability of a partnership firm, personal liability of the
partners, and transparent financial statements are key factors when considering lending money to
the firm. Despite some disadvantages such as unlimited liability and potential internal conflicts, a
well- managed partnership firm can be a highly effective business model.

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Differences between Single Owner Business and Partnership Firms (With Focus on Accounting
and Lenders' Perspectives)

Aspect Single Owner Business Partnership Firm

Ownership Owned by two or more individuals

Owned by a single individual.
Structure who share ownership.

Not a separate legal entity from Separate legal entity from the
Legal Entity the owner. Owner and business partners in some jurisdictions, but
are considered the same entity. partners are jointly liable for debts.

Partners contribute capital as per the

Capital Capital is contributed solely by partnership agreement. Capital
Contribution the owner. contributions may vary between
partners.

Centralized decision-making Decisions are made jointly by

Decision Making with the owner having full partners, often based on the
control. partnership agreement.

Business and personal finances Business is treated as a distinct

Accounting are often mixed, though they accounting entity from the personal
Entity Concept should be accounted for finances of the partners. Separate
separately for clarity. capital accounts for each partner.

Profits and losses are shared among

Profit & Loss All profits and losses are borne
partners as per the partnership
Allocation by the sole owner.
agreement.

No need for separate capital Each partner has a separate capital

Capital Accounts accounts. Owner's capital and account, tracking contributions,
drawings are tracked together. withdrawals, and the share of profits.

Partners have unlimited liability

Unlimited liability. The owner unless the firm is a Limited Liability
Liability is personally liable for all Partnership (LLP). Partners can be
business debts and obligations. held personally liable for the firm’s
obligations.

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 Continuity depends on the
The business ceases to exist partnership agreement. Some
Continuity upon the owner's death or partnerships dissolve upon a
decision to close. partner’s death, while others
continue.

Partnership firms are taxed as a

Income is taxed as personal separate entity, but profits are
Taxation
income of the owner. distributed to partners, who are taxed
on their share of income.

Audits may be mandatory based on

Generally, no mandatory audit
Audit the size and nature of the firm,
requirement unless turnover
Requirements especially in cases of LLPs or large
exceeds certain thresholds.
partnerships.

Requires detailed financial

Simpler financial reporting.
statements, including capital
Financial Financial statements primarily
accounts for each partner. Profit-
Reporting for tax purposes and internal
sharing ratios and other partner-
use.
specific details must be disclosed.

Higher risk for lenders due to Lenders assess the collective

Lenders’
the dependence on a single financial strength of the partners.
Perspective: Risk
individual's financial capacity The risk is somewhat spread
Assessment
and business continuity. across
multiple individuals.
Business assets and personal assets
Typically, personal assets of
Lenders’ of partners can be used as collateral,
the owner are used as collateral
Perspective: subject to partnership agreements.
since the business is not
Collateral All partners may need to agree for
separate from the individual.
collateralization.

Creditworthiness is assessed based

Creditworthiness is based on
Lenders’ on the firm's financials and the
the owner's personal financial
Perspective: individual partners’ financial
standing and business
Creditworthiness standing. The partnership’s track
performance.
record also matters.

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 All partners are jointly and severally
The sole owner is solely
Lenders’ liable for debts unless an LLP
responsible for repayment.
Perspective: structure is in place. The burden of
This poses a higher risk to
Debt repayment is shared, providing more
lenders in case of default.
Repayment security to lenders.

Greater potential for expansion as

Limited growth potential due
Expansion partners can pool resources,
to constraints on the owner's
Potential expertise, and contacts. Easier to
resources and expertise.
raise capital.

Requires a formal partnership

Simple and inexpensive to
Ease of agreement and possibly registration,
form with minimal regulatory
Formation depending on the jurisdiction. More
requirements.
complex than a sole proprietorship.

More regulatory compliance,

Compliance & Fewer regulatory and
including partnership agreements,
Regulatory compliance requirements,
profit-sharing disclosures, and
Requirements primarily related to tax filings.
possibly audits.

This table highlights the key differences between a single owner business and a partnership firm,
particularly in terms of accounting practices and how lenders assess their risk and creditworthiness.
Partnerships tend to offer greater financial and management flexibility, but they come with
increased complexity in financial reporting and regulatory compliance.

Corporations in Bangladesh -Private Limited Corporations and Public Limited

Corporations

A corporation, in its simplest form, is a legal entity separate from its owners, established through
registration with the relevant government authorities. Corporations in Bangladesh, similar to other
countries, are primarily of two types: Private Limited Corporations and Public Limited
Corporations. Each type of corporation serves different purposes and caters to different market
demands, having unique characteristics, advantages, disadvantages, financial reporting
requirements, and compliance regulations.

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In this write-up, we will delve into the financial and regulatory aspects of both Private and Public
Limited Corporations in the context of Bangladesh, focusing on characteristics, accounting
concepts, financial reporting, taxation, compliance, and the implications from a lender's perspective.

1. Characteristics of Private Limited and Public Limited

Corporations Private Limited Corporation

A Private Limited Corporation in Bangladesh is often formed by smaller groups of individuals or

family members and operates under specific restrictions that distinguish it from a Public Limited
Corporation.

 Limited Liability: Shareholders are only liable for the corporation’s debts up to the amount
they have invested.

 Ownership Structure: The number of shareholders is limited (up to 50 in Bangladesh), and

shares cannot be publicly traded.

 Restricted Transfer of Shares: The company’s shares are not freely transferable.
Shareholder consent is typically required for any share transfer.

 Smaller Scale of Operations: Private limited companies generally cater to smaller or

medium-sized businesses and often have lower capital requirements compared to public
corporations.

Public Limited Corporation

A Public Limited Corporation, on the other hand, is designed to attract large numbers of investors
and raise significant capital through public share offerings.

 Unlimited Shareholders: There is no cap on the number of shareholders.

 Publicly Traded Shares: The corporation can offer its shares to the general public via the
stock exchange, allowing for greater access to capital.

 Increased Regulatory Scrutiny: Public corporations are subject to stricter regulations to

ensure transparency and protect public investors.

 Higher Capital Requirements: Public companies usually need to meet more stringent
capital and financial disclosure requirements.

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 2. Key Accounting Concepts and Financial Reporting

Financial accounting for both types of corporations revolves around the core principles of transparency,
consistency, and accuracy. However, the specific accounting standards and financial reporting
requirements can differ significantly between Private Limited and Public Limited Corporations.

Private Limited Corporation: Financial Reporting

Private limited corporations are subject to financial reporting, but the level of detail and frequency is
often less rigorous than for public corporations. The key accounting concepts include:

 Periodic Financial Statements: Like all businesses, private limited corporations need to
prepare annual financial statements, including an income statement, balance sheet, and cash
flow statement, in accordance with the Bangladesh Financial Reporting Standards (BFRS).

 Conservatism: Private corporations tend to follow a conservative approach to financial

reporting, ensuring that potential liabilities and risks are clearly reflected.

 Audit Requirements: While audits are mandatory for larger private companies, smaller
ones may not require external audits unless stipulated by shareholders or other stakeholders,
such as lenders.

Public Limited Corporation: Financial Reporting

For public limited corporations, the reporting requirements are far more comprehensive due to their
impact on the public and stock markets:

 Regular and Detailed Financial Reports: Public limited corporations must provide
quarterly and annual financial reports in compliance with BFRS and International Financial
Reporting Standards (IFRS).

 Transparency: The financial reports must be transparent, reflecting the company’s financial
position accurately to protect investors and stakeholders.

 Auditing Requirements: Annual audits by independent third-party auditors are mandatory,

with public disclosure of the audit results.

 Continuous Disclosure: Any material financial or operational changes must be promptly

reported to regulators and investors.

Private Limited Corporation: Taxation

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Private limited companies are taxed based on their net profits, with the corporate tax rate depending
on the industry. The general corporate tax rate for non-public companies in Bangladesh is
approximately 30%. Some tax incentives may be available for companies operating in special
economic zones or export processing zones.

 Tax Planning: Private limited companies often engage in tax planning to minimize their tax
liabilities, such as through depreciation, investment allowances, or other deductions.

 Dividends: Dividends paid to shareholders are subject to additional withholding tax.

3. Advantages and Disadvantages of Private and Public Limited

Corporations Private Limited Corporation: Advantages

 Control: Owners have greater control over the business.

 Confidentiality: Financial statements are typically not available to the public, allowing
more privacy.

 Lower Regulatory Burden: Private companies are subject to fewer regulations compared
to public companies.

Private Limited Corporation: Disadvantages

 Limited Access to Capital: Raising capital is more challenging since shares cannot be
publicly traded.

 Restricted Growth: The limited number of shareholders can sometimes restrict expansion
opportunities.

Public Limited Corporation: Advantages

 Access to Capital: The ability to raise capital through the stock exchange is a significant
advantage.

 Liquidity: Shareholders can easily buy or sell shares, increasing liquidity.

 Visibility and Prestige: Public companies often enjoy greater visibility and brand
recognition.

Public Limited Corporation: Disadvantages

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  Regulatory Compliance: Public corporations face a much higher level of regulatory
scrutiny, including stringent financial reporting and corporate governance requirements.

 Loss of Control: Original owners may lose some control over the company as more shares
are issued to the public.

4. Compliance Requirements

Both private and public limited corporations must comply with the Companies Act, 1994, in
Bangladesh, but the level of regulatory compliance differs significantly.

Private Limited Corporation: Compliance

 Simpler Governance Structures: Private limited companies have more flexibility in their
internal governance structures.

 Less Frequent Reporting: Private companies are not required to disclose as much financial
or operational information to the public.

Public Limited Corporation: Compliance

 Stringent Corporate Governance: Public companies must comply with detailed corporate
governance regulations, including having a board of directors with independent members.

 Securities and Exchange Commission (SEC) Regulations: Public companies must

comply with SEC regulations concerning public disclosures, financial reporting, and
investor protections.

5. Differences between Private Limited Corporations and Public Limited Corporations

Private Limited
Aspect Public Limited Corporation
Corporation

Number of
Up to 50 shareholders Unlimited
Shareholders

Freely transferable on the stock

Share Transferability Restricted
exchange

Limited to private Can raise capital through public

Capital Raising
investment offerings

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 Less frequent and less Regular and detailed reporting
Financial Reporting
detailed required

Regulatory Scrutiny Less regulatory scrutiny High regulatory scrutiny

Slightly higher corporate Lower tax rates for public

Tax Rates
tax rates corporations

Centralized control among Distributed control among more

Control
fewer shareholders shareholders

Easier compliance Stricter compliance with

Compliance
procedures corporate governance laws

6. Lenders' Perspectives on Lending to Private and Public Limited Corporations

Lenders play a crucial role in providing financial support to corporations, and their perspectives on
lending can differ based on whether the corporation is private or public.

Lending to Private Limited Corporations

Lenders view private limited corporations as higher risk due to the limited number of shareholders,
smaller scale of operations, and restricted access to capital markets. To mitigate these risks, lenders
may:

 Require Collateral: Given the perceived risk, lenders often demand collateral, such as
property or personal guarantees from shareholders.

 Higher Interest Rates: Private corporations may face higher interest rates due to the higher
risk of lending to smaller companies with limited transparency.

Lending to Public Limited Corporations

Public limited corporations are generally perceived as lower-risk borrowers because of their larger
capital base, greater transparency, and regulatory oversight.

 Lower Risk Premiums: Public companies often receive loans at more favorable terms,
including lower interest rates, due to their stronger financial position and broader access to
capital markets.

 Confidence in Transparency: Lenders trust that public companies’ financial reports are
accurate and reflect their true financial condition, thanks to the rigorous auditing and

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reporting requirements.

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In the context of Bangladesh, private and public limited corporations serve distinct purposes and
cater to different segments of the economy. From a financial accounting perspective, public
companies offer greater transparency and access to capital, but at the cost of increased regulatory
scrutiny and loss of control. On the other hand, private companies retain more control and privacy,
albeit with limited access to funding and higher financial risk for lenders.

Ultimately, the choice between operating as a private or public limited corporation depends on the
corporation's long-term goals, capital needs, and risk appetite. Both forms of corporations play a
crucial role in Bangladesh's growing economy,

Joint Venture

1. Introduction

A joint venture (JV) is a business arrangement where two or more parties come together to pool
resources, share risks, and collaborate for a common business goal. Each party maintains its
separate legal identity, but the JV operates as a distinct entity. In the context of Bangladesh, JVs are
commonly formed between local firms and foreign companies, particularly in sectors like
telecommunications, energy, infrastructure, and manufacturing.

This write-up aims to provide an in-depth analysis of the financial accounting aspects of JVs,
considering their characteristics, accounting principles, financial reporting, taxation, compliance,
and the key considerations from the lenders' perspective.

2. Characteristics of Joint Ventures

Joint ventures are characterized by the following features:

 Shared Ownership: The partners contribute equity and have ownership interests in the JV,
which may or may not be equally divided.

 Joint Control: Each partner typically has an equal say in major decisions, although control
rights can vary depending on the agreement.

 Shared Risk and Rewards: Both profits and losses are shared based on each partner’s stake
in the JV.

 Defined Purpose and Timeframe: JVs are often formed for a specific project or goal and
may be temporary or for a limited duration.

 Separate Legal Entity: Although the partners maintain their own businesses, the JV
operates as a separate legal entity with its own financial statements.

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 3. Accounting Concepts for Joint Ventures

The financial accounting of JVs in Bangladesh follows the standards set by the Bangladesh Financial
Reporting Standards (BFRS) and International Financial Reporting Standards (IFRS). There are two
primary methods used for accounting joint ventures:

 Equity Method (For Jointly Controlled Entities): Under this method, each venturer
recognizes its share of the JV’s net assets and profits. The investment is initially recorded at
cost and subsequently adjusted for changes in the investor’s share of net assets.

 Proportionate Consolidation (For Jointly Controlled Operations or Assets): This method

allows each partner to account for their share of the JV’s assets, liabilities, income, and
expenses on a line-by-line basis in their own financial statements.

4. Financial Reporting

The financial reporting for JVs must comply with BFRS and align with international standards,
ensuring transparency and accuracy. Key aspects include:

 Consolidated Financial Statements: Parent companies involved in a JV may be required to

present consolidated financial statements that include the JV’s financial position and
performance.

 Disclosures: Full disclosure of the nature of the JV, the basis for accounting, and the share
of profits or losses is mandatory.

 Inter-company Transactions: Any transactions between the JV and the partners must be
properly eliminated in the consolidated statements.

5. Compliance with Laws and Regulations

In Bangladesh, JVs must comply with several key regulations:

 Companies Act 1994: JVs structured as companies must adhere to the provisions of the
Companies Act, including registration, governance, and compliance requirements.

 Bangladesh Investment Development Authority (BIDA): Foreign JVs must comply with
the rules of BIDA, which oversees foreign direct investment in Bangladesh.

 Bangladesh Securities and Exchange Commission (BSEC): Publicly listed JVs need to
comply with BSEC regulations, including those regarding financial disclosures, governance,
and reporting standards.

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 6. Advantages of Joint Ventures

 Access to Resources: JVs allow partners to pool their resources, including capital,
technology, and expertise, which can be crucial for large-scale projects.

 Shared Risk: By distributing the financial burden across partners, the risks associated with
the venture are minimized.

 Market Access: Local partners in Bangladesh can help foreign investors navigate
regulatory environments and access local markets more easily.

 Synergies: JVs often create synergies that allow the venture to operate more efficiently than
the individual partners could on their own.

7. Disadvantages of Joint Ventures

 Complex Decision-Making: Joint control can lead to slow or inefficient decision-making

processes, particularly if there are disagreements among the partners.

 Profit Sharing: While profit sharing is a benefit, it also means each partner receives a
smaller share of the profits compared to a wholly owned subsidiary.

 Cultural and Operational Differences: In cross-border JVs, differences in culture,

business practices, and legal frameworks can complicate operations.

 Risk of Disputes: Conflicts over resource contributions, profit distribution, or strategic

direction can lead to disputes among partners.

8. Financial Reporting Issues

Several financial reporting issues arise in the context of JVs:

 Fair Value Measurement: The assets and liabilities of the JV need to be recognized at fair
value, which can be challenging when valuing intangible assets or when local accounting
practices diverge from international standards.

 Revenue Recognition: The timing of revenue recognition can differ based on whether the
JV is involved in long-term contracts, which often require percentage-of-completion
accounting.

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 9. Lenders' Perspective

From the lenders' perspective, several factors are critical when assessing a JV as a borrower:

 Creditworthiness of Partners: Lenders will closely examine the financial strength of each
partner involved in the JV, as well as the terms of the agreement, to ensure adequate
guarantees or security for loans.

 Risk Sharing: While the shared risk is advantageous for the partners, lenders may perceive
a JV as riskier because of the potential for partner disputes or failure of one party to meet its
obligations.

 Cash Flow Stability: Lenders will focus on the JV’s ability to generate stable cash flows,
particularly if the venture involves long-term infrastructure projects with delayed revenue
realization.

 Debt-to-Equity Ratios: The JV's capital structure, including the mix of debt and equity,
will be scrutinized to ensure that the venture has sufficient equity to support its debt
obligations without becoming over-leveraged.

 Security and Guarantees: Lenders may require additional security, such as guarantees
from the JV partners or liens on the JV’s assets, to mitigate the risk of non-performance.

Hindu Undivided Family (HUF)

Introduction

A Hindu Undivided Family (HUF) is a unique legal entity in India and Bangladesh, recognized under
both personal and tax laws. It refers to a family that consists of lineal descendants of a common
ancestor, along with their wives and unmarried daughters. While predominantly present in Hindu
families, the structure is relevant in the financial and tax framework for business ownership and
wealth management. This write-up delves into the financial accounting and reporting aspects of an
HUF, including its characteristics, accounting practices, advantages and disadvantages, taxation,
compliance, and lender perspectives.

Characteristics of HUF

An HUF is defined by its legal and cultural recognition as a distinct entity for holding and managing
family wealth. The key characteristics include:

1. Legal Entity: HUF is a separate legal entity recognized by tax laws, capable of owning
property, entering into contracts, and engaging in financial transactions.

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 2. Membership by Birth: Membership in an HUF is automatic by birth. Sons, daughters, and
other lineal descendants of a common ancestor become members. Married daughters cease
to be members, but unmarried daughters remain part of the HUF.

3. Karta Leadership: The HUF is led by the eldest male member known as the Karta. The
Karta manages the family business and assets. His authority is almost absolute, though other
members can demand transparency.

4. Perpetual Succession: HUF is not dissolved upon the death of the Karta, as leadership
passes to the next senior male member.

Accounting Concepts and Financial Reporting for HUF

From an accounting perspective, the HUF is treated as a separate accounting entity distinct from
individual members' personal finances. The following are the key accounting concepts applicable to
HUF:

1. Entity Concept: HUF is a distinct entity and prepares separate financial statements from
those of its individual members. All business or financial transactions are accounted for in
the HUF’s name.

2. Going Concern: Since an HUF enjoys perpetual succession, it is considered a going

concern for accounting purposes. The entity's financial reporting assumes the business will
continue indefinitely unless a formal partition or dissolution is declared.

3. Dual Aspect: Like other business entities, every transaction involving an HUF has two effects
— debit and credit — ensuring that the balance sheet remains balanced.

4. Separate Capital Accounts: Members' individual contributions or drawings must be

separately accounted for. The Karta’s personal wealth should also be distinct from the
HUF's assets and liabilities.

5. Revenue Recognition and Expenses: The revenue earned by the HUF from its assets,
businesses, or investments is recognized following the accrual concept. Similarly, expenses
must be recorded in the period they are incurred.

Financial Reporting Standards for HUF

The financial statements of an HUF consist of:

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  Balance Sheet: Lists the family’s assets, liabilities, and capital (including the family
property, investments, and business assets). Separate capital accounts for individual
members, including the Karta, must be maintained.

 Income Statement: Reflects the income earned by the HUF from its property, business, and
investments, alongside the expenses incurred in the course of managing these assets.

 Cash Flow Statement: A cash flow statement records the inflow and outflow of cash,
aiding in assessing liquidity. It is particularly useful for lenders when assessing loan
applications.

Advantages of HUF

1. Tax Benefits: The ability to file separate tax returns and split income between individual
and HUF earnings helps reduce the overall tax burden.

2. Asset Pooling: Families can pool resources in an HUF to manage assets, invest, or run
family businesses more efficiently.

3. Wealth Management: HUF helps maintain continuity in family businesses or property

management across generations, ensuring stability.

4. Succession Planning: The structure of HUF ensures that wealth is transferred easily to the
next generation, avoiding complex legal processes.

Disadvantages of HUF

1. Control Issues: The Karta holds disproportionate control, leading to potential conflicts
among family members, especially if transparency is lacking.

2. Limited Liability: HUF members have joint ownership of family property, which means
individual members cannot easily claim their share of the property without a partition.

3. Tax Implications on Dissolution: If an HUF is partitioned, there can be tax implications,

including potential capital gains tax on distributed assets.

4. Lack of Flexibility: Decisions on family wealth management can be cumbersome due to the
involvement of multiple family members.

Lenders' Perspective on Dealing with HUF

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From a lender's point of view, dealing with an HUF can present unique challenges and opportunities.

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 1. Risk Assessment: Lenders need to assess the financial health of the HUF by reviewing its
financial statements and cash flow position. Since HUF members have joint rights to
property, securing collateral may require agreement from all adult members.

2. Creditworthiness of Karta: As the primary decision-maker, the Karta’s financial behavior

and creditworthiness are essential for lenders. Karta's ability to manage family businesses
and assets will impact loan approval.

3. Collateral: Given that HUFs typically hold property, this can be used as collateral.
However, lenders need to ensure that there are no disputes or pending partitions that could
affect ownership.

4. Repayment Capacity: Lenders must consider both the HUF's business revenues and the
Karta's personal assets to assess repayment capacity. HUFs with diversified investments,
such as real estate and businesses, offer stronger repayment assurances.

Hindu Undivided Families (HUFs) represent a significant legal and financial entity in Bangladesh,
especially within Hindu families. From an accounting perspective, HUFs require careful
management of financial reporting, compliance, and tax obligations. Lenders must consider the
unique structure of HUFs when assessing creditworthiness, particularly regarding the role of the
Karta and joint ownership of assets. While the structure offers tax benefits and continuity for family
wealth, it also brings challenges related to control, partition, and legal compliance. For expert
financial users and lenders, understanding the nuances of HUF is crucial for effective financial
planning and decision- making.

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 Short Questions

1. What is a sole proprietorship in the context of business in Bangladesh?

2. How does the accounting equation apply to sole proprietorships?

3. What is the impact of drawings on the owner’s equity in a sole proprietorship?

4. How are profits taxed in a sole proprietorship in Bangladesh?

5. Why is financial transparency important for sole proprietorships when seeking loans?

6. What is the main difference between a partnership and a sole proprietorship in terms of
ownership?

7. How does a partnership firm distribute profits among partners?

8. What is unlimited liability in a partnership firm?

9. What financial statements are typically prepared by a partnership firm?

10. What are the main advantages of forming a partnership in Bangladesh?

11. How are partnership firms taxed in Bangladesh?

12. What is the role of the Karta in a Hindu Undivided Family (HUF)?

13. How does the financial reporting of a HUF differ from that of a sole proprietorship?

14. What are the key tax benefits of a HUF in Bangladesh?

15. What is a joint venture, and how is it typically structured?

16. How financial reporting is handled in joint ventures?

17. What are the taxation considerations for joint ventures in Bangladesh?

18. What is the main difference between a private limited and public limited corporation in
terms of ownership structure?

19. Why do public limited corporations face higher regulatory scrutiny than private limited
corporations?

20. How do lenders assess the creditworthiness of a joint venture?

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References:

1. Anthony, R. N., & Reece, J. S. (1995). Accounting Principles (7th ed.). Richard D.
Irwin, Inc.
2. Anthony, R. N. (1976). Essentials of Accounting. Addison-Wesley.
3. Hermanson, R. H., Edwards, J. D., & Maher, M. W. (1992). Accounting Principles
(5th ed.).
4. Khan, M. M. (1966). Advanced Accounting (Vol. I–II). Ideal Library, Dhaka.
5. Weygandt, J. J., Kieso, D. E., & Kell, W. G. (1993). Accounting Principles (3rd ed.).
John Wiley & Sons.
6. Saunders, A., & Cornett, M. M. (2018). Financial Institutions Management: A
Risk Management Approach (9th ed.). McGraw-Hill Education.
7. Hoyle, J. B., & Skender, C. J. (Year unknown). Business Accounting.
8. Institute of Cost Accountants of India. (2018). Fundamentals of Accounting (Foundation
Study Notes, 1st ed.). ICAI.
9. Saylor Academy. (n.d.). Financial Accounting [online course]. Saylor Academy.
10. Jonick, C. (n.d.). Principles of Financial Accounting.

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 About the Author

Dr. Md. Shahid Ullah is an Associate Professor at the Bangladesh Institute of Bank Management
(BIBM). With over 20 years of teaching and research experience in banking and finance, he
has built a strong academic and professional profile. Before joining BIBM, he served as a
faculty member at the University of Science and Technology, Chittagong (USTC), and the
Asian University of Bangladesh. He also taught at the University of Sheffield, United
Kingdom, after joining BIBM, as part of his academic engagement during doctoral studies.

Dr. Ullah holds a PhD in Social and Environmental Accounting, jointly awarded by the
University of Sheffield, UK, and Kobe University, Japan. His core areas of expertise include
sustainable finance, corporate governance, social and environmental reporting, green banking,
and the Sustainable Development Goals (SDGs).

He has published extensively in recognized international journals, focusing on long-term

financing, green banking, corporate responsibility, and governance. He also serves as the
Associate Editor of Bank Parikrama – A Journal of Banking and Finance. Dr. Ullah is the
author of two widely used books—Management Accounting for Bankers and Basic
Accounting—both published by the Institute of Bankers, Bangladesh.

Recently, he completed a research-based consultancy titled ‘Long-term Financing: A Critical

Assessment of the Bond Market in Bangladesh and the Way Forward’ for the Ministry of
Finance, Government of Bangladesh. He was also involved as a team member in three
consultancy projects conducted during 2021–2023 on sustainable finance and environmental
and social risk management (ESRM), commissioned by Bangladesh Bank.

Dr. Ullah has visited several countries, including Australia, Austria, Germany, Hungary, India,
Japan, Malaysia, China, Slovakia, Turkey, and the United Kingdom. Google scholar profile of
Dr Md. Shahid Ullah: https://scholar.google.com/citations?user=SSnuf4MAAAAJ&hl=en

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