Imagine a company ( A Bakery) lets say its total turn over is 50 crore per year. Lets also imagine they have got two production factories one in pala and one in ernakulam.
Todays date is 1-04-09.
Everything is working smoothly and today one guy from pala mfg unit got a idea of a new product and he tells it to his production manager and manager like that idea but he requires some special utensils and some experiments to manufacture this new item which requires 1lac and this production manager has got the power to release that much amount of money from the accounts. [we are considering this example bcos all small investment and R&D decisions wont go up to the top management until and unless it is important enough affecting the companies strategy]
Accounts department releases 1lac from the bank account on request of manager to buy the equipment and writes in its financial statement as R&D expense=20k(for experiment) and 80K for equipment.
Threre are three main financial statements
1) Balance sheet (B/S)
2) Income (profit loss) statement
3) Cash flow statement.
You might have seen them when it is send to employees during quarterly result publishing.
1) Idea of a balance sheet (b/s) :
Asset(A) = Liability(L) + Owners Equity(E) which means that what all things are available in a company (everything in monetary terms) has got either of two owners The equity holder or the bank who gave the loan (liability).
Asset: Cash + inventory + receivables (which u hav to get from customers) + present value (after depreciation) of Machineries + value of land + present value of buildings (after depreciation) + all govt bonds and other financial assets
Liability: payables ( which u hav to giv to suppliers) + loan from banks
Owners equity: the money u invested in business when it started + Profit After Tax which u reinvested in business + any other investment u did in btw
So in the present case we are having a R&D expense and spending on Utensil. R&D is a expense just like travel etc,.. utensil is an asset and add it in ur asset list as u add this utensil in asset list ur cash is reduced in same amount or ur loan amount frm bank will go up by same amt ( whatever happens A=L+E basic funda of accounting hope u understood)
2) Next thing is Income statement which shows the real profit u generated. Here u don’t bring the price of utensil as a whole as expense of 2009 but u can split the amt into different pieces (depreciation) for a period of time say 5 yrs (govt regulation is there regarding what type of item and how to split etc: with a lot of margin J ) then u can depreciate 80K/5 = 16K every year. This 16K along with 20K (R&D expense for first yr) can be deducted from the total profit and for the remaining amount u pay the tax. After paying tax the amount left is called PAT (Profit After Tax) this will add up to ur asset column as cash and also in Owners Equity as ur reinvestment.
3) Cash flow statement (CF):
As I told before in the B/S asset column has got a cash component but if I show a statement of 2008 and it is written cash is 10lac and in 2009 statement cash is written as 12 lac u wont understand how it changed so to make it clear v use the C/F for explaining
10lac (carry forward from 2008) – 20K( R&D expense) – 80K (Utensil added) + 3lac (PAT)
All this will be clear and smooth since what all transactions are done is recorded in real time basis. Or on daily basis and at most on weekly basis.
The same thing happens for all companies only thing is on a higher scale, like many people will be working over Research many units will be investing in different projects and assets.
I hope something is clear for the reader,. expecting comments,..
No comments:
Post a Comment