1307528088181-MIDDLE LEVEL MANAGERS Action Research Final Paper
8.Finance for Middle Level Managers-H.L.mukundh, DCA.
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Transcript of 8.Finance for Middle Level Managers-H.L.mukundh, DCA.
““Finance for Middle Level Finance for Middle Level
Officers”Officers”
Discussion onDiscussion on
H.L. Mukunda,
Deputy Controller (Accounts & Costing), KPTCL
Date : 11th April, 2007
Management Management
"The conventional definition of "The conventional definition of
management is getting work management is getting work
done through people, but real done through people, but real
management is developing management is developing
people throughpeople through work.“work.“
— — Agha Hasan Abedi Agha Hasan Abedi
Topics to share with you Topics to share with you Accrual vs Cash BasisCapital and Revenue ItemsCash and Non-cash ItemsEvent and TransactionElements of CostFinancial StatementsAuditing
Two Part TariffACPS, ARR and CoSSubsidy IssuesEnergy AuditBudgetary ControlComputer AwarenessCommercial OrientationDouble Entry System of Book Keeping
Assets, Liabilities, Income and ExpenditureOperative and Non-operative AccountsBank Reconciliation StatementCapital Budgeting Techniques
Parties interested in Accounting InformationParties interested in Accounting Information
Owners or ShareholdersOwners or Shareholders
Prospective InvestorsProspective Investors
Debenture HoldersDebenture Holders
Financial InstitutionsFinancial Institutions
CreditorsCreditors
CustomersCustomers
ManagementManagement
EmployeesEmployees
GovernmentGovernment
EmployeesEmployees
ConsumersConsumers
Stock ExchangesStock Exchanges
Investment AnalystsInvestment Analysts
Economists Economists
ResearchersResearchers
General PublicGeneral Public
Accounting and Book-keeping Accounting and Book-keeping
““AccountingAccounting may be defined as the identifying, may be defined as the identifying,
measuring, recording and communicating measuring, recording and communicating
financial information.“financial information.“— — Bierman and DerbinBierman and Derbin
According to J.R. BatliboiAccording to J.R. Batliboi “ “Book-keepingBook-keeping may be may be
defined as the science as well as the art of defined as the science as well as the art of
recording business transactions under appropriate recording business transactions under appropriate
accounts."accounts."
Double-Entry System of Accounting Double-Entry System of Accounting
Meaning :Meaning :
The system of making two or double entries of equal The system of making two or double entries of equal
value in two different accounts in opposite sides in value in two different accounts in opposite sides in
the books of each of the contracting parties is the books of each of the contracting parties is
known as the double-entry system of accounting.known as the double-entry system of accounting.
The double-entry system requires that the two The double-entry system requires that the two
entries required for a transaction should be made entries required for a transaction should be made
in two different accounts for the same value (i.e., in two different accounts for the same value (i.e.,
for the same amount) and simultaneously (i.e., at for the same amount) and simultaneously (i.e., at
the same time).the same time).
Event and TransactionEvent and Transaction
Transaction Transaction :: “Every financial change which occurs in the “Every financial change which occurs in the
business is a transactions”. In other words, a transaction refers business is a transactions”. In other words, a transaction refers
to any monetary or financial event or activity (i.e., an activity to any monetary or financial event or activity (i.e., an activity
having value measurable in terms of money) which changes the having value measurable in terms of money) which changes the
financial position of the business.financial position of the business.
Event :Event : All events may not be transactions, whereas all All events may not be transactions, whereas all
transactions are events. All events may not be measurable in transactions are events. All events may not be measurable in
terms of money, but every transaction is measurable in terms of terms of money, but every transaction is measurable in terms of
money. An event may or may not cause a change in the financial money. An event may or may not cause a change in the financial
position of the business. On the other hand a transaction position of the business. On the other hand a transaction
necessarily causes a change in the financial position of the necessarily causes a change in the financial position of the
business.business.
Accrual vs Cash BasisAccrual vs Cash Basis
Under Under Accrual ConceptAccrual Concept, revenues are accounted in that , revenues are accounted in that
year in which they accrue and are earned and not in year in which they accrue and are earned and not in
the year in which they are actually received. Similarly the year in which they are actually received. Similarly
expenses are accounted in the year in which they are expenses are accounted in the year in which they are
incurred, and not in the year in which they are actually incurred, and not in the year in which they are actually
paid. paid.
Under Under Cash basis of accountingCash basis of accounting, transactions are , transactions are
recognized and accounted only when there is an recognized and accounted only when there is an
exchange of cash. exchange of cash.
Capital and Revenue Capital and Revenue
Capital Expenditure and Revenue Expenditure :Capital Expenditure and Revenue Expenditure :
Funds used by a company to acquire or upgrade physical Funds used by a company to acquire or upgrade physical
assets such as property, industrial buildings or assets such as property, industrial buildings or
equipment is capital expenditure. On the other hand, equipment is capital expenditure. On the other hand,
expenditure incurred for running and maintaining the expenditure incurred for running and maintaining the
assets or purchasing goods for resale is revenue assets or purchasing goods for resale is revenue
expenditure.expenditure.
Capital Receipt and Revenue Receipt : Capital Receipt and Revenue Receipt :
Any receipt either in cash or kind meant for creation of Any receipt either in cash or kind meant for creation of
asset is a Capital Receipt, whereas the receipt from asset is a Capital Receipt, whereas the receipt from
trading or non-trading activities is a Revenue Receipt.trading or non-trading activities is a Revenue Receipt.
Cash and Non-Cash ExpenditureCash and Non-Cash Expenditure
Revenue Expenditure involving cash Revenue Expenditure involving cash
outgo is Cash Expenditure. outgo is Cash Expenditure.
Examples are Salary and wages, Repair Examples are Salary and wages, Repair
expenses, Interest, etc., . expenses, Interest, etc., .
Revenue Expenditure charged to Profit Revenue Expenditure charged to Profit
and Loss Account (ie., reckoned as an and Loss Account (ie., reckoned as an
expenditure) but not involving cash expenditure) but not involving cash
outgo is Non-cash expenditure. outgo is Non-cash expenditure.
Examples are Deprecation and Return on Examples are Deprecation and Return on
Equity or Profit.Equity or Profit.
Operative and Non-Operative AccountsOperative and Non-Operative Accounts
KPTCL and ESCOMs are adopting a policy of centralised KPTCL and ESCOMs are adopting a policy of centralised
pooling of Revenue and providing funds from Central pooling of Revenue and providing funds from Central
point for meeting expenditure by Accounting Units. point for meeting expenditure by Accounting Units.
All Cash receipts at Accounting Units invariably be All Cash receipts at Accounting Units invariably be
transferred to Corporate Office by the Units. The Bank transferred to Corporate Office by the Units. The Bank
Account through which such transfer takes place is Account through which such transfer takes place is
called “Non-Operative Bank Account” ie., Account not called “Non-Operative Bank Account” ie., Account not
to be operated by Units except for remittances into the to be operated by Units except for remittances into the
Account.Account.
For meeting expenditure by Accounting Units, the funds For meeting expenditure by Accounting Units, the funds
are transferred from Corporate Office. The Units are transferred from Corporate Office. The Units
maintain an “Operative Bank Account” to account such maintain an “Operative Bank Account” to account such
receipts and make disbursement out of such amounts.receipts and make disbursement out of such amounts.
Classification of TransactionsClassification of Transactions
Transaction in a business enterprise is Transaction in a business enterprise is
classified under any of the following classified under any of the following
group :group :
AssetAsset
LiabilityLiability
IncomeIncome
ExpenditureExpenditure
Financial StatementsFinancial Statements
Trading (Manufacturing) Account
Balance Sheet
Profit and Loss Accounts
Cash Flow Statement
Profit and Loss AccountProfit and Loss Account Income and ExpenditureIncome and Expenditure of a Company during a of a Company during a
specified period are depicted here.specified period are depicted here.
P&L Account indicates the P&L Account indicates the financial performancefinancial performance of of
the Company the Company duringduring the said period. the said period.
The The differencedifference between the between the Income Income and and
ExpenditureExpenditure may be either may be either Profit or LossProfit or Loss. This is . This is
normally referred to as ‘Bottom Line’ of the normally referred to as ‘Bottom Line’ of the
Company’s P&L Account.Company’s P&L Account.
For each item of Income and Expenditure further For each item of Income and Expenditure further
break-up details are disclosed in separate break-up details are disclosed in separate
Schedules. At present 16 schedules are there. Schedules. At present 16 schedules are there.
(which may vary depending on the extent of (which may vary depending on the extent of
disclosure).disclosure).
P / L A/c in ‘T’ Form – A sampleP / L A/c in ‘T’ Form – A sample
ExpenditureExpenditure Income (or Revenue)Income (or Revenue)AmountAmount AmountAmount
To Purchase of PowerTo Purchase of Power
To Employee CostsTo Employee Costs
To Repairs and Maintenance To Repairs and Maintenance
ExpensesExpenses
To Administration and To Administration and General General
ExpensesExpenses
To Interest and Finance To Interest and Finance ChargesCharges
To DepreciationTo Depreciation
To Prior Period Expenses (or To Prior Period Expenses (or
credits)credits)
To Other ExpensesTo Other Expenses
Profit (balancing figure)Profit (balancing figure)
By Revenue from Sale of By Revenue from Sale of power power
to consumersto consumers
By Revenue from sale of By Revenue from sale of power power
to Hukkeri Societyto Hukkeri Society
By Revenue from inter-state By Revenue from inter-state
trading of powertrading of power
By Wheeling ChargesBy Wheeling Charges
By Open Access ChargesBy Open Access Charges
By Miscellaneous Income By Miscellaneous Income from from
consumersconsumers
By Non-Tariff IncomeBy Non-Tariff Income
Loss (balancing figures)Loss (balancing figures)
TotalTotal TotalTotal
Dr. Dr.Profit and Loss Account for the year ending 31st March, 2007
P / L A/c in Horizontal Form – A sampleP / L A/c in Horizontal Form – A sample
ParticularsParticulars AmountAmountREVENUE :REVENUE :
Revenue from Sale of power to consumersRevenue from Sale of power to consumers
Revenue from sale of power to Hukkeri SocietyRevenue from sale of power to Hukkeri Society
Revenue from inter-state trading of powerRevenue from inter-state trading of power
Wheeling ChargesWheeling Charges
Open Access ChargesOpen Access Charges
Miscellaneous Income from consumersMiscellaneous Income from consumers
Non-Tariff IncomeNon-Tariff Income
Total RevenueTotal Revenue
EXPENSES :EXPENSES :
Purchase of PowerPurchase of Power
Employee CostsEmployee Costs
Repairs and Maintenance ExpensesRepairs and Maintenance Expenses
Administration and General ExpensesAdministration and General Expenses
Interest and Finance ChargesInterest and Finance Charges
DepreciationDepreciation
Prior Period Expenses (or credits)Prior Period Expenses (or credits)
Other ExpensesOther Expenses
Less : Expenses CapitalisedLess : Expenses Capitalised
Total ExpensesTotal Expenses
Net Profit or Net LossNet Profit or Net Loss
Profit and Loss Account for the year ending 31st March, 2007
Balance SheetBalance Sheet Assets and LiabilitiesAssets and Liabilities of a Company are of a Company are
depicted here.depicted here. It indicates theIt indicates the financial positionfinancial position of the of the
Company asCompany as at the end of a periodat the end of a period. . The The figures shown in Balance Sheet are cumulative figures shown in Balance Sheet are cumulative since the inception of the Company.since the inception of the Company.
There are There are 17 Schedules17 Schedules to the Balance Sheet to the Balance Sheet giving detailed information for each item of giving detailed information for each item of Asset or Liability (No. of schedules may vary Asset or Liability (No. of schedules may vary depending on depiction).depending on depiction).
AssetsAssets broadly include Fixed Assets, broadly include Fixed Assets, Investments, Current Assets and Deferred Investments, Current Assets and Deferred Revenue ExpenditureRevenue Expenditure.. Contd.,
Balance SheetBalance Sheet
Under Under LiabilitiesLiabilities the items of Equity Capital (Share the items of Equity Capital (Share
Capital or share Deposit), Reserves and Surplus, Capital or share Deposit), Reserves and Surplus,
Loans (Secured and Unsecured), Service Line and Loans (Secured and Unsecured), Service Line and
Security Deposits from Consumers are shown.Security Deposits from Consumers are shown.
Current AssetsCurrent Assets include Inventories, Sundry include Inventories, Sundry
Debtors (Receivables), Cash and Bank Balances, Debtors (Receivables), Cash and Bank Balances,
Loans and Advances and Other Assets.Loans and Advances and Other Assets.
Current LiabilitiesCurrent Liabilities include Power Purchase include Power Purchase
Liabilities, Security Deposit from Liabilities, Security Deposit from
Contractors/Suppliers, Bills payable and Provisions.Contractors/Suppliers, Bills payable and Provisions.
BALANCE SHEET in Horizontal Form – A sampleBALANCE SHEET in Horizontal Form – A sample
ParticularsParticulars AmountAmountSOURCES OF FUNDS :SOURCES OF FUNDS :
Share Capital Share Capital Reserves and SurplusReserves and SurplusSecured LoansSecured LoansUnsecured LoansUnsecured LoansDeposits from ConsumersDeposits from Consumers
TOTALTOTALAPPLICATOIN OF FUNDS :APPLICATOIN OF FUNDS :
Fixed Assets – Gross BlockFixed Assets – Gross Block Less Accumulated DepreciationLess Accumulated Depreciation Net BlockNet BlockInvestmentsInvestmentsCapital Work in ProgressCapital Work in ProgressCurrent Assets Current Assets InventoriesInventories Sundry DebtorsSundry Debtors Cash & Bank BalancesCash & Bank Balances Loans & AdvancesLoans & Advances Other AssetsOther Assets
Total Current AsstsTotal Current AsstsLess Current Liabilities & Prov.Less Current Liabilities & Prov.
Net Current AssetsNet Current AssetsDeferred Revenue ExpenditureDeferred Revenue Expenditure
TOTALTOTAL
Balance Sheet as at 31st March, 2007
BALANCE SHEET in ‘T’ Form – A sampleBALANCE SHEET in ‘T’ Form – A sample
Capital and LiabilitiesCapital and Liabilities Assets and PropertiesAssets and PropertiesAmountAmount AmountAmount
Share Capital Share Capital
Reserves and SurplusReserves and Surplus
Secured LoansSecured Loans
Unsecured LoansUnsecured Loans
Deposits from ConsumersDeposits from Consumers
Fixed Assets – Gross BlockFixed Assets – Gross Block
Less Accumulated DepreciationLess Accumulated Depreciation
Net BlockNet Block
InvestmentsInvestments
Capital Work in ProgressCapital Work in Progress
Current Assets Current Assets
InventoriesInventories
Sundry DebtorsSundry Debtors
Cash & Bank BalancesCash & Bank Balances
Loans & AdvancesLoans & Advances
Other AssetsOther Assets
Total Current AsstsTotal Current Assts
Less Current Liabilities & Prov.Less Current Liabilities & Prov.
Net Current AssetsNet Current Assets
Deferred Revenue ExpenditureDeferred Revenue Expenditure
TotalTotal TotalTotal
Balance Sheet as at 31st March, 2007
Cash Flow StatementCash Flow Statement
While the While the P&L AccountP&L Account is based on is based on ‘Accrual‘Accrual’ basis ’ basis
of reckoning Income and Expenditure items, in of reckoning Income and Expenditure items, in
Cash flow statementCash flow statement the the income actually receivedincome actually received
in cashin cash and and expenses actually paidexpenses actually paid in cashin cash are are
considered.considered.
CFS is very vital in a situation where there is CFS is very vital in a situation where there is
significant variation in Income and Expenditure significant variation in Income and Expenditure
figures between accrued and cash basis.figures between accrued and cash basis.
DepreciationDepreciation being being ‘non-cash’ item of expenditure‘non-cash’ item of expenditure
is excluded from expenditure outgo in Cash flow is excluded from expenditure outgo in Cash flow
statement. Similar is the treatment for statement. Similar is the treatment for Net profitNet profit
(ROR/ROE) which remain with the Company. (ROR/ROE) which remain with the Company.
Cash Flow StatementCash Flow Statement Deposits from consumers, Augmentation charges, capital Deposits from consumers, Augmentation charges, capital
receipts / grants received in cash, etc., which are not receipts / grants received in cash, etc., which are not
figured in P&L Account are taken as Cash inflow items in figured in P&L Account are taken as Cash inflow items in
CFA.CFA.
The sum of Depreciation and RoE along with above type of The sum of Depreciation and RoE along with above type of
receipts constitute receipts constitute ‘Internal Resources’‘Internal Resources’ of the Company. of the Company.
The ‘The ‘Debt RepaymentDebt Repayment’ (only principal amount) has to be ’ (only principal amount) has to be
made normally out of such internal resources. made normally out of such internal resources.
If there is residual amount out of Internal Resources after If there is residual amount out of Internal Resources after
such debt repayment the same would be available for such debt repayment the same would be available for
meeting meeting Capital ExpenditureCapital Expenditure..
On the other hand, if there is shortfall to make debt On the other hand, if there is shortfall to make debt
repayment out of internal resources, the Company has to repayment out of internal resources, the Company has to
borrow for repayment of existing debt (a debt trap borrow for repayment of existing debt (a debt trap
position).position).
Revenue ItemsRevenue ItemsItems of Revenue in KPTCL/ESCOMS P&L A/c are Items of Revenue in KPTCL/ESCOMS P&L A/c are
::
Subsidy from GoK is also taken as an item of Revenue while finalising the Accounts. However, this item may be a gap
filling balancing figure.
Revenue from Sale of Power to Consumers
Revenue from Inter-State sale of power
Wheeling Charges
Open Access Charges
Miscellaneous Income from Consumers
Non-Tariff or Other Income
ExpenditureExpenditure Items ItemsItems of Expenditure in KPTCL/ESCOMS P&L A/c Items of Expenditure in KPTCL/ESCOMS P&L A/c
are :are :Revenue Expenses
capitalised are taken
as a negative
item in P&L Account
Net Profit or Net Loss also figure in P&L A/c
as difference between Revenue
and Expenditur
e
Purchase of Power
Repairs and Maintenance Expenditure
Employee Costs
Administration and General Expenses
Depreciation
Interest and Finance Charges
Prior Period Expenses (or Credits)
Other Expenses
It is a statement prepared to reconcile the bank balance as per the cash It is a statement prepared to reconcile the bank balance as per the cash
book with the bank balance as per the pass book.book with the bank balance as per the pass book.
Causes for disagreement :Causes for disagreement :
Cheques issued but not presentedCheques issued but not presented
Cheques deposited but not collectedCheques deposited but not collected
Cheques received but not presented to bankCheques received but not presented to bank
Cheques issued but dishonouredCheques issued but dishonoured
Cheques deposited but dishonoured by drawee bankCheques deposited but dishonoured by drawee bank
Direct deposits into bank accountDirect deposits into bank account
Payment made by the bank on behalf of the customerPayment made by the bank on behalf of the customer
Interest / Dividend collected and credited by the bankerInterest / Dividend collected and credited by the banker
Interest on bank balance allowed by the bankerInterest on bank balance allowed by the banker
Bank commission, charges, interest on overdraft charged by the Bank commission, charges, interest on overdraft charged by the
bankerbanker
Wrong entries in the cash book or pass bookWrong entries in the cash book or pass book
Bank Reconciliation StatementBank Reconciliation Statement
CapitalCapital
BudgetingBudgeting
TechniquesTechniques
Capital Budgeting TechniquesCapital Budgeting Techniques
Payback PeriodPayback Period Discounted Cash flow Discounted Cash flow
TechniquesTechniques Net Present Value (NPV)Net Present Value (NPV) Internal Rate of Return (IRR)Internal Rate of Return (IRR) Benefit-cost Ratio (BCRBenefit-cost Ratio (BCR))
PAY BACK PERIODPAY BACK PERIOD
PBP =Original Investments________________
Annual Cash-inflows
Example :
Original Investments Rs.2,80,000
Average Annual cash-inflow
(savings after tax but before depreciation) Rs. 80,000
=________
80000
280000
=
3.5 Years
NET PRESENT VALUENET PRESENT VALUEYearYear Project AProject A Project BProject B
Initial InvestmentInitial Investment Rs.50000Rs.50000 Rs.50000Rs.50000
Cash-inflow 1Cash-inflow 1stst Year Year Rs.15000Rs.15000 Rs.5000Rs.5000
22ndnd Year Year Rs.20000Rs.20000 Rs.15000Rs.15000
33rdrd Year Year Rs.25000Rs.25000 Rs.20000Rs.20000
44thth Year Year Rs.15000Rs.15000 Rs.30000Rs.30000
55thth Year Year Rs.10000Rs.10000 Rs.20000Rs.20000
Total InflowTotal Inflow Rs.85000Rs.85000 Rs.90000Rs.90000
Evaluation of Projects without using NPV method :
Project A : Rs.85000 - Rs.50000 = Rs.35000
Project B : Rs.90000 - Rs.50000 = Rs.40000
As the Net Cash Inflow is more in respect of Project B than Project
A, Project B is preferred and considered as financially viable.
NET PRESENT VALUENET PRESENT VALUEYearYear Project AProject A Project BProject B Discount Discount
Factor at 10%Factor at 10%Project A Project A
PVPVProject B Project B
PVPV
Initial InvestmentInitial Investment Rs.50000Rs.50000 Rs.50000Rs.50000
Cash-inflow 1Cash-inflow 1stst Year Year Rs.15000Rs.15000 Rs.5000Rs.5000 0.9090.909 Rs.13635Rs.13635 Rs. 4545Rs. 4545
22ndnd Year Year Rs.20000Rs.20000 Rs.15000Rs.15000 0.8260.826 Rs.16520Rs.16520 Rs.12390Rs.12390
33rdrd Year Year Rs.25000Rs.25000 Rs.20000Rs.20000 0.7510.751 Rs.18775Rs.18775 Rs.15020Rs.15020
44thth Year Year Rs.15000Rs.15000 Rs.30000Rs.30000 0.6830.683 Rs.10245Rs.10245 Rs.20490Rs.20490
55thth Year Year Rs.10000Rs.10000 Rs.20000Rs.20000 0.6200.620 Rs. 6210Rs. 6210 Rs.12420Rs.12420
Total InflowTotal Inflow Rs.85000Rs.85000 Rs.90000Rs.90000 Rs.65385Rs.65385 Rs.64865Rs.64865
Evaluation using Net Present Value :
Project A : Rs.65385 - Rs.50000 = Rs.15385
Project B : Rs.64865 - Rs.50000 = Rs.14865
Based on NPV, Project A is preferred than Project B as the NPV of future Cash flows is more in ‘A’ than that of Project B
Procedure / Method of calculation :
First determine the NPV using some assumed Discount factor.
By trial and error method change the discount factor rate and rework the NPV until the Original investment equate the Present Value.
The rate at which the Investment equates the Present Value is the IRR of the project.
The IRR is compared to the cost of capital and the project having higher difference is preferred to the other projects.
Internal Rate of Return (IRR)
Benefit to Cost RatioBenefit to Cost Ratio (BCR or Profitability Index method)(BCR or Profitability Index method)
BCR =
PV of future Cash inflows__________________
Investments
Example :
Original Investments Rs.5000
NPV of future cash inflows Rs.5860 8000
=________
5000
5860
= 1.17
Higher the BCR, the more desirable is the investment.
Project AProject A Project BProject B
Rs.Rs.
Present ValuePresent Value 3000030000 6000060000
InvestmentsInvestments 2000020000 4500045000
Net Present ValueNet Present Value 1000010000 1500015000
On NPV basis, Project B is feasible and preferredOn NPV basis, Project B is feasible and preferred
Benefit to Cost RatioBenefit to Cost Ratio 1.501.50 1.331.33
On BCR basis, Project A is feasible and preferredOn BCR basis, Project A is feasible and preferred
Comparison – NPV vs BCRComparison – NPV vs BCR
BudgetaryBudgetary
ControlControl
Types of Budget :Types of Budget :
Incremental BudgetingIncremental Budgeting
Zero Based Budgeting (ZBB)Zero Based Budgeting (ZBB)
Rolling BudgetRolling Budget
Flexible BudgetFlexible Budget
Monthly, Quarterly, YearlyMonthly, Quarterly, Yearly
Budgetary Control Budgetary Control
Capital Budget and Revenue BudgetCapital Budget and Revenue Budget Revenue BudgetRevenue Budget – –
• Constituents – Power Purchase Cost, Employee Costs, R&M Expenditure, A&G Constituents – Power Purchase Cost, Employee Costs, R&M Expenditure, A&G
Expenses, Interest and Other Expenses.Expenses, Interest and Other Expenses.
• Importance of KERC Tariff Order – KERC Order de facto Revenue Budget.Importance of KERC Tariff Order – KERC Order de facto Revenue Budget.
Capital Budget or Project Monitoring process :Capital Budget or Project Monitoring process :
Necessity of taking up future projectsNecessity of taking up future projects
Evaluation of proposed Capital ProgramEvaluation of proposed Capital Program
Sourcing of proposed capital worksSourcing of proposed capital works
Execution of WorksExecution of Works
Monitoring of WorksMonitoring of Works
Post Project AppraisalPost Project Appraisal
Budgetary Control Budgetary Control
Subsidy IssuesSubsidy IssuesThe policy of the GoK is to provide subsidy to The policy of the GoK is to provide subsidy to
ESCOMs for mitigating the loss on account of ESCOMs for mitigating the loss on account of supplying power to certain category of supplying power to certain category of consumers (Ex :IP Sets, BJ/KJ).consumers (Ex :IP Sets, BJ/KJ).
Such loss occur due to charging such Such loss occur due to charging such consumers at tariffs below the cost of power.consumers at tariffs below the cost of power.
Cross-subsidy element ie., amount available Cross-subsidy element ie., amount available from charging to certain categories at tariffs from charging to certain categories at tariffs more than the average cost, is taken into more than the average cost, is taken into account for working out the loss.account for working out the loss.
Subsidy is taken as an item of Revenue in P&L Subsidy is taken as an item of Revenue in P&L A/c to finalise the accounts. A/c to finalise the accounts.
Two Part TariffTwo Part Tariff
Meaning Meaning :: Distinguishes the total Distinguishes the total
costs as Fixed and Variable Costs. costs as Fixed and Variable Costs.
Tariffs are determined taking Tariffs are determined taking
Annual Fixed Cost into Annual Fixed Cost into
consideration and Variable Cost consideration and Variable Cost
per Unit.per Unit.
Basis :Basis : Marginal Costing Technique Marginal Costing Technique
principles.principles.
Fixed Costs
Level of Activity (Like Sales, Production, Generation)
Cost
Total Fixed Cost
0
Variable Costs
Level of Activity (Like Sales, Production, Generation)
Cost
Total Variable Cost
0
Break Even Point
Level of Activity (Like Sales, Production, Generation)
Cost / Income
Total Income
0
Total Costs
Fixed Costs
Break Even Point
Break Even Point Formula : {(FC) / (SP – VC) }Where FC : Total Fixed Cost, SP: Selling Price / unit and
VC: Variable Cost unit)
Profit Area
Loss Area
Even Fixed Cost not
recovered
Two Part Tariff Two Part Tariff
ComponentsComponents Amount (Rs. Crs.)Amount (Rs. Crs.)
Fixed Cost (FC) :Fixed Cost (FC) :
1. Interest on Loan Capital1. Interest on Loan Capital
2. Depreciation2. Depreciation
3.Return on Equity3.Return on Equity
4. Operation and Maintenance Expenses4. Operation and Maintenance Expenses
5. Interest on Working Capital5. Interest on Working Capital
Total Fixed CostTotal Fixed Cost
Fixed Cost per Unit (Total Fixed Cost / Net Energy sent Fixed Cost per Unit (Total Fixed Cost / Net Energy sent out)out)
Variable Cost (VC) :Variable Cost (VC) :
1. Cost of Primary Fuel (Fuel Cost / Unit)1. Cost of Primary Fuel (Fuel Cost / Unit)
2. Cost of Secondary Fuel (Fuel Cost / Unit)2. Cost of Secondary Fuel (Fuel Cost / Unit)
Variable Cost / UnitVariable Cost / Unit
Total Cost per UnitTotal Cost per Unit
ACPS, ARR and CoSACPS, ARR and CoS
Average Cost of Power Supply (ACPS)Average Cost of Power Supply (ACPS) ::
Total pooled cost divided by Energy Sold gives Total pooled cost divided by Energy Sold gives
the Average Cost of Power Supply. the Average Cost of Power Supply.
Average Realisation Rate (ARR)Average Realisation Rate (ARR) :: It is the It is the
average rate at which the revenue is realised average rate at which the revenue is realised
per unit. (Realisation on accrual basis not on per unit. (Realisation on accrual basis not on
cash basis ie., Demand raised).cash basis ie., Demand raised).
Cost to Serve (CoS)Cost to Serve (CoS) :: It is the cost incurred to It is the cost incurred to
supply power at specified voltage or to a supply power at specified voltage or to a
specified class of consumers.specified class of consumers.
“ “ If you can’t measure it, If you can’t measure it,
you can’t manage ityou can’t manage it”” Unless metering is complete, whatever may be the Unless metering is complete, whatever may be the
level of accuracy in assessing the unmetered level of accuracy in assessing the unmetered
sales, the figures are susceptible for manipulation sales, the figures are susceptible for manipulation
and lead to biased decisions.and lead to biased decisions.
Tackling of distribution loss based on such un-Tackling of distribution loss based on such un-
authenticated figures may not yield expected authenticated figures may not yield expected
results.results.
Metering - Importance
Energy AuditEnergy Audit
At Sector level
At Company level
At Zone / Circle / Division level
At Sub-division level
At Feeder Level
DTC Level
O&M Unit-wise
Aggregate Technical
and Commercia
l Losses
Energy AuditEnergy Audit
Concept :
In the context of Transmission and Distribution functions, simple meaning of Energy Audit is keeping an account of Energy Input and the Energy Realised.
Importance :
With Reforms and Restructuring measures initiated in the power sector coupled
with intervention of Regulator and power purchase cost is steeply increasing, the
Energy Audit is becoming crucial aspect in the sector. . Method and Purpose :
The Energy Audit can be carried out at DTC (Distribution Transformer Centre)
level, Feeder level, O&M Unit Level, Sub-division / Division / Circle / Zone /
ESCOM level depending on the requirement and focus.
Simply carrying out the Energy Audit without analysing the results and taking
further corrective action to identify the high loss areas and plugging the loss is of
no use. The results should be effectively used for short listing the DTCs / Feeders
having abnormal losses, negative losses, etc., for taking appropriate action.
DTC-wise Energy AuditDTC-wise Energy Audit
Concept :
The DTC-wise Energy Audit is becoming a key performance evaluation
parameter as it is the last point in our supply chain before energy reaches the
consumer’s installation. It is also construed as best micro-level management
criteria as the result would point out specific area of supply contributing to
high loss may be due to technical reasons or due to commercial loss by way
of theft, pilferage, metering inaccuracies, etc.,.
Steps : 1. Metering at DTC level is the key factor for carrying out DTC-wise energy
audit.2. Input at DTC level is taken based on DTC meter reading.3. Consumption as per billed data is taken as the energy sold (if all the
installations are metered)4. If all the installations under the DTC are not metered, the consumption in
respect of unmetered installations has to be assessed based on some reasonable realistic basis. Contd.,
DTC-wise Energy AuditDTC-wise Energy Audit
Steps :
5. From the total energy input of the DTC, the sum of billed consumption and the assessed consumption in respect of unmetered categories is deducted to arrive at the energy loss.
6. The percentage of energy loss to the energy input is the DTC-wise Energy Loss.
Energy Audit Results and Corrective Action :After carrying out the Energy Audit in respect of all DTCs in a O&M Unit / Sub-
division, the list has to be arranged in descending order (using SORT function of MS- EXCEL).
Keeping the allowable loss (say 2.5% in Urban DTCs and 5% in Rural DTCs) as the basis, the installations under DTCs having loss above this level are to be subjected to thorough verification either by physical checking or meter calibration by the Meter Testing (MT) wing or both measures.
The results of DTCs having negative loss should also be analysed to ascertain the reasons and correcting the problems.
Based on the report from MT wing after calibration action as suggested may be initiated.
Aggregate Technical and Commercial Aggregate Technical and Commercial Loss (AT&C Loss)Loss (AT&C Loss)
Concept :
It represents the difference between units input and the units realised. It captures
both the energy loss and the impact of collection efficiency
Importance :
AT & C Loss is one of the best yardsticks to measure the efficiency of an
ESCOM. This can also be worked out for any Revenue Unit like Feeder, DTC,
Sub-division, Division, Circle, Zone. Billing / Collection / Business Efficiency :
The percentage of energy billed (ie., input minus T&D Loss) is the ‘Billing
Efficiency’. The percentage of Revenue Collection to Revenue Demand is
‘Collection Efficiency’. The product of Billing and Collection Efficiency is
‘Business Efficiency’. The residual ie., 1 minus Business Efficiency is the AT&C
Loss (in%).
A T & C LossA T & C Loss (Figures of KPTCL and ESCOMs )
ExampleExample ActualActual
Energy Purchased (or Energy Input)Energy Purchased (or Energy Input) 100 Units100 Units 31260 MUs31260 MUs
Energy Sold by ESCOM to Consumers (incl. sales to Energy Sold by ESCOM to Consumers (incl. sales to Hukkeri Society ) Hukkeri Society )
78 Units (T& D Loss in Units 22)78 Units (T& D Loss in Units 22) 21572 MUs21572 MUs
Revenue Demand (billed by ESCOM to Consumers)Revenue Demand (billed by ESCOM to Consumers) 78 Units (@ Re.1 / Unit)78 Units (@ Re.1 / Unit) Rs. 7,000 Crs.Rs. 7,000 Crs.
Revenue CollectionRevenue Collection 65 Units (@ Re1 / Unit)65 Units (@ Re1 / Unit) Rs. 6,300 Crs.Rs. 6,300 Crs.
A T & C LossA T & C Loss 35 Units35 Units
== 37.90 %37.90 %
A T & C Losses =
( 21572 )_____________
( 31260 )
X _______
( 7000 )
( 6300 )1 - X 100
T & D Loss { (100 minus 78 in % for Ex.) and ( 21572 / 31260 for Actuals) }T & D Loss { (100 minus 78 in % for Ex.) and ( 21572 / 31260 for Actuals) } 22.00 %22.00 % 31.00 %31.00 %
Billing Efficiency (ie., 100 minus T&D Loss)Billing Efficiency (ie., 100 minus T&D Loss) 78.00 %78.00 % 69.00 %69.00 %
Collection Efficiency Collection Efficiency {65 / 78 for Ex.) and ( 6300 / 7000 for Actuals)}{65 / 78 for Ex.) and ( 6300 / 7000 for Actuals)} 83.00 %83.00 % 90.00 %90.00 %
Business Efficiency (i.e., Billing Efficiency X Collection Efficiency)Business Efficiency (i.e., Billing Efficiency X Collection Efficiency) 65.00 %65.00 % 62.10 %62.10 %
A T & C Loss (100 minus Business Efficiency)A T & C Loss (100 minus Business Efficiency) 35.00%35.00% 37.90 %37.90 %
Types of AuditTypes of Audit
1.1. Statutory AuditStatutory Audit
2.2. C&AG AuditC&AG Audit
3.3. Internal AuditInternal Audit
4.4. Cost AuditCost Audit
5.5. Management AuditManagement Audit
6.6. Periodical Audit Periodical Audit
7.7. Special Audit Special Audit
Internal Audit in KPTCL / ESCOMsInternal Audit in KPTCL / ESCOMs
Internal Audit in KPTCL and ESCOMs cover the Internal Audit in KPTCL and ESCOMs cover the following key areas :following key areas :Revenue AuditRevenue AuditCash AuditCash AuditVoucher AuditVoucher AuditAudit of Turnkey WorksAudit of Turnkey WorksAudit of Projects (ie., Capital Works)Audit of Projects (ie., Capital Works)Material Audit (Stores, etc.,)Material Audit (Stores, etc.,)Audit of Accounts Audit of Accounts (Trial Balance, M(F) Accounts, (Trial Balance, M(F) Accounts,
etc.,)etc.,)
Auditing in EDP EnvironmentAuditing in EDP Environment(Points listed out based on observations during Inspection by Revenue Improvement and (Points listed out based on observations during Inspection by Revenue Improvement and
Loss Reduction Team constituted by MD, KTPCL)Loss Reduction Team constituted by MD, KTPCL)
Even under computerised scenario Registers like 6A, 6B Registers, Meter Even under computerised scenario Registers like 6A, 6B Registers, Meter
Constant Register, Register of Appeal / Court / Vigilance / MT Cases, Constant Register, Register of Appeal / Court / Vigilance / MT Cases,
Checking OB against Consumer Accounts before and after Checking OB against Consumer Accounts before and after
computerisation, etc., are to be verified.computerisation, etc., are to be verified.
Though Audit Officers / staff are not required to understand the Billing Though Audit Officers / staff are not required to understand the Billing
software fully, it is of utmost importance that they should be aware of software fully, it is of utmost importance that they should be aware of
broad framework of the software.broad framework of the software.
In particular, the Audit Officer / Staff should be familiar with mode of In particular, the Audit Officer / Staff should be familiar with mode of
generating various ‘Reports’ either through front end or back end generating various ‘Reports’ either through front end or back end
queries.queries.
In respect of any key data required to be generated using software for In respect of any key data required to be generated using software for
which no provision has been made, the Agency maintaining the which no provision has been made, the Agency maintaining the
software may be appraised of the requirement and asked to develop software may be appraised of the requirement and asked to develop
Reports or Queries for generating Reports.Reports or Queries for generating Reports.
Auditing in EDP EnvironmentAuditing in EDP EnvironmentProvision made in the Software for generating reports in respect of items Provision made in the Software for generating reports in respect of items
like Bills not issued, Arrears list, Nil Consumption, Installations with like Bills not issued, Arrears list, Nil Consumption, Installations with
remarks like continuous Door lock, Readings not furnished, etc., have remarks like continuous Door lock, Readings not furnished, etc., have
to be utilised fully by the Audit for analysing and pointing out to be utilised fully by the Audit for analysing and pointing out
deficiencies, discrepancies, shortcomings.deficiencies, discrepancies, shortcomings.
Audit should adopt MBE (Management By Exception) approach wherein Audit should adopt MBE (Management By Exception) approach wherein
instead of verifying voluminous data, they can generate Exceptional instead of verifying voluminous data, they can generate Exceptional
Report or Sort the Data (using computer) to short list the items and Report or Sort the Data (using computer) to short list the items and
prioritize for detailed verification. prioritize for detailed verification.
As key data relating to certain technical issues like Energy Audit, As key data relating to certain technical issues like Energy Audit,
Disconnections not attended, Disconnections only on paper (without Disconnections not attended, Disconnections only on paper (without
effecting it physically), Reading not furnished list of installations etc., effecting it physically), Reading not furnished list of installations etc.,
can be generated easily using computer software, Audit can use such can be generated easily using computer software, Audit can use such
data for pointing out lapses effectively.data for pointing out lapses effectively.
Issues Normally Misunderstood Issues Normally Misunderstood by Non-Finance Officersby Non-Finance Officers
Capital or Revenue Expenditure make no differenceCapital or Revenue Expenditure make no difference
Cash collection at Revenue Sub-divisions is our IncomeCash collection at Revenue Sub-divisions is our Income
Profit shown in P&L Account is available in cash with the CompanyProfit shown in P&L Account is available in cash with the Company
Deposits collected from consumers is also our RevenueDeposits collected from consumers is also our Revenue
Augmentation charges collected is also our RevenueAugmentation charges collected is also our Revenue
Company can raise loan to whatever extent it desiresCompany can raise loan to whatever extent it desires
Non-capitalisation of an asset has no financial impactNon-capitalisation of an asset has no financial impact
As the Co.,.is making all payments in time, its financial health is goodAs the Co.,.is making all payments in time, its financial health is good
Payment of Suppliers and Contractors Bills can be met out of Revenue Payment of Suppliers and Contractors Bills can be met out of Revenue Collections.Collections.
Sufficient cash is available at Corporate Office for transfer to Unit Sufficient cash is available at Corporate Office for transfer to Unit Offices for meeting expenditure within the budget allocationOffices for meeting expenditure within the budget allocation
Average Realisation Rate (ARR) means revenue realised ie., collected Average Realisation Rate (ARR) means revenue realised ie., collected per unit of energy sold.per unit of energy sold.
Issues Normally Misunderstood Issues Normally Misunderstood by Non-Finance Officersby Non-Finance Officers
Revenue Arrears written off would reduce the Company’s burdenRevenue Arrears written off would reduce the Company’s burden
Transmission Cost will be recovered in full irrespective of the quantum Transmission Cost will be recovered in full irrespective of the quantum of energy handled/transmitted in the systemof energy handled/transmitted in the system
ESCOMs will earn profit if the entire revenue demand is collected ESCOMs will earn profit if the entire revenue demand is collected during a specified period (ignoring the cost & quantum energy during a specified period (ignoring the cost & quantum energy purhcase & sales)purhcase & sales)
Entire Depreciation is available as internal resources for taking up Entire Depreciation is available as internal resources for taking up capital workscapital works
Maintaining 100% collection efficiency i.r.o. revenue would solve all Maintaining 100% collection efficiency i.r.o. revenue would solve all financial problems (ignoring the huge accumulated past arrears)financial problems (ignoring the huge accumulated past arrears)
Company is generating resources for meeting capital works program Company is generating resources for meeting capital works program (either through support from Govt. or out of internal resources)(either through support from Govt. or out of internal resources)
e-mail of H.L. Mukunda : [email protected]
Accounting StandardsAccounting Standards AS 1AS 1 – Disclosure of Accounting Policies – Disclosure of Accounting Policies AS 2AS 2 – Valuation of Inventories – Valuation of Inventories AS 3AS 3 – Cash Flow Statements – Cash Flow Statements AS 4AS 4 – Contingencies and Events occurring after – Contingencies and Events occurring after
the Balance Sheet date the Balance Sheet date AS 5AS 5 – Net profit or loss for the period, prior – Net profit or loss for the period, prior
period items and changes in Accounting policies.period items and changes in Accounting policies. AS 6AS 6 – Depreciation Accounting – Depreciation Accounting AS 7AS 7 – Accounting for Construction contracts – Accounting for Construction contracts AS 8AS 8 – Accounting for Research and Development – Accounting for Research and Development AS 9AS 9 – Revenue Recognition – Revenue Recognition AS 10AS 10 – Accounting for Fixed Assets – Accounting for Fixed Assets
Accounting StandardsAccounting Standards AS 11AS 11 – Accounting for the Effects of changes – Accounting for the Effects of changes
Foreign Exchange ratesForeign Exchange rates AS 12AS 12 – Accounting for Government Grants – Accounting for Government Grants AS 13AS 13 – Accounting for investments – Accounting for investments AS 14AS 14 – Accounting for Amalgamations – Accounting for Amalgamations AS 15AS 15 – Accounting for Retirement benefits in – Accounting for Retirement benefits in
the Financial Statements of Employeesthe Financial Statements of Employees AS 16AS 16 – Borrowing Costs – Borrowing Costs AS 17AS 17 – Segment Reporting – Segment Reporting AS 18AS 18 – Related Party Disclosure – Related Party Disclosure AS 19AS 19 – Leases – Leases AS 20AS 20 – Earnings per Share – Earnings per Share
Accounting StandardsAccounting Standards AS 21AS 21 – Consolidated Financial Statements – Consolidated Financial Statements AS 22AS 22 – Accounting for taxes on income – Accounting for taxes on income AS 23AS 23 – Accounting for Investments in – Accounting for Investments in
Associates in Consolidated Financial Associates in Consolidated Financial StatementsStatements
AS 24AS 24 – Discontinuing Operations – Discontinuing Operations AS 25AS 25 – Interim Financial Reporting – Interim Financial Reporting AS 26AS 26 – Intangible Assets – Intangible Assets AS 27AS 27 – Financial Reporting of Interests in – Financial Reporting of Interests in
Joint VenturesJoint Ventures AS 28AS 28 – Impairment of Assets – Impairment of Assets AS 29AS 29 – Provisions, Contingent Liabilities and – Provisions, Contingent Liabilities and
Contingent AssetsContingent Assets
Basic Accounting TermsBasic Accounting TermsEquity Equity :: Means the claims against the assets of an Means the claims against the assets of an
enterprise or rights in the assets of an enterprise. enterprise or rights in the assets of an enterprise. Owner’s equity refers to owner’s capital and outsiders’ Owner’s equity refers to owner’s capital and outsiders’ equity refer to liabilities of an enterprise.equity refer to liabilities of an enterprise.
Capital :Capital : The amount of money or money’s worth The amount of money or money’s worth invested by the proprietor into his business at the time invested by the proprietor into his business at the time of the commencement of business is called capital. of the commencement of business is called capital. Capital is also defined as owner’s equity i.e., owner’s Capital is also defined as owner’s equity i.e., owner’s claims against the assets of the business.claims against the assets of the business.
Assets :Assets : Means enough or sufficient economic resources Means enough or sufficient economic resources owned by a business concern for carrying on the owned by a business concern for carrying on the business. According to Finney and Miller “ Assets are business. According to Finney and Miller “ Assets are future economic benefits, the rights of which are owned future economic benefits, the rights of which are owned or controlled by an Organisation or individuals”. or controlled by an Organisation or individuals”. Examples are land, building, vehicles, furniture, Examples are land, building, vehicles, furniture, goodwill, trade mark, bills receivable, debtors, etc.,.goodwill, trade mark, bills receivable, debtors, etc.,.
Basic Accounting TermsBasic Accounting TermsLiabilities Liabilities :: Mean the claims or outsiders against the Mean the claims or outsiders against the
business concern which bind the business concern to business concern which bind the business concern to
others. Examples are loans borrowed, bank overdraft, others. Examples are loans borrowed, bank overdraft,
creditors, bills payable, etc.,.creditors, bills payable, etc.,.
Net worth :Net worth : Means the excess of the total assets of a Means the excess of the total assets of a
business over its total liabilities at any particular point business over its total liabilities at any particular point
of time. It is the net value of assets that belongs to the of time. It is the net value of assets that belongs to the
owner. It is also called owner’s capital.owner. It is also called owner’s capital.
Debtor :Debtor : A debtor is a person who owes money to the A debtor is a person who owes money to the
business. He owes money to the business because he business. He owes money to the business because he
has received some benefit from the business. A debtor has received some benefit from the business. A debtor
constitutes an asset for the business.constitutes an asset for the business.
Basic Accounting TermsBasic Accounting TermsDebt Debt :: The amount of a business transaction due from a The amount of a business transaction due from a
person (i.e., debtor) to the business is called a debt.person (i.e., debtor) to the business is called a debt.
Creditor :Creditor : A creditor is a person to whom the business owes A creditor is a person to whom the business owes
money. The business owes money to him, because he has money. The business owes money to him, because he has
given some benefit to the business. A creditor constitutes a given some benefit to the business. A creditor constitutes a
liability for the business.liability for the business.
Solvent :Solvent : A businessman is said to be solvent when he is able A businessman is said to be solvent when he is able
to pay his liabilities in full. In other words, a businessman to pay his liabilities in full. In other words, a businessman
is regarded as solvent when his assets exceed his liabilities.is regarded as solvent when his assets exceed his liabilities.
Goods :Goods : Goods refers to merchandise, commodities, Goods refers to merchandise, commodities,
products, articles, things in which a trader deals. In other products, articles, things in which a trader deals. In other
words, they refer to commodities or things meant for resale.words, they refer to commodities or things meant for resale.
Basic Accounting TermsBasic Accounting Terms
Purchases Purchases :: Goods purchased by a business are called Goods purchased by a business are called
purchases. It may be cash or credit purchase.purchases. It may be cash or credit purchase.
Sales :Sales : Goods sold by a business are called sales. The Goods sold by a business are called sales. The
sale of goods may be cash sales or credit sales. sale of goods may be cash sales or credit sales.
Inventory :Inventory : Inventory or stock refers to be stock of Inventory or stock refers to be stock of
finished goods held for sale in the ordinary course of finished goods held for sale in the ordinary course of
business, or the stock of raw materials and work-in-business, or the stock of raw materials and work-in-
progress held for consumption in the production of progress held for consumption in the production of
finished goods for sale, or stock of consumable stores finished goods for sale, or stock of consumable stores
held for use in the factory.held for use in the factory.
Basic Accounting TermsBasic Accounting Terms
Revenue :Revenue : Revenue or income is the earning of a Revenue or income is the earning of a
business from the sale of goods or from the rendering business from the sale of goods or from the rendering
of services to customers during an accounting period. of services to customers during an accounting period.
Examples are Revenue from sale of goods, interest on Examples are Revenue from sale of goods, interest on
investments, royalty received, discount received, etc.,investments, royalty received, discount received, etc.,
Expenses :Expenses : Expenses are the costs incurred in Expenses are the costs incurred in
connection with the earnings of revenue. In other connection with the earnings of revenue. In other
words expense is the cost of the things or services for words expense is the cost of the things or services for
the purpose of generating income. Examples are repair the purpose of generating income. Examples are repair
expenses, cost of goods purchased, salary and wages, expenses, cost of goods purchased, salary and wages,
interest, etc., interest, etc.,
Basic Accounting TermsBasic Accounting TermsLoss :Loss : Loss refers to money or money’s worth given up Loss refers to money or money’s worth given up
without getting any benefit in return. Loss occurs without getting any benefit in return. Loss occurs
accidentally or involuntarily. Examples are loss of goods by accidentally or involuntarily. Examples are loss of goods by
fire, loss of machinery in accident, damages paid to others, fire, loss of machinery in accident, damages paid to others,
etc.,.etc.,.
Gain :Gain : Gain refers to revenue which is not generated through Gain refers to revenue which is not generated through
routine regular business activities. They are of irregular in routine regular business activities. They are of irregular in
nature. Examples are profit on sale of fixed asset, refund of nature. Examples are profit on sale of fixed asset, refund of
tax received, winnings in a court case, etc.,.tax received, winnings in a court case, etc.,.
Profit :Profit : Profit is the excess of revenues over the expenses of a Profit is the excess of revenues over the expenses of a
given period of time, usually a year. Profit results in given period of time, usually a year. Profit results in
increase in owner’s capital.increase in owner’s capital.
Basic Accounting TermsBasic Accounting TermsDebit Debit :: Means an entry on the debit side or left-hand side Means an entry on the debit side or left-hand side
of an account (when used as a noun). When it is used of an account (when used as a noun). When it is used
as an adjective, it is termed as debit side i.e., left hand as an adjective, it is termed as debit side i.e., left hand
side of an account. When it is used as a verb, it is side of an account. When it is used as a verb, it is
termed as ‘to debit’ which means to make an entry on termed as ‘to debit’ which means to make an entry on
the debit side of an account. the debit side of an account.
Credit :Credit : Means an entry on the credit side or right-hand Means an entry on the credit side or right-hand
side of an account (when used as a noun). When it is side of an account (when used as a noun). When it is
used as an adjective, it is termed as credit side i.e., used as an adjective, it is termed as credit side i.e.,
right hand side of an account. When it is used as a right hand side of an account. When it is used as a
verb, it is termed as ‘to credit’ which means to make an verb, it is termed as ‘to credit’ which means to make an
entry on the credit side of an account. entry on the credit side of an account.
Classification of AccountsClassification of Accounts
Types of Accounts :Types of Accounts : Real AccountReal Account
Examples :Examples : Tangible items like Buildings a/c, Cash a/c, Tangible items like Buildings a/c, Cash a/c, Goods a/c, and Intangible items like Goodwill a/c, Patent Goods a/c, and Intangible items like Goodwill a/c, Patent a/c, Trade Marks a/c, etc.,a/c, Trade Marks a/c, etc.,
Personal AccountPersonal Account Examples :Examples : Natural personal accounts like Jame’s a/c, Dev’s Natural personal accounts like Jame’s a/c, Dev’s
a/c, and Artificial personal accounts like Galaxy Bank a/c, a/c, and Artificial personal accounts like Galaxy Bank a/c, BESCOM a/c, etc.,.BESCOM a/c, etc.,.
Nominal (or Fictitious) AccountNominal (or Fictitious) Account Examples :Examples : Revenues and incomes a/cs like Commission Revenues and incomes a/cs like Commission
earned, interest received, gain on sale of vehicle and earned, interest received, gain on sale of vehicle and Expense accounts like salaries paid, discount allowed, bad Expense accounts like salaries paid, discount allowed, bad debts, etc.,debts, etc.,
Golden Rules of AccountingGolden Rules of Accounting
Two aspects of a transaction :Two aspects of a transaction : Debit aspect and Credit aspect.Debit aspect and Credit aspect. These two aspects affect two different accounts.These two aspects affect two different accounts.
Rules for Debit or Credit :Rules for Debit or Credit :Real AccountReal Account – – Debit what comes in and Debit what comes in and
Credit what goes outCredit what goes outPersonal AccountPersonal Account – – Debit the Receiver and Debit the Receiver and
Credit the giverCredit the giverNominal AccountNominal Account – – Debit all expenses (and Debit all expenses (and
losses) and credit all incomes (gains)losses) and credit all incomes (gains)
Books of AccountsBooks of AccountsJournalJournal
The book of original entry under the conventional method of The book of original entry under the conventional method of accounting is the journal. It means a day book or a daily accounting is the journal. It means a day book or a daily record.record.
AccountAccount Refers to a summarised record of all the transactions relating to Refers to a summarised record of all the transactions relating to
a person, thing or a service which have taken place during a a person, thing or a service which have taken place during a given period of time.given period of time.
LedgerLedger Means a book where the various accounts are kept.Means a book where the various accounts are kept.
Trial BalanceTrial Balance It is a schedule or list of balances, both debit and credit, It is a schedule or list of balances, both debit and credit,
extracted from the accounts in the ledger and including cash extracted from the accounts in the ledger and including cash and bank balances from the cash book.and bank balances from the cash book.
Trial BalanceTrial Balance
It is a statement of ledger balances under It is a statement of ledger balances under
various heads of account.various heads of account.
All the Accounts can be classified under four All the Accounts can be classified under four
heads viz., heads viz., Assets, Liabilities, Income and Assets, Liabilities, Income and
Expenditure.Expenditure.
All All AssetsAssets and and ExpenditureExpenditure heads of account heads of account
show show DebitDebit balance. balance.
All All LiabilitiesLiabilities and and IncomeIncome heads of account heads of account
show show CreditCredit balance. balance.Contd.,
Trial BalanceTrial Balance
As per the Chart of Accounts being used in As per the Chart of Accounts being used in
KPTCL (more or less same at ESCOMs also) the KPTCL (more or less same at ESCOMs also) the
classification is as shown below :classification is as shown below :
Assets Assets Debit Head Debit Head 10 to 37 10 to 37
(except 12 series and certain heads of account)(except 12 series and certain heads of account)
Liabilities Liabilities Credit Head Credit Head 12 and 41 to 5812 and 41 to 58
Income Income Credit Head Credit Head 61 to 65 61 to 65
Expenditure Expenditure Debit Head Debit Head 70 to 8370 to 83
(except credit head of account meant for capitalisation)(except credit head of account meant for capitalisation)
Basic Accounting TermsBasic Accounting TermsAccount Account :: An account (or its abbreviation a/c) means a An account (or its abbreviation a/c) means a
summarised record of all the transactions relating to a summarised record of all the transactions relating to a
particular person, thing (i.e., asset) or a service (i.e., an particular person, thing (i.e., asset) or a service (i.e., an
expense or an income) which have taken place during a expense or an income) which have taken place during a
given period of time. It is a ledger record.given period of time. It is a ledger record.
Entry :Entry : The record of a transaction in a book of accounts The record of a transaction in a book of accounts
is known as an entry.is known as an entry.
CWIP :CWIP : Refers to Capital Works In Progress. It is an Refers to Capital Works In Progress. It is an
intermediary account in which the expenditure on on-intermediary account in which the expenditure on on-
going works is initially booked and transferred to fixed going works is initially booked and transferred to fixed
asset account (called capitalisation) when the related asset account (called capitalisation) when the related
asset is commissionedasset is commissioned. .
Basic Accounting TermsBasic Accounting TermsGoodwill :Goodwill : Goodwill typically reflects the value of Goodwill typically reflects the value of
intangible assets such as a strong brand name, good intangible assets such as a strong brand name, good
customer relations, good employee relations and any customer relations, good employee relations and any
patents or proprietary technology.patents or proprietary technology. Goodwill is seen as Goodwill is seen as
an intangible asset on the balance sheet because it is an intangible asset on the balance sheet because it is
not a physical asset such as buildings and equipment. .not a physical asset such as buildings and equipment. .
Bottom Line :Bottom Line : The net profit ie., profit after tax (normally The net profit ie., profit after tax (normally
called as PAT or Profit After Tax) is known as ‘Bottom called as PAT or Profit After Tax) is known as ‘Bottom
Line’ of a Company because it is depicted as the last Line’ of a Company because it is depicted as the last
line in its Profit & Loss account.line in its Profit & Loss account.
Basic Accounting TermsBasic Accounting TermsCarried down or c/d Carried down or c/d :: It is written in a ledger account, It is written in a ledger account,
at the time of balancing it, at the end of an accounting at the time of balancing it, at the end of an accounting period, to indicate that the balance in that account has period, to indicate that the balance in that account has been carried own to the next period.been carried own to the next period.
Brought Down or b/d :Brought Down or b/d : It is written in a ledger It is written in a ledger account, at beginning of the next accounting period, to account, at beginning of the next accounting period, to indicate that the opening balance in that account has indicate that the opening balance in that account has been brought down from the previous period.been brought down from the previous period.
Carried Forward or c/f :Carried Forward or c/f : It is written at the bottom of It is written at the bottom of the page of a journal or ledger, to indicate that the the page of a journal or ledger, to indicate that the totals of that page have been carried forward to the totals of that page have been carried forward to the next page.next page.
Brought Forward or b/f : Brought Forward or b/f : It is written at the top of It is written at the top of the next or subsequent page of a journal or ledger, to the next or subsequent page of a journal or ledger, to indicate that the totals shown on the top of that page indicate that the totals shown on the top of that page have been brought forward from the previous page.have been brought forward from the previous page.
An Annual Report is presentation of the Company’s An Annual Report is presentation of the Company’s performance during a period to the Shareholders.performance during a period to the Shareholders.
Contents :Contents :• Chairman’s StatementChairman’s Statement• Director’s ReportDirector’s Report• Financial StatementsFinancial Statements• Comments of C&AG of IndiaComments of C&AG of India• Auditors’ Certificate – Observations of Statutory Auditor Auditors’ Certificate – Observations of Statutory Auditor
and Management Replyand Management Reply• DisclosuresDisclosures• Others Others
Corporate Governance, Directors’ responsibility statement, Disclosure under Corporate Governance, Directors’ responsibility statement, Disclosure under the Companies rules 1988 (i.e., Energy conservation, Technology the Companies rules 1988 (i.e., Energy conservation, Technology absorption, Foreign Exchange earnings and outgo, etc.,), Statement absorption, Foreign Exchange earnings and outgo, etc.,), Statement pursuant to Sec.212 – relating to Subsidiary, Management’s discussion pursuant to Sec.212 – relating to Subsidiary, Management’s discussion and analysis on industry and key issues, Committees of the Board, and analysis on industry and key issues, Committees of the Board, General Body meetings, etc., General Body meetings, etc.,
Annual ReportAnnual Report
Some Accounting TerminologiesSome Accounting Terminologies
Net Worth :Net Worth : The net worth of an enterprise represents the The net worth of an enterprise represents the
excess of book value of all assets over the outside excess of book value of all assets over the outside
liabilities. It represents the interest of the shareholders liabilities. It represents the interest of the shareholders
in the enterprise. It is normally equivalent to the net in the enterprise. It is normally equivalent to the net
equity i.e., Share capital plus Reserves plus Retained equity i.e., Share capital plus Reserves plus Retained
profits less Unabsorbed losses or Expenses.profits less Unabsorbed losses or Expenses.
Earnings Per Share :Earnings Per Share : The profit attributable to each share The profit attributable to each share
based on the consolidated profit of the period after tax.based on the consolidated profit of the period after tax.
Contingent Liability :Contingent Liability : Liabilities which are dependent on a Liabilities which are dependent on a
condition which exists at the balance sheet date, where condition which exists at the balance sheet date, where
the outcome will be confirmed only on the occurrence or the outcome will be confirmed only on the occurrence or
non-occurrence of one or more uncertain future events.non-occurrence of one or more uncertain future events.
Some Accounting TerminologiesSome Accounting Terminologies
Generally Accepted Accounting Principles (GAAP) :Generally Accepted Accounting Principles (GAAP) : Many Many
countries have got their own GAPP. These are ground countries have got their own GAPP. These are ground
rules covering financial accounting, prescribed by rules covering financial accounting, prescribed by
Financial Accounting Standard Board, USA, that attempt Financial Accounting Standard Board, USA, that attempt
to strike a balance between the criterion of relevance on to strike a balance between the criterion of relevance on
one hand and the criteria of objectivity and feasibility on one hand and the criteria of objectivity and feasibility on
the other.the other.
Secured / Unsecured Loans :Secured / Unsecured Loans : Liability ‘secured’ on asset with Liability ‘secured’ on asset with
lender having legal right to proceeds from sale of that lender having legal right to proceeds from sale of that
asset on liquidation, up to the amount of the liability. asset on liquidation, up to the amount of the liability.
Liability without any such security is ‘Unsecured’ Loan.Liability without any such security is ‘Unsecured’ Loan.
Distinctions One should invariably knowDistinctions One should invariably know
Charged to Revenue :Charged to Revenue :
All items which are taken as expenditure in P&L Account for All items which are taken as expenditure in P&L Account for
comparing with the Revenue and arriving at profit or loss are comparing with the Revenue and arriving at profit or loss are
stated to have been ‘Charged’ to Revenue. These items have to stated to have been ‘Charged’ to Revenue. These items have to
be invariably considered for finalising the Accounts. Examples be invariably considered for finalising the Accounts. Examples
are Salaries, interest, etc., which have to be absorbed by the are Salaries, interest, etc., which have to be absorbed by the
Company invariably.Company invariably.
Appropriation of Profit :Appropriation of Profit :
Appropriation means distribution or taking ‘out of’ profit earned. Appropriation means distribution or taking ‘out of’ profit earned.
Examples are Transfer to Reserves, Payment of Dividend, etc.,. Examples are Transfer to Reserves, Payment of Dividend, etc.,.
Appropriation of profit arises only when the Company has earned Appropriation of profit arises only when the Company has earned
profit. Other-wise there is no scope for appropriation.profit. Other-wise there is no scope for appropriation.
Distinctions One should invariably knowDistinctions One should invariably know
Repairs and Maintenance Expenses :Repairs and Maintenance Expenses :
Any expenditure on restoring an asset back up Any expenditure on restoring an asset back up
to the level of output / efficiency / to the level of output / efficiency /
performance at which it was, when it was first performance at which it was, when it was first
put to use is put to use is repairs repairs expenditure.expenditure.
Any expenditure on maintaining the asset up to Any expenditure on maintaining the asset up to
the level of output /efficiency / performance the level of output /efficiency / performance
at which it was, when it was first put to use is at which it was, when it was first put to use is
maintenancemaintenance expenditure. expenditure.
Both repairs and maintenance expenditure is Both repairs and maintenance expenditure is
revenue expenditure only and revenue expenditure only and charged to charged to
revenuerevenue in the year in which it is incurred. in the year in which it is incurred.
Distinctions One should invariably knowDistinctions One should invariably know
Additions :Additions :
Additions may bring into existence a new asset Additions may bring into existence a new asset
or increase in the physical size of an asset or increase in the physical size of an asset
through expansion, extension, etc.,. Cost of through expansion, extension, etc.,. Cost of
additions shall be capitalised.additions shall be capitalised.
Improvements :Improvements :
An expenditure having the effect of extending An expenditure having the effect of extending
the useful life of an asset or increasing the the useful life of an asset or increasing the
output or capacity or efficiency of an asset or output or capacity or efficiency of an asset or
decreasing operating costs of an asset is decreasing operating costs of an asset is
‘Improvement. All expenditure on ‘Improvement. All expenditure on
improvements shall be capitalsied.improvements shall be capitalsied.
Distinctions One should invariably knowDistinctions One should invariably know
Replacements :Replacements :
Substitution of one fixed asset by another, Substitution of one fixed asset by another,
particularly of an old asset by a new asset, or particularly of an old asset by a new asset, or
of an old part by a new part is ‘Replacement’. of an old part by a new part is ‘Replacement’.
Expenditure on minor replacement shall be Expenditure on minor replacement shall be
charged to revenue as R&M Expenditure.charged to revenue as R&M Expenditure.
Major replacement expenditure shall be Major replacement expenditure shall be
capitalised.capitalised.
A broad criterion of distinguishing minor and A broad criterion of distinguishing minor and
major shall be that replacement of any asset major shall be that replacement of any asset
or part of the asset for which a separate fixed or part of the asset for which a separate fixed
asset record is required shall be considered. asset record is required shall be considered.
Capex, Debt, Depreciation, Profit – Inter-relatedCapex, Debt, Depreciation, Profit – Inter-related
There are two sources for There are two sources for funding capexfunding capex. One is internal resources . One is internal resources and the other is external source.and the other is external source.
Depreciation and Profit which are non-cash expenditure constitutes Depreciation and Profit which are non-cash expenditure constitutes ‘Internal Resources’.‘Internal Resources’.
Repayment of existing DebtRepayment of existing Debt is is notnot an expenditure item an expenditure item chargeable chargeable to P&Lto P&L A/c, but involves cash outgo. A/c, but involves cash outgo.
Repayment of existing debtRepayment of existing debt has to be has to be met out of internal resourcesmet out of internal resources available from depreciation and profit.available from depreciation and profit.
After meeting repayment of existing debt obligation out of internal After meeting repayment of existing debt obligation out of internal resources, if any amount is left, it is available for funding capex.resources, if any amount is left, it is available for funding capex.
If there is If there is negative internal resourcenegative internal resource generation i.e., repayment of generation i.e., repayment of existing debt is more than available internal resources, the shortfall existing debt is more than available internal resources, the shortfall has to met out of fresh borrowings or it results in default in has to met out of fresh borrowings or it results in default in repayment of debt. This situation is termed as repayment of debt. This situation is termed as ‘debt trap’‘debt trap’..
To ascertain the capacity of the company to repay its existing debt, To ascertain the capacity of the company to repay its existing debt, normally normally Debt Service Coverage RatioDebt Service Coverage Ratio (DSCR) is calculated. (DSCR) is calculated.