Reference no: EM131109720

CASE STUDY (Process of Accounting).

Rajiv and Rahul were twin brothers. Rajiv was interested in computers and would find time to always work on computers either at college or at his friend's place. His keen interest in subject made him take up computer software for his degree course. He pleaded with his father Mr. Raghunath and purchased a computer for his use at home. Rahul was always interested in sitting at his father's shop at the nearby market place selling electrical appliances. He would often go and help his father at the shop after college hours.

Mr. Raghunath was happy that Rahul showed keen interest in his business but was worried about Ram who would always spend time with computers.

He felt that if the interest of the two sons be put together they could start a flourishing business of their own. The boom in the IT industry made him find ways to satisfy his son's dream.

After college, the twins were drifting apart due to varied interest. Mr. Raghunath decided that this is the time for him to intervene and make decisions for his sons.

He decided to start a computer business for his sons.He asked Rahul, a commerce graduate to draw up a proposal for the same.Rahul came out with the following ideas:

The area they lived on ad run shop consisted of middle income group families and many of them did not possess computers at home

Their shop could provide the following services:

Ø  Computer classes for various age groups.

Ø  Computer using facilities on payment per hourly basis and printing of documents from computers.

Ø  Internet access facility at the prevailing market rates by entering into contract with AIRTEL.

Ø  Computer games corer for children

Rajiv jumped at the idea and they made up a common proposal.  Rajiv wanted that they purchase 10 computers and start with first two areas of operation and expand when things go well.

The shop they had at the market place was a single storey building. Their father offered to build the first floor and give it to them for their business.  He spent'5,00,000 on construction of the facility and gave them  '5,00,000 for the business. The sons went to bank and put up their proposal and managed to get a loan to the extent of 75% of the cost of computers ' 4,00,000 with printers. As the bank manager was aware of the credit worthiness of Mr. Raghunath, he advanced loan of '3,00,000. Total amount to be repaid will be '3,60,000 including interest in three annual installments as follows:

Ø  End of the first year     =    ' 1,30,000

Ø  End of the 2^nd year      =   ' 1,20,000

Ø  End of the 3^rd year    =  ' 1,10,000

(Where ' 1, 00,000 is the principal repayment)

They started business on 1^st April 2010. Rahul decided to deposit' 4, 40,000 in the bank.

He gave ' 1, 00,000 to computer company as 25% of the value of computers purchased and ' 3, 00,000 out of bank loan availed. He deposited ' 20,000 for electrical connection with the Electricity Board. He paid deposit of ' 1, 00,000 with AIRTEL for Internet connection. He used the telephone connection of the shop as there were two connections at the shop. The brothers got the computer café furnished by paying ' 50,000. Rahul got pamphlets printed and distributed at the cost of ' 4,500 in the surrounding colonies.

All payments were to be made by cheques. All the receipts were in cash to be deposited in the bank on the same day.

The students on the average paid a monthly fee of ' 500 for the three months computer evening classes.

There were a number of internet subscribers and receipts on account of internet facility was ' 10,000 a month in the first quarter on an average.  They decided to buy and sell computer stationery also like floppy, discs, CDs etc.

At the end of the financial year, their results showed the following:

	'
Total revenue including sale of computer stationery	4,98,000
Purchase of computer stationery	55,000
Electricity charges yet to be paid	1,24,000
Telephone charges	34,000
Petty expenses	12,000
Entertainment expenses	10,000
Maintenance expenses	10,000

There was a helper at their father's shop, who agreed to clean up the computer café and fetched water to various visitors. For the additional services, he was paid ' 500 per month. They withdrew '.3, 000 by cheque each month for their personal expenses. They paid bank loan regularly.

The father was pleased at their son's efficiency.He wanted to expand business.              

Mean while Rahul received the pass book statement (for the end of March 2011) which showed the transactions as follows:

Particulars	Deposit	Withdrawal	Balance  '
Balance as on 1 march 2011			4,76,500 CR
Fees remitted direct into business account.	50,000		5,26,500 CR
Bank charges		500	5,26,000 CR
Withdrawal by cheque no......		6,000	5,20,000 CR
Payment by cheque no.......		6,000	5,14,000 CR
Interest credited	2,000		5,16,000 CR
Balance as on 31 march 2011			5,16,000 (CR)

1.       Analyze the transactions and explain the rules applied as per double entry system of bookkeeping.

2.       Journalize the above transactions. Post them into the ledgers and prepare trial balance.

3.       Prepare Bank Reconciliation Statement and make necessary adjustment in the books of account.

4.       Prepare Profit and Loss account and Balance Sheet.

5.       Charge depreciation @25% on computers, @10% on furniture, 5% on buildings.

6.       Paisa can be rounded off.

7.       What are the basic assumptions and concepts applied by Rahul while preparing the above statements?

8.       Calculate profitability ratios.

9.       They approached bank for further loan. Compute the ratios the banker will require before granting the loan.

10.   Comment on the efficiency of the business if the net profit and gross profit in similar type of business concerns are 20% and 50% respectively.