JAIIB AFM 17 🔥 ch 12 Balancesheet equation - module b

Hello friends, good morning to all of you. And in today's video we are going to start with Module B from the AFM that is Accounting and the Financial Management for the Bankers. So if you are preparing for the JRB exam and if you want to specifically clear it in the very first attempt then make sure to go through these videos on a daily basis. These videos are available free of cost on our YouTube channel. So definitely you should be going for those videos. So we have already completed Module A. And now we are going to cover Module B. End This is the first chapter of Module B. Chapter No. 12 Which is the Balance Sheet Equation. And trust me that these are the basics. These are the basics. If you skip these basics, you will find it difficult to understand the next chapters. Right? So let's drive into it. Please confirm the OD video quality at the earliest so that we can proceed with the video right and do confirm the OD video quality at the earliest so if you want the complete crash course of AFM or complete crash course of JIB then simply you can WhatsApp JIB to the number 8360944207 right and the complete details will be available if you want to go through the free test series. You should be visiting the website iibf.store. You will also find PDFs and one liners on iibf.store. You will be finding the interactive game also. Right? Everything is available over there. Let's start today's session quickly. It is related to the chapter number 12 from the module B that is a balance sheet equation. So first of all let us understand what is balance sheet equation or accounting equation ? So the accounting equation is the base of the double entry system. I already told you about the double entry system. Where any entry you make, any journal entry you make, has two aspects. This means that at least two accounts are going to be impacted. This explains that whatever the business owns, that is, whatever the business owns, will either be financed or provided by the owner. Ok? Either you have taken it from somewhere outside and you have made your own things from it or that money is your own. You should understand it as if you are doing a job. Right? So you have either taken a loan from the bank or it is your own capital with which you have created your assets. This is the accounting equation. This is a balance sheet equation. And that basically says what? That your total assets will be the total of the assets that is equal to the capital, that is, your money plus outside liabilities will be equal to that. Assets means they are resources. Assets are the resources that a business operates on. Ok? Like cash, stocks, debtors, buildings. Ok? These are all assets. What is capital? Capital is the owner's claim in the business. This is the owner's claim in the business. And when we're talking about the liabilities, liabilities mean outside liabilities. The money that you have to pay outside has now become your creditors, bank loan, term loan. Those are your outside liabilities. Those are all your outside liabilities. Right? So, this is a very basic logic. And every asset has a source of finance. Now let me tell you an interesting thing. Now if you look at the structure of the balance sheet, the structure of the balance sheet is also similar. Like this is very easy to understand and this equation is also made on its basis. Like we have on the right side we are having the assets and on the left side we are having the liabilities. Now we call them liabilities. So liabilities are the sources of the funds. These are the sources of the funds. And those are the assets, these are the uses of funds. That means wherever money is invested, it is being used. And the source of funds is your liability. Ok? That is your liability. Or what is the total up part of the liabilities? That is a capital part in which your capital , shareholders funds, reserves , surplus, that becomes capital. And then come your long term liabilities. Then there are the short term liabilities. Then come short term liabilities. And if you look at the asset side, you are having the fixed assets, non-current assets, current assets, intangible assets. That is it. And the interesting thing is that their total is all equal. The total of all the assets is equal to the total of all the liabilities. End liabilities have two components. One it is a capital and the other one it is the outside liabilities. These are your outside liabilities. End capital is your own money, your own stake in the company that is present. Right? Now look at an example. Assets of M/s Lakshmi Traders are worth ₹9 lakh. Outside liability is central creditors plus bank loan of ₹5 lakh. So whose capital will be equal to? Capital would be equal to assets minus outside liabilities. What was the formula? Assets equal to capital plus outside liabilities. So you have outside liabilities given. Assets are given. You can easily be calculating the capital from here and we calculated it. Right? And we calculate it. Whose capital did you get equal to? It came to the equivalent of ₹4 lakh. Ok? Now, we can definitely rearrange this equation. So we can rearrange it accordingly to calculate whatever is required. Then it's about the point that when a firm which is let's have a look at this point insight. Look at this insight carefully. When a firm raises a term loan. For example, suppose there was a firm x y z and that firm took a term loan. Right? Let's assume this thing is a firm here. Right? Let's assume that this firm here is ABC. And this ABC firm took a term loan from outside. Now what will happen when the term loan is taken? Basically, your long term liability will increase and at the same time your bank balance will also increase because you have received the money. Ok ? Or the bank may have taken the asset and given it to you through finance, then your fixed assets will increase. So that will be the case, that thing is bound to happen. So both your assets and outside liabilities will increase. Ok? Both assets and outside liabilities will increase. Your capital has not been reduced. That unremained of yours will not have any impact on him. Because when you took the turn loan, we did not touch the capital at all. So, firstly, there will be an impact on your long term liabilities and secondly, your fixed assets or your bank balance will increase due to the loans. Only that will be the matter. That's the only difference it's going to make. That is a case. That is the only scenario. Ok? And so here see one thing that if you get a question that statement a term loan of 3,50,000 reduces by a reduces capital by ₹3,50,000 then what is that thing? That is what will be wrong. That thing will go wrong. So this is how you get questions. You will be finding the questions like this. Ok? Let's see the impact now. And on this basis we will be finding the different questions also. Let's have a look at these transactions. The first transaction is that the owner brings ₹ lakh cash. Now if the owner has brought ₹ lakh in cash then the cash account will increase by ₹ lakh. Right? Because debit is what comes in and credit is what goes out. So the cash account will be increasing by ₹2 lakh. That means the asset side will be increasing by ₹2 lakh. And since this is your own capital, the capital account will also be increasing. Right? So in this case your assets will increase by ₹ lakh. The assets will be increasing by ₹2 lakh. And there will be no impact on the liabilities as such. I am not talking about the liability side. I am talking about outside liabilities. Here the liabilities means I will also write it here. We mean outside liabilities, we are talking about outside liabilities. Right? We are not talking about the overall liabilities. Ok? So there will be no impact on your outside liabilities. And your capital that will increase will increase. Right? There will be impact over it. So that will increase. Similarly, you took a term loan. We just read this topic. You have just taken a term loan of Rs 3.5 lakh. Took a topic worth Rs 3.5 lakh. Either cash balance or bank balance was available. That means your assets have increased. Right? And your outside liabilities have increased. Absolutely did it. But there was no impact on the Capitol. There is no impact on the capital. And further you purchase the goods. Now when you purchase goods, your cash account will decrease. Your cash account will basically be reducing. Ok? But your stock will definitely increase. Your stock will increase. So this is what happened here. We now bought goods on credit, that is, on loan. If so, I would buy the goods in cash. If I would have purchased a goods in cash. So my cash account would have been reduced by that amount and my purchases i.e. my stock account would have been increased. So only my asset side would have reduced and increased, neither would it have had an impact on the capital nor on the outside liabilities, okay if I had done it in cash, but now what we did is now we basically dealt with the credit, we dealt with goods on credit, okay in credit, credit means loan, so what happened in the loan is that my liabilities got increased, okay, those liabilities of mine got increased, now it could be a short term liability because I took a credit for a short term period, which are my trade creditors. That is basically the short term liability because it comes under current liability. So my liability part increased. Right? And from there my stock increased. There was no impact on the Capitol. Similarly, when I sell goods, it is very important to understand this entry to build your basics. So make sure that you understand them well. Right? So what is the next entry that you sold the goods, Sold Goods Costing ₹0000 for ₹0000, there were goods in stock worth ₹50000 which you sold for ₹0000, now what happened is that the net plus cash you had was 200000 up to 70, okay, your cash went up and your stock went down by 500, this had an impact and further your capital increased by ₹00 because that is your profit. That's your profit. That's your capital increased by ₹20,000. And there was no impact on your liabilities. If you have paid salary. If you have paid the salary then your bank balance has reduced. This was reduced by ₹25,000. And your expense got reduced by ₹25,000. That means the payables were reduced. There was no impact on your particular liabilities. If your owner withdrew the money, the owner withdrew the money. If you withdraw ₹400, then ₹400 is gone from the bank and ₹40,000 is reduced from your capital. There was no impact on liabilities. Clear with it? So if these entries become clear to you , then definitely you will be able to answer things easily. Then it's after that it's about the profit loss equation. So look, we have just read the equation. Balance Sheet Equation So we are right but now it is about the profit loss equation. What does the profit loss equation say? Now the profit and loss is due to business operations. Ok? So if the total of revenues is exceeding the total of expenses then that is profit. If total revenue is less than total expenses then it will be a loss. So what will happen to that? There will be a loss. So it's basically the net effect. It is a net effect of the revenue generating activities and further profit increases the capital. If there is profit then capital will increase. If there is a loss, capital will be reduced. That's the basic relationship. So this is the basic relationship. And profit and loss are equal to what? It is equal to the total of the revenues minus the total of the expenses. Right? So what is this equal to ? That is equal to the total of the revenues minus the total of the expenses. What does end revenue mean? Revenue means whatever income you are earning as a business. Whatever income you are earning as a business. You received commission, you received interest. You received the discount. If you have any income, right, then where will all those things come in? Will come in revenue. What does expense mean ? Any expense. Any expense that you incur, be it salary, electricity bill, depreciation expense, interest. Ok? You took out provisions for bad debts , that's anything that's an expense. That's basically The Expenses. And when will there be profit? When the R is greater than E, i.e. when the revenue is greater than the expense, then there will be a profit and if R is less than E, then there will be a loss. What will happen with that? Then there will be loss. Right? So, here is a scenario. If revenues are more than your expenses, then there will be profit and capital increase. And on the other side, if your expenses are more than the revenue, then there will be a loss and the overall capital will reduce, hence the overall capital will reduce. Just let's have a look at the example here, the total revenue is ₹15 lakh and the total expense is ₹11400. Now the revenue is greater than the expense, so how much profit did you make? You made a profit of ₹3600 and this net profit will be added to the owner's capital, that will be added to the owner's capital. Ok ? So the balance sheet equation is doing the same thing here. Here also the balance sheet equation is working. Ah here we are having the asset side. Here we are having a particular liability side. Right? So, if you make profit overall, then the net profit will be added to your capital. So your profit that is basically present on the capital liability side comes. But if there is any loss then basically that is recorded as intangible asset. So it is recorded as an intangible asset. Because it increases your overall assets. Ok ? This is basically a new point to you, right? But when there is a loss, it is written on the asset side. And when you make a profit, it is written on the liability side. Because the business entity concept is there. What the business entity concept says is that whatever I earn, I will have to give it to my owner. That company thinks that whatever I earn will be given to me because I did not have my own capital. I had taken capital from one person. So if I earn something by being a company. Ok? So to whom will I have to give that money? I will have to give that money to my owner. So profit is a liability for me as a company. But at the same time, if I incur a loss, I will not have to return the money. So that basically would be an asset to me. clear? Now after that it is about the trading After that it is about the trading account. Now look what we have is the trading account, like the profit and loss account comes later. Ok? What do we do first? As I told you from the beginning that you made journal entries i.e. you did journaling. Then you based the things in the ledger and further then we did the balancing. Then we got the trial balance prepared. We did error rectification etc. End final statements. Now what is the first part in the final statements? The trading account part comes. It's about the trading account. That means whatever is your core activity, whatever are your direct expenses, okay? You go through those particular expenses and you look at them. You basically go for the trading account so that you can calculate the gross profit or gross loss. Right? So what is the main purpose of a trading account? We will know whether you will have gross profit or gross loss. And after the trading account we go for the P&L account. That is, profit and loss account. And from the profit and loss account we get to know the net profit and net loss. So whenever we talk about trading account , we are talking about the direct incomes and expenses. talk about what? We are talking about the direct incomes and expenses. And when we talk about P&L, we're talking about the net profit and net loss. Right? So, the main motive of trading account is why do we prepare trading account ? Because we are to find out basically the gross profit and the gross loss for that particular period. Right? So basically what we do is we capture all the trading activities that take place. Purchase and Sales of Goods captures them. That is the main funda. That is the main point related to it. And now let's have a look at the key features of the trading account. Key Features of the Trading Account So what is the nature of a trading account ? Trading account is a nominal account. What is a trading account? It is a nominal account. So the trading account is your nominal account. And when the year ends, because there are all the nominal accounts, what are those accounts ? All those accounts are temporary accounts. These are the temporary accounts. The balance at the end of the year is transferred to the profit and loss account. In the same way, the balance of the trading account is also transferred to the profit and loss account. And what is its main purpose? Either we are to find the gross profit and the gross loss. Right? And then it relates to you having two sides. There are two sides of a trading account. Like in the case of a simple account also we have two sides. There is one debit side and one credit side. Here also is the same game. You have the credit side on the right side. The debit side is on the left side. On the debit side, you showcase cost related items. Which items? Cost related items are showcased on the debit side. Like it is also mentioned here that on the debit side you have opening stock, net purchases. What is the meaning of net purchase? Whatever purchases you make, less purchased returns. Right? So that's it. Direct whatever your expenses are, direct wages, ah freight inward, factory rent. Ok? You spent on power fuel, import duty and octroi. Or whatever your direct expenses are, manufacturing expenses, all of them come on your debit side. And when we talk about the credit side, let's talk about the credit side. Ok? So whatever your revenue is, whatever your sales revenue is , okay? That will come to you i.e. sales minus sales returns. Ok? So your net sales will come and your closing stock will come on this side. Right? That would be, that is, your revenue generating items which will be on the credit side, that will be on the credit side and further if your credit side is more than the debit side then you have made a profit, so it will be gross profit and if your debit side is more than the credit side then it will be a gross loss that is basically about the closing balance, that will become your closing balance for the trading account clear with it do confirm at the earliest if you are able to understand the logic very important points so as to understand right so make sure that you answer as quickly as possible that if you are able to understand this or not do confirm at the earliest then if the credit side is more than the debit side then we say that we have gross profit and if the debit side is more then the expense side is heavy and your revenue side is less then we say to be That you will have a gross loss. Then we will be having a gross loss position. Ok now check the format once. So you have the debit side and you have the credit side. And here is a let's say there is a dividing line between them. We make this dividing line one. Right? So here is a structure. So on one side you have the debit side and on the other side you have the credit side. So, here is a debit side and here is a credit side. Right? So, the different items in it are explained. Like opening stock is done, net purchase is done and whatever your direct expenses are, all those expenses have been incurred. Direct expenses will be there and further after that what you have is your credit side like bye your net sales and then the closing stock, right that will be it and if your credit side is greater than the debit side then what will happen to you, you will have gross profit then it will be the gross profit right because debit is basically representing the expenses and if the debit side is greater than the credit side then there will be gross loss then it will be the gross loss. So accordingly we can be working upon it. Further after that it's about the direct versus the indirect expenses. It's about the direct versus the indirect expenses. Now what are direct expenses and indirect expenses ? Look, direct expenses are those which are directly related to your business. Ok? For example, suppose you made purchases and incurred expenses on production. Right? Expenses incurred to make the goods ready for sale. So where will they go? Those all are delta in trading account. Whatever direct expenses you have, where do we showcase them? We showcase them on the debit side of the trading account. Right? And when we talk about our direct expenses. Let's talk about indirect expenses. Indirect expenses i.e. expenses were incurred. That means the expenditure was incurred but it was not incurred directly. Let's say you hired a person laborer for the manufacturing, then that is a direct expense. But then after that we appointed sales people. Ok? So that will be my indirect expense. Right? So whatever my expenses are for administration, selling , distribution, finance, that will be my indirect expenses. That will be the indirect expense. And the indirect expenses that are a part of the profit and loss account, we showcase them in the P&L. That is showcased on the PNL account. Right? We will read more about that later. And further talking about nature, expenses are incurred to bring the goods into saleable condition. And further, if you have to run the business and sell goods, direct expenses and indirect expenses are incurred for that. Examples of direct expenses are like we are hanging the wages, carriage, inward freight on purchases, power, fuel and octroi. Now in this, one term is asked many times in the question. That is a carriage inward. What is carriage inward? That means you have your own vendor of raw material. You are having the raw material vendor from where you purchase the raw material. The cost of bringing the product from there to the factory where it is to be manufactured. Ok? That is the carriage inward. Now that raw material is coming to our factory. So that is a carriage inward. What is that basically ? That's a direct expense. Right? Carriage outward right there. When you sell something and you tell the customer that we will deliver the thing to the customer's home. I will pay for it. That means the expenses that will be incurred from the customer's place to his home are carriage outwards. Ok? So this money that we have here, we spent to bring our stuff, that is a carriage inward. We call this carriage inward. And the expense we incurred in delivering the goods to the customer is that it is a carriage outward. So the carriage outward that happens is the indirect That is an indirect expense. And carriage inward is a direct expense. So where will Carriage Inward be showcased ? This will form part of the trading account. And whatever is carried outward, it will become part of the P&L account. This will be related to the P&L account. Clear with it? So, this is the reason that your carriage inward is a part of the direct x indirect, it is basically a part of direct expense and the carriage outward which you write here, if we write the example of carriage outward here, then this indirect expense will become carriage outward, okay, so whatever are your direct expenses, those will be impacting the gross profit, gross loss and whatever are your indirect expenses, those will be impacting the net profit, net loss, after that it is about the gross profit and cost of goods, that is your gross profit, cost of goods, about that. Right? So if the topic is clear till here then please confirm it as soon as possible. And if you face any issue, you can post the comment below. You should be posting the comment below. So that we can be looking into it. Right? So, let's have a look at the point. That's about the gross profit and the cost of goods sold. Now what does gross profit mean ? The money you earned from your basic trading and manufacturing activities. That is your gross profit. You have not yet reduced indirect expenses. not yet reduced the indirect expenses. That is, when I created the trading account, the trading account is my nominal account. I created a trading account. So in the trading account I am dealing with the direct expenses only. I am dealing only with direct expenses. And at that time what I am basically looking at from the trading account is that I am either having the gross profit or having the gross loss. Ok? So if I earn any profit from my direct activity, without showing my indirect expenses , without considering my indirect income , then that will be the gross profit. What will that be? That will be the gross profit. What is the formula for end gross profit ? Total sales you made minus the cost of sales or cost of goods sold. So gross profit is equal to sales minus the cost of sales or we call it COGS. It is called cost of goods sold. That is your gross profit. That is your gross profit. Now it is important to understand the meaning here. The first thing is what is sales? Sales means the goods that you have sold to customers. That is the sales. And for further calculation we always do consider the net sales. What do you consider? Net sales are considered. What does net sales mean? That means gross sales. Net sales are equal to your gross sales. Whatever your gross sales were minus whatever your returns were. Many times it also happens that the sales you made get returned and you get some goods. So we will minus the sales return. That will be your net sale. That will become your net sale. Ok? And what is COGS? COGS means the cost of goods that we actually sold during that particular period. Cost of goods. Ok ? Cost of goods means what we actually sold, right? That's basically the cost of goods sold. So what will basically come in this? Your opening stock is your net purchases, your direct expenses minus the closing stock. That is the cost of sales. So the formula for cost of sales is quite simple. Whatever opening stock you had plus whatever direct expenses you incurred on that goods. Let's include wages paid or whatever other expenses you incurred in direct expenses. Ok? You will see that. Plus whatever net purchase you made, even purchase also comes. The net purchases you made this year will also be accepted. Minus closing stock Minus closing stock this is your cost of goods sold this is a formula related to the cost of goods sold through this you do the calculation and further that is the formula now we will read further then I will also tell you how to calculate the cost of goods sold. Now questions will also come related to this. So net sales equal to ₹20 lakhs cost of sales is equal to ₹14 lakhs then what will the gross profit be equal to? That will be ₹6 lakhs That will be ₹6 lakhs and what will be the GP ratio Gross Profit Ratio Here the GP ratio has been calculated That is a gross profit ratio and what is the gross profit ratio equal to Gross Profit Ratio is equal to whatever gross profit you have earned divided by the sales Net Sales multiplied by 100 Like in this scenario how much gross profit we have Gross Profit of ₹6 lakhs. Right? And how much sales did you make? You had sales of ₹20 lakh. You had sales of ₹ lakh, multiply it by 100 and you will calculate it. That will be the answer. clear? Is this part clear? So, this way we can be calculating. Now look, here the formula of cost of good sold has been explained. What is the cost of good sold equal to? That is basically equal to your opening stock, the purchases you made, plus any direct expenses and further minus the closing stock. This is the formula. This is the formula. Ok? So whatever entries there are, please understand them carefully. First of all, whatever was the opening stock, whatever stock you had, whatever you purchased , net purchases, that is, whatever you purchased , whatever goods you returned, that will be your net purchases. Plus whatever direct expenses you have, wages payable, electricity expenses, that is, the expenses that we showcase in the trading account , all those direct expenses minus the closing stock minus the closing stock that is your cost of goods sold. So opening stock is the inventory at the start of the period. Net purchases which are purchases minus purchase returns. and Direct Expenses Wages Carriage Inwards etc. and Closing Stock which is the inventory unsold at the end of the period. So this way you can be calculating the cost of goods sold. An example has also been given. Opening stock is given, Net purchase is given, Direct expenses is given, Closing stock is given. And based upon that simply adding the full amount and that full amount is opening stock plus net purchases plus direct expenses minus the closing stock and we calculated the COGS to be the ₹1 lakh. So, from here we have calculated our COGS. Value of ₹1 lakh is existing with us. Right? Then further gross profit ratio I already told you full. Gross profit divided by sales * 100. That is the formula for the gross profit ratio, which is how much profit you made from your sales. That is a gross profit ratio. And what does this gross profit ratio basically indicate? That is, how efficiently you are basically maintaining the margin. How much are you making in gross profit as a percentage of sales? That's what This Is What It showcases. And the more the better. More is merrier. So more is better. Gross Profit Ratio, Net Profit Ratio Higher the better. Ok? So right now we are talking about a particular trading account and further talking about trading account, we are talking about the gross profit ratio. When we talk about profit and loss, then we will be talking about the net profit ratio. So gross profit and net sales are the two components we deal with. Sales means we are talking about the net sales all the times. Sales is written here but it is a net sales. So what is gross profit? It's a profitability This is a pro

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