Mr. Babloo Prasad, a Mechanical Engineer, was working with a 'Fortune 500' company as a middle level executive. He was a high flyer in the organization and his colleagues were envious of his selling skills and dynamism. He was declared as the 'Smart Seller' for the Year 1999 by the company and rewarded with a Europe tour along with his spouse. At London Heathrow Airport, Mr. Babloo purchased a Euro lottery ticket.

On his return to India, he received a message declaring him the lucky winner of the Euro lottery. He had won net prize money of Rs 8,00,000. Mr. Babloo was very excited and decided to form his own business firm that would deal in manufacturing and selling toys for children.

Thus, he formed a limited company, Babloo Toys Limited, with his wife as a shareholder. He paid the prize money into the company's account towards the share capital. Further, he borrowed Rs 9 lakh from M/S Collins Group of Banks, at an interest of 12 per cent per annum with the principal amount repayable in 5 equal instalments at the end of each accounting year. Besides, the bank has also agreed to extend overdraft. He also negotiated with the bank manager for an overdraft to take care of the Working Capital needs, at a rate of 15 per cent per annum. The company purchased and paid for a seven-year lease on business premises for Rs 14 lakh and some plant and equipment for Rs 5 lakh.

The first year was very busy. Mr. Babloo worked very hard to get the business off to a good start. Being a talented sales man, he achieved invoiced sales at Rs 96 lakh against purchase of goods of Rs 72 lakh. He settled all the suppliers' invoices by the year-end. The staff was paid up to date. He felt pleased with himself as his company progressed excellently in the first year of trading. The feeling of success in the business made him enjoy a holiday.

Crisis

On his return to the office after the holiday, he found a letter from the Bank Manager, Mr. Kuber Singh. It read: " I am extremely worried about the size of the overdraft. It is beyond the limit we agreed upon. The situation is critical. It is essential that you do not issue any more cheques. Please make an immediate appointment." The tone of the letter shocked and worried Mr. Babloo considerably. His feelings of success evaporated rapidly and his spirits sank. Mr. Babloo began to ponder, because he never really understood finance. According to the Bank Manager, he was facing an apparent 'financial' crisis. Suddenly, he remembered Mr. Norwell, who had recently completed his MBA with Financial Management as his major subject. He called Mr. Norwell and asked for his advice.

Help

After speaking to Mr. Babloo, Mr. Norwell realized that he urgently needed at least, a Cash Account, a Profit and Loss Account and a Balance Sheet of Babloo Toys Ltd. Therefore, he went over to Mr. Babloo's company office and checked all the records. He observed that many Accounting Principles are not being followed in maintaining the accounts at Babloo Toys Ltd. He also observed that Mr. Babloo had taken Rs 30,000 for a personal holiday. When enquired, Mr. Babloo said that the company belonged to him, hence he felt that he could withdraw money for personal use, whenever he liked in addition to the salary he took. Mr. Norwell explained to him that a firm is different from its owner as per the Accounting Principle (with a view to determine true profits).It is mandatory to prepare Annual Statement of accounts and the same must be audited. Mr. Babloo asked Mr. Norwell what the Accounting Principles were. Mr. Norwell briefed him the following principles:


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