8/8/2019 38693257 Accountancy

1/53

MADE EASY

8/8/2019 38693257 Accountancy

2/53

Definition..

yAn art of recording, classifying andsummarizing in a significant mannerand in terms of money, transactionsand events which are in part at least ofa financial character, and interpretingthe results thereof

8/8/2019 38693257 Accountancy

3/53

Features:y Service activity.

y Referred to as the language of business.

y It is the measurement of financial activities.y Provides quantitative information.

y Useful in decision making.

y Helps in making choices.

8/8/2019 38693257 Accountancy

4/53

Objectives:yMaintenance of business records.

yCalculation of profit or loss.

yDepiction of financial position.

yChanges in financial position.

y

Provides information on economic resourcesand obligations of an enterprise.

8/8/2019 38693257 Accountancy

5/53

Advantages:yProvides information to make decisions.

y It provides information to various interestedpeople.

y It acts as an evidence in court of law.

y It helps in comparison of financialinformation.

y It helps to track all the financial transactionsof the company.

8/8/2019 38693257 Accountancy

6/53

Limitations:yHistorical in nature.

yCurrent revenues and historical costs arecompared.

y Increase in value of assets are notconsidered.

y It does not provide qualitative information.

yAccounting principles and methods varywith organizations.

8/8/2019 38693257 Accountancy

7/53

Branches ofAccountingy Financial Accounting: The accounting system that is

concerned only with the financial affairs of thebusiness, with the aim to know the financial status ofthe business.

y Cost Accounting: This accounting system basicallyinvolves the analysis of various elements of cost,estimating future cost and to exercise cost control andcost reduction.

y Management Accounting:Accounting whichprovides information to management which helpsthem in making policies and decisions.

8/8/2019 38693257 Accountancy

8/53

Book keeping andAccounting

y Book keeping is concerned with identifyingfinancial transactions; measuring them in money

terms; recording and classifying them.yAccounting is concerned with summarizing

recorded transactions, interpreting them andcommunicating the results.

yAccounting starts where book keeping ends.

8/8/2019 38693257 Accountancy

9/53

Accountancy:

yThe knowledge of how to

make accounting is calledas accountancy.

8/8/2019 38693257 Accountancy

10/53

Parties interested in accounting

informationyOwners

yShareholders (in case of companies)

y InvestorsyCreditors

yLenders

yEmployeesyManagers

yGovernment

8/8/2019 38693257 Accountancy

11/53

GAAP (Generally AcceptedAccounting

Principles)

y MoneyMeasurement Concept: All transactionsentered in books must be expressed in terms of

money.y Dual Concept: Both the aspects i.e., debit and credit

should be recorded. Assets= Liabilities + Capital

y Going Concern Concept: Accounting is done based on

the assumption that business will run for ever.y Periodicity Concept: accounts are generally compiled

for one full year which is April toMarch.

8/8/2019 38693257 Accountancy

12/53

Contd.yAccrual Concept: Transactions are recorded based on

their occurrence and not on the receipt or payment of

money.y Matching Concept: Revenue should match with the

expenses incurred.

y Realisation Concept: Revenue should be brought into

account only when it is realised.y Materiality Concept: Facts which are material should

be disclosed in the books.

8/8/2019 38693257 Accountancy

13/53

Contdy Consistency Concept: Uniform accounting practices

and policies are followed without changing themfrequently.

y

Conservatism Concept: Recognize all losses andanticipate no gains.

y Historical Cost Concept: Transactions are recorded inthe books at the cost on the` date of transaction and

market value is not considered.

8/8/2019 38693257 Accountancy

14/53

C

ontd..y Theoretical Concepts:

1. Business Entity Concept: Business is different fromits owner. Liabilities + Capital = Assets.

2. Proprietary Concept: This concept insists theimportance of proprietor in a business.

Assets Liabilities = Proprietorship.

3. Fund Concept: Funds allocated for specificpurpose is used only for that purpose.

8/8/2019 38693257 Accountancy

15/53

Accounting ProcessyIdentification of financial transactions

y

RecordingyClassifying

ySummarising

yAnalysis and interpretation.

8/8/2019 38693257 Accountancy

16/53

RecordingyAfter financial transactions are identified, transactions

are recorded in the books based on the documentary

evidences in a chronological order.y This book is called as Journal and the act of recording

is called asJournalising.

y instead of journal transactions are recorded into

different books called as the subsidiary books which isdiscussed later.

8/8/2019 38693257 Accountancy

17/53

Classification:y Here transactions of similar nature are grouped under

a particular head called a ledger and this process is

called posting.y Transactions are grouped under a particular head

called Account.

yAccount is a part of ledger.

yAccount is classified to three different types which isdiscussed in the later slides.

8/8/2019 38693257 Accountancy

18/53

Summarising, Analysis and

interpretationySummarising

involves draftingof trial balance,trading and profit& loss account,Balance sheet.

yThe summarisedaccounts areinformed to theinterested parties,used to takedecisions.

8/8/2019 38693257 Accountancy

19/53

Account and its types

8/8/2019 38693257 Accountancy

20/53

Account..y Summarised record of relevant transactions at one

place pertaining to a particular head.

y

It records not only the amount of transaction and alsotheir effect and direction.

y Every account has two sides called as debit (Dr.) andcredit (Dr.)

y Debit denotes the left side while Credit denotes theright side.

8/8/2019 38693257 Accountancy

21/53

Types ofAccountsyAccounts are broadly classified into three:

1. Personal Account: Accounts related to individuals,

persons and artificial persons. Ex. Ram, Capital,Bank, etc.

2. Real Account: Accounts related to things that can betouch and felt i.e., tangible. Ex. Cash, furniture, etc.

3. Nominal Account: Accounts which are related tothings which are intangible, they cannot be touchand felt. They exist only for accounting purpose. Ex.Salaries, Wages, Rent, etc.

8/8/2019 38693257 Accountancy

22/53

8/8/2019 38693257 Accountancy

23/53

Personal Accounty Debit:

The receiver.

Ex. Cash given to Ram.Here Ram receives money.

So Ram A/c is debited.

y Credit:

The giver.

Ex. Cash received fromRam. Here Ram givesmoney. So Ram A/c iscredited.

8/8/2019 38693257 Accountancy

24/53

Real Accounty Debit:

What comes in. Ex. Cash

received from Ram. Herecash comes in.

So Cash A/c is debited.

y Credit:

What goes out. Ex. Cash

paid to Ram. Here cashgoes out.

So Cash A/c is credited.

8/8/2019 38693257 Accountancy

25/53

Nominal Accounty Debit:

All the expenses and

losses.Ex. Salaries paid. Salaries

are expenses. So, SalariesA/c is debited.

y Credit:

All the incomes and gains.

Ex. Rent received. This isan income. So, Rent A/cis credited.

8/8/2019 38693257 Accountancy

26/53

Receipts and expenditure.

8/8/2019 38693257 Accountancy

27/53

Receiptsy Receipts are broadly classified in to Capital Receipts

and Revenue Receipts.

y

Capital Receipts: Those which are not available fordistribution as profits, without which a business cansurvive. Ex. Fresh issue of shares, Sale of machinery.

y Revenue Receipts: Those which are received in the

ordinary course of business, without which a businesscannot exist; also can be utilised for distribution asprofits. Ex. Sales.

8/8/2019 38693257 Accountancy

28/53

xpenditurey Expenditure can be broadly classified as Capital

Expenditure and Revenue Expenditure.

y Capital Expenditure: Those which are incurred formore than one accounting period; not recurring innature; can be incurred even before thecommencement of business; which eventuallybecomes revenue expenditure in the long run i.e. by

depreciation. Ex. Purchase of land, furniture, etc.y Revenue Expenditure: Those which are incurred for

the current period or 1 year; recurring in nature. Ex.Purchases, Rent, etc.

8/8/2019 38693257 Accountancy

29/53

Journal

8/8/2019 38693257 Accountancy

30/53

MeaningyJournal is called as the book of prime entry, where

transactions are recorded regularly in the

chronological order, as and when they occur.yA model journal book is available in the books.

y Only after recording transactions in journaltransactions are posted into the respective ledger

account.

8/8/2019 38693257 Accountancy

31/53

Steps to journalise..y Identify the financial element in transaction.

y Find the parties involved.

yApply the rules of debit and credit.y Find which account is to be debited and which account

is to be credited.

yJournalise the transaction as:

Account to be debited Dr.

To Account to be credited.

8/8/2019 38693257 Accountancy

32/53

xample forjournal:Cash received from Ram Rs.1000

1. Financial element rs. 1000

2. Accounts involved: two, Cash and Ram3. Cash: Real Account- comes in- so debit

4. Ram: Real Account- giver- so credit.

5. So the journal will be:

Cash A/c Dr.

To Ram A/c

[Being cah received from Ram]

8/8/2019 38693257 Accountancy

33/53

Subsidiary Books

8/8/2019 38693257 Accountancy

34/53

Meaning.Subsidiary books are those books of prime entry, which canbe used instead of journal.

Subsidiary books are of different types:

1. Cash book: Where transactions relating to cash arerecorded. Cash book are of different types: a) Singlecolumn cash book: where transactions related to cashalone are recorded.

b) Double column cash book: where transactions relatedto cash and bank are recorded.

c) Three column cash book: where transactions relatedto cash and bank are recorded along with discountcolumns.

8/8/2019 38693257 Accountancy

35/53

Contd.2. Purchases Day book: where credit purchases are

recorded. This book is totaled every month and the

figure is taken to the debit side of the Purchases A/c asTo Sundry Purchases

3. Sales DayBook: where credit sales are recorded. Thisbook is also totaled every month and that figure istaken to the credit side ofSales A/c

4. Purchases Returns Book: where returns outward arerecorded, the total is taken to the credit side ofPurchases Returns A/c.

8/8/2019 38693257 Accountancy

36/53

Contd.5. Sales Returns Book: where returns outwards will be

recorded, totaled and taken to the debit side of SalesReturns A/c

6. Bills Receivable Book: where transactions related tobills receivable are recorded.

7. Bills Payable Book: where transactions related to bills

payable are recorded.8. Journal Proper: where transactions which do not fall

into any of the above books.

8/8/2019 38693257 Accountancy

37/53

Contd.y In all the books except the last one, one aspect is

recorded in the respective subsidiary book and the

other aspect is recorded in the other aspectAccount.

yWhen Cash Book is maintained there is no need tomaintain Cash A/c and Bank A/c.

y Transactions in Journal Proper are treated asjournal and posting is done as usual on to theaccounts.

8/8/2019 38693257 Accountancy

38/53

Ledgery It is grouping of transactions relating to a particular

head under an Account.

y

An Account is aT

shaped format with two sides as Dr.and Cr.

yAfter transactions are journalised they are posted intothe ledger accounts.

yEntries in the debit side are posted with word startingTo and those of the credit side are posted with the

word starting By.

8/8/2019 38693257 Accountancy

39/53

Balancing a ledger accounty Total both the sides.

yWrite the biggest total in both the sides.

y The step explained below is called as balancing anaccount.

y Subtract the lowest total from the highest total andwrite the balance on the side having low total and

write it as To balance c/d or By balance c/d and writethe balance figure on the opposite side of the nextmonth as By balance b/d or To balance b/d.

yAccounts are generally balanced once in a month.

8/8/2019 38693257 Accountancy

40/53

The Trial Balance.y Trial Balance is a statement which shows the balances

of all the accounts as on a particular date.

y The debit balances and credit balances are recordedand both are totaled.

yWhen both the sides total are equal then it is called astally of trial balance.

yA trial balance is prepared to check the arithmetical

accuracy of recording transactions.yWhen there are errors the trial balance do not tally.Then those errors are called as errors disclosed by trialbalance.

8/8/2019 38693257 Accountancy

41/53

Contd.yAt certain cases the trial balance tallies even when

there are errors, then those errors are called as

errors not disclosed by trial balance.yA sample trial balance is available in the book.

y Final accounts of a business are prepared only afterpreparation of trial balance.

8/8/2019 38693257 Accountancy

42/53

rrors disclosedby trial balancey PartialOmission:Omission to record one of the

aspects of a transaction. Ex. When cash is receivedfrom Ram- if we debit Cash A/c and do not credit Ram

A/c or vice versa it is called as partial omission.

y Debit/Credit entries either not posted or posted twice.Ex. When Cash is received from Ram- Either Cash A/cis debited twice or Ram A/c is credited twice.

y Debits wrongly posted as credit and vice-versa. Ex.When cash is received from Ram- Ram A/c is debitedor Cash A/c is credited.

8/8/2019 38693257 Accountancy

43/53

Contd.yWrong totaling of subsidiary books. From here the

totals are taken to respective ledger accounts. Soobviously this leads to an disagreement of debit andcredit. Ex. Purchases day book actual total is rs. 10000but totaled as Rs. 11000 and taken to Purchases A/c.

y Difference in amount between entry: When Cash Isreceived from Ram rs.10000, Cash A/c is debited forRs10000 while Ram A/c is credited for Rs1000.

y Error in computation of Account Balance. That is whilebalancing the account.

8/8/2019 38693257 Accountancy

44/53

Contd.y Balance of an account wrongly recorded in in TrialBalance. Ex. When Cash A/c balance is Rs.11000 it isrecorded in Trial Balance as Rs10000.

y Omission of an Account Balance in trial balance. Ex.When all the accounts are properly maintained butfailed to take any of the account balances to the trialbalance.

y Error in Extraction of trial balance: While totaling thedebit and credit items we may make errors.

8/8/2019 38693257 Accountancy

45/53

rrors not disclosed.y Compensating Errors: When one error compensates

the other such. Ex. When goods sold to Ram forRs10000 it is recorded as Rs1000 and the same mistakeis done when cash is received from him.

y Error of principle: When error is done in the basicstage itself. That is, when classifying the accounts andapplying rules of debit and credit.

y Error of complete omission: When one entry iscompletely omitted to be recorded.

8/8/2019 38693257 Accountancy

46/53

Final Accounts.y Final accounts implies Trading Account, Profit & Loss

Account and Balance Sheet.

y

Final Accounts are usually prepared once in a year.That is, at the end of an accounting year.

y Final Accounts are prepared to find out the profits andalso the position of the business.

yTrading and Profit & Loss A/c gives details on profits

while Balance Sheet shows the overall financialposition of the business.

8/8/2019 38693257 Accountancy

47/53

Trading Accounty Trading Account is prepared for a period ending which

is usually one year.

y

It is prepared in order to find out gross profit.y Gross profit is found out by finding difference between

net sales and all direct costs involved to make createvalue to the goods or to make them salable.

y

Direct expenses include all factory and direct expenseslike wages, factory rent, purchases, fuel and power, etc.

y Gross Profit= Sales Cost of goods sold.

8/8/2019 38693257 Accountancy

48/53

Tips to prepare Trading A/cy Items of debit side:

1. Opening stock (available in balance sheet)

2. Net Purchases (purchases- purchase returns)3. Direct expenses (available in trial balance, exercise

caution while finding out)

4. Carriage inwards (but not carriage outwards)

Items on Credit side:1. Net Sales (Sales- Sales Returns)

2. Closing stock (Available in adjustments)

8/8/2019 38693257 Accountancy

49/53

Contd.y Total the credit side.

y Take that total to the debit side also.

y

Find the difference in the debit side.y That difference amount will be the gross profit.

y The above steps are almost usual for every sum, butvice-versa is applicable when the debit balance is morethan credit balance, where we get gross loss.

y This is to solve a simple problem without adjustments.

yAdditional steps will be done if there are adjustmentswhich will be explained in the later part.

8/8/2019 38693257 Accountancy

50/53

Profit & Loss Accounty This is prepared to find out Net Profit/Net Loss.

y Net returns are found out by adjusting all otherincomes and expenses to the gross profit/gross loss.

yAllOther Income are shown on the credit side below

the gross profit.yAll other expenses like discount, carriage allowed,

management expenses, selling expenses, provisions areshown on the debit side and balanced in the same

manner ofT

rading Account and Net Profit/Net Lossare found out.

y The balancing figure in debit side is Net Profit whilethe balancing figure in credit side is Net Loss.

8/8/2019 38693257 Accountancy

51/53

Contd.y The above steps are common for all sums, except for

special adjustments which will follow in the later parts.

y Most of the adjustments like bad debts, provisions forbad debts, provision for discounts, outstanding and

prepaid expenses, depreciation, etc. will have to bemade only in Profit & Loss A/c.

8/8/2019 38693257 Accountancy

52/53

Balance SheetyWhile Trading and Profit & Loss A/c are called as the

income statements Balance Sheet is called as thePosition Statement.

y Balance Sheet shows the position of a business as on aparticular date.

yAs other accounts and statements are divided into

debit and credit, the balance sheet is divided intoAssets side and Liabilities side.

yAssets are those which are owned by the business,either to generate current revenues or future revenues.

8/8/2019 38693257 Accountancy

53/53

Contd.Liabilities are those that a firm is liable to pay to theoutsiders, including to the proprietor.

y A general tip is that information given outside the trial

balance appears usually in two places, once in the tradinga/c or profit & loss a/c and other on the balance sheet.

y In any sum the Assets side total and the Liabilities sidetotal should be equal. If not there is mistake in the sum orin solving the sum.

y Balance sheet is either prepared in horizontal form orvertical form. And the arrangement of assets and liablitiescan be either in the order of liquidity or in the order ofpermamanency.