accounting cycle by dr. suresh vadde
TRANSCRIPT
What is Book - keeping & Accounting Book - keeping & Accounting ?
♦ Book keeping– Recording the
transactions of an organization
♦ Accounting– Analysis of the
performance of an organization
What is Book keepingBook keeping 1 ?
♦ You have £10.♦ Your mother/father/aunt
gives you £100 because today is your birthday.
♦ You go with your friends to celebrate your birthday.
♦ You have £15 left after the celebration.
♦ How much money did you spend?
♦ In businesses, all of this would be recorded !
‘Books’ would be kept of all your (financial) activities !!
What is BookkeepingBookkeeping 2 ?
♦ Record important, useful information.♦ The information must be recorded
accurately♦ It is routine♦ It is recording ♦ It is ‘accounting for’ business
transactions♦ Examples of transactions:♦ sale/purchase of goods/services,
every sale, etc., is shown in money.Accounts are kept of all the (financial) activities
Book-keeping is often known as ‘Double entry’
What is Accounting 1Accounting 1?♦ Providing financial
information in an organization – objectively– consistently– professionally– conservatively valued
♦ to enable management to perform three functions
– recording– analysis– control
What is Accounting 2Accounting 2?♦ Using financial information to analyse
the performance of management of (and inside ) an
organization – objectively– consistently
– professionally
– with reliable techniques for internal management
control– and comparing overall performance
of the organisation– with (for example) other
organizations
What is Book keepingBook keeping and and AccountingAccounting?♦ We cannot keep Accounting records
– without documents (proof of transactions)
– sales, purchases, banking (payment and receipts) documents
♦ these are source documents♦ this documentary evidence:
– tells/shows us the actual transaction
– shows what has happened
♦ Accounting records: – show the impact of these transactions on a business
– show what these transactions mean to a business
Single Entry:
♦ It is incomplete system of recording business transactions.
♦ The business organization maintains only cash book and personal accounts of debtors and creditors.
♦ So the complete recording of transactions cannot be made and trail balance cannot be prepared.
Double Entry:
♦ It this system every business transaction is having a two fold effect of benefits giving and benefit receiving aspects.
♦ The recording is made on the basis of both these aspects.
♦ Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits.
I - JOURNAL
♦ journal is a simple book of accounts in which all the business transactions are originally recorded in chronological order.
♦ Journaling refers to the act of recording each transaction in the journal and the form in which it is recorded, is known as a journal entry.
Advantages of Journal
♦ As all the transactions are entered in the journal chronologically, a date wise record can easily be maintained;
♦ 2. All the necessary information and the required explanations regarding all transactions can be obtained from the journal.
♦ Errors can be easily located and prevented by the use of journal or book of prime entry.
Types of Accounts
♦ Business transactions have been classified into three categories:
(i) Transactions relating to persons. ( Personal Account)
(ii) Transactions relating to properties and assets ( Real Account)
(iii) Transactions relating to incomes and expenses. ( Nominal Account)
Personal Accounts:
♦ Accounts recording transactions with a person or group of persons.
♦ These accounts are necessary, in particular, to record credit transactions.
♦ The rule for personal accounts is: • Debit the receiver• Credit the giver
Real Accounts
♦ Accounts relating to properties or assets♦ A separate account is maintained for each
asset e.g., Cash Machinery, Building, etc.,♦ The rule for Real accounts is:
• Debit what comes in• Credit what goes out
Nominal Accounts♦ It is relating to income, revenue, gain
expenses and losses.♦ A separate account is maintained for each
expense or loss and gain or income.♦ Ex:-Wages account, Rent account
Commission account, Interest received account etc.,
♦ The rule for Nominal accounts is: • Debit all expenses and losses• Credit all incomes and gains
The Rules of Debit and Credit
Debit Account Credit
Increase in Assets Decrease in Assets
Decrease in Liabilities Increase in Liabilities
Decrease in Owner’s Equity Increase in Owner’s Equity
Decrease in Revenue Increase in Revenue
Increase in Expenses Decrease in Expenses
Expansion of Basic Equation
Assets = Liabilities + Owner’s Equity
AssetsLiabilities Capital Drawings
Revenue Expenses
Recording Transaction
Transaction Debit Credit
Started business with cash. CapitalCash
Bought office equipment on creditfrom Syarikat Emas.
OfficeEquipment
Account Payable
Received loan from Bank Intanin cash.
Cash BankLoan
Transaction Debit Credit
Bought motor van by cash Motor Vehicle
Cash
Paid rental expenses by cash RentalExpenses
Cash
Bought office supplies by credit OfficeSupplies
Account Payable
Transaction Debit Credit
Paid utility bills with cash UtilityExpenses
Cash
Received cash from Abu, a debtor. Cash AccountReceivable
A check on supplies showedthat $120 supplies has been used.
SuppliesExpenses
OfficeSupplies
Transaction Debit Credit
Owner brought in his own car to be used in business.
MotorVehicle
Capital
Sold motor van for cash CashMotor Vehicle
Owner took cash for his own use. Drawings Cash
Journal Entries
Siti Malaysia, the owner of Tadika Malaysia started her businesson 1 January 2002 with cash M25,000. The followings are transactions related to the business for the month of January:
Illustration : Tadika Malaysia
Tadika Malaysia
General Journal
Date Particulars Debit Credit
Jan. 1 Cash 25,000
Capital 25,000
( Cash invested by owner )
Tadika Malaysia- General Journal
Jan. 5 Bought office equipment with cash, RM500.
Jan. 5 Office Equipment 500
Cash 500
(Bought office equipment with cash)
Date Particulars Debit Credit
Jan.10 Bought furnitures amounting to RM4,700 withcash from Syarikat Perabot Kita.
Jan. 10 Furnitures 4,700
Cash 4,700
( Bought furnitures withcash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan. 11 35,000
35,000
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.11 Bought motor van for business use by creditfrom Syarikat Kenderaan amounting to RM35,000.
Motor vehicles
Account Payable
( bought motor van by credit )
Jan.15 Paid advertising expense RM2,000 with cash.
Jan. 15 Advertising expense 2,000
Cash 2,000
( Paid advertising expense with cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.18 Paid utility bills with cash amounting to RM325.
Jan. 18 Utilities Expense 325
Cash 325
( Paid utility bills with cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.23 Paid salaries by cash RM700 per person for5 workers.
Jan. 23 Salary expense 3,500
Cash 3,500
( Paid salary by cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan 24 Received cash RM7,500 for the fees of the month.
Jan. 24 Cash 7,500
Revenue : Fees 7,500
( received fees or the month )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.27 Bought two units of computers on credit , amountingto RM4,000 per unit.
Jan. 27 Office Equipment 8,000
Account Payables 8,000
( Bought computers on credit )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.30 Siti Malaysia took cash RM1,200 for her own use.
Jan. 30 Drawings 1,200
Cash 1,200
( Cash withdrawals by the owner )
Date Particulars Debit Credit
Tadika Malaysia- General Journal
II - LEDGER
♦ In journal, as all the business transactions are recorded chronologically, it is very difficult to obtain all the transactions pertaining to one head of account together at one place.
♦ But, the preparation of different ledger accounts helps to get a consolidated picture of the transactions pertaining to one ledger account at a time.
♦ Thus, a ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense, or income or gain or loss which have taken place during a specified period and shows their net effect ultimately.
General Ledger
Cash
Jan 1 Capital 25,000 Jan 5 Office Equipt 500
24 Fees Rec. 7,500 10 Furnitures 4,700
18 Utilities 325
15 Advertising 2,000
30 Drawings 1,200
23 Salary 3,500
Balance c/f
32,500 32,500
20,275
General Ledger
Furnitures
Jan 31 Bal c/f 4,700Jan 10 Cash 4,700
4,700 4,700
Motor Vehicles
Jan 11 A/c Payable 35,000 Jan 31 Bal c/f 4,700
35,000 35,000
General Ledger
Account Payable
Jan 31 Bal c/f 43,000 Jan 11 M. Vehicles 35,000
27 O. Equipmt 8,000
43,000 43,000
General Ledger
Advertising
Jan 31 Bal c/f 2,000Jan 15 Cash 2,000
2,000 2,000
Utility
Jan 18 Cash 325 Jan 31 Bal c/f 325
325 325
General Ledger
Salaries
Jan 31 Bal c/f 3,500Jan 23 Cash 3,500
3,500 3,500
Fees Received
Jan 24 Cash 7,500Jan 31 Bal c/f 7,500
7,500 7,500
Practice Question:-Journalise the following transactions, post the same in relevant ledger
account and balance the same.
III - TRIAL BALANCE♦ Trial balance is a statement prepared with the
balances or total of debits and credits of all the accounts in the ledger to test the arithmetical accuracy of the ledger accounts.
♦ As the name indicates it is prepared to check the ledger balances.
♦ If the total of the debit and credit amount columns of the trail balance are equal, it is assumed that the posting to the ledger is accurate.
♦ If not, it is a sign of error that occurs during journalizing and posting.
Tadika MalaysiaTrial Balance as at 31 January 2002
Accounts Debit Credit
Cash 20,275
Capital 25,000
Office Equipment 8,500Furniture 4,700Motor Vehicles 35,000Account Payables 43,000
Advertising 2,000Utility 325Salaries 3,500
Fees Received 7,500Drawings 1,200
75,500 75,500
IV – FINANCIAL STATEMENTS(FINAL ACCOUNTS)
♦ A. Trading Account♦ B. Profit and Loss Account♦ C. Balance Sheet
A. Trading Account♦ Trading account is prepared for an accounting period to
find the trading results i.e., the amount of gross profit/loss of the concern.
♦ It has made from buying and selling during the accounting period.
♦ The difference between the sales and cost of sales is gross profit.
♦ For the purpose of computing cost of sales, value of opening stock, purchases, direct expenses on purchasing and manufacturing are added up and closing stock of finished goods is reduced.
♦ The balance of this account shows gross profit or loss which is transferred to the profit and loss account.
B. Profit And Loss Account
♦ Profit and loss account starts with gross profit brought down from trading account on the credit side. (If gross loss, on the debit side).
♦ All the indirect expenses are debited and all the revenue incomes are credited to the profit and loss account
♦ If incomes or credit is more, than the expenses or debit, the difference is net profit.
♦ On the other hand if the expenses or debit side is more, the difference is net loss.
Example:- From the following Trial balance of Mr.Gandhi prepare profit and loss account for the year ended 31-3-2001.
C. Balance Sheet ♦ “Balance sheet is a screen picture of the financial position of a going
business concern at a certain moment” - Francis.♦ It comprises of lists of assets, liabilities and capital fund on a given
date.♦ It presents the financial position of a concern as revealed by the
accounting records. ♦ It reflects the assets owned by the concern and the sources of funds
used in the acquisition of those assets. ♦ In simple language it is prepared in such a way that true financial
position is revealed in a form easily readable and more rapidly understood.
Example:- From the following adjustment Trial Balance, Prepare Balance Sheet of Saravanan Traders as at 31st December 2004.
Individual AssignmentFrom the following data, prepare a profit and loss a/c and a balance sheet
as on 31-3-1996.