Accountancy Unit I

8/3/2019 Accountancy Unit I

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Topic 1

Financial Accounting

Meaning

ScopeImportance

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Accounting-Introduction

American Institute of certified PublicAccountants

(AICPA)

Accounting is the art of recording,classifying & summarizing insignificant manner and in terms of

money, transactions & events whichare, in part at least , of a financialcharacter and interpreting the results

there of2


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Accounting-Introduction

Smith & AshburneAccounting is the science of recordingand classifying business transactions

and events, primarily of a financialcharacter, and the art of makingsignificant summaries, analysis and

interpretations of those transactionsand events and communicating theresults to persons who must makedecisions or form judgment.

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Functions of Accounting

1.Recording

2.Classifying

3.Summarizing

4.Deals with Financial Transactions

5.Analysis and Interprets6.Communicates

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Branches/Scope of Accounting


Cost Accounting

Management Accounting

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Original form of accounting.

Kohler in Dictionary for accountants, has defined

financial accounting as the accounting for

revenues, expenses, assets and liabilities that iscommonly carried on in the general office of a

business.

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Cost Accounting

It involves classification, accumulation, assignment

and control of costs.

Purpose of cost accounting is to ascertain the cost of

production, to enable the management fix the priceof the product and to ensure cost reduction.

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Management Accounting

Management Accounting is concerned with

accounting information which is useful to the

management in formulating policies and controlling

the business operations.

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Financial vs. Management Accounting

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Financial & Cost Accounting Tracks Historical data

Internal Data

Used for External Reporting

Governed by Law and

Regulations

Used by shareholders,

lenders, suppliers,

government agencies, etc.

Management Accounting Uses Historical & Forecast

Internal & External Data

Used for Internal Reporting

and Decision Making

Free-format and changes

according to users needs

Exclusive use of managers at

different levels


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Importance of Accounting

1.Assistance to Management

i)Planning

ii)Decision Making

iii)Controlling Management2. Replacement of Memory

3. Comparative Study

4. Settlement of Taxation Liability5. Evidence in court

6. Sale of Business

7. Assistance to an Insolvent Person 10


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Topic 2Accounting Principles

Accounting principles may be definedas those rules of action or conduct

which are adopted by the accountantsuniversally while recordingtransactions. These principles can be

classified into two categories:Accounting Concepts

Accounting Conventions11


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Continued---

Accounting Concepts

Basic assumptions or conditions uponwhich the science of accounting isbased.

Accounting ConventionsThose customs or traditions whichguide the accountant while preparing

the accounting statements.12


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Accounting Concepts

1. Separate Entity

2. Going Concern

3. Money Measurement

4. Cost

5. Dual Aspect

6. Accounting period7. Periodic Matching of Cost &

Revenue

8. Realization Concept13


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Accounting Conventions

1. Convention of Conservatism2. Convention of Full Disclosure

3. Convention of Consistency

4. Convention of Materiality

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Assignment No 1Last date of submission Oct 04,2010

For Lateral EntriesQ1. Define Accounting. Explain itsscope and importance.

Q2. state the persons who should beinterested in accounting information.

Q3. what are the accounting conceptsand conventions? Explain them withexamples.

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Accounting Terminology1.Capital

2.Liabilitiesi) Long term Liability

ii) Current Liability

3. Assetsi) Fixed Assets

ii) Current Assets

4. Revenue5. Income

6. Gain

7. Expense16


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Continued---

8. Expenditure

9. Purchases

10. Sales

11. Stock

12. Debtors

13. Receivables

14. Creditors15. Payables

16. Losses

17. Proprietor 17


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Continued---

18.Drawings

19. Discount

i) Trade Discount

ii)Cash Discount

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Topic 3Formation & Imp. of Accounting standards

Accounting standards may be defined as written

statements, issued from time to time by institutions

of accounting professionals, specifying uniform

rules or practices for drawing the financial

statements.

Kohler defines accounting standards as a code

of conduct imposed on accountants by custom, law

or professional body.19


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Nature

Lay down the norms of accounting policies

Makes financial statements of different business unit

comparable

Prescribe a preferred accounting treatment

Provide basis of financial statements and information to

the users

Set the limits within which accountant has to function.20


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Importance

It improves the reliability and credibility of financial

statements

It ensures the consistency and comparability of financial

statements

It helps in resolving conflict

It reduce the chances of manipulation and frauds

Helpful to Auditors.21


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Topic 4Accounting Process

1. Identification of Transactions

2. Preparation of Vouchers

3. Recording4. Classifying

5. Summarizing

6. Analysis and Interpretation

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Recording

Journal and Subsidiary Books

Journal is that primary book of accounts in which

transactions are originally recorded in a

chronological (day to day) order.In case number of transactions are large, journal is

categorized into various subsidiary books, namely

Cash Book, Purchases Book, Sales Book, SalesReturn Book, Purchases Returns Book, Bills Payable

Book, Bills Receivable Book, and Journal Proper.

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Double Entry System

In all the business firms, transactions are recorded under theDouble Entry System, which is derived from the basic

concept of Dual Aspect of accounting.

Dual Aspect of Accounting

Assets = Liabilities + Capital

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Account

An account is a summarized record of relevanttransactions at one place relating to a particular head.

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A f 3


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Accounts are of 3 types1. Personal Account

Relates to some personAn individual - Ram

A company - RIL

Debtor, Creditor, Capital Account, Drawing Account.

Rule of Double Entry System

Debit the Receiver and Credit the Giver

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2. Real Account

Relates to tangible or intangible assets of the firm.

Machinery, Plant, Land, Equipment, Building, Stock, Cash,

goodwill, patents etc.


Debit what comes in and Credit what goes out

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3. Nominal Account

Relates to expenses, losses, revenues and gains.

Expenses and Losses Salaries Paid, Interest Paid, Loss by

fire, Theft, etc.

Revenues and Gains - Sales proceeds, Income from other

sources, Profit earned.


Debit all expenses & losses and credit all revenues & gains

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Guidelines for Debit and Credit Entries

Item Increase in Value Decrease in Value

Asset Debit Credit

Expense Debit Credit

Income Credit Debit

Liability Credit Debit

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Journal Entry

Date Description L.F Debit Credit- Cash a/c Dr. 20,000

To Ram 20,000

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Classifying

Ledger

Entries are made in the journal in serial order as

transactions take place.

Transactions of one nature are posted in an account.

All the accounts put together is known as Ledger

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Working of Ledger

A separate page is allotted to an individual A/c.

Each account has two sides.

Amount and details are brought to the account

from the journal.

This process is called Posting.

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A/c

Dr. Cr.

DATE

-------

PARTICULARS

To ------------

J.F Amt. DATE

-----------

PARTICULARS

By -------------

J.F Amt.

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Preparing a Trial Balance

1. When? At the end of an accounting period.

2. Why? Verification of the sum of debit andcredit balances of the ledger accounts.

3. What? Is a statement of account balances and

their totals.

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Topic 5

Depreciation

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Depreciation is the decrease or depletion in the

value of an asset.

Depreciation is a gradual decrease in the value of

an asset from any cause

Depreciation accounting is a system of

accounting which aims to distribute the cost in a

systematic manner.

It is the process of allocation and not of valuation

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R.N. Carter

Depreciation is the gradual and permanent decreasein the value of an asset from any cause

Spicer & Pegler

Depreciation is the measure of the exhaustion of the

effective life of an asset from any cause during a

given period

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S i


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Special Features

All fixed assets with certain exceptions (Land andAntiques) suffer depreciation

Fall is of permanent nature.

Gradual & continuing process.

It is a process of allocation of the cost of an asset.

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S i l F C i d


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Special Features Continued---

It is a non-cash expense.It represents only book value not mkt. value

Used only in respect of fixed assets

Is a charge against profits

Is different from maintenance

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C


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Causes

By Constant UseBy Expiry of time

By Expiry of legal rights

By Obsolescence

By Accident

By Depletion

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I t


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Importance

For ascertaining the true profit or lossFor showing the true and fair view of the

financial position

To ascertain the accurate cost of production

To provide funds for replacement of assets

To prevent the distribution of profits out of capital

For avoiding over payment of income tax

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F t Aff ti


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Factors Affecting

Total cost of the assetEstimated useful life of Asset

Estimated scrap value

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M th d f D i ti


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Methods of Depreciation

Straight Line Method

Written Down Value Method

Annuity Method

Depreciation Fund Method

Insurance Policy Method

Revaluation Method

Depletion Method

Machine Hour Rate Method 43


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Straight Line Method

Depreciation is charged evenly every year

throughout the effective life of the asset.

This method is also known as:

Equal Installment Method Fixed Installment Method

Original Cost Method

Straight-Line

Depreciation

Expense

=

Asset Cost - Salvage Value

Useful Life

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On January 1, 2009, Monroe Inc. purchased oil

pumping equipment for Rs. 62,000 cash. The

equipment has an estimated useful life of 5 yearsand Monroe expects to sell the equipment at the end

of its life for Rs.2,000 cash.

Lets compute depreciation expense for the yearended December 31, 2006.

2009

Depreciation

Expense

=

Rs.62,000 - Rs.2,000

5

= Rs.12,000

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Merits

Simplicity

Equality of depreciation burden

Assets can be completely written off

Useful for those assets which get depreciated more on

account of expiry of period e.g. lease hold properties,

patents etc.

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Demerits

Total charge for use of the asset goes on increasing

Undue pressure in later years

Unrealistic to written off the value to Zero

Difficulty in determining of scrap value

Does not take into account, the effective utilization of the

assets.

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Depreciation is charged on the Book Value of the

asset each year.Book Value = Original Acquisition Cost Total

Accumulated Depreciation

This method is also known as

Reducing Installment Method

Diminishing Balance Method

If depreciation rate is not given

Depreciation Rate = 1-n net residual value

acquisition cost48


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Merits

Equal Charge Against Income

No undue pressure in later years

Balance of asset is never written off to zeroApproved method by income tax authorities

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St i ht Li V W itt D


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Straight Line Vs. Written Down

Amount of Depreciation

Basis of calculation of depreciation

Zero Level

Combined effect of depreciation & repairs on P&L A/c

Rate of Depreciation

Approval of Income Tax authorities

Suitability

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A it M th d


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Annuity Method

Annuity method considers both the value of the

asset and amount of interest which might have beenearned, when this amount is used elsewhere. The

interest is debited to asset account and is credited to

profit and loss account.

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D i ti F d M th d


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Depreciation Fund Method

This method provides funds for the replacement of

the asset at the end of its servicing life. The amountof depreciation is credited to an account called

depreciation fund account which is shown on the

liabilities side of the balance sheet.

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I P li M th d


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Insurance Policy Method

In this method an insurance policy is purchased for

the value of the asset. This policy is taken up for thelife of the asset and it matures at a time when the

asset is to be replaced.

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R l ti M th d


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Revaluation Method

In this method the amount of depreciation is

calculated by revaluing the asset at the end of eachyear. The difference between the value of the asset

at the beginning and the end of the period is taken

as depreciation.

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D l ti M th d


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Depletion Method

This method is specially used for those assets

which deplete with use. The cost of the assets isdivided by total workable deposits.

For e.g.:- If a mine has 2 lakh tons of coal and the

value of mine is Rs. 5 lakhs, each ton of coal willcost Rs. 2.5 and the resultant figure will be the

amount of depreciation.

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M hi H R t M th d


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Machine Hour Rate Method

The life of the asset is estimated in hours. The value

of the asset minus scrap value is divided by theestimated number of hours. In this way a machine

hour rate is calculated. Machine hour rate

determines the amount of depreciation per hour.

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Topic 6: Final Accounts of Non Corporate

Entities

Capital Expenditure

Acquisition of Fixed

Assets

Expenses incurred onAcquisition

Expansion of Fixed Assets

Revenue Expenditure

Daily routine expenses

Up keep of Fixed Assets

Purchase of stocks ofMaterial

Depreciation

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Expenditure


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Final Accounts

Why ?

To know about two essential facts.

1. Whether he has earned a profit or suffered a lossduring a period

Reply is Income statement (Trading Account andProfit and Loss Account)

2. Where does he stand now/what is the financial

positionReply is Balance sheet

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Income Statement


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Income Statement

Trading Account

Gives the overall result of trading, i.e. purchasing &selling of goods and tells about Gross profit/Loss.

Trading Account

For the period ending XXXXParticulars Amt. Particulars Amt.

To Opening Stock

To Purchases -

Less: Returns -

To Direct Expenses

-

-

-

By Sales -

Less: returns -

By Closing Stock

-

-

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Important Points


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Important Points

Stock

Opening stock

Closing stock

Purchases: Cash + Credit

Sales: Cash + Credit

Direct Expenses: wages, wages and salaries,

customs and import duty, Freight, carriage and

cartage, Royalty, Gas, electricity, water, fuel,

Packing materials

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Profit and Loss Account


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Profit and Loss Account

Gives the net result of the business after considering

all other operating expenses and incomes.

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Important Points


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Important Points

Gross Profit or Gross Loss

Operating Expenses/Incomes: Salaries, Interest,Commission, Trade expenses, Printing and

Stationery, Advertisement, Bad debts,

Depreciation, Discount.

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Balance Sheet


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Balance Sheet

Balance sheet is a statement containing the assets

and liabilities of a business on a particular date. It is a classified summary of the various remaining

accounts.

It has two sides Left hand side represents Liabilities

Right hand side represents Assets

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Balance sheet as on ------


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Balance sheet as on Liabilities Amt. Assets Amt.

Capital A -Add Net Profits -

Less Drawings -

Long term loan

Sundry creditors

Bills payble

Bank overdraft

-

-

-

-

-

GoodwillLand

Building

Plant and Machinery

Furniture

Closing Stock

Debtors

Bills Receivable

Prepaid Expenses

Cash at bank/hand

--

-

-

-

-

-

-

-

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A t ll i ht ti hi h b i


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Assets: all rights or properties which a businessowns

Current Assets: acquired with the intention ofconverting into cash during normal businessoperation period

Liquid Assets: immediately convertible

Fixed Assets: acquired for relatively long periodsfor carrying on the business and are not meant forresale

Intangible Assets: which cannot be seen andtouched

Fictitious Assets: not represented by tangible

possession or property66

i bili i l i i h f fi


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Liabilities: claims against the assets of a firm

whether those of owners or of the creditors

Current Liabilities: payable within a yearFixed Liabilities: other than current liabilities

Owners Liability/Equity: capital+Profits

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Adjustment Entries


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Adjustment Entries

Closing Entries: are required to transfer the

balances of accounts which are supposed to transferin Trading a/c or P&L a/c. Say all income andexpenses a/c

Closing stock:

closing stock a/c Dr.

To Trading a/c

The stock at the end appears in the Balance

Sheet.If the value of the stock is given in the Trial

Balance68

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Outstanding Expenses

become due during the accounting period but havenot been paid

Expenses a/c Dr.

To Outstanding Expenses a/c

Liabilities side of balance sheet.

Will be added in the expense in the Debit side of theP&L a/c

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Prepaid Expenses


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Prepaid Expenses

which have been paid in advance

Prepaid Expense a/c Dr.

To Expense a/c

Asset side of Balance SheetWill be deducted from Expense in the debit side

of P&L a/c

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Outstanding Incomes

which has become due during the accounting year butwhich has not so far been received.

Outstanding Income a/c Dr.

To Income a/cAsset side of Balance Sheet

Will be added in Income in the credit side of P&L

a/c.

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Accrued Income:

earned but which has not yet become due

Accrued Income a/c Dr.

To Income a/c

Asset side of Balance Sheet

Will be added in Income in the credit side of P&La/c.

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Income Received in advance


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Income Received in advance

has been received before it being earnedIncome a/c Dr.

To Income Received in Advance a/c

Deducted from the Income in Credit side ofP&L a/c.

Liabilities side of P&L a/c

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Depreciation


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Depreciation

Decrease in the value of asset due to wear and tear,

lapse of time, and accident.

Depreciation a/c Dr.

To Fixed Asset a/c

Debit side of P&L a/c

Deducted from the asset in the assets side of the

Balance Sheet.

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Bad Debts

Bad debts occur when there are credit sales.

It is a loss to the business and a gain to the debtor.

Bad Debts a/c Dr.To Debtors Personal a/c

Debit side of P&L a/c

Deducted from the asset in the assets side of theBalance Sheet.

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P i i f B d D bt


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Provision for Bad Debts

A firm makes provision at the end of the accoun-ting year for likely bad debts which may happen

during the course of the next year

Profit and Loss a/c Dr.

To Provision for Bad Debts a/c

Deducted from debtors in the Balance Sheet

Charged from the P&L a/c

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Interest on Capital

In order to determine the true profit, it isnecessary that the profit should be determined

after deducting interest on such funds, which the

proprietor could have earned otherwise.Interest on Capital a/c Dr.

To Capital a/c

Debit side of P&L a/cWill be added in capital in the liabilities side

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Interest on Drawings

It is usual practice to charge interest on drawings incase interest is allowed to the proprietor on his

capital.

Capital a/c Dr.To Interest on Drawings a/c

Credit side of P&L a/c

Will be deducted from the capital in the liabilities

side

Accountancy Unit I

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