Introduction Accounting

8/11/2019 Introduction Accounting

1/103

Financial AccountingRoshna Varghese, MBA, PhD

Asst Prof, RCBSEmail: [email protected];

[email protected]

1
mailto:[email protected]:[email protected]


2/103

2

Sesn No Topic(s)

1-2 IntroductionFinancial accountingConcept, need, importance andscope, accounting principles: Concepts and conventions

3-8

JournalRecording of transactions - writing Journal entries of

business transactions

9-12Ledger

Recording of transactions - preparing Ledger Accounts

13-15Trial BalanceRecording of transactions - preparation of Trial Balance

16-18Final Accounts

Final accounts with out adjustments


3/103

Outline of your PGDM Financial

Accounting

Module 1 : Introduction, Accounting concepts,Journal, Ledger and Trial Balance

Module 2 : Preparation of Final accounts

Module 3 : Accounting Standards

Module 4 : Cash Flow Statement

Module 5 : Corporate financial statements

3


4/103

References

o T.S Reddy and Y.Hariprasad Reddy (2008). Financial andManagement Accounting, 4thed., Chennai : Margham

Publications.

o S.N. Maheshwari. (2006). Financial and ManagementAccounting, 5thed., New Delhi : Sulthan chand & Sons.

o M.C.Shukla, T.S Grewal and V.C Gupta(2008).Advanced

Accounts. New Delhi : S. Chand & Company

4


5/103

Accounting Definitions

Accounting is the process of keeping accounts

A system of recording financial transactions- analysing,

verifying and reporting transactions

Simply put Accounting is the language of Business

5

Purpose of Accounts

Provide

information

Monitor

Activities

Transparency Reduce

chances of

Fraud


6/103

6

Who needs Accounting???Any Individual Partnership firm

Corporate Entity Government


7/103

Types of Business Structure

Sole Proprietorship

Partnership

Corporation (Company)

7


8/103

Accounting...

8

is the language of business.


9/103


10/103

Accounting

Meaning- a process of identifying, recording, summarizing,

and reporting economic information to decisionmakers in the form of financial statements.

Definition (most popular definition) the art of recording, classifying, and summarising,

in a significant manner and in terms of money,

transactions and events which are in part at least ofa financial character, and interpreting the resultsthereof.

Committee on Terminology of the AmericanInstitute of Certified Public Accountants (AICPA)

10


11/103

End Result of Accounting

Financial Statements

Balance Sheet

Statement of Profit and LossCash flow Statement

11


12/103

Accounting Process

12

1. Analyse transactions

and Source documents

2. Record in General

Journal

3. Post Information to

Ledger

4. Prepare Trial Balance

5. Prepare Financial Statements

B/S, P&L & CFS


13/103

13


14/103


15/103

owners

managers employees

15

EXTERNAL USERS

Financial Accounting

investors

creditors

regulators

customers competitors

o Ownerso Managers

o Employees

INTERNAL USERS

Financial Accounting

Users of Accounting Information


16/103


17/103

Accounting Concepts and

Conventions

17


18/103


19/103

Accounting concepts &

Accounting conventions

oAccounting concepts

oBasic assumptions or conditions upon which

the science of accounting is based

oAccounting conventions

oThose customs or traditions which guide theaccountant while preparing the accounting

statements

19


20/103

Accounting Principles

concepts & conventions

Concepts

Separate Entity Concept

Going Concern Concept

Money Measurement Concept

Cost Concept

Dual Aspect Concept

Accounting Period Concept

Periodic Matching of cost and

revenue Concept

Realisation concept

Conventions

Convention of Conservatism

Convention of Full Disclosure

Convention of Consistency

Convention of Materiality

20


21/103

Accounting Concepts : Separate Entity

o Separate Existence for the businesso Distinct Legal Identityo E.g.

o Any private and personal incomes and expenses of the owner(s)should not be treated as the incomes and expenses of the business

o

Any payments for the owners personal expenses by the business willbe treated as drawings and reduced the owners capital contribution

in the business


22/103

o Life of infinite duration

o As per this concept, fixed assets are recorded at their

original cost & depreciation is charged on these assets.o Because of this concept, outside parties enter into long

term contracts with the enterprise.

22

1 4 7 10 20

Lifespan in years

Microsoft Corporation


23/103

Accounting Concepts : Money Measurement

All transactions of the business are recorded in terms

of money It provides a common unit of measurement

Transactions of qualitative nature, even though ofgreat importance to business are not considered

o E.g.oHuman resources are assets but not recorded

oMarket conditions, technological changes and the

efficiency of management would not be disclosed

in the accounts


24/103

Historical Cost concept

o Generally all transactions recorded at cost and

not market value

Example The cost of fixed assets is recorded at the date of

acquisition cost. The acquisition cost includes allexpenditure made to prepare the asset for its intended use.

It included the invoice price of the assets, freight charges,insurance or installation costs

Land

24


25/103

Dual Aspect

oEvery transaction has two aspects

oE.g. increase in one asset & decrease in another

oE.g. increase in one asset increases a liability

25


26/103

Accounting Concepts

o Accounting period/Periodicity conceptoOne year period is taken up for measuring performance

and appraisal of financial positiono Yearly/quarterly

o Matching concept

oAlso known as periodic matching of cost and revenue

concept

oMatching of income with expenses of the same period

o

Realisation conceptoWhen revenue is to be recognised and how much??

oChange in value of an asset is recorded only when

business realises it.


27/103

The Matching Principle

27

Revenue Expense = Net income


28/103

The Matching Principle

28

Revenue Expense = (Net loss)


29/103

Accounting Conventions

Conservatism

Selecting the method of measurement whichyields the gloomiest immediate results

Anticipate no immediate gains but provide

for all possible losses

E.g. Inventory valuation -Lower of cost ormarket price

Full Disclosure Accounting reports should disclose fully and

fairly the information they represent Transparency; material information

Companies Act, 1956 - prescribed form forbalance sheet; P&L account


30/103


Materiality Trivial assets of small value may be written off as

expenses

Materiality depends on the size and nature of the

item

E.g. Small payments such as postage, stationery and cleaning expenses

should not be disclosed separately. They should be grouped

together as sundry expenses

The cost of small-valued assets such as pencil sharpeners and

paper clips should be written off to the profit and loss account as

revenue expenditures, although they can last for more than one

accounting period


31/103


Consistency

Similar treatment of transaction e.g. depreciation

methods, inventory valuation etc.

Changes can be made but should be disclosedwith their effects

E.g.

If a company adopts straight line method and shouldnot be changed to adopt reducing balance method in

other period

31


32/103

Single Entry and Double Entry

Single Entry One account entry for each transactionmaintains only cash book and personal accounts of

debtors and creditors.

trail balance cannot be prepared.

Double Entry Two account entries for each

transaction One debit and one credit

32


33/103


34/103

Accounting Records

Journal, Ledger and Trial Balance

34


35/103

Accounting terms

Business transaction

Economic event that has some effect on theresources of firm or on the sources of firmsassets.

o Goods

o Things in which a business deals

o Goods are bought for resale

oE.g. stationery articles are goods for a stationery shop

o Furniture an asset in a grocery shop but goods for afurniture making company


36/103


37/103


38/103

38

The Accounting Equation


39/103

The Accounting Equation

39

Economic

Resources

Claims to

Economic Resources

Assets = Liabilities + Owners Equity


40/103


41/103

41

Record transactions

in the journal.

J l


42/103

42

Journalo Journal

o It is a list in chronological order of all the financial

transactions for a business

o Journal is the book of original record /primary

entryo Each entry is called Journal Entry

o On double entry system

o Journalising : It is the process of entering

transactions into the journal


43/103

Journal

o Steps

oIdentify transaction from source documents

oSpecify accounts affected.

oApply debit/credit rules.

oRecord transaction with description

43


44/103

Say whether financial transaction or not

o Appointment of Mr Varma as a manager of

a department

o Payment of wages

o Agreement with trade union regarding a

dispute

o Sale of goods

o Purchase of goods

44


45/103

45

Journal entry

What does a journal entry include?

date of the transaction

title of the account debited

title of the account credited

amount of the debit and credit

description of the transaction (narration)


46/103

Specimen of a journal

Date Particulars L.F. Debit

amount

Credit

amount

Title of the account debited Dr

To Title of the account credited

46


47/103

(Being commencement of

business)

(Furniture bought)

(Being rent paid)

47


48/103

Classification of Account

o Account - Meaning

o Summary of all transactions relating to

one personor assetor expenseor income

o Classification

1. Real account2. Personal account

3. Nominal account

48


49/103

49


50/103

Classification of Account

o Real account

oAccounts of assets or properties

o Tangible or intangible

o

Personal accountoAccounts in the name of persons, firms or companies.

o Natural person

o Artificial person

o Representative person

o Nominal account

oAccounts of all expenses, losses, incomes and gains


51/103

Nominal and personal account

Nominal account Personal account

1. Rent account

2. Interest account

3. Salary account

4. Insurance account

5. Commission account

1. Rent prepaid account; outstanding

rent account

2. Outstanding interest, interest

received in advance, prepaid interest

3. Outstanding salaries account, prepaid

salaries account

4. Outstanding insurance account,

prepaid insurance account

5. Outstanding commission account,

prepaid commission account


52/103

Journal entryRules

Real Account Debit what comes in

Credit what goes out

Personal Account Debit the Receiver

Credit the Giver

Nominal Account Debit all Expenses/Losses

Credit all Incomes/Gains

52


53/103

Find out the nature of account and which account

should be debited and which should be credited

Rent paid Salaries paid

Interest received

Dividends received

Furniture purchased for cash Machinery sold

Outstanding for salaries

Telephone charges paid

Paid to Suresh

Received form Mohan (The proprietor)

Lighting


54/103

Sl

No

Transaction A/Cs

involved

Classification

of a/cs

Debit/Credit

1 Rent paid Rent

Cash

Nominal

Real

Debit

Credit

2 Salaries paid

3 Interest received

4 Dividends received

5 Furniture purchased for cash

6 Machinery sold

7 Outstanding for salaries

8 Telephone charges paid

9 Paid to Suresh

10 Received from Mohan (The

proprietor)

11 Lighting charges paid


55/103

What we learned so far

Meaning and definition of accounting

Types of Business Structure

Concepts and Conventions of Accounting

Journal

Types of accounts

Rules of debit and Credit

55


56/103

b


57/103

Points to remember

o Assumptions regarding sales and purchases

o If names of supplier or customers are given without

specifying whether cash/credit transaction, they should

be assumed to be on credit basis

o Expenditure on acquisition of assets

oTreated as capital expenditure and added to asset cost.

E.g. freight, loading/unloading charges, installation

expenses etc

57

i b


58/103

Points to remember

o Compound entry

o Simple entry - an entry for a transaction thataffects only two accounts

o Compound entry - an entry for a transaction thataffects more than two accounts

o Remember: whether the entry is simple orcompound, the debits (left side) and credits (rightside) must alwaysequal.

o Trade discounto Amount of trade discount to be reduced from

sales or purchases

C h Di


59/103

Cash Discounts

o

Deduction in the amount of invoiceo When goods are bought on credit

o To encourage the buyer to make before the end of credit period

o No cash is received/paid; Just an adjustment in price

o Discount types

o Discount allowed, i.e., discount on sales

o Discount received, i.e., discount on purchases

o NB : Trade discounts is different from cash discount. Allowed by

wholesalers to retailers. Only the net invoice price is treated as

value of purchase or sale.


60/103

Points to remember

o Owners transactions

oMoney invested is capital (Personal account)

o If owner withdraws money or goods or assets for

personal usetreated as drawings


61/103

Banking transactions

Bank account is treated as a personal account

1. When cash is deposited in the bank

2. When cash is withdrawn from the bank

3. When bank allows interest on deposit

4. When bank charges expenses against the deposit a/c

5. When cheque is issued to supplier on account

6. When cheque is received from a customer on a/c

7. When a cheque received from customer is deposited inbank for collection

8. When a loan is granted by the bank

o When cheque is received from a customer


62/103

o When cheque is received from a customer

o 2 situationso

A cheque received from a customer and sent to the bank at alater dateo Cash a/c Dr

To Customers a/c

When sent for collection

Bank a/c DrTo Cash a/c

o A cheque received from a customer and sent to the bank thesame dayo Bank a/c Dr

To Customers a/c

o In the absence of any specific instructions in the Qn, assume thatcheque received from a customer was sent to the bank on thesame day


63/103


64/103

Journal Entries - Exercises

Gupta and Ramaswamy. Advanced

Accountancy. P. 1.6.5 Illustration 2

S.N. Maheshwari. Accounting for

Management. P.1.41, Practical problems 1


Management. P.1.34, illustration 3.4


Management. P.1.38, illustration 3.6

64


65/103

Capital Assets Liabilities

To increase each

item CREDIT DEBIT CREDIT

To decrease eachitem

DEBIT CREDIT DEBIT


66/103


67/103

67

Ledger


68/103

Ledger Accounts

Ledger a group of related accounts kept in a systematic

manner

oPostingo It is the transfer of information from the journal to the

appropriate accounts in the ledger.

Think of ledger as a book withone page for each account.

68

Ledger


69/103

L d A t


70/103

Ledger Accounts

o A simplified version of a ledger account is T-account.

o The account is divided into two sides for recordingincreases and decreases in the accounts.

Debit (dr.): an entry or balance on the left side of an a/c

Credit (cr.):an entry or balance on the right side of an a/c

Remember:

Debit is alwaysthe left side!

Credit is alwaysthe right side!

70


71/103

The Account

71

Account Title

Debit Credit

LEFT SIDE


72/103

The Account

72

Account Title

Debit Credit

RIGHT SIDE


73/103

73

Proforma for Account

Dr Cr

Balancing of an account


74/103

Balancing of an account

o Technique of finding out the net balance of an

account

o Totals both debits and credits and find out the balance

o Balance is put on the side of the account which is smaller

o Reference is given that balance has been carried down (c/d)or carried forward

o In the next period reference is given that opening balance

has been brought down (b/d) or brought forward (b/f)

o Done monthly/quarterly/yearly

o Helpful in knowing the position of an account


75/103

Ledger Accounts

Balance - difference between total left-side amounts

and total right-side amounts at any particular time

Assets have left-side balances.

Increased by entries to the left side

Decreased by entries to the right side

Liabilities and Owners Equity have right-side balances.

Decreased by entries to the left side

Increased by entries to the right side

75


76/103


77/103

TRIAL BALANCE

77


78/103

TRIAL BALANCE

o Listing of all the accounts with their relatedbalances.

o

Purpose of Trial BalanceoTo help check on accuracy of posting byproving whether the total debits equal thetotal credits

oTo establish a convenient summary ofbalances in all accounts for the preparation offormal financial statements

78


79/103


80/103

Subsidiary Books/

Subdivision of Journal

S b idi k


81/103

Subsidiary Books

Journal is the book of original entry

For large scale firms

Subdivision of journal into many special journals

Important subsidiary books Or


82/103

p y

subdivision of Journal

Cash Journal/Book: It is used to record all cash receipts and payments.

Purchases Journal/Book: It is used to record all credit purchases.

Sales Journal/Book: It is used to record all credit sales

Purchases returns Journal/book: It is used to record all goods returned by us to our suppliers.

Sales Returns Journal/Book:

It is used to record all goods returned to us by our customers. General Journal / Journal Proper:

It is used for recording those transactions for which there is noseparate book.


83/103

Cash Book


84/103

Book of original entry in which transactions relating only tocash receipts and payments are recorded in detail.

When cash is received it is entered on the debit or left handside. Similarly, when cash is paid out the same is recordedon the credit or right hand side of the cash book.

The cash book, though it serves the purpose of a cash bookof original entry viz., cash journal really it represents thecash account of the ledger separately bound for the sake ofconvenience. It is more a ledger than a journal. It is journal as cash

transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash

transactions.

The balances of the cash book are recorded in the trial balanceand the balance sheet.

Always debit balance

F t


85/103

Format

Date Particulars L

F

Amount Date Particulars L

F

Amount

C h B k T


86/103

Cash Book - Types

Single column cash Book

Double column cash Book

Triple column cash Book

T f h b k


87/103

Types of cash book

1. Single column cash bookrecords only cashreceipts and payments.

2. A double column cash bookor two column cash

book is one which consists of two separate columnson the debit side as well as credit side for recording

cash and Bank (discount)

3. Triple Column Cash Book : Three columns on each

side

Cash column for cash received and cash paid

Discount column

Bank column

T i l C l C h B k


88/103

Triple Column Cash Book

Date Particulars L.F Dis.

Rs.

Cash

Rs.

Bank

Rs.

Date Particulars L.F Dis.

Rs.

Cash

Rs.

Bank

Rs.

C t E t


89/103

Contra Entry

o Transactions where both cash and bank areinvolved

Exercises


90/103

Exercises

Reddy, p.3.75, Exercises 27

Reddy, p.3.75, Exercises 29

Maheshwari p.1.68; Illustration 5.3

Maheshwari p.1.68; Illustration 5.4

Maheshwari p.1.85 Practical problems 4

Purchase Journal

Maheshwari p.1.73 , Illustration 5.6

Sales Journal

Maheshwari p. 1.74 illustration 5.7

Posting:


91/103

g

The cash columns will be posted in the same way as singlecolumn cash book.

But as regards discount column, each item of discountallowed (Dr. side of the cash book) will be posted to the

credit of the respective personal accounts. Similarly eachitem of discount received will be posted to the debit of therespective personal account. Total of the discount columnon the debit side of the cash book will be posted to thedebit side of the discount account in the ledger and the

total of discount column on the credit side of the cash bookon the credit side of the discount account. The discountcolumns are not balanced like cash column of the towcolumn cash book.

Petty Cash Book


92/103

Petty Cash Book

o Maintained by business to record petty (small)cash expenses of the business

o E.g. expense on postage, stationery, cleaning charges

o Under Imprest system

o A fixed amount is advanced to the petty cashier at the

beginning of the period

o Petty cashier submits his accounts at the end of the

period

Important subsidiary books Or


93/103

subdivision of Journal

Cash Journal/Book: It is used to record all cash receipts and payments.

Purchases Journal/Book: It is used to record all credit purchases.

Sales Journal/Book: It is used to record all credit sales

Purchases returns Journal/book: It is used to record all goods returned by us to our suppliers.

Sales Returns Journal/Book:

It is used to record all goods returned to us by our customers. General Journal / Journal Proper:

It is used for recording those transactions for which there is noseparate book.

Purchase Journal


94/103

Purchase Journal

o Also known as Purchases Day Book or BoughtDay Book

o Records credit purchase of goods

Date Invoice

No.

Particulars L.F Amount

Rs

Total

Amount

Rs.


95/103

Purchase Returns and sales returns


96/103

Journal

Date Invoice

No.

Particulars L.F Amount

Rs

Total

Amount

Rs.

General Journal/Journal Proper


97/103

General Journal/Journal Proper

E.g. Purchase of fixed assets on credit

Opening entries

Closing entries

Adjustment entries

Rectification entries

Exercises


98/103

Exercises

Maheshwari, p. 1.73; Illustration 5.6



Suspense Account


99/103

Suspense Account

o Temporary account in which difference intrial balance is placed.

o Removed when errors are located and

corrected.


100/103

Accrual Basis and cash basis


101/103

101

TWO METHODS

Reporting Revenue and Expense

Cash Basis of Accounting

Accrual Basis of Accounting

h i f i


102/103

102

Cash Basis of Accounting

Revenue reported when cash is received

Expense reported when cash is paid

Does not properly match revenues and

expenses

A l B i f A ti


103/103

Accrual Basis of Accounting

Revenue reported when earned

Expense reported when incurred

Properly matches revenues and expenses in

determining net income

Requires adjusting entries at end of period

Introduction Accounting

Documents

Transcript of Introduction Accounting