Unit I Introduction - Accounting for Managers.ppt

To understand the meaning of accounting
To understand the scope and objectives of
financial accounting
To know about the branches of accounting
To understand the importance and limitations
of financial accounting
To know more about the users of accounting
information
To know the basic accounting principles

To understand the recording of transactions
To know what are the advantages of journal
To learn about the classification of accounts and its
rules
To learn about compound entries
To learn about opening and closing entries
To understand the term ledger
To know how to do ledger postings
To understand the rules of posting
To know the meaning of trial balance

To learn more about trial balance
To understand the objectives of preparing trial
balance
To learn how errors are disclosed by trial balance
To learn how errors are not disclosed by trial
balance
To learn about the methods of allocating errors in a
trial balance
To understand the meaning of capital expenditure
To understand the meaning of revenue expenditure
To understand the meaning of profit and loss
account
To understand the method of preparing the profit
and loss account

To understand the meaning of balance
sheet
To know the method of preparing a
balance sheet
To know the difference between profit and
loss account and balance sheet
To know the relationship between profit
and loss account and balance sheet
To know how to make various
adjustments in trial balance

Accounting is the language of business; it is the medium through
which business organizations communicate information about
their financial performance and financial position to the outside
world.
Financial accounting involves identifying and recording
business transactions and summarizing them in rupee terms.
The financial information is presented in three basic financial
statements - the balance sheet, the profit and loss statement and
the cash flow statement.
These statements are used to communicate the financial status of
the organization to various stakeholders of the business to enable
them to take economic decisions.

The definition given by the American Institute of
Certified Public Accountants clearly brings out the
meaning and functions of accounting. According to
it, accounting is “the art of recording, classifying
and summarizing in a significant manner and in
terms of money, transactions and events which are,
in part at least, of a financial character and
interpreting the result thereof.”

Accounting is an Art
Accounting classifies as an art as it helps in
attaining the goal of ascertaining the financial
results. Analysis and interpretation of the
financial data is the art of accounting,
requiring special knowledge, experience and
judgment.

Involves Recording, Classifying and Summarizing
• Recording means systematically writing down the
transactions and events in account books soon after their
occurrence.
• Classifying is the process of grouping transactions or entries
of similar nature at a place. This is done by opening accounts in
a book called ledger.
• Summarizing involves the preparation of reports and
statements from the classified data (ledger), understandable and
useful to management and other interested parties. This involves
preparation of final accounts.

Records Transaction in Terms of Money
Recording business transaction in terms
of money is the common measure of
recording and helps in better
understanding of the state of affairs of
the business.

Deals with Financial Transactions
Accounting records only those
transactions and events which are of
financial character. If a transaction has
no financial character, it will not be
measured in terms of money and hence
will not be recorded.

Interpretation
Interpretation is the art of interpreting
the results of operations to determine
the financial position of an enterprise,
the progress it has made and how well it
is getting along.

Accounting involves Communication
The results of analysis and interpretation are
communicated to management and to other
interested parties.

Keeping accounts is not the primary objective of a person or
an entity.
On the contrary, the primary objective is to take decision on
the basis of the financial facts given by the accounting
statements.
Thus, the understanding of accounts is not the basic objective.
It only helps to realize a specific objective. As such,
accounting is not an end in itself but a means to an end.

• Provides necessary information about the financial
activities to the interested parties.
• Provides necessary information about the efficiency or
otherwise of management with regard to the proper
utilization of scarce resources.
• Provides necessary information for making predictions
(financial forecasting)
• Facilitates to evaluate the earning capacity of a firm by
supplying the statement of financial position, the statement
of periodical earning, together with the statement of financial
activities to various interested parties.

• Facilitates in decision-making with regard to the changes
in the manner of acquisition, utilization, preservation and
distribution of scarce resources
• Facilitates in decision-making with regard to the
replacement of fixed assets and expansion of the firm
• Provides necessary data to the government to enable it to
take proper decisions concerning to duties, taxes, price
control etc.
• Devices remedial measures for the deviations of the actual
from the budgeted performance
• Provides necessary data and information to managers for
internal reporting and formulation of overall policies

Financial Accounting
Accounting deals with recording, classifying and summarizing the business
events that have already occurred. It is, therefore, historical in nature. That
is why it is called historical accounting or post-mortem accounting or more
popularly financial accounting. Its aim is to collate the information about
income and financial position on the basis of business events that have
taken place during a particular period of time.
Financial accounting primarily aims at meeting the informational needs of
external users though insiders also make use of the information.

Cost Accounting
Cost accounting deals with the detailed study of cost
pertaining to cost ascertainment, cost reduction and cost
control. The emphasis is on historical costs as well as future
decision-making costs.

Management
Accounting
Management accounting provides information to
management not only about cost but also about
revenue, profits, investments etc. to enable
managers to discharge their duties more efficiently
and effectively. Thus, it provides required database
to managers to plan and control the activities of
business.

Social Responsibility
Accounting
Social responsibility accounting involves accounting of
social costs incurred by an enterprise and reporting of social
benefits created by it. i.e it aims to measure and inform the
general public about the social welfare activities
undertaken by the enterprise and their effects on the
society.
Under the Companies Act, 2013, certain class of profitable entities are
required to spend at least two per cent of their three-year average
annual net profit towards CSR activities

(1) Owner(s)
Owner(s) refers to a person or a group of persons who has
provided capital for running the business. It refers to an individual
in case of proprietor, partners in case of partnership firm and
shareholders in case of a joint stock company. The information
needs of shareholders have assumed a greater significance in the
corporate business world because of the separation of ownership
and management in the case of joint stock companies.

(2)Managers
For managing business profitably, management requires
adequate information about financial results and financial
position. By providing this information, accounting helps
managers in efficient and smooth running of the business.
(3). Investors
Prospective investors would be keen to know about the past
performance of business before making investment in that
concern. By analyzing historical information provided by
accounting records, they can arrive at a decision about the
expected return and the risk involved in investing in a particular
business.

(4). Creditors and Financial Institutions
Whosoever is extending credit or loan to a business enterprise
would like to have information about its repaying capacity, credit
worthiness etc. Analyzing and interpreting the financial statements
of an enterprise can help in obtaining the required information.
(5). Employees
Employees are concerned about job security and future
prospects. Both of these are intimately related with the
performance of business. Thus, by analyzing the financial
statements, they can draw conclusions about their job security and
future prospects.

(6). Government
Government policies relating to taxation, providing subsidies
etc. are guided by the relevance of industries in the economic
development of the country. The policies also consider the past
performance of industries. Information about past performance is
provided by the accounting system. Collection of taxes is also
based on accounting records.
(7).Researchers
Researchers need financial information for testing hypothesis
and development of theories and models. The required
information is provided by accounting system.

(8). Customers
The customers who have developed loyalties toward a business
are those who are certainly interested in the continuance of the
business. They certainly want to know about the future directions
of the enterprise with which they are associating themselves. The
way to information about the enterprise is through their financial
statements.
(9).Public
Public at large is always interested in knowing the future
directions of an enterprise and the only window to peep inside an
enterprise is through their financial statements.

1.Facilitates toReplaceMemory
Accounting facilitates to replace human memory by maintaining a
complete record of financial transactions. Human memory is
limited by its very nature. Accounting helps to overcome this
limitation.
2.FacilitatestoComply withLegalRequirements
3.Facilitates toAscertainNetResultofOperations
4.FacilitatestoAscertainFinancialPosition
5.FacilitatestheUserstotakeDecisions

6.FacilitatesaComparative Study
7.AssistManagement
8.FacilitatesControloverAssets
9.FacilitatestheSettlement ofTaxLiability
10.FacilitatestheAscertainmentofValueofBusiness
11.FacilitatesRaisingLoans

1. CAPITAL
Capital generally refers to
the amount invested in an
enterprise by its owners. For
example, paid up share
capital in a corporate
enterprise. Capital also refers
to the interest of owners in the
assets of an enterprise.
2. ASSETS
Assets refer to the tangible
objects or intangible rights
owned by an enterprise and
carrying probable future
benefits.

3. LIABILITY
 Liability is the financial
obligation of an enterprise
other than owners’ funds.
4. REVENUE
 Revenue is the gross inflow
of cash, receivables or other
considerations arising in the
course of ordinary activities
of an enterprise’s resources
yielding interest, royalties and
dividends.

5. COST OF GOODSSOLD
 It is the cost of goods sold
during an accounting period.
In manufacturing operations,
it includes the following:
 Cost of materials
 Labor and factory overheads
6. PROFIT
 Profit is a general term for
the excess of revenue over
related cost. When the result
of this computation is
negative, it is referred to as
loss.

8. EXPENSES
An expense is the cost of operations that a company incurs to
generate revenue.
9. Deferred Expenditure
 Deferred expenditure is the expenditure for which payment has been made or a
liability incurred but which is carried forward on the presumption that it will be a benefit
over a subsequent period or periods. This is also referred to as deferred revenue
expenditure.
 Deferred expenses, also called prepaid expenses or accrued expenses, refer to
expenses that have been paid but not yet incurred by the business.
Example:
 Rent on office space
 Startup costs
 Advertising fees
 Advance payment of insurance coverage
 An intangible asset cost that is deferred due to amortization
 Tangible asset depreciation costs

SUNDRYCREDITOR
 Sundry creditor is the
amount owed by an enterprise
on account of goods
purchased or services
received, or in respect of
contractual obligations. It is
also termed as trade creditor
or account payable.
SUNDRYDEBTOR
 Sundry debtors are persons
from whom amounts are due
for goods sold or services
rendered, or in respect of
contractual obligations. These
are also termed as debtor,
trade debtor and account
receivable.

CONTINGENTASSET
 Contingent asset is an asset,
the existence, ownership or
value of which may be known
or determined only on the
occurrence or non-occurrence
of one or more uncertain
future events.
 Eg: Lawsuits, Warranties,
Settlement, Merger &
Acquisition
CONTINGENTLIABILITY
 Contingent liability is an
obligation relating to an
existing condition or situation
which may arise in future
depending on the occurrence or
non-occurrence of one or more
uncertain future events.
 Eg: Potential lawsuits,
product warranties, and pending
investigation

Collecting and analyzing data from transactions
and events.
Putting transactions into the general journal.
Posting entries to the general ledger.
Preparing an unadjusted trial balance.
Adjusting entries appropriately.
Preparing an adjusted trial balance.
Organizing the accounts into the financial
statements.
Closing the books.
Preparing a post-closing trial balance to check the
accounts.

 The Business Entity Concept:
 Entity concept is an assumption that for an accounting purposes,
the business is separate and different from that of its owners. The
entity concept is also known as the concept of an “Enterprise” and
is one of the central concepts in accounting. The entity concept
may be applied to the whole organization or even to the part of the
organization. Thus according to these concepts the business is
treated as separate unit from that of its owners, creditors,
managers, employees and others.

 According to this concepts an enterprises has an unlimited
existence. Thus the concept of Going Concern Continuity can be
expressed as under.
“Unless & until there is evidence to the contrary, an
enterprise must be considered as continuing largely in its
present form and with its present purpose”

 The money measurement a concept is an assumption that any
accounting transaction is to be measured in money or money’s
worth. It is only when a transaction is measured that it can be
recorded in the books of an enterprise and the result of the
business is determined.
 Thus the measurement of a transaction also has to be in a
common denomination (medium).
 Money is this common denominations in which transaction are
recorded in the books of account.

 The determination of the income of the enterprise cannot be
postponed till the end of the enterprise. Since, according to Going-
concern concept there is no limit for the life of the enterprises.
Hence the economic activities of the business must be recorded
periodically. These period is called as Accounting period & these
Accounting period is normally called as “Accounting Year” or
“Financial Year” or “Fiscal Year”.
 It is, within this Accounting Year, that the income & expenses
(i.e.) costs & revenues are matched with reasonable accuracy to
provide significant results.

 According to Historical cost concept, all the transactions are
recorded in the books at cost and not at its market value. Thus the
underlying ideas of this concept are two forms.
a. An asset is recorded at the price paid to acquire it i.e. at
cost and
b. This cost is the basis of all the subsequent treatment of
the assets. e.g. depreciation, stock valuation, etc.,

 Matching of Expired cost (i.e., expenses) and revenues for the
period’s determination of income, is one of the most important
concept and procedures of accounting.
 This concept follows the accounting period concept i.e. once an
accounting period is determined, within that period, the revenues
and its related costs are matched.
 This concepts is one of the most important concept of
accounting and has received major attention of accountants.
Matching of costs and revenue is the ‘Test reading’ of the results
and the success of the business activity. At the same time, it is one
of the most difficult accounting problems.

 This concept is also called the Accrual theory of Accounting or Accrual
Accounting It means a system of recording revenues and expenses of particular
accounting period.
 Whether or not they are receive or paid in cash, at the time of accounting. It
is also known as “Mercantile System of Accounting” as contrasted to “ Cash
system of Accounting. In cash system of accounting, the revenues are recorded
only when received, whether due or not. Payments i.e. expenses are also
recorded irrespective of the fact whether they pertain to the period concerned or
not.
 For matching of costs and revenue under accrual concept, all revenues
related to current year, whenever received, and all costs of the current year,
whenever paid, must be taken into account.

 ASSIGNMENT:
What are the conventions
of accountancy ?Explain.

Consistency:
This concept states that once the organisation has decided on a
method, it should use the same method subsequently unless there
is a valid reason for a change of method. If frequent changes are
made it is not possible to carry out comparisons on an inter-period
or interfirm basis. If a change is necessary it has to be highlighted.
e.g. if depreciation is charged on diminishing balance method, it
should be done year after year.

 All significant information should be disclosed. The
disclosure concept states that all significant information
should be disclosed and all insignificant information
should be disregarded. However, there are no definite
rules to separate the two. For recording purposes also
only significant events are recorded in detail taking into
consideration the cost of detailed record keeping

The accountant should attach importance to material details and
ignore insignificant details. The question what constitutes a
material detail is left to the discretion of the accountant. An item is
material if there is reason to believe that knowledge of it would
influence the decision of the informed investor.
a) Materiality of information b) Materiality of amount
c ) Materiality of procedure.

Financial statements are drawn on a conservatism basis where
better evidence is required of losses. This is necessary as
Management and ownership are in different hands and a cut is
needed on management to show overoptimistic, favourable
performance results.
For example, inventories are valued at the cost or market price
whichever is lower. Revenues are recognised when they are
certain but expenses as soon as they are reasonably possible.
e.g. it encourages the accountant to create provisions for bad and
doubtful debts.

 Double-entry accounting is a method of record-keeping that lets
you track just where your money comes from and where it goes.
 Using double-entry means that money is never gained nor lost--
-it is always transferred from somewhere (a source account) to
somewhere else (a destination account). This transfer is known as
a transaction, and each transaction requires at least two accounts.
 An account is a record for keeping track of what you own,
owe, spend or receive.

 For example, we buy machinery for Rs. 300,000.
 It has brought two changes, machinery increases by Rs 300,000
and cash decreases by an equal amount.
 While recording this transaction in the books of accounts, both
the changes must be recorded. In accounting language these two
changes are termed "as a debit change" & "a credit change".

 Thus we see that for every transaction there will be two entries,
one debit entry and another credit entry.
 For each debit there will be a corresponding credit entry of an
equal amount.
 Conversely, for every credit entry there will be a corresponding
debit entry of an equal amount.
 So, the system under which both the changes in a transaction
are recorded together, one change is debited, while the other
change is credited with an equal amount, is known as double
entry system.

 The equation that is the foundation of double entry accounting.
The accounting equation displays that all assets are either financed
by borrowing money or paying with the money of the company’s
shareholders. Thus, the accounting equation is
Assets = Liabilities + Shareholder
Equity

 The balance sheet is a complex display of this equation,
showing that the total assets of a company are equal to the total of
liabilities and shareholder equity. Any purchase or sale has an
equal effect on both sides of the equation, or offsetting effects on
the same side of the equation.
 The accounting equation is also written as
Liabilities = Assets – Shareholder Equity
OR
Shareholder Equity = Assets – Liabilities.

Transac
tion
Number
Assets Liabilities
Shareholder's
Equity
Explanation
1 + 6,000 + 6,000 Issuing stocks for cash or other assets
2 +
10,00
0
+
10,00
0
Buying assets by borrowing money (taking a
loan from a bank or simply buying on credit)
3 − 900 − 900
Selling assets for cash to pay off liabilities: both
assets and liabilities are reduced
4 + 1,000 + 400 + 600
Buying assets by paying cash by shareholder's
money (600) and by borrowing money (400)
5 + 700 + 700 Earning revenues

6 − 200 − 200
Paying expenses (e.g. rent or professional
fees) or dividends
7 + 100 − 100
Recording expenses, but not paying them at
the moment
8 − 500 − 500 Paying a debt that you owe
9 0 0 0
Receiving cash for sale of an asset: one asset
is exchanged for another; no change in assets
or liabilities
Transac
tion
Number
Assets Liabilities
Shareholder's
Equity
Explanation

 Introduction:-
Accounting is the art of recording, classifying and
summarizing the financial transactions and interpreting the
results thereof. Thus, the accounting cycle involves the
following four major phases:
1. Recording of transactions-- This is done in a book called journal.
2. Classifying the transactions-- This is done in a book called ledger.
3. Summarizing the transactions-- This includes preparation of trial
balance, profit and loss account and balance sheet of the business.
4. Interpreting the results-- This involves computation of various
accounting ratios etc. to know about the liquidity, solvency and
profitability of the business.

 A journal records all daily transactions of a
business in the order of their occurrence. A journal
may, therefore, be defined as a book containing a
chronological record of transactions.
Journal

 Alltransactionsinthejournalarerecordedonthebasisofrulesof debit
andcredit.Forthispurpose,transactionshavebeenclassifiedintothree
categories:
i.Transactionsrelatingtopersons
ii.Transactionsrelatingtopropertiesandassets
iii.Transactionsrelatingtoincomesandexpenses

 Onthebasisofaboverules,itisnecessarytokeeptheaccountsinrespect
ofthefollowing:
i.Eachpersonwith whomitdeals(customer,suppliers)
ii.Eachproperty orassetwhichitowns(building,machinery etc.)
iii.Eachitemofincomeandexpense(commission,rent,salaryetc.)

Classification of
Accounts
Personal
Accounts
Real
Accounts
Nominal
Accounts

Personal accounts include the accounts of persons with whom the business
deals. These accounts can be further classified into three categories:
a. Natural Personal Account
Natural personal account means persons who are creations of God. For
example, Vijay’s a/c, Hary’s a/c etc.
b. Artificial Person Account
Artificial person account includes accounts of corporate bodies or institutions
which are recognized as persons in business dealings. For example,
government, club, limited company, cooperative society etc.
c. Representative Personal Account
Representative personal account is the account which represents a person or a
group of persons. For example, when the rent is due to landlord, an outstanding
rent account represents the account of a landlord to whom the rent is payable.

Real accounts may be of the following types:
a. Tangible Real Account
Tangible real accounts are those which relate to such things that can be
touched, felt and measured. For example, cash a/c, building a/c, furniture a/c
etc.
b. Intangible Real Account
These accounts represent such things which cannot be touched but, however,
can be measured in terms of money. For example, patent a/c, goodwill a/c etc.

Nominal accounts are opened in the books of accounts to
simply explain the nature of the transactions. They do not
really exist. For example, salary paid to employee, rent paid to
landlord etc. Nominal accounts mainly include accounts of
expense, losses, income and gains.

1. Determine the 2 accounts which are involved in the
transaction.
2. Classify the above two accounts under Personal ,
Real and Nominal.
3. Find out the rules of debit and credit for the above
two accounts.
4. Identify which account is to be debited and which
account is to be credited.

Sometimes, there are a number of transactions on the same date
relating to one particular account or of one particular nature. Such
entries can be passed by way of a single journal entry instead of
passing individual journal entries. It may be recorded in any of the
following three ways:
1. A particular account may be debited while several accounts
may be credited.
2. A particular account may be credited while several accounts
may be debited.
3. Several accounts might debited as well as credited.

In the case of a running business, the assets and liabilities
appearing in the pervious year’s balance sheet will have to be
brought forward to the next year. This is done by the means of a
journal entry which is known as “opening entry.” All assets are
debited while all liabilities are credited. The excess of assets over
liabilities is the proprietor’s capital and is credited to his capital
account

Pass the opening entry on 1.1.2001 on the basis of the following
information taken from the business of Mr. Shubham.
1. Cash in hand-- Rs. 20,000
2. Sundry Debtors-- Rs. 60,000
3. Stock in Trade-- Rs. 40,000
4. Plant and Machinery-- Rs. 50,000
5. Land and Building-- Rs. 1,00,000
6. Sundry Creditors-- Rs. 1,00,000

 An incentive that a seller offers to a buyer in return for paying a bill owed
before the scheduled due date. The seller will usually reduce the amount owed
by the buyer by a small percentage or a set dollar amount. If used properly, cash
discounts improve the days-sales-outstanding aspect of a business's cash
conversion cycle.
 For example, a typical cash discount would be if the seller offered a 2%
discount on an invoice due in 30 days if the buyer were to pay within the first
10 days of receiving the invoice.
Providing a small cash discount would be beneficial for the seller as it would
allow him to have access to the cash sooner. The sooner a seller receives the
cash, the earlier he can put the money back into the business to buy more
supplies and/or grow the company further.
 Cash Discount

 A discount on the list price granted by a manufacturer
or wholesaler to buyers in the same trade.
 Suppose A buys from B $200 worth of goods. He is
allowed a discount of 10% from the list price. Then he
would have to pay only $180 to B. Suppose the terms
had stipulated that he be allowed a discount of 10% and
5% off from the list price. This would not give him a
deduction of 15% from the $200

Cash Discount Trade Discount
Is a reduction granted by supplier from
the invoice price in consideration of
immediate or prompt payment
Is a reduction granted by supplier from
the list price of goods or services on
business consideration re: buying in bulk
for goods and longer period when in
terms of services
As an incentive in credit management to
encourage prompt payment
Allowed to promote the sales
Not shown in the supplier bill or invoice
Shown by way of deduction in the
invoice itself
Cash discount account is opened in the
ledger
Trade discount account is not opened in
the ledger
Allowed on payment of money Allowed on purchase of goods
It may vary with the time period within
which payment is received
It may vary with the quantity of goods
purchased or amount of purchases made

 Gave away as charity goods costing Rs. 100 and cash
Rs.50.
Charity Account ……………Dr. 150
To Purchases A/C ………………. 100
To Cash Account …………….. 50

 Goods worth Rs. 4000 were destroyed in a fire. Insurance
company paid 80% of the loss.
Cash Account …………… Dr. 3200
Loss by fire A/C …………….Dr. 800
To Purchases Account …………….. 4000

 Plant purchased for Rs. 7000. Provide Deprecation
@10% P.A. for full year.
Deprecation Account ……………Dr. 700
To Plant Account …………………….. 700

 A machine is purchased for rs. 50000. Transportation
expenses Rs. 2000 and Installation charges Rs. 3000 on
this machine.
Machine A/C …………….Dr. 55000
To Cash Account …………………….55000

Sarkar who owed us Rs. 1000 is declared insolvent
and 60 paise in a rupee is received
Cash Account ……………Dr. 600
Bad Debts A/C …………….Dr. 400
To Sarkar Account …………….. 1000

 LEDGER is the principal book of accounts which
contains various accounts. An account is a summarized
record of similar transactions during an accounting
period relating to a particular person or thing.
Therefore, all the accounts, whether real, nominal or
personal, are collected in the ledger.
Ledger

 What is a ledger?
 It is a digest of all accounts utilized by an entity during
an accounting period.
79
Bound
books
Computer
printout
Cards
Loose leaf
pages

 Ledger - a group of related accounts kept current in a
systematic manner
 Think of a ledger as a book with one page for
each account.
80
Ledger

81
Cash
Accts. Payable
Ledger
Accts. Receivable
Supplies
Ledger

82
Cash
Accts. Payable
Ledger
A B C D
Customer Accounts
Accts. Receivable
Supplies
Ledger

83
Cash
Ledger
Supplies
Accts. Payable
Ledger
A B C D
Customer Accounts
Accts. Receivable
A B C D
Creditor Accounts

 A simplified version of a ledger account is called the T-
account.
 They allow us to capture the essence of the accounting process without
having to worry about too many details.
 The account is divided into two sides for recording increases and
decreases in the accounts.
84
Account Title
Left Side Right Side

 Debit (dr.) - an entry or balance on the left side of an
account
 Credit (cr.) - an entry or balance on the right side of an
account
 Remember:
 Debit is always the left side!
 Credit is always the right side!
85

86
Post from the journal
to the ledger.

 What is posting?
 It is the transfer of information from the journal to the
appropriate accounts in the ledger.
87

 POSTING REFERS TO TRANSFERRING THE
INFORMATION IN A JOURNAL ENTRY TO THE
APPROPRIATE LEDGER ACCOUNT
 ENTER DATE
 ENTER AMOUNT IN PROPER DEBIT OR
CREDIT COLUMN
 ENTER JOURNAL SOURCE INFO
88

89
Date Particulars J.f Amt. Date Particulars J.f Amt.
Debit Credit
PROFORMA FOR ACCOUNT

90
Account Title
Debit Credit
LEFT SIDE

91
Account Title
Debit Credit
RIGHT SIDE

 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
92

93
Date
Journal Page
1Particulars Debit Credit
April 2 Cash 30,000
Garge Capital 30,000
(Received initial
investment from owner)

94
Date Ref. Particulars Amount Date Ref Particulars Amoun
April 2 1 To G. Cap 30,000
Debit Cash Account
Credit
Insert the number of the journal page.
POSTING

95
L.F.
Date Description Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400
Journal Page 1
RECORDING AND POSTING AN
ENTRY
1. Analyze and record the transaction as shown.
2. Post the debit side of the transaction.
3. Post the credit side of the transaction.

96
L.f
Date Description Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 2,400
Journal
Ledger
Prepaid Insurance Account
Dr. Cr.
Page 1
Recording and Posting an Entry
Date Particulars Fol
.
Amt. Date Particulars Fol
.
Amt.
12/1 To Cash 1 2400

97
Recording and Posting an Entry
Date Description L.f. Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 11 2,400
Journal
Ledger Page No.15
Prepaid insurance Account
Dr. Cr.
Page 1
1
3 2
4
Date Particulars Fol. Amt. Date Particulars Fol. Amt.
12/1 To Cash 1 2400

 The totals of the debit side and credit side of an account are
taken to ascertain the difference between the two sides.
 This difference is known as the balance on the account. The
total of the heavier side is entered on the lighter side for arriving
at the balance.
 When the total of the debit side exceeds the total of the credit
side, the balance is said to be in debit, i.e. known debit balance.
 When the total of the credit side exceeds the total of the debit
side, it means that the account has a credit balance.
 The balancing of the account is necessary to ascertain the net
effect whether debit or credit on the account.

 Trial balance is a list of debit and credit balances extracted
from the ledger on a particular date. Since for every debit
entry there is a corresponding credit entry of the equivalent
amount, the total of the debit and credit balances should agree
in equal amount.
 A trial balance essentially proves the arithmetical accuracy
of the entries passed in the books of account and is derived
from ledger where all accounts find a place.
 Trial balance is prepared after striking the balance of
various accounts in the ledger.

1. It forms the very basis on which final accounts are prepared.
2. It helps in knowing the balance on any particular account in the
ledger.
3. It is a test of arithmetical accuracy.
Note:- A trial balance is not a conclusive proof of the absolute
accuracy of the account. It does not indicate the absence of an
error. So, a non-tailed trial balance indicates the presence of book
keeping error.

 The purposes of the trial balance:
 To help check on accuracy of posting by
proving whether the total debits equal the total
credits
 To establish a convenient summary of
balances in all accounts for the preparation of
formal
financial statements
101

• Wrong posting of entries, e.g., a debit entry of Rs. 500 for
purchase of furniture wrongly posted as Rs. 50 in the account
• Omission of posting, e.g., when a debit entry of Rs. 500 for
purchase of furniture has not been posted at all
• Duplication of posting, e.g., when a debit entry of Rs. 500 for
purchase of furniture has been posted twice to the account
• Wrong side of posting, e.g., when debit entry is posted on the
credit side or credit entry is posted on the debit side. That is, when
debit entry of Rs. 500 is posted on the credit side and vice-versa

• Errors in casting the totals of debit or credit side of the trial
balance
• Wrong transfer of balances to the trial balance
• Omission of entering the balance of account in the trial balance
• Balance of cash book omitted to be recorded in the trial balance
• Wrong balancing of account

(a) Errors of omission to record any transaction.
(b) Posting of wrong amount to both debit and credit side of the account.
(c) Error made in the posting of debit or credit entry is compensated by an
identical error of equal amount. These errors are known as errors of
compensation.
(d) Errors made in posting a transaction on the correct side of wrong
account.
(e) Erroneously recording a transaction twice. These are known as errors
of duplication.
(f) Errors of principle when the accounting principle is disregarded. For
example, a capital item treated as revenue item and vice versa. That is,
purchase of furniture posted to purchase a/c.

 The trial balance is usually prepared with the
balance sheet accounts first, followed by the income
statement accounts.
 An example of a trial balance:
Account (Rs)
Number Account Title Debit Credit
100 Cash 3,50,000 3,50,000
130 Merchandise inventory 150,000 150,000
202 Note payable 100,000 100,000
300 Paid-in capital 400,000 400,000
500,000
500,000
==================
===================
106

 Note that a trial balance may balance even when errors
were made in recording or posting.
 A transaction may be recorded as different amounts in two
different accounts.
 A transaction may be recorded in a wrong account.
 In both situations, the total debits will still equal total
credits on the trial balance.
Dr. = Cr.
107

108
Correcting Errors
Three Types of Errors
Journal Entry Ledger Posting
1. incorrect not posted

109
Correcting Errors
2. correct incorrectly posted

110
Correcting Errors
2. correct incorrectly posted
incorrect

 What if it doesn’t balance ?
 Is the addition correct?
 Are all accounts listed?
 Are the balances listed correctly?
111
DEBITS CREDITS

 Divide the difference by two.
 Is there a debit/credit balance for this amount posted in
the wrong column?
 Check journal postings.
 Review accounts for reasonableness.
112

CAPITAL EXPENDITURE
1. Capital expenditure is that expenditure the benefits of which are not fully
consumed in a year but spread over several years.
2. It is the expenditure which results in the purchase or acquisition of asset or
property.
3. It is the expenditure incurred in connection with the purchase of asset.
4. It is the expenditure incurred to bring an old asset into working condition.
5. It is the expenditure incurred for extending or improving an existing asset to
increase its productivity or to increase the earning capacity of business or to
decrease working expenditure.

1. Revenue expenditure is the expenditure which benefits in the
current accounting year. It is not carried forward to the next year
or years.
2. It is the expenditure which is incurred in the normal course of
business to run the business and to maintain the fixed assets of
business.
3. It is the expenditure which is incurred on purchase of goods
meant for resale or to purchase materials which will be used to
convert them into final product.
Therefore, revenue expenditure is a recurring expenditure made to maintain
the business. The amount spent is generally small and the benefit is for a short
period which is not more than a year. All revenue expenditure are
charged to trading and profit and loss account.

 Deferred revenue expenditure is the expenditure which is
originally revenue in nature but the amount spent is so large that
the benefit is received for not a year but for many years.
 A proportionate amount is charged to profit and loss account of
each year and balance is carried forward to subsequent years as
deferred revenue expenditure.
 It is shown as an asset in the balance sheet, e.g., heavy
expenditure incurred on advertisements.

 Capital receipts are the receipts which are not received
in the ordinary course of business. These are non-
recurring receipts.
 Money obtained from the sale of fixed assets or
investments, issue of shares or debentures, loans taken
are some of the examples of capital receipts.
 Capital receipts are shown as liability reduced from
assets appearing in the balance sheet.

 Revenue receipts are receipts obtained in the normal
course of business. It is a receipt against supply of goods
or services.
 The money obtained from sales, interest, dividend,
transfer fees etc. are examples of revenue receipts.
Revenue receipts are credited to profit and loss account.

 Those profits which are not earned during the regular course of
business and which are not earned on account of the day-to-day
trading activities of the business are capital profits. For example,
profit on sale of asset and premium received on issue of shares.
 These types of profits are normally not taken to profit and loss
account but are shown in the liabilities side of the balance sheet.

The losses which are not suffered during the regular
course of business are called capital losses. For
example, discount on issue of shares.

120
The financial statements are a picture
of the company in financial terms.
Each financial statement relates to a specific
date or covers a particular period.

121
1. How well did the
company perform
(or operate) during
the period?
Revenues
– Direct Expenses
Gross income (Gross loss)
Trading
Account
Question Answer
Financial
Statement
1. How well did the
company perform
(or operate) during
the period?
Gross Profit
– Indirect Expenses
Net income (Net loss)
Profit and
Loss
Account

122
3. What is the company’s
financial position at the
end of the period?
Assets
= Liabilities
+ Owners’ equity
Balance
sheet
Question Answer
Financial
Statement
4. How much cash did
the company generate
and spend during
the period?
Operating cash flows
± Investing cash flows
± Financing cash flows
Increase or decrease in cash
Statement
of
cash
flows

123
The income statement,
reports the company’s revenues,
expenses, and net income
or net loss for the period.

124
The income statement is a financial
tool that provides information about
a company’s past performance.

125
Revenues
–
Expenses
= Net income
(or Net loss)

126
Sales revenues
– Cost of goods sold
Gross profit
Operating
income
Selling and
administrative
expenses
– =
Add: Other revenues and gains
Less: Other expenses and losses

127
Income Statement
Revenue - the proceeds that come from sales to customers
Cost of Goods Sold - an expense that reflects the cost of the product or good
that generates revenue. .
Gross Margin - also called gross profit, this is revenue minus
COGS
Operating Expenses - any expense that doesn't fit under COGS
such as administration and marketing expenses.
Net Income before Interest and Tax - net income before taking interest
and income tax expenses into account.
Interest Expense - the payments made on the company's
outstanding debt.
Income Tax Expense - the amount payable to government.
Net Income - the final profit after deducting all expenses from
revenue.

128
The Income Statement can be divided
into:
• Trading Account
• Profit and Loss Account

129
Revenues are inflows or other
enhancements of assets to an entity.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.

130
Expenses are outflows or
other using up of assets.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entity’s major or central operations.

 Gross profit (gross margin) - excess of sales revenue over the cost
of inventory that was sold
 Operating expenses - a group of recurring expenses that pertain to a
firm’s routine operations
 Operating income (operating profit) - gross profit less all operating
expenses
 Other revenues and expenses - items not directly related to the
main operations of a firm
131

 Net income - the remainder after all expenses
(including income taxes) have been deducted from
revenue
 Often seen as the “bottom line”
 Net loss - the excess of expenses over revenues
132

Introduction
After the agreement of trial balance, a trader closes
ledger accounts with a view to ascertain the following
aspects:
• Gross profit
• Net profit
• Financial position of the firm

The goods account is split up and separate accounts are opened
as follows:
• Opening stock account, i.e. stock at commencement
• Purchase account including both cash and credit purchases
• Sales account including both cash and credit sales
• Returns inwards account, i.e. total goods returned by customers
• Returns outwards account, i.e. total goods returned to vendors
• Closing stock account, i.e. stock of goods at the end
These separate accounts, in total, are ultimately transferred to a
common heading called trading account.

Net Sales =Cash Sales+Credit
sales-Sales Return
Cost Of Goods Sold=Opening
Stock +Net Purchases-closing
stock(stock at the end)+Direct
Expenses
Net Purchases=Cash
Purchases+Credit Purchases-
Purchases Return
Gross Profit=Net Sales Revenue-
Cost Of Goods Sold

 The balances of accounts of all related items have to
be transferred to the trading account by way of passing
entries. The entries needed for such transfers are termed
as closing entries.
 The closing entries are as follows:

 Trading A/c Dr.
To opening stock
To Purchases A/c
To Sales Return A/c
To Wages A/c
To Direct Expenses A/c

Sales A/c Dr.
Purchases Return A/c Dr.
To Trading A/c

(a) For gross Profit:
Trading A/c Dr.
To profit and Loss A/c
(b) For Gross Loss
Profit and Loss A/c Dr.
To Trading A/c

 In order to find out the gross profit or gross loss of a
business, a trading account is prepared.
 This account gives the overall profit of the business
relating to an accounting period which is subject to
deduction of general administrative, selling and other
expenses.
 Gross profit is the difference between sale proceeds of
a particular period and the cost of the goods actually sold
during that period.

 Profit and loss account is prepared with a view to ascertain the
profit or loss on account of business activity during an accounting
period.
 Profit and loss account is also an account like other accounts in
the ledger which discloses the net effect in the form of profit or
loss resulting from settling off the expenses incurred against the
revenue earned during the accounting period.
 The difference between total revenue and total expenses
represents net income or net loss according to whether the
difference is positive or negative.
 In this regard, it is pertinent to note that all the expenses
incurred for the period are to be debited to this account, whether
paid or not. Likewise, all revenue earned, whether received or not,
are to be credited to this account.

 The balance of a trading account showing gross profit or gross loss
becomes the opening transfer entry of this account on the credit or debit
side respectively.
 All the revenue expenses appear on the debit side including those
expenses which do not find a place in the trading account.
 The losses on sale of capital asset or any abnormal loss also appear on
the debit side. The credit side of the account shows the revenue earned
including the non-trading income like interest on bank deposit or
securities, dividend on shares, rent of let-out property, profit arising from
sale of fixed assets etc. after transfer of all the nominal accounts from the
trial balance to the profit and loss account.
 The net result of the profit and loss account is ascertained by balancing
it. If the credit side is more than the debit side, it indicates net profit for
the period.
 Conversely, if the debit side is more than the credit side, it indicates net
loss for the period.

145
The balance sheet is the financial
tool that focuses on the present
condition of a business.

 The American Institute of Certified Public Accountants defines
balance sheet as “a tabular statement of summary of balances
(debits and credits) carried forward after an actual and
constructive closing of books of account and kept according to
the principles of accounting.”

 The balance sheet is one of the important statements depicting
the financial strength of the company. On one hand, it shows the
properties which were utilized and on the other, the sources of
those properties.
 The balance sheet shows all the assets owned by the company
and all the liabilities and claims it owes to owners and outsiders.
 The balance sheet is prepared on a particular date. The right
hand side shows properties and assets. Usually, there is no
particular sequence for showing various assets and liabilities.

 The Balance sheet shows the financial position of a
company at a particular point in time.
 The balance sheet is also referred to as the statement of financial
position or the statement of financial condition.
 The left side lists assets – the right side lists liabilities
and owners’ equity
148

149
Probable future economic benefits
obtained or controlled by a
particular entity as a result
of past transactions events.

150
Probable future sacrifices of economic
benefits arising from present obligations
of a particular entity to transfer assets
or provide services to other entities
in the future as a result of past
transactions or events.

151
The residual interest in the assets
of an entity that remains after
deducting its liabilities.
Investment
by owners
Earned
equity

 Balance sheet formats:
 Report format - a classified balance sheet with assets at the top and
liabilities and equity below
 Account format - a classified balance sheet with assets at the left
and liabilities and equity at the right
 Regardless of format, balance sheets always contain
the same basic information.
152

 The balance sheet is affected by every
transaction that an entity encounters.
 Each transaction has counterbalancing entries that
keep total assets equal to total liabilities and
owners’ equity.
153

 RESOURCES
AVAILABLE FOR USE
BY THE FIRM (ENTITY)
 ASSETS -
PROBABLE FUTURE
ECONOMIC BENEFITS
 HOW RESOURCES
ARE FINANCED
 LIABILITIES - DEBT
OWED TO OTHERS
 OWNERS’ EQUITY -
INVESTMENT BY
OWNERS
 DIRECT
 INDIRECT
154

1. Share Capital
Share capital is the first item on the liabilities side of a balance
sheet. Authorized and issued capital is shown giving the
number of shares and their amount. The number of shares for
which public has applied (subscribed capital) are mentioned
along with the type of capital, i.e. preference share capital and
equity share capital. If the capital is issued for other than cash,
the amount of such capital is mentioned.

SECURED LOANS
All those loans against which securities are given are shown under this
category. Debentures are shown under this heading. Loans and advances from
bank, subsidiary companies etc. should be shown separately and the nature of
securities should also be mentioned.
UNSECURED LOANS
These are the loans and advances against which the company has not given
any security. The items included here are deposits, loans and advances from
subsidiary companies and loans and advances from other sources. Short-term
loans from banks and other sources are also shown in this category. Short-term
loans include those which are due for not more than one year on the balance
sheet.

(A) CURRENT LIABILITIES
INCLUDE THE FOLLOWING:
• Acceptances
• Sundry creditors
• Subsidiary companies
• Advance payments and unexpired
discounts
• Unclaimed dividends
• Other liabilities, if any
• Interest accrued but not paid on
loans
(B) FOLLOWING ITEMS ARE
INCLUDED UNDER
PROVISIONS:
• Provision for taxation
• Proposed dividends
• Provision for contingencies
• Provision for provident fund scheme
• Provision for insurance, pension and
similar staff benefits schemes
• Other provisions

1. FIXED ASSETS
 Fixed assets are those which are
purchased for use over a long period.
These assets are meant to increase
production capacity of the business.
 They are not acquired for sale but
are used for a considerable period of
time.
 The balance sheet is prepared to
show the financial position of the
concern. These assets should be
shown in such a way that balance
sheet depicts true financial position of
the business.
2. INVESTMENTS
 Investments are shown by giving
their nature and mode of valuation.
Investments under various sub-heads
such as investments in government or
trust securities, in shares, debentures
and bonds, and in immovable
properties are given separately in the
inner column of the balance sheet.

3. CURRENT ASSETS
 Current assets are such assets as in
the ordinary and natural course of
business move onward through the
various processes of production,
distribution and payment of goods,
until they become cash or its
equivalent by which debts may be
readily and immediately paid.
4. MISCELLANEOUS
EXPENDITURE
 Deferred expenditure is shown
under this heading. Miscellaneous
expenditure are the expenses which
are not debited fully to the profit and
loss account of the year in which they
have been incurred. These expenses
are spread over a number of years and
unwritten balance is shown in the
balance sheet. The items under this
heading are preliminary expenses,
discount allowed on issue of shares or
debentures, interest paid out of capital
during construction

 Elements of the balance sheet:
 Assets - resources of the firm that are expected to increase
or cause future cash flows (everything the firm owns)
 Liabilities - obligations of the firm to outsiders or claims
against its assets by outsiders (debts of the firm)
 Owners’ Equity - the residual interest in, or remaining
claims against, the firm’s assets after deducting liabilities
(rights of the owners)
163

164
Current assets
Long-term assets
Current liabilities
Long-term liabilities

165
XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Land 20,000
Accounts Payable 400
Amit, Capital 25,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Rent Expense 800
Commission 450
Supplies Expense 800
Miscellaneous Expense 275
32,900 32,900

166
XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Land 20,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Rent Expense 800
Commission 450
32,900 32,900
Balance
Sheet

167
Income
Statement
XYZ Ltd.
Trial Balance
November 30, 2002
Cash 5,900
Purchases 550
Land 20,000
Amit, Drawing 2,000
Fees Earned 7,500
Wages Expense 2,125
Rent Expense 800
Commission 450
32,900 32,900

168
XYZ Ltd.
Balance Sheet Income Statement
1. Assets
11 Cash
12 Accounts Receivable
14 purchases
15 Prepaid Insurance
17 Land
18 Office Equipment
2. Liabilities
21 Accounts Payable
23 Unearned Rent
3. Owner’s Equity
31 Amit, Capital
32 Amit, Drawing
4. Revenue
41 Sales
5. Expenses
51 Wages Expense
52 Rent Expense
54 Commission
55 Supplies Expense
59 Miscellaneous Expense

169
Original evidence
records
Accounting
records
Financial
Statements
Source
documents
Journals
Ledger
Trial
Balance
Statement of
cash flows
Balance Sheet
Profit and Loss
Statement
Closing
Entries

 The balance sheet is generally divided into parts, i.e. assets, liabilities and
capital. It is usually prepared in the horizontal form. The assets are shown on
the right hand side and capital and liabilities on the left hand side.
 The order of assets and liabilities is either on liquidity basis or on
permanency basis. When balance sheet is prepared on liquidity basis, large
liquid assets like cash in hand, cast at bank, investments etc. are shown first and
small liquid assets later. On liabilities side, the liabilities to be paid in the short
period are shown first, long-term liabilities next and capital in the last.
 The liquidity form is suitable for banking and other financial companies.
When balance sheet prepared on permanency basis, on assets side, fixed assets
are shown first and liquid assets later. On liabilities side, the capital is shown
first, long-term liabilities next, and short-term and current liabilities in the last.

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