Bank of Baroda Accounting and Financial Management

Fundamentals of Accounting
Accounting
Accounting is a process of systematic way of recording business transactions.
Process of Accounting/Steps of Accounting
Step 1: Recording (Preparation of Journal Entries)
Recording refers to recording (i.e., entering) of business transactions as and when they
occur.
Step 2: lassifying (Preparation of !edger Accounts)
lassification refers to the grouping"classifying the business transactions (which are
recorded in #ournal boo$) which are similar in nature.
Step 3: %ummari&ing (Preparation of P'! and (alance %heet)
%ummari&ation refers to presentation of classified business transactions through financial
statements li$e Profit ' !oss account and (alance %heet.
Step 4: Analysis ' )nterpretation
)t refers to drawing conclusions from the data found in the financial statements about the
profitability and the financial position of the business.
Accounting Principles:
Accounting Principles can be di*ided into +
a) Accounting oncepts
b) Accounting on*entions
I Accounting Concepts
Accounting concepts refers to ,general assumptions- on which accounts are prepared. .hese
assumptions (concepts) gi*e clarity on the transactions.
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Bank of Baroda Accounting and Financial Management
E/ample 0
Apollo tyres sold goods (tyres) to .oyota !td. on 0
st
1ec 2302 worth Rs. 4,33,333 and amount
will be recei*ed on 0
st
5eb 2306.
What is the transaction date?
E/ample 2
))) (an$ purchased a land in 7.8.Road for Rs. 4,33,333 on 0
st
Jan 2339 and the *alue of the
land as of now is Rs. :,33,333.
What should be the value to be recorded? Whether is it Rs. 5,00,000 or Rs. 9,00,000?
E/ample 6
7r. 8irish appointed as a 7anaging 1irector in .oyota !td.
Should the transaction be entered or not?
)n the abo*e three e/amples, there is an ambiguity. %o accounting concepts (assumptions) are
made to get clarity on the transactions.
.here are 00 concepts +
0) 7oney 7easurement oncept
2) 8oing oncern oncept
6) ost oncept
;) 1ual Aspect oncept"Accounting E<uation oncept
4) Accounting Period oncept
9) =b#ecti*e E*idence concept
>) 7atching oncept
?) (usiness Entity"%eparate Entity oncept
:) Accrual oncept
03) Reali&ation oncept
00) !egal Aspect oncept
0) 7oney 7easurement concept
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Bank of Baroda Accounting and Financial Management
=nly those transactions that can be e/pressed in money terms (financial transactions) are
recorded in the boo$s.
e.g. .oyota !td purchased goods from Apollo .yres !td. worth Rs. 0,33,333
@onAmonetary transactions (i.e., e*ents which cannot be e/pressed in terms of money)
will not be recorded.
e.g. a) Retirement of a managing director
b) Appointment of an employee.
2) (usiness"%eparate Entity oncept
.he owner and the business are considered as two different persons, distinct from each
other.
.ransactions are recorded from the point of *iew of the business and not the owner. As
such any amount in*ested by the owner in the business is considered as a liability by the
business towards owner.
=nly those transactions which are related to business are recorded.
Personal transactions and pri*ate property of the owner are not recorded in the boo$s.
6) 8oing oncern oncept
)t is assumed that the business will continue to operate for a fairly long time"indefinite
period.
;) ost oncept
Assets ac<uired (purchases) are recorded at cost price. (i.e., at the price actually paid for
ac<uiring the asset)
.he mar$et price of the asset is ignored.
4) 1ualAaspect oncept"E<uation oncept"Accounting E<uation oncept:
E*ery business transaction always results in recei*ing of some benefit of some *alue and
gi*ing of some other benefit of e<ual *alue.
E.g. ! ' . limited purchased goods worth Rs. 0,33,333
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Bank of Baroda Accounting and Financial Management
o ! ' . recei*ed goods + recei*ing benefit
o ! ' . gi*ing money to other party + gi*ing benefit.
.hus, e*ery business transaction in*ol*es dual or double aspects of e<ual *alue (which is
also called as double entry or twoAfold effect)
9) Accounting Period oncept:
According to this concept, the life span of a business is di*ided into fi/ed period of time
(monthly, <uarterly, half yearly, yearly) for which accounts are prepared.
Accounts of the business are closed at a specific date e*ery year and final accounts (P'!
a"c and (alance %heet) are prepared to ascertain the results.
>) =b#ecti*e E*idence oncept:
As per this concept, all accounting transactions should be e*idenced and supported by
documents such as in*oices, receipts etc.
?) Accrual oncept:
As per this concept, the business transactions are recorded when they occur (and not as
when the cash is paid or recei*ed).
E.g. (BE! !td sold goods to BA! on credit basis worth Rs. 0,33,333 on 0
st
1ec 2302,
and the amount will be paid on 2
nd
5eb 2302.
.he transaction date is 0
st
1ec 2302.
:) Reali&ation oncept:
.he reali&ation concept determines the e/act period when re*enue is recogni&ed"reali&ed.
e.g. A business recei*es an order in the month of 7arch to supply goods in the month of 7ay.
.he re*enue will only be reali&ed once the actual transaction ta$es place in the month of 7ay.
03) 7atching oncept:
As per this concept, a business organi&ation needs to match e/penses with related re*enues in
order to report a company-s profitability during a specified time inter*al.
II Accounting Conventions
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Bank of Baroda Accounting and Financial Management
0) on*ention of 7ateriality
2) on*ention of onser*atism (con*ention of caution, prudence)
6) on*ention of onsistency
on*ention of 7ateriality:
A detailed record is made only of those business transactions which are material (i.e., important)
)nsignificant transactions are not recorded.
on*ention of onser*atism
,Pro*ide for all possible losses, but anticipate no profitsC. ompany can show e/pected losses
(e.g. pro*ision for bad debts, doubtful debts) but should not show pro#ected"e/pected profits"or
re*enues)
on*ention of onsistency:
Accounting practices and methods should remain consistent (i.e., unchanged) from one
accounting year to another.
e.g. =nce a particular method adopted for depreciation, the same method should continue for
ne/t year.
Technical Terms
Goods
8oods refer to merchandise, commodities, products, articles or things in which a trader
deals. )n other words, they refer to commodities or things meant for reAsale.
Anything you purchase for the purpose of trading.
E.g. 5urniture dealer purchases chairs, tables benches etc.
Assets
Anything purchased for the purpose of use for the business.
Anything purchased not for the purpose of reAsale.
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Bank of Baroda Accounting and Financial Management
E.g. ash, machinery, land ' building etc
I !"pes
a) .angible Asset : ash, machinery, land etc.
b) )ntangible Asset: Patents, copy rights, trade mar$, goodwill etc.
II !"pes
a) 5i/ed Asset : Beld for longAterm
e.g. 7achinery, land ' building etc
b) urrent Asset : Beld for shortAterm ( generally D 02 months)
e.g. 1ebtors, ash, bills recei*ables etc.
Debt:
(orrowed money
E.g. ban$ loan, etc.
iabilit!:
Amount due from a business to others either for money borrowed or for goods purchased
on credit (i.e., goods purchased without ma$ing immediate payment)
E.g. !oan ta$en form ban$s, creditors (amount owed to suppliers), (=1 ((an$
=*erdraft)
!"pes
a) %hortAterm !iability : D 02 months
e.g. reditors (amount due to suppliers) etc.
b) !ongAterm !iability : E 02 months
e.g. !oan ta$en from the ban$, debentures etc.
Capital
Amount in*ested in the business (usually at start up, but may include additional funds
raised)
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Bank of Baroda Accounting and Financial Management
7oney (i.e., cash) or money-s worth (i.e., goods, furniture, buildings) introduced or
in*ested by the proprietor or owner in the business.
"#penses
.hese are general costs of doing business.
)t includes all e/penses ( other than cost in*ol*ed for purchase of asset) such as rent paid,
purchase of goods, salaries etc
$evenue
.he mechanism where income enters the company (note that re*enue ' income are not the same
thing + they are used here to describe each other in basic terms only)
Creditor
Amount owed to a supplier from the business for credit purchase.
Amount due by business to the suppliers of goods.
Debtors
Amount owed to the business from a customer for credit sales.
"%uit!
Represents the ownership. )t is the ownership *alue of a company.
e.g. common stoc$, retained earnings.
Depreciation
1epreciated *alue of an asset
Dra&ings
Amount withdrawn from the business by the owner for his personal use.
'ad Debt
A debt (loan) which is irreco*erable is called a bad debt.
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prashanth.kumar.ac@manipalglobal.com
Bank of Baroda Accounting and Financial Management
Doubtful Debt
A debt whose reco*ery is doubtful is called a doubtful debt.
(ournal
A #ournal is a daily record of business transactions.

)utstanding "#penses
ash such as rent, interest and insurance premium etc that are due (yet to be paid)
Prepaid "#penses
osts such as rent, interest, insurance premium etc that are paid in ad*ance.
'ills $eceivables
(ills recei*ables"Account recei*ables represent money owed by entities to the firm on the
sale of products on credit.
'ills Pa!ables
(ills payables represents money owed to suppliers of goods purchased on credit.
Accounting "%uation
Accounting e<uation represents Assets are e<ual to !iabilities.
!iabilities can be further categori&e as E/ternal !iabilities and apital
Assets F !iability G apital
Debts * Credits
1ebit is on the left or payments, redit are on the right or receipts.
Bow are debit and credit rules applied to different types of accountsH
Debit ++++++ ,ature of Accounts++++++ Credit
)ncreaseIIIIIII....AssetsIIIIIIII..1ecrease
1ecreaseIIIIIII!iabilitiesIIII...III..)ncrease
1ecreaseIII.IIIIRe*enueIIIIIIII..)ncrease
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prashanth.kumar.ac@manipalglobal.com
Bank of Baroda Accounting and Financial Management
1ecreaseIIIII..II.E<uityIIIIII.II..)ncrease
)ncreaseIIIIII...IE/pensesIIII...III.1ecrease
Classification of Accounts / Golden $ules of Accounting
0) Real Account
2) Personal Account
6) @ominal Account
$"A ACC)-,T
(usiness acti*ities re<uire tangible things li$e furniture, land, building, *ehicle, plant and
machinery etc. for operation. ash need to be paid to ac<uire these items. .hey are $nown as
real account.
1E(). JBA. =7E% )@
RE1). JBA. 8=E% =K.
P"$S),A ACC)-,T
.his accounts relates to a person, or institution (firm) in which the business concern either
Lrecei*es- something from the indi*idual or institution or Lpays- something to the indi*idual or
institution by which a Lfuture relationship is established-"
1E(). .BE REE)MER
RE1). .BE 8)MER
E.g. )ndi*iduals(ram-s a"c, Jana$i-s a"c), firm (apollo tyres, /y& ltd.), drawings, debtors, creditors
etc.
,).I,A ACC)-,T /FICTITIOUS ACCOUNT0
@ominal accounts are accounts of the e/penses ' losses which a firm incurs, and incomes '
gains which a firm earns in the course of its business.
E.g. rent paid, salary paid, commission recei*ed, interest earned etc.
1E(). A!! ENPE@%E% A@1 !=%%E%
RE1). A!! )@=7E% A@1 8A)@%
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Bank of Baroda Accounting and Financial Management
Steps to Classif! the Accounts/Application of Golden $ules of Accounting
%tep 0: 5ind out the two aspects"accounts of the transactions
%tep 2: )dentify those two aspects"accounts as e/pense, income, asset, indi*idual etc.
%tep 6: lassify those identified two accounts"aspects under 6 heads such as a) Real a"c, b)
Personal a"c, c) Personal a"c
Steps of Accounting C!cle
0) Journal
2) !eger Accounts
6) .rial (alance
;) .rading ' Profit ' !oss Account (. ' P ' ! account)
4) (alance %heet
I ()-$,A ",T$1
Journal (oo$: )t is called as boo$ of original entry recorded manually under the con*entional
method of accounting.
5ormat of Journal (oo$
1ate Particulars !5 1ebit redit
II "DG"$
)t is the boo$ where transactions of the same nature are classified and grouped together in one
place in the form of an account, through a process called ,postingC (i.e., transferring of entries
from the #ournal to the ledger), to $now the position of that account.
5ormat of !edger Account
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Bank of Baroda Accounting and Financial Management
1t t
1ate Particulars Amount 1ate Particulars Amount
III T$IA 'AA,C"
A .rial (alance is a statement of 1ebit(Payment) and redit(Receipt) balances e/tracted
from all the ledgers.
.he purpose is to find out the arithmetical accuracy of posting all accounts in the
respecti*e ledgers.
Bints for the preparation of a .rial (alance
)f a ledger account shows a debit balance, it should appear on the debit side of the trial
balance.
o .he balances of a) assets accounts b) E/penses accounts are placed in the debit
column of the trial balance
)f a ledger account shows a credit balance, it should appear on the credit side of the trial
balance.
o .he balances of a) !iabilities accounts b) capital are placed in the credit column
of the trial balance
Format of Trial 'alance
%l
@o.
Beads (i.e., @ames of Accounts) ! 5
1ebit
(alances
redit
(alances
0
2
6
;
Assets ( cash a"c, debtors a"c, machinery a"c, !oan a"c etc)
!iabilities (capital a"c, %( a"c, 51 a"c etc)
E/penses(ourier harges a"c, )nt paid a"c, rent a"c etc)
)ncomes ( )nt recei*ed a"c, commission recei*ed a"c, etc)
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prashanth.kumar.ac@manipalglobal.com
Bank of Baroda Accounting and Financial Management
///
I2 P$"PA$ATI), )F P$)FIT * )SS A/C
.he profit and loss account shows the net profit or net loss (i.e., ultimate profit or loss) of
a business for a particular period. )t considers all the income and e/penses incurred in
running the business.
Appendi( %) Banking Compan* Financial +tatements
Profit and ,oss Account for the period ending March 1- ....
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Bank of Baroda Accounting and Financial Management
A C Prashanth Kumar 1
prashanth.kumar.ac@manipalglobal.com
/ncome
/nterest 0arned
1ther /ncome
0(penditure
/nterest 0(pended
1perating 0(penses
pro2isions
Profit3,oss
Balance carried o2er to Balance +heet
+41
+41!
+41"
+41#
+41$
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Bank of Baroda Accounting and Financial Management
2 P$"PA$ATI), )F 'AA,C" S3""T
A balance sheet, also referred to as %tatement of 5inancial Position, is a statement that
e/hibits the assets and liabilities of a business enterprise prepared at a particular date.
A balance sheet comprises of three parts *i&., Assets, !iabilities and apital
Balance sheet as on March 1- ....
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Capital 5 Current ,iabilities
+hare Capital
6eser2es and +urplus
7eposits
Borro8ings
1ther liabilities and pro2isions
Assets
Cash and balance 8ith 6B/
Balances 8ith banks and mone* at call and short
notice
/n2estments
Ad2ances
Fi(ed assets
1ther assets
+41
+42
+4
+4!
+4"
+4#
+4$
+4%
+4&
+41'
+411
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