FINANCIAL ACCOUNTING

SESSION 2

1/16/13

GEETHA IYER

Accounting Process (Stages)

Identify transactions Prepare adjusted Trial Balance

Prepare Business documents

Financial Statements

Pass adjusting entries

Record transaction

Prepare unadjusted Trial Balance

Post into ledger A/c

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GEETHA IYER

IYER

GEETHA

Accounting cycle

Journal Subsidiary books-Purchase, Sales & Return books Cash book Ledger Trial Balance

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GEETHA IYER

Accounts and their Classifications

An account is a summarized record of all transactions relating to a particular revenue, expense, asset, liability or owners equity a/c. Broad classifications :1. Revenue - Sales, Interest / Dividend earned etc. 2. Expense - Rent, Salaries, Depreciation etc. 3. Assets Land, Machinery, Cash etc 4. Liabilities Loans / Interest / Bills payable etc 5. Capital Equity, Share Premium etc
1/16/13 GEETHA IYER

Accounts and their Classifications

Accounts may also be classified as follows :Personal contdaccounts Debtors / Creditors etc
1.

2. Tangible accounts Cash, Land, Car etc (Real a/c) 3. Intangible accounts Patents, Goodwill, Incomes, Losses, (Nominal a/c) Expenses etc

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GEETHA IYER

Accounts and their Classifications

Since the transactions can either increase or decrease these items, an account is structured contd parts like a capital T, denoted by into two Debit on the LHS and Credit on the RHS.
Debit Cash account Credit

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GEETHA IYER

Transactions and their Records of accounting , a transaction is In the context

an event that has the effect of changing the revenue, expense, asset, liability, or owner(s) equity of a business entity.

Transactions are recorded through a series of DEBITS and CREDITS

1/16/13 GEETHA IYER

Rules for DEBIT and DEBIT CREDIT CREDIT Increase in Assets Decrease in Assets
1. 2. 3. 4. 5.

Decrease in Liabilities Decrease in Owners Equity Decrease in Revenues Increase in Expenses DEBIT

Increase in Liabilities Increase in Owners Equity Increase in Revenues Decrease in Expenses CREDIT The Giver What goes out All Gains / Profits

1. Personal A/c 2. Tangible A/c 3. Intangible A/c

The Receiver What comes in All Expenses/Losses

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GEETHA IYER

(Book of prime entry)

Primary record of a transaction Chronological record of all transactions Also contains a narrative description Debit account is recorded first and then the credit account Does not replace but precedes the LEDGER

JOURNAL

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GEETHA IYER

Date

Proforma of a Journal
Description Furniture A/c Dr to M/s XYZ Furnishers Ltd (Being purchase of furniture on credit vide Invoice no: 205)

LF

Ref

Debit

Credit

11/8/10

Invoice 205

2000 2000

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GEETHA IYER

ILLUSTRATION
The following information relates to Shyam Enterprises Ltd. Pass Journal Entries.
Date Transaction Rs.

January 1 January 8 January 10 January 15 January 31

Starts business with Buys goods and stores them Receives order from A Delivered the goods to A, customer invoiced Customer A pays

1000 800 500 500 500

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GEETHA IYER

Date

Description Dr

L F Ref

Debit 1000

Credit

1st Jan Cash A/c to Capital A/c (Being capital introduced in cash)

1000 378 800 800

8th Jan Purchase A/c Dr to Cash A/c (Goods purchased in cash vide cash memo no 378 of M/s XYZ Ltd) 15th Jan Mr As A/c Dr to Sales A/c (Goods sold to Mr A vide sale Bill No: 001) 31st Jan Cash A/c to Mr As A/c (Being cash received on account) 1/16/13 GEETHA IYER Dr

001

500 500 500 500

Subsidiary Books Divisions of Journal

When volume of transactions of a business is large it is highly advantageous to classify them into groups of similar transactions All those transactions repeatedly affecting one aspect of an account are grouped together and recorded in a subsidiary book, Ex. Sales journal, Cash receipts journal, etc. All transactions not passed through the subsidiary books will be passed through the general journal

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GEETHA IYER

Some subsidiary books

Sales Book Recording all credit sales Purchase Book Recording all credit purchases Cash Book - records all receipts and payments of cash Sales Return BookPurchase Return BookBills Receivable BookBills Payable Book Journal proper - Other transactions

1/16/13

GEETHA IYER

Posting from Subsidiary Books

o

Possible to post the transactions periodically

Following are the transactions of credit purchases on different dates

Jan. 1 Jan. 2 Jan. 3 Jan. 4 Jan. 5 Roy and Co. Sen and Co. Carmaker and Co. Mondal and Co. Naskar and Co. Rs.2,000 3,000 1,500 6,000 3,500

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GEETHA IYER

Purchase Journal
Date Jan. 1 Jan. 2 Jan. 3 Jan. 4 Jan. 5 PURCHASES JOURNAL Name of the Supplier Roy and Co. Sen and Co. Carmaker and Co. Mondal and Co. Naskar and Co. Total 16000 Amount Rs.2,000 3,000 1,500 6,000 3,500 Rs 16,000

Purchases A/c Dr To Sundry Creditors 16000

1/16/13 GEETHA IYER

It contains all accounts of the enterprise. It classifies the transactions recorded in the Journal. May also be classified into groups of accounts, eg Sundry Debtors / Sundry Creditors Ledger etc.

LEDGER (Book of Final Ledger is a set of accounts. entry) Ledger is called main or principal book.

Proforma of a LEDGER Dr
Date Explanation J F
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Cr
Amount Date Explanation J F Amount

GEETHA IYER

POSTING OF It is the process of transferring the debit and credit items from the ACCOUNTS JOURNAL to their respective accounts in the LEDGER.
The dual aspect ensures that each transaction finds a place in at least two accounts. Total amount of debits as a result of each transaction will be equal to the credits. Debit entry will be posted on the debit side

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GEETHA IYER

Post the Journal Entries of Shyam Enterprises Ltd

1/16/13 GEETHA IYER

Dr. Cr. Date Explanation Amoun Date t

Cash Account Explanation Purchases Amoun t 800

Jan 1 To Capital A/c Jan 31 To Mr As A/c Dr. Date Explanation

1,000Jan 8 By A/c 500

Capital Account Cr. Amoun Date t Explanation Amount 1,000

Jan 1 By Cash A/c

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GEETHA IYER

Dr. Cr. Date Explanation

Purchases Account Amoun Date t 800 Explanation Amoun t

Jan 8 To Cash A/c

Dr Date Jan Dr. 15

As Account or Account Receivable Cr. Explanation Amount Date To Sales A/c Explanation Amount 500

500Jan 31By Cash A/c Sales Account Cr.

Date
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Explanation

Amount Date

Explanation

Amoun t 500

GEETHA IYER

Jan 15By Mr As A/c

CASH BOOK
Subsidiary as well as a Principal book 1. Entries in the cash book can be passed directly as it is a Subsidiary Book (Journal) 2. It is also a complete a/c showing the Cash Balance which can be directly taken to the Balance Sheet, hence also a Principal Book 3. Three types of Cash Book :a. Simple or Single Column b. Two Column (Cash & Bank, or Cash & Discount) c. Three Column (Cash, Bank, & Discount) 4. Receipts on left and Payments on right side 5. Discount columns are totaled but not balanced and posted to the discount a/c in ledger
1/16/13 GEETHA IYER

Illustration
M/s Subham & Co. purchases furniture for Rs. 10,000 on which he gets a discount of 10%. He also sells goods to M/s Sohan for Rs. 15,000. It is known that M/s Sohan also makes the full payment after availing a discountthe Taken to of discount 10%. The opening cash balance is Rs. 5,000. account in the Prepare Cash Book.
M/s. Subham & Co. Cash Book Amount Date 5,000 13,500 18,500

ledger

Date

Receipts To Bal B/d To Sales

LF

Dis. 1500 1,500

Payments By Furniture By Bal C/d

LF

Dis. 1,000 1,000

Amount 9,000 9,500 18,500

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GEETHA IYER

BALANCING AND CLOSING OF ACCOUNTS Balancing is the technique of finding the net
balance of a particular account by separately totaling the debit and the credit sides. The balance is put on the side which is lighter thus equating the debits with the credits. However, the nature of the balance in any account (debit or credit) is always known by the side that is heavier.
1/16/13 GEETHA IYER

NATURE OF BALANCE IN LEDGER ACCOUNTS

Account type
1. 2. 3. 4. 5.

Balance

Asset accounts Liability accounts Capital/Equity accounts Revenue accounts Expense accounts

Debit Credit Credit Credit Debit

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GEETHA IYER

TRIAL BALANCE
Balances of both debit and credit accounts are first transferred to a worksheet called original trial balance or unadjusted trial balance Adjustments are worked out giving rise to an Adjusted trial balance Finally, based on the type of the account it is, the balances of individual accounts are then taken to either P & L a/c or the Balance Sheet

1/16/13

GEETHA IYER

Banking Transactions
Payment made by cheques, Bearer cheques, Crossed cheques (& co, or A/c payee) Endorsing cheques to 3rd parties Cheques deposited for collection, Cheques received but not deposited into bank, Deposit/withdrawal of cash from bank, Dishonour of cheques, Overdraft, Bank charges

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GEETHA IYER

1.

It is the statement prepared to compare Bank a/c in the books with the Bank Statement (Pass Book) received from the bank It is prepared at regular intervals so that errors, if any, may be detected and rectified

BANK RECONCILIATION STATEMENT

2.

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GEETHA IYER

ILLUSTRATION
Prepare a Bank Reconciliation Statement to reconcile the

differences between the cash book and the bank pass book.
Balance as per the cash book Rs 2687 and balance as per

bank pass book is Rs 4399

Cheques issued but not presented:

Mr. A Rs 3200 Mr. B Rs 1350

Cheques deposited but not cleared from Mr. P Rs 2486 Bank debited charges Rs 352.

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GEETHA IYER

BANK RCONCILIATION SATEMENT PROFORMA Balance as per Cash Book 2,687

ADD Cheques issued not yet presented LESS Cheques deposited not yet collected 1. To Mr A 2. To Mr B 3,200 1,350 4,550 7,237

1.From Mr P 2,486 352 2,838

Other debits by bank 1. Bank Charges Balance as per Bank Statement

1/16/13 GEETHA IYER

2,838 4,399

PRACTICE PROBLEM
Mr. As Bank Book shows a debit balance of 10,500.40 Prepare a Bank Reconciliation considering following facts 1. Cheques deposited on 3oth Dec not collected by 31st Dec (a) 300.24 (b) 500.00 (c) 200.15 2. Cheques issued but not cashed by 31st Dec (a) 600.25 (b) 200.00 (c) 489.25 (d) 50.00

3. Dividend recd directly in the bank a/c, without intimation to Mr A, amounting to 1500.00 4. Bank allowed interest 20.30 and debited charges 9.20 on 31st Dec
Ans: 12350.61
1/16/13 GEETHA IYER

THANK YOU
1/16/13 GEETHA IYER