What is Accounting?????

Accounting is a process which includes: Identifying Measuring Recording Classifying Summarising Analysing the transactions which can be measured in terms of money.
By Raman Sachdeva 1

Basic Terms -Assets

Define Assets.
Any thing which is tangible or not, but can fetch some money value in the future for the business is called as an asset. Two main kinds of assets are as follows: Fixed Assets: Any asset, which do not change in a short period of time are called as fixed asset. For example: Building Land Machinery Current Assets: Any asset, which keep on changing even in short period of time is called as current asset. For example: Cash Bank balance

By Raman Sachdeva

Basic Terms Capital & Liabilities

Capital.
An amount, which is invested into the business out of own recourses of entrepreneur, is called as capital.

Liability.

An amount, which is invested into the business borrowed from outside market is called as liability. This is the amount which has to be returned in future. For example loan from bank, creditors (a person from whom goods have been purchased on credit) etc.

By Raman Sachdeva

Important Terms Goods, Debtors & Creditors

Goods Any thing in which business deals is known as goods, for e.g. books, pens, pencils etc. are goods of a stationery business. Debtors.
Those people to whom goods have been sold on credit and money has to be received back in future are called as debtors, these are a kind of current assets for the business.

Creditors.

Those people from whom goods have been purchased on credit and money has to be repaid are called as creditors, these are a
kind of current liability.
By Raman Sachdeva 4

Basic Terms - Expenses

Outstanding Expenses: Those expenses which have become due but not yet paid. For e.g. Rent of Dec. 2009 if not paid within 2009 than in 2010 it becomes Outstanding. Prepaid Expenses: Those expenses which have not yet become due but paid in advance. For e.g. Rent of Jan 2010 paid in Dec. 2009 only.
By Raman Sachdeva 5

Basic Terms Incomes

Accrued Income: Those incomes which have become due but not yet received. For e.g. Interest due in Dec. 2009 if not received in Dec 2009. Income received in advance: Those incomes which are received in advance before they have become due.
By Raman Sachdeva 6

Objectives of Accounting
To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.
By Raman Sachdeva 7

Advantages of Accounting
Helps in ascertaining the profit earned or losses suffered and financial position (status) of the business. Assists in managing the business proof in court in law Helps in remembering Helps in taxation matters Helps in case of sale of business. Helps the manager in planning, Decision making and controlling the business operations.
By Raman Sachdeva 8

Limitations of Accounting
Not absolutely exact as it based on different estimates made by different people. All items are shown at historical value as it ignores price level changes. Records only monetary transaction and avoids other important non-monetary transactions. Window dressing (manipulation) in Balance Sheet, e.g., over or undervaluation of closing stock. Omission of qualitative information, such as calibre of the management, quality of the products, health of the proprietor, etc. Based on accounting concepts and conventions. Influenced by personal judgement.
By Raman Sachdeva 9

Accounting Concepts, Principles

Money Measurement Concept
Accounting records state only those facts about a business firm, which can be expressed in monetary terms. In other words, business events and facts that cannot be expressed in monetary terms, howsoever important they may be, are excluded. Going Concern Concept The Going Concern Concept implies that the firm will continue to operate in the foreseeable future. The operational implication of this assumption is that assets are not shown in Balance Sheet at their realisable market value, which implies liquidation value. Cost Concept Assets/resources owned by the firm are shown at their acquisition cost and not at current market value/current worth. The rationale for this assumption is that it provides objective and verifiable basis for accounting records. Market valuation of assets in use is not only difficult to be made but also is related to subjectivity. Besides, market values may be constantly subject to
By Raman Sachdeva 10

Accounting Concepts, Principles

Conservative Concept As the name suggests, Conservative Concept warrants use of conservatism in business records. In relation to Income Statement, the principle is, "anticipate no profits unless realised but provide for all probable future losses". Stock of finished goods is valued at the cost of the market price whichever is lower.

Accounting Period Concept Accounting Period Concept requires that Income Statement should be prepared at periodic intervals for purposes such as performance evaluation and determination of taxes. Conventionally, the time span covered is one year. Corporate firms, as per Companies Act, are required to produce interim accounts and many business firms produce monthly or quarterly accounts for internal purposes. Matching Principle The Matching concept is, in a way, an extension of Accrual concept. In fact, this is the most comprehensive Accounting Principle that enumerates normative framework of income determination of an accounting period of a business firm.

By Raman Sachdeva

11

Accounting Concepts, Principles

Consistency Principle Matching principle has underlined the importance of treatment of capital expenditure items in income determination process. It focuses on the equitable methods, which must be used to write off the cost of plant and machinery (and in that way of other long-term assets) so that its cost is fairly allocated as expense, in form of depreciation, to each accounting period throughout its estimated useful life. There are various methods of charging depreciation. The two notables methods are, Straight-Line Method (SLM) and Written Down Value Method (WDV).

By Raman Sachdeva

12

Accounting Equation
Mr. Ram Sharma started a business by investing Rs.5,00,000 (Capital) of his own and borrowed Rs.3,00,000 from bank as loan (liability), the total amount contributed comes to Rs.8,00,000. He spend this amount in the following manner: Machinery 2,00,000 Furniture 1,00,000 Car 2,00,000 Stock 1,50,000 8,00,000 All Assets Fittings 50,000 Bank 70,000 Cash 30,000 So

Capital + Liabilities = Assets

By Raman Sachdeva 13

What is the process of accounting?

Process of accounting: Journal Subsidiary Books

Ledger

Trial Balance
Final accounts
By Raman Sachdeva 14

What is Journal? Show its format

Format of Journal
Date Particulars L.F.Amount(Dr.) Date Particulars L.F Amount(Cr.)

By Raman Sachdeva

15

What are the various type of Accounts?

Accounts

Real

Nominal

Personal

By Raman Sachdeva

16

Accountancy - Journal
Rule #1.

Aloo, the owner has purchased a machinery worth Rs. 10,000 for his business Explaination: Machinery Account will be Debited by 10,000 (because business is receiving a machinery) Cash Account will be Credited by 10,000 (because business is giving cash )
Entry : Machinery A/c To Cash A/c Dr. 10,000

Debit what comes in Credit what goes out.

This rule is related to real accounts like assets which a business receive or give away.

10,000

By Raman Sachdeva

17

Journal Rule # 2
Rule # 2

Debit the receiver Credit the giver

This rule is related to personal accounts like debtors and creditors with whom business deals.

Business purchased Machinery from Tomato on credit worth Rs. 2,000 Explanation Machinery has come into the business so according to rule # 1 it will be debited and on the other hand Tomato is giving something to the business therefore according to rule # 2 his account will be credited. Entry

Machinery A/c Dr. To Tomato A/c

2,000

2,000

By Raman Sachdeva

18

Journal Rule # 3
Rule # 3.Debit all the losses and Expenses

Credit all the gains and profits

Business paid a salary of Rs. 5,000 to staff

This rule is related to nominal accounts like incomes and expenses which a firm earns or suffers.

Explanation Cash has gone out of the business so according to rule # 1 cash will be credited and on the other hand salary a kind of expense for the business and it will be debited as per rule # 3. Entry Salary A/c Dr. To Cash A/c

5,000

5,000

By Raman Sachdeva

19

What is Ledger? Show its format.

Ledger :- A book containing the summary and classified from of a permanent record of all transactions Dr. Name of the account Cr.
Date Particulars J.F Amount (Rs.) Date Particulars J.F Amount (Rs.)

By Raman Sachdeva

20

Ledger Posting
Let us understand how to post the journal entries into ledger For example there is entry to pay salary to an employee: Entry: Salary A/c To Cash A/c Dr. 5,000 5,000

Salary Account

Cash Account

To Cash 5000

By Salary A/c 5000

Salary account debited with the name of cash

By Raman Sachdeva

Cash account credited with the name of Salary

21

What is a Trial Balance?

The Trial Balance is a statements showing the balance, or total of debits and credits, of all the accounts in the ledger with a view to verifying the equality of debits and credits posted to the ledger accounts. If the totals of debits and credits are equal, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate.
By Raman Sachdeva 22

Trial Balance
Hypothetical Example
Cash Account To balance b/d To Sales A/c To Shyam To Interst A/c To Capital A/c 10,000 5,000 By Cash A/c 2,000 3,000 10,000 30,000 To balance b/d 28,000 By balance b/d 60,000 10,000 By Purchases A/c 2,000 By balance b/d 50,000 Capital Account

By balance c/d

28,000 30,000

To balance c/d

60,000 60,000 60,000

Trial Balance
Particulars Cash Account Amount Dr. Amount Cr. 28,000

Capital Account
Note: The balance of debit and credit should match in trial balance.

60,000 By Raman Sachdeva 23

Practice Question 1

Journalise the following transactions:

Goods worth Rs. 500 were used by the proprietor for domestic purposes. Goods uninsured worth Rs. 3,000 were destroyed by fire. Paid Rs. 250 as wages on installation of new machine. Supplied goods costing Rs. 600 to Mohan issued at 10% above cost less 5% trade discount. Goods destroyd by fire Rs. 500. Paid Rs. 2,500 in cash as wages on Installation of machinery. Issued a cheque in favour of M/s Parmatma Singh and Sons on account of purchase of goods Rs. 7,500. Goods sold costing Rs. 6,000 to M/s Kalu Sons at an invoice price 10% above cost less 5% Trade discount.

By Raman Sachdeva

24

Practice Question 2
Pass necessary Journal entries :

Paid cash to Pawan on behalf of Mukesh Rs. 2,000. Received cash from Sonu Rs. 5,000 on behalf of Monu. Exchanged old car for a new car. The old car was valued at Rs. 15,000, the price of the new car was Rs. 36,000. The Balance was paid through Bank. Purchases from akshay goods worth Rs. 20,000 and sold on the same day 30% of the goods at a profit of 10%. Rs. 30,000 was paid to the Builder for construction of a shed by a crossed cheque. Purchased stationery worth Rs. 1,000. Out of this, stationery worth Rs. 200 was taken by the proprietor for domestic use. Sent a cheque to Rahul for Rs. 2,980 after deduction discount of Rs. 20 but Rahul disallowed the discount.

By Raman Sachdeva

25

Cash Book
In business most of the transactions relate to receipt of cash, payments of cash, sale of goods and purchase of goods. So it is convenient to have separate books for each such class of transaction, one for receipts and payments of cash, one for purchase of goods and one for sale of goods. These books are called subsidiary books. Cash book is a subsidiary book, which records the receipts and payment of cash. With the help of cash book cash and bank balance can be checked at my point of time.
By Raman Sachdeva 26

TYPES OF CASH BOOK

1. Simple Cash Book. 2. Two column cash book. 3. Three column cash book. 4. Petty cash book

By Raman Sachdeva

27

SIMPLE CASH BOOK

Dr. Receipts
Date Particulars Amt. Rs. Date

Payments Cr.
Particulars Amt Rs.

By Raman Sachdeva

28

Example of Simple Cash book

Enter the following transactions in simple Cash Book. Rs. Jan 1 Cash in hand 12000 Jan 5 Received from Ramesh 3000 Jan 7 Paid Rent 3000 Jan 8 Sold goods 7000 Jan 10 Paid Sohan 2000 Jan 12 Paid salary 2500 Jan 15 Received Commision 1500

By Raman Sachdeva

29

Dr Receipts
Date

TWO COLUMN CASH BOOK

Payments Cr
Date Amt. Particular Discount. Cash Amt. Amt.

Particulars Discount Cash Amt.

By Raman Sachdeva

30

Example of two column cash book

Enter the following transactions in a two-column cash Book.
Jan 1 Cash in hand Jan 5 Paid to Mohan Jan 5 Discount allowed by him Jan 6 Purchased goods Jan 10 Received from Vijay Jan 10 Discount allowed Jan 11 Sold goods Jan 12 Paid to Shyam Discount received Rs. Jan 13 Paid wages Jan 14 Paid to Rajesh in full settlement of his Account, which shows a Cr. Balance of Rs. 4000 Rs. 15,000 3,000 100 4,000 9,800 200 4,000 2,950 50 500

3900

By Raman Sachdeva

31

Three Column CashBook

Date Particulars Dis. Cash Bank Amt. Date Particulars Amt. Dis. Cash Bank

By Raman Sachdeva

32

Example of three column cash book

Cash in hand 20,000 Paid into Bank 19,000 Receives cheques from Kirti and Co. 600 Pays into bank Kirti and Cos Cheque 600 He pays Ratan and Co. by Cheque and is allowed discount of Rs. 20 330 Cheque received from Rajaram and deposited the same day 500 33 By Raman Sachdeva

PETTY CASH BOOK

A business house makes a number of small payments like telegram, textiles, cartage etc. If all these transactions are recorded in cash book the cash bank may become bulky and the main cashiers work will also increase therefore usually firms appoint a petty cashier who makes these small payments and keep record of these payments in a separate cash book which is called Petty Cash book
By Raman Sachdeva 34

IMPREST SYSTEM OF PETTY CASH BOOK.

The petty casher is given a sum of money in the beginning of the period. During the period he makes payment out of this money. At the end of the period, the firm reimburses him the amount paid by him so that the balance of cash with him remains same in the beginning of the period as well as at the end of the period. This is called the Imprest system of Petty Cash Book.
By Raman Sachdeva 35

Introduction to Final Accounts

Final accounts are also known as financial statements. Financial statements are organized summaries of detailed information about operating results and financial position of the concern. These are prepared at the end of the accounting period, generally one year. Financial statements normally include the following: Trading and Profit & Loss Account, and Balance Sheet.
By Raman Sachdeva 36

Direct Expenses
Direct expenses are those expenses, which are directly related with the quantity of goods produced. In this category, we include expenses incurred on purchase of raw materials/goods and on manufacturing of goods. Freight, carriage and cartage on purchase of goods. Customs duty and octroi, etc. Landing and clearing charges. These are expenses relating to clearing the goods purchased or imported. Dock dues/charges

By Raman Sachdeva

37

Indirect Expenses

By Raman Sachdeva

38

Capital Expenditure
Capital expenditure is the expenditure which is incurred on purchase or construction of fixed assets such as building, plant and machinery, furniture and fixture, etc. It benefits the business for a long period. It helps in generating revenue for the business. Normally the amount involved in capital expenditure is also substantial. Following types of expenditure are generally treated as capital expenditure: Acquisition of a permanent assets. Expenditure on purchase of or on installation of a fixed asset. Overhauling charges of a second hand asset purchased. Extension of or improvement in fixed assets. The purchase of right to carry on business.

By Raman Sachdeva

39

Revenue Expenditure
Revenue expenditure may be defined as an expenditure which benefits the company for a short period. The benefits are normally derived within a year. Such expenditure is necessary to maintain the assets and to generate the revenue income in ordinary course of business. It is recurring in nature. It is necessary to generate revenue income in ordinary course of business. It does not add to value of assets or profit earning capacity. For example. Cost of materials and goods. In case of materials and goods purchased only that part of revenue expenditure which has been consumed or sold during the year, is considered revenue expenditure for the current year and the balance is carried to the next year. Manufacturing expenses such as wages, factory expenses, power and fuel, etc.

By Raman Sachdeva

40

Performa Trading Account

Performa for Trading Account
Particulars To Opening Stock To Purchases Less : Purchase Return To Carriage Inward To Mfg. Expenses To Wages To Gross Profit Total Amount Particulars XXX XXX XXX XXX XXX XXX XXX XXXX By Closing Stock By Gross Loss Total XXX XXX XXXX By Sales Less : Sales Returns Amount XXX XXX

By Raman Sachdeva

41

Performa for Profit and Loss Account Particulars To Gross Loss To To To To To To To To To To To To To To To To To To To To To Amount XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total XXXX Particulars By Gross Profit Amount XXX XXX XXX XXX

Performa Profit & Loss Account

By discount received By interest received By other misc incomes

Travelling Expenses Printing and Stationery Discount allowed Depreciation Office Expenses Salary Interest Telephone Expenses Electricity Expenses Carriage outwards Advertisements Postage Rent Insurance Freight Bad debts General Expenses Rates and Taxes Repairs and maintenance Manager's remuneration Salesmens commission

To Net profit

By Net Loss Total

XXX XXXX

By Raman Sachdeva

42

Performa for Balance Sheet Performa Balance Sheet

Liabilities Capital Add : Net Profit Add : Capital introduced Less: Drawings Less: Capital withdrawn Less: Net Loss Creditors Loan from Bank Other Mortgage loans Bills Payable Outstanding Expenses Income received in advance Amount Assets XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Amount XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXXX
43

Fixed Assets : Building Furniture Vehicles Plant and Machinery Fittings Computers Current Assets Debtors Prepaid Expenses Cash in hand Cash at bank Bills Receivables Advances given Income due but not received Total

Total

XXXX
By Raman Sachdeva

By Raman Sachdeva

44