Accounting

Definition

Objectives of

accounting

Is accounting

necessary?

Accounting Systems

Cash system

Single entry system

(Imperfect

accounting)

Double entry system

Golden Rules

Traditional Rules

Modern Rules

Traditional Rules of AccountsType of Account Debit Credit

Personal The Receiver The Giver

Real What comes in What goes out

Nominal All expenses & losses All Incomes & gains

Modern Rules of Accounts

Type of Account Rules for Debit Rules for Credit

Assets Increase Decrease

Liabilities Decrease Increase

Capital Decrease Increase

Income Decrease Increase

Expenses Increase Decrease

Accounting concepts

Are the assumptions underlying the

preparation of financial statements

Accounting Concepts

Business Entity : Business is different

from businessman.

Monetary Measurement : Accounting

process records only those activities that

can be expressed in monetary terms.

Going Concern : It is assumed that the

business entity for which accounts are being

prepared is solvent and viable, and will

continue to be in business in the foreseeable

future.

Dual Aspect : Every transaction in accounting

have two aspects viz. giving and receiving.

Dual Aspect (Example)

Goods purchased on credit from Mr. A

Goods (received)

Mr. A (creditor)

Sold goods to Mr. B on credit

Goods (sold)

Mr. B (debtor)

Accrual

Accrual concept is something that becomes

due,especially an amount of

Money, that is yet to be paid or received at the end of

accounting period.

Example .Salaries of 10000 for a month of december

96 paid in jan 97.

Periodicity

Financial transactions are maintained on a periodic basis.

The liabilities ,assets and capital are measured at a given point of

time. Which is done atleast once on an annual basis.

To do this, income needs to be measured during the intermittent

period.

Example. Janaury 1 to december 31

Matching

• EXPENSES ARE MATCHED WITH REVENUES , FOR A

PARTICULAR PERIOD ,IN ORDER

TO DETERMINE PROFIT OR LOSS OF THE GIVEN PERIOD.

• IF REVENUE EXCEEDS EXPENSE IT IS CALLED PROFIT

OR INCOME, AND IF EXPENSE

EXCEEDS REVENUE IT BECOMES LOSS.

Realisation

THE CONCEPT STATES THAT ,AS TO WHEN REVENUE SHOULD BE

RECORDED IN THE BOOKS OF ACCOUNTS.

REVENUE IS SAID TO BE REALISED WHEN CASH HAS BEEN

RECEIVED OR RIGHT TO RECEIVE CASH HAS BEEN ESTABLISHED

ON THE SALE OF GOODS OR SERVICES.

EXAMPLE. REKHA SOLD GOODS FOR RS 50,000 FOR CASH IN 1996

AND THE GOODS HAVE BEEN DELIEVERED IN THE SAME YEAR.

Conservatism

Consistency

Steps•Journalizing•Posting

Of•Balancing•Trial Balance

Accounting•Income Statement•Position Statement

Journal

Is a book in which the transactions are recorded in

the order in which they occur

Date Particulars Ledger folio

Debit Credit

DateOfthetran.

Name of the account to be debited Dr. To name of the account to be credited

Amount Amount

Subsidiary Journals

Purchase Book

Sales Book

Purchase Return Book

Sales Return Book

Cash Book

Journal Proper

Each bill amount is individually posted to the credit of the Supplier’s account and the total amount is posted to the debit of the Purchases account

Date Bill No

Name of the supplier L.F Amount Description

Purchase Book

Sales book

Each invoice is individually posted to the debit of the customer’s account and the total amount is posted to the credit of the sales account

Date Inv. No

Name of the customer L.F Amount Description

Each Debit note is individually posted to the debit of the Supplier’s account and the total amount is posted

to the credit of the purchase return account.

Date Debit Note No

Name of the supplier L.F Amount Description

Purchase Return Book

Each Credit note is individually posted to the Credit of the customer’s account and the

total amount is posted to the debit of the sales return account.

Date Credit note No

Name of the customer L.F Amount Description

Sales Return Book

Journal Proper

It is a residuary book, in which all those

transactions which cannot be recorded

in any other subsidiary books, are

recorded like depreciation , discounts

allowed and received

Ledger Posting

The process of transferring the transactions recorded in the Journal to the respective accounts is called ‘Ledger Posting’

Dt Particulars J/F Amount Dt Particulars J/F Amount

Balancing

Difference between the total debit & total credit.

Steps involved

1) Make debit & credit total

2) If debit side total exceeds credit side

total then it called “Debit balance”.

3) If credit side total exceeds debit side total

then it called “Credit balance”.

Trial Balance

Is a statement which shows the balance of total amounts of

debit items & credit items of all the accounts in the ledger &

cash & bank balance.

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All accounts of expenses, losses and assets have

debit balances

All accounts of incomes, profits and liabilities

have credit balances

Trading Account

After preparation of trial balance

Matching concept

Balancing figure is gross profit/loss

Profit and Loss A/c.

Income Statement

Specific period of time

Balancing figure is Net profit/loss

Useful for investors

Two Formats

Balance sheet

It is a statement

Balance sheet is an accounting statement which

shows the financial position of all assets and

liabilities of the business as on particular date.

Two sides

Assets

Liabilities

Marshalling of Assets and Liabilities

Marshalling refers to the order in which

the various assets and liabilities are

shown in the balance sheet.

The assets and liabilities can be shown

either in the order of liquidity or in the

order of permanency.

Format of Balance sheet in order of liquidityLiabilities Rs. Assets Rs.

Current liabilitiesBank overdraftBills payableOutstanding expensesSundry creditorsIncome received in advanceLong term liabilities

Secured LoansUnsecured loansCapital

Current assetsCash in handCash at bankBills receivablesSundry debtorsPrepaid expensesAccrued incomeStockInvestments

Fixed assets FurniturePlant and machineryLand and buildingGoodwill

Balance sheet in the order of permanence

Liabilities Rs. Assets Rs.

CapitalLong term liabilitiesSecured loansUnsecured loansCurrent liabilitiesIncomes received in advanceSundry creditorsOutstanding expensesBills payableBank overdraft

Fixed assetsGood willLand and buildingPlant and machineryFurniture and fixturesInvestmentsCurrent assetsStockAccrued incomePrepaid expensesSundry debtorsBills receivableCash at bankCash in hand

Adjustment

Additional information provided after

completion of trial balance for preparation of

final accounts.

Effects

Items in the trial balance have only one effect

For every adjustment item , double effects are

given in the final accounts.