Money Cycle

8/9/2019 Money Cycle

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WELCOME


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Money Cycle

Where does the money come from?

Owners Funds

Loans-other Peoples money Undistributed Profits

Where does the money go?

Assets

Fixed Assets

Current Assets


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Understanding Financial Statements

Financial statements provide information about an enterprises

revenues, expenses, assets, liabilities and owners equity. Thesestatements are a central feature of accounting because they are theprincipal means of communicating accounting information to thoseoutside an enterprise.

Major financial statements are:

The Balance Sheet:

It presents an enterprises assets, liabilities and owners equity at aparticular time. It summarizes the resources of a firm and theclaims on those resources by owners and creditors of the enterpriseat the time.

The Profit and Loss Account:

It is also called the income statement. It summarizes the results ofa firms operations for a given period by disclosing the revenuesearned and expenses incurred. By measuring the net profit earnedby a business, it indicate its degree of operating success on a given

period.


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BALANCE SHEET

Amounts

owed by the

Business

Things owned

by the

Business

Liabilities Assets

Sources

of

Funds

Uses

of

Funds


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BALANCE SHEET-STRUCTURE

Long-Term Loans

250

Liabilities

Fixed Assets

600

Current Assets

400

Current Liabilities

300

Owners Funds

450

Assets

1000 1000


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Balance Sheet of ABC Ltd. as at 31-3-96

(Rs.000)

Sources of Funds 1995-96

Owners Funds 4,50

Long Term Liabilities 2,50

Current Liabilities 3,00Total Liabilities 10,00

Application of Funds

Fixed Assets 6,00

Current Assets 4,00

Total Assets 10,00


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BALANCE SHEET

Balance Sheet: is a statement containing the assets and liabilities of a

business on a particular date.

Liabilities: the term denotes claims against the assets of a firm.

Current Liabilities: are payable within a year; these could be:

Accounts Payable

Outstanding Expenses

Bank Overdraft

Short Term Loans

Advance Payments receivedLong Term Liabilities: are those liabilities which do not become due for

payment in one year.

Assets: are the resources acquired by a business from the funds made

available by the owners of the business or others.


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BALANCE SHEET

Current Assets: are assets held on a short term basis such as stock,

debtors, cash, and bank balance.

Fixed Assets: are those which are of permanent nature and are held by

the firm on a long term basis, such as land, buildings, plant and

machinery, furniture and fixture etc. These assets help generate revenueand cannot be easily converted into cash.

Fictitious Assets: Formation expenses such as registration charges,

,debit balance in the P&L A/C when shown on the asset side in the case

of a joint stock co.

Contingent Liability: these are contingent upon the happening of an

event such as claims pending settlement in courts; these are shown by

way of a note in the balance sheet.


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Fixed Assets

F.As. represent assets or facilities acquired for carrying on business

operations. FAs acquired with an intention to use and not to sell.

Land

BuildingsPlant & Equipment

Furniture & Fittings

Vehicles


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Current Assets

C.As. represent facilities or assets acquired with intention for sale or

conversion into goods.

Stock

Debtors

Marketable Securities

Cash

Prepayments


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Share means a share in the share capital. Equity Shares are those which

are other than Preference Shares. Equity Share holders enjoy no special

privileges. Residual claimants.

Preference Shares: holders enjoy preference over ordinary shareholders

in terms of dividend, repayment of capital. They get a fixed Dividend.

Cumulative & Non-Cumulative: When dividend, remaining unpaid in anyone year, has to be carried forward and accumulated dividends are paid

before paying equity share holders. If this feature is not there, its is non-

cumulative.

CAPITAL


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Authorized Capital: is the gross amount of authorized share capital

which company is authorized to issue.

Issued Capital: is that part of authorized capital which is issued to the

public.

Subscribed Capital: is that part of the issued capital which is subscribed

by the public.

Paid-up Capital: sometimes issued capital is required to be paid in

installments. The amount that is actually to be paid is known as paid-up

capital.

CAPITAL {contd}


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BALANCE SHEET of ALPHA Ltd. as at 31- 3 1999

Sources Of Funds 1998-99

Shareholders Funds

Ordinary Shares Rs.1,50,000

Preference shares 60,000

Reserves 70,000Retained earnings 1,70,000

Long Term Loans

Govt. Loan 2,70,000

Current Liabilities 2,50,000

Total liabilities 9,70,000

Application Of Funds

Fixed Assets 3,90,000

Depreciation 40,000 Net 3,50,000


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Current Assets 6,10,000

Debtors 2,00,000

Stock 2,70,000

CASH 40,000

Prepayments 10,000

Marketable securities 90,000

GOODWILL 10,000

Total Assets 9,70,000


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Balance Sheet. Second Day

Credit Receipt From

Whom

Debit Payment How

Utilized

Liabilities Assets

Capital

Loans

Public Deposits

Total

4,000

36,000

10,000

50,000

Stock

Furniture

Loose Tools

Loan to Mohan

Cash in Bank

Cash in hand

Total

20,000

10,000

2,000

5,000

10,000

3,000

50,000


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Profit and Loss Account

The profit or loss made by a trader can be found out by comparing

the cost of goods sold with sales value.

Rs.

Purchases 30,000

Purchases returns 5,000Sales 40,000

Sales returns 5,000

Sales 40,000

Less Sales Returns 5,000 35,000

Purchses 30,000

Less Purchases Returns 5,000 25,000

Gross Profit 10,000


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Profit and Loss Account

If a Stock of Rs. 5,000 is left unsold:

Cost of Goods sold = Net Purchases Closing Stock

= 25,000 5,000

= 20,000

Gross Profit = Net Sales COGS

= 35,000 20,000

= 15,000

Gross Profit = Sales COGS

COGS = Opening Stock + Purchases Closing Stock


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Valuation of Closing Stock

Closing stock is valued on the basis of Cost or market price which everis less principle. This valuation follows the convention of conservatism;

expected losses are to be taken into account but not expected profits.

Purchases: includes both cash and credit purchases meant forresale.

In case, a proprietor has himself used certain goods for his personal

purposes, the value of such goods at cost will be deducted from the

purchases and included in the drawings of the proprietor.

If some goods are given by way of free samples, the value of such

goods is charged to advertisement account and deducted frompurchases.

Purchases returned are also deducted.


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PROFIT & LOSS A/C of ALPHA Ltd. for the year ending 31-3-

99

Sales Rs.11,00,000

SLess Cost Of Goods Sold 8,20,000

Gross Profit 2,80,000

LessO

perating Expenses 1, 30,000Depreciation 40,000

Operating Profit [EBIT] 1,10,000

Less Interest on loan 16,200

Income tax Provision 40.300

NET INCOME [ NET PROFIT ] 53,500


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Rules of Debit and Credit - Journal

Every accounting transaction has two sides- the debit and a credit.

These terms are used in journal entries, ledger accounts, trialbalance, trading and P&L A/c. We simply know by convention that left

hand side is debit and the right hand side is credit. There is no

specific meaning of these terms debit & credit.

Conventional Approach:

We follow certain conventions regarding debit and credit these are:

a) The left hand side of every account is debit and the right hand side is

credit.

b) In case of journal and trial balance, the amount column is divided into

two parts. The left part of the amount column is debit & the right partis credit.

c) While passing journal entries, we use the term Dr, the short form of

Debtor against the accounts debited but dont use the word credit

against accounts credited.


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Rules of Debit and Credit Journal [contd]

d) All receipts are debited and all payments are credited.

e) All expenses and losses are debited but incomes and gains are

credited

The Liability side shows credit..


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Accounts are classified as Personal, Real and Nominal,

as follows:

Classification of Accounts

Personal Accounts

Natural Personal

Accounts

Artificial Personal

AccountsRepresentative

Personal Accounts

Real Accounts Nominal Accounts

Tangible Real Accounts Intangible Real Accounts

Impersonal Accounts


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Personal Accounts

There are two types of persons i.e., natural and artificial. Natural persons

are human beings, such as Ram, Mohan, John & Faisal. Artificial

Accounts are related to firms, companies, institutions, factories and

establishments, such as Ram & Sons A/c, Bank of India A/c, Janata Dal

A/c, Bata Shoe Co. A/c, Delhi Univ. A/c, Debtors A/c Creditors A/c &

Drawings A/c

Representative Personal A/cs.: represent a particular person or agroup of persons such as outstanding wages A/c; Here, instead of using

the names ofworkers whose wages are outstanding, we shall be crediting

O/s wages A/c which represents workers to whom wages are payable. In

this way, O/s wages, O/s salaries, Prepaid expenses, Accrued & unearned

Income are representative Personal A/cs.

Rules of Debit and Credit:

Debit the receiver.

Credit the giver.


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Examples: Goods sold to Ram. Ram will be debited as receiver. If Mahadev has given the goods, his A/c will be credited.

Bank A/c will be debited in case of deposits into the bank because Bank

will be the receiver of the deposit. If the amount is withdrawn from the

bank, the amount will be given by the bank. Hence Bank A/c will be

credited.

Impersonal A/cs.

i.e., not personal A/c such as those related to assets, losses, expenses,income and gain. In otherwords, these are Real & Nominal A/cs.

Real A/cs.

Cash A/c, Building A/c, Plant A/c, Furniture A/c, Goods A/c and MachineryA/c etc. are all real A/cs. Real A/cs are also concerned with intangible

assets,- goodwill, patents and trademarks.

Debit what comes in.

Credit what goes out.


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Nominal A/cs.

These are related to income and expenditure, or gains and losses, wages

A/c, Salaries A/c, Rent A/c, Interest A/c, Discount A/c and Advertisement

A/c.

Debit all expenses or losses.

Credit all income or gain.

According to this rule, wages A/c, Salaries A/c, Insurance A/c and Interest

A/c are debited when these expenses are met. Discount A/c, Commission

A/c, Interest A/c are credited whenever these are received. In case of

payment of salaries to workers, salaries are an expense, so salaries A/c

will be debited. While receiving rent from the tenant, rent will be gain andthus will be credited in the Rent Recd. A/c.


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JOURNAL

The word Journal is derived from the French JOUR meaning daily records.

Journal is a book of prime records for small firms. Big concerns prepare

Cash Book, Purchases Book, Sales Book and other Subsidiary Books in

addition to Journal proper. Small firms record their business transactions in

Journal and post them to the concerned ledger accounts. Big Concerns

record their transactions in subsidiary books and journal and post them

from these prime books to respective ledger accounts.

The Journal is subdivided into five columns. These columns are: Date,

Particulars, Ledger Folio, Amount (Debit), Amount (Credit) and narrations.

Format ofJournal

Date Particulars Ledger Folio Amounts

Dr.

Rs.

Cr.

Rs.

(1) (2) (3) (4) (5)


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1. Date: Year may not be repeated and only dates need be mentioned

chronologically.

2. Particulars Write the name of the A/c to be debited and alsow

rite Dragainst the A/c.The a/c to be credited is written below the account to

be debited. We dont write Cr. against this account. After the journal

entry, Narration is written, just to explain the journal entry. Narration is

preceded by the words Being. For can also be used instead of

Being. Presenting journal entries as above is a convention of

Accounting. It should be honoured to establish norms of the subjectand to bring uniformity in the presentation.

3. Ledger Folio (LF.) Journal & Ledger are interrelated, and ledger

posting is based upon journal. A reference to the page no. of the

ledger is, therefore, necessary to facilitate verification.

4&5. Amount (Debit) and (Credit).

Narration: Provides a brief explanation of the transaction. It is

customary to write the narration within small brackets. After the

narration, horizontal line is drawn in particulars column only just to

separate the journal entry from the other entry.


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Transaction 1: Started or commenced business with Rs. 20,000

Journal entry

Cash A/c Dr 20,000

To Capital A/c Rs. 20,000

(Being Commencement ofBusiness

Explanation: Business (entity) has recd. cash as capital to start and

carryout activities. Cash A/c (Real A/c) is to be debited as cash has

come in (Debit what comes in and Credit what goes out). Capital A/c isa personal A/c (the rule: Debit the receiver and Credit the giver) and has

to be credited.


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Transaction 2:

Goods purchased for Rs. 5000 Or

Cash purchases Rs. 5000 Or

Goods purchases from Mohan Rs. 5000

Journal entry

Purchase A/c Dr 5000

To Cash A/c Rs. 5000

(Being Goods Purchased for Cash)

Both goods A/c & Cash A/c are Real A/cs. Goods A/c is be debited

because goods are coming into the business & Cash A/c will be credited

because it is going out of business.


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Transaction 3:

Goods purchased from Mohan Rs. 3000Or

Goods purchases from Mohan on Credit Rs. 3000

Journal entry

Purchases A/c Dr 3000

To Mohans A/c Rs. 3000

(B

eing Goods Purch

ased from Moh

an on Credit)

Explanation: The A/cs.concerned are Goods A/c & Mohans A/c. Goods

A/cs, a Real A/c, will be debited because goods have come in. Mohan A/c

is personal A/c (Debit the receiver and Credit the giver)


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Transaction 5:

Salaries Paid Rs. 3200

Journal entry

Salaries A/c Dr 3200

To Cash A/c Rs 3200

(Being Salaries Paid)

Salaries A/c (Nominal A/c) The rule is Debit all expenses Salaries

being an expense, hence it will be debited. Cash A/c (Real A/c) will becredited.


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Transaction 6:

Rent received Rs. 2000

Journal entry

Cash A/c Dr 2000

To Rent A/c Rs 2000

(Being Rent Received)

Cash A/c debited (Cash recd.) Rent A/c credited Rule is Credit all

income.


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Transaction 7:

Amount received from Mohan Rs. 990

Discount allowed Rs. 10

Journal entry

Cash A/c Dr 990

Disc. A/c Dr 10

Cash A/c debited (Cash recd.). Discount A/c (Nominal A/c) also debited

because discount is an expense.


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Transaction 8:

Amount paid to Shyam Rs. 1980


Journal entry

Shyam A/c Dr 2000


Disc. A/c Rs. 20

(Being amount paid to Shyam & Disc. allowed)

In this case, the firm earned a discount. Disc. A/c (Nominal A/c) will be

credited (Credit the income)


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Transaction 9:

Depreciation on Furniture Rs. 2000

Journal entry

Depreciation A/c Dr 2000

To Furniture A/c Rs. 2000

(Being Depreciation on furniture)

Depreciation A/c debited (Expenses to be debited). Furniture A/c creditedbecause its value amounting to Rs. 2000 has gone out of business.


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Transaction 10:

Interest on Capital Rs. 1000

Journal entryInterest on Capital A/c Dr 1000

To Capital A/c Rs. 1000

(Being Interest on Capital)

Interest on Capital is the expense of the business & hence is to be

debited, Capital A/c is a Personal A/c. There is a modified rule for

Personal A/cs (Capital A/c). debit the debtor and credit the creditor. As

the interest on capital is to be paid on capital so Capital A/c will be

creditor for it and thus credited.

Also, according to the modern approach, debit the increase in

expenses. For the Capital A/c, the rule is debit the decrease and credit

the increase. As the capital is increasing with interest on capital, as such

Capital A/c will be credited.


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Transaction 11:

Outstanding Salaries Rs. 2000

Journal entry

Salaries A/c Dr 2000

To O/S Salaries A/c Rs. 2000

(Being Salaries remaining unpaid)

Salaries A/c (Nominal A/c) will be debited with expenses. Outstandingsalaries is a Personal A/c (representative of employees) & will be

credited.


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Transaction 12:

Prepaid Insurance Rs. 1000

OrUnexpired Insurance

Or

Insurance Paid in Advance

Journal entry

Prepaid Insurance A/c Dr 1000

To Insurance A/c Rs. 1000

(Being insurance paid in advance)Prepaid Insurance A/c is a representative Personal A/c and Insurance A/c

is a Nominal A/c. Insurance Co. will be the debtor of the firm for the

amount paid in advance so Prepaid Insurance A/c will be debited. Since

insurance paid in advance is the gain for the current year. Hence it should

be credited as per the rule of Nominal A/cs Credit the gains.


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Transaction 13:

Amount withdrawn by the proprietor forpersonal or private use Rs. 3000

Journal entry

Drawing A/c Dr 3000


(Being amount withdrawn by the owner )

Drawing A/c is a Personal A/c & will be debited (Debit the debtor) and

Cash A/c will be credited (Cash has gone out of the business).


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Transaction 14:

Goods taken by proprietor forpersonal use Rs. 3000

Journal entry

Drawings A/c Dr 3000

To Purchase A/c Rs. 3000

(Being goods taken by Proprietor)

Drawings A/c will be debited by credit to Purchase A/c (goods have gone

out)


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Transaction 15:

Goods given as charity Rs. 750

Journal entry

Charity A/c Dr 750

To Purchases A/c Rs. 750

(Being goods given as Charity)

Charity is a Nominal A/c, Hence charity is an expense & thereforedebited. Purchase A/c will be credited as goods have gone out of

business.


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Transaction 16:

Mohan becomes insolvent. A first

and final amount of 40 paisa in a rupeeis recd. out of a loan of Rs.2000 from the official receiver

Journal entry

Cash A/c Dr 800

Bad Debts A/c Dr 1200

To Mohan Rs. 2000

(Being Mohan became bankrupt and a first & final compensation of

40 paisa per rupee recd.)

Both Cash A/c & Bad Debts A/c (Nominal A/cs will be debited-debit all

losses. Mohan is a giver and hence should be credited.


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Transaction 18:

An amount previously written off as Bad Debthas now been recovered from Mohan, the

debtor for Rs. 700.

Journal entry

Cash A/c Dr 700

To Bad Debts recovered A/c Rs. 700

(Being recovery ofBad Debt previously written off)

Bad Debts recovered A/c is a Nominal A/c. It will be credited because it is

a gain in the business.


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Certain Important Items

1. Distribution of Goods as FreeSample.

It is not a sale but an expense. Therefore Free Samples A/c will be

debited (Nominal A/c). Purchases A/c will be credited. Goods given as

charity will be valued at cost price.

Journal entry

Free Samples A/c Dr

To Purchase A/c

(Being distribution of goods as free samples)


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Certain Important Items

Loss of Goods

i) Loss of goods by theft: It is a loss (expense). Hence this is aNominal A/c and will be debited. Credit cannot go to Sales A/c

(Since Loss is not a sale). Loss will be credited to Purchases A/c

at cost price only.

Loss by theft A/c Dr .

To purchase A/c

(Being loss by theft)

ii) Loss of goods by Fire

Loss by Fire A/c Dr

To Purchase A/c .

iii) Loss of Cash by Fire

Loss by Fire A/c Dr

To Cash A/c .

(Being loss of Cash by Fire)


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Certain Important ItemsNotes:

Purchase A/c always shows Debit balances. It is debited for both cash &

Credit purchases. In the following cases goods are valued at cost.

i) Goods given as charity

ii) Goods taken by proprietor

iii) Loss of goods by Theft

iv) Free distribution of goods as sample

v) Loss of goods by fire.


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Compound Journal Entries

There may be certain transactions of the same nature on a certain

date. In these case, we prefer to pass only one entry instead of

passing two or more entries. It can be done in either of the following

ways:

i) By debiting one account and crediting two or more accounts.

ii) By crediting one account and debiting two or more accounts.

iii) By debiting two or more accounts and crediting two or more accounts.


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Illustration: Pass necessary journal entries in the following cases:

i) Amount recd. From Mohan Rs. 1980


ii) Amount paid to Azhar Rs. 2920

Discount allowed Rs. 80iii) Salaries amounting to Rs. 3000 and wages amounting to Rs. 5000

were paid on 31-12-92

Journal Entry

Cash A/c Dr 1980

Discount A/c Dr 20

To Mohan 2000

(Being amount recd. From Mohan and discount allowed)


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ii) Azhar Dr 3000

To Cash A/c 2920To Discount A/c 80

(Being amount paid to Azhar and discount allowed)

iii) Salaries A/c Dr 3000

Wages A/c Dr 5000

To Cash A/c 8000

(Being payment ofSalaries & Wages)


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Opening Journal Entries

Business according to going concern concept is supposed to be

carried forward indefinitely. At the end of the accounting year, different

accounts are closed but the business has to be carried on so previous

year assets and liabilities are to be brought into account of the current

year. Passing journal entry in the beginning of the current yearwith

the balance of assets and liabilities of the previous year is opening

journal entry. In this entry, assets accounts are debited because

assets always show debit balance. Liability and Capital account are

credited because they show credit balance


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Opening Journal Entries

Illustration: The firm of M/s Simple and Dimple had the following

balances in their different ledger accounts on January 1, 1993.

Cash Rs. 20,000

Furniture 4,000

Closing Stock 20,000

Building 60,000

Debtors 20,000

Creditors 16,000

Capital 1,08,000


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Pass the opening journal entry:

Journal Entry:

Date Particulars Ledger Folio

Amounts

Dr.

Rs.

Cr.

Rs.

1993

Jan, 1

CashA/c Dr

Furniture A/c Dr

Stock A/c Dr

Building A/c Dr

Debtors A/c Dr

To Creditors A/c

To Capital A/c

Being pervious years

balance brought into books

20,000

4,000

20,000

60,000

20,000

16,000

1,08,000

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