UNIT II INTRODUCTION TO FINANCIAL ACCOUNTANCY

INTRODUCTION MEANING. DEFINITION OF ACCOUNTS BOOK KEEPING OBJECTIVES DOUBLE-ENTRY PRINCIPLES OF ACCOUNTANCY JOURNAL LEDGER CASH BOOK TRIAL BALAENCE FINAL ACCOUNTS TRADING ACCOUNT PROFIT AND LOSS ACCOUNT BALANCE SHEET FINAL ACCOUNTS WITH SIMPLE ADJUSTMENTS

FINANCIAL ACCOUNTING The main object of any business is to make profits. It is may be a business engaged in the purchase and sales of goods or it may be engaged in the production of goods or provision of services whatever be its nature, the main object is to earn profits. A businessman enters into business in order to earn profits. in the businessman wishes to find out how much profit he has made during a given period, he must be able to remember all the transactions that have taken place in his business. But it is not possible for any businessman to remember all the transactions that have takes place in his business. So he has to record them in his books of accounts. Book-keeping is the art of recording all business transactions in the books of account maintained by businessman for that purpose. Keeping a separate book to recording all the business transaction by using principle of accounting is also called Book-keeping. Accounting is an art as well as sciences of identifying, analyzing, recording, classifying and summarizing of business transactions which are of a financial character and are expressed in terms of money. It also includes interpretation aspect of the recorded information and the result of accounts can be submit to the require persons in the business (Accountants) Objectives of Book keeping & Accountancy: To ascertainment of financial position of the business organization. To determine the profit and loss of organization To knowing the information about capital employed in the business. To know the value of asset of the organization Calculation of amounts due to and due by others. To know how much tax to pay to the government To comparison between the current year and the previous years records. To plan the organization To make the financial decisions of the business
DOUBLE ACCOUNTING SYSTEM

Double entry system of Book-keeping is simple and universal in its application. It has the test of four hundred years continuous use. It may be claimed that it is the only system worthy of adoption by the practical businessman. To understand the system of double entry system of bookkeeping all that we need to remember is the fundamental rule:

Debit the account which receives the benefit. Credit the account which gives the benefit
Types of account 1) Personal Account 2) Real Account 3) Nominal Account

RULES FOR DEBIT & CREDIT. 1) Personal Account: - This account deals with the individuals of the organization these includes accounts of natural persons in varied capacities likes suppliers and buyers of goods, lenders and borrowers of loans etc. Debit the receiver

Credit the giver 2) Real Account: - This account deals with the group of individuals of the organization these
include combinations of the properties or assets are known as real account.

Debit what comes in Credit what goes out 3) Nominal Account: - Nominal accounts relate to such items which exist in name only. These items pertain to expenses and gains like interest, rent, commission, discount, salary etc, Debit all expenses and losses Credit all incomes and gains
JOURNAL In the early evaluation of book-keeping traders used to record the business transactions in a simple manner in the Waste book or Rough book. The waste book is a book in which a businessman briefly notes down each transaction as soon as it takes place. Transaction is writing in this very first so it is also called Book of Prime or First Entry Book. Journal format
Date Particulars Dr Amount Cr Amount

LEDGER Ledger is the secondary book of accounts all business transactions are recorded in the first instance in the journal, but they must find their place ultimately in the accounts in the ledger in a duly classified form. This ledger are also called final entry book. OR Transferring of all journals in to accounts by using accounting principles is called ledger. DR ledger format CR
Date Particulars
L F.N

Amount Date Particulars

LFN

Amount

CASH BOOK Every businessman receives cash and pays cash practically every day. All the receipts and payments of cash are recorded in a separate book called the Cash book in modern times cash includes not only legal tender money like notes and coins but also other forms of money like cheque bank, drafts. Etc.
KINDS OF CASH BOOKS

The following are the most common ones Simple or single column cash book Two or Double column cash book Three or Triple column cash book Single Column Cash Book: The single column cash book are also called simple cash book it has only one amount column representing cash with the office. This cash book is ruled just like on ordinary ledger account. The following is the format of simple cash Book. DR Cash Book CR
Date Particulars Amount Date Particulars Amount

Double Column cash Book: This book contains one extra column for discount on either side of the cash book in addition to the usual columns of a simple cash book. Since cash received and discount allowed on the debit side of the cash book. Similarly as discount received and cash paid on the credit side of the cash book. As there will be two amount column now one for the discount and the other for cash, the cash book of this type is referred to as two column or double column cash book. The format is given below. . DR Double Column cash Book CR A R
Date Particular Dis Amount Date Particulars Dis Amount

Triple Column Cash Book: In case the business man maintains an account with the bank the above mentioned two kinds of cash book do not suit his need or requirements cash book should keep a full record not only of cash and discount but also of bank transactions for this purpose a Bank column is added to either side of the cash book just after cash column. As this cash and Bank column it is called three columns Cash Book. The format of a three column cash book is given below.

DR
Date Particular

Triple Column Cash Book

Dis C B Date Particulars Dis C

CR
B

** C: CASH B: BAN
CONTRA ENTRIES

Contra, in Latin, means the other side. If the double entry of a transaction is complete in the cash book itself such entry is called Contra Entry contra entry arises only when cash account and bank account are simultaneously involved in a transactions. It happens only when either cash is deposited in the bank or cash is withdrawn from it for office use. In both cases entries have to be made in cash as well as Bank columns. TRIAL BALANCE Trail balance is a statement containing closing balances of the ledger accounts. It is prepared to verify the arithmetical accuracy whether the totals of the debit column and the credit column are equal or not. When all the ledger accounts are balanced the account which is showing debit balance will be entered on debit side of trial balance and the account which is showing credit side will be entered on the credit side of trial balance. The totals of debit side must be equal to the total of credit side. However, even if the two sides are equal it does not show the conclusive proof of the correctness of books.

Characteristic of a Trial Balance:

1. It is a statement prepared in tabular form. 2. Trial balance is a statement of closing balance but it is not an account. It is prepared to verify the arithmetical accuracy.

3. Preparation of trial balance will leads to preparation of final accounts. General format of Trial Balance Particulars Opening stock Purchases Carriage inwards wages All factory & manufacturing exp (factory rent factory Insurance factory lighting.) Oil, water. Gas. Coal. Fuel, power excise duty.octroi trade expenses Salaries Rent rates & taxes Advertising Audit fees, legal charges Insurance Bad debts Repairs Discount allowed Printing& stationary Postage& telegrams Commission paid (dr) Interest on capital Interest on loan Carriage outwards All depreciations All management exp All office exp General exp Discount on debtors Selling exp Cash in hand Cash at bank Debtors Furniture Buildings Good will patents Copy rights. Bills receivable Machinery Motor car Freehold premises All fixed variable assets Closing stock Debit Particulars Sales Commission receive bad debts reserve interest received commission receiv interest on drawing discount on creditors Capital Bank loan Bank overdraft Income received in advance Creditors Bills payable All other loans Credit

XXXX FINAL ACCOUNTS

XXXX

One of the main objects of maintaining accounts is to find out the profit or loss made by the business during a period and to ascertain the financial position of the business as a given date. In order to know the profit or loss made by the business, Trading and profit and loss Account is prepared. The position of the business on the last date of the financial year will be revealed by the Balance sheet. The trading and profit and loss account and balance sheet prepared by the businessman at the end of the trading period are called Final accounts. In order to ascertain its income and also to assess the position of assets and liabilities statements are prepared are know as financial statement. These statements are also called with their traditional name as Final Accounts Final statements are divided in two parts. i.e., income statements and position statements. The term income statement is traditionally known as Trading and Profit and Loss account and position statements are known as Balance sheet. Preparation of Final Accounts: There are three following stages of preparing final accounts of a trading concern. Trading Account Profit and Loss Account Balance Sheet Trading Account:Trading account is prepared mainly to know the Profitability of the goods brought and sold by the businessman. It show the result of trading i.e. buying and selling of goods called Gross Profit or Gross Loss The difference between the sales and cost of goods sold is Gross Profit or Gross Loss Trading account is prepared in Tform just like any other accounts expect the date and journal folio column are not provided. Profit and Loss Account:The profit and loss account is an account, which shows the net Profit or net loss of a business for a particular period. All indirect expenses such as Administrative or Management expenses, selling and Distribution Expenses. Financial expenses and other items such as depreciation, etc are taken debit side. Gross profit and all other income items are taken credit side.

Such as interest received, discount received, ect. The difference between two sides is either Net profit or Net Loss, which is transferred to Capital Account. Balance Sheet: Balance sheet is prepared to know the financial position of a business on a particular date. It is a statement, which shows the assets and liabilities of a business as on a particular date. It shows what a business owns and what it owes Balance sheet is a statement and not an account it does not have Debit and Credit sides. It is divided in to two sides left side and right side. The left side is called the liabilities side and the right side is called the assets side. ADJUSTMENTS An adjustment is a transaction which has not been taken into consideration while preparing the trial balance. But now considered for the purpose of preparing final accounts If any item of adjustment appears outside the trial balance. it will e shown at two places in the final accounts. The treatment of such item has been shown as follows. Treating of Adjustments The treatment of such main items is as follows
1) CLOSING STOCK IN THE TRADING ACCOUNT CR SIDE IN THE BALANCE SHEET ASSET SIDE 2) OUTSTANDING WAGES IN THE TRADING ACCOUNT ADD TO WAGES IN THE BALANCE SHEET LIABILITIES 3) OUTSTANDING SALARIES IN THE TRADING ACCOUNT ADD TO SALARIES IN THE BALANCE SHEET LIABILITIES SIDE 4) PREPAID INSURANCE IN THE P & L A/C LESS FROM INSURANCE IN THE BALANCE SHEET ASSETS SIDE 5) INTEREST ON CAPITAL IN THE P & L A/C DR SIDE

IN THE BALANCE SHEET ADD TO CAPITAL

PROFORMA OF FINAL ACCOUNTS

Dr
Particulars

Trading and Profit & Loss Account

Amount Particulars

Cr
Amount

To opening stock To purchases Less: pur. Returns To carriage inwards To wages Add. Out standings To all factory & manufacturing exp (factory rent factory insurance factory lighting.) To oil, water. Gas.

By sales Less: sales returns By stolen goods By closing stock By Gross loss (transfer to p &l a/c

To coal. Fuel, power To excise duty.octroi To trade expenses To Gross profit (transfer to p &la/c) To Gross profit To salaries Add outstanding To rent rates & taxes To Advertising To Audit fees, legal charges To Insurance Less prepaid insurance To bad debts To repairs To discount allowed To printing& stationary To postage& telegrams To commission paid (dr) To interest on capital To interest on loan To carriage outwards To all depreciations To all management exp To all office exp To general exp To discount on debtors To selling exp To Net profit (transfer to capital a/c)

By Gross loss By commission received By bad debts reserve By interest received By commission received By interest on drawings By discount on creditors

By Net loss (transfer to capital a/c)

Liabilities

BALANCE SHEET Amouts Assets

Amounts

Capital Add :Int on cap Add :Net profit or Less: Net loss Less: drawings Less: Int on drawings Bank loan Bank overdraft Income received in advance Creditors Less Discount on creditors Bills payable All other loans Outstanding wages, salaries

Cash in hand Cash at bank Debtors Less Bad debts Furniture Less depreciation Buildings Less depreciation Good will patents Copy rights. Bills receivable Machinery Less Depreciation Motor car Less depreciation Prepaid expenses(insurance) Freehold premises All fixed variable assets Closing stock

Self Assessment Questions 1. Give a brief account on the important records of Accounting under Double Entry System and discuss briefly the scope of each? 2. Explain the purpose of preparing the following accounts/statements and also elaborate the various items that appear in each of them. a) Trading Account b) Profit & Loss Account c) Balance Sheet 3. Explain the following concepts and illustrate their treatment with imaginary data. a) Depreciation b) Prepaid expenses c) Reserve for bad and Doubtful debts d) Income received in advance 4. Explain the following adjustments and illustrate suitably with assumed data. a) Closing stock b) Outstanding expenses

c) Prepaid Income d) Bad debts 5. (a) Define the concepts Accounting, Financial Accounting and Accounting System. (b) Explain the main objectives of Accounting and its important functions. 6. What is three columnar cash book? What is Contra Entry? Illustrate 7. What do you understand by Double Entry Book Keeping? What are its advantages? 8. What is Trial Balance? Why it is prepared? Illustration: I Journalize the following transactions and prepare a cash ledger. 1. Ram invests Rs. 10, 000 in cash. 2. He bought goods worth Rs. 2000 from shyam. 3. He bought a machine for Rs. 5000 from Lakshman on account. 4. He paid to Lakshman Rs. 2000 5. He sold goods for cash Rs.3000 6. He sold goods to A on account Rs. 4000 7. He paid to Shyam Rs. 1000 8. He received amount from A Rs. 2000 Illustration II Journalize the following transactions and post them into Ledgers Jan 1. Commenced business with a capital of Rs. 10000 ,, 2. Bought Furniture for cash Rs. 3000 ,, 3. Bought goods for cash from B Rs. 500 ,, 4. Sold goods for cash to A Rs. 1000 ,, 5. Purchased goods from C on credit Rs.2000 ,, 6. Goods sold to D on credit Rs. 1500 ,, 8. Bought machinery for Rs. 3000 paying Cash ,, 12. Paid trade expenses Rs. 50 ,, 18. Paid for Advertising to Apple Advertising Ltd. Rs. 1000 ,, 19. Cash deposited into bank Rs. 500 ,, 20. Received interest Rs. 500 ,, 24. Paid insurance premium Rs. 200 ,, 30. Paid rent Rs. 500 ,, 30. Paid salary to P Rs.1000 Illustration-III During January 2003 Narayan transacted the following business. Date Transactions Amount

2003 Jan.1 Commenced business with cash ,, 2 Purchased goods on credit from Shyam ,, 3 Received goods from Murthy as advance for goods ordered by him ,, 4 Paid Wages ,, 5 Goods returned to shyam ,, 6 Goods sold to Kamal ,, 7 Goods returned by Kamal ,, 8 Paid into Bank ,, 9 Goods sold for Cash , 10 Bought goods for cash , 11 Paid salaries , 12 Journalize the above transactions and prepare cash Account Illustration- IV Record the following transactions in the suitable form of Cash book 2004 Jan 1 2 3 5 8 10 12 14 15 Started business with cash Paid for purchases of Machinery from M/s Ram and Co Paid insurance premium Paid rent for the month of Dec 2003 Paid cash for purchase of goods Sold goods for cash Drew cash for personal use Paid to Arun Rs.400 for full settlement of Rs. Received Cash from Karuna Rs. 1000 in full settlement of Rs. Also prepare Cash Account
Illustration V:

40000 30000 3000 500 200 10000 500 500 750 1000. 700 1000

20000 3000 200 500 3000 4000 200 500 1050

From the following list of balances prepare a Trial Balance as on 30-6-2003 i ii iii iv v vi vii viii ix x xi xii Illustration VI Opening Stock Wages Sales Bank loan Coal coke Purchases Repairs Carriage Income tax Debtors Leasehold premises Cash in hand 1800 1000 12000 440 300 7500 200 150 150 2000 600 20 xiii xiv xv xvi xvii xviii xix xx xxi xxii xxiii Plant Machinery tools Lighting Creditors Capital Misc. receipts Office salaries Office furniture Patents Goodwill Cash at bank 750 180 230 800 4000 60 250 60 100 1500 510

Prepare a Trial Balance from the following Data for the year 2003. Rs. Freehold property 10800 Discount received Capital 40000 Returns inwards Returns outwards 2520 Office expenses Sales 80410 Bad debts Purchases 67350 Carriage outwards(sales exp) Depreciation on furniture 1200 Carriage inwards Insurance 3300 Salaries Opening stock 14360 Book debts Creditors for expenses 400 Cash at bank Creditors 4700

Rs. 150 1590 5100 1310 1590 1450 4950 11070 2610

Illustration: VII The following is the Trial Balance of Abhiram, was prepared on 31st March 2006. Prepare Trading and Profit& Loss Account and Balance Sheet. Debit Rs Credit Rs. Capital -----22000 Opening stock Debtors and Creditors Machinery Cash at Bank Bank overdraft Sales returns and Purchases returns Trade expenses Purchases and Sales Wages Salaries Bills payable Bank deposits TOTAL 10000 8000 20000 2000 -----4000 12000 26000 10000 12000 ------6600 110600 -----12000 ------------14000 8000 ------44000 ------------10600 ------110600

Closing Stock was valued at Rs.60, 000 Illustration VIII Prepare Trading and Profit &Loss A/C for the year ended 31.12.2001 and a Balance Sheet as on that date from the following Trial Balance. Dr, Rs. Cr, Rs. Furniture 6500 Plant and machinery 60000 Buildings 75000 Capital 125000 Bad debts 1750 Reserve for bad debts 3000 Sundry debtors 40000 Sundry creditors 24000

Stock(1.1.2001) Purchases Sales Bank over draft Sales returns Purchase returns Advertising Interest Commission received Cash in hand Salaries General expenses Car expenses Taxes and insurance Closing stock valued at Rs. 50000

34600 54750 154500 28500 2000 1250 4500 1180 3750 6500 33000 7820 9000 3500 340000

340000

Illustration VIII The following figures have been extracted from the records of Fancy Stores a proprietary concern as on 31.12.2003. Rs. Rs. 15000 Insurance Furniture 6000 54000 Rent Capital A/C 22000 3000 Sundry debtors Cash in hand 60000 50000 Opening stock Sales 600000 134600 Fixed deposits Advertisement 10000 5000 Postages & Telephone Drawings 3400 3000 Provision for bad debts Bad debts 2000 10000 Printing and stationary Cash at Bank 9000 300000 General charges Purchases 13000 19000 Salaries Sundry creditors 40000 41000 Deposit from customers Carriage inwards 6000
Prepare Trading, Profit and loss account and Balance sheet after taking into consideration the following information.

a) Closing stock as on 31st March was Rs. 10000. b) Salary of Rs. 2000 is yet to be paid to an employee. Illustration IX Prepare Trading and Profit &Loss A/C for the year ended 31.12.2001 and a Balance Sheet as on that date from the following Trial Balance. Debit Rs. Credit Rs. Purchases 45000 Debtors 60000 Interest earned 1200 Salaries 9000 Sales 96300

Purchase returns Wages Rent Sales returns Bad debts return off Creditors Capital Drawings Printing and stationary Insurance Opening stock Office expenses Furniture and fittings GRAND TOTAL Adjust the following a) Closing stock Rs.20000 b) Write off furniture @ 15% per annum.

1500 6000 4500 3000 2100 36600 31800 7200 2400 3600 15000 3600 6000 167400

167400