Basic Accounting Level II

By

Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM

Global Technology Services LLc, UAE
Email:sivakumar3009@gmail.com

Agenda
What is Accounting
Mode of Learning Accounting
Accounting and Finance - Difference
Accounting Concepts / Conventions
Accounting Events
Rules of Accounting
Preparation of Financial Statements
A Simple Case Study
2

What is Accounting
JOURNAL

PAYMENT

Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Financial Statement
Assets
at December 31, 1997
Vision Enterprises
Cash
$4,456
Account Receivable
$5,714
Financial Statement
Land Assets
at December$31,981
1997
--------- $4,456
Cash
Total Assets
$11,151$5,714
Account Receivable
======$ 981
Land Assets
--------- $4,456
Cash
Liability
Total
Assets
Account Receivable $3,830$11,151$5,714
Account
Payable
$ 416======$ 981
Land
Notes Payable
----------------Liability
$4,246 $3,830$11,151
Total
Assets
Account
Payable
Total Liability
======$ 416======
Notes Payable
$2,365
--------Liability
Stockholders Equity
$ 367$4,246 $3,830
Account Payable
Contributed
Capital
Total Liability
--------- ======$ 416
Retained Earnings
Notes Payable
$2,732 $2,365--------Total Stockholders
Stockholders Equity
======$ 367$4,246
Equity
Contributed
Capital
Total Liability
--------- ======
Retained Earnings
$2,732 $2,365
Total Stockholders
Stockholders Equity
======$ 367
Equity
Contributed Capital
--------Retained Earnings
$2,732
Total Stockholders
======
Equity

?
Accounting is defined as the art of Recording,
Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements

What is Accounting

Accounting is the art of recording, classifying and Summarizing

financial transactions in the Preparation of Financial Statements

Recording refers to creating Journal entry for every financial

transaction with Debit and Credit amounts.
Classifying
refers to Classifying each of the Debit / Credit
Transaction to Capital or Revenue and Asset, Liability, Revenue or
Expense

Summarizing refers to Grouping the Transactions of Asset, Liability,

Revenue and Expenses and preparing the Financial Statements
(Trading, Profit and Loss Account and Balance Sheet)

In case of
Trading, Manufacturing and Customer Service oriented
Organization, the sum of all income and expenses is referred to
as Profit and Loss account
Social Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as Income
and Expenditure account .
Note:- Trial Balance is not a Financial Statement. It is only a summary
of all Debit and Credit Transactions.

Mode of Learning Accounting

Change your mindset that accounting means

only Debit and Credit
Do not blindly learn Accounting Rules and
apply the rules of Debit and Credit
The Best way to Learn Accounting is

Learn the Accounting Concepts

Understand the Accounting Conventions
Classify the Accounting Event
Apply the Accounting Rules
Record, Classify and Summarize the Journal
You are Confused. Am I right?

Do not become panic and move forward, you will understand

Mode of Learning Accounting

Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
Understand Accounting Conventions
(Three major conventions)
Classify the Accounting Events
(Capital, Revenue, Deferred Revenue Expenditure)
Apply the Accounting Rules
(Personal, Real and Nominal Rules)
Record the Transaction as a Journal
(Entering the Debit and Credit Side of Transaction)
Classify the Transaction
(Asset, Liability, Revenue or Expense)
Summarize the Transaction
(Prepare Trial Balance, Trading, P&L and Balance Sheet)

Finance and Accounting - Difference

Finance

Accounts

Procurement and Utilization of

Funds

Recording of an Accounting
Event

Leads to Investment Decisions

Expressed in Monetary Terms

Financing Decisions

Recording , Classifying and

Summarizing Transactions

Futuristic

Preparation of Financial
Statements (Trading, Profit and
loss Account and Balance
Sheet)

Cost of Capital

Historical

Cash Flow / Fund Flow

Compliance with Statutory

Matters like companies Act,
Income Tax Act, Sales Tax Act
Etc.,

Project Appraisal
Ratio Analysis

Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)

The Concepts and conventions of accounting are

developed by IASC (International Accounting Standards
Committee) which is in-charge of releasing International
Accounting Standards (IAS)

The IASC Decides the preferred Accounting practices

worldwide and encourages the worldwide acceptance

There are 41 International Accounting Standards

Now IFRS (International Financial Reporting Standards)

and SOX (Sarbanes Oxley) Act gain more importance
which came up from US GAAP and UK GAAP
8

Difference between Concepts and Conventions

The Accounting Concepts / Principles evolved out of the

Practice and Procedures followed by different countries
and later on established by the International Statutory
Accounting Bodies like The Institute of Chartered
Accountants of India, The Institute of Chartered
Accountants of England and Wales etc to become an
Accounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell this
has evolved out of standard Practice followed by several
countries while preparing the Trading, Profit and Loss
Account and Balance Sheet.

The Accounting Conventions / Practices are basically

assumptions and expected to be followed while
preparing the Financial Statements.
9

Accounting Concepts / Principles

Business Entity Concept
Money Measurement Concept
Dual Aspect Concept
Cost Concept
Accounting Period
Conservatism
Realization Concept
Matching Concept
Materiality Concept
Objectivity

10

Accounting Conventions / Practices

Going Concern
Consistency
Accrual

11

Accounting Concepts
Business Entity Concept
Accounts can be kept only for Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.
Accounts need to be maintained separate from the Owners and
providers of capital. If you understand the simple logic, then you know
30% of Accounting. Just Recall Fundamentals of Accounting from
Oracle Perspective Level I Example of Siva, Oracle and Bank.
See Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Material

12

Types of Entities
Type of Organization

Example

Sole Proprietary

Siva & Co

Partnership Firm

Ganesan Bros

Private Company

Oracle India Pvt Ltd (A Private Company in which

shares are not traded in Stock Exchange and
members cannot exceed 50)

Public Company

Hindustan Unilever Ltd (A Public Company in

which Shares are traded in Stock Exchange)

Closely Held Company

Cadbury India Ltd (A Public Company in which

shares are not traded but shares are held by more
than 50 persons)

Trust

Hutchinson Private Trust

Society

Sembur Co-op Society

Association of Persons

ICAI, ICWAI, ICSI, Rotary Club

Body of Individuals (one Man Corp)

President of India, Governor of State

Any other Legal Entity (HUF)

A Hindu Undivided Family Jointly holding the

Investment and Properties for the benefit of
Family members.

13

Accounting Concepts

Business Entity Concept

Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole
Proprietor/Individual Owner of the Business. The entire capital amount for the
Business is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of books.
One set of books for the purpose of Textile Business in which, Business
owes you equivalent to the Capital Provided (Capital + Profit earned) or
(Capital Losses)
In your own Books the amount of Capital invested will be shown as an
Investment in Business as an Asset. This need not be maintained as a Normal
Set of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.
Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with
Bank of America and You have Bank Account with Citi Bank and the salary at end
of every month is transferred from Bank of America to Citi Bank. How many
accounting Entities involved in this case?
If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi
Bank)
Ex 3: You run your own Business in Software Consulting and your Friend has
agreed to provide a Loan of 50000 USD which he goes and deposit directly into
your Bank account - How many accounting Entities involved in this case?
If you say 3, You are right, it is only Three. (You, Your Friend and Bank)

14

Accounting Concepts
Money Measurement Concept
Record should be made only of that information which can be expressed in
Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be
recorded
unless a Value of Furniture is known in monetary value
Ex 2. Very Famous Indian Example Rama Killed Ravana.
Accounted? NO
Ex 3. My wife Loves me so much Can this be accounted?
A Big NO (Hahhah). This is Flaw in Financial Accounting as it
understand the human values

Can this be

does not

Ex 4. My Father in Law gave his Personal Property to start

my Business.
Can this be Accounted Yes (If the Value of the Property is provided)

15

Accounting Concepts
Money Measurement Concept
A Normal Doubt comes to your mind in the first and fourth example
in previous slide how to get the value. We should not be taking the
Purchase value, but we should take the Market value on the date of
transferring the assets to Business. This is an exception to cost
concept only in case of transfer to another business
Ex 5: Siva started his software consulting Business with his own
Property (Cost Price 1 Million USD and Market Value 1.5 Million
USD) and Furniture's Cost price 50000 worth Market Value 30000
USD
- In this case, You can record Siva Capital (1530000) and Building
1500000 and Furniture 30000 as Assets

Liabilities
Siva Capital
Total

Assets
1530000
1530000

Building
Furniture
Total

1500000
30000
1530000

16

Accounting Concepts

Dual Aspect Concept

The Value of the Assets owned by the concern is equal to the claims on
the Assets
ASSETS = LIABILITIES + OWNERS EQUITY
OWNERS EQUITY = ASSETS LIABILITIES
LIABILITIES = ASSETS OWNERS EQUITY
Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000

Asset

Owners Equity + Liabilities

Liabilities

Assets Owners Equity

Owners Equity

Assets - Liabilities
17

Accounting Concepts

Cost Concept
Assets are always shown at their Cost and not at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be
recorded only at Rs.5 Lacs even though Market value
may be lower say Rs.4 Lacs or Higher Rs.6 Lacs than
the Cost Price
Ex 2. You are acquiring a Business for a Million
USD and its value as per Books is 0.8 Million, then
the difference of 0.2 Million is termed as Goodwill
and you should records the assets and liabilities at
the price you have paid for the Business (i.e.) 1
Million
18

Accounting Concepts
Accounting Period
Accounting measures activity for a specified interval of time, usually a year
(e.g) Calendar Year (Jan07-Dec07)
Fiscal Year
(Apr07-Mar08)
Choosing the Accounting period is the entities choice, but there are legal
rules like Companies Act and Income Tax Act which prescribes the period
in which the entity has to report to them.
Remember still Entities can have different accounting period for their own
Internal Management Reporting
A Company in India can have for Company Law Purpose (Jan-Dec) Year
and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting
(Jul-Jun) Year
Note: The Entities cannot change their accounting period without getting
proper approval only in case of Companies Act and not possible with
Income Tax Authorities.

19

Accounting Concepts
Conservatism
Anticipate no Profits but provide for all possible losses.
Accountants are by nature Conservative and also to protect the interest of the
Shareholders and Creditors it is required to provide for all losses.
Ex 1. A pharmaceutical Company going to Loose the case filed for Patent
Right filed for a medicine
Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract.
Note: This rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Losses
Ex 3: You are a Government Company and there is a possibility that
Government will withdraw the subsidy for Fertilizers in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4: The Government is likely to increase the Price of petrol which is one of
the essential input for your business, then you cannot provide for losses.
Ex 5:There is a Fire in your in your Factory and Goods were lost and the
Goods are insured, then the claim you submitted can be booked to the
satisfaction of Insurance Company and Auditors.

20

Accounting Concepts
Realization Concept
The Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or realized.
Realization is assumed to occur when the seller receives cash or a
claim to cash (receivable) in exchange for goods or services
Ex 1: A Sales invoice for Rs.1 Million
Credit Note for Rs.15000 received
Ex 2: For instance, if a company is awarded a contract to build an
office building the revenue from that project would not be recorded in
one lump sum but rather it would be divided over time according to the
work that is actually being done.

21

Accounting Concepts
Matching Concept
When an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting period
Ex 1: Generally Employees Salaries are paid for the previous month at
the beginning of the next month. But they have rendered their
services to produce goods and sold and Sales revenue is recognized
in previous month. So to match the cost with the revenue earned, we
need to make provision for Salaries in previous month itself. (i.e.)
March Salary paid in April, but a Salary Payable provision will be
made in March itself
EX 2: Insurance Premium paid for Jan- Dec whereas your accounting
period closes on March. In this case only three months premium need
to be treated as Expense and balance 9 months treated as advance
premium paid as an asset

22

Accounting Concepts
Materiality concept
Insignificant events would not be recorded, if the
benefit of recording them does not signify the
cost
Ex: A calculator worth Rs.500 not recorded asset
rather than charged off as an Expense even
though the benefit is enduring in nature.
This concept need to read in conjunction with
accounting events which signifies the transaction
into Capital, Revenue and deferred revenue
expenditure.
23

Accounting Concepts
Objectivity Concept
An Evidence of the happening of the Transaction should support
every Transaction in the form of paper. External Evidence is
considered to be more authenticated proof than Internal Evidence.
This rule is more important from Audit perspective as Auditors
always consider and bound to get more external evidences than
internal Evidences.
Ex 1: Third Party Evidence (Credit Note from Supplier)
Ex 2: Auditors Collect Statements from Customer and Suppliers for
the amount showing as Outstanding from Customers and amounts
Payable to Suppliers.
Ex 3: The Sales Invoices alone is not considered as an objective
evidence unless it is not supported by Delivery challan and
acknowledgement of Goods Received by Customer.

24

Accounting Conventions
Going Concern
Accounting Records , Events and Transactions on the
assumption that the entity will continue to operate for an
indefinitely Long period of time
Ex. An Entity will not be started with an intention to close
within the specified time period. Business is always not
started with an intention to close and it is expected to
continue forever.

25

Accounting Conventions
Consistency
The Accounting Policies and methods followed by the
company should be the same every year
Ex 1. Period should not be changed frequently from JanDec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then
that Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.
26

Accounting Conventions
Accrual
In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments
(NSC
interest), Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)
The Company Law / Income Tax Act Prescribes all
Companies to follow Accrual Basis of Accounting except
for Professional Firms and Government Organizations
which are allowed to follow Cash Basis of Accounting.
27

Classification of Accounting Event

Capital Item: Any expenditure that creates an asset, for

example:

Purchase of plant or machinery

Improvements to assets that increase their
usefulness or extend their effective useful life of the
asset
Expenditure incurred in transporting an asset to its
site and preparing it for use.

28

Classification of Accounting Event

Revenue Item: An Income or Expenditure and the

benefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set up
for the Set of Books
Ex: Salary and wages, Printing and Stationery, Sales
Revenue, Interest Income, Salary Payable, Bonus
Payable, Tax Payable etc.,
In Simple terms this is an event which generates
revenue and the related cost to earn the revenue are
accounted as expense.

29

Classification of Accounting Event

Deferred Revenue Expenditure: It is neither a Capital

nor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation of
an asset.
Ex 1: Advertisement Expenditure the benefit of which
is likely to be obtained over a period more than one
year (E.g.) PepsiCo Pays USD 2 Million to Sachin
Tendulkar for an Advertisement Contract for two
Years and benefit of which is expected to be for four
years
Ex 2: Royalty paid to the author of the book for five
years
30

Rules of Accounting
Accounts

Personal
Debit the Receiver
Credit the Giver
Ex: Sole Prop, Company

Impersonal

Real

Debit what comes in

Credit what goes out
Ex: Cash, Bank, Building,Inv

Nominal
Debit Expenses and Losses
Credit Revenue and Income
Ex: Sales, Power, Rent
31

Application of Accounting Rule

Check whether is there a Money Transaction Involved?

Is that transaction affects your set of books?
Check whether does the transaction falls under which accounting
period.
Does the transaction involve a personal account (i.e.) Siva as a
Person or a Company or any other entity as mentioned in
Business entity concept
Is that person is receiver or giver in the transaction and
accordingly debit or credit the person account.
Does the transaction involves any Cash inflow or Cash outflow?
(i.e.) Cash or Bank involved
If there is no cash involvement then the choices are as follows

Both can be real ( Debit and credit both real accounts)

One real and one nominal (Either Debit/Credit for Real or Credit/ Debit
for Nominal accounts)

32

Accounting Rule of Thumb

Nature of Transaction

Increase

Decrease

Asset
Liability
Revenue
Expense
Profit

Debit
Credit
Credit
Debit
Credit

Credit
Debit
Debit
Credit
Debit

Losses

Debit

Credit

33

Combination of Rules
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Employee,
Payment to Supplier

Dr Real A/c
Cr Real A/c

Dr Real A/c
Cr Personal A/c
Ex:Capital invested, Payment Received
from Customer

Dr Real A/c
Cr Real A/c

Ex:Purchase of Inventory by Cash

Ex: Cash withdrawal or Deposit

Dr Real A/c
Cr Nominal A/c

Dr Nominal A/c
Cr Real A/c

Ex: Interest Recd by Cash, Cash Sales

Ex: Rent Paid by Cash

Dr Personal A/c
Cr Nominal A/c

Dr Nominal A/c
Cr Personal A/c

Ex: Interest Accrued on Investment,

Dividend accrued on Investment

Ex: Hire Purchase Charges accrued, Interest

Payable, Salary Payable

34

Combination of Accounting Rules

Debit

Combination Personal

Credit

Real

Nominal

Personal

Real

Nominal

X
35

Combination of Accounting Rules

Both Debit and Credit cannot be Personal Accounts

EX 1: Siva paid Cash to Ajay. The Entry Cannot be

Ajay A/c Dr
Siva A/c Cr

The Correct entries are as follows. In Ajay set of Books

Cash A/c Dr

1000

Siva A/c Cr

1000

In Siva set of Books

Ajay A/c Dr

1000

Cash A/c Cr

1000

Similarly Both Debit and Credit cannot be Nominal Accoun

Note: Remember this important aspect and therefore You

will not commit any mistake in Debit and Credit

36

Recording of Accounting Transactions

Recording of an Accounting event is known as Journal

entry
Recording is made in Primary and Secondary Books in
Manual Accounting system
Primary Books
General Ledger
Cash Book
Secondary Books
Purchase Register
Sales Register
Fixed Assets Register
Returns (Purchase return/Sales Return)
Journal Register
In Oracle ERP System GL is called Main Ledger and the
Transactions emanating from Modules are referred to37as
Sub Ledger

Recording of Accounting Transactions

First the transactions are entered as Journal

Then Second step is they are posted to individual account as T
Accounts In Oracle or any other ERP system this happens
immediately when a transaction is created
Prior to ERP system except for Non cash charges, Journals are
directly posted in Primary and secondary ledger with supporting
Document reference Number (like Invoice Number), date, amount and
a cross reference ledger folio number (Page Number) of respective
Debit and Credit Entries in Ledger.
Journals are entered only for year end Provision Entries.
Then the balance from each T account is taken and which becomes a
Trial Balance with Sum of Debits and Sum of Credit which should be
equal.
Trial Balance forms the basis for preparation of Financial Statements
and in ERP systems including Oracle Applications Debit is shown as
Positive and Credit is shown as Negative
In ERP systems the chance of Trial Balance not matching or not
tallying issue is very minimal. In case of manual Accounting this will
happen most of the time and unless it is corrected and balanced, the
accountant should not proceed to prepare Financial Statements 38

Preparation of Financial Statements

Preparation of Trial Balance

Balances Extracted from General Ledger
Sum of debit and credit balances = 0

Preparation of Trading, Profit & Loss Account or Income &

Expenditure Account and Balance sheet
Trial Balance is the base for preparing Financial
Statements
Adjustment entries are made in adjustment period and
passed as Journal Vouchers before making the financial
statements
Trading and Profit and Loss Account is Always for a
period say for an Year (Jan - Dec or Apr - Mar), Quarterly
for 3 months or Half yearly for 6 months
Balance Sheet is always as on Date (As on 31-12-2007 or
31-03-2008)
39

Accounting Concepts

A Simple Case Study

40

Case Study

Siva started Business in dealer in Computer Spare parts and

Computer Stationery on 01-APR-2007 and following events occurred
in the month of April.
Siva invested USD 50000 Cash and USD 50000 worth of furniture
Siva purchased USD 75000 worth of goods on credit
Siva friend Ajay promised him to give a loan of USD 25000
Siva sold USD 50000 worth of good for USD 100000
Siva paid rent USD 2000 for two months
Siva paid Salary to Staff USD 5000
Siva incurred USD 5000 on interior decoration which will last for two
years.
Siva sold USD 10000 worth of goods on credit for USD 18000
Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John account
Purchased Vehicle for USD 25000 paid through Bank
Cash Deposited by Siva into Bank 50000 USD

41

ARE YOU READY FOR THE

GAME
Accounting is very simple

42

Accounting Terminologies

Before creating Accounting Transactions let us recall and learn few

accounting terminologies

ASSETS: Any property or Investment which can be convertible into cash

LIABILITIES: Amount Payable to providers of goods and Services
(Creditors) and Providers of Capital (Owners)
REVENUE: Amount earned out of the Sale Proceeds and the amount
earned on Investments
EXPENSES: Amount incurred or expended to earn the revenue
PROFIT: TOTAL REVENUE TOTAL EXPENSES
LOSS: If the Total Expenses is more than Total Revenue it is termed as
Loss
FIXED ASSETS: Amount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)
CURRENT ASSETS: Amount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)
NOTE: The Fixed Asset and Current asset vary from Person to Person
Ex: For a Dealer in Refrigerator it is a Current asset which becomes Fixed
Asset for you when you buy.
CREDITORS: Person who provide Money or Goods on Credit to the
Business (Supplier)
DEBTORS: Goods or Money Provided / sold on Credit by the Business
(Customers)
43

Accounting Terminologies

You should also understand the same accounting

terminology is referred or used by different people in
different context

Receivables also known as Trade Debtors, Debtors, Account

Receivables, Sundry Debtors, Trade Receivables, Amount
Receivables
Liability is also known as Trade Creditors, Account Payable,
Sundry Creditors, Amount Payable, Trade Liabilities, Creditors
Cost of Goods Sold: It varies with Company to Company the way
they do set up and use it. The Cost of Goods Sold comprise of
Material Cost, Resource Cost (Labor and Machinery) and
Overheads. There are few companies which will have only Material
Cost and will not add up Resource Cost and Overheads. You
Should talk to client and understand their requirement
Lets See Each of this in a Formula Model

44

Accounting Calculation and Formula

Receivables (or) Debtors
Reconciliation
Opening Receivables
(+) Add Credit Sales
(+) Debit Memo
(+) Positive Adjustments

Payables (or) Creditors

Reconciliation
100
2500
150
75

Opening Payables
(+) Add Credit Purchases
(+) Debit Memo
(+) Positive Adjustments

200
2000
150
75

(-) Less Cash Received

2000
(-) Less Credit Memo (Sales Return) 125
(-) Negative Adjustments
50

(-) Less Cash Paid

1500
(-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments
50

Closing Receivables

Closing Payables

650

750

45

Accounting Calculations and Formula

Purchased Inventory
Reconciliation
Opening Purchased Inventory
(+) Add Purchases

Finished Goods (FG)

Reconciliation
100
2500

(-) Less Issued to Production

(-) Less Purchase Return

2000
125

Closing Purchased Inventory

475

Opening stock of FG

200

(+) Add Production

(+) Sales Return

2000
100

(-) Less Sales

1500

Closing FG Inventory

800

46

Accounting Calculations and Formula

Cash Reconciliation
Opening Cash Balance

Bank Balance Reconciliation

100

Opening Balance of Bank

200

(+) Add Cash Receipts

2500
(Cash Sales, Cash Recd from
Receivables, Cash with drawl from
Bank)

(+) Add Bank Receipts

(Cash Deposits, Cheque Received
From Debtors, Interest Credited)

2000

(-) Less Cash Payments

2000
(Cash Purchases, Expenses paid
By Cash, Cash Deposited into Bank)

(-) Less Payments from Bank

(Paid to Creditors by Cheque,
Expenses paid by cheque, Cash
With drawl from bank)

1500

Closing Cash Balance

600
Closing Bank Balance

700

47

Accounting Entries for the Case Study

Sl
No

Description

Nature of Account

Dr (in
USD)

Cash A/c Dr
Furniture A/c Dr
(Cash and Furniture Real
Tangible Asset. Hence
apply the Real Rule Debit
What comes in)
To Siva Capital A/c
(Siva is a Person running
the business as a
Proprietor in this case.
Hence apply the Rule for
Personal Credit the giver)

Real
Real

50000
50000

Inventory A/c Dr
(Real Tangible Asset)

Real

To Creditors A/c
(Person be an Individual or
Company gives the goods
on Credit)

Personal

Personal
(Also using the Business Entity
Concept Siva being owner is
also treated as a Creditor for
the purpose of Business. If the
Business is wind up Business
has to pay back Siva)

Cr (in
USD)

100000

75000

75000

48

Accounting Entries for the Case Study

Sl
No

Description

Nature of Account

No Entry
(Mere Promise to give does
not tantamount to Monetary
Transaction)

No Entry
(Money Measurement Concept
No Monetary transaction
involved )

Two Entries involved (One

for sale of goods and one
for reduction in inventory)
Cash / Bank A/c Dr
(Real Debit what comes
in)
To Revenue (Sales) A/c
(Nominal Rule - Credit all
Income and Revenue)

Real A/c

Dr (in
USD)

100000

Nominal A/c

Cost of Goods Sold A/c Dr

(Nominal Debit Expenses)
Nominal A/c
To Inventory A/c
(Reduction in Inventory)
Real A/c

Cr (in
USD)

100000

50000
50000

49

Accounting Entries for the Case Study

Sl
No

Description

Nature of Account

Dr (in
USD)

Rent A/c Dr
(Debit Expense Nominal)
Rent Advance A/c Dr
(This is like Cash Advanced
to Landlord. Hence it
should be treated as
Personal Debit the Receiver)
To Cash A/c
(Real Credit what goes
out)

Nominal A/c
Personal A/c

1000
1000

Salary A/c Dr
(Nominal Debit Expense)

Nominal A/c

To Cash A/c
(Real Credit what goes
out)

Real

Real A/c

Cr (in
USD)

2000

5000

5000

50

Accounting Entries for the Case Study

Sl
No

Description

Nature of Account

Dr (in
USD)

Advertisement Exp A/c Dr

Advt Exp Adv A/c Dr
(This is like a Deferred
Revenue Expense needs to
be charged in two years.
50% need to be Current
Year Expense and Balance
50% is carried Forward and
treated as Expense in next
Year)
To Cash A/c
(Real Credit what goes
out)

Nominal
Real

2500
2500

Real
8

Cr (in
USD)

5000

Receivables A/c Dr
To Revenue A/c

Real
Nominal

18000

Cost of Goods Sold A/c Dr

To Inventory A/c

Nominal
Real

10000

18000

10000
51

Accounting Entries for the Case Study

Sl
No

Description

Nature of Account

No Entry
(This is a Mistake done by
Bank. Bank has to make
correction and in Sivas
Book there is no
accounting entry required)

No Entry

10

Vehicles A/c Dr
(Real Tangible Asset
Debit what comes in)
To Bank A/c
(Real asset Credit what
goes out)

Real

Bank A/c Dr
(Real asset- Debit what
comes in
To Cash A/c
(Real Asset Credit what
goes out)

Real

11

Dr (in
USD)

Cr (in
USD)

25000

Real

25000
50000

Real
50000

52

T Accounts
Furniture Account

Siva Capital Account

Dr
To Bal
Total

USD
100000
100000

Cr

USD

By Cash
50000
By Furniture 50000
Total

100000

Dr

USD

To Siva Cap 50000

To Sales 100000

Total

150000

Cr

USD

By Bal

50000

Total

Total

50000

50000

Inventory Account
USD

By Rent
By Rent Adv
By Salary
By Advt Adv
By Advt exp
By Bank
By Balance
Total

Cr

To Siva Cap 50000

Cash Account
Dr

USD

1000
1000
5000
2500
2500
50000
88000

Dr

USD

Cr

USD

To Creditors 75000

By COGS 50000
By COGS 10000
By Bal
15000

Total

Total

75000

75000

150000

53

T Accounts

Creditors Account
Dr

USD

Cr

USD

Dr

Rent
Account
USD
Cr

To Cash

1000

By Bal

1000

Total

1000

Total

1000

To Bal

75000

By Invent

75000

Total

75000

Total

75000

Revenue / Sales Account

Rent Advance Account

Dr

USD

Cr

USD

USD

Dr

USD

Cr

USD

To Cash

1000

By Bal

1000

To Bal

118000

By Cash 100000
By Rece 18000

Total

1000

Total

1000

Total

118000

Total

Salary Account
Dr

USD

Cr

118000

Advertisement Exp Account

USD

Dr

USD

Cr

USD

To Cash

5000

By Bal

5000

To Cash

2500

By Bal

2500

Total

5000

Total

5000

Total

2500

Total

2500
54

T Accounts

Advt Exp Advance Account

Dr

USD

Cr

USD

To Cash

2500

By Bal

2500

Total

2500

Total

2500

Receivables Account

Dr

USD

Cr

USD

To sales

18000

By Bal

18000

Total

18000

Total

18000

Vehicle Account

Cost of Goods Sold Account

Dr

USD

Cr

USD

Dr

USD

Cr

To Inventory 50000
To Inventory 10000

By Bal

60000

To Bank

25000

By Bal

25000

Total

Total

60000

Total

25000

Total

25000

60000

USD

Bank Account
Dr

USD

Cr

USD

To Cash

50000

By Vehicle
By Bal

25000
25000

Total

50000

Total

50000

55

Trial Balance
Trial Balance for the Month of APRIL 2007
A Asset, L Liability, R Revenue, E - Expense

Debit

USD

Credit

USD

Furniture (A)
50000
Cash (A)
88000
Bank (A)
25000
COGS (E)
60000
Salary (E)
5000
Rent (E)
1000
Rent Advance (A)
1000
Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500
Inventory (A)
15000
Vehicle (A)
25000
Receivable (A)
18000

Siva Capital (L)

Sales / Revenue (R)
Creditors (L)

100000
118000
75000

Total

Total

293000

293000

56

Profit and Loss Account For APR 2007

Expenses

USD

Revenue

USD

COGS (E)
60000
Salary (E)
5000
Rent (E)
1000
Advertisement Exp (E) 2500
To Profit
49500

Sales / Revenue (R)

118000

Total

Total

118000

118000

57

Balance Sheet as on 30-APR-2007

Liabilities
Siva Capital
Add Profit
Siva Capital
Creditors

Total

USD
100000
49500
149500
75000

224500

Assets
Furniture
Vehicle
Cash
Bank
Receivables
Inventory
Rent Advance
Advt Exp Advance
Total

USD
50000
25000
88000
25000
18000
15000
1000
2500
224500

58

Important Points to Remember

Accounting can be learnt only by Practice and not by reading

Try to learn by creating Journal entries with Examples
Cash Balance can never have negative balance at any point of time
Land will never Depreciate and it will have only Appreciation
Bank can have negative balance if you have Overdraft facility
The Bank which maintains your account will have exactly opposite
entries of what is shown in your Bank Account
In the above, Example the bank account in your Books and in Bank
Books will be as follows
Siva Books
Bank Account

Bank Books
Siva Account

Dr

USD

Cr

To Cash

50000

By Vehicle 25000
By Balance 25000

To Vehicle 25000
To Balance 25000

By Cash 50000

Total

Total

Total

Total

50000

USD

50000

Dr

USD

25000

Cr

USD

25000

59

Case Study for Practice

Take your own Personal Account and try to create the following
On First of July 2007 You had a Cash balance of USD2500 which is
your Capital
On 3rd July You have received Salary of USD 12000
On 5th Paid Rent of USD 1200 by cheque
On 7th You purchased provision for house for 800 USD
On 10th You spent for outing through your credit card USD 500
On 15th You withdraw Cash USD 8000
On 20th You Invested in Fixed Deposit USD 5000 @5% Interest Per
annum
On 22nd you have given a Loan of USD 2000 to friend James
On 25th You spent for Car Repairs 500 USD
On 28th Your wife gave USD 200 to your Neighbor from her pocket
On 30th You Deposited Cash 1000 USD to your Bank Account

60

How to Approach to Learn

I tried my best to teach Accounting in simple way. This

is only a beginning. You have to Practice a Lot to learn
The simple way to Learn Accounting is as follows

Do not go for advanced level books without understanding the

basics
Start with (+1) Accounting book in case of people in India and
Pre-University book in case of other Countries. Practice the
examples given in that book and exercises
This is more than sufficient for any non accounting candidate to
work on Oracle Applications
Never try to memorize the concepts and rules
Try to understand and apply the concepts and Rules
There are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I do not
want you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You can
handle all of them
Read and Practice Level I and II at least Three times

61

"There is a difference between an objective and

actions. Unless you understand your objective,

you will be wasting your time in actions. Know your
objective first " - Swami Vivekananda

62

Disclaimer: This Document was created with my own

assumptions to explain the concept of accounting
and the names of the companies used in this article
are only to explain the accounting concept with data
assumptions and none of the Company is not
responsible for the Data provided in this article.

Thank You
Hope You find this article useful
Get Ready for Learning
Accounting in Oracle Applications
63