Professional Documents
Culture Documents
Basic concepts of accounting: Single and double entry, Books of original Entry,
Bank Reconciliation, Journal, ledgers, Trial Balance, Rectification of Errors,
Manufacturing, Trading, Profit & loss Appropriation Accounts, Balance Sheet
Distinction between Capital and Revenue Expenditure, Depreciation Accounting,
Valuation of Inventories, Non-profit organisations Accounts, Receipts and Payments
and Income & Expenditure Accounts, Bills of Exchange, Self Balancing Ledgers.
Abbreviations
o DO - Debit order
o SO - Standing order
o IS - Insurance
o SF - Service fees
o CO- Credit order
o
Terminology
Financial Accounting:
In business numerous transactions take place every day. The recording of those
business transactions is the main function served by Accounting.
OBJECTIVES OF ACCOUNTING
According to G.A. Lee, the accounting system has following two stages :
Stage i) the making of routine records, in prescribed form and according to
set rules is called Book-keeping.
stage ii) the summarisation as Profit & loss statement and Balance sheet and
interpreting the financial result and further communication to interested
parties is called accounting.
Following people are interested in examining the financial information to study the
present position of business, compare its present performance with that of its past
years, and compare its performance with that of similar enterprises.
Owners: Owners wants to know profit or loss and financial position of the
business.
Managers: Managers use Accounting information to plan, control, evaluate
all business activities and make various decisions.
Lenders: Before lending; money, lenders would like to know about the
solvency (capacity to repay debts) of the enterprise.
Creditors: Creditors too want to know about credit worthiness of the
enterprise.
Prospective Investors: Prospective partners or shareholders would like to
know the safety of the proposed investment.
Tax Authorities: Governments Tax authorities are interested in the financial
statements to assess the tax liability of the enterprise.
Employees: The employees of the enterprise are also interested in knowing
the state of affairs to know safety of their interests.
Branches of Accounting
Implications:
Non-monetary happenings like death of an efficient manages or the
appointment of an accountant, howsoever important they may be, are not
recorded in the books of account.
The value of money changes over a period of time. That is why the
accounting data does not reflect the true and fair view of the affairs of the
business.
Objective Evidence Concept: All transactions should be evidenced and supported
by documents such as invoices, receipts, cash memos, etc. for their verification by
auditors afterwards. Although, the items like depreciation and the provision for
doubtful debts where no documentary evidence is available, the policy statements
made by management are treated as the necessary evidence.
Historical Record Concept: we record only those transactions which have
actually taken place. It is because accounting records are to be objectively
evidenced and recorded in chronological (date wise) order. Although, we make
provision for some expected losses such as doubtful debts. This is done only at the
time of ascertaining the profit or loss of the business in accordance with
conservatism.
Cost Concept: According to the cost concept, all assets are recorded in books at
their original purchase price. However, the cost of assets may systematically be
reduced from year to year by charging depreciation as a fixed percentage and
shown in the balance sheet at the depreciated value.
Dual Aspect Concept: Every transaction has two-fold effect. For example, if you
purchase a machine increases one assets and decreases another asset i.e. cash.
This principle is the core of double entry book-keeping and if this is strictly followed,
it is called Double Entry System of Book-keeping.
As per the dual aspect concept a contribution to the business, either in cash or kind,
not only increases its resources (assets), but also its obligations (liabilities/equities)
correspondingly. Thus, at a given point of time, the total assets and the total
liabilities must be equal. This equality is called balance sheet equation or
accounting equation.
The term assets denotes the resources (property) owned by the business while the
term equities denotes the claims of various parties against the business assets.
Equities are of two types: (i) owners equity, and (ii) outsiders equity. The total
assets of a business will always be equal to its liabilities.
SYSTEMS OF BOOK-KEEPING
It refers to incomplete records or the defective double entry system. The Single
Entry System is a mixture of double entry, single entry and no entry. In such system,
arithmetical accuracy cannot be checked, because a trial balance cannot be
prepared. It also becomes difficult to ascertain the correct amount of profit or loss.
This system is normally followed by small business firms.
WHAT IS AN ACCOUNT ?
CLASSIFICATION OF ACCOUNTS
(i) Personal Account Accounts in the name of persons, other firms, other
companies or institutions
The accounts which represent expenses payable, expenses paid in advance incomes
receivable, and incomes received in advance are called Representative Personal
Account. For example, Salaries Outstanding Account
(ii) Real Account those relating to property (assets). Examples: Cash Account,
Furniture Account, Machinery Account, Building Account, etc.,
(iii) Nominal Account those relating to incomes and expenses. Examples: Wages
Account, Salaries Account, Commission Received Account, and Interest Received
Account
Note: Real and Nominal Accounts taken together are called Impersonal
Accounts.
RULES OF DEBIT AND CREDIT
For convenience, three different rules have been laid down for the three classes of
accounts :
For Personal Accounts: Debit the receiver and credit the giver.
For Real Accounts: Debit when an asset comes in and credit when goes out.
For Nominal Accounts: Debit all expenses and losses and credit all incomes and
gains.
ACCOUNTING PROCESSES
o Accounting Cycle
Opening of balances of accounts, day-to-day business
transactions of accounting year are first recorded in Journal
Periodically these transactions are transferred to concerned
accounts known as ledger accounts
At the end of every year these accounts are balanced & trial
balance is prepared
Then the final accounts viz., trading, profit/loss accounts are
prepared
Finally balance sheet made which gives fin position of business
at end of yr
o Final accounts and Balance sheet are the end products of Book Keeping
o Need for GAAP
To be logical & consistent in recording the transaction
To confirm to the established practices & procedures
o Fundamental Assumptions for Accounting/ GAAP
Going concern a balance sheet which is prepared on the basis
of record of facts on historical costs cannot show the true or real
worth of the concern at a particular date. The underlying
principle there is that the earning power and not the cost is the
basis for valuing a continuing business
Business to continue indefinitely; financial and accounting
policies followed to maintain continuity of business unit
Consistency uniformity in accounting processes and policies
from one period to another should be followed so that the results
disclosed in fin stmt will be uniform and comparable.
Accruals - It is the accounting process of recognizing assets,
liabilities or income amounts expected to be received or paid in
future.
Ex - purchases and sales of goods or services on credit,
interest, rent (unpaid), wages and salaries, taxes
Asset Accts tangible and intangible assets
Liabilities Accts fin obligations of the firm to the
outsiders
Capital accts relates to owners of the enterprise
Revenue accts amount charged for goods sold or
services rendered or permit others to use enterprises
resources for royalty/interest/dividend
Expenses accts amount spent or lost in the process of
earning revenue
o
Not-for-profit Organizations
Organisations which are set up for providing service to its members and the
public in general
o Ex - clubs, charitable institutions, schools, religious organisations,
trade unions, welfare societies and societies for the promotion of art
and culture
The funds raised by such organisations are credited to capital fund or general
fund. The major sources of their income usually are subscriptions from their
members donations, grants-in-aid, income from investments, etc.
The main objective of keeping records in such organisations is to meet the
statutory requirement and help them in exercising control over utilisation of
their funds.
The main sources of income of such organisations are: (i) subscriptions from
members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income from
investments, etc credited to Capital fund/ General fund.
o Surplus generated is added over to the capital fund.
o Earn their reputation on the basis of their contributions to the welfare
of the society rather than on the customers or owners satisfaction.
They are required to maintain a stock register to keep complete record of all
fixed assets and the consumables.
Final accounts of Not-for-profit organization consists of Receipt & payment
acc, Income and Expenditure acc, Balance sheet
Receipts and Payments account
o Prepared at the end of accounting yr. on the basis of cash receipts and
cash payments recorded in the cash book
o Ex1 - subscriptions received from the members on different dates
which appear on the debit side of the cash book, shall be shown on the
receipts side of the Receipt and Payment Account as one item with its
total amount
o Ex2 - salary, rent, electricity charges paid from time to time as
recorded on the credit side of the cash book but the total salary paid,
total rent paid, total electricity charges paid during the year appear on
the payment side of the Receipt and Payment Account
o This account does not show any non cash item like depreciation.
o Features
It is a summary of cashbook receipts are recorded on debit
side and payments are entered on credit side.
Applied for inventories other than work in progress arising in the ordinary
course of business of service providers, construction contracts; shares,
debentures held as stock-in-trade; producers inventories of livestock, agro
and forest produces, minerals, ores, gases etc
Inventories are assets held for sale, in the process of production for sale, in
the form of supplies to be consumed in production process
Inventories incl. goods purchased and held for resale, but not include
machinery spares
Inventories should be valued at lower of cost and net realizable value
o Net Realizable value estimated selling price less estimated costs of
completion/est cost to complete the sale
o Cost of inventories incl. cost of purchase, cost of conversion and other
costs incurred for transit etc
o Exclusions abnormal costs on wastage, labour, prod proc; storage
costs; admin overheads in the process of transit; selling and
distribution costs
Cost formulas
o cost of inventories of items that are not ordinarily interchangeable and
goods or services produced and segregated for specific projects should
be assigned by specific identification of their individual costs
o cost of inventories should be assigned by using the first-in, first-out
(FIFO), or weighted average cost formula - fairest possible
approximation to the cost incurred
o FIFO - inventory which were purchased or produced first are consumed
or sold first
o Weighted average - cost of each item is determined from the weighted
average of the cost of similar items at the beginning of a period and
the cost of similar items purchased or produced during the period
Techniques for measurement standard cost method, retail method
o Standard costs take into account normal levels of consumption of
materials and supplies, labour, efficiency and capacity utilization
regularly reviewed & revised
o retail method is often used in the retail trade for measuring inventories
of large numbers of rapidly changing items that have similar margins
and for which it is impracticable to use other costing methods.
Net Realizable Value
o cost of inventories may not be recoverable if those inventories are
damaged, if they have become wholly or partially obsolete, or if their
selling prices have declined
o Inventories are usually written down to net realisable value on an
itemby-item basis or grouped if they are similar products
o Estimates of net realisable value are based on the most reliable
evidence available at the time the estimates, the purpose for which the
inventory is held
o Materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at or above
cost
Final Statements should disclose
o Accounting policies adopted in measuring inventories, including the
cost formula used
o Total carrying amount of inventories and its classification appropriate
to the enterprise
Journals
Journal (entries) - a book of accounts in which all day to day business
transactions are recorded in a chronological order/ order of occurrence
o Also known as Book or original record/ Book of primary entry
process of recording transactions in the journal is known as Journalising
Narration brief explanation of a journal entry is known as narration
particulars
Format of journal date, particulars, ledger folio, Dr. Amount and Cr. Amount
o Ledger folio - In ledger-folio column we enter the page-number where
the account pertaining to the entry is opened and posting from the
Journal is made
Process of journalizing
o Identify the accounts, Recognize the type of accounts, apply the rules
of debit and credit,
o Rules of Debit and Credit
Assets and expenses accounts are debited if there is an increase
and credited if there is decrease
Liability, capital and revenue accounts are debited if there is
decrease and credited if there is increase
Before making journal entries it is imp to determine kind of accounts to be
debited/ credited
o Debited (Dr.) when amount is received/ about to receive/ expected/
discount/ accrued/ Interest on capital/ Depreciation in the firm are
included in the Dr. column
o Credited (Cr.) amount is given/ vendor/ customer/ rent paid/ sales/
outgoing from the firm are included in the Cr. Column.
Compound/ combined entries If the entities affect more than two
accounts; such entries are called compound or combined entries. If an entry
contains more than one debit/ credit/ both it is Compound Journal Entry
o Compound entries saves time and space and are made in following
cases
When two or more transactions occur on the same day
One aspect i.e., either the debit/ credit is common
Trade discount When the customer buys goods in bulk or in large uantity
some discount may be allowed to him. This is to encourage him to buy more
and more. This discount is called Trade Discount
o No journal entry is made for Trade discount not entered in book of
accounts
o But Cash discount is entered in the account books
Adjusting Entries - For matching the cost and revenue, amount of every
expense and revenue should pertain to the period for which accounts are
being prepared. In this regard, a situation may arise if (i) Amount has been
paid or received spanning more than one accounting year (ii) amount of
expense or revenue stands due for the current year. In this case adjustments
to be made, resulting in Adjustment Journal Entry.
o Ex Outstanding expenses, Prepaid expenses, accrued income,
Miscellaneous entries (interest on capital, depreciation, drawings)
Classification of Journal Special Journal (special purpose), Journal Proper
(trans which dont occur frequently)
Trial Balance
Rectification of Errors -
Self-balancing ledgers
10. Money and Banking Monetary/ Fiscal policy- Role and functions of Reserve Bank
of India; functions of commercial Banks/RRB/Payment Banks Budget and Fiscal
deficits and Balance of payments Fiscal Responsibility and Budget Management Act,
2003