FINANCIAL ACCOUNTING

Reference Books: Accountancy by D. K. Goel Rajesh Goel OR Double Entry Book keeping by T. S. Grewal

MEANING OF ACCCOUNTING
DEFINITION Accounting is recording, classifying & summarizing, in monetary terms, information about business. Only those transactions are recorded which can RECORDING Accounting is an art of recording business transactions according to some specific accounting principles. All the transactions are first recorded in a book called JOURNAL CLASSIFYING Classification is the process of grouping the transactions of one nature at one place. The book in which various accounts are opened is called LEDGER SUMMARISING is the presentation of classified data in a manner that it becomes understandable to the management and other users. In involves preparation of TRIAL BALANCE from the balance of ledger accounts.

be expressed in financial terms

BASIC ACCOUNTING TERMS

CAPITAL -

Is the amount invested by the owner in a business. It can be in cash or in kind

DRAWINGS -

Is the cash/ goods withdrawn by the owner from the business.

LIABILITIES -

Is the amount which the firm owes to outsiders.

Eg Creditors, Bank Loan etc

ASSETS -

Anything which is in possession of the business from which future benefit is expected to come. Eg. Cash, Bank, Stock , Machinery, Building, Land, Debtors

REVENUE:

Is the income of regular nature. It includes amount received from sale of goods, rent, commission, interest received. Revenue is related to day to day affairs of business

Eg. Capital contribution or loan borrowed is not revenue

EXPENSE :

Expense is the cost incurred in producing and selling the goods and services. eg: Cost of goods sold Amt. Paid for salary, Advertisement, Rent etc Depreciation

INCOME:

Is the surplus of revenue over Expense

LOSS:

Is the amount by which the Expense exceeds the revenue.

PROCEDURE OF PREPARATION OF ACCOUNTS

Journal Entries Ledger Accounts

Trial balance

Trading & Profit & Loss A/c AND

Balance Sheet

TYPES OF ACCOUNTS
THERE ARE THREE TYPES OF ACCOUNTS PERSONAL ACCOUNTS Eg. Debtors, Creditors etc.. REAL ACCOUNTS Eg. Land, Building, Cash, etc.. NOMINAL ACCOUNTS Eg. Expenses & Incomes

DOUBLE ENTRY SYSTEM

Every business transactions affects two accounts, one debit and the other Credit & recording is made according to certain specific rules.

RULES FOR ENTRY

REAL ACCOUNT: Debit what comes in, Credit what goes out. PERSONAL ACCOUNT: Debit the receiver, Credit the giver. NOMINAL ACCOUNT: Debit all expenses and losses, credit all incomes and gains.

BOOKS OF PRIMARY ENTRY - JOURNAL

In journal, transactions are recorded in chronological order

PERFORMA
DATE PARTICULARS L/F AMOUNT DR. AMOUNT CR.

JOURNAL ENTRIES in the book of A

01.04.05 01.04.05 01.04.05 01.04.05 01.04.05 01.04.05 10.04.05 15.04.05 18.04.05 31.04.05 Mr. A started business with cash Cash purchases Goods sold to Mr. B Returned defective goods by Mr. B Received Cash from Mr. B Mr. C sold goods to us Mr. P purchased goods from us Lent to Mr. M Paid wages Received Interest Rs. 100000 Rs. 48000 Rs. 10000 Rs. 1000 Rs. Rs. Rs. Rs. Rs. Rs. 9000 20000 12000 5000 400 100

DATE

PARTICULARS

L/F

AMOUNT DR.

AMOUNT CR.

01.04.07

01.04.07

01.04.07

01.04.07

01.04.07

Cash a/c To Capital a/c (Being cash introduced as capital) Purchases a/c To Cash a/c (Being goods purchased for cash) Mr. B To Sales a/c (Goods sold to Mr. B on credit) Sales Return a/c To Mr. B (Defective goods returned from B) Cash a/c To Mr. B (Cash received from B)

Dr

100000 100000 48000 48000 10000

10000
1000 1000

9000
9000

DATE

PARTICULARS

L/F

AMOUNT DR.

AMOUNT CR.

01.04.07

10.04.07

15.04.07

18.04.07

31.04.07

Purchases a/c To C (Being gods purchased from C) P To Sales a/c (Being goods sold to P on credit) Mr. M To Cash a/c (Lent to M) Wages a/c To Cash (Paid wages) Cash a/c To Interest (Received interest)

Dr

20000 20000

Dr

12000 12000

Dr

5000 5000

Dr

400

400
Dr 100 100

NOTE
1. TRADE DISCOUNT AND CASH DISCOUNT
TRADE DISCOUNT
Trade discounted is the discount given by the seller to his customer, at fixed rate on the listed price No separate entry is passed for trade Discount. It is deducted from the invoice price and then recorded in the books Eg. Sold goods of invoice price Rs 10000 at trade discount of 20 %

Cash A/c To Sales (Being Cash sales)

Dr.

8000
8000

CASH DISCOUNT
Cash discount is allowed if the customer makes payment within fixed period. Since it is allowed at the time of payment its entry is made with the entry of payment. Eg. Goods sold to Mr. S Rs.20000 Cash received from S Rs. 18000 Discound allowed Rs. 2000 ENTRIES S To Sales (Being credit sales ) cash a/c Dr. 18000 Discount a/c Dr. 2000 To S (Being cash received & discount allowed) Dr. 20000 20000

20000

Notes 2 :
Opening Entry The first entry in each years Journal will be to record the previous years closing balances of all the assets and liabilities.

In this entry the accounts of all assets are debited because assets always show debit balances and the accounts of liabilities and capital are credited.
If the balance of the capital account is not given in the question, it will be found out by deducting the total of liabilities from the total of assets. On the contrary, if the total of liabilities exceeds the total of assets, the difference will be treated as the amount of Goodwill and the same will be debited in the opening entry. Assets : Cash Rs. 8,000 ; Bank Balance Rs. 20,000 ; Stock Rs. 54,000 ; Debtors Rs. 47,000 (Ashok Rs. 12,000, Pawan Rs. 15,000, Vivek Rs. 20,000); Machinery Rs. 60,000. Liabilities : Creditors Rs. 20,000 (Chaman Lal Rs. 7,000 ; Om Pal Rs. 13,000), Capital Rs. 2,00,000.

Notes : 3 Outstanding Expenses

Notes : 4 Prepaid Expenses Notes : 5 Depreciation Notes : 6 Expenditure on the installation of Machinery and on the erection of Building : Machinery and Building are the assets of the business. As such, any expenditure incurred on the carriage and installation of machinery is debited to the Machinery Account. Similarly any expenditure incurred for the construction of a Building, are also treated debited to the Building Account. However, repair charges incurred on an asset which is already appearing in the books are debited to repairs account.

LEDGERS

MEANING AND DEFINITION

Business transaction are first entered in Journal. The next step Is to transfer the entries to respective accounts in Ledger. Ledger is the book which contains a classified and permanent record of all the transaction of a business.

NEED AND IMPORTANCE

The basic objective of accounting is to ascertain as to
(I) How much amount is due from each customer or how much amount the firm has to each supplier, How much is the amount of purchase and sale during a particular period ; How much amount has been spent on each head of expenditure and how much amount has been earned on account of each head of income.

(II)

(III)

The Journal fails to provide us the above information because it is only a chronological record of the daily transactions of a business.

PERFORMA OF LEDGER
Dr Name of Account Cr.

Date

Particulars

J.F.

Amount Rs.

Date

Particulars

J.F.

Amount Rs.

RULES OF POSTING
Posting is the process of transferring entries from Journal to the Ledger. All transactions relating to one account should be entered at one place. The word To is used before the accounts which appear on the debit side of an account. Similarly, the word By is use before the accounts which appear on the credit side of account. If an account has been debited in the Journal entry , the posting in the Ledger should also be made on the debit side of such account. In the Particulars column, the name of the other account which has been credited in the Journal entry should be written for reference.

Dr

Cash a/c

Cr.

Date

Particulars

J.F.

Amount Rs.
10000 9000 100

Date

Particulars

J.F.

Amount Rs.
4800 5000 400

01.04.07 To Capital 01.04.07 To B 31.4.07 To Interest

01.04.07 By Purchases 10.04.07 By M 15.04.07 By Wages

Dr.

Purchase a/c

Cr.

Date
01.04.07 To C

Particulars

J.F.

Amount Rs.
20000

Date

Particulars

J.F.

Amount Rs.

Dr.

Sales a/c

Cr.

Date

Particulars

J.F.

Amount Rs.

Date

Particulars

J.F.

Amount Rs.
100 12000

01.04.07 10.04.07

By B By P

CLOSING & BALANCING OF ACCOUNTS

Balancing of an account means that the Debit and Credit sides are totaled and the difference between the two sides is inserted on the side which is shorter so as to make their totals equal. If the debit side exceeds the credit side, the balance is called the debit balance. If the credit side exceeds the debit side, the balance is called the credit balance.

Significance of various balances relating to Accounts:

A debit balance is either an assets or an expense. A credit balance shows liability, capital or the income earned.

POSTING OF OPENING ENTRIES

As the accounts of all the assets will be debited in an opening entry, an account for each asset will be opened in the ledger and posting will be made on the debit side by writing the words To Balance b/d Similarly as the accounts of the liability will be credited in an opening entry, an account of each liability will be opened in the ledger and posting will be made to the credit side by posting the words By Balance B/d

Eg.

JOURNAL ENTRIES In the books of ABC & Co.

Date

Particulars

L.F

Amount(Rs.)

Amount(Rs.)

01.04.02

Cash A/c Stock A/c Anil Brothers Gopal Machinery A/c To Jay To Capital A/c (Being Opening entry recorded in Journal)

20000.00 45000.00 15600.00 22000.00 60000.00 4000.00 158600.00

TRIAL BALANCE

TRIAL BALANCE
When posting of all the transactions into the Ledger is completed and the accounts are balanced off the balance of each and every account in the Ledger is put on a list. The list so prepared is called a trial balance. Ledger account which shows a debit balance is put on the debit side of the trial balance and the account which shows a credit balance is put on the credit side of the trial balance. Account which shows no balance, i.e., whose debit and credit totals are equal, is not entered in the trial balance. Objectives of Preparing Trial Balance :(1) To ascertain the arithmetical accuracy of the ledger account (2) To help in locating errors. (3) To help in the preparation of Final Accounts. Trial Balance is always prepared on a particular date