Professional Documents
Culture Documents
Confidential
TOPICS
OBJECTIVES
Confidential
Partnership
Partnership
Confidential
Corporation
Corporation
Accounting
is the
Accounting
Accounting
art of
Recording
Recording
Classifying
Classifying
the
theresults
resultsto
tohelp
help
users
usersmake
makebetter
better
decisions.
decisions.
Interpreting
Interpreting
Summarizing
Summarizing
Presenting
Presenting
the financial
aspect and
Confidential
Accounting
Recording means entering the financial transactions in
journals.
Classifying means posting the transactions from journals to
ledger
Summarizing means to prepare the Trial Balance.
Presentation means setting out the financial data in a
systematic manner in the form of Statements ( i.e. Profit &
Loss and Balance Sheet).
Interpretation means to understand the financial statements
for the user to make appropriate decisions.
Confidential
Confidential
External Users
Lenders
Confidential
Officers
Internal
Auditors
Sales Staff
Budget
Officers
Controllers
Confidential
Accounting Terminologies
Assets: Assets are the properties or resources which are owned by the
business entity.
Ex: Land, building, machinery, cash etc. owned by the business.
Liabilities: Liabilities are the debts owed by the business to the
outsiders.
Ex: Amount due to suppliers, Loan from bank.
Capital: Capital represents owners claim or share in the assets of the
business. In common sense, Capital is the amount invested by the
proprietor in his business.
Drawings: Drawing means the amount of cash or any asset withdrawn
by the owner of the business for his personal or domestic use.
Confidential
Accounting Terminologies
Expense: Expenses are the amounts spent on purchasing, manufacturing
and selling of goods and services.
Ex: Salary, Rent, Wages, Telephone bills paid etc.
Revenue: Revenue represents the cash generated by sale of goods or by
rendering services.
Ex: Sale proceeds of goods, Rent earned, Consulting fees etc.
Accounting Year: Accounting year is generally a period of 12 months
during which the accounts are maintained.
An accounting year may be a calendar year (i.e. from 1 st January to
31st December) or any financial year (i.e. from 1 st April to 31st
March) or any other period of year.
The Profit or Loss of a business are ascertained after the close of
every accounting year.
Confidential
Accounting Methods
CASH BASIS
The Cash Method of accounting records revenue when cash is
received, and records expenses when cash is paid.
Ex: Magazine Subscription
ACCRUAL BASIS
The accrual method records revenue when they are earned and
records expenses when they are actually incurred.
Confidential
Confidential
Accounting Cycle
Financial
Transactions
Posting to Ledger
Accounts
Accounting Process
Entering Into
Journals
Accounting Terminologies
Journal: Journal is a book of original entry where transactions are
entered in sequence of their occurrence date wise.
Ledger: Ledger is a book of final entry containing all the accounts of
the business. The accounts are the classified records of all the
transactions prepared on the basis of journals.
Posting: Posting is the process of transferring the entries of the
transactions from journals to the ledger accounts.
Trial Balance: Trial Balance is the list of all debit and credit balances of
accounts taken out from the ledger at any given date.
Confidential
Accounting Terminologies
P & L Account: It is a summarized revenue account which shows net
profit or loss made by a business during the year.
Balance Sheet: Balance sheet is the statement of assets and liabilities
prepared with a view to ascertain the financial position of the business
as on a specified date.
Confidential
Accounting Terminologies
Goods: It includes all commodities, articles or products which are
purchased for the purpose of resale.
Purchases:
The term Purchases means goods purchased for resale.
Any goods purchased for office use is not regarded as purchases.
It may be treated as an Asset or office expense depending upon the
use of such goods
Ex: If a furniture dealer buys tables, chairs etc. for trading purpose,
it will be treated as Purchases.
But if they are purchased for use in the office, it will be treated as an
Asset.
It should be noted that Purchases are treated as expenses for
accounting purpose.
Confidential
Accounting Terminologies
Sales:
The term Sales means goods sold for cash or on credit.
Note: Sales doesnt include sale of any asset.
It may be treated as an Asset or Revenue depending upon the use
of such goods.
Ex: If a furniture dealer sells tables, chairs etc. for trading purpose,
it will be treated as Sales.
But if he sells the office furniture's in use, then it will be treated as
an
Asset.
It should be noted that Sales are treated as Revenue for
accounting purpose.
Confidential
Accounting Terminologies
Purchases Returns (or Returns Outwards):
It means the goods which were purchased being returned to the
suppliers.
Goods may be returned for reasons such as poor quality, damage
by bad packing etc.
The amount of goods returned reduces the purchases.
Sales Returns (or Returns Inwards):
It means the goods which were sold to customers are now returned
for the same reasons stated above.
The amount of such returns reduces the sales.
Confidential
Accounting Terminologies
Debtor:
Debtor is a person who owes any amount to another person.
Ex: If we sell goods to Mr. X on credit, he becomes our debtor.
Creditor:
Creditor is a person to whom any amount is owed by other person.
Ex: If we purchase goods from Mr. Y on credit, he becomes our
creditor.
Confidential
Accounting Terminologies
Accounts Payable:
Accounts payable is money owed by a business to its suppliers
shown as a liability.
Ex: If we purchase goods on credit, then we make use of Accounts
Payables instead of Cash account.
Accounts Receivables:
Accounts receivables is money yet to be received by a business
from its customers shown as a asset.
Ex: If we sell goods on credit, then we make use of Accounts
Receivables instead of Cash account.
Confidential
Accounting Terminologies
Account:
Account means the record of transactions in a summarized form
pertaining to a particular person or a particular asset or a particular
expense or income.
Confidential
Confidential
Rule #1
ASSET ACCOUNTS
Increase on
Debit Side
Dr.
Confidential
Cr.
Decrease on
Credit Side
Rule #2
LIABILITY ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Confidential
Increase on
Credit Side
Rule #3
CAPITAL ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Increase on
Credit Side
JUST LIKE
LIABILITY ACCOUNTS
Confidential
Rule #4
REVENUE ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Increase on
Credit Side
JUST LIKE
LIABILITY & CAPITAL
ACCOUNTS
Confidential
Rule #5
EXPENSE ACCOUNTS
Increase on
Debit Side
Dr.
Cr.
+
JUST LIKE
ASSET ACCOUNTS
Confidential
Decrease on
Credit Side
Rule #1
ASSET ACCOUNTS
Increase on
Debit Side
Dr.
Confidential
Cr.
Decrease on
Credit Side
Example
PURCHASED OFFICE SUPPLIES FOR $800 CASH
Confidential
Step #1
Name the accounts affected:
CASH
OFFICE
SUPPLIES
Confidential
Step #2
Determine Classification of Accounts
AS
ASS
ET
CASH
Confidential
SE
OFFICE
SUPPLIES
Step #3
Now that we know the classification, we can identify
increase and decrease sides.
CASH
DR.
OFFICE SUPPLIES
CR.
DR.
Confidential
CR.
Confidential
INCREASED
OFFICE SUPPLIES
DR.
+
$800
Confidential
CR.
Confidential
DECREASED
CASH
DR.
Confidential
CR.
$800
DEBITS = CREDITS
OFFICE SUPPLIES
DR.
CR.
$800
Confidential
CASH
DR. CR.
$800
Rule #2
LIABILITY ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Confidential
Increase on
Credit Side
Example
PURCHASED EQUIPMENT ON ACCOUNT FOR
$3,000.
Confidential
Step #1
Name the accounts affected:
ACCOUNTS
EQUIPMENT
PAYABLE
Confidential
Step #2
Determine Classification of Accounts
AS
SE
T
LIA
BI
LIT
Y
ACCOUNTS
PAYABLE
EQUIPMENT
Confidential
Step #3
Now that we know the classification, we can identify
increase and decrease sides.
EQUIPMENT
DR.
CR.
ACCOUNTS PAYABLE
DR.
CR.
+
Confidential
Did Equipment
Increase or Decrease
in this transaction?
Confidential
INCREASED
EQUIPMENT
DR.
$3000
Confidential
CR.
ACCOUNTS PAYABLE?
Increase or Decrease
in this transaction?
Confidential
INCREASED
ACCOUNTS PAYABLE
DR.
CR.
$3000
Confidential
DEBITS = CREDITS
EQUIPMENT
DR.
CR.
$3000
ACCOUNTS PAYABLE
DR. CR.
$3000
Confidential
Rule #3
CAPITAL ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Increase on
Credit Side
JUST LIKE
LIABILITY ACCOUNTS
Confidential
Example
MARY ADAMS, THE OWNER, INVESTED $25,000 IN
THE BUSINESS
Confidential
Step #1
Name the accounts affected:
CAPITAL
CASH
Confidential
Step #2
Determine Classification of Accounts
O
EQ WN
U ER
IT S
Y
ASS
ET
CASH
CAPITAL
Confidential
Step #3
Now that we know the classification, we can identify
increase and decrease sides.
CAPITAL
DR.
CASH
CR.
DR.
Confidential
CR.
Did Capital
Increase or Decrease
in this transaction?
Confidential
INCREASED
M. ADAMS, CAPITAL
DR.
CR.
$25,000
Confidential
CASH?
Increase or Decrease
in this transaction?
Confidential
INCREASED
CASH
DR.
$25,000
Confidential
CR.
DEBITS = CREDITS
CASH
DR. CR.
$25,000
M. ADAMS, CAPITAL
DR. CR.
$25,000
Confidential
Rule #4
REVENUE ACCOUNTS
Decrease on
Debit Side
Dr.
Cr.
Increase on
Credit Side
JUST LIKE
LIABILITY & CAPITAL
ACCOUNTS
Confidential
Example
MARY PERFORMED SERVICES AND RECEIVED
$4,500 IN CASH
Confidential
Step #1
Name the accounts affected:
CONSULTING
FEES
Confidential
CASH
Step #2
Determine Classification of Accounts
RE
VE
NU
E
ASS
ET
CASH
CONSULTING
FEES
Confidential
Step #3
Now that we know the classification, we can identify
increase and decrease sides.
CASH
CONSULTING FEES
DR.
CR.
Confidential
DR.
CR.
Confidential
INCREASED
CONSULTING FEES
DR.
CR.
$4,500
Confidential
CASH?
Increase or Decrease
in this transaction?
Confidential
INCREASED
CASH
DR.
$4,500
Confidential
CR.
DEBITS = CREDITS
CASH
DR. CR.
CONSULTING FEES
DR. CR.
$4,500
$4,500
Confidential
Rule #5
EXPENSE ACCOUNTS
Increase on
Debit Side
Dr.
Cr.
+
JUST LIKE
ASSET ACCOUNTS
Confidential
Decrease on
Credit Side
Example
MARY ADAMS PAID HER ASSISTANT $750 IN WAGES
Confidential
Step #1
Name the accounts affected:
WAGES
CASH
EXPENSE
Confidential
Step #2
Determine Classification of Accounts
EXP
AS
ENS
E
SE
CASH
WAGES
EXPENSE
Confidential
Step #3
Now that we know the classification, we can identify
increase and decrease sides.
WAGES EXPENSE
DR.
CR.
Confidential
CASH
DR.
CR.
Confidential
INCREASED
OFFICE SUPPLIES
DR.
$750
Confidential
CR.
Confidential
DECREASED
CASH
DR.
Confidential
CR.
$750
DEBITS = CREDITS
WAGES EXPENSE
DR.
CR.
$750
Confidential
CASH
DR. CR.
$750
Confidential
Extra Examples:
Gagan commenced business with Rs. 100,000.
Cash Account
Capital Account
Asset Account
Capital Account
Increases
Increases
Confidential
Cash Account
Expense Account
Asset Account
Increases
Decreases
Confidential
Ankits Account
Expense Account
Liability Account
Increases
Increases
Cash Account
Liability Account
Asset Account
Decreases
Decreases
Confidential
Liability Account
Expense Account
Decreases
Decreases
Confidential
Anils Account
Asset Account
Liability Account
Increases
Increases
Confidential
Cash Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Machinery Account
Asset Account
Asset Account
Increases
Decreases
NOTE:
Here, we assume that the Supplier returns the amount immediately.
If the supplier doesnt returns the amount immediately, then the
offset account will be Accounts Receivables.
Confidential
Sales Account
Asset Account
Revenue Account
Increases
Increases
Confidential
Sales Account
Asset Account
Revenue Account
Increases
Increases
Akhtars Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Akhtars Account
Revenue Account
Asset Account
Decreases
Decreases
Confidential
Cash Account
Revenue Account
Asset Account
Decreases
Decreases
NOTE:
Here, we assume that the amount is returned immediately.
If the company doesnt returns the amount immediately, then the
offset account will be Accounts Payables.
Confidential
Cash Account
Expense Account
Asset Account
Increase
Decreases
NOTE:
Here, we assume that the salary is paid as on date.
If the company doesnt pays the amount as on date, then the offset
account will be Salary Payables which will be a Liability Account.
Confidential
Cash Account
Expense Account
Asset Account
Increase
Decreases
NOTE:
Here, we assume that the rent is paid as on date.
If the company doesnt pays the rent amount as on date, then the
offset account will be Rent Payables which will be a Liability
Account.
Confidential
Cash Account
Expense Account
Asset Account
Increase
Decreases
Confidential
Interest Account
Asset Account
Revenue/Income Account
Increases
Increases
Confidential
Cash Account
Capital Account
Asset Account
Decreases
Decreases
Confidential
Asset Account
Liability Account
Increases
Increases
Confidential
Banking Transactions
Business concerns generally deposit their excess cash into
bank. It is for the sake of safety and also the bank provides
some facilities to the depositors.
Whenever cash is required it can be withdrawn from bank
and even the payments can be made to others through
cheques.
The other parties may also make payments to us by means
of cheques drawn on their banks.
Confidential
Cash Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Bank Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Bank Account
Liability Account
Asset Account
Decreases
Decreases
Confidential
Akhtars Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Cash Account
Asset Account
Asset Account
Increases
Decreases
Confidential
Journal Format
Date
Particulars
L.F.
Dr.
Cr.
Journal Entries
Jan 1, 2013: Borrowed from Mr. B cash Rs. 10,000
Jan 3, 2013: Paid Rs. 6,000 to Mr. B on Account.
Journal Entries
Date
Particulars
Jan 1, 2013
Cash Account
To Mr. Bs Account
10,000
Mr. Bs Account
To Cash Account
6,000
Jan 3, 2013
Confidential
L.F.
Dr.
Cr.
10,000
6,000
Ledger Format
Name of the Account
Debit
Date
Particulars
Credit
J.F.
Amount
Date
Particulars
J.F.
Amount
Posting
Journal Entries
Date
Particulars
Jan 1, 2013
Cash Account
To Mr. Bs Account
10,000
Mr. Bs Account
To Cash Account
6,000
Jan 3, 2013
L.F.
Dr.
Cr.
10,000
6,000
Cash Accounts
Date
Jan 1, To Mr. Bs
2013 Account
10,000
Date
Particulars
Jan 3,
2013
By Mr. Bs A/c
J.F
Amount
6,000
Mr. Bs Accounts
Date
Jan 3, To Cash
2013 Account
6,000
Confidential
Date
Particulars
Jan 1,
2013
By Cash A/c
J.F
Amount
10,000
T Accounts
ACCOUNT NAME
CASH
Dr.
Cr.
SHAPED
LIKE a T
Confidential
BALANCING T ACCOUNTS
CASH
10,000
BALANCE 4,000
Confidential
16,000
Balance is
written on
side with
larger
total
Accounting Terminologies
Debit Balance:
If the total amount of debit side of an account is higher than that of
the credit side, the difference amount is called the Debit Balance.
Credit Balance:
If the total amount of credit side of an account is higher than that of
the debit side, the difference amount is called the Credit Balance.
Confidential
Account Title
Debit Balance
Credit Balance
It Balances!!!
Debits = Credits
Total
Amount Revenue/Profit
XXXX
Total
Amount
XXXX
NOTE:
The result of P& L Account may be either: Net Profit or Net Loss.
The Net Profit is shown on the debit side and the Net Loss on the
credit side.
Confidential
Total
Amount Assets
XXXX
Total
NOTE:
The Balance Sheet, when totaled up, should tally.
It means, the total of both the sides must be equal.
Confidential
Amount
XXXX
Example
NOTE:
Please refer the word document for complete flow of transactions
from the Journal to Balance Sheet.
Microsoft Word
Document
Confidential
QUESTIONS
Confidential
118
Confidential