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Introduction
to
Financial
Accounting
What is Accounting?
Accounting is an art of recording, classifying and summarizing all financial transactions and interpreting the results.
Groups interested in
Accounting Information
Owners/Proprietors
Management
Potential Investors
Creditors
Employees
Government
Researchers
Citizens / communities
Why is Accounting Required?
To Know -
Whether business is making a profit or loss (for a non-profit institution this would be surplus / deficit of income over expenditure)
The financial position of business / institution
What to pay ? (Liability)
Whom to pay?
How much to pay?
Why is Accounting Required? Contd..
What to collect? (Asset)
From whom to collect?
How much to collect?
From where is the money coming?
Where is it going?
What are the Costs?
What is the Revenue?
What decisions to take?
Kinds of Accounts
Personal (accounts of a person or institution)
Impersonal (all other accounts)
Kinds of Accounts
Contd...
Personal Account
Proprietor CreditorsDebtors
RamyaKarnataka BankIndian Institute of Science etc.
Kinds of Accounts
Contd...
Impersonal
Real Nominal(Tangible- what you(Intangible what cannot
Can touch and feel)be touched or seen)
.
Kinds of Accounts
Contd...
Real
Assets Goods(meant for use) (meant for resale)
.
cash, furniture,
Assets are usually classified into Fixed Assets (life/ use > 1 year) like Building, Furniture and Current Assets (life/ use > 1 year) like cash, stamps etc.
Kinds of Accounts
Contd...
Nominal
Expenses & Income & Losses Gains
.
conveyance, Interest recd. refreshment etc.. Sales
Rules for Debit & Credit
PERSONAL ACCOUNTS
Debit the receiver. Credit the giver
REAL ACCOUNTS
Debit what comes in. Credit what goes out
Rules for Debit & Credit
Contd...
NOMINAL ACCOUNTS
Debit all expenses & losses Credit all gains & income
IN DOUBLE ENTRY SYSTEM, EVERYTRANSACTION HAS TWO ASPECTS - DEBIT & CREDITThe sum of debit always = sum of credit for EVERY transaction
Books of Accounts
Journal (Book of first or original entry, maintained date wise)Purchase Day Book
Sales Day Book
Ledger (party wise record)Debtors Ledger
Creditors Ledger
General Ledger
Cash Book (this is both journal and ledger)
In modern computerised systems, transaction is recorded once and both the Journal and Ledger are reports
The Accounting Transaction
Moves from the Source Document to Books of
Accounts
1. Source Document
2. Voucher
3. Recording in Journal / Cash Book / Purchase / Sales Book
4. Posting in Ledgers
5. Preparation of Trial Balance and financial statements
Flow of transaction
Accounting Concepts
Entity
Going concern
Consistency
Accrual - Mercantile & Cash system
Materiality
Cost
Accounting Conventions
Conservatism
Disclosure
Accounting policies - Indian
International Accounting standards
Inventory valuation
Depreciation
Revenue recognition
Pass Accounting Entries For
Cash paid - Rs.5,000/- to customer Ramya
Fee of Rs.20,000/- recovered from Malini
by cheque
Rs.20,000/- transferred from Ravis A/c to Ganesh's A/c
Salary Rs.6,000/- paid to Raji by cash
Pass Accounting Entries For
Contd....
Rent for June paid Rs.4,000/- by cheque
Computer purchased for Rs.100,000/- on 30 days credit from IBM
Printing expenses of Rs.10,000/-
provided for
Conveyance paid to Anita Rs.250/- cash
Pass Accounting Entries For
Contd....
Furniture purchased for Rs.5,000/- paid by cheque
Sold software for Rs.50,000/- and received cash for the same
Test
1. Ramya A/c To Cash A/c2. Bank A/c To Fees A/c3. Mr. Ganeshs A/c To Mr. Ravis A/c4. Salaries A/c To Cash A/c
DR CR 5,000 5,00020,00020,00020,00020,000 6,000 6,000
TestContd...
5. Rent A/c To Bank A/c6. Computers A/c To I.B.M. A/c7. Printing exp A/c To accrued Expenses A/c
DR CR 4,000 4,000100,000100,000 10,000 10,000
TestContd...
8. Conveyance exp To cash 9. Furniture To Bank10. Cash To Sales A/c
DR CR 250 2505,000 5,00050,000 50,000
Ledger Accounts
Cash Book
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Sales A/c50000 By Ramya 5000 By Salaries 6000 By Conveyance 250 By Balance c/f 38750_____ _____50000 50000 ===== =====To Bal. b/f38750
Ledger Accounts
Bank Book
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To fees20000 By Rent 4000 By Furniture 5000 By Balance c/f 11000_____ _____20000 20000 ===== =====To Bal. b/f11000
Ledger Accounts
Ram A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To cash 5000 By Balance c/f 5000_____ _____ 5000 5000 ===== =====To Bal. b/f 5000
Ledger Accounts
Fees A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Balc/f 20000 By Bank 20000_____ _____ 20000 20000 ===== ===== By Bal b/f 20000
Ledger Accounts
Ganesh A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Ravi A/c 20000 By Bal c/f 20000_____ _____ 20000 20000 ===== =====To Bal b/f 20000
Ledger Accounts
Ravi A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Bal c/f 20000 By Ganesh 20000===== ===== By Bal b/f 20000
Ledger Accounts
Salaries A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To cash 6000 By Bal c/f 6000===== =====To Bal b/f 6000
Ledger Accounts
Rent A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To bank 4000 By Bal c/f 4000===== =====To Bal b/f 4000
Ledger Accounts
Computer A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To IBM a/c 100000 By Bal c/f 100000===== =====To Bal b/f 100000
Ledger Accounts
IBM A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Bal c/f 100000 By computers 100000===== ===== By Bal b/f 100000
Ledger Accounts
Printing Expense A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Accrued 10000 By Bal c/f 10000 expenses ===== ====To Bal b/f 10000
Ledger Accounts
Accrued Expenses A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Bal c/f 10000 By Printing 10000===== expenses ==== By Bal b/f 10000
Ledger Accounts
Conveyance Expense A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To cash 250 By Bal c/f 250==== ===To Bal b/f 250
Ledger Accounts
Furniture A/c
Dr.Cr.
Date ParticularsAmt Date Particulars Amt
To Bank 5000 By Bal c/f 5000==== ===To Bal b/f 5000
Trial Balance
When all the accounts of a concern are
balanced off, then they are put in a list called Trial Balance
The first column is the Particulars which consists of name of each account
The second column is the Debit which consists of debit balance
The third column is the Credit which consists of all credit balance
Trial Balance Format Contd....
Particulars
Debit
Credit
Sl.No.
1Share Capital 1,90,0002 Commission 2,60,0003 Fixed Deposits 1,50,0004 Reserve Fund 1,40,0005 Audit Fees 5,0006 Salaries 2,15,000
Total 4,80,000 4,80,000
Trial Balance Contd....
The total of the debit side must be equal to that of its credit side.
This is based on the principle that in Double Entry System, for every debit there must be a credit.
The Trial Balance is the basis for the preparation of the financial statements - Balance Sheet and Profit & Loss Account
Balance Sheet
Statement of Assets and Liabilities andhence made as atA predetermined date of a month or year Balance Sheet as at 31.12.1997 Balance sheet as at 31.03.1998
Profit & Loss Account
Statement showing Profit or Loss for a period ending on A Month, A Quarter, A Year Profit & Loss Account for the year ended 31.12.1997 Profit & Loss Account for the period Jan to June 96
Assets
Current Assets
Cash
Investments
Accounts Receivable
Prepaid Expenses
Raw Materials
Work in Progress
Finished Goods
Assets Contd...
Fixed Assets
Land
Buildings
Plant & Machinery
Assets Valuation
Do I value at Cost?Do I value at Market Price?Do I consider what the Asset will Realise?OrIs it Cost Less Depreciation??
CURRENT ASSETS
AtCost or Market Value
FIXED ASSETSAtCost or RevaluationLESSAccumulated Depreciation
Liabilities
Current Liabilities
Accounts Payable
Provisions
Fixed Liabilities
Loans - Unsecured
Loans - Secured
Shareholders Funds
Share Capital
Reserves
Shareholders Funds
Owners Funds
Initial Investment
Profits from Business