Financial Accounting Introduction to Accounting

Financial Accounting Introduction to AccountingSaurabh AgrawalAccountingAmerican Institute of Certified Public AccountantsAccounting is the art of recording, classifying and summarizing in a significant manner and in terms of money; transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.American Accounting Association Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the informationSaurabh AgrawalAccounting ProcessFinancial Transactions or EventsRecordingJournalCash BookPurchase BookSales BookPurchase Return BookSales Return BookBills Payable BookBills Receivable Book Classifying(Posting into Ledger)SummarizingAnalysis & InterpretationCommunicatingto the UsersSaurabh AgrawalCharacteristics Of AccountingIdentification of financial transactions & EventsMeasuring the identified transactions (Money)Recording (Journal)Classifying (Ledger)Summarizing Analysis & InterpretationCommunicating

Saurabh AgrawalBranches Of AccountingSaurabh AgrawalObjectives of AccountingRecord of financial transactions & eventsDetermine profit or lossDetermine financial positionAssisting the ManagementCommunicating Accounting Information to Users

Functions Of AccountingMaintaining Systematic Accounting RecordPreparation of Financial StatementsMeeting Legal RequirementsCommunicating the Financial DataAssistance to Management

Saurabh AgrawalAdvantages Of AccountingSaurabh AgrawalAdvantages Of AccountingSaurabh AgrawalLimitations of AccountingIncomplete informationInfluence by personal judgementRealisable value is not shownComplete control on frauds is impossibleManipulations in accountsDoes not provide timely information

Saurabh AgrawalUsers of Accounting Information

External UsersLendersShareholdersGovernmentsConsumer GroupsExternal AuditorsCustomers

Internal UsersManagersOfficersInternal AuditorsSales StaffBudget OfficersControllersSaurabh AgrawalUsers of Accounting InformationSaurabh Agrawal

External UsersFinancial accounting provides external users with financial statements (shareholders, lenders, etc.).

Managerial accounting provides information needs for internal decision makers (officers, managers, etc.).Internal UsersAccounting TerminologyAccount:- Account is a statement in which all transactions for a definite period relating to a particular person or particular assets are recorded.

DateParticulars

J.F.

Amount

Date

Particulars

J.F.

Amount

DrCrSaurabh Agrawal13Assets:- An assets is anything that is owned by a business and with the help of which the work of the business is carried on.Assets are classified into the following types:Fixed Assets:- Fixed Assets are those assets which are purchased for long term use in the business with the purpose of producing goods or services and are not meant for resale.For examples:- Land & Building, Plant & Machinery, Furniture.b. Current Assets:- Assets which are meant for sale or which would be converted into cash within one year.For examples:- Cash in hand, Cash at bank, Bills Receivables, Sundry Debtors, Marketable Securities, Stock.

Saurabh AgrawalAccounting Terminologyc. Tangible Assets:- tangible assets are those assets which have a physical existence or can be seen and touched.For example:- Cash, Furniture, stock and tools Accounting TerminologyFormat of Balance SheetLiabilitiesAmountAssetsAmountSundry or Trade Creditors-----------Cash in Hand------------Bills Payable-----------Cash at Bank------------Bank Overdraft-----------Bills Receivable------------Employees Provident Fund-----------Sundry Debtors/Book Debts------------Loans (Cr.)-----------Loans(Dr.)------------Mortgage-----------Closing Stock------------Reserve or Reserve Fund-----------Loose Tools------------Capital ------Add:- Interest on Capital --- Net Profit ---

Less:- Drawings --- Income Tax --- Interest on Drawings --- Net Loss --- -----------

Investment------------Furniture & Fittings------------Plant & Machinery------------Land & Building------------Freehold/Leasehold Land------------Business Premises------------Patents & Trademarks etc------------Goodwill------------Saurabh AgrawalGolden Rules Of AccountingPersonal A/c (Name, Bank)Debit The ReceiverCredit The Giver

Real A/c (Assets:- Cash, Goods, Machinery, furniture, Land, Building )Debit what comes in Credit what goes out

Nominal A/c (Stationery, Electricity bill, telephone bill, Discount, Carriage)Debit all expenses & lossesCredit all gains & Income

Sold goods for cashPersonal A/cDebit The ReceiverCredit The GiverReal A/cDebit what comes in Credit what goes outNominal A/cDebit all expenses & lossesCredit all gains & IncomeGoodsCashEntriesSold goods for cashCash A/cDr. To Sales A/c (Being goods sold for cash)

Sold goods to RamPersonal A/cDebit The ReceiverCredit The GiverReal A/cDebit what comes in Credit what goes outNominal A/cDebit all expenses & lossesCredit all gains & IncomeGoodsRamEntriesSold goods to RamRam A/cDr. To Sales A/c (Being goods sold to Ram)

Purchased Goods for cashPersonal A/cDebit The ReceiverCredit The GiverReal A/cDebit what comes in Credit what goes outNominal A/cDebit all expenses & lossesCredit all gains & Income

EntriesPurchased Goods for cashPurchases A/cDr. To Cash A/c (Being goods purchased for cash)

Purchased Goods from MohanPersonal A/cDebit The ReceiverCredit The GiverReal A/cDebit what comes in Credit what goes outNominal A/cDebit all expenses & lossesCredit all gains & Income

EntriesPurchased Goods from MohanPurchases A/cDr. To Mohan A/c (Being goods purchased from Mohan)

Cash Deposited in bankPersonal A/cDebit The ReceiverCredit The GiverReal A/cDebit what comes in Credit what goes outNominal A/cDebit all expenses & lossesCredit all gains & Income

EntriesCash Deposited in bankBank A/cDr. To cash A/c (Being cash deposited in bank)Journal Entries4.(i) Provide depreciation on furniture Rs 1,500 and on machinery Rs 3,500

4.(ii) Received cash Rs 2,000 for bad-debts written off last year

Date ParticularsAmountDebitCredit(ii)Cash A/c .Dr To Bad Debts Recovered A/c (Being cash Received)2,0002,000DateParticularsAmountDebitCredit(i)Depreciation A/c .Dr To Machinery A/c To Furniture A/c(Being depreciation charged on Assets)5,0003,5001,5004.(iii) Rakesh was declared bankrupt, he owned Rs 5,000 to us. This amount was written off as bad debts.

4.(iv) Rs 2,000 for wages and Rs 3,000 for salaries are outstanding.

Date ParticularsAmountDebitCredit(iii)Bad Debts A/c Dr To Rakesh A/c (Being written off bad debts)5,0005,000Date ParticularsAmountDebitCredit(iv)Wages A/c ...DrSalaries A/c..Dr To Outstanding Exp. A/c (Being wages and sales outstanding)2,0003,0005,0004.(v) Purchased furniture for Rs 10,000 for the proprietor and paid the amount by cheque.

Date ParticularsAmountDebitCredit(v)Drawings A/c Dr To Bank A/c (Being furniture purchased for the proprietor )10,00010,000DateParticularsAmountDebitCredit4.(i)

(ii)

(iii)

(iv)

(v)Depreciation A/c .Dr To Machinery A/c To Furniture A/c(Being depreciation charged on Assets)

Cash A/c .Dr To Bad Debts Recovered A/c (Being cash Received)

Bad Debts A/c Dr To Rakesh A/c (Being written off bad debts)

Wages A/c ...DrSalaries A/c..Dr To Outstanding Exp. A/c (Being wages and sales outstanding)

Drawings A/c Dr To Bank A/c (Being furniture purchased for the proprietor )Grand Total5,000

2,000

5,000

2,0003,000

10,000

27,0003,5001,500

2,000

5,000

5,000

10,000

27,0007.(i) Purchased Machinery for Rs 50,000 and paid Rs 1,000 for its carriage.

7.(ii) Received a cheque of Rs 9,500 from AVI in full settlement of his account of Rs 10,000.

Date ParticularsAmountDebitCredit(i)Machinery A/c Dr To Cash A/c (Being machinery purchased and paid carriage )51,00051,000Date ParticularsAmountDebitCredit(ii)Cash A/c.......DrDiscount A/c....Dr To AVI A/c (Being cash received and discount allowed )9,50050010,0007.(iii) Received a first and final payment of 50 paisa in a rupee from Mohan who owed us Rs 20,000.

7.(iv) Sold goods to Rahul for Rs 20,000 at a Trade discount of 20%. Next day a cheque was received from him after deducting 5% cash discount. Cheque was immediately deposited into bank.

Date ParticularsAmountDebitCredit(iii)Cash A/c.. DrBad Debts A/c..Dr To Mohan A/c (Being cash received and bad debts written off)10,00010,00020,000Date ParticularsAmountDebitCredit(iv)Rahul A/c.. ..Dr To Sales A/c (Being goods sold on 20% trade discount)Bank A/c..DrDiscount A/cDr To Rahul A/c(Being cheque received and deposit in the bank )16,000

15,20080016,000

16,0007.(v) Goods costing Rs 10,000 sold to Ashok at a profit of 25% on cost less 10% trade discount.

Date ParticularsAmountDebitCredit(v)Ashok A/c.. Dr To Sales A/c (Being goods sold)11,250

11,250Working Notes(iv)GoodsLess:- Trade Discount 20% on Rs 20,000Sales PriceLess- Cash Discount 5% on Rs 16,000Cash Received20,000 4,00016,000 80015,200(v)GoodsAdd:- Profit of 25% on Cost (Rs 10,000)

Less:- Trade Discount 10% on Rs 12,500 10,000 2,50012,500 1,25011,250DateParticularsAmountDebitCredit7.(i)

(ii)

(iii)

(iv)

(v)Machinery A/c Dr To Cash A/c (Being machinery purchased and paid carriage)

Cash A/c.......DrDiscount A/c....Dr To AVI A/c (Being cash received and discount allowed)

Cash A/c.. DrBad Debts A/c..Dr To Mohan A/c (Being cash received and bad debts written off)

Rahul A/c.. ..Dr To Sales A/c (Being goods sold on 20% trade discount)

Bank A/c..DrDiscount A/cDr To Rahul A/c(Being cheque received and deposit in the bank)

Ashok A/c.. Dr To Sales A/c (Being goods sold)Grand Total51,000

9,500500

10,00010,000

16,000

15,200800

11,250

1,24,25051,000

10,000

20,000

16,000

16,000

11,250

1,24,2509.(i) Purchased business for Rs 90,000.

(ii) Purchased machinery from Mohan brothers, kolkata for Rs 15,000 on which they paid Rs 150 freight on my behalf.

Date ParticularsAmountDebitCredit(i)Business Purchases A/c ...Dr To Vendors A/c (Being Business purchase)90,00090,000Date ParticularsAmountDebitCredit(ii)Machinery A/c ...Dr To Mohan Brothers (Being machinery purchase)15,15015,150(iii) The erection charges of machinery amounted to Rs 450 which were paid in cash.

(iv) A cashier has stolen Rs 700 and now he is absconding.Date ParticularsAmountDebitCredit(iii)Machinery A/c ....Dr To cash A/c (Being Erection Charges paid)450450Date ParticularsAmountDebitCredit(iv)Loss by Theft A/c ....Dr To Cash A/c (Being cash stolen)700700(v) On claim being made for theft of cash, insurance company paid Rs 700.

(vi) Received an order from Dinesh for supply of goods worth Rs 2,000.

Date ParticularsAmountDebitCredit(vi)No Entry Date ParticularsAmountDebitCredit(v)Insurance Claim A/cDr To Loss by Theft A/c (Being claim admitted)

Cash A/c..Dr To Insurance Claim A/c(Being receipt of claim money)700

700

700

700

(vii) Goods were supplied as per order of Dinesh and on it freight of Rs 100 was paid.

(viii) Goods worth Rs 50 were distributed as sample free of charge.

Date ParticularsAmountDebitCredit(vii)Dinesh A/c ..Dr To Sales A/c To Cash A/c(Being goods supplied and freight paid)2,1002,000100Date ParticularsAmountDebitCredit(viii)Free Sample A/cDr To Purchases A/c(Being free sample distributed)5050

(ix) Goods, the list price of which is Rs 20,000 are sold to Suresh at 8% trade discount on list price.

(x) Goods worth Rs 150 were spoiled in transit and a claim was made to Railway in this respect.

Date ParticularsAmountDebitCredit(x)Insurance Claim A/cDr To Spoiled in Transit A/c(Being claim admitted)150150

Date ParticularsAmountDebitCredit(ix)Suresh A/cDr To Sales A/c(Being goods sold at 8% trade discount)18,40018,400

(xi) Rs 150 were received in cash from railway in the payment of claim.

Date ParticularsAmountDebitCredit(xi)Cash A/c..Dr To Insurance Claim A/c(Being claim money received)150150

Working Notes(ix)GoodsLess:- Trade Discount 8% on Rs 20,00020,000 1,60018,400DateParticularsAmountDebitCredit9.(i)

(ii)

(iii)

(iv)

(v)Business Purchases A/c ...Dr To Vendors A/c (Being Business purchase)

Machinery A/c ...Dr To Mohan Brothers (Being machinery purchase)

Machinery A/c ....Dr To cash A/c (Being Erection Charges paid)

Loss by Theft A/c ....Dr To Cash A/c (Being cash stolen)

Insurance Claim A/cDr To Loss by Theft A/c (Being claim admitted)

Cash A/c..Dr To Insurance Claim A/c(Being receipt of claim money)90,000

15,150

450

700

700

700

90,000

15,150

450

700

700

700DateParticularsAmountDebitCredit9.(vi)

(vii)

(viii)

(ix)

(x)

(xi)

No Entry

Dinesh A/c ..Dr To Sales A/c To Cash A/c(Being goods supplied and freight paid)

Free Sample A/cDr To Purchases A/c(Being free sample distributed)

Suresh A/cDr To Sales A/c(Being goods sold at 8% trade discount)

Insurance Claim A/cDr To Spoiled in Transit A/c(Being claim admitted)

Cash A/c..Dr To Insurance Claim A/c(Being claim money received)2,100

50

18,400

150

150

1,28,5502,000100

50

18,400

150

150

1,28,5507(i) Business commenced with a capital of Rs 6,00,000.

(ii) Rs 4,50,000 deposited in a bank account. Date ParticularsAmountDebitCredit(i)Cash A/c ......Dr To Capital A/c (Being Business Started with capital)6,00,0006,00,000Date ParticularsAmountDebitCredit(ii)Bank A/c .....Dr To Cash A/c (Being cash deposited in bank)4,50,0004,50,000(iii) Rs 2,30,000 plant and machinery purchased by paying Rs 30,000 cash immediately.

(iv) Purchased goods worth Rs 40,000 for cash and Rs 45,000 on account.Date ParticularsAmountDebitCredit(iii)Plant & Machinery A/c ...Dr To Cash A/c To Creditors A/c(Being plant and machinery purchased)2,30,00030,0002,00,000Date ParticularsAmountDebitCredit(iv)Purchases A/c ......Dr To Cash A/c To Bank A/c(Being goods purchased)85,00040,00045,000(v) Paid a cheque of Rs 2,00,000 to the supplier for plant and machinery.

(vi) Rs 70,000 cash sales (of goods costing Rs 50,000)

Date ParticularsAmountDebitCredit(v)Creditors A/c ...Dr To Bank A/c (Being paid to supplier of plant and machinery)2,00,0002,00,000Date ParticularsAmountDebitCredit(vi)Cash A/c ...Dr To Sales A/c (Being sold goods for cash)70,00070,000(vii) Withdrawn by the proprietor Rs 35,000 cash for personal use.

(viii) Insurance Paid by cheque of Rs 2500

Date ParticularsAmountDebitCredit(vii)Drawings A/c ...Dr To Cash A/c (Being cash withdrawn by the proprietor)35,00035,000Date ParticularsAmountDebitCredit(viii)Insurance A/c ...Dr To Bank A/c (Being paid insurance by cheque)2,5002,500(ix) Salary of Rs 5,500 outstanding.

(x) Furniture of Rs 30,000 purchased in cash.

Date ParticularsAmountDebitCredit(ix)Salary A/c ...Dr To Outstanding Salary A/c (Being salary outstanding)5,5005,500Date ParticularsAmountDebitCredit(x)Furniture A/c ...Dr To Cash A/c (Being furniture purchased for cash)30,00030,000