3.accounting Equation &accounting Cycle

The Accounting Equation

Resources
What are an organization’s resources called?

Resources = Sources
Assets
What are the

Resources used sources of the
in the business assets?
Resources = Sources
Liabilities
Assets
Owner’s
Equity
Resources
Resources used supplied by
in the business creditors and
owners
At any point of time, the resources of a business
entity must be equal to the claims of the persons
who have financed these resources.
Assets = Liabilities + Owner’s Equity
Economic Claims to
Resources Economic
Resources
The Basic Accounting Equation
• The Accounting equation is the equation which shows the
relationship among the three elements of the balance sheet
namely-
 Assets,
 Liabilities and
 Owners’ equity of a business.(capital)
Assets = Liabilities + Capital

• The equation must be in balance after every recorded
transaction in the system.
Business
Business Transactions
Transactions
a. Sachin deposits RS 25,000 in a bank account

for ABC Ltd
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions

for ABC Ltd.
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Business
Transactions

for ABC Ltd.
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Sachin, Capital
25,000
Total Total
25,000 25,000
Business
Transactions
b. ABC Ltd. buys land for Rs 20,000.
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions
b. ABC Ltd. buys land for Rs 20,000.
ASSETS LIABILITIES
Cash
(20,000)
= OWNER’S EQUITY
Business
Transactions
b. ABC Ltd buys land for RS 20,000.
ASSETS LIABILITIES
Cash
Cash
(20,000)
(20,000)
Land = OWNER’S EQUITY
20,000
Land
20,000
Total Total
25,000 25,000
Business
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to

pay the supplier in the near future.
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to

pay the supplier in the near future.
ASSETS LIABILITIES
Accounts Payable
1,350
Purchases
1,350 = OWNER’S EQUITY
Total Total
26,350 26,350
Business
Transactions
d.
d.Receive
Receivefees
feesfor
forservices
servicesperformed,
performed,Rs.7,500
Rs.7,500
ASSETS LIABILITIES
Cash
7,500
= OWNER’S EQUITY
Fees earned
7,500
Total Total
33,850 33,850
Business
Transactions
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;

utilities, Rs 450; and miscellaneous, Rs 275.
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions

utilities, Rs 450; and miscellaneous, Rs 275.
ASSETS LIABILITIES
Cash
(3,650)
= OWNER’S EQUITY
Business
Transactions

utilities, Rs 450;
commission, Rs and
450;miscellaneous,
and miscellaneous,
Rs 275.
Rs 275.
ASSETS LIABILITIES
Cash
(3,650)
= OWNER’S EQUITY
Expenses
(3,650)
Total Total
30,200 30,200
Business
Transactions
f. ABC Ltd pays Rs 950 to creditors on account.
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Cash
(950)
= OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Accounts Payable
(950)
Cash
(950)
= OWNER’S EQUITY
Total Total
29,250 29,250
Business
Transactions
g. Sold goods worth Rs.800 for Rs 900
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Purchases
(800) = OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Purchases
Cash
900
Business
Transactions
ASSETS LIABILITIES
Purchases
Profit
Cash 100
900
Total Total
29,350 29,350
Business
Transactions
h. Sachin withdraws Rs 2,000 in cash.
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Cash
(2,000)
= OWNER’S EQUITY
Business
Transactions
ASSETS LIABILITIES
Cash
(2,000)
= OWNER’S EQUITY
Sachin’s, Drawing
(2,000)
Total Total
27,350 27,350
Transaction
Transaction Summary
Summary
ASSETS LIABILITIES
Cash 6,800 OWNER’S EQUITY

Purchases
Land
550
20,000
=
Transaction
Transaction Summary
Summary
ASSETS LIABILITIES
Accts. Payable 400

Purchases
Land
550
20,000
=
Transaction
Transaction Summary
Summary
ASSETS LIABILITIES
Accts. Payable 400

Purchases
Land
550
20,000
= Sachin, Capital 25,000
Sachin, Drawing (2,000)
Fees Earned 7,500
Wages Expense (2,125)
Rent Expense (800)
Commission (450)
Misc. Expense (275)
Profit 100
Accounting Equation Example
Anil started business with cash Rs. 2,50,000
Purchased goods on credit worth Rs. 24,000
Purchased goods for cash Rs. 4,000
Purchased furniture for cash Rs. 1,500
Withdrew cash for private use Rs. 1,000
Paid rent Rs. 3,000
Received interest Rs. 1,000
Sold goods on credit (cost Rs. 1,500) Rs.1,700
Paid to creditors Rs. 4,000
Paid salaries Rs. 2s,000
Accounting Equation Example
Anil started business with cash Rs. 2,50,000
Purchased goods on credit worth Rs. 24,000
Purchased goods for cash Rs. 4,000
Purchased furniture for cash Rs. 1,500
Withdrew cash for private use Rs. 1,000
Paid rent Rs. 3,000
Received interest Rs. 1,000
Sold goods on credit (cost Rs. 1,500) Rs.1,700
Paid to creditors Rs. 4,000
Paid salaries Rs. 2s,000
The Double Entry System
Double-Entry
Double-Entry Accounting
Accounting
Double entry accounting is the orderly
recording of financial transactions of a
business in a systematic manner whereby
each transaction is recorded in its 2-
fold aspects:
i. Aspect of receiving i.e. debit
ii. Aspect of giving i.e. credit
Every debit has an equal and opposite
credit.
The Double-Entry
The Double Entry System
System
Each transaction is recorded with at least:
One debit One credit
Total debits must equal total credits.

Double-Entry
Double-Entry Accounting
Accounting
In the Double entry system, both these aspects are
recorded in terms of accounts, such that at least two
accounts are always affected by each transaction.
The T account is a representation of a scale or balance.
The total of the debit entries and total of the credit
entries in the various accounts must be equal
Scale or Balance T account
Luca Pacioli Left Side Right Side

Developer of Receive Give
Double-Entry DEBIT CREDIT
Receive Give Accounting
DEBIT CREDIT
Advantage of Double Entry System
1) A complete record of the financial transactions is

maintained because it records both the aspects of every
financial transaction.
2) It gives accurate information of amount due from
various debtors and amount due to various
creditors by maintaining personal accounts of debtors
and creditors.
3) Provides a check on Arithmetical accuracy of the
account books.
Advantage of Double Entry System
(Cont….)
4) It is helpful in preventing frauds and errors. to
locate the errors.
5) Helpful in ascertaining profit or loss of a particular
period by preparing the Profit and Loss Account.
6) Financial position of the business entity can be
ascertained by preparing the Balance Sheet.
7) It provides readily available information to be sent to
income tax and sales tax authorities.
8) It is helpful in filing accurate claim for loss of stock
as a result of fire to the insurance company because a
complete record of stock is kept.
Disadvantage of Double Entry System
1) This system requires the maintenance of a

number of books of accounts which is not
practical in small concerns.
2) The system is costly because a number of
records are to be maintained.
3) There is no guarantee of absolute accuracy of
the books of account because trial balance may
agree in spite of errors .
Classification of Accounts According to
Traditional Approach
ACCOUNTS
Personal Impersonal
Accounts Accounts
Nominal Real
Accounts Accounts
Natural Artificial Representative
Persons’ Persons’ Persons’
Accounts Tangible Intangible
Accounts Accounts Accounts Accounts
A: PERSONAL ACCOUNT:
1. Natural Person’s Personal Account. An account recording transactions with an
individual human being is known as a natural person’s Personal Account, e.g., Aneesh’s
Account.
2. Artificial Person’s Personal Account. An account recording financial transactions
with an artificial person created by law or otherwise is called an artificial person’s
personal account, e.g., ABC Industries Ltd., Bank Account, S &. Co. etc.
3. Representative Personal Account. An account indirectly representing a person or
persons is known as a representative personal account. When accounts are of a similar
nature and their number is large, it is better to group them under one head and open a
representative personal account. Examples of such types of accounts can be: Rent
Outstanding Account, Interest Outstanding Account, Prepaid Salary Account etc. Rent
Outstanding Account is a personal account representing rent payable to. .

B: REAL ACCOUNT:
1. Tangible Real Account. Such type of account relates to an asset which can be
touched, Felt, seen and measured e.g., Plant Account, Cash Account, BuildingAccount,
Stock Account etc.
2. Intangible Real Account. Such type of account relates to an asset which cannot be
touched physically but can be measured in value. For example, Goodwill Account, Patents
Account, Trade Marks Account, Copy Rights Account etc.
C. NOMINAL ACCOUNTS.
These accounts deal with expenses, incomes, profits and losses.

Rules For Double Entry System
on the Basis of Traditional Classification
• Real Account = Debit –What comes in

Credit- what goes out
• Personal Account = Debit –Receiver
Credit - Giver
• Nominal Account = Debit –Expenses/ Losses
Credit- Incomes/Gains
Classification of Accounts According to
Accounting Equation
• Assets Accounts
– Relates to tangible and intangible assets
• Liabilities Accounts
– Eg. Creditors, bills payable, unearned revenue, other
short-term liabitlities, long term liabilities(secured and
unsecured)
• Equity Accounts
– Eg capital/share capital a/c, drawings a/c, retained
earnings,Revenue Accounts, Expense Accounts,
dividends
Rules For Double Entry System on Basis of
Accounting Equation
• Regarding assets:
Increases in assets - DEBIT
Decreases in assets - CREDIT
• Regarding Liabilities:
Increases in liabilities -
CREDIT
Decreases in liabilities - DEBIT
• Regarding Capital:
Increases in capital - CREDIT
Decreases in capital - DEBIT
• Regarding Expenses and Revenue:
Expenses, Drawings, Dividends - DEBIT
Revenue - CREDIT
• Regarding Incomes or Profits and Losses :
Incomes or profits - CREDIT
Losses - DEBIT
Analysis
Analysis of
of Transactions
Transactions
• Analysis of transactions is necessary for correct
recording of transactions.
• Steps:
Identify the accounts involved in the transaction to
be recorded.
Classify the accounts identified as personal, real or
nominal; or as asset, liabilities, capital, revenue or
expense
Determined the rules of debit and credit applicable to
the accounts involved
Finally determine the account(s) to be debited and
the account(s) to be credited.
Example
Example
1. Started business with Rs. 50,000

2. Purchased furniture for Rs. 1,000 on credit from
Pankaj
3. Goods purchased for cash Rs. 20,000
4. Goods sold to Rahul Niwas for Rs. 5,000 on credit
5. Paid salaries to staff Rs. 1,800
6. Goods worth Rs. 500 returned by Rahul Niwas
7. Rs. 1,000 commission received
Accounting Cycle
It refers to a complete sequence of accounting

procedures, which are required to be repeated in the
same order during each accounting period.
It is complete sequence beginning with the recording

of the transaction and ending with the preparation of
the final accounts.
Accounting Cycle
Accounting cycle includes:
(a) Recording: First, all transactions should be recorded in
the Journal or Books of Original Entry known as subsidiary
books as and when they take place.
(b) Classifying: All entries in the Journal or Books of
Original Entry should be posted to the appropriate ledger
accounts to find out at a glance the total effect of all such
transactions in a particular account.
(c) Summarizing: Last stage is to prepare the trial balance
and final accounts with a view to ascertaining the profit or
loss made during a trading period and the financial position
of the business on a particular date.
(d) Interpreting :The financial statements are interpreted in a
manner useful to the users ,so as to enable them to make
decisions.
The Accounting Cycle: Steps
1. Analyze the transaction

2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the trial balance
5. Prepare financial statements
Accounting Cycle
• The sequence of steps in recording

transactions:
Transactions Documentation Journal
Financial Trial Ledger

Statements Balance
Accounting Cycle
• Analysis of transactions from source documents
• Journalising the transactions
• Posting of journal entries into the ledger accounts
• Balancing of each ledger account
• Preparation of a trial balance to establish equality of debits
and credits in the ledger accounts.
• Recording of adjusting entries in the journal
• Recording of adjusting entries in the Ledger account.
• Recording of closing entries in the journal
• Preparation of financial statements/final accounts
Accounting Cycle
1. Analyze the transaction

• The process starts with source
documents, which are the supporting
original records of any transaction.
– Examples are sales slips or invoices,
check stubs, purchase orders, bank
deposit slips, and cash receipt slips.
2. Journalize the transaction
• In the second step, an analysis of the
transaction is placed in the book of
original entry, journal, which is a
chronological record of how the
transactions affect the balances of
applicable accounts.
– The most common example is the
general journal - a diary of all events
(transactions) in an entity’s life.
3. Post the transaction to accounts in ledger

• In the third step, transactions are entered into
the ledger.
– Remember that a transaction is not
entered in just one place; it must be
entered in each account that it affects.
– Depending on the nature of the
organization, analysis of the transactions
could occur continuously or periodically.
Accounting Cycle
4. Prepare the trial balance
• The fourth step includes the preparation
of the trial balance, which is a simple
listing of all accounts from the ledger
with their balances.
– Aids in verifying accuracy and
in preparing the financial
statements
– Prepared periodically as necessary
The Accounting
AccountingCycle:
Cycle Steps
5. Prepare financial statements

• In the final step, the financial statements
are prepared.
– Financial statements may be prepared
after each quarter of the year.
December 2007
– the companies may prepare
financial statements at
various other intervals to
meet the needs of
their users.
JOURNAL
Journal
What is a journal?
• It is a list in chronological order of all the

transactions for a business.
•It is the book of original (first) entry
•It has the following columns:
•Date •Voucher Number
•Particulars •Amount (DEBIT)
•Ledger Folio •Amount (CREDIT)
Format of Journal
Date Particulars V.NO. L.F Debit Credit

Journal entry
Journal entry is an analysis of the effects of a
transaction on the accounts, usually
accompanied by an explanation of the
transaction.
–This analysis identifies the accounts to be
debited and credited.
Types of journal entries
 Simple entry - an entry for a transaction that
affects only two accounts
 Compound entry - an entry for a transaction
that affects more than two accounts
• Remember: whether the entry is simple or

compound, the debits (left side) and credits (right
side) must always be equal.
Journal entry
What does a journal entry include?
– Date of the transaction
– Title of the account debited
– Title of the account credited
– Amount of the debit and credit
– Description of the transaction (narration)
Recording transactions
in the journal.
Journalizing
• It is the process of entering transactions
into the journal
Steps:
1.Identify transaction from source documents.
2.Specify accounts affected.
3.Apply debit/credit rules.
4.Record transaction with description.
Steps Involved in Journalizing
Transactions
• Analyse the transaction in source document to identify
appropriate accounts affected
• Determine which accounts are to be debited and those
to be credited based on rules of debit and credit
• Enter date in first column(date column)
• In particulars column enter the name of the account
debited at extreme left of column and abbreviation Dr.
at right end of particulars column.
• Write amount in Debit column
Steps Involved in Journalizing
Transactions
• In particulars column enter the title of the account to
be credited indented to right preceded by the word
“To” and write amount in Credit column.
• Insert a narration which is a brief description of
transaction
• Draw a line across particulars column
Journalizing
• On April 1, Garge invested Rs 30,000 in
GillenTravel.
Journal entry
Date Particulars Debit Credit
April Rs Rs
1 Cash Account Dr 30,000
To Garge Capital
30,000 (Received initial investment
from owner)
Subsidiary Books
Subsidiary books, or books of prime entry or original entry

are those where business transactions are recorded in the
books in the first instance and then posted to the ledger
from these books.
Types of Journals
1) Cash Book.
2) Purchase (or Bought or Invoice) Book.
3) Sales (or day) Book.
4) Purchases Returns (or Return Outwards) Book.
5) Sales return (or Return Outwards) Book.
6) Bills Receivable Book.
7) Bill Payable Book.
8) Journal Proper (General Journal)
**First seven journals are special Journals while journal
proper is general journal
Types of Journals
1) Cash Book-records cash (and bank) receipts and payments
Shows balance of cash in hand and at bank.
May also show discount allowed or received etc.
2) Purchases Day (or Bought or Invoice) Book-records all
transactions of credit purchases of all merchandise
Shows the total credit purchases of goods and materials made during a
particular period.
Credit purchases of goods, dealt in or of the materials and stores required
in the factory
3) Sales (or day) Book-records all credit sales (of goods dealt in)
Shows total sales made during a particular period.
Types of Journals
4) Purchases Returns (or Return Outwards) Book-
records all returns of goods and materials previously
purchased
Shows total returns during a particular period.
5) Sales return (or Return Outwards) Book- records
all sales returns made by the customers
Shows the total returns inwards during a particular period..
6) Bills Receivable Book- records all bills received
from the customers.
Types of Journals
7) Bill Payable Book- records all acceptances of bills made by the firm
Indicates the various dates on which payments of various bills are to be made.
8) Journal Proper (General Journal) -records all residual
transactions
Records all those transactions which could not be recorded in any of the
above subsidiary books will be recorded in this book such as
i. Credit purchase and sale of assets
ii. Opening entries
iii. Adjustment and Rectification Entries
iv. Closing Entries
v. Any other non-cash transaction not recorded elsewhere
The Sales Journal
Sales Journal Page 35

Invoice
Date No. Particulars Details Amount
3/2 615 MyMusicClub.com 2,200

3/6 616 RapZone.com 1,750
3/18 617 Web Cantina 2,650
3/27 618 MyMusicClub.com 3,000
Totals 9,600
All sales on credit are recorded in this journal. Each

sales invoice is listed in numerical order. This
journal is often referred to as an invoice register.
The Purchases Journal
Purchases Journal Page 11
Date Particulars Details Amount
3/3 Howard Supplies 600

3/7 Donnelly Supplies 420
3/19 Donnelly Supplies 1,450
3/27 Howard Supplies 960
Totals 3,430
All purchases on account are recorded in this journal.

Cash journals
• Single column Cash Book

= Simple cash Book
• Double column Cash Book
= Cash Book with bank column
• Triple column Cash Book
=Cash Book with Bank & Discount Column
• Petty Cash Book
= Record small cash payouts
Ledger
Ledger
• Ledger - a group of related accounts

kept current in a systematic manner
Ledger
– Think of a ledger as a book with
one page for each account.
Ledger
• Ledger is a register having a number of pages

which are numbered consecutively.
• One account is usually assigned one page in the

ledger.
• However, if the transactions, pertaining to a

particular account are more, it may be assigned
more than one page in the ledger.
Ledger
• A ledger is a secondary book.
• The secondary books may be classified as:
Main Ledger (General Ledger)
• Contains all accounts except those of individual trade
debtors and trade creditors.
Subsidiary Ledger
• Debtors’ Ledger (Sales Ledger) -contains individual
customers’ accounts
• Creditors’ Ledger (Purchases Ledger) -contains
individual accounts of trade creditors
Ledger
Ledger
General Ledger
Debtors’ Ledger Customer Accounts
A B C D
Creditors’ Ledger Creditor Accounts
A B C D
Ledger
Ledger
General Ledger
Debtors’ Ledger Customer Accounts
A B C D
Cash Book
Creditors’ Ledger Creditor Accounts
A B C D
Ledger Account
• A ledger account may be defined as a summary

statement of all the transactions relating to a person,
asset, expense or income which have taken place
during a given period of time and shows their net
effect.
The T Account
• The common form of an account is the T account.
• The account is divided into two sides for recording

increases and decreases in the accounts.
• The T account has 3 parts:

1. A title that describes the name of the asset, liability, or
equity account
2. A left side, or the Debit side.
3. A right side, or the Credit side.
Proforma for Account
Debit Title of the account Credit

Date Particulars L.f Amt. Date Particulars L.f Amt.
Standard Form of Account
• In practice, accountants draw up accounts in a form

known as the standard form.
• The standard form shows the balance after every
transaction and is therefore more useful and efficient
to use than the T-form.
Date Explanation Post Debit Credit Balance
Ref.
2008
Mar 1 50,000 50,000
2 20,000 70,000
3 58,000 12,000
Posting
• What is posting?
• It is the transfer of information from the
journal to the appropriate accounts in the
ledger.
Posting
• The account debited in the journal should also be debited
in the ledger and account credited should also be credited
in the ledger
• Steps:
• Enter date
• Enter name of the other account being debited or credited.
• Enter amount in proper debit or credit column
• Enter journal source info
– Usually the words ‘to’ and ‘by’ are used on the debit
and credit side of the account respectively.
Recording and Posting an Entry
Journal Page 1
Date Particulars Debit Credit
April 2 Cash 30,000
Garge Capital 30,000
(Received initial
investment from owner)
Debit Cash Account Credit
Date Ref. Particulars Amount Date Ref Particulars Amount
April 2 1 To G. Cap 30,000
Insert the number of the journal page.

Journal Page 1
L.F.
Date Description Debit Credit
12/1 Prepaid Insurance 2,400
Cash 2,400
1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.
3. Post the credit side of the transaction.
Journal Page 1
L.f
Date Description Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 2,400
Ledger
Dr. Prepaid Insurance Account Cr.

Date Particulars J.F. Amt. Date Particulars J.F. Amt.
12/1 To Cash 1 2400

Journal Page 1
Date Description L.f.
Debit Credit
12/1 Prepaid Insurance 15 2,400
Cash 11 2,400
1
2 3 5
4
Ledger Page No.15
Dr. Prepaid Insurance Account Cr.

Date Particulars J.F. Amt. Date Particulars J.F. Amt.
12/1 To Cash 1 2400

Balancing of Accounts
• Balance - difference between total left-side
amounts and total right-side amounts at any
particular time
– Assets have left-side balances.
• Increased by entries to the left side
• Decreased by entries to the right side
– Liabilities and Owners’ Equity have right-side balances.
• Decreased by entries to the left side
• Increased by entries to the right side
• Various accounts in the ledger are balanced with
a view to preparing the final accounts.
Balancing of Accounts
The procedure of balancing accounts is as follows:
1) Take the totals of the two sides of the account concerned.
2) Ascertain the difference between the totals of two sides. If the debit side
is more then the balance is a Debit balance
If the credit side is more than the balance is a credit balance
3) Enter the difference in the amount column of the side showing less total.
Write against the difference in the particulars column “ To Balance c/d”
(c/d means carried down) if debit side of the account is less (credit balance)
and “By Balance c/d” on the credit side of the account. In this way, the
total of two sides will agree.
4) The balance is brought forward at the beginning of the next period. If “To
Balance c/d” is written on the debit side before balancing, it is brought
forward on the credit side and “By Balance b/d” (b/d means brought down)
is written against the balance in the particulars column and vice versa.
TRIAL BALANCE
TRIAL BALANCE
• A trial Balance may be defined as a

statement of debit and credit totals or ledger
balances extracted from the various accounts
in the ledger with a view to test the
arithmetical accuracy of the books.
TRIAL BALANCE
• It is a listing of all the accounts with their related
balances at the end of the accounting period after all
transactions have journalized and posted
• It is an internal document.
• Thus, at the end of the financial year or at any other
time, the balance of all the ledger accounts are extracted
and are written up in a statement known as Trial
Balance and finally totaled up to see if the total of debit
be is equal to the total of credit balances.
The purposes of the Trial
Balance
• It provides a check on accuracy by showing whether
total debits equal total credits.
• Source document for preparing external financial
statements-To establish a convenient summary of
balances in all accounts for the preparation of formal
financial statements
• To identify accounts to be adjusted
• To have an overview of operations
The Financial Statements
The financial statements are a picture
of the company in financial terms.
Each financial statement relates to a specific

date or covers a particular period.
Information Reported on the
Financial Statements
Financial
Question Answer Statement
1. How well did the
Revenues
company perform Trading
– Direct Expenses
(or operate) during Account
Gross income (Gross loss)
the period?
2. How well did the

Gross Profit Profit and
company perform
– Indirect Expenses Loss
(or operate) during
Net income (Net loss) Account
the period?
Information Reported on the
Financial Statements
Financial
Question Answer Statement
3. What is the company’s Assets
Balance
financial position at the = Liabilities
sheet
end of the period? + Owners’ equity
4. How much cash did Operating cash flows Statement

the company generate ± Investing cash flows of
and spend during ± Financing cash flows cash
the period? Increase or decrease in cash flows
Income Statement
The income statement,

reports the company’s revenues,
expenses, and net income
or net loss for the period.
The Income Statement
DANIELS COMPANY
Income Statement
for the Year Ended June 30, 2002
Sales Rs98,600
Expenses:
Wages expense Rs45,800
Rent expense 12,000
Carriage 6,500
Depreciation expense 5,000
Total expenses 69,300
Net Income Rs29,300
==============
The Income Statement can be divided
into:
• Trading Account
• Profit and Loss Account
Trading Account
• This account is prepared to know the trading results or
gross profit (gross margin) on trading of the business, i.e.,
buying and selling of goods during a particular period.
• The difference between the sales and cost of goods sold
is gross profit.
• The balance of this account represents gross profit or loss
and is transferred to the profit and loss account.
• Only the transactions in goods and expenses related to
purchase of goods and manufacturing of goods (direct
expenses) are included and indirect expenses (admin.
Expenses, selling & distrib expenses, financial expenses)
are ignored
Gross Profit
• Gross profit = Sales – cost of goods sold
Cost of goods sold = Opening Stock + Net Purchases (i.e. Purchases –
Return outwards) + Direct Expenses - Closing Stock
• Therefore,
• Gross Profit = Sales – (Opening Stock + Net Purchases + Direct
Expenses - Closing Stock)
• Gross Profit = Sales – Opening Stock - Net Purchases - Direct
Expenses + Closing Stock
• Opening Stock + Net Purchases + Direct Expenses + Gross Profit
= Sales + Closing Stock
• The left hand side of this equation depicts debit sided and right hand
side depicts credit side of the Trading Account.
Example
1. Compute the cost of goods sold from the following
information:
Opening stock, Rs. 11,000; Purchases, Rs 210,000; purchase
returns Rs 7,000, Carriage inwards 18,000, closing stock Rs
17,000.
2. For the year ended March 31, 2009, Vishal Company sold
goods for Rs 717,000. The average gross margin on sale was
40%. The following information is available : Sales Returns
Rs 17000, Opening Stock Rs 40,000, Purchases Rs 4,18,000;
Purchase Returns Rs 6,000 and carriage inwards Rs 23,000.
Calculate closing stock.
Proforma for the Trading
Account for the year ending
on 31.12.2005
Particulars Amount Particulars Amount
Opening stock Sales
Purchases Less: Returns Inwards
Less:- Returns Outwards
Closing stock
:-Drawings
Goods Lost by fire
Direct Expenses:-
Carriage inward (Gross Loss c/d)
Wages
Fuel & Power
Customs/Import duty
Gross profit c/d(bal)
Trading account
For the year ended 31st March, 20XX
(Rs.) (Rs.)
To Opening Stock By Sales
” Purchases Less : Sales Returns
Less : Purchases Returns By Closing Stock
To Direct Expenses By Gross Loss* c/d
Carriage Inward
Wages
Fuel and Power
Manufacturing Expenses
Coal, Water and Gas
Motive Power
Octroi
Import duty
Custom Duty
Consumable Stores
Foreman/ Works Manager’s
Salary
Royalty on Manufactured
Goods
To *Gross Profit c/d
Closing Entries of Trading Account
• For closing of Debit Accounts
Trading A/c Dr.
To Opening Stock
To Purchases A/c
To Sales Return A/c
To Direct Expenses (eg. Wages, carriage inwards,
freight inwards)
• For Closing of Credit Accounts
Sales A/cDr.
Closing Stock A/c Dr.
Loss of goods by fire A/c Dr.
To Trading Account
Closing Entries of Trading Account
• For closing Trading Account
Trading A/c Dr.
To Profit and Loss A/c
(Gross Profit, if credit side exceeds the debit side)
OR
Profit and Loss A/c Dr.
To Trading Account
(Gross Loss, if debit side exceeds the credit side)
Proforma for the
Profit and Loss Account
for the year ending on
Profit and Loss Account
Debit for the period ending on ----- Credit
Gross loss b/d Gross Profit b/d
Administration Expenses Interest Received
Rent, Rates & Taxes Discount Received
Office salaries Comm. Received
Printing & Stationery
Dividend from shares
Telephone charges
Rent from property
Insurance
Audit fees Profit on sale of fixed
Selling & Dist Exp :-
assets/investments
Advertisement Net Loss c/d
Traveller’s Salary, exp. &
commission
Bad Debts
Carriage outwards
Bank charges
Net Profit c/d (bal)
Closing Entries For Profit and Loss Account
• For transfer of various expenses to Profit and Loss A/c
Profit and Loss A/c Dr.
To Various Expenses A/c
(eg. Salaries, carriage outwards, Insurance,
advertisement)
• For transfer of various incomes and gains to Profit and
Loss A/c
Various Incomes and Gains A/c Dr.
To Profit and Loss Account
• For Net Profit •For Net Loss
Profit and Loss A/c Dr. Capital A/c Dr.
To Capital A/c To Profit and Loss A/c
Income Statement
For the year ended…………. (All figures in Rs.
‘000)
Sales 16,000
Less: Cost of Goods Sold:
Raw materials consumed 7,800
Consumables 800
Direct Labour 750
Other Direct Expenses 480 9830
Gross Profit 6170
Less: Operating Expenses
Administration Expenses 1200
Selling Expenses 260
Depreciation 700 2160
Operating Profit 4010
Add: Non Operating Income 50
4060
Less:Non-Operating Expenses 100
Net Profit before Interest & Tax 3960
Less: Interest Paid 360
Net Profit Before Tax 3600
Less: Income Tax @ 50% 1800
For the year ended…………. (All figures in Rs. ‘000)
Revenue from Sales
Gross Sales XXXX
Less: Sales Returns XXXX
Net Sales XXXX
Less: Cost of Goods Sold:
Opening Stock XXXX
Purchases XXXX
Less: Purchase Returns (XXXX)
XXXX
Add Carriage Inwards XXXX
Net cost of Purchases XXXX
Cost of goods available for sale XXXX
Less: Closing Stock (XXXX)
Cost of Goods Sold XXXX
Gross Profit XXXX
Less: Operating Expenses
Administration Expenses XXXX
Selling Expenses XXXX
Depreciation XXXX XXXX
Operating Profit/ Profit Before Interest and Taxes XXXX
Less: Interest Paid (XXXX)
Net Profit Before Tax XXXX
Less: Income Tax (XXXX)
Net profit after tax XXXX
The Accounting Terms- Income Statement
 Revenue - the proceeds that come from sales to
customers
 Cost of Goods Sold (COGS) - an expense that reflects
the cost of the product or good that generates revenue.
 Gross profit (gross margin) - excess of sales revenue
over the cost of inventory that was sold. This is revenue
minus COGS
 Operating expenses - a group of recurring expenses that
pertain to a firm’s routine operations. It includes any
expense that doesn't fit under COGS such as
administration and marketing expenses.
 Operating income (operating profit) - gross profit less
all operating expenses
 Other revenues and expenses - items not directly related
to the main operations of a firm
 Net Income before Interest and Tax - net income before
taking interest and income tax expenses into account. It is
the remainder after all expenses have been deducted from
revenue
 Net loss - the excess of expenses over revenues
Interest Expense - the payments made on the company's

outstanding debt.
Income Tax Expense - the amount payable to
government.
Net Income – the final profit after deducting all expenses
(including income taxes) from revenue.
•Often seen as the “bottom line”
The Balance Sheet
Definition
A balance sheet is a statement that shows the
financial position of a business entity at a
given date, usually the last date of the
accounting period.
A balance sheet is a financial statement which shows the

assets and liabilities of an enterprise as on a particular
date.
The Balance Sheet
• The Balance sheet shows the financial position of a
company at a particular point in time.
– The balance sheet is also referred to as the statement
of financial position or the statement of financial
condition.
• The financial position of a concern is indicated by its
assets on a given date and its liabilities on that date.
• Excess of assets over liabilities represent the capital and
is indicative of the financial soundness of a company.
• A balance Sheet is also described as a “statement
showing the sources and application of capital”.
XYZ Ltd.
Balance sheet, as at ____________
Liabilities Rs. Assets Rs.
Shareholders’ Funds: Fixed Assets:
Capital Gross Block
Reserves and Surplus Less Accumulated Depreciation
Long Term Liabilities: Net Block
Secured Loans Investments:
Unsecured Loans Current Assets and Loans &
Current Liabilities and Advances:
Provisions: Stock
Current Liabilities: Debtors
Creditors Bills Receivable
Bill Payable Cash at Bank
Bank Overdraft Cash in Hand
Outstanding Expenses Prepaid Expenses
Income received in advance Misc. Expenses
Provisions: Profit & Loss A/c
Provision for tax
Proposed dividend
Total Total
Classification of Assets
1. Fixed assets: Acquired for long term use in the
business and not for resale
2. Current assets: acquired with the intention of
converting them into cash or for consumption during
the normal business operations.
3. Liquid assets: are assets which are immediately
convertible into cash without much loss. Liquid assets
= Current assets – Stock – Prepaid expenses
4. Intangible assets: eg. goodwill
5. Fictitious assets: Are assets not represented by
tangible possession or property.eg. Formation
expenses, debit balance of P & L A/c, discount on
Classification of Liabilities
Liabilities can be classified into:
1. Long term liability: Liabilities which do not fall due
for payment in a relatively short period, usually 12
months
2. Current Liabilities: Liabilities which falls due for
payment in a relatively short period.
3. Contingent Liability: are not actual liabilities but
become actual on the occurrence of some events which
are uncertain.eg. Arrears of dividends on cumulative
preference shares, bills of exchange discounted. These
are not shown in the balance sheet but are shown by
way of a footnote at the bottom of the balance sheet.
Grouping and Marshalling of the
Balance Sheet
• The arrangement of assets and liabilities in
certain groups and in a particular order is called
Grouping and Marshalling of the Balance Sheet
of a business.
Grouping and Marshalling of the
Balance Sheet
• Assets and liabilities can be arranged in the Balance

Sheet into two ways:
1. In order of permanence
2. In order of liquidity
Current Liabilities Current Assets:
Bank Overdraft Cash in Hand
Bill Payable Cash at Bank
Outstanding Expenses Bills Receivable
Sundry Creditors Sundry debtors
Income received in advance Stock in Trade
Long Term Liabilities: Prepaid Expenses
Loan from Bank Accrued income
Debentures Investments:
Capital: Fixed Assets:
Opening balance Furniture & Fixtures
Add: Net Profit Motor Car
Or Plant & Machinery
Less: Net Loss Building
Add capital introduced during the Land
year Intangible Assets
Less: Drawings Patents,Copyright
Licenses
Goodwill
Fictitious Assets:
Advertisement
Misc. Expenses
Profit & Loss A/c
Total Total
Fixed Liabilities: Intangible Assets
Capital Goodwill
Opening balance Patents
Add: net profit(-net loss) Copyright
Capital introduced Licenses
Less: Drawings Fixed Assets:
Long Term Liabilities: Building
Loan from Bank Machinery
Debentures Furniture & Fixtures
Current Liabilities and Motor Car
Provisions: Investments:
Income received in advance Current Assets:
Sundry Creditor Stock in Trade
Outstanding Expenses Sundry debtors
Bill Payable Investments
Bank Overdraft Bills Receivable
Provisions: Cash at Bank
Provision for tax Cash in Hand
Proposed dividend Prepaid Expenses
Fictitious Assets:
Advertisement
Misc. Expenses
Profit & Loss A/c
Total Total
From the following Trial Balance prepare Trading and Profit & Loss Account and Balance
Dr (Rs.) Cr (Rs.)
Capital - 108,900 Closing stock= Rs. 65,00
Opening Stock 46,800 -
Sales & Sales return 8600 2,89,600
Purchases & Pur. Returns 243100 5800
Carriage Outward 18600 -
Rent and Taxes 5700 -
Salaries & wages 9300 -
S/Debtors & creditors 24,000 14,990
Bank loan - 20,000
Bank Interest 900 -
Printing & Advertising 14600 -
Income from Investment - 250
Cash at bank 8000 -
Discount received - 3190
Investments 5000 -
Furniture & fittings 1800 -
Discount paid 7540 -
General Expenses 3910 -
Audit Fees 700 -
Insurance 600 -
Travelling Expenses 2330 -
Postage & telegram 870 -
Cash in hand 380 -
Deposit with x 30,000 -
Drawings account 10,000 -
442730 442730
From the following Trial Balance prepare Trading, Profit & Loss Account and Balance Sheet
Dr (Rs.) Cr (Rs.)
Notes:
Capital - 108,900
Opening Stock 46,800 - 1. Closing stock as on 30 June,
Sales & Sales return 8600 2,89,600 2007 was Rs. 78600
Purchases & Pur. Returns 243100 5800 2. 50% of Printing and
Freight and Carriage Inward 18600 -
Advertisement is to be
Rent and Taxes 5700 -
Salaries & wages 9300 - carried forward as a charge
S/Debtors & creditors 24,000 14,800 in the following year.
Bank loan @6% - 20,000 3. Depreciate Furniture and
Bank Interest 900 - Fittings by 10%.
Printing & Advertising 14600 -
Income from Investment - 250
4. Create 5% reserve for
Cash at bank 8200 - doubtful debts on Debtors,
Discount received - 3690 and Reserve 2% for
Investments 5000 - discount of Debtors and
Furniture & fittings 1800 - creditors.
Discount paid 7340 -
5. Insurance prepaid amounts
General Expenses 3160 -
Audit Fees 500 -
to Rs 200.
Insurance 800 - 6. Salaries outstanding Rs 500
Travelling Expenses 2130 - and Carriage outstanding Rs
Postage & telegram 870 - 100.
Cash in hand 830 -
Deposit with x @ 10% 30,000 -
7. Charge full year’s interest on
Drawings account 10,000 - deposit with X
442230 442230
PROFORMA
BALANCE SHEET
LIABILITIES ASSETS
SHARE CAPITAL FIXED ASSETS

Authorised a) Land , b) Buildings, c) Goodwill,
Issued d) Plant and Machinery e) Furniture and fittings
Subscribed f) Patents, trade marks and designs.
Less:- Calls unpaid INVESTMENTS:
Add:- Forfeited shares a) Investments in Government or Trust
RESERVES AND SURPLUS Securities, in shares, debentures or bonds,
SECURED LOANS b) Immovable Properties.
UNSECURED LOANS: CURRENT ASSETS, LOANS AND
ADVANCES:
CURRENT LIABILITIES AND (A) Current Assets:
PROVISIONS: a) Interest accrued on Investments.
A. CURRENT LIABILITIES: b) Stores and Spare Parts,c) Loose Tools
a) Acceptances. d) Stock in trade, e) Works in progress.
b) Sundry Creditors f) Sundry Debtors, g) Cash balance on hand
c) Subsidiary companies. h) Bank balances
d) Advance Payments (B) LOANS AND ADVANCES:
e) Unclaimed dividends a) Advances and loans to subsidiaries.
f) Other liabilities (if any) b) Bills of Exchange.
g) Interest accrued but not due on loans. c) Advances recoverable in cash or in kind
B. PROVISIONS MISCELLANEOUS EXPENDITURE:
a) Provision for taxation. a) Preliminary expenses.
b) Proposed dividends. b) Commission or brokerage on underwriting
c) For contingencies. or subscription of shares or debentures.
c) Discount allowed on the issue of shares or
debentures.

3.accounting Equation &accounting Cycle

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The Accounting Equation

The Accounting Equation

What are an organization’s resources called?

What are the

Assets = Liabilities + Owner’s Equity

Assets = Liabilities + Capital

a. Sachin deposits RS 25,000 in a bank account

a. Sachin deposits RS 25,000 in a bank account

a. Sachin deposits RS 25,000 in a bank account

b. ABC Ltd. buys land for Rs 20,000.

b. ABC Ltd. buys land for Rs 20,000.

b. ABC Ltd buys land for RS 20,000.

c. ABC Ltd buys goods for RS1,350, agreeing to

c. ABC Ltd buys goods for RS1,350, agreeing to

e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;

e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;

e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;

f. ABC Ltd pays Rs 950 to creditors on account.

f. ABC Ltd pays Rs 950 to creditors on account.

f. ABC Ltd pays Rs 950 to creditors on account.

g. Sold goods worth Rs.800 for Rs 900

g. Sold goods worth Rs.800 for Rs 900

g. Sold goods worth Rs.800 for Rs 900

g. Sold goods worth Rs.800 for Rs 900

h. Sachin withdraws Rs 2,000 in cash.

h. Sachin withdraws Rs 2,000 in cash.

h. Sachin withdraws Rs 2,000 in cash.

Cash 6,800 OWNER’S EQUITY

Cash 6,800 OWNER’S EQUITY

Cash 6,800 OWNER’S EQUITY

Each transaction is recorded with at least:

One debit One credit

Total debits must equal total credits.

Scale or Balance T account

Luca Pacioli Left Side Right Side

1) A complete record of the financial transactions is

1) This system requires the maintenance of a

• Real Account = Debit –What comes in

1. Started business with Rs. 50,000

It refers to a complete sequence of accounting

It is complete sequence beginning with the recording

1. Analyze the transaction

• The sequence of steps in recording

Financial Trial Ledger

1. Analyze the transaction

3. Post the transaction to accounts in ledger

5. Prepare financial statements

• It is a list in chronological order of all the

Date Particulars V.NO. L.F Debit Credit

• Remember: whether the entry is simple or

Subsidiary books, or books of prime entry or original entry

Sales Journal Page 35

3/2 615 MyMusicClub.com 2,200

All sales on credit are recorded in this journal. Each

Purchases Journal Page 11

Date Particulars Details Amount

3/3 Howard Supplies 600

All purchases on account are recorded in this journal.

• Single column Cash Book

• Ledger - a group of related accounts

• Ledger is a register having a number of pages

• One account is usually assigned one page in the