Basics of Accounting Level II

Basic Accounting Level II
By
Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM
Global Technology Services LLc, UAE
Email:sivakumar3009gmail.com
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Agenda Agenda
at is Accounting at is Accounting
Mode of Learning Accounting Mode of Learning Accounting
Accounting and Finance Accounting and Finance - - Difference Difference
Accounting Concepts / Conventions Accounting Concepts / Conventions
Accounting Events Accounting Events
RuIes of Accounting RuIes of Accounting
Preparation of FinanciaI Statements Preparation of FinanciaI Statements
A SimpIe Case Study A SimpIe Case Study
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Accounting is defined as te art of Recording,
CIassifying and Summarizing transactions in
monetary terms (in Money terms) for te
preparation of FinanciaI Statements
J0URNAL
PAYHENT
Vision Enterprises
Financial Statement
at December 31, 1997
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Stockholder`s Equity
Contributed Capital
Retained Earnings
Total Stockholder`s
Equity
$4,456
$5,714
$ 981
---------
$11,151
$3,830
$ 416
---------
$4,246
$2,365
$ 367
---------
$2,732
Vision Enterprises
Financial Statement
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Contributed Capital
Retained Earnings
Total Stockholder`s
Equity
$4,456
$5,714
$ 981
---------
$11,151
$3,830
$ 416
---------
$4,246
$2,365
$ 367
---------
$2,732
Vision Enterprises
Financial Statement
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Contributed Capital
Retained Earnings
Total Stockholder`s
Equity
$4,456
$5,714
$ 981
---------
$11,151
$3,830
$ 416
---------
$4,246
$2,365
$ 367
---------
$2,732
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Accounting Accounting is is te te art art of of recording, recording, cIassifying cIassifying and and Summarizing Summarizing
financiaI financiaI transactions transactions in in te te Preparation Preparation of of FinanciaI FinanciaI Statements Statements
Recording Recording refers refers to to creating creating JournaI JournaI entry entry for for every every financiaI financiaI
transaction transaction wit wit Debit Debit and and Credit Credit amounts amounts..
CIassifying CIassifying refers refers to to CIassifying CIassifying eac eac of of te te Debit Debit // Credit Credit
Transaction Transaction to to CapitaI CapitaI or or Revenue Revenue and and Asset, Asset, LiabiIity, LiabiIity, Revenue Revenue or or
Expense Expense
Summarizing Summarizing refers refers to to Grouping Grouping te te Transactions Transactions of of Asset, Asset,
LiabiIity, LiabiIity, Revenue Revenue and and Expenses Expenses and and preparing preparing te te FinanciaI FinanciaI
Statements Statements (Trading, (Trading, Profit Profit and and Loss Loss Account Account and and BaIance BaIance Seet) Seet)
In In case case of of
Trading, Trading, Manufacturing Manufacturing and and Customer Customer Service Service oriented oriented
Organization, Organization, te te sum sum of of aII aII income income and and expenses expenses is is referred referred to to
as as Profit Profit and and Loss Loss account account
SociaI SociaI Service Service oriented oriented Organization Organization Iike Iike ScooIs, ScooIs, HospitaIs HospitaIs and and
Government Government Organizations, Organizations, Banks Banks it it is is referred referred to to as as Income Income
and and Expenditure Expenditure account account ..
Note Note: :- - TriaI TriaI BaIance BaIance is is not not a a FinanciaI FinanciaI Statement Statement.. It It is is onIy onIy a a summary summary
of of aII aII Debit Debit and and Credit Credit Transactions Transactions..
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Cange your mindset tat accounting means Cange your mindset tat accounting means
onIy Debit and Credit onIy Debit and Credit
Do not bIindIy Iearn Accounting RuIes and Do not bIindIy Iearn Accounting RuIes and
appIy te ruIes of Debit and Credit appIy te ruIes of Debit and Credit
Te Best way to Learn Accounting is Te Best way to Learn Accounting is
Learn te Accounting Concepts Learn te Accounting Concepts
Understand te Accounting Conventions Understand te Accounting Conventions
CIassify te Accounting Event CIassify te Accounting Event
AppIy te Accounting RuIes AppIy te Accounting RuIes
Record, CIassify and Summarize te JournaI Record, CIassify and Summarize te JournaI
ou are Confused. Am I rigt? ou are Confused. Am I rigt?
Do not become panic and move forward, you wiII understand Do not become panic and move forward, you wiII understand
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Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
Understand Accounting Conventions
(Three major conventions)
Classify the Accounting Events
(Capital, Revenue, Deferred Revenue Expenditure)
Apply the Accounting Rules
(Personal, Real and Nominal Rules)
Record the Transaction as a ]ournal
(Entering the Debit and Credit Side of Transaction)
Classify the Transaction
(Asset, Liability, Revenue or Expense)
Summarize the Transaction
(Prepare Trial Balance, Trading, PSL and Balance Sheet)
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Finance and Accounting Finance and Accounting - - Difference Difference
Finance Finance Accounts Accounts
Procurement and UtiIization of Procurement and UtiIization of
Funds Funds
Recording of an Accounting Recording of an Accounting
Event Event
Leads to Investment Decisions Leads to Investment Decisions Expressed in Monetary Terms Expressed in Monetary Terms
Financing Decisions Financing Decisions Recording , CIassifying and Recording , CIassifying and
Summarizing Transactions Summarizing Transactions
Futuristic Futuristic Preparation of FinanciaI Preparation of FinanciaI
Statements (Trading, Profit and Statements (Trading, Profit and
Ioss Account and BaIance Ioss Account and BaIance
Seet) Seet)
Cost of CapitaI Cost of CapitaI HistoricaI HistoricaI
Cas FIow / Fund FIow Cas FIow / Fund FIow CompIiance wit Statutory CompIiance wit Statutory
Matters Iike companies Act, Matters Iike companies Act,
Income Tax Act, SaIes Tax Act Income Tax Act, SaIes Tax Act
Etc., Etc.,
Project AppraisaI Project AppraisaI
Ratio AnaIysis Ratio AnaIysis
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Accounting Concepts/Conventions Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX) (US GAAP/UK GAAP/IFRS/SOX)
Te Te Concepts Concepts and and conventions conventions of of accounting accounting are are
deveIoped deveIoped by by IASC IASC (InternationaI (InternationaI Accounting Accounting Standards Standards
Committee) Committee) wic wic is is in in- -carge carge of of reIeasing reIeasing InternationaI InternationaI
Accounting Accounting Standards Standards (IAS) (IAS)
Te Te IASC IASC Decides Decides te te preferred preferred Accounting Accounting practices practices
worIdwide worIdwide and and encourages encourages te te worIdwide worIdwide acceptance acceptance
Tere are 41 InternationaI Accounting Standards Tere are 41 InternationaI Accounting Standards
Now Now IFRS IFRS (InternationaI (InternationaI FinanciaI FinanciaI Reporting Reporting Standards) Standards)
and and SOX SOX (Sarbanes (Sarbanes OxIey) OxIey) Act Act gain gain more more importance importance
wic wic came came up up from from US US GAAP GAAP and and UK UK GAAP GAAP
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Difference between Concepts and Conventions Difference between Concepts and Conventions
Te Te Accounting Accounting Concepts Concepts // PrincipIes PrincipIes evoIved evoIved out out of of te te
Practice Practice and and Procedures Procedures foIIowed foIIowed by by different different countries countries
and and Iater Iater on on estabIised estabIised by by te te InternationaI InternationaI Statutory Statutory
Accounting Accounting Bodies Bodies Iike Iike Te Te Institute Institute of of Cartered Cartered
Accountants Accountants of of India, India, Te Te Institute Institute of of Cartered Cartered
Accountants Accountants of of EngIand EngIand and and aIes aIes etc etc to to become become an an
Accounting Accounting PrincipIe PrincipIe statutoriIy statutoriIy need need to to be be foIIowed foIIowed
wiIe wiIe preparing preparing te te FinanciaI FinanciaI Statements Statements.. In In nutseII nutseII tis tis
as as evoIved evoIved out out of of standard standard Practice Practice foIIowed foIIowed by by severaI severaI
countries countries wiIe wiIe preparing preparing te te Trading, Trading, Profit Profit and and Loss Loss
Account Account and and BaIance BaIance Seet Seet..
Te Te Accounting Accounting Conventions Conventions // Practices Practices are are basicaIIy basicaIIy
assumptions assumptions and and expected expected to to be be foIIowed foIIowed wiIe wiIe
preparing preparing te te FinanciaI FinanciaI Statements Statements..
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Accounting Concepts / PrincipIes Accounting Concepts / PrincipIes
Business Entity Concept Business Entity Concept
Money Measurement Concept Money Measurement Concept
DuaI Aspect Concept DuaI Aspect Concept
Cost Concept Cost Concept
Accounting Period Accounting Period
Conservatism Conservatism
ReaIization Concept ReaIization Concept
Matcing Concept Matcing Concept
MateriaIity Concept MateriaIity Concept
Objectivity Objectivity
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Accounting Conventions / Practices Accounting Conventions / Practices
Going Concern Going Concern
Consistency Consistency
AccruaI AccruaI
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Accounting Concepts Accounting Concepts
Accounts can be kept onIy for Entities, wic are different from te Accounts can be kept onIy for Entities, wic are different from te
persons wo are associated wit tese entities persons wo are associated wit tese entities
Ex Ex.. SoIe SoIe Proprietary, Proprietary, Partnersip Partnersip firm, firm, Company Company
Tis Tis is is one one of of te te most most Important Important and and fundamentaI fundamentaI accounting accounting
principIe principIe wit wit wic wic DoubIe DoubIe entry entry system system of of accounting accounting as as evoIved evoIved..
Accounts Accounts need need to to be be maintained maintained separate separate from from te te Owners Owners and and
providers providers of of capitaI capitaI.. If If you you understand understand te te simpIe simpIe Iogic, Iogic, ten ten you you know know
30 30% % of of Accounting Accounting.. Just Just RecaII RecaII FundamentaIs FundamentaIs of of Accounting Accounting from from
OracIe OracIe Perspective Perspective LeveI LeveI II ExampIe ExampIe of of Siva, Siva, OracIe OracIe and and Bank Bank..
See See Next Next SIide SIide for for More More ExampIes ExampIes.. If If you you cannot cannot understand understand tis tis
Concept Concept PIease PIease Do Do not not Proceed Proceed Furter Furter and and try try to to understand understand by by
reading reading again again LeveI LeveI II and and LeveI LeveI II II MateriaI MateriaI
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Types of Entities Types of Entities
Type of Organization Type of Organization ExampIe ExampIe
SoIe Proprietary SoIe Proprietary Siva & Co Siva & Co
Partnersip Firm Partnersip Firm Ganesan Bros Ganesan Bros
Private Company Private Company OracIe India Pvt Ltd (A Private Company in wic OracIe India Pvt Ltd (A Private Company in wic
sares are not traded in Stock Excange and sares are not traded in Stock Excange and
members cannot exceed 50) members cannot exceed 50)
PubIic Company PubIic Company Hindustan UniIever Ltd (A PubIic Company in Hindustan UniIever Ltd (A PubIic Company in
wic Sares are traded in Stock Excange) wic Sares are traded in Stock Excange)
CIoseIy HeId Company CIoseIy HeId Company Cadbury India Ltd (A PubIic Company in wic Cadbury India Ltd (A PubIic Company in wic
sares are not traded but sares are eId by more sares are not traded but sares are eId by more
tan 50 persons) tan 50 persons)
Trust Trust Hutcinson Private Trust Hutcinson Private Trust
Society Society Sembur Co Sembur Co- -op Society op Society
Association of Persons Association of Persons ICAI, ICAI, ICSI, Rotary CIub ICAI, ICAI, ICSI, Rotary CIub
Body of IndividuaIs (one Man Corp) Body of IndividuaIs (one Man Corp) President of India, Governor of State President of India, Governor of State
Any oter LegaI Entity (HUF) Any oter LegaI Entity (HUF) A Hindu Undivided FamiIy JointIy oIding te A Hindu Undivided FamiIy JointIy oIding te
Investment and Properties for te benefit of Investment and Properties for te benefit of
FamiIy members. FamiIy members.
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Ex Ex 1 1: : ou ou are are running running your your own own TextiIe TextiIe Sowroom Sowroom as as a a DeaIer DeaIer in in CIot CIot as as a a SoIe SoIe
Proprietor/IndividuaI Proprietor/IndividuaI Owner Owner of of te te Business Business.. Te Te entire entire capitaI capitaI amount amount for for te te
Business Business is is provided provided by by you you.. In In tis tis case case aIso aIso for for te te purpose purpose of of accounting accounting you you
need need to to maintain maintain Two Two set set of of books books..
One set of books for te purpose of TextiIe Business in wic, Business One set of books for te purpose of TextiIe Business in wic, Business
owes you equivaIent to te CapitaI Provided (CapitaI + Profit earned) or owes you equivaIent to te CapitaI Provided (CapitaI + Profit earned) or
(CapitaI (CapitaI - - Losses) Losses)
In your own Books te amount of CapitaI invested wiII be sown as an In your own Books te amount of CapitaI invested wiII be sown as an
Investment in Business as an Asset. Tis need not be maintained as a Investment in Business as an Asset. Tis need not be maintained as a
NormaI Set of Books but required to know te Cas InfIow and Cas OutfIow NormaI Set of Books but required to know te Cas InfIow and Cas OutfIow
from Income Tax Perspective. from Income Tax Perspective.
Ex Ex 2 2: : ou ou are are working working for for OracIe OracIe Corporation Corporation and and OracIe OracIe as as a a Bank Bank Account Account
wit wit Bank Bank of of America America and and ou ou ave ave Bank Bank Account Account wit wit Citi Citi Bank Bank and and te te saIary saIary
at at end end of of every every mont mont is is transferred transferred from from Bank Bank of of America America to to Citi Citi Bank Bank.. How How
many many accounting accounting Entities Entities invoIved invoIved in in tis tis case? case?
If your answer is 4, ten you are rigt (ou, OracIe Corp, Bank of America, If your answer is 4, ten you are rigt (ou, OracIe Corp, Bank of America,
Citi Bank) Citi Bank)
Ex Ex 3 3: : ou ou run run your your own own Business Business in in Software Software ConsuIting ConsuIting and and your your Friend Friend as as
agreed agreed to to provide provide a a Loan Loan of of 50000 50000 USD USD wic wic e e goes goes and and deposit deposit directIy directIy into into
your your Bank Bank account account - - How How many many accounting accounting Entities Entities invoIved invoIved in in tis tis case? case?
If you say 3, ou are rigt, it is onIy Tree. (ou, our Friend and Bank) If you say 3, ou are rigt, it is onIy Tree. (ou, our Friend and Bank)
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Record souId be made onIy of tat information wic can be Record souId be made onIy of tat information wic can be
expressed in Monetary Terms (i.e.) Currency vaIue (USD,GBP,INR) expressed in Monetary Terms (i.e.) Currency vaIue (USD,GBP,INR)
Ex Ex 1 1.. SoIe SoIe Proprietor Proprietor ad ad 40 40 TabIes TabIes & & Cairs Cairs.. Tis Tis cannot cannot be be
recorded recorded unIess unIess a a VaIue VaIue of of Furniture Furniture is is known known in in monetary monetary vaIue vaIue
Ex 2. Ex 2. Very Famous Indian ExampIe Very Famous Indian ExampIe - - Rama KiIIed Ravana. Rama KiIIed Ravana. Can Can
tis be Accounted? tis be Accounted? - - NO NO
Ex 3 Ex 3. My wife Loves me so muc . My wife Loves me so muc - - Can tis be accounted? Can tis be accounted?
- - A Big NO (Haa). Tis is FIaw in FinanciaI Accounting as it A Big NO (Haa). Tis is FIaw in FinanciaI Accounting as it
does not understand te uman vaIues does not understand te uman vaIues
Ex Ex 4 4.. My My Fater Fater in in Law Law gave gave is is PersonaI PersonaI Property Property to to start start my my
Business Business.. Can Can tis tis be be Accounted Accounted - - es es (If (If te te VaIue VaIue of of te te
Property Property is is provided) provided)
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A A NormaI NormaI Doubt Doubt comes comes to to your your mind mind in in te te first first and and fourt fourt
exampIe exampIe in in previous previous sIide sIide ow ow to to get get te te vaIue vaIue.. e e souId souId not not be be
taking taking te te Purcase Purcase vaIue, vaIue, but but we we souId souId take take te te Market Market vaIue vaIue on on
te te date date of of transferring transferring te te assets assets to to Business Business.. Tis Tis is is an an
exception exception to to cost cost concept concept onIy onIy in in case case of of transfer transfer to to anoter anoter
business business
Ex Ex 5 5: : Siva Siva started started is is software software consuIting consuIting Business Business wit wit is is own own
Property Property (Cost (Cost Price Price 1 1 MiIIion MiIIion USD USD and and Market Market VaIue VaIue 1 1..5 5 MiIIion MiIIion
USD) USD) and and Furniture's Furniture's Cost Cost price price 50000 50000 wort wort Market Market VaIue VaIue 30000 30000
USD USD
- - In tis case, ou can record Siva CapitaI (1530000) and BuiIding In tis case, ou can record Siva CapitaI (1530000) and BuiIding
1500000 and Furniture 30000 as Assets 1500000 and Furniture 30000 as Assets
LiabiIities LiabiIities Assets Assets
Siva Capital 1530000 Siva Capital 1530000 Building 1500000 Building 1500000
Furniture 30000 Furniture 30000
Total 1530000 Total 1530000 Total 1530000 Total 1530000
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Accounting Accounting Concepts Concepts
DuaI Aspect Concept DuaI Aspect Concept
Te VaIue of te Assets owned by te concern is equaI to te cIaims on Te VaIue of te Assets owned by te concern is equaI to te cIaims on
te Assets te Assets
ASSETS = LIABILITIES + ONER'S EQUIT ASSETS = LIABILITIES + ONER'S EQUIT
ONER'S EQUIT = ASSETS ONER'S EQUIT = ASSETS - - LIABILITIES LIABILITIES
LIABILITIES = ASSETS LIABILITIES = ASSETS - - ONER'S EQUIT ONER'S EQUIT
Ex: If Owners Equity is 600000 and LiabiIities are 400000, ten TotaI Ex: If Owners Equity is 600000 and LiabiIities are 400000, ten TotaI
Asset = 1000000 Asset = 1000000
Asset Asset Owner's Equity + LiabiIities Owner's Equity + LiabiIities
LiabiIities LiabiIities Assets Assets - - Owner's Equity Owner's Equity
Owner's Equity Owner's Equity Assets Assets - - LiabiIities LiabiIities
18 18
Cost Concept Cost Concept
Assets are aIways sown at teir Cost and not at Assets are aIways sown at teir Cost and not at
teir current Market VaIue teir current Market VaIue
Ex Ex 1 1.. A A Land Land Purcased Purcased for for Rs Rs..5 5 Lacs Lacs wiII wiII be be
recorded recorded onIy onIy at at Rs Rs..5 5 Lacs Lacs even even toug toug Market Market
vaIue vaIue may may be be Iower Iower say say Rs Rs..4 4 Lacs Lacs or or Higer Higer Rs Rs..6 6
Lacs Lacs tan tan te te Cost Cost Price Price
Ex Ex 2 2.. ou ou are are acquiring acquiring a a Business Business for for a a MiIIion MiIIion
USD USD and and its its vaIue vaIue as as per per Books Books is is 0 0..8 8 MiIIion, MiIIion, ten ten
te te difference difference of of 0 0..2 2 MiIIion MiIIion is is termed termed as as GoodwiII GoodwiII
and and you you souId souId records records te te assets assets and and IiabiIities IiabiIities at at
te te price price you you ave ave paid paid for for te te Business Business (i (i..e e..) ) 1 1
MiIIion MiIIion
19 19
Accounting Period Accounting Period
Accounting measures activity for a specified intervaI of time, usuaIIy Accounting measures activity for a specified intervaI of time, usuaIIy
a year a year
(e.g) CaIendar ear (Jan'07 (e.g) CaIendar ear (Jan'07- -Dec'07) Dec'07)
FiscaI ear (Apr'07 FiscaI ear (Apr'07- -Mar'08) Mar'08)
Coosing Coosing te te Accounting Accounting period period is is te te entities entities coice, coice, but but tere tere are are
IegaI IegaI ruIes ruIes Iike Iike Companies Companies Act Act and and Income Income Tax Tax Act Act wic wic prescribes prescribes
te te period period in in wic wic te te entity entity as as to to report report to to tem tem..
Remember Remember stiII stiII Entities Entities can can ave ave different different accounting accounting period period for for teir teir
own own InternaI InternaI Management Management Reporting Reporting
A A Company Company in in India India can can ave ave for for Company Company Law Law Purpose Purpose (Jan (Jan- -Dec) Dec)
ear ear and and Income Income Tax Tax Purpose Purpose (Apr (Apr- -Mar) Mar) ear ear and and for for own own internaI internaI
Reporting Reporting (JuI (JuI- -Jun) Jun) ear ear
Note Note: : Te Te Entities Entities cannot cannot cange cange teir teir accounting accounting period period witout witout
getting getting proper proper approvaI approvaI onIy onIy in in case case of of Companies Companies Act Act and and not not
possibIe possibIe wit wit Income Income Tax Tax Autorities Autorities..
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Conservatism Conservatism
Anticipate no Profits but provide for aII possibIe Iosses. Anticipate no Profits but provide for aII possibIe Iosses.
Accountants Accountants are are by by nature nature Conservative Conservative and and aIso aIso to to protect protect te te interest interest of of
te te SareoIders SareoIders and and Creditors Creditors it it is is required required to to provide provide for for aII aII Iosses Iosses..
Ex Ex 1 1.. A A parmaceuticaI parmaceuticaI Company Company going going to to Loose Loose te te case case fiIed fiIed for for Patent Patent
Rigt Rigt fiIed fiIed for for a a medicine medicine
Ex Ex 2 2..Company Company is is IikeIy IikeIy to to in in a a Major Major LegaI LegaI Dispute Dispute or or a a SaIes SaIes Contract Contract..
Note Note: : Tis Tis ruIe ruIe souId souId not not be be misinterpreted misinterpreted to to provide provide anticipated anticipated reduction reduction
in in market market price price of of a a Product Product and and Providing Providing Losses Losses
Ex Ex 3 3: : ou ou are are a a Government Government Company Company and and tere tere is is a a possibiIity possibiIity tat tat
Government Government wiII wiII witdraw witdraw te te subsidy subsidy for for FertiIizers FertiIizers in in te te fortcoming fortcoming
budget, budget, ou ou cannot cannot provide provide Ioss Ioss of of subsidy subsidy as as a a Ioss Ioss now now itseIf itseIf..
Ex Ex 4 4: : Te Te Government Government is is IikeIy IikeIy to to increase increase te te Price Price of of petroI petroI wic wic is is one one of of
te te essentiaI essentiaI input input for for your your business, business, ten ten you you cannot cannot provide provide for for Iosses Iosses..
Ex Ex 5 5: :Tere Tere is is a a Fire Fire in in your your in in your your Factory Factory and and Goods Goods were were Iost Iost and and te te
Goods Goods are are insured, insured, ten ten te te cIaim cIaim you you submitted submitted can can be be booked booked to to te te
satisfaction satisfaction of of Insurance Insurance Company Company and and Auditors Auditors..
21 21
ReaIization Concept ReaIization Concept
Te Te SaIes SaIes is is considered considered to to ave ave taken taken pIace pIace onIy onIy wen wen eiter eiter te te cas cas
is is received received or or some some tird tird party party becomes becomes IegaIIy IegaIIy IiabIe IiabIe to to pay pay te te
amount amount.. Revenues Revenues are are recognized recognized wen wen tey tey are are earned earned or or
reaIized reaIized.. ReaIization ReaIization is is assumed assumed to to occur occur wen wen te te seIIer seIIer receives receives
cas cas or or a a cIaim cIaim to to cas cas (receivabIe) (receivabIe) in in excange excange for for goods goods or or services services
Ex Ex 1 1: : A A SaIes SaIes invoice invoice for for Rs Rs..1 1 MiIIion MiIIion
Credit Note for Rs.15000 received Credit Note for Rs.15000 received
Ex 2 Ex 2: For instance, if a company is awarded a contract to buiId an : For instance, if a company is awarded a contract to buiId an
office buiIding te revenue from tat project wouId not be recorded in office buiIding te revenue from tat project wouId not be recorded in
one Iump sum but rater it wouId be divided over time according to te one Iump sum but rater it wouId be divided over time according to te
work tat is actuaIIy being done. work tat is actuaIIy being done.
22 22
Matcing Concept Matcing Concept
en an Event affects bot te revenues and expenses, te effect on en an Event affects bot te revenues and expenses, te effect on
eac souId be recognized in te same accounting period eac souId be recognized in te same accounting period
Ex Ex 1 1: : GeneraIIy GeneraIIy EmpIoyees EmpIoyees SaIaries SaIaries are are paid paid for for te te previous previous mont mont at at
te te beginning beginning of of te te next next mont mont.. But But tey tey ave ave rendered rendered teir teir
services services to to produce produce goods goods and and soId soId and and SaIes SaIes revenue revenue is is recognized recognized
in in previous previous mont mont.. So So to to matc matc te te cost cost wit wit te te revenue revenue earned, earned, we we
need need to to make make provision provision for for SaIaries SaIaries in in previous previous mont mont itseIf itseIf.. (i (i..e e..) )
Marc Marc SaIary SaIary paid paid in in ApriI, ApriI, but but a a SaIary SaIary PayabIe PayabIe provision provision wiII wiII be be
made made in in Marc Marc itseIf itseIf
EX EX 2 2: : Insurance Insurance Premium Premium paid paid for for Jan Jan- - Dec Dec wereas wereas your your accounting accounting
period period cIoses cIoses on on Marc Marc.. In In tis tis case case onIy onIy tree tree monts monts premium premium need need
to to be be treated treated as as Expense Expense and and baIance baIance 9 9 monts monts treated treated as as advance advance
premium premium paid paid as as an an asset asset
23 23
MateriaIity concept MateriaIity concept
Insignificant Insignificant events events wouId wouId not not be be recorded, recorded, if if te te
benefit benefit of of recording recording tem tem does does not not signify signify te te
cost cost
Ex Ex: : A A caIcuIator caIcuIator wort wort Rs Rs..500 500 not not recorded recorded asset asset
rater rater tan tan carged carged off off as as an an Expense Expense even even
toug toug te te benefit benefit is is enduring enduring in in nature nature..
Tis Tis concept concept need need to to read read in in conjunction conjunction wit wit
accounting accounting events events wic wic signifies signifies te te transaction transaction
into into CapitaI, CapitaI, Revenue Revenue and and deferred deferred revenue revenue
expenditure expenditure..
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Objectivity Concept Objectivity Concept
An An Evidence Evidence of of te te appening appening of of te te Transaction Transaction souId souId support support
every every Transaction Transaction in in te te form form of of paper paper.. ExternaI ExternaI Evidence Evidence is is
considered considered to to be be more more autenticated autenticated proof proof tan tan InternaI InternaI Evidence Evidence..
Tis Tis ruIe ruIe is is more more important important from from Audit Audit perspective perspective as as Auditors Auditors
aIways aIways consider consider and and bound bound to to get get more more externaI externaI evidences evidences tan tan
internaI internaI Evidences Evidences..
Ex 1 Ex 1: Tird Party Evidence (Credit Note from SuppIier) : Tird Party Evidence (Credit Note from SuppIier)
Ex Ex 2 2: : Auditors Auditors CoIIect CoIIect Statements Statements from from Customer Customer and and SuppIiers SuppIiers for for
te te amount amount sowing sowing as as Outstanding Outstanding from from Customers Customers and and amounts amounts
PayabIe PayabIe to to SuppIiers SuppIiers..
Ex Ex 3 3: : Te Te SaIes SaIes Invoices Invoices aIone aIone is is not not considered considered as as an an objective objective
evidence evidence unIess unIess it it is is not not supported supported by by DeIivery DeIivery caIIan caIIan and and
acknowIedgement acknowIedgement of of Goods Goods Received Received by by Customer Customer..
25 25
Accounting Conventions Accounting Conventions
Going Concern Going Concern
Accounting Accounting Records Records ,, Events Events and and Transactions Transactions on on te te
assumption assumption tat tat te te entity entity wiII wiII continue continue to to operate operate for for an an
indefiniteIy indefiniteIy Long Long period period of of time time
Ex Ex.. An An Entity Entity wiII wiII not not be be started started wit wit an an intention intention to to cIose cIose
witin witin te te specified specified time time period period.. Business Business is is aIways aIways not not
started started wit wit an an intention intention to to cIose cIose and and it it is is expected expected to to
continue continue forever forever..
26 26
Consistency Consistency
Te Accounting PoIicies and metods foIIowed by te Te Accounting PoIicies and metods foIIowed by te
company souId be te same every year company souId be te same every year
Ex 1 Ex 1. Period souId not be canged frequentIy from Jan . Period souId not be canged frequentIy from Jan- -
Dec to Apr Dec to Apr- -Mar Mar
Ex 2 Ex 2. Inventory VaIuation cange from FIFO to LIFO or . Inventory VaIuation cange from FIFO to LIFO or
eigted Average not permitted frequentIy eigted Average not permitted frequentIy
Ex 3 Ex 3. Canging Depreciation PoIicy from Straigt Line to . Canging Depreciation PoIicy from Straigt Line to
Reducing BaIance Metod frequentIy Reducing BaIance Metod frequentIy
Note Note: : If If any any Company Company decides decides to to cange cange te te poIicy, poIicy, ten ten
tat tat Company Company as as to to report report on on te te effect effect of of Profit/Loss Profit/Loss
due due to to te te cange cange for for past past 5 5 ears ears..
27 27
AccruaI AccruaI
In In GeneraI GeneraI it it is is assumed assumed tat tat Accounts Accounts are are aIways aIways
prepared prepared based based on on AccruaI AccruaI basis basis.. However However tere tere are are
entities entities wic wic foIIow foIIow Cas Cas Basis Basis of of Accounting Accounting AIso AIso
Ex Ex: : SaIary SaIary PayabIe PayabIe to to empIoyees empIoyees (Marc (Marc saIary saIary paid paid in in
ApriI), ApriI), Interest Interest ReceivabIe ReceivabIe on on Investments Investments (NSC (NSC
interest), interest), Dividend Dividend ReceivabIe ReceivabIe on on sares, sares, Tax Tax PayabIe PayabIe to to
Government Government (Marc (Marc saIes saIes Tax Tax and and AnnuaI AnnuaI Income Income Tax) Tax)
Te Te Company Company Law Law // Income Income Tax Tax Act Act Prescribes Prescribes aII aII
Companies Companies to to foIIow foIIow AccruaI AccruaI Basis Basis of of Accounting Accounting except except
for for ProfessionaI ProfessionaI Firms Firms and and Government Government Organizations Organizations
wic wic are are aIIowed aIIowed to to foIIow foIIow Cas Cas Basis Basis of of Accounting Accounting..
28 28
CIassification of Accounting Event CIassification of Accounting Event
CapitaI Item: CapitaI Item: Any expenditure tat creates an asset, for Any expenditure tat creates an asset, for
exampIe exampIe: :
Purcase of pIant or macinery Purcase of pIant or macinery
Improvements to assets tat increase teir Improvements to assets tat increase teir
usefuIness or extend teir effective usefuI Iife of te usefuIness or extend teir effective usefuI Iife of te
asset asset
Expenditure incurred in transporting an asset to its Expenditure incurred in transporting an asset to its
site and preparing it for use. site and preparing it for use.
29 29
Revenue Revenue Item Item: : An An Income Income or or Expenditure Expenditure and and te te
benefit benefit of of wic wic wiII wiII be be exausted exausted witin witin a a year year (i (i..e e..) ) Te Te
CaIendar CaIendar ear ear or or te te FinanciaI FinanciaI ear ear wicever wicever is is set set up up
for for te te Set Set of of Books Books
Ex Ex: : SaIary SaIary and and wages, wages, Printing Printing and and Stationery, Stationery, SaIes SaIes
Revenue, Revenue, Interest Interest Income, Income, SaIary SaIary PayabIe, PayabIe, Bonus Bonus
PayabIe, PayabIe, Tax Tax PayabIe PayabIe etc etc..,,
In In SimpIe SimpIe terms terms tis tis is is an an event event wic wic generates generates
revenue revenue and and te te reIated reIated cost cost to to earn earn te te revenue revenue are are
accounted accounted as as expense expense..
30 30
Deferred Deferred Revenue Revenue Expenditure Expenditure: : It It is is neiter neiter a a CapitaI CapitaI
nor nor Revenue Revenue and and te te benefit benefit of of wic wic wiII wiII be be reaIized reaIized for for
more more tan tan a a year year (Exceeding (Exceeding beyond beyond te te CaIendar CaIendar year year
for for te te set set of of books) books) and and does does not not resuIt resuIt in in creation creation of of
an an asset asset..
Ex Ex 1 1: : Advertisement Advertisement Expenditure Expenditure te te benefit benefit of of wic wic
is is IikeIy IikeIy to to be be obtained obtained over over a a period period more more tan tan one one
year year (E (E..gg..) ) PepsiCo PepsiCo Pays Pays USD USD 2 2 MiIIion MiIIion to to Sacin Sacin
TenduIkar TenduIkar for for an an Advertisement Advertisement Contract Contract for for two two
ears ears and and benefit benefit of of wic wic is is expected expected to to be be for for four four
years years
Ex Ex 2 2: : RoyaIty RoyaIty paid paid to to te te autor autor of of te te book book for for five five
years years
31 31
RuIes of Accounting RuIes of Accounting
Accounts
Personal
Impersonal
Real Nominal
Debit the Receiver
Credit the Giver
Debit what comes in
Credit what goes out
Debit Expenses and Losses
Credit Revenue and Income
Ex: Sole Prop, Company
Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent
32 32
AppIication of Accounting RuIe AppIication of Accounting RuIe
Ceck weter is tere a Money Transaction InvoIved? Ceck weter is tere a Money Transaction InvoIved?
Is tat transaction affects your set of books? Is tat transaction affects your set of books?
Ceck weter does te transaction faIIs under wic accounting Ceck weter does te transaction faIIs under wic accounting
period. period.
Does te transaction invoIve a personaI account (i.e.) Siva as a Does te transaction invoIve a personaI account (i.e.) Siva as a
Person or a Company or any oter entity as mentioned in Person or a Company or any oter entity as mentioned in
Business entity concept Business entity concept
Is tat person is receiver or giver in te transaction and Is tat person is receiver or giver in te transaction and
accordingIy debit or credit te person account. accordingIy debit or credit te person account.
Does te transaction invoIves any Cas infIow or Cas outfIow? Does te transaction invoIves any Cas infIow or Cas outfIow?
(i.e.) Cas or Bank invoIved (i.e.) Cas or Bank invoIved
If tere is no cas invoIvement ten te coices are as foIIows If tere is no cas invoIvement ten te coices are as foIIows
Bot can be reaI ( Debit and credit bot reaI accounts) Bot can be reaI ( Debit and credit bot reaI accounts)
One reaI and one nominaI (Eiter Debit/Credit for ReaI or Credit/ Debit One reaI and one nominaI (Eiter Debit/Credit for ReaI or Credit/ Debit
for NominaI accounts) for NominaI accounts)
33 33
Accounting RuIe of Tumb Accounting RuIe of Tumb
Nature of Transaction Nature of Transaction Increase Increase Decrease Decrease
Asset Asset Debit Debit Credit Credit
Liability Liability Credit Credit Debit Debit
Revenue Revenue Credit Credit Debit Debit
Expense Expense Debit Debit Credit Credit
Profit Profit Credit Credit Debit Debit
Losses Losses Debit Debit Credit Credit
34 34
Combination of RuIes Combination of RuIes
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Employee,
Payment to Supplier
Dr Real A/c
Cr Personal A/c
Ex:Capital invested, Payment Received
Irom Customer
Dr Real A/c
Cr Nominal A/c
Ex: Interest Recd by Cash, Cash Sales
Dr Nominal A/c
Cr Real A/c
Ex: Rent Paid by Cash
Dr Personal A/c
Cr Nominal A/c
Ex: Interest Accrued on Investment,
Dividend accrued on Investment
Dr Nominal A/c
Cr Personal A/c
Ex: Hire Purchase Charges accrued, Interest
Payable, Salary Payable
Dr Real A/c
Cr Real A/c
Ex:Purchase oI Inventory by Cash
Dr Real A/c
Cr Real A/c
Ex: Cash withdrawal or Deposit
35 35
Combination of Accounting RuIes Combination of Accounting RuIes
Combination Combination Personal Personal Real Real Nominal Nominal
Personal Personal XX
Real Real
Nominal Nominal XX
Debit
Credit
36 36
Combination of Accounting RuIes Combination of Accounting RuIes
Bot Bot Debit and Credit Debit and Credit cannot be PersonaI Accounts cannot be PersonaI Accounts
EX 1: Siva paid Cas to Ajay. Te Entry Cannot be EX 1: Siva paid Cas to Ajay. Te Entry Cannot be
Ajay A/c Dr Ajay A/c Dr
Siva A/c Cr Siva A/c Cr
Te Correct entries are as foIIows. In Ajay set of Books Te Correct entries are as foIIows. In Ajay set of Books
Cash A/c Dr Cash A/c Dr 1000 1000
Siva A/c Cr Siva A/c Cr 1000 1000
Ajay A/c Dr Ajay A/c Dr 1000 1000
Cash A/c Cr Cash A/c Cr 1000 1000
n Siva set of Books
Similarly Both Debit and Credit cannot be Nominal Accounts
Note: Remember this important aspect and therefore You
will not commit any mistake in Debit and Credit
37 37
Recording of Accounting Transactions Recording of Accounting Transactions
Recording of an Accounting event is known as JournaI Recording of an Accounting event is known as JournaI
entry entry
Recording is made in Primary and Secondary Books in Recording is made in Primary and Secondary Books in
ManuaI Accounting system ManuaI Accounting system
Primary Books Primary Books
GeneraI Ledger GeneraI Ledger
Cas Book Cas Book
Secondary Books Secondary Books
Purcase Register Purcase Register
SaIes Register SaIes Register
Fixed Assets Register Fixed Assets Register
Returns (Purcase return/SaIes Return) Returns (Purcase return/SaIes Return)
JournaI Register JournaI Register
In In OracIe OracIe ERP ERP System System GL GL is is caIIed caIIed Main Main Ledger Ledger and and te te
Transactions Transactions emanating emanating from from ModuIes ModuIes are are referred referred to to as as
Sub Sub Ledger Ledger
38 38
Recording of Accounting Transactions Recording of Accounting Transactions
First te transactions are entered as JournaI First te transactions are entered as JournaI
Ten Ten Second Second step step is is tey tey are are posted posted to to individuaI individuaI account account as as 'T' 'T'
Accounts Accounts - - In In OracIe OracIe or or any any oter oter ERP ERP system system tis tis appens appens
immediateIy immediateIy wen wen a a transaction transaction is is created created
Prior Prior to to ERP ERP system system except except for for Non Non cas cas carges, carges, JournaIs JournaIs are are
directIy directIy posted posted in in Primary Primary and and secondary secondary Iedger Iedger wit wit supporting supporting
Document Document reference reference Number Number (Iike (Iike Invoice Invoice Number), Number), date, date, amount amount and and
a a cross cross reference reference Iedger Iedger foIio foIio number number (Page (Page Number) Number) of of respective respective
Debit Debit and and Credit Credit Entries Entries in in Ledger Ledger..
JournaIs JournaIs are are entered entered onIy onIy for for year year end end Provision Provision Entries Entries..
Ten Ten te te baIance baIance from from eac eac TT account account is is taken taken and and wic wic becomes becomes a a
TriaI TriaI BaIance BaIance wit wit Sum Sum of of Debits Debits and and Sum Sum of of Credit Credit wic wic souId souId be be
equaI equaI..
TriaI TriaI BaIance BaIance forms forms te te basis basis for for preparation preparation of of FinanciaI FinanciaI Statements Statements
and and in in ERP ERP systems systems incIuding incIuding OracIe OracIe AppIications AppIications Debit Debit is is sown sown as as
Positive Positive and and Credit Credit is is sown sown as as Negative Negative
In In ERP ERP systems systems te te cance cance of of TriaI TriaI BaIance BaIance not not matcing matcing or or not not
taIIying taIIying issue issue is is very very minimaI minimaI.. In In case case of of manuaI manuaI Accounting Accounting tis tis wiII wiII
appen appen most most of of te te time time and and unIess unIess it it is is corrected corrected and and baIanced, baIanced, te te
accountant accountant souId souId not not proceed proceed to to prepare prepare FinanciaI FinanciaI Statements Statements
39 39
Preparation of FinanciaI Statements Preparation of FinanciaI Statements
Preparation of TriaI BaIance Preparation of TriaI BaIance
BaIances Extracted from GeneraI Ledger BaIances Extracted from GeneraI Ledger
Sum of debit and credit baIances = 0 Sum of debit and credit baIances = 0
Preparation of Trading, Profit & Loss Account or Income & Preparation of Trading, Profit & Loss Account or Income &
Expenditure Account and BaIance seet Expenditure Account and BaIance seet
TriaI BaIance is te base for preparing FinanciaI TriaI BaIance is te base for preparing FinanciaI
Statements Statements
Adjustment entries are made in adjustment period and Adjustment entries are made in adjustment period and
passed as JournaI Voucers before making te financiaI passed as JournaI Voucers before making te financiaI
statements statements
Trading and Profit and Loss Account is AIways for a Trading and Profit and Loss Account is AIways for a
period say for an ear (Jan period say for an ear (Jan - - Dec or Apr Dec or Apr - - Mar), QuarterIy Mar), QuarterIy
for 3 monts or HaIf yearIy for 6 monts for 3 monts or HaIf yearIy for 6 monts
BaIance Seet is aIways as on Date (As on 31 BaIance Seet is aIways as on Date (As on 31- -12 12- -2007 or 2007 or
31 31- -03 03- -2008) 2008)
40 40
A SimpIe Case Study A SimpIe Case Study
Accounting Concepts
41 41
Case Study Case Study
Siva started Business in deaIer in Computer Spare parts and Siva started Business in deaIer in Computer Spare parts and
Computer Stationery on 01 Computer Stationery on 01- -APR APR- -2007 and foIIowing events occurred 2007 and foIIowing events occurred
in te mont of ApriI. in te mont of ApriI.
Siva invested USD 50000 Cas and USD 50000 wort of furniture Siva invested USD 50000 Cas and USD 50000 wort of furniture
Siva purcased USD 75000 wort of goods on credit Siva purcased USD 75000 wort of goods on credit
Siva friend Ajay promised im to give a Ioan of USD 25000 Siva friend Ajay promised im to give a Ioan of USD 25000
Siva soId USD 50000 wort of good for USD 100000 Siva soId USD 50000 wort of good for USD 100000
Siva paid rent USD 2000 for two monts Siva paid rent USD 2000 for two monts
Siva paid SaIary to Staff USD 5000 Siva paid SaIary to Staff USD 5000
Siva incurred USD 5000 on interior decoration wic wiII Iast for two Siva incurred USD 5000 on interior decoration wic wiII Iast for two
years. years.
Siva soId USD 10000 wort of goods on credit for USD 18000 Siva soId USD 10000 wort of goods on credit for USD 18000
Siva as a Bank account wit Citi Bank wic credited USD 5000 Siva as a Bank account wit Citi Bank wic credited USD 5000
wrongIy of Jon account wrongIy of Jon account
Purcased VeicIe for USD 25000 paid troug Bank Purcased VeicIe for USD 25000 paid troug Bank
Cas Deposited by Siva into Bank 50000 USD Cas Deposited by Siva into Bank 50000 USD
42 42
ARE OU READ FOR THE ARE OU READ FOR THE
GAME GAME
Accounting is very simpIe Accounting is very simpIe
43 43
Accounting TerminoIogies Accounting TerminoIogies
Before creating Accounting Transactions Iet us recaII and Iearn few Before creating Accounting Transactions Iet us recaII and Iearn few
accounting terminoIogies accounting terminoIogies
ASSETS: ASSETS: Any property or Investment wic can be convertibIe into cas Any property or Investment wic can be convertibIe into cas
LIABILITIES: LIABILITIES: Amount PayabIe to providers of goods and Services Amount PayabIe to providers of goods and Services
(Creditors) and Providers of CapitaI (Owners) (Creditors) and Providers of CapitaI (Owners)
REVENUE: REVENUE: Amount earned out of te SaIe Proceeds and te amount Amount earned out of te SaIe Proceeds and te amount
earned on Investments earned on Investments
EXPENSES: EXPENSES: Amount incurred or expended to earn te revenue Amount incurred or expended to earn te revenue
PROFIT: PROFIT: TOTAL REVENUE TOTAL REVENUE - - TOTAL EXPENSES TOTAL EXPENSES
LOSS: LOSS: If te TotaI Expenses is more tan TotaI Revenue it is termed as If te TotaI Expenses is more tan TotaI Revenue it is termed as
Loss Loss
FIXED ASSETS: FIXED ASSETS: Amount Invested in Long Term Assets wic is not Amount Invested in Long Term Assets wic is not
intended to be soId witin a ear (Ex. Macinery, Land) intended to be soId witin a ear (Ex. Macinery, Land)
CURRENT ASSETS: CURRENT ASSETS: Amount invested in Sort Term Assets wic is Amount invested in Sort Term Assets wic is
intended and rotated to earn Revenue (Ex. Inventory) intended and rotated to earn Revenue (Ex. Inventory)
NOTE: NOTE: Te Fixed Asset and Current asset vary from Person to Person Te Fixed Asset and Current asset vary from Person to Person
Ex: Ex: For a DeaIer in Refrigerator it is a Current asset wic becomes Fixed For a DeaIer in Refrigerator it is a Current asset wic becomes Fixed
Asset for you wen you buy. Asset for you wen you buy.
CREDITORS: CREDITORS: Person wo provide Money or Goods on Credit to te Person wo provide Money or Goods on Credit to te
Business (SuppIier) Business (SuppIier)
DEBTORS: DEBTORS: Goods or Money Provided / soId on Credit by te Business Goods or Money Provided / soId on Credit by te Business
(Customers) (Customers)
44 44
Accounting TerminoIogies Accounting TerminoIogies
ou ou souId souId aIso aIso understand understand te te same same accounting accounting
terminoIogy terminoIogy is is referred referred or or used used by by different different peopIe peopIe in in
different different context context
ReceivabIes ReceivabIes aIso aIso known known as as Trade Trade Debtors, Debtors, Debtors, Debtors, Account Account
ReceivabIes, ReceivabIes, Sundry Sundry Debtors, Debtors, Trade Trade ReceivabIes, ReceivabIes, Amount Amount
ReceivabIes ReceivabIes
LiabiIity LiabiIity is is aIso aIso known known as as Trade Trade Creditors, Creditors, Account Account PayabIe, PayabIe,
Sundry Sundry Creditors, Creditors, Amount Amount PayabIe, PayabIe, Trade Trade LiabiIities, LiabiIities, Creditors Creditors
Cost Cost of of Goods Goods SoId SoId: : It It varies varies wit wit Company Company to to Company Company te te way way
tey tey do do set set up up and and use use it it.. Te Te Cost Cost of of Goods Goods SoId SoId comprise comprise of of
MateriaI MateriaI Cost, Cost, Resource Resource Cost Cost (Labor (Labor and and Macinery) Macinery) and and
Overeads Overeads.. Tere Tere are are few few companies companies wic wic wiII wiII ave ave onIy onIy MateriaI MateriaI
Cost Cost and and wiII wiII not not add add up up Resource Resource Cost Cost and and Overeads Overeads.. ou ou
SouId SouId taIk taIk to to cIient cIient and and understand understand teir teir requirement requirement
Let's Let's See See Eac Eac of of tis tis in in a a FormuIa FormuIa ModeI ModeI
45 45
Accounting CaIcuIation and FormuIa Accounting CaIcuIation and FormuIa
ReceivabIes (or) Debtors ReceivabIes (or) Debtors
ReconciIiation ReconciIiation
Opening ReceivabIes 100 Opening ReceivabIes 100
(+) Add Credit SaIes 2500 (+) Add Credit SaIes 2500
(+) Debit Memo 150 (+) Debit Memo 150
(+) Positive Adjustments 75 (+) Positive Adjustments 75
( (- -) Less Cas Received 2000 ) Less Cas Received 2000
( (- -) Less Credit Memo (SaIes Return) 125 ) Less Credit Memo (SaIes Return) 125
( (- -) Negative Adjustments 50 ) Negative Adjustments 50
CIosing ReceivabIes 650 CIosing ReceivabIes 650
PayabIes (or) Creditors PayabIes (or) Creditors
Opening PayabIes 200 Opening PayabIes 200
(+) Add Credit Purcases 2000 (+) Add Credit Purcases 2000
(+) Debit Memo 150 (+) Debit Memo 150
(+) Positive Adjustments 75 (+) Positive Adjustments 75
( (- -) Less Cas Paid 1500 ) Less Cas Paid 1500
( (- -) Less Credit Memo (Purc. Return) 125 ) Less Credit Memo (Purc. Return) 125
( (- -) Negative Adjustments 50 ) Negative Adjustments 50
CIosing PayabIes 750 CIosing PayabIes 750
46 46
Accounting CaIcuIations and FormuIa Accounting CaIcuIations and FormuIa
Purcased Inventory Purcased Inventory
Opening Purcased Inventory 100 Opening Purcased Inventory 100
(+) Add Purcases 2500 (+) Add Purcases 2500
( (- -) Less Issued to Production 2000 ) Less Issued to Production 2000
( (- -) Less Purcase Return 125 ) Less Purcase Return 125
CIosing Purcased Inventory 475 CIosing Purcased Inventory 475
Finised Goods (FG) Finised Goods (FG)
Opening stock of FG 200 Opening stock of FG 200
(+) Add Production 2000 (+) Add Production 2000
(+) SaIes Return 100 (+) SaIes Return 100
( (- -) Less SaIes 1500 ) Less SaIes 1500
CIosing FG Inventory 800 CIosing FG Inventory 800
47 47
Accounting CaIcuIations and FormuIa Accounting CaIcuIations and FormuIa
Cas ReconciIiation Cas ReconciIiation
Opening Cas BaIance 100 Opening Cas BaIance 100
(+) Add Cas Receipts 2500 (+) Add Cas Receipts 2500
(Cas SaIes, Cas Recd from (Cas SaIes, Cas Recd from
ReceivabIes, Cas wit drawI from ReceivabIes, Cas wit drawI from
Bank) Bank)
( (- -) Less Cas Payments 2000 ) Less Cas Payments 2000
(Cas Purcases, Expenses paid (Cas Purcases, Expenses paid
By Cas, Cas Deposited into Bank) By Cas, Cas Deposited into Bank)
CIosing Cas BaIance 600 CIosing Cas BaIance 600
Bank BaIance ReconciIiation Bank BaIance ReconciIiation
Opening BaIance of Bank 200 Opening BaIance of Bank 200
(+) Add Bank Receipts 2000 (+) Add Bank Receipts 2000
(Cas Deposits, Ceque Received (Cas Deposits, Ceque Received
From Debtors, Interest Credited) From Debtors, Interest Credited)
( (- -) Less Payments from Bank 1500 ) Less Payments from Bank 1500
(Paid to Creditors by Ceque, (Paid to Creditors by Ceque,
Expenses paid by ceque, Cas Expenses paid by ceque, Cas
it drawI from bank) it drawI from bank)
CIosing Bank BaIance 700 CIosing Bank BaIance 700
48 48
Accounting Entries for te Case Study Accounting Entries for te Case Study
SI SI
No No
Description Description Nature of Account Nature of Account Dr (in Dr (in
USD) USD)
Cr (in Cr (in
USD) USD)
1 1 Cas A/c Dr Cas A/c Dr
Furniture A/c Dr Furniture A/c Dr
(Cas and Furniture ReaI (Cas and Furniture ReaI
TangibIe Asset. Hence TangibIe Asset. Hence
appIy te ReaI RuIe appIy te ReaI RuIe - - Debit Debit
at comes in) at comes in)
To Siva CapitaI A/c To Siva CapitaI A/c
(Siva is a Person running (Siva is a Person running
te business as a te business as a
Proprietor in tis case. Proprietor in tis case.
Hence appIy te RuIe for Hence appIy te RuIe for
PersonaI PersonaI - - Credit te giver) Credit te giver)
ReaI ReaI
ReaI ReaI
PersonaI PersonaI
(AIso using te Business Entity (AIso using te Business Entity
Concept Siva being owner is Concept Siva being owner is
aIso treated as a Creditor for aIso treated as a Creditor for
te purpose of Business. If te te purpose of Business. If te
Business is wind up Business Business is wind up Business
as to pay back Siva) as to pay back Siva)
50000 50000
50000 50000
100000 100000
2 2 Inventory A/c Dr Inventory A/c Dr
(ReaI TangibIe Asset) (ReaI TangibIe Asset)
To Creditors A/c To Creditors A/c
(Person be an IndividuaI or (Person be an IndividuaI or
Company gives te goods Company gives te goods
on Credit) on Credit)
ReaI ReaI
PersonaI PersonaI
75000 75000
75000 75000
49 49
SI SI
No No
USD) USD)
Cr (in Cr (in
USD) USD)
3 3 No Entry No Entry
(Mere Promise to give does (Mere Promise to give does
not tantamount to not tantamount to
Monetary Transaction) Monetary Transaction)
No Entry No Entry
(Money Measurement Concept (Money Measurement Concept
- - No Monetary transaction No Monetary transaction
invoIved ) invoIved )
4 4 Two Entries invoIved (One Two Entries invoIved (One
for saIe of goods and one for saIe of goods and one
for reduction in inventory) for reduction in inventory)
Cas / Bank A/c Dr Cas / Bank A/c Dr
(ReaI (ReaI - - Debit wat comes Debit wat comes
in) in)
To Revenue (SaIes) A/c To Revenue (SaIes) A/c
(NominaI RuIe (NominaI RuIe - - Credit aII Credit aII
Income and Revenue) Income and Revenue)
Cost of Goods SoId A/c Dr Cost of Goods SoId A/c Dr
(NominaI (NominaI - - Debit Debit
Expenses) Expenses)
To Inventory A/c To Inventory A/c
(Reduction in Inventory) (Reduction in Inventory)
ReaI A/c ReaI A/c
NominaI A/c NominaI A/c
ReaI A/c ReaI A/c
100000 100000
50000 50000
100000 100000
50000 50000
50 50
SI SI
No No
USD) USD)
Cr (in Cr (in
USD) USD)
5 5 Rent A/c Dr Rent A/c Dr
(Debit Expense (Debit Expense - - NominaI) NominaI)
Rent Advance A/c Dr Rent Advance A/c Dr
(Tis is Iike Cas (Tis is Iike Cas
Advanced to LandIord. Advanced to LandIord.
Hence it souId be treated Hence it souId be treated
as PersonaI as PersonaI - -
Debit te Receiver) Debit te Receiver)
To Cas A/c To Cas A/c
(ReaI (ReaI - - Credit wat goes Credit wat goes
out) out)
PersonaI A/c PersonaI A/c
ReaI ReaI
1000 1000
1000 1000
2000 2000
6 6 SaIary A/c Dr SaIary A/c Dr
(NominaI (NominaI - - Debit Expense) Debit Expense)
out) out)
ReaI A/c ReaI A/c
5000 5000
5000 5000
51 51
SI SI
No No
USD) USD)
Cr (in Cr (in
USD) USD)
7 7 Advertisement Exp A/c Dr Advertisement Exp A/c Dr
Advt Exp Adv A/c Dr Advt Exp Adv A/c Dr
(Tis is Iike a Deferred (Tis is Iike a Deferred
Revenue Expense needs to Revenue Expense needs to
be carged in two years. be carged in two years.
50% need to be Current 50% need to be Current
ear Expense and BaIance ear Expense and BaIance
50% is carried Forward and 50% is carried Forward and
treated as Expense in next treated as Expense in next
ear) ear)
out) out)
NominaI NominaI
ReaI ReaI
ReaI ReaI
2500 2500
2500 2500
5000 5000
8 8 ReceivabIes A/c Dr ReceivabIes A/c Dr
To Revenue A/c To Revenue A/c
Cost of Goods SoId A/c Dr Cost of Goods SoId A/c Dr
To Inventory A/c To Inventory A/c
ReaI ReaI
NominaI NominaI
NominaI NominaI
ReaI ReaI
18000 18000
10000 10000
18000 18000
10000 10000
52 52
SI SI
No No
USD) USD)
Cr (in Cr (in
USD) USD)
9 9 No Entry No Entry
(Tis is a Mistake done by (Tis is a Mistake done by
Bank. Bank as to make Bank. Bank as to make
correction and in Siva's correction and in Siva's
Book tere is no Book tere is no
accounting entry required) accounting entry required)
No Entry No Entry
10 10 VeicIes A/c Dr VeicIes A/c Dr
(ReaI TangibIe Asset (ReaI TangibIe Asset
Debit wat comes in) Debit wat comes in)
To Bank A/c To Bank A/c
(ReaI asset (ReaI asset - - Credit wat Credit wat
goes out) goes out)
ReaI ReaI
ReaI ReaI
25000 25000
25000 25000
11 11 Bank A/c Dr Bank A/c Dr
(ReaI asset (ReaI asset- - Debit wat Debit wat
comes in comes in
(ReaI Asset (ReaI Asset - - Credit wat Credit wat
goes out) goes out)
ReaI ReaI
ReaI ReaI
50000 50000
50000 50000
53 53
T Accounts T Accounts
Dr USD Dr USD Cr USD Cr USD
To BaI 100000 To BaI 100000 By Cas 50000 By Cas 50000
By Furniture 50000 By Furniture 50000
TotaI 100000 TotaI 100000 TotaI 100000 TotaI 100000
To Siva Cap 50000 To Siva Cap 50000 By BaI 50000 By BaI 50000
Siva Capital Account
Furniture Account
To Siva Cap 50000 To Siva Cap 50000
To SaIes 100000 To SaIes 100000
By Rent 1000 By Rent 1000
By Rent Adv 1000 By Rent Adv 1000
By SaIary 5000 By SaIary 5000
By Advt Adv 2500 By Advt Adv 2500
By Advt exp 2500 By Advt exp 2500
By Bank 50000 By Bank 50000
By BaIance 88000 By BaIance 88000
To Creditors 75000 To Creditors 75000 By COGS 50000 By COGS 50000
By COGS 10000 By COGS 10000
By BaI 15000 By BaI 15000
Cash Account !nventory Account
54 54
To BaI 75000 To BaI 75000 By Invent 75000 By Invent 75000
To Cas 1000 To Cas 1000 By BaI 1000 By BaI 1000
Creditors Account Rent Account
To BaI 118000 To BaI 118000 By Cas 100000 By Cas 100000
By Rece 18000 By Rece 18000
Rent Advance Account
Revenue / Sales Account
Salary Account Advertisement Exp Account
55 55
To saIes 18000 To saIes 18000 By BaI 18000 By BaI 18000
Advt Exp Advance Account Receivables Account
To Inventory 50000 To Inventory 50000
To Inventory 10000 To Inventory 10000
To Bank 25000 To Bank 25000 By BaI 25000 By BaI 25000
Cost of Coods Sold Account
vehicle Account
Bank Account
To Cas 50000 To Cas 50000 By VeicIe 25000 By VeicIe 25000
56 56
TriaI BaIance TriaI BaIance
Debit USD Debit USD Credit USD Credit USD
Furniture (A) 50000 Furniture (A) 50000
Cas (A) 88000 Cas (A) 88000
Bank (A) 25000 Bank (A) 25000
COGS (E) 60000 COGS (E) 60000
SaIary (E) 5000 SaIary (E) 5000
Rent (E) 1000 Rent (E) 1000
Rent Advance (A) 1000 Rent Advance (A) 1000
Advertisement Exp (E) 2500 Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500 Advt Exp Advance (A) 2500
Inventory (A) 15000 Inventory (A) 15000
VeicIe (A) 25000 VeicIe (A) 25000
ReceivabIe (A) 18000 ReceivabIe (A) 18000
Siva CapitaI (L) 100000 Siva CapitaI (L) 100000
SaIes / Revenue (R) 118000 SaIes / Revenue (R) 118000
Creditors (L) 75000 Creditors (L) 75000
Trial Balance for the Nonth of APRL 2007
A - Asset, L - Liability, R - Revenue, E Expense
57 57
Profit and Loss Account For APR 2007 Profit and Loss Account For APR 2007
Expenses USD Expenses USD Revenue USD Revenue USD
COGS (E) 60000 COGS (E) 60000
SaIary (E) 5000 SaIary (E) 5000
Rent (E) 1000 Rent (E) 1000
Advertisement Exp (E) 2500 Advertisement Exp (E) 2500
To Profit 49500 To Profit 49500
SaIes / Revenue (R) 118000 SaIes / Revenue (R) 118000
58 58
BaIance Seet as on 30 BaIance Seet as on 30- -APR APR- -2007 2007
LiabiIities USD LiabiIities USD Assets USD Assets USD
Siva CapitaI 100000 Siva CapitaI 100000
Add Profit 49500 Add Profit 49500
Siva CapitaI 149500 Siva CapitaI 149500
Creditors 75000 Creditors 75000
Furniture 50000 Furniture 50000
VeicIe 25000 VeicIe 25000
Cas 88000 Cas 88000
Bank 25000 Bank 25000
ReceivabIes 18000 ReceivabIes 18000
Inventory 15000 Inventory 15000
Rent Advance 1000 Rent Advance 1000
Advt Exp Advance 2500 Advt Exp Advance 2500
59 59
Important Points to Remember Important Points to Remember
Accounting can be Iearnt onIy by Practice and not by reading Accounting can be Iearnt onIy by Practice and not by reading
Try to Iearn by creating JournaI entries wit ExampIes Try to Iearn by creating JournaI entries wit ExampIes
Cas BaIance can never ave negative baIance at any point of time Cas BaIance can never ave negative baIance at any point of time
Land wiII never Depreciate and it wiII ave onIy Appreciation Land wiII never Depreciate and it wiII ave onIy Appreciation
Bank can ave negative baIance if you ave Overdraft faciIity Bank can ave negative baIance if you ave Overdraft faciIity
Te Bank wic maintains your account wiII ave exactIy opposite Te Bank wic maintains your account wiII ave exactIy opposite
entries of wat is sown in your Bank Account entries of wat is sown in your Bank Account
In te above, ExampIe te bank account in your Books and in Bank In te above, ExampIe te bank account in your Books and in Bank
Books wiII be as foIIows Books wiII be as foIIows
To Cas 50000 To Cas 50000 By VeicIe 25000 By VeicIe 25000
By BaIance By BaIance 25000 25000
To VeicIe 25000 To VeicIe 25000
To BaIance To BaIance 25000 25000
By Cas 50000 By Cas 50000
Siva Books
Bank Account
Bank Books
Siva Account
60 60
Case Study for Practice Case Study for Practice
Take your own PersonaI Account and try to create te foIIowing Take your own PersonaI Account and try to create te foIIowing
On First of JuIy 2007 ou ad a Cas baIance of USD2500 wic is On First of JuIy 2007 ou ad a Cas baIance of USD2500 wic is
your CapitaI your CapitaI
On 3 On 3
rd rd
JuIy ou ave received SaIary of USD 12000 JuIy ou ave received SaIary of USD 12000
On 5 On 5
t t
Paid Rent of USD 1200 by ceque Paid Rent of USD 1200 by ceque
On 7 On 7
t t
ou purcased provision for ouse for 800 USD ou purcased provision for ouse for 800 USD
On 10 On 10
t t
ou spent for outing troug your credit card USD 500 ou spent for outing troug your credit card USD 500
On 15 On 15
t t
ou witdraw Cas USD 8000 ou witdraw Cas USD 8000
On 20 On 20
t t
ou Invested in Fixed Deposit USD 5000 @5% Interest Per ou Invested in Fixed Deposit USD 5000 @5% Interest Per
annum annum
On 22 On 22
nd nd
you ave given a Loan of USD 2000 to friend James you ave given a Loan of USD 2000 to friend James
On 25 On 25
t t
ou spent for Car Repairs 500 USD ou spent for Car Repairs 500 USD
On 28 On 28
t t
our wife gave USD 200 to your Neigbor from er pocket our wife gave USD 200 to your Neigbor from er pocket
On 30 On 30
t t
ou Deposited Cas 1000 USD to your Bank Account ou Deposited Cas 1000 USD to your Bank Account
61 61
How to Approac to Learn How to Approac to Learn
I tried my best to teac Accounting in simpIe way. Tis I tried my best to teac Accounting in simpIe way. Tis
is onIy a beginning. ou ave to Practice a Lot to Iearn is onIy a beginning. ou ave to Practice a Lot to Iearn
Te simpIe way to Learn Accounting is as foIIows Te simpIe way to Learn Accounting is as foIIows
Do not go for advanced IeveI books witout understanding te Do not go for advanced IeveI books witout understanding te
basics basics
Start wit (+1) Accounting book in case of peopIe in India and Start wit (+1) Accounting book in case of peopIe in India and
Pre Pre- -University book in case of oter Countries. Practice te University book in case of oter Countries. Practice te
exampIes given in tat book and exercises exampIes given in tat book and exercises
Tis is more tan sufficient for any non accounting candidate to Tis is more tan sufficient for any non accounting candidate to
work on OracIe AppIications work on OracIe AppIications
Never try to memorize te concepts and ruIes Never try to memorize te concepts and ruIes
Try to understand and appIy te concepts and RuIes Try to understand and appIy te concepts and RuIes
Tere are areas Iike Depreciation, Provision and Amortization Tere are areas Iike Depreciation, Provision and Amortization
etc migt not ave been covered in tis presentation. I do not etc migt not ave been covered in tis presentation. I do not
want you to go to advanced IeveI witout understanding te want you to go to advanced IeveI witout understanding te
basics. If you understand te Concepts and RuIes ten ou can basics. If you understand te Concepts and RuIes ten ou can
andIe aII of tem andIe aII of tem
Read and Practice LeveI I and II at Ieast Tree times Read and Practice LeveI I and II at Ieast Tree times
62 62
Tere is a difference between an objective and Tere is a difference between an objective and
actions. UnIess you understand your objective, actions. UnIess you understand your objective,
you wiII be wasting your time in actions. Know you wiII be wasting your time in actions. Know
your objective first your objective first - - Swami Swami Vivekananda Vivekananda
63 63
DiscIaimer DiscIaimer: : Tis Tis Document Document was was created created wit wit my my own own
assumptions assumptions to to expIain expIain te te concept concept of of accounting accounting
and and te te names names of of te te companies companies used used in in tis tis articIe articIe
are are onIy onIy to to expIain expIain te te accounting accounting concept concept wit wit data data
assumptions assumptions and and none none of of te te Company Company is is not not
responsibIe responsibIe for for te te Data Data provided provided in in tis tis articIe articIe..
Tank ou Tank ou
Hope ou find tis articIe usefuI Hope ou find tis articIe usefuI
Get Ready for Learning Get Ready for Learning
Accounting in OracIe AppIications Accounting in OracIe AppIications

Basics of Accounting Level II

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Basic Accounting Level II

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