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Accounting Principles

Accounting Principles

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Published by: Bhooshan Jape on Jan 09, 2012
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ACCOUNTING PRINCIPLES

Dr.K.Ananthanarayanan Associate Professor Department of Civil Engineering IIT Madras

To provide the economic activities of the enterprise to several group of people 2.Financial Statements Objectives: 1.To provide information to the investors . To provide useful information to the creditors 3.

Accounting Definition: Accounting is an art of recording. classifying and summarizing in terms of money transactions and events of a financial character and interpreting the result thereof. .

Balance sheet . Trading & Profit and loss account 2.ART OF RECORDING Two statements 1.

Groups interested  Owner  Management  Potential Investors  Creditors  Employees  Government  Researchers-students .

matching Accrual.Accounting Principles Main features: Usefulness Objectivity Feasibility Concepts: Duality.Revenue Recognition.objectivity .Going concern Accounting period-Historic Cost Money measurement.

Payment of taxes.Dual aspect concept Purchase of good from several suppliers Sales to several customers on cash and credits Payments to suppliers and collection from customers. Payment of salaries to salesmen. rents Two aspects involved.receipts of goods and payment of cash .

Nithin.000 this fact is recorded in two places: assets account and capital account Capital Nithin 70000 = Assets building + cash 50000 + 20000 . the proprietor of the business.Example Mr. starts his business with a cash Rs20.000 and building of Rs 50.

Accounting * The business increases by borrowing Rs 20000 Capital+ Liability = Assets Nithin +Loan building + cash 70000+20000 50000 + 40000 *Pays for furniture Rs 5000 and purchase land on credit for Rs 8000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 70000+20000 +8000 50000 + 35000+ 5000+8000 If he pays expenses say Rs2000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 68000+20000 +8000 50000 + 33000+ 5000+8000 .

bills payable Outstanding expences = Assets Building Land Machinery Furniture Stock in trade Debtor Bills receivable Bank cash . Bank overdraft.Capital + Liabilities Proprietor's capital + Loan. Creditors.

straight line method 2.00.000 per annum show what will be the amount of profits after depreciation under 1.60. The asset has to be depreciated at 40% on diminishing balance method.Problem A limited company purchases a machinery for Rs1.440. If the profits before depreciation are Rs1.000. Its estimated life is 5 years at the end of which it will have a scrap value of Rs12.Diminishing balance method .

Diminishing Balance method Depreciation Profit after dep.000 70490 70490 70490 70490 70480 352440 ------------ 64000 38400 23040 13820 8300 ------147560 12440 1. I Yr II Yr III Yr IV Yr V Yr.60.000 36000 61600 76990 86180 91700 352440 ------------- . Total profit Total depre. Add Scrap value Cost of asset 29510 29510 29510 29510 29520 ------147560 12440 1.60.Year Straightline method Depreciation Profit after dep.

the profit also diminishes as the age of the asset increases. ± This method is preferred as it helps early recovery of the investment 1. Uniform profit is assumed. .Comments Total depreciation. In the diminishing method dep. Are constant for each year 3. In practice productivity of the assets diminishes. and profit after dep. Charge is heavy in the earlier years resulting in reduction in the profits. 4. In the straight line method dep. total profits is the same by both the methods over 5years 2.

Manufacturing Accounts and Cost statements Cost of materials consumed Direct labour cost Direct expenses Prime cost (direct cost) Factory overhead Gross work cost Network cost of production .

Work in progress at close Factory cost or network cost of production . depreciation + work in progress at start .Scheme of Manufacturing Concern Manufacturing Account Prime cost Direct material Direct Labour Direct expenses + Factory over heads Rent. Insurance. supervisor¶s remuneration Plant repair.

Trading Account Opening Stock of finished goods SALES + Networks of cost of production +Closing Stock of finished goods + Gross profit .

commission etc + Distribution overheads Van expenses. electricity. Fright outward. Insurance + Net profit Gross profit .Profit and loss account Administrative overheads office salaries. Packing . rent stationary and others + Selling overheads salaries in sales dept.

170 4.860 37.110 4.000 25. expenses Cash discount ±Dr Depreciation Plant Office building Factory building Rs 12.200 .68.27.200 54930 15.000 1.960 67.00.300 48.920 1.000 Sales Trade discount (cr) Carriage outward Salaries Gen.140 3.000 36.000 10.Problem Prepare a trading and P& L A/c Stock: Finished goods Work in progress Raw material Chemicals Purchases raw materials Chemicals Factory wages Factory on cost Rs 40.200 6.500 1.

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