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Accounts Job Related Preparation

Accounting Concepts/
1. (Business Entity):


The business enterprise and its owners are two separate independent entities. Therefore, any personal
expenses incurred by owners of a business will not appear in the income statement of the entity.
Similarly, if any personal expenses of owners are paid out of assets of the entity, it would be
considered to be drawings for the purpose of accounting much in the same way as cash drawings.
2. (Going Concern):

This concept states that a business firm will continue to carry on its activities for an indefinite period
of time. Simply stated, it means that every business entity has continuity of life.

3. (Cost Principle):

Accounting cost concept states that all assets are recorded in the books of accounts at their purchase
price, which includes cost of acquisition, transportation and installation and not at its market price. It
means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of
accounts at a price paid for them.

4. (Full Discloser Principle):

Financial statements and their notes should contain all relevant data.

5. (Conservatism Principles):


6. Matching Concept:
The matching concept states that the revenue and the expenses incurred to earn the revenues must
belong to the same accounting period. So once the revenue is realized, the next step is to allocate it to
the relevant accounting period. This can be done with the help of accrual concept.

7. Accruals Concept
Financial statements are prepared under the Accruals Concept of accounting which requires that
income and expense must be recognized in the accounting periods to which they relate rather than on
cash basis. An exception to this general rule is the cash flow statement whose main purpose is to
present the cash flow effects of transaction during an accounting period.

3 Cs:

1. Cost Principles
2. Consistency Principles:
Financial statements of one accounting period must be comparable to another in order for the users
to derive meaningful conclusions about the trends in an entity's financial performance and position
over time. Comparability of financial statements over different accounting periods can be ensured
by the application of similar accountancy policies over a period of time.
3. Conservatism

American I nstitute of Certified Public Accounts(AI CPA): Accounting is a arts of recording,
classifying & Summarizing in a significant manner in terms of money, transactions & events which
are in part at least of a financial character & interpreting the result there of

Kiso, Kimmel & Weyganlt: Accounting is an information system identifies, records, & communicates
the economic events of an organization to interested users


Business finance is that business activity which is concerned with the acquisition & conversation of
capital funds in meeting the financial needs & overall objective of business enterprise.

Accounting Vs Finance:

Key difference: Accounting is the process of creating and managing financial statements which record
the day to day transactions of the business. Finance has a broader scope and is responsible for initiating
transactions to aid in cash, investment and other working capital management.
Accounting and finance are both forms of managing the money of the business, but they are used for two very
different purposes. One of the ways to distinguish between the two is to realize that accounting is part of
finance, and that finance has a much broader scope than accounting.
Accounting is the practice of preparing accounting records, including measuring, preparation, analyzing, and
the interpretation of financial statements. These records are used to develop and provide data measuring the
performance of the firm, assessing its financial position, and paying taxes. Finance, on the other hand, is the
efficient and productive management of assets and liabilities based on existing information.
Finance is the study of money and capital markets which deals with many of the topics covered in macro
economics. It is the management and control of assets and investments, which focuses on the decisions of
individual, financial and other institutions as they choose securities for their investments portfolios. Also,
managerial finance involves the actual management of the firm, as well as profiling and managing project risks.
Another way to look at it is that, accounting analyzes the past expenses and performance of the business. This
information is then used by the finance department to make decisions about the future.
Accounting Finance
Definition Preparation of accounting records
Efficient and productive management of assets
and liabilities based on existing information
Measuring, preparation, analyzing, and
interpretation of financial statements.
To collect and present financial
Decision making regarding working capital
issues such as level of inventory, cash holding,
credit levels, financial strategy, managing and
controlling cash flow.
To see how the company is performing,
to monitor day to day accounting
operations, and for taxing.
To forecast the future performance of the
Balance sheets, profit and loss ledgers,
positional declarations, and cash flow
Performance reports, ratio analysis, risk
analysis, estimating break evens, returns on
investment, etc.
of funds
Revenue is acknowledged at the point
of sale and not when it was collected.
Expenses are acknowledged when they
are incurred than when they are paid.
Revenues are acknowledged during the actual
receipt in cash as in cash flow and the expenses
are acknowledged when the actual payment is
made as in cash outflow

Financial Accounting vs. Management Accounting

Management accounting is a field of accounting that analyzes and provides cost information to the
internal management for the purposes of planning, controlling and decision making.
Management accounting refers to accounting information developed for managers within an
organization. CIMA (Chartered Institute of Management Accountants) defines Management
accounting as Management Accounting is the process of identification, measurement, accumulation,
analysis, preparation, interpretation, and communication of information that used by management to
plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its
resources. This is the phase of accounting concerned with providing information to managers for use
in planning and controlling operations and in decision making.
Managerial accounting is concerned with providing information to managers i.e. people inside an
organization who direct and control its operations. In contrast, financial accounting is concerned with
providing information to stockholders, creditors, and others who are outside an organization.
Managerial accounting provides the essential data with which organizations are actually run. Financial
accounting provides the scorecard by which a companys past performance is judged.
Because it is manager oriented, any study of managerial accounting must be preceded by some
understanding of what managers do, the information managers need, and the general business
Comparison chart
Financial Accounting Management Accounting
Financial accounts are supposed to be in
accordance with a specific format by IAS so
that financial accounts of different
organizations can be easily compared.
No specific format is designed for
management accounting systems.
Planning and control
Financial accounting helps in making
investment decision, in credit rating.
Management Accounting helps
management to record, plan and
control activities to aid decision-
making process.
External Vs. Internal
A financial accounting system produces
information that is used by parties external to
the organization, such as shareholders, bank
and creditors.
A management accounting system
produces information that is used
within an organization, by managers
and employees.
Focus Financial accounting focuses on history.
Management accounting focuses on
future & Present.
Financial accounting reports are primarily
used by external users, such as shareholders,
bank and creditors.
Management accounting reports are
exclusively used by internal users
viz. managers and employees.
Reporting frequency
and duration
Well-defined - annually, semi-annually,
As needed - daily, weekly, monthly.
Preparing financial accounting reports are
mandatory especially for limited companies.
There are no legal requirements to
prepare reports on management
The main objectives of financial accounting
are :i) to disclose the end results of the
business, and ii) to depict the financial
condition of the business on a particular date.
The main objectives of Management
Accounting are to help management
by providing information that used
by management to plan, evaluate,
and control.
Drafted according to GAAP - General
Accepted Accounting Procedure.
Drafted according to management
Accounting process
Follows a full process of recording,
classifying, and summmarising for the
purpose of analysis and interpretation of the
financial information.
Cost accounts are not preserved
under Management Accounting. The
necessary data from financial
statements and cost ledgers are
Segment reporting
Pertains to the entire organization or
materially significant business units.
May pertain to smaller business units
or individual departments, in
addition to the entire organization.
Nature of information Focus on quantitative information
Focus on both qualitative and
quantitative information
Cost Accounting vs. Management Accounting
Cost Accounting:

Cost accounting is a phase of general accounting procedure by means of which deals of cost of materials, labors
& overhead necessary to produce and sale an article are recorded, summarized, analyzed & interpreted.

Cost Accounting Management Accounting
External Vs.
Cost Accounting is that branch of
accounting information system which
records, measures and reports information
about costs.
A management accounting system produces
information that is used within an organization, by
managers and employees.
The primary purpose of the Cost Accounting
is cost ascertainment and its use in decision-
making performance evaluation.
The main objectives of Management Accounting
are to help management by providing information
that used by management to plan, evaluate, and
Cost Accounting preserves cost accounts by
maintaining double-entry accounting process
if felt necessary. Cost Ledger is used under
Cost accounts are not preserved under
Management Accounting. The necessary data from
financial statements and cost ledgers are analyzed.

Income/ :

The amount of money or its equivalent received during a period of time in exchange for labor or services, from
the sale of goods or property, or as profit from financial investments.

Income= (Revenue + Gain) (Exp Loss).

Capital/ :

Money invested in a business to generate income.

Cash or goods used to generate income either by investing in a business or a different income property.

The net worth of a business; that is, the amount by which its assets exceed its liabilities

Revenue/ :

For a company, this is the total amount of money received by the company for goods sold or services provided
during a certain time period. It also includes all net sales, exchange of assets; interest and any other increase in
owner's equity and is calculated before any expenses are subtracted.

Revenue Recognition

When selling goods, IAS 18 requires that revenue should be recognised only when all of the following
conditions have been satisfied:
The seller has transferred to the buyer the significant risks and rewards of ownership.
The seller retains neither continuing managerial involvement to the degree usually associated with
ownership, or effective control over the goods sold.
The amount of revenue can be measured reliably.
It is probable that the economic benefits associated with the transaction will flow to the seller.
The costs incurred (or to be incurred) in respect of the transaction can be measured reliably.

When providing a service, IAS 18 requires that revenue should only be recognised when all of the following
conditions are met:
The amount of revenue can be measured reliably.
It is probable that the economic benefits will flow to the seller.
The stage of completion at the reporting date can be measured reliably.
The costs incurred (or to be incurred) in respect of the transaction can be measured reliably.

On 1 October in the current year, a private tuition provider enrolls a student on a six-month course. Lectures
are held regularly every week over the whole six-month period. The tuition fees are $6,000 and oncepaid are
non-refundable. All books and materials have to be purchased separately. The student pays a first
installment of $3,000 prior to the commencement of the course, and the balance of $3,000 in six, $500
monthly installments. The tuition provider has a financial year-end of 31 December, and proposes to
recognise revenue in the financial accounts on a cash receipt basis. At the year end, the three, monthly
installments due have been received.
Advise the tuition provider on the correct accounting treatment for this transaction.
Dr Cash 4,500 Being the receipt of cash
Cr Revenue/Sales 3,000 Being the revenue earned being recognised
Cr Deferred income 1,500 Being the monies received in advance of the delivery of the services.

On 1 November 20X0, a car retailer agreed to sell a motor vehicle for $20,000. At that time, the customer
negotiated a three-year free service agreement as part of the transaction. This service agreement is normally
sold for $1,000. Also, on 1 November 20X0, the customer paid a non-refundable deposit of $2,000. A further
$10,000 is payable three months later on 1 February 20X1. The customer has taken advantage of an interest-
free offer and will pay the balance of the $8,000 on 1 February 20X3. Delivery of the car to the customer will
take place on 1 February 20X1. The car retailer has a financial year end of 31 December and proposes to
recognise the sale of the car at $20,000 in the financial accounts for the current year.
Advise the car retailer on the correct accounting treatment for this transaction.
1 November 20X0
Dr Cash 2,000 Being the receipt of cash
Cr Deferred income 2,000 Being monies received in advance of the sale being
recognised and so deferred income.
1 February 20X1
Dr Deferred income 2,000 To clear out the b/f deferred income account

Dr Cash 10,000 Being the receipt of cash
Dr Debtor/Receivable 6,612 Measured at present value with a discount rate of say 10%
Cr Deferred income 1,000 In respect of the monies received in advance for the three-year
service agreement
Cr Sales/Revenue 17,612 Revenue in respect of the car balancing figure

On 1 December in the current year, an I nternet travel agent accepts a payment by credit card of $1,000 in
respect of a hotel booking for the following February. The travel agent confirms the booking and issues the
customer with an appropriate receipt. I n due course, the I nternet travel agent will pay $900 to the hotel.
Having received $1,000 from the customer (Dr Cash $1,000), the I nternet travel agent proposes to
immediately recognise $1,000 as revenue in the current year (Cr Sales $1,000). I t will then record the liability
to pay the hotel (Cr Liability $900), and complete the double entry by posting this as an expense (Dr Expense
$900). The I nternet travel agent has a financial year end of 31 December.
Advise the I nternet travel agent on the correct accounting treatment for this transaction.

Dr Cash 1,000 Being the banking of the cash received
Cr Revenue/Sales 100 Being the commission earned as an agent
Cr Hotel creditor 900 Being the liability to pay money over to the hotel


Cost is the measurement in monetary terms of the amount of resources used for some purposes.
In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and
utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or
service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-
generating asset) are expenses.

1. Direct Cost: a. Direct Material Cost; b. Direct Labour Cost, c. Direct expenses cost;
2. Indirect Cost: a. Factory overheads, b. Office & Administrative overheads, c. Selling &
Distribution overheads.

Cost Vs Exp:
Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrence of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
an expense or expenditure is an outflow of money to another person or group to pay for an item or service,
or for a category of costs
Types of transaction:
Cost: Incurred capital and revenue transaction.
Exp: Incurred only revenue transaction.
Duration of Consumption:
Cost: Long and Shot Terms.
Exp: Only for short terms.


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1. Capital Transaction: a. Capital Expenditure, b. Capital Payment, c. Capital Revenue, d. Capital
2. Revenue Transaction: a. Revenue Expenditure & Payments, b. Revenue Income & Receipts.

1. A: Capital Expenditure / :

Capital expenditure consists of those expenditures, the benefits of which is carried over to the several
accounting period.

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1. B: Capital Payments / :

1. C: Capital Income / :

1. D: Capital Receipts / :

2. A. Revenue Income ( ):

Revenue income is all recurring income which is earns during normal course of activities.
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2. B: Revenue Expenditure ( ):
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Deferred Revenue Expenditure( ) :

An expenditure which is revenue nature but its benefits will be derived for a very long period is
called deferred revenue expenditure.

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1. (Comparative Analysis)

2. (Trand Analysis)
Change Since Base Period =
(Current Base)/Base

4. (Ratio Analysis)
5. (Cash Flow
6. (Fund Flow
7. (Net Working
Capital Analysis)


Q: Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying
salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income
statement that reduces equity via retained earnings?
A: Capital expenditures are capitalized because of the timing of their estimated benefits the lemonade stand
will benefit the firm for many years. The employees work, on the other hand, benefits the period in which the
wages are generated only and should be expensed then. This is what differentiates an asset from an expense.
Q: Walk me through a cash flow statement.
A. Start with net income, go line by line through major adjustments (depreciation, changes in working capital
and deferred taxes) to arrive at cash flows from operating activities.
Mention capital expenditures, asset sales, purchase of intangible assets, and purchase/sale of investment
securities to arrive at cash flow from investing activities.
Mention repurchase/issuance of debt and equity and paying out dividends to arrive at cash flow from
financing activities.
Adding cash flows from operations, cash flows from investments, and cash flows from financing gets you
to total change of cash.
Beginning-of-period cash balance plus change in cash allows you to arrive at end-of-period cash balance.
Q: What is working capital?
A: Working capital is defined as current assets minus current liabilities; it tells the financial statement user how
much cash is tied up in the business through items such as receivables and inventories and also how much cash
is going to be needed to pay off short term obligations in the next 12 months.
Q: Is it possible for a company to show positive cash flows but be in grave trouble?
A: Absolutely. Two examples involve unsustainable improvements in working capital (a company is selling off
inventory and delaying payables), and another example involves lack of revenues going forward. in the pipeline
Q: How is it possible for a company to show positive net income but go bankrupt?
A: Two examples include deterioration of working capital (i.e. increasing accounts receivable, lowering
accounts payable), and financial shenanigans.
Q: I buy a piece of equipment; walk me through the impact on the 3 financial statements
A: Initially, there is no impact (income statement); cash goes down, while PP&E goes up (balance sheet), and
the purchase of PP&E is a cash outflow (cash flow statement)
Over the life of the asset: depreciation reduces net income (income statement); PP&E goes down by
depreciation, while retained earnings go down (balance sheet); and depreciation is added back (because it is a
non-cash expense that reduced net income) in the cash from operations section (cash flow statement).
Q: Why are increases in accounts receivable a cash reduction on the cash flow statement?
A: Since our cash flow statement starts with net income, an increase in accounts receivable is an adjustment to
net income to reflect the fact that the company never actually received those funds.
Q: How is the income statement linked to the balance sheet?
A: Net income flows into retained earnings.
Q. What is Goodwill?
A: Goodwill is an asset that captures excess of the purchase price over fair market value of an acquired
business. Lets walk through the following example: Acquirer buys Target for $500m in cash. Target has 1
asset: PPE with book value of $100, debt of $50m, and equity of $50m = book value (A-L) of $50m.
Acquirer records cash decline of $500 to finance acquisition
Acquirers PP&E increases by $100m
Acquirers debt increases by $50m
Acquirer records goodwill of $450m

Q: What is a deferred tax liability and why might one be created?
A: Deferred tax liability is a tax expense amount reported on a companys income statement that is not actually
paid to the IRS in that time period, but is expected to be paid in the future. It arises because when a company
actually pays less in taxes to the IRS than they show as an expense on their income statement in a reporting
Differences in depreciation expense between book reporting (GAAP) and IRS reporting can lead to differences
in income between the two, which ultimately leads to differences in tax expense reported in the financial
statements and taxes payable to the IRS.
Q: What is a deferred tax asset and why might one be created?
A: Deferred tax asset arises when a company actually pays more in taxes to the IRS than they show as
an expense on their income statement in a reporting period.
Differences in revenue recognition, expense recognition (such as warranty expense), and net
operating losses (NOLs) can create deferred tax assets.
Cash flow ( ) :
The statement of cash flow reports the cash receipts, cash payment and net change in cash resulting
from operating, investing and financial activities during a period. It does so in a format that reconciles
the beginning and ending cash balance.

Cash flow statement vs. Fund flow statement ( ):


Difference between Funds Flow Statement and Cash Flow Statement
Basis of Difference Funds Flow Statement Cash Flow Statement
1. Basis of Analysis
Funds flow statement is based on
broader concept i.e. working
Cash flow statement is based on narrow
concept i.e. cash, which is only one of
the elements of working capital.
2. Source
Funds flow statement tells about the
various sources from where the
funds generated with various uses to
Cash flow statement stars with the
opening balance of cash and reaches to
the closing balance of cash by
which they are put. proceeding through sources and uses.
3. Usage
Funds flow statement is more useful
in assessing the long-range financial
Cash flow statement is useful in
understanding the short-term phenomena
affecting the liquidity of the business.
4. Schedule of Changes
in Working Capital
In funds flow statement changes in
current assets and current liabilities
are shown through the schedule of
changes in working capital.
In cash flow statement changes in
current assets and current liabilities are
shown in the cash flow statement itself.
5. End Result
Funds flow statement shows the
causes of changes in net working
Cash flow statement shows the causes
the changes in cash.
6. Principal of
Funds flow statement is in
alignment with the accrual basis of
In cash flow statement data obtained on
accrual basis are converted into cash

What is the difference between the cash basis and the accrual basis of accounting?

Under the cash basis of accounting:

1. Revenues are reported on the income statement in the period in which the cash is received from

2. Expenses are reported on the income statement when the cash is paid out.

Under the accrual basis of accounting:

1. Revenues are reported on the income statement when they are earned---which often occurs before
the cash is received from the customers.

2. Expenses are reported on the income statement in the period when they occur or when they expire---
which is often in a period different from when the payment is made.

The accrual basis of accounting provides a better picture of a company's profits during an accounting
period. The reason is that the income statement prepared under the accrual basis will report all of the
revenues actually earned during the period and all of the expenses incurred in order to earn the

The accrual basis of accounting also provides a better picture of a company's financial position at a
moment or point in time. The reason is that all assets that were earned are reported and all liabilities
that were incurred will be reported.
The accrual basis of accounting is required because of the matching principle.
Here is an example of how a transaction would be recorded differently using each method/approach:

What is an invoice?
Definition: a document sent to a buyer that specifies the amount and cost of products or services that
have been provided by a seller.
An invoice indicates what must be paid by the buyer according to the payment terms of the seller.
Payment terms usually specify the period of time that a buyer has to send payment to the seller for the
goods and/or services that they have purchased.
Included in a typical invoice
Usually, an invoice will include an arrangement of the following points of information:
The word Invoice
A unique reference number for reference
The date the product was sent or delivered (or the date the service was rendered)
The date the invoice was sent
The contact information and name of the seller
The name of the buyer
The contact information of the buyer
The terms of payment (that explain the means of payment, when the sum should be received,
the discount details for early payment, late payment fees, etc.)
An account detailing the product/service
The cost per unit of the product (if this applies)
The total amount that is owed
What is the difference between an invoice and a voucher?
An invoice from a vendor is the bill that is received by the purchaser of goods or services from an
outside supplier. The vendor invoice lists the quantities of items, brief descriptions, prices, total
amount due, credit terms, where to remit payment, etc.

A voucher is an internal document used in a company's accounts payable department in order to
collect and organize the necessary documentation and approvals before paying a vendor invoice. The
voucher acts as a cover page to which the following will be attached: vendor invoice, company's
purchase order, company's receiving report, and other information needed to process the vendor
invoice for payment.
Capital gain:
The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain
is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't
been sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital
gain. For most investments sold at a profit, including mutual funds, bonds, options, collectibles,
homes, and businesses, the IRS is owed money called capital gains tax.
Letter of credit:

Is a commitment, grantee or undertaking generally by a bank either on behalf of Importer or on its own
behalf, to the Exporter about the payment of certain amount subject to the fulfillment of certain
documentary conditions.

Air Waybills

Air Waybills make sure that goods have been received for shipment by air. A typical air waybill
sample consists of three originals and nine copies.

Bill of Lading (B/L)

Bill of Lading is a document given by the shipping agency for the goods shipped for transportation
form one destination to another and is signed by the representatives of the carrying vessel.
A document issued by a carrier, or its agent, to the shipper as a contract of carriage of goods. It
is also a receipt for cargo accepted for transportation, and must be presented for taking delivery at the
Among other items of information, a bill of lading contains (1) consignor's and consignee's
name, (2) names of the ports of departure and destination, (3) name of the vessel, (4) dates of
departure and arrival, (5) itemized list of goods being transported with number of packages and kind of
packaging, (6) marks and numbers on the packages, (7) weight and/or volume of the cargo, (8) freight
rate and amount. It serves as a proof of ownership (title) of the cargo, and may be issued either in a
negotiable or non-negotiable form. In negotiable form, it is commonly used in letter of credit
transactions, and may be bought, sold, or traded; or used as security for borrowing money. A bill of
lading is required in all claims for compensation for any damage, delay, or loss; and for the resolution
of disputes regarding ownership of the cargo. The rights, responsibilities, and liabilities of the carrier
and the shipper under a bill of lading (often printed on its back) are governed generally either by the
older Hague rules, or by the more recent Hague-Visby rules.

Certificate of Origin

The Certificate of Origin is required by the custom authority of the importing country for the purpose
of imposing import duty. It is usually issued by the Chamber of Commerce and contains information
like seal of the chamber, details of the good to be transported and so on.

Combined Transport Document

Combined Transport Document is also known as Multimodal Transport Document, and is used when
goods are transported using more than one mode of transportation.

Commercial Invoice

Commercial Invoice document is provided by the seller to the buyer. Also known as export invoice or
import invoice, commercial invoice is finally used by the custom authorities of the importer's country
to evaluate the good for the purpose of taxation.

Bill of exchange

A Bill of Exchange is a special type of written document under which an exporter ask importer a
certain amount of money in future and the importer also agrees to pay the importer that amount of
money on or before the future date.

Insurance Certificate

Also known as Insurance Policy, it certifies that goods transported have been insured under an open
policy and is not actionable with little details about the risk covered

Bills of entry

A declaration by an importer or exporter of the exact nature, precise quantity and value of goods that
have landed or are being shipped out. Prepared by a qualified customs clerk or broker, it is examined
by customs authorities for its accuracy and conformity with the tariff and regulations.

Bank Reconciliation

Bank reconciliation statement is a report which compares the bank balance as per company's
accounting records with the balance stated in the bank statement.

The bank reconciliation statement is prepared for the following reasons:
1) to verify the entries in the bank statement matches with your cash book entries.
2) Any errors can be reported immediately to the bank to rectify
3) To verify all your transactions have been recorded in your cash book correctly.
4) This will prevent overdrawing on your account.
5) your recites in the cash book are properly deposited in the bank.

Following is a sample Bank Reconciliation Statement:

Bank Reconciliation Statement as at 31 December 2011
Balance as per corrected Cash Book 1 xxx
Unpresented Cheques 2 xxx
Deposits in Transit 3 (xxx)
Errors in Bank Statement 4 (xxx)
Balance as per Bank Statement xxx

1. Balance as per corrected Cash Book:

This is the starting point of bank reconciliation. Corrected bank balance is calculated by adjusting the
cash book ledger balance for transactions that are recorded by the bank but not by the entity as shown
Balance as per Cash Book xxx
Direct Credits 5 xxx
Interest on Deposit 6 xxx
Bank Charges 7 (xxx)
Direct Debits 8 (xxx)
Standing Order 9 (xxx)
Errors in Cash Book 10 (xxx)
Balance as per corrected Cash Book xxx

What are reversing entries and why are they used?
Reversing entries are made on the first day of an accounting period in order to remove certain
adjusting entries made in the previous accounting period. Reversing entries are used in order to avoid
the double counting of revenues or expenses and to allow for the efficient processing of documents.
Reversing entries are most often used with accrual-type adjusting entries.
The benefit of reversing those adjusting entries is that this eliminates the need to identify what part, if
any, of a particular payment or receipt made or received in the period relates to the previous period
expense or revenue.

When reversing entries are not made, the accountant needs to remember last period adjusting entries
and account for any expense/revenue previously recognized relating to current period payments or
receipts. This is done using compound journal entries.

Reversing entries are best explained using an example:
Two of the adjusting entries recorded by a company on year ending Dec 31, 2012 are shown below:

Date Account Debit Credit
Dec 31 Interest Expense $1,500
Interest Payable $1,500
Dec 31 Rent Receivable $29,000
Rent Revenue $29,000

Interest was accrued during the months of November and December on loan of $100,000 obtained on
Nov 1, 2012. Interest is payable after every three months. Rent receivable is related to a building given
on rent on Dec 1, 2012. Rent is payable after every 2 months.
Pass the journal entries recording the actual payment of interest and receipt of rent first without
reversing entries and then with reversing entries.
Interest Rate on Loan = (1,500 2) 12 / $100,000 = 9%
Total Interest Payment on Feb 1, 2013 (a) = 9% 3/12 $100,000 = $2,250
Rent Payable on Feb 1 (b) = 29,000 2 = $58,000
Without Using Reversing Entries:
Under this method, each payment is apportioned between expense and payable and each receipt
between revenue and a receivable. Thus:
Interest Expense in 2013 resulting from (a) = $2,250 $1,500 = $750
Rent Expense in 2013 resulting from (b) = $58,000 $29,000 = $29,000
Date Account Debit Credit
Feb 1 Interest Expense $750

Interest Payable $1,500


Feb 1 Cash $58,000

Rent Receivable


Rent Revenue

Using Reversing Entries:
This method involves two steps, first, the last period adjusting entries which involve future payments
or receipts are reversed as shown below:
Date Account Debit Credit
Jan 1 Interest Payable $1,500

Interest Expense

Jan 1 Rent Revenue $29,000

Rent Receivable

At the time of actual payment or receipt, a simple journal entry is used to record them without any
regard to the part of the payment or receipt which may related to last period. Thus,
Date Account Debit Credit
Feb 1 Interest Expense $2,250


Feb 1 Cash $58,000

Rent Revenue


Example of a Reversing Journal Entry
To explain the concept, the following entry shows an expense accrual in January for an $18,000
expense item for which the supplier's invoice has not yet arrived:
Debit Credit
Expense 18,000
Accrued expenses 18,000

You now create the following reversing entry at the beginning of the February accounting period. This
leaves the original $18,000 expense in the income statement in January, but now creates a negative
$18,000 expense in the income statement in February.
Debit Credit
Accrued expenses 18,000
Expense 18,000

But we are not done yet. The supplier's invoice arrives later in February, and we record it with the
following entry, which offsets the negative $18,000 that would otherwise have appeared in the
company's income statement in February:

Debit Credit
Expense 18,000
Accounts payable 18,000
The result is that the $18,000 expense appears in the company's income statement in January, which is
presumably when it was supposed to appear under the accrual basis of accounting, while there is no
net recognition of any expense at all in February. Thus, a reversing entry has allowed us to properly
record an expense during the period when the expense was incurred, rather than in a later period, when
the company obtains the supplier's invoice.

Which of the following errors will cause the trial balance totals to be UNEQUAL?

a. Failure to record a transaction or post a transaction.
b. Recording the same erroneous amount for both the debit and the credit parts of a transaction.
c. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
d. Posting the debit amount of the transaction correctly and posting the credit amount of the
transaction incorrectly.

Self and Sectional Balance System:
A Self balancing ledger system implies a system of ledger keeping which classifies ledgers as per
nature of transactions namely; Sales ldeger, Purchase ledger, General ledger , etc. and also make them
to balance independently.
In order to make each ledger self balancing, an extra account called
General Ledger Adjustment Account is opened in each of the Sales ledger and Purchase ledger.
Normally, the accounts of individual debtors are maintained recording credit sales, cash collection,
discounts, bed debts. etc; in Debtors ledger or Sales ledger. The General Ledger Adjustment Account
in Sales ledger gives a summery of all transactions in reverse manner. Similarly in Purchase ledger,
general ledger adjustment account gives a summery of all transaction of the purchase ledger in a
reverse manner. Against these ledger adjustment accounts, two other adjustment accounts are
maintained in the Genereal ledger to complte the double entry.
a) Purchae Ledger Adjustment Account
b) Sales Ledger Adjustment Account
These adjustment accounts are known as control accounts. The correctness of individual balances in
each ledger would be varifyed by extracting its balances and agreeing them with the balance of
Control Account. The object of the system is to identified errors and to facilitate their quick detection
with the minimum effort.
Under Sectional balancing system, only two additional accounts 1. Total Debtors Accounts and 2.
Total Creditors Account are kept in general ledger. Thus only the total accounts for each of the
subsidiary ledgers is opened in the General Ledger and no Control Account/ Adjustment Account is
opened in the subsidiary ledger. It would mean that whereas accounts of individual customers would
be maintained in the Sales Ledger;in the General Ledger, the Total Debtors Account would be posted
by the(monthly) totals of verious transactions with credit customers. The balance of the Total Debtors
Accounts should be equal to the total of balances shown by the accounts of individual customers. A
difference would show that there are some errors somewhere. in the same way, the accurecy of
individual suppliers account may be checked by comparing the total of their balances with the balance
of the Total Creditors Account. A Trial Balance can be prepared on the basis of General Ledger only,
without using Debtors Ledger and Credors Ledger since the double entry is completed in the general
ledger itself.

Promissory note

A promissory note is a legal instrument (more particularly, a financial instrument), in which one party
(the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee),
either at a fixed or determinable future time or on demand of the payee, under specific terms. If the
promissory note is unconditional and readily salable, it is called a negotiable instrument.

Audit/ :

An Audinting is a systemetic examination of the books of records of business or other organization in
order of ascertain and varify & to report uopn the factors regarding its financial operations & the result
theire of.

Error / :

) ) - ) ) )

) (Errors of Principles):
- -


) (Clarical Errors):

) ( Errors of Omission):


) (Errors of Commission)


) (Compensating Errors)


Fraud/ / / :

Fraud means false representation or entry made or withour beliefs its truth with a view to defraud

( Teming & landing):
Lapping may be
define as concealment of shortage by deliang the recording of cash receipts.

# / Rectification of Errors:


I .
I I .

I I I .

( )

I .

I I .

I I I .
- -

- Closing entries:
- . ; . / -


. / -


I .
sales....................................................... DR
Any kind of income.................................. DR
Income summery.................................. CR
I I .
Income summery ....................................... DR
Any kind of Exp........................................ CR
I I I . Income summery
Income Summery .................................................................. DR
Owners equity/ Retained earnings ...................................... CR

XYX Company Ltd
Cost Statement
For the year ended 2013
Particular Tk. Tk. Tk.
1. Direct Materials Cost:
Beg inventory of Raw materials 2,000.00
Purchase of raw materials

Add: Freight in

Total Cost of purchase

Less: Purchase return / Trade discount


Less: Abnormal loss / sale or transfer of materials

Net Cost of purchase 21,000.00
Raw materials available for use 23,000.00
Less: Ending inventory of materials

Raw materials consumed/ used 20,000.00
2. Direct Labor/ Productive wages/ Process wages/
factory wages
3. Direct exp/ Chargeable exp/ Direct Overhead

Prime Cost 32,000.00
4. Factory O/H/ Manufacturing O/H / Factory on cost:
Indirect materials & labor

Factory rent / rates & taxes

Power, Fuel. Gas & Water

Lighting & Heating

Repairs & maintenance

Factory managers salary

Foreman salary


Drawings office Salary

Amortization of patent

Spare Parts

Overtime Premium

Consumable Premium 3,000.00
Factory O/H 30,000.00
Total factory cost/ Works cost/ Total manufacturing
cost incurred during the period or cost charged into

Add: Beg work in progress

Cost of goods process during the period/ Total cost of
input 70,000.00
Less: Closing work in progress

Less: Sale of Scrap(Finished goods)

Cost of goods manufactured/ Manufacturing cost 66,000.00
Add: Beg inventory of finished goods

Cost of goods available for sale 75,000.00
Less: Closing inventory of finished goods

Cost of Goods Sold 70,000.00
Add: Commercials Exp 21,000.00
Add: Selling & Distribution 10,000.00
Total Operating Exp 31,000.00
Total Cost / Cost of Sales 1,01,000.00
Profit 24,000.00
Sales 1,25,000.00