Basic Accounting Level II

By
Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM
Global Technology Services LLc, UAE
Email:sivakumar3009@gmail.com
 Agenda
What is Accounting
Mode of Learning Accounting
Accounting and Finance - Difference
Accounting Concepts / Conventions
Accounting Events
Rules of Accounting
Preparation of Financial Statements
A Simple
A Simple Case
Case Study
Study

2
 What is Accounting
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement
Cash at December 31, 1997$4,456
JOURNAL Account Receivable
Land Assets
Vision Enterprises
Financial $
$5,714
Statement
981
Cash at December---------
31, 1997$4,456
Total Assets
Account Receivable $11,151$5,714
Land Assets ======$ 981
Liability Cash --------- $4,456
AccountTotal Assets
Account
Payable Receivable $3,830 $11,151 $5,714
Land $ 416======$ 981
Notes Payable ---------
Liability ---------
AccountTotal Assets
Payable $4,246 $3,830$11,151
Total Liability ======$ 416======
Notes Payable $2,365---------
Liability
Stockholder’s Equity
PAYMENT Contributed
Total Capital
Liability
$ 367$4,246 $3,830
Account Payable ---------
======$ 416
Notes Payable $2,732 $2,365---------
Retained Earnings
Total Stockholder’s
Equity Stockholder’s Equity ======$ 367$4,246
Contributed
Total Capital
Liability --------- ======
Retained Earnings
$2,732 $2,365
Total Stockholder’s
Equity Stockholder’s Equity ======$ 367
Contributed Capital ---------
Retained Earnings
$2,732
Total Stockholder’s
Equity ======

Accounting is defined as the art of Recording,

Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements
3
 What is Accounting
Accounting
Accounting is is the
the art
art ofofrecording,
recording,classifying
classifyingand andSummarizing
Summarizing
financial transactions in the Preparation of Financial
Financial Statements
Recording refers to creating Journal entry entryfor forevery
everyfinancial
financial
transaction with Debit and and Credit
Credit amounts.
Classifying refers
refers toto Classifying
Classifyingeach
each of of the
the Debit
Debit // Credit
Credit
Transaction to Capital or or Revenue and Asset, Liability,
Liability, Revenue
Revenue or or
Expense
Summarizing refersrefers to to Grouping
Grouping the
the Transactions
Transactions of of Asset,
Asset,
Liability, Revenue
Revenue and and Expenses
Expenses and
and preparing
preparing thethe Financial
Financial
Statements (Trading, Profit and Loss Account and Balance Sheet)
In case of
• Trading,
Trading, Manufacturing and Customer Service oriented
Organization, the sum of all income
income andand expenses
expenses is is referred
referred to
to
as Profit and Loss
Loss account
account
• Social
Social Service
Service oriented
oriented Organization
Organization like Schools, Hospitals
Hospitalsandand
Government Organizations,
Organizations, Banks
Banks itit isisreferred
referredtotoas
asIncome
Income
Expenditure account
and Expenditure account ..

Note:- Trial Balance is not a Financial Statement. It is only a summary

of all Debit and Credit Transactions.

4
Mode of Learning Accounting
Change
Change your
your mindset
mindset that accounting means
only Debit and Credit
Do
Do not
not blindly
blindly learn
learn Accounting
Accounting Rules
Rules and
and
apply the rules of Debit and Credit
The
The Best
Best way
way to
to Learn
Learn Accounting
Accounting is
is
Learn the Accounting Concepts
Understand the Accounting Conventions
Classify the Accounting Event
Apply the Accounting Rules
Record, Classify and Summarize the Journal
• You
Youare
areConfused.
Confused. Am I right?
Do not become panic and move forward, you
you will
will understand

5
Mode of Learning Accounting
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 Journal

(Entering the Debit and Credit Side of Transaction)

Classify the Transaction

(Asset, Liability, Revenue or Expense)

Summarize the Transaction

(Prepare Trial Balance, Trading, P&L and Balance Sheet)
6
Finance and Accounting - Difference
Finance
Procurement and Utilization of
Funds
Leads to Investment Decisions
Financing Decisions
Futuristic
Cost of Capital
Cash Flow / Fund Flow
Accounts
Recording of an Accounting
Event
Expressed in Monetary Terms
Recording , Classifying and
Summarizing Transactions
Preparation of Financial
Statements (Trading, Profit and
loss Account and Balance
Sheet)
Historical
Compliance with Statutory
Matters like companies Act,
Income Tax Act, Sales Tax Act
Etc.,

Project Appraisal
Ratio Analysis 7
Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)
The
The Concepts
Concepts and
and conventions
conventions of of accounting
accounting areare
developed by IASC (International Accounting
AccountingStandards
Standards
Committee) which is in-charge of releasing International
Accounting Standards (IAS)

The
The IASC
IASC Decides
Decides the
the preferred
preferred Accounting
Accounting practices
practices
worldwide and encourages the worldwide acceptance

There
Thereare
are41
41International
International Accounting Standards

Now
Now IFRS
IFRS (International
(International Financial
Financial Reporting
Reporting Standards)
Standards)
and SOX (Sarbanes Oxley) Act gain gainmore
moreimportance
importance
which came up from US GAAP and UK GAAP

8
Difference between Concepts and Conventions
The
TheAccounting
AccountingConcepts
Concepts/ / Principles
Principles evolved
evolved outout of
of the
the
Practice and Procedures followed by different countries
countries
and later on
onestablished
establishedbybythe
theInternational
International Statutory
Statutory
Accounting Bodies
Bodies like
like The
The Institute
Institute ofof Chartered
Chartered
Accountants of of India,
India, The
The Institute
Institute ofof Chartered
Chartered
Accountants of England
EnglandandandWales
Walesetc
etctotobecome
becomean an
Accounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell this
has evolved out of standard
standard Practice followed by several
countries while preparing the Trading, Profit and
Profit Loss
and Loss
Account and Balance Sheet.

The
TheAccounting
AccountingConventions
Conventions/ / Practices areare
Practices basically
basically
assumptions andand expected
expected toto be
be followed
followed while
while
preparing the Financial Statements.
9
Accounting Concepts / Principles
Business Entity Concept
Money Measurement Concept
Dual Aspect Concept
Cost Concept
Accounting Period
Conservatism
Realization Concept
Matching Concept
Materiality Concept
Objectivity
10
Accounting Conventions / Practices
Going
Going Concern
Concern
Consistency
Consistency
Accrual
Accrual

11
 Accounting Concepts
Business Entity Concept
only for
Accounts can be kept only for Entities,
Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting accounting
principle with which Double entry system of accounting has evolved.

Accounts need to be maintained separate from the Owners and

providers of capital. If you understand
understand the
the simple
simple logic,
logic, then
thenyou
youknow
know
30% of Accounting.
Accounting. JustJust Recall
Recall Fundamentals
Fundamentalsof ofAccounting
Accountingfromfrom
Perspective Level
Oracle Perspective Level I Example of Siva,
Siva, Oracle and Bank.
Bank.

See Next Slide

Slidefor
forMore
MoreExamples.
Examples. If If youyoucannot
cannotunderstand
understandthis
this
Concept Please Do not Proceed
Proceed Further
Further and
andtry
trytotounderstand
understandbyby
reading again
reading again Level
Level I and Level II Material

12
 Types of Entities
Type of Organization Example
Sole Proprietary Siva & Co

Partnership Firm Ganesan Bros

Private Company Oracle India Pvt Ltd (A Private Company in which
shares are not traded in Stock Exchange and
members cannot exceed 50)

Public Company Hindustan Unilever Ltd (A Public Company in

which Shares are traded in Stock Exchange)

Closely Held Company Cadbury India Ltd (A Public Company in which

shares are not traded but shares are held by more
than 50 persons)

Trust Hutchinson Private Trust

Society Sembur Co-op Society

Association of Persons ICAI, ICWAI, ICSI, Rotary Club

Body of Individuals (one Man Corp) President of India, Governor of State

Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the
Investment and Properties for the benefit of
Family members. 13
 Accounting Concepts
Business
BusinessEntity
EntityConcept
Concept
Ex 1: You are running your own own Textile
Textile Showroom
Showroom as as aa Dealer
Dealer in
in Cloth
Cloth as
as aa Sole
Sole
Proprietor/Individual Owner of the theBusiness.
Business.The Theentire
entirecapital
capital amount
amount for
for the
the
Business is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of of books.
• One
One set
set of
of books
books for
for the
the purpose
purpose ofof Textile
Textile Business
Business in in which,
which,Business
Business
owes you equivalent to to the
the Capital
Capital Provided
Provided (Capital
(Capital ++ Profit
Profitearned)
earned)or
(Capital – Losses)
• In
In your
your own Books the amount of of Capital invested will be be shown
shown asas an
an
Investment in Business as an Asset. This This need
need not
notbebe maintained
maintained as
as aa Normal
Normal
Set of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.

Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with with
Bank of America and You have Bank Account with Citi Bank and the salary at end
of every
every month
month is
is transferred
transferred from
from Bank
Bank of
of America
America
to Citi
to Citi Bank.
Bank.How
Howmany
many
accounting Entities involved in this case?
• IfIf your answer is 4, then you are right (You,
(You,Oracle Corp, Bank
Bank of
of America,
Citi Bank)

Ex 3: You run your own ownBusiness

BusinessininSoftware
SoftwareConsulting
Consultingand
andyour
your Friend
Friend has
has
agreed to provide a Loan of 50000
50000USD USDwhich
whichhehegoes
goesand
anddeposit
deposit directly
directlyinto
into
your Bank account - How many accounting Entities involved in this case?
• IfIf you
you say
say 3,
3, You
You are
are right,
right, itit is
is only
only Three.
Three. (You,
(You, Your Friend and Bank)

14
 Accounting Concepts
Money Measurement Concept
that information
Record should be made only of that information which
which can
can be
be
expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole
Sole Proprietor
Proprietorhad
had 40
40 Tables
Tables && Chairs.
Chairs. ThisThis
cannot
cannot be
be
recorded unless
recorded unless aa Value
Value of
of Furniture
Furnitureisisknown
knownininmonetary
monetary value
value

Ex 2. Very Famous Indian Example – Rama Killed Ravana. Can

this be Accounted? – NO

3.. My wife Loves me so much – Can this be accounted?

Ex 3
– A Big NO (Hahhah).
(Hahhah). This
This is
is Flaw
Flaw in
in Financial
Financial Accounting as it
does not understand the human values

Ex 44.. My
My Father in inLaw
Lawgave
gavehis
hisPersonal
Personal Property
Propertytotostart
start my
my
Business. Can
Can this
this be Accounted –– Yes
be Accounted Yes (If
(If the the
Value
Value
of of thethe
Property is provided)

15
 Accounting Concepts
Money Measurement Concept
A Normal Doubt
Doubt comes
comesto toyour
yourmind
mindininthe
thefirst
first and fourth
and fourth
example in
example in previous
previous slide
slide how
how toto get
get the
thevalue.
value. We should not be
the Purchase
taking the Purchase value,
value, but we should take the Market value on
the date of transferring the assets to Business. This Thisis is
anan
exception to cost concept
concept only
only inin
case
caseofof
transfer
transfer to another
to another
business

Ex 5: Siva
Siva started
started his
his software
software consulting
consulting Business
Business with
with his
his own
own
Property (Cost Price
Price11Million
MillionUSD
USDandandMarket
Market Value 1.51.5
Value Million
Million
USD) and Furniture's Cost priceprice50000
50000worth
worthMarket
Market Value
Value30000
30000
USD
- In this case, You can record
record Siva
Siva Capital
Capital (1530000) and Building
Building
1500000 and Furniture 30000 as Assets

Liabilities Assets
Siva Capital 1530000 Building 1500000
Furniture 30000
Total 1530000 Total 1530000
16
 Accounting Concepts
Dual
Dual Aspect Concept
The Value of the
the Assets
Assets owned
owned by
by the
theconcern
concernis
isequal to the
equalto the claims
claimson
on
the Assets
ASSETS = LIABILITIES
LIABILITIES ++ OWNER’S
OWNER’S EQUITY
EQUITY
OWNER’S
OWNER’S EQUITY
EQUITY == ASSETS
ASSETS –– LIABILITIES
LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY

Ex: If Owners Equity is 600000 and Liabilities are 400000, then

then Total
Total
Asset = 1000000

Asset Owner’s Equity + Liabilities

Liabilities Assets – Owner’s Equity

Owner’s Equity Assets - Liabilities

17
 Accounting Concepts
Cost
Cost Concept
Assets are always shown at their Cost
Cost and
and not
not at
at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be be
recorded only at Rs.5 Lacs even though Market value
may be lower saysayRs.4
Rs.4Lacs
Lacsoror Higher
Higher Rs.6
Rs.6 Lacs
Lacs
than the Cost Price

Ex 2. You
You are
are acquiring
acquiring aa Business
Business for
for aaMillion
Million
USD and its value as per Books
Booksisis0.8
0.8Million,
Million, thenthen
the difference of 0.2 Million is termed as Goodwill
and you should records the assets and liabilities at
the price you have paid for the Business
the Business(i.e.)(i.e.)
1 1
Million

18
 Accounting Concepts
Accounting Period
Accounting measures
measures activity
activity for of time, usually
for a specified interval of
a year
(e.g) Calendar Year (Jan’07-Dec’07)
Fiscal Year (Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but but there are
legal rules like Companies Act andand Income
Income Tax
TaxAct
Act which
whichprescribes
prescribes
the period in which the entity has to report to
to them.
them.

Remember still Entities can have different accounting period for their
own Internal Management Reporting

A Company in India can have for Company Law Purpose (Jan-Dec)

Year and
and Income
Income Tax
Tax Purpose
Purpose (Apr-Mar)
(Apr-Mar) Year
Year and
and for
for own
own internal
internal
Reporting (Jul-Jun)
Reporting (Jul-Jun) Year

Note: The Entities cannot change

changetheir
their accounting
accountingperiod
periodwithout
without
getting proper approval
approval only
onlyin
incase
caseof
ofCompanies
CompaniesAct
Act and and
not not
possible with Income Tax Authorities.
19
 Accounting Concepts
Conservatism
possible losses.
Anticipate no Profits but provide for all possible losses.

Accountants are by nature Conservative and also to protect the interest of

the Shareholders and Creditors it is required to provide for all losses.
losses.

Ex 1
1.. AApharmaceutical
pharmaceutical Company
Company goinggoing to
to Loose
Loose the
the case
case filed
filed for
for Patent
Patent
Right filed for a medicine
Ex 2.Company is likely to Win a Major Legal Dispute Dispute oror aa Sales
Sales Contract.
Contract.
Note: This rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Losses
Ex 33:: You are a aGovernment
GovernmentCompany
Companyand andthere
thereisis a apossibility
possibilitythat
that
Government will withdraw
withdrawthe thesubsidy
subsidyfor
for Fertilizers in the
Fertilizers forthcoming
in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4: The Government is likely to increase the Price of petrol which which isis one
one of
of
the essential input for your business, then you cannot provide for losses.
Ex 5: There is
5:There is aa Fire
Fire in
in your
your in
in your
your Factory
Factory and
and Goods
Goods werewere lost
lost and
and the
the
Goods are insured, then thenthe
theclaim
claimyou
yousubmitted
submittedcan canbebebooked
bookedtotothe the
satisfaction of Insurance Company and Auditors.

20
 Accounting Concepts
Realization Concept
The Sales is considered to have taken place only when either the thecash
cash
is received or some third party becomes legally liable to pay the
amount. Revenues
Revenues are
are recognized
recognized when
when they
they are
are earned
earned or
or realized.
realized.
Realization is assumed to occur when the seller receives cash
receives or aor a
cash
claim to cash (receivable) in exchange for goods or services

Ex 1
1:: A Sales invoice for Rs.1 Million
Note for
Credit Note for Rs.15000 received

Ex 2: For instance, if a company is awarded a contract toto build

build an
an
project would not be recorded in
office building the revenue from that project
lump sum
one lump sum but
but rather it would be divided over time according to the
work that is actually
actually being
being done.
done.

21
 Accounting Concepts
Matching Concept
When an Event
Event affects
affects both
both the
the revenues
revenuesand
andexpenses, the effect
expenses,the effect on
each should be recognized in the same accounting period
period

Ex 1: Generally Employees Salaries are paid for the previous month

at the
thebeginning
beginningof
of the
thenext
next month.
month.But they
But have
they haverendered
rendered their
their
services to produce goods and sold and Sales revenue
revenue is
is recognized
recognized
in previous month. So to match the cost with withthe
therevenue
revenueearned,
earned, we we
need to make provision for Salaries
Salaries
in in
previous
previousmonth
monthitself.
itself. (i.e.)
(i.e.)
March Salary paid in April, butbut
a Salary
a SalaryPayable
Payableprovision
provisionwill
will be be
made in March itself

EX 2: Insurance Premium paid forfor Jan-

Jan- Dec
Dec whereas
whereas your
your accounting
accounting
period closes on March. In this case only three months
months premium
premium need
need
to be treated as Expense and balance 9 months treated
treated as
as advance
advance
premium paid as an asset

22
 Accounting Concepts
Materiality concept
Insignificant events would not be
Insignificant berecorded,
recorded, ifif the
the
benefit of
of recording
recordingthem
themdoes
doesnot
notsignify
signify
the the
cost
Ex: A calculator worth Rs.500 not recorded
recordedasset
asset
rather than charged off asas anan
Expense
Expense even
even
though thethe benefit
benefit is enduring in nature.

This concept need

needtotoread
readininconjunction
conjunctionwith
with
accounting events which signifies the transaction
into Capital,
Capital, Revenue
Revenue andand deferred
deferred revenue
revenue
expenditure.
23
 Accounting Concepts
Objectivity Concept
An Evidence of the happening of the Transaction should support
every Transaction in the form of paper. External
External Evidence
Evidence isis
considered to be more authenticated proof thanthanInternal
Internal Evidence.
Evidence.
This rule is more important fromfrom
Audit
Audit perspective
perspectiveasasAuditors
Auditors
always consider andandbound
boundtotoget
get more
moreexternal
external evidences
evidencesthan
than
internal Evidences.

Ex 1
1:: Third Party Evidence (Credit Note from Supplier)

Ex 2
2:: Auditors
Auditors Collect
Collect Statements from Customer and
and Suppliers
Suppliers for
for
the amount showing
showing as
as Outstanding
Outstanding from
from Customers
Customers and
and amounts
amounts
Payable to Suppliers.

Ex 3
3:: The
The Sales
Sales Invoices
Invoices alone
alone is
is not
not considered
consideredasas
anan
objective
objective
evidence unless it isisnotnot supported
supported by by Delivery
Delivery challan
challan and
and
acknowledgement of Goods Received by Customer.

24
 Accounting Conventions
Going Concern
AccountingRecords
Accounting Records, , Events
Eventsand
andTransactions
Transactionsonon
the
the
assumption that the entity will continue
continuetotooperate
operatefor
for an
an
indefinitely Long period of time

Ex. An Entity will not

notbe
bestarted
startedwith
withan
anintention
intentionto toclose
close
within the specified time period. Business
Business is is
always not
always not
started with an intention to close and it is expected to
continue forever.

25
 Accounting Conventions
Consistency
The Accounting
Accounting Policies
Policiesand
andmethods
methodsfollowed
followedby bythe
the
company should be the same every year
Ex 1. Period should not be changed frequently from Jan-
Dec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line Line to
to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then then
that Company has to report on onthe
theeffect
effectofofProfit/Loss
Profit/Loss
due to the change for past 5 Years.

26
 Accounting Conventions
Accrual
General it it isis assumed
InInGeneral assumed that
that Accounts
Accounts are
are always
always
prepared based on Accrual basis. basis. However
However there
there are
are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments (NSC
interest), Dividend Receivable on shares, Tax TaxPayable
Payabletoto
Government (March sales Tax and Annual Income Tax)

The Company Law / Income IncomeTax

TaxAct
ActPrescribes
Prescribesallall
Companies to follow Accrual Basis
BasisofofAccounting
Accountingexcept
except
for Professional
Professional Firms
Firms and
and Government
Government Organizations
Organizations
which are allowed to follow Cash Basis of Accounting.

27
Classification of Accounting Event
Capital
Capital Item: Any expenditure that creates an asset, for
example
example::
Purchase of plant or machinery
Improvements to
Improvements to assets
assetsthat
thatincrease
increasetheir
their
usefulness or extend their effective useful life of the
asset
Expenditure incurred in transporting an asset totoits
its
site and preparing it for use.

28
Classification of Accounting Event
Revenue
Revenue Item
Item:: An Income or Expenditure
Expenditureandandthe
the
benefit of which will be exhausted within a year (i.e.) The
Calendar Year or or the Financial Year
Year whichever
whichever is set up
up
for the Set of Books
Ex: Salary and wages, Printing
Printing and
and Stationery,
Stationery, Sales
Sales
Revenue, Interest
Interest Income,
Income, Salary
Salary Payable,
Payable, Bonus
Bonus
Payable, Tax Payable etc.,
In Simple terms this is an event which generates
revenue and the related cost to toearn
earnthe
therevenue
revenueare
are
accounted as expense.

29
Classification of Accounting Event
Deferred
DeferredRevenue
RevenueExpenditure
Expenditure:: ItIt isisneither
neither aaCapital
Capital
nor Revenue and the benefit of which will be realized for
more than a year (Exceeding
(Exceedingbeyond
beyondthe theCalendar
Calendar year
year
for the
the set
set of
of books)
books) and does not result inincreation
creationofof
an asset.
Ex 1: Advertisement Expenditure the benefit of which
is likely to be obtained over a aperiod
periodmore
morethan
thanone
one
year (E.g.)
(E.g.)PepsiCo
PepsiCoPaysPaysUSD
USD22Million
MilliontotoSachin
Sachin
Tendulkar for for an
an Advertisement
Advertisement Contract
Contract for
for two
two
Years and benefit of which is expected to be for four four
years
Ex 2 2:: Royalty
Royalty paid
paid to
to the
the author
author ofof the
the book
book for
for five
five
years

30
 Rules of Accounting
Accounts

Personal Impersonal

Debit the Receiver

Credit the Giver
Ex: Sole Prop, Company
Real Nominal

Debit what comes in Debit Expenses and Losses

Credit what goes out Credit Revenue and Income

Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent

31
 Application of Accounting Rule
Check
Checkwhether
whether is there a Money Transaction Involved?
IsIsthat
thattransaction
transactionaffects
affectsyour
yourset
set of books?
Checkwhether
Check whetherdoes
doesthethetransaction
transactionfalls
fallsunder
underwhich
whichaccounting
accounting
period.
Does
Does the
the transaction
transaction involve
involve a personal account
account(i.e.)
(i.e.) Siva as a
Person or a Company or any other entity entity asas mentioned
mentioned in in
Business entity concept
IsIsthat
thatperson
personisisreceiver
receiver or giver in the transaction
transaction and
and
accordingly debit
accordingly debit or credit the person account.
Does
Doesthethetransaction
transactioninvolves
involvesany
anyCash
Cashinflow
inflowor
orCash
Cashoutflow?
outflow?
(i.e.) Cash or Bank involved
IfIfthere
thereisisno
nocash
cashinvolvement
involvementthen
thenthe
thechoices
choicesareareasasfollows
follows
Both can be real ( Debit
Debit and
and credit
credit both
both real
real accounts)
accounts)
One real and one nominal (Either Debit/Credit for Real or
or Credit/
Credit/ Debit
Debit
for Nominal accounts)

32
 Accounting Rule of Thumb

Nature of Transaction Increase Decrease

Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Profit Credit Debit
Losses Debit Credit

33
 Combination of Rules
Dr Personal A/c Dr Real A/c
Cr Real A/c Cr Personal A/c
Ex:Drawings or Advance to Employee,
Ex:Capital invested, Payment Received
Payment to Supplier
from Customer

Dr Real A/c Dr Real A/c

Cr Real A/c Cr Real A/c
Ex:Purchase of Inventory by Cash Ex: Cash withdrawal or Deposit

Dr Real A/c Dr Nominal A/c

Cr Nominal A/c Cr Real A/c
Ex: Interest Recd by Cash, Cash Sales
Ex: Rent Paid by Cash

Dr Personal A/c Dr Nominal A/c

Cr Nominal A/c Cr Personal A/c
Ex: Interest Accrued on Investment, Ex: Hire Purchase Charges accrued, Interest
Dividend accrued on Investment Payable, Salary Payable

34
 Combination of Accounting Rules
Debit

Combination Personal Real Nominal

Personal X

Credit
Real

Nominal X
35
Combination of Accounting Rules
Both
Both Debit and Credit
Credit cannot
cannot be
be Personal
Personal Accounts
EX 1: Siva paid Cash to Ajay. The Entry Cannot be
• Ajay
Ajay A/c
A/c Dr
Dr
• Siva
Siva A/c
A/c Cr
Cr
The Correct entries are as follows. In
In Ajay
Ajay set
set of
of Books
Books

Cash A/c Dr 1000

Siva A/c Cr 1000

In Siva set of Books

Ajay A/c Dr 1000

Cash A/c Cr 1000

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
36
Recording of Accounting Transactions
Recording
Recordingofofan
anAccounting
Accountingevent
event is known as Journal
entry
Recording
Recordingisismade
madeininPrimary
Primaryand
andSecondary
SecondaryBooks
Booksinin
Manual Accounting system
Primary
PrimaryBooks
Books
General Ledger
Cash Book
Secondary Books
Purchase Register
Sales Register
Fixed Assets Register
Returns (Purchase return/Sales Return)
Journal Register
In
InOracle
OracleERP
ERPSystem
SystemGL
GLis
iscalled
calledMain
MainLedger
Ledgerand thethe
and
Transactions emanating from Modules are referred to as
Sub Ledger
37
Recording of Accounting Transactions
First
First the transactions are entered as Journal
ThenSecond
Then Secondstep
stepisisthey
theyare
areposted
postedto toindividual
individual account
account
as ‘T’
as ‘T’
Accounts – In Oracle or any anyother
other ERP ERP system
system this
this happens
happens
immediately when a transaction is created
Prior
PriortotoERP
ERPsystem
systemexcept
exceptfor
forNon
Noncash
cashcharges,
charges, Journals are are
Journals
directly posted in Primary and secondary ledger withwith supporting
supporting
Document reference Number (like (like Invoice
Invoice Number),
Number), date, amount and
a cross reference ledger folio folionumber
number (Page
(Page Number)
Number) ofof respective
respective
Debit and Credit Entries in Ledger.
Ledger.
Journals
Journals are
are entered
entered only
only for
for year endend Provision
Provision Entries.
Entries.
Then
Thenthethebalance
balancefrom
fromeach
eachTTaccount
accountis istaken
takenand
andwhich
whichbecomes
becomesaa
Trial Balance with Sum of Debits and Sum of Credit which whichshould
shouldbebe
equal.
Trial
TrialBalance
Balanceforms
formsthethebasis
basis for
for preparation
preparation of Financial Statements
of Financial
and in ERP systems including Oracle Applications Debit isisshown shownas as
Positive and Credit is shown as Negative
In
InERP
ERPsystems
systemsthethechance
chanceof ofTrialTrial Balance
Balancenotnotmatching
matchingor ornot
not
tallying issue is very minimal. In In case ofof manual
manual Accounting
Accounting this will
happen most of the time and unless unless itit is
is corrected
correctedand
andbalanced,
balanced, the
accountant should
should not
not proceed to prepare Financial Statements
Statements
38
 Preparation of Financial Statements
Preparation
Preparationof
ofTrial
Trial Balance
Balances Extracted from General Ledger
Sum
Sum of
of debit
debit and
andcredit
creditbalances
balances==00

Preparation
Preparationof
ofTrading,
Trading, Profit & Loss Account or Income &
Expenditure Account and Balance sheet
Trial Balance is the base for preparing Financial
Statements
Adjustment
Adjustment entries
entries are
are made
made in
in adjustment
adjustment period
period and
and
passed as Journal Vouchers before making the financial
statements
Trading and Profit and Loss Account is Always for a
period say for an Year (Jan - Dec or Apr - Mar), Quarterly
for 3 months or Half yearly for 6 months
Balance Sheet is always as on Date (As on 31-12-2007 or
31-03-2008)
39
 Accounting Concepts

A Simple Case Study

40
 Case Study
Siva
Sivastarted
startedBusiness
Business in in dealer Computer Spare parts and
dealer in Computer
Computer Stationery on 01-APR-2007 and following events occurred
month of
in the month of April.
Siva
Siva invested
invested USD
USD 50000
50000 Cash
Cash and USD 50000 worth of furniture furniture
Siva
Siva purchased
purchased USDUSD 75000
75000 worth
worth of goods
goods on on credit
credit
Sivafriend
Siva friendAjay
Ajaypromised
promisedhim himtotogive
giveaaloan
loanof
ofUSD
USD25000
25000
Siva
Siva sold
sold USD
USD 50000
50000 worth
worth of
of good for USDUSD 100000
100000
Siva paid
Siva paid rent
rent USD
USD 2000
2000 for
for two
two months
Siva
Siva paid
paid Salary
Salary to
to Staff
Staff USD
USD 5000
5000
Siva
Sivaincurred
incurredUSDUSD5000
5000ononinterior
interiordecoration
decorationwhich
whichwill last for two
willlast
years.
Sivasold
Siva soldUSD
USD10000
10000worth
worthofofgoods
goodson oncredit for USD 18000
credit for
Siva
Siva has
has aa Bank
Bank account
account with
with Citi
Citi Bank which credited USD 5000 5000
wrongly of John account
Purchased
Purchased Vehicle
Vehicle for
for USD
USD 25000
25000 paid
paid through
through Bank
Cash Deposited
Cash Deposited byby Siva
Siva into
into Bank
Bank 50000 USD

41
ARE YOU READY FOR THE
GAME
Accounting is very simple

42
 Accounting Terminologies
Before
Beforecreating
creatingAccounting
Accounting Transactions
Transactions let us
usrecall
recall and learn
learn few
few
accounting terminologies
ASSETS: Any property or Investment which can be convertible into cash
LIABILITIES: Amount Payable to providers of goods goods and
and Services
Services
(Creditors) and Providers of Capital (Owners)
REVENUE: Amount earned out of the Sale Proceeds and the amount
earned on Investments
EXPENSES: Amount incurred or expended to earn the revenue
PROFIT: TOTAL REVENUE – TOTAL EXPENSES
LOSS: If the Total Expenses is more than Total Revenue it is termed as
Loss
FIXED ASSETS: Amount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)
CURRENT ASSETS: Amount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)
Inventory)
NOTE: The Fixed Asset and Current asset vary from Person to Person
Ex: For a Dealer in Refrigerator it is
is aa Current
Current asset which becomes Fixed
Asset for you when you buy.
CREDITORS: Person who provide Money or Goods on Credit to the
Business (Supplier)
DEBTORS: Goods or Money Provided / sold on Credit by the Business Business
(Customers)
43
 Accounting Terminologies
You
You should
should also
also understand
understand the
the same
same accounting
accounting
terminology is referred or used by by
used different people
different in in
people
different context
Receivables also known as Trade Debtors, Debtors, Debtors, Account
Account
Receivables, Sundry
Sundry Debtors,
Debtors, Trade
Trade Receivables,
Receivables, Amount
Amount
Receivables
Liability is also known as Trade Creditors, Account AccountPayable,
Payable,
Sundry Creditors,
Sundry Creditors, Amount Payable, Trade Liabilities, Creditors
Cost of Goods Sold: It varies with Company to Company the way
they do set upupand
anduse
useit.it. The
TheCost
Cost of
ofGoods
GoodsSold
Soldcomprise
compriseofof
Material Cost,
Cost, Resource
Resource Cost Cost (Labor
(Labor and
and Machinery)
Machinery) and
and
Overheads. There are few companies which will have have only
only Material
Material
Cost and
andwill
will not
notadd
add up upResource
ResourceCost
Cost and
and
Overheads.
Overheads. You
You
Should talk to client and understand their requirement
requirement
• Let’s
Let’s See
See Each
Each of
of this
this in
in aa Formula
Formula Model
Model

44
 Accounting Calculation and Formula

Receivables (or) Debtors Payables (or) Creditors

Reconciliation Reconciliation

Opening Receivables 100 Opening Payables 200

(+) Add Credit Sales 2500 (+) Add Credit Purchases 2000
(+) Debit Memo 150 (+) Debit Memo 150
(+) Positive Adjustments 75 (+) Positive Adjustments 75

(-) Less Cash Received 2000 (-) Less Cash Paid 1500
(-) Less Credit Memo (Sales Return) 125 (-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments 50 (-) Negative Adjustments 50

Closing Receivables 650 Closing Payables 750

45
 Accounting Calculations and Formula

Purchased Inventory Finished Goods (FG)

Reconciliation Reconciliation

Opening Purchased Inventory 100 Opening stock of FG 200

(+) Add Purchases 2500 (+) Add Production 2000

(+) Sales Return 100

(-) Less Issued to Production 2000 (-) Less Sales 1500

(-) Less Purchase Return 125

Closing Purchased Inventory 475 Closing FG Inventory 800

46
 Accounting Calculations and Formula

Cash Reconciliation Bank Balance Reconciliation

Opening Cash Balance 100 Opening Balance of Bank 200

(+) Add Cash Receipts 2500 (+) Add Bank Receipts 2000
(Cash Sales, Cash Recd from (Cash Deposits, Cheque Received
Receivables, Cash with drawl from From Debtors, Interest Credited)
Bank)

(-) Less Cash Payments 2000 (-) Less Payments from Bank 1500
(Cash Purchases, Expenses paid (Paid to Creditors by Cheque,
By Cash, Cash Deposited into Bank) Expenses paid by cheque, Cash
With drawl from bank)

Closing Cash Balance 600

Closing Bank Balance 700

47
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
1 Cash A/c Dr Real 50000
Furniture A/c Dr Real 50000
(Cash and Furniture Real
Tangible Asset. Hence
apply the Real Rule – Debit Personal 100000
What comes in) (Also using the Business Entity
To Siva Capital A/c Concept Siva being owner is
(Siva is a Person running also treated as a Creditor for
the business as a the purpose of Business. If the
Proprietor in this case. Business is wind up Business
Hence apply the Rule for has to pay back Siva)
Personal – Credit the giver)

2 Inventory A/c Dr Real 75000

(Real Tangible Asset)

To Creditors A/c Personal 75000

(Person be an Individual or
Company gives the goods
on Credit)
48
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
3 No Entry No Entry
(Mere Promise to give does (Money Measurement Concept
not tantamount to Monetary – No Monetary transaction
Transaction) involved )
Two Entries involved (One
4
for sale of goods and one
for reduction in inventory)
Cash / Bank A/c Dr
(Real – Debit what comes
in)
To Revenue (Sales) A/c
(Nominal Rule - Credit all Real A/c 100000
Income and Revenue)

Nominal A/c 100000

Cost of Goods Sold A/c Dr
(Nominal – Debit Expenses)
To Inventory A/c Nominal A/c 50000
(Reduction in Inventory)
Real A/c 50000
49
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
5 Rent A/c Dr Nominal A/c 1000
(Debit Expense – Nominal) Personal A/c 1000
Rent Advance A/c Dr
(This is like Cash
Advanced to Landlord.
Hence it should be treated
as Personal -
Debit the Receiver)
To Cash A/c
(Real – Credit what goes
out) Real 2000
Salary A/c Dr
(Nominal – Debit Expense)
6 Nominal A/c 5000

To Cash A/c
(Real – Credit what goes Real A/c 5000
out)

50
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
7 Advertisement Exp A/c Dr Nominal 2500
Advt Exp Adv A/c Dr Real 2500
(This is like a Deferred
Revenue Expense needs to
be charged in two years.
50% need to be Current
Year Expense and Balance
50% is carried Forward and
treated as Expense in next
Year)
To Cash A/c
(Real – Credit what goes
out)

Real 5000
8 Receivables A/c Dr Real 18000
To Revenue A/c Nominal
18000

Cost of Goods Sold A/c Dr Nominal 10000

To Inventory A/c Real 10000
51
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
9 No Entry No Entry
(This is a Mistake done by
Bank. Bank has to make
correction and in Siva’s
Book there is no
accounting entry required)
Vehicles A/c Dr
10 (Real Tangible Asset Real 25000
Debit what comes in)
To Bank A/c
(Real asset – Credit what
goes out) Real 25000
Bank A/c Dr
(Real asset- Debit what
11 comes in Real 50000
To Cash A/c
(Real Asset – Credit what
goes out) Real
50000

52
 T Accounts
Siva Capital Account Furniture Account
Dr USD Cr USD Dr USD Cr USD
To Siva Cap 50000 By Bal 50000
To Bal 100000 By Cash 50000
By Furniture 50000
Total 50000 Total 50000
Total 100000 Total 100000

Cash Account Inventory Account

Dr USD Cr USD Dr USD Cr USD

To Siva Cap 50000 By Rent 1000

To Sales 100000 By Rent Adv 1000 To Creditors 75000 By COGS 50000
By Salary 5000 By COGS 10000
By Advt Adv 2500 By Bal 15000
By Advt exp 2500
By Bank 50000
By Balance 88000
Total 75000 Total 75000

Total 150000 Total 150000

53
 T Accounts
Creditors Account Rent
Dr USD Cr USD Dr AccountCr
USD USD
To Cash 1000 By Bal 1000
To Bal 75000 By Invent 75000

Total 1000 Total 1000

Total 75000 Total 75000

Rent Advance Account Revenue / Sales Account

Dr USD Cr USD Dr USD Cr USD
To Bal 118000 By Cash 100000
To Cash 1000 By Bal 1000 By Rece 18000

Total 1000 Total 1000 Total 118000 Total 118000

Salary Account Advertisement Exp Account
Dr USD Cr USD Dr USD Cr USD
To Cash 2500 By Bal 2500
To Cash 5000 By Bal 5000

Total 5000 Total 5000 Total 2500 Total 2500

54
 T Accounts
Advt Exp Advance Account Receivables Account
Dr USD Cr USD Dr USD Cr USD
To sales 18000 By Bal 18000
To Cash 2500 By Bal 2500

Total 18000 Total 18000

Total 2500 Total 2500

Cost of Goods Sold Account Vehicle Account

Dr USD Cr USD Dr USD Cr USD
To Bank 25000 By Bal 25000
To Inventory 50000 By Bal 60000
To Inventory 10000

Total 60000 Total 60000 Total 25000 Total 25000

Bank Account
Dr USD Cr USD

To Cash 50000 By Vehicle 25000

By Bal 25000

Total 50000 Total 50000

55
 Trial Balance
Trial Balance for the Month of APRIL 2007
A – Asset, L – Liability, R – Revenue, E - Expense

Debit USD Credit USD

Furniture (A) 50000 Siva Capital (L) 100000
Cash (A) 88000 Sales / Revenue (R) 118000
Bank (A) 25000 Creditors (L) 75000
COGS (E) 60000
Salary (E) 5000
Rent (E) 1000
Rent Advance (A) 1000
Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500
Inventory (A) 15000
Vehicle (A) 25000
Receivable (A) 18000

Total 293000 Total 293000 56

Profit and Loss Account For APR 2007
Expenses USD Revenue USD
COGS (E) 60000 Sales / Revenue (R) 118000
Salary (E) 5000
Rent (E) 1000
Advertisement Exp (E) 2500
To Profit 49500

Total 118000 Total 118000

57
 Balance Sheet as on 30-APR-2007
Liabilities USD Assets USD
Siva Capital 100000 Furniture 50000
Add Profit 49500 Vehicle 25000
Siva Capital 149500 Cash 88000

Bank 25000
Creditors 75000 Receivables 18000
Inventory 15000
Rent Advance 1000
Advt Exp Advance 2500

Total 224500 Total 224500

58
 Important Points to Remember
Accounting
Accounting can
can be
be learnt only by
learnt only by Practice
Practice and
and not
not by
by reading
reading
Tryto
Try tolearn
learnby
bycreating
creatingJournal
Journalentries
entrieswith
withExamples
Examples
Cash
Cash Balance
Balance can
can never
never have
have negative
negative balance
balance at any point
point of
of time
time
Landwill
Land willnever
neverDepreciate
Depreciateandandititwill
willhave
haveonly
onlyAppreciation
Appreciation
Bank
Bank can
can have
have negative
negative balance
balance if you
you have
have Overdraft
Overdraft facility
TheBank
The Bankwhich
whichmaintains
maintainsyour
youraccount
accountwill
willhave
haveexactly
exactlyopposite
opposite
entries of what is shown
shown inin your
your Bank
Bank Account
Account
Inthe
In theabove,
above,Example
Examplethethebank
bankaccount
accountin inyour
yourBooks
BooksandandininBank
Bank
Books will be as follows

Siva Books Bank Books

Bank Account Siva Account
Dr USD Cr USD Dr USD Cr USD
To Vehicle 25000 By Cash 50000
To Cash 50000 By Vehicle 25000 To Balance 25000
By Balance 25000

Total 50000 Total 50000 Total 25000 Total 25000

59
 Case Study for Practice
Take
Takeyour
your own Personal Account
Account and try to create the following
On
OnFirst
First of
of July
July 2007
2007 You
You had
had a Cash balance of USD2500
USD2500 which
which is
is
your Capital
On33rdJuly
On JulyYouYouhave
havereceived
receivedSalary
Salaryof ofUSD
USD12000
12000
On55thPaid
On PaidRent
RentofofUSD
USD1200
1200by
bycheque
cheque
On77thYou
On Youpurchased
purchasedprovision
provisionfor
forhouse
houseforfor800
800 USD
USD
On 10thYou
On10 Youspent
spentfor
forouting
outingthrough
throughyour credit card USD 500
your credit
On 15thYou
On15 Youwithdraw
withdrawCashCashUSD
USD8000
8000
On 20thYou
On20 YouInvested
InvestedininFixed
FixedDeposit
DepositUSD USD50005000@5%@5%Interest
Interest Per
annum
On 22ndyou
On22 youhave
havegiven
givenaaLoan
LoanofofUSD
USD2000
2000 totofriend
friend James
James
th
On
On25
25 YouYouspent
spentfor
forCar
CarRepairs
Repairs500500USD
USD
On 28thYour
On28 Yourwife
wifegave
gaveUSD
USD200200totoyour
yourNeighbor
Neighbor from her pocket
On 30thYou
On30 YouDeposited
DepositedCashCash1000
1000USDUSDto toyour
your Bank
BankAccount
Account

60
 How to Approach to Learn
II tried my best to teach Accounting in simple way. This
is only a beginning. You have to Practice a Lot to learn
Thesimple
The simple way
way to
to Learn Accounting
Accounting is
is as
as follows
follows
Do not go for advanced level books without understanding the
basics
Start with (+1) Accounting book in case of people in India and
Countries. Practice the
Pre-University book in case of other Countries.
examples given in that book and exercises
This is more than sufficient for any non accounting candidate to
work on Oracle Applications
Never try to memorize the concepts and rules
Try to understand and apply the concepts and Rules
There are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I dodo not
not
want you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You can
handle all of them
and Practice
Read and Practice Level
Level I and II at least Three times

61
 "There is a difference between an objective and
actions. Unless you understand your objective,
you will be wasting your time in actions. Know
Know your
your
objective first " - Swami Vivekananda

62
Disclaimer: This
Disclaimer: This Document
Documentwas
wascreated
createdwith
withmymyown
own
assumptions to explain the concept of accounting
and the names of the
thecompanies
companiesused
usedininthis
thisarticle
article
are only to explain the accounting concept with data
assumptions and none of the theCompany
Companyisisnot not
responsible for the Data provided in this article.

Thank You
Hope You find this article useful
Get Ready for Learning
Accounting in Oracle Applications
63