Financial Accounting

M B Ragupathy – FAC-SME @ SNU

 Golden Rules of Accounting

Personal account
• Debit the receiver
• Credit the giver

Real account
• Debit what comes in
• Credit what goes out
Nominal account
• Debit all expenses and losses
• Credit all incomes and gains
 Basic Accounting Cycle
• Journal
– Record of primary entry
– In chronological order
– Loose leaf form / book form
– Vouchers and the data entry
• Ledger
– Classification part of accounting process
– One separate ledger a/c will be opened for every item of
transaction
– Posting  entering the transaction into the ledger
– Balancing  … at the end of the month
 Basic Accounting Cycle
• Trial Balance
– Summary of all balances of ledger a/c
– Excess debit will be debited and the excess
credit, credited in the T B.
– Debit and credit sides must be equal
– Checks the arithmetic accuracy of transactions
– Final a/c s will be prepared with the help of
Trial Balance
 Basic Accounting Cycle
• The Income Statement
– Trading a/c.: All direct expenses and direct
incomes related with manufacturing / trading
are entered
– Profit & Loss a/c.: All indirect / office and
administrative expenses will be entered.
– Profit & Loss Appropriation a/c.: Allocation of
Net Profit to various stake holders’ purposes.
 Basic Accounting Cycle
• Balance sheet
– A position statement
– Statement of assets and liabilities of the firm on a
particular date.
– Capital and profit are liabilities
– No closing of balance sheet entries
• The equation
– Total liabilities = Total assets
– Capital + outside liabilities = Total assets
• Liquidity or Permanency order or marshalling
 Capital and Revenue…
• Classifying expenses and incomes into
capital and revenue items.
• Capital items are entered in balance sheet
• Revenue items are entered in profit and loss
a/c
• Written-off or amortised expenses will be
entered at P&L a/c.
 Capital Expenditure
• … of fixed assets (purchase / value adition)
• … utility period more than one accounting
year
• … materiality concept can also be applied
for classification
 Revenue Expenditure
• … benefits enjoyed immediately or within
one accounting year
• … routine and recurring in nature
• … wages, salaries, rent etc.
 Receipts
• Capital receipts
– Makes a long term claim or from disposal of
fixed assets
– Bank loan, income from sale of machinery etc.
• Revenue receipts
– Arises during the regular course of business
– Recurring in nature
– … sale of goods
 Deferred revenue expenditure
• Revenue in nature but usefulness stretches
to more than one accounting year
• Written-off over a period
• Preliminary expenses, share issue expenses
etc.
Warming up to accounting cycle
– On August 1, Roshan invested Rs.5,000 in business as
owner
– On August 1, the firm paid Rs.750 rent for the month of
August
– The firm borrowed Rs.4000 from a bank on a 9% note
payable, with interest payable quarterly and the principal
due in full at the end of two years.
– Equipment costing Rs.7,200 was purchased for cash. The
expected life of the equipment was 10 years
Warming up to accounting cycle
– An initial inventory of pizza ingredients and boxes
was purchased on credit for Rs.800
– In August pizza sales were Rs.12,000, all for cash.
– During August, the pizzeria’s employees were paid
Rs.3,000 in wages.
– During the month, an additional Rs.5,750 of
ingredients and boxes was purchased on credit.
– August sales consumed Rs.6,000 of ingredients
and boxes.
Warming up to accounting cycle
– At the end of the month, bills for various utilities
used in August were received and paid, totaling
Rs.450.
– During the month, Rs.4,800 of accounts payable
was paid
– On August 13, the firm catered a party for a fee of
Rs.200. Because the customer was a friend of
Roshan, the customer was told that payment could
be made later in the month.
– On August 29, a cheque was received rom
Roshan’s friend for the party of August, 13.