Accounting Process

ACCOUNTING PROCESS
Accounting for Management

Basic Accounting Process
1. Financial Transaction happens

2. Voucher – Basic Standardized unit of an accounting
transaction
3. Journal Entry – Compilation of all vouchers made
for the day. Journal entries contain all relevant
information pertaining to a transaction.
4. Posting into General Ledger
5. Trial balance
6. Preparation of Financial Statements & Reports

The Accounting Process
Transactions
Information Sources Accounting
Invoices Principles
Receipts
Cheques Analysis & Transformation
Double Entry
Date wise Entry of Voucher Preparation
Transactions
Journal Entry Posting Ledger Entry

Complete information about Account wise details
the transaction
Error Correction
Trial Balance Transformation
To check for errors Adjusting Entries
Closing Entries
Reports & Financial Statements

Balance Sheet , Income Statement,
Cash Flow Statement, Management Accounting Reports
General Ledger
 A general ledger is a group of accounts, both

permanent and temporary.
 In accounting, the term account is used to denote
any item for which the transactions affect the
amount of that item.
 There are five basic types of accounts – assets,
liabilities, owner’s equity, revenue and expenses
 Accounts can be represented as T – accounts, a
sample of which is shown in the next slide

T - Account
Cash Account
Dr (Debit) Cr (Credit)
(Increases) (Decreases)
Beginning Balance 0 Raw Material Purchase 30000
Sale of goods 10000 Deposited in Bank 10000
Loan Taken 50000 Wages paid 15000
Withdrawn from bank 10000 55000
Balancing Figure 15000

70000 70000

New Opening Balance 15000


All Asset Accounts
ASSET ACCOUNTS
 Cash
 Accounts Receivable
 Plants & Machinery
 Inventory
 Plant & Machinery
 Land & Building
 Patents, Trademark, License

All Liability Accounts
LIABILITY ACCOUNTS
 Notes Payable
 Accounts Payable
 Unearned Revenue
 Salaries Payable
 Interest Payable
 Taxes Payable

All Owner’s Equity Accounts

All Revenue Accounts
REVENUE ACCOUNTS
 Sales
 Interest Income
 Rental Income
 Service Fees

All Expense Accounts
EXPENSE ACCOUNTS
 COGS
 Salaries & Wages
 Rent
 Utilities
 Office Expense
 Advertising
 Depreciation
Basic Accounting Equation
Assets = Liabilities + Equity
Cash Accounts Revenues + Expenses- Owner’s Contribution+

Inventory Payable Owner’s Draws-
Receivables Interest Income COGS
Rental Income Rent
Prepaids Notes
Service Fees Depreciation
Equipment payable Advertising
Professional Fees
Advance Utilities
Revenue Office Supplies
Accounting for management

Examples of Transactions
 Assume you sold a product for Rs. 100 cash and

deposited the money into the bank.
 You originally bought the product for Rs. 50 and put
it into inventory.
 Now that the product is sold you have to decrease
inventory by that amount and increase Cost of
Goods Sold.

Example of Transactions

Case study: A new company
• 1. 1 Jan 2011 : Two people started the Company.

• 2. 2 Jan 2011 : They invested Rs. 500,000 in the Company.
• 3. 3 Jan 2011 : Company rented office space Rs. 20,000 p.m.
• 4. 4 Jan 2011 : 2 people were hired at Rs. 5,000 p.m. each.
• 5. 31 Jan 2011 : Salaries and rent were paid.

Balance sheet of the company
As on 2nd Jan 2011
2nd Jan - They invested Rs. 500,000 in the Company.
Assets Liabilities
CAPITAL 500000
Dr. Bank 500000
Cr. Capital 500000
BANK 500000
Total 500000 Total 500000

As on 4th Jan 2011
3rd Jan - Company rented office space Rs. 20,000 p.m.
4th Jan - 2 people were hired at Rs. 5,000 p.m. each.
Assets Liabilities
CAPITAL 500000
Bank 500000

As on 31st Jan 2011
31st Jan - Salaries and rent were paid.
Assets Liabilities
CAPITAL 500000
Earnings -30000
Dr Rent 20000
Dr Salary 10000
Cr Bank 30000
Bank 470000

Financial Statements
• This session illustrates how to prepare the basic financial
statements
The Income Statement

The Statement of Retained Earnings
The Balance Sheet
The Cash Flow Statement
The purpose of these statements is

to help users make better decisions.
Income Statement
• The first statement prepared is the Income Statement.
• The Income Statement reports a business’ performance

for the period.

Income Statement
• A simple format for an income statement is:
Revenues – Expenses = Net Income
 We will look at a more complex format later.

Income Statement
• Revenues are earned for the sale of goods or services.
Note that revenues occur when the sale is made. The
payment may or may not have been received.
Examples of revenues include sales,

service revenue and interest revenue.

Income Statement
• Expenses are incurred when a business receives goods
and services. Like revenues, payment may or may not
have been made.
Examples of expenses include salaries expense,

utility expense and interest expense.

Income Statement
• Most businesses require more information from their
businesses than a simple income statement can provide.
Therefore, they use a multi-step income statement
format.
• A format for a multi-step income statement is shown in

the next slide.

Income Statement
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income

Income Statement
• Cost of goods sold represents the expense a business
incurred to buy or make a product for resale.
Example - a book store buys a book for

Rs. 25 and then sells it for Rs. 32. The
cost of goods sold is Rs. 25.

Income Statement
• Operating expenses are the usual expenses incurred in
operating a business.
Accounts such as salaries expense,

utility expense, and depreciation
expenses are all shown in this section.

Income Statement
• Non-operating items are revenue, expenses, gains and
losses that do not relate to the company’s primary
operations.
Accounts include interest expense and

gains and losses on the sale of
equipment and investments.

Income Statement
• Income taxes are computed by multiplying Income
before taxes by the income tax rate.
Example – Income before taxes is

Rs.50,000. The income tax rate is 30%.
Income taxes = 50,000 * 30% = Rs.15,000.

Statement of Retained Earnings
• The Statement of Retained Earnings reports how net
income and dividends affected a company’s financial
position during the period.

The format of the statement is:
Beg. balance, retained earnings

+ Net income
- Dividends
End. balance, retained earnings

• Note that the Income Statement must be prepared
before the Statement of Retained Earnings.
• This is because you have to know the amount of net

income in order to compute the ending balance of
retained earnings.

Balance Sheet
• The purpose of the balance sheet is to report the
financial position of an accounting entity at a particular
point in time.
The basic format for the balance sheet is:

Assets = Liabilities + Equity

Balance Sheet
• Assets are economic resources owned by a company.
Examples include cash, accounts

receivable, supplies, buildings and
equipment.

Balance Sheet
• Liabilities are the company’s debt or obligations.
Examples are accounts payable, unearned

revenues and bonds payable.

Balance Sheet
• Equity is the residual balance. Assets – liabilities =
equity. Equity is commonly called stockholders’ equity if
the business is a corporation as it represents the
financing provided by the stockholders along with the
earnings from the business not paid out as dividends.

Balance Sheet
• There are two different types of assets shown on a
balance sheet. These are current assets and non-
current assets.
Current assets
+ Non-current assets
Total assets

Balance Sheet
• Current assets are assets that will be used or turned
into cash within one year.
Examples include cash, accounts

receivable, inventory, short-term
investments, supplies and prepaids.

Balance Sheet
• Non-current assets comprise the remainder of the
assets.
These include accounts such as: long-

term investments, land, building,
equipment and patents.

Balance Sheet
• There are two different types of liabilities shown on a
balance sheet – current liabilities and long-term liabilities.
Current liabilities
+ Long-term liabilities
Total liabilities

Balance Sheet
• Current liabilities are obligations that will be paid in

cash (or other services) or satisfied by providing service
within the coming year.
Examples include accounts payable,

short-term notes payable, and taxes
payable.

Balance Sheet
• Long-term liabilities are obligations that will not be paid
or satisfied within the year.
Examples include mortgage payable

and bonds payable.

Balance Sheet
• Stockholders’ Equity is divided into two categories:
contributed capital and retained earnings.
Contributed capital
+ Retained earnings
Total stockholders’ equity

Balance Sheet
• Contributed capital is the amount of cash (or other
assets) provided by the shareholders.
Common Stock and Additional Paid

in Capital are accounts in this
section.

Balance Sheet
• Retained earnings is the total earnings that have not
been distributed to owners as dividends.

The Balance Sheet
Current assets
Total assets
Current liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity

Balance Sheet
• The Balance Sheet must be prepared after the

Statement of Retained Earnings in order to have
calculated the ending balance of Retained Earnings.

Order of Preparation
Income
Statement
Statement of Retained
Earnings Balance Sheet
Net income Beginning Retained
Earnings
+ Net income
– Dividends
Ending retained earnings Ending Balance
Retained
Earnings

Review
 Income statement—A summary of the revenue

and expenses for a specific period of time.
 Statement of retained earnings – a summary of
the changes in the retained earnings that have
occurred during a specific period of time.
 Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.

Temporary & Permanent Accounts
 Temporary Accounts – Revenues & Expenses – appear

in the Income Statement
 Permanent (Real Accounts) – Assets & Liabilities –

appear in the Balance Sheet

Example Problem
Cash 5,000 Sales 100,000
Utility Expense 8,000 Buildings 65,000
Common Stock 45,000 Accounts Payable 12,000
Supplies 4,000 Cost of Goods Sold 58,000
Interest Expense 5,000 Additional Paid in Capital 20,000
Bonds Payable 40,000 Supplies Expense 3,000
Salaries Expense 16,000 Accounts Receivable 10,000
Inventories 45,000 Retained Earnings 5,000 (beg. bal.)
Income Tax Rate 30%

Step One
• Classify the accounts as assets, liabilities, equity,
revenue or expenses.

Assets
Cash 5,000 Sales 100,000
Interest Expense 5,000 Additional Paid in 20,000

Capital
Income Tax Rate 30%

Assets, Liabilities
Cash 5,000 Sales 100,000

Capital
Income Tax Rate 30%

Assets, Liabilities, Equity
Cash 5,000 Sales 100,000

Capital
Income Tax Rate 30%

Assets, Liabilities, Equity, Revenues
Cash 5,000 Sales 100,000

Capital
Income Tax Rate 30%

Assets, Liabilities, Equity,
Revenues, Expenses
Cash 5,000 Sales 100,000

Capital
Income Tax Rate 30%

Step Two
• Prepare the Income Statement.
Sales revenue
- Cost of goods sold
Gross profit
- Operating expenses
Income from operations
+/- Non-operating items
Income before taxes
- Income taxes
Net income

Income Statement
Sales 100,000
- Cost of Goods Sold -58,000
Gross Margin 42,000
- Operating Expenses -27,000
Income from Operations 15,000
- Non-operating Items -5,000
Income before Taxes 10,000
- Income Taxes -3,000
Net Income 7,000

Income Statement
Sales 100,000

Operating expenses include:
Gross Margin 42,000
- Operating Expenses -27,000 Utility expense 8,000

Salaries expense 16,000
Income from Operations 15,000 Supplies expense 3,000
Income before Taxes 10,000
Net Income 7,000

Income Statement
Sales 100,000
Gross Margin 42,000

Non-operating items include:
Income before Taxes 10,000 Interest expense 5,000
Net Income 7,000

Income Statement
Sales 100,000
Gross Margin 42,000

Income before Taxes 10,000 Income taxes = Income before

taxes * Income tax rate
Net Income 7,000 10,000 * 30% = 3,000

Step Three
• Prepare the Statement of Retained Earnings.
Beg. balance, retained earnings

+ Net income
- Dividends
End. balance, retained earnings

Beginning Balance, 5,000

Retained Earnings Net Income is brought
+ Net Income +7,000 forward from the Income
Statement.
- Dividends -0
Ending Balance, Retained 12,000

Earnings

Step Four
• Prepare the Balance Sheet.
Current assets
Total assets
Current liabilities
+ Stockholders’ equity
Total liabilities and
stockholders’ equity

Balance Sheet
Current Assets: Current Liabilities:
Cash 5,000 Accounts Payable 12,000
Accounts Receivable 10,000 Long-term liabilities:
Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’ Equity:
Non-Current Assets: Common Stock 45,000

Buildings 65,000 Additional Paid in Capital 20,000
Retained Earnings 12,000
Total Assets 129,000 Total Liabilities and 129,000

Equity

Balance Sheet
Current Assets: Current Liabilities:
Cash 5,000 Accounts Payable 12,000
Accounts Receivable 10,000 Long-term liabilities:
Inventories 45,000 Bonds Payable 40,000

Supplies 4,000 Stockholders’ Equity:
Non-Current Assets: Common Stock 45,000 End. Bal. is

brought
Buildings 65,000 Additional Paid in 20,000 forward from
the Statement
Capital
of Retained
Retained Earnings 12,000 Earnings
Total Assets 129,000 Total Liabilities and 129,000

Equity

Statement of Cash Flows
Cash Flows from Operating Activities—This section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing Activities—This section

reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing Activities—This section

reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.

Relationship between the 3 statements
Income Statement
Beginning Balance Sheet Ending Balance Sheet
Cash Flow Statement
Period of Time (usually 1 year) Time Line

THANK YOU

Accounting Process

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Process

Uploaded by

Copyright:

Available Formats

ACCOUNTING PROCESS

Accounting for Management

1. Financial Transaction happens

Accounting for Management

Journal Entry Posting Ledger Entry

Reports & Financial Statements

 A general ledger is a group of accounts, both

Accounting for Management

Accounting for Management

Accounting for Management

Accounting for Management

Accounting for Management

Accounting for Management

Assets = Liabilities + Equity

Cash Accounts Revenues + Expenses- Owner’s Contribution+

Accounting for management

 Assume you sold a product for Rs. 100 cash and

Accounting for Management

Accounting for Management

• 1. 1 Jan 2011 : Two people started the Company.

Accounting for Management

Total 500000 Total 500000

Accounting for Management

Total 500000 Total 500000

Accounting for Management

Accounting for Management

The Income Statement

The purpose of these statements is

• The Income Statement reports a business’ performance

Accounting for management

• A simple format for an income statement is:

Revenues – Expenses = Net Income

 We will look at a more complex format later.

Accounting for management

Examples of revenues include sales,

Accounting for management

Examples of expenses include salaries expense,

Accounting for management

• A format for a multi-step income statement is shown in

Accounting for management

Accounting for management

Example - a book store buys a book for

Accounting for management

Accounts such as salaries expense,

Accounting for management

Accounts include interest expense and

Accounting for management

Example – Income before taxes is

Accounting for management

Accounting for management

The format of the statement is:

Beg. balance, retained earnings

Accounting for management

• This is because you have to know the amount of net

Accounting for management

The basic format for the balance sheet is:

Accounting for management

Examples include cash, accounts

Accounting for management

• Liabilities are the company’s debt or obligations.

Examples are accounts payable, unearned

Accounting for management

Accounting for management