2. SESSION 2
Recap
Session I – Introduction to Accounting
Concepts of Accounting (GAAP)
Session II – Accounting Mechanics – Preparation of
Journal entries & General Ledgers
Presentation of Assignment on Survey of
Indian Industry 2010
3. Recap
What is accounting
Accounting is the language of business
According to AICPA, Accounting is the art of
recording, classifying and summarizing in a
significant manner and in terms of money,
transactions and events which are of financial nature
and interpreting the results thereof.
This accounting process continues as financial
statements and reports that are provided to users.
4. Recap
What is accounting cycle?
Recording of financial transactions
Classifying means to get information on different
transactions individually. The book of account used
for classification is called is called “Ledger”
Summarizing - Once classified information is
available in the ledger, it is used to make summaries
in the form of Income Statement & Balance Sheet. ie.
Financial result and financial position
5. Recap
What is the need for “financial accounting”?
The important functions of management; decision
making, planning & controlling cannot be executed
without correct and timely information in the form of
accounting data. A business man would like to
periodically know the position of his business
The two systems of accounting are:
Cash basis Accrual basis
Forms of business organization
Sole Proprietorship, Partnership & Company
6. Recap
The three branches of accounting are:
Financial Accounting refers to accounting for
revenues, expenses, assets & liabilities.
Cost Accounting refers to recording classifying
allocating and reporting current and prospective
costs.
Management Accounting refers to providing
information to various management levels as a basis
for management decisions.
7. Users of financial reports
Shareholders
Board of Directors
Government
Employees
Creditors
Bankers
8. Generally Accepted Accounting Principles (GAAP).
Accounting Period Concept Money-Measurement
Cost Concept Matching Principle
Business Entity Concept ` Going Concern
Realization Concept Conservatism
Materiality Concept Consistency
Dual Aspect Concept
9. Role of Financial Accounting in business
This can be best understood by understanding the
role of the finance department in an organization
To ensure
efficient management of cash flow
maintenance of accurate accounts
making and reviewing policies & procedures,
control income and expenses
guide all departments
by
providing accurate and timely information for decision
making in order to maximize profitability
10. Session 2 - Capital & Revenue Items
Segregation of Income and Expenses into Capital &
Revenue Items is an important aspect of Accounting
To ascertain the correct Revenue from business
To ascertain the correct Value of the business
We may overstate or understate profits in the Profit
& Loss Account in case of incorrect classification
We may overvalue or undervalue the business in the
Balance Sheet in case of incorrect classification
11. Revenue Items
Revenue Items include revenue receipts and
revenue expenses and are reflected in the P & L A/c
Revenue receipts includes Sales & all other income
earned from the business on a regular basis
Revenue expenses include all expenses that are
incurred in the usual course of business on a regular
basis
Examples of Revenue receipts are- Sales, Interest
received, Commission received, Dividend recd.
Examples of Revenue expenses – Freight, Purchases,
Depreciation, Interest paid, Factory expenses.
12. Capital Items
Capital items include capital receipts and capital
expenses.
Capital expenses is incurred to
Buy a fixed asset
Increase the useful life of an asset
Increase the productive capacity of fixed assets
Make an asset usable or reusable
Increase the profitability of the business
by achieving operating efficiency
Capital Items are reflected in the Balance Sheet of the
Business.
13. Deferred Revenue Expenditure
Sometimes a revenue expenses may be of the
nature of a deferred revenue expenditure
The benefits of the expense may last for more than a
year but are definitely not capital in nature. Eg.
Advertisement & Publicity
Preliminary expenses, brokerage or commission
paid on issue of debentures are some examples
These expenses are written off over a period of time
14. Capital & Revenue Expenses
Rs. 1 lakh spent on purchase of machine. A loan was
taken for the same.
Rs. 10,000 was spent on freight to bring the machine
The machine started production on 1st October 2009
Interest paid Rs. 12000 upto September 2009 on loan
Interest from October to March - Rs. 12,000
Rs.50,000 spent on preventive maintenance of a machine
Rs.20,000 spent on brokerage & commision
expenses for issue of shares
Rs.20,000 spent on machinery to increase its capacity
Rs.5 lakh spent on advertisement which will be
publicised for 3 years
15. Saurav has received 2,00,000 from his father on joining
the MMS course on 1st April 2010. He buys a laptop for Rs.
40,000 in May 2010. He buys a cupboard for Rs. 10,000 in
June 2010. His rent expenses are Rs. 2500 per month
which he pays on 5th of every month. He purchases a
mobile for Rs. 10,000 in July 2010. He receives Rs. 30,000
from his mother on his birthday in August 2010. He pays
his fees of Rs. 100,000 in September 2010. His day to day
expenses on food & laundry is Rs. 2000 per month. He
takes his friends out for dinner in November 2010 on
getting a first class in the first semester and spends Rs.
5000. He pays his exam fees of Rs. 2000 in February 2010.
He buys a gift of Rs. 3000 for his parents on their
anniversary in March 2011. Prepare a month wise diary of
his income and expenditure and his cash balance on 31st
March 2011.
16. Divya receives an education loan of Rs. 300000 on
joining the MMS course on 1st April 2010. She buys a
laptop for Rs. 50,000 in May 2010. She buys a cupboard
for Rs. 10,000 in June 2010. Her hostel rent expense is
Rs.3000 per month which she pays on 5th of every
month. She purchases a mobile for Rs. 10,000 in July
2010. She pays her fees of Rs. 150,000 in September
2010. Her day to day expenses on food & laundry is Rs.
3000 per month. She buys clothes worth Rs. 5000 on her
birthday. She pays her exam fees of Rs. 2000 in February
2010. She buys 10 shares at the price of Rs. 50000. She
spends Rs. 3000 on a gift for her brother on his birthday
in March 2011. Prepare a month wise diary of her income
and expenditure and her cash balance on 31st March
2011.
17. Journal entries
The two aspects of a transaction are identified as two “Accounts”
While recording transactions the accounts involved are
Debited and Credited
All accounts are classified in the following categories
Personal Account / Real Account /Nominal Account
Personal Account is an account of a person eg. Ms. Jyoti, Mr.
Ram, Debtors account, Creditors account etc.
Real accounts are accounts of assets of the business eg.
Stock, furniture, land, building, Goodwill, Bank account
Nominal Account are accounts of expenses, income, losses,
gains, interest, stationery etc.
18. Classify the following
Goods account
Printing & Stationery account
Repairs to machinery account
Vinay’s account
Land account
Debtors account
Salary account
Furniture account
19. Golden Rules
Personal Account
Debit the receiver
Credit the giver
Real Account
Debit what comes in
Credit what goes out
Nominal Accounts
Debit all expenses and losses
Credit all income and gains
Journalise the transaction – Cash brought in as capital to start
business in Jyoti & Company Rs. 1 lakh
20. Format of a journal entry
IN THE BOOKS OF JYOTI & CO.
C
J.V NO. DATE PARTICULARS L.F. Dr (Rs.). Cr (Rs.)
21
01 11/11/08 Cash a/c Dr. 100000
To Capital a/c 22 100000
(Being cash brought in as
capital to start
business)
21. Pass Journal entries for the following transactions
Mr. A starts a Company called M/s. Jyoti & Company with a
cash investment of Rs. 1,00,000 on 15th November
He buys office building space for Rs. 50,000 and furniture of
Rs. 25,000 in cash on 20th November
He pays for advertising expenses Rs. 1900 on 20th November.
He buys office stationery for Rs. 1000 on 22nd November
He purchase 1000 pens for Rs. 10,000 on 25th November.
He sells the pens for Rs. 15,000 on 29th November
He pays salary to staff of Rs. 2000 on 30th November
He pays for water Rs.500 and Rs.600 for electricity on 30th
November
22. Ledgers
Classification of data
Collecting all transactions of a similar type or category at
one single place so as to give complete information
The book used to classify transactions is called “Ledger”
For an individual type of transaction an individual
“account” is maintained in the ledger book used to
classify transactions is called “Ledger”
23. Format of a ledger account
Bank Loan Account
Dr. Cr.
Date Particulars JF Rs. Date Particulars JF Rs.
5/31/99 To Bal c/d 4.50 5/1/99 By Bank a/c 4.50
4.50 4.50
24. Balancing the ledgers
Once the process of posting to the ledger accounts is
complete, these accounts are balanced
If debit side is higher, the account has a debit balance
and vice versa
The trial balance is a statement of balances of the ledger
accounts
The Trial Balance totals match as the double entry
system is followed