ac module 1
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 1
Introduction to Accounting
- Thangjam RavichandraAsst. Professor
IASMS
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The Need for Accounting
Managers, investors, and other internal groups
want the answers to two important questions:
How well did
the organization
perform?
Where does
the organization
stand?
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The Need for Accounting
Accountants answer these questions
with three major financial statements:
Income
statement
Balance
sheet
Statement of
cash flows
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The Need for Accounting
A
transaction
is any event that affects the
financial position of an organization
and requires recording.
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Accounting
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Objectives of Accounting
To ascertain whether the business
operations have been profitable or not
To ascertain the financial position of thebusiness
To generate information
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Functions of Accounting
1. Systematic record of business
transactions2. Protecting the property of the business3. Communicating results to interested
parties4. Compliance with legal requirement
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Who uses accounting information ?
Owners
Managers
Investors (including potential)
Analysts on their behalf Creditors (including potential)
Government (tax assessment)
Regulators
Customers
Employees
Public & Research Scholar
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Branches of Accounting
Financial Accounting
Cost Accounting
Management Accounting
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CLASSIFICATION OF ACCOUNTS
ACCOUNTS
PERSONALACCOUNTS
IMPERSONALACCOUNTS
REALACCOUNTS
NOMINALACCOUNTS
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PERSONAL ACCOUNTS
Accounts in the name of persons are known aspersonal accounts.
Eg:Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
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REAL ACCOUNTS
These are accounts of assets or properties. Assetsmay be tangible or intangible. Real accounts are
impersonal which are tangible or intangible innature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we canfeel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accountswhich are of intangible in nature.
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NOMINAL ACCOUNTS
These accounts are impersonal, but invisible andintangible. Nominal accounts are related to those
things which we can feel, but can not see andtouch. All expenses and losses and all incomesand gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, InterestReceived A/C, Commission Received A/C,Discount A/C, etc.
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Lets Start Then.. Huh?
1. Drawings A/c2. Bank A/c3. Cash A/c4. Discount A/c5. Patent A/c6. Goodwill A/c
7. Salaries A/c8. Capital A/c9. Machinery A/c10.Purchases A/c
: Personal: Personal: Real: Nominal: Real: Real
: Nominal: Personal: Real: Real
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting13/e, Horngren/Sundem/Stratton 15 - 15
RULES FOR DEBIT AND CREDIT
PersonalAccount
Debit the Receiver
Credit the Giver
Real Accounts
Debit what comes in
Credit what goesout
NominalAccounts
Debit all Expensesand Losses
Credit all Incomesand Gains
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Steps for finding the debit and credit
aspects of a particular transaction
Find out the two accounts involved in the
transaction.
Check whether it belongs to Personal, Real or
Nominal account.
Apply the debit and credit rules for the two
accounts.
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Exercise
Started Business with Rs 50,000 Purchased Furniture for Rs 1000 from Pankaj Goods purchased for cash Rs 20,000 Goods sold to Ram for Rs 5000 on credit Paid salaries to staff Rs 1800
Goods worth Rs 500 returned by Ram Rs 1000 Commission received
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Accounting Equation
Assetsare economic resources that
are expected to benefit futureactivities of the organization.
Liabilitiesare the entitys economic
obligations to nonowners.
Owners equityis the excessof the assets over the liabilities.
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Double EntryAccounting Equation
Initial investment by owners: $100,000 cash
Acquisition of inventory: $75,000 cash
Acquisition of inventory onopen account: $35,000
Merchandise costing $100,000 wassold on open account for $120,000.
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Balancing of Accounting Equation
1) Cash +100,000 +100,000
2) Cash 75,000Inventory + 75,000
3) Inventory + 35,000 + 35,0004a) Receivable +120,000 +120,0004b) Cost 100,000 100,000Subtotal +155,000 + 35,000 +120,000
Assets = Liabilities +Stockholders
equity
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Exercise
Cash collections of accounts receivable: $15,000
Cash payments of accounts payable: $20,000
On March 1, paid $3,000 cash for store rent for
March, April, and May. Rent is $1,000 per month.
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King Hardware Transactions
5) Cash + 15,000
Receivable 15,0006) Cash 20,000 20,0007) Cash 3,000
Prepaid + 3,000
Total 20,000 20,000Totals (1-4) +155,000 + 35,000 +120,000
Assets = Liabilities +Stockholders
equity
134,000 134,000
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Revenues and Expenses
Revenues are increases in ownershipclaims arising from the delivery
of goods or services.
Expenses are decreases in ownership
claims arising from delivering goodsor services or using up assets.
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The Analytical Power of the
Balance Sheet Equation
The balance sheet equation can highlight the linkbetween the income statement and balance sheet.
Assets (A) = Liabilities (L) + Stockholders equity (SE)
A = L + Paid-in capital + Retained income
A = L + Paid-in capital + RevenueExpenses
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Accounting Concepts
Business Entity Concept
Money Measurement Concept
Cost Concept
Going Concern Concept
Dual Aspect Concept
Realization Concept
Accounting Period Concept
Matching
Objective Evidence
Accrual
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Accounting Conventions
Convention of Consistency
Convention of Disclosure
Convention of Conservation
Convention of Materiality
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Fundamental Accounting
Assumptions
Going Concern Consistency Accrual
Disclosure of Accounting Policies as per AS1 :
All significant accounting policies The disclosure should form part of the financial statement Any change in the accounting policies which has material effect
should be disclosed
If the fundamental accounting assumptions viz, Going concern,Consistency and Accrual are followed in financial statement, specificdisclosure is not required. Otherwise, the fact should be disclosed.
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Recording Business Transactions
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Analyzesourcedocuments.
Journalizetransactions inthe general
journal.
Post entries tothe accounts inthe generalledger.
Prepare financialstatements.
Prepare a trialbalance.
Steps in The Accounting Cycle
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Recording Transactions
Each transaction always affects at least twodifferent accounts.
One account has a debit effect.
The second account has a credit effect.
This methodology was named double entry
accounting by whom?
- Luco Pacioli (1494)
All transactions are recorded in the General Journal.
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General Journal Page
GENERAL JOURNAL
Page:
Date Description PR Debit Credit
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Journal EntriesExample 1
On January 1, 19X7, CaldwellCompany borrows $10,000 from
the bank.
Prepare the appropriate general
journal entry for the abovetransaction.
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Journal EntriesSolution 1
Two accounts are affected:Cash is increased by $10,000.
Notes Payable is increased by $10,000.
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Journal Entries
Solution 1
Two accounts are affected:Cash is increased by $10,000.
Notes Payable is increased by $10,000.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
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Journal Entries
Solution 1
Two accounts are affected:Cash is increased by $10,000.
Notes Payable is increased by $10,000.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
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Journal Entries
Solution 1
Two accounts are affected:Cash is increased by $10,000.
Notes Payable is increased by $10,000.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Typically, accounts arenumbered. The accountnumbers are used as
references for posting to theGeneral Ledger. More onaccount numbers will comelater.
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Journal Entries
Example 2
On January 15, 19X7, CaldwellCompany purchases a truck for
$19,500 cash.
Prepare the appropriate journal
entry for the above transaction.
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Journal Entries
Solution 2
Two accounts are affected:Trucks is increased by $19,500.Cash is decreased by $19,500.
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Journal Entries
Solution 2
Two accounts are affected:Trucks is increased by $19,500.Cash is decreased by $19,500.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
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Journal Entries
Solution 2
Two accounts are affected:Trucks is increased by $19,500.Cash is decreased by $19,500.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
15-Jan Trucks 150 19,500
Cash 100 19,500
to record purchase of truck
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Journal Entries
Example 3
On January 20, 19X7, CaldwellCo. pays the $400 electric bill for
January.
Prepare the appropriate journal
entry for the above transaction.
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Journal Entries
Solution 3
Two accounts are affected:Utility Expense is increased by $400.
Cash is decreased by $400.
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Journal Entries
Solution 3
Two accounts are affected:Utility Expense is increased by $400.
Cash is decreased by $400.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
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Journal Entries
Solution 3
Two accounts are affected:Utility Expense is increased by $400.
Cash is decreased by $400.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
20-Jan Utility Expense 511 400
Cash 100 400
to record payment of January
electric bill
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Start with the journal entry fromthe General Journal.
GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 10,000
Notes Payable 10,000
to record loan from bank
Posting to the GLExample
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 10,000
Notes Payable 10,000
to record loan from bank
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 0
Next, find the appropriate page in theGeneral Ledger for Cash.
Posting to the GLExample
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
Post the account reference number.
Posting to the GLExample
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 0
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan G1 10,000
Posting to the GLExample
Post the transaction info to the GL.
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan G1 10,000 10,000
Update the General Ledger balance.
Posting to the GLExample
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 10,000
to record loan from bank
ACCOUNT NAME: Notes Payable ACCOUNT No. 201
Date Description PR Debit Credit Balance
Beginning Balance 0 0
Posting to the GLExampleNext, find the Notes Payable page inthe General Ledger.
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
ACCOUNT NAME: Notes Payable ACCOUNT No. 201
Date Description PR Debit Credit Balance
Beginning Balance 0 0
Posting to the GLExample
Post the account reference number.
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
ACCOUNT NAME: Notes Payable ACCOUNT No. 201
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan G1 10,000
Posting to the GLExample
Post the transaction info to the GL.
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
ACCOUNT NAME: Notes Payable ACCOUNT No. 201
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan G1 10,000 10,000
Posting to the GLExample
Update the General Ledger balance.
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 9,500
to record purchase of truck
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan from bank G1 10,000 10,000
Examine the next journal entry.
Posting to the GLExample
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GENERAL JOURNALPage: 1
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
Posting to the GLExample
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan from bank G1 10,000 10,000
Record the account reference.
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GENERAL JOURNALPage: 3
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan from bank G1 10,000 10,000
15-JanPurchase of truck G3 9,500
Posting to the GLExample
Post the entry to the GL.
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GENERAL JOURNALPage: 3
Date Description PR Debit Credit
15-Jan Trucks 9,500
Cash 100 9,500
to record purchase of truck
ACCOUNT NAME: CASH ACCOUNT No. 100
Date Description PR Debit Credit Balance
Beginning Balance 0 01-JanLoan from bank G1 10,000 10,000
15-JanPurchase of truck G3 9,500 500
Posting to the GLExample
Update the General Ledger balance.
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IllustrationsJournal, Ledger and
Trial Balance
Page 33-44
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Assignments ( for internals)
1. GAAP and Accounting Environment2. Role of Accounting in Capital Markets and
Corporate Governance3. Frauds done by Accountant with a Case
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