basic accounting slides

Basic Accounting Level

22

AgendaAgenda What is AccountingWhat is Accounting Mode of Learning AccountingMode of Learning Accounting Accounting and Finance - DifferenceAccounting and Finance - Difference Accounting Concepts / ConventionsAccounting Concepts / Conventions Accounting EventsAccounting Events Rules of AccountingRules of Accounting Preparation of Financial StatementsPreparation of Financial Statements A Simple Case Study A Simple Case Study

33

Accounting is defined as the art of Recording, Classifying and Summarizing transactions in monetary terms (in Money terms) for the preparation of Financial Statements

JOURNAL

PAYMENT

Vision EnterprisesFinancial Statement

at December 31, 1997

Assets Cash Account Receivable Land

Total Assets

Liability Account Payable Notes Payable

Total Liability

Stockholder’s Equity Contributed Capital Retained Earnings Total Stockholder’s Equity

$4,456 $5,714 $ 981---------$11,151======

$3,830 $ 416---------$4,246====== $2,365 $ 367---------$2,732======




Total Assets


Total Liability


$4,456 $5,714 $ 981---------$11,151======

$3,830 $ 416---------$4,246====== $2,365 $ 367---------$2,732======




Total Assets


Total Liability


$4,456 $5,714 $ 981---------$11,151======

$3,830 $ 416---------$4,246====== $2,365 $ 367---------$2,732======

?

What is AccountingWhat is Accounting

44

What is AccountingWhat is Accounting Accounting is the art of recording, classifying and Summarizing Accounting is the art of recording, classifying and Summarizing

financial transactions in the Preparation of Financial Statementsfinancial transactions in the Preparation of Financial Statements Recording refers to creating Journal entry for every financial Recording refers to creating Journal entry for every financial

transaction with Debit and Credit amounts.transaction with Debit and Credit amounts. Classifying refers to Classifying each of the Debit / Credit Classifying refers to Classifying each of the Debit / Credit

Transaction to Capital or Revenue and Asset, Liability, Revenue or Transaction to Capital or Revenue and Asset, Liability, Revenue or ExpenseExpense

Summarizing refers to Grouping the Transactions of Asset, Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses and preparing the Financial Liability, Revenue and Expenses and preparing the Financial Statements (Trading, Profit and Loss Account and Balance Sheet)Statements (Trading, Profit and Loss Account and Balance Sheet)

In case of In case of • Trading, Manufacturing and Customer Service oriented Trading, Manufacturing and Customer Service oriented

Organization, the sum of all income and expenses is referred to Organization, the sum of all income and expenses is referred to as Profit and Loss accountas Profit and Loss account

• Social Service oriented Organization like Schools, Hospitals and Social Service oriented Organization like Schools, Hospitals and Government Organizations, Banks it is referred to as Income Government Organizations, Banks it is referred to as Income and Expenditure account .and Expenditure account .

Note:-Note:- Trial Balance is not a Financial Statement. It is only a summary Trial Balance is not a Financial Statement. It is only a summary of all Debit and Credit Transactions.of all Debit and Credit Transactions.

55

Mode of Learning AccountingMode of Learning Accounting Change your mindset that accounting means Change your mindset that accounting means

only Debit and Creditonly Debit and Credit Do not blindly learn Accounting Rules and Do not blindly learn Accounting Rules and

apply the rules of Debit and Creditapply the rules of Debit and Credit The Best way to Learn Accounting isThe Best way to Learn Accounting is

Learn the Accounting ConceptsLearn the Accounting Concepts Understand the Accounting ConventionsUnderstand the Accounting Conventions Classify the Accounting EventClassify the Accounting Event Apply the Accounting RulesApply the Accounting Rules Record, Classify and Summarize the JournalRecord, Classify and Summarize the Journal

• You are Confused. Am I right?You are Confused. Am I right? Do not become panic and move forward, you will understandDo not become panic and move forward, you will understand

66

Mode of Learning AccountingMode of Learning AccountingLearn 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)

77

Finance and Accounting - DifferenceFinance and Accounting - DifferenceFinanceFinance AccountsAccounts

Procurement and Utilization of Procurement and Utilization of FundsFunds

Recording of an Accounting Recording of an Accounting EventEvent

Leads to Investment DecisionsLeads to Investment Decisions Expressed in Monetary TermsExpressed in Monetary Terms

Financing DecisionsFinancing Decisions Recording , Classifying and Recording , Classifying and Summarizing TransactionsSummarizing Transactions

FuturisticFuturistic Preparation of Financial Preparation of Financial Statements (Trading, Profit and Statements (Trading, Profit and loss Account and Balance loss Account and Balance Sheet)Sheet)

Cost of CapitalCost of Capital HistoricalHistorical

Cash Flow / Fund FlowCash Flow / Fund Flow Compliance with Statutory Compliance with Statutory Matters like companies Act, Matters like companies Act, Income Tax Act, Sales Tax Act Income Tax Act, Sales Tax Act Etc.,Etc.,

Project AppraisalProject Appraisal

Ratio AnalysisRatio Analysis

88

Accounting Concepts/Conventions Accounting Concepts/Conventions (US GAAP/UK GAAP/IFRS/SOX)(US GAAP/UK GAAP/IFRS/SOX)

The Concepts and conventions of accounting are The Concepts and conventions of accounting are developed by IASC (International Accounting Standards developed by IASC (International Accounting Standards Committee) which is in-charge of releasing International Committee) which is in-charge of releasing International Accounting Standards (IAS)Accounting Standards (IAS)

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

There are 41 International Accounting StandardsThere are 41 International Accounting Standards

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

99

Difference between Concepts and ConventionsDifference between Concepts and Conventions

The Accounting Concepts / Principles evolved out of the The Accounting Concepts / Principles evolved out of the Practice and Procedures followed by different countries Practice and Procedures followed by different countries and later on established by the International Statutory and later on established by the International Statutory Accounting Bodies like The Institute of Chartered Accounting Bodies like The Institute of Chartered Accountants of India, The Institute of Chartered Accountants of India, The Institute of Chartered Accountants of England and Wales etc to become an Accountants of England and Wales etc to become an Accounting Principle statutorily need to be followed Accounting Principle statutorily need to be followed while preparing the Financial Statements. In nutshell this while preparing the Financial Statements. In nutshell this has evolved out of standard Practice followed by several has evolved out of standard Practice followed by several countries while preparing the Trading, Profit and Loss countries while preparing the Trading, Profit and Loss Account and Balance Sheet.Account and Balance Sheet.

The Accounting Conventions / Practices are basically The Accounting Conventions / Practices are basically assumptions and expected to be followed while assumptions and expected to be followed while preparing the Financial Statements.preparing the Financial Statements.

1010

Accounting Concepts / PrinciplesAccounting Concepts / Principles

Business Entity ConceptBusiness Entity Concept Money Measurement ConceptMoney Measurement Concept Dual Aspect ConceptDual Aspect Concept Cost ConceptCost Concept Accounting PeriodAccounting Period ConservatismConservatism Realization ConceptRealization Concept Matching ConceptMatching Concept Materiality ConceptMateriality Concept ObjectivityObjectivity

1111

Accounting Conventions / PracticesAccounting Conventions / Practices

Going ConcernGoing Concern ConsistencyConsistency AccrualAccrual

1212

Accounting ConceptsAccounting Concepts Business Entity ConceptBusiness Entity Concept Accounts can be kept only for Entities, which are different from the Accounts can be kept only for Entities, which are different from the

persons who are associated with these entitiespersons who are associated with these entitiesEx. Sole Proprietary, Partnership firm, CompanyEx. Sole Proprietary, Partnership firm, Company

This is one of the most Important and fundamental accounting This is one of the most Important and fundamental accounting principle with which Double entry system of accounting has evolved.principle with which Double entry system of accounting has evolved.

Accounts need to be maintained separate from the Owners and Accounts need to be maintained separate from the Owners and providers of capital. If you understand the simple logic, then you know providers of capital. If you understand the simple logic, then you know 30% of Accounting. Just Recall Fundamentals of Accounting from 30% of Accounting. Just Recall Fundamentals of Accounting from Oracle Perspective Level I Example of Siva, Oracle and Bank.Oracle Perspective Level I Example of Siva, Oracle and Bank.

See Next Slide for More Examples. If you cannot understand this See Next Slide for More Examples. If you cannot understand this Concept Please Do not Proceed Further and try to understand by Concept Please Do not Proceed Further and try to understand by reading again Level I and Level II Materialreading again Level I and Level II Material

1313

Types of EntitiesTypes of EntitiesType of OrganizationType of Organization ExampleExample

Sole ProprietarySole Proprietary Siva & CoSiva & Co

Partnership FirmPartnership Firm Ganesan BrosGanesan Bros

Private CompanyPrivate Company Oracle India Pvt Ltd (A Private Company in which Oracle India Pvt Ltd (A Private Company in which shares are not traded in Stock Exchange and shares are not traded in Stock Exchange and

members cannot exceed 50)members cannot exceed 50)

Public CompanyPublic Company Hindustan Unilever Ltd (A Public Company in Hindustan Unilever Ltd (A Public Company in which Shares are traded in Stock Exchange)which Shares are traded in Stock Exchange)

Closely Held CompanyClosely Held Company Cadbury India Ltd (A Public Company in which Cadbury India Ltd (A Public Company in which shares are not traded but shares are held by more shares are not traded but shares are held by more

than 50 persons)than 50 persons)

TrustTrust Hutchinson Private TrustHutchinson Private Trust

SocietySociety Sembur Co-op SocietySembur Co-op Society

Association of PersonsAssociation of Persons ICAI, ICWAI, ICSI, Rotary ClubICAI, ICWAI, ICSI, Rotary Club

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

Any other Legal Entity (HUF) Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the A Hindu Undivided Family Jointly holding the Investment and Properties for the benefit of Investment and Properties for the benefit of

Family members.Family members.

1414

Accounting ConceptsAccounting Concepts Business Entity ConceptBusiness Entity Concept

Ex 1:Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole You are running your own Textile Showroom as a Dealer in Cloth as a Sole Proprietor/Individual Owner of the Business. The entire capital amount for the Proprietor/Individual Owner of the Business. The entire capital amount for the Business is provided by you. In this case also for the purpose of accounting you Business is provided by you. In this case also for the purpose of accounting you need to maintain Two set of books.need to maintain Two set of books.

• One set of books for the purpose of Textile Business in which, Business One set of books for the purpose of Textile Business in which, Business owes you equivalent to the Capital Provided (Capital + Profit earned) or owes you equivalent to the Capital Provided (Capital + Profit earned) or (Capital – Losses)(Capital – Losses)

• In your own Books the amount of Capital invested will be shown as an In your own Books the amount of Capital invested will be shown as an Investment in Business as an Asset. This need not be maintained as a Normal Investment in Business as an Asset. This need not be maintained as a Normal Set of Books but required to know the Cash Inflow and Cash Outflow from Set of Books but required to know the Cash Inflow and Cash Outflow from Income Tax Perspective.Income Tax Perspective.

Ex 2:Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with You are working for Oracle Corporation and Oracle has a Bank Account with Bank of America and You have Bank Account with Citi Bank and the salary at end Bank of America and You have Bank Account with Citi Bank and the salary at end of every month is transferred from Bank of America to Citi Bank. How many of every month is transferred from Bank of America to Citi Bank. How many accounting Entities involved in this case?accounting Entities involved in this case?

• If your answer is 4, then you are right (You, Oracle Corp, Bank of America, If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi Bank)Citi Bank)

Ex 3:Ex 3: You run your own Business in Software Consulting and your Friend has You run your own Business in Software Consulting and your Friend has agreed to provide a Loan of 50000 USD which he goes and deposit directly into agreed to provide a Loan of 50000 USD which he goes and deposit directly into your Bank account - How many accounting Entities involved in this case?your Bank account - How many accounting Entities involved in this case?

• If you say 3, You are right, it is only Three. (You, Your Friend and Bank) If you say 3, You are right, it is only Three. (You, Your Friend and Bank)

1515

Accounting ConceptsAccounting Concepts Money Measurement ConceptMoney Measurement Concept

Record should be made only of that information which can be expressed in Record should be made only of that information which can be expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)Monetary Terms (i.e.) Currency value (USD,GBP,INR)

Ex 1.Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be Sole Proprietor had 40 Tables & Chairs. This cannot be recorded unless a Value of Furniture is known in monetary recorded unless a Value of Furniture is known in monetary valuevalue

Ex 2.Ex 2. Very Famous Indian Example – Rama Killed Ravana. Very Famous Indian Example – Rama Killed Ravana. Can this Can this be Accounted? – NObe Accounted? – NO

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

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

Ex 4Ex 4. My Father in Law gave his Personal Property to start . My Father in Law gave his Personal Property to start my my Business. Can this be Accounted – Yes (If the Value of the Business. Can this be Accounted – Yes (If the Value of the Property is Property is provided) provided)

1616

Accounting ConceptsAccounting Concepts Money Measurement ConceptMoney Measurement Concept

A Normal Doubt comes to your mind in the first and fourth A Normal Doubt comes to your mind in the first and fourth example in previous slide how to get the value. We should not be example in previous slide how to get the value. We should not be taking the Purchase value, but we should take the Market value on taking the Purchase value, but we should take the Market value on the date of transferring the assets to Business. This is an the date of transferring the assets to Business. This is an exception to cost concept only in case of transfer to another exception to cost concept only in case of transfer to another businessbusiness

Ex 5: Siva started his software consulting Business with his own Ex 5: Siva started his software consulting Business with his own Property (Cost Price 1 Million USD and Market Value 1.5 Million Property (Cost Price 1 Million USD and Market Value 1.5 Million USD) and Furniture's Cost price 50000 worth Market Value 30000 USD) and Furniture's Cost price 50000 worth Market Value 30000 USDUSD

- In this case, You can record Siva Capital (1530000) and - In this case, You can record Siva Capital (1530000) and Building 1500000 and Furniture 30000 as Assets Building 1500000 and Furniture 30000 as Assets

LiabilitiesLiabilities AssetsAssets

Siva Capital 1530000Siva Capital 1530000 Building 1500000Building 1500000

Furniture 30000Furniture 30000

Total 1530000Total 1530000 Total 1530000Total 1530000

1717

AccountingAccounting ConceptsConcepts Dual Aspect ConceptDual Aspect Concept The Value of the Assets owned by the concern is equal to the claims on The Value of the Assets owned by the concern is equal to the claims on

the Assetsthe Assets ASSETS = LIABILITIES + OWNER’S EQUITYASSETS = LIABILITIES + OWNER’S EQUITY OWNER’S EQUITY = ASSETS – LIABILITIESOWNER’S EQUITY = ASSETS – LIABILITIES

LIABILITIES = ASSETS – OWNER’S EQUITYLIABILITIES = ASSETS – OWNER’S EQUITY

Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total Asset = 1000000Asset = 1000000

AssetAsset Owner’s Equity + LiabilitiesOwner’s Equity + Liabilities

LiabilitiesLiabilities Assets – Owner’s EquityAssets – Owner’s Equity

Owner’s EquityOwner’s Equity Assets - LiabilitiesAssets - Liabilities

1818

Accounting ConceptsAccounting Concepts Cost ConceptCost Concept Assets are always shown at their Cost and not at Assets are always shown at their Cost and not at

their current Market Valuetheir current Market Value Ex 1.Ex 1. A Land Purchased for Rs.5 Lacs will be A Land Purchased for Rs.5 Lacs will be

recorded only at Rs.5 Lacs even though Market recorded only at Rs.5 Lacs even though Market value may be lower say Rs.4 Lacs or Higher Rs.6 value may be lower say Rs.4 Lacs or Higher Rs.6 Lacs than the Cost PriceLacs than the Cost Price

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

1919

Accounting ConceptsAccounting Concepts Accounting PeriodAccounting Period Accounting measures activity for a specified interval of time, usually a Accounting measures activity for a specified interval of time, usually a

yearyear (e.g) Calendar Year (Jan’07-Dec’07) (e.g) Calendar Year (Jan’07-Dec’07)

Fiscal Year (Apr’07-Mar’08)Fiscal Year (Apr’07-Mar’08)Choosing the Accounting period is the entities choice, but there are Choosing the Accounting period is the entities choice, but there are legal rules like Companies Act and Income Tax Act which prescribes legal rules like Companies Act and Income Tax Act which prescribes the period in which the entity has to report to them.the period in which the entity has to report to them.

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

A Company in India can have for Company Law Purpose (Jan-Dec) Year A Company in India can have for Company Law Purpose (Jan-Dec) Year and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting (Jul-Jun) Year(Jul-Jun) Year

Note:Note: The Entities cannot change their accounting period without The Entities cannot change their accounting period without getting proper approval only in case of Companies Act and not possible getting proper approval only in case of Companies Act and not possible with Income Tax Authorities.with Income Tax Authorities.

2020

Accounting ConceptsAccounting Concepts ConservatismConservatism Anticipate no Profits but provide for all possible losses.Anticipate no Profits but provide for all possible losses.

Accountants are by nature Conservative and also to protect the interest of Accountants are by nature Conservative and also to protect the interest of the Shareholders and Creditors it is required to provide for all losses.the Shareholders and Creditors it is required to provide for all losses.

Ex 1Ex 1. A pharmaceutical Company going to Loose the case filed for Patent . A pharmaceutical Company going to Loose the case filed for Patent Right filed for a medicineRight filed for a medicineEx 2Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract..Company is likely to Win a Major Legal Dispute or a Sales Contract.Note:Note: This rule should not be misinterpreted to provide anticipated reduction This rule should not be misinterpreted to provide anticipated reduction in market price of a Product and Providing Losses in market price of a Product and Providing Losses Ex 3Ex 3: You are a Government Company and there is a possibility that : You are a Government Company and there is a possibility that Government will withdraw the subsidy for Fertilizers in the forthcoming Government will withdraw the subsidy for Fertilizers in the forthcoming budget, You cannot provide loss of subsidy as a loss now itself.budget, You cannot provide loss of subsidy as a loss now itself.Ex 4Ex 4: The Government is likely to increase the Price of petrol which is one of : The Government is likely to increase the Price of petrol which is one of the essential input for your business, then you cannot provide for losses.the essential input for your business, then you cannot provide for losses.Ex 5:Ex 5:There is a Fire in your in your Factory and Goods were lost and the There is a Fire in your in your Factory and Goods were lost and the Goods are insured, then the claim you submitted can be booked to the Goods are insured, then the claim you submitted can be booked to the satisfaction of Insurance Company and Auditors.satisfaction of Insurance Company and Auditors.

2121

Accounting ConceptsAccounting ConceptsRealization ConceptRealization Concept

The Sales is considered to have taken place only when either the cash The Sales is considered to have taken place only when either the cash

is received or some third party becomes legally liable to pay the is received or some third party becomes legally liable to pay the amount. Revenues are recognized when they are earned or realized. amount. Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or servicesclaim to cash (receivable) in exchange for goods or services

Ex 1Ex 1: A Sales invoice for Rs.1 Million: A Sales invoice for Rs.1 Million

Credit Note for Rs.15000 receivedCredit Note for Rs.15000 received

Ex 2Ex 2: For instance, if a company is awarded a contract to build an : For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in office building the revenue from that project would not be recorded in one lump sum but rather it would be divided over time according to the one lump sum but rather it would be divided over time according to the work that is actually being done. work that is actually being done.

2222

Accounting ConceptsAccounting Concepts Matching ConceptMatching Concept When an Event affects both the revenues and expenses, the effect on When an Event affects both the revenues and expenses, the effect on

each should be recognized in the same accounting periodeach should be recognized in the same accounting period

Ex 1:Ex 1: Generally Employees Salaries are paid for the previous month Generally Employees Salaries are paid for the previous month at the beginning of the next month. But they have rendered their at the beginning of the next month. But they have rendered their services to produce goods and sold and Sales revenue is recognized services to produce goods and sold and Sales revenue is recognized in previous month. So to match the cost with the revenue earned, we in previous month. So to match the cost with the revenue earned, we need to make provision for Salaries in previous month itself. (i.e.) need to make provision for Salaries in previous month itself. (i.e.) March Salary paid in April, but a Salary Payable provision will be March Salary paid in April, but a Salary Payable provision will be made in March itself made in March itself

EX 2: EX 2: Insurance Premium paid for Jan- Dec whereas your accounting Insurance Premium paid for Jan- Dec whereas your accounting period closes on March. In this case only three months premium need period closes on March. In this case only three months premium need to be treated as Expense and balance 9 months treated as advance to be treated as Expense and balance 9 months treated as advance premium paid as an assetpremium paid as an asset

2323

Accounting ConceptsAccounting Concepts Materiality conceptMateriality concept

Insignificant events would not be recorded, if the Insignificant events would not be recorded, if the benefit of recording them does not signify the benefit of recording them does not signify the costcost

Ex:Ex: A calculator worth Rs.500 not recorded asset A calculator worth Rs.500 not recorded asset rather than charged off as an Expense even rather than charged off as an Expense even

though though the benefit is enduring in nature.the benefit is enduring in nature.

This concept need to read in conjunction with This concept need to read in conjunction with accounting events which signifies the transaction accounting events which signifies the transaction into Capital, Revenue and deferred revenue into Capital, Revenue and deferred revenue expenditure.expenditure.

2424

Accounting ConceptsAccounting Concepts Objectivity ConceptObjectivity Concept

An Evidence of the happening of the Transaction should support An Evidence of the happening of the Transaction should support every Transaction in the form of paper. External Evidence is every Transaction in the form of paper. External Evidence is considered to be more authenticated proof than Internal Evidence. considered to be more authenticated proof than Internal Evidence. This rule is more important from Audit perspective as Auditors This rule is more important from Audit perspective as Auditors always consider and bound to get more external evidences than always consider and bound to get more external evidences than internal Evidences.internal Evidences.

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

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

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

2525

Accounting ConventionsAccounting Conventions Going ConcernGoing Concern

Accounting Records , Events and Transactions on the Accounting Records , Events and Transactions on the

assumption that the entity will continue to operate for an assumption that the entity will continue to operate for an indefinitely Long period of timeindefinitely Long period of time

Ex.Ex. An Entity will not be started with an intention to close An Entity will not be started with an intention to close within the specified time period. Business is always not within the specified time period. Business is always not started with an intention to close and it is expected to started with an intention to close and it is expected to continue forever. continue forever.

2626

Accounting ConventionsAccounting Conventions

ConsistencyConsistency The Accounting Policies and methods followed by the The Accounting Policies and methods followed by the

company should be the same every year company should be the same every year Ex 1Ex 1. Period should not be changed frequently from Jan-. Period should not be changed frequently from Jan-Dec to Apr-MarDec to Apr-MarEx 2Ex 2. Inventory Valuation change from FIFO to LIFO or . Inventory Valuation change from FIFO to LIFO or Weighted Average not permitted frequentlyWeighted Average not permitted frequentlyEx 3Ex 3. Changing Depreciation Policy from Straight Line to . Changing Depreciation Policy from Straight Line to Reducing Balance Method frequentlyReducing Balance Method frequentlyNote: Note: If any Company decides to change the policy, then If any Company decides to change the policy, then that Company has to report on the effect of Profit/Loss that Company has to report on the effect of Profit/Loss due to the change for past 5 Years.due to the change for past 5 Years.

2727

Accounting ConventionsAccounting Conventions AccrualAccrual In General it is assumed that Accounts are always In General it is assumed that Accounts are always

prepared based on Accrual basis. However there are prepared based on Accrual basis. However there are entities which follow Cash Basis of Accounting Alsoentities which follow Cash Basis of Accounting Also

Ex:Ex: Salary Payable to employees (March salary paid in Salary Payable to employees (March salary paid in April), Interest Receivable on Investments April), Interest Receivable on Investments (NSC interest), (NSC interest), Dividend Receivable on shares, Tax Payable to Dividend Receivable on shares, Tax Payable to Government (March sales Tax and Annual Income Tax)Government (March sales Tax and Annual Income Tax)

The Company Law / Income Tax Act Prescribes all The Company Law / Income Tax Act Prescribes all Companies to follow Accrual Basis of Accounting except Companies to follow Accrual Basis of Accounting except for Professional Firms and Government Organizations for Professional Firms and Government Organizations which are allowed to follow Cash Basis of Accounting. which are allowed to follow Cash Basis of Accounting.

2828

Classification of Accounting EventClassification of Accounting Event Capital Item:Capital Item: Any expenditure that creates an asset, for Any expenditure that creates an asset, for

exampleexample:: Purchase of plant or machineryPurchase of plant or machinery Improvements to assets that increase their Improvements to assets that increase their

usefulness or extend their effective useful life of the usefulness or extend their effective useful life of the asset asset

Expenditure incurred in transporting an asset to its Expenditure incurred in transporting an asset to its site and preparing it for use. site and preparing it for use.

2929

Classification of Accounting EventClassification of Accounting Event Revenue ItemRevenue Item: An Income or Expenditure and the : An Income or Expenditure and the

benefit of which will be exhausted within a year (i.e.) The benefit of which will be exhausted within a year (i.e.) The Calendar Year or the Financial Year whichever is set up Calendar Year or the Financial Year whichever is set up for the Set of Booksfor the Set of Books Ex:Ex: Salary and wages, Printing and Stationery, Sales Salary and wages, Printing and Stationery, Sales

Revenue, Interest Income, Salary Payable, Bonus Revenue, Interest Income, Salary Payable, Bonus Payable, Tax Payable etc.,Payable, Tax Payable etc.,

In Simple terms this is an event which generates In Simple terms this is an event which generates revenue and the related cost to earn the revenue are revenue and the related cost to earn the revenue are accounted as expense.accounted as expense.

3030

Classification of Accounting EventClassification of Accounting Event Deferred Revenue ExpenditureDeferred Revenue Expenditure: It is neither a Capital : It is neither a Capital

nor Revenue and the benefit of which will be realized for nor Revenue and the benefit of which will be realized for more than a year (Exceeding beyond the Calendar year more than a year (Exceeding beyond the Calendar year for the set of books) and does not result in creation of for the set of books) and does not result in creation of an asset.an asset. Ex 1Ex 1: Advertisement Expenditure the benefit of which : Advertisement Expenditure the benefit of which

is likely to be obtained over a period more than one is likely to be obtained over a period more than one year (E.g.) PepsiCo Pays USD 2 Million to Sachin year (E.g.) PepsiCo Pays USD 2 Million to Sachin Tendulkar for an Advertisement Contract for two Tendulkar for an Advertisement Contract for two Years and benefit of which is expected to be for four Years and benefit of which is expected to be for four years years

Ex 2Ex 2: Royalty paid to the author of the book for five : Royalty paid to the author of the book for five yearsyears

3131

Rules of AccountingRules of Accounting

Accounts

Personal Impersonal

Real Nominal

Debit the ReceiverCredit the Giver

Debit what comes inCredit what goes out

Debit Expenses and LossesCredit Revenue and Income

Ex: Sole Prop, Company

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

3232

Application of Accounting RuleApplication of Accounting Rule Check whether is there a Money Transaction Involved?Check whether is there a Money Transaction Involved? Is that transaction affects your set of books?Is that transaction affects your set of books? Check whether does the transaction falls under which accounting Check whether does the transaction falls under which accounting

period.period. Does the transaction involve a personal account (i.e.) Siva as a Does the transaction involve a personal account (i.e.) Siva as a

Person or a Company or any other entity as mentioned in Person or a Company or any other entity as mentioned in Business entity conceptBusiness entity concept

Is that person is receiver or giver in the transaction and Is that person is receiver or giver in the transaction and accordingly debit or credit the person account.accordingly debit or credit the person account.

Does the transaction involves any Cash inflow or Cash outflow? Does the transaction involves any Cash inflow or Cash outflow? (i.e.) Cash or Bank involved(i.e.) Cash or Bank involved

If there is no cash involvement then the choices are as followsIf there is no cash involvement then the choices are as follows Both can be real ( Debit and credit both real accounts)Both can be real ( Debit and credit both real accounts) One real and one nominal (Either Debit/Credit for Real or Credit/ Debit One real and one nominal (Either Debit/Credit for Real or Credit/ Debit

for Nominal accounts)for Nominal accounts)

3333

Accounting Rule of ThumbAccounting Rule of Thumb

Nature of TransactionNature of Transaction IncreaseIncrease DecreaseDecrease

AssetAsset DebitDebit CreditCredit

LiabilityLiability CreditCredit DebitDebit

RevenueRevenue CreditCredit DebitDebit

ExpenseExpense DebitDebit CreditCredit

ProfitProfit CreditCredit DebitDebit

LossesLosses DebitDebit CreditCredit

3434

Combination of RulesCombination of RulesDr Personal A/cCr Real A/cEx:Drawings or Advance to Employee, Payment to Supplier

Dr Real A/cCr Personal A/cEx:Capital invested, Payment Received from Customer

Dr Real A/cCr Nominal A/cEx: Interest Recd by Cash, Cash Sales

Dr Nominal A/cCr Real A/cEx: Rent Paid by Cash

Dr Personal A/cCr Nominal A/cEx: Interest Accrued on Investment, Dividend accrued on Investment

Dr Nominal A/cCr Personal A/cEx: Hire Purchase Charges accrued, Interest Payable, Salary Payable

Dr Real A/cCr Real A/cEx:Purchase of Inventory by Cash

Dr Real A/cCr Real A/cEx: Cash withdrawal or Deposit

3535

Combination of Accounting RulesCombination of Accounting Rules

CombinationCombination PersonalPersonal RealReal NominalNominal

PersonalPersonal XX

RealReal

NominalNominal XX

Debit

Credit

3636

Combination of Accounting RulesCombination of Accounting Rules Both Both Debit and CreditDebit and Credit cannot be Personal Accountscannot be Personal Accounts

EX 1: Siva paid Cash to Ajay. The Entry Cannot be EX 1: Siva paid Cash to Ajay. The Entry Cannot be • Ajay A/c DrAjay A/c Dr• Siva A/c CrSiva A/c Cr

The Correct entries are as follows. In Ajay set of BooksThe Correct entries are as follows. In Ajay set of Books

Cash A/c DrCash A/c Dr 10001000

Siva A/c CrSiva A/c Cr 10001000

Ajay A/c DrAjay A/c Dr 10001000

Cash A/c CrCash A/c Cr 10001000

In Siva set of Books

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

3737

Recording of Accounting TransactionsRecording of Accounting Transactions Recording of an Accounting event is known as Journal Recording of an Accounting event is known as Journal

entryentry Recording is made in Primary and Secondary Books in Recording is made in Primary and Secondary Books in

Manual Accounting systemManual Accounting system Primary BooksPrimary Books

General LedgerGeneral Ledger Cash BookCash BookSecondary BooksSecondary Books Purchase RegisterPurchase Register Sales RegisterSales Register Fixed Assets RegisterFixed Assets Register Returns (Purchase return/Sales Return)Returns (Purchase return/Sales Return) Journal RegisterJournal Register

In Oracle ERP System GL is called Main Ledger and the In Oracle ERP System GL is called Main Ledger and the Transactions emanating from Modules are referred to as Transactions emanating from Modules are referred to as Sub LedgerSub Ledger

3838

Recording of Accounting TransactionsRecording of Accounting Transactions First the transactions are entered as JournalFirst the transactions are entered as Journal Then Second step is they are posted to individual account as ‘T’ Then Second step is they are posted to individual account as ‘T’

Accounts – In Oracle or any other ERP system this happens Accounts – In Oracle or any other ERP system this happens immediately when a transaction is createdimmediately when a transaction is created

Prior to ERP system except for Non cash charges, Journals are Prior to ERP system except for Non cash charges, Journals are directly posted in Primary and secondary ledger with supporting directly posted in Primary and secondary ledger with supporting Document reference Number (like Invoice Number), date, amount Document reference Number (like Invoice Number), date, amount and a cross reference ledger folio number (Page Number) of and a cross reference ledger folio number (Page Number) of respective Debit and Credit Entries in Ledger.respective Debit and Credit Entries in Ledger.

Journals are entered only for year end Provision Entries.Journals are entered only for year end Provision Entries. Then the balance from each T account is taken and which becomes a Then the balance from each T account is taken and which becomes a

Trial Balance with Sum of Debits and Sum of Credit which should be Trial Balance with Sum of Debits and Sum of Credit which should be equal.equal.

Trial Balance forms the basis for preparation of Financial Statements Trial Balance forms the basis for preparation of Financial Statements and in ERP systems including Oracle Applications Debit is shown as and in ERP systems including Oracle Applications Debit is shown as Positive and Credit is shown as NegativePositive and Credit is shown as Negative

In ERP systems the chance of Trial Balance not matching or not In ERP systems the chance of Trial Balance not matching or not tallying issue is very minimal. In case of manual Accounting this will tallying issue is very minimal. In case of manual Accounting this will happen most of the time and unless it is corrected and balanced, the happen most of the time and unless it is corrected and balanced, the accountant should not proceed to prepare Financial Statementsaccountant should not proceed to prepare Financial Statements

3939

Preparation of Financial StatementsPreparation of Financial Statements Preparation of Trial BalancePreparation of Trial Balance

Balances Extracted from General LedgerBalances Extracted from General Ledger Sum of debit and credit balances = 0 Sum of debit and credit balances = 0

Preparation of Trading, Profit & Loss Account or Income & Preparation of Trading, Profit & Loss Account or Income & Expenditure Account and Balance sheetExpenditure Account and Balance sheet Trial Balance is the base for preparing Financial Trial Balance is the base for preparing Financial

StatementsStatements Adjustment entries are made in adjustment period and Adjustment entries are made in adjustment period and

passed as Journal Vouchers before making the financial passed as Journal Vouchers before making the financial statementsstatements

Trading and Profit and Loss Account is Always for a Trading and Profit and Loss Account is Always for a period say for an Year (Jan - Dec or Apr - Mar), Quarterly period say for an Year (Jan - Dec or Apr - Mar), Quarterly for 3 months or Half yearly for 6 monthsfor 3 months or Half yearly for 6 months

Balance Sheet is always as on Date (As on 31-12-2007 or Balance Sheet is always as on Date (As on 31-12-2007 or 31-03-2008)31-03-2008)

4040

A Simple Case StudyA Simple Case Study

Accounting Concepts

4141

Case StudyCase Study Siva started Business in dealer in Computer Spare parts and Siva started Business in dealer in Computer Spare parts and

Computer Stationery on 01-APR-2007 and following events occurred Computer Stationery on 01-APR-2007 and following events occurred in the month of April.in the month of April.

Siva invested USD 50000 Cash and USD 50000 worth of furnitureSiva invested USD 50000 Cash and USD 50000 worth of furniture Siva purchased USD 75000 worth of goods on creditSiva purchased USD 75000 worth of goods on credit Siva friend Ajay promised him to give a loan of USD 25000Siva friend Ajay promised him to give a loan of USD 25000 Siva sold USD 50000 worth of good for USD 100000Siva sold USD 50000 worth of good for USD 100000 Siva paid rent USD 2000 for two monthsSiva paid rent USD 2000 for two months Siva paid Salary to Staff USD 5000Siva paid Salary to Staff USD 5000 Siva incurred USD 5000 on interior decoration which will last for two Siva incurred USD 5000 on interior decoration which will last for two

years.years. Siva sold USD 10000 worth of goods on credit for USD 18000Siva sold USD 10000 worth of goods on credit for USD 18000 Siva has a Bank account with Citi Bank which credited USD 5000 Siva has a Bank account with Citi Bank which credited USD 5000

wrongly of John account wrongly of John account Purchased Vehicle for USD 25000 paid through BankPurchased Vehicle for USD 25000 paid through Bank Cash Deposited by Siva into Bank 50000 USDCash Deposited by Siva into Bank 50000 USD

4242

ARE YOU READY FOR THE ARE YOU READY FOR THE GAMEGAME

Accounting is very simpleAccounting is very simple

4343

Accounting TerminologiesAccounting Terminologies Before creating Accounting Transactions let us recall and learn few Before creating Accounting Transactions let us recall and learn few

accounting terminologiesaccounting terminologies ASSETS:ASSETS: Any property or Investment which can be convertible into cash Any property or Investment which can be convertible into cash LIABILITIES:LIABILITIES: Amount Payable to providers of goods and Services Amount Payable to providers of goods and Services

(Creditors) and Providers of Capital (Owners)(Creditors) and Providers of Capital (Owners) REVENUE:REVENUE: Amount earned out of the Sale Proceeds and the amount Amount earned out of the Sale Proceeds and the amount

earned on Investmentsearned on Investments EXPENSES:EXPENSES: Amount incurred or expended to earn the revenue Amount incurred or expended to earn the revenue PROFIT:PROFIT: TOTAL REVENUE – TOTAL EXPENSES TOTAL REVENUE – TOTAL EXPENSES LOSS:LOSS: If the Total Expenses is more than Total Revenue it is termed as If the Total Expenses is more than Total Revenue it is termed as

LossLoss FIXED ASSETS:FIXED ASSETS: Amount Invested in Long Term Assets which is not Amount Invested in Long Term Assets which is not

intended to be sold within a Year (Ex. Machinery, Land)intended to be sold within a Year (Ex. Machinery, Land) CURRENT ASSETS:CURRENT ASSETS: Amount invested in Short Term Assets which is Amount invested in Short Term Assets which is

intended and rotated to earn Revenue (Ex. Inventory)intended and rotated to earn Revenue (Ex. Inventory) NOTE:NOTE: The Fixed Asset and Current asset vary from Person to Person The Fixed Asset and Current asset vary from Person to Person Ex:Ex: For a Dealer in Refrigerator it is a Current asset which becomes Fixed For a Dealer in Refrigerator it is a Current asset which becomes Fixed

Asset for you when you buy.Asset for you when you buy. CREDITORS:CREDITORS: Person who provide Money or Goods on Credit to the Person who provide Money or Goods on Credit to the

Business (Supplier)Business (Supplier) DEBTORS:DEBTORS: Goods or Money Provided / sold on Credit by the Business Goods or Money Provided / sold on Credit by the Business

(Customers)(Customers)

4444

Accounting TerminologiesAccounting Terminologies You should also understand the same accounting You should also understand the same accounting

terminology is referred or used by different people in terminology is referred or used by different people in different contextdifferent context

Receivables also known as Trade Debtors, Debtors, Account Receivables also known as Trade Debtors, Debtors, Account Receivables, Sundry Debtors, Trade Receivables, Amount Receivables, Sundry Debtors, Trade Receivables, Amount ReceivablesReceivables

Liability is also known as Trade Creditors, Account Payable, Liability is also known as Trade Creditors, Account Payable, Sundry Creditors, Amount Payable, Trade Liabilities, CreditorsSundry Creditors, Amount Payable, Trade Liabilities, Creditors

Cost of Goods Sold: It varies with Company to Company the way Cost of Goods Sold: It varies with Company to Company the way they do set up and use it. The Cost of Goods Sold comprise of they do set up and use it. The Cost of Goods Sold comprise of Material Cost, Resource Cost (Labor and Machinery) and Material Cost, Resource Cost (Labor and Machinery) and Overheads. There are few companies which will have only Material Overheads. There are few companies which will have only Material Cost and will not add up Resource Cost and Overheads. You Cost and will not add up Resource Cost and Overheads. You Should talk to client and understand their requirementShould talk to client and understand their requirement

• Let’s See Each of this in a Formula Model Let’s See Each of this in a Formula Model

4545

Accounting Calculation and FormulaAccounting Calculation and Formula

Receivables (or) Debtors Receivables (or) Debtors ReconciliationReconciliation

Opening Receivables 100Opening Receivables 100

(+) Add Credit Sales 2500(+) Add Credit Sales 2500

(+) Debit Memo 150(+) Debit Memo 150

(+) Positive Adjustments 75(+) Positive Adjustments 75

(-) Less Cash Received 2000(-) Less Cash Received 2000

(-) Less Credit Memo (Sales Return) 125(-) Less Credit Memo (Sales Return) 125

(-) Negative Adjustments 50(-) Negative Adjustments 50

Closing Receivables 650Closing Receivables 650

Payables (or) Creditors Payables (or) Creditors ReconciliationReconciliation

Opening Payables 200Opening Payables 200

(+) Add Credit Purchases 2000(+) Add Credit Purchases 2000

(+) Debit Memo 150(+) Debit Memo 150

(+) Positive Adjustments 75(+) Positive Adjustments 75

(-) Less Cash Paid 1500(-) Less Cash Paid 1500

(-) Less Credit Memo (Purc. Return) 125(-) Less Credit Memo (Purc. Return) 125

(-) Negative Adjustments 50(-) Negative Adjustments 50

Closing Payables 750Closing Payables 750

4646

Accounting Calculations and FormulaAccounting Calculations and Formula

Purchased Inventory Purchased Inventory ReconciliationReconciliation

Opening Purchased Inventory 100Opening Purchased Inventory 100

(+) Add Purchases 2500(+) Add Purchases 2500

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

(-) Less Purchase Return 125(-) Less Purchase Return 125

Closing Purchased Inventory 475 Closing Purchased Inventory 475

Finished Goods (FG) Finished Goods (FG) ReconciliationReconciliation

Opening stock of FG 200Opening stock of FG 200

(+) Add Production 2000(+) Add Production 2000

(+) Sales Return 100(+) Sales Return 100

(-) Less Sales 1500(-) Less Sales 1500

Closing FG Inventory 800Closing FG Inventory 800

4747

Accounting Calculations and FormulaAccounting Calculations and Formula

Cash ReconciliationCash Reconciliation

Opening Cash Balance 100Opening Cash Balance 100

(+) Add Cash Receipts 2500(+) Add Cash Receipts 2500

(Cash Sales, Cash Recd from(Cash Sales, Cash Recd from

Receivables, Cash with drawl fromReceivables, Cash with drawl from

Bank)Bank)

(-) Less Cash Payments 2000(-) Less Cash Payments 2000

(Cash Purchases, Expenses paid (Cash Purchases, Expenses paid

By Cash, Cash Deposited into Bank) By Cash, Cash Deposited into Bank)

Closing Cash Balance 600 Closing Cash Balance 600

Bank Balance ReconciliationBank Balance Reconciliation

Opening Balance of Bank 200Opening Balance of Bank 200

(+) Add Bank Receipts 2000(+) Add Bank Receipts 2000

(Cash Deposits, Cheque Received(Cash Deposits, Cheque Received

From Debtors, Interest Credited)From Debtors, Interest Credited)

(-) Less Payments from Bank 1500(-) Less Payments from Bank 1500

(Paid to Creditors by Cheque, (Paid to Creditors by Cheque,

Expenses paid by cheque, CashExpenses paid by cheque, Cash

With drawl from bank)With drawl from bank)

Closing Bank Balance 700Closing Bank Balance 700

4848

Accounting Entries for the Case StudyAccounting Entries for the Case StudySl Sl NoNo

DescriptionDescription Nature of AccountNature of Account Dr (in Dr (in USD)USD)

Cr (in Cr (in USD)USD)

11 Cash A/c DrCash A/c Dr

Furniture A/c DrFurniture A/c Dr

(Cash and Furniture Real (Cash and Furniture Real Tangible Asset. Hence Tangible Asset. Hence apply the Real Rule – Debit apply the Real Rule – Debit What comes in)What comes in)

To Siva Capital A/cTo Siva Capital A/c

(Siva is a Person running (Siva is a Person running the business as a the business as a Proprietor in this case. Proprietor in this case. Hence apply the Rule for Hence apply the Rule for Personal – Credit the giver) Personal – Credit the giver)

RealReal

RealReal

PersonalPersonal

(Also using the Business Entity (Also using the Business Entity Concept Siva being owner is Concept Siva being owner is also treated as a Creditor for also treated as a Creditor for the purpose of Business. If the the purpose of Business. If the Business is wind up Business Business is wind up Business has to pay back Siva)has to pay back Siva)

5000050000

5000050000

100000100000

22 Inventory A/c DrInventory A/c Dr

(Real Tangible Asset)(Real Tangible Asset)

To Creditors A/cTo Creditors A/c

(Person be an Individual or (Person be an Individual or Company gives the goods Company gives the goods on Credit) on Credit)

RealReal

PersonalPersonal

7500075000

7500075000

4949




33 No EntryNo Entry

(Mere Promise to give does (Mere Promise to give does not tantamount to Monetary not tantamount to Monetary Transaction)Transaction)

No EntryNo Entry

(Money Measurement Concept (Money Measurement Concept – No Monetary transaction – No Monetary transaction involved )involved )

44 Two Entries involved (One Two Entries involved (One for sale of goods and one for sale of goods and one for reduction in inventory)for reduction in inventory)

Cash / Bank A/c DrCash / Bank A/c Dr

(Real – Debit what comes (Real – Debit what comes in)in)

To Revenue (Sales) A/cTo Revenue (Sales) A/c

(Nominal Rule - Credit all (Nominal Rule - Credit all Income and Revenue)Income and Revenue)

Cost of Goods Sold A/c DrCost of Goods Sold A/c Dr

(Nominal – Debit Expenses)(Nominal – Debit Expenses)

To Inventory A/cTo Inventory A/c

(Reduction in Inventory)(Reduction in Inventory)

Real A/cReal A/c

Nominal A/cNominal A/c


Real A/cReal A/c

100000100000

5000050000

100000100000

5000050000

5050




55 Rent A/c DrRent A/c Dr

(Debit Expense – Nominal)(Debit Expense – Nominal)

Rent Advance A/c DrRent Advance A/c Dr

(This is like Cash (This is like Cash Advanced to Landlord. Advanced to Landlord. Hence it should be treated Hence it should be treated as Personal - as Personal -

Debit the Receiver)Debit the Receiver)

To Cash A/cTo Cash A/c

(Real – Credit what goes (Real – Credit what goes out)out)


Personal A/cPersonal A/c

RealReal

10001000

10001000

20002000

66 Salary A/c DrSalary A/c Dr

(Nominal – Debit Expense)(Nominal – Debit Expense)




Real A/cReal A/c

50005000

50005000

5151




77 Advertisement Exp A/c DrAdvertisement Exp A/c Dr

Advt Exp Adv A/c DrAdvt Exp Adv A/c Dr

(This is like a Deferred (This is like a Deferred Revenue Expense needs to Revenue Expense needs to be charged in two years.be charged in two years.

50% need to be Current 50% need to be Current Year Expense and Balance Year Expense and Balance 50% is carried Forward and 50% is carried Forward and treated as Expense in next treated as Expense in next Year)Year)



Nominal Nominal

RealReal

RealReal

25002500

25002500

50005000

88 Receivables A/c DrReceivables A/c Dr

To Revenue A/cTo Revenue A/c

Cost of Goods Sold A/c DrCost of Goods Sold A/c Dr

To Inventory A/cTo Inventory A/c

RealReal

NominalNominal

NominalNominal

RealReal

1800018000

1000010000

1800018000

1000010000

5252




99 No EntryNo Entry

(This is a Mistake done by (This is a Mistake done by Bank. Bank has to make Bank. Bank has to make correction and in Siva’s correction and in Siva’s Book there is no Book there is no accounting entry required)accounting entry required)

No EntryNo Entry

1010 Vehicles A/c DrVehicles A/c Dr

(Real Tangible Asset(Real Tangible Asset

Debit what comes in)Debit what comes in)

To Bank A/cTo Bank A/c

(Real asset – Credit what (Real asset – Credit what goes out)goes out)

RealReal

RealReal

2500025000

2500025000

1111 Bank A/c DrBank A/c Dr

(Real asset- Debit what (Real asset- Debit what comes incomes in


(Real Asset – Credit what (Real Asset – Credit what goes out)goes out)

RealReal

RealReal

5000050000

5000050000

5353

T AccountsT Accounts

Dr USDDr USD Cr USDCr USD

To Bal 100000To Bal 100000 By Cash 50000By Cash 50000

By Furniture 50000By Furniture 50000



To Siva Cap 50000To Siva Cap 50000 By Bal 50000By Bal 50000


Siva Capital Account Furniture Account


To Siva Cap 50000To Siva Cap 50000

To Sales 100000To Sales 100000

By Rent 1000By Rent 1000

By Rent Adv 1000By Rent Adv 1000

By Salary 5000By Salary 5000

By Advt Adv 2500By Advt Adv 2500

By Advt exp 2500By Advt exp 2500

By Bank 50000By Bank 50000

By Balance 88000By Balance 88000



To Creditors 75000To Creditors 75000 By COGS 50000By COGS 50000

By COGS 10000By COGS 10000

By Bal 15000By Bal 15000


Cash Account Inventory Account

5454



To Bal 75000To Bal 75000 By Invent 75000By Invent 75000



To Cash 1000To Cash 1000 By Bal 1000By Bal 1000


Creditors Account Rent Account





To Bal 118000To Bal 118000 By Cash 100000By Cash 100000

By Rece 18000By Rece 18000


Rent Advance Account Revenue / Sales Account

Salary Account Advertisement Exp Account







5555






To sales 18000To sales 18000 By Bal 18000By Bal 18000


Advt Exp Advance Account Receivables Account


To Inventory 50000To Inventory 50000

To Inventory 10000To Inventory 10000




To Bank 25000To Bank 25000 By Bal 25000By Bal 25000


Cost of Goods Sold Account Vehicle Account

Bank Account


To Cash 50000To Cash 50000 By Vehicle 25000By Vehicle 25000



5656

Trial BalanceTrial Balance

Debit USDDebit USD Credit USDCredit USD

Furniture (A) 50000Furniture (A) 50000

Cash (A) 88000Cash (A) 88000

Bank (A) 25000Bank (A) 25000

COGS (E) 60000COGS (E) 60000

Salary (E) 5000Salary (E) 5000

Rent (E) 1000Rent (E) 1000

Rent Advance (A) 1000Rent Advance (A) 1000

Advertisement Exp (E) 2500Advertisement Exp (E) 2500

Advt Exp Advance (A) 2500Advt Exp Advance (A) 2500

Inventory (A) 15000Inventory (A) 15000

Vehicle (A) 25000Vehicle (A) 25000

Receivable (A) 18000Receivable (A) 18000

Siva Capital (L) 100000Siva Capital (L) 100000

Sales / Revenue (R) 118000Sales / Revenue (R) 118000

Creditors (L) 75000Creditors (L) 75000


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

5757

Profit and Loss Account For APR 2007Profit and Loss Account For APR 2007

Expenses USDExpenses USD Revenue USDRevenue USD

COGS (E) 60000COGS (E) 60000

Salary (E) 5000Salary (E) 5000

Rent (E) 1000Rent (E) 1000

Advertisement Exp (E) 2500Advertisement Exp (E) 2500

To Profit 49500To Profit 49500

Sales / Revenue (R) 118000Sales / Revenue (R) 118000


5858

Balance Sheet as on 30-APR-2007Balance Sheet as on 30-APR-2007

Liabilities USDLiabilities USD Assets USDAssets USD

Siva Capital 100000Siva Capital 100000

Add Profit 49500Add Profit 49500

Siva Capital 149500 Siva Capital 149500

Creditors 75000Creditors 75000

Furniture 50000Furniture 50000

Vehicle 25000Vehicle 25000

Cash 88000Cash 88000

Bank 25000Bank 25000

Receivables 18000Receivables 18000

Inventory 15000Inventory 15000

Rent Advance 1000Rent Advance 1000

Advt Exp Advance 2500Advt Exp Advance 2500


5959

Important Points to RememberImportant Points to Remember Accounting can be learnt only by Practice and not by readingAccounting can be learnt only by Practice and not by reading Try to learn by creating Journal entries with ExamplesTry to learn by creating Journal entries with Examples Cash Balance can never have negative balance at any point of timeCash Balance can never have negative balance at any point of time Land will never Depreciate and it will have only AppreciationLand will never Depreciate and it will have only Appreciation Bank can have negative balance if you have Overdraft facilityBank can have negative balance if you have Overdraft facility The Bank which maintains your account will have exactly opposite The Bank which maintains your account will have exactly opposite

entries of what is shown in your Bank Accountentries of what is shown in your Bank Account In the above, Example the bank account in your Books and in Bank In the above, Example the bank account in your Books and in Bank

Books will be as followsBooks will be as follows


To Cash 50000To Cash 50000 By Vehicle 25000By Vehicle 25000

By Balance By Balance 2500025000



To Vehicle 25000To Vehicle 25000

To Balance To Balance 2500025000

By Cash 50000By Cash 50000


Siva Books Bank Account

Bank Books Siva Account

6060

Case Study for PracticeCase Study for Practice Take your own Personal Account and try to create the followingTake your own Personal Account and try to create the following On First of July 2007 You had a Cash balance of USD2500 which is On First of July 2007 You had a Cash balance of USD2500 which is

your Capitalyour Capital On 3On 3rdrd July You have received Salary of USD 12000 July You have received Salary of USD 12000 On 5On 5thth Paid Rent of USD 1200 by cheque Paid Rent of USD 1200 by cheque On 7On 7thth You purchased provision for house for 800 USD You purchased provision for house for 800 USD On 10On 10thth You spent for outing through your credit card USD 500 You spent for outing through your credit card USD 500 On 15On 15thth You withdraw Cash USD 8000 You withdraw Cash USD 8000 On 20On 20thth You Invested in Fixed Deposit USD 5000 @5% Interest Per You Invested in Fixed Deposit USD 5000 @5% Interest Per

annumannum On 22On 22ndnd you have given a Loan of USD 2000 to friend James you have given a Loan of USD 2000 to friend James On 25On 25thth You spent for Car Repairs 500 USD You spent for Car Repairs 500 USD On 28On 28thth Your wife gave USD 200 to your Neighbor from her pocket Your wife gave USD 200 to your Neighbor from her pocket On 30On 30thth You Deposited Cash 1000 USD to your Bank Account You Deposited Cash 1000 USD to your Bank Account

6161

How to Approach to Learn How to Approach to Learn

The simple way to Learn Accounting is as followsThe simple way to Learn Accounting is as follows Do not go for advanced level books without understanding the Do not go for advanced level books without understanding the

basicsbasics Start with (+1) Accounting book in case of people in India and Start with (+1) Accounting book in case of people in India and

Pre-University book in case of other Countries. Practice the Pre-University book in case of other Countries. Practice the examples given in that book and exercisesexamples given in that book and exercises

This is more than sufficient for any non accounting candidate to This is more than sufficient for any non accounting candidate to work on Oracle Applicationswork on Oracle Applications

Never try to memorize the concepts and rulesNever try to memorize the concepts and rules Try to understand and apply the concepts and RulesTry to understand and apply the concepts and Rules There are areas like Depreciation, Provision and Amortization There are areas like Depreciation, Provision and Amortization

etc might not have been covered in this presentation. I do not etc might not have been covered in this presentation. I do not want you to go to advanced level without understanding the want you to go to advanced level without understanding the basics. If you understand the Concepts and Rules then You can basics. If you understand the Concepts and Rules then You can handle all of themhandle all of them

Read and Practice Level I and II at least Three timesRead and Practice Level I and II at least Three times

basic accounting slides

Documents

accounting conventionsclassify

accounting rulesrecord

accounting eventscapital

accounting islearn

accounting eventleads

conventions of accounting

accounting rulespersonal

accounting eventapply