ACCOUNTING MECHANISM
Learning objectives:
To understand the Accounting mechanism (Accounting Cycle)
To understand the Double Entry systemTo understand the meaning of account and
classification of accountsConceptual frame work of Financial AccountingTo know how to prepare the Final Accounts.
Double Entry System of Book Keeping
It recognizes that every transaction has a twofold effect.
The method of writing every transaction in to two accounts, of these two accounts, one A/c is given ‘Debit’ while other one is given ‘Credit’ with an equal amount so that the Accounting Equation is always in balance.
On any date
Total Debits = Total Credits
The steps in Recording Process
Transactions Documentation Journal
FinancialStatements
TrialBalance
Ledger
Conceptual frame work of Financial Accounting
Profit and Loss A/c Profit/loss tra ns fe rre d to B a la n ce S he e t
Balance Sheet(A sse ts a n d L iab ilit ie s)
O utp u t: Trial Balance
Ledger
Jounal
P rin c ip le : Double Entry System
S ub : Financial Accounting
ACCOUNTING MECHANISM
1. Recording Journalizing
2. Classifying Ledger preparation
3. Summarizing Balancing the ledger Preparation of Trial Balance Preparation of Profit and Loss A/c Preparation of Balance Sheet
4. Interpreting the results.
JOURNAL
The book containing chronological record of transactions.
Recording of entries in the journal is known as Journalizing.
Large Firms/Concerns maintain special journals also known as Subsidiary Books.
ACCOUNT - MEANING
An individual record of increases and decreases in an item that is likely to be of interest or importance.
It is “T” shaped
Debit is left side of “T” account Credit is right side of “T” account
Journalizing
Debits are always recorded first.Indent, then record the credit below the
debit.A short explanation is included on the
second line.Leave a space between journal entries.Debits must always equal credits.
Classification of Accounts
Classification of Accounts
In d ivid u a ls
P h ys ica l
F irm s ,C o m pa n ie s,
B a n ks
A rtif ic ica l
O /s E xpO /s sa la riesP re pa id E xp
R e p re se n ta tive
P e rso na l A /cs
A sse ts likeC a sh , lan d ,
B u ild in g , P la n t,P a te n ts , e tc ..
R e a l A /cs
E xp s o r L osse s,O r In co m es
o r P ro fits
N o m ina l A /cs
Im p erso n a l A /cs
A ccou n ts
Rules of Double Entry System
Personal A/c Real A/c Nominal A/c
Debit: The Receiver What comes in
All expensesand Losses
Credit: The giver What goes out
All incomesand gains
SUBSIDIARY BOOKS
1. Cash Book: Simple Two column Three column
2. Purchase Book3. Purchase returns Book4. Sales Book5. Sales returns book6. Bills Receivable book7. Bills Payable Book8. Journal Proper (other transactions)
LEDGER
It is set of all accounts.It contains a classified summary of all
transactions recorded in journal.The concerned account debited in
journal should also be debited in the ledger with a reference to the a/c which has been credited in ledger and vice versa.
Balancing of Ledger Accounts
The difference between the total debit and total credit sides of an account is called balancing.
The difference is entered in the amount column of the side showing less total .
An account is said to have a debit balance if its debit side is greater than credit .
TRIAL BALANCE
A statement of Debit and Credit totals or balances extracted from the various accounts in the Ledger.
Objectives:– To facilitate the preparation of Final Accounts.– To check the arithmetical accuracy of the
books.
Methods of preparing trial Balance
Balance Method• Prepared
with the balances of Ledger Accounts.
Total Method • The total of
the debit and credit side of every account is separately written in the debit and credit column of trial balance .
Total and Balance Method• Both the
balance and total method are presented in the trial balance
Elimination of Equal Total Method.• Accounts
whose debit totals and credit totals are equal are not incorporated in the trial balance
FINAL ACCOUNTS
Include preparation of:Trading and Profit and Loss A/c
– To know the operating performance of the business i.e.profitability.
Balance Sheet– To know the financial position of the firm on a
particular date.
Trading Account
Shows the results of buying and selling goods/services.
Ascertain Gross profit/Gross lossCalculates the cost of Goods SoldCalculates Gross profit ratio, ratio of direct
expenses to gross profit.Comparison of Actual with the desired
performance.
Items Appearing in trading Account
Debit Side
1)Purchases2)Purchase return3) Opening Stock
4)Wages5)Carriage inward
6)Custom duty7)Royalty
8) Gas, electricity etc9)Packing Material
Profit and Loss Account
Summarizes the financial results of a company during a particular period of time.
It ascertains the net profit or loss for a particular period .
It contains all the items of revenue , gains, losses and expenses pertaining to the accounting period .
Items of Profit and loss account
Debit Side
Balance Sheet
Balance sheet is an item wise list of assets ,liabilities and proprietorship of a business at a certain date.
To ascertain the financial position of a business. It gives protection against uncertaintyHelps ascertain proprietary ratio
Items of Balance Sheet
Assets Side
Items of Balance sheet
Non curre
nt Asset
s
Items of Balance sheet
Current
Assets
Inventories
Trade Receivab
lesCash and
Cash Equivale
nts
Other Current Assets
Short Term Loans and
Advances
Current Investme
nts
Items of Balance sheet
Owner’s Equity
Share Capital
Reserves and
SurplusMoney receive
d against share
warrants
Share applicat
ion money pendin
g Allotm
ent
Items of Balance sheetLong Term Provisions
Non Curren
t Liabilit
ies
Items of Balance sheetCurren
t Liabilit
ies Trade Payables
Short Term
Provisions
Other Current
Liabilities
Short Term
Borrowings
Adjustments
Adjusting journal entries are required to be passed for errors,ommissions not yet recorded in the books .The main adjustments are
Relating to expensesRelating to incomeRelating to provisionsOther adjustments.
Adjustments Adjustments Journal Entry Adjustment in
trading p/l a/cBalance Sheet
Closing Stock Closing stock To Trading a/c
Credit Side of Trading
Asset Side
Depreciation Depreciation To Asset
Dr of P&l a/c Deducted from concerned asset
Appreciation Asset To Appreciation
Cr of P&l/ac Added to concerned asset
Outstanding Expenses
Expenses To O/s Expenses
Added to concerned expense of debit side of p& l a/c
Liabilities side
Prepaid Expenses Prepaid Exp To Expense
Ded from concerned expense of debit side of p& l a/c
Asset Side
Adjustments
Adjustments Journal ENTRY Trading and P&l a/c
Balance Sheet
Accrued Income Accrued Income To Income
Added to concerned income of credit side of p& l a/c
Liabilities side
Unearned Income Income to Unearned
Deducted to concerned income of credit side of p& l a/c
Asset Side
Interest on capital Interest on capital To capital
Dr of p&l a/c Added to capital
Interest on Drawings
Drawing To interest on drawing
Cr of P/l ac Deducted from capital
Adjustments
Adjustments Journal ENTRY Trading and P&l a/c
Balance Sheet
Interest on investments
Investment To interest
Dr side of p & l a/c
Added to investment
Interest on loans(borrow)
Interest on loan To loan
Cr side of P&l a/c Added to loan on liabilities
Interest on loans(advance)
Loan To Interest
Dr side of p&l a/c Added to loan to asset side
Bad Debts Bad DebtTo Debtor
Cr side of p& l a/c Deducted from debtors
Provision for Bad debts
P/L A/C To Provision for bad debts
Dr side of p&l a/c Deducted from debtors
Adjustments
Adjustments Journal ENTRY Trading and P&l a/c Balance Sheet
Provision on discount on debtors
P&l a/c To prov. for discount on debtors
Dr. side of P/L a/c Deducted from debtors
Provision for discount on creditors
Prov. for discount on debtors To p&l a/c
Cr. Side of P/L A/C Deducted from creditors
Accidental loss of stock
Loss of stock To trading a/c orTo Purchases a/c
Ded from purchases or posted at the cr side of trading a/c and dr of p/l a/c
No effect
Loss of assets by fire(if not insured)
Loss by fire a/c To assets a/c
Dr to p/l a/c Ded from the asset
Adjustments
Adjustments Journal ENTRY Trading and P&l a/c
Balance Sheet
Accidental loss of assets if insured
Insurance co.a/c orLoss by fire a/c to assets a/c
Dr side of p/l a/c (loss by fire a/c)
Insurance co.a/c shown on asset side , loss by fire deducted from asset
O/S manager’s commission
p/l a/c To o/c manager’s commission
Dr. side of p/l a/c Liabilities side
Goods taken by proprietor for personal use
Drawings a/c To purchases a/c
Amt of goods deducted from purchases
Deducted from capital
Goods given as charity
Charity a/c To Purchases a/c
Deducted from purchases
Deducted from capital
Adjustments
Adjustments Journal ENTRY Trading and P&l a/c
Balance Sheet
Goods distributed as free samples
Advertising a/c Or Free samples a/c To purchases a/c
Dr .side of p/l a/c No effect.
Goods sent on approval
1) Sale price of goods
Sale a/c To debtors a/c2) Cost price of
goodsClosing stock To trading a/c
Deducted from sales on cr side of trading a/cAdded to closing stock on the cr . Side of trading a/c
Deducted from debtorsAdded to closing stock