Accounting- Class 1 &2

8/2/2019 Accounting- Class 1 &2

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MOD 1 PLAN

Course Code and Title: MBAC518 Accounting concepts and analysis

Module Number and Title: 1 GAAP and accounting standards Planned Hours: 06 hrs

Learning Objectives

At the end of this module student should be able to:

Explain the meaning of GAAP & Accounting concepts and importance (L2)

Compile various types of Journal entries (L5)

Formulate & Compare various ledger accounts (L4)


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LESSON SCHEDULEMOD 1

Class No. Portion covered per hour

1. Introduction

Accountancy, Accounting.

2. Meaning of Accountancy, book keeping.

3. Accounting concepts and conventions.

4. Double entry system of book keeping, introduction to journals.

5. Passing the various journal entries.6. Introduction to Ledger and passing journal entries to ledger.

Assignment 1:- On passing various journal entries.

Review Questions

1.Explain accounting concepts and conventions.2.Explain rules of debit and credit of three kinds of accounts under English system.3.Problem on passing the journal entries.


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ACCOUNTING


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ACCOUNTING

Accounting is the art of recording, classifying and

summarizing in a significant manner and in terms ofmoney, transactions and events which are, in part,at least of a financial character, and interpreting the

results thereof.


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BOOKKEEPING

Book keeping defined as an art as well as science of recording allthe financial transactions and dealings systematically in a set ofbooks. It involves clerical work of entering financial data injournalsand ledgers.

Journals are the books in which the transaction are recorded in achronological order every day.

Ledger is a book which contains the classified accounts relating tothe things , persons, incomes, and expenses of a business entity.


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ACCOUNTINGFUNCTIONS

1. Recording:

Recording is the basic function of Accounting. Eventsand transactions, which are of financial character, either fully orpartly, are recorded in an orderly manner in books of accounts.The transactions are recorded in a journal, as and when they

happen or occur.

2. Classifying:

All similar transactions are grouped and posted in one

book, which is called a Ledger. The objective of classificationis to find a summary of the entries of same nature at oneplace.

This book Ledger contains different nature of accounts. For

example, there may be separate heads of accounts such as

Salaries, Traveling Expenses, Repairs, Printing and Stationery etc.


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3. Summarizing:

When posting is completed in the ledger, totals are

made for debit and credit side in each head of account and finalbalance, let it be it debit or credit, is arrived.

The individual accounts find a place in a summarized manner,which is called Trial Balance.

Income statement (Trading and Profit and Loss account) and

Balance Sheet are prepared from the Trial Balance.

4. Presentation:

Presentation means setting out the financial data in asystematic manner in the statements so as to facilitate theirinterpretation.


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5. Analysis and Interprets:

This is the final and important functionof accounting. It means arriving at the meaning of ourunderstanding of the financial statements for enablingthe users to form their judgments for decision making.


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USERS OF ACCOUNTING

1. Creditors:Creditors are interested to know whether they would

get their dues, as assured by the firm.

2. Shareholders:

In case of joint stock company, shareholders knowthe financial results of the company only through the annualstatements, sent by the company to them.

3.Government:Government is interested to know the amount of tax

it can collect, based on the financial statements of theorganizations. Required financial data can be collected forcompiling statistics.


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CONTI..

4. Investors:

Those who are interested to invest their money canmake their decisions based on the study of the financial statements.Potential shareholders take lot of interest in the financial statementsfor their decisions in investing.

5. Lenders:Those who want to lend money, financial institutions or

banks, are interested to read to make their decisions, before lending.After lending, they would be able to assure themselves about thesafety of the funds, after a careful analysis of the statements.

6. Management:

Management is the basic user of accounts. Theyunderstand the financial results and position of the firm from theaccounts. They are interested in every aspect of accounting as their

uses are diverse for different purposes.


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BRANCHES OF ACCOUNTING

1. Financial Accounting:Financial accounting is the original form of

accounting. It is mainly limited to the preparation of financialstatements i.e. Profit and Loss Account and Balance Sheet. Here,the preparation is made on historical basis i.e. after the happening

of the event.

2. Cost Accounting:

Cost Accounting has developed on account of the

limitations of the Financial Accounting. Cost Accounting is, basically,concerned with the estimation of costs, in advance, and theirsubsequent detailed analysis for the purpose of control.


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3. Management Accounting:

Management Accounting is accounting for the

Management. Management wants information to discharge itsfunctions in forecasting, budgeting, control over costs and strategyformation.

Persons engaged in management are not alwaysfamiliar with accounts. Management Accounting helps them in the

creation of the policy

4. Mechanical accounting :

Mechanical accounting is the recent development in

accounting. It makes use of electronic data processing systemssuch as computers, laptops etc for the purpose of accounting.Today, an accountant must have the operational knowledge ofthese machines.


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ACCOUNTINGPROCESS

Financialtransactions

Entering into journals& day books

Postings to ledgeraccounts

Taking out trialbalance

Preparing Trading,

P & L account and B/S


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NEEDFOR ACCOUNTING

Creating records

Creating evidence

Decision making

Control Prevention of frauds and losses

Determination of tax liability

Legal requirements

Comparative study of business

Sanctioning of loans

Planning


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OBJECTIVES / ADVANTAGES OF ACCOUNTING

To maintain the record of the financial transactions of abusiness neatly and accurately.

To ascertain the profit and loss made by the business

during an accounting period.

To present the true and fair view of the financial positionof a business (i.e value of assets , liabilities and capital).

To know the amount due at each of the creditors.

To know the amount receivables from each of thedebtors.


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CONTI..

To compute the tax liability to the government.

To supply the required financial information to themanagement for decision making and controlling theaffairs of the business.

To offer expert advice on the financial aspects of thebusiness.

To facilitate inter-period comparison of the financial trendsof the business.

To enable the comparison of performances of different

firms.


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LIMITATIONSOFACCOUNTING

Profit shown in Financial Accounting is not fully exact

Financial Accounting does not indicate what the business will

realize, if sold

Financial Accounting does not tell the whole story

Accounting statements may be drawn up differently

All assets are not shown in financial statements

Manipulation

Impact of Inflation


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SYSTEMS OF ACCOUNTING

There are two systems of accounting for recording transactionsSingle Entry Systemand Double Entry System.

1. Single Entry System:

Single entry system sounds economical, but it is, really,costly. In fact, it is rather a lack of system. This system is adopted where thebusiness is run on cash basis only.

It is not a scientific system and final accounts can not beeasily prepared on the basis of this system. Small businesses and organizationsthat do not require ascertainment of profit, follow this system.

2. Double Entry System:

The only real system is the double entry system. DoubleEntry System recognizes the fundamental factor that every transactions double-sided affair. According to this system, for every debit, there is a correspondingcredit.

This system is universally followed in accounting. On thebasis of this system, accuracy of accounting can be maintained and arithmeticalcorrectness can easily be established. Financial statements i.e. Profit and Loss

Account and Balance Sheet are easily prepared, once the concern follows thedouble entry system of accounting.


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BASICTERMSOFACCOUNTING

Entity: It may be a business unit or a department of abusiness or a group of related businesses. A businessmay be regarded as an independent entity.

Capital: Capital is the amount, initially, invested whilecommencing the business. Capital need not be in theform of cash, alone. Capital can be introduced in theform of goods or any type of assets.

Capital = Assets Liabilities

Drawings: Drawings is the amount withdrawn from thebusiness by the proprietor or partner in a partnershipfirm. Drawings can be, again, cash or goods. Drawingsare reduced from the capital amount.


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Turnover: The total amount of sales during a particularperiod is called Turnover. The turnover can be cash

sales or credit sales or both.

Discount: The allowance or concession granted to aretailer by the wholesaler/dealer is called discount. It

is of two types:(A) Trade discount (B) Cash discount

1. Trade discount: Trade discount is allowed by a

dealer to the retailer or buyer to induce him to buymore from him. Trade discount is offered both on cashand credit sales.no entry is made for trade discount,separately, in books of accounts of the seller and buyer


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2. Cash discount: Cash discount is allowed by the sellerto encourage the customer to make early payment,before the credit period expires.Entry for cash discountis, invariably, made in the accounts of the seller as wellas buyer.

Debtor or Book Debt: The person to whom goods orservices are sold on credit is called Debtor. The

amount due from the debtor is called Book Debt.Another name is Accounts Receivable.

Creditor: The person from whom goods or services arepurchased on credit, is called creditor till the paymentdue to him is made.


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Bad Debts: Amount that cannot be recovered from adebtor is called Bad Debt. Bad debts result in

reduction of profits of the firm.

Equity: All claims against the assets of the firm arecalled as Equity. The claim of the outsiders is called

creditors equity or liabilities. The claim of the

proprietor is called owners equity or capital.

Assets: Assets are the properties owned by the firm.Examples of Assets are Building, Plant and Machinery,Debtors, Bills Receivable, Goodwill, Preliminaryexpenses etc.


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Assets can be divided into two categoriesfixed assetsand current assets.

Fixed assets: are the assets owned by the firm for thepurpose of conducting business, using the fixed assets.Examples are Building, Plant and Machinery etc

Current assets: are those assets, which are held by thefirm for the purpose of carrying on business. Currentassets, normally, change their form. Examples areCash, Bank, Finished Goods, Debtors, Bills Receivable,Accrued income etc.


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Liabilities: Liabilities are the amounts that are payable.Advances or loans received have to be repaid. Till date

of repayment, they are liabilities. Goods or serviceswhen bought on credit are shown as creditors, whichare also liabilities.

Capital invested by proprietor or partner is also a liability

as the business firm is independent from them, so far asaccounting is concerned.

This is the reason why capital is shown on the liability

side in the balance sheet. Capital, loan, outstandingexpenses and bills payable are some of the examples ofliabilities.


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Debit: The entry made on the debit side of the accountis called Debit. The abridged form is Dr.

Credit: The entry made on the credit side of the accountis called Credit. The abridged form is Cr.

Entry: The record made in the books of accounts inrespect of a transaction or an event is called an entry.

Books of Account: The registers or books maintained

by any business firm or institution for recording thebusiness transactions are called Books of Account.


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Solvent : Solvent is a person whose assets are equal toor more than that of his liabilities.

Insolvent: insolvent is a person whose assets are notsufficient to make payment of his liabilities in full.

Goods: the term goods includes all commodities ,articles or products which are purchased for the purposeof resale.

Purchases: the term purchases means goods

purchased for resale. Such purchases may be for cashor on credit. But any goods purchased for factory use oroffice use are not regarded as purchases. It may betreated as an asset or expenses.


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Sales : means goods sold for cash or on credit. But itdoes not include sale of any asset. If the cloth

merchant sells cloth from his stock then it is treated assales.

Stock : there will remain some goods unsold at any

given date. The value of such goods on that date isknown as stock.


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STATEWHETHERTHEFOLLOWINGSTATEMENTSARETRUEOR FALSE

(i) Joint stock companies, by law, have to keep the books of accounts tomeet the requirements of Companies Act.

(ii) Capital is decreased by profits and increased by losses.

(iii) The chief objective of maintaining books of accounts is to ascertain theoperational results and find the financial position of the organization.

(iv) The term Book-keeping means recording the transactions andmaintaining books of accounts in the prescribed manner, regularly,according to certain rules and regulations.

(v) Accounting is a science as well as an art.

(vi) Book-keeping and accounting are synonymous (inter-changeable)terms.

(vii) Accounting records transactions, which are of financial character.


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(viii) Accounting is useful to record business transactions only.

(ix) Income statement (Trading and Profit and Loss account)and Balance Sheet are prepared from the Trial Balance.

(x) Transactions that cannot be expressed in terms of moneyare also recorded in accounting books.

(xi) Balance Sheet serves as a barometer for ascertaining thefinancial health of a business.

(xii) Financial statements of a joint stock company are notaccessible to the public.

(xiii) Analysis and interpretation of financial statements are

complementary to each other.


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ANSWERS

(i) True (ii) False (iii) True (iv) True (v) True (vi) False

(vii) True (viii) False (ix) True (x) False (xi) True

(xii) False (xiii) True

Accounting- Class 1 &2

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