ACCOUNTING MECHANISM

Accounting Documents and Records

Flow of data

1. Recording transactions in journal – passing journal entries through double entry system

2. Posting into a ledger - classifying all entries of a similar account into a ledger

3. Ledger balancing – closing all ledger accounts and finding out the balance in each ledger account.

4. Preparing trial balance – Listing all ledger balances into debit and credit balances.

5. Passing adjustment entries / closing entries6. Preparation of Profit & Loss A/c and Balance

Sheet.

Account : A record of transactions related to a particular item of expense , income , assets or liabilities

Expenses : Salaries ,repairs, traveling , audit fees , printing & stationary etc.

Income : Sales , dividend , interest , commission etc.

Assets : Buildings, Machinery , Furniture , Debtors, Prepaid expenses, Cash, Bills receivable

Liabilities : Debentures, loans, creditors, expenses payable, Bills payable, Provisions

Capital : Share capital, Reserves, Retained earnings

Classification of accounts

1. Real Accounts, Personal Accounts, Nominal Accounts

2. Asset Accounts, Liability Accounts, Income Accounts, Payment Accounts

Understanding Outstanding and prepaid accounts and the concept of Matching principle

Outstanding Expenses – Liability Outstanding Income - Asset

Prepaid expenses - Asset Pre received income - Liability

Rules of debit / creditDouble entry system of recording entries : Every transaction recorded must have equal debits and credits

Analysis of transactions Accounting equation can be expanded as :Liabilities + Capital+ Revenues =Assets +Expenses+ Dividends

Effect Asset, Expenses, Dividend Liability,Capital,Revenue

Basic Debit Credit Increase Debit

Credit Decrease Credit Debit

Class exercise 1Put a cross in the appropriate column to indicate the type of account and the accounts normal balance

Type of account Normal balance Asset Liability Capital Debit Credit

Salaries Miscellaneous expenses Prepaid rent Share capital Office supplies Interest income Commission earned Rent expense Proprietors drawings Bills receivable Margin money deposit Cash Debtors Creditors Advance to suppliers Unearned professional fees Advance from debtors Electricity charges Professional fees earned Income tax payable Income tax earned Dividends Bills Payable Outstanding expenses Debentures Reserves Provision for tax Bank balance Telephone expenses Bad debts

Class exercise 1

Classify the following ledger balances into debit and credit balances and prepare a trial balance.

Building 25000 Telephone expenses 500

Office equipment 20000 Share capital 50000Cash 14000 Loan taken 5000

Creditors 10000 Prepaid insurance 1000

Debtors 21700 Unpaid repairs expenses 500Bills payable 3000 Dividend received 200Purchases 12000 Reserves 2000Sales 30000 Provision for tax 2000

Salaries 5000 Depreciation 1500 Electricity 1000 Advertisement 1000

Class exercise 2

Venus Music corner provides is in the business of providing audio CDs to customers. During March the accounts were maintained by a professional accountant On March 31 , the records showed a balance of Rs.21140 in his capital account. Since he could not afford an accountant , he starts maintaining the accounting records himself. He prepared the statements for the month of April 2006 and was shocked to find that his business had not fared well. He wants you to review his statements.

Profit & Loss A/c for the month ended April’10 Expenses Revenues

Salaries 5600 Investments by owner 3000Electricity 410 Service revenue recd 600Advertisement 130 in advanceRent 300Drawings 4000 Loss for the month 6840 10440 10440 Balance Sheet as on April 30, 2010 Liabilities AssetsCreditors 2510 Recording equipment 25500Service revenue Supplies 2190earned 12660 Debtors 1210Capital 14300 Cash 570 29470 29470

Schedule VI Part I – Balance Sheet

The company’s balance Sheet may be in horizontal or vertical form

It shall disclose current years as well as previous years figures

Details may be given in Schedules attached to Balance Sheet

Figures may be rounded off to the nearest ’00 or ’000. It can also be in 00.00 format.

Format of Horizontal Balance Sheet

P.Y Liabilities C.Y P.Y Assets C.Y

1. Share Capital 1. Fixed Assets2. Reserves & Surplus 2. Investments3. Secured Loans 3. Current Assets, Loans4. Unsecured Loans and Advances5. Current Liabilities and A. Current Assets and Provisions B. Loans and Advances A. Current liabilities 4. 1 Miscellaneous

Expenditure B. Provisions 2. Profit and Loss A/c Dr

bal

Footnote :Contingent liabilities

Vertical form of Balance Sheet

I. Sources of funds 1. Shareholders funds

Share capital Reserves & Surplus 2. Loan Funds

Secured loans Unsecured loans

II. Application of funds 1. Fixed Assets 2. Investments 3. Current assets , loans and advances less: Current liabilities and provisions 4. Miscellaneous expenditure.

Footnote for contingent liabilities

zSchedule VI Part II – Profit & Loss Account

General requirementsIt shall disclose every material factor w.r.t Incomes & ExpendituresAny item> 1% of the turnover or Rs.5000 whichever is higher should be shown separate item and not under miscellaneous expenses.

1.Turnover2. Commission paid to selling agents, brokerage and discount allowed3. Value of raw material consumed 4. Opening and closing stock of goods and raw materials5. Depreciation6. Interest paid7. Income tax8. Transfer to reserves / withdrawals from reserves9. Stores and spare parts10.Rent, power & fuel, repairs, insurance, rates and taxes, Auditors fees11.Salaries , contribution to staff welfare schemes12 Profit and loss from unusual sources13.Earnings / expenditure in foreign currency ( notes to accounts )14. FOB value of exports

Format of Vertical Profit & Loss AccountIncome SalesOthers

ExpenditureMaterials consumed and purchasesManufacturing

The trial balance of Trendy Leather Products is given belowParticulars Debit CreditStore equipment 20000Accumulated depreciation 2000Opening stock 17400Office supplies 2730Debtors 9700Cash 2870Store rent 12000Insurance 6000Creditors 7580Share capital 35000Retained earnings 7100Sales 115760Sales returns 1170Sales Discounts 1030Purchases 69230Purchase returns 1180Purchase discounts 2150Freight 4200Salaries 5100Selling expenses 9600Advertisement expenses 2300Delivery expenses 1130Telephone expenses 910Advance to suppliers 5400 ------- -------- 170770 170770

1. Depreciation on equipment Rs.1000

2. Closing stock Rs. 23100

3. Rent is paid for the period Jun’09 – May’10 @ Rs.1000 p.m

4. Insurance charges is paid for the year ended 31.10.10

5. Estimated income tax Rs.50006. Salaries are unpaid to the extent of

Rs.3000