Accounting Notes for Students

8/12/2019 Accounting Notes for Students

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Bank of Baroda Accounting and Financial Management

Fundamentals of Accounting

Accounting

Accounting is a process of systematic way of recording business transactions.

Process of Accounting/Steps of Accounting

Step 1: Recording (Preparation of Journal Entries)

Recording refers to recording (i.e., entering) of business transactions as and when they

occur.

Step 2: lassifying (Preparation of !edger Accounts)

lassification refers to the grouping"classifying the business transactions (which arerecorded in #ournal boo$) which are similar in nature.

Step 3: %ummari&ing (Preparation of P'! and alance %heet)

%ummari&ation refers to presentation of classified business transactions through financial

statements li$e Profit ' !oss account and alance %heet.

Step 4: Analysis ' nterpretation

t refers to drawing conclusions from the data found in the financial statements about the

profitability and the financial position of the business.

Accounting Principles:

Accounting Principles can be di*ided into +

a) Accounting oncepts

b) Accounting on*entions

I Accounting Concepts

Accounting concepts refers to general assumptions- on which accounts are prepared. hese

assumptions (concepts) gi*e clarity on the transactions.

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E/ample 0

Apollo tyres sold goods (tyres) to oyota !td. on 0 st1ec 2302 worth Rs. 4,33,333 and amount

will be recei*ed on 0st5eb 2306.

What is the transaction date?

E/ample 2

an$ purchased a land in 7.8.Road for Rs. 4,33,333 on 0 stJan 2339 and the *alue of the

land as of now is Rs. ,33,333.

What should be the value to be recorded? Whether is it Rs. 5,00,000 or Rs. 9,00,000?

E/ample 6

7r. 8irish appointed as a 7anaging 1irector in oyota !td.

Should the transaction be entered or not?

n the abo*e three e/amples, there is an ambiguity. %o accounting concepts (assumptions) are

made to get clarity on the transactions.

here are 00 concepts +

0) 7oney 7easurement oncept

2) 8oing oncern oncept

6) ost oncept

;) 1ual Aspect oncept"Accounting E) 7atching oncept

?) usiness Entity"%eparate Entity oncept

) Accrual oncept

03) Reali&ation oncept

00) !egal Aspect oncept

0) 7oney 7easurement concept


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=nly those transactions that can be e/pressed in money terms (financial transactions) are

recorded in the boo$s.

e.g. oyota !td purchased goods from Apollo yres !td. worth Rs. 0,33,333

@onmonetary transactions (i.e., e*ents which cannot be e/pressed in terms of money)

will not be recorded.

e.g. a) Retirement of a managing director

b) Appointment of an employee.

2) usiness"%eparate Entity oncept

he owner and the business are considered as two different persons, distinct from each

other.

ransactions are recorded from the point of *iew of the business and not the owner. As

such any amount in*ested by the owner in the business is considered as a liability by the

business towards owner.

=nly those transactions which are related to business are recorded.

Personal transactions and pri*ate property of the owner are not recorded in the boo$s.

6) 8oing oncern oncept

t is assumed that the business will continue to operate for a fairly long time"indefinite

period.

;) ost oncept

Assets ac


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o ! ' recei*ed goods + recei*ing benefit

o ! ' gi*ing money to other party + gi*ing benefit.

hus, e*ery business transaction in*ol*es dual or double aspects of e


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0) on*ention of 7ateriality

2) on*ention of onser*atism (con*ention of caution, prudence)

6) on*ention of onsistency

on*ention of 7ateriality:

A detailed record is made only of those business transactions which are material (i.e., important)

nsignificant transactions are not recorded.

on*ention of onser*atism

Pro*ide for all possible losses, but anticipate no profitsC. ompany can show e/pected losses

(e.g. pro*ision for bad debts, doubtful debts) but should not show pro#ected"e/pected profits"or

re*enues)

on*ention of onsistency:

Accounting practices and methods should remain consistent (i.e., unchanged) from one

accounting year to another.

e.g. =nce a particular method adopted for depreciation, the same method should continue for

ne/t year.

Technical Terms

Goods

8oods refer to merchandise, commodities, products, articles or things in which a trader

deals. n other words, they refer to commodities or things meant for resale.

Anything you purchase for the purpose of trading.

E.g. 5urniture dealer purchases chairs, tables benches etc.

Assets

Anything purchased for the purpose of use for the business.

Anything purchased not for the purpose of resale.

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E.g. ash, machinery, land ' building etc

I !"pes

a) angible Asset : ash, machinery, land etc.

b) ntangible Asset: Patents, copy rights, trade mar$, goodwill etc.

II !"pes

a) 5i/ed Asset : Beld for longterm

e.g. 7achinery, land ' building etc

b) urrent Asset : Beld for shortterm ( generally D 02 months)

e.g. 1ebtors, ash, bills recei*ables etc.

Debt:

orrowed money

E.g. ban$ loan, etc.

iabilit!:

Amount due from a business to others either for money borrowed or for goods purchased

on credit (i.e., goods purchased without ma$ing immediate payment)

E.g. !oan ta$en form ban$s, creditors (amount owed to suppliers), =1 (an$

=*erdraft)

!"pes

a) %hortterm !iability : D 02 months

e.g. reditors (amount due to suppliers) etc.

b) !ongterm !iability : 02 months

e.g. !oan ta$en from the ban$, debentures etc.

Capital

Amount in*ested in the business (usually at start up, but may include additional funds

raised)

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7oney (i.e., cash) or money-s worth (i.e., goods, furniture, buildings) introduced or

in*ested by the proprietor or owner in the business.

"#penses

hese are general costs of doing business.

t includes all e/penses ( other than cost in*ol*ed for purchase of asset) such as rent paid,

purchase of goods, salaries etc

$evenue

he mechanism where income enters the company (note that re*enue ' income are not the same

thing + they are used here to describe each other in basic terms only)

Creditor

Amount owed to a supplier from the business for credit purchase.

Amount due by business to the suppliers of goods.

Debtors

Amount owed to the business from a customer for credit sales.

"%uit!

Represents the ownership. t is the ownership *alue of a company.

e.g. common stoc$, retained earnings.

Depreciation

1epreciated *alue of an asset

Dra&ings

Amount withdrawn from the business by the owner for his personal use.

'ad Debt

A debt (loan) which is irreco*erable is called a bad debt.

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Doubtful Debt

A debt whose reco*ery is doubtful is called a doubtful debt.

(ournal

A #ournal is a daily record of business transactions.

)utstanding "#penses

ash such as rent, interest and insurance premium etc that are due (yet to be paid)

Prepaid "#penses

osts such as rent, interest, insurance premium etc that are paid in ad*ance.

'ills $eceivables

ills recei*ables"Account recei*ables represent money owed by entities to the firm on the

sale of products on credit.

'ills Pa!ables

ills payables represents money owed to suppliers of goods purchased on credit.

Accounting "%uation

Accounting e


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1ecreaseIIIII..II.E


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Steps to Classif! the Accounts/Application of Golden $ules of Accounting

%tep 0: 5ind out the two aspects"accounts of the transactions

%tep 2: dentify those two aspects"accounts as e/pense, income, asset, indi*idual etc.

%tep 6: lassify those identified two accounts"aspects under 6 heads such as a) Real a"c, b)

Personal a"c, c) Personal a"c

Steps of Accounting C!cle

0) Journal

2) !eger Accounts

6) rial alance

;) rading ' Profit ' !oss Account ( ' P ' ! account)

4) alance %heet

I ()-$,A ",T$1

Journal oo$: t is called as boo$ of original entry recorded manually under the con*entional

method of accounting.

5ormat of Journal oo$

1ate Particulars !5 1ebit redit

II "DG"$

t is the boo$ where transactions of the same nature are classified and grouped together in one

place in the form of an account, through a process called postingC (i.e., transferring of entries

from the #ournal to the ledger), to $now the position of that account.

5ormat of !edger Account

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I2 P$"PA$ATI), )F P$)FIT * )SS A/C

he profit and loss account shows the net profit or net loss (i.e., ultimate profit or loss) of

a business for a particular period. t considers all the income and e/penses incurred in

running the business.

Appendi( %) Banking Compan* Financial +tatements

Profit and ,oss Account for the period ending March 1-


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/ncome

/nterest 0arned

ther /ncome

0(penditure

/nterest 0(pended

perating 0(penses

proisions

Profit3,oss

Balance carried oer to Balance +heet

+41

+41!

+41"

+41#

+41$


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2 P$"PA$ATI), )F 'AA,C" S3""T

A balance sheet, also referred to as %tatement of 5inancial Position, is a statement that

e/hibits the assets and liabilities of a business enterprise prepared at a particular date.

A balance sheet comprises of three parts *i&., Assets, !iabilities and apital

Balance sheet as on March 1-

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Capital 5 Current ,iabilities

+hare Capital

6eseres and +urplus

7eposits

Borro8ings

ther liabilities and proisions

Assets

Cash and balance 8ith 6B/

Balances 8ith banks and mone* at call and short

notice

/nestments

Adances

Fi(ed assets

ther assets

+41+42+4+4!+4"

+4#+4$+4%+4&

+41'+411

Accounting Notes for Students

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