Edc76Financial Accounting I- An Introductory Perspective (1)

download Edc76Financial Accounting I- An Introductory Perspective (1)

of 21

Transcript of Edc76Financial Accounting I- An Introductory Perspective (1)

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    1/21

    Basic Accounting

    An Introductory Perspectives

    Objectives

    On completion of this unit, each student should be able to:

    Determine the net worth of the business.

    Identify assets, liabilities and owners equity.

    To use the accounting equationTo define accounting concepts and be able to do accounting exercises.

    Over the last four decades, outside India, accounting has continued to be the fastestgrowing profession and due to its increasing popularity the most popular field of

    study at colleges, business schools and universities the world over.

    Important in the successful operation of a firm is its ability to systematically record

    its business transactions.

    The business transactions are entered in the book-keeping records and processed todetermine information such as : profit or loss, Total debtors, Total creditors, Cash at

    bank, Cost of goods sold and other details as required by the firm. Regardless of the

    type and size of business, it usually owns assets and owes liabilities.

    (1) Assets

    These are things of value owned by a firm. Examples would be: Cash at bank, Ending

    Inventory, debtors, motor vehicles, Land and buildings, furniture and equipment,

    plant and machinery and loans given to other firms or persons.

    Assets can be further classified as: Current assets, Non Current assets, Investments

    and Intangibles.

    Current Assets

    These are assets which are in cash (Cash on hand, Cash at bank) or can be easily

    converted to cash within 12 months. Examples would be: Ending Inventory, Debtors,Income receivable, Loans given to other firms or persons.

    Non Current Assets

    These are assets which were bought by the firm to be used to earn revenues. Theyremain longer in business and a bit difficult to convert into cash. Examples would be:

    Motor Vehicles, Furniture and Equipment, Land and Buildings, Plant and Machinery

    1

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    2/21

    Investments

    These are assets which the firm buys or puts its own money in another business other

    then a bank. These may be converted to cash but it would take time. Examples would

    be: Shares in Hunts Travel Ltd.

    Intangible Assets

    These are assets which are owned by the firm but they have no physical existence. In

    certain cases there are certain expenses that need to be written off each year, such as:

    Preliminary Expenses, Sale of Shares Expenses. The assets do have some value which

    is used to earn revenue for the firm. Examples would be: Patents, Goodwill,Preliminary Expenses, Trademarks and Copyrights

    (2) Liabilities

    These are things of value owed by a firm. Examples would be: Creditors, BankOverdraft, Loans that were given by other firms or persons, Debentures, Mortgage.

    Liabilities can be further classified as: Current liabilities and Non Current Liabilities.

    Current Liabilities

    These are liabilities which have to be paid within 12 months. Examples would be:

    Creditors, Short-term Loans given by other persons or firms, Expenses Due. Income

    in Advance, Bills Payable, Provisions for Dividend, Provisions for Taxation,Provision for Leave.

    Non Current Liabilities

    These are liabilities which may be paid according to the arrangement made with the

    financiers and normally payment is made between (5 20) years. Examples would

    be: Mortgage, Debentures and Long-Term loans given by other persons of firms.

    (3) Owners Equities

    This is also known as Proprietorship or Shareholders Equities. These are things of

    value provided by the owner(s) or benefits allocated for the owner(s) of the business.

    Here, in some cases, would include expenses made by the owner(s), which is calledDrawings.

    2

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    3/21

    Accounting Equation

    The relation between Assets, Liabilities and Proprietorship can be expressed in an

    accounting equation:

    Assets (A) = Liabilities (L) + Proprietorship (P)

    Hence the equation can be written also as follows to find out Liabilities andProprietorship.

    Liabilities (L) = Assets (A) Proprietorship (P) and

    Proprietorship (P) = Assets (A) Liabilities (L)

    Why people do business?

    People do business for many reasons. Some of these reasons would be : (1) To betheir own boss; (2) having a passion to take risks; (3) ability to manage others; (4)

    willingness to make profits every year; (5) a market exists to provide goods and

    service.

    All businesses need the services of an accountant who would perform the book-

    keeping and accounting functions.

    What is Book-keeping?

    Its the traditional way of doing accounting or maintaining financial records. Involves

    keeping (7) specialized books. Largely manual work involved. Still in use by

    countless small businesses in India. Includes preparation of journals, postings toledger and extraction of a trial balance. Book-keepers need to have basic knowledge

    of accounting and should be able to do everything till preparation of a trial balance..

    What is Accounting?

    Accounting is often called the language of business. For example, Hindi is the official

    language in India and is used to facilitate communication among Hindustani people inIndia. Accounting is said to be a common medium of communicating business of

    financial information amongst interested parties in the big world of commerce

    Accounting is a business language used by accountants to communicate about the

    financial performance of the business particularly to the owners of the business.

    3

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    4/21

    It involves identification of all financial activities relating to the firm and this has to

    be classified and recorded in seven different books. The information is processed,

    summarized , analysed and then interpreted to interested parties for decision making.

    Accounting is a very complex, comprehensive and highly important and responsible

    position. Some 30-40 years ago, either you became an accountant or an engineer. Ifyou could not do accounting, engineering, medicine, teaching, then housework was

    just the work for you. Large businesses exist simply because there is a brainy person

    who manages their financial affairs.It has been said that accounting is an information system. Firstly, what is a system? A

    system has 3 elements: Input, Processing and Output. In accounting, the (Input)

    involves the business transactions and events recorded in the carious source

    documents issued by the firm or received from other businesses. The (Processing)involves classification into the 7 journals and postings to the ledger accounts as per

    the accounting principles and procedures and extraction of a trial balance, while the

    (Output) includes the preparation of the financial reports which may be analysed and

    then interpreted to make it more meaningful for users who would use it to makedecisions

    Accountants to a certain extent are also known as financial engineers. Those who

    aspire to learn accounting (and become expert in this language) later become

    accountants. However, non accountants although they do not become experts but may

    have a fair bit of knowledge in accounting terms tend to become almost goodinvestors and business men.

    Accounting function

    Involves identification, recording, classification, analysis and interpretation of

    financial information to interested parties to assist them in their decision-making.

    Management function

    Involves the decision-making, organizing, policy-making, defining workable

    strategies, setting of targets, monitoring of key performance indicators (KPI),

    providing and presenting various types of reports, assisting management in making

    decisions, controlling of financial and non-financial, and human resources, setting ofstandards and measures and at times decision-makers.

    Branches of accounting

    There are (3) main branches.

    Management accounting

    4

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    5/21

    Is the preparation and communication of financial and other information to

    management of the firm that helps them to carry out their responsibilities in planning

    and controlling their operations effectively and efficiently. The reports are moredetailed and timely.

    Cost accounting

    Primarily deals with costing details, budgets, production level techniques, decisions

    on the level of production, profit planning and cost measurement techniques.

    Financial accounting

    Is the preparation and communication of financial information for use primarily bythose outside the enterprise. The purpose of financial accounting is to provide

    information to owners and other interested users about the performance of the

    business.

    Accounting Cycle

    This shows the various stages of the accounting functions before the desired result is

    achieved.

    1. Recording of source documents2. Classification in the (7) journals.

    3. Postings to the Ledger accounts

    4. Extraction of the Trial balance5. Identification of the End-of-period-adjustments

    6. Extraction of Adjusted Trial balance

    7. Closing journal entries prepared8. Preparation of Profit and Loss Statement and Balance Sheet, and Cash Flow

    Statement

    9. Analysis of various ratios10. Interpretation of the ratios and the actual results obtained compared with the

    Management reports

    Accounting Assumptions and principles.

    There are two types of activities that take place in the business world: Businesstransactions and Non-business transactions.

    Business Transactions

    These are financial activities that take place between the business and other persons

    and or businesses. Examples would be: Purchase of goods for sale either for cash and

    or on account.; buying of fixed assets for cash or on account; payment or expenses,

    debt relating to the business.

    5

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    6/21

    Non Business transactions

    This could be any activity which does not include exchange of money for goods or

    services provided by the business to others or that provided by others to a business.

    Also, there may be certain activities which may include the exchange of money butthese activities may be done by the owner(s) of the business which is treated as

    personal transactions of the owner and since the firms funds or assets would have

    been used, it would be shown asDrawings in the Balance Sheet.

    Some basic accounting principles

    Accounting Entity Concept

    This is also known as `Separate Entity Concept. The activities of the business and

    the owner are treated as separate. Assume Tanya owns a beauty parlor. Tanya also

    has a personal car, jewelry, cash at bank which would not be included as part of theparlor business. Tanya may also be a co-owner in another business but she has to

    keep the activities of both the businesses and her personal affairs separate from eachother.

    Going Concern

    It suggests that the life of a business is continuous as long as its business dealings are

    all transparent, does not have any liquidity problems should continue to exist for quite

    some time.

    Period Concept

    The business activities of a firm have to be recorded at regular intervals and

    information provided to interested parties at regular intervals. So financial statements

    may be prepared monthly to reflect the performance of the business so that theperformance may be tracked and if there are any problems they can be rectified or

    corrective actions taken on time.

    Monetary Concept

    All financial activities and contents of the financial statements are to be expressed inmonetary terms. Example a farmer may have 200 cows, 4 tractors, 3 sons and 50 acre

    land. These are all stated in non monetary terms, however, a value has to be put for all

    (except on his 3 sons) and the details could be shown in his Balance Sheet.

    6

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    7/21

    Historical (Cost) Concept

    States that all non current assets and Non Current Liabilities have to be shown in the

    Balance Sheet at their purchase price and Total value respectively. Example. A firm

    had bought 3 Trucks at Rs5,00,000 each on 2/1/2005. In the Balance Sheet, theTrucks would be recorded at their cost price of Rs15,00,000. Accumulated

    depreciation would also be shown and the net result would be the Book Value of the

    assets.

    Matching Concept

    All revenues (those received in cash plus amount receivable) should be subtracted(matched) with all expenses (Those paid in cash plus amount payable) which should

    give an end result of either Net Profit or Net Loss.

    Timeliness Concept

    Time plays a very important role in all businesses. Everybody has to work according

    to time else the results would be affected. Firms have to prepare financial statements

    on time so that the users (those who are interested in the performance of the business)

    can study it and make relevant decisions on time.

    Consistency Concept

    Accountants when preparing financial statements should adopt a similar format in

    their presentation and not make too many changes every time. Example; if the final

    reports are prepared in T- form then they should continue to be prepared in thisformat unless a decision was taken to present it in statement format, but once this is

    done it should not go back and forth with the old format. Similarly the methods of

    accounting for depreciation and inventory valuation should also be uniform and notkeep changing every often.

    Generally Accepted Accounting Principles (GAAP)

    To ensure that the information contained in the financial statements can be relied

    upon by various users, these reports need to be prepared based on GAAP which is aset of rules, conventions and procedures necessary to define accepted accounting

    practice.

    GAAP represents policies that have been agreed by a body of experts in the field of

    accounting and many of whom are in public practice or in academia or both.

    7

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    8/21

    Accounting Standards

    Firms generally follow diverse accounting policies which are regarded as necessaryfor the preparation of financial statements. These standards are formulated by the

    Accounting Standards Board of the ICAI.

    Formats of the Financial Statements

    Trading Account

    This report shows how well the firm had traded. If the firm made a Gross Profit it

    meant that the firm had higher sales then the cost of the goods it had purchased. Theformat of preparing a Trading account is shown below:

    Trading Account of XYZ Stores

    For the year ended 31st December 201X

    Opening stock Ending stock

    Purchases Sales

    Duty Returns Outwards

    Wages of storemen Purchase Returns

    Freight Inwards Gross Loss

    Returns Inwards

    Cartage Inwards

    Sales Returns

    Buying expenses= Cost of Sales

    Gross Profit

    Note:

    You can only have a Gross Profit or a Gross Loss but not both.

    Gross profit would result if the right-hand side Total figure is greater then the Cost of

    sales and Gross Loss would occur if the Cost of Sales is greater then the Total figureon the right hand side.

    8

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    9/21

    Profit and Los Account

    This report considers all the Revenues and Expenses of the firm. The objective is to

    find out if there is a Net Profit or Net loss.

    Net Profit = Total Revenues Total Expenses.

    The format of the Profit and Loss account is given below.

    Profit and Loss Account of XYZ Stores

    For the year ended 31st December 201X

    Expenses Revenues

    Gross Loss Gross profitAdvertising Rent received

    Bad debts Interest received

    Insurance Discount Received

    Cartage outwards Commission Received

    Salaries Net Loss

    Rent paid

    Interest paid

    Electricity

    TelephoneRepairs & maintenance

    StationeryLoss on sale

    Discount allowed

    Depreciation

    Net Profit

    Net Profit (Loss) = Total Revenues Total Expenses.

    If Total Revenues are greater then Total Expenses then there would be a Net Profit

    and a Net Loss if vice-versa.

    9

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    10/21

    Balance Sheet

    This report considers all the Assets, Liabilities and the Owners Share in the firm. Theformat of a Balance Sheet is given below:

    Balance Sheet of XYZ Stores

    As at 31st December 201X

    Current Liabilities Current Assets

    Creditors Cash on hand

    Expenses due Cash at bank

    Income in advance Ending stock

    Short Term Loans Debtors

    Bank overdraft Prepayments

    Loan to XYZ

    Non Current Liabilities Income due

    Long Term LoansDebentures Non Current Assets

    Mortgage BuildingsLess Accumulated Depn

    Owners Equities Vehicles

    Capital Less Accumulated Depn

    + Net Profit Equipment

    - Net Loss Less Accumulated Depn

    - Drawings Land

    + Additional Capital FurnitureLess Accumulated Depn

    Recording of Business Transactions

    Before the financial statements (Trading account, Profit & Loss account, Balance

    Sheet and the Cash Flow Statement) is prepared, the various transactions (Financialactivities) have to be classified in to various categories and accounts would have to be

    created.

    Accounts

    These are individual records of opening and closing balances together with increases

    and decreases of relative importance. The number of accounts varies according to thesize and nature of the business.

    10

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    11/21

    There are 5 classification of accounts (1) Assets; (2) Liabilities; (3) Owners

    Equities; (4) Revenues; (5) Expenses

    Under each type of account we have several accounts that are used in business.

    Example : Classification of Account: Asset Names of accounts used: Cash at Bank, Debtors, Buildings, Motor

    Vehicles, Land, Equipment, Inventory.

    Ledgers

    The file or binder which contains details of all the accounts that exist for a given

    business.

    Double Entry System(DES)

    In the (DES) every transaction is recorded with a debit(s) and credit(s) and both thedebits and credits should each give the same total amount at the end.

    Construction of a Ledger Account

    Name of Account

    Date Particulars Amount Date Particulars Amount

    Left side (DEBIT) Right side (CREDIT)

    Debit and Credit Rules

    Under this rule, (Assets) are entered on the debit side of the account for increases andon the credit side for any decreases. Similarly, (Liabilities) and (Owners Equity)

    accounts are entered on the debit side for decreases and on the credit side for any

    increases.

    Illustrative transactions

    Jan 1 Raju the owner of Kwik Fashions invested Rs2,00,000 cash in the business as

    capital.

    Accounts affected: Cash at Bank (Asset) and Capital (Owners equities)

    Analysis: Assets (cash at bank) increased by Rs2,00,000 and Owners equities

    (capital) also increased by Rs2,00,000.

    11

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    12/21

    Rules of Debit and credit: Assets increased so we record on the debit side of Cash at

    Bank account. Increase in Owners Equity means we record on the credit side of the

    Capital account

    Procedure: On the debit side of the Cash at bank account we record the reason for the

    increase and that occurred due to capital invested so we write Capital (the name ofthe account affected)

    Balancing Ledger Accounts

    Every ledger account has to be balanced to indicate what would be the closing or

    (ending) balance. Ledger accounts can be in `T format or in `Columnar format

    Example of `T format Ledger accounts

    Jan3 Opening balance in Cash at Bank account Rs80,000 DR

    Jan 7 Cash Sales Rs10,000Jan7 Received from Peter a debtor Rs70,000.

    Jan 15 Cash purchases Rs70,000Jan 20 Cash Sales Rs50,000

    Jan 22 Paid wages Rs15,000

    Cash at BankDate Particulars Amount Date Particulars Amount

    3./1 Opening balance 80,000 15/1 Purchases 70,000

    7/1 Sales 10,000 22/1 Wages 15,000

    Peter 70,000

    20/1 Sales 50,000

    Notes

    1) This is an Asset account. Note there are (Assets, Liabilities, Owners Equities,Revenues and Expense) related accounts. Under Assets, we have Cash at Bank so this

    becomes the `name of the account

    2) The opening balance is written first. It could have either a Debit balance (as in thisexample) or a Credit balance.

    3) On the Debit side as per the date in which they occurred, the name of the accountis written which is responsible for the increase in Cash at Bank and on the credit side

    are those accounts responsible for the decrease in Cash at bank.

    12

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    13/21

    4) Once all the transactions affecting (increase or decrease) the Cash at Bank are

    entered, the next task would be to balance the ledger account.

    5) To balance the ledger accounts, perform the following steps: STEP 1: Add both

    sides of the total and see which side has the HIGHEST TOTAL. STEP 2: The side

    which has the highest total would be the main total for both sides. STEP 3: the sidewhich has the lowest total should be subtracted with the (highest) or the MAIN

    TOTAL. STEP 4: This difference would be called the Ending balance. STEP 5: The

    final step would be write the ending balance just below the Main Total on theopposite side of where the Ending balance was written. Example, if the main total is

    Rs20,000 and the credit side is less by Rs16,000, then Rs16,000 becomes the Endingbalance. The final step would be to write Ending balance just below the Main Total

    on the Debit sideby an amount of Rs16,000. (Note that the date would be the 1st ofthe new month)

    Cash at BankDate Particulars Amount Date Particulars Amount3./1 Opening balance 80,000 15/1 Purchases 70,000

    7/1 Sales 10,000 22/1 Wages 15,000

    Peter 70,000 31/1 Ending balance 1,25,000

    20/1 Sales 50,000

    Rs2,10,000 Rs2,10,000

    1 /2 Ending balance Rs1,25,000

    STEP 1: Add both sides: Debit side is Rs2,10,000 and the Credit side is Rs85,000.

    The debit side has a larger total so this would be the main total.

    STEP 2: Rs2,10,000 Rs85,000 gives Rs1,25,000 which becomes the Ending balanceon the credit side.

    STEP 3: The ending balance on the Credit side is now written just below the maintotal on the DEBIT side. This amount indicates that there is still Rs1,25,000 in the

    business bank account and on 1st Feb the Opening balance was Rs1,25,000.

    Example of `Columnar format Ledger accounts. (We would use the same example)

    Jan3 Opening balance in Cash at Bank account Rs80,000 DR

    Jan 7 Cash Sales Rs10,000Jan7 Received from Peter a debtor Rs70,000.

    Jan 15 Cash purchases Rs70,000Jan 20 Cash Sales Rs50,000

    Jan 22 Paid wages Rs15,000

    13

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    14/21

    Cash at Bank AccountDate Particulars Debit Credit Balance

    3/1 Opening balance Rs80,000DR

    7/1 Sales 10,000 Rs90,000DR

    Peter 70,000 Rs1,60,000DR

    15/1 Purchases 70,000 Rs90,00020/1 Sales 50,000 Rs1,40,000

    22/1 Wages 15,000 Rs1,25,000DR

    The advantage of this format is that after each transaction, a new balance is

    determined. This is the format used by businesses who have a computerized Ledgersystem.

    Analysis Chart

    This chart is useful for anyone who is learning accounting or has difficulties in

    knowing the relevance of Debits and Credits. It allows users to prepare ledgeraccounts accurately as possible and also keep track of what is happening.

    Illustrative Example

    a) Cash sales Rs20,000b) Bought goods from MH Ltd Rs1,20,000

    c) Paid rent Rs5,000

    d) Sold goods to Rameshwar Rs40,000e) Received from Rameshwar Rs30,000

    f) Owner provided additional cash as capital Rs2,50,000

    g) Bought a vehicle from Max Motors for Rs1,50,000 and paid deposit of

    Rs35,000h) Owner took cash Rs15,000 for personal use.

    Show the effect of these transactions on the analysis chart.

    Transactions Accounts

    affected

    Account

    Classification

    Effect (Increase)

    or (Decrease)

    Ledger Entry

    (Debit) or (Credit)

    Cash sales Rs20,000 Cash at Bank Sales

    AssetRevenue

    IncreaseIncrease

    DebitCredit

    Bought goods from MH LtdRs1,20,000

    PurchasesMH Ltd

    ExpensesLiabilities

    IncreaseIncrease

    DebitCredit

    Paid rent Rs5,000 Rent

    Cash at Bank

    Expenses

    Assets

    Increase

    Decrease

    Debit

    Credit

    Sold goods to RameshwarRs40,000

    RameshwarSales

    AssetsRevenue

    IncreaseIncrease

    DebitCredit

    Owner provided additional

    cash capital Rs2,50,000

    Cash at Bank

    Capital

    Assets

    Owners Equities

    Increase

    Increase

    Debit

    Credit

    Bought a vehicle from Max

    Motors for Rs1,50,000 and

    paid a deposit of Rs35,000

    Vehicles

    Max Motors Ltd

    Cash at Bank

    Asset

    Liabilities

    Assets

    Increase

    Increase

    Decrease

    Debit

    Credit

    Credit

    Owner took cash Rs15,000

    for own use

    Drawings

    Cash at Bank

    Owners Equities

    Assets

    Decrease

    Decrease

    Debit

    Credit

    14

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    15/21

    Now we prepare the ledger accounts.

    From the second column we prepare these ledger accounts: (Note an account should

    appear once only although it may be used several times.

    1) Cash at Bank2) Sales

    3) Purchases

    4) MH Ltd5) Rent

    6) Rameshwar

    7) Capital

    8) Vehicles9) Mac Motors Ltd

    10) Drawings

    (1) Cash at Bank Account

    a) Sales 20,000 c) Rent 5,000

    e) Rameshwar 30,000 g) Max Motors Ltd 35,000

    f) Capital 2,50,000 h) Drawings 15,000

    Ending balance 2,45,000

    Rs3,00,000 Rs3,00,000

    Ending balance Rs2,45,000

    (2) Sales Account

    Ending balance 60,000 a) Cash 20,000d) Rameshwar 40,000

    Rs60,000 Rs60,000

    Ending balance Rs60,000

    (3) Rent Account

    c) Cash at Bank 5,000 Ending balance 5,000

    Ending balance Rs5,000

    (4) Rameshwar Account

    d) Sales 40,000 e) Cash at Bank 30,000

    Ending balance 10,000

    Rs40,000 Rs40,000

    Ending balance Rs10,000

    15

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    16/21

    (5) Purchases Account

    b) MH Ltd 1,20,000 Ending balance 1,20,000

    Ending balance Rs1,20,000

    (6) MH Ltd AccountEnding balance Rs1,20,000 b) Purchases 1,20,000

    Ending balance Rs1,20,000

    (7) Capital Account

    Ending balance Rs2,50,000 f) Cash at Bank 2,50,000

    Ending balance Rs2,50,000

    (8) Vehicles Account

    g) Max Motors Ltd 1,50,000 Ending balance 1,50,000

    Ending balance Rs1,50,000

    (9) Max Motors Account

    Cash at Bank 35,000 g) Vehicles 1,50,000

    Ending balance Rs1,15,000

    Rs1,50,000 Rs1,50,000

    Ending balance Rs1,15,000

    (10) Drawings Account

    h) Cash at bank 15,000 Ending balance 15,000Ending balance Rs15,000

    Notice that all (10) ledger accounts have been prepared. Next thing accountants do is

    prepare a Trial balance.

    Trial Balance

    It contains a list of all those accounts that have an ending balance. Whichever side the

    new Opening balance (for the new month) appears, it would be entered accordingly in

    the Trial balance. For instance, The Cash at Bank in the illustration given above has aending balance on the debit side of Rs2,45,000 so it would be entered on the debit

    side of the trail balance.

    So the ending balances would be entered in the Trial balance as follows:

    16

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    17/21

    Trial Balance

    Cash at bank 2,45,000 Sales 60,000

    Rent 5,000 MH Ltd 1,20,000

    Rameshwar 10,000 Capital 2,50,000

    Purchases 1,20,000 Max Motors 1,15,000

    Vehicles 1,50,000Drawings 15,000

    Rs5,45,000 Rs5,45,000

    The Trial balance has balanced and both sides have the same amount of Rs5,45,000.This means that the ledger accounts have been correctly posted to either the debit or

    credit side. The final ending balance has been computed correctly and appears on the

    correct side.

    If the trial balance does Not balance, the whole exercise of ledger account postings,

    accounts and totals would have to be srutunised.

    Students have a choice of preparing ledger accounts in (T form) or in the

    modern(easier) Columnar format. Many prefer columnar method.

    Exercise 1

    1) In each of the following list of business items, identify the assets, liabilities and

    proprietorship (Owners Equities)

    a) Cash at bank d) Debtors

    b) Land and Buildings e) Motor vehiclesc) Creditors f) Drawings

    2) Classify the following under Current Assets, Non Current Assets, Investments,Current Liabilities, Non Current liabilities

    a) Cash in hand j) Stock on handb) Loan to G. Green k) Sundry debtorsc) Loan from Axis Bank l) Prepayments

    d) Accounts receivable m) Buildings

    e) Fixtures and Fittings n) Bank overdraftf) Shares in B. Company o) Equipment

    g) Mortgage on Buildings

    h) Plant and Machinery

    17

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    18/21

    i) Accounts Payable

    3) For the following ledger account names identify which of these areAsset/Liabilities/Owners Equities/Revenues/Expenses account?

    a) Cash at bank l) Capitalb) Rent paid m) Interest paid

    c) Office Expenses n) Bank overdraft

    d) Debtors o) Salariese) Creditors p) Stationery

    f) Loan to Bandook Lal q) Loan from Mithai lal

    g) Wages r) Petty Cash expenses

    h) Sales s) Sales returnsi) Creditors t) Purchase returns

    j) Purchases u) Motor vehicles

    k) Bad debts v) Motor vehicles expenses

    4) Prepare an analysis chart and determine which accounts from the following

    transactions of Brahma Nand are debited and which are credited.

    a) Sold goods for cash Rs2,000

    b) Paid rent Rs1,500

    c) Bought goods from Bandura Ltd Rs3,700d) Bought goods for cash Rs5,000

    e) Sold goods on credit to Chamatkaar Traders Rs25,000

    f) Paid office expenses Rs2,000g) Returned goods to Bandura Ltd Rs700

    h) Received interest from Murray Rs200

    i) Credit sales to Dharam Raj Rs11,000j) Paid Bandura Rs2,000

    k) Received from Dharam Raj Rs9,500

    5) Prepare an analysis chart and ledger accounts in columnar form and a trial balance.

    a) Suman contributed cash Rs50,000 as capital

    b) Cash purchases Rs20,000c) Sold goods to Rashi Rs50,000

    d) Bought goods from Supa Mart Rs1,25,000

    e) Paid rent Rs2,000f) Cash sales Rs85,000

    g) Owner took cash Rs20,000 for personal use.

    h) Paid Supa Mart Rs40,000i) Received from Rashi RS45,000

    18

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    19/21

    6) Prepare an Analysis Chart, ledger accounts and then extract a trial balance of

    Bindula from the following details.

    October

    4 Bindula started business with Cash Rs1,50,000 as capital

    5 Bought goods from Murari Lal for Rs80,0006 Sold goods to Arvind Khajurewala for Rs1,20,000

    7 Paid wages RS10,000

    8 Bought furniture from Courts Ltd Rs50,000 and made a deposit Rs10,0009 Received from Arvind Khajurewala Rs1,00,000

    10 Cash sales Rs25,000

    11 Owner took goods Rs10,000 and cash Rs20,000 for personal use

    7) The book-keeper of Fast Foods and Books Store left in hurry to complete his

    BCom in which he was debarred for 2 years for very low attendance and not

    maintaining a satisfactory CGPA. Copy the following ledger accounts, balance theaccounts and then prepare a trial balance.

    Chautala Account

    Sales Rs1,000 Sales returns Rs150

    Cash at bank 400

    Discount allowed 20

    Gautam Account

    Sales Rs10,000 Sales returns Rs2,150

    Cash at bank 5,400

    Bad Debts 2,450

    Motor Vehicles Account

    Cash at bank Rs12,500

    Cash at Bank Account

    Chautala 400 Motor Vehicles 12,500

    Gautam 5,400

    Sales 13,000

    Sales Returns Account

    Chautala 150

    Gautam 2,150

    Bad Debts Account

    Gautam Rs2,450

    19

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    20/21

    Discount Allowed Account

    Chautala 20

    Sales Account

    Chautala 1,000

    Gautam 10,000Cash at bank 13,000

    8) Natwarlal Nautankiwala operates a milk bar. Recently, he has begun learning

    accounting, but he needs your assistance to complete the ledger accounts and extract a

    trial balance.

    Cash at Bank Account

    Prasad 236 Office expenses 120

    Mandira 380 Stationery 60Salaries 250

    Kanti 114

    Mandira Account

    Sales 380 Sales return 20

    Cash at Bank 380

    Discount allowed 10

    Gopal Account

    Returns 20 Purchases 170

    Prasad Account

    Sales 400 Discount allowed 14

    Cash at Bank 236

    Kanti Account

    Purchase returns 25 Purchases 1,500

    Cash at bank 114

    Discount received 20

    Discount Allowed Account

    Mandira 10

    Prasad 14

    Discount Received Account

    Kanti 20

    20

  • 7/29/2019 Edc76Financial Accounting I- An Introductory Perspective (1)

    21/21

    Sales Account

    Mandira 380

    Prasad 400

    Sales Returns Account

    Mandira 20

    Purchases Account

    Gopal 170

    Kanti 1,500

    Purchases Returns AccountGopal 20

    Kanti 25

    Office Expenses Account

    Cash at bank 120

    Salaries Expenses Account

    Cash at bank 250

    Stationery Expenses AccountCash at bank 60