FRCC-ORIENTATION

2-Mechanics

2-1-The mechanicsCategorization1) Assets; Are resources controlled /owned by enterprises from

which future economic benefits are expected to flow to the enterprise

2) Liabilities are a present obligation the settlement of which is expected to result in a “resource outflow” to the enterprise

3) Incomes( & Revenues ) Are Inflows that represent economic benefits that flow to the enterprise

4) Capital The interests of the Owners—the residual interest in the assets of the enterprise after deducting the liabilities

5) Expense/ Expenditure Are outflows that represent economic outgo not creating an asset in the process

2-2-Mechanics

2-2a

2-3• Assets• Assets are valuable resources that are owned or

controlled by a firm. They represent probable future economic benefits and arise as the result of past transactions or events.

• First, the term probable suggests that in some situations accountants are not certain that future economic benefits exist.

• Second, assets must be owned or controlled by the firm. This component of the definition is designed to exclude public goods from balance sheets

2-4• Liabilities are present obligations of the firm. .

Common examples of liabilities are notes payable (written obligations), accounts payable (obligations to suppliers arising in the normal course of business), and taxes payable.

• They are probable future sacrifices of past events. Ex. Loss that can probably arise because of a claim– the profits made in the past could be lost due to liqiudated damages

2-5• Two aspects of the definition of liabilities need

elaboration. First, as with assets, the term probable is used. This is an important part of the definition. Although in some instances, the existence of a liability is virtually certain (as when one arises from obtaining a bank loan), other situations are less clear. For example, consider a firm that has been sued. At the inception of the suit, the outcome may be highly uncertain, but as the litigation proceeds, it may seem more likely (but not certain) that the firm will be forced to pay some amount. Accountants need to exercise judgment in determining the existence of a liability. They do so by assessing whether a potential future sacrifice is probable

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• Second, the definition requires that liabilities arise from past transactions or events

2-7-Mechanics

• 1) Split the transaction into its relevant parts-ALICE categorization

• 2) Write the Basic nature of each of the parts—Mark Dr/Cr against it

• 3) Note the “change”-increase/ decrease?

Change the notations in case of a “decrease”

2-8-Another method

C=A A can also be financed out of Loan and out of Retained earnings

Thus, L+R/E+C=A. Now, you could expend the amount or, Create Assets out of it.

L+R/E+C=A+E

If you drew out monies( Drawings) the Capital would reduce as it is an Application

L+R/E+C= A+ E+D The basic equation

2-9Split the following transactions into their relevant components

Jan 1 Commenced business with a Capital of Rs 100,00,000/-Jan1 Bought Furniture for Rs. 50,000/ . Amount paid by cashJan2 Bought stationery worth Rs. 10,00,000/- from M/s Ram & Co; the terms

were 50% cash and the rest on a 15 day interest-free creditJan2 Opened a Current a/c with M/s Canara Bank by depositing a sum of Rs

50,00,000/-Jan 3 Sold some stationery to Mr. Shyam for Rs 200000/- Shyam paid Rs.

1,20,000/- by way of a cheque, Rs. 15000/- by cash and the balance was to be paid on a 15 day credit

Jan 4 Mr. Hari joined the services of the organization . He is to be paid a salary of Rs 15000/ per month

Jan 5 Rented Godown space on rentals of Rs. 10,000/ per month. Paid a Interest Free deposit of Rs. 100,000/ by cheque. The land lord is Mr. Krish( look at rent deposit a/c and NOT KRISH a/c!)

2-10• 1) Cash Dr 100,000

• To Capital------------100,000• 2) Furniture Dr 50,000• To Cash----------------50,000• 3)Purchases Dr– 10,00,000• To Ram&co------------------5,00,000• To Cash----------------------5,00,000• 4) SB a/c Dr –50,000• To Cash---------------50,000• 5) Bank Dr---1,20,000• Cash Dr—15,000• Debtor-Dr----65,000• TO Sales-------------2,00,000

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• No entry need be passed for Hari joining the Organization as Salary accrues only AFTER he has worked

• Similarly no entry need be passed for renting the Godown as, rent becomes payable ONLY AFTER the Godown has been occupied. For the remaining part, the entry is---

• Rent deposit a/c Dr-1,00,000

• To bank-------------------1,00,000

2-11a-Another method• Cap + Loan+R/e(Rev)= assets+ Expenses + drawings• 1) 100 =100• 2) = 0.50• (0.50)• 3) 5 = (5) +10• 4) =50• (50)• 5) 2 =1.20• 0.15 6 no entry• 0.65• 7) =1+(1)

2-12-Opening Entries-Sample

2-13-Examples• Jan 6 Sold stationery to Mr. Raj on credit-Rs. 50,000/-

Mr. Raj has agreed to pay to pay the dues by 22nd Jan.• Jan7 Withdrew( Drawings) Rs. 25,000/- by Cash• Jan 8 Paid Rs. 25000/- in cash to M/s Bangalore

Electricity Supply Company Ltd. This is an “advance” that will be adjusted against the monthly electricity bill.

• Jan 9 Bought a Motorcycle from M/s TVS motors on a 3 month credit. The Asset cost Rs. 40,000/-. Paid Rs 2000/- for fittings( in cash) to M/s Jam from whom the fittings were bought

2-14• 6-1 Debtor a/c Dr 50,000• To Sales 50,000• 7-1 Drawings a/c Dr Dr 25,000• To Cash 25000• ( Cash balance in the firm reduces)• 8-1 Electricity Advance a/c Dr 25,000• To Cash 25000• 9-1 Motorcycle a/c Dr 42,000• To TVS 40,000• To cash 2000

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• Jan 10 Bought Stationery worth Rs. 50.000/- from M/s Bhim & Co. The amount was settled by paying cash

• Jan 11Bought a shop from M/s S& Co. for Rs. 10,00,000/ making a payment of Rs. 300000/- in cash and raising a Mortgage Loan for the balance. The Mortgage carries an Interest of 12% p.a, is repayable over a period of 5 years in equal annual installments. The mortgage carries a Principal repayment moratorium of 2 years

2-1610-1 Purchases a/c Dr 50,000• To cash 50000• 11-1 Shop a/c Dr 10,00,000• To M/s S&co 10,00,000• S& Co. Dr 10,00,000• To Cash 3,00,000• To Loan a/c 7,00,000• Year end- Interest a/c Dr- 84,000• To Lender 84000• Lender Dr 84000• To Cash 84000• 2nd Yr Loan a/c Dr 140000• To Lender 140000• Lender Dr 140000• To cash 140000

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• 12-1 Advance paid to a supplier M/s A& Co Rs 10,000/-

• Advance to M/s A a/c Dr 10,000

• To cash 10,000

• 13-1 Cash introduced into business Rs. 25,000

• Cash a/c Dr 25,000

• To Capital a/c 25,000

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• January 1 - Started business with Rs.3,000• January 2 - Bought goods worth Rs.2,000• January 9 - Received order for half of the goods from `G’• January 12 - Delivered the goods, G invoiced Rs.1,300• January 15 - Received order for remaining half of the total goods• purchased• January 21 - Delivered goods and received cash Rs.1,200• January 30 - G makes payment• January 31 - Paid salaries Rs.210• - Received interest Rs.50• Let us now analyse the transactions one by one.

2-19• January 1 – Started business with Rs.3,000: The two accounts involved

are cash and owners’ equity. Cash, an asset increases and hence it has to be debited. Owners’ equity, a liability also increases and hence it has to be credited.

• January 2 – Bought goods worth Rs.2,000 (CASH): The two accounts affected by this transaction are cash and goods (purchases). Cash balance decreases and hence it s credited and goods on hand, an asset, increases and hence it is to be debited.

• January 9 – Received order for half of the goods from `G’: No entry is• required as realisation of revenue will take place only when goods are

delivered (Realisation concept).• January 12 – Delivered the goods, `G’ invoiced Rs.1,300: This

transaction affects two accounts – Goods (Sales) a/c and Receivables a/c. Since it is a credit transaction receivables increase (asset) and hence is to be debited. Sales decreases goods on hand and hence goods (Sales) a/c is to be credited. Since the term `goods’ is used to mean purchase of goods and sale of goods, to avoid confusion purchase of goods is simply shown as Purchases a/c and Sale of goods as Sales a/c.

2-20• Trial Balance• The Purposes of preparing a Trial Balance are—

• 1) To have an immediate overview of the a/cs on a particular day• 2) To check the Arithmetical accuracy of a/cs—especially Ledger

Balances

• A trial balance may be prepared at any point in time—whenever the arithmetical accuracy is sought to be established

• A Trial Balance is not a part of the books;it is drawn up as a separate statement and becomes , often, the Source document for drawing up External Financial Statements—P& L a/c & the B/s

• A Trial; balance consists of All ELEMENTS---ALICE

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