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MADE EASY
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Definition..
yAn art of recording, classifying andsummarizing in a significant mannerand in terms of money, transactionsand events which are in part at least ofa financial character, and interpretingthe results thereof
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Features:y Service activity.
y Referred to as the language of business.
y It is the measurement of financial activities.y Provides quantitative information.
y Useful in decision making.
y Helps in making choices.
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Objectives:yMaintenance of business records.
yCalculation of profit or loss.
yDepiction of financial position.
yChanges in financial position.
y
Provides information on economic resourcesand obligations of an enterprise.
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Advantages:yProvides information to make decisions.
y It provides information to various interestedpeople.
y It acts as an evidence in court of law.
y It helps in comparison of financialinformation.
y It helps to track all the financial transactionsof the company.
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Limitations:yHistorical in nature.
yCurrent revenues and historical costs arecompared.
y Increase in value of assets are notconsidered.
y It does not provide qualitative information.
yAccounting principles and methods varywith organizations.
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Branches ofAccountingy Financial Accounting: The accounting system that is
concerned only with the financial affairs of thebusiness, with the aim to know the financial status ofthe business.
y Cost Accounting: This accounting system basicallyinvolves the analysis of various elements of cost,estimating future cost and to exercise cost control andcost reduction.
y Management Accounting:Accounting whichprovides information to management which helpsthem in making policies and decisions.
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Book keeping andAccounting
y Book keeping is concerned with identifyingfinancial transactions; measuring them in money
terms; recording and classifying them.yAccounting is concerned with summarizing
recorded transactions, interpreting them andcommunicating the results.
yAccounting starts where book keeping ends.
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Accountancy:
yThe knowledge of how to
make accounting is calledas accountancy.
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Parties interested in accounting
informationyOwners
yShareholders (in case of companies)
y InvestorsyCreditors
yLenders
yEmployeesyManagers
yGovernment
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GAAP (Generally AcceptedAccounting
Principles)
y MoneyMeasurement Concept: All transactionsentered in books must be expressed in terms of
money.y Dual Concept: Both the aspects i.e., debit and credit
should be recorded. Assets= Liabilities + Capital
y Going Concern Concept: Accounting is done based on
the assumption that business will run for ever.y Periodicity Concept: accounts are generally compiled
for one full year which is April toMarch.
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Contd.yAccrual Concept: Transactions are recorded based on
their occurrence and not on the receipt or payment of
money.y Matching Concept: Revenue should match with the
expenses incurred.
y Realisation Concept: Revenue should be brought into
account only when it is realised.y Materiality Concept: Facts which are material should
be disclosed in the books.
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Contdy Consistency Concept: Uniform accounting practices
and policies are followed without changing themfrequently.
y
Conservatism Concept: Recognize all losses andanticipate no gains.
y Historical Cost Concept: Transactions are recorded inthe books at the cost on the` date of transaction and
market value is not considered.
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C
ontd..y Theoretical Concepts:
1. Business Entity Concept: Business is different fromits owner. Liabilities + Capital = Assets.
2. Proprietary Concept: This concept insists theimportance of proprietor in a business.
Assets Liabilities = Proprietorship.
3. Fund Concept: Funds allocated for specificpurpose is used only for that purpose.
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Accounting ProcessyIdentification of financial transactions
y
RecordingyClassifying
ySummarising
yAnalysis and interpretation.
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RecordingyAfter financial transactions are identified, transactions
are recorded in the books based on the documentary
evidences in a chronological order.y This book is called as Journal and the act of recording
is called asJournalising.
y instead of journal transactions are recorded into
different books called as the subsidiary books which isdiscussed later.
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Classification:y Here transactions of similar nature are grouped under
a particular head called a ledger and this process is
called posting.y Transactions are grouped under a particular head
called Account.
yAccount is a part of ledger.
yAccount is classified to three different types which isdiscussed in the later slides.
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Summarising, Analysis and
interpretationySummarising
involves draftingof trial balance,trading and profit& loss account,Balance sheet.
yThe summarisedaccounts areinformed to theinterested parties,used to takedecisions.
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Account and its types
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Account..y Summarised record of relevant transactions at one
place pertaining to a particular head.
y
It records not only the amount of transaction and alsotheir effect and direction.
y Every account has two sides called as debit (Dr.) andcredit (Dr.)
y Debit denotes the left side while Credit denotes theright side.
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Types ofAccountsyAccounts are broadly classified into three:
1. Personal Account: Accounts related to individuals,
persons and artificial persons. Ex. Ram, Capital,Bank, etc.
2. Real Account: Accounts related to things that can betouch and felt i.e., tangible. Ex. Cash, furniture, etc.
3. Nominal Account: Accounts which are related tothings which are intangible, they cannot be touchand felt. They exist only for accounting purpose. Ex.Salaries, Wages, Rent, etc.
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Personal Accounty Debit:
The receiver.
Ex. Cash given to Ram.Here Ram receives money.
So Ram A/c is debited.
y Credit:
The giver.
Ex. Cash received fromRam. Here Ram givesmoney. So Ram A/c iscredited.
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Real Accounty Debit:
What comes in. Ex. Cash
received from Ram. Herecash comes in.
So Cash A/c is debited.
y Credit:
What goes out. Ex. Cash
paid to Ram. Here cashgoes out.
So Cash A/c is credited.
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Nominal Accounty Debit:
All the expenses and
losses.Ex. Salaries paid. Salaries
are expenses. So, SalariesA/c is debited.
y Credit:
All the incomes and gains.
Ex. Rent received. This isan income. So, Rent A/cis credited.
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Receipts and expenditure.
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Receiptsy Receipts are broadly classified in to Capital Receipts
and Revenue Receipts.
y
Capital Receipts: Those which are not available fordistribution as profits, without which a business cansurvive. Ex. Fresh issue of shares, Sale of machinery.
y Revenue Receipts: Those which are received in the
ordinary course of business, without which a businesscannot exist; also can be utilised for distribution asprofits. Ex. Sales.
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xpenditurey Expenditure can be broadly classified as Capital
Expenditure and Revenue Expenditure.
y Capital Expenditure: Those which are incurred formore than one accounting period; not recurring innature; can be incurred even before thecommencement of business; which eventuallybecomes revenue expenditure in the long run i.e. by
depreciation. Ex. Purchase of land, furniture, etc.y Revenue Expenditure: Those which are incurred for
the current period or 1 year; recurring in nature. Ex.Purchases, Rent, etc.
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Journal
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MeaningyJournal is called as the book of prime entry, where
transactions are recorded regularly in the
chronological order, as and when they occur.yA model journal book is available in the books.
y Only after recording transactions in journaltransactions are posted into the respective ledger
account.
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Steps to journalise..y Identify the financial element in transaction.
y Find the parties involved.
yApply the rules of debit and credit.y Find which account is to be debited and which account
is to be credited.
yJournalise the transaction as:
Account to be debited Dr.
To Account to be credited.
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xample forjournal:Cash received from Ram Rs.1000
1. Financial element rs. 1000
2. Accounts involved: two, Cash and Ram3. Cash: Real Account- comes in- so debit
4. Ram: Real Account- giver- so credit.
5. So the journal will be:
Cash A/c Dr.
To Ram A/c
[Being cah received from Ram]
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Subsidiary Books
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Meaning.Subsidiary books are those books of prime entry, which canbe used instead of journal.
Subsidiary books are of different types:
1. Cash book: Where transactions relating to cash arerecorded. Cash book are of different types: a) Singlecolumn cash book: where transactions related to cashalone are recorded.
b) Double column cash book: where transactions relatedto cash and bank are recorded.
c) Three column cash book: where transactions relatedto cash and bank are recorded along with discountcolumns.
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Contd.2. Purchases Day book: where credit purchases are
recorded. This book is totaled every month and the
figure is taken to the debit side of the Purchases A/c asTo Sundry Purchases
3. Sales DayBook: where credit sales are recorded. Thisbook is also totaled every month and that figure istaken to the credit side ofSales A/c
4. Purchases Returns Book: where returns outward arerecorded, the total is taken to the credit side ofPurchases Returns A/c.
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Contd.5. Sales Returns Book: where returns outwards will be
recorded, totaled and taken to the debit side of SalesReturns A/c
6. Bills Receivable Book: where transactions related tobills receivable are recorded.
7. Bills Payable Book: where transactions related to bills
payable are recorded.8. Journal Proper: where transactions which do not fall
into any of the above books.
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Contd.y In all the books except the last one, one aspect is
recorded in the respective subsidiary book and the
other aspect is recorded in the other aspectAccount.
yWhen Cash Book is maintained there is no need tomaintain Cash A/c and Bank A/c.
y Transactions in Journal Proper are treated asjournal and posting is done as usual on to theaccounts.
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Ledgery It is grouping of transactions relating to a particular
head under an Account.
y
An Account is aT
shaped format with two sides as Dr.and Cr.
yAfter transactions are journalised they are posted intothe ledger accounts.
yEntries in the debit side are posted with word startingTo and those of the credit side are posted with the
word starting By.
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Balancing a ledger accounty Total both the sides.
yWrite the biggest total in both the sides.
y The step explained below is called as balancing anaccount.
y Subtract the lowest total from the highest total andwrite the balance on the side having low total and
write it as To balance c/d or By balance c/d and writethe balance figure on the opposite side of the nextmonth as By balance b/d or To balance b/d.
yAccounts are generally balanced once in a month.
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The Trial Balance.y Trial Balance is a statement which shows the balances
of all the accounts as on a particular date.
y The debit balances and credit balances are recordedand both are totaled.
yWhen both the sides total are equal then it is called astally of trial balance.
yA trial balance is prepared to check the arithmetical
accuracy of recording transactions.yWhen there are errors the trial balance do not tally.Then those errors are called as errors disclosed by trialbalance.
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Contd.yAt certain cases the trial balance tallies even when
there are errors, then those errors are called as
errors not disclosed by trial balance.yA sample trial balance is available in the book.
y Final accounts of a business are prepared only afterpreparation of trial balance.
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rrors disclosedby trial balancey PartialOmission:Omission to record one of the
aspects of a transaction. Ex. When cash is receivedfrom Ram- if we debit Cash A/c and do not credit Ram
A/c or vice versa it is called as partial omission.
y Debit/Credit entries either not posted or posted twice.Ex. When Cash is received from Ram- Either Cash A/cis debited twice or Ram A/c is credited twice.
y Debits wrongly posted as credit and vice-versa. Ex.When cash is received from Ram- Ram A/c is debitedor Cash A/c is credited.
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Contd.yWrong totaling of subsidiary books. From here the
totals are taken to respective ledger accounts. Soobviously this leads to an disagreement of debit andcredit. Ex. Purchases day book actual total is rs. 10000but totaled as Rs. 11000 and taken to Purchases A/c.
y Difference in amount between entry: When Cash Isreceived from Ram rs.10000, Cash A/c is debited forRs10000 while Ram A/c is credited for Rs1000.
y Error in computation of Account Balance. That is whilebalancing the account.
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Contd.y Balance of an account wrongly recorded in in TrialBalance. Ex. When Cash A/c balance is Rs.11000 it isrecorded in Trial Balance as Rs10000.
y Omission of an Account Balance in trial balance. Ex.When all the accounts are properly maintained butfailed to take any of the account balances to the trialbalance.
y Error in Extraction of trial balance: While totaling thedebit and credit items we may make errors.
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rrors not disclosed.y Compensating Errors: When one error compensates
the other such. Ex. When goods sold to Ram forRs10000 it is recorded as Rs1000 and the same mistakeis done when cash is received from him.
y Error of principle: When error is done in the basicstage itself. That is, when classifying the accounts andapplying rules of debit and credit.
y Error of complete omission: When one entry iscompletely omitted to be recorded.
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Final Accounts.y Final accounts implies Trading Account, Profit & Loss
Account and Balance Sheet.
y
Final Accounts are usually prepared once in a year.That is, at the end of an accounting year.
y Final Accounts are prepared to find out the profits andalso the position of the business.
yTrading and Profit & Loss A/c gives details on profits
while Balance Sheet shows the overall financialposition of the business.
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Trading Accounty Trading Account is prepared for a period ending which
is usually one year.
y
It is prepared in order to find out gross profit.y Gross profit is found out by finding difference between
net sales and all direct costs involved to make createvalue to the goods or to make them salable.
y
Direct expenses include all factory and direct expenseslike wages, factory rent, purchases, fuel and power, etc.
y Gross Profit= Sales Cost of goods sold.
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Tips to prepare Trading A/cy Items of debit side:
1. Opening stock (available in balance sheet)
2. Net Purchases (purchases- purchase returns)3. Direct expenses (available in trial balance, exercise
caution while finding out)
4. Carriage inwards (but not carriage outwards)
Items on Credit side:1. Net Sales (Sales- Sales Returns)
2. Closing stock (Available in adjustments)
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Contd.y Total the credit side.
y Take that total to the debit side also.
y
Find the difference in the debit side.y That difference amount will be the gross profit.
y The above steps are almost usual for every sum, butvice-versa is applicable when the debit balance is morethan credit balance, where we get gross loss.
y This is to solve a simple problem without adjustments.
yAdditional steps will be done if there are adjustmentswhich will be explained in the later part.
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Profit & Loss Accounty This is prepared to find out Net Profit/Net Loss.
y Net returns are found out by adjusting all otherincomes and expenses to the gross profit/gross loss.
yAllOther Income are shown on the credit side below
the gross profit.yAll other expenses like discount, carriage allowed,
management expenses, selling expenses, provisions areshown on the debit side and balanced in the same
manner ofT
rading Account and Net Profit/Net Lossare found out.
y The balancing figure in debit side is Net Profit whilethe balancing figure in credit side is Net Loss.
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Contd.y The above steps are common for all sums, except for
special adjustments which will follow in the later parts.
y Most of the adjustments like bad debts, provisions forbad debts, provision for discounts, outstanding and
prepaid expenses, depreciation, etc. will have to bemade only in Profit & Loss A/c.
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Balance SheetyWhile Trading and Profit & Loss A/c are called as the
income statements Balance Sheet is called as thePosition Statement.
y Balance Sheet shows the position of a business as on aparticular date.
yAs other accounts and statements are divided into
debit and credit, the balance sheet is divided intoAssets side and Liabilities side.
yAssets are those which are owned by the business,either to generate current revenues or future revenues.
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Contd.Liabilities are those that a firm is liable to pay to theoutsiders, including to the proprietor.
y A general tip is that information given outside the trial
balance appears usually in two places, once in the tradinga/c or profit & loss a/c and other on the balance sheet.
y In any sum the Assets side total and the Liabilities sidetotal should be equal. If not there is mistake in the sum orin solving the sum.
y Balance sheet is either prepared in horizontal form orvertical form. And the arrangement of assets and liablitiescan be either in the order of liquidity or in the order ofpermamanency.
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