MODULE 1&2

Basics of Accounting Role of Financial Accounting Function of Financial Accounting

Basic Accounting Concepts and Conventions

underlying the preparation of Financial Statements Double Entry book keeping system Books of Accounts &Trial Balance and Preparation of Profit &Loss Account and Balance Sheet Rectification of errors.

Name the monument?

Who built it? Why it was built? What was the motive behind construction of this monument? What was the cost of building it? Who were the suppliers? Who were the parties interested in this project? Is the person accountable to Any one?

Name the project?

Who undertook this project?

What was the motive behind this project?

What was the cost involved in it?

Why it was taken up?

Who were the suppliers?

Who were the parties interested in this project?

Is their any accountability?

BUSINESS
Business is a form of activity involving production

and purchase of goods with the object of selling a profit. Producing and selling at profit is essential to constitute a business. The term business also includes the performance of services for others on payments.

FORMS OF BUSINESS
Sole Proprietor Partnership Company or Corporation

Every business whether small or large has the basic objective to see whether the money invested is efficiently utilized or not.

PARTIES INTERESTED IN BUSINESS

Owner or Shareholder Managers Creditors Banks, Financial Institutions Prospective Investors Government Employees Society Researchers All these parties are interested in the Financial position of the organisation in order to take decisions.

ACCOUNTING
Accounting is a language of business.

The basic objective of language is to communicate the

results of business operations to various parties Business must know:What it owns? What it owes? Whether it has earned a profit or loss on account of running a business? What is its financial position i.e. will it be able to meet all his commitments in the near future

Accounting provides the answer of all these questions

DEFINING ACCOUNTING
Accounting is a process of recording, classifying and summarizing in a significant and in terms of money, transactions and events which are, in part,at least of financial character and interpreting results thereof According to AICPA (1941) Accounting may be defined as the process of recording, classifying, summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the parties interested in such information.

OBJECTIVES OF ACCOUNTING
To maintain the records of business transaction Computation of Profit or Loss Depiction of financial position

To make information available to various groups and

users. To facilitate rational decision making.

FUNCTIONS OF ACCOUNTING
Recording
Only transactions that have financial character are recorded. Recording is done in the book JOURNAL

Classifying
Grouping of transactions of similar nature at one place i.e LEDGER

FUNCTIONS OF ACCOUNTING
Summarizing
It involves presenting the classified data in a manner which is understandable and useful to the internal as well as external users of accounting statements.
Trial Balance Income Statement Balance Sheet

Deals with financial transactions

Only financial transactions are recorded in the books of accounts.

Analysis and Interpretation

It helps the management to judge the performance of the business operations and for preparing future plans.

FUNCTIONS OF ACCOUNTING
Communicating Results Accounting information so analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through distribution of accounting reports Making Information more Reliable This is done by use of internationally accepted accounting standards

BRANCHES OF ACCOUNTING
Financial Accounting Cost Accounting Management Accounting

Module 1
Sub Mod 1 ACCOUNTING PRINCIPLES

ACCOUNTING PRINCIPLES
Accounting is termed as language of business. As in case of

language there are set of rules which are adopted for communication same is the case with accounting also. Those rules of action or conduct which are adopted by accountant universally while recording accounting transactions are termed as GAAPs. These principles are of two types: Accounting Concepts Accounting Conventions

Accounting Principles

Accounting Concepts

Accounting Conventions

Basic Assumptions and conditions on Which the accounting is based

Are the customs or traditions Which are followed by the accountants as a guide in the Financial statements

Accounting Concepts
Business Entity Concept Going Concern Concept Money Measurement Concept Cost Concept Dual Aspect Concept Accounting Period Concept Realization Concept Accrual Concept Matching Concept Objective Evidence Concept

Business Entity Concept

This concept considers business as a separate and distinct

entity from the owners of the enterprise. Accounting records are kept only from the point of view of the business unit and not the owners. The owner is treated as an outsider or creditor of the business. Transactions of private affairs of the owner are not recorded but the drawings & additional capital related to the business are recorded in the books of the enterprise .

Going Concern Concept

This concept assumes that the business will continue in

operation for a indefinite period of time and will not be dissolved in the foreseeable future. The benefit from a certain expenditure incurred in a particular year will accrue to the business over a longer period of time.

Money Measurement Concept

Money has been adopted by the accounting system as its basic

unit of measurement, & as a monitory expression of economic events. Money is universally known to compare values.
Functions of Money It performs the function of a medium of exchange It acts as a unit of accounting It is used as a store of value Hence , All transactions of the business are recorded in terms of money

Cost Concept
Cost concept implies that all transactions are recorded at

cost & not at the market value . It is closely related to the going concern concept . If the land is acquired for the operations of the business & would not be sold shortly , Then it is immaterial to know the market value of the land. This cost becomes the basis for computation of depreciation.

Dual Aspect Concept

The accounting equation is the basis for double entry

system accounting. It states that every time a transaction takes place, there is always a two-sided effect.
ASSETS=LIABILITIES+CAPITAL
o Purchased Furniture from Rao Bros worth Rs. 50000 o Received Rs.7000 from Anand on account. o Withdrew cash for personal use Rs. 2000 o Owner introduced further capital of Rs. 80000

Accounting Period Concept

Business has perpetual succession , but it has to

ascertain the results at periodic intervals to know the financial position of the business. Hence a period of 12 months is taken as the ideal period , recognized by Companies Act & Taxation laws.

Realization Concept
Revenue is the process of converting non-cash resources

and rights into money. This concept is governed by the concept of conservatism. Revenue should only be brought in to account when it is actually realized. Revenue is recognized at the point of sale or at the performance of a services. Revenues should be recognized when the major economic activities have been completed Sales are recognized when the goods are sold and delivered to customers or services are rendered

Accrual Concept
The accrual concept is an accounting system which recognizes revenues and expenses as they earned or incurred, respectively without regard to the date of receipt and payments Due to this assumption various expenses outstanding & prepaid , incomes receivable & received in advance are suitably adjusted in the financial year

Matching Concept
The matching concept requires that the expenses for an

accounting period should be matched against related incomes. This concept assumes that the costs of the business of a particular period are compared with revenues of that period in order to ascertain the net profit or loss.

Accounting Convention
Convention of Conservatism Convention of Consistency Convention of Disclosure

Convention of Materiality

Convention of Conservatism
Conservatism refers to early recognition of unfavorable

events. It believes in understating gains and values and overstating losses and liabilities. While preparing the financial statements it is necessary to provide for all possible losses .

Convention of Consistency
It required that once an entity has decided on one

method, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to change the method of treatment of that event. If a change is adopted , it has to be disclosed below the balance sheet as a foot note.

Convention of Materiality
Materiality implies significance, substance, importance and

consequence. Item is recorded only when it is considered to be useful or important to the user of a financial statement. The items of small value is not shown as asset but shown as an expense.

Convention of Full Disclosure

According to the Company Law , each item of expense &

income should be disclosed independently & separately . All information of material importance should be disclosed in the Profit & loss account & the balance sheet Methods & policies of the firm has to be shown as the foot notes to the balance sheet

Module 1
Sub Mod 2

BALANCE SHEET 9

IDENTIFICATION OF TRANSACTION 1

PREPARTION OF BUSINESS DOCUMENTS 2

PROFIT AND LOSS ACCOUNT 8

Accounting Process
PREPARATION OFADJUSTED TRIAL BALANCE 7

RECORDING OF TRANSACTION IN JOURNAL 3

POSTING TO LEDGER 4
PASSING OF ADJUSTING ENTRIES 6 PREPARATION OF UNADJUSTED TRIAL BALANCE 5

Accounting Terms
Goods The term Goods includes all commodities, articles or products which are purchased for the purpose of resale. It refers to any merchandise in which a trader deals. Debtor Debtor is a person/firm to whom the goods are sold on credit. Creditor Creditor is a person/firm to whom the firm owes IOW Creditor is a person/firm who have supplied goods to the business on credit.

 On Account Cash paid or cash received on account means payment or receipt of cash for previous balance or dues.

Transaction Any dealing between two person/firm where the transfer of money or its equivalent take place.
Cash Transaction Any transaction which involves either the immediate payment of cash or the immediate receipt of cash is called cash transaction.

 Credit Transaction Transaction which does not involves immediate payment/receipt of cash IOW transaction which involves postphonement of receipt or payment to some future date Assets Assets are tangible or intangible things having value expressible in money, which are owned by a business for carrying on business activities. Assets are the property or resources of business concern Assets are classified into Fixed Assets & Current Assets

 Liabilities Liabilities are the debts owned by the business entity to the outsiders. Liabilities are classified into Fixed Liabilities & Current Liabilities. Capital Amount invested by the owner in his business. It is defined as excess of Assets over liabilities. Drawing The amount of cash or any asset withdrawn by the owner of the business for his personal or domestic use.

 Solvent Solvent is a person who is capable of paying his debts in full IOW Solvent is a person whose assets are equal to or more than that of liabilities. Purchase The term Purchases means goods purchased for resale. Goods purchased for factory use or office use are not regarded as purchases. It is treated as an asset. Purchases are treated as expenses for accounting purposes.

 Sales The term Sales means goods sold for cash or on credit. It does not include sale of asset. Sales are treated as incomes for accounting purposes. Purchase Return Goods purchased on credit basis, when returned back to the supplier for various reasons is treated as purchase return.

Sales Return Goods sold on credit basis, when returned back by the customers for various reasons is treated as sales return.

 Entry When a business transaction is duly entered in a journal it becomes an entry Opening Stock The value of goods lying in the storehouse at the beginning of the period. Closing Stock The value of unsold goods at the end of the period. The closing stock is valued at cost or market value whichever is lower.

Journal It is a book of original entry or prime entry in which all the transactions are entered in chrological order of date wise.

Performa of Journal
Date 7/08/2009 Particulars Purchase A/c------Dr To Cash A/c (Being purchase goods on cash) L/F Debit 5000 Credit 5000

 Folio

It is the page number for easy reference of account Ledger is abook of fnal entry containing all the accounts of the business Account means the record of the trnasactions in a summarized form pertaining to particular person or a particular asset or a particular expense or income

Ledger

Account

Parts of an Account
Dr. Date To Particular J/f Suresh A/c Amt Date By Particular J/f Cr. Amt

 Posting Posting is a process of transferring the entries of the transactions from journal to the ledger account.

Debiting Debiting means recording the transaction on the debit side(left side) of an account.
Crediting Recording the transaction on the credit side (right side) of an acccount. Casting Casting means totalling of the amount columns of the accounts or journals.

 Debit Balance If the debit side total of an account is more than credit side total. The account is said to posses debit balance.

Credit Balance If the credit side total of an account is more than debit side total. The account is said to posses credit balance.
Expenses Expenses are the amounts spent on purchasing, manufacturing and selling of goods and services. Losses Reduction in the value of asset or resources without any benefit.

 Incomes Incomes refers to an amount received or receivable for sale of goods and services or for use of any right belonging to the business. Gains Gains refers to increase in value of an asset

Module 2
Sub Mod 3

System of Accounting
Two System of Accounting Business Transactions Cash System of Accounting
Under this system only those business transaction which involve receipt and payment of cash are recorded. Credit transaction are not recorded. This system of accounting is best suited for professional like CAs, Lawyer, etc.

Mercantile System or Accrual System of Accounting

Under this system both cash and credit transactions are recording in books of account. This system of accounting is followed by both profit and non-profit organisation.

Systems of Book-Keeping
Book keeping is the art of recording business

transactions in a regular and systematic manner. Recording of transactions may be done by following any one of the system.
Single Entry System Double Entry System

 Single Entry System It is a system of recording business transaction where in the principle of dual aspect concept is not followed. It is incomplete & Inaccurate form of entering business transaction. Under this system cash account and personal account of debtors and creditors will be maintained. This system is best suited for small business concern.

 Double Entry System It is the system of recording business transaction where in two-fold aspects of a transactions are recorded. Two fold aspects implies benefit receiving and benefit giving It is based on accounting equation i.e. Assets = Liab+Equities. Accounts maintained under system are reliable to outsiders.

Classification of Business Transactions

Business transactions are classified into three

categories;

Transactions relating to persons. Transactions relating to properties and Assets Transactions relating to incomes and expenses.

On the basis of this the firm need to maintain

account of;

Each person with whom it deals Each property or asset which the business owns Each item of expense or income.

Classification of Accounts
Account

Personal

Real

Nominal

Classification of Accounts
Account

Personal

Real

Nominal

Natural Personal A/c

Artifical Personal A/c

Representative Personal A/c

Rule
Debit Receiver Credit - Giver

Classification of Accounts
Account

Personal

Real

Nominal

Tangible

Intangible

Rule
Debit What comes in Credit What goes out

Classification of Accounts
Account

Personal

Real

Nominal

Expenses & Losses

Incomes & Gains

Rule
Debit Expenses & Losses Credit Incomes & Gains

Note
When prefix and suffix is added to a Nominal Account, it becomes Personal Account.
Rent Account

Interest Account
Salary Account Insurance Account Commission Account

: Rent prepaid a/c, O/s Rent a/c : O/s Interest A/c, Interest Received in Advance a/c, Prepaid Interest A/c : O/s salaries a/c, Prepaid Salaries a/c : O/s Insurance a/c, Prepaid Insurance a/c. : O/s commission a/c, Prepaid commission a/c.

Problem
From the following transactions, find out the nature of account and also state which account should be debited and which account should be credited. 1. Rent paid 2. Salaries paid 3. Interest received 4. Dividends received 5. Furniture purchased for cash 6. Machinery sold 7. O/s for salaries 8. Telephone charges paid 9. Paid to suresh on account 10. Received from Mohan(the proprietor) 11. Lighting charges paid.

solution
Sl.no. Transaction Accounts involved Nature of Accounts Debit/ Credit

Module 2
Sub Mod 4

Journal & ledger

Journal Entry
Single Journal Entry

If a transaction involves only one debit and credit, it is called single journal entry Eg: Paid Wages, Received cash from Ashok on account, Purchased goods for cash. Compound Journal Entry If a transaction involves multiple debit and multiple credits is called compound journal entry. Eg: Received Cash Rs. 44500 from Anil and allowed discount of Rs. 500. Mr. Arvind started business with furniture Rs. 50000, Goods Rs. 100000, cash Rs. 10000. Paid to sunil Rs. 1500 and he allowed discount of Rs. 100.

Ledger
A ledger is a book which contains various accounts. IOW Leger is a set of accounts. It contains all the accounts

of the business enterprise. It contains all the personal, real and nominal accounts. It is a book of final entry. It is a bases for preparing trail balance.

Module 2
Sub Mod 5

Sub Division of Journal Or Subsidiary Book

Journal

General Journal

Special Journal/ Subsidiary Books

Subsidiary Book is a book of original entry in which specific and homogeneous transactions are recorded in the chronological order of date

Journal

General Journal

Special Journal

Cash Journal

Goods Journal

Bills Journal

Cash Receipts Cash Payments

Purchase Journal Purchase Return Journal Sales Journal

B/R

B/P

Sales Return Journal

 Purchase

Book Sales Book Purchase Return Book Sales Return Book Cash Book Bills Receivable Book Bills Payable Book Journal Proper

All credit purchase of goods are written in this book. Cash purchase of goods and credit purchase of assets are not recorded in this book. Other names of purchase book are purchase day book, purchase journal, bought journal, inward invoice book etc. Name of the Supplier Date L/ F Inward Invoice No. 112 200 Amount Rs. Amount Rs. 5000 57000

1-05- 08 5-05- 08

Rajesh Traders, Shimoga Vinay Suppliers, Less: Trade discount 5%

60000 3000 _______ _______ _ _ 62000

Total Credit Purchase

 It is book meant for recording only credit sale of

goods, Cash sales and Sale of Asset is not recorded in this book. Other names of Sales Book are Sales Day Book, Sales Journal, Sold book, Outward Invoice Book etc

Specimen of Sales Book

Date
11-05-08 15-05-08 Name of the Customer Ramesh Traders, Hubli Rao Traders, Hubli Less: T D 5% L/F Outward Invoice No. 401 402 30000 1500 ______ Amount Amount Rs. Rs. 15000

28500 ______

Total Credit Sales

43500

It is a book meant for recording goods return to our suppliers due to various reasons and also for Claiming for the damage goods received. Short supply in the goods received. Difference in the quality of goods ordered and received. Difference in the price quoted and price charged in the invoice.

Date

Name of the Supplier

L/F

Debit Note No. 51 52

Amount Rs.

Amount Rs.

11-05-08

Rajesh Traders, Shimoga Vinay Suppliers, Less: Trade discount 5%

1000 5000 250 ______

15-05-08

4750 ________ 5750

Total Purchase Return

It is a book meant for recording goods return by our customers due to various reasons and also for Claiming for the damage goods received. Short supply in the goods received. Difference in the quality of goods ordered and received. Difference in the price quoted and price charged in the invoice.

Date

Name of the Customer Ramesh Traders, Hubli

L/ F

credit note No. 401

Amount Rs.

Amount Rs. 2000

21-05-08

25-05-08 Rao Traders, Hubli Less: T D 5%

Total Sales return

402

3000 150 ______ _

2850
______ 4850

Cash book is a book of original entry in which all the cash transactions i.e. cash receipts and cash payment is recorded. There are different types of cash book like; Simple cash book Two column (Discount & Cash column) Three column and (Discount, Cash & Bank Column) Multiple column cash book. Depending upon the requirement the suitable type of cash book is maintained.

Date

Receipts

CR L Amou No. / nt F Rs.

Date

Payment

V L Amount N / Rs. o. F

1-05-08 To bal b/d 3-05-08 ToRamesh 9-05-08 Trs. To Furniture

5000 2-05-08 3000 5-05-08 10000 15-05-08 31-05-08

______

By Stationary By Rajesh Trs. By Purchases By bal -----c/d

500 1000 5000 11500 _____ 18000

18000

 This book is maintained to record all the bills

receivable and promissory notes received during the period from the debtors. This books helps the trader to know the total amount receivable in the form of bills and the maturity period.

Stamp

Bangalore 10th June 2009

Three months after date pay me or order the sum of Ten thousand rupees only for value received To Drawee Mary Jacob Mangalattu house Indiranagar Bangalore

Signed Surya Jacob Drawer

Stamp

Bangalore 10th June 2009

Three months after date I promise to pay you or to your order the sum of Ten thousand rupees only for value received

To Drawee Surya Jacob Mangalattu house Indiranagar Bangalore

Signed Mary Jacob

Drawer

Date

Name of the Acceptor

L/F

Term

Due date

Payee

Amount Remarks

 This book is maintained to record all the bills

payables and promissory notes accepted during the period of our suppliers. This books helps the trader to know the total amount payable in the form of bills and the maturity period.

Date

Name of the Drawer

L/F

Term

Due date

Payee

Amount

Remarks

Journal Proper is a book in which those transactions which cannot be recorded in any of the above subsidiary books will be recorded. Ex: Purchase of asset on credit, sale of Asset on credit, opening entry , rectification entries, Transfer entries, adjusting entries etc. This book is also called as residual book or just a journal.

Date

Particulars

L/F

Debit

Credit

Module 2
Sub Mod 6
BANK RECONCILIATION STATEMENT
Learning Objectives: Need for Bank Reconciliation Statement Meaning of Bank Reconciliation Statement Reasons for differences in the balances between Cash book and Pass book Procedure for preparation of Bank Reconciliation Statement Format of BRS under different situations

Meaning of Bank Reconciliation Statement

Bank Reconciliation Statement is a statement prepared To reconcile the differences shown in the cash book and pass book balances, With a object of knowing the causes of differences between the two balances And pass necessary correcting or adjusting entries in the book of the firm.

Reasons for difference in Bank Balance as per Cash Book and Pass Book
Cheques issued but not presented or cashed.

Cheques deposited into the bank but not collected

or credited by the bank. Cheques omitted to be deposited into bank. Direct deposit made by our customer into our bank account. Any charges or interest debited by the banker. Interest on deposits credited by the banker.

Reasons for difference in Bank Balance as per Cash Book and Pass Book
Dividend, interest on investment collected as per

our standing instructions by the bank. Insurance premium, electricity bill, telephone bills paid by banker as per standing instructions. Cheques issued and subsequently dishonored. Cheques paid into bank but subsequently dishonored. Bills receivables collected and credited by banker. Mistakes or wrong entries in cash book or pass book.

Procedure for preparing Bank Reconciliation Statement

The cash book should be completed

and the balance as per the bank column is to be ascertained. The bank should be requested to issue complete bank statement upto the period specified. Tick the items appearing in the pass book with the items appearing in the cash book. Make a list of unticked items appearing in pass book and cash book. The unticked items are the items

Procedure for preparing Bank Reconciliation Statement conti..

Start with cash book or pass book balance

as a starting point. The effect of a particular cause of difference should be studied in the opposite book and accordingly the items must be added or subtracted. In case of unfavorable balance (overdraft) the amount of overdraft should be written with minus sign. After adjusting the items causing difference we get the required balance.

PROFORMA OF BRS
Particulars Bank balance as per Pass book Or Overdraft balance as per Pass book Add: Cheques deposited into bank but not yet collected Bank charges debited in pass book Cheques omitted to be deposited into bank Debit charges for dishonor of cheques Insurance premium paid as per standing instruction Less: Cheques issued but not cashed Interest credited in pass book Direct deposit made by customer into our bank account Interest , dividend collected and credited in pass book Balance as per Pass book OR Overdraft balance as per Pass book Amount Amount
XXX (XXX)

XXX XXX XXX XXX XXX _________

XXX XXX XXX XXX _________

XXX

________ XXX

XXX _________ XXX (XXX)

PROFORMA OF BRS

Particulars
Bank balance as per Cash book Or Overdraft balance as per Cash book Add: Cheques issued but not cashed Interest credited in pass book Direct deposit made by customer into our bank account Interest , dividend collected and credited in pass book Less: Cheques deposited into bank but not yet collected Bank charges debited in pass book Cheques omitted to be deposited into bank Debit charges for dishonour of cheques Insurance premium paid as per standing instruction Balance as per Pass book OR Overdraft balance as per Pass book

Amount

Amount
XXX (XXX)

XXX XXX XXX XXX _________ XXX XXX XXX XXX XXX __________

XXX ________ XXX

XXX _________ XXX (XXX)

Module 2
Sub Mod 7

Trail Balance
Trial balance is a statement, which shows the debit &

credit balance of ledger accounts on a particular date. It represents all transactions relating to different accounts in a summarized form for a particular period. The trial balance is prepared after all the transactions for the period have been journalized and posted to the General Ledger. The main intention of a trial is to check the arithmetic accuracy of the accounts. Position of particular account can be judged by

Types of Balances
Assets

:Debit Balance Expenses :Debit Balance Drawings :Debit Balance Purchase :Debit Balance Sales Return :Debit Balance Opening Stock :Debit Balance Provision for Doubtful Debts :Debit Balance
:Credit Balance :Credit Balance :Credit Balance : Credit Balance : Credit Balance

Liabilities Income Owners Capital Purchase. Return Sales

Format of Trail Balance

Sl.no.

Account

L/F

Debit Balance

Credit Balance

Module 2
Sub Mod 8

RECTIFICATION OF ERRORS
Content Introduction Meaning of Error Meaning of Mistake Types of Errors Meaning of Rectification Methods of Rectification of Errors Problem

Meaning of Error
It is an unintentional act committed by the book keeper or accountant due to lack of accounting knowledge.

Meaning of Mistake

It is also an unintentional act committed by the bookkeeper or accountant due to oversight, negligence or omission etc.

Examples of Errors

Types of Errors
Errors are broadly classified into two categories:
a. Errors affecting one account only/One sided Error/Errors

affecting the agreement of the Trail balance. b. Errors affecting two or more account /Two sided Error/Errors that do not affect the agreement of the Trail balance.

Meaning of Rectification of Error

Rectification of errors means correction of errors or mistakes of any type committed by a book keeper or an accountant.

Methods of Rectification of Error

Direct Entry Method Journal Entry

Suspense A/c An account in which the difference in a trial balance is put temporarily till such time that errors are located and rectified. It facilitates the preparation of provisional financial statements even when the trial balance does not tally.

Module 2
Sub Mod 9

ADJUSTMENTS
CONTENT: Introduction Meaning of Adjustment Meaning of Adjusting Entries Rule of Final Account Adjustments and Treatment

Meaning of Adjustment
Adjustments are the additional
information given with the Trail Balance to facilitates the ascertainment of correct financial position of a business.

Meaning of Adjusting Entries

Adjusting

Entries are the entries passed in the Journal Proper relating to the additional information given and not for actual transaction.

Adjustments
Closing stock Outstanding Expenses Prepaid Expenses Outstanding Income Income received in Advance Depreciation Appreciation Bad Debts Provision for Doubtful Debts Provision for Discount on Debtors Interest on Capital Interest on Drawing

Adjustments and Treatment

Adjustment Adjusting Entry Treatment

Closing Stock O/S Expense

Closing stock a/c---Dr To Trading a/c Expenses a/c--------Dr To O/s Exp.a/c

Trading A/c- Credit side Balance sheetAsset side Add to expenses a/c Balance sheet-Liability side
Less from expense a/c Balance sheet-Asset side

Prepaid Expense

Prepaid exp.a/c-----Dr To Expense a/c

Adjustment O/S Income

Adjusting Entry O/s Income a/c-----Dr To Income a/c

Treatment Add to Income a/c in P&loss, Balance sheet-Asset side

Income received in advance

Income a/c---------Dr Less from Income a/c To Advance Income a/c Balance sheet-Liability side

Depreciation

Depreciation a/c---Dr To Asset a/c

Less from asset a/c in Balance sheet Profit & Loss a/c-Debit side

Adjustment Appreciation

Adjusting Entry Asset a/c-----------Dr To Appreciation a/c

Treatment Add to the asset a/c in Balance sheet Profit & loss a/c Credit side

Bad debts

Bad debts recovered

Less from Drs in Balance sheet Profit & loss a/c-Debit side Cash a/c------------Dr If given in Trail To Bad debts recover a/c Balance: Profit & loss a/c-Credit side

Bad Debts a/c-----Dr To Debtors a/c

Adjustments Reserve for Doubtful Debts

Adjusting Entry P&loss a/c ---------Dr To RDD a/c

Treatment
If Old RDD is not given in TB Less New RDD from Drs in Balance sheet. Profit & loss a/c Debit side If Old RDD is given in TB Less New RDD from Drs in Balance sheet. Compare Old RDD with New RDD If New RDD > Old RDD difference record on Debit side of P&loss a/c. If New RDD <Old RDD difference record on Credit side of P&loss a/c.

Adjustments Reserve for Discount on Debtors

Adjusting Entry P&loss a/c ---------Dr To Reserve for discount on Drs a/c

Treatment
If Old RDD is not given in TB Less New RDD from Drs in Balance sheet. Profit & loss a/c Debit side If Old RDD is given in TB Less New RDD from Drs in Balance sheet. Compare Old RDD with New RDD If New RDD > Old RDD difference record on Debit side of P&loss a/c. If New RDD <Old RDD difference record on Credit side of P&loss a/c.

Adjustment Interest on Capital

Adjusting Entry Interest on Capital a/c--Dr To Capital a/c

Treatment Add to Capital a/c in Balance Sheet P& loss a/c Debit side

Interest on Drawing

Drawing a/c ------Dr Add to Drawing a/c in To Int on Drawing a/c Balance sheet P& loss a/c Credit side

Module 2
Sub Mod 10

FINANCIAL STATEMENT
Meaning

of Financial Statements. Types of Financial Statements. Nature of Financial Statement Trading Account Profit & Loss Account Balance Sheet

MEANING OF FINANCIAL STATEMENT

A financial statement is an organized collection of data prepared according to logical and consistent accounting procedure According to Smith and Ashburn Financial Statements are the end products of financial accounting, prepared by the accountant that purport to reveal the financial position of the enterprise, the result of its recent activities and an analysis of what has been done with the earnings.

TYPES OF FINANCIAL STATEMENTS

There are six basic financial statements of special importance, they are;
The

Income Statement (or P&L A/c) The Position Statement (or B/S) The Funds Flow Statement The Cash Flow Statement The Statement of Retained Earnings Schedules.

NATURE OF FINANCIAL STATEMENTS

According to AICPA Financial statement reflect A combination of recorded facts, accounting conventions and personal judgments and the judgment and conventions applied affect them materially

Recorded Facts Accounting Conventions Personal Judgement

TRADING ACCOUNT
Trading Account is a revenue account which shows the result of the purchasing and selling of goods. The basic objective of preparing trading account is to know gross profit or gross loss. It is generally prepared after the end of financial year i.e. Accounting year

Trading Account for the year ending Particulars

To Opening Stock To Purchases: Cash Credit

--------Amount
Xxx Xxx ____ Xxx Xxx ___

Amount

--Amount

Particulars
By Sales Cash Credit

Amount

Xxx Xxx ____ Xxx Xxx Xxx xxx ______

Less: Sales Return By closing stock By Gross Loss c/d Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx _____ xxx

Less: Purchase Return Goods distributed as samples Goods withdrawn for personal use. To wages To carriage inward To Gas,Water,Fuel To Packing charges To other factory expenses To Gross Profit c/d

Xxx

Xxx Xxx _____ xxx

EQUATIONS

Cost of Goods sold Opening stock +Purchases +Direct Exp Closing stock Cost of Goods sold Net Sales Gross Profit Net Sales + Gross Loss Gross Profit = Credit Total Debit Total Gross Loss = Debit Total Credit Total

PROFIT AND LOSS ACCOUNT

It is a revenue account which records all the expenses and loss and incomes and gains. Debit side is meant for recording expenses and losses Credit side is meant for recording incomes and gains If Credit side total is more than Debit side total the difference is Net Profit. vice-versa. It is also know as Income Statement, Statement of earnings, Statement of operations Profit and loss account is a flow statement that portrays the operations over/during a particular time period.

Profit and Loss Account for the year ending ___________

Expenses & Losses

To Gross Loss -----b/d To Taveling Expenses To Rent & Taxes To Printing & Stationery To Postage & Telegrams To Telephone Charges To Light Charges To Insurance To Interest To Discount Allowed To Advertisement To commission To Carriage Outwards To Audit Fees To Legal Expenses To Bad Debts To RDD To Depreciation To Repairs To Net Profit ---c/d

Amt

Amount
Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx Xxx ____ xxx

Incomes & Gains

By Gross Profit b/d By Interest Earned By Commission Earned By Discount Earned By Dividend on shares

Amt

Amount
Xxx Xxx Xxx Xxx Xxx Xxx

By Net Loss ---c/d

Xxx

_____ xxx

BALANCE SHEET

Balance Sheet is a statement of 'assets' and 'liabilities' of a business on a particular date, generally the last date of an accounting period. Balance sheet is also called the financial position statement. A Balance Sheet is a financial "snapshot" of business at a given date in time. It lists various assets, liabilities, and the difference between the two, represents owner's equity, or net worth. The accounting equation (assets = liabilities + owner's equity) is the basis for the balance sheet.

Balance sheet is generally prepared in T form. (Horizontal form). Balance sheet can also be prepared in Vertical form. Assets are shown on the right hand side Liabilities on the left hand side. Some important assets are Cash in hand. Debtors, closing stock, machinery, furniture, Building, etc. Liabilities may be creditors. Bank overdraft. Bills payable, capital etc.

OBJECTIVES
The main objective of preparing balance sheet is to assess the financial position of a business on a particular date. It also shows the net capital of the proprietor of the business on a particular date. Balance Sheet also indicates the capacity of a business to continue its business activities in future.

BASES OF ARRANGING ASSETS AND LIABILITIES

On the Basis of Performance
Liabilities Fixed Liabilities Long Term Liabilities Current Liabilities Total Amount Xxx Xxx xxx Xxx Assets Fixed Assets Current Assets Fictitious Assets Total Amount Xxx Xxx Xxx xxx

On the Basis of Liquidity

Liabilities Current Liabilities Long Term Liabilities Fixed Liabilities Total Amount Xxx Xxx xxx Xxx Assets Current Assets Fixed Assets Fictitious Assets Total Amount Xxx Xxx Xxx xxx

BALANCE SHEET OF __ AS ON ___

Liabilities Capital Add: Additional capital Net Profit Less: Drawings Net Loss Mortgage Loan Other loans Sundry Creditors Bills Payable Bank Overdraft O/s Expenses Income received in advance

Amount Xxx Xxx Xxx ___ Xxx Xxx ___

Amount

Assets Land & Buildings Plant & Machinery Less: Depreciation Furniture & Fixtures Motor vehicles Loose tools & Spares Investments Closing Stock Bills Receivables Sundry Debtors Less: Bad Debts

Amount Xxx Xxx ___

Amount xxx xxx xxx xxx xxx xxx xxx xxx

Xxx Xxx Xxx Xxx Xxx Xxx Xxx xxx

Less: New RDD Prepaid Expenses O/s Incomes Cash at Bank Cash in Hand

Xxx Xxx ___ Xxx Xxx ___

xxx xxx xxx xxx xxx xxx

xxx

SUMMARY

Module 1: Basics of Accounting Mod 1 Sub 1: Accounting Concepts & Conventions Mod 1 Sub 2: Accounting Process and Accounting Terms Mod 2 Sub 3: Classification of Accounts Mod 2 Sub 4: Journal and Ledger Mod 2 Sub 5: Subsidiary Books Mod 2 Sub 6: Bank Reconciliation Statement Mod 2 Sub 7: Trail Balance Mod 2 Sub 8: Rectification of Error