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Accounting is a process which includes: Identifying Measuring Recording Classifying Summarising Analysing the transactions which can be measured in terms of money.
By Raman Sachdeva 1
By Raman Sachdeva
Liability.
An amount, which is invested into the business borrowed from outside market is called as liability. This is the amount which has to be returned in future. For example loan from bank, creditors (a person from whom goods have been purchased on credit) etc.
By Raman Sachdeva
Creditors.
Those people from whom goods have been purchased on credit and money has to be repaid are called as creditors, these are a
kind of current liability.
By Raman Sachdeva 4
Objectives of Accounting
To keep systematic records: Accounting is done to keep a systematic record of financial transactions. In the absence of accounting there would have been terrific burden on human memory which in most cases would have been impossible to bear. To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted us. This is possible on account of accounting supplying the information to the manager or the proprietor. To ascertain the operational profit or loss: Accounting helps is ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of revenues and expenses of a particular period. The profit and loss account is prepared at the end of a period and if the amount of revenue for the period is more than the expenditure incurred in earning that revenue, there is said to be a profit. In case the expenditure exceeds the revenue, there is said to be a loss. To ascertain the financial position of business: The profit and loss account gives the amount of profit or loss made by the business during a particular period. However, it is not enough. The businessman must know about his financial position i.e., where he stands; what he owes and what he owns? This objective is served by the balance sheet or position statement. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.
By Raman Sachdeva 7
Advantages of Accounting
Helps in ascertaining the profit earned or losses suffered and financial position (status) of the business. Assists in managing the business proof in court in law Helps in remembering Helps in taxation matters Helps in case of sale of business. Helps the manager in planning, Decision making and controlling the business operations.
By Raman Sachdeva 8
Limitations of Accounting
Not absolutely exact as it based on different estimates made by different people. All items are shown at historical value as it ignores price level changes. Records only monetary transaction and avoids other important non-monetary transactions. Window dressing (manipulation) in Balance Sheet, e.g., over or undervaluation of closing stock. Omission of qualitative information, such as calibre of the management, quality of the products, health of the proprietor, etc. Based on accounting concepts and conventions. Influenced by personal judgement.
By Raman Sachdeva 9
Accounting Period Concept Accounting Period Concept requires that Income Statement should be prepared at periodic intervals for purposes such as performance evaluation and determination of taxes. Conventionally, the time span covered is one year. Corporate firms, as per Companies Act, are required to produce interim accounts and many business firms produce monthly or quarterly accounts for internal purposes. Matching Principle The Matching concept is, in a way, an extension of Accrual concept. In fact, this is the most comprehensive Accounting Principle that enumerates normative framework of income determination of an accounting period of a business firm.
By Raman Sachdeva
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By Raman Sachdeva
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Accounting Equation
Mr. Ram Sharma started a business by investing Rs.5,00,000 (Capital) of his own and borrowed Rs.3,00,000 from bank as loan (liability), the total amount contributed comes to Rs.8,00,000. He spend this amount in the following manner: Machinery 2,00,000 Furniture 1,00,000 Car 2,00,000 Stock 1,50,000 8,00,000 All Assets Fittings 50,000 Bank 70,000 Cash 30,000 So
Ledger
Trial Balance
Final accounts
By Raman Sachdeva 14
By Raman Sachdeva
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Real
Nominal
Personal
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Accountancy - Journal
Rule #1.
Aloo, the owner has purchased a machinery worth Rs. 10,000 for his business Explaination: Machinery Account will be Debited by 10,000 (because business is receiving a machinery) Cash Account will be Credited by 10,000 (because business is giving cash )
Entry : Machinery A/c To Cash A/c Dr. 10,000
This rule is related to real accounts like assets which a business receive or give away.
10,000
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Journal Rule # 2
Rule # 2
This rule is related to personal accounts like debtors and creditors with whom business deals.
Business purchased Machinery from Tomato on credit worth Rs. 2,000 Explanation Machinery has come into the business so according to rule # 1 it will be debited and on the other hand Tomato is giving something to the business therefore according to rule # 2 his account will be credited. Entry
2,000
2,000
By Raman Sachdeva
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Journal Rule # 3
Rule # 3.Debit all the losses and Expenses
This rule is related to nominal accounts like incomes and expenses which a firm earns or suffers.
Explanation Cash has gone out of the business so according to rule # 1 cash will be credited and on the other hand salary a kind of expense for the business and it will be debited as per rule # 3. Entry Salary A/c Dr. To Cash A/c
5,000
5,000
By Raman Sachdeva
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By Raman Sachdeva
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Ledger Posting
Let us understand how to post the journal entries into ledger For example there is entry to pay salary to an employee: Entry: Salary A/c To Cash A/c Dr. 5,000 5,000
Salary Account
Cash Account
To Cash 5000
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Trial Balance
Hypothetical Example
Cash Account To balance b/d To Sales A/c To Shyam To Interst A/c To Capital A/c 10,000 5,000 By Cash A/c 2,000 3,000 10,000 30,000 To balance b/d 28,000 By balance b/d 60,000 10,000 By Purchases A/c 2,000 By balance b/d 50,000 Capital Account
By balance c/d
28,000 30,000
To balance c/d
Trial Balance
Particulars Cash Account Amount Dr. Amount Cr. 28,000
Capital Account
Note: The balance of debit and credit should match in trial balance.
Practice Question 1
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Practice Question 2
Pass necessary Journal entries :
Paid cash to Pawan on behalf of Mukesh Rs. 2,000. Received cash from Sonu Rs. 5,000 on behalf of Monu. Exchanged old car for a new car. The old car was valued at Rs. 15,000, the price of the new car was Rs. 36,000. The Balance was paid through Bank. Purchases from akshay goods worth Rs. 20,000 and sold on the same day 30% of the goods at a profit of 10%. Rs. 30,000 was paid to the Builder for construction of a shed by a crossed cheque. Purchased stationery worth Rs. 1,000. Out of this, stationery worth Rs. 200 was taken by the proprietor for domestic use. Sent a cheque to Rahul for Rs. 2,980 after deduction discount of Rs. 20 but Rahul disallowed the discount.
By Raman Sachdeva
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Cash Book
In business most of the transactions relate to receipt of cash, payments of cash, sale of goods and purchase of goods. So it is convenient to have separate books for each such class of transaction, one for receipts and payments of cash, one for purchase of goods and one for sale of goods. These books are called subsidiary books. Cash book is a subsidiary book, which records the receipts and payment of cash. With the help of cash book cash and bank balance can be checked at my point of time.
By Raman Sachdeva 26
By Raman Sachdeva
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Payments Cr.
Particulars Amt Rs.
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Dr Receipts
Date
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3900
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By Raman Sachdeva
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Direct Expenses
Direct expenses are those expenses, which are directly related with the quantity of goods produced. In this category, we include expenses incurred on purchase of raw materials/goods and on manufacturing of goods. Freight, carriage and cartage on purchase of goods. Customs duty and octroi, etc. Landing and clearing charges. These are expenses relating to clearing the goods purchased or imported. Dock dues/charges
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Indirect Expenses
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Capital Expenditure
Capital expenditure is the expenditure which is incurred on purchase or construction of fixed assets such as building, plant and machinery, furniture and fixture, etc. It benefits the business for a long period. It helps in generating revenue for the business. Normally the amount involved in capital expenditure is also substantial. Following types of expenditure are generally treated as capital expenditure: Acquisition of a permanent assets. Expenditure on purchase of or on installation of a fixed asset. Overhauling charges of a second hand asset purchased. Extension of or improvement in fixed assets. The purchase of right to carry on business.
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Revenue Expenditure
Revenue expenditure may be defined as an expenditure which benefits the company for a short period. The benefits are normally derived within a year. Such expenditure is necessary to maintain the assets and to generate the revenue income in ordinary course of business. It is recurring in nature. It is necessary to generate revenue income in ordinary course of business. It does not add to value of assets or profit earning capacity. For example. Cost of materials and goods. In case of materials and goods purchased only that part of revenue expenditure which has been consumed or sold during the year, is considered revenue expenditure for the current year and the balance is carried to the next year. Manufacturing expenses such as wages, factory expenses, power and fuel, etc.
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By Raman Sachdeva
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Performa for Profit and Loss Account Particulars To Gross Loss To To To To To To To To To To To To To To To To To To To To To Amount XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Total XXXX Particulars By Gross Profit Amount XXX XXX XXX XXX
Travelling Expenses Printing and Stationery Discount allowed Depreciation Office Expenses Salary Interest Telephone Expenses Electricity Expenses Carriage outwards Advertisements Postage Rent Insurance Freight Bad debts General Expenses Rates and Taxes Repairs and maintenance Manager's remuneration Salesmens commission
To Net profit
XXX XXXX
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Fixed Assets : Building Furniture Vehicles Plant and Machinery Fittings Computers Current Assets Debtors Prepaid Expenses Cash in hand Cash at bank Bills Receivables Advances given Income due but not received Total
Total
XXXX
By Raman Sachdeva
By Raman Sachdeva
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