1. ACCOUNTING MECHANISM

2. Accounting Documents and Records

3. Flow of data
1. Recording transactions in journal –
passing journal entries through
double entry system
2. Posting into a ledger - classifying all
entries of a similar account into a ledger
3. Ledger balancing – closing all ledger
accounts and finding out the balance in
each ledger account.
4. Preparing trial balance – Listing all ledger

4. Account : A record of transactions related
to a particular item of expense , income ,
assets or liabilities
Expenses : Salaries ,repairs, traveling ,
audit fees , printing & stationary etc.
Income : Sales , dividend , interest ,
commission etc.
Assets : Buildings, Machinery ,
Furniture , Debtors, Prepaid expenses,
Cash, Bills receivable

5. Classification of accounts
1. Real Accounts, Personal Accounts,
Nominal Accounts
2. Asset Accounts, Liability Accounts,
Income Accounts, Payment Accounts
Understanding Outstanding and
prepaid accounts and the concept of
Matching principle
Outstanding Expenses – Liability
Outstanding Income - Asset

6. Rules of debit / credit
Double entry system of recording entries : Every transaction recorded must
have equal debits and credits
Analysis of transactions
Accounting equation can be expanded as :
Liabilities + Capital+ Revenues =Assets +Expenses+ Dividends
Effect Asset, Expenses, Dividend
Liability,Capital,Revenue
 Basic Debit Credit
 Increase Debit
Credit
 Decrease Credit Debit

7. Class exercise 1
Put a cross in the appropriate column to indicate the type of account and the accounts normal balance
Type of account Normal balance
Asset Liability Capital Debit Credit
 Salaries
 Miscellaneous expenses
 Prepaid rent
 Share capital
 Office supplies
 Interest income
 Commission earned
 Rent expense
 Proprietors drawings
 Bills receivable
 Margin money deposit
 Cash
 Debtors
 Creditors
 Advance to suppliers
 Unearned professional fees
 Advance from debtors
 Electricity charges
 Professional fees earned
 Income tax payable
 Income tax earned
 Dividends
 Bills Payable
 Outstanding expenses
 Debentures
 Reserves
 Provision for tax
 Bank balance
 Telephone expenses
 Bad debts

8. Class exercise 1
Classify the following ledger balances into
debit and credit balances and prepare a trial
balance.
Building 25000 Telephone expenses 500
Office equipment 20000 Share capital 50000
Cash 14000 Loan taken 5000
Creditors 10000 Prepaid insurance 1000
Debtors 21700 Unpaid repairs expenses 500
Bills payable 3000 Dividend received 200
Purchases 12000 Reserves 2000
Sales 30000 Provision for tax 2000

9. Class exercise 2
Venus Music corner provides is in the business of providing audio
CDs to customers. During March the accounts were maintained by
a professional accountant On March 31 , the records showed a
balance of Rs.21140 in his capital account. Since he could not
afford an accountant , he starts maintaining the accounting records
himself. He prepared the statements for the month of April 2006
and was shocked to find that his business had not fared well. He
wants you to review his statements.

10. Profit & Loss A/c for the month ended April’10
Expenses Revenues
Salaries 5600 Investments by owner 3000
Electricity 410 Service revenue recd 600
Advertisement 130 in advance
Rent 300
Drawings 4000 Loss for the month 6840
10440 10440
Balance Sheet as on April 30, 2010
Liabilities Assets
Creditors 2510 Recording equipment 25500
Service revenue Supplies 2190
earned 12660 Debtors 1210
Capital 14300 Cash 570
 29470 29470

11. Schedule VI Part I – Balance Sheet
The company’s balance Sheet may be in
horizontal or vertical form
It shall disclose current years as well as
previous years figures
Details may be given in Schedules attached to
Balance Sheet
Figures may be rounded off to the nearest ’00
or ’000. It can also be in 00.00 format.

12. Format of Horizontal Balance Sheet
P.Y Liabilities C.Y P.Y Assets C.Y
1. Share Capital 1. Fixed Assets
2. Reserves & Surplus 2. Investments
3. Secured Loans 3. Current Assets, Loans
4. Unsecured Loans and Advances
5. Current Liabilities and A. Current Assets
and Provisions B. Loans and Advances
A. Current liabilities 4. 1 Miscellaneous Expenditure
B. Provisions 2. Profit and Loss A/c Dr bal
Footnote :
Contingent liabilities

13. Vertical form of Balance Sheet
I. Sources of funds
1. Shareholders funds
Share capital
Reserves & Surplus
2. Loan Funds
Secured loans
Unsecured loans
II. Application of funds
1. Fixed Assets
2. Investments
3. Current assets , loans and advances
less: Current liabilities and provisions
4. Miscellaneous expenditure.
Footnote for contingent liabilities

14. z
Schedule VI Part II – Profit & Loss Account
General requirements
It shall disclose every material factor w.r.t Incomes & Expenditures
Any item> 1% of the turnover or Rs.5000 whichever is higher should be shown
separate item and not under miscellaneous expenses.
1.Turnover
2. Commission paid to selling agents, brokerage and discount allowed
3. Value of raw material consumed
4. Opening and closing stock of goods and raw materials
5. Depreciation
6. Interest paid
7. Income tax
8. Transfer to reserves / withdrawals from reserves
9. Stores and spare parts
10.Rent, power & fuel, repairs, insurance, rates and taxes, Auditors fees
11.Salaries , contribution to staff welfare schemes
12 Profit and loss from unusual sources
13.Earnings / expenditure in foreign currency ( notes to accounts )
14. FOB value of exports

15. Format of Vertical Profit & Loss Account
Income
Sales
Others
Expenditure
Materials consumed and purchases
Manufacturing

16. The trial balance of Trendy Leather Products is given below
Particulars Debit Credit
Store equipment 20000
Accumulated depreciation 2000
Opening stock 17400
Office supplies 2730
Debtors 9700
Cash 2870
Store rent 12000
Insurance 6000
Creditors 7580
Share capital 35000
Retained earnings 7100
Sales 115760
Sales returns 1170
Sales Discounts 1030
Purchases 69230
Purchase returns 1180
Purchase discounts 2150
Freight 4200
Salaries 5100
Selling expenses 9600
Advertisement expenses 2300
Delivery expenses 1130
Telephone expenses 910
Advance to suppliers 5400
------- --------
170770 170770

17. 1. Depreciation on equipment Rs.1000
2. Closing stock Rs.
23100
3. Rent is paid for the period Jun’09 – May’10
@ Rs.1000 p.m
4. Insurance charges is paid for the year
ended 31.10.10
5. Estimated income tax Rs.5000
6. Salaries are unpaid to the extent of
Rs.3000