Accounting Mechanics Processing Accounting Information

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Accounting Mechanics is a vast topic, where collecting and recording accounting data for preparation of principal financial statements required by GAAP.

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Accounting Mechanics Processing Accounting Information

  1. 1. Importance Importance ‘ Accounting Mechanics ’ shows us howAccountants collect and record accounting data for preparation of principal financial statements required by GAAP.
  2. 2. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account ‘ Account ’ is a summary device to record transactions in Company’s books of accounts.It is a label to record changes in assets, liabilities and shareholders’ equity. Account Head _________________________________________ Debit CreditThe balance in an account is the difference between the totals of debits and credits.
  3. 3. Cash vs. Accrual Accounting Cash vs. Accrual Accounting‘ Accrual Accounting Cash AccountingRecord Income When earned. When money received.Record Expense When Incurred When Paid.Use Universal Small units.Mandatory Yes. GAAP Not Recognized. Requirement. In this course we will use the accepted accrual system of accounting.
  4. 4. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account ‘Accounts are classified as :Personal Accounts Real AccountsNon Personal Accounts } Nominal Accounts
  5. 5. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Accounts are classified as : Personal Accounts – related to persons like debtor, creditor, supplier or customer.
  6. 6. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Accounts are classified as :• Personal Accounts Real Accounts – related to assets, of the firm but not its debt. e.g. Land , Buildings, Plant, Cash etc.
  7. 7. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Accounts are classified as :• Personal Accounts• Real Accounts Nominal Accounts – related to expenses, incomes, losses and gains. e.g. salaries, interest, travel etc.
  8. 8. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Accounts are classified as :• Personal Accounts• Real Accounts• Nominal Accounts – related to expenses, incomes, losses and gains. e.g. salaries, interest, travel etc. ‘ net result of all the nominal accounts is reflected as P & L for the accounting year.’
  9. 9. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Golden rules of double entry#1 For real accounts; debit (dr) what comes in, and credit (cr) what goes out.Purchased materials – dr Inventory.Issued cheque for it - cr Bank
  10. 10. Concept & Operation of ‘‘ Account ’’ Concept & Operation of Account‘Golden rules of double entry#1 - For real accounts; debit (dr) what comes in, and credit (cr) what goes out.# 2 - For personal accounts; debit (dr) the receiver, and credit (cr) the giver.Issued cheque to Sachin – dr SachinRecd. cheque from Sachin – cr Sachin
  11. 11. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry#1 - For real accounts; debit (dr) what comes in, and credit (cr) what goes out.#2 - For personal accounts; debit (dr) the receiver, and credit (cr) the giver.#3 - For nominal accounts; debit (dr) expenses / assets, and credit (cr) income /liabilities.Distributed salaries – dr SalariesRecd. Interest cheque – cr Interest
  12. 12. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry :You buy a machine for Rs 15,000/- & issue cheque.Dr Machinery ( Rule # 3 – dr expenses )Cr Bank ( Rule # 1 – cr what goes out )
  13. 13. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry :You issue cheque of Rs 10,000/- for car hire.Dr Travel ( Rule # 3 – dr expense )Cr Bank ( Rule # 1 – cr what goes out )
  14. 14. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry :You receive cheque of Rs 10,000/- for interest on Fixed Deposit.Dr Bank ( Rule # 1 – dr what comes in )Cr Interest ( Rule # 3 – cr incomes )
  15. 15. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry : You sell goods worth Rs. 10,000/- and offer 5% quantity ( trade ) discount. You receive cheque.Dr Bank Rs 9,500/- Cr Sales Rs 9,500/- ‘trade discount is a reduction in market price. Market price is not relevant in accounting, & is ignored.
  16. 16. Concept & Operation of ‘‘ Account ’’ Concept & Operation of AccountGolden rules of double entry : You sell goods worth Rs. 10,000/- and offer 5% cash discount. You receive cheque.Dr Bank Rs 9,500/-Dr Discount allowed Rs 500/- Cr Sales Rs 10,000/-Cash discount is an extra discount allowed(or earned) for early cash settlement, hence recorded in the books’
  17. 17. ‘‘ Journal & Ledger’ Journal & Ledger’The Journal ‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’
  18. 18. ‘‘ Journal & Ledger’ Journal & Ledger’ The Journal ‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’The General Ledger ‘ is the book where details of all accounts are maintained.’ Entries in the Journal are periodically posted to the respective accounts in the Ledger.
  19. 19. ‘‘ Journal & Ledger’ Journal & Ledger’ The Journal ‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’ The General Ledger ‘ is the book where details of all accounts are maintained.’“ in computerized environment these two stages get rolled into one “
  20. 20. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction. - recognizable, recordable event with monetary impact.
  21. 21. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher - a source document bearing approved monetary value e.g. cash receipt, cheque, customer invoice, deposit slip, supplier invoice, material receipt etc.
  22. 22. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction - identify accounts affected, find out whether to be debited or credited & by how much.
  23. 23. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record By preparing entry in appropriate journal ( manual accounting)
  24. 24. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post journal entry into ledger account Thus all transactions on an account are available at one place & net balance can be arrived at
  25. 25. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance a simple listing of all the accounts with their net balances. Ensure debits equal credits to eliminate recording errors.
  26. 26. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance Remember balanced listing does not eliminate compensating errors or missing entries.
  27. 27. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries for deferrals, accruals & depreciation.
  28. 28. ‘‘ Accounting Process ’’ Accounting Process7 Prepare adjusting entries for deferrals, accruals & depreciation.Deferral : An adjustment for which the business paid or received cash in advance.
  29. 29. ‘‘ Accounting Process ’’ Accounting Process7 Prepare adjusting entries for deferrals, accruals & depreciation.Deferral : An adjustment for which the business paid or received cash in advance.Accrual : An expense or a revenue occurring before the business pays or receives cash.
  30. 30. ‘‘ Accounting Process ’’ Accounting Process7 Prepare adjusting entries for deferrals, accruals & depreciation.Deferral : An adjustment for which the business paid or received cash in advance.Accrual : An expense or a revenue occurring before the business pays or receives cash.Depreciation : An allocation of the cost of a plant asset to expense over the asset’s useful life.
  31. 31. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.
  32. 32. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger. 8 Prepare adjusted trial balance. - include adjusting entries
  33. 33. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.8 Prepare adjusted trial balance.9 Prepare principal financial statements.
  34. 34. ‘‘ Accounting Process ’’ Accounting Process9 Prepare principal financial statements.Income Statement - from the revenue, expenses, gains and losses.
  35. 35. ‘‘ Accounting Process ’’ Accounting Process9 Prepare principal financial statements. $ Income Statement$ Balance Sheet - prepared from the assets, liabilities and equity accounts.
  36. 36. ‘‘ Accounting Process ’’ Accounting Process9 Prepare principal financial statements. $ Income Statement $ Balance Sheet$ Statement of Retained Earnings - prepared from the net income and dividend information.
  37. 37. ‘‘ Accounting Process ’’ Accounting Process9 Prepare principal financial statements. $ Income Statement $ Balance Sheet $ Statement of Retained Earnings$ Cash Flow Statement- prepared from other financial statements by direct or indirect method ( discussed in Chapter Five later).
  38. 38. ‘‘ Accounting Process ’’ Accounting Process9 Prepare principal financial statements. $ Income Statement $ Balance Sheet $ Statement of Retained Earnings $ Cash Flow StatementWith these four you are in compliance with GAAP.
  39. 39. ‘‘ Accounting Process ’’ Accounting Process1 Identify the transaction.2 Prepare a voucher3 Analyze and classify transaction4 Record5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.8 Prepare adjusted trial balance.9 Prepare principal financial statements. and the job is complete!
  40. 40. ‘‘ Accounting Process ’’ Accounting Process and the job is complete!However, you have still to i) prepare closing journal entries that close temporary accounts & post them to Ledger
  41. 41. ‘‘ Accounting Process ’’ Accounting Process and the job is complete!However, you have still to i) prepare closing journal entries that close temporary accounts & post them to Ledger ii) prepare after-closing trial balance‘ to make sure that debits equal credits’
  42. 42. ‘‘ Accounting Process ’’ Accounting Process and the job is complete!However, you have still to i) prepare closing journal entries that close temporary accounts & post them to Ledger ii) prepare after-closing trial balance iii) Prepare reversing journal entries; this way you have ensured that accruals and deferrals of this year do not result in double accounting next year.
  43. 43. “ Theimportance of “accounting mechanics : processing accounting information “ is to collect, process, classify, compile, check and present meaningful financial data for decisions that have to taken in the modern business world!”

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