Basics of Financial Accounting (Download: http://wp.me/p1z0VI-Y)

ITM EEC, Batch 13B

Classification of Accounts

Personal Account Real Account Nominal Account

If the a/c head relates to any person or Real a/c deals with assets All Expense Accounts
artificial person. Fixed tangible assets (see, feel ,touch) All Income Accounts
In final a/c such personal a/c are located only & fixed intangible assets (documents & Trading Account
in balance sheet. promise) Profit & Loss Account
Personal a/c implies any resemblance with Real a/c appears in balance sheet on assets
name of any person side.
It never appears in trading & p/l a/c
If the amount is receivable from any person Fixed tangible Assets Expenses
eg debtors or If the amount is payable to any Land & Bldg Purchases
person eg creditors, Then such person’s a/c is Plant & Machinery Wages
personal a/c. Furniture & Fixtures Inward expenses
Vehicles & Equipments Factory Expenses
Computer Administrative Expenses
Livestock Selling & Distribution Expenses
REPRESENTATIVES A/C FIXED INTANGIBE ASSETS Outward Expenses
Outstanding expenses (expense payable) Goodwill Interest paid on Loan given
Pre received income Patent Depreciation
Prepaid income/expense paid in advance Copyright All Losses
Outstanding income Trademark Bad Debts
Licenses Discount Allowed. ETC
Franchises
BUSINESS HAS TO RECEIVE FROM OR PAY TO Cash Income
Bills Receivable Sales
Investments. Rent received
Stock of Goods is a real a/c (see feel touch) Commission Received

Financial Accounting – Term I (0.1) Page 1

ITM EEC, Batch 13B

Journal Entry

Personal Account Real Account Nominal Account

o Debit the Receiver o Debit what Comes in o Debit Expenses & Losses
o Receivable from any Person that Person is o Credit what Goes Out o Credit Incomes & gains
Debited (eg Debtors or Loan Given) o Debit means Increase Of Asset
o Credit the Giver o Credit means Decrease of Asset
o Payable To Any Person that Person is
Credited (eg Capital ,Loan
Taken,Creditors.)

Date / Sr. no. Particulars LF Dr Cr

1 Cash A/c. Dr 5000

To Sales A/c. Cr 5000

(Being Sales made)

2 Purchase A/c Dr 5000

To Cash A/c Cr 5000

(Being cash purchase of goods)

3 Sale return a/c Dr 5000

To Cash a/c Cr 5000

(Being goods returned to us by customers & we paid tjhem


ITM EEC, Batch 13B

cash back)

4 Cash a/c. Dr 5000

To Purchase return a/c Cr 50000

(Being purchased goods returned to supplier and recd cash
back)

5 Purchase A/c Dr

To Creditors a/c Cr

(Being purchase of goods on credit from supplier)

6 Debtors a/c Dr

To Sales a/c Cr

(Being Credit sale of goods to customer)

7 Saurav a/c Dr

To Sales a/c Cr

(Being goods sold on credit to saurav)

8 Purchase a/c Dr

To Amol a/c Cr

(Being goods purchased from amul on credit)

9 Amul a/c Dr


ITM EEC, Batch 13B

To Purchase Return a/c Cr

(Being purchase return of the above goods to amul)

10 Sale return a/c Dr

To Saurav a/c Cr

 Rule : Any exps incurred for purchase/construction/installation/acquisition of the asset is to be debited to that particular asset.

Important

1 Plant & Machinery a/c Dr

To cash a/c Cr

(Being wages paid on installation of P & M)

2 Land & Building a/c Dr

To Cash / Bank a/c Cr

(Being stamp duty & registration paid on purchase of property)

3 Cash a/c Dr 4000

P & M a/c Dr 3000

Stock a/c Dr 2000

Bank a/c Dr 1000


ITM EEC, Batch 13B

To Capital / Owners Capital a/c Cr 10000

(Being Cash Rs 4000/-, P&M Rs 3000/-, Stock Rs 2000/- brought
by owner & converted his savings a/c into current a/c Rs.
1000/-

4 Interest on Cap A/c Dr

To owners cap. a/c Cr

(Being interest on capital payable to owner)

5 Salary to Partner a/c Dr

To owners / partners cap a/c Cr

(Being salary payable to partner)

6 Interest on partners loan a/c Dr

To Partners Loan a/c Cr

(Being Interest on partners loan payable)

7 Commission to partner a/c Dr

To Partners Cap a/c Cr

(Being commission to partner payable)

8 Owners Drawing a/c Dr

To Interest on Drawing a/c Cr


ITM EEC, Batch 13B

(Being Interest on Drawing receivable)

9 Drawings a/c Dr 4000

Goods withdrawn a/c Dr 3000

Asset taken over a/c Dr 2000

LIC / Medical Dr 1000

To Cash / Bank a/c Cr 5000

To Goods a/c Cr 3000

To Asset a/c Cr 2000

(Being Cash withdrawn Rs. 4000/-, Goods withdrawn Rs. 3000/-,
Asset taken over Rs. 2000/-, LIC/Mediclaim/Club
bill/House Rent/I.T/ Sons Fees/Wifes Gift paid through
chq. Rs. 1000/- from business)

1 Loss by fire a/c Dr

To Goods Cr

(Being Goods Loss by fire)

2 Loss by fire a/c Dr 2000


ITM EEC, Batch 13B

Insurance Claim a/c Dr 3000

To Goods loss by fire Cr 5000

(Being goods loss by fire Rs.5000/-, Insurance Claim admitted
Rs. 3000/-)

3 Cash a/c Dr

To Insurance Claim a/c Cr

(Being above insurance claim recd)

4 Cash a/c Dr 4000

loss by fire a/c Dr 1000

To Goods Cr 5000

(Being goods lost by fire Rs. 5000/-, Ins. Co. settled for Rs.
4000/-)

5 Cash a/c Dr 4950

Discount a/c Dr 50

To Sales a/c Cr 5000

6 Purchase a/c Dr 5000

To Cash a/c Cr 4950

To Discount recd. a/c Cr 50


ITM EEC, Batch 13B

(Goods purchased for 5000/- & recd discount of Rs. 50/-)

Closing Entries

1 Closing Stock a/c Dr

To Trading a/c. Cr

(Being Closing Stock valued at cost of market value whichever is
lower)

2 Depreciation a/c Dr

To Fixed Asset a/c Cr

(Being Depreciation of fixed Tangible Asset)

3 Profit & Loss a/c Dr

To Reserve for Doubtful Debts (R.D.D.) a/c Cr

(Being R.D.D Created)

4 Expenses a/c Dr

To expenses payable / outstanding exps a/c Cr

(Being Outstanding Expenses payable)

5 Electricity a/c Dr

To outstanding electricity a/c Cr


ITM EEC, Batch 13B

(Being electricity bill payable)

6 Prepaid Salary a/c Dr

To Salaries Cr

(Being prepaid salaries)

7 Outstanding Rent a/c Dr

To Rent a/c Cr

(Being outstanding rent payable)

8 Commission a/c Dr

To Pre received commission a/c Cr

(Pre received commission from Amul)


ITM EEC, Batch 13B

Trading Account

 Trading Account is prepared by the trader generally on the last date of any year to get either gross profit or gross loss.
 Trading Account is prepared from the trial balance.
 Trading Account is the mixture of goods account and factory related expenses.
 Goods when comes in are recorded on the Debit Side.
 Goods when goes out are recorded on the Credit Side. (Eg. Net Sales, Loss By Theft or Fire, Goods distributed as Free Samples).
 Closing Stock is valued at cost or market value, whichever is less.
o Based on principle of Conservation which says “Provide for known losses, do not provide for known gains.”
 All the losses of goods & goods distributed as free samples are to be recorded at cost unless instructed otherwise.
 In Trading and Profit & Loss Account on the DEBIT side, Expenses & Losses are recorded and on the CREDIT side, Income & Gains are
recorded. Therefore gross profit from Trading Account is transferred to Profit & Loss Account on CREDIT side, Therefore gross loss from
Trading Account is transferred to DEBIT side.


ITM EEC, Batch 13B

XYZ Corporation
Trading Account for year ended 31 March 2008
Dr. Cr.
Particulars Amount Total Particulars Amount Total

To Opening Stock By Sales
To Purchases (-) Less Sales Return
(-) Less Purchase Return By Closing Stock
To Factory Expenses
To Wages / Salaries By Loss of Goods By Flood/Famine
To Lightning & Heating By Loss of Goods by Theft
To Buying Expenses By Loss of Goods by Fire
To Import Duty By Goods Distributed As Free Sample
To Clearing Charges
To Custom Duty By Drawing of Goods By The Owner/Partner
To Port Charges
To Carriage Inward By Gross Loss (Balancing Figure)
To Freight Inward
To Octroi Duty
To Unloading Charges
To Inward Expenses
To Primary Packing
To Works Manager Salary
To Factory Manager Salary
To Royalty On Production
To Motive Power
To Consumables Or Stores (eg. Coal, Coke, Oil
Gas)
To Gross Profit (Balancing Figure)
Total Total


ITM EEC, Batch 13B

Profit & Loss Account

 Profit & Loss Account conceptually records payments related to third parties (not owners) for example Payments related to Auditors,
Lawyers, Government, Suppliers (Interest on delay payment to suppliers), Electricity etc.
 Profit & Loss Account on the CREDIT side records all the incomes other than Sales
 Land Never depreciates but building does from day one.
 Profit & Loss Account – 3rd Party Related i.e. Non Owners


ITM EEC, Batch 13B

XYZ Corporation
Profit & Loss Account for year ended 31 March 2008
Dr. Cr.

To Gross Loss B/D By Gross Profit B/D
To Office & Admin Expenses By Bad Debts Recovered
To Salaries (Office Staff)
To Printing & Stationary
To Staff Welfare
To Postage / Telegram
To Rent / Rates / Taxes
To Repairs & Maintenance
To Office Insurance
To Telephone Expenses
To General Expenses
To Audit Charges
To Legal Charges
To Director Fees
To Bank Charges
To Bonus
To Interest on loan taken
To Interest on delay in payment to supplier
To Selling & Distribution Expenses
To Carriage outward
To Discount Allowed
To Travelling & Sales Conveyance
To Salesman Salaries
To Sales Manager Salaries
To Sales Commission
To Depreciation on Office Furniture


ITM EEC, Batch 13B

To Depreciation on Fixed Assets
To Provision for Taxation
To Provision for Doubtful Debts
To Provision for Reserve for Discount on
Debtors.
To Loss on Sale on Investment
To Loss on Sale on Fixed Asset

To Net Profit
(Transfer to P&L Appropriations Account)
Total Total


ITM EEC, Batch 13B

XYZ Corporation
Profit & Loss Appropriation Account
Dr. Cr.

To Drawings By Net Profit B/D
(a) Partner 1 By Interest on Drawings
(b) Partner 2
To Preference Dividend
To Equity Dividend
To Transfer To Reserves
To Retained Earnings
(Reserves & Surplus)
To Interest on Capital
(to Owner/Partner)
To Salary to Owner / Partner
To Commission to owners
To Interest Paid on Partner Loan Taken

Total Total


ITM EEC, Batch 13B

XYZ Corporation
Capital Account
Dr. Cr.

To Drawings  By Balance B/D 
(Opening Capital)
To Interest on Drawings  By Profit 
To Additional Drawings By Interest on Capital 
Personal Expenses  By Salary To Partner 
Personal Insurance  By Brokerage / Commission to Partner 
(LIC/Mediclaim)
Personal Expenses 
(Son’s Fees, Wife’s Gift)
Income Tax 

To Balance Closing 
(Closing Captal)

Total: Total:


ITM EEC, Batch 13B

Trial Balance

 All Expenses & Assets – DEBIT BALANCE
 All Income & Liabilities – CREDIT BALANCE
 Trial Balance is the List of Balance Amount which is prepared from closing the ledger account.
 Closing Debit Balance of any account will be given DEBIT in the Trial Balance. Typically all the expenses & Assets will show debit balance.
 If any account shows closing credit balance in the ledger account it will be given CREDIT in trial balance.
 Any amount payable to any person will have CREDIT balance, while any amount receivable from any person will have DEBIT balance.
 Trial Balance MUST tally.
 RDD = Reserve for Doubtful Debts
 RFDD = Reserve for Discount on Debtors
 NRDD = New Reserve for Doubtful Debts
 ORDD = Old Reserve for Doubtful Debts
 RFDC = Reserve For Discount on Creditors

DEBIT CREDIT

Account Account
Dr. Cr. Dr. Cr.
   

Receivable Payable
Expenses Income
Assets Liabilities
Debtors Creditors
Drawings Capital


ITM EEC, Batch 13B

XYZ Corporation
Trial Balance as at 31 March 2008
Sr. No. Particulars Debit Amount Credit Amount

Owner’s Capital 
Owner’s Drawings 
Furniture & Fixtures (Fixed Assets) 
Plant & Machinery (Fixed Assets) 
Loans Taken 
Carriage Inward 
Carriage Outward 
Discount Received 
Commission Received 
Discount Allowed 
Rent Received 
Purchase 
Sales 
Return Inward (Sale Return) 
Return Outward (Purchase Return) 
Investment 
Bank Overdraft 
Debtors 
Creditors 
Goodwill 


ITM EEC, Batch 13B

Cash Credit 
Cash In Hand 
Advertisement 
Prepaid Expenses 
Outstanding Expenses 
Pre-received Income 
Outstanding Income 
Investment in KVP / NSC 
Bills Payable 
Bills Receivable 
Bad Debts Recovered 
Bad Debts 
Profit from Sale of Investment or Fixed Asset 
Suspense Account  
Total  

 Suspense Account on Debit Side means any asset or expense has been unrecorded.
 Suspense Account on Credit Side means any liabilities or income has been unrecorded.


ITM EEC, Batch 13B

Balance Sheet

 Not an Account, Just a statement or Report as on a given Date or Time. Also known as financial statement.
 Will not have a Debit or Credit Side.
 Shows position of Assets or Liabilities.
 In India (Horizontal Format), Balance Sheet is divided into 2 sides I.e. Liabilities (LHS) and Assets (RHS)
 Asset = Receivable, Application of Fund, Funds Deployed.
 Liabilities = Payable Side, Source of Funds.
 Assets are depreciated every year from balance sheet. It is shown as fixed assets less depreciation.
Classification
Liabilities Assets
 Capital  Fixed Assets
 Reserves & Surplus  Investments
 Secured Loans  Current Assets & Loans & Advances
 Unsecured Loans  Miscellaneous Expenses Not Written Off
 Current Liabilities & Provisions
Intangible Assets
Capital for Ownership or Partnership firm  Goodwill
 Opening Capital  Patents
o (+) Profits  Copyrights
o (+) Salary to owner  Trademarks
o (+) Brokerage to Owner  Rights
o (-) Drawings  Franchise
o (-) Personal Expenses Fixed Assets
o (-) Losses  Fixed assets are the long term assets which are used for
Capital for Company (Pvt. Ltd. / Ltd. etc) production of goods & services for years to come
 Authorised capital/registered capital/nominal capital  Land & building
 Equity share capital(issued ,subscribed & paid)  Plant & machinery
 Preference share capital(issued ,subscribed & paid)  Furniture & fixtures
Reserves & Surplus for Company  Vehicles & equipment
 Accumulated Profits  Capital WIP (Work In Progress)
 Retained Earnings  Computers


ITM EEC, Batch 13B

 Capital Reserves  Books
 Securities Premium  Loose tools
 Revaluation Reserves  Car
 General Reserves  Fan
Secured Loan  Cupboard
 Bank loan (secured against fixed assets)  (-) Depreciation
 Mortgage loan Investments
Unsecured Loan  Investments in shares of other company
 Loan from friends  Investment in debentures of other company
 Loan from relatives  Investment in government securities
 Loan from wife  Investment in mutual funds
Current Liabilities  Investment in bank fixed deposits
 Cash credit  Investments in gold
 Bank overdraft  Investment in postal schemes.
 Creditors Current Assets
 Suppliers  Cash /Cash In Hand/Cash At Box
 Accounts payable  Bank/ Bank Balance/Cash At Bank
 Suppliers ledger balance  Debtors
 Bills payable  A/C Receivable /Book Debts /Sales Ledger Balance
 Outstanding expenses  Customer Account (Dr. Bal I.E. Receivable)
 Expense payable  Bills Receivable
 Expenses due  Outstanding Income/Income Receivable
 Expenses accrued  Commission Receivable
 Pre-received income  Prepaid Expenses/Expense Paid In Advance
 Income received in advance  Advance Salaries ,Advance Tax
Provisions  Loan To Someone (For Less Than 12 Months)
 Provision for taxation Miscellaneous Expenses Not Written Off
 Provision for gratuity fund.  Heavy advertisement expenses
 Preliminary exp not written off
 Formation exp not written off
 Underwriting commission not written off
 Heavy losses not written off


ITM EEC, Batch 13B

Profit & Loss Account (Dr. Balance i.e. Profit)


ITM EEC, Batch 13B

XYZ Corporation
Balance Sheet As At 31 March 2008
Liabilities Assets

Capital Fixed Assets
(-) Drawings (-) Provision for Depreciation
Reserves & Surplus Closing Stock
(-) Stock Reserve
Secured Loans Investments
Unsecured Loans Current Assets & Loans & Advances
Current Liabilities & Provisions Miscellaneous Expenses Not Written Off
Creditors Debtors
(-) Reserve for Discount on Creditors (-) Reserve for Doubtful Debts
(-) Reserve for Discount on Debtors

Total Total


ITM EEC, Batch 13B

Cost Sheet

Cost Account Financial Account

In Books of Manufacturer In Books of Trader

Manufacturer – Buys Raw Material & Sells Finished Goods Trader – Buys Finished Goods & Sells Finished Goods

Cost Sheet Trading Account, Profit & Loss Account, Balance Sheet

Prepared at the Start of the Year Prepared at the End of the Year

To know selling price per unit (for that it is important to know cost per To determine profit.
unit.)

Factory, Admin, Sales & Distribution – Are ESTIMATED Factory, Admin, Sales & Distribution – Are ACTUALS

Exclude Financial Income & Expenses Include All Financial Income & Expenses

 Prime Cost / Direct Cost = Direct Material + Direct Labour + Direct Expense
 Indirect Cost = Factory Overheads + Administrative Overheads + Selling & Distribution Overheads
 Factory (/Works) Cost = Prime Cost +Factory Overheads – Sale Of Scrap + Opening Stock WIP – Closing Stock WIP
 Cost Of Production = Factory Cost + Administrative Overheads
 Production Cost of Goods Sold = Cost Of Production + Opening Stock of Finished Goods – Closing Stock of Finished Goods
 Cost of Sales = Production Cost of Goods Sold + Selling and Distribution Cost
 Sales = Profit + Cost of Sales OR Profit = Sales – Cost of Sales

 From start (Direct Material) till cost of Production, all calculation will be made on Production Unit (Units Produced) AND Production Cost
of Goods Sold (PCOGS) till Sales (End), all calculations will be based on Sales Unit (Units Sold).


ITM EEC, Batch 13B

 Factory Overheads are Calculated as % of Direct Wages
 Administrative Overheads are calculated as % of Factory Cost
 Sales & Distribution Overheads are calculated as % of Sales

 COP = Cost Of Production
 COPPU = Cost Of Production Per Unit

 Concept of Valuation of Closing Stock in the Cost Sheet
o In the absence of Information, Closing stock of finished goods is to be valued at Cost Of Production Per Unit.
o Based on FIFO Principle, Opening stock of Finished Goods is fully sold out.
o Closing Stock of Finished Goods forms a part of current year’s production unit.
o Current Year’s Production Unit is valued at Cost of Production Per Unit.
o Closing Stock of Finished Goods is valued at Cost of Production Per Unit.

 Pure Financial Expenses are excluded/ignored i.e. Bad Debts Written Off, Interest on Capital, Dividends, Write Offs.

 Inward Expenses / Buying Expenses
o Custom duty o Octori duty
o Import duty o Unloading charges
o Dock charges o Buying expness/Inward expenses
o Clearing charges

 Factory Overheads
o Supervisor salary o Machinery upkeep
o Indirect wages o Oil/ grease/ coal/ crude oil/Coke/fuel/cotton.
o Indirect labour o Depreciation on factory assets
o Unproductive wages o Depreciation on plant and machinery
o Unproductive labour o Manufacturing expness
o Factory manager salary o Production expenses
o Worker manger salary o Power / fuel/ motive power
o Salary of watchman o Consumables & stores.
o Indirect material o Factory cleaning
o Indirect expness o Excise duty
o Factory insurance o Research and laboratory expness


ITM EEC, Batch 13B

o Repairs and maintenance of machinery o Employees state insurance corporation.
o Factory lighting and heating

 Administrative Overheads
o Office overheads o Depreciation on office building
o Office on cost o Depreciation on office computer
o General expenses o Rent and rates of offices
o Legal expenses o Estimation expenses
o Audit charges/ bank charges o Stationary and consumables
o Salary on staff o Postage / fax / telex
o Administration manager salary o Office upkeep
o Director fees / remuneration o General office manager salary
o Printing and stationary

 Selling & Distribution Overheads
o Selling on- cost o Rent/repairs/lighting/depreciation of show room
o Selling burden/ overheads o Depreciation of warehouse
o Sales promotion expenses o Sales of sales office
o Advertisement o Travelers salary
o Depreciation on delivery vans/vehicles o Traveling and conveyance
o Secondary packing o Loading expenses
o Packing o Upkeep of delivery van
o Packing material o Sales manager salary
o Carriage/ freight outward o Donation of goods
o Commission on sale o Discount allowed
o Salary’s to sales staff o Rent of warehouse


ITM EEC, Batch 13B

XYZ Corporation
Cost Sheet

Elements Units Amount Amount CostPerUnit
Raw Material Consumed
+ Opening Stock of Raw Material
+ Purchase of Raw Material
- Return of Raw Material
+ Inward Expenses
- Closing Stock of Raw Material
Direct Labour
Direct Expenses
(1) Prime Cost
Factory Overheads
+ Factory Rent
+ Factory Insurance
- Sale Of Scrap
+ Opening Stock of WIP
- Closing Stock of WIP
(2) Factory Cost
Administrative Overheads
+ Bank Charges
+ Legal & Audit Charges
(3) Cost of Production
Opening Stock of Finished Goods
- Closing Stock Of Finished Goods
(4) Production Cost Of Goods Sold
Selling & Distribution


ITM EEC, Batch 13B

Cost of Sales

Profit

Sales


Basics of Financial Accounting (Download: http://wp.me/p1z0VI-Y)

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