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Accountingmechanism 091228082628-phpapp02

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  • 1. ACCOUNTING MECHANISM
  • 2. Learning objectives: To understand the Accounting mechanism To understand the Double Entry system To understand the meaning of account and classification of accounts Conceptual frame work of Financial Accounting To know how to prepare the Final Accounts.
  • 3. Double Entry System It recognizes that every transaction has a twofold effect. The method of writing every transaction in to two accounts, of these two accounts, one A/c is given „Debit‟ while other one is given „Credit‟ with an equal amount so that the Accounting Equation is always in balance. On any date Total Debits = Total Credits
  • 4. The Recording Process The sequence of steps in recording transactions: Transactions Documentation Journal Financial Statements Trial Balance Ledger
  • 5. ACCOUNTING MECHANISM 1. Recording  Journalizing 2. Classifying  Ledger preparation 3. Summarizing  Balancing the ledger  Preparation of Trial Balance  Preparation of Profit and Loss A/c  Preparation of Balance Sheet 4. Interpreting the results.
  • 6. JOURNAL The book of original entry. Recording of entries in the journal is known as Journalising. Large Firms/Concerns maintain special journals also known as Subsidiary Books.
  • 7. SUBSIDIARY BOOKS 1. Cash Book:  Simple  Two column  Three column 2. Purchase Book 3. Purchase returns Book 4. Sales Book 5. Sales returns book 6. Bills Receivable book 7. Bills Payable Book 8. Journal Proper
  • 8. LEDGER It is set of all accounts. It contains a classified summery of all transactions recorded in journal.
  • 9. ACCOUNT - MEANING An individual record of increases and decreases in an item that is likely to be of interest or importance. It is “T” shaped Debit is left side of “T” account Credit is right side of “T” account
  • 10. Classification of Accounts Classification of Accounts Individuals Physical Firms, Companies, Banks Artificical O/s Exp O/s salaries Prepaid Exp Representative Personal A/cs Assets like Cash, land, Building, Plant, Patents, etc.. Real A/cs Exps or Losses, Or Incomes or Profits Nominal A/cs Impersonal A/cs Accounts
  • 11. Rules of Double Entry System Personal A/c Real A/c Nominal A/c Debit: The Receiver What comes in All expenses and Losses Credit: The giver What goes out All incomes and gains
  • 12. Conceptual frame work of Financial Accounting Profit and Loss A/c Profit/loss transferred to Balance Sheet Balance Sheet (Assets and Liabilities) Output: Trial Balance Ledger Jounal Principle: Double Entry System Sub: Financial Accounting
  • 13. TRIAL BALANCE A statement of Debit and Credit totals or balances extracted from the various accounts in the Ledger. Objectives: To facilitate the preparation of Final Accounts. To check the arithmetical accuracy of the books.
  • 14. CAPITAL AND REVENUE ITEMS Capital Expenditure: – The benefit of which is not fully derived in one year but spread over several periods. – Eg: Acquisition of assets, additions to fixed assets Revenue Expenditure: – The benefit of which is derived in the year in which the expenditure was incurred. – Eg: Raw material, Rent, wages and salaries.
  • 15. FINAL ACCOUNTS Include preparation of: Trading and Profit and Loss A/c – To know the operating performance of the business i.e.profitability. Balance Sheet – To know the financial position of the firm on a particular date.