1. Basic Accounting Level II
By
Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM
Global Technology Services LLc, UAE
Email:sivakumar3009@gmail.com

2. Agenda
 What is Accounting
 Mode of Learning Accounting
 Accounting and Finance - Difference
 Accounting Concepts / Conventions
 Accounting Events
 Rules of Accounting
 Preparation of Financial Statements
 A Simple Case Study
2

3. What is Accounting
JOURNAL
PAYMENT
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Financial Statement
Assets
Cash
at December 31,$4,456
1997
Vision$5,714
Enterprises
Account Receivable
Land Assets
$ 981
Financial Statement
--------- 1997
Cash
at December 31,$4,456
Total Assets
$11,151$5,714
Account Receivable
======$ 981
Land Assets
--------- $4,456
Cash
Liability
$3,830$11,151$5,714
Total Assets
Account Receivable
Account Payable
$ 416======$ 981
Land
Notes Payable
----------------Liability
$4,246 $3,830$11,151
Total Assets
Account
Total Liability Payable
======$ 416======
Notes Payable
$2,365--------Liability
Stockholder’s Equity
$ 367$4,246 $3,830
Account
Contributed Liability Payable--------- ======$ 416
Total Capital
Retained Earnings Payable $2,732 $2,365--------Notes
Total Stockholder’s Equity
======$ 367$4,246
Equity Stockholder’s
Contributed Liability
Total Capital
--------- ======
Retained Earnings
$2,732 $2,365
Total Stockholder’s Equity
======$ 367
Equity Stockholder’s
Contributed Capital
--------Retained Earnings
$2,732
Total Stockholder’s
======
Equity
?
Accounting is defined as the art of Recording,
Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements
3

4. What is Accounting

Accounting is the art of recording, classifying and Summarizing
financial transactions in the Preparation of Financial Statements
 Recording refers to creating Journal entry for every financial
transaction with Debit and Credit amounts.

Classifying refers to Classifying each of the Debit / Credit
Transaction to Capital or Revenue and Asset, Liability, Revenue or
Expense

Summarizing refers to Grouping the Transactions of Asset,
Liability, Revenue and Expenses and preparing the Financial
Statements (Trading, Profit and Loss Account and Balance Sheet)
 In case of
• Trading, Manufacturing and Customer Service oriented
Organization, the sum of all income and expenses is referred to
as Profit and Loss account
• Social Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as Income
and Expenditure account .
Note:- Trial Balance is not a Financial Statement. It is only a summary
of all Debit and Credit Transactions.
4

5. Mode of Learning Accounting



Change your mindset that accounting means
only Debit and Credit
Do not blindly learn Accounting Rules and
apply the rules of Debit and Credit
The Best way to Learn Accounting is





Learn the Accounting Concepts
Understand the Accounting Conventions
Classify the Accounting Event
Apply the Accounting Rules
Record, Classify and Summarize the Journal
• You are Confused. Am I right?

Do not become panic and move forward, you will understand
5

6. Mode of Learning Accounting
Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
Understand Accounting Conventions
(Three major conventions)
Classify the Accounting Events
(Capital, Revenue, Deferred Revenue Expenditure)
Apply the Accounting Rules
(Personal, Real and Nominal Rules)
Record the Transaction as a Journal
(Entering the Debit and Credit Side of Transaction)
Classify the Transaction
(Asset, Liability, Revenue or Expense)
Summarize the Transaction
(Prepare Trial Balance, Trading, P&L and Balance Sheet)
6

7. Finance and Accounting - Difference
Finance
Accounts
Procurement and Utilization of
Funds
Recording of an Accounting
Event
Leads to Investment Decisions
Expressed in Monetary Terms
Financing Decisions
Recording , Classifying and
Summarizing Transactions
Futuristic
Preparation of Financial
Statements (Trading, Profit and
loss Account and Balance
Sheet)
Cost of Capital
Historical
Cash Flow / Fund Flow
Compliance with Statutory
Matters like companies Act,
Income Tax Act, Sales Tax Act
Etc.,
Project Appraisal
Ratio Analysis
7

8. Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)

The Concepts and conventions of accounting are
developed by IASC (International Accounting Standards
Committee) which is in-charge of releasing International
Accounting Standards (IAS)

The IASC Decides the preferred Accounting practices
worldwide and encourages the worldwide acceptance

There are 41 International Accounting Standards

Now IFRS (International Financial Reporting Standards)
and SOX (Sarbanes Oxley) Act gain more importance
which came up from US GAAP and UK GAAP
8

9. Difference between Concepts and Conventions

The Accounting Concepts / Principles evolved out of the
Practice and Procedures followed by different countries
and later on established by the International Statutory
Accounting Bodies like The Institute of Chartered
Accountants of India, The Institute of Chartered
Accountants of England and Wales etc to become an
Accounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell this
has evolved out of standard Practice followed by several
countries while preparing the Trading, Profit and Loss
Account and Balance Sheet.

The Accounting Conventions / Practices are basically
assumptions and expected to be followed while
preparing the Financial Statements.
9

10. Accounting Concepts / Principles
 Business Entity Concept
 Money Measurement Concept
 Dual Aspect Concept
 Cost Concept
 Accounting Period
 Conservatism
 Realization Concept
 Matching Concept
 Materiality Concept
 Objectivity
10

11. Accounting Conventions / Practices



Going Concern
Consistency
Accrual
11

12. Accounting Concepts
 Business Entity Concept
Accounts can be kept only for Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.
Accounts need to be maintained separate from the Owners and
providers of capital. If you understand the simple logic, then you know
30% of Accounting. Just Recall Fundamentals of Accounting from
Oracle Perspective Level I Example of Siva, Oracle and Bank.
See Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Material
12

13. Types of Entities
Type of Organization
Example
Sole Proprietary
Siva & Co
Partnership Firm
Ganesan Bros
Private Company
Oracle India Pvt Ltd (A Private Company in which
shares are not traded in Stock Exchange and
members cannot exceed 50)
Public Company
Hindustan Unilever Ltd (A Public Company in
which Shares are traded in Stock Exchange)
Closely Held Company
Cadbury India Ltd (A Public Company in which
shares are not traded but shares are held by more
than 50 persons)
Trust
Hutchinson Private Trust
Society
Sembur Co-op Society
Association of Persons
ICAI, ICWAI, ICSI, Rotary Club
Body of Individuals (one Man Corp)
President of India, Governor of State
Any other Legal Entity (HUF)
A Hindu Undivided Family Jointly holding the
Investment and Properties for the benefit of
Family members.
13

14. Accounting Concepts

Business Entity Concept



Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole
Proprietor/Individual Owner of the Business. The entire capital amount for the
Business is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of books.
• One set of books for the purpose of Textile Business in which, Business
owes you equivalent to the Capital Provided (Capital + Profit earned) or
(Capital – Losses)
• In your own Books the amount of Capital invested will be shown as an
Investment in Business as an Asset. This need not be maintained as a Normal
Set of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.
Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with
Bank of America and You have Bank Account with Citi Bank and the salary at end
of every month is transferred from Bank of America to Citi Bank. How many
accounting Entities involved in this case?
• If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi
Bank)
Ex 3: You run your own Business in Software Consulting and your Friend has
agreed to provide a Loan of 50000 USD which he goes and deposit directly into
your Bank account - How many accounting Entities involved in this case?
• If you say 3, You are right, it is only Three. (You, Your Friend and Bank)
14

15. Accounting Concepts
 Money Measurement Concept
Record should be made only of that information which can be
expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be
recorded unless a Value of Furniture is known in monetary value
Ex 2. Very Famous Indian Example – Rama Killed Ravana.
this be Accounted? – NO
Can
Ex 3. My wife Loves me so much – Can this be accounted?
– A Big NO (Hahhah). This is Flaw in Financial Accounting as it
does not understand the human values
Ex 4. My Father in Law gave his Personal Property to start
Business. Can this be Accounted – Yes (If the Value of the
Property is provided)
15
my

16. Accounting Concepts
 Money Measurement Concept
A Normal Doubt comes to your mind in the first and fourth
example in previous slide how to get the value. We should not be
taking the Purchase value, but we should take the Market value on
the date of transferring the assets to Business. This is an
exception to cost concept only in case of transfer to another
business
Ex 5: Siva started his software consulting Business with his own
Property (Cost Price 1 Million USD and Market Value 1.5 Million
USD) and Furniture's Cost price 50000 worth Market Value 30000
USD
- In this case, You can record Siva Capital (1530000) and Building
1500000 and Furniture 30000 as Assets
Liabilities
Siva Capital
Total
Assets
1530000
1530000
Building
Furniture
1500000
30000
Total
1530000
16

17. Accounting Concepts

Dual Aspect Concept
The Value of the Assets owned by the concern is equal to the claims on
the Assets
ASSETS = LIABILITIES + OWNER’S EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY
Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000
Asset
Owner’s Equity + Liabilities
Liabilities
Assets – Owner’s Equity
Owner’s Equity
Assets - Liabilities
17

18. Accounting Concepts

Cost Concept
Assets are always shown at their Cost and not at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be
recorded only at Rs.5 Lacs even though Market value
may be lower say Rs.4 Lacs or Higher Rs.6 Lacs than
the Cost Price
Ex 2. You are acquiring a Business for a Million
USD and its value as per Books is 0.8 Million, then
the difference of 0.2 Million is termed as Goodwill
and you should records the assets and liabilities at
the price you have paid for the Business (i.e.) 1
Million
18

19. Accounting Concepts
 Accounting Period
Accounting measures activity for a specified interval of time, usually
a year
(e.g) Calendar Year (Jan’07-Dec’07)
Fiscal Year
(Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but there are
legal rules like Companies Act and Income Tax Act which prescribes
the period in which the entity has to report to them.
Remember still Entities can have different accounting period for their
own Internal Management Reporting
A Company in India can have for Company Law Purpose (Jan-Dec)
Year and Income Tax Purpose (Apr-Mar) Year and for own internal
Reporting (Jul-Jun) Year
Note: The Entities cannot change their accounting period without
getting proper approval only in case of Companies Act and not
19
possible with Income Tax Authorities.

20. Accounting Concepts
 Conservatism
Anticipate no Profits but provide for all possible losses.
Accountants are by nature Conservative and also to protect the interest of the
Shareholders and Creditors it is required to provide for all losses.
Ex 1. A pharmaceutical Company going to Loose the case filed for Patent
Right filed for a medicine
Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract.
Note: This rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Losses
Ex 3: You are a Government Company and there is a possibility that
Government will withdraw the subsidy for Fertilizers in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4: The Government is likely to increase the Price of petrol which is one of
the essential input for your business, then you cannot provide for losses.
Ex 5:There is a Fire in your in your Factory and Goods were lost and the
Goods are insured, then the claim you submitted can be booked to the
satisfaction of Insurance Company and Auditors.
20

21. Accounting Concepts
 Realization Concept
The Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or realized.
Realization is assumed to occur when the seller receives cash or a
claim to cash (receivable) in exchange for goods or services
Ex 1: A Sales invoice for Rs.1 Million
Credit Note for Rs.15000 received
Ex 2: For instance, if a company is awarded a contract to build an
office building the revenue from that project would not be recorded in
one lump sum but rather it would be divided over time according to the
work that is actually being done.
21

22. Accounting Concepts
 Matching Concept
When an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting period
Ex 1: Generally Employees Salaries are paid for the previous month at
the beginning of the next month. But they have rendered their
services to produce goods and sold and Sales revenue is recognized
in previous month. So to match the cost with the revenue earned, we
need to make provision for Salaries in previous month itself. (i.e.)
March Salary paid in April, but a Salary Payable provision will be
made in March itself
EX 2: Insurance Premium paid for Jan- Dec whereas your accounting
period closes on March. In this case only three months premium need
to be treated as Expense and balance 9 months treated as advance
premium paid as an asset
22

23. Accounting Concepts
 Materiality concept
Insignificant events would not be recorded, if the
benefit of recording them does not signify the
cost
Ex: A calculator worth Rs.500 not recorded asset
rather than charged off as an Expense even
though the benefit is enduring in nature.
This concept need to read in conjunction with
accounting events which signifies the transaction
into Capital, Revenue and deferred revenue
expenditure.
23

24. Accounting Concepts
 Objectivity Concept
An Evidence of the happening of the Transaction should support
every Transaction in the form of paper. External Evidence is
considered to be more authenticated proof than Internal Evidence.
This rule is more important from Audit perspective as Auditors
always consider and bound to get more external evidences than
internal Evidences.
Ex 1: Third Party Evidence (Credit Note from Supplier)
Ex 2: Auditors Collect Statements from Customer and Suppliers for
the amount showing as Outstanding from Customers and amounts
Payable to Suppliers.
Ex 3: The Sales Invoices alone is not considered as an objective
evidence unless it is not supported by Delivery challan and
acknowledgement of Goods Received by Customer.
24

25. Accounting Conventions
 Going Concern
Accounting Records , Events and Transactions on the
assumption that the entity will continue to operate for an
indefinitely Long period of time
Ex. An Entity will not be started with an intention to close
within the specified time period. Business is always not
started with an intention to close and it is expected to
continue forever.
25

26. Accounting Conventions
 Consistency
The Accounting Policies and methods followed by the
company should be the same every year
Ex 1. Period should not be changed frequently from JanDec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then
that Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.
26

27. Accounting Conventions
 Accrual
In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments
(NSC
interest), Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)
The Company Law / Income Tax Act Prescribes all
Companies to follow Accrual Basis of Accounting except
for Professional Firms and Government Organizations
which are allowed to follow Cash Basis of Accounting.
27

28. Classification of Accounting Event

Capital Item: Any expenditure that creates an asset, for
example:

Purchase of plant or machinery
 Improvements to assets that increase their
usefulness or extend their effective useful life of the
asset
 Expenditure incurred in transporting an asset to its
site and preparing it for use.
28

29. Classification of Accounting Event

Revenue Item: An Income or Expenditure and the
benefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set up
for the Set of Books
 Ex: Salary and wages, Printing and Stationery, Sales
Revenue, Interest Income, Salary Payable, Bonus
Payable, Tax Payable etc.,
 In Simple terms this is an event which generates
revenue and the related cost to earn the revenue are
accounted as expense.
29

30. Classification of Accounting Event

Deferred Revenue Expenditure: It is neither a Capital
nor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation of
an asset.

Ex 1: Advertisement Expenditure the benefit of which
is likely to be obtained over a period more than one
year (E.g.) PepsiCo Pays USD 2 Million to Sachin
Tendulkar for an Advertisement Contract for two
Years and benefit of which is expected to be for four
years
 Ex 2: Royalty paid to the author of the book for five
years
30

31. Rules of Accounting
Accounts
Personal
Debit the Receiver
Credit the Giver
Ex: Sole Prop, Company
Impersonal
Real
Debit what comes in
Credit what goes out
Ex: Cash, Bank, Building,Inv
Nominal
Debit Expenses and Losses
Credit Revenue and Income
Ex: Sales, Power, Rent
31

32. Application of Accounting Rule







Check whether is there a Money Transaction Involved?
Is that transaction affects your set of books?
Check whether does the transaction falls under which accounting
period.
Does the transaction involve a personal account (i.e.) Siva as a
Person or a Company or any other entity as mentioned in
Business entity concept
Is that person is receiver or giver in the transaction and
accordingly debit or credit the person account.
Does the transaction involves any Cash inflow or Cash outflow?
(i.e.) Cash or Bank involved
If there is no cash involvement then the choices are as follows


Both can be real ( Debit and credit both real accounts)
One real and one nominal (Either Debit/Credit for Real or Credit/ Debit
for Nominal accounts)
32

33. Accounting Rule of Thumb
Nature of Transaction
Increase
Decrease
Asset
Liability
Revenue
Expense
Profit
Debit
Credit
Credit
Debit
Credit
Credit
Debit
Debit
Credit
Debit
Losses
Debit
Credit
33

34. Combination of Rules
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Employee,
Payment to Supplier
Dr Real A/c
Cr Real A/c
Dr Real A/c
Cr Personal A/c
Ex:Capital invested, Payment Received
from Customer
Dr Real A/c
Cr Real A/c
Ex:Purchase of Inventory by Cash
Ex: Cash withdrawal or Deposit
Dr Real A/c
Cr Nominal A/c
Dr Nominal A/c
Cr Real A/c
Ex: Interest Recd by Cash, Cash Sales
Ex: Rent Paid by Cash
Dr Personal A/c
Cr Nominal A/c
Dr Nominal A/c
Cr Personal A/c
Ex: Interest Accrued on Investment,
Dividend accrued on Investment
Ex: Hire Purchase Charges accrued, Interest
Payable, Salary Payable
34

35. Combination of Accounting Rules
Debit
Combination Personal
Real
Nominal
Personal
Credit
X


Real



Nominal


X
35

36. Combination of Accounting Rules

Both Debit and Credit cannot be Personal Accounts

EX 1: Siva paid Cash to Ajay. The Entry Cannot be
• Ajay A/c Dr
• Siva A/c Cr

The Correct entries are as follows. In Ajay set of Books
Cash A/c Dr
1000
Siva A/c Cr
1000
In Siva set of Books
Ajay A/c Dr
1000
Cash A/c Cr
1000
Similarly Both Debit and Credit cannot be Nominal Accounts
Note: Remember this important aspect and therefore You
will not commit any mistake in Debit and Credit
36

37. Recording of Accounting Transactions




Recording of an Accounting event is known as Journal
entry
Recording is made in Primary and Secondary Books in
Manual Accounting system
Primary Books

General Ledger
 Cash Book
Secondary Books
 Purchase Register

Sales Register
 Fixed Assets Register

Returns (Purchase return/Sales Return)
 Journal Register
In Oracle ERP System GL is called Main Ledger and the
Transactions emanating from Modules are referred to as
37
Sub Ledger

38. Recording of Accounting Transactions







First the transactions are entered as Journal
Then Second step is they are posted to individual account as ‘T’
Accounts – In Oracle or any other ERP system this happens
immediately when a transaction is created
Prior to ERP system except for Non cash charges, Journals are
directly posted in Primary and secondary ledger with supporting
Document reference Number (like Invoice Number), date, amount and
a cross reference ledger folio number (Page Number) of respective
Debit and Credit Entries in Ledger.
Journals are entered only for year end Provision Entries.
Then the balance from each T account is taken and which becomes a
Trial Balance with Sum of Debits and Sum of Credit which should be
equal.
Trial Balance forms the basis for preparation of Financial Statements
and in ERP systems including Oracle Applications Debit is shown as
Positive and Credit is shown as Negative
In ERP systems the chance of Trial Balance not matching or not
tallying issue is very minimal. In case of manual Accounting this will
happen most of the time and unless it is corrected and balanced, the
accountant should not proceed to prepare Financial Statements
38

39. Preparation of Financial Statements

Preparation of Trial Balance
 Balances Extracted from General Ledger

Sum of debit and credit balances = 0

Preparation of Trading, Profit & Loss Account or Income &
Expenditure Account and Balance sheet

Trial Balance is the base for preparing Financial
Statements

Adjustment entries are made in adjustment period and
passed as Journal Vouchers before making the financial
statements
 Trading and Profit and Loss Account is Always for a
period say for an Year (Jan - Dec or Apr - Mar), Quarterly
for 3 months or Half yearly for 6 months
 Balance Sheet is always as on Date (As on 31-12-2007 or
31-03-2008)
39

40. Accounting Concepts
A Simple Case Study
40

41. Case Study












Siva started Business in dealer in Computer Spare parts and
Computer Stationery on 01-APR-2007 and following events occurred
in the month of April.
Siva invested USD 50000 Cash and USD 50000 worth of furniture
Siva purchased USD 75000 worth of goods on credit
Siva friend Ajay promised him to give a loan of USD 25000
Siva sold USD 50000 worth of good for USD 100000
Siva paid rent USD 2000 for two months
Siva paid Salary to Staff USD 5000
Siva incurred USD 5000 on interior decoration which will last for two
years.
Siva sold USD 10000 worth of goods on credit for USD 18000
Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John account
Purchased Vehicle for USD 25000 paid through Bank
Cash Deposited by Siva into Bank 50000 USD
41

42. ARE YOU READY FOR THE
GAME
Accounting is very simple
42

43. Accounting Terminologies

Before creating Accounting Transactions let us recall and learn few
accounting terminologies












ASSETS: Any property or Investment which can be convertible into cash
LIABILITIES: Amount Payable to providers of goods and Services
(Creditors) and Providers of Capital (Owners)
REVENUE: Amount earned out of the Sale Proceeds and the amount
earned on Investments
EXPENSES: Amount incurred or expended to earn the revenue
PROFIT: TOTAL REVENUE – TOTAL EXPENSES
LOSS: If the Total Expenses is more than Total Revenue it is termed as
Loss
FIXED ASSETS: Amount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)
CURRENT ASSETS: Amount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)
NOTE: The Fixed Asset and Current asset vary from Person to Person
Ex: For a Dealer in Refrigerator it is a Current asset which becomes Fixed
Asset for you when you buy.
CREDITORS: Person who provide Money or Goods on Credit to the
Business (Supplier)
DEBTORS: Goods or Money Provided / sold on Credit by the Business
(Customers)
43

44. Accounting Terminologies

You should also understand the same accounting
terminology is referred or used by different people in
different context



Receivables also known as Trade Debtors, Debtors, Account
Receivables, Sundry Debtors, Trade Receivables, Amount
Receivables
Liability is also known as Trade Creditors, Account Payable,
Sundry Creditors, Amount Payable, Trade Liabilities, Creditors
Cost of Goods Sold: It varies with Company to Company the way
they do set up and use it. The Cost of Goods Sold comprise of
Material Cost, Resource Cost (Labor and Machinery) and
Overheads. There are few companies which will have only Material
Cost and will not add up Resource Cost and Overheads. You
Should talk to client and understand their requirement
• Let’s See Each of this in a Formula Model
44

45. Accounting Calculation and Formula
Receivables (or) Debtors
Reconciliation
Opening Receivables
(+) Add Credit Sales
(+) Debit Memo
(+) Positive Adjustments
Payables (or) Creditors
Reconciliation
100
2500
150
75
Opening Payables
200
(+) Add Credit Purchases
(+) Debit Memo
(+) Positive Adjustments
2000
150
75
(-) Less Cash Received
2000
(-) Less Credit Memo (Sales Return) 125
(-) Negative Adjustments
50
(-) Less Cash Paid
1500
(-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments
50
Closing Receivables
Closing Payables
650
750
45

46. Accounting Calculations and Formula
Purchased Inventory
Reconciliation
Opening Purchased Inventory
Finished Goods (FG)
Reconciliation
100
Opening stock of FG
200
(+) Add Purchases
2500
(+) Add Production
(+) Sales Return
2000
100
(-) Less Issued to Production
(-) Less Purchase Return
2000
125
(-) Less Sales
1500
Closing Purchased Inventory
475
Closing FG Inventory
46
800

47. Accounting Calculations and Formula
Cash Reconciliation
Opening Cash Balance
Bank Balance Reconciliation
100
Opening Balance of Bank
200
(+) Add Cash Receipts
2500
(Cash Sales, Cash Recd from
Receivables, Cash with drawl from
Bank)
(+) Add Bank Receipts
(Cash Deposits, Cheque Received
From Debtors, Interest Credited)
2000
(-) Less Cash Payments
2000
(Cash Purchases, Expenses paid
By Cash, Cash Deposited into Bank)
(-) Less Payments from Bank
(Paid to Creditors by Cheque,
Expenses paid by cheque, Cash
With drawl from bank)
1500
Closing Cash Balance
600
Closing Bank Balance
47
700

48. Accounting Entries for the Case Study
Sl
No
Description
Nature of Account
Dr (in
USD)
1
Cash A/c Dr
Furniture A/c Dr
(Cash and Furniture Real
Tangible Asset. Hence
apply the Real Rule – Debit
What comes in)
To Siva Capital A/c
(Siva is a Person running
the business as a
Proprietor in this case.
Hence apply the Rule for
Personal – Credit the giver)
Real
Real
50000
50000
Inventory A/c Dr
(Real Tangible Asset)
Real
To Creditors A/c
(Person be an Individual or
Company gives the goods
on Credit)
Personal
2
Personal
(Also using the Business Entity
Concept Siva being owner is
also treated as a Creditor for
the purpose of Business. If the
Business is wind up Business
has to pay back Siva)
Cr (in
USD)
100000
75000
75000
48

49. Accounting Entries for the Case Study
Sl
No
Description
Nature of Account
Dr (in
USD)
3
No Entry
(Mere Promise to give does
not tantamount to Monetary
Transaction)
No Entry
(Money Measurement Concept
– No Monetary transaction
involved )
4
Two Entries involved (One
for sale of goods and one
for reduction in inventory)
Cash / Bank A/c Dr
(Real – Debit what comes
in)
To Revenue (Sales) A/c
(Nominal Rule - Credit all
Income and Revenue)
Real A/c
Cr (in
USD)
100000
Nominal A/c
100000
Cost of Goods Sold A/c Dr
(Nominal – Debit Expenses)
Nominal A/c
To Inventory A/c
(Reduction in Inventory)
Real A/c
50000
50000
49

50. Accounting Entries for the Case Study
Sl
No
Description
Nature of Account
Dr (in
USD)
5
Rent A/c Dr
(Debit Expense – Nominal)
Rent Advance A/c Dr
(This is like Cash Advanced
to Landlord. Hence it
should be treated as
Personal Debit the Receiver)
To Cash A/c
(Real – Credit what goes
out)
Nominal A/c
Personal A/c
1000
1000
Salary A/c Dr
(Nominal – Debit Expense)
Nominal A/c
6
To Cash A/c
(Real – Credit what goes
out)
Real
Cr (in
USD)
2000
5000
Real A/c
5000
50

51. Accounting Entries for the Case Study
Sl
No
Description
Nature of Account
Dr (in
USD)
7
Advertisement Exp A/c Dr
Advt Exp Adv A/c Dr
(This is like a Deferred
Revenue Expense needs to
be charged in two years.
50% need to be Current
Year Expense and Balance
50% is carried Forward and
treated as Expense in next
Year)
To Cash A/c
(Real – Credit what goes
out)
Nominal
Real
2500
2500
Real
8
Cr (in
USD)
5000
Receivables A/c Dr
To Revenue A/c
Real
Nominal
18000
Cost of Goods Sold A/c Dr
To Inventory A/c
Nominal
Real
10000
18000
51
10000

52. Accounting Entries for the Case Study
Sl
No
Description
Nature of Account
9
No Entry
(This is a Mistake done by
Bank. Bank has to make
correction and in Siva’s
Book there is no
accounting entry required)
No Entry
10
Vehicles A/c Dr
(Real Tangible Asset
Debit what comes in)
To Bank A/c
(Real asset – Credit what
goes out)
Real
Bank A/c Dr
(Real asset- Debit what
comes in
To Cash A/c
(Real Asset – Credit what
goes out)
Real
11
Dr (in
USD)
Cr (in
USD)
25000
Real
25000
50000
Real
50000
52

53. T Accounts
Furniture Account
Siva Capital Account
Dr
To Bal
Total
USD
100000
100000
Cr
USD
By Cash
50000
By Furniture 50000
Total
100000
Dr
USD
To Siva Cap 50000
To Sales 100000
Total
150000
Cr
USD
By Bal
50000
Total
Total
50000
50000
Inventory Account
USD
By Rent
By Rent Adv
By Salary
By Advt Adv
By Advt exp
By Bank
By Balance
Total
Cr
To Siva Cap 50000
Cash Account
Dr
USD
1000
1000
5000
2500
2500
50000
88000
Dr
USD
Cr
USD
To Creditors 75000
By COGS
By COGS
By Bal
50000
10000
15000
Total
Total
75000
75000
150000
53

54. T Accounts
Creditors Account
Dr
USD
Rent
Account
USD
Cr
Cr
USD
Dr
To Cash
1000
By Bal
1000
Total
1000
Total
1000
To Bal
75000
By Invent
75000
Total
75000
Total
75000
USD
Revenue / Sales Account
Rent Advance Account
Dr
USD
Cr
USD
Dr
To Cash
1000
By Bal
1000
To Bal
118000
By Cash 100000
By Rece 18000
Total
1000
Total
1000
Total
118000
Total
Salary Account
USD
Cr
USD
118000
Advertisement Exp Account
Dr
USD
Cr
USD
Dr
USD
Cr
USD
To Cash
5000
By Bal
5000
To Cash
2500
By Bal
2500
Total
5000
Total
5000
Total
250054 Total
2500

55. T Accounts
Advt Exp Advance Account
Dr
USD
Cr
USD
To Cash
2500
By Bal
2500
Total
2500
Total
2500
Receivables Account
Dr
USD
Cr
USD
To sales
18000
By Bal
18000
Total
18000
Total
18000
Vehicle Account
Cost of Goods Sold Account
Dr
USD
Cr
USD
Dr
To Inventory 50000
To Inventory 10000
By Bal
60000
To Bank
25000
By Bal
25000
Total
Total
60000
Total
25000
Total
25000
60000
USD
Cr
Bank Account
Dr
USD
Cr
USD
To Cash
50000
By Vehicle
By Bal
25000
25000
Total
50000
Total
50000
55
USD

56. Trial Balance
Trial Balance for the Month of APRIL 2007
A – Asset, L – Liability, R – Revenue, E - Expense
Debit
USD
Credit
USD
Furniture (A)
50000
Cash (A)
88000
Bank (A)
25000
COGS (E)
60000
Salary (E)
5000
Rent (E)
1000
Rent Advance (A)
1000
Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500
Inventory (A)
15000
Vehicle (A)
25000
Receivable (A)
18000
Siva Capital (L)
Sales / Revenue (R)
Creditors (L)
Total
Total
293000
56
100000
118000
75000
293000

57. Profit and Loss Account For APR 2007
Expenses
USD
Revenue
USD
COGS (E)
60000
Salary (E)
5000
Rent (E)
1000
Advertisement Exp (E) 2500
To Profit
49500
Sales / Revenue (R)
118000
Total
Total
118000
118000
57

58. Balance Sheet as on 30-APR-2007
Liabilities
Siva Capital
Add Profit
Siva Capital
Creditors
Total
USD
100000
49500
149500
75000
224500
Assets
USD
Furniture
Vehicle
Cash
Bank
Receivables
Inventory
Rent Advance
Advt Exp Advance
Total
50000
25000
88000
25000
18000
15000
1000
2500
224500
58

59. Important Points to Remember







Accounting can be learnt only by Practice and not by reading
Try to learn by creating Journal entries with Examples
Cash Balance can never have negative balance at any point of time
Land will never Depreciate and it will have only Appreciation
Bank can have negative balance if you have Overdraft facility
The Bank which maintains your account will have exactly opposite
entries of what is shown in your Bank Account
In the above, Example the bank account in your Books and in Bank
Books will be as follows
Siva Books
Bank Account
Dr
To Cash
Total
USD
50000
50000
Cr
Bank Books
Siva Account
USD
Dr
USD
Cr
USD
By Vehicle 25000
By Balance 25000
To Vehicle 25000
To Balance 25000
By Cash 50000
Total
Total
Total
50000
25000
59
25000

60. Case Study for Practice












Take your own Personal Account and try to create the following
On First of July 2007 You had a Cash balance of USD2500 which is
your Capital
On 3rd July You have received Salary of USD 12000
On 5th Paid Rent of USD 1200 by cheque
On 7th You purchased provision for house for 800 USD
On 10th You spent for outing through your credit card USD 500
On 15th You withdraw Cash USD 8000
On 20th You Invested in Fixed Deposit USD 5000 @5% Interest Per
annum
On 22nd you have given a Loan of USD 2000 to friend James
On 25th You spent for Car Repairs 500 USD
On 28th Your wife gave USD 200 to your Neighbor from her pocket
On 30th You Deposited Cash 1000 USD to your Bank Account
60

61. How to Approach to Learn


I tried my best to teach Accounting in simple way. This
is only a beginning. You have to Practice a Lot to learn
The simple way to Learn Accounting is as follows







Do not go for advanced level books without understanding the
basics
Start with (+1) Accounting book in case of people in India and
Pre-University book in case of other Countries. Practice the
examples given in that book and exercises
This is more than sufficient for any non accounting candidate to
work on Oracle Applications
Never try to memorize the concepts and rules
Try to understand and apply the concepts and Rules
There are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I do not
want you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You can
handle all of them
Read and Practice Level I and II at least Three times
61

62. "There is a difference between an objective and
actions. Unless you understand your objective,
you will be wasting your time in actions. Know your
objective first " - Swami Vivekananda
62

63. Disclaimer: This Document was created with my own
assumptions to explain the concept of accounting
and the names of the companies used in this article
are only to explain the accounting concept with data
assumptions and none of the Company is not
responsible for the Data provided in this article.
Thank You
Hope You find this article useful
Get Ready for Learning
Accounting in Oracle Applications
63