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Demystifying of Accounting Equation


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Demystifying of Accounting Equation

  2. 2.  Vidya is the qualified architect and a certified interior designer and decorator who initially was working with reputed consulted firm for almost a decade. But , later on April 2005 she started her own business under the name “ Sri Vidya Associates” for offering consultancy expertise in interior design and decoration.
  4. 4.      She received INR 280000 from billing (TDS25000) Outstanding Amount 95,000 Not recovered Amount 20,000 After some time when she found out that her bank balance had come down to RS 14750, she noted down the following expenditures from her bank A/c
  5. 5.              Salary paid 3 months 12000*3 = 36000 Telephone and internet bill 1250*3 = 3750 Paid to welfare association 1000*3 = 3000 Insurance premium 6000*1 = 6000 Withdraw for personal use =10,000 Service tax payable during June =35,000 Paid freight for equipment = 5,000 Hotel charges = 5,200 Purchase of office supplies = 1800 Advanced income tax = 15000 Total exp. 1,20,750 Net Amt.available 14,750 Total bank amt. 1,35,500
  6. 6. EMPLOYEES Works for the system SELF EMPLOYED Hates to work in the system BUSINESSMAN OWN SYSTEM INVESTORS Invests in the system
  7. 7. A person who works to earn money • Works for the system • And earn money Who makes money for following three entities • Employer • Government • Bank
  8. 8. A person who moves into the zone of independence People who are ready to take calculated risks Who works as • Doctors • Counselors
  9. 9. These are the people who are having ability to lead people those are more talented than them. •Who can take high risk •And has great ideas to earn money Owns control and the system •They run their own system •And keep control in their hands They have the power to hire employees and even the selfskilled people •For accounting •marketing
  10. 10. These are the most smart people amongst all the four quadrants •Smart income •More money in short time They make money to work the system properly •functioning •planning These are the people who are financially independent and do not have any time constraints •Own money •Self risk
  11. 11. Investors Businessmen Employees/Self employed
  12. 12.  Accounting is the art of recording, classifying and summarizing in a significant manner in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results there of.
  13. 13. 1 2 3 4 5 6 7 8 Identifying the business transaction Measuring the identified transaction Recording the business transaction Classifying the Business Transaction Summarizing the business transaction Analyzing the business transaction Interpreting the business transaction Communicating the interpreted information to the users
  15. 15. At the end of the accounting period, there may be expenses which have become due but have not yet been paid. The extent to which the amount belongs to the currents year but payable in the next year is called Outstanding Expenses. Salaries a/c Dr xxx To Outstanding salaries a/c xxx (Being Salaries for the month of Mar 2011 due but not yet paid accounted.)
  16. 16. The only relation is that both are the balancing figures i.e. balance in hand is the opening balance and net profit or loss is the closing figure...and balance in hand is the cash that you have & profit is the earning after your expenses. You might have profit without cash!!!
  17. 17. At the end of the accounting period, there may be expenses which have been paid in advance. These are expenses which are paid in advance and would be adjusted in the relevant expenditure during the subsequent accounting periods.
  18. 18. Income that is earned in a fund or by company by providing a service or selling a product, but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time but only pay it out to shareholders once a year are, by definition, accruing their income. Individual companies can also accrue income without actually receiving it, which is the basis of the accrual accounting system.
  19. 19.   For calculating depreciation over assets we make an account known as depreciation. In this particular case there is no amount for depreciation but we calculate it on the basis of accounting standard that we have to take 10% depreciation on furniture that would be Rs. 250 for three months.
  20. 20. Because that contribution is treated as the capital for the business and the business is liable to pay back to vidya’s contribution at the time of dissolution of firm. according to law business is treated separate and the people who work for them also treated as separate entity
  21. 21.  Definition of actual rent: The actual rental  Definition of realistic rent. The realistic rent is rate that the landlord achieves after deducting the concession value from the base rental rate a tenant pays that the landlord achieves before deducting the concession tax, and municipal charges from the actual rent
  22. 22. LIABILITIES These denote the money which a businessman owes to outsider who have supplied goods or rendered services to the business.  Long term liability- which are repaid after one year.  Current liability- which are repaid within a period of one year.
  23. 23. Assets: Economic resources employed by an enterprise or valuable things having a money value. Assets may be of various types: Fixed Assets- are of permanent nature and are acquired for use in the business and not for resale. Ex- land & building, Plant & Machinery, furniture.  Current Assets- are those which can be converted into cash within a period of 12 months. Ex- closing stock, debtors, cash in hand.
  24. 24.       It is prepared to know the net profit or loss. It includes indirect expenses other than manufacturing expenses All the balances of nominal account are transferred to profit and loss account Incomes and expenses are shown Helpful in preparation of balance sheet Income tax is levied on the basis of net income
  25. 25. Profit & Loss Account of Vidya Associates as on June 2005 Payments Amount (Rs.) ReceiptsAmount (Rs.) To Rent 30,000By Salary Received To Salary Paid 60,000By Sales To Tel. Bill 3,000 To Insurance 1,000 To Office Supply 280,000 3,750 To Maintenance 4,800 1,800 To Bad Debts 20,000 To Freight 5,000 To Int. Paid 4,500 To Service tax 35,000 To Membership 1,000 To Depriciation 250 To Sundry Expenses 5,200 To Net Profit 114,300 Total 284,800Total To Net Profit added to Capital 114,300 284,800
  26. 26. Statement containing the balances of assets and liabilities on a particular date  It has two sides i.e. on left side liability is shown and on right side asset is shown  It shows the financial position of the business 
  27. 27. Balance Sheet of Vidya Associates as on June 2005 Capital + Liability Capital 1,50,000 (+) Net Profit 1,14,300 (-) Depreciation 10,000 Liability :Creditors Loan @ 12% p.a. Amount (Rs.) Assets Amount (Rs.) Current Assets :Bank 254,300 75,000 150,000 134,350 Bills Recievable P.P. for Equipment Prepaid Inc. Tax Tax Deducted at Source Security Deposit Adv. Insurance 95,000 50,000 15,000 25,000 60,000 5,000 Fixed Assets :Office Stock Furniture 10,000 (-) 10% Dep. 250 1,200 9,750 Computer Intangible Assets :Membership (Lifetime) Total Foot Note :(a) Bank balance calculated at Rs. 1,34,350 479,300 75,000 9,000 Total 479,300
  28. 28.   First of all Vidya needs to appoint an accountant for handling her business accounts as she is unable to understand the accounting jargons. Secondly, as we have seen that she is earning the profit more than her previous salary that means her decision for starting her own business is justified.