SESSION 2RecapSession I – Introduction to Accounting Concepts of Accounting (GAAP)Session II – Accounting Mechanics – Preparation of Journal entries & General LedgersPresentation of Assignment on Survey ofIndian Industry 2010
RecapWhat is accountingAccounting is the language of businessAccording to AICPA, Accounting is the art ofrecording, classifying and summarizing in asignificant manner and in terms of money,transactions and events which are of financial natureand interpreting the results thereof.This accounting process continues as financialstatements and reports that are provided to users.
RecapWhat is accounting cycle?Recording of financial transactionsClassifying means to get information on differenttransactions individually. The book of account usedfor classification is called is called “Ledger”Summarizing - Once classified information isavailable in the ledger, it is used to make summariesin the form of Income Statement & Balance Sheet. ie.Financial result and financial position
RecapWhat is the need for “financial accounting”?The important functions of management; decisionmaking, planning & controlling cannot be executedwithout correct and timely information in the form ofaccounting data. A business man would like toperiodically know the position of his businessThe two systems of accounting are: Cash basis Accrual basis Forms of business organizationSole Proprietorship, Partnership & Company
RecapThe three branches of accounting are:Financial Accounting refers to accounting forrevenues, expenses, assets & liabilities.Cost Accounting refers to recording classifyingallocating and reporting current and prospectivecosts.Management Accounting refers to providinginformation to various management levels as a basisfor management decisions.
Users of financial reports Shareholders Board of Directors Government Employees Creditors Bankers
Role of Financial Accounting in businessThis can be best understood by understanding therole of the finance department in an organizationTo ensureefficient management of cash flowmaintenance of accurate accountsmaking and reviewing policies & procedures,control income and expensesguide all departmentsbyproviding accurate and timely information for decisionmaking in order to maximize profitability
Session 2 - Capital & Revenue ItemsSegregation of Income and Expenses into Capital &Revenue Items is an important aspect of AccountingTo ascertain the correct Revenue from businessTo ascertain the correct Value of the businessWe may overstate or understate profits in the Profit& Loss Account in case of incorrect classificationWe may overvalue or undervalue the business in theBalance Sheet in case of incorrect classification
Revenue ItemsRevenue Items include revenue receipts andrevenue expenses and are reflected in the P & L A/cRevenue receipts includes Sales & all other incomeearned from the business on a regular basisRevenue expenses include all expenses that areincurred in the usual course of business on a regularbasisExamples of Revenue receipts are- Sales, Interestreceived, Commission received, Dividend recd.Examples of Revenue expenses – Freight, Purchases,Depreciation, Interest paid, Factory expenses.
Capital ItemsCapital items include capital receipts and capitalexpenses.Capital expenses is incurred to Buy a fixed asset Increase the useful life of an asset Increase the productive capacity of fixed assets Make an asset usable or reusable Increase the profitability of the business by achieving operating efficiencyCapital Items are reflected in the Balance Sheet of theBusiness.
Deferred Revenue ExpenditureSometimes a revenue expenses may be of thenature of a deferred revenue expenditureThe benefits of the expense may last for more than ayear but are definitely not capital in nature. Eg.Advertisement & PublicityPreliminary expenses, brokerage or commissionpaid on issue of debentures are some examplesThese expenses are written off over a period of time
Capital & Revenue ExpensesRs. 1 lakh spent on purchase of machine. A loan wastaken for the same.Rs. 10,000 was spent on freight to bring the machineThe machine started production on 1st October 2009Interest paid Rs. 12000 upto September 2009 on loanInterest from October to March - Rs. 12,000Rs.50,000 spent on preventive maintenance of a machineRs.20,000 spent on brokerage & commisionexpenses for issue of sharesRs.20,000 spent on machinery to increase its capacityRs.5 lakh spent on advertisement which will bepublicised for 3 years
Saurav has received 2,00,000 from his father on joiningthe MMS course on 1st April 2010. He buys a laptop for Rs.40,000 in May 2010. He buys a cupboard for Rs. 10,000 inJune 2010. His rent expenses are Rs. 2500 per monthwhich he pays on 5th of every month. He purchases amobile for Rs. 10,000 in July 2010. He receives Rs. 30,000from his mother on his birthday in August 2010. He payshis fees of Rs. 100,000 in September 2010. His day to dayexpenses on food & laundry is Rs. 2000 per month. Hetakes his friends out for dinner in November 2010 ongetting a first class in the first semester and spends Rs.5000. He pays his exam fees of Rs. 2000 in February 2010.He buys a gift of Rs. 3000 for his parents on theiranniversary in March 2011. Prepare a month wise diary ofhis income and expenditure and his cash balance on 31stMarch 2011.
Divya receives an education loan of Rs. 300000 onjoining the MMS course on 1st April 2010. She buys alaptop for Rs. 50,000 in May 2010. She buys a cupboardfor Rs. 10,000 in June 2010. Her hostel rent expense isRs.3000 per month which she pays on 5th of everymonth. She purchases a mobile for Rs. 10,000 in July2010. She pays her fees of Rs. 150,000 in September2010. Her day to day expenses on food & laundry is Rs.3000 per month. She buys clothes worth Rs. 5000 on herbirthday. She pays her exam fees of Rs. 2000 in February2010. She buys 10 shares at the price of Rs. 50000. Shespends Rs. 3000 on a gift for her brother on his birthdayin March 2011. Prepare a month wise diary of her incomeand expenditure and her cash balance on 31st March2011.
Journal entriesThe two aspects of a transaction are identified as two “Accounts”While recording transactions the accounts involved areDebited and CreditedAll accounts are classified in the following categoriesPersonal Account / Real Account /Nominal AccountPersonal Account is an account of a person eg. Ms. Jyoti, Mr.Ram, Debtors account, Creditors account etc.Real accounts are accounts of assets of the business eg.Stock, furniture, land, building, Goodwill, Bank accountNominal Account are accounts of expenses, income, losses,gains, interest, stationery etc.
Classify the following Goods account Printing & Stationery account Repairs to machinery account Vinay’s account Land account Debtors account Salary account Furniture account
Golden RulesPersonal Account Debit the receiver Credit the giverReal Account Debit what comes in Credit what goes outNominal Accounts Debit all expenses and losses Credit all income and gainsJournalise the transaction – Cash brought in as capital to startbusiness in Jyoti & Company Rs. 1 lakh
Format of a journal entry IN THE BOOKS OF JYOTI & CO. CJ.V NO. DATE PARTICULARS L.F. Dr (Rs.). Cr (Rs.) 21 01 11/11/08 Cash a/c Dr. 100000 To Capital a/c 22 100000 (Being cash brought in as capital to start business)
Pass Journal entries for the following transactionsMr. A starts a Company called M/s. Jyoti & Company with acash investment of Rs. 1,00,000 on 15th NovemberHe buys office building space for Rs. 50,000 and furniture ofRs. 25,000 in cash on 20th NovemberHe pays for advertising expenses Rs. 1900 on 20th November.He buys office stationery for Rs. 1000 on 22nd NovemberHe purchase 1000 pens for Rs. 10,000 on 25th November.He sells the pens for Rs. 15,000 on 29th NovemberHe pays salary to staff of Rs. 2000 on 30th NovemberHe pays for water Rs.500 and Rs.600 for electricity on 30thNovember
LedgersClassification of dataCollecting all transactions of a similar type or category atone single place so as to give complete informationThe book used to classify transactions is called “Ledger”For an individual type of transaction an individual“account” is maintained in the ledger book used toclassify transactions is called “Ledger”
Format of a ledger account Bank Loan AccountDr. Cr.Date Particulars JF Rs. Date Particulars JF Rs. 5/31/99 To Bal c/d 4.50 5/1/99 By Bank a/c 4.50 4.50 4.50
Balancing the ledgersOnce the process of posting to the ledger accounts iscomplete, these accounts are balancedIf debit side is higher, the account has a debit balanceand vice versaThe trial balance is a statement of balances of the ledgeraccountsThe Trial Balance totals match as the double entrysystem is followed
Assignment Presentation of Companies in different sectors