This document discusses key accounting concepts such as bookkeeping, accounting, the accounting cycle, and financial statements. It defines bookkeeping as recording transactions and accounting as analyzing an organization's performance. The accounting cycle involves recording transactions in journals, posting to ledgers, preparing a trial balance, and ultimately financial statements including trading accounts, profit and loss statements, and balance sheets. Trading accounts determine gross profit or loss, profit and loss statements calculate net profit or loss, and balance sheets present the financial position of an organization by listing assets, liabilities, and capital. Examples are provided to illustrate journal entries, ledger accounts, trial balances, and basic financial statements.

1. Financial and Managerial Accounting
–MBA
Chapter –II
Understanding of financial
statements

2. What is
Book - keeping & AccountingBook - keeping & Accounting ?
♦ Book keeping
– Recording the
transactions
of an organization
♦ Accounting
– Analysis of the
performance
of an organization

3. What is Book keepingBook keeping 1 ?
♦ You have £10.
♦ Your mother/father/aunt
gives you £100 because
today is your birthday.
♦ You go with your friends
to celebrate your birthday.
♦ You have £15 left after the
celebration.
♦ How much money did you
spend?
♦ In businesses, all of this
would be recorded !
‘Books’ would be kept
of all your (financial)
activities !!

4. What is BookkeepingBookkeeping 2 ?
♦ Record important, useful information.
♦ The information must be recorded
accurately
♦ It is routine
♦ It is recording
♦ It is ‘accounting for’ business
transactions
♦ Examples of transactions:
♦ sale/purchase of goods/services,
every sale, etc., is shown in money.
Accounts are kept of all
the (financial) activities
Book-keeping is
often known as
‘Double entry’

5. What is Accounting 1Accounting 1?
♦ Providing financial
information in an
organization
– objectively
– consistently
– professionally
– conservatively valued
♦ to enable management to
perform three functions
– recording
– analysis
– control

6. What is Accounting 2Accounting 2?
♦ Using financial information to analyse
the performance of management
of (and inside ) an
organization
– objectively
– consistently
– professionally
– with reliable techniques for
internal management
control
– and comparing overall performance
of the organisation
– with (for example) other

7. What is
Book keepingBook keeping andand AccountingAccounting?
♦ We cannot keep Accounting records
– without documents (proof of transactions)
– sales, purchases, banking (payment and receipts)
documents
♦ these are source documents
♦ this documentary evidence:
– tells/shows us the actual transaction
– shows what has happened
♦ Accounting records:
– show the impact of these transactions on a business
– show what these transactions mean to a business

8. Methods of Accounting

9. Single Entry:
♦ It is incomplete system of recording
business transactions.
♦ The business organization maintains only
cash book and personal accounts of debtors
and creditors.
♦ So the complete recording of transactions
cannot be made and trail balance cannot be
prepared.

10. Double Entry:
♦ It this system every business transaction is
having a two fold effect of benefits giving
and benefit receiving aspects.
♦ The recording is made on the basis of both
these aspects.
♦ Double Entry is an accounting system that
records the effects of transactions and other
events in at least two accounts with equal
debits and credits.

11. STEPS IN ACCOUNTING CYCLE
Documents
Documents
DocumentsSource
Documents
Journal Ledger
Trial Balance

12. I - JOURNAL
♦ journal is a simple book of accounts in
which all the business transactions are
originally recorded in chronological order.
♦ Journaling refers to the act of recording
each transaction in the journal and the form
in which it is recorded, is known as a
journal entry.

13. Advantages of Journal
♦ As all the transactions are entered in the
journal chronologically, a date wise record
can easily be maintained;
♦ 2. All the necessary information and the
required explanations regarding all
transactions can be obtained from the
journal.
♦ Errors can be easily located and prevented
by the use of journal or book of prime
entry.

14. Journal Performa
Name of the journal
Date Particular L. Folio Debit Credit

15. Types of Accounts
♦ Business transactions have been classified
into three categories:
(i) Transactions relating to persons.
( Personal Account)
(ii) Transactions relating to properties and
assets ( Real Account)
(iii) Transactions relating to incomes and
expenses. ( Nominal Account)

16. Personal Accounts:
♦ Accounts recording transactions with a
person or group of persons.
♦ These accounts are necessary, in particular,
to record credit transactions.
♦ The rule for personal accounts is:
• Debit the receiver
• Credit the giver

17. Real Accounts
♦ Accounts relating to properties or assets
♦ A separate account is maintained for each
asset e.g., Cash Machinery, Building, etc.,
♦ The rule for Real accounts is:
• Debit what comes in
• Credit what goes out

18. Nominal Accounts
♦ It is relating to income, revenue, gain
expenses and losses.
♦ A separate account is maintained for each
expense or loss and gain or income.
♦ Ex:-Wages account, Rent account
Commission account, Interest received
account etc.,
♦ The rule for Nominal accounts is:
• Debit all expenses and losses
• Credit all incomes and gains

19. The Rules of Debit and Credit
Debit Account Credit
Increase in Assets Decrease in Assets
Decrease in Liabilities Increase in Liabilities
Decrease in Owner’s Equity Increase in Owner’s Equity
Decrease in Revenue Increase in Revenue
Increase in Expenses Decrease in Expenses

20. Expansion of Basic Equation
Assets = Liabilities + Owner’s Equity
Assets
Liabilities Capital Drawings
Revenue Expenses

21. Recording Transaction
Transaction Debit Credit
Started business with cash. CapitalCash
Bought office equipment on credit
from Syarikat Emas.
Office
Equipment
Account
Payable
Received loan from Bank Intan
in cash.
Cash
Bank
Loan

22. Transaction Debit Credit
Bought motor van by cash Motor
Vehicle
Cash
Paid rental expenses by cash Rental
Expenses
Cash
Bought office supplies by credit Office
Supplies
Account
Payable

23. Transaction Debit Credit
Paid utility bills with cash
Utility
Expenses
Cash
Received cash from Abu, a debtor. Cash Account
Receivable
A check on supplies showed
that $120 supplies has been used.
Supplies
Expenses
Office
Supplies

24. Transaction Debit Credit
Owner brought in his own car
to be used in business.
Motor
Vehicle
Capital
Sold motor van for cash
Cash
Motor
Vehicle
Owner took cash for his own use. Drawings Cash

25. Journal Entries
Siti Malaysia, the owner of Tadika Malaysia started her business
on 1 January 2002 with cash M25,000. The followings are
transactions related to the business for the month of January:
Illustration : Tadika Malaysia

26. Tadika Malaysia
General Journal
Date Particulars Debit Credit
Jan. 1 Cash 25,000
Capital 25,000
( Cash invested by owner )

27. Tadika Malaysia- General Journal
Jan. 5 Bought office equipment with cash, RM500.
Jan. 5 Office Equipment 500
Cash 500
(Bought office equipment
with cash)
Date Particulars Debit Credit

28. Jan.10 Bought furnitures amounting to RM4,700 with
cash from Syarikat Perabot Kita.
Jan. 10 Furnitures 4,700
Cash 4,700
( Bought furnitures with
cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

29. Jan. 11 35,000
35,000
Date Particulars Debit Credit
Tadika Malaysia- General Journal
Jan.11 Bought motor van for business use by credit
from Syarikat Kenderaan amounting to RM35,000.
Motor vehicles
Account Payable
( bought motor van by credit )

30. Jan.15 Paid advertising expense RM2,000 with cash.
Jan. 15 Advertising expense 2,000
Cash 2,000
( Paid advertising expense
with cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

31. Jan.18 Paid utility bills with cash amounting to RM325.
Jan. 18 Utilities Expense 325
Cash 325
( Paid utility bills with cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

32. Jan.23 Paid salaries by cash RM700 per person for
5 workers.
Jan. 23 Salary expense 3,500
Cash 3,500
( Paid salary by cash )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

33. Jan 24 Received cash RM7,500 for the fees of the month.
Jan. 24 Cash 7,500
Revenue : Fees 7,500
( received fees or the month )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

34. Jan.27 Bought two units of computers on credit , amounting
to RM4,000 per unit.
Jan. 27 Office Equipment 8,000
Account Payables 8,000
( Bought computers on credit )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

35. Jan.30 Siti Malaysia took cash RM1,200 for her own use.
Jan. 30 Drawings 1,200
Cash 1,200
( Cash withdrawals by the owner )
Date Particulars Debit Credit
Tadika Malaysia- General Journal

36. II - LEDGER
♦ In journal, as all the business transactions are recorded
chronologically, it is very difficult to obtain all the
transactions pertaining to one head of account together at
one place.
♦ But, the preparation of different ledger accounts helps to
get a consolidated picture of the transactions pertaining to
one ledger account at a time.
♦ Thus, a ledger account may be defined as a summary
statement of all the transactions relating to a person, asset,
expense, or income or gain or loss which have taken place
during a specified period and shows their net effect
ultimately.

37. Posting from journal to ledger
Journal Ledger

38. General Ledger
Cash
Jan 1 Capital 25,000 Jan 5 Office Equipt 500
24 Fees Rec. 7,500 10 Furnitures 4,700
18 Utilities 325
15 Advertising 2,000
30 Drawings 1,200
23 Salary 3,500
Balance c/f
32,500 32,500
20,275

39. General Ledger
Capital
Jan 1 Cash 25,000
25,00025,000
Jan 31 Bal c/f 25,000

40. General Ledger
Office Equipment
Jan 31 Bal c/f 8,500
Jan 5 Cash 500
27 A/c Payable8,000
8,500 8,500

41. General Ledger
Furnitures
Jan 31 Bal c/f 4,700Jan 10 Cash 4,700
4,700 4,700
Motor Vehicles
Jan 11 A/c Payable 35,000 Jan 31 Bal c/f 4,700
35,000 35,000

42. General Ledger
Account Payable
Jan 31 Bal c/f 43,000 Jan 11 M. Vehicles 35,000
27 O. Equipmt 8,000
43,000 43,000

43. General Ledger
Advertising
Jan 31 Bal c/f 2,000Jan 15 Cash 2,000
2,000 2,000
Utility
Jan 18 Cash 325 Jan 31 Bal c/f 325
325 325

44. General Ledger
Salaries
Jan 31 Bal c/f 3,500Jan 23 Cash 3,500
3,500 3,500
Fees Received
Jan 24 Cash 7,500Jan 31 Bal c/f 7,500
7,500 7,500

45. General Ledger
Drawings
Jan 30 Cash 1,200
1,2001,200
Jan 31 Bal c/f 1,200

46. Practice Question:-
Journalise the following transactions, post the same in relevant ledger
account and balance the same.

47. III - TRIAL BALANCE
♦ Trial balance is a statement prepared with the
balances or total of debits and credits of all the
accounts in the ledger to test the arithmetical
accuracy of the ledger accounts.
♦ As the name indicates it is prepared to check the
ledger balances.
♦ If the total of the debit and credit amount columns
of the trail balance are equal, it is assumed that the
posting to the ledger is accurate.
♦ If not, it is a sign of error that occurs during
journalizing and posting.

48. Tadika Malaysia
Trial Balance as at 31 January 2002
Accounts Debit Credit
Cash 20,275
Capital 25,000
Office Equipment 8,500
Furniture 4,700
Motor Vehicles 35,000
Account Payables 43,000
Advertising 2,000
Utility 325
Salaries 3,500
Fees Received 7,500
Drawings 1,200
75,500 75,500

49. IV – FINANCIAL STATEMENTS
(FINAL ACCOUNTS)
♦ A. Trading Account
♦ B. Profit and Loss Account
♦ C. Balance Sheet

50. A. Trading Account
♦ Trading account is prepared for an accounting period to
find the trading results i.e., the amount of gross profit/loss
of the concern.
♦ It has made from buying and selling during the accounting
period.
♦ The difference between the sales and cost of sales is gross
profit.
♦ For the purpose of computing cost of sales, value of
opening stock, purchases, direct expenses on purchasing
and manufacturing are added up and closing stock of
finished goods is reduced.
♦ The balance of this account shows gross profit or loss
which is transferred to the profit and loss account.

52. Example:-

53. Solution

54. B. Profit And Loss Account
♦ Profit and loss account starts with gross profit brought
down from trading account on the credit side. (If gross
loss, on the debit side).
♦ All the indirect expenses are debited and all the revenue
incomes are credited to the profit and loss account
♦ If incomes or credit is more, than the expenses or debit, the
difference is net profit.
♦ On the other hand if the expenses or debit side is more, the
difference is net loss.

55. The Specimen of Profit and Loss Account

57. Example:-
From the following Trial balance of Mr.Gandhi prepare
profit and loss account for the year ended 31-3-2001.

58. Solution

59. C. Balance Sheet
♦ “Balance sheet is a screen picture of the financial position of a going
business concern at a certain moment” - Francis.
♦ It comprises of lists of assets, liabilities and capital fund on a given
date.
♦ It presents the financial position of a concern as revealed by the
accounting records.
♦ It reflects the assets owned by the concern and the sources of funds
used in the acquisition of those assets.
♦ In simple language it is prepared in such a way that true financial
position is revealed in a form easily readable and more rapidly
understood.

60. Proforma of Balance Sheet

61. Example:-
From the following adjustment Trial Balance, Prepare Balance Sheet of
Saravanan Traders as at 31st December 2004.

62. Solution

63. Individual Assignment
From the following data, prepare a profit and loss a/c and a balance sheet
as on 31-3-1996.

64. Any QuestionsQuestions ?
By
Dr. Suresh Vadde
Associate Professor
Department of Management
Samara University, Ethiopia.