FAM_Unit I-Inroduction to accounting.pptx

FINANCIALACCOUNTING FOR MANAGERS
1

FINANCIAL ACCOUNTING FOR
MANAGERS
•Course Code: MBA203C11
•Discipline Specific Core Courses (DSCC)
•Credits: 3
Hours: 36
2

Objectives
• To familiarize them in brief with accounting mechanics,
process and system, but emphasis is laid on sound concepts
and their managerial implications.
• To provide the knowledge to the students about financial
statements and principles underlying them and to develop
their skills in reading Annual Financial Reports.
• To lay a foundation for developing their skills in interpreting
financial statements and to familiarize the Accounting
Information System.
•
3

Learning Outcomes
• Analyse a business transaction throughout its cycle and record
them.
• Construct financial statements for sole trading concern and
joint-stock companies.
• Appraise financial statements and interpret the financial
health of an organisation.
• Create accounting information using accounting information
system.
4

Syllabus
Unit: 1 Introduction to Accounting
Unit:2 Preparation of Financial Statements
Unit: 3 Analysing and Interpreting Financial
Statements.
Unit: 4 Accounting Information System
5

Unit 1
Introduction to Accounting
6

Introduction to Accounting 12 Hours
• Introduction to Financial Accounting- uses and users of
accounting information; GAAP - Significant Accounting
Policies; IFRS and IND-AS; The concept of double entry and
fundamental principles; Accounting Equation; Journal; Ledger;
Trial Balance. Bank reconciliation statement-Calculating bank
balance at accounting date, Need and preparation, corrected
Cash book balance, Detection and Rectification of errors;
preparation of Suspense account; Forensic accounting
(theory); Block chain accounting, Hedge Accounting (theory)
7

● During 1400s, accounting grew
further because the needs for
information of merchants in the
Venis City of Italy increased. The
first known description of double
entry book keeping was first
published in 1994 by Lucas Pacioli.
He was a mathematician and a
friend of Leonardo Ileda Vinci

American Institute of Certified Public Accountants (AICPA) defines,
accounting as
“The art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events, which are in
part at least, of a financial character and interpreting the results
thereof”.
Definition of Accounting

Branches of Accounting
• Financial Accounting
– Mainly concerned with recording business transactions in books of
account for computing profit or loss for a period and the financial position
at the end of the period
• Cost Accounting
– To analyse the expenditure so as to facilitate cost determination, cost
control, price determination etc.
– Mainly used for internal use (management)
• Management Accounting
– Encompasses techniques and processes that are intended to provide
financial and non-financial information to people within an organization
to make better decisions to achieve business objectives
13

Characteristics of Accounting
• Accounting is an art which helps in attaining the objective of ascertaining
the financial results
• Recording, Classifying and Summarizing
– Transactions recorded as when they take place
– Classification by opening accounts in the form of a ledger
– Summarized in the form of Trading & Profit and Loss A/C and Balance
Sheet
• Accounting records transactions in terms of money
• Only transactions and events of financial nature are recorded
• Interpreting the results of accounts
– Ratio analysis, Comparative Statements etc.
15

Objectives / Functions of Accounting
• Recording.
• Basic function of accounting
• Keeps a systematic record of transactions in the sequence of
their dates
• Ascertaining Profit/Loss and Financial position
• P&LA/C showing net profit or loss during the period
• Balance Sheet showing financial position at a particular point
of time
• Communicating
• To those who have to make use of them (managers, owners,
creditors etc.) 16

Objectives / Functions of
Accounting
• Meeting legal requirements
• Fulfilling the requirements of law (file income tax
returns, GST returns etc.)
• Interpreting
• Attempt to determine the meaning of the data in
Financial statements
• Pinpoints the strengths and weakness of a
business entity
17

Users of Accounting Information
• Internal users
• Proprietors: Profitability and financial health of an enterprise needs to be communicated
to the proprietors.
• Managers: Financial disclosures communicate the financial health and help the managers
to plan and manage the enterprise better.
• External Users
• Shareholders and Present Investors: To judge whether financial position of the business
is sound and whether the firm is engaged in profitable operations.
• Creditors/Bankers: Entities that have extended credit look into financial statements to
ascertain security of their credit.
• Prospective Investors: Financial statements communicate profitability and financial health
to attract investment into an enterprise.
• Government Agencies: Such as Income Tax Department, Registrar of companies, Ministry
of Commerce and Industry, Central Statistical Organization etc. for regulating general
business activity and also particular types of business
• Employees: To judge the capacity of the company to bonus ands their claims for higher
salary or wage structure 18

Uses of Accounting information
• It provides information to tax authorities and government agencies
• Provides information that helps the management of the organization to plan
the future course of action and other funds related issues.
• Accounting makes it possible to record, analyse and retrieve important
financial information
• Accounting provides the information used to determine a company’s
financial status and provides us with the reports needed to make sound
financial decisions
• Accounting helps with controlling assets, planning in respect to cash and
in determining the results of operations in a particular period.
19

Basic Accounting Terms
● Account- A formal record of a particular type of transaction expressed in money or other unit of
measurement and kept in a ledger
● Transaction -Any exchange with another person is a transaction. Any kind of action involved in
conducting business.
● Business Transaction – A business transaction is a financial event between two or more parties. It
involves an exchange of goods, services or money and gets recorded in the books of accounts for the
organisations involved. Transaction are classified as Cash transactions and Credit transactions.
● Capital – Capital is a critical component of any business to run its daily operations and help its future
growth. The capital for a business comes either from its owners or from outsiders (shares, debentures
or bonds).
● Drawings – Drawings refer to the withdrawals made by the owners of a business for personal use. It
gets deducted from the Owner’s Capital in the Liabilities side of a Balance Sheet.
● Liabilities (Non-Current and Current) – Current Liabilities are the amount due to the creditors of a
business that has to be paid back within twelve months. Non-Current Liabilities are the long-term
obligations of a company that are not due for payment before a year.
● Assets (Non-Current and Current) – Current Assets are the assets that a firm can liquidate within
twelve months. Non-Current Assets are the long-term investments of a business that they cannot
liquidate within a year.

● Fixed assets (Tangible and Intangible) – Tangible Fixed Assets are the long-term
investments of a business that have a physical existence. Intangible Fixed Assets are
the long-term investments made by a company that doesn’t have a physical
existence.
● Expenditure (Capital and Revenue) – A business incurs Capital Expenditure to
acquire assets for long-term income generation. It also incurs Revenue Expenditure
to run the day-to-day operations of a business.
● Expense – Expenses in accounting refer to the cost incurred or money the business
owners spend to generate revenue. A business must keep its expenses under control
to generate profits both in the short and long run.
● Income – Income is the revenue that a business earns from the sale of its goods or
services. It is essential for the survival and growth of any enterprise, and the failure
to generate revenue can lead to a shutdown of the business.
● Profit – Profit is the positive difference between the income generated from selling
goods or services and the Expenses incurred to perform that business activity. Profit
is the excess of revenues over the expenses.
● Gain – A Gain is an increase in the total value of an asset of a business. It takes place
when the current price of the asset exceeds its original purchase price. It can occur
at any time during the useful life of an asset.
● Loss – Loss is the excess of the Expenses incurred from selling goods or services over
the income generated to perform that business activity. Sustained losses over time
can lead to the shutdown of a business organisation.

Generally Accepted Accounting
Principles (GAAP)

Generally Accepted Accounting
Principles (GAAP)
GAAPs are a combination of authoritative standards set by policy
boards and most preferred ways of recording and reporting
accounting information like balance sheet, classification of assets
and liabilities, treatment of outstanding incomes and expenses,
reserves, etc., .
These principles have been developed to ensure uniformity and easy
understanding of the accounting information
GAAP are the pillars on which the structure of accounting is resting
Fall into three categories:
1. Accounting Concepts
2. Accounting Conventions
3. Accounting standards
23

Indian GAAP
• Indian GAAP is a set of accounting standards that every
company operating in India has to follow when reporting its
financial results.
• While US has its own set of accounting Standards termed as
US GAAP. A non-US company when presenting its financial
results in US has to follow US GAAP.
• GAAP includes the standards, conventions and rules followed
by the accountants in recording, summarizing and the
preparation of financial statements.
24

• GAAP is slowly being phased out in favor of the
International Financial Reporting Standards (IFRS) due to
global business.
• While there is close similarity between GAAP and the
international rules, the differences can lead a financial
statement user to believe incorrectly that company A is
better than company B simply because they report using
different rules.
• The move towards International Standards aims to eliminate
this kind of disparity.
25

ACCOUNTING CONCEPTS
• Accounting concepts define the assumptions on the
basis of which financial statements of a business
entity are prepared.
• Concepts means idea or notion , which has universal
application
• Concepts are those basic assumptions and conditions,
which form the basis upon which accountancy has been
laid.
• Unlike physical sciences, accounting concepts are only
result of broad consensus.
26

Accounting Concepts
• Accounting Entity(Separate Entity) Concept
– Assumption that business has a separate existence and its entity is
different from the person or persons who own it.
– This concept does not permit the businessman to intermingle his
personal transactions with those of his business.
– For accounting purposes, a distinction has to be made between
personal transactions and business transactions
• Money Measurement Concept
– Accounting records only those transactions and events which can
be measured in terms of money.
– Money means currency
– In other words, any transaction or event which cannot be
expressed in terms of money is not recorded in accounting records
27

Accounting Concepts cont’d
• Going Concern Concept
– Assumption that the business will continue to operate for an indefinite
period of time in the future unless there is good evidence to the
contrary.
– Business has continuity of life and there is no intension or necessity
of liquidating the business in the near foreseeable future
– Assets are valued at cost less depreciation , because the market values
are relevant only in the event of the liquidation of the company
• Cost Concept
– Asset is recorded in the books of account at the cost paid to acquire it.
– This cost is the basis for all subsequent accounting for this asset
– The rationale is that cost price is objectively verifiable
28

Accounting Concepts cont’d
• Dual Aspect Concept
– Very foundation of the universally accepted system of double entry book-
keeping system
– Every transaction has a twofold effect called dual aspect of a transaction
– Accordingly, total assets must be equal to the claims of various parties
against these assets
– Accounting equation: Assets = Capital + Liabilities
• Accounting Period Concept
– Related to going concern concept
– Owner cannot wait for a long time to determine the profit / loss
– Broken up into convenient time say, one year
• Matching concept
– Revenue realized during the period should be matched with expenses for the
same period.
29

Accounting Conventions
• Used to signify customs or traditions as a guide to the
preparations of accounting statements
• Emerged out of accounting practices over a period of
time
• Convention of Consistency
– Same accounting method or procedure will be followed year
after year (eg. Method of charging depreciation)
– Helps to achieve comparability of the financial statements of
an enterprise over the time
– Does not imply that an accounting method, once accepted
cannot be changed.
– Desirable changes whenever the circumstances so demand
30

Accounting Conventions
cont’d
• Convention of Conservatism (Prudence
Convention)
– Policy of playing safe
– Requires that prospective or likely future losses should be
accounted for, while prospective profits are ignored
– “Anticipate no profits but provide for all probable losses”
– Makes early recognition of unfavorable events so as to play
safe
• Valuation of inventory ‘at cost or market price whichever is
less’
• Making provision for bad and doubtful debts
31

Accounting Conventions cont’d
• Convention of Materiality
– This convention states that accounting should focus on only
important and material information and should not waste
resources in recording insignificant and irrelevant information
– According to AAA “an item should be regarded as material if
there is a reason to believe that knowledge of it would
influence the decision of an informed investor”
• Convention of Full and Fair Disclosure
– Financial statements must disclose all the relevant and material
information about the financial activities of a business
enterprise in conformity with the GAAP
– The information disclosed should be full, fair and adequate
32

ACCOUNTING STANDARDS
Accounting standards are written documents
issued by the regulatory bodies covering various
aspects of cost measurement, treatment,
presentation and disclosure of accounting
transactions.
They serve as guidelines for preparation of
financial statements in acceptable form .
33

Objectives of Accounting
Standards
• To remove the differences in the treatment of
various accounting aspects.
• To bring standardization in presentation so as to
facilitate intra-firm and inter-firm comparison.
34

Advantages of Accounting Standards
• Facilitates comparison of financial statements of different
companies in the same industry
• Reduce or eliminate any confusion regarding the variation in
the accounting treatment of different items appearing in
financial statements
• Improve the reliability and creditability of the financial
statements and create sense of confidence in the minds of
users.
• Facilitate informed decision making in lending and
investment
• May call for disclosure of certain information which may not
be required by law to be disclosed
35

Why Converge to IFRS?
• To bring about uniformity in reporting system globally.
• To access foreign capital markets.
• Foreign Direct Investors and FIIs are more comfortable and
confident with globally accepted standards.
• To increase comparability
• To bring balance sheet closer to economic value and to have
single set of AS around the globe.
36

Objectives of IFRS
• “To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in
financial statements and other financial reporting to help participants
in the various capital markets of the world and other users of
information to make economic decisions.”
 To promote the use and application of IFRS
 To facilitate the adoption of IFRS through convergence of national
accounting standards of countries with IFRS
37

Advantages of IFRS
• Produces reliable, timely and better quality financial
information for the stakeholders and regulators
• Enhanced global comparability
• Improved transparency of results
• Decreased cost of capital as industry is able to raise capital
from foreign markets at a lower cost
• The ability to secure cross border listing is increased
• It facilitates better management of global operations
• It increases the growth of international business
38

ACCOUNTING PROCESS
Steps Involved
Documenting the transaction
Recording transaction in the Journal
Posting of journal entries in ledger accounts
Preparing a trial balance & Adjusting entries
Preparing financial statements
Closing the accounts
Analysis and Interpretation of financial statements
39

Accounting Process - elaborated
• 1. Identifying and Analysing Business Transactions
– The accounting process starts with identifying and analysing business
transactions and events.
– Not all transactions and events are entered into the accounting system.
Only those that pertain to the business entity are included in the
process.
– The first step includes the preparation of business documents, or
source documents.
– A business document serves as basis for recording a transaction.(E.g.
Voucher, debit note, credit note etc.)
• 2. Recording in the Journals
– A journal is a book – paper or electronic – in which transactions are
recorded.
– Business transactions are recorded using the double-entry bookkeeping
system.
– Journals are also known as Books of Original Entry
40

• 3. Posting to the Ledger
– Also known as Books of Final Entry, the ledger is a collection
of accounts that shows the changes made to each account as a
result of past transactions, and their current balances.
– After the posting all transactions to the ledger, the balances of
each account should be determined.
• 4. Unadjusted Trial Balance
– A trial balance is prepared to test the equality of the debits and
credits.
– All account balances are extracted from the ledger and
arranged in one report
– Total debits should be equal to total credits
41

• 5. Adjusting Entries
– Adjusting entries are prepared to update the accounts before
they are summarized in the financial statements.
– Adjusting entries are made for accrual of income, accrual of
expenses, deferrals (income method or liability method),
prepayments (asset method or expense method), depreciation,
and allowances.
• 6. Adjusted Trial Balance
– An adjusted trial balance may be prepared after adjusting
entries are made and before the financial statements are
prepared.
– This is to test if the debits are equal to credits after adjusting
entries are made.
• 7. Financial Statements
– The financial statements are the end-products of an accounting
system. 42

• 8. Closing Entries
– Temporary or nominal accounts, i.e. income statement accounts,
are closed to prepare the system for the next accounting period.
Temporary accounts include income, expense, and withdrawal
accounts. These items are measured periodically
• 9. Post-Closing Trial Balance
– In the accounting cycle, the last step is to prepare a post-closing
trial balance. It is prepared to test the equality of debits and
credits after closing entries are made.
• 10. Reversing Entries: Optional step at
the beginning of the new accounting
period
– Reversing entries are optional. They are prepared at the
beginning of the new accounting period to facilitate a smoother
and more consistent recording process.
43

Book- Keeping
 Bookkeeping, often called record keeping, is the part of
accounting that records transactions and business events in the
form of journal entries in the accounting system.
 “Book-keeping is the art of maintaining a systematic record of
business transactions in a set of books”
 In other words, bookkeeping is the means by which data are
entered into an accounting system.
 This can either be done manually on a physical ledger pad or
electronically in an accounting program like Quickbooks, and
Tally. 44

Methods/ Types of Accounting
1. Single Entry
• Refers to any system of accounting other than double-entry
system
• It is an 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 is not done and
Trail Balance cannot be prepared.
45

Methods/ Types of Accounting
2. Double Entry
• 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.
• In this system every business transaction is perceived to have
two fold effect/ aspect of giving benefits and receiving
benefit .
• The recording is made on the basis of both these aspects.
46

Principles of Double Entry System
For every transaction there are two aspects.
One is called Debit and the other is called Credit.
The debit and credit aspects of a transaction are to be
identified based on the principles of double entry
system of accounting.
47

 Debit refers to entering an amount on the left side of an
account and Credit means to enter an amount on the right
side of an account.
 The abbreviated form of Dr. stands for Debit and Cr. stands
for Credit.
 Rules of debit and credit are based on Dual Aspect concept
namely, every transaction has a debit effect and an
equivalent credit effect.
 Before deciding which account is to be debited or credited, it
is necessary to decide the nature of accounts which are
influenced by the business transactions.
Principles of Double Entry System
48

Personal Accounts
• These accounts are related to individuals, firms, companies,
etc. A few examples of personal accounts include debtors,
creditors, banks, outstanding/prepaid accounts, accounts of
credit customers, accounts of goods suppliers, capital,
drawings, etc.
• Natural personal accounts: This type of personal accounts is
the simplest to understand out of all and includes all God’s
creations who have the ability to deal, who, in most cases, are
people. E.g. Kumar’s A/C, Adam’s A/C, etc.
• Artificial personal accounts: Personal accounts which are
created artificially by law, such as corporate bodies
and institutions, are called Artificial personal
accounts. E.g. Pvt. Ltd companies, LLCs(limited liability company),
LLPs(limited liability partnership), clubs, schools, etc.
50

• Representative personal accounts: Accounts which
represent a certain person or a group directly or indirectly.
• E.g. Let’s say that wages are paid in advance to a group
of employees – a Wage Prepaid Account will be opened in
the books of accounts.
• This ‘Wages Prepaid Account’ is a representative personal
account indirectly linked to those persons.
• E.g. "Wages Outstanding Account", Pre-paid Insurance
Account, Advance Interest Account, Accrued Salaries
Account
51

Personal Accounts:
• Rule : Debit the Receiver
Credit the Giver
• According to the above principle, the benefit
receiver’s account is to be debited and the
benefit giver’s account is to be credited.
52

Real Accounts:(Assets)
• All assets of a firm, which are tangible or intangible,
fall under the category ”Real Accounts”.
• Tangible real accounts are related to things that can be
touched and felt physically. A few examples of tangible
real accounts are building, machinery, stock, land, etc.
• Intangible real accounts are related to things that can’t
be touched and felt physically. A few examples of such real
accounts are goodwill, patents, trademarks, etc.
• Rule : Debit what comes in
Credit what goes out
53

• According to Real Accounts’ principle, when an
asset is received by the business, the concerned
asset account is to be debited, when any asset goes
out of the business, the asset account is to be
credited.
• For example:
Purchased office furniture for Rs. 10,000.
• In this transaction office furniture (asset – Real A/c)
is coming in and cash (asset – Real A/c) is going
out.
• Hence, Office Furniture Account is to be debited
and Cash Account is to be credited.
54

Nominal Accounts
(Expenses, Losses, Incomes, Gains)
• Accounts which are related to expenses, losses,
incomes or gains are called Nominal accounts.
• Nominal accounts do not really exist in physical form,
but behind every nominal account money is involved.
• E.g. Purchase A/C, Salary A/C,
Sales/C, Commission received A/C, etc.
• The final result of all nominal accounts is either profit
or loss which is then transferred to the capital account.
55

Nominal Account
Rule : Debit all Expenses and Losses.
Credit all Incomes and Gains.
• According to Nominal Account principle, expenses
and losses are to be debited and all incomes and
gains of the business are to be credited.
E.g. Salaries paid Rs. 5000
• In this transaction salaries (expenditure-nominal
A/c) is debited and cash (real A/c) going out is
credited.
56

Rules of Debit and Credit - Summerised
(Golden Rules of Accounting)
57

O/s standing and Prepaid accounts
• Expenses A/C Dr.......
To Outstanding expenses A/c
• Salaries A/C Dr.......
To Outstanding salaries A/c
Rent A/C Dr.......
To Outstanding rent A/c
Prepaid insurance Ac.......dr
To Insurance A/c
58

• Outstanding expenses are obligations they are
credited as per two rules of accounting
• personal a/c- credit the giver
• liability-credit the increse in the liability.
59

Exercise 1:Classify the following accounts into Personal A/C, Real A/C and Nominal A/C
Sl.
No
Name of Account Type of
Account
Reasons
1. Furniture A/C
2. Salaries A/C
3. Outstanding Wages A/C
4. National Trading Co. Ltd. A/C
5. Stationery A/C
6. Prepaid Insurance A/C
7. Capital A/C
8. Interest A/C
9. Building A/C
10. Purchases A/C
11. Cash A/C
12. Bank A/C
13.. Sales A/C
14. Commission Received in Advance A/C 60

Exercise 1:Classify the following accounts into Personal A/C, Real A/C and Nominal A/C
Sl.
No
Name of Account Type of
Account
Reasons
15. Discount A/C
16. Drawings A/C
17. Loan A/C
18. Mysore Stores A/C
19. Repairs to Machinery A/C
20. Stock A/C
61

Alternative Rules
Item Rule Applicable
Asset Increase is debited
Decrease is credited
Liability Increase is credited
Decrease is debited
Capital Increase is credited
Decrease is debited
Expenses/Losses Debited
Incomes/Gains Credited
62

Journal Entries Exercise 02
State the nature of each account and also whether account will be debited or credited
Transaction Nature of Account
Debited or
Credited
1 Salary paid
2 Rent received
3 Machinery sold
4 Wages paid
5 Rent paid
6 Capital introduced
7 Goods purchased
8 Goods sold
9 Cartage paid
10 Prepaid salary
11 Stationary expenses
12 Advertisement
13 Bank deposit
14 Rent outstanding
15 Bank withdrawal
16 Discount allowed
17 Goods sold returned by buyer
18 Drawings by proprietor
19 Loss of goods by fire
20 Purchase of Shares for investment 63

Journal book-The Journal, also called the Book of Primary Entry, is the first record of any
transaction in a business. The information in these simple journal entries is then transferred
to the other books of accounts.
65

Cash A/c Debit
To Capital A/C Credi
1. Journal Entry for Business Started (in cash)
When a business commences and capital is introduced in form
of cash.
● Cash is an asset for the business hence debit the increase in assets.
● Capital is an internal liability for the business hence credit the increase in
liabilities. 66

Debtors A/C Debit
To Sales A/C Credit
Journal Entry for Sales (Credit)
The sale of goods by a business on credit.
● Debtors are assets for the business, therefore debit the
increase in assets.
● Sales are income earned by the business, therefore credit the
increase in income.
67

Asset A/c Debit
To Cash A/C Credit
Journal Entry for Asset Purchase
When a business purchases an asset for cash.
● A new purchase increases overall assets for the firm, therefore, debit
the increase in assets.
● When a business makes a payment in cash it reduces current assets
therefore, credit the decrease in assets.
68

Journal,LedgerandTrialBalance
1. JournalisethefollowingOpeningEntry:
Cashinhand
Rs.
2,00,000
Plant 5,00,000
Furniture 50,000
Creditors 1,30,000
Debtors 1,80,000
Problem -1
69

Journal entry
All assets a/c…………Dr
To All Liabilities A/c
To capital a/c
70

Pass Opening Journal Entry:
– Cash in hand –5000
– Cash at Bank – 18,000
– Stock – 5,000
– Account Receivable – 6,000
– Buildings – 80,000
– Investment – 42,000
– Furniture – 50,000
– Accounts Payable – 80,000
– Loan – 1,20,000
Problem -2
71

Journal entry
All assets a/c…………Dr
To All Liabilities A/c
To capital a/c
72

1. JournalizethefollowingtransactionsinthebookofMrGopal
2022,Jan1GopalcommencedbusinesswithcashRs.5000
3 PaidintobankRs.1000
5 BoughtofficefurnitureforcashRs.500
6SoldgoodsforcashRs.600
7SoldgoodstoMurthyoncreditRs.400
12 PaidsalarytoManagerRs.100
16 ReceivedcommissionfromSureshRs.20
31 BoughtgoodsfromKamatforcashRs.500
Problem -3
73

1. Journalizethefollowingtransactions:
2022June,1 CommencedbusinesswithcashRs.10000
10 PurchasedgoodsfromAoncreditRs.4000
12 SoldgoodstoBoncreditRs.4500
13 WithdrewfrombankRs.3000
14 PaidA’ona/cRs.2000
18 ReceivedfromBona/cRs.2500
20 Tookloanfrom‘C’Rs.5000
22 Gaveloanto‘D’Rs.4000
27 CashwithdrewfromthebusinessforpersonneluseRs.300
30 Rentdueto‘E’,thelandlordRs.1000
Problem -4
74

75
Rent A/C Dr.......
To Outstanding rent A/c

1. Journalize the following transaction in the books of Suresh:
2022 May, 1 Suresh commenced business with cash Rs. 10000
2 Paid into bank Rs. 5000
3 Purchased goods from Krishna Rs. 4000
6 Sold goods to Raman Rs.2000
8 Return goods to Krishna Rs.100
9 Raman returned goods Rs. 50
13 Received from Raman on a/c Rs.1500
14 Paid Krishna on a/c Rs.3000
19 Purchased Machine from Hindustan Tools Ltd. Rs.3000
20 Advanced Govinda Rs.1000 as loan
22 Received Cheque from Raman on a/c Rs.300
25 Drew for office use Rs. 1000
27 Received loan from Broad Rs.200
31 Cash paid to Krishna Rs.900
Problem -5
76

1. JournalizethefollowingtransactionsinthebooksofVaibhav&Co.forNovember2016
1. StartedbusinesswithRs.2,00,000,outofwhichRs.50,000depositedintobank
2. PurchasedgoodsfromTrilok&SonsworthRs.40,000
4. SoldgoodsforcashRs.20,000
8. PaidtoTrilok&SonsandavailedcashdiscountofRs.400
10.PaidtelephonebillthroughbankRs.500
12.PurchasedfurnitureworthRs.25,000forexchangeofgoods
15.PurchasedacomputerforpersonaluseforRs.20,000paidthroughbank
18.PurchasedgoodsfromSaurabh&companyoninvoicepriceofRs.12,000ata
tradediscountof10%
22.IssuedChequetoSaurabh&Companytosettlehisaccount.
Problem -6
77

Cash discounts refer to a discount that a seller offers to a buyer in return for paying a
bill before the maturity of the due date. Trade Discount is a reduction of amount from
the list price of the goods, which the trader allows to the customer at a given rate
78
Date Particulars Debit Credit
2016
Nov 1
Cash a/c …………..Dr
Bank a/c …………..Dr
To capital a/c
50,000
50,000
200000
Nov 8 Trilokh and Sons a/c ...Dr
To Discount a/c
To cash A/C
40000
400
39600

1. Journalize the following transactions in the books
of Sasi Kumar:Jan 2022
1. Started business with Rs.800000
5. Purchased goods worth Rs.50000 less 20% trade
discount & 5% on cashdiscount
10. Bought 100 shares of Bharthi Ltd at Rs.15 per share,
Brokerage paidRs.25
15. Purchased a Motor Car in Exchange of goods of
Rs.20000 and cashRs.30000
18. Sold goods to Raj Kumar for Rs.50000 on credit
20. Purchased goods from Veerappan Rs.25000
25. Goods distributed as free samples Rs.1000
28 Raj Kumar became insolvent & only a dividend of 50
Paisa is recoveredfrom his estate
31. Cash Rs.5000 is withdrawn by the proprietor for personal use
Problem -7
79

80
Date Particulars Debit Credit
Jan 28 Cash a/c …………..dr
Bad debts a/c…….dr
To Raj Kumar a/c
25000
25000
50,000

1. Passthecompound entriesforthefollowingtransactions forthemonth August 2022
1 Commencedbusiness withcashRs.5000, Goods Rs.3000&FurnitureRs.8000
3 Purchasedgoodsfrom‘A’Rs.1000 &tookloanfrom‘A’ Rs.2000
4 PurchasedgoodsforcashRs.2000,from‘C’Rs.1000&from‘D’ on creditRs.3000
12 Receivedfrom‘Z’ Rs.1000allowedhima discountofRs.20
13 Paidto‘C’Rs.1500infullsettlement of his accountofRs.1530
14 Paidsalaries Rs.500, RentRs.800 &Postage Rs.10
18 ReceivedcommissionRs.300 andinterest Rs.700
20 TheproprietortookcashofRs.200 &goods of Rs.300frombusinessforhis personal use.
31 Bought goods worth Rs.3000 and paidcarriage Rs.50
Problem -8
81

1. Journalisethefollowingtransactionsduring2022:
Jan1 MohanBrotherscommencedbusinesswithcapitalofRs.50,000andgoods
worthRs.30,000
Jan11 SoldoldmachinerytoShanforRs.2,500
Jan15 GoodsworthRs.5,000givenascharity
Jan20 ProprietorwithdrewforprivateuseRs.2,000fromofficeandRs.3,000from
bank
Jan25 CashpurchaseswereofRs.10,000.CashsalesofRs.8,000
Problem -9
82

Ledger book
its a book of collection of ledger accounts
Ledger account
It is a account showing the all the transactions pertaining to a
specific account.
83

Balancing of ledger
• Balancing is the process of equalizing the two sides of the
account.
• After posting has been completed, the difference between the
total of debit and credit side is ascertained. This is known as
balancing.
• If the total of debit side is more than the credit side, it is said to
have debit balance. If the total of Credit side is more than the
debit side, it is said to have credit balance.
• The difference between the two is placed on the shorter side by
writing By or To balance C/d so that both the side become
equal
85

From the following information prepare ledger
account
Date Particulars Amount
2023
October 10
Started business with cash 70,000
October 13 Purchased goods for cash 15000
October 14 Sold goods for cash 35000
October 17 Introduced additional capital 40,000
October 18 Sold goods to Mohan for cash 25000
October 19 Purchased goods from keerthana 18000
October 20 Sold goods to Rajesh for cash 5000
October 22 Purchased goods from keerthana on cash 8000
86

Trial Balance
• The general purpose of producing a trial balance is to ensure
that the entries in a company’s bookkeeping system are
mathematically correct.
• The Trial Balance is an accounting report that lists the ending
balance in each general ledger account.
• A Trial Balance is a bookkeeping worksheet in which the
balances of all ledgers are compiled into debit and credit
account column totals that are equal.
• A company prepares a trial balance periodically, usually at the
end of every reporting period.
87

Trial Balance
• The report is primarily used to ensure that the total of all debits
equals the total of all credits; this means that there are no
unbalanced journal entries in the accounting system that would
make it impossible to generate accurate financial statements.
88

• all assets-- debit bal
• all libilities -credit bal
• all exp -debit bal
• all income-credit bal
• sales- credit bal
• purchase-debit bal
• sales ret-debit bal
• pur ret-credit bal
90

Objectives of Trial Balance:
• It helps in ascertaining arithmetic errors that occur while preparing
accounts.
– Accountants can make mistakes while recording financial transactions under the double-
entry bookkeeping system.
– When the debit and credit sides of a Trial Balance do not match, it means one of two
things.
– One, there was an error in either recording the account balance. Or two, there is an
accounting mistake made while recording the transaction in the ledgers.
• It helps in preparing the financial statements of a company at the end of a
financial year.
– The final balance of expenses and revenue accounts is taken from the Trial Balance and
used in the Profit and Loss Account.
– Similarly, the accounts related to Assets, Liabilities and Capital gets recorded in the
Balance Sheet.
• A Trial Balance helps in summarising the financial transactions done while
running a business.
– It is a consolidated summary of the financial transactions that have taken place within a
financial year.
– It can help the management in making business decisions as well.
91

Trial Balance - Limitations
• The main limitations of a Trial Balance are as follows:
a) It may hide errors of omission. Some transactions are not
journalised at all. Even a correctly balanced Trial Balance cannot
reveal this mistake.
b) If a journal entry with an incorrect amount gets recorded in both
accounts, the Trial Balance will not detect that error.
c) A journal entry may have the right amount, but the accountant may
have entered it under the wrong accounting heads. The Trial
Balance cannot identify such mistakes.
d) If a journal entry is missing in the ledger, it will not reflect in the
Trial Balance.
92

Problems on Trial balance
Refer the text book -
• MN arrora page no- 3.27,problem no-3.6
• MN arrora page no- 3.30,problem no-3, 8 and
10
Test on TB
MN arrora page no- 3.5,problem no-3.5
96

Accounting Equation
Meaning:
An Accounting Equation is a statement of equality between the
resources and the sources which finance the resources and is
expressed as follows:
Resources = Sources of Finances
Resources mean the Assets
Assets refer to the tangible objects
Land and Building, Plant and Machinery, Furniture,
Investments, Stock, Debtors, Bank balance, Cash balance
Or intangible rights
Patents, Trademark, Copyright
Sources of Finance means equities
Internal Equity (Capital)
External Equities (Liabilities)
97

Accounting Equation
Total Assets = Total Equities
or
Assets = Internal Equity + External Equity
or
Assets = Capital + Liabilities
• Accounting equation, also called as balance sheet equation, represent the
relation between assets, liabilities and owners’ equity of a business.
• It is the foundation for the double entry book keeping.
The total debits shall be equal to total credits.
98

Steps Involved in Developing an Accounting Equation
Steps Process
Step 1 Ascertain the variables (i.e., Assets, Liabilities or Capital) of an
equation affected by a transaction.
Step 2 Find out the effect (in terms of increase or decrease) of a
transaction on the variables of an equation.
Step 3 Show the effect on the appropriate side of an equation and
ensure that the total of the right hand side is equal to the total
of the left hand side
99

Accounting Equation: Practice Problem
1. Started business with Rs.1,00,000
Step 1 Variables affected Assets and Capital
Step 2 Effects of transaction on variables Increase in Assets and capital
Step 3 Accounting Equation Assets = Liabilities + Capital
1,00,000 = 0 + 1,00,000
2. Borrowed Rs.10,000 from Sham
Step 1 Variables affected Assets and Liabilities
Step 2 Effects of transactions on variables Increase in Assets and Liabilities
10,000 = 10,000 + 0
3. Purchased Furniture for Rs.10,000
Step 1 Variables affected Assets
Step 2 Effects of transactions on variables Increase in one Asset and decrease in
another Asset
(-)10,000 + 10,000 = 0 + 0
100

4. Purchased goods for cash Rs.20,000
Step 1 Variables affected Assets
Step 2 Effects of transaction on variables Increase in one Assets and decrease in
another Asset
(-)20,000 + 20,000 = 0 + 0
5. Purchased goods on credit from Mathew for Rs.30,000
Step 2 Effects of transactions on variables Increase in Assets and Liabilities
30,000 = 30,000 + 0
6. Paid cash to a supplier of goods Rs.15,000
Step 2 Effects of transactions on variables Decrease in Asset and Liabilities
(-)15,000 = (-) 15,000 + 0
101

7. Withdrew cash Rs.2,000 for personal use.
Step 2 Effects of transactions on variables Decrease in Asset and Capital
(-)2,000 = 0 + (-) 2,000
8. Withdrew goods costing Rs.3,000 for personal use
Step 2 Effects of transaction on variables Decrease in Assets and Capital
(-) 3,000 = 0 + (-) 3,000
102

9. Furniture costing Rs.10,000 is valued at Rs.9,000
Step 2 Effects of transactions on variables Decrease in Asset and Capital
(-)1,000 = 0 + (-) 1,000
10. Repaid loan of Rs.10,000 along with interest of Rs.100
Step 1 Variables affected Assets, Liabilities and Capital
Step 2 Effects of transactions on variables Decrease in Assets, Liabilities and
Capital
(-) 10,100 = (-) 10,000 + (-) 100
103

1. Show the Accounting Equation on the basis of the following transaction of M/S Shakti
Industries Ltd.
i. Started business with cash Rs.90,000
ii. Purchased goods on credit Rs.50,000
iii. Purchased furniture for cash Rs.10,000
iv. Sold goods costing Rs.20,000 for Rs.40,000
v. Sold goods costing Rs.20,000 on credit for Rs.42,000
vi. Bought goods worth Rs.20,000 (Rs.15,000 paid in cash and balance on credit)
vii. Drawn for personal use Rs.5,000
viii. Paid for rent Rs.1,000 and salaries Rs.3,000
ix. Paid to creditors Rs.40,000
x. Received from debtors Rs.12,000
104

1. Prove that accounting equation is satisfied after each transaction given
below
i. Mr. Z started business with Rs. 50,000 brought in cash
ii. He purchased goods for cash Rs. 5000
iii. He purchased goods on credit for Rs. 10,000
iv. He sold goods for cash Rs.6000 (cost price of goods was Rs.4000)
v. He withdrew Rs.1000 for personal expenses
vi. Paid rent Rs.500
vii. Rent outstanding Rs.300
viii. He sold goods for Rs. 3000 on credit (cost price Rs.2000)
105

1. Create an Accounting Equation on the basis of the following
transactions:
i. Commenced business with cash Rs. 50,000, goods Rs. 30,000
and furniture Rs. 20,000
ii. Sold goods to Ajay on credit costing Rs. 4,000 for Rs. 5,000
iii. Purchased goods for cash Rs. 40,000
iv. Purchased goods on credit Rs. 20,000
v. Paid rent Rs. 3,000, including Rs. 2,000 in advance
vi. Paid salaries Rs. 2,000
vii. Sold goods costing Rs. 8,000 for Rs. 10,000
viii. Salaries outstanding Rs. 1,000
ix. Charge depreciation on furniture Rs. 500
106

1. Show the accounting equation on the basis of following transaction
i. Mohan commenced business with cash Rs. 15,000
ii. He purchased goods on credit Rs.5,000
iii. He sold goods for cash costing Rs.2,500 for Rs.3,000
iv. Purchased furniture for cash Rs.1,500
v. Sold goods to Rakesh on credit (costing Rs. 400) for Rs. 500
vi. Paid salaries Rs. 250
vii. Received cash from Rakesh Rs. 500
viii. Withdrew cash for private use Rs.1,200
ix. Received rent from tenants Rs. 1,500
x. Purchased goods from Mukesh for cash Rs. 500
107

Subsidiary Books
• Subsidiary Books are books that maintain
track of all transactions that are similar in
nature in such an orderly way.
• They're also referred to as special journals or
daybooks.
• It is complicated in large business institutions
to record all transactions in one journal and
post them to various accounts.
108

Types of Subsidiary Books
• Cash Book.
• Purchase Book.
• Sales Book.
• Purchase Return Book.
• Sales Return Book.
• Bills Receivable Book.
• Bills Payable Books.
• Journal Proper.
109

Journal proper is book
• Journal Proper is the book that is maintained
to record those transactions which are not
recorded in the special books.
• Journal proper is book of original entry
(simple journal) in which miscellaneous credit
transactions which do not fit in any other
books are recorded. It is also called
miscellaneous journal.
110

What is difference between journal
and journal proper?
• A journal refers to a daily book or a day-to-day
book that is used to record the business
transactions date-wise or chronologically. ... A
journal proper maintains records of original
transactions that are not usually mentioned in
any accounting book because they do not
occur frequently or are of not much
significance.
111

Advantages of Subsidiary Books
• Proper With Systematic Record of the
Business Transactions. ...
• Convenience While Posting. ...
• Efficiency. ...
• Helpful in Decision Making. ...
• Errors and Frauds are Prevented. ...
• Availability of Requisite Information at a
Glance.
112

RECTIFICATION OF ERRORS
• Trial Balance is a statement of debit and credit balances taken
from the ledger accounts
• Purpose of T/B is to test the accuracy of the books of
accounts
• Agreement of the totals of debit and credit balances in a Trial
Balance is not necessarily a conclusive evidence of the
accuracy of books of accounts
• Agreement of Trial Balance gives a primary evidence that
accounts are correct from arithmetic point of view
• Still there may be errors
– Certain errors are disclosed when Trial Balance does not
agree
– Trial Balance fails to disclose certain other errors
113

Errors
• Accounting errors are unintentional mistakes
that can originate in a number of ways.
Commonly, they involve recording a
transaction incorrectly because of a data-entry
mishap. Sometimes transactions are missed
entirely or are simply recorded in the wrong
subsidiary journal.
114

Types of Errors
• I. Disclosed Errors
– Errors in casting (totaling) the subsidiary books
– Errors in balancing the ledger accounts
– Errors in carrying forward the totals of one page to another
– Errors of posting from journal to ledger
– Errors in preparing schedule of debtors and creditors
– Errors in transferring the balance of an account to the T/B
– Errors in totaling the Trial balance
• II. Undisclosed Errors
– Errors of Omission (wholly and partially)
– Errors of Commission
– Errors of Principle
– Compensating errors
115

Errors: Explained
• I. Errors of Omission
– (i) Complete Omission
– (ii) Partial Omission
• II. Errors of Commission
– (i) Error of Recording
– (ii) Error of Casting (amount is wrongly posted
or amount is posted in a wrong account) of
Subsidiary Books
– (iii) Error of Totaling or Balancing of Accounts
– (iv) Error of Posting
• (a) Posting to the wrong side but correct account
• (b) Posting to the wrong account but correct side
• (c) Posting of wrong amount
• (d) Posting twice in an account
– (v) Error in Carrying Forward
116

Errors: Explained
• III. Errors of Principle
– (i) Treating Capital Items as Revenue
– (ii) Treating Revenue Items as Capital
• IV. Compensating Errors
– When two or more errors are committed in
such a way that the effect of one error is
compensated by the effect of other, it is known
as compensating errors
117

Reasons for Disagreement of Trial Balance
1) The omission of account from posting in the ledger
inadvertently.
2) Posting from journal to ledger in the wrong account.
3) One account out of two accounts of the transaction is
accounted for.
4) Recording twice in a particular account of a transaction
inadvertently.
5) Recording wrong amount i.e. short or excess amount in the
ledger accounts at the time of posting from journal to ledger.
6) Committing mistakes in balancing a ledger account.
7) Committing mistakes in recording the amount of ledger
balance in the Trial Balance.
8) Committing mistake in writing ledger balances in the Trial
Balance i.e. debit balance in the credit money column or
credit balance in the debit money column.
9) Committing mistake in casting totals of debit and credit
money columns of Trial Balance.
118

RECTIFICATION OF ERRORS:
Finding the reasons for Disagreement
1) At the outset, casting of the Trial Balance is to be checked carefully.
2) Ensure that all ledger accounts have been posted in the Trial Balance
properly.
3) Ensure that all the transactions have properly been posted from journal
to ledger.
4) Calculation of totals of ledger accounts and balancing of ledger accounts
are to be checked properly.
5) Verification of correct posting of debit and credit ledger balances.
6) Checking that totals of cash and bank account and balancing and
inclusion of these balances in Trial Balance have been made properly.
7) Ensure that casting of purchase journal, sales journal and other
subsidiary journals are correct and these are posted in the ledger
accounts properly.
8) The current Trial Balance is to be compared with the past one. (for
locating missing items)
9) It is to be observed that the totals of accounts receivable and accounts
payable and recorded amount of the same accounts in Trial Balance are
the same.
119

Rectification of Errors
• Rectification of errors should always be done by a correcting entry
– Never by erasing or crossing the wrong amount and
inserting the correct one
• From the point of view of rectification, errors fall into two types
– Errors which affect one account
– Errors which affect more than one account
• Errors affecting only One Account
– Errors of Casting
• Example: Total of Purchases Book is Rs.24,536; but it is
written as Rs.24,436.
– Errors of Posting
• Example: A’s A/C is debited with Rs.5,800 instead of Rs.8,500
– Error of Carry Forward
• Error occurs when total of one page is copied on the next page
by a wrong amount
• ( A useful method to determine the rectifying entry is to
compare the correct entry with the incorrect entry. A rectifying
entry is made after the comparison)
120

• Errors Affecting More Than One Account
• Errors of Omission
– 1. Purchase from A was not recorded Rs.1,500
– 2. Wages paid Rs.5,400 was not recorded in the Cash Book
• Error of Recording
– 1. Sales of Rs.3,000 to Vijay is recorded as Rs.300.
• Error of posting to Wrong Account
– 1. Sales to Ram Rs.15,000 is posted to Raj’s A/C
– 2. Machinery purchased Rs.40,000 is wrongly posted in
Furniture A/C
• Error of Principle
– 1. Sale of old furniture Rs.2,500 is passed through the sales
Book.
– 2. Wages Rs.1,200 paid for construction of building is
debited to Wages A/C
121

• Rectification of Errors after preparation of Final Accounts
• Errors are detected after the Profit & Loss A/C and Balance Sheet are prepared
• Rectification should not affect the profit or loss of the next accounting year
• A Profit & Loss Adjustment account is opened and rectifying entries will be
through it if such an error has an impact on profit/loss.
– 1. A sale of old furniture Rs.5,000 is wrongly entered in the Sales Book
• Suspense Account
– When the difference in Trial Balance is not quickly located and difference in
preparation of Final Accounts is to be avoided, the difference in T/B is put to Suspense
Account
– When the debit side is short, the suspense Account is debited
– When credit side is short, the Suspense Account is credited
– When errors are located, the rectifying entries are made with the help of Suspense
Account
– When all the errors are rectified, the Suspense Account will show nil balance
122

FORENSIC ACCOUNTING
• Forensic accountants, also referred to as forensic auditors
or investigative auditors, often have to give expert
evidence at the eventual trial.
• In other words, Forensic accounting, forensic
accountancy or financial forensics is the specialty
practice area of accountancy that describes engagements
that result from actual or anticipated disputes or litigation.
123

Scope / Application of Forensic
Accounting
• Economic damages calculations, whether suffered
through offense or breach of contract
• Post-acquisition disputes such as earn outs or breaches
of warranties
• Bankruptcy, insolvency, and reorganization
• Securities fraud
• Business valuation
124

Hedge Accounting
•Hedge accounting is a practice of accountancy that attempts to reduce any
volatility created by the repeated adjustment of a financial instrument’s
value.
•Every business, regardless of its size or sector, is inherently exposed to risks.
•Hedge accounting is an accounting treatment that represents, within a
business’s financial statements, the impact of risk management activities that
use financial instruments to reduce exposure to particular risks that could
affect profit or loss or other income.
Put simply, hedge accounting enhances the basis for recognising gains and
losses on hedging instruments by matching the timing of their impact to
profit or loss with the hedged items.
125

Purpose of Hedge Accounting
• The aim of this is to eliminate volatility in
financial statements that otherwise would
arise if the hedged items were accounted for
separately under International Financial
Reporting Standards (IFRS)
126

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