SAP FICO,SAP COPA & S4 HANA SIMPLE FINANCE MODULES

Basic Accounting Level II
By
Marks Solutions
www.markssolutions.com

22
AgendaAgenda
 What is AccountingWhat is Accounting
 Mode of Learning AccountingMode of Learning Accounting
 Accounting and Finance - DifferenceAccounting and Finance - Difference
 Accounting Concepts / ConventionsAccounting Concepts / Conventions
 Accounting EventsAccounting Events
 Rules of AccountingRules of Accounting
 Preparation of Financial StatementsPreparation of Financial Statements
 A Simple Case StudyA Simple Case Study

33
Accounting is defined as the art of Recording,
Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements
JOURNAL
PAYMENT
Vision Enterprises
Financial Statement
at December 31, 1997
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Stockholder’s Equity
Contributed Capital
Retained Earnings
Total Stockholder’sEquity
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
Vision Enterprises
Financial Statement
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Contributed Capital
Retained Earnings
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
Vision Enterprises
Financial Statement
Assets
Cash
Account Receivable
Land
Total Assets
Liability
Account Payable
Notes Payable
Total Liability
Contributed Capital
Retained Earnings
$4,456
$5,714
$ 981
---------
$11,151
======
$3,830
$ 416
---------
$4,246
======
$2,365
$ 367
---------
$2,732
======
?
What is AccountingWhat is Accounting

44
What is AccountingWhat is Accounting
 Accounting is the art of recording, classifying and SummarizingAccounting is the art of recording, classifying and Summarizing
financial transactions in the Preparation of Financial Statementsfinancial transactions in the Preparation of Financial Statements

Recording refers to creating Journal entry for every financialRecording refers to creating Journal entry for every financial
transaction with Debit and Credit amounts.transaction with Debit and Credit amounts.

Classifying refers to Classifying each of the Debit / CreditClassifying refers to Classifying each of the Debit / Credit
Transaction to Capital or Revenue and Asset, Liability, Revenue orTransaction to Capital or Revenue and Asset, Liability, Revenue or
ExpenseExpense

Summarizing refers to Grouping the Transactions of Asset,Summarizing refers to Grouping the Transactions of Asset,
Liability, Revenue and Expenses and preparing the FinancialLiability, Revenue and Expenses and preparing the Financial
Statements (Trading, Profit and Loss Account and Balance Sheet)Statements (Trading, Profit and Loss Account and Balance Sheet)

In case ofIn case of
• Trading, Manufacturing and Customer Service orientedTrading, Manufacturing and Customer Service oriented
Organization, the sum of all income and expenses is referred toOrganization, the sum of all income and expenses is referred to
as Profit and Loss accountas Profit and Loss account
• Social Service oriented Organization like Schools, Hospitals andSocial Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as IncomeGovernment Organizations, Banks it is referred to as Income
and Expenditure account .and Expenditure account .
Note:-Note:- Trial Balance is not a Financial Statement. It is only a summaryTrial Balance is not a Financial Statement. It is only a summary
of all Debit and Credit Transactions.of all Debit and Credit Transactions.

55
Mode of Learning AccountingMode of Learning Accounting
 Change your mindset that accounting meansChange your mindset that accounting means
only Debit and Creditonly Debit and Credit
 Do not blindly learn Accounting Rules andDo not blindly learn Accounting Rules and
apply the rules of Debit and Creditapply the rules of Debit and Credit
 The Best way to Learn Accounting isThe Best way to Learn Accounting is

Learn the Accounting ConceptsLearn the Accounting Concepts

Understand the Accounting ConventionsUnderstand the Accounting Conventions

Classify the Accounting EventClassify the Accounting Event

Apply the Accounting RulesApply the Accounting Rules

Record, Classify and Summarize the JournalRecord, Classify and Summarize the Journal
• You are Confused. Am I right?You are Confused. Am I right?

Do not become panic and move forward, you will understandDo not become panic and move forward, you will understand

66
Mode of Learning AccountingMode 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)

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Finance and Accounting - DifferenceFinance and Accounting - Difference
FinanceFinance AccountsAccounts
Procurement and Utilization ofProcurement and Utilization of
FundsFunds
Recording of an AccountingRecording of an Accounting
EventEvent
Leads to Investment DecisionsLeads to Investment Decisions Expressed in Monetary TermsExpressed in Monetary Terms
Financing DecisionsFinancing Decisions Recording , Classifying andRecording , Classifying and
Summarizing TransactionsSummarizing Transactions
FuturisticFuturistic Preparation of FinancialPreparation of Financial
Statements (Trading, Profit andStatements (Trading, Profit and
loss Account and Balanceloss Account and Balance
Sheet)Sheet)
Cost of CapitalCost of Capital HistoricalHistorical
Cash Flow / Fund FlowCash Flow / Fund Flow Compliance with StatutoryCompliance with Statutory
Matters like companies Act,Matters like companies Act,
Income Tax Act, Sales Tax ActIncome Tax Act, Sales Tax Act
Etc.,Etc.,
Project AppraisalProject Appraisal
Ratio AnalysisRatio Analysis

88
Accounting Concepts/ConventionsAccounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)(US GAAP/UK GAAP/IFRS/SOX)
 The Concepts and conventions of accounting areThe Concepts and conventions of accounting are
developed by IASC (International Accounting Standardsdeveloped by IASC (International Accounting Standards
Committee) which is in-charge of releasing InternationalCommittee) which is in-charge of releasing International
Accounting Standards (IAS)Accounting Standards (IAS)
 The IASC Decides the preferred Accounting practicesThe IASC Decides the preferred Accounting practices
worldwide and encourages the worldwide acceptanceworldwide and encourages the worldwide acceptance
 There are 41 International Accounting StandardsThere are 41 International Accounting Standards
 Now IFRS (International Financial Reporting Standards)Now IFRS (International Financial Reporting Standards)
and SOX (Sarbanes Oxley) Act gain more importanceand SOX (Sarbanes Oxley) Act gain more importance
which came up from US GAAP and UK GAAPwhich came up from US GAAP and UK GAAP

99
Difference between Concepts and ConventionsDifference between Concepts and Conventions
 The Accounting Concepts / Principles evolved out of theThe Accounting Concepts / Principles evolved out of the
Practice and Procedures followed by different countriesPractice and Procedures followed by different countries
and later on established by the International Statutoryand later on established by the International Statutory
Accounting Bodies like The Institute of CharteredAccounting Bodies like The Institute of Chartered
Accountants of India, The Institute of CharteredAccountants of India, The Institute of Chartered
Accountants of England and Wales etc to become anAccountants of England and Wales etc to become an
Accounting Principle statutorily need to be followedAccounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell thiswhile preparing the Financial Statements. In nutshell this
has evolved out of standard Practice followed by severalhas evolved out of standard Practice followed by several
countries while preparing the Trading, Profit and Losscountries while preparing the Trading, Profit and Loss
Account and Balance Sheet.Account and Balance Sheet.
 The Accounting Conventions / Practices are basicallyThe Accounting Conventions / Practices are basically
assumptions and expected to be followed whileassumptions and expected to be followed while
preparing the Financial Statements.preparing the Financial Statements.

1010
Accounting Concepts / PrinciplesAccounting Concepts / Principles
 Business Entity ConceptBusiness Entity Concept
 Money Measurement ConceptMoney Measurement Concept
 Dual Aspect ConceptDual Aspect Concept
 Cost ConceptCost Concept
 Accounting PeriodAccounting Period
 ConservatismConservatism
 Realization ConceptRealization Concept
 Matching ConceptMatching Concept
 Materiality ConceptMateriality Concept
 ObjectivityObjectivity

1111
Accounting Conventions / PracticesAccounting Conventions / Practices
 Going ConcernGoing Concern
 ConsistencyConsistency
 AccrualAccrual

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Accounting ConceptsAccounting Concepts
Accounts can be kept only for Entities, which are different from theAccounts can be kept only for Entities, which are different from the
persons who are associated with these entitiespersons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, CompanyEx. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accountingThis is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.principle with which Double entry system of accounting has evolved.
Accounts need to be maintained separate from the Owners andAccounts need to be maintained separate from the Owners and
providers of capital. If you understand the simple logic, then you knowproviders of capital. If you understand the simple logic, then you know
30% of Accounting. Just Recall Fundamentals of Accounting from30% of Accounting. Just Recall Fundamentals of Accounting from
Oracle Perspective Level I Example of Siva, Oracle and Bank.Oracle Perspective Level I Example of Siva, Oracle and Bank.
See Next Slide for More Examples. If you cannot understand thisSee Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand byConcept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Materialreading again Level I and Level II Material

1313
Types of EntitiesTypes of Entities
Type of OrganizationType of Organization ExampleExample
Sole ProprietarySole Proprietary Siva & CoSiva & Co
Partnership FirmPartnership Firm Ganesan BrosGanesan Bros
Private CompanyPrivate Company Oracle India Pvt Ltd (A Private Company in whichOracle India Pvt Ltd (A Private Company in which
shares are not traded in Stock Exchange andshares are not traded in Stock Exchange and
members cannot exceed 50)members cannot exceed 50)
Public CompanyPublic Company Hindustan Unilever Ltd (A Public Company inHindustan Unilever Ltd (A Public Company in
which Shares are traded in Stock Exchange)which Shares are traded in Stock Exchange)
Closely Held CompanyClosely Held Company Cadbury India Ltd (A Public Company in whichCadbury India Ltd (A Public Company in which
shares are not traded but shares are held by moreshares are not traded but shares are held by more
than 50 persons)than 50 persons)
TrustTrust Hutchinson Private TrustHutchinson Private Trust
SocietySociety Sembur Co-op SocietySembur Co-op Society
Association of PersonsAssociation of Persons ICAI, ICWAI, ICSI, Rotary ClubICAI, ICWAI, ICSI, Rotary Club
Body of Individuals (one Man Corp)Body of Individuals (one Man Corp) President of India, Governor of StatePresident of India, Governor of State
Any other Legal Entity (HUF)Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding theA Hindu Undivided Family Jointly holding the
Investment and Properties for the benefit ofInvestment and Properties for the benefit of
Family members.Family members.

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
Ex 1:Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a SoleYou 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 theProprietor/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 youBusiness is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of books.need to maintain Two set of books.
• One set of books for the purpose of Textile Business in which, BusinessOne set of books for the purpose of Textile Business in which, Business
owes you equivalent to the Capital Provided (Capital + Profit earned) orowes you equivalent to the Capital Provided (Capital + Profit earned) or
(Capital – Losses)(Capital – Losses)
• In your own Books the amount of Capital invested will be shown as anIn 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 NormalInvestment 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 fromSet of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.Income Tax Perspective.

Ex 2:Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account withYou 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 endBank 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 manyof every month is transferred from Bank of America to Citi Bank. How many
accounting Entities involved in this case?accounting Entities involved in this case?
• If your answer is 4, then you are right (You, Oracle Corp, Bank of America, CitiIf your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi
Bank)Bank)

Ex 3:Ex 3: You run your own Business in Software Consulting and your Friend hasYou 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 intoagreed 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?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)If you say 3, You are right, it is only Three. (You, Your Friend and Bank)

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

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A Normal Doubt comes to your mind in the first and fourthA Normal Doubt comes to your mind in the first and fourth
example in previous slide how to get the value. We should not beexample in previous slide how to get the value. We should not be
taking the Purchase value, but we should take the Market value ontaking the Purchase value, but we should take the Market value on
the date of transferring the assets to Business. This is anthe date of transferring the assets to Business. This is an
exception to cost concept only in case of transfer to anotherexception to cost concept only in case of transfer to another
businessbusiness
Ex 5: Siva started his software consulting Business with his ownEx 5: Siva started his software consulting Business with his own
Property (Cost Price 1 Million USD and Market Value 1.5 MillionProperty (Cost Price 1 Million USD and Market Value 1.5 Million
USD) and Furniture's Cost price 50000 worth Market Value 30000USD) and Furniture's Cost price 50000 worth Market Value 30000
USDUSD
- In this case, You can record Siva Capital (1530000) and Building- In this case, You can record Siva Capital (1530000) and Building
1500000 and Furniture 30000 as Assets1500000 and Furniture 30000 as Assets
LiabilitiesLiabilities AssetsAssets
Siva Capital 1530000Siva Capital 1530000 Building 1500000Building 1500000
Furniture 30000Furniture 30000
Total 1530000Total 1530000 Total 1530000Total 1530000

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AccountingAccounting ConceptsConcepts
 Dual Aspect ConceptDual Aspect Concept
The Value of the Assets owned by the concern is equal to the claims onThe Value of the Assets owned by the concern is equal to the claims on
the Assetsthe Assets
ASSETS = LIABILITIES + OWNER’S EQUITYASSETS = LIABILITIES + OWNER’S EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIESOWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITYLIABILITIES = ASSETS – OWNER’S EQUITY
Ex: If Owners Equity is 600000 and Liabilities are 400000, then TotalEx: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000Asset = 1000000
AssetAsset Owner’s Equity + LiabilitiesOwner’s Equity + Liabilities
LiabilitiesLiabilities Assets – Owner’s EquityAssets – Owner’s Equity
Owner’s EquityOwner’s Equity Assets - LiabilitiesAssets - Liabilities

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

1919
 Accounting PeriodAccounting Period
Accounting measures activity for a specified interval of time, usuallyAccounting measures activity for a specified interval of time, usually
a yeara year
(e.g) Calendar Year (Jan’07-Dec’07)(e.g) Calendar Year (Jan’07-Dec’07)
Fiscal Year (Apr’07-Mar’08)Fiscal Year (Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but there areChoosing the Accounting period is the entities choice, but there are
legal rules like Companies Act and Income Tax Act which prescribeslegal rules like Companies Act and Income Tax Act which prescribes
the period in which the entity has to report to them.the period in which the entity has to report to them.
Remember still Entities can have different accounting period for theirRemember still Entities can have different accounting period for their
own Internal Management Reportingown Internal Management Reporting
A Company in India can have for Company Law Purpose (Jan-Dec)A Company in India can have for Company Law Purpose (Jan-Dec)
Year and Income Tax Purpose (Apr-Mar) Year and for own internalYear and Income Tax Purpose (Apr-Mar) Year and for own internal
Reporting (Jul-Jun) YearReporting (Jul-Jun) Year
Note:Note: The Entities cannot change their accounting period withoutThe Entities cannot change their accounting period without
getting proper approval only in case of Companies Act and notgetting proper approval only in case of Companies Act and not
possible with Income Tax Authorities.possible with Income Tax Authorities.

2020
 ConservatismConservatism
Anticipate no Profits but provide for all possible losses.Anticipate no Profits but provide for all possible losses.
Accountants are by nature Conservative and also to protect the interest of theAccountants are by nature Conservative and also to protect the interest of the
Shareholders and Creditors it is required to provide for all losses.Shareholders and Creditors it is required to provide for all losses.
Ex 1Ex 1. A pharmaceutical Company going to Loose the case filed for Patent. A pharmaceutical Company going to Loose the case filed for Patent
Right filed for a medicineRight filed for a medicine
Ex 2Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract..Company is likely to Win a Major Legal Dispute or a Sales Contract.
Note:Note: This rule should not be misinterpreted to provide anticipated reductionThis rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Lossesin market price of a Product and Providing Losses
Ex 3Ex 3: You are a Government Company and there is a possibility that: You are a Government Company and there is a possibility that
Government will withdraw the subsidy for Fertilizers in the forthcomingGovernment will withdraw the subsidy for Fertilizers in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4Ex 4: The Government is likely to increase the Price of petrol which is one of: 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.the essential input for your business, then you cannot provide for losses.
Ex 5:Ex 5:There is a Fire in your Factory and Goods were lost and the Goods areThere is a Fire in your Factory and Goods were lost and the Goods are
insured, then the claim you submitted can be booked to the satisfaction ofinsured, then the claim you submitted can be booked to the satisfaction of
Insurance Company and Auditors.Insurance Company and Auditors.

2121
Realization ConceptRealization Concept
The Sales is considered to have taken place only when either the cashThe Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay theis received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or realized.amount. Revenues are recognized when they are earned or realized.
Realization is assumed to occur when the seller receives cash or aRealization is assumed to occur when the seller receives cash or a
claim to cash (receivable) in exchange for goods or servicesclaim to cash (receivable) in exchange for goods or services
Ex 1Ex 1: A Sales invoice for Rs.1 Million: A Sales invoice for Rs.1 Million
Credit Note for Rs.15000 receivedCredit Note for Rs.15000 received
Ex 2Ex 2: For instance, if a company is awarded a contract to build an: For instance, if a company is awarded a contract to build an
office building the revenue from that project would not be recorded inoffice building the revenue from that project would not be recorded in
one lump sum but rather it would be divided over time according to theone lump sum but rather it would be divided over time according to the
work that is actually being done.work that is actually being done.

2222
 Matching ConceptMatching Concept
When an Event affects both the revenues and expenses, the effect onWhen an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting periodeach should be recognized in the same accounting period
Ex 1:Ex 1: Generally Employees Salaries are paid for the previous month atGenerally Employees Salaries are paid for the previous month at
the beginning of the next month. But they have rendered theirthe beginning of the next month. But they have rendered their
services to produce goods and sold and Sales revenue is recognizedservices to produce goods and sold and Sales revenue is recognized
in previous month. So to match the cost with the revenue earned, wein previous month. So to match the cost with the revenue earned, we
need to make provision for Salaries in previous month itself. (i.e.)need to make provision for Salaries in previous month itself. (i.e.)
March Salary paid in April, but a Salary Payable provision will beMarch Salary paid in April, but a Salary Payable provision will be
made in March itselfmade in March itself
EX 2:EX 2: Insurance Premium paid for Jan- Dec whereas your accountingInsurance Premium paid for Jan- Dec whereas your accounting
period closes on March. In this case only three months premium needperiod closes on March. In this case only three months premium need
to be treated as Expense and balance 9 months treated as advanceto be treated as Expense and balance 9 months treated as advance
premium paid as an assetpremium paid as an asset

2323
 Materiality conceptMateriality concept
Insignificant events would not be recorded, if theInsignificant events would not be recorded, if the
benefit of recording them does not signify thebenefit of recording them does not signify the
costcost
Ex:Ex: A calculator worth Rs.500 not recorded assetA calculator worth Rs.500 not recorded asset
rather than charged off as an Expense evenrather than charged off as an Expense even
thoughthough the benefit is enduring in nature.the benefit is enduring in nature.
This concept need to read in conjunction withThis concept need to read in conjunction with
accounting events which signifies the transactionaccounting events which signifies the transaction
into Capital, Revenue and deferred revenueinto Capital, Revenue and deferred revenue
expenditure.expenditure.

2424
 Objectivity ConceptObjectivity Concept
An Evidence of the happening of the Transaction should supportAn Evidence of the happening of the Transaction should support
every Transaction in the form of paper. External Evidence isevery Transaction in the form of paper. External Evidence is
considered to be more authenticated proof than Internal Evidence.considered to be more authenticated proof than Internal Evidence.
This rule is more important from Audit perspective as AuditorsThis rule is more important from Audit perspective as Auditors
always consider and bound to get more external evidences thanalways consider and bound to get more external evidences than
internal Evidences.internal Evidences.
Ex 1Ex 1: Third Party Evidence (Credit Note from Supplier): Third Party Evidence (Credit Note from Supplier)
Ex 2Ex 2: Auditors Collect Statements from Customer and Suppliers for: Auditors Collect Statements from Customer and Suppliers for
the amount showing as Outstanding from Customers and amountsthe amount showing as Outstanding from Customers and amounts
Payable to Suppliers.Payable to Suppliers.
Ex 3Ex 3: The Sales Invoices alone is not considered as an objective: The Sales Invoices alone is not considered as an objective
evidence unless it is not supported by Delivery challan andevidence unless it is not supported by Delivery challan and
acknowledgement of Goods Received by Customer.acknowledgement of Goods Received by Customer.

2525
Accounting ConventionsAccounting Conventions
 Going ConcernGoing Concern
Accounting Records , Events and Transactions on theAccounting Records , Events and Transactions on the
assumption that the entity will continue to operate for anassumption that the entity will continue to operate for an
indefinitely Long period of timeindefinitely Long period of time
Ex.Ex. An Entity will not be started with an intention to closeAn Entity will not be started with an intention to close
within the specified time period. Business is always notwithin the specified time period. Business is always not
started with an intention to close and it is expected tostarted with an intention to close and it is expected to
continue forever.continue forever.

2626
 ConsistencyConsistency
The Accounting Policies and methods followed by theThe Accounting Policies and methods followed by the
company should be the same every yearcompany should be the same every year
Ex 1Ex 1. Period should not be changed frequently from Jan-. Period should not be changed frequently from Jan-
Dec to Apr-MarDec to Apr-Mar
Ex 2Ex 2. Inventory Valuation change from FIFO to LIFO or. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequentlyWeighted Average not permitted frequently
Ex 3Ex 3. Changing Depreciation Policy from Straight Line to. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequentlyReducing Balance Method frequently
Note:Note: If any Company decides to change the policy, thenIf any Company decides to change the policy, then
that Company has to report on the effect of Profit/Lossthat Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.due to the change for past 5 Years.

2727
 AccrualAccrual
In General it is assumed that Accounts are alwaysIn General it is assumed that Accounts are always
prepared based on Accrual basis. However there areprepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Alsoentities which follow Cash Basis of Accounting Also
Ex:Ex: Salary Payable to employees (March salary paid inSalary Payable to employees (March salary paid in
April), Interest Receivable on InvestmentsApril), Interest Receivable on Investments (NSC(NSC
interest), Dividend Receivable on shares, Tax Payable tointerest), Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)Government (March sales Tax and Annual Income Tax)
The Company Law / Income Tax Act Prescribes allThe Company Law / Income Tax Act Prescribes all
Companies to follow Accrual Basis of Accounting exceptCompanies to follow Accrual Basis of Accounting except
for Professional Firms and Government Organizationsfor Professional Firms and Government Organizations
which are allowed to follow Cash Basis of Accounting.which are allowed to follow Cash Basis of Accounting.

2828
Classification of Accounting EventClassification of Accounting Event
 Capital Item:Capital Item: Any expenditure that creates an asset, forAny expenditure that creates an asset, for
exampleexample::

Purchase of plant or machineryPurchase of plant or machinery

Improvements to assets that increase theirImprovements to assets that increase their
usefulness or extend their effective useful life of theusefulness or extend their effective useful life of the
assetasset

Expenditure incurred in transporting an asset to itsExpenditure incurred in transporting an asset to its
site and preparing it for use.site and preparing it for use.

2929
 Revenue ItemRevenue Item: An Income or Expenditure and the: An Income or Expenditure and the
benefit of which will be exhausted within a year (i.e.) Thebenefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set upCalendar Year or the Financial Year whichever is set up
for the Set of Booksfor the Set of Books

Ex:Ex: Salary and wages, Printing and Stationery, SalesSalary and wages, Printing and Stationery, Sales
Revenue, Interest Income, Salary Payable, BonusRevenue, Interest Income, Salary Payable, Bonus
Payable, Tax Payable etc.,Payable, Tax Payable etc.,

In Simple terms this is an event which generatesIn Simple terms this is an event which generates
revenue and the related cost to earn the revenue arerevenue and the related cost to earn the revenue are
accounted as expense.accounted as expense.

3030
 Deferred Revenue ExpenditureDeferred Revenue Expenditure: It is neither a Capital: It is neither a Capital
nor Revenue and the benefit of which will be realized fornor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar yearmore than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation offor the set of books) and does not result in creation of
an asset.an asset.

Ex 1Ex 1: Advertisement Expenditure the benefit of which: Advertisement Expenditure the benefit of which
is likely to be obtained over a period more than oneis likely to be obtained over a period more than one
year (E.g.) PepsiCo Pays USD 2 Million to Sachinyear (E.g.) PepsiCo Pays USD 2 Million to Sachin
Tendulkar for an Advertisement Contract for twoTendulkar for an Advertisement Contract for two
Years and benefit of which is expected to be for fourYears and benefit of which is expected to be for four
yearsyears

Ex 2Ex 2: Royalty paid to the author of the book for five: Royalty paid to the author of the book for five
yearsyears

3131
Rules of AccountingRules of Accounting
Accounts
Personal Impersonal
Real Nominal
Debit the Receiver
Credit the Giver
Debit what comes in
Credit what goes out
Debit Expenses and Losses
Credit Revenue and Income
Ex: Sole Prop, Company
Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent

3232
Application of Accounting RuleApplication of Accounting Rule
 Check whether is there a Money Transaction Involved?Check whether is there a Money Transaction Involved?
 Does that transaction affect your set of books?Does that transaction affect your set of books?
 Check whether does the transaction fall under which accountingCheck whether does the transaction fall under which accounting
period.period.
 Does the transaction involve a personal account (i.e.) Siva as aDoes the transaction involve a personal account (i.e.) Siva as a
Person or a Company or any other entity as mentioned inPerson or a Company or any other entity as mentioned in
Business entity conceptBusiness entity concept
 Is that person receiver or giver in the transaction and accordinglyIs that person receiver or giver in the transaction and accordingly
debit or credit the person account.debit or credit the person account.
 Does the transaction involve any Cash inflow or Cash outflow?Does the transaction involve any Cash inflow or Cash outflow?
(i.e.) Cash or Bank involved(i.e.) Cash or Bank involved
 If there is no cash involvement then the choices are as followsIf there is no cash involvement then the choices are as follows

Both can be real ( Debit and credit both real accounts)Both can be real ( Debit and credit both real accounts)

One real and one nominal (Either Debit/Credit for Real or Credit/ DebitOne real and one nominal (Either Debit/Credit for Real or Credit/ Debit
for Nominal accounts)for Nominal accounts)

3333
Accounting Rule of ThumbAccounting Rule of Thumb
Nature of TransactionNature of Transaction IncreaseIncrease DecreaseDecrease
AssetAsset DebitDebit CreditCredit
LiabilityLiability CreditCredit DebitDebit
RevenueRevenue CreditCredit DebitDebit
ExpenseExpense DebitDebit CreditCredit
ProfitProfit CreditCredit DebitDebit
LossesLosses DebitDebit CreditCredit

3434
Combination of RulesCombination of Rules
Dr Personal A/c
Cr Real A/c
Ex:Drawings or Advance to Employee,
Payment to Supplier
Dr Real A/c
Cr Personal A/c
Ex:Capital invested, Payment Received
from Customer
Dr Real A/c
Cr Nominal A/c
Ex: Interest Recd by Cash, Cash Sales
Dr Nominal A/c
Cr Real A/c
Ex: Rent Paid by Cash
Dr Personal A/c
Cr Nominal A/c
Ex: Interest Accrued on Investment,
Dividend accrued on Investment
Dr Nominal A/c
Cr Personal A/c
Ex: Hire Purchase Charges accrued, Interest
Payable, Salary Payable
Dr Real A/c
Cr Real A/c
Ex:Purchase of Inventory by Cash
Dr Real A/c
Cr Real A/c
Ex: Cash withdrawal or Deposit

3535
Combination of Accounting RulesCombination of Accounting Rules
CombinationCombination PersonalPersonal RealReal NominalNominal
PersonalPersonal XX  
RealReal   
NominalNominal   XX
Debit
Credit

3636
Combination of Accounting RulesCombination of Accounting Rules
 BothBoth Debit and CreditDebit and Credit cannot be Personal Accountscannot be Personal Accounts

EX 1: Siva paid Cash to Ajay. The Entry Cannot beEX 1: Siva paid Cash to Ajay. The Entry Cannot be
• Ajay A/c DrAjay A/c Dr
• Siva A/c CrSiva A/c Cr

The Correct entries are as follows. In Ajay set of BooksThe Correct entries are as follows. In Ajay set of Books
Cash A/c DrCash A/c Dr 10001000
Siva A/c CrSiva A/c Cr 10001000
Ajay A/c DrAjay A/c Dr 10001000
Cash A/c CrCash A/c Cr 10001000
In Siva set of Books
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

3737
Recording of Accounting TransactionsRecording of Accounting Transactions
 Recording of an Accounting event is known as JournalRecording of an Accounting event is known as Journal
entryentry
 Recording is made in Primary and Secondary Books inRecording is made in Primary and Secondary Books in
Manual Accounting systemManual Accounting system
 Primary BooksPrimary Books

General LedgerGeneral Ledger

Cash BookCash Book
Secondary BooksSecondary Books

Purchase RegisterPurchase Register

Sales RegisterSales Register

Fixed Assets RegisterFixed Assets Register

Returns (Purchase return/Sales Return)Returns (Purchase return/Sales Return)

Journal RegisterJournal Register
 In Oracle ERP System GL is called Main Ledger and theIn Oracle ERP System GL is called Main Ledger and the
Transactions emanating from Modules are referred to asTransactions emanating from Modules are referred to as
Sub LedgerSub Ledger

3838
Recording of Accounting TransactionsRecording of Accounting Transactions
 First the transactions are entered as JournalFirst the transactions are entered as Journal
 Then Second step is they are posted to individual account as ‘T’Then Second step is they are posted to individual account as ‘T’
Accounts – In Oracle or any other ERP system this happensAccounts – In Oracle or any other ERP system this happens
immediately when a transaction is createdimmediately when a transaction is created
 Prior to ERP system except for Non cash charges, Journals arePrior to ERP system except for Non cash charges, Journals are
directly posted in Primary and secondary ledger with supportingdirectly posted in Primary and secondary ledger with supporting
Document reference Number (like Invoice Number), date, amount andDocument reference Number (like Invoice Number), date, amount and
a cross reference ledger folio number (Page Number) of respectivea cross reference ledger folio number (Page Number) of respective
Debit and Credit Entries in Ledger.Debit and Credit Entries in Ledger.
 Journals are entered only for year end Provision Entries.Journals are entered only for year end Provision Entries.
 Then the balance from each T account is taken and which becomes aThen the balance from each T account is taken and which becomes a
Trial Balance with Sum of Debits and Sum of Credit which should beTrial Balance with Sum of Debits and Sum of Credit which should be
equal.equal.
 Trial Balance forms the basis for preparation of Financial StatementsTrial Balance forms the basis for preparation of Financial Statements
and in ERP systems including Oracle Applications Debit is shown asand in ERP systems including Oracle Applications Debit is shown as
Positive and Credit is shown as NegativePositive and Credit is shown as Negative
 In ERP systems the chance of Trial Balance not matching or notIn ERP systems the chance of Trial Balance not matching or not
tallying issue is very minimal. In case of manual Accounting this willtallying issue is very minimal. In case of manual Accounting this will
happen most of the time and unless it is corrected and balanced, thehappen most of the time and unless it is corrected and balanced, the
accountant should not proceed to prepare Financial Statementsaccountant should not proceed to prepare Financial Statements

3939
Preparation of Financial StatementsPreparation of Financial Statements
 Preparation of Trial BalancePreparation of Trial Balance

Balances Extracted from General LedgerBalances Extracted from General Ledger

Sum of debit and credit balances = 0Sum of debit and credit balances = 0
 Preparation of Trading, Profit & Loss Account or Income &Preparation of Trading, Profit & Loss Account or Income &
Expenditure Account and Balance sheetExpenditure Account and Balance sheet

Trial Balance is the base for preparing FinancialTrial Balance is the base for preparing Financial
StatementsStatements

Adjustment entries are made in adjustment period andAdjustment entries are made in adjustment period and
passed as Journal Vouchers before making the financialpassed as Journal Vouchers before making the financial
statementsstatements

Trading and Profit and Loss Account is Always for aTrading and Profit and Loss Account is Always for a
period say for an Year (Jan - Dec or Apr - Mar), Quarterlyperiod say for an Year (Jan - Dec or Apr - Mar), Quarterly
for 3 months or Half yearly for 6 monthsfor 3 months or Half yearly for 6 months

Balance Sheet is always as on Date (As on 31-12-2007 orBalance Sheet is always as on Date (As on 31-12-2007 or
31-03-2008)31-03-2008)

4040
A Simple Case StudyA Simple Case Study
Accounting Concepts

4141
Case StudyCase Study
 Siva started Business as dealer in Computer Spare parts andSiva started Business as dealer in Computer Spare parts and
Computer Stationery on 01-APR-2007 and following events occurredComputer Stationery on 01-APR-2007 and following events occurred
in the month of April.in the month of April.
 Siva invested USD 50000 Cash and USD 50000 worth of furnitureSiva invested USD 50000 Cash and USD 50000 worth of furniture
 Siva purchased USD 75000 worth of goods on creditSiva purchased USD 75000 worth of goods on credit
 Siva’s friend Ajay promised him to give a loan of USD 25000Siva’s friend Ajay promised him to give a loan of USD 25000
 Siva sold USD 50000 worth of good for USD 100000Siva sold USD 50000 worth of good for USD 100000
 Siva paid rent USD 2000 for two monthsSiva paid rent USD 2000 for two months
 Siva paid Salary to Staff USD 5000Siva paid Salary to Staff USD 5000
 Siva incurred USD 5000 on interior decoration which will last for twoSiva incurred USD 5000 on interior decoration which will last for two
years.years.
 Siva sold USD 10000 worth of goods on credit for USD 18000Siva sold USD 10000 worth of goods on credit for USD 18000
 Siva has a Bank account with Citi Bank which credited USD 5000Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John accountwrongly of John account
 Purchased Vehicle for USD 25000 paid through BankPurchased Vehicle for USD 25000 paid through Bank
 Cash Deposited by Siva into Bank 50000 USDCash Deposited by Siva into Bank 50000 USD

4242
ARE YOU READY FOR THEARE YOU READY FOR THE
GAMEGAME
Accounting is very simpleAccounting is very simple

4343
Accounting TerminologiesAccounting Terminologies
 Before creating Accounting Transactions let us recall and learn fewBefore creating Accounting Transactions let us recall and learn few
accounting terminologiesaccounting terminologies

ASSETS:ASSETS: Any property or Investment which can be convertible into cashAny property or Investment which can be convertible into cash

LIABILITIES:LIABILITIES: Amount Payable to providers of goods and ServicesAmount Payable to providers of goods and Services
(Creditors) and Providers of Capital (Owners)(Creditors) and Providers of Capital (Owners)

REVENUE:REVENUE: Amount earned out of the Sale Proceeds and the amountAmount earned out of the Sale Proceeds and the amount
earned on Investmentsearned on Investments

EXPENSES:EXPENSES: Amount incurred or expended to earn the revenueAmount incurred or expended to earn the revenue

PROFIT:PROFIT: TOTAL REVENUE – TOTAL EXPENSESTOTAL REVENUE – TOTAL EXPENSES

LOSS:LOSS: If the Total Expenses is more than Total Revenue it is termed asIf the Total Expenses is more than Total Revenue it is termed as
LossLoss

FIXED ASSETS:FIXED ASSETS: Amount Invested in Long Term Assets which is notAmount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)intended to be sold within a Year (Ex. Machinery, Land)

CURRENT ASSETS:CURRENT ASSETS: Amount invested in Short Term Assets which isAmount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)intended and rotated to earn Revenue (Ex. Inventory)

NOTE:NOTE: The Fixed Asset and Current asset vary from Person to PersonThe Fixed Asset and Current asset vary from Person to Person

Ex:Ex: For a Dealer in Refrigerator it is a Current asset which becomes FixedFor a Dealer in Refrigerator it is a Current asset which becomes Fixed
Asset for you when you buy.Asset for you when you buy.

CREDITORS:CREDITORS: Person who provide Money or Goods on Credit to thePerson who provide Money or Goods on Credit to the
Business (Supplier)Business (Supplier)

DEBTORS:DEBTORS: Goods or Money Provided / sold on Credit by the BusinessGoods or Money Provided / sold on Credit by the Business
(Customers)(Customers)

4444
Accounting TerminologiesAccounting Terminologies
 You should also understand the same accountingYou should also understand the same accounting
terminology is referred or used by different people interminology is referred or used by different people in
different contextdifferent context

Receivables also known as Trade Debtors, Debtors, AccountReceivables also known as Trade Debtors, Debtors, Account
Receivables, Sundry Debtors, Trade Receivables, AmountReceivables, Sundry Debtors, Trade Receivables, Amount
ReceivablesReceivables

Liability is also known as Trade Creditors, Account Payable,Liability is also known as Trade Creditors, Account Payable,
Sundry Creditors, Amount Payable, Trade Liabilities, CreditorsSundry Creditors, Amount Payable, Trade Liabilities, Creditors

Cost of Goods Sold: It varies with Company to Company the wayCost of Goods Sold: It varies with Company to Company the way
they do set up and use it. The Cost of Goods Sold comprise ofthey do set up and use it. The Cost of Goods Sold comprise of
Material Cost, Resource Cost (Labor and Machinery) andMaterial Cost, Resource Cost (Labor and Machinery) and
Overheads. There are few companies which will have only MaterialOverheads. There are few companies which will have only Material
Cost and will not add up Resource Cost and Overheads. YouCost and will not add up Resource Cost and Overheads. You
Should talk to client and understand their requirementShould talk to client and understand their requirement
• Let’s See Each of this in a Formula ModelLet’s See Each of this in a Formula Model

4545
Accounting Calculation and FormulaAccounting Calculation and Formula
Receivables (or) DebtorsReceivables (or) Debtors
ReconciliationReconciliation
Opening Receivables 100Opening Receivables 100
(+) Add Credit Sales 2500(+) Add Credit Sales 2500
(+) Debit Memo 150(+) Debit Memo 150
(+) Positive Adjustments 75(+) Positive Adjustments 75
(-) Less Cash Received 2000(-) Less Cash Received 2000
(-) Less Credit Memo (Sales Return) 125(-) Less Credit Memo (Sales Return) 125
(-) Negative Adjustments 50(-) Negative Adjustments 50
Closing Receivables 650Closing Receivables 650
Payables (or) CreditorsPayables (or) Creditors
Opening Payables 200Opening Payables 200
(+) Add Credit Purchases 2000(+) Add Credit Purchases 2000
(+) Debit Memo 150(+) Debit Memo 150
(+) Positive Adjustments 75(+) Positive Adjustments 75
(-) Less Cash Paid 1500(-) Less Cash Paid 1500
(-) Less Credit Memo (Purc. Return) 125(-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments 50(-) Negative Adjustments 50
Closing Payables 750Closing Payables 750

4646
Accounting Calculations and FormulaAccounting Calculations and Formula
Purchased InventoryPurchased Inventory
Opening Purchased Inventory 100Opening Purchased Inventory 100
(+) Add Purchases 2500(+) Add Purchases 2500
(-) Less Issued to Production 2000(-) Less Issued to Production 2000
(-) Less Purchase Return 125(-) Less Purchase Return 125
Closing Purchased Inventory 475Closing Purchased Inventory 475
Finished Goods (FG)Finished Goods (FG)
Opening stock of FG 200Opening stock of FG 200
(+) Add Production 2000(+) Add Production 2000
(+) Sales Return 100(+) Sales Return 100
(-) Less Sales 1500(-) Less Sales 1500
Closing FG Inventory 800Closing FG Inventory 800

4747
Accounting Calculations and FormulaAccounting Calculations and Formula
Cash ReconciliationCash Reconciliation
Opening Cash Balance 100Opening Cash Balance 100
(+) Add Cash Receipts 2500(+) Add Cash Receipts 2500
(Cash Sales, Cash Recd from(Cash Sales, Cash Recd from
Receivables, Cash with drawl fromReceivables, Cash with drawl from
Bank)Bank)
(-) Less Cash Payments 2000(-) Less Cash Payments 2000
(Cash Purchases, Expenses paid(Cash Purchases, Expenses paid
By Cash, Cash Deposited into Bank)By Cash, Cash Deposited into Bank)
Closing Cash Balance 600Closing Cash Balance 600
Bank Balance ReconciliationBank Balance Reconciliation
Opening Balance of Bank 200Opening Balance of Bank 200
(+) Add Bank Receipts 2000(+) Add Bank Receipts 2000
(Cash Deposits, Cheque Received(Cash Deposits, Cheque Received
From Debtors, Interest Credited)From Debtors, Interest Credited)
(-) Less Payments from Bank 1500(-) Less Payments from Bank 1500
(Paid to Creditors by Cheque,(Paid to Creditors by Cheque,
Expenses paid by cheque, CashExpenses paid by cheque, Cash
With drawl from bank)With drawl from bank)
Closing Bank Balance 700Closing Bank Balance 700

4848
Accounting Entries for the Case StudyAccounting Entries for the Case Study
SlSl
NoNo
DescriptionDescription Nature of AccountNature of Account Dr (inDr (in
USD)USD)
Cr (inCr (in
USD)USD)
11 Cash A/c DrCash A/c Dr
Furniture A/c DrFurniture A/c Dr
(Cash and Furniture Real(Cash and Furniture Real
Tangible Asset. HenceTangible Asset. Hence
apply the Real Rule – Debitapply the Real Rule – Debit
What comes in)What comes in)
To Siva Capital A/cTo Siva Capital A/c
(Siva is a Person running(Siva is a Person running
the business as athe business as a
Proprietor in this case.Proprietor in this case.
Hence apply the Rule forHence apply the Rule for
Personal – Credit the giver)Personal – Credit the giver)
RealReal
RealReal
PersonalPersonal
(Also using the Business Entity(Also using the Business Entity
Concept Siva being owner isConcept Siva being owner is
also treated as a Creditor foralso treated as a Creditor for
the purpose of Business. If thethe purpose of Business. If the
Business is wind up BusinessBusiness is wind up Business
has to pay back Siva)has to pay back Siva)
5000050000
5000050000
100000100000
22 Inventory A/c DrInventory A/c Dr
(Real Tangible Asset)(Real Tangible Asset)
To Creditors A/cTo Creditors A/c
(Person be an Individual or(Person be an Individual or
Company gives the goodsCompany gives the goods
on Credit)on Credit)
RealReal
PersonalPersonal
7500075000
7500075000

4949
SlSl
NoNo
USD)USD)
Cr (inCr (in
USD)USD)
33 No EntryNo Entry
(Mere Promise to give does(Mere Promise to give does
not tantamount to Monetarynot tantamount to Monetary
Transaction)Transaction)
No EntryNo Entry
(Money Measurement Concept(Money Measurement Concept
– No Monetary transaction– No Monetary transaction
involved )involved )
44 Two Entries involved (OneTwo Entries involved (One
for sale of goods and onefor sale of goods and one
for reduction in inventory)for reduction in inventory)
Cash / Bank A/c DrCash / Bank A/c Dr
(Real – Debit what comes(Real – Debit what comes
in)in)
To Revenue (Sales) A/cTo Revenue (Sales) A/c
(Nominal Rule - Credit all(Nominal Rule - Credit all
Income and Revenue)Income and Revenue)
Cost of Goods Sold A/c DrCost of Goods Sold A/c Dr
(Nominal – Debit Expenses)(Nominal – Debit Expenses)
To Inventory A/cTo Inventory A/c
(Reduction in Inventory)(Reduction in Inventory)
Real A/cReal A/c
Nominal A/cNominal A/c
Real A/cReal A/c
100000100000
5000050000
100000100000
5000050000

5050
SlSl
NoNo
USD)USD)
Cr (inCr (in
USD)USD)
55 Rent A/c DrRent A/c Dr
(Debit Expense – Nominal)(Debit Expense – Nominal)
Rent Advance A/c DrRent Advance A/c Dr
(This is like Cash Advanced(This is like Cash Advanced
to Landlord. Hence itto Landlord. Hence it
should be treated asshould be treated as
Personal -Personal -
Debit the Receiver)Debit the Receiver)
To Cash A/cTo Cash A/c
(Real – Credit what goes(Real – Credit what goes
out)out)
Personal A/cPersonal A/c
RealReal
10001000
10001000
20002000
66 Salary A/c DrSalary A/c Dr
(Nominal – Debit Expense)(Nominal – Debit Expense)
out)out)
Real A/cReal A/c
50005000
50005000

5151
SlSl
NoNo
USD)USD)
Cr (inCr (in
USD)USD)
77 Advertisement Exp A/c DrAdvertisement Exp A/c Dr
Advt Exp Adv A/c DrAdvt Exp Adv A/c Dr
(This is like a Deferred(This is like a Deferred
Revenue Expense needs toRevenue Expense needs to
be charged in two years.be charged in two years.
50% need to be Current50% need to be Current
Year Expense and BalanceYear Expense and Balance
50% is carried Forward and50% is carried Forward and
treated as Expense in nexttreated as Expense in next
Year)Year)
out)out)
NominalNominal
RealReal
RealReal
25002500
25002500
50005000
88 Receivables A/c DrReceivables A/c Dr
To Revenue A/cTo Revenue A/c
Cost of Goods Sold A/c DrCost of Goods Sold A/c Dr
To Inventory A/cTo Inventory A/c
RealReal
NominalNominal
NominalNominal
RealReal
1800018000
1000010000
1800018000
1000010000

5252
SlSl
NoNo
USD)USD)
Cr (inCr (in
USD)USD)
99 No EntryNo Entry
(This is a Mistake done by(This is a Mistake done by
Bank. Bank has to makeBank. Bank has to make
correction and in Siva’scorrection and in Siva’s
Book there is noBook there is no
accounting entry required)accounting entry required)
No EntryNo Entry
1010 Vehicles A/c DrVehicles A/c Dr
(Real Tangible Asset(Real Tangible Asset
Debit what comes in)Debit what comes in)
To Bank A/cTo Bank A/c
(Real asset – Credit what(Real asset – Credit what
goes out)goes out)
RealReal
RealReal
2500025000
2500025000
1111 Bank A/c DrBank A/c Dr
(Real asset- Debit what(Real asset- Debit what
comes incomes in
(Real Asset – Credit what(Real Asset – Credit what
goes out)goes out)
RealReal
RealReal
5000050000
5000050000

5353
T AccountsT Accounts
Dr USDDr USD Cr USDCr USD
To Bal 100000To Bal 100000 By Cash 50000By Cash 50000
By Furniture 50000By Furniture 50000
To Siva Cap 50000To Siva Cap 50000 By Bal 50000By Bal 50000
Siva Capital Account Furniture Account
To Siva Cap 50000To Siva Cap 50000
To Sales 100000To Sales 100000
By Rent 1000By Rent 1000
By Rent Adv 1000By Rent Adv 1000
By Salary 5000By Salary 5000
By Advt Adv 2500By Advt Adv 2500
By Advt exp 2500By Advt exp 2500
By Bank 50000By Bank 50000
By Balance 88000By Balance 88000
To Creditors 75000To Creditors 75000 By COGS 50000By COGS 50000
By COGS 10000By COGS 10000
By Bal 15000By Bal 15000
Cash Account Inventory Account

5454
To Bal 75000To Bal 75000 By Invent 75000By Invent 75000
To Cash 1000To Cash 1000 By Bal 1000By Bal 1000
Creditors Account Rent
Account
To Bal 118000To Bal 118000 By Cash 100000By Cash 100000
By Rece 18000By Rece 18000
Rent Advance Account Revenue / Sales Account
Salary Account Advertisement Exp Account

5555
To sales 18000To sales 18000 By Bal 18000By Bal 18000
Advt Exp Advance Account Receivables Account
To Inventory 50000To Inventory 50000
To Inventory 10000To Inventory 10000
To Bank 25000To Bank 25000 By Bal 25000By Bal 25000
Cost of Goods Sold Account Vehicle Account
Bank Account
To Cash 50000To Cash 50000 By Vehicle 25000By Vehicle 25000

5656
Trial BalanceTrial Balance
Debit USDDebit USD Credit USDCredit USD
Furniture (A) 50000Furniture (A) 50000
Cash (A) 88000Cash (A) 88000
Bank (A) 25000Bank (A) 25000
COGS (E) 60000COGS (E) 60000
Salary (E) 5000Salary (E) 5000
Rent (E) 1000Rent (E) 1000
Rent Advance (A) 1000Rent Advance (A) 1000
Advertisement Exp (E) 2500Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500Advt Exp Advance (A) 2500
Inventory (A) 15000Inventory (A) 15000
Vehicle (A) 25000Vehicle (A) 25000
Receivable (A) 18000Receivable (A) 18000
Siva Capital (L) 100000Siva Capital (L) 100000
Sales / Revenue (R) 118000Sales / Revenue (R) 118000
Creditors (L) 75000Creditors (L) 75000
Trial Balance for the Month of APRIL 2007
A – Asset, L – Liability, R – Revenue, E - Expense

5757
Profit and Loss Account For APR 2007Profit and Loss Account For APR 2007
Expenses USDExpenses USD Revenue USDRevenue USD
COGS (E) 60000COGS (E) 60000
Salary (E) 5000Salary (E) 5000
Rent (E) 1000Rent (E) 1000
Advertisement Exp (E) 2500Advertisement Exp (E) 2500
To Profit 49500To Profit 49500
Sales / Revenue (R) 118000Sales / Revenue (R) 118000

5858
Balance Sheet as on 30-APR-2007Balance Sheet as on 30-APR-2007
Liabilities USDLiabilities USD Assets USDAssets USD
Siva Capital 100000Siva Capital 100000
Add Profit 49500Add Profit 49500
Siva Capital 149500Siva Capital 149500
Creditors 75000Creditors 75000
Furniture 50000Furniture 50000
Vehicle 25000Vehicle 25000
Cash 88000Cash 88000
Bank 25000Bank 25000
Receivables 18000Receivables 18000
Inventory 15000Inventory 15000
Rent Advance 1000Rent Advance 1000
Advt Exp Advance 2500Advt Exp Advance 2500

5959
Important Points to RememberImportant Points to Remember
 Accounting can be learnt only by Practice and not by readingAccounting can be learnt only by Practice and not by reading
 Try to learn by creating Journal entries with ExamplesTry to learn by creating Journal entries with Examples
 Cash Balance can never have negative balance at any point of timeCash Balance can never have negative balance at any point of time
 Land will never Depreciate and it will have only AppreciationLand will never Depreciate and it will have only Appreciation
 Bank can have negative balance if you have Overdraft facilityBank can have negative balance if you have Overdraft facility
 The Bank which maintains your account will have exactly oppositeThe Bank which maintains your account will have exactly opposite
entries of what is shown in your Bank Accountentries of what is shown in your Bank Account
 In the above, Example the bank account in your Books and in BankIn the above, Example the bank account in your Books and in Bank
Books will be as followsBooks will be as follows
To Cash 50000To Cash 50000 By Vehicle 25000By Vehicle 25000
By BalanceBy Balance 2500025000
To Vehicle 25000To Vehicle 25000
To BalanceTo Balance 2500025000
By Cash 50000By Cash 50000
Siva Books
Bank Account
Bank Books
Siva Account

6060
Case Study for PracticeCase Study for Practice
 Take your own Personal Account and try to create the followingTake your own Personal Account and try to create the following
 On First of July 2007 You had a Cash balance of USD2500 which isOn First of July 2007 You had a Cash balance of USD2500 which is
your Capitalyour Capital
 On 3On 3rdrd
July You have received Salary of USD 12000July You have received Salary of USD 12000
 On 5On 5thth
Paid Rent of USD 1200 by chequePaid Rent of USD 1200 by cheque
 On 7On 7thth
You purchased provision for house for 800 USDYou purchased provision for house for 800 USD
 On 10On 10thth
You spent for outing through your credit card USD 500You spent for outing through your credit card USD 500
 On 15On 15thth
You withdraw Cash USD 8000You withdraw Cash USD 8000
 On 20On 20thth
You Invested in Fixed Deposit USD 5000 @5% Interest PerYou Invested in Fixed Deposit USD 5000 @5% Interest Per
annumannum
 On 22On 22ndnd
you have given a Loan of USD 2000 to friend Jamesyou have given a Loan of USD 2000 to friend James
 On 25On 25thth
You spent for Car Repairs 500 USDYou spent for Car Repairs 500 USD
 On 28On 28thth
Your wife gave USD 200 to your Neighbor from her pocketYour wife gave USD 200 to your Neighbor from her pocket
 On 30On 30thth
You Deposited Cash 1000 USD to your Bank AccountYou Deposited Cash 1000 USD to your Bank Account

6161
How to Approach to LearnHow to Approach to Learn
 I tried my best to teach Accounting in simple way. ThisI tried my best to teach Accounting in simple way. This
is only a beginning. You have to Practice a Lot to learnis only a beginning. You have to Practice a Lot to learn
 The simple way to Learn Accounting is as followsThe simple way to Learn Accounting is as follows

Do not go for advanced level books without understanding theDo not go for advanced level books without understanding the
basicsbasics

Start with (+1) Accounting book in case of people in India andStart with (+1) Accounting book in case of people in India and
Pre-University book in case of other Countries. Practice thePre-University book in case of other Countries. Practice the
examples given in that book and exercisesexamples given in that book and exercises

This is more than sufficient for any non accounting candidate toThis is more than sufficient for any non accounting candidate to
work on Oracle Applicationswork on Oracle Applications

Never try to memorize the concepts and rulesNever try to memorize the concepts and rules

Try to understand and apply the concepts and RulesTry to understand and apply the concepts and Rules

There are areas like Depreciation, Provision and AmortizationThere are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I do notetc might not have been covered in this presentation. I do not
want you to go to advanced level without understanding thewant you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You canbasics. If you understand the Concepts and Rules then You can
handle all of themhandle all of them

Read and Practice Level I and II at least Three timesRead and Practice Level I and II at least Three times

6262
""There is a difference between an objective andThere is a difference between an objective and
actions. Unless you understand your objective,actions. Unless you understand your objective,
you will be wasting your time in actions. Know youryou will be wasting your time in actions. Know your
objective first " - Swami Vivekanandaobjective first " - Swami Vivekananda

6363
Disclaimer:Disclaimer: This Document was created with my ownThis Document was created with my own
assumptions to explain the concept of accountingassumptions to explain the concept of accounting
and the names of the companies used in this articleand the names of the companies used in this article
are only to explain the accounting concept with dataare only to explain the accounting concept with data
assumptions and none of the Company is notassumptions and none of the Company is not
responsible for the Data provided in this article.responsible for the Data provided in this article.
Thank YouThank You
Hope You find this article usefulHope You find this article useful

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