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PAN African eNetwork

Project

Masters of Business Administration (IB)

Accounting and Finance

Semester - I

Dr. N N Sen Gupta



Copyright © Amity University

Meaning and definitions

Book Keeping:

Book Keeping is an activity primarily relatedwith recording of financial transactions of a

business concern in a set of books in a

scientific manner.




Meaning and definitions

Accounting:

The American Institute of Certified Public

Accounts (AICPA) has defined accounting as

the ―art of recording, classifying and

summarizing in a scientific manner and in

terms of money; transactions and events which

are in part at least of a financial character andinterpreting the results thereof‖.




Features of Accounting

- Recording – Journalizing

- Classifying – Ledger

- Summarizing – Trial Balance

- Interpreting – Explaining the

significance of the

financial statement


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Need for Accounting

- Profit- Future Planning

- Limited Memory

- To know the business positions

- To keep others informed



Objectives of Accounting:

- To make decisions

- To make systematic record of the

resources and obligations

- To ensure effective direction and

control

- To ascertain financial positions of the

business

- To provide useful information to

interested parties



Branches of Accounting: I Financial accounting

II Cost Accounting

III Management Accounting



Limitations of Accounting: - Records only those transactions that

can be measured in money terms.

- It records transactions at cost. The

effects of change in prices are not

shown anywhere.

- Every chance of manipulation of

accounting profits by the accountant.

- It is only a post-mortem report.



Importance of Accounting:Uses of parties interested in accounting information

Internal users or parties External users or parties

- Owners of shareholders - Creditors

- Management - Government

- Employees - Consumer

- General public- Other parties

a. Tax authorities

b. Stock Exchanges

c. Political Parties

d. Trade Union



The profession of Accounting –

Accounting team can be classified in two groups- Bookkeepers – Recording the

transactions and posting than into ledger

- The Accountants - Prepare the financial

statement

- Prepare report and interpret them



Basis of Accounting

- The Institute of Chartered Accountants of India (ICAI),

together with the Institute of Cost and works Accountants of

India (ICWAI) has issued guidelines on the basis of which the

professional accountants prepare financial statements of

business houses in conformity with the accounting standardsissued by the Institute and other professional bodies.

Basis of Accounting:

- Cash basis

- Accrual basis

- Mixed basis



Accounting Equations

Accounting equations means recording of

entries in a way that the assets equal

equities.

Assets = Equities

Equities = Owner’s Equity + Liabilities

Assets = Owner’s Equity + Liabilities



System of Book Keeping:

•Single Entry System

•Double Entry System

– Purely based on accounting principles

– Every debit there is corresponding credit. – Double entry system does not mean the two entries

a transaction should be made in two different

accounts on the same side; but in two different

accounts on opposite sides for an equal amount.



Stages of Double Entry

SystemThere are three stages which are as under

• All the in transactions should be recorded in either in

journal or in subsidiary.

• All the entries in the journal or subsidiary booksshould be posted to the concerned ledger accounts.

• The preparation of profit and loss accounts is to

ascertain the trading result and the balance sheet to

know the financial position of the business.



Nature of Accounting

• Certain things are common in business

• Business enters into contract with other persons a

firms whose transactions are recorded in personal

account.• Every business owns or posses certain properties.

These assets are recorded in real account.

• Every business earns income and incurs expenses

such transaction in recorded in nominal account.



Type of Accounts

Type of Accounts

Personal Accounts Impersonal Accounts

Natural Artificial Representative Real Nominal Account Account Account Account Account

Tangible Intangible

Account Account

Expense Incomes

Account Account



Rules of Account:very business transaction has two aspects

- Receiving Aspects – is debited

- Giving Aspects – is credited

Rules of Account

Personal Account - Debit the receiver

- Credit the giver

Real Account - Debit what comes in

- Credit what goes outNominal Account - Debit all expenses and losses

- Credit all incomes and gains



Concept underlying the

Financial Statement

A financial statement is an organized collection of

data according to logical and consistent accountingprocedures. Its purpose is to convey an

understanding of some financial aspects of a

business firms.



The financial statements generally refer these basic

statements:

(i) The Income Statement (Profit and Loss Account)

(ii) The Balance Sheet (Financial Position of a

Business as a specified moment of time)

(iii) A statement of retained earnings (Profit and Loss

Appropriation Account)

(iv) A statement of changes in financial positions

a. Change in the firm’s working capital (fund

flow statement)b. Change in the firm’s cash positions (cash

flow statement)

c. Change in the firms total position



Financial statement is affected

by:(i) Recorded fact

(ii) Accounting Conventions(iii) Personal Judgement



Limitations of Financial

Statements:Financial statements are prepared with the object of

presenting a periodical review or reports on the progress

by the management and deal with the(i) Status of the investments in the business and

(ii) Results achieved during the period under review.



These are the Limitations:

Profit shown is the profit and loss account and financial

position as depicted in balance sheet is not exact.

Financial statements are prepared on the basis of certain

accounting concepts and conventions (going concern,conservation)

Many items are left & personal judgement of the

accountant (i.e. method of depreciation, mode of

amortization of fixed assets, treatment of different revenueexpenditure)

Disclose only monetary facts.



Users of Financial

Statements Users of Financial Statements

Internal users or parties External users

or parties

-Owners/Shareholders -Creditors

-Managements -Government

-Employee -Consumers

-Generalpublic

-Other

Parties




Generally Accepted Accounting

Principles (GAAP):

The origin GAAP is 1920’s where the speculative activities

excesses in the stock market. The reasons for the crash of

economies were the absence of uniform and stringent

financial reporting requirements. Taking the serious view of

this, the American Institute of Accountants which renamed

AICPA, created a Committee in 1930s to cooperate with the

New York Stock Exchange with the aim of establishingstandards to be followed for all accounting practices and

procedures.




Generally Accepted Accounting

Principles (GAAP):

Generally Accepted Accounting Principle (GAAP) are

concerned with the measurement of economic activityrecording, disclosing, preparation and presentation of

information in form of financial statements. They

encompass the conventions; rules and procedures

necessary to define accepted accounting principles at aparticular time. They also includes the broad guidelines

of general application but also detailed practices and

procedures.




Sources of GAAP

The authentic and authoritative sources of GAAP are:

- American Institute of Certified Public Accounts (AICPA)

- Financial Accounting Standard Board (FASB)

- Government Accounting Standard Board (GASB)- International Accounting Standard (IAS)

- Pronouncements of Securities and Exchange Commission (PSEC)

- Various Publications of Professional Organisations

- Various books, articles and Committee reports on accounting that

contain expressions of GAAP which are authentic.



Accounting Conventions

Generally accepted accounting

practice

1. Business entity

2. Historical cost

3. The monetary unit4. Going concern

5. Accounting period



Accounting Conventions



Accounting Doctrines

Recommended p r inc ip les that Accountants

should fo l low-

1. Full disclosure2. Consistency

3. Materiality

4. Conservatism5. Objectivity



Accounting Doctrines



Who Needs

AccountingINTERNAL

– Managers, supervisors, directors



Who Needs Accounting

EXTERNAL

– Investors, creditors, lenders, Customers

– Statutory authorities eg: tax office, payroll tax, ABS



Type of Accounts

Type of Accounts

Personal Accounts Impersonal Account

Natural AccountRepresentative

AccountArtificial Account Real Account Nominal Account

Tangible Account Intangible Account Expense Account Incomes Account




Classification Of Accounts

1. Personal Accounts

1. Debit is the receiver

2. Credit is the Giver2. Real Accounts

1. Debit what comes in

2. Credit what goes out

3. Nominal Accounts1. Debit- Expenses & Losses

2. Credit- Income & Profit




Final Account

Process Of Accounting

1. Journal

2. Ledger

3. Trial balance4. Adjustments

5. Trading & P/L

6. Balance Sheet




Accounting Cycle

1.Analyze

Transactions

2.

Journalize3. Post

4. Unadjustedtrial balance

5. Adjust

6. Adjusted

trial balance

7. Prepare

finance

statements

8.Close Start the

next cycle




Numerical

• Journalize the following transactions, post them in theLedger and balance the accounts on 31st January.

• Ram started business with a capital of Rs. 10,000.

• He purchased goods from Mohan on credit Rs. 2,000.

• He paid cash to Mohan Rs. 1000.• He sold goods to Suresh Rs. 2000.

• He received cash from Suresh Rs. 3000.

• He further purchased goods from Mohan Rs. 2,000.

• He paid cash to Mohan Rs. 1000.

• He further sold goods to Suresh Rs. 2000.• He received cash from Suresh Rs. 1000.

Particulars L F Debit Amount Credit Amount



Particulars L.F. Debit Amount

(Rs.)

Credit Amount

(Rs.)

Cash Account Dr.

To Capital Account

(Being commencement of business)

10000

10000

Purchase Account Dr.

To Mohan

(Being purchase of goods on credit)

2000

2000

Mohan Dr.

To Cash

(Being payment of cash to Mohan)

1000

1000

Suresh Dr.

To sales

(Being goods sold to Suresh)

2000

2000

Cash Account Dr.To Mohan

(Being cash received from Suresh)

30003000

Purchase Account Dr.

To Mohan

(Being purchase of goods form Mohan)

2000

2000

h



Mohan Dr.

To Cash Account

(Being payment of Cash to Mohan)

1000

1000

Suresh Dr.

To Sales Account(Being goods sold to Suresh)

2000

2000

Cash Account Dr.

To Suresh

(Being cash received from Suresh)

1000

1000

Total 24000 24000

L d




Ledger

Cash Account

Dr.

Cr.Date Particulars Amount

(Rs.)

Date Particulars Amount

(Rs.)

To capital A/C 10000 1000

To Suresh 3000 1000

To Suresh 1000 Jan.31 12000

14000

Feb.1 To balance b/d 12000

CAPITAL ACCOUNT



CAPITAL ACCOUNT

Dr. Cr.


(Rs.)


(Rs.)

Jan

31

To Balance c/d 10000 By Cash A/c 10000

10000 10000

Feb 1 By Balance b/d 10000

PURCHASE ACCOUNT



PURCHASE ACCOUNT

Dr. Cr.


(Rs.)


(Rs.)

To Mohan 2000 Jan 31 By Balance c/d 4000

To Mohan 2000

4000

Feb 1 To Balance b/d 4000

MOHAN



Dr.

Cr.


(Rs.)


(Rs.)

To Cash 1000 By Purchases 2000

To Cash 1000 By Purchases 2000

To Balance c/d 2000

4000 4000

By Balance b/d 2000

SURESH



Dr. Cr.


(Rs.)


(Rs.)

To Sales 2000 By Purchases 3000

To Sales 2000 By Purchases 1000

To Balance c/d 4000 4000

SURESH

D C



Dr. Cr.


(Rs.)


(Rs.)

Jan

31

To Balance c/d 4000 By Suresh 2000

By Suresh 2000

4000 4000

Feb. 1 By Balance b/d 4000

TRIAL BALANCE



TRIAL BALANCE

as on 31st January

Particulars Debit (Rs.) Credit (Rs.)

Cash Account 12000

Capital Account 10000

Purchases Account 4000

Mohan 2000

Sales Account 4000

16000 16000

Thus, the two sides of the Trial Balance tally. It means

the books of accounts are arithmetically accurate.




Problem I

Journalize the following transactions and post them into the Ledger:

1999

Rs.

Jan 1 Surendra started business with cash5000

Jan 2 Goods purchased from Prasad on credit200

Jan 3 Goods sold to Prem500

Jan 4 Goods purchased from Sohan for cash

400Jan 5 Paid for wages 50

Jan 15 Goods purchased from Prem100

Jan 17 Goods sold to Om 50

Jan 21 Goods purchase from Charanjit 300Jan 23 Paid for interest 15

Jan 24 Goods purchased from Om200

Jan 28 Cash received from Prem 100

Jan 31 Cash paid to Charanjit 300

Jan 31 Paid for Rent 10




Problem 2

On 1st January, 1999 the following were the ledger balances of Rajan & Co. Cash in hand Rs.900; Cash

at bank Rs. 21,000; Soni (Cr.) Rs. 3000; Zahir (Dr.) Rs.2,400; Stock Rs. 12,000; Parsad (Cr.)Rs. 6,000;

Sharma (Dr.) Rs. 4,500; Lall (Cr.) Rs. 2,700; Ascertain capital.Transactions during the month were:

1999Rs.

Jan 2 Bought goods for Prasad2700

Jan 3 Sold to Sharma 3000

Jan 5 Bought goods of Lall for cash, paid by cheque 3600

Jan 7 Took goods for personal use 200Jan 13 Received from Zahir in full settlement

2350

Jan 17 Paid Soni in full settlement 2920

Jan 22 Paid cash for stationery 50

Jan 29 Paid to Prasad by cheque2650

Discount allowed by him 50

Jan 30 Provided interest on capital 100

Rent due to landlord 200

Journalize the above transactions and post to the ledger and prepare a Trial Balance.




Preparation of Financial Statement

Dr. N. N. Sengupta




Accounting cycle involved the following stages

1. Recording of Transactions: This is done in the book

termed as ‘Journal’.

2. Classifying the Transactions: This is done in the booktermed as ‘Ledger’.

3. Summarizing the Transactions: This includes

preparation of trial balance profit and loss accountand balance sheet of the business.

A ti l i l d th f ll i




Accounting cycle involved the following

stages:

Interpreting the results: This involves

computation of various accounting ratios etc. toknow about the liquidity solvency and profitability

of business.




Journal- Journal is defined as a book containing a

chronological record of transactions

- It is the book in which the transactions are recorded

first of all under the double entry system.

- This is a book of original record.

- The recording of transactions in journal is termed as

‘Journalizing’




Date Particulars L.F. Debit

(Rs.)

Credit

(Rs.)

(1) (2) (3) (4) (5)

The Proforma of Journal

Th P f f J l





1. Date: The Date on which transaction was

entered is recorded here.

2. Particulars: The two aspects of transaction

are recorded in this column i.e. the

details regarding accounts which have to

be debited and credited.






• 3. L.F.: It means ledger folio. Thetransactions entered in the journal are later

on posted to the ledger.

• 4. Debit: In this column, the amount to bedebited is entered.

• 5. Credit: In this column, the amount to becredited is shown.

C d J l E t




Compound Journal Entry

Sometimes there are a number of transactionson the same date relating to one particular

account or of one particular nature. Such

transactions may be recorded by means of

single journal entry instead of passing several journal entries.

It may be recorded in any of the following

three ways:






I A particular account may be debited while

several other accounts may be credited.

ii. One particular accounting may be credited

while several other accounting may bedebited.

iii. Several accounts may be debited and severalthere accounts may be credit.




Ledger Position - Ledger is a book which contains various

accounts.

- It may be also called ledger is a set of

account.

L d b k t i f th




Ledger may be kept in any of the

following two forms

i. Bound Ledger

ii. Loose leaf ledger




Posting The term ‘Posting’ means transforming the

debit and credit items from the journal to

their respective accounts in the ledger.

Posting may be done at any time. However,

it should be completed before the financial

statements are prepared.

Posting




Posting

The Posting may be done by the book-keeper

from the journal to the ledger by any of thefollowing methods:

i. He may take a particular side first. Forexample, he may take the debits first and

make the complete postings of all debits from

the Journal to the Ledger.

Posting




Posting

ii. He may take a particular account and post alldebits and credits relating to that account appearing

on one particular page of the Journal. He may then

take some other accounts and follow the same

procedure.

iii. He may complete postings of each journal entrybefore proceeding to the next journal entry.




Relationship between Journal and Ledger

Both Journal and Ledger are the mostimportant books used under Double Entry

System of Book-keeping.

Journal is the book of first or original entry,

while the ledger is the book of second entry.





Journal Records Transactions is a

chronological order, while the ledger

records transactions is a analytical order.





Journal is more reliable as compared to theledger since it is the book in which the entry

is passed first of all.

The processing of recording transactions is

termed is ‗journalizing‘ while the process of

recording transactions is the ledger is calledas ‗posting‘.




Rules Regarding Posting

The following rules should be observed while

posting transactions in the ledger from theJournal:

i. Separate accounts should be opened in the

ledger for posting transactions related todifferent accounts recorded in the

Journal.






ii. The concerned account which has been

debited in the Journal should also be debited

in the ledger. However, a reference should

be made of the other accounts which hasbeen credited in the Journal.






iii. The concerned account, which has

been credited in the Journal should also becredited in the Ledger, but reference should

be given of the account, which has been

debited in the Journal

Use of the words “To” and “By”




Use of the words To and By

It is customary to use words ‘to’ and ‘by’while making posting in the ledger.

The word ‘to’ is used with the accountswhich appear on the debit side of a Ledger

Account.

Similarly, the word ‘by’ is use with the

accounts which appear on the credit side

of the ledger account.

Cashbook




Cashbook is a special journal in which all

cash transactions are recorded directly.Cashbook shows the cash receipts and

the cash payments. The Cashbook

resembles a ledger with the debit andcredit sides, and the balance represents

cash on hand at the end of the accounting

period.

Kinds of Cashbook




• Simple Cashbook/Single Column Cashbook

• Double Column Cashbook

• Three Column Cashbook

Simple Cashbook




In Simple Cashbook all the cash transactions

are recorded in chronological order. All cash

receipts are entered on the debit side and cash

payments on the credit side of the Cashbook.The difference between the two sides is the cash

in hand.

Simple Cashbook




Simple Cashbook

Dr. CashBook Cr.

Date

Particulars L.F. Rs. Date Particulars L.F. Rs.

Double Column Cashbook





This Cashbook is an extension of simple

Cashbook. An additional column is maintained

to record discount involved in the settlement ofdebtors and creditors in the double column

Cashbook.




Dr. Cashbook Cr.

Date Particulars L.F. Discount

Rs.

Cash

Rs.

Date Particulars L.F. Discount

Rs.

Cash Rs.

Three Column Cashbook





The Three Column Cashbook is accounts for

cash and bank with additional information about

discount allowed and discount received.




Dr. Cashbook Cr.

Date Receipts Discount

allowed

Cash Bank Date Receipts Discount

allowed

Cash Bank

Contra Entries




Contra Entries

If a transaction affects both cash account andbank account in the opposite sides, the entry forrecording the transaction is called a contra entry.

Entries which are made on both sides of theCashbook are called contra entries. No ledgerposting is required, because both aspects of thetransaction are recorded in the Cashbook itself.

This fact I indicated in the Cashbook by writing‗C‘ in L.H. column.



Contra Entries

Dr. Cashbook Cr.

Date Particulars L.F Discount

Allowed

Cash Bank Date Particulars L.F Discount

Allowed

Cash Bank

Petty Cashbook




Petty Cashbook

The Petty Cashbook would contain a number of

analytical columns for grouping the various

expenses under a few classifications whichwould facilitate subsequent posting into the

General Ledger.



Analytical Petty Cashbook

Amount

Received

Date Particulars Total

Amount

paid

Postage and

Telegrams

Printing and

Stationery

Carriage Traveling

Expenses

Sundry

Expenses

Subsidiary Books




Subsidiary Books

All non-cash transactions should be recorded in

the journal. The journal is inadequate as the

single book of the original entry when thetransactions are voluminous in number. The

journal is divided into divisions and they are

commonly termed as subsidiary books. Some of

the subsidiary books are:

Subsidiary Books




Subsidiary Books

• Purchase Book

• Purchase Returns Book

• Sales Book

• Sales Return Book• Bill Receivable Book

• Bills Payable Book

• Journal Proper

Purchase Book




Purchase Book

Also known as the Purchases Journal, this book is used to

record credit purchases of goods only.

Purchase Book

DateParticulars

(Name of Supplier, etc.)L.F. Inward Invoice No. Amount

Rs.

Purchases Returns Book





This subsidiary book is used to record the goods purchased on creditand sent back to suppliers as not conforming to specifications or for

any other reason.


Date Name of Supplier L.F. Debit Note No. Amount

Rs.

Sales Book




Also known as the Sales Journal, this subsidiary book is used to

record the sale of goods on credit.

Sales Book

Date Name of Customer L.F. Outward Invoice No. AmountRs.

Sales Returns Book




This book is used to record the transactions relating to goods sold on

credit and received back from the customers as not conforming to

the specifications or for any other reason.

Sales Returns Book

Date Name of Customer L.F. Credit Note No. Amount

Rs.

Bills Receivable Book




The Bills Receivable of an enterprise consists of all Promissory Notesgiven or Bills or Exchange accepted by customers in respect of

amounts due from them.

Bills Receivable Book

S.No. Date From Whom

Received

Acceptor Date

of Bill

Term Date of

Maturity

L.F. Where

Payable

Amount

Rs.

How

Disposed

Trial Balance




Trial Balance

Trial Balance is a statement containing the various

ledger balances on a particular date.

Proforma of Trial Balance



Trial Balance




1. Under this head we take the ledger accountin which the balance is brought down either

on debit or credit side.

2. it is the amount in debit side of particularledger account.

3. It is the amount is credit side of a particularledger account.

Objective of Preparing a Trial




Balance:

- Checking of the arithmetical accuracy ofthe accounting entries.

- Basis for financial statements

- Summarized ledger

Methods of Preparing Trial Balance:




p g

i. Total Method: In case of this method the totals of

debit and credit of the accounts are shown in theTrial Balance.

ii. Balance Method: In case of this method, thebalance of the ledger accounts are shown in therespective debit and credit column of the trialbalance.

The total of the balance of the debit column mustbe equal to the total balance of credit column.

Trial Balance and Adjustments




j

Before an accountant can proceed to prepare

the financial statements from the trial balance,

he has to process some additional information,

which he either already knows or receives fromsome other divisions or departments. The

following are a few examples showing where

adjustment entries would be required:




Particulars L.F. Dr. (Rs) Cr. (Rs) 1. Capital Account — 13,400

2. Sales Account — 15,300

3. Shyam‘s Account 1,500 —

4. Discount Account 300 —

5. Purchases Account17,000 —

6. Salaries Account 500 — 7. Drawings Account5,000 —

8. Ram‘s Account — 400

9. Cash in hand 900 —

10. Bank Overdraft — 4,100

11. Furniture A/c 8,000 —

33,20033,200

Closing Inventory




The value of closing inventory will be brought

into the books of accounts through the following

journal entry:

Closing Inventory A/C Dr.

To Trading A/cWhile the closing inventory appears on the credit

side of the trading account to reduce the cost of

goods sold, it also appears as an asset in the

balance sheet.

Outstanding or Accrued Expense




The nominal accounts record the actual expense

paid during the accounting period. However,

prior to the preparation of the financial

statements, it must be ensured that all expenseswhich have fallen due to be paid but which have

not been paid during the accounting period are

also brought into the books to help in the proper

matching of revenues and expenses.





g p

The adjusting journal entry to record any

outstanding or accrued expense is

Expense A/C Dr.

To Outstanding Expense A/C





g p

While the amount of expense taken from the trial

balance will be increased by the amountoutstanding and shown in the trading and profitand loss account, the actual outstanding will beshown as a liability in the balance sheet.

In the subsequent accounting period, theoutstanding expense liability will be transferred tothe expense or nominal account and will be set-off

by the entry of actual payment when it is made.

Prepaid Expense




p p

Certain expenses paid may relate to more than one

accounting period. In such cases, it is necessary to

identify that portion of the expenditure for which thebenefit is yet to be received by the concern and

treat that part of the expenditure as prepaid.

Prepaid Expense




The journal entry to record any prepaid expenseis:

Prepaid Expenses A/C Dr.

To Expenses A/C

In the subsequent accounting period, the

balance in the prepaid expense account will be

transferred back to the expense account.

Outstanding or Accrued Income




An income appearing in the ledger account may not

represent the income that must have been received

during the year. If a portion of an income has notyet been received or is outstanding as at the end of

the accounting period then the outstanding amount

must be brought into books.





To record any outstanding income in the books

of accounts, the journal entry is:

Outstanding Income A/C DrTo Income A/C





While the interest received will be increased toshown in the profit and loss account, theoutstanding interest account will be listed as anasset in the balance sheet.

In the subsequent accounting period, theamount in the Outstanding Interest A/C will betransferred to Interest Received A/C and theactual receipt of the interest will offset the formertransfer entry.

Income Received in Advance




While preparing the financial statements,

adjustments may be necessary in respect of anyincomes received in advance.

The entry to adjust for the income received inadvance will be.

Subscriptions A/C Dr.

To Subscriptions received in Advance A/C

Income Received in Advance




With the posting of the above journal entry, thesubscriptions account will be shown n the profit

and loss account and in the balance sheet, the

subscriptions received I advance will be listed as

a liability.

Provisions for Bad Debts




The sales revenue recorded in the books ofaccounts of an organization represents theamount realized/to be realized from the sale of

goods. When goods are sold on credit it maysometimes happen that even though customersbought them with every intention of paying forthem, (owing to certain subsequent change in

circumstances.) they may not be able to fulfilltheir obligations.





The journal entry to record the above loss would

be:

Bad Debts A/C Dr.To X A/C





Please not that the sales account remains

unchanged. However, in the income statement,

while sales revenue will appear at the full figure,the bad debts will appear as a loss and thus the

reduction in the amount realized will be account

for. The Accounts Receivable account will also

appear in the balance sheet at the realizablevalue.

Provision for Bad and Doubtful Debts




When bad debts are expected to occur in thefuture: (a) the exact amount of loss may not be

known and (b) a particular debtor‘s account

cannot be identified to write-off the expected

loss or even if the debtor‘s account can be

identified, a reduction in claim can be given

effect to only when it becomes one hundred

percent certain.

Provision for Bad and Doubtful Debts




For creating the provision for bad and doubtfuldebts, the journal entry is:

Profit and Loss A/C Dr

To Provision for Bad Debts A/C

Estimating Bad and Doubtful Debts




Any one of the following methods may be used toestimate the amount of possible bad debts.

Bad debts may be estimated as a percentage of totalsales during the year. This method can be used only

when there are no cash sales or such sales arenegligible.

Bad debts may be estimated as a percentage of creditsales.

Estimate bad debts as a percentage of receivablesoutstanding at the end of the accounting period.

Estimating Bad and Doubtful Debts




The percentage used will be based on the

Judgement of the management and the pastexperience with regard to bad debts.



Treatment of Bad Debts when a Provision

for Bad Debts E ists




for Bad Debts Exists

• Since a provision for bad debts to the extentalready exists, the actual bad debts will be

transferred at the end of the year to this

provision account and not to the profit and loss

account. The entry for the transfer will be,

Provision for Bad Debts A/c

To Bad Debts A/c







At this point the provision account will appear asunder:

Provision for Bad Debts AccountDr. Cr.

Particulars Rs. Particulars Rs.







Since the provision has been utilized to the

extent . The remaining setting off any bad debts

in the forthcoming year. However, PQR Ltd.,

wishes to maintain the provision at % on

debtors. So, the balance required in the

provision account as on date is % of total debtor







To bring up the provision to the required balancea further appropriation to be made from the

profit and loss account.

Entry will be:

Profit and Loss A/c Dr.

To Provision for Bad Debts A/c







The provision account, after posting this entry, will appear asfollows:

Provision for Bad Debts Account

Dr. Cr.

Particulars Rs. Particulars Rs.

The balance sheet will again show the Accounts Receivable at their

realizable value.

Recovery of Bad Debts Written off




Sometimes, an amount written off as bad debts

may be subsequently recovered. Any suchrecovery must be treated as a windfall and

transferred to the Profit and Loss Account as a

gain:

Recovery of Bad Debts Written off




The journal entries will be,

At the time of receipt of the amount

Cash A/c Dr.

To Bad Debts Recovered A/c

At the end of this financial year,Bad Debts Recovered A/c Dr.

To Profit and Loss A/c

Provision for Discounts on Accounts

R i bl




Receivable

The organization which allow the facility of

making payments before the due date and

enable their debtors to avail of cash discount,

must take into account the possible amount of

discounts that may be allowed on closing

debtors in the forthcoming year. This is

necessary to show the closing debtors at theirrealizable value.

Reserve for Discounts on Accounts Payable




Organizations may like to show the sundrycreditors in the balance sheet at the net payable

value by estimating in advance the amount of

cash discounts that may be received at the time

of settlement of amounts due. This is usuallydone by creating a reserve for discounts on

creditors and then transferring the discounts

received to such reserves. Since, income in

respect of discounts receivable is recognized in

advance,

Reserve for Discounts on Accounts Payable




The journal for creation of the reserve will be:Reserve for Discount on

Accounts Payable A/c Dr

To Profit and Loss A/c




Meaning and Scopeof Accounting

1. Accounting covers only thefollowing activities:




following activities:

(a) Recording and classifying

(b) Recording, Classifying,

Summarising and analysing(c) Summarising, Analysing and

Interpreting

(d) Identifying, Measuring andCommunication

2. An economic event that




involves transfer of

money or money’ worth is-

(a) Financial transaction

(b) Barter

(c) Settlement(d) Receipt/Payment

3. Sale of goods to Ram forCash Rs 1 000 is a –




Cash Rs.1,000 is a

(a) Cash transaction

(b) Credit transaction

(c) Barter

(d) Internal Event

4. Current Assets are thoseassets-




assets

(a) Which can be converted into cashwith 12 months.

(b) Which can be converted into cashwithin a period normally notexceeding 12 months

(c) Which can be converted into cashwithin an operating cycle which normallydoes not exceed 12 months

(d) Which are held for their conversion into

cash within an operating cycle whichnormally does not exceed 12 months

5. Fixed Assets are those

t




assets-

(a) Which can not be converted intocash

with 12 months.

(b) Which can be converted into cashafter

12 months.

(c) Which can be converted into cash

afterthe expiry of operating cycle.

(d) Which are not held for their conversioninto

cash within an operating cycle which

6. Capital is the -




(a) Excess of external liabilities over theassets.

(b) Excess of assets over the external

liabilities

(c) Excess of external liabilities over theassets.

(d) Excess of assets of over the internalliabilities

7. Drawing represent -




(a) Cash withdrawn for officeuse

(b) Cash withdrawn forpersonal use

(c) Goods withdrawn for

personal use(d) (b) & (c)

8. A person who owesmone to the firm is




money to the firm is -

(a) A creditor

(b) A debtor(c) An investor

(d) A lender

9. A person to whommoney is owed by the




money is owed by the

business -

(a) A creditor

(b) A debtor(c) A borrower

(d) A customer

10. Income is reflected in




the form of -(a) Inflow of assets incurrence of

liabilities

(b) Outflow of assets or decrease

in liabilities(c) Inflow of assets or decrease

in liabilities

(d) Outflow of assets orincurrence of liabilities

11. Expenses are reflected




pin the form of -

(a) Inflow of assets or incurrence ofliabilities

(b) Outflow of assets or decrease inliabilities

(c) Inflow of assets or decrease inliabilities

(d) Outflow of assets or incurrenceof liabilities



Thank You

Please forward your query

To: [email protected]

CC: [email protected]

mailto:[email protected]

mailto:[email protected]

af session 1

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