accounting mechanics

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Symbiosis Institute of Telecom Management

Accounting Mechanics Module II

A.V.Chirputkar, Faculty - Finance, SITM.

M.Com. F.C.A. M.B.F. (ICAI), C.I.S.A. (USA)

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2Apr 7, 2023SITM

Accounting Cycle

Identifying monetary transactions;

Recording transactions;

Classifying the transactions;

Summarizing the transactions;

Interpreting the results.

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3Apr 7, 2023SITM

Journal – First Step

The journal records all daily transactions of a business in the order in which they occur.

The process of recording the transactions in a journal is called as “Journalizing”

The transactions are recorded under the double entry system.

The recording of transactions – Batch processing to real time processing.

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Journal

The transactions are recorded with the help of “Rules of Debit & Credit”.

For this purpose, business transactions are classified into three categories;

a) Transactions relating to persons;

b) Transactions relating to assets;

c) Transactions relating to incomes and expenses.

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Classification of Accounts

For transactions relating to persons – called as Personal Accounts;

Types of Personal Accounts;

a) Natural: eg: natural person

b) Artificial : Company, bank

c) Representative Personal Accounts: It is a certain group of persons like salaries payable etc.

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Rule – Personal Account

Debit the receiver

and

Credit the giver

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Classification of Accounts

For Transactions relating to Assets – called as Real Accounts.

It is classified as;

a)Tangible Real Accounts – Cash, building, stock etc.

a)Intangible Accounts – Goodwill, License, Bandwidth, software etc.

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Rule – Real Account

Debit What Comes In

and

Credit What Goes Out

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Nominal Accounts

For transactions relating to income and expenses – called as Nominal Accounts;

Types of Nominal Accounts;

a)Expenses / Losses

b)Incomes / Gains

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Rule – Nominal Accounts

Debit all expenses / losses

And

Credit all incomes / gains

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Case Study

Journalize the transactions;

Ledger Posting

Trial Balance

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Final Account – Adjustments

Opening Stock in the trial balance is debited to the trading account.

Closing Stock (generally given as additional information) is credited to Income Account and shown as an asset in the balance sheet.

Purchases / Sales returns are deducted from total purchases / total sales appearing in the Income Statement to arrive at Net Purchases and Net Sales.

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Adjustments

Prepaid expenses:

Deduct from the respective expense in the P & L A/c. and show as an asset in the balance sheet.

Illustration:

Prepaid Insurance: Insurance premium paid for the year July 2011 to June 2012 -Rs. 12,000.

How it will appear in Income Statement and Balance Sheet?

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Adjustments

Outstanding expenses: Add to the respective expense in the P & L A/c. and show as a liability in the balance sheet.

Illustration:

Outstanding salary: Salary as per trial balance Rs.5,50,000. Salary

for the month of March 2012 (as salary payable in April, yet to be

accounted for Rs. 50,000.)

How it will appear in Income Statement and Balance Sheet?

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Adjustments

Pre-received income (Unearned Revenue): (If accounted for as revenue): Deduct from the revenue in the P & L A/c. and show as liability in the balance sheet

Illustration:

Advance from customers: Annual revenue Rs. 51,00,000, including Rs. 1,00,000 Advance received from customers accounted for as revenue.

How it will appear in Income Statement and Balance Sheet?

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Adjustments

Accrued Income: Credit the P & L A/c. with appropriate income account and show income accrued (but not received) as an asset in the balance sheet.

Illustration:

Deposit of Rs. 10,000 kept with bank on July 1, @ 12% p. a. for 5 years.

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Adjustments

Provision for Doubtful Debts: Debit the P & L A/c. with the provision and show the provision as a deduction from Sundry Debtors in the balance Sheet.

Illustration:

Sundry Debtors as per the trial balance Rs. 5,00,000. Create a provision of 5 % for doubtful debts.

How it will appear in Income Statement and Balance Sheet?

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Adjustments

Depreciation: It means diminution in the utility value of assets due to wear and tear or passage of time.

Illustration:

Provide depreciation @ 15% on Plant and machinery of Rs. 10,00,000.

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Depreciation

Meaning

Importance

Legal Requirement

Effect on Dividend, Taxation, Managerial Remuneration and cash flows of the company.

Accounting Standard

Methods of Depreciation.

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Bank Reconciliation Statement

Meaning

Importance

Method of preparation

Managerial aspect as control

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