basics of accounts fresh jamia (1)

8/8/2019 Basics of Accounts Fresh Jamia (1)

1/33

What is Accounting?????Accounting is a process which includes: I

dentifying Measuring Recording Classifying

Summarising Analysing the transactions which can be

measured in terms of money.


2/33

Basic Terms -AssetsDefine Assets.Any thing which is tangible or not, but can fetch some money value inthe future for the business is called as an asset. Two main kinds ofassets are as follows:Fixed Assets: Any asset, which do not change in a short period oftime are called as fixed asset. For example:

Building Land Machinery

Current Assets: Any asset, which keep on changing even in shortperiod of time is called as current asset. For example:

Cash Bank balance


3/33

Basic Terms Capital &

LiabilitiesCapital.An amount, which is invested into the business

out of own recourses of entrepreneur, iscalled as capital.Liability.An amount, which is invested into the business borrowed fromoutside market is called as liability. This is the amount which has

to be returned in future. For example loan from bank, creditors(a person from whom goods have been purchased on credit) etc.


4/33

Important Terms Goods,

Debtors & CreditorsGoodsAny thing in which business deals is known as goods, for e.g.

books, pens, pencils etc. are goods of a stationery business.

Debtors.Those people to whom goods have been sold on credit and moneyhas to be received back in future are called as debtors, these

are a kind of current assets for the business.

Creditors.Those people from whom goods have been purchased on creditand money has to be repaid are called as creditors, these are a

kind of current liability.


5/33

Basic Terms - Expenses

Outstanding Expenses: Those expenses

which have become due but not yet paid. Fore.g. Rent of Dec. 2009 if not paid within2009 than in 2010 it becomes Outstanding.

Prepaid Expenses: Those expenses which

have not yet become due but paid inadvance. For e.g. Rent of Jan 2010 paid inDec. 2009 only.


6/33

Basic Terms

Incomes

Accrued Income: Those incomes which

have become due but not yet received.For e.g. Interest due in Dec. 2009 ifnot received in Dec 2009.

Income received in advance: Thoseincomes which are received in advancebefore they have become due.


7/33

Objectives of Accounting To keep systematic records: Accounting is done to keep a systematic record of

financial transactions. In the absence of accounting there would havebeen terrificburden on human memory which in most cases would havebeen impossible tobear.

To protect business properties: Accountingprovidesprotection to business

properties from unjustified and unwarranted us. This ispossible on account ofaccounting supplying the information to themanager or theproprietor.

To ascertain the operational profit or loss: Accounting helps is ascertaining thenetprofit earned or loss suffered on account of carrying thebusiness. This is donebykeeping a proper record of revenues and expenses of a particularperiod. Theprofitand loss account is prepared at theend of a period and if the amount of revenue fortheperiod is more than theexpenditure incurred in earning that revenue, there is said

tobe a profit. In case theexpenditureexceeds the revenue, there is said to be a loss. To ascertain the financial position of business: Theprofit and loss account gives

the amount ofprofit or loss madeby thebusiness during a particularperiod.However, it is not enough. Thebusinessman must know about his financialpositioni.e., where he stands; what he owes and what he owns? This objective is served bythebalance sheet orposition statement.

To facilitate rational decision making: Accounting these days has taken upon itselfthe task of collection, analysis and reporting of information at the requiredpoints oftime to the required levels of authority in order to facilitate rational decision making.


8/33

Advantages of Accounting

Helps in ascertaining theprofit earned or lossessuffered and financialposition (status) of the

business. Assists in managing thebusinessproof in court in

law

Helps in remembering

Helps in taxation matters

Helps in case of sale ofbusiness.

Helps themanager inplanning, Decision makingand controlling thebusiness operations.


9/33

L

imitations of Accounting Not absolutely exact as it based on different estimates made

by differentpeople.

All items are shown at historical value as it ignorespricelevel changes.

Records only monetary transaction and avoids otherimportant non-monetary transactions.

Window dressing (manipulation) in Balance Sheet,e.g.,over or undervaluation of closing stock.

Omission ofqualitative information, such as calibre of themanagement,quality of theproducts, health of theproprietor,etc.

Based on accounting concepts and conventions.

Influenced bypersonal judgement.


10/33

Accounting Concepts, PrinciplesMoneyMeasurement Concept

Accounting records state only those facts about a business firm, which can beexpressed in monetaryterms. In other words,business events and facts that cannot beexpressed in monetary terms,howsoever important they may be, areexcluded.

Going Concern Concept

The Going Concern Concept implies that the firm will continue to operate in the foreseeable future.The operational implication of this assumption is that assets are not shown in Balance Sheet at theirrealisablemarket value, which implies liquidation value.

Cost ConceptAssets/resources owned by the firm are shown at their acquisition cost and not at current marketvalue/current worth.

The rationale for this assumption is that it provides objective and verifiable basis for accountingrecords. Market valuation of assets in use is not only difficult to bemadebut also is related tosubjectivity. Besides,market values may be constantly subject to


11/33

Accounting Concepts, Principles

Conservative Concept

As the name suggests, Conservative Concept warrants use of conservatism in business records.In relation to Income Statement, theprinciple is, "anticipate noprofits unless realised butprovide for all probable future losses". Stock of finished goods is valued at the cost of themarket price whichever is lower.

Accounting Period Concept

Accounting Period Concept requires that Income Statement should beprepared at periodicintervals forpurposes such as performanceevaluation and determination of taxes.Conventionally, the time span covered is one year. Corporate firms, as per Companies Act,are required to produce interim accounts and manybusiness firms producemonthly orquarterly accounts for internal purposes.

Matching Principle

The Matching concept is, in a way, an extension of Accrual concept. In fact, this is themostcomprehensive Accounting Principle that enumerates normative frameworkof incomedetermination of an accounting period of a business firm.


12/33

Accounting Concepts, Principles

Consistency Principle

Matchingprinciple has underlined the importance of treatment of capitalexpenditure items in income determination process. It focuses on the

equitablemethods, which must be used to write off the cost ofplant andmachinery (and in that way of other long-term assets) so that its cost isfairly allocated as expense, in form of depreciation, to each accountingperiod throughout its estimated useful life. There are various methods ofcharging depreciation. The two notables methods are, Straight-LineMethod (SLM) and Written Down Value Method (WDV).


13/33

Accounting Equation Mr. Ram Sharma started a business by investing Rs.5,00,000 (Capital) of his

own and borrowed Rs.3,00,000 from bank as loan (liability), the total amountcontributed comes to Rs.8,00,000. He spend this amount in the followingmanner:

Machinery 2,00,000Furniture 1,00,000Car 2,00,000Stock 1,50,000 8,00,000 All AssetsFittings 50,000Bank 70,000Cash 30,000

So

Capital + Liabilities = Assets


14/33

What is the process of

accounting?

Process of accounting:Journal Subsidiary Books

Ledger

Trial Balance

Final accounts


15/33

What is Journal? Show its

format

Format of JournalDate Particulars L.F.Amount(Dr.) Date Particulars L.F Amount(Cr.)


16/33

What are the various type of

Accounts?

Accounts

Real Nominal Personal


17/33

Accountancy - Journal Rule #1. Debit what comes in

Credit what goes out. Aloo, the owner has purchased a machinery worth Rs. 10,000 f or his

business Explaination:

MachineryAccount will beDebitedby 10,000(because business is receiving a machinery)Cash Account will be Creditedby 10,000(because business is giving cash)

Entry :MachineryA/c Dr. 10,000

To Cash A/c 10,000

Thisrule isrelated torealaccountslikeassetswhichabusinessreceiveorgiveaway.


18/33

Journal R

ule # 2 Rule # 2 Debit the receiver

Credit the giver

Business purchased Machinery from Tomato on credit worth Rs. 2,000

ExplanationMachineryhas come into the business so according to rule # 1 it will bedebited and on the other hand Tomato is giving something to the businesstherefore according to rule # 2 his account will be credited.

Entry

Machinery A/cDr. 2,000To Tomato A/c 2,000

This rule is related topersonal accounts likedebtors andcreditorswith whom businessdeals.


19/33

Journal R

ule # 3 Rule # 3.Debit all the losses andExpenses

Credit all the gains andprofits

Business paid a salary ofRs. 5,000 to staff

ExplanationCash has gone out of the business so according to rule # 1 cash will becredited and on the other handsalary a kind of ex pense for the businessand it will be debited as per rule # 3.

EntrySalary A/c Dr. 5,000

To Cash A/c 5,000

This rule isrelated to nominalaccounts likeincomesandexpenseswhich a

firm earns orsuffers.


20/33

What is Ledger? Show its

format. Ledger :- A book containing the summary and classified from of a

permanent record of all transactions

Dr. Name of the account Cr.

Date Particulars J.F Amount

(Rs.)

Date Particulars J.F Amount

(Rs.)


21/33

Let us understand how to post thejournal entries into ledger

Forexample there is entry to pay salary to an employee:

Entry:

Salary A/c Dr. 5,000

To Cash A/c 5,000

Salary Account Cash Account

To Cash 5000 By Salary A/c 5000

Salary account debited Cash account credited

with the name of cash with the name of Salary

Ledger Posting


22/33

What is a Trial Balance?

The Trial Balance is a statements showing

thebalance, or total of debits and credits, ofall the accounts in the ledger with a view toverifying theequality of debits and creditsposted to the ledger accounts. If the totals of

debits and credits areequal, it is presumedthat theposting to the ledger in terms of debitand credit amounts is accurate.


23/33

Trial Balance

Hypothetical Example

Cash Account Capital Account

Tobalanceb/d 10,000 By Purchases A/c 2,000Bybalanceb/d 50,000

To Sales A/c 5,000By Cash A/c 10,000

To Shyam 2,000

To Interst A/c 3,000

To Capital A/c 10,000 By balance c/d 28,000 Tobalance c/d 60,000

30,000 30,000 60,000 60,000

To balanceb/d 28,000Bybalanceb/d 60,000

Trial Balance

Particulars Amount Dr. Amount Cr.

Cash Account 28,000

Capital Account 60,000

Note: The balance of debit and credit should match in trial balance.


24/33

Cash BookIn business most of the transactions relate to receipt of cash,payments of cash, sale of goods and purchase of goods. So itis convenient to have separate books for each such class oftransaction, one for receipts and payments of cash, one forpurchase of goods and one for sale of goods. These books arecalled subsidiary books.

Cash book is a subsidiary book, which records the receiptsand payment of cash. With the help of cash book cash andbank balance can be checked at my

point of time.


25/33

TYPES OFCASH BOOK

1. Simple Cash Book.

2. Two column cash book. 3. Three column cash book.

4. Petty cash book


26/33

SIMPLE CASH BOOK

Dr. Receipts Payments Cr.

Date Particulars Amt. Date Particulars Amt

Rs. Rs.


27/33

Example of Simple Cashbook

Enter the following transactions in simple Cash Book.

Rs.

Jan 1 Cash in hand 12000

Jan 5 Received from Ramesh 3000

Jan 7 Paid Rent 3000

Jan 8 Sold goods 7000

Jan 10 Paid Sohan 2000 Jan 12 Paid salary 2500

Jan 15 Received Commision 1500


28/33

TWOCOLUMNCASH

BOOKDr Receipts Payments CrDate Particulars Discount Cash Date Particular Discount. Cash

Amt. Amt. Amt. Amt.


29/33

Example of two column cash

bookEnter the following transactions in a two-column cash Book.

Rs.

Jan 1 Cash in hand 15,000

Jan 5 Paid to Mohan 3,000

Jan 5 Discount allowed by him 100

Jan 6 Purchased goods 4,000

Jan 10 Received from Vijay 9,800

Jan 10 Discount allowed 200

Jan 11 Sold goods 4,000

Jan 12 Paid to Shyam 2,950

Discount received Rs. 50 Jan 13 Paid wages 500

Jan 14 Paid to Rajesh in full settlement of his

Account, which shows a Cr. Balance of

Rs. 4000 3900


30/33

Three ColumnCashBook

Date Particulars Dis. Cash Bank Date Particulars Dis. Cash Bank

Amt. Amt.


31/33

Example of three column

cash

book

Cash in hand 20,000

Paid into Bank 19,000 Receives cheques from Kirti and Co. 600

Pays into bank Kirti and Cos Cheque 600

Hepays Ratan and Co. by Cheque and isallowed discount of Rs. 20330

Cheque received from Rajaram and

deposited the same day 500


32/33

PETTY CASH BOOK

A business house makes a number of smallpayments like telegram, textiles, cartageetc. If all these transactions are recordedin cash book the cash bank may becomebulky and the main cashiers work willalso increase therefore usually firmsappoint a petty cashier who makes thesesmall payments and keep record of thesepayments in a separate cash book whichis called Petty Cash book


33/33

IMPREST SYSTEMOFPETTY

CASH BOOK.

The petty casher is given a sum of

money in the beginning of the period.During the period he makes paymentout of this money. At the end of theperiod, the firm reimburses him the

amount paid by him so that the balanceof cash with him remains same in thebeginning of the period as well as atthe end of the period. This is called the

Imprest system of Petty Cash Book.

basics of accounts fresh jamia (1)

Documents