introduction to financial accounting. introduction to final final accounts finance means cash,...
TRANSCRIPT
Introduction to Final Final Accounts
Finance means Cash, Money, Price, Value and Cost Its relating to Monetary benefit
Basically 3 Concepts
Introduction to Final Final Accounts
Account – It’s a summarized statement of Debit and Credit Accounting – it’s a process of all types of accounts such as PA, RA & NA Accountancy – its law of accounts.
Introduction to Accounting
Accounting is a old concept. It was introduced by Edward Jones in 1795 in the books of “Modern Accounting System”.
Accounting is “Method of Identifying, Classifying, Summarizing in a significant manner in terms of Money”.
Principles of Accounting
Recording Identifying Classifying Summarizing Balancing
Eg. 1. Mr. Ramu Purchased a book of Rs. 150/- from kiran at Koti.
2. Mrs. Aishwarya Sold a Machinery of Rs. 10000/- to Bharati by cash.
Concepts of Accounting
Money Measurement concept Business Entity concept Going concern concept Cost concept Dual aspect concept Accounting period concept Matching concept Reliasation concept Objective concept Other concepts
Conventions of Accounting
Convention of Disclose Convention of Consistency Convention of Conservatism Convention of Materiality
Principles of Double Entry system
Principles
Personal Accounts Real Accounts Nominal Accounts
Debit Credit Debit Credit Debit Credit
Receiver Giver What comes in
What goes out
Exp and Loss
Income & Gain
Journal
When the size of the business firm is big. All the business transections are first recorded in a Rough Book, before entering them in “JOURNAL”.
After words these transactions are recorded in a chronological order.
After analyzing, classifying these benefits according to the principles of debit & Credit is called “Journal”.
Advantages of Accounting
Replacing money Assisting the performance of the business Assessing the financial status of the business Documentary evidence Assisting in realisation of debts. Facilitating & detecting frauds Preventing & detecting frauds Help full to Management
Types of Subsidiary books
Purchase book Sales book Purchase returns book Sales returns book Cash book Bill receivable book Bills payable book Journal proper
Characteristics of Cash book
It can also be treated as a subsidiary book Like ledger, there are the debit and credit columns in cash book Only cash transactions are recorded It always shows debit balance but it never shows the credit balance The balance of cas can be known at any point of time
Types of Cash books
Simple cash book Double column cash book Triple column cash book Petty cash book
Trial Balance
M.S gosav defined the Trail Balance as “The Trail balance is a statement containing the balances of all ledger accounts., as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of the ledger postings”.
Characteristics of Trial Balance
Basically Trial Balance is a statement or list It contains all the Debit and Credit balances It total debit balances must be equal in aggregate to the total of the credit
balances when accounts are balanced at any given time. Trial Balance is the only base for the preparation of final accounts
Advantages of Trial balance
Preparation of final accounts will become easy with the preparation of Trail balance
When the total balance of debit is equal to the total balance of credit in a trial balance one can confidently rely on the results derived out of such trail balance.
Final Accounts
Relating to Trading Concern Trading Account Profit & Loss Account Balance sheet
Relating to Manufacturing Firm Manufacturing Account Trading Account Profit & Loss Account Balance Sheet
Importance of Trading Account
We can ascertain Gross Profit / Gross Loss We can observe the changes in direct expenses. We can calculate the cost of production We can establish the relation b/w the costs and revenues We can analyze the trend in sales We can decide the earning capacity of the firm
Importance of Profit & Loss Account
The main purpose of preparing the Profit & Loss account is to ascertain Net profit / Net Loss of the firm
It is also useful to establish a relationship b/w the sales and the total indirect expenses through percentages.
Its relating to the expenses and Incomes of the firm
Balance Sheet
“Balance Sheet is a statement prepared on a particular date of reflect the financial position of the firm with all assets and liabilities of the firm”.
Need for ACCOUNTING• As you are aware, every trader generally
starts business for purpose of earning profit.
• While establishing business, he brings own capital, Then he purchases machinery, furniture, raw materials and other assets.
• He starts buying and selling of goods, paying for salaries, rent and other expenses, depositing and withdrawing cash from bank. Like this he undertakes innumerable transactions in business.
• The number of transactions in an organization depends upon the size of the organization
• In small organizations, the transactions generally will be in thousands and in big organizations they may be in lakhs.
• It is humanly impossible to remember all these transactions. Further, it may not be possible to find out the final result of the business without recording and analyzing these transactions.
• Accounting came into practice as an aid to human memory by maintaining a systematic record of business transactions.
DEFINITION OF ACCOUNTANCY
o “Accountancy is the science of RECORDING and CLASSIFYING business transactions and events, primarily of financial character and the art of making significant SUMMARIES, ANALYSIS & INTERPRETATIONS of those transactions and events, & COMMUNICATING the results to persons who make decisions or form judgments”
Smith & Ashburne
• American Institute of Certified Public Accountants (AICPA): “The art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events, which are in part at least, of a financial character and interpreting the results thereof.”
• Thus, accounting is an art of identifying, recording, summarizing and interpreting business transactions of financial nature. Hence accounting is the Language of Business.
Objectives of Accountancy• To keep permanent, accurate and complete record of business transactions
• To maintain records of incomes and expenses and losses in such a way that, the Net profit/Loss for any specified period is ascertained
• To maintain records of Assets and Liabilities and in such a way that, the Financial position of the business at any point is ascertained
• To provide information for legal & tax purposes.
Accounting Principles
• Accounting principles are general rules adopted in accounting
• These principles enables standardization in recording & reporting of financial information
• Accounting principles may be defined as those rules of conduct or procedures which are adopted by the accountants universally while recording the accounting transactions.
Double entry system of Accounting• According to this system of Accounting every transaction has two fold aspect.
i.e., One party receiving benefit & Other party giving benefit• Every transaction is divided in to two aspects Debit & Credit.
• The basic principle of Double entry system is FOR EVERY DEBIT THERE IS CORRESPONDING CREDIT OF EQUAL VALUE.
Basic Books of Accounts
• An account is a summary of the record of all the transactions relating to particular Person, Asset, expense or gain.
An account has two sides• left side of the account is called Debit side• right side of the account is called Credit side
CLASSIFICATION OF BUSINESS TRANSACTIONS
All business transactions are classified into three categories:
• 1.Those relating to persons• 2.Those relating to property Assets)• 3.Those relating to income & expenses Thus, three classes of accounts are
maintained for recording all business transactions. They are:
• 1.Personal accounts• 2.Real accounts• 3.Nominal accounts
• 1.Personal Accounts :Accounts relating to persons & artificial persons are called “Personal Accounts” .
• A separate account is kept on the name of each person for recording the benefits received from ,or given to the person in the course of dealings with him.
E.g.: • Krishna’s A/C,• Gopal’s A/C,• Nagarjuna Finances Ltd.A/C,
• 2.Real Accounts: The accounts relating to properties or assets are known as “Real Accounts” .
• Every business needs assets such as machinery , furniture etc, for running its activities .A separate account is maintained for each asset owned by the business .
• E.g.: • Cash A/C• Furniture A/C• Building A/C• Machinery A/C etc.
• 3.NominalAccounts:Accounts relating to expenses, losses, incomes and gains are known as “Nominal Accounts”. A separate account is maintained for each item of expenses, losses, income or gain.
• E.g.: Salaries A/C, Stationery A/C, Wages A/C, Postage A/C, Commission A/C, Interest A/C, Purchases A/C, Rent A/C, Discount A/C, Commission received A/C, Interest received A/C,Rent received A/C, Discount received A/C.
Basic Accounting rules
• Before recording a transaction, it is necessary to find out which of the accounts is to be debited and which is to be credited. The following three different rules have been laid down for the three classes of accounts….
• 1.Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and the account of the person giving the benefit (given) is to be credited.
• 2.Real Accounts: When an asset is coming into the business, account of that asset is to be debited .When an asset is going out of the business, the account of that asset is to be credited.
• 3. Nominal Accounts: When an expense is incurred or loss encountered, the account representing the expense or loss is to be debited . When any income is earned or gain made, the account representing the income of gain is to be credited.
Summary of Accounting rulesPersonal account Rule: “Debit----The Receiver
Credit---The Giver”Real account Rule:
“Debit----What comes in Credit---What goes out”
Nominal account Rule: “Debit----All expenses and losses
Credit---All incomes and gains”
Journal• The book in which the business transactions are recorded in a chronological order, after analyzing them and classifying the benefits according to the principles of debit & credit is called JOURNAL.
• As all the day to day transactions are recorded in journal, this book is also called as “Day book” or Daily record”
• All the transactions related to business like Purchases, Purchase returns, sales, sales returns, cash receipts, cash payments, loans & advances taken (given), assets acquired, salaries paid are first recorded in the book of JOURNAL.
• Hence Journal is called as “BOOK OF PRIME ENTRY”.
JOURNAL ENTRY• The process of recording the business transactions in a chronological order in the journal after analyzing, classifying & identifying them as Dr and Cr is called entry.
• All the transactions are recorded in the book of Journal are in the form of Entry.
• For easy identification of the transaction a brief description is given under each entry with in brackets. (Narration)
Journalize the following transactions
1. Ram commenced business with Rs 50,0002. Purchase furniture for cash Rs 3,0003. Purchase machinery from Manoj on credit
Rs 40,0004. Received cash from pavan Rs 8,000 on
account5. Paid rent to land lord Rs 5,000
• Jan 1 Raja commenced business with Rs 50,000
• Jan 2 Deposited in bank Rs 40,000• Jan 5 Purchased goods from Krishna on credit
Rs 10000• Jan 7 Sold goods to ram on credit 8,000• Jan 9 Purchased goods from Mahesh for cash
5000• Jan 12 Sold goods for cash to sailesh 8500
Journalize the following transactions
• Jan 15 purchased machinery from ajay engineering company, payment made by cheque 20,000
• Jan 18 Issued cheque to Krishna 7500• Jan 20 Received interest from raja 700• Jan 22 Cash withdrawn from bank for office
use 2000• Jan 24 Amount with drawn from bank for
personal use 800• Jan 27 Loan taken from rajiv varma 15000
• Jan 29 Cash with drawn from office for personal use 1000
• Jan 30 Goods withdrawn for personal use 2000
• Jan 31 Paid rent to landlord by cheque 600
Ledger• Introduction• Journal cannot give net results of various transactions related to any account, at a given date the full information is not made available, with regard to value of assets, incomes & expenses.
• This limitation can be overcome by opening a LEDGER, which shows the net results of different accounts on given date.
• LEDGER is also called the “Book of final entry”
• From the LEDGER it is not possible to know the total purchases, sales, rent, salaries paid etc, this limitation can be over come by LEDGER.
• LEDGER : It is a book, where the various accounts pertaining to particular person, asset, expense are grouped together in one place in the form of an account.
• The process of transferring the transactions from JOURNAL to LEDGER is called “POSTING”
• LEDGER is the principal book of business & hence called “king of books of accounts”
1. Journalize the following transactions, post them into ledger and balance the accounts.
Jan 1kittu commenced business 1,00,000Jan 2 purchase goods from Ravi 10,000Jan 4 sold goods to gopi 20,000Jan 5 cash purchases 20,000Jan 7 paid salaries 5,000Jan 8 sold for cash 15,000Jan 9 purchased furniture paid by cheque
2,000
Jan 9 brought goods from Sobhan 10,000Jan 14 cash paid to ravi 9800, discount received 200Jan 17 received cash from gopi 19,500, discount allowed 500Jan 18 deposited with bank 10,000Jan 20 Paid for advertisement by cheque 700Jan 22 Stationary expenses 800Jan 24 Sold old furniture 1,700Jan 28 Paid cash to shoban 4,000Jan 26 Received interest through cheque (sent to bank on the same day) 500Jan 31 Proprietors personal use 1,000
Trial Balance
INTRODUCTION The Trial Balance contains the debit and credit balances of all LEDGER accounts, it is very much useful in preparation of FINAL ACCOUNTS.
It is a connecting link between the LEDGER & FINAL ACCOUNTS.
Trial Balance can be prepared at any time & not necessarily at the end of a calendar or accounting year.
It is the only base for preparation of FINAL ACCOUNTS
• Your are requested to prepare the Trial Balance from the Ledger account balances.
capital 65,500 bills payable 4,500 Creditors 18,200 reserve for bad debts 3,250Debtors 21,350 tax outstanding 1,110Cash 6,750 interest on investment 2,150Sales 1,20,000 drawings 1510Purchases 69,100 fixed deposits 45,000Cash at bank 7,800 Rent 9,50Machinery 35,000 Insurance prepaid 4,200Discount allowed 5,000 Wages 3,150Discount received 3,200 Salaries outstanding 7,200Furniture 4,000 bills receivables 21,300.
Trading Account• Trading account is prepared at the end of each accounting period to assess the GROSS PROFIT/LOSS.
• GROSS PROFIT = Net sales – COGS• GROSS LOSS = COGS – Net sales• Net sales = sales – sales returns• COGS or cost of production or cost of goods
sold = opening stock + purchases + direct expenses – closing stock
• Direct expense: the following are direct expenses
carriage inwardwages cartage or freightimport duty excise duty coal, fuel, power factory expense, manufacturing expenses.
Particulars amount Particulars amount
To opening stockTo purchases xxxxLess: returns xxTo carriage inwardsTo wagesTo freight/cartageTo customs dutyTo gas, fuel, coalTo factory expensesTo other man. ExpensesTo productive expenses
To gross profit c/d(Transferred to P&L account)
Xxxx
XxxxxxxxXxxxXxxxXxxxXxxx
By sales xxxxLess: returns xxxBy closing stockBy goods destroyed by fireBy gross loss(Transferred to P&L account)
xxxxXxxxxxxx
Trading account proforma
Profit & Loss account • It is prepared to ascertain the Net profit/loss of the firm for the accounting period.
• Net profit can be arrived by deducting the administrative expenses from the Gross profit.
• By nature Profit & Loss account is a Nominal account and should not have opening & closing balances
• If the total of credit column exceeds the total of debit column the difference is called net profit, which is transferred to the capital account or added to the existing share capital while preparing the balance sheet.
• Net profit will increase the capital and net loss will decrease the capital.
Particulars amt Particulars amt
TO office salaries
TO rent, rates, taxes
TO Printing and stationery
TO Legal charges
To Audit fee
TO Insurance
TO General expenses
TO Advertisements
TO Bad debts
TO Carriage outwards
TO Repairs
TO Depreciation
TO interest paid
TO Interest on capital
TO Interest on loans
TO Discount allowed
TO Commission
TO Net profit-------
(transferred to capital a/c)
XxxxxxXxxxxXxxxxXxxxXxxxXxxxXxxxxXxxxXxxxXxxxXxxxxXxxxxXxxxxXxxxXxxxxXxxxxXxxxxxxxxxxxxxx
Xxxx
Xxxx
Xxxxx
Xxxxx
Xxxx
Xxxxx
By gross profit b/d
By Interest received
By Discount received
By Commission received
By Income from investments
By Dividend on shares
By Rent received
Xxxxxxxx
Xxxx
Xxx
Xxxx
Xxxx
xxxxxx
PROFIT AND LOSS A/C OF …………………….FOR THE YEAR ENDED…………
Balance sheet• The preparation of Balance sheet is the last
and third stage of Final accounts.• The balance sheet has to be prepared only
after the preparation of Trading & Profit & Loss account.
• Trading & Profit & Loss account are prepared for a period of time where as the Balance sheet is prepared on a particular point of time
• “Balance sheet is a Statement prepared on particular date to reflect the financial position of the firm with all the assets and liabilities of the firm”
• Balance sheet is not an account but it is a final statement of the financial position of a business on a closing date.
• Assets are shown on the right side, liabilities including Capital is shown on the left side of the Balance sheet.
Liabilities amt Assets amt
Creditors
Bills payable
Bank overdraft
Loans
Mortgage
Reserve fund
Capital xxxx
+ Additional capital xx
+ Interest on capital x
+ Net profit xxx
Less
Drawings xxx
Interest on drawings xx
Net loss xxx
Xxx
Xxxx
Xxxxx
Xxxx
Xxxxx
Xxxxx
Cash in hand
Cash at bank
Bills receivable
Debtors
Closing stock
Investments
Furniture and fittings
Plats&machinery
Land & buildings
Goodwill
Prepaid expenses
Outstanding incomes
xXxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
Xxx
xxx
BALANCE SHEET OF ………………………… AS ON …………………………………….