money cycle
TRANSCRIPT
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WELCOME
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Money Cycle
Where does the money come from?
Owners Funds
Loans-other Peoples money Undistributed Profits
Where does the money go?
Assets
Fixed Assets
Current Assets
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Understanding Financial Statements
Financial statements provide information about an enterprises
revenues, expenses, assets, liabilities and owners equity. Thesestatements are a central feature of accounting because they are theprincipal means of communicating accounting information to thoseoutside an enterprise.
Major financial statements are:
The Balance Sheet:
It presents an enterprises assets, liabilities and owners equity at aparticular time. It summarizes the resources of a firm and theclaims on those resources by owners and creditors of the enterpriseat the time.
The Profit and Loss Account:
It is also called the income statement. It summarizes the results ofa firms operations for a given period by disclosing the revenuesearned and expenses incurred. By measuring the net profit earnedby a business, it indicate its degree of operating success on a given
period.
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BALANCE SHEET
Amounts
owed by the
Business
Things owned
by the
Business
Liabilities Assets
Sources
of
Funds
Uses
of
Funds
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BALANCE SHEET-STRUCTURE
Long-Term Loans
250
Liabilities
Fixed Assets
600
Current Assets
400
Current Liabilities
300
Owners Funds
450
Assets
1000 1000
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Balance Sheet of ABC Ltd. as at 31-3-96
(Rs.000)
Sources of Funds 1995-96
Owners Funds 4,50
Long Term Liabilities 2,50
Current Liabilities 3,00Total Liabilities 10,00
Application of Funds
Fixed Assets 6,00
Current Assets 4,00
Total Assets 10,00
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BALANCE SHEET
Balance Sheet: is a statement containing the assets and liabilities of a
business on a particular date.
Liabilities: the term denotes claims against the assets of a firm.
Current Liabilities: are payable within a year; these could be:
Accounts Payable
Outstanding Expenses
Bank Overdraft
Short Term Loans
Advance Payments receivedLong Term Liabilities: are those liabilities which do not become due for
payment in one year.
Assets: are the resources acquired by a business from the funds made
available by the owners of the business or others.
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BALANCE SHEET
Current Assets: are assets held on a short term basis such as stock,
debtors, cash, and bank balance.
Fixed Assets: are those which are of permanent nature and are held by
the firm on a long term basis, such as land, buildings, plant and
machinery, furniture and fixture etc. These assets help generate revenueand cannot be easily converted into cash.
Fictitious Assets: Formation expenses such as registration charges,
,debit balance in the P&L A/C when shown on the asset side in the case
of a joint stock co.
Contingent Liability: these are contingent upon the happening of an
event such as claims pending settlement in courts; these are shown by
way of a note in the balance sheet.
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Fixed Assets
F.As. represent assets or facilities acquired for carrying on business
operations. FAs acquired with an intention to use and not to sell.
Land
BuildingsPlant & Equipment
Furniture & Fittings
Vehicles
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Current Assets
C.As. represent facilities or assets acquired with intention for sale or
conversion into goods.
Stock
Debtors
Marketable Securities
Cash
Prepayments
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Share means a share in the share capital. Equity Shares are those which
are other than Preference Shares. Equity Share holders enjoy no special
privileges. Residual claimants.
Preference Shares: holders enjoy preference over ordinary shareholders
in terms of dividend, repayment of capital. They get a fixed Dividend.
Cumulative & Non-Cumulative: When dividend, remaining unpaid in anyone year, has to be carried forward and accumulated dividends are paid
before paying equity share holders. If this feature is not there, its is non-
cumulative.
CAPITAL
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Authorized Capital: is the gross amount of authorized share capital
which company is authorized to issue.
Issued Capital: is that part of authorized capital which is issued to the
public.
Subscribed Capital: is that part of the issued capital which is subscribed
by the public.
Paid-up Capital: sometimes issued capital is required to be paid in
installments. The amount that is actually to be paid is known as paid-up
capital.
CAPITAL {contd}
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BALANCE SHEET of ALPHA Ltd. as at 31- 3 1999
Sources Of Funds 1998-99
Shareholders Funds
Ordinary Shares Rs.1,50,000
Preference shares 60,000
Reserves 70,000Retained earnings 1,70,000
Long Term Loans
Govt. Loan 2,70,000
Current Liabilities 2,50,000
Total liabilities 9,70,000
Application Of Funds
Fixed Assets 3,90,000
Depreciation 40,000 Net 3,50,000
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Current Assets 6,10,000
Debtors 2,00,000
Stock 2,70,000
CASH 40,000
Prepayments 10,000
Marketable securities 90,000
GOODWILL 10,000
Total Assets 9,70,000
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Balance Sheet. Second Day
Credit Receipt From
Whom
Debit Payment How
Utilized
Liabilities Assets
Capital
Loans
Public Deposits
Total
4,000
36,000
10,000
50,000
Stock
Furniture
Loose Tools
Loan to Mohan
Cash in Bank
Cash in hand
Total
20,000
10,000
2,000
5,000
10,000
3,000
50,000
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Profit and Loss Account
The profit or loss made by a trader can be found out by comparing
the cost of goods sold with sales value.
Rs.
Purchases 30,000
Purchases returns 5,000Sales 40,000
Sales returns 5,000
Sales 40,000
Less Sales Returns 5,000 35,000
Purchses 30,000
Less Purchases Returns 5,000 25,000
Gross Profit 10,000
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Profit and Loss Account
If a Stock of Rs. 5,000 is left unsold:
Cost of Goods sold = Net Purchases Closing Stock
= 25,000 5,000
= 20,000
Gross Profit = Net Sales COGS
= 35,000 20,000
= 15,000
Gross Profit = Sales COGS
COGS = Opening Stock + Purchases Closing Stock
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Valuation of Closing Stock
Closing stock is valued on the basis of Cost or market price which everis less principle. This valuation follows the convention of conservatism;
expected losses are to be taken into account but not expected profits.
Purchases: includes both cash and credit purchases meant forresale.
In case, a proprietor has himself used certain goods for his personal
purposes, the value of such goods at cost will be deducted from the
purchases and included in the drawings of the proprietor.
If some goods are given by way of free samples, the value of such
goods is charged to advertisement account and deducted frompurchases.
Purchases returned are also deducted.
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PROFIT & LOSS A/C of ALPHA Ltd. for the year ending 31-3-
99
Sales Rs.11,00,000
SLess Cost Of Goods Sold 8,20,000
Gross Profit 2,80,000
LessO
perating Expenses 1, 30,000Depreciation 40,000
Operating Profit [EBIT] 1,10,000
Less Interest on loan 16,200
Income tax Provision 40.300
NET INCOME [ NET PROFIT ] 53,500
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Rules of Debit and Credit - Journal
Every accounting transaction has two sides- the debit and a credit.
These terms are used in journal entries, ledger accounts, trialbalance, trading and P&L A/c. We simply know by convention that left
hand side is debit and the right hand side is credit. There is no
specific meaning of these terms debit & credit.
Conventional Approach:
We follow certain conventions regarding debit and credit these are:
a) The left hand side of every account is debit and the right hand side is
credit.
b) In case of journal and trial balance, the amount column is divided into
two parts. The left part of the amount column is debit & the right partis credit.
c) While passing journal entries, we use the term Dr, the short form of
Debtor against the accounts debited but dont use the word credit
against accounts credited.
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Rules of Debit and Credit Journal [contd]
d) All receipts are debited and all payments are credited.
e) All expenses and losses are debited but incomes and gains are
credited
The Liability side shows credit..
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Accounts are classified as Personal, Real and Nominal,
as follows:
Classification of Accounts
Personal Accounts
Natural Personal
Accounts
Artificial Personal
AccountsRepresentative
Personal Accounts
Real Accounts Nominal Accounts
Tangible Real Accounts Intangible Real Accounts
Impersonal Accounts
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Personal Accounts
There are two types of persons i.e., natural and artificial. Natural persons
are human beings, such as Ram, Mohan, John & Faisal. Artificial
Accounts are related to firms, companies, institutions, factories and
establishments, such as Ram & Sons A/c, Bank of India A/c, Janata Dal
A/c, Bata Shoe Co. A/c, Delhi Univ. A/c, Debtors A/c Creditors A/c &
Drawings A/c
Representative Personal A/cs.: represent a particular person or agroup of persons such as outstanding wages A/c; Here, instead of using
the names ofworkers whose wages are outstanding, we shall be crediting
O/s wages A/c which represents workers to whom wages are payable. In
this way, O/s wages, O/s salaries, Prepaid expenses, Accrued & unearned
Income are representative Personal A/cs.
Rules of Debit and Credit:
Debit the receiver.
Credit the giver.
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Examples: Goods sold to Ram. Ram will be debited as receiver. If Mahadev has given the goods, his A/c will be credited.
Bank A/c will be debited in case of deposits into the bank because Bank
will be the receiver of the deposit. If the amount is withdrawn from the
bank, the amount will be given by the bank. Hence Bank A/c will be
credited.
Impersonal A/cs.
i.e., not personal A/c such as those related to assets, losses, expenses,income and gain. In otherwords, these are Real & Nominal A/cs.
Real A/cs.
Cash A/c, Building A/c, Plant A/c, Furniture A/c, Goods A/c and MachineryA/c etc. are all real A/cs. Real A/cs are also concerned with intangible
assets,- goodwill, patents and trademarks.
Debit what comes in.
Credit what goes out.
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Nominal A/cs.
These are related to income and expenditure, or gains and losses, wages
A/c, Salaries A/c, Rent A/c, Interest A/c, Discount A/c and Advertisement
A/c.
Debit all expenses or losses.
Credit all income or gain.
According to this rule, wages A/c, Salaries A/c, Insurance A/c and Interest
A/c are debited when these expenses are met. Discount A/c, Commission
A/c, Interest A/c are credited whenever these are received. In case of
payment of salaries to workers, salaries are an expense, so salaries A/c
will be debited. While receiving rent from the tenant, rent will be gain andthus will be credited in the Rent Recd. A/c.
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JOURNAL
The word Journal is derived from the French JOUR meaning daily records.
Journal is a book of prime records for small firms. Big concerns prepare
Cash Book, Purchases Book, Sales Book and other Subsidiary Books in
addition to Journal proper. Small firms record their business transactions in
Journal and post them to the concerned ledger accounts. Big Concerns
record their transactions in subsidiary books and journal and post them
from these prime books to respective ledger accounts.
The Journal is subdivided into five columns. These columns are: Date,
Particulars, Ledger Folio, Amount (Debit), Amount (Credit) and narrations.
Format ofJournal
Date Particulars Ledger Folio Amounts
Dr.
Rs.
Cr.
Rs.
(1) (2) (3) (4) (5)
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1. Date: Year may not be repeated and only dates need be mentioned
chronologically.
2. Particulars Write the name of the A/c to be debited and alsow
rite Dragainst the A/c.The a/c to be credited is written below the account to
be debited. We dont write Cr. against this account. After the journal
entry, Narration is written, just to explain the journal entry. Narration is
preceded by the words Being. For can also be used instead of
Being. Presenting journal entries as above is a convention of
Accounting. It should be honoured to establish norms of the subjectand to bring uniformity in the presentation.
3. Ledger Folio (LF.) Journal & Ledger are interrelated, and ledger
posting is based upon journal. A reference to the page no. of the
ledger is, therefore, necessary to facilitate verification.
4&5. Amount (Debit) and (Credit).
Narration: Provides a brief explanation of the transaction. It is
customary to write the narration within small brackets. After the
narration, horizontal line is drawn in particulars column only just to
separate the journal entry from the other entry.
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Transaction 1: Started or commenced business with Rs. 20,000
Journal entry
Cash A/c Dr 20,000
To Capital A/c Rs. 20,000
(Being Commencement ofBusiness
Explanation: Business (entity) has recd. cash as capital to start and
carryout activities. Cash A/c (Real A/c) is to be debited as cash has
come in (Debit what comes in and Credit what goes out). Capital A/c isa personal A/c (the rule: Debit the receiver and Credit the giver) and has
to be credited.
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Transaction 2:
Goods purchased for Rs. 5000 Or
Cash purchases Rs. 5000 Or
Goods purchases from Mohan Rs. 5000
Journal entry
Purchase A/c Dr 5000
To Cash A/c Rs. 5000
(Being Goods Purchased for Cash)
Both goods A/c & Cash A/c are Real A/cs. Goods A/c is be debited
because goods are coming into the business & Cash A/c will be credited
because it is going out of business.
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Transaction 3:
Goods purchased from Mohan Rs. 3000Or
Goods purchases from Mohan on Credit Rs. 3000
Journal entry
Purchases A/c Dr 3000
To Mohans A/c Rs. 3000
(B
eing Goods Purch
ased from Moh
an on Credit)
Explanation: The A/cs.concerned are Goods A/c & Mohans A/c. Goods
A/cs, a Real A/c, will be debited because goods have come in. Mohan A/c
is personal A/c (Debit the receiver and Credit the giver)
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Transaction 5:
Salaries Paid Rs. 3200
Journal entry
Salaries A/c Dr 3200
To Cash A/c Rs 3200
(Being Salaries Paid)
Salaries A/c (Nominal A/c) The rule is Debit all expenses Salaries
being an expense, hence it will be debited. Cash A/c (Real A/c) will becredited.
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Transaction 6:
Rent received Rs. 2000
Journal entry
Cash A/c Dr 2000
To Rent A/c Rs 2000
(Being Rent Received)
Cash A/c debited (Cash recd.) Rent A/c credited Rule is Credit all
income.
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Transaction 7:
Amount received from Mohan Rs. 990
Discount allowed Rs. 10
Journal entry
Cash A/c Dr 990
Disc. A/c Dr 10
Cash A/c debited (Cash recd.). Discount A/c (Nominal A/c) also debited
because discount is an expense.
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Transaction 8:
Amount paid to Shyam Rs. 1980
Discount allowed Rs. 20
Journal entry
Shyam A/c Dr 2000
To Cash A/c Rs. 1980
Disc. A/c Rs. 20
(Being amount paid to Shyam & Disc. allowed)
In this case, the firm earned a discount. Disc. A/c (Nominal A/c) will be
credited (Credit the income)
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Transaction 9:
Depreciation on Furniture Rs. 2000
Journal entry
Depreciation A/c Dr 2000
To Furniture A/c Rs. 2000
(Being Depreciation on furniture)
Depreciation A/c debited (Expenses to be debited). Furniture A/c creditedbecause its value amounting to Rs. 2000 has gone out of business.
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Transaction 10:
Interest on Capital Rs. 1000
Journal entryInterest on Capital A/c Dr 1000
To Capital A/c Rs. 1000
(Being Interest on Capital)
Interest on Capital is the expense of the business & hence is to be
debited, Capital A/c is a Personal A/c. There is a modified rule for
Personal A/cs (Capital A/c). debit the debtor and credit the creditor. As
the interest on capital is to be paid on capital so Capital A/c will be
creditor for it and thus credited.
Also, according to the modern approach, debit the increase in
expenses. For the Capital A/c, the rule is debit the decrease and credit
the increase. As the capital is increasing with interest on capital, as such
Capital A/c will be credited.
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Transaction 11:
Outstanding Salaries Rs. 2000
Journal entry
Salaries A/c Dr 2000
To O/S Salaries A/c Rs. 2000
(Being Salaries remaining unpaid)
Salaries A/c (Nominal A/c) will be debited with expenses. Outstandingsalaries is a Personal A/c (representative of employees) & will be
credited.
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Transaction 12:
Prepaid Insurance Rs. 1000
OrUnexpired Insurance
Or
Insurance Paid in Advance
Journal entry
Prepaid Insurance A/c Dr 1000
To Insurance A/c Rs. 1000
(Being insurance paid in advance)Prepaid Insurance A/c is a representative Personal A/c and Insurance A/c
is a Nominal A/c. Insurance Co. will be the debtor of the firm for the
amount paid in advance so Prepaid Insurance A/c will be debited. Since
insurance paid in advance is the gain for the current year. Hence it should
be credited as per the rule of Nominal A/cs Credit the gains.
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Transaction 13:
Amount withdrawn by the proprietor forpersonal or private use Rs. 3000
Journal entry
Drawing A/c Dr 3000
To Cash A/c Rs. 3000
(Being amount withdrawn by the owner )
Drawing A/c is a Personal A/c & will be debited (Debit the debtor) and
Cash A/c will be credited (Cash has gone out of the business).
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Transaction 14:
Goods taken by proprietor forpersonal use Rs. 3000
Journal entry
Drawings A/c Dr 3000
To Purchase A/c Rs. 3000
(Being goods taken by Proprietor)
Drawings A/c will be debited by credit to Purchase A/c (goods have gone
out)
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Transaction 15:
Goods given as charity Rs. 750
Journal entry
Charity A/c Dr 750
To Purchases A/c Rs. 750
(Being goods given as Charity)
Charity is a Nominal A/c, Hence charity is an expense & thereforedebited. Purchase A/c will be credited as goods have gone out of
business.
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Transaction 16:
Mohan becomes insolvent. A first
and final amount of 40 paisa in a rupeeis recd. out of a loan of Rs.2000 from the official receiver
Journal entry
Cash A/c Dr 800
Bad Debts A/c Dr 1200
To Mohan Rs. 2000
(Being Mohan became bankrupt and a first & final compensation of
40 paisa per rupee recd.)
Both Cash A/c & Bad Debts A/c (Nominal A/cs will be debited-debit all
losses. Mohan is a giver and hence should be credited.
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Transaction 18:
An amount previously written off as Bad Debthas now been recovered from Mohan, the
debtor for Rs. 700.
Journal entry
Cash A/c Dr 700
To Bad Debts recovered A/c Rs. 700
(Being recovery ofBad Debt previously written off)
Bad Debts recovered A/c is a Nominal A/c. It will be credited because it is
a gain in the business.
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Certain Important Items
1. Distribution of Goods as FreeSample.
It is not a sale but an expense. Therefore Free Samples A/c will be
debited (Nominal A/c). Purchases A/c will be credited. Goods given as
charity will be valued at cost price.
Journal entry
Free Samples A/c Dr
To Purchase A/c
(Being distribution of goods as free samples)
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Certain Important Items
Loss of Goods
i) Loss of goods by theft: It is a loss (expense). Hence this is aNominal A/c and will be debited. Credit cannot go to Sales A/c
(Since Loss is not a sale). Loss will be credited to Purchases A/c
at cost price only.
Loss by theft A/c Dr .
To purchase A/c
(Being loss by theft)
ii) Loss of goods by Fire
Loss by Fire A/c Dr
To Purchase A/c .
iii) Loss of Cash by Fire
Loss by Fire A/c Dr
To Cash A/c .
(Being loss of Cash by Fire)
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Certain Important ItemsNotes:
Purchase A/c always shows Debit balances. It is debited for both cash &
Credit purchases. In the following cases goods are valued at cost.
i) Goods given as charity
ii) Goods taken by proprietor
iii) Loss of goods by Theft
iv) Free distribution of goods as sample
v) Loss of goods by fire.
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Compound Journal Entries
There may be certain transactions of the same nature on a certain
date. In these case, we prefer to pass only one entry instead of
passing two or more entries. It can be done in either of the following
ways:
i) By debiting one account and crediting two or more accounts.
ii) By crediting one account and debiting two or more accounts.
iii) By debiting two or more accounts and crediting two or more accounts.
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Compound Journal Entries
Illustration: Pass necessary journal entries in the following cases:
i) Amount recd. From Mohan Rs. 1980
Discount allowed Rs. 20
ii) Amount paid to Azhar Rs. 2920
Discount allowed Rs. 80iii) Salaries amounting to Rs. 3000 and wages amounting to Rs. 5000
were paid on 31-12-92
Journal Entry
Cash A/c Dr 1980
Discount A/c Dr 20
To Mohan 2000
(Being amount recd. From Mohan and discount allowed)
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Compound Journal Entries
ii) Azhar Dr 3000
To Cash A/c 2920To Discount A/c 80
(Being amount paid to Azhar and discount allowed)
iii) Salaries A/c Dr 3000
Wages A/c Dr 5000
To Cash A/c 8000
(Being payment ofSalaries & Wages)
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Opening Journal Entries
Business according to going concern concept is supposed to be
carried forward indefinitely. At the end of the accounting year, different
accounts are closed but the business has to be carried on so previous
year assets and liabilities are to be brought into account of the current
year. Passing journal entry in the beginning of the current yearwith
the balance of assets and liabilities of the previous year is opening
journal entry. In this entry, assets accounts are debited because
assets always show debit balance. Liability and Capital account are
credited because they show credit balance
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Opening Journal Entries
Illustration: The firm of M/s Simple and Dimple had the following
balances in their different ledger accounts on January 1, 1993.
Cash Rs. 20,000
Furniture 4,000
Closing Stock 20,000
Building 60,000
Debtors 20,000
Creditors 16,000
Capital 1,08,000
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Pass the opening journal entry:
Journal Entry:
Date Particulars Ledger Folio
Amounts
Dr.
Rs.
Cr.
Rs.
1993
Jan, 1
CashA/c Dr
Furniture A/c Dr
Stock A/c Dr
Building A/c Dr
Debtors A/c Dr
To Creditors A/c
To Capital A/c
Being pervious years
balance brought into books
20,000
4,000
20,000
60,000
20,000
16,000
1,08,000