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The Accounting Equation
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Resources
The Accounting EquationThe Accounting Equation
What are an organizations resources called?
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Assets
Resources = Sources
The Accounting EquationThe Accounting Equation
What are thesources of theassets?
Resources usedin the business
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Assets
Liabilities
OwnersEquity
Resources = Sources
Resources usedin the business
Resources
supplied bycreditors and
owners
The Accounting EquationThe Accounting Equation
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T he Accounting Equation
EconomicResources
Claims toEconomicResources
Assets = Liabilities + Owners Equity
At any point of time, the resources of a businessentity must be equal to the claims of the personswho have financed these resources.
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The Accounting equation is the equation whichshows the relationship among the three elements of the balance sheet namely-
Assets,Liabilities andOwners equity of a business.(capital)
The equation must be in balance after every recorded transaction in the system.
The Basic Accounting Equation The Basic Accounting Equation
Assets = Liabilities + Capital
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a. Sachin deposits RS 25,000 in a bank accountfor ABC Ltd
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITY
LIABILITIES
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a. Sachin deposits RS 25,000 in a bank accountfor ABC Ltd.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITYCashCash
25,00025,000
LIABILITIES
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a. Sachin deposits RS 25,000 in a bank accountfor ABC Ltd.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITYCashCash
25,00025,000
LIABILITIES
Sachin, CapitalSachin, Capital25,00025,000
TotalTotal25,00025,000
TotalTotal25,00025,000
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. ABC Ltd. buys land for Rs 20,000.
ASSETS
= OWNERS EQUITY
LIABILITIES
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. ABC Ltd. buys land for Rs 20,000.
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(20,000)(20,000)
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. ABC Ltd buys land for RS 20,000.
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(20,000)(20,000)
LandLand
20,00020,000
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. ABC Ltd buys land for RS 20,000.
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(20,000)(20,000)
LandLand20,00020,000
TotalTotal25,00025,000
TotalTotal25,00025,000
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
c. ABC Ltd buys goods for RS1,350, agreeing topay the supplier in the near future.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
c. ABC Ltd buys goods for RS1,350, agreeing topay the supplier in the near future.
Accounts PayableAccounts Payable1,3501,350PurchasesPurchases
1,3501,350
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
c. ABC Ltd buys goods for RS1,350, agreeing topay the supplier in the near future.
Accounts PayableAccounts Payable1,3501,350PurchasesPurchases
1,3501,350
TotalTotal26,35026,350
TotalTotal26,35026,350
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d. Receive fees for services performed, Rs.7,500
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
= OWNERS EQUITY
LIABILITIES
Fees earnedFees earned
7,5007,500
ASSETS
CashCash7,5007,500
TotalTotal33,85033,850
TotalTotal33,85033,850
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;utilities, Rs 450; and miscellaneous, Rs 275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(3,650)(3,650)
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;utilities, Rs 450; and miscellaneous, Rs 275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
f. ABC Ltd pays Rs 950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(950)(950)
f. ABC Ltd pays Rs 950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(950)(950)
Accounts PayableAccounts Payable(950)(950)
f. ABC Ltd pays Rs 950 to creditors on account.
TotalTotal29,25029,250
TotalTotal29,25029,250
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g. Sold goods worth Rs.800 for Rs 900
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITY
LIABILITIES
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g. Sold goods worth Rs.800 for Rs 900
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITY
LIABILITIES
PurchasesPurchases(800)(800)
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g. Sold goods worth Rs.800 for Rs 900
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITY
LIABILITIES
PurchasesPurchases(800)(800)
CashCash900900
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g. Sold goods worth Rs.800 for Rs 900
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNERS EQUITY
LIABILITIES
PurchasesPurchases(800)(800)
CashCash900900
ProfitProfit
100100
TotalTotal29,35029,350
TotalTotal29,35029,350
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
h. Sachin withdraws Rs 2,000 in cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(2,000)(2,000)
h. Sachin withdraws Rs 2,000 in cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash(2,000)(2,000)
Sachins, DrawingSachins, Drawing(2,000)(2,000)
h. Sachin withdraws Rs 2,000 in cash.
TotalTotal27,35027,350
TotalTotal27,35027,350
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash 6,8006,800PurchasesPurchases 550550LandLand 20,00020,000
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash 6,8006,800PurchasesPurchases 550550LandLand 20,00020,000
Accts. PayableAccts. Payable 400400
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNERS EQUITY
LIABILITIES
CashCash 6,8006,800PurchasesPurchases 550550LandLand 20,00020,000
Accts. PayableAccts. Payable 400400
Sachin, CapitalSachin, Capital 25,00025,000
Sachin, DrawingSachin, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Commission (450)Commission (450)Misc. ExpenseMisc. Expense (275)(275)
Profit 100Profit 100
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Accounting Equation ExampleAccounting Equation Example
Anil started business with cash Rs. 2,50,000Purchased goods on credit worth Rs. 24,000
Purchased goods for cash Rs. 4,000
Purchased furniture for cash Rs. 1,500
Withdrew cash for private use Rs. 1,000
Paid rent Rs. 3,000
Received interest Rs. 1,000Sold goods on credit (cost Rs. 1,500) Rs.1,700
Paid to creditors Rs. 4,000
Paid salaries Rs. 2s,000
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Accounting Equation ExampleAccounting Equation Example
Anil started business with cash Rs. 2,50,000Purchased goods on credit worth Rs. 24,000
Purchased goods for cash Rs. 4,000
Purchased furniture for cash Rs. 1,500
Withdrew cash for private use Rs. 1,000
Paid rent Rs. 3,000
Received interest Rs. 1,000
Sold goods on credit (cost Rs. 1,500) Rs.1,700Paid to creditors Rs. 4,000
Paid salaries Rs. 2s,000
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The Double Entry System The Double Entry System
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DoubleDouble- -Entry AccountingEntry AccountingDoubleDouble- -Entry AccountingEntry Accounting
Double entry accounting is the orderlyrecording of financial transactions of abusiness in a systematic manner wherebyeach transaction is recorded in its 2-fold aspects:i. Aspect of receiving i.e. debitii. Aspect of giving i.e. credit
Every debit has an equal and oppositecredit.
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On e debit On e credit
Each tra n sactio n is recorded with at least:
Total debits must equal total credits.
The
Double-Entry System The Double Entry System The Double Entry System
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DoubleDouble- -Entry AccountingEntry AccountingDoubleDouble- -Entry AccountingEntry Accounting
In the Double entry system, both these aspects are
recorded in terms of accounts, such that at least twoaccounts are always affected by each transaction.
The T account is a representation of a scale or balance.
The total of the debit entries and total of the creditentries in the various accounts must be equal
Scale or Balance
Receive
DEBIT
Give
CREDIT
T account
Left SideReceiveDEBIT
Right SideGive
CREDIT
Luca PacioliDeveloper of Double-EntryAccounting
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Adva n tage of Double E n try System
1) A complete record of the financial transactions ismaintained because it records both the aspects of every financial transaction.
2) It gives accurate information of amou n t due fromvarious debtors a n d amou n t due to variouscreditors by maintaining personal accounts of
debtors and creditors.3) Provides a check o n Arithmetical accuracy of the
account books.
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Adva n tage of Double E n try System(Co n t.)
4 ) It is helpful in preve n ti n g frauds a n d errors . tolocate the errors.
5) Helpful in ascertai n in g profit or loss of a particular period by preparing the Profit and Loss Account.
6) Fi n a n cial positio n of the business entity can beascertained by preparing the Balance Sheet.
7) It provides readily available information to be sentto in come tax a n d sales tax authorities .
8) It is helpful in filing accurate claim for loss of stock as a result of fire to the in sura n ce compa n y
because a complete record of stock is kept.
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Disadva n tage of Double E n try System
1) This system requires the mai n te n a n ce of an umber of books of accounts which is n otpractical in small concerns.
2) The system is costly because a number of records are to be maintained.
3) There is n o guara n tee of absolute accuracy of the books of account because trial balance mayagree in spite of errors .
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Classification of Accounts According toTraditional Approach
Impersonal Accounts
Personal Accounts
ACCOUNTS
Real
Accounts
Nominal
AccountsNatural
Persons Accounts
ArtificialPersons
Accounts
RepresentativePersons
AccountsTangible
AccountsIntangible
Accounts
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A: PERS ON ALACC OUN T:1. N atural Perso n s Perso n al Accou n t. An account recording transactions with anindividual human being is known as a natural persons Personal Account, e.g., AneeshsAccount.2. Artificial Perso n s Perso n al Accou n t. An account recording financial transactionswith an artificial person created by law or otherwise is called an artificial persons personalaccount, e.g., ABC Industries Ltd., Bank Account, S &. Co. etc.3. Represe n tative Perso n al Accou n t . An account indirectly representing a person or
persons is known as a representative personal account. When accounts are of a similar nature and their number is large, it is better to group them under one head and open a
representative personal account. Examples of such types of accounts can be: RentOutstanding Account, Interest Outstanding Account, Prepaid Salary Account etc. RentOutstanding Account is a personal account representing rent payable to. .
B: REALACC OUN T:1. Ta n gible Real Accou n t. Such type of account relates to an asset which can be
touched, Felt, seen and measured e.g., Plant Account, Cash Account, BuildingAccount,Stock Account etc.2. In ta n gible Real Accou n t. Such type of account relates to an asset which cannot betouched physically but can be measured in value. For example, Goodwill Account, PatentsAccount, Trade Marks Account, Copy Rights Account etc.C. NOM IN ALACC OUN TS.
These accounts deal with expenses, incomes, profits and losses.
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Rules For Double Entry Systemon the Basis of Traditional Classification
Real Account = D ebit What comes in
Credit- what goes out
Personal Account = D ebit Receiver
Credit - Giver
Nominal Account = D ebit Expenses/ Losses
Credit- Incomes/Gains
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Classification of Accounts According toAccounting Equation
Assets Accou n ts Relates to tangible and intangible assets
Liabilities Accou n ts Eg. Creditors, bills payable, unearned revenue, other
short-term liabitlities, long term liabilities(secured andunsecured )
Equity Accou n ts Eg capital/share capital a/c, drawings a/c, retained
earnings,Revenue Accounts, Expense Accounts,
dividends
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Regardi n g assets:Increases in assets - DEBITDecreases in assets - CREDIT
Regardi n g Liabilities:Increases in liabilities - CREDIT
Decreases in liabilities - DEBITRegardi n g Capital:Increases in capital - CREDITDecreases in capital - DEBIT
Regardi n g Expe n ses a n d Reve n ue:Expenses, Drawings, Dividends - DEBITRevenue - CREDIT
Regardi n g I n comes or Profits a n d Losses :Incomes or profits - CREDIT
Losses - DEBIT
Rules For Double E n try System o n Basis of Accou n ti n g Equatio n
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Analysis of transactions is necessary for correctrecording of transactions.Steps:
Identify the accounts involved in the transaction to
be recorded.Classify the accounts identified as personal, real or nominal; or as asset, liabilities, capital, revenue or expenseDetermined the rules of debit and credit applicable tothe accounts involvedFinally determine the account(s ) to be debited and
the account(s ) to be credited.
Analysis of Transactions
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1. Started business with Rs. 50,000
2. Purchased furniture for Rs. 1,000 on credit fromPankaj
3. Goods purchased for cash Rs. 20,0004 . Goods sold to Rahul Niwas for Rs. 5,000 on credit
5. Paid salaries to staff Rs. 1,800
6. Goods worth Rs. 500 returned by Rahul Niwas
7. Rs. 1,000 commission received
Example
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Accounting cycle includes:(a) Recordi n g: First, all transactions should be recorded inthe Journal or Books of Original Entry known as subsidiary
books as and when they take place.(b) Classifyi n g: All entries in the Journal or Books of
Original Entry should be posted to the appropriate ledger accounts to find out at a glance the total effect of all suchtransactions in a particular account.(c) Summarizi n g: Last stage is to prepare the trial balanceand final accounts with a view to ascertaining the profit or
loss made during a trading period and the financial position of the business on a particular date.(d) In terpreti n g : The financial statements are interpreted in amanner useful to the users ,so as to enable them to makedecisions.
Accou n ti n g Cycle
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1. Analyze the transaction
2. Journalize the transaction3. Post the transaction to accounts in ledger
4 . Prepare the trial balance
5. Prepare financial statements
The Accounting Cycle: Steps The Accounting Cycle: Steps
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Accou n ti n g Cycle
The sequence of steps in recordingtransactions:
Tra n sactio n s Docume n tatio n J our n al
Fi n a n cialStateme n ts
TrialBala n ce
Ledger
The Accounting Cycle: Steps The Accounting Cycle: Steps
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Accou n ti n g Cycle
Analysis of transactions from source documentsJournalising the transactionsPosting of journal entries into the ledger accountsBalancing of each ledger accountPreparation of a trial balance to establish equality of debits and credits in the ledger accounts.
Recording of adjusting entries in the journalRecording of adjusting entries in the Ledger account.Recording of closing entries in the journalPreparation of financial statements/final accounts
The Accounting Cycle: Steps The Accounting Cycle: Steps
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Accou n ti n g Cycle
The process starts with sourcedocuments, which are the supportingoriginal records of any transaction.
Examples are sales slips or invoices,check stubs, purchase orders, bankdeposit slips, and cash receipt slips.
1. A n alyze the tra n sactio n
The Accounting Cycle: Steps The Accounting Cycle: Steps
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2 . J our n alize the tra n sactio n In the second step, an analysis of the
transaction is placed in the book of
original entry, journal , which is achronological record of how thetransactions affect the balances of applicable accounts. T he most common example is the
general journal - a diary of all events(transactions) in an entitys life.
The Accounting Cycle: Steps The Accounting Cycle: Steps
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In the third step, transactions are entered into
the ledger. Remember that a transaction is not
entered in just one place; it must beentered in each account that it affects.
D epending on the nature of theorganization, analysis of the transactionscould occur continuously or periodically.
3 . Post the tra n sactio n to accou n ts i n ledger
The Accounting Cycle: Steps The Accounting Cycle: Steps
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Accou n ti n g Cycle
The fourth step includes the preparationof the trial balance, which is a simplelisting of all accounts from the ledger with their balances. Aids in verifying accuracy and
in preparing the financial statements Prepared periodically as necessary
4. Prepare the trial bala n ce
The Accounting Cycle: Steps The Accounting Cycle: Steps
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Accou n ti n g Cycle
In the final step, the financial statements
are prepared. Financial statements may be prepared
after each quarter of the year. the companies may prepare
financial statements atvarious other intervals tomeet the needs of their users.
December 2007
5 . Prepare fi n a n cial stateme n ts
The Accounting Cycle: Steps The Accounting Cycle: Steps
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J OURNAL
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J ournal
It is a list in chronological order of all the
transactions for a business.
What is a journal?
ItIt isis thethe book book of of originaloriginal (first )(first ) entryentryItIt hashas thethe followingfollowing columnscolumns::
DateDate
ParticularsParticulars
Ledger Ledger FolioFolio
Voucher Number Voucher Number
Amount (DEB IT)Amount (DEB IT)
Amount (CRED IT)Amount (CRED IT)
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Date Particulars V.NO. L.F Debit Credit
Format of J
ourn
al
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Types of journal entriesSimple e n try - an entry for a transaction thataffects only two accounts
Compou n d e n try - an entry for a transactionthat affects more than two accounts
R emember: whether the entry is simple or compound, the debits (left side) and credits (right side) must always be equal.
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Recording transactionsin the journal.
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J ournalizing
It is the process of entering transactionsinto the journal
Steps:1. Identify transaction from source documents.
2.Specify accounts affected.
3.Apply debit/credit rules.
4.Record transaction with description.
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Steps Involved in J ournalizingTransactions
Analyse the transaction in source document to identifyappropriate accounts affected
Determine which accounts are to be debited and thoseto be credited based on rules of debit and credit
Enter date in first column( date colum n )
In particulars column enter the name of the accountdebited at extreme left of column and abbreviation Dr.at right end of particulars column.
Write amount in Debit column
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Steps Involved in J ournalizingTransactions
In particulars column enter the title of the account to be credited indented to right preceded by the word
To and write amount in Credit column.Insert a narration which is a brief description of transaction
Draw a line across particulars column
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J ournalizing
On April 1, Garge invested Rs 30,000 inGillen T ravel.
J ournal entryD ate Particulars D ebit Credit
April 1 Cash Account D r 30,000
To Garge Capital 30,000(Received initial investment
from owner)
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Subsidiary Books
Subsidiary books, or books of prime entry or original entryare those where business transactions are recorded in the books in the first instance and then posted to the ledger from these books.
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Types of J our n als
1) Cash Book.2) Purchase (or Bought or Invoice ) Book.3) Sales (or day ) Book.4 ) Purchases Returns (or Return Outwards ) Book.5) Sales return (or Return Outwards ) Book.6) Bills Receivable Book.7) Bill Payable Book.
8) Journal Proper (General Journal )**First seven journals are special Journals while journal
proper is general journal
T f J l
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Types of J ournals1) Cash Book -records cash (and bank) receipts and
paymentsShows balance of cash in hand and at bank.May also show discount allowed or received etc.
2) Purchases Day (or Bought or I n voice) Book -records all transactions of credit purchases of all merchandise
Shows the total credit purchases of goods and materials madeduring a particular period.
Credit purchases of goods, dealt in or of the materials andstores required in the factory
3) Sales (or day) Book- records all credit sales (of goods dealt in)
Shows total sales made during a particular period.
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Types of J ournals
4 ) Purchases Retur n s (or Retur n O utwards) Book-records all returns of goods and materials previously
purchased Shows total returns during a particular period.
5) Sales retur n (or Retur n O utwards) Book - recordsall sales returns made by the customersShows the total returns inwards during a particular period..
6) Bills Receivable Book- records all bills received from the customers.
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Types of J ournals7) Bill Payable Book- records all acceptances of bills made
by the firmIndicates the various dates on which payments of various billsare to be made.
8) J our n al Proper (Ge n eral J our n al) - records all residual transactions
Records all those transactions which could not be recorded inany of the above subsidiary books will be recorded in this book such as
i. Credit purchase and sale of assetsii. Opening entriesiii. Adjustment and Rectification Entriesiv. Closing Entriesv. Any other non-cash transaction not recorded elsewhere
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3/2 615 MyMusicClub.com 2,2003/6 616 RapZone.com 1,7503/18 617 Web Cantina 2,6503/27 618 MyMusicClub.com 3,000
Totals 9,600
Sales J ournalInvoice
Date No. Particulars Details Amount
Page 35
The Sales J ournalThe Sales J ournal
All sales on credit are recorded in this journal. Each
sales invoice is listed in numerical order. This journal is often referred to as an invoice register.
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3/3 Howard Supplies 6003/7 Donnelly Supplies 4203/19 Donnelly Supplies 1,4503/27 Howard Supplies 960
Totals 3,430
Purchases J ournal Page 11
The Purchases J ournalThe Purchases J ournal
All purchases on account are recorded in this journal.
Date Particulars Details Amount
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Cash journals
Single column Cash Book = Simple cash Book
Double column Cash Book = Cash Book with bank column
Triple column Cash Book
=Cash Book with Bank & Discount ColumnPetty Cash Book
= Record small cash payouts
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Ledger
Ledger - a group of related accountskept current in a systematic manner
T hink of a ledger as a book withone page for each account.
Ledger
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Ledger
Ledger is a register having a number of pageswhich are numbered consecutively.
One account is usually assigned one page in theledger.
However, if the transactions, pertaining to a
particular account are more, it may be assignedmore than one page in the ledger.
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Ledger
A ledger is a secondary book.The secondary books may be classified as:
M ai n Ledger (Ge n eral Ledger)
Contains all accounts except those of individual tradedebtors and trade creditors.
Subsidiary LedgerDebtors Ledger (Sales Ledger ) -contains individual
customers accountsCreditors Ledger ( Purchases Ledger ) -containsindividual accounts of trade creditors
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Ledger Ledger
Creditors Ledger
Ledger
A B C D
Customer AccountsDebtors Ledger
A B C D
Creditor Accounts
General Ledger
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Ledger Ledger
Cash Book
Creditors Ledger
Ledger
A B C D
Customer AccountsDebtors Ledger
A B C D
Creditor Accounts
General Ledger
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Ledger Account
A ledger account may be defined as a summary
statement of all the transactions relating to a person,
asset, expense or income which have taken placeduring a given period of time and shows their net
effect.
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The common form of an account is the T account.
The account is divided into two sides for recording
increases and decreases in the accounts.
The T account has 3 parts:
1. A title that describes the name of the asset,liability, or equity account
2. A left side, or the Debit side .
3. A right side, or the Credit side .
The T Account
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Date Particulars L.f Amt. Date Particulars L.f Amt.
Debit Title of the account CreditProforma for Accou n t
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In practice, accountants draw up accounts in a formknown as the standard form.
The standard form shows the balance after everytransaction and is therefore more useful and efficientto use than the T-form.
Sta n dard Form of Accou n t
Date Expla n atio n Post
Ref.
Debit Credit Bala n ce
2008Mar 1
2
3
50,00020,000
58,000
50,00070,000
12,000
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Posting
What is posting?It is the transfer of information from the
journal to the appropriate accounts in theledger.
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Posting
The account debited in the journal should also bedebited in the ledger and account credited should also
be credited in the ledger Steps:Enter dateEnter name of the other account being debited or credited.
Enter amount in proper debit or credit columnEnter journal source info U sually the words to and by are used on the
debit and credit side of the account respectively.
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Date Particulars Debit CreditApril 2 Cash 30,000
Garge Capital 30,000(Received initial
investment from owner )
Journal Page 1
Recording and Posting an EntryRecording and Posting an Entry
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Date Ref. Particulars Amount Date Ref Particulars Amount
April 2 1 To G. Cap 30,000
Debit Cash Account Credit
Insert the number of the journal page.
Recording and Posting an EntryRecording and Posting an Entry
Recording and Posting an EntryRecording and Posting an Entry
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L.F.Date Description Debit Credit
12/1 Prepaid Insurance 2,400Cash 2,400
J ournal Page 1
1. Analyze and record the transaction as shown.2. Post the debit side of the transaction.
3. Post the credit side of the transaction.
Recording and Posting an EntryRecording and Posting an Entry
Recording and Posting an EntryRecording and Posting an Entry
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L.f Date Description Debit Credit
12/1 Prepaid Insurance 15 2,400Cash 2,400
J ournal
Ledger
Dr. Prepaid Insurance Account Cr.
Page 1
Recording and Posting an EntryRecording and Posting an Entry
D ate Particulars J .F. Amt. D ate Particulars J .F. Amt.
12/1 To Cash 1 2400
Recording and Posting an EntryRecording and Posting an Entry
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Recording and Posting an EntryRecording and Posting an Entry
Date Description L.f. Debit Credit
12/1 Prepaid Insurance 15 2,400Cash 11 2,400
J ournal Page 1
13
4
Ledger Page No.15
Dr. Prepaid Insurance Account Cr.D ate Particulars J .F. Amt. D ate Particulars J .F. Amt.
12/1 To Cash 1 2400
2 5
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Balancing of Accounts
Balance - difference between total left-sideamounts and total right-side amounts at anyparticular time Assets have left-side balances.
Increased by entries to the left side Decreased by entries to the right side
Liabilities and Owners Equity have right-sidebalances.
Decreased by entries to the left side Increased by entries to the right side
Various accounts in the ledger are balanced witha view to preparing the final accounts.
Balancing of Acco nts
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Balancing of AccountsThe procedure of balancing accounts is as follows:
1) Take the totals of the two sides of the account concerned.2) Ascertain the difference between the totals of two sides. If the
debit side is more then the balance is a Debit bala n ceIf the credit side is more than the balance is a credit bala n ce
3) Enter the difference in the amount column of the side showingless total.Write against the difference in the particulars column To
Bala n ce c/d (c/d means carried down ) if debit side of the accountis less (credit balance ) and By Bala n ce c/d on the credit side of the account. In this way, the total of two sides will agree.
4 ) The balance is brought forward at the beginning of the next period.If To Balance c/d is written on the debit side before balancing, itis brought forward on the credit side and By Balance b/d (b/dmeans brought down ) is written against the balance in the
particulars column and vice versa.
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T R I AL B ALANCE
TR IAL BALANCE
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A trial B alance may be defined as a statement
of debit and credit totals or ledger balances
extracted from the various accounts in the
ledger with a view to test the arithmetical
accuracy of the books.
TR IAL BALANCE
TR IAL BALANCE
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It is a listing of all the accounts with their related balances at the end of the accounting period after all transactions have journalized and posted
It is an internal document.
Thus, at the end of the financial year or at any other time, the balance of all the ledger accounts are extracted
and are written up in a statement known as TrialBalance and finally totaled up to see if the total of debit
be is equal to the total of credit balances.
TR IAL BALANCE
The purposes of the Trial
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The purposes of the TrialBalance
It provides a check o n accuracy by showing whether total debits equal total credits.
Source document for preparing external financial
statements-To establish a convenient summary of balances in all accounts for the preparation of formalfinancial statements
To identify accounts to be adjusted
To have an overview of operations
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T he Financial Statements
The financial statements are a pictureof the company in financial terms.
Each financial statement relates to a specificdate or covers a particular period.
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Information Reported on the
Financial Statements
1. How well did thecompa n y perform(or operate) duri n gthe period?
Reven
ues Direct Expe n sesGross i n come (Gross loss)
Tradi n gAccou n t
Question Answer Financial
Statement
2 . How well did thecompa n y perform(or operate) duri n gthe period?
Gross Profit I n direct Expe n ses
N et i n come ( N et loss)
Profit a n dLoss
Accou n t
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Income Statement
The income statement,reports the companys revenues,
expenses, and net incomeor net loss for the period.
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Tradi n g Accou n t
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Tradi g Accou tThis account is prepared to know the tradi n g results or
gross profit (gross margin ) on trading of the business, i.e., buying and selling of goods during a particular period.
The differe n ce betwee n the sales a n d cost of goods soldis gross profit.
The balance of this account represents gross profit or lossand is transferred to the profit and loss account.
Only the transactions in goods and expenses related to
purchase of goods and manufacturing of goods (directexpenses ) are included and indirect expenses (admin.Expenses, selling & distrib expenses, financial expenses )are ignored
Gross Profit
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Gross profit = Sales cost of goods sold
Cost of goods sold = Opening Stock + Net Purchases (i.e.Purchases Return outwards ) + Direct Expenses - ClosingStock Therefore,
Gross Profit = Sales ( O pe n in g Stock + N et Purchases +Direct Expe n ses - Closi n g Stock)Gross Profit = Sales Opening Stock - Net Purchases -Direct Expenses + Closing Stock
O pe n in g Stock + N et Purchases + Direct Expe n ses +Gross Profit = Sales + Closi n g Stock T he left hand side of this equation depicts debit sided and right hand side depicts credit side of the T rading Account.
Example
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Example1. Compute the cost of goods sold from the following
information:Opening stock, Rs. 11 ,000; Purchases, Rs 2 10,000;
purchase returns Rs 7,000, Carriage inwards 18,000,closing stock Rs 17,000.
2. For the year ended March 3 1, 2009, V ishal Companysold goods for Rs 7 17,000. The average gross marginon sale was 4 0%. The following information is
available : Sales Returns Rs 17000, Opening Stock Rs4 0,000, Purchases Rs 4 ,18,000; Purchase Returns Rs6,000 and carriage inwards Rs 23,000. Calculateclosing stock.
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Proforma for the TradingAccount for the year ending
on 31.12.2005
Particulars Amount Particulars Amount
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Opening stock
Purchases
Less:- Returns Outwards:-Drawings
Direct Expenses:-
Carriage inward
WagesFuel & Power
Customs/Import duty
Gross profit c/d(bal)
Sales
Less: Returns Inwards
Closing stock
Goods Lost by fire
(Gross Loss c/d)
Trading accountFor the year ended 31st March, 20XX
Partic lars Amo nt Partic lars Amo nt
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Particulars Amount(Rs.)
Particulars Amount(Rs.)
To Opening Stock Purchases
Less : Purchases ReturnsTo D irect Expenses
Carriage InwardWagesFuel and Power
Manufacturing ExpensesCoal, Water and GasMotive Power
OctroiImport dutyCustom D uty
Consumable StoresForeman/ Works ManagersSalary
Royalty on ManufacturedGoods
To *Gross Profit c/d
B y SalesLess : Sales ReturnsB y Closing StockB y Gross Loss* c/d
Closi n g E n tries of Tradi n g Accou n t
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Closi g E tries of Tradi g Accou tFor closing of Debit Accounts
Trading A/c Dr.To Opening Stock To Purchases A/cTo Sales Return A/cTo Direct Expenses (eg. Wages, carriage inwards,
freight inwards )For Closing of Credit Accounts
Sales A/c Dr.Closing Stock A/c Dr.Loss of goods by fire A/c Dr.
To Trading Account
Closi n g E n tries of Tradi n g Accou n t
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Closi g E tries of Tradi g Accou t
For closing Trading AccountTrading A/c Dr.To Profit and Loss A/c
(Gross Profit, if credit side exceeds the debit side )
OR Profit and Loss A/c Dr.
To Trading Account(Gross Loss, if debit side exceeds the credit side )
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Proforma for theProfit and Loss Account
for the year ending on
Profit a n d Loss Accou n tDebit for the period e n di n g o n ----- Credit
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p gParticulars Amou n t Particulars Amou n tGross loss b/dAdmi n istratio n Expe n sesRe n t, Rates & TaxesO ffice salariesPri n ti n g & Statio n ery
Telepho n e chargesIn sura n ceAudit feesSelli n g & Dist Exp :-Advertiseme n t
Traveller s Salary, exp. &commissio nBad Debts
Carriage outwardsBa n k charges
N et Profit c/d (bal)
Gross Profit b/dIn terest ReceivedDiscou n t ReceivedComm. ReceivedDivide n d from shares
Re n t from propertyProfit o n sale of fixedassets/i n vestme n tsN et Loss c/d
Closi n g E n tries For Profit a n d Loss Accou n t
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Closi g E tries For Profit a d Loss Accou tFor transfer of various expenses to Profit and Loss A/c
Profit and Loss A/c Dr.To V arious Expenses A/c(eg. Salaries, carriage outwards, Insurance,
advertisement )
For transfer of various incomes and gains to Profit andLoss A/cV arious Incomes and Gains A/c Dr.
To Profit and Loss AccountFor Net ProfitProfit and Loss A/c Dr.
To Capital A/c
For Net Loss
Capital A/c Dr.
To Profit and Loss A/c
Income StatementFor the year ended. (All figures in Rs. 000)
Sales 16 000
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Sales 16,000Less: Cost of Goods Sold:
Raw materials consumed 7,800
Consumables 800D irect Labour 750Other D irect Expenses 480 9830Gross Profit 6170
Less: Operating Expenses
Administration Expenses 1200Selling Expenses 260D epreciation 700 2160
Operating Profit 4010 Add: Non Operating Income 50
4060Less:Non-Operating Expenses 100Net Profit before Interest & Tax 3960Less: Interest Paid 360Net Profit B efore Tax 3600Less: Income Tax @ 50% 1800
Net profit after tax 1800
. .Revenue from SalesGross Sales XXXXL S l R XXXX
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Less: Sales Returns XXXXNet Sales XXXXLess: Cost of Goods Sold:
Opening Stock XXXXPurchases XXXXLess: Purchase Returns (XXXX)
XXXX Add Carriage Inwards XXXX
Net cost of Purchases XXXX
Cost of goods available for sale XXXXLess: Closing Stock (XXXX)Cost of Goods Sold XXXXGross Profit XXXXLess: Operating Expenses
Administration Expenses XXXX
Selling Expenses XXXXD epreciation XXXX XXXX
Operating Profit/ Profit B efore Interest and Taxes XXXXLess: Interest Paid (XXXX)Net Profit B efore Tax XXXXLess: Income Tax (XXXX)
Net profit after tax XXXX
The Accou n ti n g Terms I n come Stateme n t
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The Accou n ti n g Terms- I n come Stateme n t
Reve n ue - the proceeds that come from sales tocustomers
Cost of Goods Sold (C O GS) - an expense that reflectsthe cost of the product or good that generates revenue.
Gross profit (gross margi n ) - excess of sales revenueover the cost of inventory that was sold. This is revenueminus COGS
O perati n g expe n ses - a group of recurring expenses that pertain to a firms routine operations. It includes anyexpense that doesn't fit under COGS such asadministration and marketing expenses.
The Accou n ti n g Terms I n come Stateme n t
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O perati n g i n come (operati n g profit) - gross profit lessall operating expensesO ther reve n ues a n d expe n ses - items not directly relatedto the main operations of a firmN et I n come before I n terest a n d Tax - net income beforetaking interest and income tax expenses into account. It isthe remainder after all expenses have been deducted from
revenueN et loss - the excess of expenses over revenues
The Accou n ti n g Terms- I n come Stateme n t
The Accou n ti n g Terms I n come Stateme n t
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In terest Expe n se - the payments made on the company'soutstanding debt.
In come Tax Expe n se - the amount payable togovernment.
N et I n come the final profit after deducting all expenses(including income taxes ) from revenue.
Often seen as the bottom line
The Accou n ti n g Terms- I n come Stateme n t
Th B l n Sh t
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The Bala n ce Sheet
A balance sheet is a statement that shows thefinancial position of a business entity at agiven date, usually the last date of theaccounting period.
A balance sheet is a financial statement which shows the
assets and liabilities of an enterprise as on a particular date.
Definition
The Bala n ce Sheet
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The Balance sheet shows the financial position of acompany at a particular point in time. The balance sheet is also referred to as the statement
of financial position or the statement of financialcondition.
The financial position of a concern is indicated by itsassets on a given date and its liabilities on that date.Excess of assets over liabilities represent the capital andis indicative of the financial soundness of a company.A balance Sheet is also described as a statementshowing the sources and application of capital.
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Classificatio n of Assets
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1. Fixed assets: Acquired for long term use in the business and not for resale
2. Current assets: acquired with the intention of converting them into cash or for consumption during
the normal business operations.3. Liquid assets: are assets which are immediately
convertible into cash without much loss. Liquid assets= Current assets Stock Prepaid expenses
4 . Intangible assets: eg. goodwill5. Fictitious assets: Are assets not represented by tangible
possession or property.eg. Formation expenses, debit balance of P & L A/c, discount on issue of shares.
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Groupi n g a n d M arshalli n g of the
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p g gBala n ce Sheet
The arrangement of assets and liabilities incertain groups and in a particular order is calledGrouping and Marshalling of the Balance Sheetof a business.
Groupi n g a n d M arshalli n g of the
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Assets and liabilities can be arranged in the BalanceSheet into two ways:
1. In order of permanence
2. In order of liquidity
Bala n ce Sheet
Liabilities Rs. Assets Rs.Current Liabilities Current Assets:
B alance sheet, as at ____________
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Current LiabilitiesB ank Overdraft
B ill Payable
Outstanding ExpensesSundry CreditorsIncome received in advanceLong Term Liabilities:
Loan from B ankD ebentures
Capital:Opening balance
Add: Net ProfitOr
Less: Net Loss Add capital introduced during theyear Less: D rawings
Total
Current Assets:Cash in H andCash at B ankB ills ReceivableSundry debtorsStock in T radePrepaid Expenses
Accrued incomeInvestments:Fixed Assets:Furniture & Fixtures
Motor Car Plant & MachineryB uildingLandIntangible AssetsPatents,CopyrightLicensesGoodwillFictitious Assets:
AdvertisementMisc. ExpensesProfit & Loss A/c
Total
Liabilities Rs. Assets Rs.Fixed Liabilities: Intangible Assets
Balance sheet, as at ____________
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Fixed Liabilities:Capital
Opening balance
Add: net profit(-net loss)Capital introducedLess: D rawingsLong Term Liabilities:Loan from B ankD ebenturesCurrent Liabilities andProvisions:Income received in advanceSundry Creditor Outstanding ExpensesB ill PayableB ank OverdraftProvisions:Provision for taxProposed dividend
Total
Intangible AssetsGoodwillPatents
CopyrightLicensesFixed Assets:
B uildingMachineryFurniture & FixturesMotor Car
Investments:Current Assets:
Stock in T radeSundry debtorsInvestmentsB ills ReceivableCash at B ankCash in H andPrepaid Expenses
Fictitious Assets: AdvertisementMisc. ExpensesProfit & Loss A/c
Total
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rom e o ow ng r a a ance prepare ra ng, ro oss ccoun an a ance eeD r (Rs.) Cr (Rs.)
Capital - 108,900Opening Stock 46,800 -
Notes:1. Closing stock as on 30 J une,
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Sales & Sales return 8600 2,89,600Purchases & Pur. Returns 243100 5800Freight and Carriage Inward 18600 -Rent and Taxes 5700 -Salaries & wages 9300 -S/ D ebtors & creditors 24,000 14,800B ank loan @6% - 20,000B ank Interest 900 -Printing & Advertising 14600 -Income from Investment - 250Cash at bank 8200 -D iscount received - 3690Investments 5000 -Furniture & fittings 1800 -D iscount paid 7340 -General Expenses 3160 -
Audit Fees 500 -Insurance 800 -T ravelling Expenses 2130 -Postage & telegram 870 -Cash in hand 830 -D eposit with x @ 10% 30,000 -D rawings account 10,000 -
442230 442230
2007 was Rs. 786002. 50% of Printing and
Advertisement is to becarried forward as a chargein the following year.
3. D epreciate Furniture andFittings by 10%.
4. Create 5% reserve for doubtful debts on D ebtors,and Reserve 2% for discount of D ebtors andcreditors.
5. Insurance prepaid amountsto Rs 200.
6. Salaries outstanding Rs 500and Carriage outstanding Rs100.
7. Charge full years interest ondeposit with X
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PR O F O R M ABALA N CE SHEET
LIABILITIES ASSETS
SHARE CAPITALAuthorised
FIXED ASSETSa) Land b ) Buildings c ) Goodwill
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AuthorisedIssuedSubscribed
Less:- Calls unpaidAdd:- Forfeited sharesRESERVES A N D S U RPL U SSEC U RED L O AN SUN SEC U RED L O AN S:
C U RRE N T LIABILITIES A N D
PR O VISI ON S:A. C U RRE N T LIABILITIES:a) Acceptances.
b) Sundry Creditorsc) Subsidiary companies.d) Advance Paymentse) U nclaimed dividends
f ) Other liabilities (if any )g) Interest accrued but not due on loans.B. PR O VISI ON Sa) Provision for taxation.
a) Land , b ) Buildings, c ) Goodwill,d) Plant and Machinery e ) Furniture and fittingsf) Patents, trade marks and designs.
IN VEST M E N TS:a) Investments in Government or TrustSecurities, in shares, debentures or bonds,
b) Immovable Properties.C U RRE N T ASSETS, L O AN S A N D
ADVA N CES:(A) Curre n t Assets:
a) Interest accrued on Investments. b) Stores and Spare Parts,c ) Loose Toolsd) Stock in trade, e ) Works in progress.f ) Sundry Debtors, g ) Cash balance on handh) Bank balances(B) L O AN S A N D ADVA N CES:a) Advances and loans to subsidiaries.
b) Bills of Exchange.c) Advances recoverable in cash or in kindM ISCELLA N E OU S EXPE N DIT U RE:a) Preliminary expenses.