Accounting and basic model

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Accounting

Meaning – Accounting is the process of identifying, measuring and

communicating economics information to permit informed judgments and

decisions by users of the information.

Purpose - The purpose of accounting

is to accumulate and report on financial

information about the performance,

financial position, and cash flows of a

business. This information is then used to reach decisions about how to

manage the business, or invest in it, or lend money to it.

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Accounting

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Godrej Industries Ltd. – Annual Report 2012-13

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Financial Statement

Definition:-

The end product of the financial accounting process is a set of reports

that are called ‘Financial Statements’.

GAAP require that three such reports be prepared to provide

business’s financial position. They are -

1) Balance Sheet

2) Income Statement

3) Cash Flow Statement

Basic Accounting Model

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Assets = Liabilities + Equity

Assets = Liabilities + Equity

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Assets = Cash + Furniture + Plant & Machinery +

Bank Balance + Trade Receivables +

Inventory

Liabilities = Bank Loan + Trade Payables +

Outstanding Expenses

Equity = Capital – Drawings + Retained Earnings +

Revenues - Expenses

Using accounting equation prepare balance sheet after the

transactions mentioned below:

1) Mr. Aman invested Rs. 50,000 cash in the Aman Services .

2) Bought furniture on credit Rs.10,000.

3) Paid office rent, Rs.16,500.

4) Paid creditor for furniture, Rs.5,000.

5) Took a Bank Loan, Rs.15,000.

6) Received payment from sales of services, Rs.12,000.

7) Paid salary to office assistant, Rs.5,000.

8) Withdrew cash for personal use, Rs. 4,500.

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1. Mr. Aman invested Rs. 50,000 cash in the Aman Services.

The accounts involve are –

a) Cash (Assets)

b) Equity (Equity)

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Equity

+ 50,000

0Cash

+ 50,000

Assets = Liabilities + EquityAssets = Liabilities + Equity

2. Bought furniture on credit Rs.10,000.

The accounts involve are –

a) Furniture (Assets)

b) Creditors or Trade Payables (Liabilities)

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0Creditors

+ 10,000

Furniture

+ 10,000

Assets = Liabilities + EquityAssets = Liabilities + Equity

3. Paid Office Rent, Rs.16,500.

The accounts involve are –

a) Cash (Assets)

b) Equity (Equity)

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Equity

- 16,500

0Cash

- 16,500

Assets = Liabilities + EquityAssets = Liabilities + Equity

4. Paid creditor for furniture, Rs.5000.

The accounts involve are –

a) Cash (Assets)

b) Creditors or Trade Payables (Liabilities)

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0Creditors

- 5000

Cash

- 5000

Assets = Liabilities + EquityAssets = Liabilities + Equity

5. Took a Bank Loan, Rs.15,000.

The accounts involve are –

a) Cash (Assets)

b) Bank Loan (Liability)

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0Bank Loan

+ 15,000

Cash

+ 15,000

Assets = Liabilities + EquityAssets = Liabilities + Equity

6. Received payment from sales of services, Rs.12,000.

The accounts involve are –

a) Cash (Assets)

b) Equity (Equity)

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Equity

+ 12,000

0Cash

+ 12,000

Assets = Liabilities + EquityAssets = Liabilities + Equity

7. Paid salary to office assistant, Rs.5000.

The accounts involve are –

a) Cash (Assets)

b) Equity (Equity)

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Equity

- 5000

0Cash

- 5,000

Assets = Liabilities + EquityAssets = Liabilities + Equity

8. Withdrew cash for personal use, Rs.4,500.

The accounts involve are –

a) Cash (Assets)

b) Equity (Equity)

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Equity

- 4,5000Cash

- 4,500

Assets = Liabilities + Equity

Accounting Equation

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No. Assets = Liabilities Equity

Cash Furniture = Creditors Bank Loan Equity

1. +50,000 = +50,000

2. +10,000 = +10,000

3. -16,500 = -16,500

4. -5,000 = -5,000

5. +15,000 = +15,000

6. +12,000 = +12,000

7. -5,000 = -5,000

8. -4,500 = -4,500

Total +46,000 +10,000 = +5,000 +15,000 +36,000

56,000 = 56,000

Balance Sheet of Aman Services

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Balance Sheet as on date

Assets Amount Liabilities & Equity Amount

Cash

Furniture

46,000

10,000

Equity

Bank Loan

Creditors

36,000

15,000

5,000

56,000 56,000