accounting notes

Paper Code: BCA 207

Paper ID: 20207

Paper: Principles of Accounting

Pre-requisites: None

UNIT I

Meaning and nature of accounting, Scope of financial accounting, Interrelationship of Accounting with

other disciplines, Branches of Accounting, Accounting concepts and convention, Accounting standards in

India.

[No. of Hrs: 11]

UNIT – II

Journal, Rules of Debit and Credit, Sub Division of Journal: Cash Journal, Petty Cash Book,

Purchase Journal, Purchase Return, Sales Journal, Sales Return Journal, Ledger, Trial Balance [No. of Hrs: 11]

UNIT-III

Preparation of Final Accounts, Profit & Loss Account, Balance Sheet-Without adjustments and

with adjustments. [No. of Hrs: 11]

UNIT – IV

Meaning of Inventory, Objectives of Inventory Valuation, Inventory Systems, Methods of

Valuation of Inventories-FIFO, LIFO and Weighted Average Method, Concept of Deprecation,

Causes of Depreciation, Meaning of Depreciation Accounting, Method of Recording

Depreciation, Methods of Providing Depreciation. [No. of Hrs: 11]

Principles of Accounting –BCA-207

Unit I

Introduction to Financial Accounting

Financial accountancy (or financial accounting) is the field of accountancy

concerned with the preparation of financial statements for decision makers, such as

stockholders, suppliers, banks, employees, government agencies, owners and other

stakeholders.

Financial capital maintenance can be measured in either nominal monetary units or

units of constant purchasing power. The central need for financial accounting is to

reduce the various principal-agent problems, by measuring and monitoring the

agents' performance and thereafter reporting the results to interested users.

Principles of Financial Accounting

Financial accounting is based on several principles known as Generally Accepted

Accounting Principles (GAAP) (Williamson 2007). These include the business entity

principle, the objectivity principle, the cost principle and the going-concern

principle.

• Business entity principle: Every business requires to be accounted for separately

by the proprietor. Personal and business-related dealings should not be mixed.

• Objectivity principle: The information contained in financial statements should be

treated objectively and not shadowed by personal opinion.

• Cost principle: The information contained in financial statements requires it to be

based on costs incurred in business transactions.

• Going-concern principle: The business will continue operating and will not close

but will realise assets and discharge liabilities in the normal course of operations.

Importance of Financial Accounting • It provides legal information to stakeholders such as financial accounts in the form of trading, profit and loss account and balance sheet. • It shows the mode of investment for shareholders.

• It provides business trade credit for suppliers. • It notifies the risks of loan in business for banks and lenders. Limitations of Financial Accounting

One of the major limitations of financial accounting is that it does not take into account the non-monetary facts of the business like the competition in the market, change in the value for money etc. The following limitations of financial accounting have led to the development of cost accounting: 1. No clear idea of operating efficiency: You will agree that, at times, profits may be more or less, not because of efficiency or inefficiency but because of inflation or trade depression. Financial accounting will not give you a clear picture of operating efficiency when prices are rising or decreasing because of inflation or trade depression. 2. Weakness not spotted out by collective results: Financial accounting discloses only the net result of the collective activities of a business as a whole. It does not indicate profit or loss of each department, job, process or contract. It does not disclose the exact cause of inefficiency i.e. it does not tell where the weakness is because it discloses the net profit of all the activities of a business as a whole. Say, for instance, it can be compared with a reading on a thermometer. A reading of more than 98.4° or less than 98.4º discloses that something is wrong with the human body but the exact disease is not disclosed. Similarly, loss or less profit disclosed by the profit and loss account is a signal of bad performance of the business in whole, but the exact cause of such performance is not identified. 3. Not helpful in price fixation: In financial accounting, costs are not available as an aid in determining prices of the products, services, production order and lines of products. 4.No classification of expenses and accounts: In financial accounting, there is no such system by which accounts are classified so as to give relevant data regarding costs by departments, processes, products in the manufacturing divisions, by units of product lines and sales territories, by departments, services and functions in the administrative division. Further expenses are not attributed as to direct and indirect items. They are not assigned to the products at each stage of production to show the controllable and uncontrollable items of overhead costs. 5. No data for comparison and decision-making: It will not provide you with useful data for comparison with a previous period. It also does not facilitate taking various financial decisions like introduction of new products, replacement of labour by machines, price in normal or special circumstances, producing a part in the factory or sourcing it from the market, production of a product to be continued or given up, priority accorded to different products and whether investment should be made in new products etc.

6. No control on cost: It does not provide for a proper control of materials and supplies, wages, labour and overheads. 7. No standards to assess the performance: In financial accounting, there is no such well developed system of standards, which would enable you to appraise the efficiency of the organisation in using materials, labour and overhead costs. Again, it does not provide you any such information, which would help you to assess the performance of various persons and departments in order that costs do not exceed a reasonable limit for a given quantum of work of the requisite quality. Accounting Principles

Financial accounting is information that must be processed and reported objectively. Third parties, who must rely on such information, have a right to be assured that the data is free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called 'Generally Accepted Accounting Principles' (GAAP). Principles derived from tradition, such as the concept of matching. In any report of financial statements (audit, compilation, review, etc.), the preparer/auditor must indicate to the reader whether or not the information contained within the statements complies with GAAP. • Principle of regularity: Regularity can be defined as conformity to enforced rules and laws. • Principle of consistency: This principle states that when a business has fixed a specific method for the accounting treatment of an item, it will enter all similar items that follow, in exactly the same way. • Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. • Principle of the permanence of methods: This principle aims at maintaining the coherence and comparison of the financial information published by the company. Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, revenue with an expense etc. • Principle of prudence: This principle aims at showing the reality 'as is': one should not try to make things look rosier than they are. Typically, revenue should be recorded only when it is certain and a provision should be entered for an expense, which is probable. • Principle of continuity: When stating financial information, one assumes that business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value.

• Principle of periodicity: Each accounting entry should be allocated to a given period and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not accounted for entirely on the date of the transaction. • Principle of full disclosure/materiality: All information and values pertaining to the financial position of a business must be disclosed in the records. Accounting Concepts and Conventions

An accounting convention is a modus operandi of universally accepted system of recording and presenting accounting information to the concerned parties. They are followed judiciously and rarely ignored. Accounting conventions are evolved through the regular and consistent practice over the years to aid unvarying recording in the books of accounts. Accounting conventions help in comparing accounting data of different business units or of the same unit for different periods. These have been developed over the years. 1.Convention of relevance: The convention of relevance emphasises the fact that only such information should be made available by accounting that is pertinent and helpful for achieving its objectives. The relevance of the items to be recorded depends on its nature and the amount involved. It includes information, which will influence the decision of its client. This is also known as convention of materiality. For example, business is interested in knowing as to what has been the total labour cost. It is neither interested in knowing the amount employees spend nor what they save. 2. Convention of objectivity: The convention of objectivity highlights that accounting information should be measured and expressed by the standards which are universally acceptable. For example, unsold stock of goods at the end of the year should be valued at cost price or market price, whichever is less and not at a higher price even if it is likely to be sold at a higher price in the future. 3. Convention of feasibility: The convention of feasibility emphasises that the time, labour and cost of analysing accounting information should be comparable to the benefits arising out of it. For example, the cost of 'oiling and greasing' the machinery is so small that its break-up per unit produced will be meaningless and will amount to wastage of labour and time of the accounting staff. 4. Convention of consistency: The convention of consistency means that the same accounting principles should be used for preparing financial statements year on year. An evocative conclusion can be drawn from financial statements of the same enterprise when there is similarity between them over a period of time. However, these are possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period. If dissimilar accounting procedures and practices are followed for preparing financial statements of different accounting years, then the result will not be analogous. Generally, a businessman follows the above-mentioned general practices or methods year after year. For example, while charging depreciation on fixed assets or valuing unsold stock, if a

particular method is used it should be followed year after year, so that the financial statements can be analysed and a comparison made. 5. Convention of full disclosure: Convention of full disclosure states that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be complete, reasonable and sufficient disclosure of accounting information. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should disclose all pertinent information. For example, the business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc. The shareholder would like to know the profitability of the firm while the creditors would like to know the solvency of the business. This is only possible if the financial statement discloses all relevant information in a complete, fair and an unprejudiced manner. 6. Convention of conservatism: This concept accentuates that profits should never be overstated or anticipated. However, if the business anticipates any loss in the near future, provision should be made for it in the books of accounts, for the same. For example, creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill, patent and so on should be taken in to consideration Traditionally, accounting follows the rule 'anticipate no profit and provide for all possible losses.' For example, the closing stock is valued at cost price or market price, whichever is lower. The effect of the above is that in case market price has come down then provide for the 'anticipated loss', but if the market price has increased then ignore 'anticipated profits'. The convention of conservatism is a valuable tool in situation of ambiguity and qualms.

UNIT-II

JOURNALISING TRANSACTIONS

Account An accounting system keeps separate record of each item like assets, liabilities, etc. For example, a separate record is kept for cash that shows increase and decrease in it. This record that summarizes movement in an individual item is called an Account. Each element/sub-element of the balance sheet is named as "Account", having three parts viz title, left side (Debit or Dr) and a right side (Credit or Cr). Technically, these are also called `Ledger Accounts'. Account Payable: An amount owed to a supplier for good or services purchased on credit; payment is due within a short time period, usually 30 days or less. Notes Payable: A liability expressed by a written promise to make a future payment at a specific time, OR are obligations (short term debt) evidenced by a promissory note? The proceeds of the note are used to purchase current assets (inventory & receivables). Dual Aspect of Transactions For every debit there is an equal credit. This is also called the dual aspect of the transaction i.e. every transaction has two aspects, debit and credit and they are always equal. This means that every transaction should have two-sided effect. For example Mr. A starts his business and he initially invests Rupees 100,000/- in cash for his business. Out of this cash following items are purchased in cash A building for Rupees 50,000/-; Furniture for Rupees 10,000/-; and A vehicle for Rupees 15,000/- This means that he has spent a total of Rupees 75,000/- and has left with Rupees 25,000 cash. We will apply the Dual Aspect Concept on these events from the viewpoint of business.

When Mr.A invested Rupees 100,000/ the cash account benefited from him. The event will be recorded in the books of business as, Debit Cash Rs.100, 000 Credit Mr. A Rs.100, 000 Analyse the transaction. The account that received the benefit, in this case is the cash account, and the account that provided the benefit is that of Mr. A. Building purchased The building account benefited from cash account · Debit Building Rs.50, 000 Credit Cash Rs.50, 000 Assets Assets are the properties and possessions of the business. Properties and possessions can be of two types:

1. Tangible Assets that have physical existence ( are further divided into Fixed Assets and Current Assets)

2. Intangible Assets that have no physical existence

Examples of both are as follows:

• Tangible Assets Furniture, Vehicle etc.

• Intangible Assets Right to receive money, Good will etc.

Accounting Equation From the above example, if the debits and credits are added up, the situation will be as follows: Debits Cash Rs.100, 000/- Building 50,000/-

Furniture 10,000/- Vehicle 15,000/- Credits Mr. A Rs.100, 000/- Cash 75,000/ *Rules of Debit and Credit From our discussion up to this point, we have established following rules for Debit and Credit:

Any account that obtains a benefit is Debit. OR Anything that will provide benefit to the business is Debit. Both these statements may look different but in fact if we consider that whenever an account benefits as a result of a transaction, it will have to return that benefit to the business then both the statements will look like different sides of the same picture. For credit, Any account that provides a benefit is Credit. OR Anything to which the business has a responsibility to return a benefit in future is Credit. As explained in the case of Debit, whenever an account provides benefit to the business the business will have a responsibility to return that benefit at some time in future and so it is Credit. *Rules of Debit and Credit for Assets Similarly we have established that whenever a business transfers a value / benefit to an account and as a result creates some thing that will provide future benefit; the `thing' is termed as Asset. By combining both these rules we can devise following rules of Debit and Credit for Assets: o When an asset is created or purchased, value / benefit is transferred to that account, so it is Debited I. Increase in Asset is Debit Reversing the above situation if the asset is sold, which is termed as disposing off, for o

say cash, the asset account provides benefit to the cash account. Therefore, the asset account is Credited II. Decrease in Asset is Credit *Rules of Debit and Credit for Liabilities Anything that transfers value to the business, and in turn creates a responsibility on part of the business to return a benefit, is a Liability. Therefore, liabilities are the exact opposite of the assets. When a liability is created the benefit is provided to business by that account so it is o Credited III. Increase in Liability is Credit When the business returns the benefit or repays the liability, the liability account o benefits from the business. So it is Debited IV. Decrease in Liability is Debit *Rules of Debit and Credit for Expenses Just like assets, we have to pay for expenses. From assets, we draw benefit for a long time whereas the benefit from expenses is for a short run. Therefore, Expenditure is just like Asset but for a short run. Using our rule for Debit and Credit, when we pay cash for any expense that expense account benefits from cash, therefore, it is debited. Now we can lay down our rule for Expenditure: o V. Increase in Expenditure is Debit Reversing the above situation, if we return any item that we had purchased, we will o receive cash in return. Cash account will receive benefit from that Expenditure account. Therefore, Expenditure account will be credited VI. Decrease in Expenditure is Credit *Rules of Debit and Credit for Income Income accounts are exactly opposite to expense accounts just as liabilities are opposite to that of assets. Therefore, using the same principle we can draw our rules of Debit and Credit for Income VII. Increase in Income is Credit VIII. Decrease in Income is Debit

JOURNAL

The word ‘Journal’ has been derived from the French word ‘JOUR’ means daily records. Journal is a book of original entry in which transactions are recorded as and when they occur in chronological order (in order of date) from source documents. Recording in journal is made showing the accounts to be debited and credited in a systematic manner. Thus, the journal provides a date-wise record of all the transactions with details of the accounts and amounts debited and credited for each transaction with a short explanation, which is known as narration. Firms having limited number of transactions record those in journal and from there post these to the concerned ledger accounts. Firms having large number of transactions, maintain some special purpose journals such as, Purchase Book, Sales Books, Returns books, Bills Book, Cash Book, Journal proper etc. Format of Journal: The following is the format of Journal.

Date Particulars L.F

Amount

Debit Credit

Rs. Rs.

(i) (ii) (iii) (iv)

Ledger Folio (L.F): Journal is the original record of the business transactions. All entries from the journal are posted in the ledger accounts. The page number or folio number of the ledger account where the posting has been made from the journal is recorded in the L.F column of the Journal. Each entry in the journal must be explained in brief. This brief explanation of the entry is called Narration. Thus, Narration gives a brief explanation of the transaction for which the entry has been passed is given. It enables the persons going through the journal entry to have an idea about the transaction. Although Journal is chronological record of all business transactions, yet it cannot provide all information regarding a particular account at one place. The journal cannot show the net effect of various transactions affecting a particular person,

assets, revenue and expense. For example, if a trader wants to know the amount due to a particular supplier or the amount due from a particular customer, he will have to go through the whole journal. It would be a tedious and time consuming process. To overcome this difficulty, another book of account, in addition to Journal/special purpose books, is maintained. This book is called ‘Ledger’. Ledger is a book of account which contains a condensed and classified record of all transactions of the business posted from the journal. It is also called the book of final entry. In other words, the book, which contains accounts, is known as the ledger, also called the Principal Book. Ledger provides necessary information regarding various accounts. Personal accounts in ledger show how much money firm owes to the creditors and the amount it can recover from its debtors. The real accounts show the value of properties and also the value of stock. Nominal accounts reflect the sources of income and also the amount spent on various items. In accounting all transactions are ultimately recorded in the ledger. In this book, separate accounts are opened for each ‘account head’ and all transactions relating to a particular ‘account head’ will be posted in the concerned account. An account for each person, each type of revenue, expense, assets and liability is opened in the ledger. For example, all transactions relating to a particular supplier; say Vivek will be posted to the account of Vivek. This helps in ascertaining the amount due to Vivek. Ledger is generally maintained in the form of a bound register. First few pages of the ledger has ordinary horizontal ruling for indexing. Remaining pages area ruled like an account and is consecutively numbered. The index pages are used for writing the names of accounts and the Folio No. (Page No.) where a particular account has been opened for easy location. The ledger may also be maintained in loose-leaf form instead of one bound book Ledger is the ‘King of all the books of accounts’ Ledger is called the king of all the books of account, because it is the book which alone can exhibit the position of each ‘account head’ in a convenient form. It can supply all the useful information such as the net result of various transactions involving an asset, a liability, capital, revenue and an expense. Ledger is the ultimate destination of all transactions because posting is made from the journal to the ledger. The information available in the ledger in classified and summarised form also facilitates the preparation of a Trading and Profit and Loss Account and a Balance Sheet. Thus, Ledger is called the King of all books because no other book of account can supply all the information like ledger. Utility/Importance/ Advantages: The utility/importance of ‘Ledger’ can be summarised as follows:

(a) Consideration of Scattered Information: The ledger brings out the scattered information from the ‘Journal’. It shows the condensed information under each account head. (b) Full information at a glance: As the ledger records both the debit and credit aspects in two different sides, the complete position of an account can be ascertained at a glance. (c) Balance: At the end of a specified period, the net effect of transactions on a particular ‘account head’ can be ascertained by finding out the balance of that account. For example, how much is due from a customer or how much is payable to a creditor or what is the total amount of purchases or what has been the expenditure on different heads? All these information can be ascertained by balancing the accounts appearing in the ledger. (d) Trial Balance: As both the aspects are recorded, the net debit effect and the net credit on the accounts must be equal on a particular date. This is verified by preparing a statement called Trial Balance. This is possible only if the ledger accounts are maintained. (e) Preparation of final accounts: Ledger is the ‘store-house’ of all information relating to the transactions. It facilitates the preparation of a ‘Profit and Loss Account’ from the balances of revenue and expenses accounts. It also, facilitates the preparation of a ‘Balance Sheet’ from the balances of assets, liabilities and capital accounts. Purpose of Ledger: A businessman requires various information to ascertain the net results, financial position and progress of the business. Ledger can provide various information, which are given below. (a) Information regarding Debtors: A trader can know the amount of money receivable from various customers and others who are known as debtors. (b) Information regarding Creditors: A trader can know the amount of money payable to various suppliers and others who are known as creditors. (c) Information regarding Purchases and Sales: The total purchase of goods and the total sale of goods during a specific period can be known by preparing Purchase A/c and Sales A/c. (d) Information regarding Revenue and Expenses: The amount of revenue earned from different sources and the amount of expenses incurred on different accounts heads for a particular period may be known from the ledger. (e) Information regarding Assets and Liabilities: The amount of various types of assets such as Land, Building, Machinery, cash in hand, cash at bank, etc. and the amount of various liabilities can be obtained from ledger. Sub-divisions of Ledger: Ledgers may be sub-divided in the following manner:

Personal Ledger (i) Debtors’ ledger or Sales Ledger and (ii) Creditors’ ledger or Bought Ledger. General or Nominal Ledger. These are explained below: A. Personal Ledger: The ledger which contains the accounts of persons, firms or organisations to whom goods are sold on credit or from which goods are bought on credit, is known as personal ledger. Generally personal ledgers are sub-divided into (i) Debtors’ ledger or Sales Ledger and (ii) Creditors’ ledger or Bought Ledger. (i) Debtor’ ledger or Sales ledger: In this ledger, the accounts of all Debtors for goods sold are maintained. Posting is made from Sales Day Book, Purchase Returns Book, Cash Book, Bills Receivable Book and Journal Proper for the transactions affecting the accounts of Debtors. (ii) Creditors’ Ledger or Bought Ledger: In this ledger, the accounts of all Creditors for goods purchased are maintained. Posting is made from Purchases Day Book, Purchase Returns Book, Cash Book, Bill Payment Book and Journal proper for the transactions affecting the accounts of Creditors. (B) General Ledger: This ledger contains all accounts other than the accounts of Debtors and Creditors for goods. All accounts falling in the category of Assets, Liabilities (except debtors and creditors for goods), Capital, Revenue and Expense are maintained in this proper ledger. For example, if a machine is sold to Ram on credit, his account will appear in General Ledger; again, if goods are sold to him on credit, his account will appear in the Debtors’ Ledger. General Ledger is also known as Impersonal Ledger or Nominal Ledger. Format of a Ledger Account: There are two types of forms for writing up Ledger Accounts namely (a) Horizontal form and (b) Vertical or ‘T’ form. These are discussed below. (a) Horizontal Ledger Account is ruled out as follows:

“AB & Co” Account

Date

Particulars

J. F

Debit Amount (Rs.)

Credit Amount (Rs.)

Debit Or Credit

Balance (Rs.)

In this form of ledger, balance is ascertained after every transaction. This method is generally used in bank. Where the accounts are maintained in computers through the use of accounting software like Tally, accounts are also prepared in this from. (b) A vertical or ‘T’ shaped form is ruled as under:-

“AB & Co” Account Dr. Cr.

Date Particulars

J. F.

Amount (Rs.)

Date Particulars J. F.

Amount (Rs.)

1 2 3 4 1 2 3 4

J.F (Journal Folio): In this column, the page number of the Journal where the transaction was originally recorded is mentioned. It helps in locating the entry in the Journal. Again, in Journal the page number of the Ledger where the account appears is written in the Ledger Folio column. Features of Ledger accounts: In ‘T’ shaped form of writing up a ledger account, balance is ascertained periodically. In this book ‘T’ shaped form of Ledger Account has been used. Such Ledger Account has the following features: (a) Two sides: A Ledger Account has two sides, namely Left hand and Right hand side. Left hand side is called the Debit side while the right hand side is called the Credit side. (b) Recording of two aspects: Posting is made on the debit side of the ledger account which has been debited in the journal and the account which has been credited in the journal is posted on the credit side of the ledger account (c) Balancing: Each account in the ledger is balanced independently. This is done by ascertaining the difference between the total of the Debit side and total of the Credit side. Closing and Opening Balance The balances of account ascertained at the end of a particular period are known as closing balances. These balances become the opening balances in the next period.

Ledger posting means making entries of the transactions in the ledger books from the journals. Posting is a process of transferring debit and credit aspects of the

entries appearing in the journal and other books of original entry to the debit and credit sides of the relevant accounts in the ledger. Postings are made using the word ‘To’ and ‘By’ as a prefix. For debit side entry ‘To’ prefix is used and for credit side entry ‘By’ prefix is used. The aim of posting is to make a classified and summarised record of all business transactions under appropriate account heads.

Rules generally followed while posting the transactions in the Ledger: The following basic rules are to be followed while posting the transactions in the ledger: (a) Separate accounts should be opened in the ledger for posting the different transactions recorded in the journal. (b) All the transactions pertaining to one account head should be posted to that account. (c) Two aspects of the business transaction namely – debit and credit aspects – should be posted on the debit side and credit side of the account respectively.

Basic points regarding posting: Basic points to be kept in mind before posting are: 1. Opening of separate accounts: Separate accounts should be opened for different ‘account heads’ in the ledger for posting the different transactions recorded in the journal. For example: Cash A/c, salary A/c, purchases A/c etc.

2. One account for each kind of transactions: One account should be opened for each kind of transaction. Transactions taking place during an accounting period relating to that particular account should be posted to that account only. If more than one account is opened for one kind of transactions, the object of summarisation of transactions of similar nature will not be achieved. For example, it may be found that in the journal, Cash A/c has been debited during a week, say on six different dates and the same account has been credited on four different dates. For recording in Cash A/c, only one Cash A/c will be opened for transactions taking place on all the days and posting of all entry relating to Cash A/c will be made in that account only.

Methods of Posting: There are three methods of posting from Journal to Ledger: a. Entry wise posting: Posting of each journal entry in the affected ‘account heads’ may be made before proceeding to the next entry. b. Account head wise posting: Posting may be made ‘account head’ wise i.e. posting of all Debits and Credits relating to one particular account head may be made before taking up another account head. c. Page wise posting: Posing may be made in all account heads appearing in one particular page of the journal before taking up the next page.

Procedure for posting into an account: (a) Which has been debited in the journal- Step 1: Concerned account in the ledger should be located. If no account appears in the ledger for that account head, a new account should be opened and the name of the new account head along with the Folio No. should be recorded in the index page. Step 2: In the ‘Date column’ on the debit side, date of the transaction should be recorded. Step 3: In the ‘Particulars column’ on the debit side, the name of the ‘account head’ credited in the journal, should be recorded as: “To ………… (name of the account credited)…….”

Step 4: In the ‘J.F column’ on the debit side, the Folio (page) number of the Journal where the transaction has been originally recorded should be entered. Also the Folio

(page) number of the ledger in which the concerned account appears, should be entered in the ‘Ledger folio column’ of the Journal for cross reference. Step 5: In the ‘Amount column’ on the debit side, the amount as recorded in the journal against the account where the posting has been made should be entered. (b) Which has been credited in the journal? -

Step 1: Concerned account in the ledger should be located. If no account appears in the ledger for that account head, a new account should be opened and the name of the new account head along with the Folio No. should be recorded in the index page. Step 2: In the ‘Date column’ on the Credit side, the date of the transaction should be recorded.

Step 3: In the ‘Particular column’ on the credit side, the name of the ‘account head’ debited on the journal, should be recorded as: “By …………… (name of the account credited) ……” Step 4: In the ‘J.F. column’ on the credit side, the Folio (page) number of the Journal where the transaction has been originally recorded should be entered’. Also the Folio (page) number of the ledger in which the concerned account appears, should be entered in the ‘Ledger folio column’ of the Journal for cross reference. Step 5: In the ‘Amount column’ on the credit side, the amount as recorded in the journal against the account where the posting has been made should be entered. Note: When the debit aspect of a transaction entered in the journal is posted in the ledger, only the debit side of that account is affected; when the credit aspect of a transaction entered in the journal is posted in the ledger, only credit side of that account is affected. In order to have a complete record of each transaction, both

the aspects will have to be posted. Posting of simple Journal Entry:

Illustration: On 1st January 2008, Srinath started business with a capital Rs. 18,000

Journal of M/s Srinath

Date Particulars L. F.

Dr. Amount (Rs.)

Cr. Amount (Rs.)

2008 Jan1

Cash A/c Dr. To Capital A/c

(Being cash brought in as capital)

18,000

18,000

After posting the accounts in the ledger and balancing the same, a statement is prepared to show separately the debit and credit balances. Such a statement is known as Trial Balance. The Trial Balance is a statement which shows the closing balances, debit balances as well as credit balances of all ledger accounts. This statement is always prepared in ‘T’ Shape. In the left hand side, debit balances and in the right hand side, credit balances of ledger accounts are written and both sides are totalled. The totals of the both the sides, should always be equal. This equality in the totals of debit side and credit side ensures the completion of double entry system of book-keeping. It also ensures the arithmetical accuracy of ledger accounts. Objects of Trial Balance: The following are the objectives of preparing the Trial Balance. 1. Ascertainment of arithmetical accuracy of the ledger accounts: The Trial Balance is a test of arithmetical accuracy of ledger accounts. If the totals of two sides of Trial Balance i.e. debit side and credit side are equal, it ensures the arithmetical accuracy of the ledger accounts. It means that there is no mistake in totalling the debit side and credit side of all the ledger accounts. 2. Help in the preparation of Final Accounts: Trial Balance facilitates the preparation of Trading Account, Profit and loss Account and the Balance Sheet. Preparation of these financial statements is very clumsy. If the ledger accounts balances are collected and grouped under the two headings of Debit and Credit in the Trial Balance, it becomes easier to prepare the final accounts.

3. Providing summary information of Financial result and position: A close and intelligent observation of the Trial Balance gives us some information of the profit or loss and the financial position of the firm. 4. Help in locating errors: Some of the errors in the books of accounts can be located with the help of the Trial Balance. If the Trial Balance does not agree, an intelligent scrutiny to the items and their amounts may reveal the cause of disagreement of the Trial Balance. Thus Trial Balance discloses some of the errors in the books of accounts. 5. Completion of Double Entry: Trial Balance, if it agrees, i.e. the two sides are equal, proves the completion of double entry. There are two method of constructing a Trial Balance: (a) Balance Method and (b) Total of Accounts Method: (a) Balance Method: All the closing balances of all the ledgers- personal ledgers, General Ledgers and Cash Book, Bank Book, Petty Cash Book are taken into account to prepare the Trial Balance by Balance Method. There are two types of formats to prepare Trial Balance by Balance Method. Horizontal Format ‘T’ shape Format Step of construction: Close the account in ledgers and cash books. Balance all the accounts. Write all the Debit balances on a sheet of paper. Write all the Credit balances on a separate sheet of paper. Now under Horizontal Format, the following format is used to prepare Trial Balance.

Trial Balance As on 31-03-1995

Heads of Accounts

L.F. Debit Balance (Rs.)

Credit Balance (Rs.)

Total:

6. Write (a) names of all accounts having a closing balance in the Heads of Account column. (b) Ledger Folio number of the ledger where the particular account is balanced, in the L.F column. (c) the amount of debit balance in Debit Balance column and (d) the amount of credit balance in credit Balance column.

7. Add the debit Balance column and credit Balance column and write these two totals at the bottom of the two columns. 8. See that totals of both debit balance and credit balance column agree or not. If we want to prepare the Trial Balance under ‘T’ shape format, then the following format should be used but, the procedure of prepare it (i.e. steps of preparation) is the same

UNIT III FINAL ACCOUNTS

So far, we have discussed that how the business transactions are recorded in Journal and ledger and how to detect and rectify the errors and how to prepare Trial Balance. Is quite natural that the businessman is interested in knowing whether his business is running on Profit or Loss and also the true financial position of his business. The main aim of Bookkeeping is to inform the Proprietor, about the business progress and the financial position at the right time and in the right way. Preparation of Final accounts is highly possible only after the preparation of Trial Balance. Final Accounts

Trading & Profit and Loss A/c Balance sheet 1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss. 2. Balance Sheet is prepared to find out financial position a if concern. Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account. Revenue account of trading concern is divided into two-part i.e. 1. Trading Account and 2. Profit and Loss Account. TRADING ACCOUNT

Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and Cost price. If the selling price exceeds the cost price, it will bring Gross Profit. For example, if the cost price of Rs. 50,000 worth of goods are sold for Rs. 60,000 that will bring in Gross Profit of Rs. 10,000. If the cost price exceeds the selling price, the result will be Gross Loss. For example, if the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will result in Gross Loss of Rs. 10,000. Thus the Gross Profit or Gross Loss is indicated in Trading Account. Items appearing in the Debit side of Trading Account. 1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the Opening Stock. 2. Purchases: It indicates total purchases both cash and credit made during the year.

3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account. 4. Direct Expenses on Purchases: Some of the Direct Expenses are. i. Wages: It is also known as Productive wages or Manufacturing wages. ii. Carriage or Carriage Inwards: iii. Octroi Duty: Duty paid on goods for bringing them within municipal limits. iv. Customs duty, dock dues, Clearing charges, Import duty etc. v. Fuel, Power, Lighting charges related to production. vi. Oil, Grease and Waste. vii. Packing charges: Such expenses are incurred with a view to put the goods in the Saleable Condition. Items appearing on the credit side of Trading Account 1. Sales: Total Sales (Including both cash and credit) made during the year. 2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to get Net sales. Net Sales will be shown. 3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears outside the Trial balance. It represents the value of goods at the end of the trading period. BALANCING OF TRADING ACCOUNT The difference between the two sides of the Trading Account indicates either Gross Profit or Gross Loss. If the total on the credit side is more, the difference represents Gross Profit. On the other hand, if the total of the debit side is high, the difference represents Gross Loss. The Gross Profit or Gross Loss is transferred to Profit and Loss A/c. Closing Entries of Trading A/c

Trading A/c is a ledger account. Hence, no direct entries should be made in the trading account. Several items such as Purchases, Sales are first recorded in the journal and then posted to the ledger. The Same accounts are closed by the transferring them to the trading account. Hence it is called as closing entries. Advantages of Trading Account 1. The result of Purchases and Sales can be clearly ascertained 2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price. 3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary expenses could be eliminated. 4. Comparison of trading account details with previous years details help to draw better administrative policies. PROFIT AND LOSS ACCOUNT

Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year. Items appearing on Debit side of the Profit & Loss A/c The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are grouped under four heads: 1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling Expenses, Advertising etc., 2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc., 3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc. 4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial Expenses. Item appearing on Credit side of Profit and Loss A/c. Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the business are shown on the credit side. Typical of such gains are items such as Interest received, Rent received, Discounts earned, Commission earned. BALANCE SHEET

Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively, Besides the Proprietor wants i. To know the total Assets invested in business ii. To know the Position of owner’s equity iii. To know the liabilities of business. DEFINITION

The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.” On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities.

OBJECTIVES OF BALANCE SHEET:

1. It shows accurate financial position of a firm. 2. It is a gist of various transactions at a given period. 3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities. 4. The accuracy of final accounts is verified by this statement 5. It shows the profit or Loss arrived through Profit & Loss A/c The Balance sheet contains two parts i.e. 1. Left hand side i.e. the Liabilities 2. Right hand side i.e. the Assets

ASSETS: Assets represent everything which a business owns and has money value. Assets are always shown as debit balance in the ledger. Assets are classified as follows. 1. Tangible Assets: Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are classified into two: a. Fixed Assets: Assets which are durable in nature and used in business over and again are known as Fixed Assets. e.g., land and Building, Machinery, Trucks, etc. b. Floating Assets or Current Assets: Current Assets are i. Meant to be converted into cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock, Sundry Debtors. 2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill, Patent. 3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S. are known as Fictitious assets: E.g., Preliminary expenses, Discount or creditors. LIABILITIES:

All that the business owes to others are called Liabilities. It also includes Proprietor’s Capital. They are known as credit balances in ledger. Classification of Liabilities: 1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years E.g. Capital, Long Term Loans. 2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan. 3. Contingent Liabilities: Liabilities, which have the following features, are called contingent liabilities. They are: a. Not actual liability at present b. Might become a liability in future on condition that the contemplated event occurs. E.g. Liability in respect of pending suit.

Equation of Balance Sheet: Capital = Assets – Liabilities

Liabilities = Assets – Capital Assets = Liabilities + Capital.

UNIT IV

Inventory Valuation Method and Depreciation Inventory for a merchandising business consists of the goods available for resale to customers. However, retailers are not the only businesses that maintain inventory. Manufacturers also have inventories related to the goods they produce. Goods completed and awaiting sale are termed "finished goods" inventory. A manufacturer may also have "work in process" inventory consisting of goods being manufactured but not yet completed. And, a third category of inventory is "raw material," consisting of goods to be used in the manufacture of products. Inventory Costing Methods The value of a company's shares of stock often moves significantly with information about earnings. Why begin a discussion of inventory with this observation? The reason is that inventory measurement bears directly on the determination of income! The slightest adjustment to inventory will cause a corresponding change in an entity's reported income. Recall from earlier chapters this basic formulation: Notice that the goods available for sale are "allocated" to ending inventory and cost of goods sold. In the graphic, the inventory appears as physical units. But, in a company's accounting records, this flow must be translated into units of money. The following graphic illustrates this allocation process. Observe that if $1 less is allocated to ending inventory, then $1 more flows into cost of goods sold (and vice versa). Further, as cost of goods sold is increased or decreased, there is an opposite effect on gross profit. Thus, a critical factor in determining income is the allocation of the cost of goods available for sale between ending inventory and cost of goods sold: THE COST OF ENDING INVENTORY

In earlier chapters, the assigned cost of inventory was always given. Not much was said about how that cost was determined. To now delve deeper, consider a general rule: Inventory should include all costs that are "ordinary and necessary" to put the goods "in place" and "in condition" for resale. This means that inventory cost would include the invoice price, freight-in, and similar items relating to the general rule. Conversely, "carrying costs" like interest

charges (if money was borrowed to buy the inventory), storage costs, and insurance on goods held awaiting sale would not be included in inventory accounts; instead those costs would be expensed as incurred. Likewise, freight-out and sales commissions would be expensed as a selling cost rather than being included with inventory. COSTING METHODS

Once the unit cost of inventory is determined via the preceding logic, specific costing methods must be adopted. In other words, each unit of inventory will not have the exact same cost, and an assumption must be implemented to maintain a systematic approach to assigning costs to units on hand (and to units sold). To solidify this point, consider a simple example. Mueller Hardware has a nail storage barrel. The barrel was filled three times. The first filling consisted of 100 pounds costing $1.01 per pound. The second filling consisted of 80 pounds costing $1.10 per pound. The final restocking was 90 pounds at $1.30 per pound. The barrel was never allowed to empty completely and customers have picked all around in the barrel as they bought nails. It is hard to say exactly which nails are "physically" still in the barrel. As one might expect, some of the nails are probably from the first filling, some from the second, and some from the final. At the end of the accounting period, Mueller weighs the barrel and decides that 120 pounds of nails are on hand. What is the cost of the ending inventory? Remember, this question bears directly on the determination of income! To deal with this very common accounting question, a company must adopt an inventory costing method (and that method must be applied consistently from year to year). The methods from which to choose are varied, generally consisting of one of the following:

1. First-in, first-out (FIFO) 2. Last-in, first-out (LIFO) 3. Weighted-average

Each of these methods entails certain cost-flow assumptions. Importantly, the assumptions bear no relation to the physical flow of goods; they are merely used to assign costs to inventory units. (Note: FIFO and LIFO are pronounced with a long "i" and long "o" vowel sound.) Another method that will be discussed shortly is the specific identification method. As its name suggests, the specific identification method does not depend on a cost flow assumption. FIRST-IN,FIRST-OUT CALCULATIONS

With first-in, first-out, the oldest cost (i.e., the first in) is matched against revenue and assigned to cost of goods sold. Conversely, the most recent purchases are assigned to units in ending inventory. For Mueller's nails the FIFO calculations would look like this:

LAST-IN, FIRST-OUT CALCULATIONS Last-in, first-out is just the reverse of FIFO; recent costs are assigned to goods sold while the oldest costs remain in inventory: WEIGHTED AVERAGE

The weighted-average method relies on average unit cost to calculate cost of units sold and ending inventory. Average cost is determined by dividing total cost of goods available for sale by total units available for sale. Mueller Hardware paid $306 for 270 pounds, producing an average cost of $1.13333 per pound ($306/270). The ending inventory consisted of 120 pounds, or $136 (120 X $1.13333 average price per pound). The cost of goods sold was $170 (150 pounds X $1.13333 average price per pound): Perpetual Inventory Systems

The preceding illustrations were based on the periodic inventory system. In other words, the ending inventory was counted and costs were assigned only at the end of the period. A more robust system is the perpetual system. With a perpetual system, a running count of goods on hand is maintained at all times. Modern information systems facilitate detailed perpetual cost tracking for those goods. PERPETUAL FIFO

The following table reveals the FIFO application of the perpetual inventory system for Gonzales. Note that there is considerable detail in tracking inventory using a perpetual approach. Careful study is needed to discern exactly what is occurring on each date. For example, look at April 17 and note that 3,000 units remain after selling 7,000 units. This is determined by looking at the preceding balance data on March 5 (consisting of 10,000 total units (4,000 + 6,000)), and removing 7,000 units as follows: all of the 4,000 unit layer, and 3,000 of the 6,000 unit layer. Remember, this is the FIFO application, so the layers are peeled away based on the chronological order of their creation. In essence, each purchase and sale transaction impacts the residual composition of the layers associated with the item of inventory. Observe that the financial statement results are the same as under the periodic FIFO approach introduced earlier. This is anticipated because the beginning inventory and early purchases are peeled away and charged to cost of goods sold in the same order, whether the associated calculations are done "as you go" (perpetual) or "at the end of the period" (periodic). Depreciation Accounting Policies.

Depreciation is the expired or used portion of a fixed asset during an accounting period. This is taken into account to achieve the matching principle of matching revenues earned during an accounting period with the expenses incurred during that period. Since plant assets have useful life spreading over a number of accounting periods, the portion used in one accounting period is charged to Income

Statement of that accounting period in the form of Depreciation Expense. Land is recorded at cost, other fixed assets are recorded at Book Value i.e. cost less accumulated depreciation. For this, separate Depreciation Expense and Accumulated Depreciation Accounts for different plant assets are maintained. It must also be noted that depreciation is a process of cost allocation and not a process of valuation as such. Computing Depreciation Different methods are available for computing depreciation of fixed assets. Different methods can be used for different assets. However, comparison among firms with different depreciation methods becomes difficult because of the fact that each firm uses different methods for calculating depreciation, which ultimately affect its net income and balance sheet. Methods of Computing Depreciation

Straight-line method: In this, the depreciation expenses are spread evenly over i) periods. Assume that a plant asset is acquired for Rs.17, 000. It is estimated that its useful life is five years and residual value (salvage value) at the end of five years isRs.2, 000.Depreciation is a systematic allocation of the cost of a depreciable asset to expense over its useful life. It is a process of charging the cost of fixed asset to profit & loss account. Fixed Assets are those assets which are:· Of long life· To be used in the business to generate revenue· Not bought with the main purpose of resale. Fixed assets are also called "Depreciable Assets" When an expense is incurred, it is charged to profit & loss account of the same accounting period in which it has incurred. Fixed assets are used for longer period of time. Now, the question is how to charge a fixed asset to profit & loss account. For this purpose, estimated life of the asset is determined. Estimated useful life is the number of years in which a fixed asset is expected to be used efficiently. It is the life for which a machine is estimated to provide more benefit than the cost to run it. Then, total cost of the asset is divided by total number of estimated years. The value, so determined, is called` depreciation for the year' and is charged to profit & loss account. The same amount is deducted from total cost of fixed asset in the financial year in which depreciation is charged. The net amount (after deducting depreciation) is called `Written down Value' WDV = Original cost of fixed asset - Accumulated Depreciation Accumulated Depreciation is the depreciation that has been charged on a particular asset from the time of purchase of the asset to the present time. This is the amount that has been charged to profit and loss account from the year of purchase to the present year. Depreciation accumulated over the years is called accumulated depreciation. Useful Life·

Useful Life or Economic Life is the time period for machine is expected to operate efficiently.· It is the life for which a machine is estimated to provide more benefit than the cost to run it. Grouping of Fixed Assets Major groups of Fixed Assets: · Land · Building · Plant and Machinery · Furniture and Fixtures · Office Equipment · Vehicles No depreciation is charged for `Land'. In case of `Leased Asset/Lease Hold Land' the amount paid for It is charged over the life of the lease and is called Amortization. Journal entries for recording Depreciation Purchase of fixed asset :Debit: Relevant asset account Credit: Cash, Bank or Payable Account For recording of depreciation, following two heads of accounts are used:· Depreciation Expense Account· Accumulated Depreciation Account Depreciation expense account contains the depreciation of the current year. Accumulated depreciation contains the depreciation of the asset from the financial year in which it was bought up to the present financial year. Depreciation of the following years in which asset was used is added up in this account. In other words, this head of account shows the cost of usage of the asset up to the current year. Depreciation account is charged to profit & loss account under the heading of Administrative Expenses In the balance sheet, fixed assets are presented at written down value i.e. WDV = Actual cost of fixed asset - Accumulated Depreciation .Journal entry for the depreciation is given below: Debit: Depreciation Expenses Account Credit: Accumulated Depreciation Methods of calculating Depreciation

There are several methods for calculating depreciation. At this stage, we will discuss only two of them namely: · Straight line method or Original cost method or Fixed installment method

· Reducing balance method or Diminishing balance method or written down method. Straight Line Method Under this method, a fixed amount is calculated by a formula. That fixed amount is charged every year irrespective of the written down value of the asset. The formula for calculating the depreciation is given below: Depreciation = (cost Residual value) / Expected useful life of the asset Residual value is the cost of the asset after the expiry of its useful life. Under this method, at the expiry of asset's useful life, its written down value will become zero. Consider the following example: · Cost of the Asset = Rs.100,000 · Life of the Asset = 5 years · Annual Depreciation = 20 % of cost or Rs.20,000 Written down value method · Cost of the Asset = Rs. 100,000 · Annual Depreciation = 20% Year 1 Depreciation = 20 % of 100,000 = 20,000 Year 1 WDV = 100,000 20,000 = 80,000 Year 2 Depreciation = 20 % of 80,000 = 16,000 Year 2 WDV = 80,000 16,000 = 64,000 Written Down Value / Book Value Cost minus Accumulated Depreciation. In reducing balance method, a formula is used for calculation the depreciation rate i.e.

Rate = 1 n RV / C Where: "RV" = Residual Value "C" = Cost "n" = Life of Asset Calculate the rate if: Cost = 100,000 Residual Value (RV) = 20,000 Life = 3 years Rate = 13 20000/100000 = 42% Year 1 Cost 100,000 Depreciation 100,000 x 42% (42,000) WDV (Closing Balance) 58,000 Year 2 WDV (Opening Balance) 58,000 Depreciation 58,000 x 42% (24,360) WDV (Closing Balance) 33,640 Year 3 WDV (Opening Balance) 33,640 Depreciation 33,640 x 42% (14,128) WDV (Closing Balance) 19,511

Depreciation Accounting” (AS 6) (Revised)

The Accounting Standard regarding depreciation was issued at first in 1982. But it was revised in 1994. The revised standard (AS 6) is now mandatorily applicable to all concerns in India for accounting periods commencing on or after 1.4.1995. The important matters to be noted from (AS 6) are 1. “Depreciable Assets” are the assets which : - (a) are expected to be used for more than one accounting period; and (b) have limited useful life; and (c) are held by an enterprise for use in production or supply of goods and services, for rental to others or for administrative purposes but not for sale in the ordinary course of business. 2. “Useful Life” of a depreciable asset may be either : (a) the period of its expected working life, or (b) the number of production or similar units expected to be obtained from the use of the asset by the enterprise. 3. (a) The total amount to be depreciated from the value of a depreciable asset should be spread over its useful life on a systematic basis. (b) The method selected for charging depreciation should be consistently followed. However, if situations demand (like change of statute, compliance with Accounting Standard, etc.)a change of method may be made. In that case, the depreciation should be recalculated under the new method with effect from the date of the asset coming into use, that is, with retrospective effect. If Depreciation is overcharged earlier, then the following adjustment entry should be made: Asset A/c… ….Dr. To Profit & Loss Adjustment A/c If Depreciation is undercharged earlier, then the following adjustment entry should be made: Profit & Loss Adjustment A/c…..Dr To Asset A/c (c) For ascertaining the useful life of a depreciable asset, these factors should be considered : (1) expected physical wear and tear;

(2) obsolescence; and (3) legal or other limits on the use of the asset. Useful lives of major depreciable assets may be reviewed periodically. (d) Any addition or extension essential for an existing asset, should be depreciated over the remaining life of the asset. (e) If the historical cost of an asset changes due to exchange fluctuations, price adjustments, etc. the depreciation on the revised unamortized depreciable amount should be provided prospectively for the rest of the life of the asset. (f) For any asset revalued, the provision for depreciation should be made on the revalued amount for the remaining useful life of the asset. (g) In the financial statements, the matters to be disclosed are (1) The historical cost or any amount substituting it; (2) Total depreciation for the period for each class of depreciable assets; and (3) The related accumulated depreciation. The method of charging depreciation should also be disclosed.

REFERENCES:-

1. Monga,J.R.,An Introduction to Financial Accounting, First Edition,Mayoor Paperbooks,2005.

2. Maheshwari, S.N. and S. K. Maheshwari; An Introduction to Accountancy, Eighth Edition, Vikas Publishing House, 2003.

3. Gupta, R.L. and V.K. Gupta; Financial Accounting: Fundamental, Sultan Chand Publishers, 2003.

4. www.sgbau.ac.in/accounting-for-managers.pdf

5. en.wikipedia.org/

6. www.principlesofaccounting.com/chapter2/chapter2.html