Accounts PGDM

7/31/2019 Accounts PGDM

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Accounting Principles



Accounting Cycle



Accounting Cycle has thefollowing sequence of eventsOpening Entry(in the case of existing firm)

Transaction Analysis

Recording in special journal Books

Posting in special Ledger Books Preparation of Trial Balance

Adjustment Entries

Closing Entries in respect of Nominal Accounts

Preparations of Financial Statements namely, Profit& Loss Account, Profit and Loss Appropriation A/cand Balance Sheet.



Accounting Equation Method

Assets & Expenses = Liabilities, Equity

& Revenues

DR CR DR CR

Incr. Decr. Decr. Incr.

+ - - +



3 Golden rules of accounting

Personal Account:-Debit “receiver” andcredit “giver”

Real account:-Debit what comes inand credit what goes out

Nominal account:- Debit all expenses

(and losses) and credit all incomesand gains



What is Journal?

Journal entry is an recording of thedaily business transactions in an

accounting manner in a set of books ina systematic manner.

After a transaction occur and a source

document is generated, thetransaction is analyzed and entries aremade in General Journal.



Source Documents

Cash Memo

Invoice or Bill

Receipt

Pay in slip

Cheque Debit Notes and Credit Notes



Method of recordingBusiness Transaction

Conventional Method-Single Book oforiginal entry is made known as

Journal.

Modern Method-Transactions are

recorded in number of books oforiginal entry called Subsidiary Book orspecial journal.



What is Ledger?

It is a Principal books of accounts inwhich all the business transactions find

their ultimate place in the shape ofaccounts (known as “T”) in a classifiedform.

Ledger is a set of accounts.

The process of transferring entry fromthe journal to ledger is called posting



Ledger

1. Is the book of final entry.

2. Transactions are posted in the ledger after the same have

been recorded in the journal.

3. Transactions are classified according to the nature and aregrouped in the concerned accounts.

4. Narration is not required.

5. Folio of the journal or sub-journal is written.





Balancing of LEDGER

Debit Balance:-It is the excess of debit sideover credit side of an account

Credit balance:-It is the excess of credit sideover debit side of an account

To equalise their totals, the balance amountis shown/inserted on the shorter side bywriting balance carried down, abbreviatedas c/d)



Account Name

Debit / Dr. Credit / Cr.

LEDGER

If Debit entries are greater than Credit entries, the account willhave a debit balance.

LO 2 Explain double-entry rules.

10,000 Transaction #23,000

15,000

8,000Transaction #3Balance

Transaction #1

18,000 18,000



Illustration Record the following transaction in the journal of the Delhi Furniture Mart and

post them into the ledger.2010Jan 1 Started business with cash Rs. 10000.Jan 2 Deposited into Bank Rs. 9000.Jan 3 Purchased Machinery for Rs. 5000 from Jawahar and gave

him a cheque for the amount.

Jan 15 Paid installation charges of machinery Rs. 100Jan 20 Purchased timber from Naveen of the list price of Rs.2000.

He allowed 10% Trade discount.Jan 23 Furniture costing Rs 500 was used in furnishing the office.Jan 25 Sold Furniture to Naresh of the list price of Rs 1000 and

allowed him 5% Trade discount.

Jan 28 Received a cheque from Naresh for Rs. 930 in full settlementand sent the cheque to bankJan 29 Sent to Naveen in full settlement a cheque for Rs.1750.Jan 31 Paid wages Rs. 350 and Rent Rs.200







Ledger

Dr Capital Account Cr

Date Particular JF Amount Date Particular JF Amount

2010 2010

Jan--31 To Balance c/d 10000 Jan--1 By Cash A/c 10000

10000 10000

Feb--1 By Balance b/d 10000



Ledger

Dr Cash Account Cr


2010 2010

Jan--1 To Capital A/c 10000 Jan--2 By Bank A/c 9000

Jan--15By Machinery

A/c 100

Jan--31 By Wages A/c 350

Jan--31 By Rent A/c 200

Jan--31 By Balance c/d 350

10000 10000

Feb--1 To Balance b/d 250



Ledger

Dr Bank Account Cr


2010 2010

Jan--2 To Cash A/c 9000 Jan--3By Machinery

A/c 5000

To Naresh 930 By Naveen 1750

Jan--31 By Balance c/d 3180

9930 9930

Feb--1 To Balance b/d 3180 9930



Ledger

Dr Machinery Account Cr


2010

Jan--3 To Cash A/c 5000 Jan--31 By Balance c/d 5100

Jan--15 To Naresh 100

5100 5100




Ledger

Dr Naveen Cr


2010 2010

Jan--29 To Bank A/c 1750 Jan--20 By Purchase A/c 1800

Jan--15 To Discount 50

1800 1800



Ledger

Dr Office Furniture Account Cr

Date Particular JFAmou

nt Date Particular JFAmou

nt

2010

Jan--23

To PurchaseA/c 500

Jan--31

By Balancec/d 500

500 500




Ledger

Dr Naresh Cr

Date ParticularJ

FAmou

nt Date ParticularJ

FAmou

nt

2010 2010

Jan--25

To SalesA/c 950

Jan--28 By Bank A/c 930

Jan--29

By DiscountAllowed A/c 20

950 950



Ledger

Dr Sales Account Cr

Date Particular JF

Amoun

t Date Particular JF

Amoun

t

2010

Jan--31

To Balancec/d 950

Jan--25 By Naresh 950

950 950

Feb--1By Balance

b/d 950



Ledger

Dr Discount Allowed A/c Cr

Date Particular JF

Amoun


Amoun

t

2010 2010

Jan--

20

ToNare

sh 20

Jan--

31

By Balance

c/d 20

20 20




Ledger

Dr Discount Received A/c Cr

Date Particular JF

Amoun


Amoun

t

2010

Jan--31

To Balancec/d 50

Jan--25 By Naveen 50

50 50

Feb--1By balance

b/d 50



Ledger

Dr Wages Account Cr

Date Particular JF

Amoun


Amoun

t

2010 2010

31-J

an To CashA/c 350 Jan--31 By Balancec/d 350

350 350




Ledger

Dr Rent Account Cr

Date Particular JF

Amoun


Amoun

t

2010 2010

31-J

an To Cash A/c 200 Jan--31 By Balancec/d 200

200 200

Feb--

1

To Balance

b/d



Trial Balance

Trial Balance is a statement of debit andcredit Totals or balances extracted from the

various accounts in the ledger with a view totest the arithmetical accuracy of the books.

It is a Statement and not Account

It provides a convenient summary of all

ledger accounts at one place which, in turnprovides input to the preparation of incomestatement and Balance Sheet



Trial Balance

The agreement of Trial Balance is not a conclusive proof of the

correctness of recording and posting of business transactions.

There can be errors and the sum of each column of the Trial

Balance may still be equal.Trial balance fails to disclose following Errors :-

1. Errors of Omission:-arises from omission of a transaction fromthe Journal.

2. Errors of Principle:-arises from treatment of revenueexpenditure as capital Expenditure and vise versa.

3. Errors of Compensating/Offsetting Errors:-results fromoffsetting of one error by another error.



Trial balance (Balance Method

Serial No. Name of the Account Debit Amount Credit Amount

1 Capital Account 10000

2 Cash Account 350

3 Bank Account 3180

4 Machinery Account 5100

5 Purchase Account 1300

6 Office Furniture Account 500

7 Sales Account 950

8 Discount Allowed Account 20

9 Discount Received Account 50

10 Wages Account 350

11 Rent Account 200

Total 11000 11000



Trial Balance(Total Method)

Serial No. Name of the Account Debit Amount Credit Amount

1 Capital Account 10000

2 Cash Account 10000 9650

3 Bank Account 9930 6750

4 Machinery Account 5100

5 Naveen Account 1800 1800

6 Purchase Account 1300

7 Office Furniture Account 500

8 Naresh Account 950 950

9 Sales Account 950

10 Discount Allowed Account 20

11 Discount Received Account 50

12 Wages Account 350

13 Rent Account 200



You are required to make Journal Entriesfor the transaction, post in Ledger accountsand make Trial Balance

Jan-2010

1. Commenced Business with cash 20000

2. Purchased Goods on Credit from Shyam 15000

3.

Purchased Goods for cash 5004. Paid Gopal in advance for goods offered 1000

5. Received Cash from Murthy as advance for goods 1500

6. Purchased furniture for office use for cash 1000

7. Paid Wages 250

8. Received Commission in cash 3009. Goods returned to Shyam 100

10. Goods sold to Kamal 5000

11. …..continue



…..continue

11. Paid for postage and telegrams 100

12. Goods returned by Kamal 250

15. Paid for Stationery 100

18. Paid into Bank 25020.Goods sold for cash 375

22.Bought goods for Cash 500

25.Paid Salaries 350

28.Paid Rent 250

31.Drew Cash for personal use 500



Special Journals

Special Journals are designed to facilitate theprocess of journalizing and posting transactions.Special Journals are used for the most frequent

transactions in a business. To save time for journalizing the entries, and

posting the entries to the general ledgers and subledgers, Special Journals are used by somebusinesses. Even if the Special Journals are used,

the business still needs to use general journal forinfrequent transaction, such as adjusting entries and closing entries.

http://en.wikipedia.org/wiki/Financial_transaction

http://en.wikipedia.org/wiki/General_ledgers

http://en.wikipedia.org/wiki/General_journal

http://en.wikipedia.org/wiki/Adjusting_entries

http://en.wikipedia.org/wiki/Closing_entries













http://en.wikipedia.org/wiki/Financial_transaction



Types of Special JournalsThe types of Special Journals that a business uses are determined by the nature of thebusiness. Special journals are designed as a simple way to record the most frequentlyoccurring transactions. There are five types of Special Journals that are frequently usedby merchandising businesses:

Cash Book Sales Book Purchases Book Purchase Return Book Sales Return Book

Cash Book journal is used to record only cash receipts and Payment transactionsSales journal is used to record all Credit sales of goods on account;Purchases journal is used to record only Credit purchases of goods on account;Sales Return Journal is used to record return of goods sold.Purchase Return Journal is used to record Return of goods Bought.



Special Ledger

Like Special Journals, it would be equally

advantageous to have more than one general

ledger.Type of Special ledger

Debtors Ledger

Creditors Ledger Expense Ledger

Assets Ledger and so on…



Adjustment Entries

Adjustment entries are journal entries usually made atthe end of an accounting period to allocate income andexpenditure to the period in which they actually

occurred. The revenue recognition principle is the basisof making adjusting entries that pertain to unearned andaccrued revenues under accrual-basis of accounting.

Based on the matching principle of accrual accounting,

revenues and associated costs are recognized in thesame accounting period. However the actual cash maybe received or paid at a different time.


http://en.wikipedia.org/wiki/Income

http://en.wikipedia.org/wiki/Expenditure

http://en.wikipedia.org/wiki/Revenue_recognition_principle

http://en.wikipedia.org/wiki/Accrual

http://en.wikipedia.org/wiki/Matching_principle

http://en.wikipedia.org/wiki/Accrual_accounting

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Cost

http://en.wikipedia.org/wiki/Cost

http://en.wikipedia.org/wiki/Revenue



















http://en.wikipedia.org/wiki/Expenditure

http://en.wikipedia.org/wiki/Income




Adjustment Entries

Prepayments (Deferral - cash paidor received beforeconsumption)

Accrual - cash paid orreceived afterconsumption

Expenses Prepaid expenses: forexpenses paid in cashand recorded asassets before they areused

Accrued expenses: forexpenses incurred butnot yet paid in cash orrecorded

Revenues Unearned revenue: forrevenues received incash and recorded asliabilities before theyare earned

Accrued revenues: forrevenues earned butnot yet recorded orreceived in cash

http://en.wikipedia.org/wiki/Deferral



http://en.wikipedia.org/wiki/Deferral



Adjustment EntriesPrepayments/Deferrals

Adjusting entries for prepayments are necessary to account forcash that has been received prior to delivery of goods orcompletion of services. When this cash is paid, it is first recordedin a prepaid expense asset account; the account is to be

expensed either with the passage of time (e.g. rent, insurance)or through use and consumption (e.g. supplies).An example is the insurance premium paid on 1st of March forthe next six-month Rs 6000 the Journal entry will be

Prepaid Insurance a/c Dr 6000To Cash a/c 6000

At the end of the year it will be reported as an expense for themonths of March. Adjustment journal Entry will be

Insurance A/c Dr 1000To Prepaid Insurance a/c 1000



Adjustment EntriesPrepayments/Deferrals

A company receiving the cash for benefits yet to be delivered, will have torecord the amount in an unearned revenue liability account. Then, anadjusting entry to recognize the revenue is used as necessary. For example,If Building has been given to tenant on Rs 2,400 p.a but during the year Rs.3000 has been received, then Rs. 600 will be rent received in advance

Cash a/c Dr 3000To Rent a/c 3000

The adjustment Entry will be at the end of accounting year

Rent a/c Dr. 600To Rent received in Advance a/c 600



Adjustment Entries

Accruals

Accrued revenues are revenues that have been recognized (that is,services have been performed or goods have been delivered), but

their cash payment have not yet been recorded or received. Whenthe revenue is recognized, it is recorded as a receivable (asset). Forexample the interest earned in March on an investment in agovernment bond, but the interest will not be received until April.Adjustment journal Entry will be

Interest Receivable a/c Dr

To Interest on Investment a/c



Adjustment Entries

Accruals

Accrued expenses have not yet been paid for, so they are

recorded in a payable account. (liability) Expenses for interest,taxes, rent, and salaries are commonly accrued for reportingpurposes.An example the electricity that is used in March, but thepayment will not be made until April. Journal Entry will be

Electricity a/c DrTo Electricity Payable a/c



Adjustment Entries

Estimates A third classification of adjusting entry occurs where the exact

amount of an expense cannot easily be determined. Thedepreciation of fixed assets, for example, is an expense which

has to be estimated.Depreciation a/c Dr.To Plant and Machinery a/c

The entry for bad debt expense can also be classified as anestimate.

Bad Debt a/c DrTo Sundry Debtors a/c

http://en.wikipedia.org/wiki/Depreciation

http://en.wikipedia.org/wiki/Depreciation



Closing Entries

Closing Entries are entries that close all revenue andexpenses accounts by transfer to profit and lossaccount.

Sales Revenue a/c Dr.Interest Received a/c Dr.Commission received a/c Dr.Discount received a/c Dr.Any other Income a/c Dr.

To Profit and Loss a/c(all revenue and other accounts closed by trf to P&L

a/c)



Closing Entries

Profit & Loss A/c Dr.

To Wages a/c

To Salaries a/cTo Depreciation a/c

To Repairs a/c

To any other expense a/c(any expense accounts are closed by trf to P&

L a/c)



Opening Entries

Are recorded to transfer all assets and liabilities from thePrevious year to the current year.Cash a/c Dr.Machinery a/c Dr.

Building a/c Dr.Patent a/c Dr.Any other asset a/c Dr.

To Capital A/cTo profit and loss a/c

To Loan a/cTo creditors a/cTo any other liability a/c

(Being transfer all assets and liabilities)

