Basics of Accounting

Basics of Accounting – I

FINANCIAL ACCOUNTING / ISU MANUFACTURING

PRITHWIRAJ SEN [email protected]

TCS Internal

Basics of Accounting - I

CONTENTS

CONTENTS........................................................................................................................2FINANCIAL ACCOUNTING...........................................................................................3

STRUCTURE OF ACCOUNTING..............................................................................4RELATION BETWEEN ACCOUNTING AND BOOK KEEPING.............................5

DIFFERENT FORMS OF BUSINESS ORGANISATIONS......................................5ENTITY CONCEPT (ACCOUNTING CONCEPT)...................................................6

WHAT IS ACCOUNT ? WHAT ARE THE DIFFERENT TYPES OF ACCOUNTS?......................................................................................................................8

TYPES OF ACCOUNTS................................................................................................8GOLDEN RULES OF DEBIT & CREDIT....................................................................9Some Concepts..................................................................................................................13

TRIAL BALANCE.......................................................................................................23ASSET & LIABILITY....................................................................................................30LIABILITY........................................................................................................................32FINAL ACCOUNTS OF CORPORATES.....................................................................35

SOURCES OF FUND (ALL LIABILITIES)...........................................................36APPLICATION OF FUND.........................................................................................36

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FINANCIAL ACCOUNTING

Introduction

It is not easy to provide a concise definition of accounting since the word has a broad application within businesses and applications.

The American Accounting Association defines accounting as follows:

"The process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.

- It suggests that accounting is about providing information to others. Accounting information is economic information - it relates to the financial or economic activities of the business or organization.

- Accounting information needs to be identified and measured. This is done by way of a "set of accounts", based on a system of accounting known as double-entry bookkeeping. The accounting system identifies and records "accounting transactions".

- The "measurement" of accounting information is not a straight-forward process. It involves making judgments about the value of assets owned by a business or liabilities owed by a business. It is also about accurately measuring how much profit or loss has been made by a business in a particular period.

- The definition identifies the need for accounting information to be communicated. The way in which this communication is achieved may vary. There are several forms of accounting communication (e.g. annual report and accounts, management accounting reports) each of which serve a slightly different purpose. The communication need is about understanding, who needs the accounting information, and what they need to know.

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Accounting

Basic Accounting Managerial Accounting(Accountancy & Book Keeping ) i> Cost Accounting

ii> Management Accountingiii> Financial Managementiv> Investment Management

Banking WC Mgt. Portfolio Mgt. Fin.Mgt. Strategic Capital Costing Market

STRUCTURE OF ACCOUNTING

Journal

Ledgers

Trial Balance

Final Accounts

P&L A/c. Balance Sheet

Fund Flow Analysis

Cash Flow Analysis

Ratio Analysis

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Definition of Accounting: The systematic recording, reporting and analysis

of financial transactions of a business.

Working Capital Management: Working capital management involves the

relationship between a firm's short-term assets and its short-term liabilities.

The goal of working capital management is to ensure that a firm is able to

continue its operations and that it has sufficient ability to satisfy both

maturing short-term debt and upcoming operational expenses. The

management of working capital involves managing inventories, accounts

receivable and payable, and cash.

RELATION BETWEEN ACCOUNTING AND BOOK KEEPING

Accounting is basically the principles, the assumptions and postulates which determines the way of maintaining accounts.

Book keeping is the practical application of the theories of Accounting.

DIFFERENT FORMS OF BUSINESS ORGANISATIONS

O W N E R (S)

1. Sole Proprietorship … Proprietor

2. Partnership … All Partners

3. Corporate Entity … Share Holders

a) Private Limited

b) Public Limited

4. Co-Operative Society … Members

5. Hindu Undivided Family Business … All the Family Members

(co-parceners)

6. State Enterprises … Government

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ENTITY CONCEPT (ACCOUNTING CONCEPT)

Business is having its separate legal entity. In the eyes of law though

sole proprietorship or partnerships are identical with the proprietors and

partners but in case of companies, co- operative society and state

enterprises , there is a separate legal entities of the business itself.

The organizations and the owners are not the same. Company can file a

case against Share holders or share holders can file a case against the

company.

- In Entity concept - everyone has a separate legal entity.

- Any accounting , finance or costing matter is done from the point of view of organization itself and not from the point of view of owners or share holders.

1. Owners gives the money to the business .

Mr. X Rs.10 A Ltd. (to whom loan is given)

Capital (Liabilities) (as the loan is to be given back)(Personal Asset)(who gives loan)

Loan - External liability - ( Here, loan is to repay with a pre- settled interest)

Capital (Share ) - Internal liability - (Here full money or major portion is to be given back.

External liability is preferred first than Internal liability.

Assets are always equal to liability. ∑A = ∑L + ∑C

Increasing liability means increasing Assets also.

Decreasing liability means decreasing Assets also.

EVENTS & TRANSACTIONS :

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An event which is related to the business is known as transactions.

Business Transactions - Any events which affects the financial condition of the organization is called Business transaction.

Non Business Transactions - are general events. In transaction, both the organizations or unit is affected or both

takes part.

From the followings determine which one is Non Businesss Transaction and which one is Business Transaction.

1. Mr. X received Rs.10,000 from his company as salary - Business Transaction.

2. Mr. Ram started a business by investing Rs.1 lakh in cash - Business Transaction.

3. P. Ltd. Commenced its business with the issue of 1000 equity share at the rate of Rs.10 within which ½ of the share is taken by Mr Shyamlal against a Plant and Machinery and remaining ½ part is being taken by the public at large by way of payment through bank - ( Both are affecting the financial states of the organization. Both – by cash or kind if it affects the financial states it is a Business Transaction.)

4. ITC Ltd. Paid Rs.10 per share as dividend to its existing share holder by issuing bonus share and not by paying cash - Business Transaction.

5. Mr. Das a Proprietor of a Chartered Account firm withdraw Rs.10,000 for his personal use - Business Transaction.

6. ITC Ltd. Entered into an MOU with Classic Finance for a deal of Rs.5.00 crore - Event ( no transaction has started ).

7. A foreign investment is being signed between Govt. of India & Govt. of USA for 1 billion Rupees. – Event ( no transaction has started ).

8. Mr. Hari the Purchase Manager, Hindustan Ltd. obtained the quotation of Milk and Sugar from different vendors and came to the conclusion that Rs.15 per Kg. of Sugar and Rs.10 per Kg. of milk is the best price offered by XYZ Ltd. For a quantity of one ton each - Event ( no transaction ).

9. A debtor ( from whom the company will receive the money ) acknowledged through a letter about his outstanding of Rs.1 lakh to C. Ltd. - Event.

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10. X Ltd. is having B. Ltd. as debtors for Rs.10,000 as on 1st Jan., 2000. On 10th Jan. B. Ltd. exchanged a bill of exchange with its debtors balance of Rs.10,000. - Transaction ( Wealth remains the same i.e it neither increased nor decreased but internal changes occurred within the organization).

WHAT IS ACCOUNT ? WHAT ARE THE DIFFERENT TYPES OF ACCOUNTS?

An account is the summarized statement of business transactions.

(Transactions are recorded in Accounts ) :

TYPES OF ACCOUNTS

Personal Impersonal

Real NominalAccount Account

Personal Account - Any Account which deals with the Person or the Name of an Organization is a Personal Account.

e.g. Bank of India Account, Ram’s Account etc.

Impersonal Account -Any account which is not related to any person or organization is known as Impersonal Account.

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Real Account - Account of any head which deals with Property, Assets , Wealth etc. known as a Real Account .

e.g. Bank Account / Cash Account / Debtors Account / Building Account / Car Account.

Nominal Account - Account of any head which records Expenses and Losses , Profit or Gains is known as Nominal Accounts.

e.g. Sales Account, Commission Account, Salary Account, Wages Account etc.

Format of an A/c is as follows :-

BANK ACCOUNT

Dr. Cr.Dt. Particulars J.F Rs. Debit Particulars J.F Rs.

Whenever there is a Debit, there is a corresponding Credit i.e. to say, if one account is debited with X amount, some other account has to be credited with the X amount. ∑ Dr. = ∑ Cr, at any point of time in accounting principles.

Any business transaction always involves at least two accounts.

SINGLE ENTRY SYSTEM OF BOOK KEEPING – A single entry system is similar to a check book register and is characterized by the fact that there is only a single line entered in the journal for each transaction. Each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash.

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DOUBLE ENTRY SYSTEM OF BOOK KEEPING - Scientific accounting. When debit is done then a credit is also has to be done. This is called double entry system. [ To All Debit, there must be an Equal Credit.]

GOLDEN RULES OF DEBIT & CREDIT

Personal Account :

i) Debit the RECEIVERii) Credit the GIVER

Real Account :

i) Debit what COMES IN ii) Credit what GOES OUT

Nominal Account :

i) Debit ALL EXPENSES & LOSSESii) Credit ALL GAINS & INCOMES

Rule of Thumb : i) Debit all Assetii) Credit all Liabilities.

Classify the following accounts into Real, Nominal and Personal Accounts :-

i) Capital - (Personal A/c. or Real A/c.) / Liabilities (Cr.Balance)ii) Equity Share - ( Personal A/c. or Real A/c.) / Liabilities

(Cr.Balance)iii) Loan - (Personal Account ) / Liabilities (Cr.Balance)iv) Furniture - (Real Account ) / Asset (Dr.Balance)v) Building - ( Real Account ) / Asset (Dr.Balance)vi) Salary - (Nominal Account ) / Expenses (Dr.Balance)vii) Wages - (Nominal Account ) / Expenses (Dr.Balance)viii) Dividends - (Nominal Account ) / Expenses (Dr.Balance)ix) Bills Receivable - (Real Account) / Assets (Dr.Balance)x) Bills Payable - ( Real Account ) / Liabilities (Cr.Balance)

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xi) Commission - (Nominal Account ) / Indirect Expenses (Dr.Balance)

xii) Sales - (Nominal Account ) / Direct Income (Cr.Balance)xiii) Opening Stock ( Real Account) / Current Asset (Dr.Balance)xiv) Closing Stock ( Real Account ) / Current Asset (Dr.Balance)xv) Cash - ( Real Account ) / Current Asset (Dr.Balance)xvi) Bank - (Real Account ) / Current Asset (Dr.Balance)xvii) Bank of India A/c. - (Personal Account)/ Asset (Dr.Balance)xviii) City Bank Account - (Personal Account ) / (Dr.Balance) xix) Outstanding Wages Account - ( Nominal Account ) (Cr.Balance)xx) Mr. Ram Accounting - ( Personal Account ) (Dr./ Cr. Balance)xxi) Consignment Account - (Personal Account ) (Dr./ Cr. Balance)xxii) Branch Account - (Personal Account ) (Dr./ Cr. Balance)xxiii) Higher Purchase Account (Nominal Account)xxiv) Lease hold property account - (Real Account) ( Fixed Asset ).

From the following Transaction, identify each account and state which one to be debited and which one is to be credited by applying the golden rules.

1. Mr Ram started a business with Rs.10,000 as capital

a) Capital Account - credited b) Cash Account - debited.

2 Purchase goods worth Rs.1000 from Mr. X in cash –

a) Purchase - Debit b) Cash - Credit

3. Purchase goods from Mr. X in credit

a) Purchase Account - Debitb) X Account - Credit.

Purchase machinery worth Rs.2000

Machinery Account – DebitedCash Account - Credited

Sale goods to Mr. P in cash for Rs.5000

Sales Account - Credited Cash Account - Debited

6. Sale goods to Mr. PQ for Rs.5000 in credit -

Mr. PQ Account - Debited Sales Account - Credited.

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Paid Rs.500 to the workers as salary -

Salary Account - DebitCash Account - Credit

8. Withdraw Rs.1000 from the business for proprietor’s personal use -

Drawings Account - DebitedCash Account - Credited.

Receive Rs.1000 from the Debtors (PQ)

Cash Account - DebitPQ Account - Credit

From the following transactions of ITC Ltd., make a tabular statement classifying each account for each transactions & state which account to be debited and which account to be credited.

1) Issue of 100 equity share @Rs.100 to general public in cash.

Cash Account - Real Account - DebitedShare Account - Liability / Personal Account – Credited

2) Purchase Raw Tobacco from the farmers of Andhra Pradesh for Rs.5000 in cash.

Purchase Account - Nominal Account - DebitedCash Account - Real Account - Credited

3) Pay salaries & wages for the year ended amounts to Rs.2000

Salary & wages A/c. - Nominal - DebitedCash A/c. - Real Account - Credited.

4) Sales to the agent amounts to Rs.1 Lakh

Agents Account - Personal A/c. - Debited Sales Account - Nominal A/c. - Credited.

5) Paid Sachin Tendulkar 10 Lakhs for advertising their products -

Publicity Account - Nominal Account - DebitedCash Account - Real Account - Credited

6) Spent 10 Lakhs for publicity of their brands in different media.

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Advertising Account - Nominal Account - DebitedCash Account - Real Account - Credited

7) Deposited Rs.10 Lakhs into bank from collection.

Bank Account - Real Account - DebitedCash Account - Real Account - Credited

JOURNAL

Definition : Journal is the Primary Books of Entry where all transactions are recorded as soon as they occur. Following is the format of a Journal.

Journal

Date Particulars LF

Debit (Rs.)Dr.

Credit (Rs.)Cr.

1.4.2000

Cash A/c. Dr. To, Capital A/c(Being cash introduced by Mr. Ram as Capital)

……… …….

5.4.2000

Purchase A/c. Dr.To, Cash(Being cash purchase done)

……… ………

6.4.2000

Purchase A/c. Dr.To, Mr. X A/c.(Being credit purchase done)

……… ……

The following are the different types of Journals :

1) PURCHASE DAY BOOK – Credit Purchase2) PURCHASE RETURN BOOK – Credit Purchase Return3) SALES DAY BOOK – Credit Sales4) SALES RETURN BOOK – Credit Sales Return 5) CASH BOOK – All Cash Entry / Cash, Bank & Disc.

A/c.6) JOURNAL PROPER - All the residual entry goes to

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Journal proper - a) Opening entries

b) Closing entries c) Rectification entries d) Adjustment entries e) Purchase & Sale of fixed Asset on Credit.

7) Bills Payable Book – Bills Payable 8) Bills Receivable Book – Bills Receivable

Some Concepts

Accrual Concept : Revenues and costs are accrued, that is , recognized as they are earned or incurred (and not as many received or paid) and recorded in the financial statements of the periods to which they relate.

Cash Concept

Revenue Transaction & Capital Transaction.

The financial year in India starts from 1st April and ends on 31st March. When you have made a credit purchase, you have to write in that times period or year, or same Financial period only. It is known as - Accrual Concept.

1) Revenue Expenditure - Any benefit from any expenditure or any income from any source which expires within a period of 12 months under normal circumstances, it is known as Revenue Expenditure.

2) Capital Expenditure - If it crosses the barrier of 1 year, it becomes capital expenditure or capital receipts.

3) Going Concern Concept - We assume that the business will continue forever. It has a perpetual succession.

LEDGER

Definition : Ledger is a book of account where detailed information in relation to a particular account is maintained.

e.g Purchase Account ; Capital Account. Rent Account , Sales Account etc.

Purchase A/c.

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Dr. Cr.

Date ParticularsJ.F Amount

(Rs.)Date

ParticularsJ.F Amount

(Rs.)

CASH BOOK

Cash Book is a Book of primary book of entry where all the receipts and payments of cash are recorded. Cash book is also known as a Journalized ledger.

Cash Books are generally of 3 types.

1) SINGLE COLUMN CASH BOOK (Cash A/c.)2) DOUBLE COLUMN CASH BOOK (Cash & Bank A/c.)3) TRIPLE COLUMN CASH BOOK (Cash, Bank & Discount A/c)

In a Single column Cash Book - we record only the Cash records.

In a Double column Cash Book - we record Cash as well as Bank Transactions.

In a Triple column Cash Book - we record Bank and Cash account and also we keep a record of Discount A/c.

In corporate world generally a triple column cash book is maintained. The following is the format of Triple column Cash Book.

At the time of Cash & Bank Transactions, questions of contra balance will come. Contra entry is identified as ‘C’ in the L.F Column.

Petty Cash Book: A petty cash book is a book of vouchers which are prepared each time a disbursement is made from petty cash. The voucher would show the date, amount, recipient, purpose and general ledger account number relating to the expense. The person giving out the petty cash and the person receiving the petty cash would sign the voucher and any supporting documentation (such as receipts) would be attached.

CASH BOOKDr. Cr.

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Dt.

Particulars

LF

Cash Bank

Dis-count

Dt.

Particulars

LF

Cash

Bank

Dis-count

Note :

Discount Received - CreditDiscount Allowed - Debit

Petty Cash Book.

Problem - 1 (Examples)

i) In the books of ABC consultant write up a cash book with suitable columns Started on 1st Jan’2000 ; Started business with a capital of Rs.10,000, brought in the form of cheque Rs.5000, cash Rs.4000 plant & machineries Rs.1000.

ii) On 10th Jan, purchase materials in cash for Rs.500.

iii) 20th Jan, Sales in cash Rs.1000 received by an Account Payee cheque.

iv) On 25th Jan. deposited Rs.100 into Banks.

v) 28th Jan. received Rs.900 from X. Ltd. for a full settlement office bill of Rs.1000.

vi) 29th Jan. paid XY Ltd. Rs.2000 on full settlement for a bill of Rs.2500.

vii) 30th Jan withdraw cash from bank for office use Rs.500.

Dt. Particulars LF

Cash

(Rs.)

Bank

(Rs.)

Dis-count(Rs.)

Dt. Particulars LF

Cash

(Rs.

Bank

(Rs.)

Dis-count(Rs.)

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Dr. Cr.


)19.1 To, Capital A/c. 400

05000 10.1 By

Purchase500

20.1 To, Sales A/c. 1000 25.1 By Bank A/c c 10025.1 To, Cash A/c. c 100 29.1 By X Y A/c 2000

050

28.1 To,X A/c. (Assu- med recd. by cheque.)

900 100 30.1 By Cash A/c. c 500

30.1 To, Bank c 500 By Bal. c/d.(closing bal/)

3900

4500

4500

7000 100 4500

7000 50

3900

4500

1.2 To, Balance b/d

Problem -

From the following information, prepare a cash book & a Journal Proper , in the book of XYZ & .Company.

i) Opening balance on 1st Jan, 1999, Cash Rs.100 & Bank R.10,000

ii) 2.1.99 proprietor introduced fresh capital of Rs.20,000 brought in the form of cash 10,000, motor car Rs.10,000.

iii) 3.1.99 purchased raw material in cash from XYZ & Company Rs.2000.

iv) 4.1.99 Sales in cash to C.Ltd. received by way of demand draft Rs.20,000

v) 5.1.99paid X Ltd. a cheque of Rs.50,000 in full statement of his claim of Rs.55000.

vi) 6.1.99 received Rs.10,000 in cash from T. Ltd. in full settlement of a bill of Rs.10,000.

vii) 7.1.99 purchase from ITC Ltd. Rs.10,000

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viii) 8.1.99 sales to HLL Rs.5000 ( take it as credit sales).

ix) 9.1.99 Proprietor withdraw Rs.600 for personal news from the bank.

From the Company’s point of view, when money is withdrawn or business is started - it is to be debited.

In case of purchase or expenditure, the same is to be credited.

JOURNAL PROPER

Particulars LF

Debit (Rs.) Credit (Rs.)

1.1 Motor Car A/c. Dr.To, Capital A/c.(Being Motor Car is introduced as capital )

10,00010,000

2.1 Purchase A/c. Dr. To, ITC Ltd.(Being purchase made oncredit from ITC Ltd.)

10,00010,000

3.1 HLL Ltd. A/c. Dr.Sales A/c.(Being credit sales to HLL Ltd.)

5,000 5,000

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LEDGER

Car Account

Dr CrDt. Particulars L

FAmount Dt. Particulars Amount

To Capital A/c.

To Balance B/d

10,000

Rs.10,00010,000

By Balance C/d 10,000

Rs.10,000

CAPITAL A/C.

Dr. CrDt. Particulars J

FAmount

Rs.Dt. Particulars J

FAmount

Rs.To, Balance c/d

20,000

20,000

By Car A/c.By Car

10,00010,000

20,000

PURCHASE A/CDr. Cr.Date Particulars L

FAmount

Rs.Date Particulars Amount

Rs.To, ITC Ltd. A/c. 10,000 By Balance c/d 10,000

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To, balance b/d 10,000 10,000

SALES A/C Dr.

Cr. To, balance c/d, 5000 By HLL A/c.

5000(Trading A/c.)

5000 5000

ITC Ltd. A/c.

Dr. Cr.

To, Balance C/d, 10,000 By, Purchase 10,000

10,000 10,000 By , Balance b/d 10,000

HLL A/c.

Dr. Cr.

To, Sales A/c. 5000 By balance c/d 5000

5000 5000

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To, balance b/d 5000

Debit (No. of debit balances ) Credit (No. of credit balances)

(1) Car - 10,000 (1) Capital - 20,000(2) Purchase - 10,000 (2) Sales - 5,000(3) HNL - 5,000 (3) ITC - 10,000(4) Cash - 10,000

35000 35000

Problem - 3 :

A & Co. is a proprietorship concern commenced its business on 1st April 2000 with a capital of Rs.1 Lakh brought in by its proprietor by way of Bank Draft.

7/4 - Purchased Raw Materials in cash for Rs.10,0008/4 - Purchased good from B Ltd. for Rs.10,0009/4 - Sold to C Ltd. in cash goods worth Rs.25,00010/4 - Credit Sales to C Ltd another Rs.30,00010/4 - Rent paid Rs.500015/4 - Salary & Wages paid Rs.10,000 (you can assume both

cash & bank)20/4 - Tax paid Rs.10,000 (In case of tax, you have to

assume through bank unless it is written by cash).25/4 - Proprietor withdraw Rs.5000 from bank for personal

use. (Here bank means proprietor’s personal savings account ).

25/4 - Proprietor withdraw Rs.1000 from Companies Bank account for his own use.

26/4 - Receive Rs.10,000 from C Ltd.26/4 - Paid Rs.1000 to B Ltd.

Prepare a Cash book and all the ledger accounts.

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Purchase A/c.

Dr. Cr.

To, B Ltd. … 10,000 By Balance C/d …20,000

To, Cash … 10,000

______ _____ Rs.20,000

Rs.20,000

Sales A/c.Dr. Cr.To, Balance C/d. …. 55,000 By Cash A/c. … 25,000

By C Ltd. A/c … 30,000(Trading A/c.)

Rs.55,000

Rs.55,000

Capital A/c.

Dr. Cr.

To, Balance c/d. … 1,00,000 By Bank A/c. …1,00,000

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_______ Rs.1,00,000

Rs.1,00,000By Bal. b/d.

1,00,000

Drawings A/c.

Dr. Cr.

To, Bank A/c. … 1,000 By balance c/d … 1,000(P/L) or BS( or by cash)

_______Rs.1,000

Rs.1,000

Rent A/c.Dr. Cr.

To, Cash A/c. … 5,000 By balance c/d. … 5,000(P/L)

______ Rs. 5,000

Rs.5,000

Tax A/c.

Dr. Cr.

To, Bank A/c. 10,000 By balance c/d. 10,000

(P/L)_______ Rs.10,000 Rs.10,000

B.Ltd.

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Dr. Cr.

To, Bank A/c. 1,000 By, Purchase A/c. 10,000

By balance c/d 9,000 _____

Rs.10,000Rs.10,000

To, Bal. b/d. 9,000

C. Ltd.

Dr. Cr.

To Sales A/c. 30,000 By Bank A/c.10,000

By Balance c/d 20,000______

Rs.30,000 Rs.30,000To Bal. b/d 20,000

Trial BalanceAs on ……………

Dr. Cr.

Purchase 20,000 Capital 1,00,000

Rent 5,000 Sales 55,000

Salary & Wages 10,000 B. Ltd. 9,000

Tax 10,000Drawings 1,000C. Ltd. 20,000Bank 96,000Cash 2,000

Rs.1,64,000 Rs.1,64,000

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TRIAL BALANCE

It is a statement prepared from the balance of the ledger account to verify the arithmetical accuracy of the books of account.

THE ERRORS NOT DISCLOSED BY A TRIAL BALANCE :

(1) Error of Omission(2) Error of Commission(3) Error of Misposting(4) Errors of Compensation.

THE ERRORS DISCLOSED BY TRIAL BALANCE :

(1) Casting Error ( mistake in addition or subtraction in Ledger )

(2) Posting Error (3) Error of Principles – Violation of Principles(4) Clerical Error (5) Fraud with mutual undertaking of two or more persons.

The following is the format of Trial Balance.

Name ……..Trial Balance ……….

Sr. No. Particulars L.F Debit (Rs.) Credit (Rs.)

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Manufacturing , Trading , Profit & Loss Account

For the year ended ……………..Dr. Cr.

Particulars Amount (Rs.) Particulars AmountMfg. A/c.

To, Purchase

To, Carriage inward

5,00,000

5,000

By Cost of Production c/d 5,05,000

5,05,000 5,05,000Tra-dingA/c.

To cost of Pro-duction b/d

To Carriage Outward

To Gross Profit c/d

5,05,000

10,000

4,85,000

By sales A/c. 10,00,000

Rs. Rs.10,00,000 Rs. Rs.10,00,000

Profit& LossA/c.

To Disc. Allowed

To Rent paid

To Salaries & Wages

To Net Profit(Transfer to Balance Sheet)

1,000

50,000

10,000

5,26,000

By Gross Profit b/d

By Discount recd.

By Commission recd.

4,85,000

2,000

1,00,000

Rs.5,87,000 Rs.5,87,000

Final Accounts consists of Manufacturing Account, Trading Account, Profit & Loss Account & a Balance Sheet.

In general , we call final a/c. as P&L Account & Balance Sheet. The P&L Account is a nominal account from which the business finds out its gross profit, net profit etc

Again, a Balance Sheet is a statement of Asset & Liabilities which shows the financial position of the business as on a particular date.

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Items of Trial Balance will come either in a Balance Sheet or P & L Account.

All Revenue Items will come on P & L Account.

All Capital Item will come on Balance Sheet.

Revenue Items - Any items whose benefits lasts for 1 year or less than 1 year is known as Revenue Items.

Capital Items - Any Item whose benefits goes on for more than one year is known as Capital Item.

Whenever, the term salaries & wages are there, you have to assume that the salaries & wages are paid for office employees and it is to be considered as indirect expense, so they will be placed in Profit & Loss Account.

BALANCE SHEET AS ON 1.03.2000

Liability Rupees Asset Rupees

Capital 5,00,000 Plant & Machinery 3,00,000Net Profit 5,26,000 Motor Car 1,00,000Sundry Creditors 2,00,000 Sundry debtors 5,00,000

Bank 50,000Cash 2,76,000

Rs.12,26,000 Rs.12,26,000

Manufacturing A/c. - It is the first step of the final accounts. It shows the manufacturing cost of the concern for the particular period. All the direct manufacturing expenses & incomes are placed in this manufacturing account. The following is the specimen manufacturing account with the common items.

A & Company

Manufacturing A/c.For the Year ended 31.3.2000

Dr. Cr.

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Particulars Amt.

(Rs.)

Amt.

(Rs.)

Particulars Amt.(Rs.)

Amt.

(Rs.)

To Opening Stock (Raw Material)

100 By Sales of Scrap (By Product)

50

Add. Purchase 200(Raw Material)Less, Returns 50

150

Mfg. Cost c/d(Transfer to Trading A/C.)

300

Less, Closing stock 50Material Consumed 200To Carriage Inward 50To Wages (Work) 50To,(Any other DirectFactory Expenses)

50

-Rs. 350 Rs. 350

Trading Account : A Trading Account is the second step of the Final Account where we find the gross profit or the gross loss from the direct expenses or direct incomes.

Trading Account

For the year ended 31.03.2000

Dr. Cr.Particulars Amt.

(Rs.)Amt. (Rs.)

Particulars Amt. (Rs.)

Amt. (Rs.)

To Mfg. A/c. 300 By Sales 1000

To Opening Stock (Finished goods)

100 Less Returns 100 900

To Purchase (F.G) 100 Closing Stock (F.G.) 200

To Any other Direct Expenses

100

To Gross Profit (Transfer to Profit & Loss A/c.)

500

1,100 1,100

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Profit & Loss Account : P&L A/c. in the 3rd part of the Final A/c. where all the indirect expenses & incomes are recorded to find out the Net Profit or Net Loss. The following is the format of a P&L Account.

Profit & Loss A/c.

For the year ended 31.03.2000

Dr. Cr.Particulars Amt.

(Rs.)Amt.(Rs.)


Amt.(Rs.)

To Salaries 50 By Gross Profit b/d 500To Rent 20 By Commission 50To Electricity 30 By Interest 50To Depreciation 10 By Dividend 100To Package 10To Advertisement 10To Bad Debtor 10To Commission Paid 10To Interest Paid 10To Net Profit c/d(Transfer to P&L Appropriation A/c.)

540

700 700

Profit & Loss Appropriation A/c. : It is an Account which show the apportionment of net profit for the particular year. The format of an P&L Appropriation A/c. is as follows :-

Profit & Loss Appropriation AccountFor the year ends : 31.03.2000

Dr. Cr.Particulars Amt

.(Rs.)

Amt.(Rs.)


Amt.(Rs.)

To Drawings / Dividend 100 By Net Profit 540

To Tax A/c. -To Reserve Account 200

To Balance c/d(P&L A/c.)

240

Rs. 540 Rs. 540

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Balance Sheet

It is ‘Statement ‘ prepared from the balances of the Trial Balance & Final A/cs. to show the financial condition of business on a particular day.

A & Company

Balance Sheet as on 31.03.2000

Liabilities Rs. Asset Rs.Capital 10,000 Land & Building 100Reserves 200 Sundry Debtors 100P & L A/c. 240 Bank 200Loans 500 Closing Stock 100Sundry Creditors 100 Goodwill 5,000

Investment 3,000Cash 2,540

Rs.11,040

Rs.11,040

Problem : 1

From the Trial Balance, draw a Trading and P & L Account and a Balance Sheet.

Sr. No.

Particulars L.F. Debit (Rs.) Credit (Rs.)

1. Capital 10,0002. Purchase 12,0003. Sales 25,0004. Wages 2,0005. Debtor 15,0006. Creditor 2,0007. Rent, Rates &

Taxes2,000

8. Cash 9,5009. Bank (Overdraft) 4,000

Rs.41,000 Rs.41,000

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Trading & Profit & Loss Account

For the year ended ………….Dr. Cr.Particulars Amount Particular Amount

To Purchase 12,000 By Sales 25,000To Wages 2,000To Gross Profit c/d 11,000

25,000 25,000

Profit & Loss A/c.Dr. Cr.Particulars Amount Particular Amount

By G.P b/d 11,000To Salary 500To Rent, Rate & Taxes 2000To Net Profit (Transfer to Balance Sheet)

8500

Rs.11000 Rs.11,000

Balance Sheet

As on ………………….Dr. Cr.Liabilities Amount Asset Amount

Capital 10000 Debtors 15,000Add. 8500 18500 Cash 9,500Creditors 2000Bank Overdraft 4000

Rs.24,500 Rs.24,500

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ASSET & LIABILITY

Asset : The entries on a balance sheet showing all properties, both tangible and intangible and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights and goodwill.

Different types of Assets are as follows :-

ASSETS

Fixed Current Fictitious Contingent Asset Asset Asset Asset(Land, Bldg., M/c) (Stock Debtor) (P/L {Dr.}) (Claim receivable

from Law Suit)

Tangible IntangibleLiquid Super LiquidAsset Asset

A. FIXED ASSET : Fixed Assets are those assets, the benefits of which last more than 1 year.

Example - Land & BuildingMotor CarsPlant & MachineriesFurniture & FixtureLong Term Investment.

Tangible Asset : Tangible assets are those assets which one can see feel and views directly.

Intangible Asset : Intangible assets are those assets which, one can realize and one can get benefit out of it but can not be seen or felt but can be realized.

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Example : GoodwillPatentTrademarkCopy Right.

B. CURRENT ASSET : The Current Asset is an asset, the benefit of which expires within 1 year and these are convertible in cash if required within the same financial year in general.

Example : CashBank Raw MaterialsDebtors Work in ProgressStock Finished goodsBills ReceivableShort Term Investment.

Current Assets are classified on the basis of their convertibility into cash :

Liquid Asset : Debtors, stocks, Bills Receivable will take some more time to be converted into Bank or Cash. So they are known as Liquid Assets.

Super Liquid Asset : Cash in hand, Bank balance are liquid in itself. So these are known as Super Liquid Assets.

C. FICTITIOUS ASSETS : Assets which never exists but still find a place in the balance sheet is known as a Fictitious Assets. In other words, these are Negative Assets or no assets. It gives a loss to the concern. It is beneficial for an organization to have less amount of Fictitious Asset.

Example : (P & L Account … Dr.)Preliminary Expenses - Expenses which are incurred while incorporating a company.

D. CONTINGENT ASSET : Assets which may or may not arise with the happening of any events are known as Contingent Asset. Contingent Assets are shown below the total line of balance sheet because there is no certainty as to whether these are going to be assets or not. That is to say, it is shown as a footnote.

Example - Insurance ClaimLottery Tickets

Goodwill can be classified according to 3 different categories :-

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Dog Goodwillii) Cat Goodwilliii) Rat Goodwill

Dog Goodwill : These are personalized goodwill which follows with the individuals or organizations.

-Doctors, Lawyers ( in case of individuals ).-Localization of Industries.

Cat Goodwill : This is a localized goodwill. It is identified with place.

Rat Goodwill : It is a negative goodwill. If goodwill becomes ‘negative goodwill’. It will come under Fictitious Asset.

Negative Goodwill: A gain occurring when the price paid for an acquisition is less than the fair value of its net assets.Depending on the circumstances, this is listed as a separate line item and usually recognized as income. Negative goodwill can sometimes occur after a distressed sale. Because of this type of sale almost always happens under unfavourable conditions, the seller generally receives a worse price. When the price received is less than the actual value of its net assets, you have negative goodwill.

LIABILITY

Any obligation to pay is known as Liability.

Liability

Internal Longterm Current Contingent(Owner’s ) Liability Liability Liability

INTERNAL LIABILITY : These are liabilities of the organization to its owner. Be it a proprietorship concern, partnership firm or a Body Corporate.

Capital ( Proprietor & Partnership ) - ReservesEquity Share (company form of business ) - P & L Account

LONG TERM LIABILITY : The Liability which have to be paid of in more than 1 year term is considered to be a long term liability.

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Term Loan from bankDebentureLong Term LoanLoan from Financial Institution.

CURRENT LIABILITIES : The Liabilities which lasts or which is to be paid of within 1 year is known as Current Liabilities.

CreditorBank OverdraftBills PayableOutstanding Expense.

CONTINGENT LIABILITY : The liabilities which may or may not happen in the happening or non-happening of an event is called contingent liability.

e.g. Pending Litigation.

* Contingent Liabilities are shown as foot note in Balance sheet.

Note : -

Any recurring expense which should have been paid but not paid is known as - Outstanding Expenses.

Any expense which you have paid before it occurs is known as pre-paid expense. This is a Current Asset to be placed in the Balance Sheet.

Income which should have been received but not received is known as - Outstanding income. It is also a Current Asset to be placed in the Balance Sheet.

Problem :

From the following Trial Balance, prepare a Trading Account & Profit & Loss Account for the year 2000 and a balance sheet on that date in the books of S K Joshi & Associates.

TRIAL BALANCE AS ON 31.03.2000

Sr.No.

Particulars LF

Debit (Rs.)

Credit (Rs.)

1. Capital 1,00,0002. Drawings 10,0003. Purchase 10,00,0004. Sales 20,00,0005. Debtors 3,00,0006. Creditors 2,00,000

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7. Wages 10,0008. Salaries 10,0009. Rent Paid 5,00010. Disc. Allowed 10,00011. Disc. Recd. 20,00012. Furniture & Fixture 20,00013. Land & Building 10,00014. Plant & Machinery 50,00015. Bank Balance 8,00,00016. Cash in hand 95,000

Total Rs.23,20,000 Rs.23,20,000

Additional Information :-

Depreciate all fixed asset at 10%Provide provision for doubtful debts at 10%Closing Stock – 10,000Outstanding Salaries – 50,000Accrued Commission - 10,000(Receivable)

Trading A/c. & P & L A/c. For the year ended……….Dr. Cr.Particulars Amt.

Rs.Particulars Amt.

Rs.To Purchase 10,00,00

0By Sales 20,00,000

To Wages 10,000 Closing Stock 10,000To Gross Profit c/d 10,00,00

0Rs. 20,10,00

0Rs. 20,10,000

To Salary 10,000

By Gross Profit b/d 10,00,000

Outstanding Salary 50,000

60,000 By Discount Received 20,000

To Rent 5,000 By Accrued Commission

10,000

To Disc. Allowed 10,000To Depreciation -Furniture & Fixture – 2000Building & Land - 1000 Plant & Machinery - 5000 8,000To Provision for bad &

doubtful debtors30,000

Net Profit c/d(Transfer to B.S.)

9,17,000

Rs. 10,30,00 Rs. 10,30,000

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0

BALANCE SHEETAs on ………………….

Liabilities AmountRs.

Asset AmountRs.

Capital 1,00,000 Plant & Machinery- 50,000Less, Depreciation- 5,000

Add. Net Profit 9,17,000 45,00010,17,00

0Less. Drawings 10,000 Land & Bldg. - 10,000

10,07,000

Less, Depreciation - 1,000 9,000

Furniture & Fixture - 20,000Creditors 2,00,000 Less, Depreciation - 2,000 18,000Outstanding Salaries 50,000

Debtors - 300000Less, Bad Debt. 30000 2,70,000Bank 8,00,000Cash 9,50,000Accrued Commission 10,000Closing Stock 10,000

Rs. 12,57,000

Rs. 12,57,000

Whenever there is an additional information, we have to consider that item twice unlike the item which were already there in the Trial Balance which we consider only for once to prepare the final Accounts. Since, for additional item one have to provide both the debit and credit entries.

Conservatism Theory in Accounting: Accounting conservatism is traditionally defined by the adage “anticipate no profit, but anticipate all losses”. Anticipating profits means recognizing profits before there is legal claim to the revenues generating them and that the revenues are verifiable. Conservatism does not imply that all revenue cash flows should be received before profits are recognized-credit sales are recognized-but rather that those cash flows should be verifiable.

FINAL ACCOUNTS OF CORPORATES

As per Schedule – VI of the Companies Act. the balance sheet should be represented in the following orders :-

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LIABILITIES Rs. ASSETS Rs.

SHARE CAPITAL : FIXED ASSET :- Equity Share Capital - Goodwill- Preference Share - Land & Building

- Furniture & Fixtures- Plant & Machineries

RESERVES & SURPLUS : INVESTMENT :- Capital Reserves - Short Term Investment- Revenue Reserves - Long Term Investment- P & L A/c. (Net Profit)

CURRENT ASSETS :SECURED LOANS: - Short Term Investment- Secured Debentures - Sundry Debtors- Secured Long Term Loans - Cash

- Bank UNSECURED LOANS : - Bills Receivable- Unsecured Debentures- Unsecured Short Term or LOANS & ADVANCES : Long Term Loans - If company gives some

loans it will come here.CURRENT LIABILITIES & Advances for Purchase PROVISIONS : MISC. EXPENSES :- Sundry Creditors - P & L A/c. (Loss )- Bills Payable - Patent- Provision for Doubtful

Debts.- Copy Right

- Preliminary Expenses etc.* Secured Loan : This loan is taken by mortgaging Fixed Asset.

Interest to be paid to Bank, if any car is purchased from Bank, otherwise, it would be seized by the bank. It has lower interest rate.

* Unsecured Loan : It is not considered how this loan would be used or the person who lent money won’t want back the money or asset. It has higher interest rate.

NEW VERTICAL FORMAT OF BALANCE SHEET

SOURCES OF FUND (ALL LIABILITIES)

Share Capital - 100Reserves & Surplus - 100Secured Loans - 100Unsecured Loans - 100

400

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APPLICATION OF FUND

Fixed Asset - 100Investment - 100Current Asset - 200Less, Current Liabilities - 100 & Provision - 100 (Working Capital)Loans & Advance - 100Misc. Expenses - 000

400Note :-

If the problem is given in company form of business try to follow both the methods of Balance Sheet.

Pvt. Ltd. / Ltd. - If these words are not there, the company would be Proprietorship or Partnership.

Pvt. Ltd./ Ltd. - Whenever these words are there, it would be a company form of business.

ADVANTAGES OF FINANCIAL ACCOUNTS :

(1) It shows the detailed record of the day to day business transaction of an organization.

(2) Profit & Loss assets and Liabilities are shown for the year and for a particular time.

(3) Financial Accounting is an actual figure based on Actual happening so the data are reliable.

(4) Final Accounting supplies accounting information like Gross Profit, Net Profit, Asset, Liabilities, Taxes, Turnovers, Tax Liabilities to the interested parties like owners, lender, financial institutes, tax authorities etc.

(5) It is an uniform practice so anybody with accounting background could understand the position easily.

(6) Now a days sophisticated but simple software accounting packages are available which makes the accounting job easier & timely (FACT, TALLX etc.)

LIMITATIONS OF FINANCIAL ACCOUNTING :

(1) Financial Accounting express everything in absolute term so decision can not be taken perfectly.

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(2) Financial Accounting is only a Post-mortem analysis. One can not express any sort of opinion about it, so it is very rigid.

(3) Financial Accounting can always forecast the facts which have already occurred but it fails to analyze the future.

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Basics of Accounting

Documents

system of accounting

accounting system

managerial accounting

management accounting

management of working

economic information

accounts receivable

financial statements