Mms2,3 2011

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING

Session II – Accounting Mechanics – Preparation of Journal entries & General Ledgers

Session I – Introduction to Accounting Concepts of Accounting (GAAP)

SESSION 2

Recap

Presentation of Assignment on Survey of Indian Industry 2010

What is accounting

According to AICPA, Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of financial nature and interpreting the results thereof.

This accounting process continues as financial statements and reports that are provided to users.

Accounting is the language of business

Recap

Classifying means to get information on different transactions individually. The book of account used for classification is called is called “Ledger”

Recording of financial transactions

Summarizing - Once classified information is available in the ledger, it is used to make summaries in the form of Income Statement & Balance Sheet. ie. Financial result and financial position

Recap

What is accounting cycle?

Recap

What is the need for “financial accounting”?

The important functions of management; decision making, planning & controlling cannot be executed without correct and timely information in the form of accounting data. A business man would like to periodically know the position of his business

The two systems of accounting are:

Cash basis Accrual basis

Forms of business organization

Sole Proprietorship, Partnership & Company

The three branches of accounting are:

Recap

Management Accounting refers to providing information to various management levels as a basis for management decisions.

Cost Accounting refers to recording classifying allocating and reporting current and prospective costs.

Financial Accounting refers to accounting for revenues, expenses, assets & liabilities.

Users of financial reports

Shareholders

Creditors

Government

Board of Directors

Employees

Bankers

Accounting Period Concept Money-Measurement

Cost Concept Matching Principle

Going Concern

Generally Accepted Accounting Principles (GAAP).

Business Entity Concept `

Realization Concept Conservatism

Materiality Concept Consistency

Dual Aspect Concept

This can be best understood by understanding the role of the finance department in an organization

To ensure efficient management of cash flow

Role of Financial Accounting in business

maintenance of accurate accounts making and reviewing policies & procedures,

by providing accurate and timely information for decision making in order to maximize profitability

control income and expensesguide all departments

Session 2 - Capital & Revenue Items

Segregation of Income and Expenses into Capital & Revenue Items is an important aspect of Accounting

To ascertain the correct Revenue from business

To ascertain the correct Value of the business

We may overstate or understate profits in the Profit & Loss Account in case of incorrect classification

We may overvalue or undervalue the business in the Balance Sheet in case of incorrect classification

Revenue Items

Revenue Items include revenue receipts and revenue expenses and are reflected in the P & L A/c

Revenue receipts includes Sales & all other income earned from the business on a regular basis

Revenue expenses include all expenses that are incurred in the usual course of business on a regular basis

Examples of Revenue receipts are- Sales, Interest received, Commission received, Dividend recd. Examples of Revenue expenses – Freight, Purchases, Depreciation, Interest paid, Factory expenses.

Capital Items

Capital items include capital receipts and capital expenses.

Increase the useful life of an asset

Capital expenses is incurred to

Buy a fixed asset

Increase the productive capacity of fixed assets

Make an asset usable or reusableIncrease the profitability of the business by achieving operating efficiency

Capital Items are reflected in the Balance Sheet of the Business.

Deferred Revenue Expenditure

Sometimes a revenue expenses may be of the nature of a deferred revenue expenditure

These expenses are written off over a period of time

The benefits of the expense may last for more than a year but are definitely not capital in nature. Eg. Advertisement & Publicity

Preliminary expenses, brokerage or commission paid on issue of debentures are some examples

Capital & Revenue Expenses

Rs. 1 lakh spent on purchase of machine. A loan was taken for the same.

Rs.50,000 spent on preventive maintenance of a machine

The machine started production on 1st October 2009Interest paid Rs. 12000 upto September 2009 on loan Interest from October to March - Rs. 12,000

Rs.20,000 spent on brokerage & commision expenses for issue of sharesRs.20,000 spent on machinery to increase its capacity

Rs.5 lakh spent on advertisement which will be publicised for 3 years

Rs. 10,000 was spent on freight to bring the machine

Saurav has received 2,00,000 from his father on joining the MMS course on 1st April 2010. He buys a laptop for Rs. 40,000 in May 2010. He buys a cupboard for Rs. 10,000 in June 2010. His rent expenses are Rs. 2500 per month which he pays on 5th of every month. He purchases a mobile for Rs. 10,000 in July 2010. He receives Rs. 30,000 from his mother on his birthday in August 2010. He pays his fees of Rs. 100,000 in September 2010. His day to day expenses on food & laundry is Rs. 2000 per month. He takes his friends out for dinner in November 2010 on getting a first class in the first semester and spends Rs. 5000. He pays his exam fees of Rs. 2000 in February 2010. He buys a gift of Rs. 3000 for his parents on their anniversary in March 2011. Prepare a month wise diary of his income and expenditure and his cash balance on 31st March 2011.

Divya receives an education loan of Rs. 300000 on joining the MMS course on 1st April 2010. She buys a laptop for Rs. 50,000 in May 2010. She buys a cupboard for Rs. 10,000 in June 2010. Her hostel rent expense is Rs.3000 per month which she pays on 5th of every month. She purchases a mobile for Rs. 10,000 in July 2010. She pays her fees of Rs. 150,000 in September 2010. Her day to day expenses on food & laundry is Rs. 3000 per month. She buys clothes worth Rs. 5000 on her birthday. She pays her exam fees of Rs. 2000 in February 2010. She buys 10 shares at the price of Rs. 50000. She spends Rs. 3000 on a gift for her brother on his birthday in March 2011. Prepare a month wise diary of her income and expenditure and her cash balance on 31st March 2011.

While recording transactions the accounts involved are Debited and Credited

The two aspects of a transaction are identified as two “Accounts”

All accounts are classified in the following categories

Journal entries

Personal Account is an account of a person eg. Ms. Jyoti, Mr. Ram, Debtors account, Creditors account etc.

Personal Account / Real Account /Nominal Account

Real accounts are accounts of assets of the business eg. Stock, furniture, land, building, Goodwill, Bank account

Nominal Account are accounts of expenses, income, losses, gains, interest, stationery etc.

Printing & Stationery account

Goods account

Repairs to machinery account

Classify the following

Land account

Vinay’s account

Salary account

Debtors account

Furniture account

Debit the receiver

Personal Account

Credit the giver

Golden Rules

Debit what comes in

Real Account

Nominal Accounts

Journalise the transaction – Cash brought in as capital to start business in Jyoti & Company Rs. 1 lakh

Credit what goes out

Credit all income and gains

Debit all expenses and losses

Format of a journal entryIN THE BOOKS OF JYOTI & CO.

Cr.

J.V NO. DATE PARTICULARS L.F. Dr (Rs.). Cr (Rs.)

01 11/11/08 Cash a/c Dr. 21

100000  

4.50

To Capital a/c 22

100000

(Being cash brought in as capital to start business)          

He buys office building space for Rs. 50,000 and furniture of Rs. 25,000 in cash on 20th November

Mr. A starts a Company called M/s. Jyoti & Company with a cash investment of Rs. 1,00,000 on 15th November

He purchase 1000 pens for Rs. 10,000 on 25th November.

Pass Journal entries for the following transactions

He pays salary to staff of Rs. 2000 on 30th November

He pays for advertising expenses Rs. 1900 on 20th November.

He pays for water Rs.500 and Rs.600 for electricity on 30th November

He buys office stationery for Rs. 1000 on 22nd November

He sells the pens for Rs. 15,000 on 29th November

Ledgers

Classification of data

Collecting all transactions of a similar type or category at one single place so as to give complete information 

The book used to classify transactions is called “Ledger”

For an individual type of transaction an individual “account” is maintained in the ledger book used to classify transactions is called “Ledger”

Format of a ledger account

Bank Loan Account

Dr. Cr.

Date Particulars JF Rs. Date Particulars JF Rs.

5/31/99 To Bal c/d   4.50 5/1/99 By Bank a/c   4.50

      4.50       4.50

Once the process of posting to the ledger accounts is complete, these accounts are balanced 

Balancing the ledgers

If debit side is higher, the account has a debit balance and vice versa

The trial balance is a statement of balances of the ledger accounts

The Trial Balance totals match as the double entry system is followed

Assignment

Presentation of Companies in different sectors

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Thank you!Thank you!