Example 1: Financing Activities
Owner invested $10,000 in the company.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Assets (Cash) by $10,000 Debit2 Increase in Owner's Equity by $10,000 Credit
Journal Entry Debit CreditCash 10,000
Owner's Equity 10,000
Description of Journal EntryOwner invested $10,000 in the company.
Results of Journal EntryCash balance increases by $10,000. --> Increase in AssetsOwner's Equity balance increases by $10,000. --> Increase in Owner's Equity
Example 2: Financing Activities
The company borrowed $20,000 from a bank.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Assets (Cash) by $20,000 Debit2 Increase in Liabilities (Borrowings) by $20,000 Credit
Journal EntryDebit Credit
Cash 20,000 Borrowings 20,000
Description of Journal EntryBorrowed $20,000.
Results of Journal EntryCash balance increases by $20,000. --> Increase in AssetsBorrowings balance increases by $10,000. --> Increase in Liabilities
Example 3: Investing Activities
The company purchased $12,000 equipment and paid in cash.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Assets (Equipment) by $12,000 Debit2 Decrease in Assets (Cash) by $12,000 Credit
Journal Entry Debit CreditEquipment 12,000
Cash 12,000
Description of Journal EntryPurchased $12,000 equipment in cash.
Results of Journal EntryEquipment balance increases by $12,000. --> Increase in AssetsCash balance decreases by $12,000. --> Decrease in Assets
Example 4: Operating Activities
The company purchased $6,000 merchandise (600 units) on credit.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Assets (Merchandise) by $6,000 Debit2 Increase in Liabilities (Accounts Payable) by $6,000 Credit
Journal Entry Debit CreditMerchandise 6,000
Accounts Payable 6,000
Description of Journal EntryPurchased $6,000 merchandise on credit.
Results of Journal EntryMerchandise balance increases by $6,000. --> Increase in AssetsAccounts Payable balance increases by $6,000. --> Increase in Liabilities
Example 5: Operating Activities
The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of sale.
Analysis of Transaction Note: This transaction includes both "REVENUE" and "EXPENSE" components.
(1) REVENUE side
Steps Debit or Credit ?
1 Increase in Assets (Cash) by $9,000 Debit2 Increase in Assets (Accounts Receivable) by $2,000 Debit3 Increase in Revenue (Sales) by $11,000 Credit
(2) EXPENSE side
Steps Debit or Credit ?
1 Increase in Expenses (Cost of Merchandise Sold) by $5,000($6,000 / 600 units = $10 per unit)($10 per unit X 500 units sold = $5,000 cost)
Debit
2 Decrease in Assets (Merchandise) by $5,000 Debit
(1) REVENUE Journal Entry Debit CreditCash 9,000Accounts Receivable 9,000
Sales Revenue 11,000 Description of Journal Entry
Sold merchandise at $11,000 price and received $9,000 in cash.
Results of Journal EntryCash balance increases by $9,000. --> Increase in AssetsAccounts Receivable balance increases by $2,000. --> Increase in AssetsSales Revenue account balance increases by $11,000. --> Increase in Revenue
(2) EXPENSE Journal Entry
Debit CreditCost of Merchandise Sold 5,000
Merchandise 5,000
Description of Journal Entry To record the cost of merchandise sold.
Results of Journal EntryMerchandise balance decreases by $5,000. --> Decrease in AssetsCost of Merchandise Sold account balance increases by $5,000. --> Increase in Expense
Example 6: Operating Activities
The company paid $3,500 salaries.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Expenses (Salaries Expense) by $3,500 Debit2 Decrease in Assets (Cash) by $3,500 Credit
Journal Entry Debit CreditSalaries Expense 3,500
Cash 3,500
Description of Journal EntryPaid $3,500 salaries.
Results of Journal EntryCash balance decreases by $3,500. --> Decrease in AssetsSalaries Expense account balance increases by $3,500. --> Increase in Expenses
Example 7: Operating Activities
The company paid $1,500 rent.
Analysis of Transaction
Steps Debit or Credit ?
1 Increase in Expenses (Rent Expense) by $1,500 Debit2 Decrease in Assets (Cash) by $1,500 Credit
Journal Entry Debit CreditRent Expense 1,500
Cash 1,500
Description of Journal EntryPaid $1,500 rent.
Results of Journal EntryCash balance decreases by $1,500. --> Decrease in AssetsRent Expense account balance increases by $1,500. --> Increase in Expenses
Summary of Transactions from previous file.
No. Date Transactions(1) May 1 Owner invested $20,000 in the company.
(2) May 3 Borrowed $10,000 from a bank.(3) May 6 Purchased $15,000 equipment in cash.(4) May 8 Purchased $9,000 merchandise (900 units) on credit.
(5) May 15 Sold 500 units of merchandise at the price of $11,000. Customer paid $8,000 in cash at the time of sale.
(6) May 25 Paid $2,500 salaries.(7) May 26 Paid $1,500 rent.
Summary of Journal Entries from previous file.
No. Journal Entries Debit Credit
(1) Cash 10,000(1) Owner's Equity 10,000
Owner invested $10,000 in the company.
(2) Cash 20,000(2) Borrowings 20,000
Borrowed $20,000.
(3) Equipment 12,000(3) Cash 12,000
Purchased $12,000 equipment in cash.
(4) Merchandise 6,000(4) Accounts Payable 6,000
Purchased $6,000 merchandise on credit.
(5)-1 Cash 9,000(5)-1 Accounts Receivable 2,000(5)-1 Sales 11,000
Sold merchandise at $11,000 price and received $9,000 in cash.
(5)-2 Cost of Goods Sold 5,000(5)-2 Merchandise 5,000
To record the cost of goods sold ($5,000 merchandise).
(6) Salaries Expense 2,500(6) Cash 3,500
Paid $2,500 salaries.
(7) Rent Expense 1,500(7) Cash 1,500
Paid $1,500 rent.
Balance Sheet and Income Statement Balance Sheet
As of May 31, 20XX
Assets Liabilities and Owner's EquityCash $ 23,000 Accounts Payable $ 6,000Accounts Receivable 2,000 Borrowings 20,000Merchandise 1,000 Equipment 12,000 Owner's Equity 12,000 (*1)
Total Assets $ 38,000 Total Liabilities and Owner's Equity
$ 38,000
Income StatementFor the Period from May 1 to May 31, 20XX
Revenue Sales $ 11,000Total Revenue $ 11,000 Expenses Cost of Goods Sold $ 5,000 Salaries Expense 2,500 Rent Expense 1,500Total Expenses 9,000
Net Income $ 2,000 (*2)
(*1) Owner's Equity=Investment by Owner+Net Income=$10,000+$2,000=$12,000(*2) Net Income = Total Revenue - Total Expenses = $11,000 - $9,000 = $2,000
Accounting Journal Entry Examples 01
* Cash payment transactions1. Purchase of assets in cash2. Repayment of liabilities in cash3. Payment of expenses in cash
* Cash receipt transactions4. Sale of assets in cash5. Borrowing money6. Issuance of stock
* Cash payment transactions1. Purchase of assets in cash1a. Purchased merchandise and paid $2,000 in cash1b. Purchased an equipment and paid $15,000 in cash
2. Repayment of liabilities in cash2a. Repaid $7,000 of bank loans2b. Paid $3,000 accounts payable
3. Payment of expenses in cash3a. Paid $3,500 rent expense3b. Paid $6,000 salaries expense
* Cash receipt transactions4. Sale of assets in cash4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,1004b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000
5. Borrowing money5a. Borrowed $9,000 in cash5b. Issued a promissory note and received $11,000 in cash
6. Issuance of stock6a. Issued 500 shares of common stock, at $50 per share6b. Issued 200 shares of preferred stock, at $80 per share
Cash payment transactions
1. Purchase of assets in cash
1a. Purchased merchandise and paid $2,000 in cash
debit credit
merchandise 2,000 cash 2,000
debit: increase in assets (merchandise)credit: decrease in assets (cash)
1b. Purchased an equipment and paid $15,000 in cash
debit credit
equipment 15,000 cash 15,000
debit: increase in assets (equipment)credit: decrease in assets (cash)
2. Repayment of liabilities in cash
2a. Repaid $7,000 of bank loans
debit credit
borrowings 7,000 cash 7,000
debit: decrease in liabilities (borrowings)
credit: decrease in assets (cash)
2b. Paid $3,000 accounts payable
debit credit
accounts payable 3,000 cash 3,000
debit: decrease in liabilities (accounts payable)credit: decrease in assets (cash)
3. Payment of expenses in cash
3a. Paid $3,500 rent expense
debit credit
rent expense 3,500 cash 3,500
debit: increase in expenses (rent expense)credit: decrease in assets (cash)
3b. Paid $6,000 salaries expense
debit credit
salaries expense 6,000 cash 6,000
debit: increase in expenses (salaries expense)credit: decrease in assets (cash)
Cash receipt transactions
4. Sale of assets in cash
4a. Sold merchandise and received $6,500 in cash
debit credit
cash 6,500 sales 6,500
debit: increase in assets (cash)credit: increase in revenue (sales)
The cost of merchandise sold was 5,100
debit credit
cost of goods sold 5,100 merchandise 5,100
debit: increase in assets (cash)credit: increase in revenue (sales)
4b. Sold an equipment and received $8,600 in cash
The book value of the equipment was $8,000
debit credit
cash 8,600 equipment 8,000 gain on sale of equipment
600
debit: increase in assets (cash)credit: increase in revenue (sales)
5. Borrowing money
5a. Borrowed $9,000 in cash
debit credit
cash 9,000 borrowings 9,000
debit: increase in assets (cash)credit: increase in liabilities (borrowings)
5b. Issued a promissory note and received $11,000 in cash
debit credit
cash 11,000 notes payable 11,000
debit: increase in assets (cash)credit: increase in liabilities (notes payable)
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share
debit credit
cash 25,000 Common stock 25,000
debit: increase in assets (cash)
credit: increase in equity (common stock)
6b. Issued 200 shares of preferred stock, at $80 per share
debit credit
cash 16,000 Preferred stock 16,000
debit: increase in assets (cash)credit: increase in equity (preferred stock)
Current assets are reported separately from noncurrent assetsCurrent liabilities are reported separately from noncurrent liabilities
Current assets--> Assets that are expected to be realized --> within a year or normal operating cycle, whichever is longer
Current liabilities--> Liabilities that are expected to liquidate--> within a year or normal operating cycle, whichever is longer
Regulation S-X: 17 CFR Part 210
Rule 5-02: Balance sheets
Current Assets5-02.1: Cash and cash items5-02.2: Marketable securities5-02.3: Accounts and notes receivable5-02.4: Allowances for doubtful accounts and notes receivable5-02.5: Unearned income5-02.6: Inventories5-02.7: Prepaid expenses5-02.8: Other current assets5-02.9: Total current assets
Noncurrent assets5-02.12: Other investments5-02.13: Property, plant and equipment5-02.14: Accumulated depreciation5-02.15: Intangible assets5-02.16: Amortization of intangible assets5-02.17: Other assets5-02.18: Total assets
Current liabilities5-02.19: Accounts and notes payable
5-02.20: Other current liabilities5-02.21: Total current liabilities
Noncurrent liabilities5-02.22: Bonds, mortgages and other long-term debt5-02.24: Other liabilities5-02.25: Commitments and contingent liabilities
Stockholders' equity5-02.27: Redeemable preferred stocks5-02.28: Non-redeemable preferred stocks5-02.29: Common stocks5-02.30: Other stockholders' equity5-02.31: Noncontrolling interests5-02.32: Total liabilities and equity
Revenue Accounts 01Examples and Practice Questions
Revenue
1. Revenue is the increase in resources from the operations of an entity
2. Increase in resources may be (A), (B) or (C)(A) Increase in assets(B) Decrease in liabilities(C) Both (A) and (B)
Recognition of revenue
1. Recognition means "recording" in accounting2. Revenue is reported when it is recognized3. Revenue is recognized when it is earned and realized (or realizable)4. Realized means the collection of cash5. Earned means the delivery of products or services
Debits and credits
1. Revenue accounts have normal balances on the credit side
2. Increases in revenue accounts are recorded on the credit side3. Decrease in revenue accounts are recorded on the debit side
Examples of revenue accounts
Sales revenue
Services revenue Interest revenue Rent revenue
Practice Questions
1. On December 15, 2010Entity A sold 300 units of products at the price of $20 per unit
2. On December 15, 2010Entity A received $3,600 in cash
3. On January 27, 2011Entity A received $2,400 in cash
4. What is the amount revenue for 2010?300 units x $20 = $6,000
5. What is the balance of accounts receivable at December 31, 2010?$6,000 - $3,600 = $2,400
6. Prepare journal entries at the following dates(1) December 15, 2010(2) December 31, 2010(3) January 27, 2011
7. Journal entry at December 15, 2010
debit credit
Cash 3,600 Accounts receivable 2,400 Sales revenue 6,000
8. Journal entry at December 31, 2010--> No journal entry is required at December 31, 2010
9. Journal entry at January 27, 2011
debit credit
Cash 2,400 Accounts receivable 2,400
Equity
1. Equity represents the owners' equity
2. For corporations, shareholders are owners--> equity represents the shareholders' equity
3. Equity is a residual concept
--> equity is what's left after subtracting liabilities from assets
4. Equity = Assets - Liabilities
Components of equity
1. Paid-in capital--> the amount shareholders contributed to the entity--> in exchange of the shares of common stock or preferred stock
2. Retained earnings--> net income is accumulated in retained earnings--> dividends are paid from retained earnings
Debits and credits
1. Equity accounts have normal balances on the credit side
2. Increases in equity accounts are recorded on the credit side3. Decrease in equity accounts are recorded on the debit side
Practice Questions
1. Issuance of common stock
Entity A issued 8,000 shares of common stockPar value = $1 per shareIssue price = $10 per share
debit credit
Cash 80,000 Common stock 8,000 Additional paid-in capital
72,000
2. Issuance of common stock with no par value
Entity B issued 7,000 shares of common stockNo par valueIssue price = $20 per share
debit credit
Cash 140,000 Common stock 140,000
Retained earnings
1. Net income is added to retained earningsEnding retained earnings = Beginning retained earnings + Net income
2. Dividends decrease retained earningsEnding retained earnings = Beginning retained earnings + Net income - Dividends declared
Practice Questions
1. Dividends are declaredEntity C has 500,000 shares of common stock outstanding--> and declared $3 per share dividends
debit credit
Retained earnings 150,000 Dividends payable 150,000
2. Entity D had $230,000 balance of retained earnings as of December 31, 2009.During 2010, Entity D earned $60,000 net income and declared $15,000 dividends.What is the ending balance of retained earnings as of December 31, 2010?
Ending retained earnings= Beginning retained earnings + Net income - Dividends declared= $230,000 + $60,000 - $15,000 = $275,000
Examples of equity accounts
Common stock
Preferred stock Additional paid-in capital Retained earnings
Accounting Equation 01
Basic form of an equation --> Left side = Right side
1. Balance Sheet VersionAssets = Liabilities + Equity
2. Income Statement Version
Net Income = Revenue - Expenses
3. Combined VersionAssets = Liabilities + Equity---> Equity = Beginning Equity + Net Income
Assets = Liabilities + Beginning Equity + Net Income---> Net Income = Revenue - Expenses
Assets = Liabilities + Beginning Equity + Revenue - Expenses
An Example of Combined Version
At January 1, 2010, the balance of equity was $100,000.During the year of 2010, revenue and expenses were as followsRevenue = $300,000Expenses = $240,000
What is the balance of equity at December 31, 2010?
Equity = Beginning Equity + Revenue - Expenses--> $100,000 + $300,000 - $240,000 = $160,000
At December 31, 2010, Entity A had the following balancesAssets = $280,000Liabilities = $120,000Equity = $160,000
Balance sheet versionAssets = Liabilities + Equity--> $280,000 = $120,000 + $160,000
Combined versionAssets = Liabilities + Beginning Equity + Revenue - Expenses--> $280,000 = $120,000 + $100,000 + $300,000 - $240,000
Cases and Practice Questions
Case 1:
Assets = $12,000Liabilities = $5,000Equity = $7,000Assets = Liabilities + Equity$12,000 = $5,000 + $7,000
Practice Question 1:
If Assets = $12,000 and Liabilities = $3,000what is the amount of equity?
--> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000
Case 2:
Revenue = $16,000Expenses = $10,000Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000
Practice Question 2:
If Revenue = $16,000 and Expenses = $11,000what is the amount of net income?
--> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000
Case 3:
Assets = $25,000Liabilities = $11,000Beginning Equity = $10,000Revenue = $36,000Expenses = $32,000Assets = Liabilities + Beginning Equity + Revenue - Expenses$25,000 = $11,000 + $10,000 + $36,000 - $32,000
Practice Question 3:
In the following case, what is the amount of Beginning EquityAssets = $55,000Liabilities = $21,000Revenue = $76,000Expenses = $62,000Beginning Equity = ?
Assets = Liabilities + Beginning Equity + Revenue - Expenses$55,000 = $21,000 + ? + $76,000 - $62,000--> Beginning Equity = ? = $20,000
The following accounts have normal balances on the debit side
1. Asset accounts2. Expense and loss accounts
Increases and decreases 1. Increases in asset accounts are recorded on the debit side2. Decreases in asset accounts are recorded on the credit side 3. Increases in expense and loss accounts are recorded on the debit side
4. Decreases in expense and loss accounts are recorded on the credit side
Examples of asset accounts
Cash and cash equivalents
Accounts receivable Notes receivable Interest receivable Rent receivable Inventories Merchandise Raw materials Work-in-process Finished goods Supplies Prepaid expenses Prepaid rent expense Prepaid insurance expense Prepaid interest expense Investment in debt and equity securities Trading securities Available-for-sale securities Held-to-maturity securities Property, plant and equipment Land Buildings Equipment Machinery Capitalized leases Leasehold improvements Intangible assets Goodwill Trademarks Patents
Examples of expense and loss accounts
Cost of goods sold
Selling, general and administrative expenses
Salaries expense Advertising expense Rent expense Travel expense Communication expense Insurance expense Supplies expense Utilities expense Depreciation expense Other expenses and losses Interest expense Loss on disposal of equipment Income tax expense
Trial Balance
If the journal entries are error-free and were posted properly to the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credits, then an error has occurred somewhere in the process. The total of the accounts on the debit and credit side is referred to as the trial balance.
To calculate the trial balance, first determine the balance of each general ledger account as shown in the following example:
General Ledger
Cash
Sep 1 7500 17 400 25 425
Sep 15 1000 28 500
Bal. 6825
Accounts Receivable
Sep 17 700 Sep 25 425
Bal. 275
Parts Inventory
Sep 8 2500 Sep 18 275
Accounts Payable
Sep 28 500 Sep 8 2500
Bal. 2225 Bal. 2000
Capital
Sep 1 7500
Bal. 7500
Revenue
Sep 17 1100
Bal. 1100
Expenses
Sep 15 1000Sep 18 275
Bal. 1275
Once the account balances are known, the trial balance can be calculated as shown:
Trial Balance
Account Title Debits Credits
Cash 6825
Accounts Receivable
275
Parts Inventory 2225
Accounts Payable 2000
Capital 7500
Revenue 1100
Expenses 1275
10600 10600
In this example, the debits and credits balance. This result does not guarantee that there are no errors. For example, the trial balance would not catch the following types of errors:
Transactions that were not recorded in the journal Transactions recorded in the wrong accounts Transactions for which the debit and credit were transposed Neglecting to post a journal entry to the ledger
If the trial balance is not in balance, then an error has been made somewhere in the accounting process. The following is listing of common errors that would result in an unbalanced trial balance; this listing can be used to assist in isolating the cause of the imbalance.
Summation error for the debits and credits of the trial balance Error transferring the ledger account balances to the trial balance columns
o Error in numeric valueo Error in transferring a debit or credit to the proper columno Omission of an account
Error in the calculation of a ledger account balance Error in posting a journal entry to the ledger
o Error in numeric valueo Error in posting a debit or credit to the proper column
Error in the journal entry o Error in a numeric valueo Omission of part of a compound journal entry
The more often that the trial balance is calculated during the accounting cycle, the easier it is to isolate any errors; more frequent trial balance calculations narrow the time frame in which an error might have occurred, resulting in fewer transactions through which to search.
How To Solve Difficult Adjustments And Journal Entries In Financial Accounts - Presentation Transcript
1. How to solve difficult adjustments in Financial Accounts By Professors Augustin Amaladas and Shanthi Augustin M.Com(Loyola, Chennai)., AICWA These slides Are prepared Only to Clarify major Doubts To students And staff. Only Difficult Adjustments are explained Exclusively to CA ICWA,CS Students or others who wants to learn Accounts thoroughly CA CPT, ICWA entrance,ACS entrance students should read this Alternative work is rest
2. Why does Equity shares and fixed assets appear first in the Balance sheet o The balance sheet is prepared in order. Left hand side liabilities and right hand side
Assets. If business comes to an end the liability which is paid last is share capital. The last asset which is sold out will be fixed asset. Among fixed assets goodwill(good name) is sold out last.No one wants to sell one’s name unless everything is lost.The order of arrangement is known as order of permanence.
o What is the Order of Liquidity? 3. Order of Liquidity?
o The liability which is disposed off first comes first in the balance sheet. The asset which is used to pay liability first appears first in the assets side.
o Therefore cash appears first in the balance sheet asset side. And Creditors should appear in the liability side first.
o The above two orders are known as marshalling 4. Income tax paid by sole proprietor and partnership business-Journal entry?
o Income tax does not recognise sole proprietor or firm as a unit but the individuals who run the organisation are recognised.
o Income tax is a direct tax. Direct taxes such as Income tax, wealth tax are to be paid by the individual who runs such organisation.It is a personal liability even such incomes from business.
o If business money is used for personal use of paying tax, then such payment to be treated as drawings.
o Journal entry: Debit drawings and credit Cash. o Note: do not debit incometax account. o If you debit income tax account it means that its treated as business expenditure. It is
wrong in this case. 5. If Income tax paid by company?
o Company is a separate legal entity.The payment of tax is the liability of the company. It is not the liability of Shareholders. SHARE HOLDERS ARE DIFFERENT FROM COMPANY.
o It is a business expenditure. o Journal entry: Debit Income tax account and credit Cash account.
6. How do you deal indirect taxes? o Indirect taxes such as sales tax, excise duty, Octroi duty, import duty, export duty are
actually imposed on the individual who buys such article. It is not the responsibility of the individuals who run the business but by the business itself. It is a business expenditure.
o Journal entry: Debit sales tax a/c Credit cash a/c 7. 5.Double entry / Single entry
o Is Accounting based on business concept or religious concept? 8. It is based on religious concept
o Giving first and receiving later. o Giving cash receiving machinery o God is an accountant for every business. Who ever gives given credit.whoever receives
given debit. What ever goes out of you to be credited because god will reward you.What ever comes to you is given debit because god will take away from you.
o Giving is right hand function.Receiving is left hand function. 9. Rules of acccounting
o Personal rule/Account-supplier debtors, owner, banker, outstanding wages o Real rule/Account- cash, bank, building, furniture, goodwill, patent rights o Nominal rule/account: income and expenditure: salary, rent , insurance, commission,
internet expenses, cell phone expenses. 10. Personal rule
o Debit the receiver o credit the giver o Example: Computer chips purchased on credit from wipro o Here credit Wipro as Wipro is the giver of computer. o Sold goods to Meena o Meena is the receiver-debit
11. Exercise o 1.Amount collected from debtors? o 2.Amount deposited to bank? o Answer 1: two accounts to be selected.A) cash because it comes in B) debtors given
money.The giver to be given credit- PERSONAL RULE. o Cash related to real rule because we can see.
o Therefore Journal entry Is: Debit cash, credit o debtors. o 2. Banker is the receiver –related to personal rule therefore debit bank. Cash goes out –
related to real rule-credit cash. 12. Real rule
o These are the accounts of assets and liabilities o Rule: debit what comes in
Credit what goes out 13. Excercise
o 1.Goods supplied for cash o 2.Cash withdrawn from bank o 3.Cash withdrawn from bank for personal use o 4.Land purchased by giving a cheque o 5.Building sold on credit 14.o Answer: 1.Goods and cash are two accounts required. Person who supplied is not
important as it is a cash transaction.Both are related to real rule. o JE: Goods A/c debit o Cash A/c credit o 2.Cash and bank are two accounts. Both are related to real rule. o JE: Cash a/c debit o Bank a/c credit o Note: Cash withdrawn does not mean drawings.Only when cash withdrawn for personal
use we consider it as drawings. 15.o 5. Building sold on credit. o He is not a dealer in building.If he is not a dealer in building we can not consider it as
goods. Only when they are goods they can be taken to sale(Revenue income) otherwise they should be removed from capital expenditure.
o JE:The person who buys a/c debit o Building account credit. 16.o 3. Cash with drawn for personal use:owner and cash is important. Owner is personal
rule and cash is related to real rule.Debit the receiver, therefore debit drawings and credit bank as banker is the giver of cash.
o JE: Drawings a/c debit o Bank a/c credit o 4.Land purchased by giving a cheque: o Land and bank are two important.Both are related to real rule. Debit what comes in and
credit what goes out. o JE: Land A/c debit o bank A/c credit
17. Nominal rule o Related to Expenses and income o Rule: Debit all expenses and losses o Credit all incomes and gains
18. Exercise
o Rent paid Rs 50,000(Rent debit and cash credit) o Wages paid Rs.1,00,000(wages debit and cash credit) o Wages outstanding-Rs.60,000(wages a/c debit and outstanding wages to Mr.X to be
credited) o Commission received-25,000(Cash A/c debit and commission a/c to be credited) o Discount allowed to customer – Rs.1,000(Discount is related to nominal rule.debit
discount and credit debtors who had given cash) o Telephone bills paid-Rs.2500(Telephone a/c debit and cash to be credited) o Shares issued at premium-Rs.2,00,000(Cash a/c debit and share premium to be credited
as it belongs to nominal rule) 19. Suitable questions to pass journal entry
o If cash transaction, person is not important o Every birth of an account there is a death of the account o Ask what comes in? o Or what goes out?
20. What is the journal entry for bad debts? o Bad debt a/c debit o to debtors a/c o Bad debt follows nominal rule. Debit all expenses and losses and credit all income and
gains. o Debtors account follow personal rule. Debit the receiver and credit the giver.
21. Journal entry for provision for bad and doubtful debts? o Profit and loss account Debit o credit provision for bad and doubtful debts o Reasons:- All provisions are taken out of profits. It means profit is reduced and provision
to be increased. All provisions are future expected liabilities. 22. Rent and rent outstanding exp
o JE: Rent debit and cash credit o Rent outstanding: o Rent debit and rent outstanding to some one(say Mr.X )credit. o Rent appears in the profit and loss account debit side o Rent outstanding appears in the balance sheet under the head current liabilities.
23. What is contingent liability? o Liability which may or may not happen depends on the future situations o Example:1. Court case against the company o 2. contract yet to be completed. o No journal entry as it is not a real liability on the date of balance sheet.
24. Final Accounts Adjustments o Domestic house hold Expenses(Drawings a/c debit and cash credit) o Income tax refund( It is a personal income.If it is taken to the business then cash a/c
debit and capital a/c credit) o Income from house property( cash a/c debit and capital credit) as personal income has
been taken to business. o Un expired insurance(Unexpired insurance debit(asset) insurance premium a/c credit) 25.o Income received in Advance(It is a liability.debit income a/c and credit income received
in advance a/c credit)
o Interest on Capital( it is an expenditure. Interest on capital a/c debit and capital account credit)
o Provision on Doubtful debts(Profit and loss a/c debit and provision for bad and doubtful debts credit)
26.o provision for Discount on debtor( Profit and loss account debit and provision for
discount on debtors credit)It is because all provisions are taken from profit and loss account.
o Deferred revenue expenditure((HUGE Revenue expenditure incurred during the current year but can not be treated as one year expenditure as the benefit will come for more than a year.)
o JE: Deferred revenue expenditure a/c debit and cash to be credited. 27. Final Accounts Adjustments
o Reserve Fund( all reserves taken from profit. debit profit and loss a/c and credit Reserve fund)
o Goods Distributed as free sample( goods with drawn other than trading activity: Advertisement a/c debit and purchase a/c credit)
o Manager’s Commission( he is entitled to receive commission. Therefore: Manager’s commission a/c debit and Outstanding commission a/c credit.
28. Bad debts written off recovered o Once bad debts written off means that it is completely removed from debtors and
transferred to profit and loss account as a loss.There is no such account is seen any where in the books.
o If recovered such recovery does not affect debtors but affects profit and loss account o JE: Cash a/c debit o Bad debts recovery or profit and loss a/c credit
29. Goods destroyed due to fire and insurance company partly accepted o Goods which are meant for trading destroyed. Operating activity becomes non
operating activity or extraordinary activity. o JE: Insurance company a/c debit(like a debtor or asset) o loss of stock a/c debit o Trading a/c or purchase account
30. What do you mean by adjustment accounting point of view? o It means pass a fresh journal entry. o It means any item appears in the trial balance means that we had already passed journal
entry. That is why such items appear only once in the final account. o Since we pass journal entry for adjustments they appear twice in the final accounts. o The head of the account is important when you pass a fresh journal entry for
adjustments.Example:rent outstanding means rent account. Insurance prepaid means insurance account, interest due means interest account,
31. If closing stock appears in trial balance where should appear in the final accounts? o If it appears in the trial balance means we had passed journal entry for such stock and
adjusted with purchases to calculate cost of goods sold. Therefore it should not appear in the trading account. Being an asset it should appear in the Balance sheet.
32. Out standing expenses(rent) given in the trial balance? o It means it is already journal entry passed and adjusted with rent account(added to
rent)
o Do not adjust with rent in profit and loss account. o Take such item to balance sheet as a liability.
33. How do you deal advanced income tax paid by proprietor? o Income tax paid itself is considered as drawings, therefore advanced income tax also to
be considered as drawings onle o JE: Drawings a/c debit and cash a/c to be credited.
34. Bad debts given in the trial balance? o It means journal entry was passed and adjusted against debtors(head). Do not adjust
such bad debts against debtors in the balance sheet. o As a loss it should appear in the profit and loss account. o If such bad debt is given in the adjustments? 35.o It means pass a fresh journal entry for the new bad debt and to be adjusted with the
head of such account(Debtors). o Reduce such bad debt from debtors in the balance sheet before calculating provision for
bad and doubtful debts. o As a new bad debt add to the existing bad debts which is given in the trial balance which
will appear in the profit and loss account. 36. Do we deduct discount allowed given in the adjustment from debtors before calculating
provision for bad and doubtful debts? o Yes. It is because it is given in the adjustment and also it is certain that such debtors
already gone out of books of debtors. There is no doubts about it. The provision is always calculated only on debtors who are shaky.
37. If goods sent out on Higher purchase how do you deal? o If on the balance sheet date if such goods are with the customer divide the goods into
two
Cost Profit Add to Closing stock in trading a/c and Balance sheet + = Debtors Reduce from debtors
38. What is the JE when goods are received by consignee from consignor? o No journal entry. Why? o Owner ship is not transferred from consignor to consignee. Even though the goods are
physically in the hands of consignee but there is no transfer of goods taken place from consignor to consignee.Owner ship should be transferred to pass journal entry.
o The concept is that one person can not transfer to oneself . 39. When branch sends goods to head office or vice versa, what is the journal entry?
o No journal entry as ownership is not transferred.In fact there can not be any sales tax, income tax.
o One person can not earn profit by transferring to one self.Unless goods are transferred to third party no profits can be realised.
40. If sales return given in the adjustment? o It means we have to pass a fresh journal entry. o JE: Sales a/c Debit o Debtors account credit o We have to reduce sales and debtors once goods are returned.
41. What is the JE when normal loss occur?
o No Journal entry. Why. o Cost per unit will be inflated.You make customer to bear the total cost. o If abnormal loss occurs why do we pass journal entry? o It is because some portion will be recovered from insurance and some portion will be
the loss to be written of against profit. 42.o If you are satisfied please send SMS to others to share your joy. o Send your comments to the following address. Periodically I come out with other
topics.See my web periodically. o [email_address]
Accounting For Non Commerce Students Introduction To Accounting
New1 accountancy notes www.webaccountsguru.com accounting for management
How To Rectify Errors In Financial Accounts - Presentation Transcript
1. ST. Joseph’s College of Commerce, Bangalore presents to global students community RECTIFICATION OF ERRORS IN FINANCIAL ACCOUNTS Alternative work is rest All teachers Who teach Accounts At all levels CA-CPT ICWA Company secretary Sit, relax and enjoy Learn, unlearn and re-learn
2. How to Rectify Errors in Financial Accounts By Prof. Augustin Amaladas M.Com(Loyola college, Chennai),AICWA., PGDFM.,B.Ed. Simple to Tough errors and their rectifications Useful to CPT, ICWA,CS Students Useful To lecturers Who enter Into Teaching profession Alternative work is rest by S.L.Swamy
3. Dedicated to Prof.Dr. Victor Louis Anthuvan (St. Joseph’s College, Trichy) Sir made us to learn in a simple way My guru-Thank you sir. Dr. Abdul Kalam ex president Studied in St. Joseph’s College- Trichy Made the nation proud of. Dedicated to Rahul Dravid SJCC, Bangalore (Indian cricket captain)our student and my student.
4. Let us under stand the basic rules, concepts and conventions o Understanding basic rules of accounting, concepts and conventions help you to under
stand the rectification of errors better. 5. 1.concepts& conventions
o Meaning: Basic assumptions upon which the basic process of accounting based. o a] Business entity concept- o b] Dual aspect concept o c] Going concern concept o d] Accounting period concept o e] Cost concept o f] Money measurement concept o g] Matching Concept
Conventions Coservativism Materiality Consistency
6. a] Business entity concept- o Business is different from the owner o We pass Journal entry when owner contributes towards capital. o When amount / goods withdrawn for personal use we make an entry in the business o When Income tax paid by the owner out of business money we make an entry In the
books of accounts. 7. b] Dual aspect concept
o Every debit has equal amount of credit o Asset =Liability o Liability creates asset o If asset>Liability= profit o If Liability> Assets= loss
8. c] Going concern concept o Business will go for at least for a reasonable period. o Depreciation is provided based on this assumption. o If this assumption is not made all Fixed assets will be valued at realised value like current
assets. 9. d] Accounting period concept
o Fixing time limit for accounts o Profit for the period o It can be one week or two week or 6 months/one year or 5 years o But to find profit we normally consider 12 months period o Financial year for income tax point of view 1 st April-31 st March of the following year o Calendar year –January to December o Dipavali to Dipavali
10. e] Cost concept o The cost to the organisation (Actual) is recorded in the books o Assets are not recorded according to the market price every year. o Depreciation is calculated on cost not based on market price o Accounting records may not show the real worth of the business o Market price may be disclosed with in bracket in the balance sheet
11. f] Money measurement concept o Every thing which can be expressed in terms of Money is recorded in the books o Beautiful women are working /Handsome boys working in TEC /Efficient engineers
worth Rs.5000 crores –How do you record?. o Good working environment? o Highly motivated employees? o Qualitative information are not accounted.
12. Answer o We do not have record for qualitative aspects. They can enter this transaction under
Human resource accounting rather than financial accounting. 13. g] Matching Concept
o Matching Cost with revenue
o It is used to estimate correct profits o Accrual/ cash basis of accounting
Even cash paid /received if it belongs to accounting period we consider them as expenditure /income
Salary outstanding for the last month? Income from Investments yet to be received? Rent received in advance for next year? Salary outstanding for the last month to be considered as expense of the
current year under accrual basis of accounting. 14. Matching concept- continues
o Income from investment yet to be received to be considered for the current year as it belongs to current year.The year of receipt is not important.
o Rent received in advance does not belong to current year under accrual method of accounting as it belongs to next year even though it is received during the current accounting year.
15. Conventions o Customs and traditions that are followed by the accountants while preparing the
financial statements. o Why do we respect elders? o Why do we shake hands? o Why do Young Indians hate receiving dowry? o Why do students come late to class? o Why do Indians work hard?
16. Coservativism o To be on the safer side o Expect future losses as current year loss o But future income is not treated as current year income. o Stock is valued cost price / market price which ever is lower o Making provision for bad debts is based on this assumptions.
17. Materiality o Material impact on profitability are considered o Insignificant transactions ignored from recording o Pen purchased, pencil purchased? o It comes under stationary. It can not be disclosed(Shown) separately like pen account or
pencil account. 18. Consistency
o Accounting policies and procedures should be followed consistently o Method of depreciation should be followed consistently. o Stock valuation- cost/market price whichever is lower is consistently followed o If not followed it amounts to change in the policy of the company
19. 2.system of accounting (26) o 1.Cash system: o unless cash received /paid in the accounting year can not be considered as
income/expenses respectively 20. 2.Mercantile
o Mercantile/Accrual/due concept:
o Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered.
o If last year expenditure paid this year? o If you receive/paid in advance ? o If last year expense paid during the current year can not be considered as current year
expenditure.In the same way any income received in advance at the end of current year should not be entered as current year income or expenditure.
21. 3.Types of Expenditure o A) Capital expenditure o B) Revenue expenditure o C) Deferred Revenue expenditure
22. A) Capital expenditure(30) o Expenditure incurred which will : o Increase Production capacity o Increase earning capacity o Reduction in the cost of operation. o Example: purchase of fixed assets o Purchase of Machinery o purchase of investment o If such expenditure is not to do with the basic functions of the business such
expenditure is capital expenditure. o How do you consider if you buy goodwill, copy right or patent right?
23. Capital expenditure-continue(page-30) o Both tangible and intangible assets included o Intangible assets such as patent right, copy right, technical know-how, franchises,
goodwill etc., o Depreciation is provided on fixed assets. Depreciation appears in the profit and loss
account o The asset appears in the Balance sheet (after deducting depreciation) o The life is more than one year o They should not appear in the profit and loss account
24. Revenue Expenditure o Expenditure incurred which will : o Not Increase Production capacity o Not Increase earning capacity o maintain the capacity o No Depreciation is provided on current assets which will appear in the profit and loss
account o They appear in the profit and loss account o The life is not more than one year o They should not appear in the balance sheet
25. Wrong treatment? o When goods purchased(dealer in such goods) it is a revenue expenditure. It should
appear either in the trading account or profit and loss account. o If it appears as an asset , then you inflate the profits which gives a wrong profit to the
firm.It also affects the assets(over stated) which gives over stated financial position. 26.
o Example: o Your father purchased 20 kg rice bag costing Rs.600 and your mother purchased a fridge
for Rs. 15000 on the same day.Rise is to be treated as monthly expenditure where as fridge to be treated as long term expenditure(Capital expenditure).
o Instead, if such purchase of rice accounted with fridge it means monthly expenditure decreased and long term expenditure is increased.
o Accounting point of view rice goes to trading account to find out cost of the month and fridge goes to Balance Sheet on the asset side as a part of asset.
27. o Suppose fridge cost is added with rice, then your monthly expenditure will be high and
asset account is reduced. o The indirect impact is that depreciation would not have been provided on such asset as
it is included with revenue(Rise)account which affects profits. o Example-2: o Building purchased for Rs.20,00,000 entered into purchase account.Building depreciates
by 10% under straight line method. 28. o Here it is entered into purchase account. It means you are treating it as goods(dealer in
real estate) which is a revenue expenditure instead of capital expenditure.Your profit is less by Rs. 20,00,000. But had been entered into building account the profit would have been more by Rs.20,00,000.
o Because it is entered in the purchase account we had forgotten to provide depreciation of Rs.2,00,000 which should had been done.
o Net effect to rectify the error is:- Increase the profits by Rs.18,00,000. And increase the asset should be increased by 18,00,000.
29. Suppose you are a dealer in building(Real estate) o Purchase of building is considered as goods(dealer in building).The entry made in
purchase account is correct. No need to rectify such transaction. o Suppose you buy furniture(dealer) for Rs.20000 entered into furniture account.What is
the effect? How do you rectify? 30. o Here the mistake is that revenue expenditure is treated as capital expenditure.The
correct journal entry is Purchase a/c debit and cash a/c credit. o Wrong entry is: Furniture a/c debit and cash is credited. o In the absence of information we assume the mistake with respect to furniture and
purchase but there is no mistake with respect to cash account because cash payment is correct.
31. Deferred revenue expenditure(page-30) o Deferred means- postponed o Heavy revenue expenditure o Vodafone incurred 200 crores for advertisement after merger with Hutch o It can not be written off within a year o It appears in the balance sheet as last item o Every year some amount is written off in the profit and loss account. o Research and development expenditure, initial advertisement expenditure, preliminary
expenditure are example 32. 5.Double entry / Single entry
o Is Accounting based on business concept or religious concept? o Giving first and receiving later. o Giving cash receiving machinery o We consider both aspects such as debit and credit
33. Rules of accounting o Personal rule/Account-supplier debtors, owner, banker, outstanding wages o Real rule/Account- cash, bank, building, furniture, goodwill, patent rights o Nominal rule/account: income and expenditure: salary, rent , insurance, commission,
internet expenses, cell phone expenses. 34. Personal rule
o Debit the receiver o credit the giver o Example: Computer chips purchased on credit from wipro o Here credit Wipro as Wipro is the giver of computer. o Sold goods to Meena o Meena is the receiver-debit
35. Exercise o Amount collected from debtors? o Amount deposited to bank? o Amount collected from debtor: Cash and debtor are important.Cash is related to real
rule o Debit what comes in and credit what goes out o Therefore cash to be debited and debtors belong to personal rule.Credit the giver.
Therefore credit debtor account. o Cash deposited to bank : JE: Bank a/c debit and cash to be credited.
36. Real rule o These are the accounts of assets and liabilities o Rule: debit what comes in
Credit what goes out 37. Nominal rule
o Related to Expenses and income o Rule: Debit all expenses and losses o Credit all incomes and gains
38. Suitable questions to pass journal entry o If cash transaction, person is not important o Every birth of an account there is a death of the account o Ask what comes in? o Or what goes out?
39. Let us pass Correct Journal entries for a few transactions o General rules:- All assets are debited if it comes to business(when you buy for business) o All liabilities are credited when borrowed. o All expenses are debited and All income and gains are credited. o If it is a credit transaction person is important. If it is a cash transaction person is not
important.(like cash purchase or cash sales) 40. Pass Journal entries
o 1. Capital introduced by owner Rs. 20 lakhs. o Answer :
o Business point of view owner is different from business. Business receives cash and the giver is owner.
o JE : Cash a/c debit(Real rule) o Capital a/c credit(Personal rule)
41. 2. o Borrowed loan Rs. 10,00,000 o Answer : o Cash comes to business and loan vendor account is important. o JE : Cash a/c debit(Real rule) o Loan a/c credit(Personal rule)
42. 3. o Company issues Shares to public Rs.50,00,000. o Answer: o Cash comes to business. Many owners given this money. o JE : Cash a/c debit (Real rule) o Share capital a/c credit(Personal rule)
43. 4. o Partners contributed capital to business: A Rs.55,00,000 cash and B Rs.19,00,000 in
cash, building worth Rs.50,00,000, furniture worth Rs.25,00,000 and his good will Rs.10,00,000 .
o Answer: o JE : 1.Cash a/c debit Rs.55,00,000(Real rule) o A’s Capital a/c credit Rs. 55,00,000 o (personal rule) o 2. Cash a/c debit Rs.19,00,000(Real rule) o Building a/c debit Rs. 50,00,000(Real rule) o Furniture a/c debit Rs. 25,00,000(Real rule) o Good will a/c debit Rs. 10,00,000(Real rule) B’s Capital credit Rs.104,00,000 o (Personal Rule) o Here cash, building, furniture and good will are assets coming to business therefore
debited.The giver is B therefore credited. 44. o Share broker purchased shares Rs. 25,00,000. Answer: o Shares are coming to business. First understand the nature of business. Being a share
broker shares are considered as goods(a revenue expenditure). Goods are purchased for cash.
o JE : Purchase of goods a/c debit Rs.25,00,000 o (Real rule) o Cash a/c credit Rs.25,00,000 o (Real rule)
5
45. o Infosys buy shares of Wipro Rs.20,00,000 for cash . o Answer:
o Here Infosys is not a dealer in shares. It is a capital expenditure. It is not goods. It is a cash transaction.
o JE : Investments a/c debit Rs.20,00,000(Real rule) o Cash(Bank) a/c credit Rs.20,00,000 o (Real rule)
6.
46. o Debentures issued by ICICI Bank for Rs.1 crore. o Answer: o ICICI point of view, it is a loan.Cash collected. o JE : Cash a/c debit Rs.1 crore(Real rule) o Debenture a/c credit rs. 1 crore o (personal rule)
7.
47. o Building acquired by Wipro by issue of shares Rs.20,00,00,000. o Answer: o It is a capital expenditure.Here no cash paid but given shares.The person who supplied
shares are share holders(owners) o JE : Building a/c debit Rs. 20 crores(Real rule) o Share capital a/c Rs.20 crores(personal rule) o Note: share capital does not come under real rule but share capital belongs to person
who owns them.
8
48. o Shares of Wipro limited held by Infosys sold for Rs.25,00,000. o Answer: o The investments sold; the capital receipt. When ever we use the term ‘sales account’ it
indicates the goods that the company deal. o JE: Cash a/c debit Rs.25,00,000(real rule ) Investments a/c credit Rs. 20,00,000 o (Real rule) o Profit on sale of investment a/c credit Rs.5,00,000 o (Nominal rule)
9
49. o Salary paid to Kumaran Rs.50,000 o Answer:
o Salary paid for services rendered by Kumaran.Kumaran is not a creditor. Salary is an expenditure.
o JE : Salary a/c debit 50,000 o Cash a/c credit Rs.50,000 o If we enter into Kumeran account by using personal rule, kumeran account were to be
opened.How do you close his account? Salary is important rater than Kumeran.If you cannot close any time during the life of the company do not open such account. In the same way rent paid to land lord can not be entered into land lord account.Instead it should be entered in the rent account.
10
50. o Depreciation provided on Plant and Machinery Rs.2,00,000. o Answer: o Depreciation is a non cash account. There are many transactions are non cash items. It is
an expenditure as there is a reduction in the value of asset. o JE: Depreciation a/c Debit Rs.2,00,000(Nominal) o Plant and Machinery a/c Rs.2,00,000 o (Real rule)-goes out o Note: Plant and Machinery account goes out year after year when we provide
depreciation. The capital expenditure slowly becomes a revenue expenditure when we provide depreciation.
11
51. o Company declared dividend Rs. 20,00,000 o Answer: o Dividend is an appropriation of profit.It is not an expenditure because it is a share of
profits.In order to compute profit we do not reduce dividend. o JE: Dividend a/c debit Rs. 20,00,000(Nominal rule) o Cash a/c credit Rs.20,00,000(Real rule)
12
52. o Interest paid on debentures/loan Rs. 1,00,000 o Answer: o Interest is a business expenditure as it is paid to third party. If paid to owner is not
considered as expenditure. o JE: Interest a/c debit Rs.1,00,000(Nominal rule) o Cash a/c credit Rs. 1,00,000(Real)
13
53. Rectification of Errors Before preparing Trial Balance After trial balance But before Trading, P/L and Balance sheet After preparing Trading and P/L and Balance sheet Hit the individual account Hit profit or reserve or Capital {do not bother about individual/nature Of expenditure} And hit the Balance sheet Only net balance if it affects Balance sheet www.augustin.co.nr
54. Basic rules for rectification-1 o If words used ‘ account’-means error only with respect to that individual account. o Example: wages paid Rs 50,000 not entered into wages account. o Here wages paid might have affected cash also, but the statement says that it is not
entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly. Therefore rectify wages account only. It is one side error or one account error.
55. Basic rules for rectification-2 o Do not make too many assumptions. o Example: wages paid to install a machinery is entered into wages account. o Here you find wages account is treated as a revenue expenditure(Refer to the notes
earlier) but it is a capital expenditure. “ Any expenditure incurred before the asset is put into use to be capitalised”. What about cash account?
o We assume that cash account would have been correctly entered. (Continue in the next slide)
56. o You might ask which side of wage account had been entered, whether debit or credit? o Normal assumption is that wages always entered in the debit side(nominal rule). o Do not assume, had been entered into credit side of wages account what would have
happened- It is unnecessary assumption ( too much in your assumption ) o Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered)
but you should enter in the Building account now. o This is a normal assumption.
57. How do you rectify wages? o Building account to be debited Rs.50,000 o Wages account to be credited Rs.50000 o To remove wages from the account put it in the opposite side of that account. o Every account is born in one side ie debit or credit.All assets and expenditure accounts
are born in the debit side. If you want to kill it put it on the credit side. o In the same way liabilities and income accounts are born in the credit side. If you want
to kill it put it on the debit side. 58. Rectification rule-3
o Error to be rectified before the preparation of trial balance or after trial balance or after the preparation of Balance sheet.
o Before preparation of Balance sheet-Hit the individual account o After preparation on trading, profit and loss account and Balance sheet- reduce/increase
profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.
59. Rectification of errors-Rule-4 o If one side error(one account) to fulfill the double entry book keeping we open suspense
account provided, trial balance is already prepared. o Example :- Salary paid to Ranganath not entered into salary account by Rs. 40,000
o The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier).
o Rectification entry : o Salary a/c debit Rs.40,000 o Suspense a/c credit Rs. 40,000.
60. Rectification of error-Rule 5 o Suspense account: Meaning o When trial balance does not tally(debit is not equal to credit) in order to close the trial
balance we open entirely a new account on the side of deficit.Such account is known as suspense account.
o Example:-next page 61. Example for suspense account
o Trial balance: Debit credit o Purchases 5000 - o Wages 3000 - o Sales - 10,000 o Building 4000 o Suspense account ??? 2000(CR)
Note: here suspense account is a credit balance as trial is not an account Since debit side of trial balance is more than credit side, suspense account is not a credit balance
62. o Omitted from book(s )means both debit and credit of such transactions are omitted. o Account means –omitted to enter into that specific account only( normally one side
error) o Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000 o Here this transaction is completely omitted as it is given the word books. o To rectify pass a fresh journal entry: o JE: debit purchase a/c Rs.50,000 o Credit Mr.Amal a/c Rs.50,000 o Suppose it is stated that not entered into the purchase account how do you rectify?
Rectification of error-Rule-6
63. o Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s
account o Rectified entry is: o Purchase a/c debit Rs.50,000(real rule) o Suspense a/c credit Rs.50,000 o (fulfill double entry) o Note: normal assumption is that purchase is always debit. o If it is sales it is always credit. 64. o Rupees 1000 spent for repairs of building has been posted to building account. o Identify the mistake:
o Repairs 2. Building. o Repairs do not increase the capacity of building but to maintain the building. Therefore
it is a revenue expenditure but treated as capital expenditure. o Rectification : add to repairs and remove from building o Rectification entry : repairs a/c debit Rs.1000(real rule) o Building a/c credit Rs.1000 o (to remove from building a/c)
Exercise-1
65. o Sale of furniture Rs.20,000 entered in the Sales account. o Here he is not a furniture dealer. There fore sale of capital asset brings capital receipts.
It is treated as revenue receipts( like dealing in goods of furniture). o Rectification entry: o Sales a/c debit Rs.20,000 o (to remove from sale) o Furniture a/c Rs.20,000 o (to reduce furniture) o Note: sales normally credit and furniture is normally debit as asset.In order to kill put it
in the opposite side .
Exercise-2
66. o A sale of Rs.2000 to Min Min was credited to Min Min account . o Here the error with respect to Min Min account only.we assume that sales a/c is
correct(normal assumption as I have explained earlier) The normal Journal entry is : o MinMin a/c debit and Sales a/c credit. o But we have credited Min Min a/c instead of debit.To rectify such error double the
amount and put on the opposite side o Rectification entry : Min Min a/c debit Rs.4000 o (one 2000 for rectification and another to make actual entry o To suspense a/c credit Rs.4000
Exercise-3
67. o A purchase of Rs.6700 had been posted on the debit side of the creditor’s account as
Rs.7600 o Here mistake with respect to creditor only on the wrong side as creditors normally
appear on credit side(all liabilities appear on the credit side). o The second mistake is amount. o Method of rectification : Remove the wrong amount and post the correct amount on
the correct side. o Rectification entry : Suspense a/c debit Rs.14,300
o creditors a/c credit Rs.14,300 o (Rs. 7,600 is to remove wrong and Rs.6,700 to post correctly and suspense account is
opened to fulfill double entry as it is a one side error)
Exercise-4
68. o A sale of Rs.10,000 to Mr.Tim had been passed through the purchase day book. o Here the mistake is misunderstanding of transaction.Instead on sale treated as
purchase.The book means complete omission. o Rectification method : reverse sales and Tim to remove the mistake and post the correct
once again. o Rectification entry : 1. Tim A/c debit Rs.10,000 o Purchase a/c credit Rs.10,000 o (to remove the mistake put in the opposite side)
Exercise-5
69. o 2. To post the correct entry: o Tim a/c debit Rs. 10000 o credit sales a/c Rs.10,000 o Instead of passing two entries we can combine both the entries like this: o Debit Tim a/c Rs.20,000 o Credit purchases a/c Rs.10,000 o credit Sales a/c Rs.10,000
Exercise-5 continues
70. o Goods sold on Higher Purchase Rs.50,000 entered in the sales account after the
payment of first installment . o Here there is a technical error . The ownership is transferred only after the last
installment. In order to rectify remove from sale to the extent of sale price and add to stock to the extent of cost. Assume cost is Rs. 40,000.remove from debtors Rs.50,000
o Rectification entry : Sales a/c debit Rs. 50,000 o Stock a/c debit Rs.40,000 To Debtors a/c Credit Rs.50,000 o (To remove sales, debtors and added to stock)
Exercise-6
71. o Rectification after the preparation oft Trading and Profit and loss account and Balance
Sheet(after preparation of final books or financial statements) o Major repairs to renew the building Rs. 3,00,000 entered in the repairs account.
o Rectification: repairs appear in the Profit and Loss account and building appears in the Balance sheet
o To Rectify : Increase profit by Rs. 3,00,000 and add to building by Rs.3,00,000 in the balance sheet
o JE : Building a/c debit Rs. 3,00,000 o Profit and Loss a/c credit Rs. 3,00,000 o Assumtion : renewal done at the end of the year.Nature of expenditure is not important
to rectify after the preparation of final account.
Exercise-7
72. o Building purchase Rs. 40,00,000 entered in the Furniture a/c as Rs. 20,00,000.
Depreciation on building is 10%.Depreciation on Furniture is 30%.(Rectify after final accounts prepared)
o Both building and furniture fall in the balance sheet. But depreciation rates differ. It affects profit too.Depreciation on building is Rs.4,00,000 and depreciation on furniture is Rs.6,00,000.we had provided excess depreciation during the year, therefore profit should be increased.
o Furniture in the balance sheet to be reduced by Rs.14,00,000 and building to be increased by 36,00,000. ??? What is the rectification entry.
Exercise-8
73. Thank you very much Help your father in cooking Help your mother If you want to take rest Sweep your room Alternative Work is rest
74. Rectification entry? o Building a/c Debit Rs.36,00,000 o Furniture a/c credit Rs.14,00,000 o Profit and loss a/c Rs.2,00,000 o Suspense account credit Rs.20,00,000 o Note: Show net amount only.
Chart of Accounts
The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number. To set up a chart of accounts, one first needs to define the various accounts to be used by the business. Each account should have a number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order. Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering
Flag
1000 - 1999: asset accounts2000 - 2999: liability accounts3000 - 3999: equity accounts4000 - 4999: revenue accounts5000 - 5999: cost of goods sold6000 - 6999: expense accounts7000 - 7999: other revenue (for example, interest income)8000 - 8999: other expense (for example, income taxes)
By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.
Defining Accounts
Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. Accounting software packages often come with a selection of predefined account charts for various types of businesses.
There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts. However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.
Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.
Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.
Account Order
Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts
The following is an example of some of the accounts that might be included in a chart of accounts.
Sample Chart of Accounts
Asset Accounts
Current Assets
1000 Petty Cash
1010 Cash on Hand (e.g. in cash registers)
1020 Regular Checking Account
1030 Payroll Checking Account
1040 Savings Account
1050 Special Account
1060 Investments - Money Market
1070 Investments - Certificates of Deposit
1100 Accounts Receivable
1140 Other Receivables
1150 Allowance for Doubtful Accounts
1200 Raw Materials Inventory
1205 Supplies Inventory
1210 Work in Progress Inventory
1215 Finished Goods Inventory - Product #1
1220 Finished Goods Inventory - Product #2
1230 Finished Goods Inventory - Product #3
1400 Prepaid Expenses
1410 Employee Advances
1420 Notes Receivable - Current
1430 Prepaid Interest
1470 Other Current Assets
Fixed Assets
1500 Furniture and Fixtures
1510 Equipment
1520 Vehicles
1530 Other Depreciable Property
1540 Leasehold Improvements
1550 Buildings
1560 Building Improvements
1690 Land
1700 Accumulated Depreciation, Furniture and Fixtures
1710 Accumulated Depreciation, Equipment
1720 Accumulated Depreciation, Vehicles
1730 Accumulated Depreciation, Other
1740 Accumulated Depreciation, Leasehold
1750 Accumulated Depreciation, Buildings
1760 Accumulated Depreciation, Building Improvements
Other Assets
1900 Deposits
1910 Organization Costs
1915 Accumulated Amortization, Organization Costs
1920 Notes Receivable, Non-current
1990 Other Non-current Assets
Liability Accounts
Current Liabilities
2000 Accounts Payable
2300 Accrued Expenses
2310 Sales Tax Payable
2320 Wages Payable
2330 401-K Deductions Payable
2335 Health Insurance Payable
2340 Federal Payroll Taxes Payable
2350 FUTA Tax Payable
2360 State Payroll Taxes Payable
2370 SUTA Payable
2380 Local Payroll Taxes Payable
2390 Income Taxes Payable
2400 Other Taxes Payable
2410 Employee Benefits Payable
2420 Current Portion of Long-term Debt
2440 Deposits from Customers
2480 Other Current Liabilities
Long-term Liabilities
2700 Notes Payable
2702 Land Payable
2704 Equipment Payable
2706 Vehicles Payable
2708 Bank Loans Payable
2710 Deferred Revenue
2740 Other Long-term Liabilities
Equity Accounts
3010 Stated Capital
3020 Capital Surplus
3030 Retained Earnings
Revenue Accounts
4000 Product #1 Sales
4020 Product #2 Sales
4040 Product #3 Sales
4060 Interest Income
4080 Other Income
4540 Finance Charge Income
4550 Shipping Charges Reimbursed
4800 Sales Returns and Allowances
4900 Sales Discounts
Cost of Goods Sold
5000 Product #1 Cost
5010 Product #2 Cost
5020 Product #3 Cost
5050 Raw Material Purchases
5100 Direct Labor Costs
5150 Indirect Labor Costs
5200 Heat and Power
5250 Commissions
5300 Miscellaneous Factory Costs
5700 Cost of Goods Sold, Salaries and Wages
5730 Cost of Goods Sold, Contract Labor
5750 Cost of Goods Sold, Freight
5800 Cost of Goods Sold, Other
5850 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Purchase Discounts
Expenses
6000 Default Purchase Expense
6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expenses
6150 Bad Debt Expense
6200 Bank Fees
6250 Cash Over and Short
6300 Charitable Contributions Expense
6350 Commissions and Fees Expense
6400 Depreciation Expense
6450 Dues and Subscriptions Expense
6500 Employee Benefit Expense, Health Insurance
6510 Employee Benefit Expense, Pension Plans
6520 Employee Benefit Expense, Profit Sharing Plan
6530 Employee Benefit Expense, Other
6550 Freight Expense
6600 Gifts Expense
6650 Income Tax Expense, Federal
6660 Income Tax Expense, State
6670 Income Tax Expense, Local
6700 Insurance Expense, Product Liability
6710 Insurance Expense, Vehicle
6750 Interest Expense
6800 Laundry and Dry Cleaning Expense
6850 Legal and Professional Expense
6900 Licenses Expense
6950 Loss on NSF Checks
7000 Maintenance Expense
7050 Meals and Entertainment Expense
7100 Office Expense
7200 Payroll Tax Expense
7250 Penalties and Fines Expense
7300 Other Taxes
7350 Postage Expense
7400 Rent or Lease Expense
7450 Repair and Maintenance Expense, Office
7460 Repair and Maintenance Expense, Vehicle
7550 Supplies Expense, Office
7600 Telephone Expense
7620 Training Expense
7650 Travel Expense
7700 Salaries Expense, Officers
7750 Wages Expense
7800 Utilities Expense
8900 Other Expense
9000 Gain/Loss on Sale of Assets