B.A (HONS.

) BUSINESS ECONOMICS

SEMESTER 1
C2: ACCOUNTING FOR MANGERS
 COURSE STRUCTURE:
• Unit 1: Financial Accounting

• Unit 2: Analysis and Interpretation of

Financial Statements

• Unit 3: Cost and Management Accounting

• Unit 4: Planning and Control

ACCOUNTING FOR MANAGERS
 WHAT IS ACCOUNTING?
• It is an information system that reports
– on the economic activities and
– financial condition of a business or organisation

• There needs to be a system or set of rules so

– we are able to compare entities to each other
Primary Objectives of studying this paper:
• Develop the ability
– to read,
– analyze and
– interpret
– financial statements

• Understand how financial accounting statements are

constructed

• Provide you with tools for economic decision making

– Where to find information
– How the information got there
 HOW ACCOUNTING CAN HELP YOU?

• Help you understand and present the financial position

of the business

• Help you prepare a budget and keep on target

• Realise how much cash you have and if there is enough

to pay bills

• Uncover places where costs can be cut

 TOPICS TO BE COVERED IN UNIT 1:
PART I
• Meaning of Financial Accounting
• Functions and Limitations of Financial Accounting
• Users of Financial Accounting Information
• Basis of Accounting: Cash and Accrual
• Principles of Financial Accounting (GAAP)
• Overview of International Financial Reporting Standards (IFRS) and Ind AS.

PART II
• Overview of Process of Financial Accounting: Journalizing, Ledger Posting
and Preparation of Trial Balance.

PART III
• Preparation of final Accounts (with adjustments) of a Sole Proprietor:
Trading and Profit and Loss Account and Balance Sheet.
PART- I
 ACCOUNTING IS THE LANGUAGE OF BUSINESS

• It will help you succeed in business

• It is the means that business information is

communicated to the stakeholders in the business

–Stakeholders are individuals and organisations that

need information about a business.

–They include lenders, government agencies,

employees, news reporters and others.
 SEMESTER I: ACCOUNTING FOR MANGERS:
COURSE OVERVIEW:
• UNIT 1: Introduction to Accounting: The Basic Framework
& Fundamentals

• UNIT 2: Understanding Financial Accounting through

Double entry Book Keeping

• UNIT 3: Cost and Management Accounting

• UNIT 4: Accounting Information Interpretation & Financial

Analysis

• UNIT 5: Accounting for Performance Evaluation, Planning

and Control
 UNIT 1:
INTRODUCTION TO ACCOUNTING:
THE BASIC FRAMEWORK & FUNDAMENTALS
• Accounting - a process of
– identifying,
– recording,
– summarising, and
– Reporting
– economic information to
– decision makers in the form of financial statements

• Financial accounting - focuses on the specific needs of

decision makers external to the organisation, such as
stockholders, suppliers, banks, and government
agencies
Accounting can be defined
as an information system
that provides reports to stakeholders
about the economic activities and
condition of a business.

Who are stakeholders? – anyone or any entity that has an interest in the
economic performance and well-being of a business

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 Accounting can be defined as an information system that
provides reports to stakeholders about the economic activities
and condition of a business.

Who are stakeholders? – anyone or any entity that has an interest in the
economic performance and well-being of a business
Bankers and other creditors – need to ensure that the business has the ability to
repay loans, and on a timely basis
Suppliers – need to ensure their customer (the business) will be around to purchase
their supplies and then be able to pay for them
Customers – are interested in the business to determine if they will always be around
to provide a constant flow of goods and services
Government – need to ensure that the business pays the correct amount of taxes

Employees and Management– need to ensure that the business is doing well so
that they will have a job
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 The Nature of Accounting

• The accounting system is a series of

steps performed to analyse, record,
quantify, accumulate, summarise,
classify, report and interpret economic
events and their effects on an
organisation and to prepare the financial
statements.
 The Nature of Accounting

• Accounting systems are designed to

meet the needs of the decisions makers
who use the financial information

• Every business has some sort of

accounting system.
– These accounting systems may be very complex or very
simple, but the real value of any accounting system lies in the
information that the system provides.
 Accounting as an Aid to Decision
Making/Information System

• Accounting information is useful to

anyone who makes decisions that have
economic results

– Managers want to know if a new product will be profitable.

– Owners want to know which employees are productive.
– Investors want to know if a company is a good investment.
– Creditors want to know if they should extend credit, how much to
extend, and for how long.
– Government regulators want to know if financial statements conform to
requirements.
 Accounting as an Aid to
Decision Making
• Fundamental relationships in the
decision-making process:

Accountant’s
Financial
Event analysis & Users
Statements
recording
 BRANCHES OF ACCOUNTING
Financial accounting is primarily concerned with the
recording & reporting of economic data and activities for a
business to external parties.
Managerial accounting uses both financial accounting and
estimated data to aid management in running day-to-day
operations and in planning future operations.
Accountants employed by a business firm or a not-for-profit
organization are said to be employed in private accounting.
E.g. CFO, Controller, or Financial Analyst of Pepsico

Accountants and their staff who provide services to the

public (i.e. individuals and corporations) on a fee basis are
said to be employed in public accounting. E.g. Price
Waterhouse Coopers, Ernst & Young, KPMG, Deloitte
 FINANCIAL ACCOUNTING

• Branch of accounting associated with

preparing reports for external users

• i.e. the bank, shareholders

 MANAGERIAL ACCOUNTING

• Accounting to guide management in making

decisions about the business

• For example: break even analysis

 OBJECTIVES OF FINANCIAL ACCOUNTING

• To report the financial condition of a

business at a point in time

• To report changes in the financial

condition of a business over a period of
time
Objectives continued…..
• First, record the economic events affecting a
business.

• Second, summarize the impact of these events in a

report called financial statements
– Generally Accepted Accounting Principles (GAAP)
 WHO’S WHO IN ACCOUNTING

• Bookkeepers-record each transaction

• Accountants-prepare financial statements

• Auditors-review the company’s books and look for

errors and discrepancies (could be internal or
external)

• Controller-in charge of the accounting department

 WHO’S WHO IN ACCOUNTING
• CPAs-certified public accountants

• Typically work for an accounting firm called public

accounting

• Once a year come in and do an audit of the books of

the company and do the related tax returns

• CPAs also work for private companies

 Financial and Management Accounting
• The major distinction between financial and
management accounting is the users of the information.

– Financial accounting serves external users.

– Management accounting serves internal users, such as top

executives, management and administrators within
organisations.
 Financial Accounting
The primary questions about an
organisation’s success that decision
makers want to know are:
• What is the financial picture of the
organisation on a given day?
• How well did the organisation do
during a given period?
 Financial Accounting
Accountants answer these primary questions with
three major financial statements:

• Balance Sheet - financial picture on a given day

• Income Statement - performance over a given period

• Statement of Cash Flows - cash position on a

particular day and flows
 Financial Accounting
• Annual report - a document prepared
by management and distributed to
current and potential investors to
inform them about the company’s past
performance and future prospects.
– The annual report is one of the most common sources of
financial information used by investors and managers.
 Financial Accounting
• The annual report usually includes:
– a letter from corporate management
– a discussion and analysis of recent economic events by
management
– footnotes that explain many elements of the financial
statements in more detail
– the report of the independent auditors
– a statement of management’s responsibility for preparation of
the financial statements
– other corporate information
 Financial Accounting
• Financial accounting is the language that
translates economic events into uniform and
comprehensive information, understandable
by OUTSIDE observers.

• Unfortunately, this language has become

extremely complex and heterogeneous…

• This is naturally a bad thing for the outside

observers.
 Users of Accounting Information

Different categories of users need different

kinds of information for making decisions.

These users can be divided into :

• Internal Users; and

• External Users.
 Internal Users

• These are the persons who manage the

business, i.e. management at the top, middle,
and lower levels.

• Their requirements of information are different

because they make different types of decisions.
 Internal Users continue…

• The top level is more concerned with planning;

the middle level is concerned equally with
planning and control; and the lower level is
concerned more with controlling operations.

• Information is supplied on different aspects, e.g.

cash resources, sales estimates, results of
operations, financial position, etc.
 External Users

All persons other than internal users come in

the group of external users. External users
can be divided into two groups:
· those having direct interest; and
· those having indirect interest

……in a business organisation.

 External Users continue…

Main sources of information for external

users are
• annual reports of business organisations,
which state the financial position and
performance and give the auditor’s report,
director’s report and other information.
 External Users continue…

• Investors and creditors are the external users having

direct interest.

• Tax authorities, regulatory agencies, customers, labour

unions, trade associations, stock exchanges, potentials
investors, etc are indirectly interested in the company’s
financial strength, its ability to meet short-term and
long-term obligations, its future earning power, etc for
making various decisions.
BASIC ACCOUNTING
TERMINOLGIES
 ASSETS

These are economic resources of an

enterprise that can be usefully expressed in
monetary terms.
Assets are things of value used by the
business in its operations.
· Fixed Assets
· Current Assets
 ASSETS continue…

· Fixed Assets are assets held on a long-

term basis.
e.g. Land, Building, Machinery, Plant,
Furniture and Fixtures, etc.
 ASSETS continue…

· Current Assets are assets held on a short-

term basis.
e.g. Debtors, Bills receivable,
Stock(Inventory), Cash and Bank balances,
etc.
 LIABILITIES

These are obligations or debts that the

enterprise must pay in money or services at
some time in the future.

• Long-term liabilities

• Short-term liabilities
 LIABILITIES continue..

· Long-term liabilities are those that are usually

payable after a period of one year.

e.g. A term loan from a financial institution,

debentures (bonds) issued by a company.
 LIABILITIES continue..

· Short-term liabilities are obligations that

are payable within a period of one year.

e.g. Creditors, bills payable, overdraft from

a bank for a short period.
 CAPITAL

• Investment by the owner for use in the firm is

known as capital.

• Owner’s equity is the ownership claim on total

assets.

• It is equal to total assets minus total liabilities.

 REVENUES

• These are the amounts the business earns by

selling its products or providing services to
customers.

• Other titles and sources of revenue common to

many businesses are: sales, fees, commission,
interest, dividends, royalties, rent received, etc.
 EXPENSES

• These are costs incurred by a business in the process of

earning revenue.

• Generally, expenses are measured by the cost of assets

consumed or services used during an accounting period.

• The usual titles of expenses are: depreciation, rent, wages,

salaries, interest, costs of heat, light and water, telephone,
etc.
 PURCHASES
• Purchases are total amount of goods procured by a
business on credit and for cash, for use or sale.
• In a trading concern, purchases are made of
merchandise for resale with or without processing.
• In a manufacturing concern, raw materials are
purchased, processed further into finished goods
and then sold.
• Purchases may be cash purchase or credit
purchase.
 SALES

• Sales are total revenues from goods or

services sold or provided to customers.

• Sales may be cash sales or credit sales.

 STOCK

Stock (Inventory) is a measure of something

on hand – goods, spares and other items –
in a business.

It is called stock on hand.

 STOCK: continue…

In a trading concern, the stock on hand is

the amount of goods which have not been
sold on the date on which the balance sheet
is prepared. This is also called closing
stock.
 STOCK continue…

In a manufacturing concern, closing stock

comprises raw materials, semi-finished
goods and finished goods on hand on the
closing date.

Similarly, opening stock is the amount of

stock at the beginning of the accounting
year.
 DEBTORS

Debtors are persons and/or other entities who owe

to an enterprise an amount for receiving goods and
services on credit.

The total amount standing against such persons

and/or entities on the closing date, is shown in the
Balance Sheet as Sundry Debtors on the asset side.
 CREDITORS

Creditors are persons and/or other entities who

have to be paid by an enterprise an amount for
providing the enterprise goods and services on
credit.

The total amount standing to the favour of such

persons and/or entities on the closing date, is
shown in the Balance Sheet as Sundry Creditors on
the liability side.
 ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

· Accounting Concepts; and

· Accounting Conventions.
 ACCOUNTING PRINCIPLES

Accounting principles can be subdivided into

two categories:

· Accounting Concepts; and

· Accounting Conventions.
 ACCOUNTING PRINCIPLES
· Accounting Concepts
· Accounting Conventions

• The term ‘concept’ is used to connote accounting

postulates, that is necessary assumptions and conditions
upon which accounting is based.

• The term ‘convention’ is used to signify customs and

traditions as a guide to the presentation of accounting
statements.
 ACCOUNTING PRINCIPLES

Accounting Concepts
• Business Entity Concept
• Money Measurement Concept
• Cost Concept
• Going Concern Concept
• Dual Aspect Concept
• Realization Concept
• Accounting Period Concept
 ACCOUNTING PRINCIPLES

Accounting Conventions
• Convention of Consistency
• Convention of Disclosure
• Convention of Conservation
 ACCOUNTING PRINCIPLES

Accounting Concepts
The term ‘concept’ is used to connote
accounting postulates, that is necessary
assumptions and conditions upon which
accounting is based.
 Business Entity Concept

• Business is treated as a separate entity or unit

different from its owner and others
• All the transactions of the business are recorded
in the books of business from the point of
view of the business as an entity
• and even the owner is treated as a creditor
to the extent of his/her capital
 Money Measurement Concept

• In accounting, we record only those

transactions which are expressed in terms
of money.

• In other words, a fact which can not be

expressed in monetary terms, is not
recorded in the books of accounts.
 Cost Concept

• Transactions are entered in the books of accounts at the

amount actually involved. Suppose a company
purchases a car for Rs.1,50,000/- the real value of
which is Rs.2,00,000/-, the purchase will be recorded as
Rs.1,50,000/- and not any more.

• This is one of the most important concept and it

prevents arbitrary values being put on transactions.
 Going Concern Concept

• It preseumes that the business will exists

for a long time and transactions are
recorded from this point of view.

• Idea of perpetual succession

 Dual Aspect Concept

• Each transaction has two aspects, that is,

the receiving benefit by one party and the
giving benefit by the other.

• This principle is the core of accountancy.

 Dual Aspect Concept continue…

For example, the proprietor of a business

starts his business with Cash Rs.1,00,000/-,
Machinery of Rs.50,000/- and Building of
Rs.30,000/-, then this fact is recorded at two
places. That is Assets account (Cash,
Machinery & Building) and Capital accounts.
The capital of the business is equal to the
assets of the business.
 Dual Aspect Concept continue…

Thus, the dual aspect can be expressed as

under

Capital + Liabilities = Assets

or
Capital = Assets – Liabilities
 BASIS IN ACCOUNTING

• CASH BASIS

• ACCRUAL BASIS
 CASH BASIS
• Under cash accounting, income and expenses are recorded when payment
is received or made

• If a business incurs a large expense to provide a service before it has

received the payment for the service, the business’s financial statements
may communicate a distorted financial condition of the business.

• Similarly, significant distortion on the financial condition of a business is

reflected on the financial statements if it has received a large payment but
has not yet delivered the product or provided the service.

• Cash basis accounting requires less effort in bookkeeping but it is not in

accordance with the Generally Accepted Accounting Principles (GAAP)
 ACCRUAL BASIS
• Accrual accounting’s primary focus is on two
types of business events.
– First,
• from an asset perspective, an accrual is recorded when a service has
been performed or a product has been delivered by a company but
the payment has not yet been received.

• From a liability perspective, an accrual is recorded when a service or

product has been received, but the payment has not yet been made.

– Second, a deferral is recorded when payment is received before a

service is performed or product has been delivered.
 Realization Concept

• Accounting is a historical record of transactions.

• It records what has happened.

• It does not anticipate events.

• This is of great important in preventing business firms from

inflating their profits by recording sales and income that are likely
to accrue.
 Realization Concept

• Accounting is a historical record of transactions.

• It records what has happened.

• It does not anticipate events.

• This is of great important in preventing business firms from

inflating their profits by recording sales and income that are likely
to accrue.
 Realization Concept
• Realization concept in accounting, also known as revenue recognition
principle, refers to the application of
accruals concept towards the recognition of revenue (income).

• Under this principle, revenue is recognized by the seller when it is ear

ned irrespective of whether cash from the transaction has been receive
d or not
 Realization Concept
• In case of sale of goods, revenue must be recognized when the
seller transfers the risks and rewards associated with the
ownership of the goods to the buyer. This is generally deemed
to occur when the goods are actually transferred to the buyer.
 Realization Concept
Example

Motors PLC is a car dealer. It receives orders from customers in advance

against 20% down payment. Motors PLC delivers the cars to the respective
customers within 30 days upon which it receives the remaining 80% of the list
price.

In accordance with the revenue realization principle, Motors PLC must not
recognize any revenue until the cars are delivered to the respective customers
as that is the point when the risks and rewards incidental to the ownership of
the cars are transferred to the buyers.
Importance of Realization Concept
• Application of the realization principle ensures that the
reported performance of an entity, as evidenced from the
income statement, reflects the true extent of revenue earned
during a period rather than the cash inflows generated during a
period which can otherwise be gauged from the cash flow
statement

• Recognition of revenue on cash basis may not present a

consistent basis for evaluating the performance of a company
over several accounting periods due to the potential volatility
in cash flows.
 Revenue Recognition
• Recognition, as defined in the IASB Framework, means
incorporating an item that meets the definition of
revenue (in the income statement when it meets the
following criteria:

– There is a contract

– it is probable that any future economic benefit

associated with the item of revenue will flow to the
entity, and

– the amount of revenue can be measured with reliability

 Revenue Recognition: Sale of goods
Revenue arising from the sale of goods should be recognised when
all of the following criteria have been satisfied: [IAS 18.14]

• the seller has transferred to the buyer the significant risks and
rewards of ownership the seller retains neither continuing
managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold

• the amount of revenue can be measured reliably

• it is probable that the economic benefits associated with the

transaction will flow to the seller, and the costs incurred or to be
incurred in respect of the transaction can be measured reliably
 Revenue Recognition: Rendering of services

• For revenue arising from the rendering of services, provided that all of the
following criteria are met, revenue should be recognised by reference to
the stage of completion of the transaction at the balance sheet [IAS 18.20]

• the amount of revenue can be measured reliably;

• it is probable that the economic benefits will flow to the seller;
• the stage of completion at the balance sheet date can be measured
reliably;
• and the costs incurred, or to be incurred, in respect of the transaction
can be measured reliably.

• When the above criteria are not met, revenue arising from the rendering
of services should be recognised only to the extent of the expenses
recognised that are recoverable (a "cost-recovery approach". [IAS 18.26]
 Accounting Period Concept

• Strictly speaking, the net income can be measured by

comparing the assets of the business existing at the
time of its liquidation.
• But as the life of the business is assumed to be infinite,
the measurement of income according to the above
concept is not possible.
• So a twelve month period is normally adopted for this
purpose.
• This time interval is called accounting period.
 Matching Concept

• Matching Principle requires that expenses incurred by an

organization must be charged to the income statement in the
accounting period in which the revenue, to which those
expenses relate, is earned.

• Results in the presentation of a more balanced and consistent

view of the financial performance of an organization than
would result from the use of cash basis of accounting
 Matching Concept: EXAMPLE

• Cost of Goods Sold

The cost incurred in the manufacture or procurement of

inventory is charged to the income statement of the
accounting period in which the inventory is sold.

Therefore, any inventory remaining unsold at the end of

an accounting period is excluded from the computation
of cost of goods sold.
 ACCOUNTING PRINCIPLES

Accounting Conventions

The term ‘convention’ is used to signify

customs and traditions as a guide to the
presentation of accounting statements.
 Convention of Consistency

• In order to enable the management to draw important

conclusions regarding the working of the company over
a few years, it is essential that accounting practices and
methods remain unchanged from one accounting period
to another.

• The comparison of one accounting period with that of

another is possible only when the convention of
consistency is followed.
 Convention of Disclosure

• This principle implies that accounts must be honestly

prepared and all material information must be disclosed
therein

• The contents of Balance Sheet and Profit and Loss

Account are prescribed by law

• These are designed to make disclosure of all material

facts compulsory
 QUALITATIVE ATTRIBUTES OF ACCOUNTING
INFORMATION
• UNDERSTANDABILITY

• RELIABILITY
– NEUTRALITY
– FAITHFUL REPRESENTATION
– COMPLETENESS

• RELEVANCE
– TIMELINESS
– SUBSTANCE OVER FORM

• COMPARABILITY
 TIMELINESS
• Timeliness principle in accounting refers to the need for accounting
information to be presented to the users in time to fulfill their
decision making needs.

• Importance
– Timeliness of accounting information is highly desirable since
information that is presented timely is generally m¯ore relevant to
users while conversely, delay in provision of information tends to
render it less relevant to the decision making needs of the users.

– Timeliness principle is therefore closely related to the

relevance principle.

• Timeliness is important to protect the

users of accounting information from basing their decisions on outda
ted information
 SUBSTANCE OVER FORM
• Substance over form is an accounting concept which means that the
economic substance of transactions and events must be recorded in the
financial statements rather than just their legal form
– in order to present a true and fair view of the affairs of the entity.

• Substance over form concept entails

– the use of judgment on the part of the preparers of the financial
statements
• in order for them to derive the business sense from the
transactions and events and to present them in a manner that
best reflects their true essence
– Whereas legal aspects of transactions and events are of great
importance, they may have to be disregarded at times in order to
provide more useful and relevant information to the users of financial
statements.
SUBSTANCE OVER FORM: EXAMPLE
• An entity may agree to sell inventory to someone and buy back the same inventory after a
specified time at an inflated price that is planned to compensate the seller for the time value
of money.

• On paper, the sale and buy back may be deemed as two different transactions which should
be dealt with as such for accounting purposes i.e. recording the sale and (subsequently)
purchase.

• However, the economic reality of the transactions is that no sale has in fact
occurred.
• The sale and buy back, when considered in the context of both transactions, is actually a
financing arrangement in which the seller has obtained a loan which is to be repaid with
interest (via inflated price).

– Inventory acts as the security for the loan which will be returned to the 'seller' upon
repayment. So instead of recognizing sale, the entity should recognize a liability for loan
obtained which shall be reversed when the loan is repaid.

– The excess of loan received and the amount that is to be paid (i.e. inflated price) is
recognized as finance cost in the income statement.
 Convention of Conservatism
• Financial statements are always drawn up on rather a conservative
basis.

• That is, showing a position better than what it is, not permitted.

• It is also not proper to show a position worse than what it is.

o In other words, secret reserves are not permitted

• EXAMPLE: Inventory is recorded at the lower of cost or net realizable

value (NRV) rather than the expected selling price.
o This ensures profit on the sale of inventory is only realized when the
actual sale takes place
 FUNCTIONS OF ACCOUNTING

• Keeping systematic records

• Protecting properties of the business
• Communicating the results
• Meeting legal requirements
 Keeping systematic records

The first function of accounting is to keep a

systematic record of financial transactions,
to post them to the ledger accounts and
ultimately prepare final statements.
Protecting properties of the business

The second important function is to protect

the property of the business. The system
accounting is designed in such a way that it
protects its assets from an unjustified and
unwarranted use.
 Meeting legal requirements

The fourth and the last function of

accounting is to meet the legal requirements
under the Companies Act, Income Tax Act,
Sales Tax Act and so on.
 THE ACCOUNTING CYCLE

• Recording transactions in books of original

entry
• Classifying data by posting from
subsidiary books to the accounts.
• Closing the books and preparation of final
accounts.
 Accounting standards

• Accounting Standards (AS) are written policy documents

issued by expert accounting body or by government or
other regulatory body covering the aspects of recognition,
measurement, presentation and disclosure of accounting
transactions in the financial statements.
 Accounting standards: Purpose

• To reduce the accounting alternatives in the

preparation of financial statements within the bounds
of rationality

• To ensure comparability of financial statements of

different enterprises.
Accounting standards: Issues Dealt

1.Recognition of events and transactions in the financial statements

2.Measurement of these transactions and events,

3.Presentation of these transactions and events in the financial

statements in a manner that is meaningful and understandable to
the reader, and

4.Disclosure requirements which should be there to enable the

public at large and the stakeholders and the potential investors in
particular, to get an insight into what these financial statements
are trying to reflect and thereby facilitating them to take prudent
and informed business decisions.
 Accounting standards: Importance

• Users of the financial statements need an assurance

• that the entities preparing their financial
statements follow the accepted standards
• while presenting their financial information
in the financial statements
 Accounting standards:
Standard setting process

• The Institute of Chartered Accountants of India (ICAI) constitutied the Accounting

Standards Board (ASB) in 1977

• The ASB considers the International Accounting Standards (IASs)/International

Financial Reporting Standards (IFRSs) while framing Indian Accounting Standards
(ASs) and try to integrate them, in the light of the applicable laws, customs, usages
and business environment in the country.

• The composition of ASB includes, representatives of industries (namely,

ASSOCHAM, CII, FICCI), regulators, academicians, government departments etc.

• Although ASB is a body constituted by the Council of the ICAI,

• ASB is independent in the formulation of accounting standards and
• Council of the ICAI is not empowered to make any modifications in the draft
accounting standards formulated by ASB without consulting with the ASB
 Accounting standards:
Standard setting process
 Accounting standards: Benefits

•Standardisation of alternative accounting treatments

•Requirements for additional disclosures

•Comparability of financial statements

 Accounting standards: Limitations

• Difficulties in making choice between different

treatments

• Lack of flexibility

• Restricted scope
 Convergence with IFRS in India
• Convergence means, alignment of the standards of different standard setters with a
certain rate of compromise, by adopting the requirements of the standards either fully or
partially.

• Convergence with IFRS implies to achieve harmony with IFRS and to design and maintain
national accounting standards in a way that they comply with the International
Accounting Standards.

• The Ministry of Corporate Affairs (MCA) was designated as the nodal Ministry for
converging Indian GAAP with IFRS/Ind AS.

• The Institute of Chartered Accountants of India (ICAI) announced its decision to adopt
IFRS in India with effect from 1 April, 2011.
International Accounting Standard
• The London based group namely the International Accounting Standards Committee (IASC), responsible for
developing International Accounting Standards, was established in June, 1973.

• It is presently known as International Accounting Standards Board (IASB)

• The IASC comprises the professional accountancy bodies of over 75 countries (including the Institute of
Chartered Accountants of India).

• Primarily, the IASC was established, in the public interest, to formulate and publish, International Accounting
Standards to be followed in the presentation of audited financial statements

• International Accounting Standards (IAS) were issued to promote acceptance and observance of
International Accounting Standards worldwide

• The members of IASC assumed the responsibility to support the standards promulgated by IASC and to
propagate those standards in their respective countries
International Accounting Standards..contd.
• Between 1973 and 2001, the International Accounting Standards Committee (IASC) released International
Accounting Standards.

• Between 1997 and 1999, the IASC restructured their organisation, which resulted in formation of
International Accounting Standards Board (IASB).

• These changes came into effect on 1st April, 2001.

• Subsequently, IASB issued statements about current and future standards: IASB publishes its Standards in a
series of pronouncements called International Financial Reporting Standards (IFRS).

• However, IASB has not rejected the standards issued by the IASC. Those pronouncements continue to be
designated as “International Accounting Standards” (IAS).

• The IASB approved IASB Resolution on IASC Standards at their meeting in April, 2001, in which it confirmed
the status of all IASC Standards and SIC Interpretations in effect as on 1st April, 2001.
 IFRS
• The term IFRS comprises IFRS issued by IASB; IAS issued by International Accounting Standards
Committee (IASC); and Interpretations issued by the Standard Interpretations Committee (SIC) and
the International Financial reporting Interpretations Committee (IFRIC) of the IASB.

• International Financial Reporting Standards (IFRSs) are considered a "principles-based" set of

standards.

• In fact, they establish broad rules rather than dictating specific treatments.

• Every major nation is moving toward adopting them to some extent. Large number of authorities
requires public companies to use IFRS for stock-exchange listing purposes, and in addition, banks,
insurance companies and stock exchanges may use them for their statutorily required reports.
 STRUCTURE OF IFRS
IFRS are principle based set of standards that establish broad rules and also dictate specific
treatments.

International Financial Reporting Standards comprises of:-

• International Financial Reporting Standards (IFRS):- Standards issued after 2001

• International Accounting Standards (IAS):- Standards issued before 2001
• Interpretations Originated from the International Financial Reporting Interpretations Committee
(IFRIC):- Issued after 2001
• Standing Interpretations Committee (SIC):- Issued before 2001
 IFRS
• Companies needed to adopt the international standards.

• This requirement affected about thousands of enterprises, including their subsidiaries, equity
investors and joint venture partners

• The increased use of IFRS is not limited to public-company listing requirements or statutory
reporting.

• Many lenders and regulatory and government bodies are looking to IFRS to fulfil local financial
reporting obligations related to financing or licensing.
 Need for Convergence towards Global
Standards
• Change in the global economic scenario

• Emergence of trans-national corporations in search of money, not only for fuelling

growth, but to sustain on going activities has necessitated raising of capital from all
parts of the world, cutting across frontiers.

• Each country has its own set of rules and regulations for accounting and financial
reporting.

• Diverse rules and regulations will require that the enterprise is in a position to
understand the differences between the rules governing financial reporting in the
foreign country as compared to its own country of origin.
 Need for Convergence towards Global
Standards
• Accounting standards and principle need to be robust so that the larger society develops
degree of confidence in the financial statements

• International analysts and investors would like to compare financial statements based on
similar accounting standards,

• Growing support for an internationally accepted set of accounting standards for cross-border
filings

• The harmonization of financial reporting around the world will help to raise confidence of
investors generally in the information they are using to make their decisions and assess their
risks.
 Need for Convergence towards Global
Standards
• Having a multiplicity of accounting standards around the world is against the public interest

• If accounting for the same events and information produces different reported numbers, depending
on the system of standards that are being used, then it is self-evident that accounting will be
increasingly discredited in the eyes of those using the numbers.
• It creates confusion, encourages error and facilitates fraud.

• The cure for these ills is to have a single set of global standards, of the highest quality, set in the
interest of public.

• Global Standards facilitate cross border flow of money, global listing in different bourses and
comparability of financial statements
 Benefits of Convergence
• It improves the ability of investors to compare investments on a global basis and thus lowers their risk of
errors of judgment.

• It facilitates accounting and reporting for companies with global operations and eliminates some costly
requirements say reinstatement of financial statements.

• It has the potential to create a new standard of accountability and greater transparency, which are values of
great significance to all market participants including regulators.

• It reduces operational challenges for accounting firms and focuses their value and expertise around an
increasingly unified set of standards.

• It creates an unprecedented opportunity for standard setters and other stakeholders to improve the
reporting model.

• For the companies with joint listings in both domestic and foreign country, the convergence is very much
significant.
 Adoption of IFRS in India
• In 2014 Budget speech, the then Finance Minister Arun Jaitley announced
the implementation of Ind AS in India

• Indian Accounting Standards converged with the IFRS (known as Ind AS)
• MCA

• Timelines
 IND-AS
• IND AS are standards that have been harmonized
with the IFRS to make reporting by Indian
companies more globally accessible
– Indian accounting standards converged with IFRS – Ind AS

• Since Indian companies have a far wider global

reach now as compared to earlier, the need to
converge reporting standards with international
standards was felt,
– which led to the introduction of IND AS.
 IND-AS
• The Ministry of Corporate Affairs (MCA), in 2015, had notified the
Companies (Indian Accounting Standards (IND AS)) Rules 2015, which
stipulated the adoption and applicability of IND AS in a phased
manner beginning from the Accounting period 2016-17.
– The MCA has since issued three Amendment Rules, one each in year 2016,
2017, and 2018 to amend the 2015 rules.

• These standards became effective from financial year 2016-17 and in

Phase I, were applicable to all listed companies and companies having
net worth exceeding Rs.500 crores

• Any company could voluntarily comply with Ind AS for accounting

periods beginning on or after 1 April 2015
 Ind AS in Companies Act, 2013
• The Indian Accounting Standards (Ind AS), as notified
under section 133 of the Companies Act 2013,
– have been formulated keeping the Indian economic & legal
environment in view and
– with a view to converge with IFRS Standards, as issued by and
copyright of which is held by the IFRS Foundation

• Notwithstanding anything contained in the above para,

Ind AS notified under the Companies Act 2013 are
– governed by the provisions of Indian Copyright Act, 1957 and
– the copyright in Ind AS vests in Government of India
 Ind AS: Current Position
• Notification of 39 Ind AS standards by the Ministry of Corporate Affairs
starting February 2015
• Ind AS: IFRS converged standards fills up significant gaps that exist in the
current accounting guidance, and India can claim to have financial reporting
standards that are contemporary and virtually at par with the leading global
standards.
• Will improve India’s place in global rankings on corporate governance and
transparency in financial reporting.
• Around 150 countries have already adopted IFRS in their economy.
• In India, MCA announced full convergence of IFRS by 2018 through IND AS
 PART- II

PREPARATION OF JOURNAL, LEDGER AND TRIAL BALANCE

 Objectives

• Explain the principles of the double entry

bookkeeping system.

• State the rules of debit and credit for each

group of accounts.

• Describe the flow of information through an

accounting system.
 Objectives (continued)
• Explain the nature and purpose of journals
and their relationship to the ledger.

• Explain the nature and purpose of a ledger.

• Record a variety of business transactions in

appropriate ledger accounts.

• Explain the nature and purpose of a Trial

Balance.
 Single Entry System
 Under this system both the aspects of transaction are
not recorded.

 Only Personal accounts & cash book are opened.

 Under this system balance sheet is not prepared.

This system is therefore not considered as an
authentic one.
Double Entry Accounting System
 Based on principle of dual aspect of each transaction.

 For correct presentation both of them should be recorded.

 Requires maintenance of records of assets, liabilities, capital,

revenues and expenditure.

 Impact of each transaction can be seen or measured.

 Total assets are equal to total equities.

 Double entry
Some examples of double entry are :

• a debtor paying an account

• paying cash to a creditor
• the owner withdrawing assets from the
business.
• Using cash to purchase a motor vehicle
 Double entry (continued)

• There are at least two entries for each

transaction:
– an amount is recorded as a debit with a
corresponding amount being recorded as a
credit.

• Double entry transactions are entered into all

Journals.
 Classification of Accounts

 Personal Account

 Real Account

 Nominal Account
 CLASSIFICATION OF ACCOUNTS

• Accounts in the names of persons are known as

“Personal Accounts”
• Accounts in the names of assets are known as
“Real Accounts”
• Accounts in respect of expenses and incomes
are known as “Nominal Accounts”
CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL NOMINAL
ACCOUNTS ACCOUNTS
 PERSONAL ACCOUNTS

Accounts in the name of persons are known as

personal accounts.
Eg: Brian A/C,
Brian & Co. A/C,
Outstanding Salaries A/C, etc.
 PERSONAL ACCOUNTS

Personal accounts may be further classified into three categories:

• Natural Personal Account

• An account related to any individual like David, George, Ram, or Shyam is
called as a Natural Personal Account.

• Artificial Personal Account

• An account related to any artificial person like M/s ABC Ltd, M/s General
Trading, M/s Reliance Industries, etc., is called as an Artificial Personal
Account.

• Representative Personal Account

• Representative personal account represents a group of account. If there are a
number of accounts of similar nature, it is better to group them like salary
payable account, rent payable account, insurance prepaid account, interest
receivable account, capital account and drawing account, etc.
 REAL ACCOUNTS

These are accounts of assets or properties. Assets

may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts
related to things which we can feel, see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
 REAL ACCOUNTS

There are two type of assets:

Tangible assets are touchable assets such as plant,

machinery, furniture, stock, cash, etc.

Intangible assets are non-touchable assets such as

goodwill, patent, copyrights, etc.
 NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and

intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Insurance
• Bank Charges
• Bank Loan
• Telephones
• Cleaning
• Creditors
• Donations Received
• Debtors
• Electricity and Gas
• Fixtures and Fittings at Cost
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Fundraising Income

• Interest Earned
• Interest Paid
• Motor Vehicles at Cost
• Postage
• Premises at Cost
• Printing
 CLASSIFY THE FOLLOWING TO
REAL/NOMINAL/PERSONAL
• Bad Debts
• Purchases
• Rent Received
• Repairs and Renewals
• Salaries
• Sales
• Sponsorship Receipts
• Stationery
• Stock
• Government Grant Received
• Bank A/c
 Personal Account

 Personal Account: Personal

accounts are accounts relating to
persons or organisations with
whom the business has
transactions.
E.g Customer, Supplier, Money
lenders etc.
 Real Accounts
• Real Accounts: Real accounts refer to
accounts in which property and
possession are recorded.

E.g Land, Building, Plant & Machinery,

Vehicle Cash, Bank etc.
 Nominal Accounts
 Nominal Accounts: Nominal accounts
are revenue, expenses, gains, and losses.
E.g. Wages, Salary, Discount etc .
Under what headings (personal, real, and
nominal) would you classify accounts.

• Outstanding Interest A/c

• Interest Received in Advance A/c
• Income Earned but not Received A/c
• Stock A/c
• Fixtures A/c
• Bills Receivables A/c
• Bills Payable A/c
• Trading A/c
• Capital A/c of Partner
• Sales A/c
• Reserve for discount on debtors A/c
 SOLUTION
1. Outstanding Interest A/c (Personal A/c)
2. Interest Received in Advance A/c (Personal A/c)
3. income Earned but not Received A/c (Personal A/c)
4. Stock A/c (Real A/c)
5. Fixtures A/c (Real A/c)
6. Bills Receivables A/c (Personal A/c)
7. Bills Payable A/c (Personal A/c)
8. Trading A/c (Nominal)
9. Capital A/c of Partner (Personal A/c)
10. Sales A/c (Nominal A/c)
11. Reserve for discount on debtors A/c (Nominal A/c)
 Double Entry Accounting
System classification
 Cash Based
 Cash basis of accounting is a method of accounting
in which transactions are recorded in the books of
account when cash is actually received or paid out.

Eg .Property Tax has been received of Rs.10,000/-

Cash A/C Dr Rs.10,000/-

To Property Tax Cr. Rs.10,000/-
 ACCRUAL BASED
Accrual Based:-

Accrual basis of accounting is an accounting system

which recognises revenues and expenses as they are
earned or incurred , not as cash received or paid
respectively.
Eg .Raised demand and sent Property Tax bills
of Rs.10,000/- on 10th May2014 and the same amount
has been received against the demand on 30th May,2014.
 Accrual Based
• 10.05-2014
• Property Tax Receivable A/C Dr 10,000/
– To Property Tax A/C Cr. 10,000/-

• 30-05-2014
• Cash/Bank A/C Dr 10,000/-

• To Property Tax Receivable A/C Cr 10,000/-

Capital and Revenue Expenditure

Capital expenditure is the expenditure

where the benefits are not fully consumed in a
year but spread over several years.

Revenue Expenditure is the

expenditure which provides benefits in the
current accounting year only. It can not be
forwarded to next year or years.
State which of the following expenditures are capital in
nature and which are revenue in nature:
• Freight and cartage on the new machine rs.150; erection charges
Rs.200.
• A sum of rs.10,000 on painting the new factory.
• Fixtures of the book value of rs.1,500 was sold off at rs.600 and
new fixtures of the value of rs.1,000 were acquired, cartage on
purchase rs.50.
• Rs.1,000 spent on repairs before using a second hand car
purchased recently.

• The sum of rs.40,000 has been spent on a machine as follows:

– Rs.20,000 for additions to increase the output; rs.12,000 for repairs
necessitated by negligence and rs.8,000 for replacement of worn-out
parts.
 DOUBLE ENTRY BOOK KEEPING

• A business’s transactions can be analyzed

by using the double-entry accounting
system, which recognizes the different
sides of business transactions as debits
and credits.
 Double-Entry Accounting

The double-entry accounting system recognizes both the debit and credit side of a
business transaction.

double-entry accounting
A system used to analyze and record
a transaction.

debit
An entry on the left side of an account.

credit
An entry on the right side of an account.
 Double-Entry Accounting

The T account gets its name from being shaped like a T.

T-account
A visual representation of a ledger account.
The T account is a tool used to analyze
transactions.
 DEBIT AND CREDIT

• Each account have two sides – the left side and the
right side.

• In accounting, the left side of an account is called the

“Debit Side” and the right side of an account is called
the “Credit Side”

• The entries made on the left side of an account is called

a “Debit Entry” and the entries made on the right side
of an account is called a “Credit Entry”.
TRADITIONAL OR GOLDEN RULES
RULES OF DEBIT AND CREDIT
 SAMPLE PROBLEMS
Walter’s Consulting and Cleaning Company
• Walter invested equipment valued at $20,000 into his company and $45,000
cash.
• Walter paid $550 cash for supplies.
• Walter paid $22,000 cash for equipment.
• Walter’s Consulting and Cleaning Company paid $15,000 in cash for equipment
and paid $3,000 cash for additional supplies.
• Walter purchased $400 of supplies on credit from a supplier.
• Walter performed consulting services of $6,000. The customer paid with cash.
• Walter’s Consulting and Cleaning Company paid $440 cash for employee salary.
Walter’s Consulting and Cleaning Company completed consulting services of
$2,500. The customer is billed for these services.
• Walter paid $400 cash to settle the accounts payable created in transaction 5.
• Walter withdrew $1,000 cash from the company for
personal use.

• Walter paid $2,000 cash for 12 months of

insurance.

• Walter’s Consulting and Cleaning Company

provided consulting services of $2,000 and cleaning
services of $200. The customer is billed $2,200 for
these services.
 Rule #1
• A vehicle has been purchased of Rs. 8,00,000/-
by cheque.
 Concept of Debit & Credit
(Golden Rules)

• For Real Accounts: Debit what comes in and

credit what goes out.
A vehicle has been purchased of Rs.
8,00,000/- by cheque.
Journal Entry:
Vehicle A/C Dr. Rs.8,00,000/-
To Bank Cr. Rs.8,00,000/-
 Rule#2
• Furniture has been purchased from Godrej &
Boyce Ltd on credit of Rs.2,00,000/-
 Concept of Debit & Credit
(Golden Rules)
 For Personal Accounts :Debit the receiver and
credit the giver.
E.g. Furniture has been purchased from Godrej
& Boyce Ltd on credit of Rs.2,00,000/-
Journal Entry:
Furniture A/C Dr. Rs.2,00,000/-
To Godrej & Boyce Ltd Cr. Rs.2,00,000/-
 Rule# 3
• Telephone bill amounting to Rs.25,000/- paid
by cheque.
 Concept of Debit & Credit
(Golden Rules)
• For Nominal Accounts: Debit all expenses (and loses)
and Credit all incomes(and gain).
E.g Telephone bill amounting to Rs.25,000/- paid by
cheque.
Telephone Expense A/c Dr. Rs.25000/-

To Bank A/c Cr. Rs. 25000/-

General journal
General journal
General journal
 EXAMPLE: JOURNAL ENTRIES

• Mr. Nirmal has the following transactions in the month of April.

• Write Journal Entries for the transactions.
• 10th April : Commenced business with a capital of 1,00,000
• 11th April : Purchased goods from Veeru for 20,000
• 13th April : Purchased Goods for Cash 15,000
• 14th April : Purchased Goods from Abhiram for cash 9,000
• 16th April : Bought Goods from Shyam on credit 12,000
• 17th April : Sold goods worth 15,000 to Tarun
• 19th April : Sold goods for cash 20,000
 EXAMPLE: JOURNAL ENTRIES…. CONTD.

• 20th April : Sold goods to Utsav for cash 6,000

• 21st April : Sold goods to Pranav on credit 17,000
• 22nd April : Returned goods to Veeru 3,000
• 23rd April : Goods returned from Tarun 1,000
• 25th April : Goods taken by the proprietor for personal use 1,000
• 26th April : Bought Land for 50,000
• 27th April : Purchased machinery for cash 45,000
• 28th April : Bought computer from Intel Computers for 25,000
• 28th April : Cash sales 15,000
• 29th April : Cash purchases 22,000
• 30th April : Bought furniture for proprietor's residence and paid cash 10,000
SUMMARY: TRADITIONAL
RULES
MODERN RULES
RULES OF DEBIT AND CREDIT
RULES OF DEBIT AND CREDIT
 Modern Approach
• Under modern approach, accounts can be
classified in five categories:
(i) Assets Accounts
(ii) Liabilities Accounts
(iii) Capital Accounts
(iv) Revenue Accounts
(v) Expenses Accounts
 Types of Accounts
I. Asset Accounts:
In this type of category, assets are grouped. For example, Land and
Building’s Account, Furniture Account, Bank Account, Cash Account,
Trade Mark’s Account, Goodwill Account etc.
II. Liabilities Accounts:
In this type of category, accounts related to those financial obligations
of an enterprise are grouped which are related to outsiders. For
example, Creditor’s Account, Salary’s Outstanding Account etc.
III. Capital Accounts:
In this type of category, accounts related to those financial obligations
of an enterprise are grouped which are related to the owner(s). For
example, Capital Account and Drawings Account.
 Types of Accounts
IV. Revenue Account:
In this type of category, accounts related to selling of
goods, rendering services and other yields of the
enterprise are grouped. For example, Sales Account, Rent
Received Account, Interest Received etc.
V. Expenses Account:
In this type of category, accounts related to purchase of
goods or services and the amount incurred/lost in the
process of earning revenue are grouped. For example,
Purchase Account, Discount Allowed Account, Salaries
Account, Rent Account etc.
Rules for Asset Accounts

normal balance
The increase side of an account.
The word normal here means usual.
Rules for Asset Accounts

Rules for Asset Accounts

It is increased on the debit side (left side).

It is decreased on the credit side (right side).

The normal balance is the increase or debit side.

Rules for Liability and Owner’s Equity
Accounts

Rules for Liability and Owner’s Capital Accounts

It is increased on the credit side (right side).

It is decreased on the debit side (left side).

The normal balance is the increase or credit side.

 All Rules
I. Assets: ‘Debit the Increase and Credit the Decrease’
II. Liabilities: ‘Credit the Increase and Debit the Decrease’
III. Capital: ‘Credit the Increase and Debit the Decrease’
IV. Revenues: ‘Credit the Increase and Debit the Decrease’
V. Expenses: ‘Debit the Increase and Credit the Decrease’
Business Transaction Analysis

Apply the rules of debit

and credit.

When analyzing business

transactions, you should
Complete the entry in
T-account form.
 Assets and Equities Transactions

Analyzing Business Transactions

Business Transaction 1

On October 1 Crista Vargas took $25,000 from personal savings and

deposited that amount to open a business checking account in the name of
Zip Delivery Service.
 Assets and Equities Transactions

Analyzing Business Transactions

Business Transaction 1

On October 1 Crista Vargas took $25,000 from personal savings and

deposited that amount to open a business checking account in the name of
Zip Delivery Service.
 Assets and Equities Transactions

Use a T account to analyze an owner’s investment in the business:

Business Transaction 2

On October 2 Crista Vargas took two telephones valued at $200 each from her home and
transferred them to the business as office equipment.
 Assets and Equities Transactions

Use a T account to analyze an owner’s investment in the business:

Business Transaction 2

On October 2 Crista Vargas took two telephones valued at $200 each from her home and
transferred them to the business as office equipment.
 Assets and Equities Transactions

Increase an asset and decrease another asset:

Business Transaction 3

On October 4 Zip issued Check 101 for $3,000 to buy a computer system.
 Assets and Equities Transactions

Increase an asset and decrease another asset:

Business Transaction 3

On October 4 Zip issued Check 101 for $3,000 to buy a computer system.
 Assets and Equities Transactions

Increase an asset and increase a liability:

Business Transaction 4

On October 9 Zip bought a used truck on account from Coast to Coast Auto
for $12,000.
 Assets and Equities Transactions

Increase an asset and increase a liability:

Business Transaction 4

On October 9 Zip bought a used truck on account from Coast to Coast Auto
for $12,000.
 Assets and Equities Transactions

Increase an asset and decrease another asset:

Business Transaction 5

On October 11 Zip sold one phone on account to Green Company for $200.
 Assets and Equities Transactions

Increase an asset and decrease another asset:

Business Transaction 5

On October 11 Zip sold one phone on account to Green Company for $200.
 Assets and Equities Transactions
Applying the Rules of Debit
Section 4.2
and Credit

Decrease a liability and decrease an asset:

Business Transaction 6

On October 12 Zip mailed Check 102 for $350 as the first installment on the truck
purchased from Coast to Coast Auto on October 9.
 Assets and Equities Transactions
Applying the Rules of Debit
Section 4.2
and Credit

Decrease a liability and decrease an asset:

Business Transaction 6

On October 12 Zip mailed Check 102 for $350 as the first installment on the truck
purchased from Coast to Coast Auto on October 9.
 Assets and Equities Transactions
Applying the Rules of Debit
Section 4.2
and Credit

Increase an asset and decrease another asset:

Business Transaction 7

On October 14 Zip received and deposited a check for $200 from Green Company. The
check is full payment for the telephone sold on account to Green Company on October
11.
 Assets and Equities Transactions
Applying the Rules of Debit
Section 4.2
and Credit

Increase an asset and decrease another asset:

Business Transaction 7

On October 14 Zip received and deposited a check for $200 from Green Company. The
check is full payment for the telephone sold on account to Green Company on October
11.
 DEBIT CREDIT

Identify the normal balance for each of the following accounts by indicating
Debit or Credit.
Cash in Bank __________
Accounts Receivable __________
Richard Sims, Capital __________
Computer Equipment __________
1st National Bank (mortgage on building) __________
Car Wash Equipment __________
Building __________
Office Supplies __________
Debit and credit rules
 TRANSACTION ANALYSIS

On October 18 Jill’s Car Wash bought $10,000 worth of car wash equipment by issuing
Check #111. Using the Business Transaction Analysis method in your book, list the steps
you would use to record this transaction. Assume that asset accounts for Cash in Bank
and Car Wash Equipment exist.

Step 1: Identify the accounts affected.

The accounts Car Wash Equipment and Cash in Bank are
affected.
Step 2: Classify the accounts affected.
Car Wash Equipment is an asset account. Cash in Bank is an
asset account

(conti
nued)
 TRANSACTION ANALYSIS

On October 18 Dick’s Car Wash bought $10,000 worth of car wash equipment by issuing
Check #111. Using the Business Transaction Analysis method in your book, list the steps
you would use to record this transaction. Assume that asset accounts for Cash in Bank
and Car Wash Equipment exist.

Step 3: Determine the amount of increase or decrease for each

account affected.
Car Wash Equipment is increased by $10,000. Cash in Bank
is decreased by $10,000.

(conti
nued)
 TRANSACTION ANALYSIS

On October 18 Dick’s Car Wash bought $10,000 worth of car wash equipment by issuing
Check #111. Using the Business Transaction Analysis method in your book, list the steps
you would use to record this transaction. Assume that asset accounts for Cash in Bank
and Car Wash Equipment exist.

Step 4: Which account is debited and for what amount?

Increases in asset accounts are recorded as debits. Debit Car
Wash Equipment for $10,000.
Step 5: Which account is credited and for what amount?
Decreases in asset accounts are recorded as credits. Credit
Cash in Bank for $10,000.
 TRANSACTION ANALYSIS

What does “double-entry accounting” mean?

Every transaction has two sides: a debit (left) side and a credit (right) side. If a business
were to buy supplies for cash, two things would happen. First, the amount of supplies
would go up, and since supplies are assets, the increase to the Supplies account would
be recorded as a debit. Second, the balance in the Cash in Bank account would go down,
and since cash is an asset, the decrease in Cash in Bank would be recorded as a credit.
 Primary Accounting Documents
• Following primary accounting documents
have to be maintained:
Receipt Vouchers
Payment Vouchers
Fund Transfer Vouchers/Contra Vouchers.
Journal Vouchers
 Primary Books of Accounts
Before preparation of Financial Statements we
have to prepare following primary books of
accounts:
Cash book
Bank book ( incl. Bank Reconciliation
Statement)
Journal book
Ledger
Trial Balance
 Financial Statement

 Income Statement/Trading and Profit & Loss

Account

 Balance Sheet.
 Flow of information

Source documents:

• sales invoices
• purchase invoices
• cash register tapes
• Cheques
• credit notes.
 Flow of information
Types of journals:

• general journal

• specialised journals.
Flow of information (continued)

Types of ledgers:

• general ledgers

• subsidiary ledgers.
Flow of information (continued)
• The Trial Balance
– shows all the balances of the accounts in the
General Ledger
– is the basis for the preparation of the financial
statements.

• The Statement of Financial Performance

– shows the financial performance of the
business.
Flow of information (continued)
 Functions of a journal:

• Categorizes similar items together

• provides a permanent record of the

transaction

• classifies items into debit and credit

• assists in posting transactions to the

ledger.
Cash receipts journal
Cash payments journal
Sales journal
Purchases journal
General journal
 Ledgers
• T ̵ Account
 Ledgers (continued)
• Columnar format
 Trial Balance

Trial Balance assists in finding:

• arithmetic error
• recording only half of an entry.
PRACTICAL QUESTIONS ON

PREPARATION OF JOURNAL,
LEDGER AND TRIAL BALANCE
QUESTION 1
SOLUTION TO QUESTION 1: JOURNAL ENTRIES
SOLUTION TO QUESTION 1: JOURNAL ENTRIES
SOLUTION TO QUESTION 1: JOURNAL ENTRIES
SOLUTION TO QUESTION 1: JOURNAL ENTRIES
SOLUTION TO QUESTION 1: LEDGER
SOLUTION TO QUESTION 1: LEDGER
SOLUTION TO QUESTION 1: LEDGER
SOLUTION TO QUESTION 1: LEDGER
SOLUTION TO QUESTION 1: TRIAL BALANCE
QUESTION 2
SOLUTION TO QUESTION 2: JOURNAL ENTRIES
SOLUTION TO QUESTION 2: JOURNAL ENTRIES
SOLUTION TO QUESTION 2: JOURNAL ENTRIES
SOLUTION TO QUESTION 2: JOURNAL ENTRIES
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: LEDGER
SOLUTION TO QUESTION 2: TRIAL BALANCE
 Question #3
• Fahed inherited a large sum of money and decided to open up his own
business. He decided to open up a mechanic shop for fixing high end
sports cars, naming his business Fahed Fixes Fast Cars.
The following transactions took place during the month of August, 2015:
• August 1: Fahed invested 500,000 in a new business called Fahed Fixes
Fast Cars.
• August 2: Fahed transferred some mechanic tools worth 15,000 from
his home to the business.
• August 4: The business purchased repair equipment valued at 70,000
on account from ‘Tools R Us’
• August 5: The business purchased mechanic tools for 25,000 in cash.
• August 6: The business wrote check 101 for 6,000 for rent of the
mechanic shop.
 Question #3…contd.
• August 10: The business received its first customer and made a minor repair for a
customer’s car for 5,000 in cash.

• August 11: The business repaired a car for 14,000 on account for customer Kobe
Bryant.

• August 12: The business wrote check 102 in the amount of 10,000 as partial payment
for the repair equipment purchased on August 4th from ‘Tools R Us.’

• August 14: The business wrote check 103 in the amount of 4,800 for the
insurance bill for the month.

• August 15: The business repaired a customer’s car for 19,200 on account for
customer Derek Jeter.

• August 20: The business received a check in the amount of 8,500 as partial payment
for the repairs previously made for customer Kobe Bryant on August 11 th.
 Question#3…contd.
• August 21: The business paid the employee salaries for $12,000 in cash.
• August 22: Fahed withdrew $4,000 in cash for personal use.
• August 23: The business repaired a customer’s car for $7,800 in cash.
• August 24: The business received full payment for the repairs made for Derek
Jeter on August 15th.
• August 25: The business received a check for $5,500 for the repairs previously
provided on account for customer Kobe Bryant to complete the partial payment
on August 20.
• August 27: The business paid in cash for $ 8,000 for repair equipment purchased
on account for Tools R Us on August 12.
• August 28 : The business wrote a check 104 for $2,450 to purchase office
supplies.
• August 29 : The business paid an electricity bill for $4,700 in cash.
• August 31: The business repaired a car of $ 11,000 on account for the costumer
Tom Brady.
 PART -III
PREPARATION OF
FINANCIAL STATEMENTS
PREPARATION OF FINANCIAL STATEMENTS:

WHAT ARE THESE?

• The term ‘Final Accounts’ is a broader term.

The three following financial statements are
prepared for the preparation of final accounts:
– Trading account: It shows gross profit/loss of the
business.
– Profit & loss account: It shows the net profit/loss
of the business.
– Balance sheet: It shows the financial position of
the business
 PREPARATION OF FINANCIAL STATEMENTS:

FINAL ACCOUNTS? WHY THIS NAME

• Trading, profit & loss account and balance sheet,

all these three together, are called as final
accounts.
• Final result of trading is known through Profit
and Loss Account.
• Financial position is reflected by Balance Sheet.
• These are, usually, prepared at the close of the
year hence known as final accounts

SOURCE: http://www.academia.edu/4304082/Chapter_5_Preparation_of_Final_Accounts_with_Adjustments
STARTING POINT: TRIAL BALANCE

• All business transactions are first recorded in Journal or Subsidiary Books.

• They are transferred to Ledger and balanced it.
• The main object of keeping the books of accounts is to ascertain the
profit or loss of business and to assess the financial position of the
business at the end of the year.
• The object is better served if the businessman first satisfies himself that
the accounts written up during the year are correct or al least
arithmetically accurate.
• When the transactions are recorded under double entry system, there is
a credit for every debit, when on a/c is debited; another a/c is credited
with equal amount.
• If a Statement is prepared with debit balances on one side and credit
balances on the other side, the totals of the two sides will be equal. Such
a Statement is called Trial Balance

SOURCE: http://buc.edu.in/sde_book/dip_fintally.pdf
ILLUSTRATION:

SOURCE: http://buc.edu.in/sde_book/dip_fintally.pdf
TRADING ACCOUNT
• Trading refers buying and selling of goods

• Trading A/c shows the result of buying and selling of goods

• This account is prepared to find out the difference between the Selling
prices and Cost price

• If the selling price exceeds the cost price, it will bring Gross Profit
– For example, if the cost price of Rs. 50,000 worth of goods are sold for Rs. 60,000
that will bring in Gross Profit of Rs. 10,000

• If the cost price exceeds the selling price, the result will be Gross Loss.
– For example, if the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000
that will result in Gross Loss of Rs. 10,000

• Thus the Gross Profit or Gross Loss is indicated in Trading Account

PREPARATION OF TRADING ACCOUNT

• For preparing Trading Account, closing

entries shall be made in the Journal Proper

• Through these entries, items of revenue and

expenses related to the Trading Account are
closed by transferring their balances to
Trading Account
CLOSING ENTRIES- TRADING ACCOUNT
FORMAT OF TRADING ACCOUNT
BALANCING TRADING ACCOUNT

• The difference between the two sides of the Trading

Account indicates either Gross Profit or Gross Loss.

• If the total on the credit side is more, the difference

represents Gross Profit. On the other hand, if the
total of the debit side is high, the difference
represents Gross Loss.

• The Gross Profit or Gross Loss is transferred to Profit

and Loss A/C
 Calculation of Gross Profit
From the following balances extracted from the books of M/s ABC. Calculate the amount of :
• Cost of goods available for sale
• Cost of goods sold during the year
• Gross Profit

( ₹)
• Opening Stock 25,000
• Credit Purchases 7,50,000
• Cash Purchases 3,00,000
• Credit Sales 12,00,000
• Cash Sales 4,00,000
• Wages 1,00,000
• Salaries 1,40,000
• Closing stock 30,000
• Sales return 50,000
• Purchases return 10,000
PREPARATION OF TRADING ACCOUNT: PRACTICAL
QUESTION
SOLUTION (TRADING ACCOUNT)
 From the trial balance of
Mr. C, You are required to
prepare trading account
for the year ending March
31, 2014:
PROFIT & LOSS ACCOUNT

• Trading account reveals Gross Profit or Gross Loss.

• Gross Profit is transferred to credit side of Profit
and Loss A/c
• Gross Loss is transferred to debit side of the Profit
Loss Account
• Thus Profit and Loss A/c commences after
preparation of Trading A/C
• Profit & Loss A/c reveals Net Profit or Net loss at a
given time of accounting year.
PREPARATION OF PROFIT & LOSS ACCOUNT

• For preparing Profit and Loss Account, closing

entries shall be made in the Journal Proper.

• Through these entries, items of revenue and

expenses related to the Profit and Loss Account
are closed by transferring their balances to Profit
and Loss Account
CLOSING ENTRIES- PROFIT & LOSS ACCOUNT
FORMAT OF PROFIT & LOSS ACCOUNT
RELATIONSHIP BETWEEN TRADING AND PROFIT AND
LOSS ACCOUNT
PREPARATION OF PROFIT AND LOSS ACCOUNT: PRACTICAL
QUESTION
SOLUTION (PROFIT AND LOSS ACCOUNT)
BALANCE SHEET
• The Word ‘Balance Sheet’ is defined as “a
Statement which sets out the Assets and Liabilities
of a business firm and which serves to ascertain the
financial position of the same on any particular
date.”
• It is a statement and not an account
• Purpose:
– To know the total Assets invested in business
– To know the Position of owner’s equity
– To know the liabilities of business
TWO FORMS:
• HORIZONTAL:
– On the left hand side of this statement, the
liabilities and capital are shown. On the right hand
side, all the assets are shown.
– Therefore the two sides of the Balance sheet must
always be equal.
• Assets must exceed the external liabilities
• VERTICAL:
ASSETS:
• Assets represent everything which a business owns and has money
value. Assets are always shown as debit balance in the ledger. Assets
are classified as follows.

• Tangible Assets: Assets which can be seen and felt by touch are
called Tangible Assets. Tangible Assets are classified into two:
1. Fixed Assets: Assets which are durable in nature and used in business over
and again are known as Fixed Assets.
e.g. land and Building, Machinery, Trucks, etc.
2. Floating Assets or Current Assets: Current Assets are i. Meant to be
converted into cash, ii. Meant for resale, iii. Likely to undergo change e.g.
Cash, Balance, stock, Sundry Debtors.
• Intangible Assets: Assets which cannot be seen and has no fixed
shape. E.g., goodwill, Patent.
• Fictitious assets: Assets which have no real value and will appear on
the Assets side of B/S. are known as Fictitious assets:
E.g. Preliminary expenses, Discount or creditors.
LIABILITIES:
• All that the business owes to others are called Liabilities. It
also includes Proprietor’s Capital.
• Classification of Liabilities:
– Long Term Liabilities: Liabilities will be redeemed after a long
period of time 10 to 15 years E.g. Capital, Long Term Loans.

– Current Liabilities: Liabilities, which are redeemed within a year,

are called Current Liabilities or short-term liabilities E.g. Trade
creditors, B/P, Bank Loan.

– Contingent Liabilities: Liabilities, which have the following

features, are called contingent liabilities. They are:
• Not actual liability at present
• Might become a liability in future on condition that the contemplated
event occurs.
• E.g. Liability in respect of pending suit.
PREPARATION OF BALANCE SHEET:
GROUPING AND MARSHALLING
• GROUPING of Assets and Liabilities:
– Grouping of assets and liabilities means putting various assets and liabilities
having same nature under some common headings. For example, instead of
showing the names of all customers, the consolidated amount is to be shown
under the head ‘Sundry Debtors’.
– Similarly, instead of showing the names of all persons to whom amount is
owed on account of goods purchased or services rendered, the consolidated
amount is to be shown under the head ‘Sundry Creditors’.
• MARSHALING of Assets and Liabilities:
– All assets and liabilities of a business enterprise can be shown either in an
order of
• Liquidity or
• Permanence.
– The arrangement of various assets and liabilities in either of this way is called
Marshaling of Assets and Liabilities.
FORMAT OF BALANCE SHEET:
(in order of Permanence)
FORMAT OF BALANCE SHEET:
(in order of liquidity)
ADJUSTMENT ENTRIES:
Meaning and Purpose
• Transactions omitted relate to the current year must be
entered in books.
• If a transaction entered is not related to the current year, fully
or partly, that portion of income or expense must be excluded.
• This process is made through adjustment entries in the books
of accounts.
• If we ignore to make the necessary adjustments, the trading,
profit & loss accounts do not show the true profit or loss and
in consequence balance sheet fails to depict true financial
position of the business.
– This situation defeats the very purpose of final accounts.
• Hence, adjustment entries play an important role in
presenting correct picture of accounts
PREPARATION OF FINAL ACCOUNTS:

COMPREHENSIVE
ILLUSTRATIONS
COMPREHENSIVE QUESTION 1
SOLUTION TO COMPREHENSIVE QUESTION 1
SOLUTION TO COMPREHENSIVE QUESTION 1
Simple question without adjustments
Simple question without adjustments
Simple question without adjustments
 ADJUSTMENTS
 Closing Stock • Interest on Capital
 Outstanding expenses • Interest on drawings
• Further Bad Debts
 Accrued Income
• Provision for doubtful
 Prepaid Expenses debts
 Unearned Income • Provision for discount on
debtors
 Depreciation
• Provision for discount on
 Goods taken for personal use creditors
 Goods on sale or return basis
• Goods destroyed by fire
• Mangers Commission
 Goods given as charity
 Examples of Adjustments:
Provision for doubtful debtors
#1
Kishore & co. has been a running garment business. At the
end of Dec, 2007, the firm’s books of accounts show the
debtors at Rs. 3,00,000. Out of those debtors, Rs. 10,00 are
not traceable and to be treated as bad debts. By practice, over
the years, it has been noticed that the business looses money
even on the expected realizations from the good debtors too.
The business adopts a consistent policy of making a provision
of 5% on the expected good debtors towards bad and
doubtful debts.
Show the position in the financial statements.
 Examples of Adjustments:
Provision for doubtful debtors
#2
At the end of the year 2008, Radhi & Co. has observed that
their the debtors are Rs. 5,00,000.
Out of those debtors, Rs. 5,000 are not traceable and to be
treated as bad debts. By practice, over the years, it has
been noticed that the business looses money on the
expected realizations from the good debtors too. The
business adopts a consistent policy of making a provision
of 5% on the expected good debtors. Provision for bad and
doubtful debts stand at Rs. 14,500 at the end of Dec, 2007.
Show the position in the financial statements.
 Examples of Adjustments:
Provision for doubtful debtors
#3
At the end of the year 2008, Dimpy & Co. has
observed that their the debtors are Rs. 2,00,000.
Out of those debtors, Rs. 3,000 are to be treated
as bad debts. Provision for bad & doubtful debts
Rs. 4,000 is needed at the end of Dec, 2008.
• Provision for bad & doubtful debts stand at Rs.
10,500 at the end of Dec, 2007. Show the
position in the financial statements.
 Examples of Adjustments

• Uninsured Goods worth Rs. 7,000 destroyed by fire, OR Goods worth

Rs. 7,000 destroyed by fire but insurance Co. admitted no claim.
• Insured Goods worth Rs. 5,000 destroyed by fire and insurance
company admitted full claim.
• Insured Goods worth Rs. 25,000 destroyed by fire but insurance Co.
admitted a claim of Rs. 23,000.
• Goods costing Rs. 12000 were sent to customer on sale or return for
Rs. 12500 on 30th Dec. and had been recorded as actual sales.
• Wages include a sum of Rs. 10,000 spent on the erection of
machinery
• Purchases include two Typewriters costing Rs. 27,000
 GOODS SENT ON APPROVAL: EXAMPLES

• In preparing the final account of a company it is found

that the amount of sundry debtors Rs 2,00,000
includes Rs 40,000 worth of goods sent out on
approval and debited to customers’ accounts,
– in respect of which the time for returning the goods
has not yet expired.
– These goods have been invoiced at 33 1/3% above the
cost
GOODS SENT ON APPROVAL: EXAMPLES
 GOODS SENT ON APPROVAL: EXAMPLES

• A Departmental Store has credited certain items of

Sales on Approval aggregating Rs 15,000 to Sales
Account.
• Of these, goods to the value of Rs 4,000 have been
returned and taken into stock at cost Rs 2,000
though the record of return was omitted in the
accounts.
• And in respect of another parcel of Rs 3,000 (cost
being Rs 1,500) the period of approval did not
expire on the closing date.
GOODS SENT ON APPROVAL: EXAMPLES
COMPREHENSIVE QUESTION 2 • ADJUSTMENTS:

• Stock on hand on 31st

December, 2008 is Rs. 6,800.

• Machinery is to be depreciated
at the rate of 10% and Patents at
the rate of 20%.

• Salaries for the month of

December, 2008 amounting to
Rs. 1,500 were unpaid.

• Insurance includes a premium of

Rs. 170 per annum on a policy
expiring on 30th June,2009.

• Wages include a sum of Rs.

2,000 spent on the erection of a
cycle shed for employees and
customers.

• A provision for Bad and Doubtful

Debts is to be created to the
extent of 5 per cent on Sundry
Debtors
SOLUTION TO COMPREHENSIVE QUESTION 2
SOLUTION TO COMPREHENSIVE QUESTION 2
Mr. Arvindkumar had a small business enterprise. He has given the trial balance as at 31st March 2013

• ADJUSTMENTS:

1. Stock as on 31st March 2013 was

valued at Rs. 60,000
2. Write off further Rs. 6,000 as bad
debt and maintain a provision of
5% on doubtful debt.
3. Goods costing Rs. 10,000 were sent
on approval basis to a customer for
` 12,000 on 30th March, 2013. This
was recorded as actual sales.
4. RS. 2,400 paid as rent for office was
debited to Landlord’s Account and
was included in debtors.
5. (General Manager is to be given
commission at 10% of net profits
after charging his commission.
6. Works manager is to be given a
commission at 12% of net profit
before charging General Manager’s
commission and his own.
You are required to prepare final
accounts in the books of Mr.
Arvindkumar.
SOLUTION TO COMPREHENSIVE QUESTION 3
SOLUTION TO COMPREHENSIVE QUESTION 3
SOLUTION TO COMPREHENSIVE QUESTION 3
SOLUTION TO COMPREHENSIVE QUESTION 3