6 fixed assets, current assets, depreciation methods
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This document provides an overview of basic financial accounting concepts. It defines key accounting terms like accounts, accounting, assets, liabilities, equity, revenue, and expenses. It describes the double-entry system of accounting and the accounting cycle of recording transactions in journals, posting to ledgers, preparing a trial balance, and developing financial statements. It also outlines accounting concepts, conventions, the different bases of accounting, and the types and roles of various accounts.
6 fixed assets, current assets, depreciation methods
- 2. Account • It is a unit of information that represents business records. • There are five types of accounts: Asset, Liability, Equity, Revenue and Expense.
- 3. Accounting • It is concerned with the use of which the records are put, their analysis and interpretation. • It is the process of recording business activities that make changes to accounts. • Sales of products, Revenue from services earned, Buying products and/or services and so on.
- 4. Attributes of Accounting • It is the art of recording businesstransactions. • It is the art of classifying business transactions. • Thetransactions or events of abusinessmust be recorded in monetaryterms. • It is the art of summarizing financial transactions. • Theresults should be communicated to users.
- 5. Functions • Systematic record of businesstransactions. • Protecting the property ofbusiness. • Communicating results to users. • Compliance with legalrequirements.
- 6. Usersof Accounting Information • Owners • Creditors(Suppliers) • Investors • Employees • Government • Public • ResearchScholars/ Agencies • Managers
- 7. Branchesof Accounting • FinancialAccounting(Record keeping) • Cost Accounting (Price fixation & Operating efficiency) • Management Accounting (Analysis for decision making)
- 8. Advantages • Replacement of Memory • Evidencein court • T axpurpose • Comparative study • Saleof business • Assistanceto theinsolvent • For various parties
- 9. Limitations • Recordsonly monetary transactions • Effect of price level changesnotconsidered • No realistic information • Personal bias of accountant affectsthe accounting statements • Permits alternative treatments (LIFO,FIFO) • No real test for managerialperformance • Historical in nature
- 10. AccountingTerminology • Business: An organization created with the objective of making aprofit from the sale ofgoodsor services. Book keeping: The act of systematically recording the financial transactions affecting abusiness. BookValue: Thenet amount (original value plus or minus • • any adjustments such as depreciation) showed in the accounts for an asset, liability, or owners' equity item. Calendar Year: An entity's reporting year, covering 12 months. • • Transactions: Exchange of goods or services between businesses or individuals. Can also be other events having an economic impact on abusiness.
- 11. AccountingTerminology • Journal: A book or original entry in a double-entry bookkeeping system. The journal lists all transactions and indicates the accounts towhich they are posted. Journal Entry: A recording of a transaction where debits equal credits. • • Ledger: A summary statement of all the transactions relating to a person, asset, expense or income which have taken place during a given period of time and show their net effect. Trial Balance: Alisting of all account balances that provides atest of whether total debits equals total credits. Revenues: Increases in a company's resources from the sale of goodsor services. • •
- 12. AccountingTerminology • Balance sheet: A balance sheet is an itemized statement which lists the total assets and the total liabilities of a given business to show its net worth at a given moment in time (like asnapshot). Capital: Property or money used and owned by a • business and used to acquire future income or benefits. • Debtor: A debtor is a person who owes money. The amount due from his is calleddebt. • Creditor: A person to whom money is owing or payable is called acreditor. Credit:An entry on the right side of aledgeraccount. •
- 13. AccountingTerminology • Goods: This includes all articles, commodities or merchandise in which the business deals. Thus, cloth would be goods for a dealer in cloth; furniture would be goodsfor adealer in furniture and soon. • Assets: Economic resources owned or controlled by a person or company. Net Assets:Thedifference between assetsand liabilities. Liquidity: The availability of cash or ability to obtain it quickly. Also used to determine debt repaymentability. Goodwill: An intangible asset that exists when abusiness is valued at more than the fair market value of its net assets. Interest: Thecost of the useof money. • • • •
- 14. AccountingTerminology • CurrentAssets:Current assetsare those assetsof acompany that are expected to be converted to cash,sold, or consumed during the normal operating cycle of the business(usually one year). Examplesare cash,accounts receivable, short-term investments, USgovernment bonds, inventories, and prepaidexpenses. CurrentLiabilities: Liabilities to be paid within one year of the balance sheet date. Drawings:Any amount or goods withdrawn by the owner of a businessfor personal useis calleddrawings. BadDebt: An uncollectible Account Receivable. Loss: Alossisexpenditure without any benefit to the concern. On the other hand, expense is incurred to result in some benefit. Thus,amount spent on lighting is an expense but loss due to fireis loss. • • • •
- 15. AccountingTerminology • Income:It is an inflow of assetswhich results in an increase in the owner’s equity. Expenditure: Expenditure takes place when an assetor service is • acquired. Expenditure will include both payment of a sum immediately and apromise to pay it at afuture date. Expense: An expenditure whose benefit is finished or enjoyed immediately such assalaries, rent, etc. Turnover: It means total trading income from cashsalesand credit sales. • • • Net worth: It means assets minus outside liabilities. Profits of a business increase net worth whereas losses reduce the net worth of abusiness. GAAP- Refer to GenerallyAcceptedAccountingPrinciples. •
- 16. Basisof Accounting • Cashbasis –Actual cash receipts and payments are recorded. –Credit transactions are notrecorded.
- 17. Basisof Accounting • Accrualbasis – The income whether received or not but has been earned or accrued during the period forms part of the total income of theperiod. – The firm has taken benefit of a particular service, but has not paid within that period, the expenses will relates to the period in which the service has been utilized and not to the period in which payment for it ismade.
- 18. Basisof Accounting • Mixed basis –Combination of cashand accrual basis.
- 19. Systemof Accounting • Single Entry System: This system has no complete record of business transactions done during aspecified period. • Double Entry System: One account is given debit while the other account is given credit with an equalamount.
- 21. Typesof Accounts • Natural Person’s Personal Account: An account recording transactions with an individual human being is known as a natural person’s PersonalAccount. (eg. Krishnaaccount) Artificial Person’s Personal Account: An account recording financial transactions with an artificial person created by law or otherwise is called an artificial person’s personal account. (eg. VSLCollege) Representative Person’s Personal Account: An account indirectly representing a person or persons is known as a representative account. (eg. Salariesaccount) Tangible Real Account: An asset which can be touched, seen, and measured. (eg. MachineryAccount) Intangible Real Account: An asset which can’t be touched physically but can be measured in value. (eg.Goodwill) • • • •
- 22. Rulesof Double Entry System Accounts Rules Personal • Debit the receiver • Credit the giver Real • Debit what comesin • Credit what goesout Nominal • Debit all expensesandlosses • Credit all incomes andgains
- 23. Accountingcycle Recording monetary transactions in asystematicmanner Journal entries Ledger Trial balance Trading and Profit & LossAccount BalanceSheet
- 24. AccountingConcepts Business entity concept: The Business is distinct persons who own it. from the Going concern concept: It assumes that the business will continue for a longtime. Cost concept: All the transactions will be recorded at cost in t h e books. It means deducted depreciation from theassetsyearly. Dual aspectconcept:Eachtransaction is twofold affect. Money measurement concept: The transactions should b e recorded in monetary aspect only. We should not record the transaction in kilograms, quintals, meters, liters,etc.
- 25. Accounting period concept: Measuring the profit, incomes o r expenses of the period only are to be considered. Usually the period is one year (12months). Realization concept: If the revenue is recognized too early or t o o late, the company would not project the right financial position. It would look more profitable or less profitable than what it actually is. Matching concept: Expenses incurred for a period are matched with the revenues for the same period to arrive as a reasonably correct measurement of the net income or the net loss. The difference between revenues and expenses is a measure of how effectively management hasutilized the firm’sresources. Objective evidence concept: All accounting transactions should b e evidenced and supported by object documents. AccountingConcepts
- 26. Convention of disclosure: Accounts should be prepared in such a way that all material information is clearly disclosed to theusers. Convention of consistency: An accounting method o r procedure once chosen should be followed consistently from year to year. Conventionof conservatism:Any business while recording the transactions should ‘anticipate no profits but provide for all possiblelosses’. Conventionof materiality: Only those events should b e recorded which have a significant bearing and insignificant things should be ignored. There is no formula for identifying material and immaterial events. It depends on the accountantdiscretion. AccountingConventions
- 28. SourceDocuments • Cash Memo: When goods are sold or purchased for cash, the firm receives or gives cash memos which provide details regarding cashtransactions. Invoice or Bill: This document is prepared when goods are sold or purchased oncredit. Receipt: When a firm receives cash from customers it issuesareceipt which is aproof for receivingcash. Pay in Slip: This is a form available from a bank for depositing cashor cheque in abankaccount. • • • Contd…
- 29. SourceDocuments • Cheque: It is a document in writing drawn upon a specified banker and payable on demand. • Debit Notes: For the party from whom the money is recoverable this document becomes debit note. • Credit Note: For the party who is to recover the amount the document becomes credit note. When goods returned from the customer, a proper credit note should be sent tohim.
- 30. Journal • The word journal is derived from the Latin word ‘Journ’which meansa day. • Journal means a day book where in day-to-day business transactions are recorded in a chronological order. • The process of recording a transaction in the journal is calledJournalisation. • Theentries made in the book are called journal entries.
- 31. Proformaof Journal Date xx-xx-xxxx Particulars Name of the a/c Dr. To Name of the a/c (being ----- ) L.F . Dr.() xxxx Cr.() xxxx
- 32. Items in Journal • Date: Thefirst column deals with the date of transaction. • Particulars: In the first line write about debit aspect and in the second line write about credit aspect. In the third line write regarding brief explanation of the entry (narration). • LedgerFolio(L.F.): It denotes page number on which its journal entry isfound. • Debit: Fourth column deals with the amount to be debited. • Credit: Fifth column deals with the amount to be credited.
- 33. Pointsto benoted before journalising • • • • • Compoundjournal entry Cashor credit transaction Cashdiscount Trade discount Purchase of shares: When shares or securities are purchased, the entry is made at market value and not at face value. Brokerage paid on the purchase of such investment is also added in the amount ofinvestment. Sale of shares: If shares or securities are sold, the entry should be passed at market value less brokerage, if any, paid on suchshares. •
- 34. Pointsto benoted before journalising • Expenses incidental to the purchase of Fixed Assets • Insurance of Life Policy (Debited to Drawingsa/c) • Goodsgiven as charity • Goodsdistributed asfree samples • Lossof stock by Fire • Interest due on Loans(debited to interest account and credited to loanaccount)
- 35. Advantagesof Journal • It provides a chronological (date wise) order of all transactions and hence provides permanent record. • It provides the information of debit and credit in an entry and an explanation to make it understandable properly. • It reduces the possibility of error as both aspects of abusinesstransaction are written side byside.
- 36. Ledger • It is a book which contains various accounts. It is in ‘T’form. • It is a summary statement of all the transactions relating to a person, asset, expense or income which have taken place during a given period of time and shows their neteffect. • It is designed to accommodate the various accounts maintained by atrader. • Theprocess of transferring the entries from the journal into the ledger is calledposting.
- 37. Proformaof Ledger Dr. Date Particulars To Name of Credit a/c Cash a/c Cr. Amount () L.F. Amount () Date Particulars By Name of Debit a/c L.F. Left side Right side
- 38. Postingof ledger • For each item a separate new account is to be opened. • For each account there must be a name. This should be written on the top of the account in the middle. • The debit side of the journal entry is posted to the debit side of the account by starting with To. • The credit side of the journal entry is posted on the credit side of the account by starting with By.
- 39. TrialBalance • A list of balances of the ledger accounts at a point of time is called trail balance. The balances of all the ledger accounts are extracted and are written up in a statement known as Trial Balance and finally totaled up to see if the total of debit balances is equal to the total of credit balances. It is a list of ledger account titles and their respective balances. As per double entry system, every debit equals to corresponding equal credit. To prove this, statements of debits and credits will be prepared by accountant. This statement is called trail balance. • • •
- 40. Proforma of Trial balance Sl.No. Name of the Account Debit () Credit ()
- 41. Errors • Omission of any entry in asubsidiarybook. • Awrong entry in asubsidiarybook. • Posting an item to the correct side but in the wrong account. Purchase from X and credited to Y . • Compensating errors. • Errors of principles. These errors will not affect the agreement of the Trial Balance as they arise from the debiting or crediting of wrong heads of accounts.
- 42. Disagreementof the Trial Balance • • • • • • • • An item omitted to be posted from asubsidiary book into the ledger Posting of wrong amount toaledger account. Posting an amount to the wrong side of the ledger account. Wrong additions or balancing ofledger accounts. Wrong totaling of subsidiarybooks. An item in the subsidiary book posted twice to a ledger account. Balanceof some accounts written to the wrong side of the Trial Balance. An error in totaling the trial balance.
- 43. SubsidiaryBooks • Cashbookto record cashreceipts andpayments. • Simple Cash Book: It makes a record of all the receipts and payments of cash. All cash received in the form of coin, notes, cheques, postal orders, bank drafts or treasury notes will be recorded on the debit side and payments on the creditside. • CashBookwith DiscountColumn • Cash Book with Discount and Bank Column (Three columncashbook)
- 44. SubsidiaryBooks • Purchasesbookis for recording all credit purchases of goods. • Salesbookis for recording all goods sold oncredit. • Purchasesreturns book(returns outwards book) for recording all purchases returned to creditors. • Salesreturns book(returns inwards book) for recording all salesretuned by customers. • BillsReceivableBookto keep arecord of bills received from customers. • BillsPayableBookto keep arecord of bills payable to creditors. • Journalproper to keep arecord of those transactionsfor which there is no separatebook.