Financial Accounting

Introduction to Accounting

Saurabh Agrawal

Accounting
American Institute of Certified Public Accountants
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money; transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

American Accounting Association

Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information
Saurabh Agrawal

Accounting Process
Financial Transactions or Events
Communicating to the Users
1. 2. 3. 4. 5. 6. 7. Journal Cash Book Purchase Book Sales Book Purchase Return Book Sales Return Book Bills Payable Book Bills Receivable Book

Recording

Analysis & Interpretation

Summarizing
Classifying (Posting into Ledger)
Saurabh Agrawal

Characteristics Of Accounting
Identification of financial transactions & Events Measuring the identified transactions (Money) Recording (Journal) Classifying (Ledger) Summarizing Analysis & Interpretation Communicating
Saurabh Agrawal

Branches Of Accounting
Financial Accounting
Journal Ledger Trial Balance Final Accounts

Cost Accounting
Cost Sheet Job & Contract Costing Operating Costing

Management Accounting
Ratio Analysis Break Even Point Analysis Standard Costing Analysis of Financial Statement

Tax Accounting
Sales Tax Income Tax Wealth Tax Excise Duty

Government Accounting
Budget Consolidated Fund

Saurabh Agrawal

Objectives of Accounting
Record of financial transactions & events Determine profit or loss Determine financial position Assisting the Management Communicating Accounting Information to Users

Functions Of Accounting
Maintaining Systematic Accounting Record Preparation of Financial Statements Meeting Legal Requirements Communicating the Financial Data Assistance to Management

Saurabh Agrawal

Advantages Of Accounting
Advantages to Businessmen Recording of transactions Replacement of memory Provides Information Availability of net results Knowledge of Financial Position Reference in future Comparative Study Check on errors & frauds Helpful in management Helpful in the sale of business

Advantages to Consumers Proper price Quality goods

Saurabh Agrawal

Advantages Of Accounting
Advantages to the Government
Financial assistance Knowledge of financial position of the country Granting License Tax Assessment Settlement of disputes

Advantages to Employees

Increase in Salary & Bonus

Other Advantages Helpful in planning Helpful in decision making Helpful in borrowing Determination of goodwill Helpful in partnership Assessment of progress

Saurabh Agrawal

Limitations of Accounting
Incomplete information Influence by personal judgement Realisable value is not shown Complete control on frauds is impossible Manipulations in accounts Does not provide timely information

Saurabh Agrawal

Users of Accounting Information

Internal Users
External Users

Lenders
Shareholders Governments

Consumer Groups
External Auditors Customers

Managers
Officers Internal Auditors

Sales Staff
Budget Officers Controllers Saurabh Agrawal

Users of Accounting Information

External Users Internal Users

Financial accounting provides external users with financial statements (shareholders, lenders, etc.).

Managerial accounting provides information needs for internal decision makers (officers, managers, etc.).

Saurabh Agrawal

Accounting Terminology
Account:- Account is a statement in which all transactions for a definite period relating to a particular person or particular assets are recorded.
Dr Date Particulars J.F. Amount Date Particulars Cr J.F. Amount

Saurabh Agrawal

Accounting Terminology
Assets:- An assets is anything that is owned by a business and with the help of which the work of the business is carried on. Assets are classified into the following types: a. Fixed Assets:- Fixed Assets are those assets which are purchased for long term use in the business with the purpose of producing goods or services and are not meant for resale. For examples:- Land & Building, Plant & Machinery, Furniture. b. Current Assets:- Assets which are meant for sale or which would be converted into cash within one year. For examples:- Cash in hand, Cash at bank, Bills Receivables, Sundry Debtors, Marketable Securities, Stock.
Saurabh Agrawal

Accounting Terminology
c. Tangible Assets:- tangible assets are those assets which have a physical existence or can be seen and touched. For example:- Cash, Furniture, stock and tools

Format of Balance Sheet

Liabilities Sundry or Trade Creditors Bills Payable Bank Overdraft Amount ------------------------------Assets Cash in Hand Cash at Bank Bills Receivable Amount ----------------------------------

Employees Provident Fund

Loans (Cr.) Mortgage Reserve or Reserve Fund Capital Add:- Interest on Capital Net Profit Less:- Drawings Income Tax Interest on Drawings Net Loss ------------------

-----------------------------------------

Sundry Debtors/Book Debts

Loans(Dr.) Closing Stock Loose Tools Investment Furniture & Fittings Plant & Machinery Land & Building Freehold/Leasehold Land Business Premises

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Patents & Trademarks etc Goodwill

Saurabh Agrawal

Golden Rules Of Accounting

Personal A/c (Name, Bank) Debit The Receiver Credit The Giver Real A/c (Assets:- Cash, Goods, Machinery, furniture, Land, Building ) Debit what comes in Credit what goes out

Nominal A/c (Stationery, Electricity bill, telephone bill, Discount, Carriage) Debit all expenses & losses Credit all gains & Income

Sold goods for cash

Cash

Goods
Personal A/c Debit The Receiver Credit The Giver
Real A/c Debit what comes in Credit what goes out
Nominal A/c Debit all expenses & losses Credit all gains & Income

Entries
Sold goods for cash Cash A/cDr. To Sales A/c (Being goods sold for cash)

Sold goods to Ram

Ram

Goods
Personal A/c Debit The Receiver Credit The Giver
Real A/c Debit what comes in Credit what goes out
Nominal A/c Debit all expenses & losses Credit all gains & Income

Entries
Sold goods to Ram Ram A/cDr. To Sales A/c (Being goods sold to Ram)

Purchased Goods for cash

Personal A/c Debit The Receiver Credit The Giver

Real A/c Debit what comes in Credit what goes out

Nominal A/c Debit all expenses & losses Credit all gains & Income

Entries
Purchased Goods for cash Purchases A/cDr. To Cash A/c (Being goods purchased for cash)

Purchased Goods from Mohan

Personal A/c Debit The Receiver Credit The Giver

Real A/c Debit what comes in Credit what goes out

Nominal A/c Debit all expenses & losses Credit all gains & Income

Entries
Purchased Goods from Mohan Purchases A/cDr. To Mohan A/c (Being goods purchased from Mohan)

Cash Deposited in bank

Personal A/c Debit The Receiver Credit The Giver

Real A/c Debit what comes in Credit what goes out

Nominal A/c Debit all expenses & losses Credit all gains & Income

Entries
Cash Deposited in bank Bank A/cDr. To cash A/c (Being cash deposited in bank)

Journal Entries
4.(i) Provide depreciation on furniture Rs 1,500 and on machinery Rs 3,500
Date (i) Particulars Depreciation A/c .Dr To Machinery A/c To Furniture A/c (Being depreciation charged on Assets) Amount Debit 5,000 3,500 1,500 Credit

4.(ii) Received cash Rs 2,000 for bad-debts written off last year
Date (ii) Particulars Cash A/c .Dr To Bad Debts Recovered A/c (Being cash Received)

Amount
Debit 2,000 2,000 Credit

4.(iii) Rakesh was declared bankrupt, he owned Rs 5,000 to us. This amount was written off as bad debts.
Date Particulars Amount Debit Credit 5,000

(iii)

Bad Debts A/c Dr To Rakesh A/c (Being written off bad debts)

5,000

4.(iv) Rs 2,000 for wages and Rs 3,000 for salaries are outstanding.
Date (iv) Particulars Wages A/c ...Dr Salaries A/c..Dr To Outstanding Exp. A/c (Being wages and sales outstanding) Amount Debit 2,000 3,000 5,000 Credit

4.(v) Purchased furniture for Rs 10,000 for the proprietor and paid the amount by cheque.
Date Particulars Amount Debit Credit 10,000

(v)

Drawings A/c Dr To Bank A/c (Being furniture purchased for the proprietor )

10,000

Date 4.(i)

Particulars Depreciation A/c .Dr To Machinery A/c To Furniture A/c (Being depreciation charged on Assets) Cash A/c .Dr To Bad Debts Recovered A/c (Being cash Received) Bad Debts A/c Dr To Rakesh A/c (Being written off bad debts) Wages A/c ...Dr Salaries A/c..Dr To Outstanding Exp. A/c (Being wages and sales outstanding) Drawings A/c Dr To Bank A/c (Being furniture purchased for the proprietor ) Grand Total

Amount Debit 5,000 3,500 1,500 Credit

(ii)

2,000 2,000

(iii)

5,000

5,000

(iv)

2,000 3,000 5,000

(v)

10,000 10,000

27,000

27,000

7.(i) Purchased Machinery for Rs 50,000 and paid Rs 1,000 for its carriage.
Date Particulars Amount Debit Credit 51,000

(i)

Machinery A/c Dr To Cash A/c (Being machinery purchased and paid carriage )

51,000

7.(ii) Received a cheque of Rs 9,500 from AVI in full settlement of his account of Rs 10,000.
Date (ii) Particulars Cash A/c.......Dr Discount A/c....Dr To AVI A/c (Being cash received and discount allowed ) Amount Debit 9,500 500 10,000 Credit

7.(iii) Received a first and final payment of 50 paisa in a rupee from Mohan who owed us Rs 20,000.
Date (iii) Particulars Cash A/c.. Dr Bad Debts A/c..Dr To Mohan A/c (Being cash received and bad debts written off) Amount Debit 10,000 10,000 20,000 Credit

7.(iv) Sold goods to Rahul for Rs 20,000 at a Trade discount of 20%. Next day a cheque was received from him after deducting 5% cash discount. Cheque was immediately deposited into bank.
Amount

Date
(iv)

Particulars
Rahul A/c.. ..Dr To Sales A/c (Being goods sold on 20% trade discount) Bank A/c..Dr Discount A/cDr To Rahul A/c (Being cheque received and deposit in the bank )

Debit 16,000

Credit 16,000

15,200 800 16,000

7.(v) Goods costing Rs 10,000 sold to Ashok at a profit of 25% on cost less 10% trade discount.
Date Particulars Amount Debit Credit 11,250

(v)

Ashok A/c.. Dr To Sales A/c (Being goods sold)

11,250

Working Notes (iv) Goods Less:- Trade Discount 20% on Rs 20,000 Sales Price Less- Cash Discount 5% on Rs 16,000 Cash Received Goods Add:- Profit of 25% on Cost (Rs 10,000) Less:- Trade Discount 10% on Rs 12,500 20,000 4,000 16,000 800 15,200 10,000 2,500 12,500 1,250 11,250

(v)

Date

Particulars

Amount Debit Credit 51,000

7.(i)

Machinery A/c Dr To Cash A/c (Being machinery purchased and paid carriage)
Cash A/c.......Dr Discount A/c....Dr To AVI A/c (Being cash received and discount allowed) Cash A/c.. Dr Bad Debts A/c..Dr To Mohan A/c (Being cash received and bad debts written off) Rahul A/c.. ..Dr To Sales A/c (Being goods sold on 20% trade discount) Bank A/c..Dr Discount A/cDr To Rahul A/c (Being cheque received and deposit in the bank)

51,000

(ii)

9,500 500 10,000

(iii)

10,000 10,000 20,000

(iv)

16,000 16,000

15,200 800 16,000

(v)

Ashok A/c.. Dr To Sales A/c (Being goods sold)

11,250 11,250

Grand Total

1,24,250

1,24,250

9.(i) Purchased business for Rs 90,000.

Date (i) Particulars Business Purchases A/c ...Dr To Vendors A/c (Being Business purchase) Amount Debit 90,000 Credit

90,000

(ii) Purchased machinery from Mohan brothers, kolkata for Rs 15,000 on which they paid Rs 150 freight on my behalf.
Date (ii) Particulars Machinery A/c ...Dr To Mohan Brothers (Being machinery purchase) Amount Debit 15,150 15,150 Credit

(iii) The erection charges of machinery amounted to Rs 450 which were paid in cash.
Date (iii) Particulars Machinery A/c ....Dr To cash A/c (Being Erection Charges paid) Amount Debit 450 450 Credit

(iv) A cashier has stolen Rs 700 and now he is absconding.

Date (iv) Particulars Loss by Theft A/c ....Dr To Cash A/c (Being cash stolen) Amount Debit 700 700 Credit

(v) On claim being made for theft of cash, insurance company paid Rs 700.
Date (v) Particulars Insurance Claim A/cDr To Loss by Theft A/c (Being claim admitted) Cash A/c..Dr To Insurance Claim A/c (Being receipt of claim money) Amount Debit 700 700 Credit

700 700

(vi) Received an order from Dinesh for supply of goods worth Rs 2,000.
Date (vi) No Entry Particulars Amount Debit Credit

(vii) Goods were supplied as per order of Dinesh and on it freight of Rs 100 was paid.
Date (vii) Particulars Dinesh A/c ..Dr To Sales A/c To Cash A/c (Being goods supplied and freight paid) Amount Debit 2,100 2,000 100 Credit

(viii) Goods worth Rs 50 were distributed as sample free of charge.

Date (viii) Particulars Free Sample A/cDr To Purchases A/c (Being free sample distributed) Amount

Debit
50

Credit
50

(ix) Goods, the list price of which is Rs 20,000 are sold to Suresh at 8% trade discount on list price.
Date Particulars Amount Debit Credit 18,400

(ix)

Suresh A/cDr To Sales A/c (Being goods sold at 8% trade discount)

18,400

(x) Goods worth Rs 150 were spoiled in transit and a claim was made to Railway in this respect.
Date (x) Particulars Insurance Claim A/cDr To Spoiled in Transit A/c (Being claim admitted) Amount

Debit
150

Credit
150

(xi) Rs 150 were received in cash from railway in the payment of claim.
Date Particulars Amount Debit Credit 150

(xi)

Cash A/c..Dr To Insurance Claim A/c (Being claim money received)

150

Working Notes (ix) Goods Less:- Trade Discount 8% on Rs 20,000 20,000 1,600 18,400

Date
9.(i)

Particulars
Business Purchases A/c ...Dr To Vendors A/c (Being Business purchase) Machinery A/c ...Dr To Mohan Brothers (Being machinery purchase) Machinery A/c ....Dr To cash A/c (Being Erection Charges paid) Loss by Theft A/c ....Dr To Cash A/c (Being cash stolen)

Amount Debit
90,000 90,000

Credit

(ii)

15,150 15,150

(iii)

450 450

(iv)

700 700

(v)

Insurance Claim A/cDr To Loss by Theft A/c (Being claim admitted)

Cash A/c..Dr To Insurance Claim A/c (Being receipt of claim money)

700
700

700 700

Amount Date 9.(vi) (vii) No Entry Dinesh A/c ..Dr To Sales A/c To Cash A/c (Being goods supplied and freight paid) Free Sample A/cDr To Purchases A/c (Being free sample distributed) 2,100 2,000 100 Particulars Debit Credit

(viii)

50 50

(ix)

Suresh A/cDr To Sales A/c (Being goods sold at 8% trade discount)

Insurance Claim A/cDr To Spoiled in Transit A/c (Being claim admitted) Cash A/c..Dr To Insurance Claim A/c (Being claim money received)

18,400
18,400

(x)

150 150

(xi)

150 150

1,28,550

1,28,550

7(i) Business commenced with a capital of Rs 6,00,000.

Date (i) Particulars Cash A/c ......Dr To Capital A/c (Being Business Started with capital) Amount Debit 6,00,000 Credit

6,00,000

(ii) Rs 4,50,000 deposited in a bank account.

Date (ii) Particulars Bank A/c .....Dr To Cash A/c (Being cash deposited in bank) Amount Debit 4,50,000 4,50,000 Credit

(iii) Rs 2,30,000 plant and machinery purchased by paying Rs 30,000 cash immediately.
Date (iii) Particulars Plant & Machinery A/c ...Dr To Cash A/c To Creditors A/c (Being plant and machinery purchased) Amount Debit 2,30,000 30,000 2,00,000 Credit

(iv) Purchased goods worth Rs 40,000 for cash and Rs 45,000 on account.
Date (iv) Particulars Purchases A/c ......Dr To Cash A/c To Bank A/c (Being goods purchased) Amount Debit 85,000 40,000 45,000 Credit

(v) Paid a cheque of Rs 2,00,000 to the supplier for plant and machinery.
Date (v) Particulars Creditors A/c ...Dr To Bank A/c (Being paid to supplier of plant and machinery) Amount Debit 2,00,000 2,00,000 Credit

(vi) Rs 70,000 cash sales (of goods costing Rs 50,000)

Date (vi) Particulars Cash A/c ...Dr To Sales A/c (Being sold goods for cash) Amount

Debit
70,000

Credit
70,000

(vii) Withdrawn by the proprietor Rs 35,000 cash for personal use.

Date (vii) Particulars Drawings A/c ...Dr To Cash A/c (Being cash withdrawn by the proprietor) Amount Debit 35,000 35,000 Credit

(viii) Insurance Paid by cheque of Rs 2500

Date (viii) Particulars Insurance A/c ...Dr To Bank A/c (Being paid insurance by cheque) Amount Debit 2,500 2,500 Credit

(ix) Salary of Rs 5,500 outstanding.

Date (ix) Particulars Salary A/c ...Dr To Outstanding Salary A/c (Being salary outstanding) Amount Debit 5,500 5,500 Credit

(x) Furniture of Rs 30,000 purchased in cash.

Amount Debit 30,000 30,000 Credit

Date (x)

Particulars Furniture A/c ...Dr To Cash A/c (Being furniture purchased for cash)