Basics of Accounting

Syllabus – Managerial accounting

• Basic accounting concepts and methods
• Journal – Ledger – Cash book – Trial balance
• Depreciation, Provisions and reserves
• Prep of P&L account and Balance sheet as per
companies act 1956
• Financial accounting/Cost accounting/
Management accounting
• Capital and revenue exp
• Accounting standards
• Intro to cash flows (x tra if time permits)
 Why should I learn accounting?
 Basic accounting terms and their usage

 Accounting concepts

 Identifying an accounting transaction

 Basics of accounting mechanics
 What is your opinion of this company’s
performance?
Expenses Amount (in Cr) Income Amount (in Cr)
Purchases and
other expenses
90 Sales 100
Net Profit 10

Liabilities Amount (in Cr) Assets Amount (in Cr)

Capital (Owners 15 Machinery 20
money)
Cash 10
Loan from bank 5 Debtors (Money 30
due from
customers)
Creditors (Money 50 Deposits 10
due to suppliers)
 Accounting Preliminaries: An
Overview
Basic Accounting Terms
 Accounting Transaction
 Accounting Head
 Income
 Expense
 Assets
 Liabilities
What is Income?
Income is an increase in economic benefits during an
accounting period.

What is Expense?
Expenses are decrease in economic benefits during an
accounting period.

What is Asset?
Assets refer to tangible objects or intangible rights of an
enterprise which carry probable future benefits.

What is Liability?
Liabilities refer to the financial obligations of an enterprise.
General Accounting Terms
 Capital
 Drawings
 Stock
 Debtors
 Creditors
 Bad debts
 Depreciation
 Sales
 Purchases
 Exercise 1

Identify your team

Assets
Liabilities
Income
Expenditure
Odd man out
 1 Advance given to a supplier 26 Share Premium
2 Advance taken from customer 27 Telephone rent
3 Advertisement charges 28 Telephone deposit
4 Audit fees 29 Salary
5 Bad debt (Customer defaulted) 30 Income tax due but not paid
Building 31 Interest paid to bank
6
32 Interest received from bank
7 Cash
33 Job work charges
8 Commission received
34 Machinery
9 Computer
35 Land
10 Creditors (Suppliers not yet paid) 36 Loan from Bank
11 Debtors (Customers not yet paid) 37 Loan taken from director
12 Depreciation (wear and tear of fixed assets) 38 Commission earned
13 Directors salary 39 Bonus paid to workers
14 Electricity charges 40 Loan given to employees
15 Fixed deposits 41 Computers and laptops
16 Furniture 42 AMC service charges received
17 Guarantee given to group company 43 Guarantee given for directors personal loan
18 Owners capital Claim against law suit which is not yet decided in
19 Patent and Copy right 44 the court
Property tax paid in advance 45 Investment in shares
20
46 Office bus
21 Purchases
47 Rent overdue but not paid
22 Rent paid
48 Investment in gold
23 Repairs and Maintenance charges 49 Investment in group company
24 Sales 50 Long term loan from friends
25 Security deposit with government departments
51 Advance given to a supplier 76 Interest paid to bank
52Advance taken from customer 77 Interest received from bank
53Advertisement charges 78Investment in gold
54AMC service charges received 79 Investment in group company
55 Audit fees 80Investment in shares
56 Bad debt (Customer defaulted) 81 Job work charges
57 Bonus paid to workers 82 Land
58 Building 83 Loan from Bank
59 Cash 84 Loan given to employees
Claim against law suit which is not yet 85Loan taken from director
60 decided in the court 86 Long term loan from friends
61 Commission earned 87 Machinery
62 Commission received 88 Office bus
63 Computer 89Owners capital
64 Computers and laptops 90Patent and Copy right
65 Creditors (Suppliers not yet paid) 91 Property tax paid in advance
66Debtors (Customers not yet paid) 92Purchases
67Depreciation (wear and tear of fixed assets) 93 Rent overdue but not paid
68Directors salary 94Rent paid
69 Electricity charges 95 Repairs and Maintenance charges
70 Fixed deposits 96Salary
71 Furniture 97Sales
72 Goodwill 98 Security deposit with government departments
73 Guarantee given for directors personal loan 99 Share Premium
74 Guarantee given to group company 100 Telephone deposit
75Income tax due but not paid 101 Telephone rent
 Financial Statements
What is a Profit and Loss Account
EXPENSES Amt (in Rs) INCOME Amt (in Rs)

TOTAL TOTAL
Note: All figs are total for the whole year

What is a Balance sheet

LIABILITIES Amt (in Rs) ASSETS Amt (in Rs)

TOTAL TOTAL
Note: All figs are as at the balance sheet date
1. Company has a building with value Rs. 20 lakhs as on 31st march 2010
2. The amount of owner’s money in the business is Rs. 5 lakhs as on the above date
3. The business has borrowed Rs. 10 lakhs from the bank
4. Salaries paid to staff this year from 1st April 2009 till 31st march 2010 was Rs. 40
lakhs
5. The company sells steel and the total sales done during the year amounted to
Rs.100 lakhs
6. The travel expenses of the marketing team works to Rs. 2 lakhs for the whole
year
7. The electricity and machine maintenance cost incurred for the year was Rs. 5
lakhs
8. The rent paid for office premises occupied works to Rs. 5 lakhs for the year
9. A sum of Rs. 19 lakhs is still pending to be collected from one of the parties who
has bought drills from the company (from a debtor) as on 31.3.2010
10.There is cash in the bank account of business to the extent of Rs. 3 lakh as on
31.3.2010
11.The company has not yet paid the raw material suppliers Rs. 15 lakhs for the steel
supplied during the year
12.The company has purchased raw material worth Rs. 40 lakhs to manufacture
steel rods during the year.
13.Last year (2008-09), the company had made a profit of Rs. 4 lakhs and the
amount was retained in the business this year.
 INCOME STATEMENT (PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.3.2010
(1.4.2009 TO 31.3.2010)

EXPENSES Amt (Rs in   INCOME Amt (Rs in

‘000) ‘000)
Salary 40   Sale 100
Travel exp 2  
Electricity & maint 5      
Rent 5      
Purchases 40      
Profit 8      
         
TOTAL 100   TOTAL 100
BALANCE SHEET AS ON 31.3.2010
LIABILITIES Amt   ASSETS Amt
Share capital 5   Building 20
Bank loan 10   Debtor 19
Creditors 15   Bank 3
Profit for the year 8  
Last years profit 4      
TOTAL 42   TOTAL 42
 Accounting Concepts
 Separate entity concept
 Going concern concept
 Money measurement concept
 Cost Concept
 Dual Aspect concept ( Capital + Liabilities = Assets)
 Accounting Period concept
 Realization concept
Role Play – Electronic Goods show room

Try and identify the accounting

heads in the following
transactions
 Identify the Accounting Heads in the
transaction

The owner starts business with own

money of Rs. 5 cr
Identify the Accounting Heads in the
transaction

Got a Bank Loan of Rs. 5 cr

 Identify the Accounting Heads in the
transaction

Purchased Stock worth Rs. 6 cr

 Identify the Accounting Heads in the
transaction

Furnished Show room for Rs. 1 cr

 Identify the Accounting Heads in the
transaction

Customer walks into show room and

inquires about New Samsung LCD
Plasma TV Rs. 1.5 Lacs
 Identify the Accounting Heads in the
transaction

Customer booked 1 LG washing

machine worth Rs. 25,000. Paid cash
down.
 Identify the Accounting Heads in the
transaction

Corporate customer ordered 10 I-Pads

worth Rs. 40000 each. The payment is
to be made after 1 month.
 Identify the Accounting Heads in the
transaction

Did servicing of 1 refrigerator. Charged

Rs. 1000 from customer
 Identify the Accounting Heads in the
transaction

Gave demo of Bose music system to a

group from MUZIK club. The system
costs Rs. 50,000
 Identify the Accounting Heads in the
transaction

Paid a rent deposit of Rs. 100,000

Identify the Accounting Heads in the
transaction

Paid salary to the office staff Rs.

50,000
 Identify the Accounting Heads in the
transaction

The owner’s daughter won an award.

He gifts the Bose music system from
the store worth Rs. 50,000 to
daughter.
 Identify the Accounting Heads in the
transaction

One sales man is very efficient and the

owner announces the sales man as
“Employee of the month”.
 Identify the Accounting Heads in the
transaction

Purchased a land in Baroda for Rs. 50

lakhs to set up another show room.
After elections, land price has shot up
to Rs. 1 cr.
 Identify the Accounting Heads in the
transaction

Budget is announced that tax on

electronic stores will go up by 10% this
year. Advance tax paid is Rs. 10 lakhs.
 Meaning & Significance of Accounting
Accounting consists of the following activities:-
Identifying the transactions and events
Measuring the identified transactions and events
Classifying
Recording
Summarizing
Analyzing
Interpreting
Communication
 Accounting Mechanics
Traditional classification of accounts

Real Accounts (Tangible and Intangible)

- an account dealing with the material assets of a business, such as
its property, furniture, goodwill etc…

Nominal Accounts
- All incomes and expenses eg. Salary, rent, sales, purchases etc..

Personal Accounts
- An account for an individual or a company
Eg. Owners account, debtors, creditors etc..
 Exercise 3: Classify the following accounts into Real, Nominal and Personal
Bank Current Account   Auditors fees  
Computer   Dividend Income  
Creditor   Electricity charges  
Debtor   Goodwill  
Fixed Deposit   Purchases  
Furniture   Rent received  
Interest Income   Rental income  
Gold   Salaries  
Machinery   Directors salaries  
office van   Tables & chairs  
Owners capital   Tax paid  
Patent Rights   Telephone expense  
Sales   Wages to workers  
 Accounting Mechanics
Journal Entries
Ledgers
Trial Balance
P&L Account
Balance sheet
 Nursery Rhymes in Accounting
Real Accounts – “Debit what comes in Credit
what goes out”

Nominal Accounts – “Debit All expenses, credit

all incomes”

Personal Accounts - “Debit the receiver, Credit

the giver”
 Format of Journal Entries
Date Particulars Debit (Rs) Credit (Rs)

DD/ MM/ YYYY Machine a/c Dr 1,00,000

To Cash a/c 1,00,000
(Being machine
purchased for cash)

DD/ MM/ YYYY Cash a/c Dr 2,00,000

To Sales a/c 2,00,000
(Being goods sold for
cash)
Journal entries with real accounts in books of X Ltd

• X Ltd bought furniture for cash Rs. 1,00,000

• X Ltd paid for machinery by cheque Rs. 20,000
• X Ltd sold the car for Rs. 2 lakhs

Journal entries with nominal and real accounts

in books of X Ltd
• X Ltd paid salary of Rs. 20,000 to staff
• Electricity bill of Rs. 5,000 was paid
• X ltd did cash sales for Rs. 1,00,000
 Journal entries with personal accounts and real
accounts in books of X ltd
1. Owner put in Rs. 1 crore cash to start the
business
2. SBI gave a bank loan of Rs. 50 lakhs
3. X ltd sold goods worth Rs. 50,000 on credit to
Aman
4. X ltd purchased raw material worth Rs.
20,000 on credit from Sanjay
5. Loan from the director Mr.Y of Rs.30,000 was
repaid
 Pass journal entries for the following transactions in
the books of X ltd. The business is a grocery store
Date Transaction

01.01.2014 Mr. X started his retail store business with Rs. 1 lakh (own money)

2.01.2014 Took a loan of Rs. 20000 from ICICI bank

5.01.2014 Bought grocery items worth Rs. 60000 and stocked them in the
store
15.01.2014 Paid a light bill of Rs. 5000

16.01.2014 Bought a cell phone for business purpose for Rs. 35,000

16.01.2014 Did furnishing for Rs. 20000 (Table and some cupboards)

28.01.2014 Paid salary to the helper boys of Rs. 4000

 His cash sales was as
03/01– 13000; 06/01- 10000; 09/01 – 5000; 11/01 – 5000; 20/01 –
10000; 22/01 – 17000; 25/01 – 10000

20.01.2014 Bought a deep freezer for Rs. 10000 for business

21.01.2014 The helper boy took care of the shop and he sold items on credit
worth Rs. 1000 to Mr. Narang

25.01.2014 Wheat flour was purchased in bulk for Rs. 10000 and the supplier
Mr. Jain did not take cash immediately. He offered to take the
money at the end of 1 month.
 Special journal entries
• Outstanding accounts – eg. Outstanding rent,
outstanding salary, outstanding income tax
• Prepaid accounts and advance account or
deposit account – eg. Advance rent, advance
salary, advance to customer, telephone
deposit
• Provisions – eg. Provision for bad debts,
provision for income tax, provision for
debenture redemption

All these shall be treated as personal accounts.

 Outstanding and prepaid accounts
1. 31.01.2014 Salary of Rs. 50,000 was due but not paid on 31 st
January 2014
2. 31.01.2014 Rent of Rs. 10,000 was due but not paid on 31 st
January 2014
3. 1.06.2014 The business paid an advance telephone deposit of
Rs. 5,000
4. 5.06.2014 The business created a provision for tax of Rs.1000
5. 6.06.2014 An employee (Mr. Z) took a salary advance of Rs.
3,000 for his daughter’s wedding
6. 15.06.2014 X Ltd has kept a deposit of Rs. 50,000 with their
raw materials supplier Mr. Jain
7. 20.6.2014 The customer of X Ltd Mr. Narang gave an advance
of Rs. 20,000 for some bookings he has made for the month of
August
Reversal of o/s entries
31.03.2014 Salary of Rs. 50,000 which was due in
January is now paid.
31.03.2014 Rent of Rs. 10,000 which was due in Jan is
now paid.

Accounting for bad debts

11.04.2014 Customer Mr. Pai defaulted on outstanding
debt of Rs. 10,000
Accounting for provisions
30.04.2014 Business must create a provision for income
tax of Rs. 20,000 for the year.
 Pass Journal entries for the following

Journalise the following transactions in the books of a

trader for the month of Jan’15:-
2nd Purchased goods worth Rs. 5000 for cash
3rd Sold goods to customer Vijay on credit Rs. 1980
4th Received Rs. 1980 from Vijay (Customer)
5th Purchased goods from Bharat Rs. 5000 for credit
8th Purchased furniture from Mukesh for Rs. 5000 and
paid cash Rs. 2000. Balance on credit
21st Paid Bharat Rs. 4800 in full settlement
Entries with bad debts, bank, Drawings

9th Jan Sold goods to Rahim on credit Rs.

600
19th JanRahim became insolvent
27th Jan Interest received from bank Rs. 200
28th JanPaid interest on loan Rs. 500
30th JanWithdrew goods from business for
personal use Rs. 200
 Multiple entries
4/8/2015 The business made a sale of Rs. 50,000 to
Mr. Anil. Anil paid cash of Rs. 20,000 and balance
will be paid after 1 month
Accounting Heads – sales a/c, cash a/c, Anil a/c
Cash A/c Dr 20,000
Anil A/c Dr 30,000
To Sales A/c 50,000
(Being sales made to Anil for both cash & credit)
What will be journal entry if Anil repays the entire
money outstanding on 4/9/2015?
 More Multiple entries
The business purchased raw materials for Rs. 30,000
and got a cash discount of 5%.
Accounting Heads – Purchases a/c, cash a/c, discount
received a/c

Purchases a/c Dr 30,000

To Cash a/c 28500
To Discount received a/c 1500
(Being raw material purchased at 5% cash discount)
 Journalise the following transactions
Date Transaction particulars Amt (Rs in 000s)
Jan 01 Gandhari commenced business with cash 7500
Jan 03 Goods purchased for cash 1000
Jan 04 Bought goods from Hari on credit 250
Jan 08 Furniture purchased from Murari for cash 50
Jan 09 Furniture purchased from Murari on credit 250
Jan 12 Cash paid to Hari in full settlement of his account 240
Jan 15 Goods purchased from Anil on credit and he allowed a 10% 350
trade discount
Jan 20 Cash paid to Anil in full satisfaction 300
Jan 21 Sold to Prince Behari on credit 115
Jan 22 Cash paid by Prince Behari 15
Jan 25 Prince Behari became insolvent, a final composition of
50p in a rupee was received from his official receiver out
of the remaining debt.
Jan 26 Paid for miscellaneous expenses 50
Jan 28 Withdrawn by Gandhari for personal use cash 100