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Example 1: Financing Activities

Owner invested $10,000 in the company.

Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Cash) by $10,000 Debit
1
Increase in Owner's Equity by $10,000 Credit
2

Journal Entry
Debit Credit
Cash 10,000
Owner's Equity 10,000

Description of Journal Entry


Owner invested $10,000 in the company.

Results of Journal Entry


Cash balance increases by $10,000. --> Increase in Assets
Owner's Equity balance increases by $10,000. --> Increase in Owner's Equity

Example 2: Financing Activities

The company borrowed $20,000 from a bank.

Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Cash) by $20,000 Debit
1
Increase in Liabilities (Borrowings) by $20,000 Credit
2

Journal Entry
Debit Credit
Cash 20,000
Borrowings
20,000

Description of Journal Entry


Borrowed $20,000.

Results of Journal Entry


Cash balance increases by $20,000. --> Increase in Assets
Borrowings balance increases by $10,000. --> Increase in Liabilities

Example 3: Investing Activities

The company purchased $12,000 equipment and paid in cash.

Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Equipment) by $12,000 Debit
1
Decrease in Assets (Cash) by $12,000 Credit
2

Journal Entry
Debit Credit
Equipment
12,000
Cash
12,000

Description of Journal Entry


Purchased $12,000 equipment in cash.

Results of Journal Entry


Equipment balance increases by $12,000. --> Increase in Assets
Cash balance decreases by $12,000. --> Decrease in Assets

Example 4: Operating Activities

The company purchased $6,000 merchandise (600 units) on credit.

Analysis of Transaction
Steps Debit or Credit
Increase in Assets (Merchandise) by $6,000 Debit
1
Increase in Liabilities (Accounts Payable) by $6,000 Credit
2

Journal Entry
Debit Credit
Merchandise
6,000
Accounts Payable
6,000

Description of Journal Entry


Purchased $6,000 merchandise on credit.

Results of Journal Entry


Merchandise balance increases by $6,000. --> Increase in Assets
Accounts Payable balance increases by $6,000. --> Increase in Liabilities

Example 5: Operating Activities

The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in
the time of sale.

Analysis of Transaction
Note: This transaction includes both "REVENUE" and "EXPENSE" components.

(1) REVENUE side


Steps Debit or Credit
Increase in Assets (Cash) by $9,000 Debit
1

2 Increase in Assets (Accounts Receivable) by $2,000 Debit

3 Increase in Revenue (Sales) by $11,000 Credit

(2) EXPENSE side


Steps Debit or Credit
Increase in Expenses (Cost of Merchandise Sold) by $5,000 Debit
1
($6,000 / 600 units = $10 per unit)
($10 per unit X 500 units sold = $5,000 cost)
2 Decrease in Assets (Merchandise) by $5,000 Debit

(1) REVENUE Journal Entry


Debit Credit
Cash 9,000
Accounts Receivable 9,000
Sales Revenue
11,000
Description of Journal Entry
Sold merchandise at $11,000 price and received $9,000 in cash.

Results of Journal Entry


Cash balance increases by $9,000. --> Increase in Assets
Accounts Receivable balance increases by $2,000. --> Increase in Assets
Sales Revenue account balance increases by $11,000. --> Increase in Revenue

(2) EXPENSE Journal Entry


Debit Credit
Cost of Merchandise Sold
5,000
Merchandise
5,000

Description of Journal Entry


To record the cost of merchandise sold.

Results of Journal Entry


Merchandise balance decreases by $5,000. --> Decrease in Assets
Cost of Merchandise Sold account balance increases by $5,000. --> Increase in Expense

Example 6: Operating Activities

The company paid $3,500 salaries.

Analysis of Transaction
Steps Debit or Credit
Increase in Expenses (Salaries Expense) by $3,500 Debit
1
Decrease in Assets (Cash) by $3,500 Credit
2

Journal Entry
Debit Credit
Salaries Expense
3,500
Cash
3,500

Description of Journal Entry


Paid $3,500 salaries.

Results of Journal Entry


Cash balance decreases by $3,500. --> Decrease in Assets
Salaries Expense account balance increases by $3,500. --> Increase in Expenses

Example 7: Operating Activities

The company paid $1,500 rent.

Analysis of Transaction
Steps Debit or Credit
Increase in Expenses (Rent Expense) by $1,500 Debit
1
Decrease in Assets (Cash) by $1,500 Credit
2

Journal Entry
Debit Credit
Rent Expense
1,500
Cash
1,500

Description of Journal Entry


Paid $1,500 rent.

Results of Journal Entry


Cash balance decreases by $1,500. --> Decrease in Assets
Rent Expense account balance increases by $1,500. --> Increase in Expenses

Summary of Transactions from previous file.

No. Date Transactions


(1) May 1 Owner invested $20,000 in the company.
(2) May 3 Borrowed $10,000 from a bank.
(3) May 6 Purchased $15,000 equipment in cash.
(4) May 8 Purchased $9,000 merchandise (900 units) on credit.
Sold 500 units of merchandise at the price of $11,000.
(5) May 15
Customer paid $8,000 in cash at the time of sale.
(6) May 25 Paid $2,500 salaries.
(7) May 26 Paid $1,500 rent.

Summary of Journal Entries from previous file.

Journal Entries
No. Debit C
(1) Cash 10,000
(1) Owner's Equity 10
Owner invested $10,000 in the company.

(2) Cash 20,000


(2) Borrowings 20
Borrowed $20,000.

(3) Equipment 12,000


(3) Cash 12
Purchased $12,000 equipment in cash.

(4) Merchandise 6,000


(4) Accounts Payable 6
Purchased $6,000 merchandise on credit.

(5)-1 Cash 9,000


(5)-1 Accounts Receivable 2,000
(5)-1 Sales 11
Sold merchandise at $11,000 price and received $9,000 in cash.

(5)-2 Cost of Goods Sold 5,000


(5)-2 Merchandise 5
To record the cost of goods sold ($5,000 merchandise).

(6) Salaries Expense 2,500


(6) Cash 3
Paid $2,500 salaries.

(7) Rent Expense 1,500


(7) Cash 1
Paid $1,500 rent.
Balance Sheet and Income Statement
Balance Sheet
As of May 31, 20XX
Assets Liabilities and Owner's Equity

Cash $ 23,000 Accounts Payable $ 6,000

Accounts Receivable 2,000 Borrowings 20,000

Merchandise 1,000

Equipment 12,000 Owner's Equity 12,000 (*1)

Total Liabilities and


Total Assets $ 38,000 $ 38,000
Owner's Equity

Income Statement
For the Period from May 1 to May 31, 20XX

Revenue
Sales $ 11,000
Total Revenue $ 11,000

Expenses
Cost of Goods Sold $ 5,000
Salaries Expense 2,500
Rent Expense 1,500
Total Expenses 9,000

Net Income $ 2,000 (*2)

(*1) Owner's Equity=Investment by Owner+Net Income=$10,000+$2,000=$12,000


(*2) Net Income = Total Revenue - Total Expenses = $11,000 - $9,000 = $2,000

Accounting Journal Entry Examples 01

* Cash payment transactions


1. Purchase of assets in cash
2. Repayment of liabilities in cash
3. Payment of expenses in cash

* Cash receipt transactions


4. Sale of assets in cash
5. Borrowing money
6. Issuance of stock

* Cash payment transactions


1. Purchase of assets in cash
1a. Purchased merchandise and paid $2,000 in cash
1b. Purchased an equipment and paid $15,000 in cash

2. Repayment of liabilities in cash


2a. Repaid $7,000 of bank loans
2b. Paid $3,000 accounts payable

3. Payment of expenses in cash


3a. Paid $3,500 rent expense
3b. Paid $6,000 salaries expense

* Cash receipt transactions


4. Sale of assets in cash
4a. Sold merchandise and received $6,500 in cash
The cost of merchandise sold was 5,100
4b. Sold an equipment and received $8,600 in cash
The book value of the equipment was $8,000

5. Borrowing money
5a. Borrowed $9,000 in cash
5b. Issued a promissory note and received $11,000 in cash

6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share
6b. Issued 200 shares of preferred stock, at $80 per share

Cash payment transactions

1. Purchase of assets in cash


1a. Purchased merchandise and paid $2,000 in cash

debit credit

merchandise 2,000

cash 2,000

debit: increase in assets (merchandise)


credit: decrease in assets (cash)
1b. Purchased an equipment and paid $15,000 in cash

debit credit

equipment 15,000

cash 15,000

debit: increase in assets (equipment)


credit: decrease in assets (cash)
2. Repayment of liabilities in cash
2a. Repaid $7,000 of bank loans

debit credit

borrowings 7,000

cash 7,000

debit: decrease in liabilities (borrowings)


credit: decrease in assets (cash)
2b. Paid $3,000 accounts payable

debit credit

accounts payable 3,000

cash 3,000

debit: decrease in liabilities (accounts payable)


credit: decrease in assets (cash)
3. Payment of expenses in cash
3a. Paid $3,500 rent expense

debit credit

rent expense 3,500

cash 3,500

debit: increase in expenses (rent expense)


credit: decrease in assets (cash)
3b. Paid $6,000 salaries expense

debit credit

salaries expense 6,000

cash 6,000

debit: increase in expenses (salaries expense)


credit: decrease in assets (cash)

Cash receipt transactions


4. Sale of assets in cash
4a. Sold merchandise and received $6,500 in cash

debit credit

cash 6,500
sales 6,500

debit: increase in assets (cash)


credit: increase in revenue (sales)
The cost of merchandise sold was 5,100

debit credit

cost of goods sold 5,100

merchandise 5,100

debit: increase in assets (cash)


credit: increase in revenue (sales)
4b. Sold an equipment and received $8,600 in cash
The book value of the equipment was $8,000

debit credit

cash 8,600

equipment 8,000

gain on sale of 600


equipment

debit: increase in assets (cash)


credit: increase in revenue (sales)
5. Borrowing money
5a. Borrowed $9,000 in cash

debit credit

cash 9,000

borrowings 9,000

debit: increase in assets (cash)


credit: increase in liabilities (borrowings)
5b. Issued a promissory note and received $11,000 in cash

debit credit

cash 11,000

notes payable 11,000

debit: increase in assets (cash)


credit: increase in liabilities (notes payable)
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share

debit credit

cash 25,000

Common stock 25,000

debit: increase in assets (cash)


credit: increase in equity (common stock)
6b. Issued 200 shares of preferred stock, at $80 per share

debit credit

cash 16,000

Preferred stock 16,000

debit: increase in assets (cash)


credit: increase in equity (preferred stock)

Current assets are reported separately from noncurrent assets


Current liabilities are reported separately from noncurrent liabilities

Current assets
--> Assets that are expected to be realized
--> within a year or normal operating cycle, whichever is longer

Current liabilities
--> Liabilities that are expected to liquidate
--> within a year or normal operating cycle, whichever is longer

Regulation S-X: 17 CFR Part 210


Rule 5-02: Balance sheets

Current Assets
5-02.1: Cash and cash items
5-02.2: Marketable securities
5-02.3: Accounts and notes receivable
5-02.4: Allowances for doubtful accounts and notes receivable
5-02.5: Unearned income
5-02.6: Inventories
5-02.7: Prepaid expenses
5-02.8: Other current assets
5-02.9: Total current assets

Noncurrent assets
5-02.12: Other investments
5-02.13: Property, plant and equipment
5-02.14: Accumulated depreciation
5-02.15: Intangible assets
5-02.16: Amortization of intangible assets
5-02.17: Other assets
5-02.18: Total assets

Current liabilities
5-02.19: Accounts and notes payable
5-02.20: Other current liabilities
5-02.21: Total current liabilities

Noncurrent liabilities
5-02.22: Bonds, mortgages and other long-term debt
5-02.24: Other liabilities
5-02.25: Commitments and contingent liabilities

Stockholders' equity
5-02.27: Redeemable preferred stocks
5-02.28: Non-redeemable preferred stocks
5-02.29: Common stocks
5-02.30: Other stockholders' equity
5-02.31: Noncontrolling interests
5-02.32: Total liabilities and equity

Revenue Accounts 01
Examples and Practice Questions

Revenue

1. Revenue is the increase in resources from the operations of an entity

2. Increase in resources may be (A), (B) or (C)


(A) Increase in assets
(B) Decrease in liabilities
(C) Both (A) and (B)

Recognition of revenue

1. Recognition means "recording" in accounting


2. Revenue is reported when it is recognized
3. Revenue is recognized when it is earned and realized (or realizable)
4. Realized means the collection of cash
5. Earned means the delivery of products or services

Debits and credits


1. Revenue accounts have normal balances on the credit side

2. Increases in revenue accounts are recorded on the credit side


3. Decrease in revenue accounts are recorded on the debit side

Examples of revenue accounts

Sales revenue

Services revenue

Interest revenue

Rent revenue

Practice Questions

1. On December 15, 2010


Entity A sold 300 units of products at the price of $20 per unit

2. On December 15, 2010


Entity A received $3,600 in cash

3. On January 27, 2011


Entity A received $2,400 in cash

4. What is the amount revenue for 2010?


300 units x $20 = $6,000

5. What is the balance of accounts receivable at December 31, 2010?


$6,000 - $3,600 = $2,400

6. Prepare journal entries at the following dates


(1) December 15, 2010
(2) December 31, 2010
(3) January 27, 2011

7. Journal entry at December 15, 2010

debit credit

Cash 3,600

Accounts receivable 2,400

Sales revenue 6,000


8. Journal entry at December 31, 2010
--> No journal entry is required at December 31, 2010

9. Journal entry at January 27, 2011

debit credit

Cash 2,400

Accounts receivable 2,400

Equity

1. Equity represents the owners' equity

2. For corporations, shareholders are owners


--> equity represents the shareholders' equity

3. Equity is a residual concept


--> equity is what's left after subtracting liabilities from assets

4. Equity = Assets - Liabilities

Components of equity

1. Paid-in capital
--> the amount shareholders contributed to the entity
--> in exchange of the shares of common stock or preferred stock

2. Retained earnings
--> net income is accumulated in retained earnings
--> dividends are paid from retained earnings

Debits and credits

1. Equity accounts have normal balances on the credit side

2. Increases in equity accounts are recorded on the credit side


3. Decrease in equity accounts are recorded on the debit side

Practice Questions

1. Issuance of common stock


Entity A issued 8,000 shares of common stock
Par value = $1 per share
Issue price = $10 per share

debit credit

Cash 80,000

Common stock 8,000

Additional paid-in 72,000


capital

2. Issuance of common stock with no par value

Entity B issued 7,000 shares of common stock


No par value
Issue price = $20 per share

debit credit

Cash 140,000

Common stock 140,000

Retained earnings

1. Net income is added to retained earnings


Ending retained earnings
= Beginning retained earnings + Net income

2. Dividends decrease retained earnings


Ending retained earnings
= Beginning retained earnings + Net income - Dividends declared

Practice Questions

1. Dividends are declared


Entity C has 500,000 shares of common stock outstanding
--> and declared $3 per share dividends

debit credit

Retained earnings 150,000

Dividends payable 150,000

2. Entity D had $230,000 balance of retained earnings as of December 31, 2009.


During 2010, Entity D earned $60,000 net income and declared $15,000 dividends.
What is the ending balance of retained earnings as of December 31, 2010?

Ending retained earnings


= Beginning retained earnings + Net income - Dividends declared
= $230,000 + $60,000 - $15,000 = $275,000

Examples of equity accounts

Common stock

Preferred stock

Additional paid-in capital

Retained earnings

Accounting Equation 01

Basic form of an equation


--> Left side = Right side
1. Balance Sheet Version
Assets = Liabilities + Equity
2. Income Statement Version
Net Income = Revenue - Expenses
3. Combined Version
Assets = Liabilities + Equity
---> Equity = Beginning Equity + Net Income
Assets = Liabilities + Beginning Equity + Net Income
---> Net Income = Revenue - Expenses
Assets = Liabilities + Beginning Equity + Revenue - Expenses

An Example of Combined Version


At January 1, 2010, the balance of equity was $100,000.
During the year of 2010, revenue and expenses were as follows
Revenue = $300,000
Expenses = $240,000

What is the balance of equity at December 31, 2010?

Equity = Beginning Equity + Revenue - Expenses


--> $100,000 + $300,000 - $240,000 = $160,000

At December 31, 2010, Entity A had the following balances


Assets = $280,000
Liabilities = $120,000
Equity = $160,000

Balance sheet version


Assets = Liabilities + Equity
--> $280,000 = $120,000 + $160,000
Combined version
Assets = Liabilities + Beginning Equity + Revenue - Expenses
--> $280,000 = $120,000 + $100,000 + $300,000 - $240,000

Cases and Practice Questions


Case 1:

Assets = $12,000
Liabilities = $5,000
Equity = $7,000
Assets = Liabilities + Equity
$12,000 = $5,000 + $7,000
Practice Question 1:

If Assets = $12,000 and Liabilities = $3,000


what is the amount of equity?

--> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000


Case 2:

Revenue = $16,000
Expenses = $10,000
Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000
Practice Question 2:

If Revenue = $16,000 and Expenses = $11,000


what is the amount of net income?

--> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000


Case 3:

Assets = $25,000
Liabilities = $11,000
Beginning Equity = $10,000
Revenue = $36,000
Expenses = $32,000
Assets = Liabilities + Beginning Equity + Revenue - Expenses
$25,000 = $11,000 + $10,000 + $36,000 - $32,000
Practice Question 3:

In the following case, what is the amount of Beginning Equity


Assets = $55,000
Liabilities = $21,000
Revenue = $76,000
Expenses = $62,000
Beginning Equity = ?
Assets = Liabilities + Beginning Equity + Revenue - Expenses
$55,000 = $21,000 + ? + $76,000 - $62,000
--> Beginning Equity = ? = $20,000

The following accounts have normal balances on the debit side

1. Asset accounts
2. Expense and loss accounts

Increases and decreases

1. Increases in asset accounts are recorded on the debit side


2. Decreases in asset accounts are recorded on the credit side

3. Increases in expense and loss accounts are recorded on the debit side
4. Decreases in expense and loss accounts are recorded on the credit side

Examples of asset accounts

Cash and cash equivalents

Accounts receivable

Notes receivable

Interest receivable

Rent receivable

Inventories

Merchandise

Raw materials

Work-in-process

Finished goods
Supplies

Prepaid expenses

Prepaid rent expense

Prepaid insurance expense

Prepaid interest expense

Investment in debt and equity securities

Trading securities

Available-for-sale securities

Held-to-maturity securities

Property, plant and equipment

Land

Buildings

Equipment

Machinery

Capitalized leases

Leasehold improvements

Intangible assets

Goodwill

Trademarks

Patents

Examples of expense and loss accounts

Cost of goods sold


Selling, general and administrative expenses

Salaries expense

Advertising expense

Rent expense

Travel expense

Communication expense

Insurance expense

Supplies expense

Utilities expense

Depreciation expense

Other expenses and losses

Interest expense

Loss on disposal of equipment

Income tax expense

Trial Balance

If the journal entries are error-free and were posted properly to the general ledger, the total of all
of the debit balances should equal the total of all of the credit balances. If the debits do not equal
the credits, then an error has occurred somewhere in the process. The total of the accounts on the
debit and credit side is referred to as the trial balance.
To calculate the trial balance, first determine the balance of each general ledger account as
shown in the following example:
General Ledger

Cash Accounts Receivable


Sep 1 7500 1 1 2
Sep 1000 Sep 700 Sep 425
5 7 5
1
400
7 2
500
8
2 Bal. 275
425
5

Bal. 6825

Parts Inventory Accounts Payable

Sep 8 2500 1 2 Sep 8 2500


Sep 275 Sep 500
8 8

Bal. 2225 Bal. 2000

Capital Revenue

Sep 1 7500 1
Sep 1100
7

Bal. 7500 Bal. 1100

Expenses

1
Sep 1000
5
1
Sep 275
8

Bal. 1275

Once the account balances are known, the trial balance can be calculated as shown:
Trial Balance

Account Title Debits Credits

Cash 6825

Accounts Receivable 275

Parts Inventory 2225

Accounts Payable 2000

Capital 7500

Revenue 1100

Expenses 1275

10600 10600

In this example, the debits and credits balance. This result does not guarantee that there are no
errors. For example, the trial balance would not catch the following types of errors:
• Transactions that were not recorded in the journal
• Transactions recorded in the wrong accounts
• Transactions for which the debit and credit were transposed
• Neglecting to post a journal entry to the ledger
If the trial balance is not in balance, then an error has been made somewhere in the accounting
process. The following is listing of common errors that would result in an unbalanced trial
balance; this listing can be used to assist in isolating the cause of the imbalance.
• Summation error for the debits and credits of the trial balance
• Error transferring the ledger account balances to the trial balance columns
○ Error in numeric value
○ Error in transferring a debit or credit to the proper column
○ Omission of an account
• Error in the calculation of a ledger account balance
• Error in posting a journal entry to the ledger
○ Error in numeric value
○ Error in posting a debit or credit to the proper column
• Error in the journal entry
○ Error in a numeric value
○ Omission of part of a compound journal entry
The more often that the trial balance is calculated during the accounting cycle, the easier it is to
isolate any errors; more frequent trial balance calculations narrow the time frame in which an
error might have occurred, resulting in fewer transactions through which to search.

How To Solve Difficult Adjustments And Journal Entries In


Financial Accounts - Presentation Transcript
1. How to solve difficult adjustments in Financial Accounts By Professors
Augustin Amaladas and Shanthi Augustin M.Com(Loyola, Chennai)., AICWA
These slides Are prepared Only to Clarify major Doubts To students And staff.
Only Difficult Adjustments are explained Exclusively to CA ICWA,CS Students
or others who wants to learn Accounts thoroughly CA CPT, ICWA
entrance,ACS entrance students should read this Alternative work is rest
2. Why does Equity shares and fixed assets appear first in the Balance sheet
○ The balance sheet is prepared in order. Left hand side liabilities and
right hand side Assets. If business comes to an end the liability which
is paid last is share capital. The last asset which is sold out will be fixed
asset. Among fixed assets goodwill(good name) is sold out last.No one
wants to sell one’s name unless everything is lost.The order of
arrangement is known as order of permanence.
○ What is the Order of Liquidity?
3. Order of Liquidity?
○ The liability which is disposed off first comes first in the balance sheet.
The asset which is used to pay liability first appears first in the assets
side.
○ Therefore cash appears first in the balance sheet asset side. And
Creditors should appear in the liability side first.
○ The above two orders are known as marshalling
4. Income tax paid by sole proprietor and partnership business-Journal entry?
○ Income tax does not recognise sole proprietor or firm as a unit but the
individuals who run the organisation are recognised.
○ Income tax is a direct tax. Direct taxes such as Income tax, wealth tax
are to be paid by the individual who runs such organisation.It is a
personal liability even such incomes from business.
○ If business money is used for personal use of paying tax, then such
payment to be treated as drawings.
○ Journal entry: Debit drawings and credit Cash.
○ Note: do not debit incometax account.
○ If you debit income tax account it means that its treated as business
expenditure. It is wrong in this case.
5. If Income tax paid by company?
○ Company is a separate legal entity.The payment of tax is the liability of
the company. It is not the liability of Shareholders. SHARE HOLDERS
ARE DIFFERENT FROM COMPANY.
○ It is a business expenditure.
○ Journal entry: Debit Income tax account and credit Cash account.
6. How do you deal indirect taxes?
○ Indirect taxes such as sales tax, excise duty, Octroi duty, import duty,
export duty are actually imposed on the individual who buys such
article. It is not the responsibility of the individuals who run the
business but by the business itself. It is a business expenditure.
○ Journal entry: Debit sales tax a/c Credit cash a/c
7. 5.Double entry / Single entry
○ Is Accounting based on business concept or religious concept?
8. It is based on religious concept
○ Giving first and receiving later.
○ Giving cash receiving machinery
○ God is an accountant for every business. Who ever gives given
credit.whoever receives given debit. What ever goes out of you to be
credited because god will reward you.What ever comes to you is given
debit because god will take away from you.
○ Giving is right hand function.Receiving is left hand function.
9. Rules of acccounting
○ Personal rule/Account-supplier debtors, owner, banker, outstanding
wages
○ Real rule/Account- cash, bank, building, furniture, goodwill, patent
rights
○ Nominal rule/account: income and expenditure: salary, rent ,
insurance, commission, internet expenses, cell phone expenses.
10.Personal rule
○ Debit the receiver
○ credit the giver
○ Example: Computer chips purchased on credit from wipro
○ Here credit Wipro as Wipro is the giver of computer.
○ Sold goods to Meena
○ Meena is the receiver-debit
11.Exercise
○ 1.Amount collected from debtors?
○ 2.Amount deposited to bank?
○ Answer 1: two accounts to be selected.A) cash because it comes in B)
debtors given money.The giver to be given credit- PERSONAL RULE.
○ Cash related to real rule because we can see.
○ Therefore Journal entry Is: Debit cash, credit
○ debtors.
○ 2. Banker is the receiver –related to personal rule therefore debit bank.
Cash goes out –related to real rule-credit cash.
12.Real rule
○ These are the accounts of assets and liabilities
○ Rule: debit what comes in
 Credit what goes out
13.Excercise
○ 1.Goods supplied for cash
○ 2.Cash withdrawn from bank
○ 3.Cash withdrawn from bank for personal use
○ 4.Land purchased by giving a cheque
○ 5.Building sold on credit
14.
○ Answer: 1.Goods and cash are two accounts required. Person who
supplied is not important as it is a cash transaction.Both are related to
real rule.
○ JE: Goods A/c debit
○ Cash A/c credit
○ 2.Cash and bank are two accounts. Both are related to real rule.
○ JE: Cash a/c debit
○ Bank a/c credit
○ Note: Cash withdrawn does not mean drawings.Only when cash
withdrawn for personal use we consider it as drawings.
15.
○ 5. Building sold on credit.
○ He is not a dealer in building.If he is not a dealer in building we can not
consider it as goods. Only when they are goods they can be taken to
sale(Revenue income) otherwise they should be removed from capital
expenditure.
○ JE:The person who buys a/c debit
○ Building account credit.
16.
○ 3. Cash with drawn for personal use:owner and cash is important.
Owner is personal rule and cash is related to real rule.Debit the
receiver, therefore debit drawings and credit bank as banker is the
giver of cash.
○ JE: Drawings a/c debit
○ Bank a/c credit
○ 4.Land purchased by giving a cheque:
○ Land and bank are two important.Both are related to real rule. Debit
what comes in and credit what goes out.
○ JE: Land A/c debit
○ bank A/c credit
17.Nominal rule
○ Related to Expenses and income
○ Rule: Debit all expenses and losses
○ Credit all incomes and gains
18.Exercise
○ Rent paid Rs 50,000(Rent debit and cash credit)
○ Wages paid Rs.1,00,000(wages debit and cash credit)
○ Wages outstanding-Rs.60,000(wages a/c debit and outstanding wages
to Mr.X to be credited)
○ Commission received-25,000(Cash A/c debit and commission a/c to be
credited)
○ Discount allowed to customer – Rs.1,000(Discount is related to nominal
rule.debit discount and credit debtors who had given cash)
○ Telephone bills paid-Rs.2500(Telephone a/c debit and cash to be
credited)
○ Shares issued at premium-Rs.2,00,000(Cash a/c debit and share
premium to be credited as it belongs to nominal rule)
19.Suitable questions to pass journal entry
○ If cash transaction, person is not important
○ Every birth of an account there is a death of the account
○ Ask what comes in?
○ Or what goes out?
20.What is the journal entry for bad debts?
○ Bad debt a/c debit
○ to debtors a/c
○ Bad debt follows nominal rule. Debit all expenses and losses and credit
all income and gains.
○ Debtors account follow personal rule. Debit the receiver and credit the
giver.
21.Journal entry for provision for bad and doubtful debts?
○ Profit and loss account Debit
○ credit provision for bad and doubtful debts
○ Reasons:- All provisions are taken out of profits. It means profit is
reduced and provision to be increased. All provisions are future
expected liabilities.
22.Rent and rent outstanding exp
○ JE: Rent debit and cash credit
○ Rent outstanding:
○ Rent debit and rent outstanding to some one(say Mr.X )credit.
○ Rent appears in the profit and loss account debit side
○ Rent outstanding appears in the balance sheet under the head current
liabilities.
23.What is contingent liability?
○ Liability which may or may not happen depends on the future
situations
○ Example:1. Court case against the company
○ 2. contract yet to be completed.
○ No journal entry as it is not a real liability on the date of balance sheet.
24.Final Accounts Adjustments
○ Domestic house hold Expenses(Drawings a/c debit and cash credit)
○ Income tax refund( It is a personal income.If it is taken to the business
then cash a/c debit and capital a/c credit)
○ Income from house property( cash a/c debit and capital credit) as
personal income has been taken to business.
○ Un expired insurance(Unexpired insurance debit(asset) insurance
premium a/c credit)
25.
○ Income received in Advance(It is a liability.debit income a/c and credit
income received in advance a/c credit)
○ Interest on Capital( it is an expenditure. Interest on capital a/c debit
and capital account credit)
○ Provision on Doubtful debts(Profit and loss a/c debit and provision for
bad and doubtful debts credit)
26.
○ provision for Discount on debtor( Profit and loss account debit and
provision for discount on debtors credit)It is because all provisions are
taken from profit and loss account.
○ Deferred revenue expenditure((HUGE Revenue expenditure incurred
during the current year but can not be treated as one year expenditure
as the benefit will come for more than a year.)
○ JE: Deferred revenue expenditure a/c debit and cash to be credited.
27.Final Accounts Adjustments
○ Reserve Fund( all reserves taken from profit. debit profit and loss a/c
and credit Reserve fund)
○ Goods Distributed as free sample( goods with drawn other than trading
activity: Advertisement a/c debit and purchase a/c credit)
○ Manager’s Commission( he is entitled to receive commission.
Therefore: Manager’s commission a/c debit and Outstanding
commission a/c credit.
28.Bad debts written off recovered
○ Once bad debts written off means that it is completely removed from
debtors and transferred to profit and loss account as a loss.There is no
such account is seen any where in the books.
○ If recovered such recovery does not affect debtors but affects profit
and loss account
○ JE: Cash a/c debit
○ Bad debts recovery or profit and loss a/c credit
29.Goods destroyed due to fire and insurance company partly accepted
○ Goods which are meant for trading destroyed. Operating activity
becomes non operating activity or extraordinary activity.
○ JE: Insurance company a/c debit(like a debtor or asset)
○ loss of stock a/c debit
○ Trading a/c or purchase account
30.What do you mean by adjustment accounting point of view?
○ It means pass a fresh journal entry.
○ It means any item appears in the trial balance means that we had
already passed journal entry. That is why such items appear only once
in the final account.
○ Since we pass journal entry for adjustments they appear twice in the
final accounts.
○ The head of the account is important when you pass a fresh journal
entry for adjustments.Example:rent outstanding means rent account.
Insurance prepaid means insurance account, interest due means
interest account,
31.If closing stock appears in trial balance where should appear in the final
accounts?
○ If it appears in the trial balance means we had passed journal entry for
such stock and adjusted with purchases to calculate cost of goods sold.
Therefore it should not appear in the trading account. Being an asset it
should appear in the Balance sheet.
32.Out standing expenses(rent) given in the trial balance?
○ It means it is already journal entry passed and adjusted with rent
account(added to rent)
○ Do not adjust with rent in profit and loss account.
○ Take such item to balance sheet as a liability.
33.How do you deal advanced income tax paid by proprietor?
○ Income tax paid itself is considered as drawings, therefore advanced
income tax also to be considered as drawings onle
○ JE: Drawings a/c debit and cash a/c to be credited.
34.Bad debts given in the trial balance?
○ It means journal entry was passed and adjusted against debtors(head).
Do not adjust such bad debts against debtors in the balance sheet.
○ As a loss it should appear in the profit and loss account.
○ If such bad debt is given in the adjustments?
35.
○ It means pass a fresh journal entry for the new bad debt and to be
adjusted with the head of such account(Debtors).
○ Reduce such bad debt from debtors in the balance sheet before
calculating provision for bad and doubtful debts.
○ As a new bad debt add to the existing bad debts which is given in the
trial balance which will appear in the profit and loss account.
36.Do we deduct discount allowed given in the adjustment from debtors before
calculating provision for bad and doubtful debts?
○ Yes. It is because it is given in the adjustment and also it is certain that
such debtors already gone out of books of debtors. There is no doubts
about it. The provision is always calculated only on debtors who are
shaky.
37.If goods sent out on Higher purchase how do you deal?
○ If on the balance sheet date if such goods are with the customer divide
the goods into two
Cost Profit Add to Closing stock in trading a/c and Balance sheet + = Debtors
Reduce from debtors
38.What is the JE when goods are received by consignee from consignor?
○ No journal entry. Why?
○ Owner ship is not transferred from consignor to consignee. Even
though the goods are physically in the hands of consignee but there is
no transfer of goods taken place from consignor to consignee.Owner
ship should be transferred to pass journal entry.
○ The concept is that one person can not transfer to oneself .
39.When branch sends goods to head office or vice versa, what is the journal
entry?
○ No journal entry as ownership is not transferred.In fact there can not
be any sales tax, income tax.
○ One person can not earn profit by transferring to one self.Unless goods
are transferred to third party no profits can be realised.
40.If sales return given in the adjustment?
○ It means we have to pass a fresh journal entry.
○ JE: Sales a/c Debit
○ Debtors account credit
○ We have to reduce sales and debtors once goods are returned.
41.What is the JE when normal loss occur?
○ No Journal entry. Why.
○ Cost per unit will be inflated.You make customer to bear the total cost.
○ If abnormal loss occurs why do we pass journal entry?
○ It is because some portion will be recovered from insurance and some
portion will be the loss to be written of against profit.
42.
○ If you are satisfied please send SMS to others to share your joy.
○ Send your comments to the following address. Periodically I come out
with other topics.See my web periodically.
○ [email_address]

Accounting For Non Commerce Students Introduction To

Accounting New1 accountancy notes www.webaccountsguru.com

accounting for management


How To Rectify Errors In Financial Accounts - Presentation
Transcript
1. ST. Joseph’s College of Commerce, Bangalore presents to global students
community RECTIFICATION OF ERRORS IN FINANCIAL ACCOUNTS Alternative
work is rest All teachers Who teach Accounts At all levels CA-CPT ICWA
Company secretary Sit, relax and enjoy Learn, unlearn and re-learn
2. How to Rectify Errors in Financial Accounts By Prof. Augustin Amaladas
M.Com(Loyola college, Chennai),AICWA., PGDFM.,B.Ed. Simple to Tough
errors and their rectifications Useful to CPT, ICWA,CS Students Useful To
lecturers Who enter Into Teaching profession Alternative work is rest by
S.L.Swamy
3. Dedicated to Prof.Dr. Victor Louis Anthuvan (St. Joseph’s College, Trichy) Sir
made us to learn in a simple way My guru-Thank you sir. Dr. Abdul Kalam ex
president Studied in St. Joseph’s College- Trichy Made the nation proud of.
Dedicated to Rahul Dravid SJCC, Bangalore (Indian cricket captain)our
student and my student.
4. Let us under stand the basic rules, concepts and conventions
○ Understanding basic rules of accounting, concepts and conventions
help you to under stand the rectification of errors better.
5. 1.concepts& conventions
○ Meaning: Basic assumptions upon which the basic process of
accounting based.
○ a] Business entity concept-
○ b] Dual aspect concept
○ c] Going concern concept
○ d] Accounting period concept
○ e] Cost concept
○ f] Money measurement concept
○ g] Matching Concept
 Conventions
 Coservativism
 Materiality
 Consistency
6. a] Business entity concept-
○ Business is different from the owner
○ We pass Journal entry when owner contributes towards capital.
○ When amount / goods withdrawn for personal use we make an entry in
the business
○ When Income tax paid by the owner out of business money we make
an entry In the books of accounts.
7. b] Dual aspect concept
○ Every debit has equal amount of credit
○ Asset =Liability
○ Liability creates asset
○ If asset>Liability= profit
○ If Liability> Assets= loss
8. c] Going concern concept
○ Business will go for at least for a reasonable period.
○ Depreciation is provided based on this assumption.
○ If this assumption is not made all Fixed assets will be valued at realised
value like current assets.
9. d] Accounting period concept
○ Fixing time limit for accounts
○ Profit for the period
○ It can be one week or two week or 6 months/one year or 5 years
○ But to find profit we normally consider 12 months period
○ Financial year for income tax point of view 1 st April-31 st March of the
following year
○ Calendar year –January to December
○ Dipavali to Dipavali
10.e] Cost concept
○ The cost to the organisation (Actual) is recorded in the books
○ Assets are not recorded according to the market price every year.
○ Depreciation is calculated on cost not based on market price
○ Accounting records may not show the real worth of the business
○ Market price may be disclosed with in bracket in the balance sheet
11.f] Money measurement concept
○ Every thing which can be expressed in terms of Money is recorded in
the books
○ Beautiful women are working /Handsome boys working in TEC /Efficient
engineers worth Rs.5000 crores –How do you record?.
○ Good working environment?
○ Highly motivated employees?
○ Qualitative information are not accounted.
12.Answer
○ We do not have record for qualitative aspects. They can enter this
transaction under Human resource accounting rather than financial
accounting.
13.g] Matching Concept
○ Matching Cost with revenue
○ It is used to estimate correct profits
○ Accrual/ cash basis of accounting
 Even cash paid /received if it belongs to accounting period we
consider them as expenditure /income
 Salary outstanding for the last month?
 Income from Investments yet to be received?
 Rent received in advance for next year?
 Salary outstanding for the last month to be considered as
expense of the current year under accrual basis of accounting.
14.Matching concept- continues
○ Income from investment yet to be received to be considered for the
current year as it belongs to current year.The year of receipt is not
important.
○ Rent received in advance does not belong to current year under
accrual method of accounting as it belongs to next year even though it
is received during the current accounting year.
15.Conventions
○ Customs and traditions that are followed by the accountants while
preparing the financial statements.
○ Why do we respect elders?
○ Why do we shake hands?
○ Why do Young Indians hate receiving dowry?
○ Why do students come late to class?
○ Why do Indians work hard?
16.Coservativism
○ To be on the safer side
○ Expect future losses as current year loss
○ But future income is not treated as current year income.
○ Stock is valued cost price / market price which ever is lower
○ Making provision for bad debts is based on this assumptions.
17.Materiality
○ Material impact on profitability are considered
○ Insignificant transactions ignored from recording
○ Pen purchased, pencil purchased?
○ It comes under stationary. It can not be disclosed(Shown) separately
like pen account or pencil account.
18.Consistency
○ Accounting policies and procedures should be followed consistently
○ Method of depreciation should be followed consistently.
○ Stock valuation- cost/market price whichever is lower is consistently
followed
○ If not followed it amounts to change in the policy of the company
19.2.system of accounting (26)
○ 1.Cash system:
○ unless cash received /paid in the accounting year can not be
considered as income/expenses respectively
20.2.Mercantile
○ Mercantile/Accrual/due concept:
○ Even cash received/paid but due for payment/due for receipt (yet to be
received/payable) if they belong to current accounting year are
considered.
○ If last year expenditure paid this year?
○ If you receive/paid in advance ?
○ If last year expense paid during the current year can not be considered
as current year expenditure.In the same way any income received in
advance at the end of current year should not be entered as current
year income or expenditure.
21.3.Types of Expenditure
○ A) Capital expenditure
○ B) Revenue expenditure
○ C) Deferred Revenue expenditure
22.A) Capital expenditure(30)
○ Expenditure incurred which will :
○ Increase Production capacity
○ Increase earning capacity
○ Reduction in the cost of operation.
○ Example: purchase of fixed assets
○ Purchase of Machinery
○ purchase of investment
○ If such expenditure is not to do with the basic functions of the business
such expenditure is capital expenditure.
○ How do you consider if you buy goodwill, copy right or patent right?
23.Capital expenditure-continue(page-30)
○ Both tangible and intangible assets included
○ Intangible assets such as patent right, copy right, technical know-how,
franchises, goodwill etc.,
○ Depreciation is provided on fixed assets. Depreciation appears in the
profit and loss account
○ The asset appears in the Balance sheet (after deducting depreciation)
○ The life is more than one year
○ They should not appear in the profit and loss account
24.Revenue Expenditure
○ Expenditure incurred which will :
○ Not Increase Production capacity
○ Not Increase earning capacity
○ maintain the capacity
○ No Depreciation is provided on current assets which will appear in the
profit and loss account
○ They appear in the profit and loss account
○ The life is not more than one year
○ They should not appear in the balance sheet
25.Wrong treatment?
○ When goods purchased(dealer in such goods) it is a revenue
expenditure. It should appear either in the trading account or profit
and loss account.
○ If it appears as an asset , then you inflate the profits which gives a
wrong profit to the firm.It also affects the assets(over stated) which
gives over stated financial position.
26.
○ Example:
○ Your father purchased 20 kg rice bag costing Rs.600 and your mother
purchased a fridge for Rs. 15000 on the same day.Rise is to be treated
as monthly expenditure where as fridge to be treated as long term
expenditure(Capital expenditure).
○ Instead, if such purchase of rice accounted with fridge it means
monthly expenditure decreased and long term expenditure is
increased.
○ Accounting point of view rice goes to trading account to find out cost of
the month and fridge goes to Balance Sheet on the asset side as a part
of asset.
27.
○ Suppose fridge cost is added with rice, then your monthly expenditure
will be high and asset account is reduced.
○ The indirect impact is that depreciation would not have been provided
on such asset as it is included with revenue(Rise)account which affects
profits.
○ Example-2:
○ Building purchased for Rs.20,00,000 entered into purchase
account.Building depreciates by 10% under straight line method.
28.
○ Here it is entered into purchase account. It means you are treating it
as goods(dealer in real estate) which is a revenue expenditure instead
of capital expenditure.Your profit is less by Rs. 20,00,000. But had
been entered into building account the profit would have been more by
Rs.20,00,000.
○ Because it is entered in the purchase account we had forgotten to
provide depreciation of Rs.2,00,000 which should had been done.
○ Net effect to rectify the error is:- Increase the profits by Rs.18,00,000.
And increase the asset should be increased by 18,00,000.
29.Suppose you are a dealer in building(Real estate)
○ Purchase of building is considered as goods(dealer in building).The
entry made in purchase account is correct. No need to rectify such
transaction.
○ Suppose you buy furniture(dealer) for Rs.20000 entered into furniture
account.What is the effect? How do you rectify?
30.
○ Here the mistake is that revenue expenditure is treated as capital
expenditure.The correct journal entry is Purchase a/c debit and cash
a/c credit.
○ Wrong entry is: Furniture a/c debit and cash is credited.
○ In the absence of information we assume the mistake with respect to
furniture and purchase but there is no mistake with respect to cash
account because cash payment is correct.
31.Deferred revenue expenditure(page-30)
○ Deferred means- postponed
○ Heavy revenue expenditure
○ Vodafone incurred 200 crores for advertisement after merger with
Hutch
○ It can not be written off within a year
○ It appears in the balance sheet as last item
○ Every year some amount is written off in the profit and loss account.
○ Research and development expenditure, initial advertisement
expenditure, preliminary expenditure are example
32.5.Double entry / Single entry
○ Is Accounting based on business concept or religious concept?
○ Giving first and receiving later.
○ Giving cash receiving machinery
○ We consider both aspects such as debit and credit
33.Rules of accounting
○ Personal rule/Account-supplier debtors, owner, banker, outstanding
wages
○ Real rule/Account- cash, bank, building, furniture, goodwill, patent
rights
○ Nominal rule/account: income and expenditure: salary, rent ,
insurance, commission, internet expenses, cell phone expenses.
34.Personal rule
○ Debit the receiver
○ credit the giver
○ Example: Computer chips purchased on credit from wipro
○ Here credit Wipro as Wipro is the giver of computer.
○ Sold goods to Meena
○ Meena is the receiver-debit
35.Exercise
○ Amount collected from debtors?
○ Amount deposited to bank?
○ Amount collected from debtor: Cash and debtor are important.Cash is
related to real rule
○ Debit what comes in and credit what goes out
○ Therefore cash to be debited and debtors belong to personal
rule.Credit the giver. Therefore credit debtor account.
○ Cash deposited to bank : JE: Bank a/c debit and cash to be credited.
36.Real rule
○ These are the accounts of assets and liabilities
○ Rule: debit what comes in
 Credit what goes out
37.Nominal rule
○ Related to Expenses and income
○ Rule: Debit all expenses and losses
○ Credit all incomes and gains
38.Suitable questions to pass journal entry
○ If cash transaction, person is not important
○ Every birth of an account there is a death of the account
○ Ask what comes in?
○ Or what goes out?
39.Let us pass Correct Journal entries for a few transactions
○ General rules:- All assets are debited if it comes to business(when you
buy for business)
○ All liabilities are credited when borrowed.
○ All expenses are debited and All income and gains are credited.
○ If it is a credit transaction person is important. If it is a cash transaction
person is not important.(like cash purchase or cash sales)
40.Pass Journal entries
○ 1. Capital introduced by owner Rs. 20 lakhs.
○ Answer :
○ Business point of view owner is different from business. Business
receives cash and the giver is owner.
○ JE : Cash a/c debit(Real rule)
○ Capital a/c credit(Personal rule)
41.2.
○ Borrowed loan Rs. 10,00,000
○ Answer :
○ Cash comes to business and loan vendor account is important.
○ JE : Cash a/c debit(Real rule)
○ Loan a/c credit(Personal rule)
42.3.
○ Company issues Shares to public Rs.50,00,000.
○ Answer:
○ Cash comes to business. Many owners given this money.
○ JE : Cash a/c debit (Real rule)
○ Share capital a/c credit(Personal rule)
43.4.
○ Partners contributed capital to business: A Rs.55,00,000 cash and B
Rs.19,00,000 in cash, building worth Rs.50,00,000, furniture worth
Rs.25,00,000 and his good will Rs.10,00,000 .
○ Answer:
○ JE : 1.Cash a/c debit Rs.55,00,000(Real rule)
○ A’s Capital a/c credit Rs. 55,00,000
○ (personal rule)
○ 2. Cash a/c debit Rs.19,00,000(Real rule)
○ Building a/c debit Rs. 50,00,000(Real rule)
○ Furniture a/c debit Rs. 25,00,000(Real rule)
○ Good will a/c debit Rs. 10,00,000(Real rule) B’s Capital credit
Rs.104,00,000
○ (Personal Rule)
○ Here cash, building, furniture and good will are assets coming to
business therefore debited.The giver is B therefore credited.
44.
○ Share broker purchased shares Rs. 25,00,000. Answer:
○ Shares are coming to business. First understand the nature of
business. Being a share broker shares are considered as goods(a
revenue expenditure). Goods are purchased for cash.
○ JE : Purchase of goods a/c debit Rs.25,00,000
○ (Real rule)
○ Cash a/c credit Rs.25,00,000
○ (Real rule)
5
45.
○ Infosys buy shares of Wipro Rs.20,00,000 for cash .
○ Answer:
○ Here Infosys is not a dealer in shares. It is a capital expenditure. It is
not goods. It is a cash transaction.
○ JE : Investments a/c debit Rs.20,00,000(Real rule)
○ Cash(Bank) a/c credit Rs.20,00,000
○ (Real rule)
6.
46.
○ Debentures issued by ICICI Bank for Rs.1 crore.
○ Answer:
○ ICICI point of view, it is a loan.Cash collected.
○ JE : Cash a/c debit Rs.1 crore(Real rule)
○ Debenture a/c credit rs. 1 crore
○ (personal rule)
7.
47.
○ Building acquired by Wipro by issue of shares Rs.20,00,00,000.
○ Answer:
○ It is a capital expenditure.Here no cash paid but given shares.The
person who supplied shares are share holders(owners)
○ JE : Building a/c debit Rs. 20 crores(Real rule)
○ Share capital a/c Rs.20 crores(personal rule)
○ Note: share capital does not come under real rule but share capital
belongs to person who owns them.
8
48.
○ Shares of Wipro limited held by Infosys sold for Rs.25,00,000.
○ Answer:
○ The investments sold; the capital receipt. When ever we use the term
‘sales account’ it indicates the goods that the company deal.
○ JE: Cash a/c debit Rs.25,00,000(real rule ) Investments a/c credit Rs.
20,00,000
○ (Real rule)
○ Profit on sale of investment a/c credit Rs.5,00,000
○ (Nominal rule)
9
49.
○ Salary paid to Kumaran Rs.50,000
○ Answer:
○ Salary paid for services rendered by Kumaran.Kumaran is not a
creditor. Salary is an expenditure.
○ JE : Salary a/c debit 50,000
○ Cash a/c credit Rs.50,000
○ If we enter into Kumeran account by using personal rule, kumeran
account were to be opened.How do you close his account? Salary is
important rater than Kumeran.If you cannot close any time during the
life of the company do not open such account. In the same way rent
paid to land lord can not be entered into land lord account.Instead it
should be entered in the rent account.
10
50.
○ Depreciation provided on Plant and Machinery Rs.2,00,000.
○ Answer:
○ Depreciation is a non cash account. There are many transactions are
non cash items. It is an expenditure as there is a reduction in the value
of asset.
○ JE: Depreciation a/c Debit Rs.2,00,000(Nominal)
○ Plant and Machinery a/c Rs.2,00,000
○ (Real rule)-goes out
○ Note: Plant and Machinery account goes out year after year when we
provide depreciation. The capital expenditure slowly becomes a
revenue expenditure when we provide depreciation.
11
51.
○ Company declared dividend Rs. 20,00,000
○ Answer:
○ Dividend is an appropriation of profit.It is not an expenditure because it
is a share of profits.In order to compute profit we do not reduce
dividend.
○ JE: Dividend a/c debit Rs. 20,00,000(Nominal rule)
○ Cash a/c credit Rs.20,00,000(Real rule)
12
52.
○ Interest paid on debentures/loan Rs. 1,00,000
○ Answer:
○ Interest is a business expenditure as it is paid to third party. If paid to
owner is not considered as expenditure.
○ JE: Interest a/c debit Rs.1,00,000(Nominal rule)
○ Cash a/c credit Rs. 1,00,000(Real)
13
53.Rectification of Errors Before preparing Trial Balance After trial balance But
before Trading, P/L and Balance sheet After preparing Trading and P/L and
Balance sheet Hit the individual account Hit profit or reserve or Capital {do
not bother about individual/nature Of expenditure} And hit the Balance sheet
Only net balance if it affects Balance sheet www.augustin.co.nr
54.Basic rules for rectification-1
○ If words used ‘ account’-means error only with respect to that
individual account.
○ Example: wages paid Rs 50,000 not entered into wages account.
○ Here wages paid might have affected cash also, but the statement
says that it is not entered into wages account only. It does not mention
about cash account. Therefore we assume that cash account had been
entered correctly. Therefore rectify wages account only. It is one side
error or one account error.
55.Basic rules for rectification-2
○ Do not make too many assumptions.
○ Example: wages paid to install a machinery is entered into wages
account.
○ Here you find wages account is treated as a revenue expenditure(Refer
to the notes earlier) but it is a capital expenditure. “ Any expenditure
incurred before the asset is put into use to be capitalised”. What about
cash account?
○ We assume that cash account would have been correctly entered.
(Continue in the next slide)
56.
○ You might ask which side of wage account had been entered, whether
debit or credit?
○ Normal assumption is that wages always entered in the debit
side(nominal rule).
○ Do not assume, had been entered into credit side of wages account
what would have happened- It is unnecessary assumption ( too much
in your assumption )
○ Ask question:whether one/ two accounts is/are affected? Here wages
(wrongly entered) but you should enter in the Building account now.
○ This is a normal assumption.
57.How do you rectify wages?
○ Building account to be debited Rs.50,000
○ Wages account to be credited Rs.50000
○ To remove wages from the account put it in the opposite side of that
account.
○ Every account is born in one side ie debit or credit.All assets and
expenditure accounts are born in the debit side. If you want to kill it
put it on the credit side.
○ In the same way liabilities and income accounts are born in the credit
side. If you want to kill it put it on the debit side.
58.Rectification rule-3
○ Error to be rectified before the preparation of trial balance or after trial
balance or after the preparation of Balance sheet.
○ Before preparation of Balance sheet-Hit the individual account
○ After preparation on trading, profit and loss account and Balance
sheet- reduce/increase profit if it is an expense and if it affects
asset/liability increase/decrease the net amount only.
59.Rectification of errors-Rule-4
○ If one side error(one account) to fulfill the double entry book keeping
we open suspense account provided, trial balance is already prepared.
○ Example :- Salary paid to Ranganath not entered into salary account
by Rs. 40,000
○ The mistake is only in salary debit side because salary appears on the
debit side. Cash account is correct(do not assume too much as I have
stated earlier).
○ Rectification entry :
○ Salary a/c debit Rs.40,000
○ Suspense a/c credit Rs. 40,000.
60.Rectification of error-Rule 5
○ Suspense account: Meaning
○ When trial balance does not tally(debit is not equal to credit) in order
to close the trial balance we open entirely a new account on the side of
deficit.Such account is known as suspense account.
○ Example:-next page
61.Example for suspense account
○ Trial balance: Debit credit
○ Purchases 5000 -
○ Wages 3000 -
○ Sales - 10,000
○ Building 4000
○ Suspense account ??? 2000(CR)
Note: here suspense account is a credit balance as trial is not an account
Since debit side of trial balance is more than credit side, suspense account is
not a credit balance
62.
○ Omitted from book(s )means both debit and credit of such transactions
are omitted.
○ Account means –omitted to enter into that specific account
only( normally one side error)
○ Example: purchases from Mr.Amal not entered in the purchase books
Rs. 50,000
○ Here this transaction is completely omitted as it is given the word
books.
○ To rectify pass a fresh journal entry:
○ JE: debit purchase a/c Rs.50,000
○ Credit Mr.Amal a/c Rs.50,000
○ Suppose it is stated that not entered into the purchase account how do
you rectify?
Rectification of error-Rule-6
63.
○ Here, the mistake is only in the purchase account. There is no mistake
in Mr. Amal’s account
○ Rectified entry is:
○ Purchase a/c debit Rs.50,000(real rule)
○ Suspense a/c credit Rs.50,000
○ (fulfill double entry)
○ Note: normal assumption is that purchase is always debit.
○ If it is sales it is always credit.
64.
○ Rupees 1000 spent for repairs of building has been posted to building
account.
○ Identify the mistake:
○ Repairs 2. Building.
○ Repairs do not increase the capacity of building but to maintain the
building. Therefore it is a revenue expenditure but treated as capital
expenditure.
○ Rectification : add to repairs and remove from building
○ Rectification entry : repairs a/c debit Rs.1000(real rule)
○ Building a/c credit Rs.1000
○ (to remove from building a/c)
Exercise-1
65.
○ Sale of furniture Rs.20,000 entered in the Sales account.
○ Here he is not a furniture dealer. There fore sale of capital asset brings
capital receipts. It is treated as revenue receipts( like dealing in goods
of furniture).
○ Rectification entry:
○ Sales a/c debit Rs.20,000
○ (to remove from sale)
○ Furniture a/c Rs.20,000
○ (to reduce furniture)
○ Note: sales normally credit and furniture is normally debit as asset.In
order to kill put it in the opposite side .
Exercise-2
66.
○ A sale of Rs.2000 to Min Min was credited to Min Min account .
○ Here the error with respect to Min Min account only.we assume that
sales a/c is correct(normal assumption as I have explained earlier) The
normal Journal entry is :
○ MinMin a/c debit and Sales a/c credit.
○ But we have credited Min Min a/c instead of debit.To rectify such error
double the amount and put on the opposite side
○ Rectification entry : Min Min a/c debit Rs.4000
○ (one 2000 for rectification and another to make actual entry
○ To suspense a/c credit Rs.4000
Exercise-3
67.
○ A purchase of Rs.6700 had been posted on the debit side of the
creditor’s account as Rs.7600
○ Here mistake with respect to creditor only on the wrong side as
creditors normally appear on credit side(all liabilities appear on the
credit side).
○ The second mistake is amount.
○ Method of rectification : Remove the wrong amount and post the
correct amount on the correct side.
○ Rectification entry : Suspense a/c debit Rs.14,300
○ creditors a/c credit Rs.14,300
○ (Rs. 7,600 is to remove wrong and Rs.6,700 to post correctly and
suspense account is opened to fulfill double entry as it is a one side
error)
Exercise-4
68.
○ A sale of Rs.10,000 to Mr.Tim had been passed through the purchase
day book.
○ Here the mistake is misunderstanding of transaction.Instead on sale
treated as purchase.The book means complete omission.
○ Rectification method : reverse sales and Tim to remove the mistake
and post the correct once again.
○ Rectification entry : 1. Tim A/c debit Rs.10,000
○ Purchase a/c credit Rs.10,000
○ (to remove the mistake put in the opposite side)
Exercise-5
69.
○ 2. To post the correct entry:
○ Tim a/c debit Rs. 10000
○ credit sales a/c Rs.10,000
○ Instead of passing two entries we can combine both the entries like
this:
○ Debit Tim a/c Rs.20,000
○ Credit purchases a/c Rs.10,000
○ credit Sales a/c Rs.10,000
Exercise-5 continues
70.
○ Goods sold on Higher Purchase Rs.50,000 entered in the sales account
after the payment of first installment .
○ Here there is a technical error . The ownership is transferred only after
the last installment. In order to rectify remove from sale to the extent
of sale price and add to stock to the extent of cost. Assume cost is Rs.
40,000.remove from debtors Rs.50,000
○ Rectification entry : Sales a/c debit Rs. 50,000
○ Stock a/c debit Rs.40,000 To Debtors a/c Credit Rs.50,000
○ (To remove sales, debtors and added to stock)
Exercise-6
71.
○ Rectification after the preparation oft Trading and Profit and loss
account and Balance Sheet(after preparation of final books or financial
statements)
○ Major repairs to renew the building Rs. 3,00,000 entered in the repairs
account.
○ Rectification: repairs appear in the Profit and Loss account and building
appears in the Balance sheet
○ To Rectify : Increase profit by Rs. 3,00,000 and add to building by
Rs.3,00,000 in the balance sheet
○ JE : Building a/c debit Rs. 3,00,000
○ Profit and Loss a/c credit Rs. 3,00,000
○ Assumtion : renewal done at the end of the year.Nature of expenditure
is not important to rectify after the preparation of final account.
Exercise-7
72.
○ Building purchase Rs. 40,00,000 entered in the Furniture a/c as Rs.
20,00,000. Depreciation on building is 10%.Depreciation on Furniture is
30%.(Rectify after final accounts prepared)
○ Both building and furniture fall in the balance sheet. But depreciation
rates differ. It affects profit too.Depreciation on building is Rs.4,00,000
and depreciation on furniture is Rs.6,00,000.we had provided excess
depreciation during the year, therefore profit should be increased.
○ Furniture in the balance sheet to be reduced by Rs.14,00,000 and
building to be increased by 36,00,000. ??? What is the rectification
entry.
Exercise-8
73.Thank you very much Help your father in cooking Help your mother If you
want to take rest Sweep your room Alternative Work is rest
74.Rectification entry?
○ Building a/c Debit Rs.36,00,000
○ Furniture a/c credit Rs.14,00,000
○ Profit and loss a/c Rs.2,00,000
○ Suspense account credit Rs.20,00,000
○ Note: Show net amount only.
Flag

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Chart of Accounts
The chart of accounts is a listing of all the accounts in the general ledger, each account
accompanied by a reference number. To set up a chart of accounts, one first needs to define the
various accounts to be used by the business. Each account should have a number to identify it.
For very small businesses, three digits may suffice for the account number, though more digits
are highly desirable in order to allow for new accounts to be added as the business grows. With
more digits, new accounts can be added while maintaining the logical order. Complex businesses
may have thousands of accounts and require longer account reference numbers. It is worthwhile
to put thought into assigning the account numbers in a logical way, and to follow any specific
industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering
1000 - 1999: asset accounts
2000 - 2999: liability accounts
3000 - 3999: equity accounts
4000 - 4999: revenue accounts
5000 - 5999: cost of goods sold
6000 - 6999: expense accounts
7000 - 7999: other revenue (for example, interest income)
8000 - 8999: other expense (for example, income taxes)
By separating each account by several numbers, many new accounts can be added between any
two while maintaining the logical order.
Defining Accounts
Different types of businesses will have different accounts. For example, to report the cost of
goods sold a manufacturing business will have accounts for its various manufacturing costs
whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry
associations publish recommended charts of accounts for their respective industries in order to
establish a consistent standard of comparison among firms in their industry. Accounting software
packages often come with a selection of predefined account charts for various types of
businesses.
There is a trade-off between simplicity and the ability to make historical comparisons. Initially
keeping the number of accounts to a minimum has the advantage of making the accounting
system simple. Starting with a small number of accounts, as certain accounts acquired significant
balances they would be split into smaller, more specific accounts. However, following this
strategy makes it more difficult to generate consistent historical comparisons. For example, if the
accounting system is set up with a miscellaneous expense account that later is broken into more
detailed accounts, it then would be difficult to compare those detailed expenses with past
expenses of the same type. In this respect, there is an advantage in organizing the chart of
accounts with a higher initial level of detail.
Some accounts must be included due to tax reporting requirements. For example, in the U.S. the
IRS requires that travel, entertainment, advertising, and several other expenses be tracked in
individual accounts. One should check the appropriate tax regulations and generate a complete
list of such required accounts.
Other accounts should be set up according to vendor. If the business has more than one checking
account, for example, the chart of accounts might include an account for each of them.
Account Order
Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue
and expense accounts tend to follow the standard of first listing the items most closely related to
the operations of the business. For example, sales would be listed before non-operating income.
In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts
The following is an example of some of the accounts that might be included in a chart of
accounts.
Sample Chart of Accounts
Asset Accounts
Current Assets

1000 Petty Cash


1010 Cash on Hand (e.g. in cash registers)
1020 Regular Checking Account
1030 Payroll Checking Account
1040 Savings Account
1050 Special Account
1060 Investments - Money Market
1070 Investments - Certificates of Deposit
1100 Accounts Receivable
1140 Other Receivables
1150 Allowance for Doubtful Accounts
1200 Raw Materials Inventory
1205 Supplies Inventory
1210 Work in Progress Inventory
1215 Finished Goods Inventory - Product #1
1220 Finished Goods Inventory - Product #2
1230 Finished Goods Inventory - Product #3
1400 Prepaid Expenses
1410 Employee Advances
1420 Notes Receivable - Current
1430 Prepaid Interest
1470 Other Current Assets
Fixed Assets

1500 Furniture and Fixtures


1510 Equipment
1520 Vehicles
1530 Other Depreciable Property
1540 Leasehold Improvements
1550 Buildings
1560 Building Improvements
1690 Land
1700 Accumulated Depreciation, Furniture and Fixtures
1710 Accumulated Depreciation, Equipment
1720 Accumulated Depreciation, Vehicles
1730 Accumulated Depreciation, Other
1740 Accumulated Depreciation, Leasehold
1750 Accumulated Depreciation, Buildings
1760 Accumulated Depreciation, Building Improvements
Other Assets

1900 Deposits
1910 Organization Costs
1915 Accumulated Amortization, Organization Costs
1920 Notes Receivable, Non-current
1990 Other Non-current Assets
Liability Accounts
Current Liabilities

2000 Accounts Payable


2300 Accrued Expenses
2310 Sales Tax Payable
2320 Wages Payable
2330 401-K Deductions Payable
2335 Health Insurance Payable
2340 Federal Payroll Taxes Payable
2350 FUTA Tax Payable
2360 State Payroll Taxes Payable
2370 SUTA Payable
2380 Local Payroll Taxes Payable
2390 Income Taxes Payable
2400 Other Taxes Payable
2410 Employee Benefits Payable
2420 Current Portion of Long-term Debt
2440 Deposits from Customers
2480 Other Current Liabilities
Long-term Liabilities

2700 Notes Payable


2702 Land Payable
2704 Equipment Payable
2706 Vehicles Payable
2708 Bank Loans Payable
2710 Deferred Revenue
2740 Other Long-term Liabilities
Equity Accounts

3010 Stated Capital


3020 Capital Surplus
3030 Retained Earnings
Revenue Accounts

4000 Product #1 Sales


4020 Product #2 Sales
4040 Product #3 Sales
4060 Interest Income
4080 Other Income
4540 Finance Charge Income
4550 Shipping Charges Reimbursed
4800 Sales Returns and Allowances
4900 Sales Discounts
Cost of Goods Sold

5000 Product #1 Cost


5010 Product #2 Cost
5020 Product #3 Cost
5050 Raw Material Purchases
5100 Direct Labor Costs
5150 Indirect Labor Costs
5200 Heat and Power
5250 Commissions
5300 Miscellaneous Factory Costs
5700 Cost of Goods Sold, Salaries and Wages
5730 Cost of Goods Sold, Contract Labor
5750 Cost of Goods Sold, Freight
5800 Cost of Goods Sold, Other
5850 Inventory Adjustments
5900 Purchase Returns and Allowances
5950 Purchase Discounts
Expenses

6000 Default Purchase Expense


6010 Advertising Expense
6050 Amortization Expense
6100 Auto Expenses
6150 Bad Debt Expense
6200 Bank Fees
6250 Cash Over and Short
6300 Charitable Contributions Expense
6350 Commissions and Fees Expense
6400 Depreciation Expense
6450 Dues and Subscriptions Expense
6500 Employee Benefit Expense, Health Insurance
6510 Employee Benefit Expense, Pension Plans
6520 Employee Benefit Expense, Profit Sharing Plan
6530 Employee Benefit Expense, Other
6550 Freight Expense
6600 Gifts Expense
6650 Income Tax Expense, Federal
6660 Income Tax Expense, State
6670 Income Tax Expense, Local
6700 Insurance Expense, Product Liability
6710 Insurance Expense, Vehicle
6750 Interest Expense
6800 Laundry and Dry Cleaning Expense
6850 Legal and Professional Expense
6900 Licenses Expense
6950 Loss on NSF Checks
7000 Maintenance Expense
7050 Meals and Entertainment Expense
7100 Office Expense
7200 Payroll Tax Expense
7250 Penalties and Fines Expense
7300 Other Taxes
7350 Postage Expense
7400 Rent or Lease Expense
7450 Repair and Maintenance Expense, Office
7460 Repair and Maintenance Expense, Vehicle
7550 Supplies Expense, Office
7600 Telephone Expense
7620 Training Expense
7650 Travel Expense
7700 Salaries Expense, Officers
7750 Wages Expense
7800 Utilities Expense
8900 Other Expense
9000 Gain/Loss on Sale of Assets