Basic Accounting Course

PREFACE Accountants always play an important role in the progress of an economy of any country, as they are responsible for proper book keeping and implementation of effective financial controls. As a result of revolutionary changes due to development of Accounting Standards and techniques of Strategic Management, the accountant of today is also required to develop his role as a manager so as to play an effective role in the process of decision making for the achievement of organizational goals. In view of the changes in International Scenario and the development work started in Afghanistan after the fall of Taliban regime, millions of dollars have been donated by the International Aid Agencies involved in the rehabilitation and reconstruction work. Therefore, it has become an essential need to manage these funds effectively and utilize them efficiently, so that ultimate goal of making the country prosperous could be achieved in a successful manner. To achieve this objective, need is felt to make an effort to enhance the professional skills and capabilities of all those, who are related to the field of finance and accounts and those who are willing to become finance professionals. This study course is designed after considering the needs for both the on job account officers as well accountancy students and for others who want to choose accountancy as their career. Practical and theoretical aspects have been discussed simultaneously. We have made every possible effort to cover most of the topics and the practical problems that may arise during course of their work. However, there is always room of improvement and the suggestions and recommendations to improve this manual and effective training shall be highly appreciated.

AIBM Team

This material has been developed for the beginners of CAT qualification by Arif Aziz (Director-AIBM).

Basic Accounting Course Chapter 01 INTRODUCTION The origin of accounting as a social study can be traced back to very ancient days. Indeed it is as old as the beginning of the use of money itself. Indians and Romans were the ones who are reported to have the oldest accounting systems. The modern accountancy and book keeping evolved in twentieth century with the industrial revolution which made it necessary for the world to have uniform accountancy practices. FIELDS OF ACCOUNTING ACTIVITIES: Accountants are engaged in various types of employment at different levels. Few of the major sectors are discussed below: PRIVATE/COMMERCIAL: Accountants are employed in a number of organizations involving manufacturers, wholesalers, retailers, services firms, Non Government Organizations and Civil Society Organizations etc. Depending on the size of such organization, duties of the accountants vary from recording, reporting and analyzing to decision-making. Accountants can perform duties of internal auditor to examine the records and procedures with a view to safeguard assets, improve operational efficiency and effective implementation of internal controls and report to the management. PRACTICING FIRMS: Qualified accountants can also practice independently and render services to provide independent opinion on the financial statements of the entitys business. The practicing accountants also work as consultants advising their clients on accounting system, Taxation and managerial services. GOVERNMENT: The accounting records maintained and the financial statements prepared by the Government departments differ to a large extent as compared to the book keeping and accounting practices of other organizations. Accountants are working at different positions in Government sector from operational level to high-level financial decision and policy makers. DEFINITIONS: ACCOUNTING: Accounting is a broader term than bookkeeping. It calls for a greater understanding of records obtained from bookkeeping and an ability to analyze and interpret the information provided by bookkeeping record. Accounting involves recording of economic activities, which accompany the complexity, and uncertainty of business. Therefore,

Basic Accounting Course while preparing timely accounting statements, estimates and professional judgments must be made. Accounting is defined as the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events of a financial character, and interpreting the results thereof. BOOK KEEPING: Bookkeeping is an activity concerned with the recording of financial data relating to business operations in a significant and orderly manner. Bookkeeping is the recordmaking phase of accounting. Bookkeeping can therefore, be defined as The science and art of correctly recording in books of account all those business transactions that result in the transfer of moneys worth. BUSINESS: Any activity done for the sake of earning profit. BUSINESS ENTITY: A business entity is an organization of persons to accomplish an economic goal. An entity is defined as an undertaking under the control of a single management. This may include a sole proprietor, a partnership firm, a company or a non-profit making organization. TRANSACTION: A transaction is any dealing expressed in monetary terms that affect the financial position of a business unit. A transaction involves transfer of something of value between two or more entities. ACCOUNT: Account is defined as a summarized and classified record of transactions. The transactions recorded are analyzed to show their effects. It is the summary of transactions relating to a particular person or a specific thing. ASSET: Anything possessed by a business that has some value or can result in the economic benefit to the entity can be termed as asset. Such as land, building, machinery, cash, debtors etc. Assets can be classified as fixed and current.

Basic Accounting Course LIABILITY: Any claim against the assets of the business either by outsiders or owners is called liability. PURCHASES: Any item purchased for utilization in the operations and to be retained for a long term in business is called purchases. This may include goods, furniture, machinery, stationery etc SALES: Any item sold to generate income, which may result in the inflow of economic benefits to the business entity. This may include sale of goods. DEBTOR/CREDITOR: A person or business from which money or other economic benefit is owing/receivable is termed as Debtor while the person or business to which money or other economic benefit is owing/payable is known as creditor. OWNERS EQUITY/CAPITAL: As the assets of the business belongs to owners and liabilities of business are their obligations. Thus, net of assets and liabilities is called as owners equity. Capital is the total investment/contribution of the owner in any business. BUSINESS DOCUMENT / VOUCHER: Each transaction is recorded in documents providing all the information of the transaction. Voucher is a documentary evidence to record the monetary amounts at which transactions are recorded and also that the transaction is properly authorized. There may be payment, receipt and journal vouchers. ACCOUNTING PRINCIPLES: A generally accepted set of rules can provide a unity of understanding and also a unity of approach in the practice of accounting. Accounting principles can be divided into two kinds: a) b) a) Accounting Concepts Accounting Conventions ACCOUNTING CONCEPTS:

In developing the structure of accounting theory and to relate the theory to accounting practice, there are some agreed basic concepts.

Basic Accounting Course Following are the important accounting concepts: 1. 2. 3. 4. 5. 6. 7. 8. 9. Business Entity Concept Going Concern Concept Money Measurement Concept Historical Cost Concept Dual Aspect Concept Periodicity Concept Matching Concept Realization Concept Prudence Concept

BUSINESS ENTITY CONCEPT: In accounting, business is treated as a separate entity from its owners. Accounts are prepared to give information about the business and not about those who own it. The distinction between the owner and the business unit has helped accounting in reporting profitability more objectively and fairly. GOING CONCERN CONCEPT: Accounting is based on the assumption that the business unit is to remain in operation in the foreseeable future in pursuit of its goals and objectives. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations. This concept relates to the future which is, by definition, uncertain. Therefore, many factors can be used to determine whether a business unit is a going concern. Such as liquidity, capital structure, market and management ability. MONEY MEASUREMENT CONCEPT: Money has been adopted by the accounting system as its basic unit of measurement, as it is the monetary expression of economic events. In other words, an event that cannot be translated into monetary terms cannot be called a transaction and, therefore, cannot be recorded. HISTORICAL COST CONCEPT: It is a fundamental concept of accounting, which is based on the historical record of the transaction. Historical cost refers to the cost at the time of acquisition. This concept provides uniformity in accounting records under conditions of stable prices. DUAL ASPECT CONCEPT: This concept states that every time a transaction takes place, there is always a twosided effect. This concept expresses the relationship that exists among assets, liabilities, and the capital, in the form of an accounting equation, which is expressed in the following simplest form as: ASSETS = LIABILITIES + CAPITAL

Basic Accounting Course

PERIODICITY CONCEPT: The periodicity concept requires that an income statement/profit & loss account and a balance sheet should be prepared at regular intervals. It is usually of a year. Since the going concern concept states that the business will keep functioning continuously, accountants choose some convenient segment of time to ascertain results for that period. MATCHING CONCEPT: Businesses are meant for profit earning. The ascertainment of the profit is the result of matching the revenue to its cost. The figure is obtained by deducting cost of production and other ancillary costs from the sale figure. Matching concept is mandatory for all going concern businesses whose performance needs to be evaluated periodically. REALIZATION CONCEPT: Revenue should be taken into account when realized. PRUDENCE CONCEPT: All losses present and anticipated should immediately be taken into account while revenues should only be taken when and only when they realize. The main theme behind this concept is to give a pessimistic view of the business performance. b) ACCOUNTING CONVENTIONS:

Financial statements are prepared following certain traditions/customs. These traditions/customs are termed as accounting conventions. Following are the important accounting conventions. 1. 2. 3. Disclosure. Materiality. Consistency.

DISCLOSURE: Financial statements should disclose all material information to facilitate the stakeholders in proper understanding, evaluation and decision making. MATERIALITY: Materiality refers to the relative importance of an item or event. Those items and events, which have significant bearings on users decisions, should be reflected in the preparation of financial statements.

Basic Accounting Course CONSISTENCY: All policies and procedures should remain unchanged from one accounting period to the other. 1. What are accounting conventions? Explain important accounting conventions.
The term "conventions" includes those customs or traditions which guide the accountants while preparing the accounting statements. The following are the important accounting conventions.

1. 2. 3. 4.

Convention Convention Convention Convention

of of of of

Disclosure Materiality Consistency Conservatism

Convention of Disclosure:
The disclosure of all significant information is one of the important accounting conventions. It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. The term disclosure does not imply that all information that any one could desire is to be included in accounting statements. The term only implies that there is to a sufficient disclosure of information which is of material in trust to proprietors, present and potential creditors and investors. The idea behind this convention is that any body who want to study the financial statements should not be mislead. He should be able to make a free judgment. The disclosures can be in the way of foot notes. Within the body of financial statements, in the minutes of meeting of directors etc.

Convention of Materiality:
It refers to the relative importance of an item or even. According to this convention only those events or items should be recorded which have a significant bearing and insignificant things should be ignored. This is because otherwise accounting will be unnecessarily over burden with minute details. There is no formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision. It should be noted that an item material for one concern may be immaterial for another. Similarly, an item material in one year may not be material in the next year.

Convention of Consistency:
This convention means that accounting practices should remain uncharged from one period to another. For example, if stock is valued at cost or market price whichever is less; this principle should be followed year after year. Similarly, if depreciation is charged on fixed assets according to diminishing balance method, it should be done year after year. This is necessary for the purpose of comparison. However, consistency does not mean inflexibility. It does not forbid introduction of improved accounting techniques. If a change becomes necessary, the change and its effect should be stated clearly.

Convention of Conservatism:
This convention means a caution approach or policy of "play safe". This convention ensures that uncertainties and risks inherent in business transactions should be given a proper

Basic Accounting Course

consideration. If there is a possibility of loss, it should be taken into account at the earliest. On the other hand, a prospect of profit should be ignored up to the time it does not materialise. On account of this reason, the accountants follow the rule 'anticipate no profit but provide for all possible losses'. On account of this convention, the inventory is valued 'at cost or market price whichever is less.' The effect of the above is that in case market price has gone down then provide for the 'anticipated loss' but if the market price has gone up then ignore the 'anticipated profits.' Similarly a provision is made for possible bad and doubtful debt out of current year's profits. Critics point out that conservatism to an excess degree will result in the creation of secrets reserves. This will be quite contrary to the doctrine of disclosure

ACCOUNTING CYCLE: Cycles shows complete sequence of accounting procedures which are repeated in same order during each accounting period. It includes recording transactions in the journal classifying the entries and posting in ledgers and the final stage is of summarizing where the financial statements are prepared to ascertain the profit or loss during a trading period and the financial position of the business on a specific date. DOUBLE ENTRY BOOK KEEPING: Double Entry Book keeping involves recording both aspects of the transactions (debit and credit). It ensures the completeness and accuracy of transactions. FINANCIAL STATEMENTS: Financial Statements are prepared to ascertain the financial position and evaluate the financial performance of a particular period. A Financial Statement includes: 1. 2. 3. The balance sheet, which describes the overall financial position of an organization at a particular time. The income statement describes the financial performance of a particular period. Statement of changes in financial position describes the flow of funds and changes in financial position during a particular period.

ELEMENTS OF FINANCIAL STATEMENTS: Balance Sheet comprises 1. Assets. 2. Liabilities. 3. Owner Equity/Capital. Income Statement comprises: 4. Revenues

Basic Accounting Course 5. Expenses

ASSETS: Assets are the resources controlled by the organization as a result of past transactions, from which, the economic benefit is expected to flow to entity. Accounting Treatment: Debit: Increase in Assets. Credit: Decrease In Assets. Classification: Assets are further classified as: Fixed Assets: These assets are used by the organization for a long period. Examples include Land, Building, Furniture, Vehicle, Computer, Generator, Photocopier, Electrical Equipment. Current Assets: These assets are used by organization for a short period. Examples include Stock, Account Receivables, Cash, Bank, Prepayments, Advances, Deposits etc. LIABILITIES: A liability is a present obligation, arising from past transaction, the settlement of which is expected to result in outflow of resources from the entity embodying economic benefits. Accounting Treatment: Debit: Decrease in Liabilities: Credit: Increase in Liabilities: Classification: Liabilities are further classified as: LONG TERM: Those liabilities, which are expected to be paid after more than one year e.g. Long Term Loan, SHORT TERM: Those liabilities, which are due to be paid within one year. OWNER EQUITY:

Basic Accounting Course It means the claims of owner of the business against the assets of the firm. Accounting Treatment: Debit: Decrease in Equity. Credit: Increase in Equity. REVENUES: It means any type of income of the business. Accounting Treatment: Debit: Decrease in Revenue. Credit: Increase in Revenue. Revenue received from sale, donation, and interest on deposits etc. EXPENSES: Expense means the expenditure whose benefit is finished or enjoyed. Accounting Treatment: Debit: Increase in Expenses. Credit: Decrease in Expenses. Examples: Salaries, Wages, Honoraria, Consultancy Charges, Audit Fee, Printing and Stationery, Photocopies, Entertainment Exp, Meeting and Seminars, Transportation Cost, POL, TA/DA, Passport Visa fee, Purchases of materials etc SUMMARY OF RULES OF DEBIT AND CREDIT Account Assets Liabilities Owners Equity Revenues Expenses Increase Debit Credit Credit Credit Debit Decrease Credit Debit Debit Debit Credit

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Basic Accounting Course

CHAPTER 02 BOOKS OF ACCOUNTS: The business transactions from primary data are recorded in the books of accounts. How an accounting cycle runs, Can briefly be described in the following steps: Step.1 A business document is prepared for each transaction incurred, called voucher. Step.2 Information from the voucher is recorded in General journal. Step.3 The entries from the General journal are posted to the individual accounts in the ledger. Step4. A trial balance is prepared at the end of a particular period to insert all the closing balances taken from individual accounts maintained in the ledger. Step.5 Adjustment if required is made in the books of accounts or in a separate work sheet so as to work out the final balances. BOOKS OF ORIGINAL ENTRY: Initial recording of transaction takes place in the books of original entry. Particulars that should be recorded in the books of original entry include Date of transaction, Names of accounts to be debited or credited to record each transaction and Amount.

JOURNAL: Journal, a book of original entry and contains all the financial information that is required in a book of original entry. It can take the form of either General journal or a special journal (Cash journal, Sales journal, and purchase journal etc.). General journal is used to record transactions, which cannot be recorded in the special journals. ENTRIES IN THE JOURNAL: The initial recording of transaction in the books of original entry is called entry. Entries in the Journal may be made in a manner that it contains all the required information in a classified manner, which could either be utilized for future reference and aggregate results at the end of accounting period. 11

Basic Accounting Course

FORM OF JOURNAL: Following information is required to be entered in the journal as illustrated below: 1. 2. 3. 4. 5. Date Date of the transaction. Names of Accounts to be debited and credited. Reference of the ledger page or code where the entry is to be posted. Amounts in front of each account name to be debited in the debit column. Amount in front of each account to be credited in the credit column. Particulars L.F Debit Credit

To separate each entry a line is drawn at the end of each entry. Illustration: On November 01, 2004 Welfare Relief Committee received a donation of $ 75,000 and its transactions during the first month were as follows: 2004 NOV, 02 NOV, 03 NOV, 10 NOV, 15 NOV, 16 NOV, 20 NOV, 30 Paid rent of the shop for the month Purchased furniture for cash Goods Purchased from Ameer & Co Goods Purchased from XYZ limited Cash received as membership Cash received as membership Cash paid to Ameer & Co $ 5,000 10,000 30,000 45,000 9,000 15,000 20,000

Required: Record these transactions in the journal

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Basic Accounting Course JOURNAL OF WELFARE RELIEF COMMITTEE Date 2004 NOV 01 NOV 02 NOV 03 NOV 10 NOV 15 NOV 16 NOV 20 NOV 30 Particulars Cash To Donation Donation received Rent To cash Rent paid Furniture To cash Furniture purchased for cash Purchases To Ameer & Co Goods purchased Purchases To XYZ Ltd Goods purchased Cash To Membership Fee Membership fee received Cash To Membership Fee Membership fee received Ameer & Co To Cash Paid to Ameer & Co Total L. F Debit $ 75,000 75,000 5,000 5,000 10,000 10,000 30,000 30,000 45,000 45,000 9,000 9,000 15,000 15,000 20,000 20,000 209,000 209,000 Credit $

From the above it may be seen that ledger folio column is left blank. It indicates the page number to which the respective debit or credit entry shall be posted. At the time of posting, page number will be recorded. COMPOUND JOURNAL ENTRIES: Compound journal entries are passed for those transactions where a single transaction affects a number of accounts. In such case a single entry is passed instead of separate entries. ILLUSTRATION: An International relief agency has received machinery valuing $25, 000, furniture worth $6,000 and Cash $25,000 from its donor. Entries in the journal of Welfare Relief Committee would appear as follows:

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Date

Particulars Cash Machinery Furniture To Donation Donation received from donor

L.F

Debit $ 25,000 25,000 6,000

Credit $

56,000

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Basic Accounting Course CHAPTER 03 LEDGER: A book of account where transactions are classified and grouped according to its nature to form separate accounts. Distinction between ledger and journal can be made as follows: JOURNAL It is a book of original entry The process of recording transaction in the journal is called journalizing. The unit of classification is the date of transaction. It contains entries in chronological order and total effect in an individual account is not known. LEDGER It is a book of second entry. The process of recording transaction in the ledger is called posting. The unit of classification is the account. It contains entries in classified form showing the total effect in an individual account at any stage.

The previous illustration shows a number of transactions affecting cash but one cant see the net movement and effects on the cash account. This is possible in ledger. A ledger may be a book, a loose-leaf binder or a computer disc. In case of a book or loose-leaf binder, each page is used for a separate account. Posting to ledger is made at frequent intervals, such as the end of each week, month, etc. Form of a ledger: Debit Date Particular Title of Account Folio $ Date (A/C No) Credit Particulars Folio $

From the above, it may be seen that ledger folio has two parts debit side & credit side. Sometimes the format of the ledger is not like the above but it contains all the relevant information. Posting is made in the following steps: 1. Location of the account in the ledger. 2. Entering information in the respective columns and giving the folio number of ledger. 3. Entering the account number reference in the journal to which the entry has been posted.

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Basic Accounting Course ILLUSTRATION: The illustration of International Relief Agency is used to understand the posting process. Required: Post the entries of Journal of illustration of International Relief Agency in the respective ledgers account. SOLUTION: Ledger Accounts of Welfare Relief Committee. Date Nov,01 Nov,16 Nov,20 Particular Donation Membership fee Membership fee Folio Cash Debit Date $ 75,000 Nov,02 9,000 Nov,03 15,000 Nov, 30 Nov, 30 99,000 Date Nov, 30 Particular Balance C/F Folio Donation Debit Date $ 75,000 Nov,01 75,000 Purchases Debit Date $ 30,000 45,000 Nov, 30 75,000 Particulars Rent Furniture Ameer & Co Balance C/F Account No.1 Folio Credit $ 1 1 1 5,000 10,000 20,000 64,000 99,000 Account No. 5 Particulars Folio Credit $ Cash 1 75,000 75,000 Account No. 15 Folio Credit $ 75,000 75,000

1 1 1

Date Nov, 10 Nov, 15

Particular Ameer & Co XYZ Ltd

Folio 1 1

Particulars Balance

Date Nov, 30

Particular Balance

Folio

Membership Fee Account No. 20 Debit Date Particulars Folio Credit $ $ Nov,16 Cash 1 9,000 24,000 Nov 20 Cash 1 15,000 24,000 Furniture Debit Date $ 16 24,000 Account No. 10 Folio Credit $

Date

Particular

Folio

Particulars

Basic Accounting Course Nov,03 Cash 1 10,000 Nov, 30 10,000 Rent Debit Date $ 5,000 Nov, 30 5,000 Balance C/F 10,000 10,000 Account No. 8 Particular Folio Credit $ Balance 5,000 5,000

Date Nov, 02

Particular Cash

Folio 1

Date Nov, 30 Nov, 30

Particular Cash Balance C/F

Folio 1

Ameer & Co. Account No. 30 Debit Date Particular Folio Credit $ & 20,000 Nov 10 Purchases 1 30,000 10,000 30,000 XYZ Ltd Debit Date $ Nov 15 45,000 45,000 30,000 Account No. 31 Particulars Folio Credit $ Purchases 1 45,000 45,000

Date Nov, 30

Particular Balance C/F

Folio

It can be seen that Ledger and journal are cross-referenced i.e. reference of the journal page1 has been given on each ledger entry in folio column. Similarly the reference of each ledger page (account number) is given in the folio column in journal. This facilitates in spotting any mistakes or wrong postings. GENERAL& SUBSIDIARY LEDGERS: Small organizations, where the numbers of transactions are usually small, maintain a simple ledger. Large organizations, maintain two types of ledger; a general ledger is maintained containing the major accounts. The details are kept in subsidiary ledgers. For instance, one account for debtors and creditors each is kept in the general ledger and account of individual debtors and creditors are kept in the subsidiary ledgers. The sum of the balances of the subsidiary ledgers at any given date equals to the balance of its related account appearing in the general ledger. SUMMING UP THE ACOUNT BALANCES & PREPARATION OF TRIAL BALANCE: After a particular period the debit and credit sides of all accounts are summed up. The difference in the debit and credit side is worked out. The difference is called a debit balance in case the credit side is lower. Similarly if the debit side is lower, it would be called a credit balance.

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Basic Accounting Course After the balancing process is complete, a trial balance is prepared. Trial balance is a statement containing end balances of all the ledger accounts at a particular date. The total of the debit & credit side of the trial balance will be equal if all the postings have correctly been made. The trial balance verifies the mathematical accuracy of the debit and credit balances of the ledger accounts. It does not ensure the complete recording, proper journalizing and posting to the proper accounts. The trial balance however provides basic information to facilitate the adjusting entries and to properly utilize it in the financial statements. Trial Balance is extracted from the illustration of the Welfare Relief Committee: WELFARE RELEIF COMMITTEE: Trial Balance as on 30-11-2004 Ledger Accounts L.F. Debit $ Cash 1 64,000 Donation 5 Rent 8 5,000 Furniture 10 10,000 Purchases 15 75,000 Membership Fee 20 XYZ Ltd 31 Ameer & Co 30 TOTAL 154,000 ADJUSTING ENTRIES: At the end of each accounting period the accountant may realize that a number of transactions relating to the business might have incurred but remained unaccounted for. This may be due to a number of reasons e.g. 1. Any transaction which does not involve movement of cash during the accounting period. 2. The cash transaction incurred may be for a smaller or larger period than the accounting period. 3. Inventory adjustments ADJUSTED TRIAL BALANCE: As soon as the adjusting entries are passed in ledger accounts, a final or adjusted trial balance is prepared. The adjusted trial balance lists all the ledger balances after the adjusting entries have been posted. We now have the basic data in the adjusted trial balance to facilitate the preparation of financial statements, mainly the Income and Expenditure Statement and the balance sheet. Credit $ 75,000

24,000 45,000 10,000 154,000

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Basic Accounting Course CHAPTER 04 SPECIAL JOURNALS: As discussed earlier journals are of two types, a general journal and special journal. Examples of special journals are: 1 2 3 4 5 6 Cash Journal Bank Journal Purchases Journal Purchases Return Journal Sales Journal Sales Return Journal

Advantages of maintaining special journals are: 1 2 3 4 Facilitate easy recording of transactions of a similar nature Facilitate the posting process. Facilitate future referencing and evidence. Division of responsibilities amongst number of persons.

CASH BOOK: Cash Book is a type of special journal, used to record all cash and bank transactions in chronological order. It also serves as a Ledger account for Cash Transactions. FORMS OF CASH BOOK: Cash Book can either be 1. 2. 3. Single Column Cash Book Double Column Cash Book(A cash Column and a Bank Column). Petty Cash Book

SINGLE COLUMN CASH BOOK: Single column cash book is also called a simple Cash Book to record only Cash Receipts and Payments. Date Receipts Particular L.F Amount Date Payments Particular L.F Amount

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Basic Accounting Course RECORDING DAILY TRANSACTIONS IN THE CASH BOOK: The following step-by-step approach is followed to record transaction in the cashbook. 1. 2. 3. 4. Previous day closing balance is brought forward at the beginning of each day and is recorded in the top left of the receipt side. Daily receipts are recorded on the receipt side (usually left side) with dates, particulars, reference and amount. Daily payments are recorded on the right side with dates, particulars, reference and amount. At the end of each day cashbook is balanced to ascertain the closing balance.

ILLUSTRATION: For the month of December M/S Hamid Traders incurred the following cash transactions: Month December 2004 December 2004 December 2004 December 2004 December 2004 December 2004 December 2004 December 2004 December 2004 Date 1 3 6 10 13 18 24 28 30 Particulars Beginning balance Cash Sales Cash received from Khalil & Co Rent paid Cash paid to KSG Ltd Cash received from XYZ Ltd Cash paid to Ameer & Co Cash paid for electricity bill Cash Sales Amount $ 56,000 3,000 10,000 5,000 15,000 30,000 10,000 3,000 14,000

Required: Enter these transactions in the cashbook. Solution: CASH BOOK Date 2004 Dec, 1 Dec, 3 Dec,6 Dec, 18 Dec, 30 Total Particular Balance B/F Sales Khalil & Co XYZ Ltd Sales L.F Amount $ 56,000 3,000 10,000 30,000 17,000 Balance C/F 116,000 83,000 116,000 Date 2004 Dec,10 Dec,13 Dec,24 Dec, 28 Particulars Rent KSG Ltd Ameer & Co Electricity Charges L.F 8 31 30 9 Amount $ 5,000 15,000 10,000 3,000

20 35 38 20

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Basic Accounting Course Note that cash book contains its page number and similarly account pages contain their own page numbers. While posting entries in cashbook, ledger folio of the account head is entered and similarly cashbook folio is entered in Ledger account. DOUBLE COLUMN CASH BOOK As its name implies, it contains two columns a cash column and a bank column. RECORDING TRANSACTIONS IN THE BANK COLUMN: 1. Previous day closing balance: is brought forward at the beginning of each day and is recorded in the top left of the receipt side in the Bank Column. 2. Cheques received and deposited the same day: Entered on the receipt side of the cash book in the bank column. 3. Cheques received but not deposited in the bank: the amount is recorded in the cash column. 4. Payment made by cheque: The amount is entered on the credit side of the cash book in the bank column. 5. Cash deposited in the bank: Amount is entered in the cash column on the credit side. On the debit side the corresponding entry is made and amount written in the bank column. The entry is called contra entry with no effect on the ledger account. 6. Closing Balance: At the end of each day both columns are balanced to ascertain the closing balance. POSTING TO LEDGER: 1. Contra entries: All contra entries are marked distinctly as C and are not posted. 2. Entries on the receipt side: All entries in the receipt side are posted to the credit side in the ledgers of respective accounts. 3. Entries on the payment side: entries on payment side are posted to the debit of the ledger accounts.

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ILLUSTRATION: The following are the transactions of M/S Hamid Traders during the month of January 2005. January 2005 Jan 200 5 1 2 3 5 10 12 14 16 20 22 24 28 30 Cash beginning balance Cash deposited in the bank Purchases made for, paid by cheque Cheque received from XYZ Ltd and paid in the bank Paid cheque to ABC Ltd $ 10,900 Cash sales Cash deposited in bank Cash purchases Cash sales Cash deposited in bank Paid by cheque for cash purchas Received cheque from XYZ Ltd Paid cheque to ABC Ltd AMOUNT $ 80,000 25,000 8,600 6,500 10,900 7,000 5,000 9,000 15,000 10,000 3,000 10,900 5,900

Record these transactions in two-column cashbook. CASH BOOK OF HAMID TRADERS

Date 2005 Jan,1 Jan,2 Jan,5 Jan,12 Jan,14 Jan, 20 Jan, 22 Jan, 28 Particular Balance B/F C To Cash To XYZ Ltd To Sales C To Cash To Sales C To Cash To XYZ Ltd 10,900 10,000 Jan 30 By ABC Ltd 5,900 15,000 Jan,24 By Purchases 3,000 5,000 Jan,22 By bank C 10,000 7,000 Jan,16 By purchases 9,000 25,000 Jan,10 6,500 Jan,14 By bank C 5,000 By ABC Ltd 10,900 V.N o L. F Cash $ 80,000 Bank $ Date 2005 Jan,2 Jan,3 Particular By bank By purchases V.N 0 L. F C Cash $ 25,000 8,600 Bank $

Jan,30 63,900 By Bal C/F 112,900 46,500 112,900 46,500 18,100

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Date Jan 3 Jan 16 Jan 24 Date Jan 10 Jan 30 Date

Particulars Bank Cash Bank Particulars Bank Bank Particulars

Folio

Purchases Debit Date $ 8,600 9,000 3,000

Account No. Particulars Folio Credit $

Folio

ABC Limited Account No. Debit Date Particulars Folio Credit $ $ 10,900 5,900 Account No. Particulars Folio Credit Cash 7,000 Cash 15,000

SALES Folio Debit Date Jan 12 Jan 20 Folio

Date

Particulars

XYZ Limited Account No. Debit Date Particulars Folio Credit $ $ Jan 5 Bank 6,500 Jan 28 Cash 10,900

PETTY CASH BOOK: Petty Cash is the amount kept separately to meet day-to-day expenses (stationery, postage, local conveyance, office supplies etc) such expenses and the transactions so incurred are recorded in special cash book called petty cash book. FORM OF PETTY CASH BOOK: The petty cash book contains a column for recording receipts, date, particulars, voucher ref. A number of columns are then left for recording head wise payments. Every payment is recorded twice. 1st in the total column and then in the head wise column. The total of the total column at any time would agree to the grand total of the total of each column. The difference between the receipts total and total of the payment column is petty cash in hand. POSTING FROM PETTY CASH BOOK: The posting to ledgers is normally made at the end of a month. The totals of each column of receipts and payment are made directly to respective ledger accounts. IMPREST SYSTEM:

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Basic Accounting Course This means a system where a certain amount of money called imprest is kept with a staff member to meet petty payments. Sometimes imprest is kept with more than one staff member working in different locations. Statement of payments supported with vouchers is prepared at frequent intervals and sent to the chief cashier. The amount spent is reimbursed to meet payments for the next period. Advantages of the petty cash or imprest is that (a) Timely payments are possible at a place out of the reach of the main cashier. (b) The petty cashiers or imprest holder has to maintain up to date record to get timely reimbursement. ILLUSTRATION: Petty cashier of M/S Hamid Traders incurred the following transactions during the month of February 2005. Feb 01 3 6 7 10 11 14 20 25 28 28 Cash Received from main cashier Paid for stationery Paid for postage stamps Paid for stationery Wages paid Taxi charges paid Bus fair paid Tea expenses paid Food for office Postage stamp purchased Kitchen Expenses paid $ 1,000 $ 45 $ 10 $ 5 $ 60 $ 25 $ 15 $ 20 $ 25 $ 35 $ 550

Required: Enter the above transaction in the petty cash book of Hamid Traders.
PETTY CASH BOOK Receiv Dat Particulars ed e 1,000 Feb To Cash 1 To Stationery To Postage 3 To Stationery To Wages 6 To Conveyance 8 To Conveyance 10 To Entertainmen 11 t To 14 Entertainmen t 20 To Postage To 25 Entertainmen t 28 To Balance V.N o Tot al 45 10 5 60 25 15 20 25 35 550 210 Posta ge 10 Station ary 45 5 60 25 15 Wag es Account No 38 Conveya Entertain nce ment

35

20 25 550

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Basic Accounting Course

28 28 1,000 1,00 0 45 50 60 40 595

PURCHASE JOURNAL: Purchase transactions can take either the form of cash transaction or credit transaction. Cash Purchases are recorded usually in the cashbook while credit Purchases in the book called purchases journal. Purchases journal is a book of original entry to record day-to-day credit purchases in chronological order. Purchases Journal is usually kept by large organizations where most of the transactions are of credit type. FORM OF PURCHASE JOURNAL The usual form of purchase journal is presented below.
Date Particular Inv. No L. F Amount

POSTING TO LEDGER: Entries from the Purchase Journal are posted to Ledger. Credit entries are posted individually to the respective Creditor Account. While the total of Debit entries for a particular period is posted to Purchase Account as a single Figure. PURCHASES RETURN JOURNAL: Purchase Return Book is also a book of original entry. Goods return note is the document prepared when goods are returned. All goods returned to supplier, are recorded in Purchase Return Book. Posting to ledger accounts is the same as that of purchases journal but to the reverse side. The total of the purchases returns is posted to the credit side of the purchase account whereas the individual entries are debited to the respective suppliers account. When the goods are returned, documents are prepared which are called the debit advice or Goods return note and contains Particulars and reasons for return of goods. ILLUSTRATION: The following transactions were incurred by the purchases deptt. of Hamid Traders during the month of November 2004. Nov 06, Nov 10, Nov 11 Nov 16 Nov 17 Nov 25 Purchases made from Ameer & Co. Purchases made from ABC Ltd Purchases returns to Ameer & Co Purchases made from ABC Ltd Purchases from Peshawar Traders Purchases returns to ABC Ltd $ 15,000 $ 18,000 $ 2,000 $ 12,000 $ 10,000 $ 1,000

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Basic Accounting Course Nov 28 Nov 30 Purchases from Ameer & Co. Purchases return to Peshawar Traders $ 5,000 $ 2, 000

Enter transaction in the purchases journal and purchases returns journal and post to ledger.

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Basic Accounting Course SOLUTION: Purchases journal of Hamid Traders Date 2004 Nov 6 Nov 10 Nov 16 Nov 17 Nov 28 Particulars Ameer & Co ABC Ltd ABC Ltd Peshawar Traders Ameer & Co Inv.No L.F Amount $ 15,000 18,000 12,000 10,000 5,000 60,000 Debit L.F Amount $ 2,000 1,000 2,000 5,000 Ameer & Co. F Debit Date $ 2004 1 2,000 Nov 6 Nov 28 F 1 ABC Ltd Debit Date $ 2004 1,000 Nov 10 Nov 16 Account No. 30 Particular F Credit $ Purchases Purchases 1 15,000 1 5,000

Purchases returns Journal of Hamid traders Date Particulars 2004 Nov 11 Nov 25 Nov 30 Ameer & Co ABC Ltd Peshawar Traders

Ledger of Hamid Traders Date 2004 Nov 11 Particulars Purchases Returns

Date 2004 Nov 25

Particulars Purchases Returns

Account No. 31 Particular F Credit $ Purchases Purchases 1 1 18,000 12,000

Date 2004 Nov 30 Date 2004 Nov

Particulars Purchase Returns Particulars Sundry Creditors

F 1 F 1

Peshawar Traders Account No. 32 Debit Date Particular F Credit $ $ 2004 2,000 Nov 11 Purchases 1 10,000 Purchases Debit Date $ 60,000 Account No. 15 Particular F Credit $

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Basic Accounting Course

Date

Particulars

Purchases Returns Account No. 16 Debit Date Particular F Credit $ $ Nov Sundry 1 5,000 Creditors

SALES JOURNAL: Like purchases, sales transactions are also of two types, cash sales and credit sales. All credit sales are recorded in sales journal in chronological order from sale invoices. POSTING TO LEDGER: Posting from sales book is normally done at the end of some specified period such as a month. Total of the sales during the month is posted in the credit of the sales account each individual entry is however posted to the debit of customers account. SALES RETURNS JOURNAL: Sales Return Journal is maintained to record all goods returned by the customers. All entries are made from the credit advice after issuing the same to the customer. ILLUSTRATION M/S Jan Traders incurred the following transactions during the month of December 2004 Dec 6 Sales made to M/S Karim & Co. $17,000 Dec 9 Sales made to XYZ Ltd. $10,000 Dec 13 Sales returns by Karim & Co $ 3,000 Dec 15 Sales returns by XYZ Ltd $ 2,000 Dec 20 Sales to M/S Ali Enterprises $ 8,000 Dec 23 Sales to XYZ Ltd $11,000 Dec 27 Sales returns by Ali Enterprises $ 1,000 Dec 30 Sales to Karim & Co. $ 2,000 Make entries in the sales journal, sales returns journal and post to ledger accounts. SALES JOURNAL OF HAMID TRADERS Date Dec 6 Dec 9 Dec 20 Dec 23 Dec 30 Karim & Co XYZ Ltd Ali Enterprises XYZ Ltd Karim & Co Particular Inv.No L. F Page-1 Amount $ 17,000 10,000 8,000 11,000 2,000 48,000

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Basic Accounting Course

SALES RETURN JOURNAL OF HAMID TRADERS Date Dec 13 Dec 15 Dec 27 Karim& Co XYZ Ltd Ali Enterprises Particular C.A L. F Page-1 Amount $ 3,000 2,000 1,000 6,000

LEDGER OF M/S HAMID TRADERS Karim & Co Date Dec 6 Dec 30 Particulars Sales Sales F Debit 17,000 2,000 Date Dec 13 Particular Sales Return F Credit $ 3,000

XYZ Ltd Date Dec 9 Dec 23 Date Dec 20 Particulars Sales Sales Particulars Sales F F Debit Date Particular Sales Return F 10,000 Dec 15 11,000 Ali Enterprises Debit Date 8,000 Dec 27 Sales Date Dec 27 Sales Return Debit 6,000 Credit $ 2,000

Particular Sales Return

Credit $ 1,000

Particular Sundry Debtors

Credit $ 48,000

Date Dec 30

Particulars Sundry Debtors

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Basic Accounting Course CHAPTER 05 BANKING TRANSACTIONS: There are two aspects of banking transactions. Bank Deposits and withdrawal. Following types of Account are maintained to handle these transactions. a. CURRENT ACCOUNT:

Current Account is maintained for immediate cash deposits and withdrawal with no limit on amount and frequency of withdrawal. No interest is normally charged on current account. Businesses prefer this type of account to have immediate access to cash. b. SAVING BANK ACCOUNT:

Saving Bank Account normally places a limit on the amount and frequency of withdrawal. Interest is paid to account holders. Individuals normally maintain this type of account. c. FIXED DEPOSITS:

Fixed Deposit Account, as its name implies, require account holder to place the money for a fixed period usually, six month or a year or more than one year. Interest is paid by the bank, keeping in view the period of deposit. A penalty is normally imposed for premature withdrawal. Besides taking deposits Banks also issue loans to individuals and business organizations. LOANS: Funds issued to individuals and business organizations are called loans. Normally a high interest rate is charged on the loan than on deposits. OVERDRAFTS: Overdraft is the facility provided by the bank to business organizations, This facility is provided to current account holders to withdraw extra money than the deposited amount. CHEQUE: An instrument supplied by the bank to account holders. It is an instruction to the bank to pay a stated amount to a person or business named in the cheque. Cheque can either be (i) Open (can be cashed) or (ii) crossed (i.e. paid only into the account.)

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Basic Accounting Course BANK DRAFTS: Bank draft is instruments of transfer i.e. an instruction issued by the bank to one of its branch to pay a certain amount to the person concerned. BANK STATEMENT or BANK PASS BOOK: Bank Statement is a chronological record maintained by the bank for each individual account holder. The statement contains information about deposits, withdrawal, opening and closing balances for a particular period. DISHONOUR OF CHEQUE: Some cheques presented to the bank are not accepted, this is called dishonor of Cheque. Cheque may be dishonored due to the following reasons: 1. Unavailability of fund in the concerned account 2. Over writing 3. Faults in the signature

BANK RECONCILIATION STATEMENT: Bank Record maintained in the entity Books is matched with the Bank statement issued by the bank on regular interval to spot out any differences. These differences are reflected in Bank reconciliation statement. The differences exist, each time, statement is prepared. The causes of these differences are: 1. Un presented Cheques: Cheque issued by the entity at period end may be entered in the bankbook but may not be presented to bank for payment till the date of statement. 2. Direct Collection: Bank might have taken credit of Cash, Cheque received directly into the entity account but intimation of the same might have been conveyed to the client after the period end. 3. Direct Credits: Interest on savings account is credited by the bank, soon as entitlement arises, but may not be recorded in the entity books. 4. Direct Debits: Interest charged on overdraft, or commission may be debited to the entity account, while the same remain unrecorded in the entity Books. 5. The entity may have deposited cheques/drafts but bank might not have collected the same till the date of the statement. 6. Some of the cheques/drafts deposited in the bank may have been dishonored and the effect of dishonor remained unknown and unrecorded in the entity record. In order to examine whether the disagreement is due to certain genuine reasons as described above or there is some misappropriation of funds, a reconciliation statement is prepared and the causes of disagreement discovered.

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Basic Accounting Course PREPARATION OF BANK RECONCILIATION STATEMENT: The following steps are involved in the preparation of a bank reconciliation statement. 1. Check all entries on receipts and payments side with the bank statement and tick them. 2. Prepare a list of unticked entries of the bank statement and record the same in the bank book so as to work out the correct balance of the bank book 3. Prepare a list of unticked entries in the bank book and prepare the reconciliation statement by using one of the following methods. a) i. Starting from the cash book balance: If there is a debit balance, deduct all cheques/drafts deposited in the bank but not credited by the bank, and add all the cheques issued but not given in the bank statement/bank statement (or not presented to bank for payment. The balance now would agree with the bank statement. If there is a credit balance, add all cheques/drafts deposited in the bank, but not credited in the bank and less all cheques issued but not presented to the bank for payment. The balance now would agree with the bank statement. Starting from the bank statement: If there is a credit balance in the bank statement, add to it all cheques/drafts deposited but not collected and credited by the bank and deduct all cheques issued but not presented to bank for payment If there is a debit balance in the bank statement deduct all cheques/drafts deposited but not collected and credited by the bank and add to it all cheques issued but not presented to the bank for payment. ILLUSTRATION: On 31st Dec 2004, the balance of cash at bank as shown by the cash book of International Relief Agency was $4,500/- and in the bank statement the balance was shown at $19,500. On checking the cash book with the bank statement it was found that. a. b. Cheque of $1,000 deposited in bank on 27th Dec was not credited by the bank. Two cheques issued to XYZ Limited amounting to $16,000 on 24th Dec 2004 were not presented to the bank for payment. Prepare bank reconciliation statement SOLUTION: Method 1 (starting from the cash book balance) $

ii.

b)

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Basic Accounting Course

Balance as per cash book (debit) Less cheques deposited but not collected Add: cheques issued but not presented to the bank Balance as per bank statements (credit)

4,500 1,000 3,500 16,000 19,500

Method II (Starting from the bank statement/bank statement) Balance as per bank statement (credit) Less cheques issued but not presented Add cheque deposited but not collected Balance as per cash book (debit) 19,500 16,000 3,500 1,000 4,500

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Basic Accounting Course

ILLUSTRATION: From the following information of International Relief Agency prepare bank reconciliation statement on 30th June 2004. Balance as per bank statement was 8,000. i. ii. iii. Balance as per bank book Bank charges & commission debited by bank but not taken in bank book cheque received form Rahim & Co Deposited in bank on 20th June but not Credited by bank. Cheque issued to XYZ Ltd on 27th June but not presented to bank for Payment Cheque issued for rent on 29th June 2004 but not presented to bank for Payment SOLUTION: International Relief Agency Bank Reconciliation Statement as on 30-6-2004 $ 9,200 $ 100

$ 6,000

iv.

$ 2,900

v.

$ 2,000

Amount $ Balance as per bank book (debit) ii)Less: Bank charges debited by bank iii)Less cheques deposited but not collected by bank Add: cheques issued but not presented to bank iv) 27-6-04 v) 27-6-04 Balance as per bank statement (credit) 8,000 9,200 100 6,000 3,100 2,900 2,000 4,900

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Basic Accounting Course CHAPTER 06 ACCOUNTING STATEMENTS FOR NON-TRADING CONCERNS: Non-trading concerns usually maintain their accounts in double entry accounting system and periodically prepare their final accounts for submission to their members and donors. The method of preparing final accounts by non-trading concerns is different than trading concerns. As these accounts do not deals in any goods like trading concerns, so they cant prepare trading and profit and loss account. At the end of the year they prepare an account called an income and expenditure account and balance sheet. The income and expenditure account serve the same purpose as of the profit and loss account in case of trading concerns and is made out exactly in the same manner. Usually the non profit making institution do not maintain a full set of books but merely a cash book in which all the receipts and payments are entered. At the end of the year cashbook is summarized under suitable heading and the summary thus prepared is called a receipt and payment account. RECEIPT AND PAYMENT ACCOUNT It is a mere summary of cashbook for a year. It begins with cash in hand at the commencement and ends with that at the close of the year. Similarly to cash account, receipts are shown on the debit side while payments on the credit side, with out any distinction between capital and revenue. Moreover, it does not include unpaid expenditure or any unrealized income relating to the period under review and so fails to reveal the financial position of the concern. INCOME AND EXPENDITURE ACCOUNT It is another name for profit and loss account. This account is credited with all earnings (both realized and unrealized) and debited with all the expenses (both paid and Unpaid). The difference represents either surplus or deficit for a given period which is carried to the balance sheet. DIFFERENCE BETWEEN INCOME AND EXPENDITURE ACCOUNT & RECEIPT AND PAYMENT ACCOUNT RECEIPT AND PAYMENT ACCOUNT INCOME ACCOUNT AND EXPENDITURE

1.

It begins with opening

1. It does not commence with any balance. 2. It includes revenue items only.

and ends with closing balance of cash/bank. 2. It records all sum

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Basic Accounting Course received and paid whether they relate to revenue or capital item. 3. It includes all sums 3. It includes the items relating only to the year for which it is prepared. Provisions are made for all

actually received and paid during the year whether they relate to the past, the current or the next year. 4. The receipts are shown

outstanding expenses and accrued income. 4. Income is shown on the credit side and expenses on the debit side 5. It definitely shows whether there has been an excess of income over expenditure or vice versa. 6. It is always accompanied by a balance sheet.

on the debit side and the payments on the credit side. 5. It simply ends with a

closing balance of cash and does not show the result of the business. 6. It is not accompanied by

a balance sheet. BALANCE SHEET It has three components Equity/Grants/Donations Liabilities Assets While using the tabular form of presentation, Liabilities are shown on the left side whereas assets are shown on the right side. Both sides must be equal to give accurate information.

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Basic Accounting Course

Illustration International Relief Agency started work on 1-2-2004 with an endowment fund of US $ 300,000. During the month following transactions took place: Date February 01 02 05 10 12 13 15 17 18 19 28 28 Particulars Subscription received from Members Subscription still receivable Profit/Interest received Rent paid Utilities Salaries Training courses Fixed assets acquired Advances to staff Advances to suppliers Salaries Payable Utilities Payable US $ 100,000 50,000 1,000 5,000 6,000 95,000 15,000 25,000 15,000 10,000 10,000 2,500

Required: Prepare Journal, Ledger Account, Trial Balance, Receipt and payment account, Income and Expenditure Account and Balance Sheet Date Feb 01 Feb 01 Feb 02 Bank Endowment Fund Endowment Fund at Bank Bank Subscription Subscription Received Account Receivable Subscription Subscription Receivable from members Bank Interest on bank deposit Profit Received on fund deposits Rent Bank Rent paid Utilities Bank Utilities paid 37 Particulars JOURNAL L.F Debit $ 300,000 100,000 100,000 50,000 50,000 1,000 1,000 5,000 5,000 6,000 6,000 Credit $ 300,000

Feb 05

Feb 10 Feb 12

Basic Accounting Course Feb 13 Feb 15 Feb 17 Feb 18

Feb 19

Salaries Bank Salaries paid Training Bank Training Exp paid Fixed Assets Bank Fixed Asset Purchased Advances to staff Bank Advances issued to staff
Advances to suppliers Bank Advances issued to Supplier Utilities Account Payable utilities bills payable Salaries Account Payable Salary payable

95,000 95,000 15,000 15,000 25,000 25,000 15,000 15,000 10,000 10,000 2,500 2,500 10,000 10,000 LEDGER ACCOUNT Bank Book Account No.
Particulars Rent Utilities Salaries Training Exp Fixed assets Advances to staff Advances to suppliers Cash at bank Foli o Credit $ 5,000 6,000 95,000 15,000 25,000 15,000 10,000 230,000

Feb 28 Feb 28

Date 2004 Feb 01 Feb 01 Feb 05

Particulars Endowment Fund Subscription Bank profit

Foli o

Debit $ 300,000 100,000 1,000

Date Feb 10 Feb12 Feb 13 Feb 15 Feb 17 Feb 18 Feb 19 Feb 28

TOTAL

401,00 0

401,000

Subscription
Date Particulars Folio Debit Date Feb 01 Feb 02 Particulars Bank A/C Receivable

Account No.
Folio Credit 100,000 50,000

Feb 28

Income Expenditure TOTAL

&

150,0 00 150, 000

150,000

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Basic Accounting Course

INTEREST ON BANK DEPOSIT Date Feb 28 Particulars Income Expenditure TOTAL & Folio Debit 1,000 1,00 0 UTILITIES Date Feb 12 Particulars Bank Account Payable TOTAL Folio Deb it 6,00 0 2,50 0 8,5 00 RENT Date Feb 10 Particulars Bank TOTAL Foli o Debi t 5,000 5,00 0 SALARIES Date Feb 13 Feb 28 Particulars Bank Account Payable TOTAL Fol io Debi t 95,00 0 10,00 0 105, 000 Date Feb 28 Particulars Income Expenditure & Foli o Date Feb 28 Particulars Income Expenditure & Foli o Date Feb 28 Particulars Income Expenditure & Foli o Date Feb 5 Particulars Bank Folio Account No Credit 1,000 1,000

Account No Credit 8,500

8,500

Account No Credit 5,000 5,000

Account No Credit 105,000

105,000

TRAINING EXP Date Feb 15 Particulars Bank TOTAL Foli o Debi t 15,00 0 15,0 00 ADVANCES TO STAFF Date Feb 18 Particulars Bank Foli o Debi t 15,00 Date Particulars Foli o Date Feb 28 Particulars Income Expenditure & Foli o

Account No Credit 15,000 15,000

Account No Credit

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0 TOTAL 15,0 00 ADVANCES TO SUPPLIERS Date Feb 18 Particulars Bank TOTAL Foli o Debi t 10,00 0 10,0 00 Date Feb 28 Particulars Balance C/F Foli o Feb 28 Balance C/F 15,000 15,000

Account No Credit 10,000 10,000

FIXED ASSETS Date Feb 17 Particulars Bank TOTAL Foli o Debi t 25,0 00 25,0 00 Date Feb 28 Particulars Balance C/F Foli o

Account No Credit 25,000 25,000

ENDOWMENT FUND Date Feb 28 Particulars Balance C/F TOTAL Fol io Debi t 300,0 00 100, 000 Date Feb 01 Particulars Bank Foli o

Account No Credit 300,000 100,000

INTERNATIONAL RELIEF AGENCY TRIAL BALANCE AS ON FEBRUARY 28, 2004

ACCOUNT HEAD Rent paid Utilities Salaries Training courses Fixed assets acquired Advances to staff Advances to suppliers Cash at bank Endowment Fund Account Receivable Subscription Account Payable Bank profit TOTAL DEBIT 5,000 8,500 105,000 15,000 25,000 15,000 10,000 230,000 300,000 50,000 150,000 12,500 1,000 463,500 CREDIT

463,500

INTERNATIONAL RELIEF AGENCY RECEIPTS AND PAYMENT ACCOUNT FOR THE MONTH OF FEBRUARY 2004 40

Basic Accounting Course

RECEIPTS Opening Balance Add: Receipts during period Endowment Fund Subscription Received Bank profit Total

AMOUN T US $

PAYMENTS Rent paid Utilities Salaries Training courses Fixed assets acquired Advances to staff Advances to suppliers Cash at bank Total

AMOUNT US $ 5,000 6,000 95,000 15,000 25,000 15,000 10,000 230,000 401,000

300,000 100,000 1,000 401,00 0

INTERNATIONAL RELIEF AGENCY INCOME AND EXPENDITURE ACCOUNT FOR THE MONTH ENDED FEBRUARY 28, 2004
EXPENDITURE Rent paid Utilities Salaries Training courses Excess of income over (Carried to balance sheet) Total expenditures AMOUN T$ 5,000 8,500 105,000 15,000 17,500 INCOME Subscription Received 100000 Add: Receivable 50000 Bank profit Total 151,00 0 AMOUN T$ 150,000 1,000

151,00 0

INTERNATIONAL RELIEF AGENCY BALANCE SHEET AS AT FEBRUARY 28, 2004

Capital & Liabilities Endowment Fund Surplus Accrued Expenses US $ 300,000 17,500 12,500 Current Assets Subscriptions receivables Advances to staff Advances to suppliers Cash at Bank Grand Total 50,000 15,000 10,000 230,000 330,0 Property & Assets Fixed Assets less Depreciation US $ 25,000

Grand Total

330,00

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0 00

CHAPTER 07 CAPITAL AND REVENUE EXPENDITURE CAPITAL EXPENDITURE Expenditure means the amount spent. Any expenditure incurred for the following purposes is capital expenditure: a) For acquiring fixed assets such as land, buildings, plant and machinery, furniture and fittings and motor vehicles. These assets should not be acquired with a view to resell them at a profit during the year but to be retained in the business for more than a year. The cost of fixed asset would include all expenditure up to the time the asset becomes ready for use. b) For making improvements and extensions to the fixed asset e.g., additions to buildings. c) For increasing the earning capacity of a business or for reducing the cost of manufacture, administration or distribution in a business e.g., expenditure incurred in removing the business to a central locality or compensation paid to a retrenched employee. d) For raising capital money for the business such as brokerage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc. All capital expenditure represents either an assets or liability and is shown in the balance sheet. LIST OF CAPITAL EXPENDITURE The following is a list of the usual items of capital expenditure. 1. Cost of good will 2. Freehold land and buildings and the legal charges incurred in this connection. 3. Cost of lease 4. Cost of machineries, plants, tools, fixtures. etc 5. Cost of trade marks, patents, copy rights, designs etc 6. Cost of car, lorry etc 7. Cost of installation of lights and fans 8. Cost of any other assets acquired by way of equipment 9. Erection cost of plant and machinery 10. Cost of addition to existing assets 11. Structural improvements and alterations in the existing assets 12. Expenses for developments in case of mines and plantations 13. Expenses for administration incurred for construction and equipment of any industrial enterprise 14. Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights

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Basic Accounting Course

REVENUE EXPENDITURE Expenditure will be treated as revenue if it is incurred for the following purpose: a) Expenditure for purchasing floating assets. e.g. cost of goods, raw material and stores. b) Expenditure incurred by maintaining fixed assets in proper working order e.g., repairs to plant and machinery, buildings, furniture and fittings etc c) Expenditure incurred for meeting day to day expenses of operating a business e.g., salaries, wages, rent, rates, taxes, stationery, postage etc. All the revenue expenditure has to be deducted from the income earned by the organization. That is to say, all revenue items will be taken to the profit & loss account. LIST OF REVENUE EXPENDITURE The following is a list of usual items of revenue expenditure: a) Expenses incurred for the ordinary administration and carrying on the operations of a business b) Expenses for repairs c) Cost of goods for resale d) Cost of raw materials and stores acquired for consumption in course of manufacturing e) Wages paid for manufacture of products for sale f) Expenses for the manufacture and distribution of the finished product g) Loss from wear and tear and obsolescence of assets h) Depreciation of lease assets i) Interest on loans borrowed for business j) Loss from sale of fixed assets k) Fees for renewal of patent rights etc l) Up keep and maintenance of motor car and van m) Maintenance of fan and lights n) Book value of assets discarded or totally damaged or destroyed by fire or other reasons DIFFERENCE BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE. Capital expenditure 1. Its effect is long term i.e. it is not exhausted within the current accounting year- its benefit is enjoyed in future years also. 2. An asset is acquired or the value of an asset is increased as a result of this expenditure. 3. Generally, it has physical 43 Revenue expenditure 1. Its effect is temporary i.e. it is exhausted within the current accounting year.

2. Neither an asset is acquired nor is the value of an asset increased. 3. It has no physical existence i.e. it

Basic Accounting Course existence i.e. it can be seen with eyes. 4. It does not occur again and again it is non-recurring and irregular. 5. This expenditure improves the position of the concern. 6. A portion of this expenditure is shown in trading and profit & loss account or income & expenditure account as depreciation. 7. It appears in balance sheet until its benefit is fully exhausted. cannot be seen with eyes. 4. It occurs repeatedly it is recurring and regular. 5. This expenditure helps to maintain the concern. 6. The whole amount of this expenditure is shown in trading and profit & loss account or income & expenditure account. But deferred revenue expenditure and prepaid expenses are not shown. 7. It does not appear in balance sheet. Deferred revenue expenditure, outstanding expenditure, outstanding expenses and prepaid expenses are, however, temporarily shown in balance sheet. 8. It reduces revenue e.g. payment of salaries to employees decreases revenue.

8. It does not reduce the revenue of the concern. Purchase of fixed asset does not affect revenue.

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CHAPTER 09 DEPRECIATION Depreciation may be defined as the permanent and continuous diminution in the quality, quantity or value of an asset CAUSES OF DEPRECIATION The main causes of depreciation may be divided into two categories namely: 1. Internal Causes: depreciation which occurs for certain inherent normal causes is known as internal depreciation. The causes of internal depreciation are: a. Wear and Tear: Some assets physically deteriorate due to wear and tear in use. More use of an asset, the greater would be the wear and tear. Physical deterioration of an asset is caused from movement, strain, friction, etc. an obvious example of this is motor car which rapidly wears out. Other assets like this are building, plant, machinery, furniture etc. The wear and tear is general but primary cause of depreciation. b. Depletion: Some assets declines in value proportionate to the quantum of production, e.g. mine, quarry etc. with the raising of coal from coal mine the total deposit reduces gradually and after sometime it will be fully exhausted. Then it will be reduced to nil. 2. External Causes: Depreciation caused by some external reasons is called external depreciation. The causes of external depreciation are: c. Obsolescence: Some assets, although in proper working order, may become obsolete. For example, old machine becomes obsolete with the invention of more economical and sophisticated machine whose productive capacity is generally larger and cost of production is less. In order to survive in the competitive market the manufacturers must install new machine replacing the old one. Again, it may happen that the articles produced by old machine are no longer saleable in the market on account of change of habit and taste of the people. In such a case the old machine, although in good working condition, must be discarded and new one should be purchased. d. Efflux of Time: Some assets diminish in value on account of sheer passage of time, even though they are not used e.g. leasehold property, patent right, copyright etc. suppose, we take a house on lease for 10 year for US$ 10,000, its annual depreciation will be US$ 1,000 (10000/10), irrespective of whether the house has been used or not. Because with the end of lease after 10 years, the house will go out of our possession. e. Accident: Assets may be destroyed by abnormal reasons such as fire, earthquake, flood etc. in such a case the destroyed asset must be written off as loss and new one purchased.

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Basic Accounting Course FORMS AND FORMATS Name of the Organization Trial Balance As on ___________________
A/C Codes Particular DR CR

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Basic Accounting Course

Name of the Organisation Income and Expenditure Account For the Year Ended 2004 (EURO) 2003 (EURO)

Note Income Donations Other Receipts Expenditure Salaries and othe benefits (Admin) Salaries and othe benefits (Field) Repair and Maintenance Depreciation Financial Expenses Office Contingencies Travelling and Conveyance Corporate Expenses Development Expenditure Excess of Expenditure over income for the peroid Accumulated excess of income over expenditure brought forward Accumulated excess of income over Expenditure carried to Balance Sheet 8 9

The above Income and Expenditure should be read with the Annexed Notes Finance Manager Project Manager / Director

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Basic Accounting Course

Name of the Organization Balance Sheet As At 2004 (EURO) 2003 (EURO)

Note Fixed Assets at cost less accumulated depreciation Net Current Assets Current Assets Stores and spares Advances, Deposits and prepayments Cash and Bank balances Less: Current Liabilities Creditors and accrued expenses Net Assets Employed 8

Represented by Accumulated excess on income over expenditure

The above Income and Expenditure should be read with the Annexed Notes Finance Manager Project Manager / Director

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Basic Accounting Course Name of the Organization Notes to the Accounts For the year ended___________________ 1. Legal Status and Operations The ________________________________The Society has been registered under the Societies Registration Act, 1880 (or any other relevant legislation) Under this heading the organization will show summary of its overall activities e.g. (Health and sanitation, education, improvement of water supplies, women welfare etc.) 2. Accounting Polices The Following polices have been adopted in preparation of these accounts. 2.1. Accounting convention Under this heading the organization will show the basis on which they record all their transactions in the books of accounts (e.g. Historical Cost Convention) 2.2. Fixed Assets Under this heading the organization will show the basis on which they value their fixed assets. In addition the rate and method used for depreciation of Fixed Assets should also be mentioned here. 2.3. Revenue Recognition Under this heading the organization will show the timing of recognition of their income / donations / grants etc. 2.4. Consumable Stores Under this heading the organization will show the basis on which they value their 2.5. Foreign Exchange Currency Translation Under this heading the organization will show the basis on which they convert their foreign exchange into reporting currency for reporting purpose. Fixed Assets
Written down value as at 30-0604

Cost Particular As at 01-0704 Additio ns / deletio ns As at 3006-04 Ra te %

Depreciation As at 0107-04 For the year As at 3006-04

Land Building Machinery Vehicles Office Equipment Furniture & Fixture Electric Appliances Other Assets

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Basic Accounting Course

2004 (EURO) 2005 (EURO)

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Basic Accounting Course

Note Advance, Deposits and Prepayments Advances To Staff To Contractor To Other Deposits Securities Prepayments Rent Insurance

2004 (EURO)

2003 (EURO)

Cash and Bank Balances Cash in hand Cash in Bank - current account Cash in Bank - saving account Crediors and Accrued Expenses Crediors Accrued Expenses

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Basic Accounting Course

Note Income from Donaitons Funds Funds Funds Funds from Foreign Donors from Local Donors from Provincial Government from Federal Government

2004 (EURO)

2003 (EURO)

Income from Other Sources Interest on bank deposits Gain on foreign currency Interest on staff loan Consultancy fee Service charges Training fee Registration fee Income from investment Miscellaneous

General Figures have been rounded off to the nearest Euro. Figures of the previous year have been rearranged and regruoped. wherever necessary for the purpose of comparison.

Finance Manager

Director

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