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Introduction to Accounting

- Thangjam Ravichandra Asst. Professor IASMS

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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The Need for Accounting


Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform?

Where does the organization stand?


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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

The Need for Accounting


Accountants answer these questions with three major financial statements: Income statement Statement of cash flows
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Balance sheet

The Need for Accounting


A transaction is any event that affects the financial position of an organization and requires recording.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Accounting

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Objectives of Accounting
To ascertain whether the business operations have been profitable or not To ascertain the financial position of the business To generate information

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Functions of Accounting
1. Systematic record of business transactions 2. Protecting the property of the business 3. Communicating results to interested parties 4. Compliance with legal requirement

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Who uses accounting information ?


Owners Managers Investors (including potential)

Analysts on their behalf Creditors (including potential) Government (tax assessment) Regulators Customers Employees Public & Research Scholar

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

Branches of Accounting

Financial Accounting

Cost Accounting
Management Accounting

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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CLASSIFICATION OF ACCOUNTS
ACCOUNTS

PERSONAL ACCOUNTS

IMPERSONAL ACCOUNTS

REAL ACCOUNTS

NOMINAL ACCOUNTS
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

PERSONAL ACCOUNTS
Accounts in the name of persons are known as personal accounts.
Eg: Babu A/C, Babu & Co. A/C, Outstanding Salaries A/C, etc.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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REAL ACCOUNTS
These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.
Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 12

NOMINAL ACCOUNTS
These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All expenses and losses and all incomes and gains fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 13

Lets Start Then.. Huh?


1. Drawings A/c 2. Bank A/c 3. Cash A/c 4. Discount A/c 5. Patent A/c 6. Goodwill A/c 7. Salaries A/c 8. Capital A/c 9. Machinery A/c 10.Purchases A/c : Personal : Personal : Real : Nominal : Real : Real : Nominal : Personal : Real : Real
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

RULES FOR DEBIT AND CREDIT


Personal Account Debit the Receiver
Credit the Giver Debit what comes in Real Accounts Credit what goes out Debit all Expenses and Losses

Nominal Accounts

Credit all Incomes and Gains


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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

Steps for finding the debit and credit aspects of a particular transaction
Find out the two accounts involved in the
transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Exercise
Started Business with Rs 50,000 Purchased Furniture for Rs 1000 from Pankaj Goods purchased for cash Rs 20,000 Goods sold to Ram for Rs 5000 on credit Paid salaries to staff Rs 1800 Goods worth Rs 500 returned by Ram Rs 1000 Commission received

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Accounting Equation
Assets are economic resources that are expected to benefit future activities of the organization. Liabilities are the entitys economic obligations to nonowners. Owners equity is the excess of the assets over the liabilities.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 18

Double Entry Accounting Equation


Initial investment by owners: $100,000 cash

Acquisition of inventory: $75,000 cash


Acquisition of inventory on open account: $35,000 Merchandise costing $100,000 was sold on open account for $120,000.
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Balancing of Accounting Equation


Assets = Stockholders Liabilities + equity

1) 2)

Cash Cash Inventory 3) Inventory 4a) Receivable 4b) Cost Subtotal

+100,000 75,000 + 75,000 + 35,000 + 35,000 +120,000 100,000 +155,000 + 35,000

+100,000

+120,000 100,000 +120,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Exercise
Cash collections of accounts receivable: $15,000

Cash payments of accounts payable: $20,000


On March 1, paid $3,000 cash for store rent for March, April, and May. Rent is $1,000 per month.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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King Hardware Transactions


Assets = Stockholders Liabilities + equity

5) 6) 7)

Cash Receivable Cash Cash Prepaid

Total Totals (1-4)

+ 15,000 15,000 20,000 20,000 3,000 + 3,000 20,000 20,000 +155,000 + 35,000 134,000

+120,000

134,000
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

Revenues and Expenses


Revenues are increases in ownership claims arising from the delivery of goods or services. Expenses are decreases in ownership claims arising from delivering goods or services or using up assets.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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The Analytical Power of the Balance Sheet Equation


The balance sheet equation can highlight the link between the income statement and balance sheet. Assets (A) = Liabilities (L) + Stockholders equity (SE)

A = L + Paid-in capital + Retained income


A = L + Paid-in capital + Revenue Expenses
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Accounting Concepts
Business Entity Concept Money Measurement Concept

Cost Concept
Going Concern Concept Dual Aspect Concept Realization Concept Accounting Period Concept Matching Objective Evidence Accrual
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

Accounting Conventions
Convention of Consistency Convention of Disclosure

Convention of Conservation
Convention of Materiality

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Fundamental Accounting Assumptions


Going Concern Consistency Accrual Disclosure of Accounting Policies as per AS1 :
All significant accounting policies The disclosure should form part of the financial statement Any change in the accounting policies which has material effect should be disclosed If the fundamental accounting assumptions viz, Going concern, Consistency and Accrual are followed in financial statement, specific disclosure is not required. Otherwise, the fact should be disclosed.
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Recording Business Transactions

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Steps in The Accounting Cycle

Analyze source documents.

Journalize transactions in the general journal.

Post entries to the accounts in the general ledger.

Prepare a trial balance.

Prepare financial statements.


2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 29

Recording Transactions
All transactions are recorded in the General Journal.

Each transaction always affects at least two different accounts. One account has a debit effect. The second account has a credit effect. This methodology was named double entry accounting by whom? - Luco Pacioli (1494)
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

General Journal Page


GENERAL JOURNAL
Page:

Date

Description

PR

Debit

Credit

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Example 1

On January 1, 19X7, Caldwell Company borrows $10,000 from the bank.


Prepare the appropriate general journal entry for the above transaction.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 32

Journal Entries
Solution 1

Two accounts are affected:


Cash is increased by $10,000. Notes Payable is increased by $10,000.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 1

Two accounts are affected:


Date

JOURNAL Cash isGENERAL increased by $10,000. Page: Notes Payable is increased byDebit $10,000. Description PR Credit

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 1

Two accounts are affected:


Date

JOURNAL Cash isGENERAL increased by $10,000. Page: Notes Payable is increased byDebit $10,000. Description PR Credit

1-Jan

Cash Notes Payable to record loan from bank

100 201

10,000 10,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 1
Typically, accounts are numbered. The account numbers are used as references posting to theare affected: Twofor accounts JOURNAL General Ledger. on CashMore isGENERAL increased by $10,000. Page: accountNotes numbers will come Payable is increased byDebit $10,000. Date Description PR Credit later. 1-Jan Cash 100 10,000
Notes Payable to record loan from bank 201 10,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Example 2

On January 15, 19X7, Caldwell Company purchases a truck for $19,500 cash. Prepare the appropriate journal entry for the above transaction.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 37

Journal Entries
Solution 2

Two accounts are affected:


Trucks is increased by $19,500. Cash is decreased by $19,500.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 2

Two accounts are affected:


Date

GENERAL JOURNAL Trucks is increased by $19,500. Page: Cash is decreased by $19,500. Description PR Debit

1
Credit

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 2

Two accounts are affected:


Date

GENERAL JOURNAL Trucks is increased by $19,500. Page: Cash is decreased by $19,500. Description PR Debit

1
Credit

15-Jan

Trucks Cash to record purchase of truck

150 100

19,500 19,500

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Example 3

On January 20, 19X7, Caldwell Co. pays the $400 electric bill for January. Prepare the appropriate journal entry for the above transaction.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 3

Two accounts are affected:


Utility Expense is increased by $400. Cash is decreased by $400.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 3

Two accounts are affected:


Date

GENERAL JOURNAL Utility Expense is increased by $400. Page: Cash is decreased PR by $400. Description Debit Credit

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Journal Entries
Solution 3

Two accounts are affected:


Date

GENERAL JOURNAL Utility Expense is increased by $400. Page: Cash is decreased PR by $400. Description Debit Credit

20-Jan

Utility Expense Cash to record payment of January electric bill

511 100

400 400

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL
Page:

1 Credit

Date

Description

PR

Debit

1-Jan Cash Notes Payable to record loan from bank

10,000 10,000

Start with the journal entry from the General Journal.


2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 45

Posting to the GL
Example
Date

Next, find the appropriate page Page:in the General Description Ledger for Cash.PR Debit
10,000

GENERAL JOURNAL

1 Credit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR

10,000

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR

100

10,000 10,000

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL
Page:

1 Credit

Date

Description

PR

Debit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR

100

10,000 10,000

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan

G1

0 10,000

Post the transaction info to the GL.


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Posting to the GL
Example
GENERAL JOURNAL
Page:

1 Credit

Date

Description

PR

Debit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: CASH
Date Description PR

100

10,000 10,000

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan

G1

0 10,000

0 10,000

Update the General Ledger balance.


2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 49

Posting to the GL
Example
Date

Next, find the Notes PayablePage: page in the General Ledger. Description PR Debit
100 10,000

GENERAL JOURNAL

1 Credit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR

10,000

ACCOUNT No.
Debit Credit

201
Balance

Beginning Balance

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL Post the account reference number. Page: Date Description PR Debit Credit 1

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR

100 201

10,000 10,000

ACCOUNT No.
Debit Credit

201
Balance

Beginning Balance

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL
Page:

1 Credit

Date

Description

PR

Debit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR

100 201

10,000 10,000

ACCOUNT No.
Debit Credit

201
Balance

Beginning Balance 1-Jan Loan

G1

0 10,000

Post the transaction info to the GL.


2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 52

Posting to the GL
Example
GENERAL JOURNAL
Page:

1 Credit

Date

Description

PR

Debit

1-Jan Cash Notes Payable to record loan from bank ACCOUNT NAME: Notes Payable
Date Description PR

100 201

10,000 10,000

ACCOUNT No.
Debit Credit

201
Balance

Beginning Balance 1-Jan Loan

G1

0 10,000

0 10,000

Update the General Ledger balance.


2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 53

Posting to the GL
Example
Examine the next journal entry.
Date Description
GENERAL JOURNAL
Page:

PR

Debit

Credit

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH


Date Description PR

9,500 9,500

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan from bank

G1

0 10,000

0 10,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
Record the account reference.
Date Description
GENERAL JOURNAL
Page:

PR

Debit

Credit

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH


Date Description PR

9,500 100 9,500

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan from bank

G1

0 10,000

0 10,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Posting to the GL
Example
GENERAL JOURNAL
Page:

Date

Description

PR

Debit

Credit

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH


Date Description PR

9,500 100 9,500

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck

G1 G3

0 10,000 9,500

0 10,000

Post the entry to the GL.


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Posting to the GL
Example
GENERAL JOURNAL
Page:

Date

Description

PR

Debit

Credit

15-Jan Trucks Cash to record purchase of truck ACCOUNT NAME: CASH


Date Description PR

9,500 100 9,500

ACCOUNT No.
Debit Credit

100
Balance

Beginning Balance 1-Jan Loan from bank 15-Jan Purchase of truck

G1 G3

0 10,000 9,500

0 10,000 500

Update the General Ledger balance.


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Illustrations Journal, Ledger and Trial Balance


Page 33-44

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Assignments ( for internals)


1. GAAP and Accounting Environment 2. Role of Accounting in Capital Markets and Corporate Governance 3. Frauds done by Accountant with a Case

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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