Beruflich Dokumente
Kultur Dokumente
1-1
What is Accounting?
It is an information system that...
Accounting...
is called the language of business.
Assets Income
1-3
External users
make decisions about the entity.
Internal users
make decisions for the entity.
1-4
External users
1-5
Internal users
1-6
1-7
Objectives of Accounting
For external users, Accounting reports are the source of information on the financial health of the company, its ability to generate adequate surplus, its quantum of actual surplus
1-8
Objectives of Accounting
For internal users, Accounting reports provide information for managerial decision making, show its performance vis--vis the industry benchmark .
1-9
Fields of Accounting
Financial Accounting
Management Accounting
Cost Accounting
1 - 10
1 - 11
Proprietorships
What are some advantages? total undivided authority no restrictions on type of business must be legal What are some disadvantages? unlimited liability limitation on size fund raising power
1 - 12
Partnerships
What are some advantages? better credit standing possibly more brain power, but consultation with partners required What are some disadvantages? unlimited personal liability for partners need for written partnership agreement
1 - 13
Companies
What are some advantages? separate legal existence limited liability of stockholders transferability of ownership relatively easy What are some disadvantages? taxes possible double taxation extensive governmental regulation
1 - 14
Accounting is ...
Recording
1 - 15
What is a transaction?
It is any event that both affects the financial position of the business and can be reliably recorded.
1 - 16
1 - 17
Books of Account
Journal
Cash Book Purchase Book Sales Book Purchase Return Book Sales Return Book, etc Journal Proper
Ledger
1 - 18
Financial Statements
Trading
and Profit & Loss Account Balance Sheet Fund-Flow and Cash-flow Statements
1 - 19
1 - 20
Double-Entry Accounting
Double entry bookkeeping means to record the dual effects of each business transaction.
Assets
Assets are on the right (debit) side. Liabilities and Equity are on the left (credit) side.
1 - 21
Economic Resources
Assets
What is an asset?
It is something a company owns which has future economic value. land building equipment goodwill
1 - 23
Liability
What is a liability?
It is something a company owes. money service legal retainers product magazines
1 - 24
Owners Equity
What is owners equity? It is whats left of the assets after liabilities have been deducted. the same as net assets the owners claim on the entitys assets
1 - 25
Revenues
Expenses
1 - 26
Assets
Liabilities
Owners Equity
Debit +
Credit
Debit
Credit +
Debit
Credit +
1 - 27
Cash Liquid Investments Accounts Receivable Prepaid Expenses Land Building Equipment
1 - 28
Working Capital Loan Accounts Payable Accrued Liabilities (for expenses incurred but not paid) Long-term Liabilities (bonds)
1 - 29
1 - 30
1 - 31
1 - 32
1 - 33
In a company, the owners equity account is called Stockholders Equity. Contributed Capital
Retained Earnings
1 - 34
One debit
One credit
1 - 36
Cash
Liabilities
Owners Equity
1 - 37
Assets
Cash Total assets Rs. 800,000 Rs. 800,000
1 - 38
1 - 40
Journals
What is a journal? It is a list in chronological order of all the transactions for a business. 1 Identify transaction from source documents. 2 Specify accounts affected. 3 Apply debit/credit rules. 4 Record transaction with description.
1 - 41
Journals
What does a journal entry include? date of the transaction title of the account debited title of the account credited amount of the debit and credit description of the transaction
1 - 42
Recording Transactions
On April 2, Owners invested Rs. 30,000 in business. What is the journal entry? April 2 Cash 30,000 Owners Capital 30,000 Received initial investment from owner
1 - 43
1 - 44
Ledger
What is a ledger? It is a digest of all accounts utilized by an entity during an accounting period.
Posting
What is posting? It is the transfer of information from the journal to the appropriate accounts in the ledger.
1 - 46
The T-Account
Account Title Debit Credit
LEFT SIDE
1 - 47
The T-Account
Account Title Debit Credit
RIGHT SIDE
1 - 48
Accounting Terms
Cash Individual asset accounts All individual accounts combined make up the ledger. Ledger
Accounts Payable
Example 1:
Mr X sells goods worth Rs 10 lac to Mr Y on January 1, 2006. Mr Y makes a cash down payment of Rs 2 lac. On Jan 2, Mr X draws a bill for the remaining amount, which is accepted by Mr Y. On the same day, Mr X gets the bill discounted by his Banker, who deducts a discount of 1% of the bill amount.
1 - 51
Example 1:
1 - 52
Example 2:
On Feb 2, the due date of the bill, Mr Y could pay only Rs. 5 lac. The balance amount is paid by Mr. X to the Bank.
On Mar 2, Mr Y pays this remaining amount to Mr X by means of a cheque towards full and final settlement of all dues.
1 - 53
Example 2:
1 - 54
Trial Balance
What is a trial balance? It is an internal document. It is a listing of all the accounts with their related balances. Before computers, it provided a check on accuracy by showing whether total debits equal total credits.
1 - 55
DEBITS
CREDITS
1 - 56
1 - 57
The side where we expect increases to be recorded is the normal balance side.
1 - 58
Depreciation
Whenever a business organisation uses fixed assets, there is constant wear and tear of the items. Unless the impact of such wear and tear is considered suitably for the purpose of accounting, the profit or loss of the enterprise cannot be correctly estimated.
1 - 59
Depreciation
When a fixed asset is purchased, the total amount is NOT an expense but we are creating an ASSET. Every year A PART of this asset is being used up. This part is tantamount to an EXPENSE. However, actual cash outflow takes place only during the purchase of the fixed asset and NOT every year when depreciation is charged.
1 - 60
Depreciation
There
methods
of
charging
Depreciation
Depreciation
Depreciation
S
Years n
1 - 64
Depreciation
Depreciation
Therefore, C (1-r)n = S
or, r = 1 (S/C) 1/n
1 - 66
Depreciation
WDV Method
1 - 67
Example
For an equipment Original purchase price = Rs. 110000 Useful Life = 10 years Salvage Value = Rs. 10000
Compute the rate of depreciation under (a) Straight Line Method (b) Written Down Value Method
1 - 68
Example
Original purchase price = Rs. 110000 Useful Life = 10 years Salvage Value = Rs. 10000
In Straight Line Method r = (1 S/C)/n = (1 10000/110000)/10 = 1/11
1 - 69
Example
Original purchase price = Rs. 110000 Useful Life = 10 years Salvage Value = Rs. 10000
In Written Down Value Method
r = 1 (S/C) 1/n
Another Example
The original purchase price of a machine is Rs. 10 lac and depreciation is charged at 10% p.a. What will be the net (depreciated) value of the machine under SLM and WDVM after 2 years?
1 - 71
Another Example
SLM (Straight Line Method) First Year Original Value Rs. 10 lac Depreciation Rs. 1 lac Net Value Rs. 9 lac
Second Year Original Value Rs. 9 lac Depreciation Rs. 1 lac Net Value Rs. 8 lac
1 - 72
Another Example
WDVM (Written Down Value Method) First Year Original Value Rs. 10.0 lac Depreciation Rs. 1.0 lac Net Value Rs. 9.0 lac
Second Year Original Value Rs. 9.0 lac Depreciation Rs. 0.9 lac Net Value Rs. 8.1 lac
1 - 73
1 - 74
1 - 75
1 - 77
1 - 78
Financial Statements...
are the final product of the accounting process. tell how the business is performing and where it stands.
1 - 79
Financial Statements
income statement statement of owners equity or retained earnings balance sheet statement of cash flows
1 - 80
Transaction
On Apr 2, 2006 Sushma, the owner of a business brings in cash of Rs. 30000 as Owners Fund or Capital.
1 - 81
Journal Entry
Date
Particulars
Debit(Rs)
Credit (Rs)
30,000
30,000
1 - 82
Ledger Posting
Dr
To Capital A/c
Cash A/c
Rs 30,000
Cr Rs
1 - 83
Ledger Posting
Dr
Capital A/c
Rs By Cash A/c
Cr Rs 30,000
1 - 84
Life Goes On
1.
2.
3.
4.
After investing Rs. 30,000 to begin her business, Sushma purchases an office location, paying Rs. 20,000 in cash. She buys office supplies, agreeing to pay Rs. 500 in 30 days. She earns and collects Rs. 5,500 revenues.
1 - 85
Life Goes On
Sushma performs services, and the client agrees to pay Rs. 3,000 within one month. 6 During the month, she pays Rs. 3,100 for expenses incurred. 7 Sushma pays Rs. 300 to the store from which she purchased Rs. 500 worth of supplies. What is the effect of these transactions on the accounting equation?
5
1 - 86
1 - 87
+ Rs. 30,000 20,000 + 20,000 + 500 + 5,500 + 3,000 3,100 300 + Rs. 35,600
+ Rs. 35,400
1 - 88
1 - 89
Life Goes On
Other transactions that took place were as follows: The business collected Rs. 1,000 from the client. She sold some land at cost for Rs. 9,000. She withdrew Rs. 2,100 from the business.
1 - 90
Land
(2) 20,000 9000 Bal. 11,000
Office Supplies
(3) 500
Bal. 500
1 - 91
Owners Capital
(1) 30,000
Bal. 30,000
Owners Withdrawals
(6) 2,100 Bal. 2,100
1 - 92
Revenue: Fees earned Rs. 8,500 Expenses: Salary expense Rs. 1,200 Utilities and telephone expense 400 Equipment rental expense 400 Office rent expense 1,100 3,100 Net income Rs. 5,400
1 - 93
1 - 94
Owners equity, Sushma, capital 33,300 Total liabilities and owners equity Rs. 33,500
1 - 95
3,400
Rs. 3,100
(Rs. 11,000)
1 - 96
1 - 98
Revenue Principle
The revenue principle governs two things: When to record revenue and the amount of revenue to record.
1 - 99
The unadjusted trial balance lists the accounts and their balances after the periods transactions have been recorded.
1 - 100
Depreciation
Accruals
1 - 101
April 30 Rent Expense (Rs 3,000 /3) Prepaid Rent To record rent expense
1,000 1,000
1 - 102
Supplies 700
Cash 700
1 - 103
1 - 104
Furniture 16,500
1 - 105
April 30 Depreciation Expense Furniture Accumulated Depreciation Furniture To record depreciation on furniture
275
275
1 - 107
Book Value
The net amount of a plant asset (cost minus accumulated depreciation) is the book value. Plant Assets of Air & Sea at April 30
Furniture Less Accumulated Depreciation Building Less Accumulated Depreciation Book value of plant assets Rs 16,500 275 Rs 16,225 Rs 48,000 200 47,800 Rs 64,025
1 - 108
Accrued Expenses
The term accrued expense refers to a liability that arises from an expense that has not yet been paid.
Suppose Air & Sea Travel pays its employees a monthly salary of Rs 1,900, half on the 15th and half on the last day of the month.
1 - 109
Accrued Expenses
April
15
Assume that if a payday falls on the weekend, Air & Sea pays the employee on the following Monday.
30
1 - 110
Accrued Expenses
Salary Expense 4/15 950 Cash 4/15 950
1 - 111
Accrued Revenues
An accrued revenue is a revenue that has been earned but not received in cash. Bank One hires Air & Sea Travel on April 15 to arrange travel services on a monthly basis. Bank One will pay the travel agency Rs 500 monthly, with the first payment on May 15.
1 - 112
Accrued Revenues
April 30 Accounts Receivable (Rs 500 ) Service Revenue To accrue service revenue
250 250
1 - 113
Unearned Revenues
An unearned revenue is an obligation arising from receiving cash before providing a service. Plantation Foods engages Air & Sea Travel agreeing to pay the agency Rs 450 monthly, beginning immediately.
Air & Sea Travel collects the first amount on April 20 and earns one-third the last 10 days.
1 - 114
Unearned Revenues
April 20 Cash 450 Unearned Revenue Received cash for revenue in advance
April 30 Unearned Revenue (Rs 450 1/3) 150 Revenue To record unearned revenue earned
450
150
1 - 115
Partial Trial Balance Adjustments Dr. Cr. Dr. Cr. 2,250 e) 250 700 b) 300 3,000 a) 1,000 c) 275 d) 950 450 f) 150 g) 540 7,000 e) 250 f) 150 a) 1,000 1,000 950 d) 950 1,900 b) 300 300 c) 275 275 g) 540 540 3,465 3,465
Partial Adjusted Trial Balance Dr. Cr. 2,500 400 2,000 275 950 300 540 7,400
3 - 116 1 - 116
Balance Sheet
Retained Earnings
1 - 117
Account Title Service revenue Rent expense Salary expense Supplies expense Depreciation expense Utilities expense Income tax expense Totals
Income Statement
1 - 118
1 - 119
Rs 7,400
Rs 1,900 1,000 400 300 275
1 - 121
Assets Cash Rs 24,800 Accounts receivable 2,500 Supplies 400 Prepaid rent 2,000 Furniture Rs 16,500 Less: Accumulated depreciation 275 16,225
Total assets
Rs 45,925
Liabilities Accounts payable Rs 13,100 Salary payable 950 Unearned revenue 300 Income tax payable 540 Total liabilities Rs 14,890 Stockholders Equity Common stock Rs 20,000 Retained earnings 11,035 Total Rs 31,031 Total liabilities and stockholders equity Rs 45,925
1 - 122
1 - 124
1 - 128
Report Format
1 - 130
Revenues
Expenses
= Net income
1 - 131
Operating income
Add: Other revenues and gains Less: Other expenses and losses
1 - 132
Income taxes
Net earnings
1 - 133
Current Ratio
The current ratio measures the companys ability to pay current liabilities with current assets.
Current ratio = Total current assets Total current liabilities
Rule of thumb: A strong current ratio is 2.00.
1 - 134
Debt Ratio
The debt ratio indicates the proportion of assets that is financed with debt. Debt ratio = Total liabilities Total assets This ratio measures a businesss ability to pay total liabilities A low debt ratio is safer than a high debt ratio.
1 - 135