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Agenda
What is Accounting
Mode of Learning Accounting
Accounting and Finance - Difference
Accounting Concepts / Conventions
Accounting Events
Rules of Accounting
Preparation of Financial Statements
A Simple Case Study
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What is Accounting
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement
JOURNAL
Cash at December 31, 1997 $4,456
Account Receivable Vision Enterprises
$5,714
Land Assets Financial Statement
$ 981
Cash at December---------
31, 1997 $4,456
Total Assets
Account Receivable $11,151 $5,714
Land Assets ====== $ 981
Liability Cash --------- $4,456
Account Payable
Total Assets
Account Receivable $3,830 $11,151 $5,714
Notes Payable Land $ 416======$ 981
Liability --------- ---------
Total Liability
Account Payable
Total Assets $4,246 $3,830$11,151
Notes Payable ======$ 416======
Stockholders Equity
Liability $2,365---------
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Mode of Learning Accounting
Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
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Accounting Concepts
Business Entity Concept
Accounts can be kept only for Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.
See Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Material
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Types of Entities
Type of Organization Example
Sole Proprietary Siva & Co
Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account
with Bank of America and You have Bank Account with Citi Bank and the salary
at end of every month is transferred from Bank of America to Citi Bank. How
many accounting Entities involved in this case?
If your answer is 4, then you are right (You, Oracle Corp, Bank of America,
Citi Bank)
Ex 3: You run your own Business in Software Consulting and your Friend has
agreed to provide a Loan of 50000 USD which he goes and deposit directly into
your Bank account - How many accounting Entities involved in this case?
If you say 3, You are right, it is only Three. (You, Your Friend and Bank)
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Accounting Concepts
Money Measurement Concept
Record should be made only of that information which can be
expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be
recorded unless a Value of Furniture is known in monetary value
Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000
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Accounting Concepts
Cost Concept
Assets are always shown at their Cost and not at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be
recorded only at Rs.5 Lacs even though Market
value may be lower say Rs.4 Lacs or Higher Rs.6
Lacs than the Cost Price
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Accounting Concepts
Accounting Period
Accounting measures activity for a specified interval of time, usually
a year
(e.g) Calendar Year (Jan07-Dec07)
Fiscal Year (Apr07-Mar08)
Choosing the Accounting period is the entities choice, but there are
legal rules like Companies Act and Income Tax Act which prescribes
the period in which the entity has to report to them.
Remember still Entities can have different accounting period for their
own Internal Management Reporting
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Accounting Concepts
Realization Concept
The Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or
realized. Realization is assumed to occur when the seller receives
cash or a claim to cash (receivable) in exchange for goods or services
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Accounting Concepts
Matching Concept
When an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting period
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Accounting Concepts
Materiality concept
Insignificant events would not be recorded, if the
benefit of recording them does not signify the
cost
Ex: A calculator worth Rs.500 not recorded asset
rather than charged off as an Expense even
though the benefit is enduring in nature.
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Accounting Conventions
Going Concern
Accounting Records , Events and Transactions on the
assumption that the entity will continue to operate for an
indefinitely Long period of time
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Accounting Conventions
Consistency
The Accounting Policies and methods followed by the
company should be the same every year
Ex 1. Period should not be changed frequently from Jan-
Dec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then
that Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.
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Accounting Conventions
Accrual
In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments (NSC
interest), Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)
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Classification of Accounting Event
Revenue Item: An Income or Expenditure and the
benefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set up
for the Set of Books
Ex: Salary and wages, Printing and Stationery, Sales
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Classification of Accounting Event
Deferred Revenue Expenditure: It is neither a Capital
nor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation of
an asset.
Ex 1: Advertisement Expenditure the benefit of which
years
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Rules of Accounting
Accounts
Personal Impersonal
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Accounting Rule of Thumb
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Combination of Rules
Dr Personal A/c Dr Real A/c
Cr Real A/c Cr Personal A/c
Ex:Drawings or Advance to Employee,
Ex:Capital invested, Payment Received
Payment to Supplier
from Customer
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Combination of Accounting Rules
Debit
Personal X
Credit
Real
Nominal X
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Combination of Accounting Rules
Both Debit and Credit cannot be Personal Accounts
EX 1: Siva paid Cash to Ajay. The Entry Cannot be
Ajay A/c Dr
Siva A/c Cr
The Correct entries are as follows. In Ajay set of Books
Cash A/c Dr 1000
Siva A/c Cr 1000
Cash Book
Secondary Books
Purchase Register
Sales Register
Journal Register
Statements
Adjustment entries are made in adjustment period and
31-03-2008)
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Accounting Concepts
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Case Study
Siva started Business as dealer in Computer Spare parts and
Computer Stationery on 01-APR-2007 and following events occurred
in the month of April.
Siva invested USD 50000 Cash and USD 50000 worth of furniture
Siva purchased USD 75000 worth of goods on credit
Sivas friend Ajay promised him to give a loan of USD 25000
Siva sold USD 50000 worth of good for USD 100000
Siva paid rent USD 2000 for two months
Siva paid Salary to Staff USD 5000
Siva incurred USD 5000 on interior decoration which will last for two
years.
Siva sold USD 10000 worth of goods on credit for USD 18000
Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John account
Purchased Vehicle for USD 25000 paid through Bank
Cash Deposited by Siva into Bank 50000 USD
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ARE YOU READY FOR THE
GAME
Accounting is very simple
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Accounting Terminologies
Before creating Accounting Transactions let us recall and learn few
accounting terminologies
ASSETS: Any property or Investment which can be convertible into cash
LIABILITIES: Amount Payable to providers of goods and Services
(Creditors) and Providers of Capital (Owners)
REVENUE: Amount earned out of the Sale Proceeds and the amount
earned on Investments
EXPENSES: Amount incurred or expended to earn the revenue
PROFIT: TOTAL REVENUE TOTAL EXPENSES
LOSS: If the Total Expenses is more than Total Revenue it is termed as
Loss
FIXED ASSETS: Amount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)
CURRENT ASSETS: Amount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)
NOTE: The Fixed Asset and Current asset vary from Person to Person
Ex: For a Dealer in Refrigerator it is a Current asset which becomes Fixed
Asset for you when you buy.
CREDITORS: Person who provide Money or Goods on Credit to the
Business (Supplier)
DEBTORS: Goods or Money Provided / sold on Credit by the Business
(Customers)
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Accounting Terminologies
You should also understand the same accounting
terminology is referred or used by different people in
different context
Receivables also known as Trade Debtors, Debtors, Account
Receivables, Sundry Debtors, Trade Receivables, Amount
Receivables
Liability is also known as Trade Creditors, Account Payable,
Sundry Creditors, Amount Payable, Trade Liabilities, Creditors
Cost of Goods Sold: It varies with Company to Company the way
they do set up and use it. The Cost of Goods Sold comprise of
Material Cost, Resource Cost (Labor and Machinery) and
Overheads. There are few companies which will have only Material
Cost and will not add up Resource Cost and Overheads. You
Should talk to client and understand their requirement
Lets See Each of this in a Formula Model
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Accounting Calculation and Formula
(+) Add Credit Sales 2500 (+) Add Credit Purchases 2000
(+) Debit Memo 150 (+) Debit Memo 150
(+) Positive Adjustments 75 (+) Positive Adjustments 75
(-) Less Cash Received 2000 (-) Less Cash Paid 1500
(-) Less Credit Memo (Sales Return) 125 (-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments 50 (-) Negative Adjustments 50
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Accounting Calculations and Formula
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Accounting Calculations and Formula
(+) Add Cash Receipts 2500 (+) Add Bank Receipts 2000
(Cash Sales, Cash Recd from (Cash Deposits, Cheque Received
Receivables, Cash with drawl from From Debtors, Interest Credited)
Bank)
(-) Less Cash Payments 2000 (-) Less Payments from Bank 1500
(Cash Purchases, Expenses paid (Paid to Creditors by Cheque,
By Cash, Cash Deposited into Bank) Expenses paid by cheque, Cash
With drawl from bank)
Closing Cash Balance 600
Closing Bank Balance 700
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Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
1 Cash A/c Dr Real 50000
Furniture A/c Dr Real 50000
(Cash and Furniture Real
Tangible Asset. Hence Personal 100000
apply the Real Rule Debit (Also using the Business Entity
What comes in) Concept Siva being owner is
To Siva Capital A/c also treated as a Creditor for
(Siva is a Person running the purpose of Business. If the
the business as a Business is wind up Business
Proprietor in this case. has to pay back Siva)
Hence apply the Rule for
Personal Credit the giver)
2 Inventory A/c Dr Real 75000
(Real Tangible Asset)
To Cash A/c
(Real Credit what goes Real A/c 5000
out)
50
Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
7 Advertisement Exp A/c Dr Nominal 2500
Advt Exp Adv A/c Dr Real 2500
(This is like a Deferred
Revenue Expense needs to
be charged in two years.
50% need to be Current
Year Expense and Balance
50% is carried Forward and
treated as Expense in next
Year)
To Cash A/c
(Real Credit what goes
out)
Real 5000
8 Receivables A/c Dr Real 18000
To Revenue A/c Nominal 18000
57
Balance Sheet as on 30-APR-2007
Liabilities USD Assets USD
Siva Capital 100000 Furniture 50000
Add Profit 49500 Vehicle 25000
Siva Capital 149500 Cash 88000
Creditors 75000 Bank 25000
Receivables 18000
Inventory 15000
Rent Advance 1000
Advt Exp Advance 2500
Total 224500 Total 224500
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Important Points to Remember
Accounting can be learnt only by Practice and not by reading
Try to learn by creating Journal entries with Examples
Cash Balance can never have negative balance at any point of time
Land will never Depreciate and it will have only Appreciation
Bank can have negative balance if you have Overdraft facility
The Bank which maintains your account will have exactly opposite
entries of what is shown in your Bank Account
In the above, Example the bank account in your Books and in Bank
Books will be as follows
Siva Books Bank Books
Bank Account Siva Account
Dr USD Cr USD Dr USD Cr USD
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How to Approach to Learn
I tried my best to teach Accounting in simple way. This
is only a beginning. You have to Practice a Lot to learn
The simple way to Learn Accounting is as follows
Do not go for advanced level books without understanding the
basics
Start with (+1) Accounting book in case of people in India and
Pre-University book in case of other Countries. Practice the
examples given in that book and exercises
This is more than sufficient for any non accounting candidate to
work on Oracle Applications
Never try to memorize the concepts and rules
Try to understand and apply the concepts and Rules
There are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I do not
want you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You can
handle all of them
Read and Practice Level I and II at least Three times
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"There is a difference between an objective and
actions. Unless you understand your objective,
you will be wasting your time in actions. Know
your objective first " - Swami Vivekananda
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Disclaimer: This Document was created with my own
assumptions to explain the concept of accounting
and the names of the companies used in this article
are only to explain the accounting concept with data
assumptions and none of the Company is not
responsible for the Data provided in this article.
Thank You
Hope You find this article useful
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