introduction to account

7/30/2019 introduction to account

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# Introduction to accounting


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Concept of accounting

Accounting is a term used to describe a wide range of

activities. It may be defined as the identifying,

measuring, recording and communicating of financial

information.

Accounting may also be described as an information

system designed to provide, through the medium of

financial statements, relevant financial information.Usually the information provide relates to the

economics resources owned by an organization.


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Definition Of AccountingAccording to the American Institute Of Certified PublicAccountants the art of recording, classifying andsummarizing in a significant manner and in terms of

money, transactions and events which are, in part atleast, of financial character and interpreting the resultthereof.

The above definition also highlights the steps in theaccounting process.


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Objective Of Accounting

To keep systematic records

To protect business properties

To ascertain the operational profit or loss

To ascertain the financial position of business

To facilitate rational decision making


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Users of financial Accounting

information

AccountingInformation

Investors

Lenders

Managers

Suppliers andother tradecreditors

Customers

Government

Public

Employees


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Accounting Concepts, Conventions,

Bases & Policies Concepts vs Conventions

Concepts are the basic ideas, the theories on

how and why certain categories oftransactions should be treated in a particularmanner.

Once the theories have been established and

tested and proved to be acceptable, the task ofthe Conventions is to set out the limit of theirapplications.


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Accounting Concepts

6. Realisation Conceptrevenue should berecognized when it is earned.

7. Matching Conceptassociating the causeand effect relationship of revenues andexpenses.

8. Accrual Conceptsimilar to matching,

period should be decided on the basis ofaccrual.

9. Dual Aspect Concept2 aspects must be

examinedthe giving and the receiving.


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Accounting Conventions

1. Consistencymethod once adopted should be followed.

2. Full Disclosureall relevant facts concerning financial

position must be communicated to users.

3. Materialityconcerned with significant information.

4. Conservatism or Prudencewhen in doubt, choose the

solution that is least likely to overstate net assets and net

income for the current period.


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Some Important Terminology Of

Accounting

Transactions

Goods

Liabilities

Assets

Capital

Drawings

Debtors

Creditors

Profit

Loss

Net worth

Contingent liabilities

Expenses

Discounts

Solvent

Insolvent


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Some Important Terminology Of

Accounting (Cont)

Capital Expenditure

Revenue Expenditure

Accounting year

Goodwill

Income

Bad debts


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# CLASSIFICATION OF

ACCOUNTSAccounts

Personal Impersonal

Debtors Real or property NominalCreditors

Expenses

Or Loss

Revenue

Or Gains


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Real : all the assets except Debtors

Nominal : all the expenses , incomes , losses, gains.

Personal : all the accounts of persons, company or firms.

these are further classified into three types

Natural: all the accounts of persons. E.g. debtors, Creditors

Artificial: all the accounts of a company, a firm,or any other business

organization. E.g. Bank, Sharma Traders etc.

Representative: all the expense O/S or prepaid, revenue in advance oraccrued.


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Golden rules

REAL ACCOUNTSDEBIT WHAT COMES IN

CREDIT WHAT GOES OUT

PERSONAL ACCOUNTSDEBIT THE RECEIVER

CREDIT THE GIVER

NOMINAL ACCOUNTS

DEBIT ALL EXPENSES AND

LOSSES

CREDIT ALL INCOMES AND

REVENUES


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Journal Meaning And Format

Of Journal

A Journal is a book in which transactions are recorded in

chronological order.

A Journal is a book of prime entry (original entry) because

all the transactions are first recorded in this book. The word journal comes from the French word 'Jour'

meaning 'day'.

It is written up from the various source documents. The entry

passed in the journal is called 'Journal Entry'. The process ofwriting up the book of Journal is called 'Journalizing'.


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The format of a Journal is shown as

below:

Date Particulars L.F. Debit Credit

Amount Amount

(Rs.) (Rs.)

Journal offor the period


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Q1) From the following transactions of Juneja, find out the nature

of accounts and also state which account should be debited and to

be credited.

1. Started business with cash

2. Purchased Machinery

3. Purchased goods on credit from 'Shyam'

4. Sold goods for cash

5. Purchased goods for cash

6. Deposited into bank

7. Purchased goods from Sudhir8. Withdrew cash for personal use

9. Sold goods to Ram

10. Paid Rent


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Cont..

11. Received commission

12. Sold goods to Surekha

13. Received cash from Ram

14. Borrowed money from XYZ

15. Paid interest on loan

16. Outstanding Salary

17.

Amount paid to Sudhir18. Received cash from Surekha

19. Goods withdrawn for personal use

20. Interest allowed by bank.


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Q4) From the following transactions, prepare journal entries in the books of ABC

2005 Jan. 1 Started business with cash 45,000

" 1 Paid into bank 25,000

" 2 Goods purchased for cash 15,000" 3 Purchase of furniture and payment by cheque 5,000

" 5 Sold goods for cash 8,500

" 8 Sold goods to Arvind Walia 4,000

10 Goods purchased from Amrit Lai 7,000

12Goods returned to Amrit Lai 1,000

"15 Goods returned by Aravind Walia 200

18 Cash received from Arvind Walia Ra. 3,760 and discount

allowed to him 40

"21 Withdrew from bank for private use 1,000

Withdrew from bank for use in the business 5,000"25 Paid telephone rent for one year 400

"28 Cash paid to Amrit Lai in full settlement of his account 5,940

"30 Paid for: Stationery 200

Rent 1,000

Salaries to staff 2,500


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Journalize the following transactions.

2006

January 1

Started business with Rs.10, 000, paid into bank Rs.5, 000.

" 3 Bought furniture for Rs.900.

" 4 Purchased goods from Mohan & Co. for Rs.4, 000 for cash

" 5 Sold goods for Rs. 1,700

" 7 Paid telephone rent for the year Rs.400.

" 8 Purchased goods for Rs. 1, 000 from Bir & Co" 10 Paid Rs. 100 for advertisement by cheque

" 11 Bought one Typewriter for Rs.750 from Universal Typewriter Co. on

credit

12 Sold goods to Bedi & Co. for Rs.2, 900

" 14 Withdrew Rs.350 from the Bank for private use" 16 Sold goods to Omega & Co. for Rs.650 cash

" 25 Received cash from Bedi & Co. Rs.2, 850, discount allowed Rs.50.

26 Paid into bank Rs.2, 500

" 31 Issued cheque for Rs.300 in favour of the landlord for rent for January

" 31 Paid salaries to staff Rs.600" 31 Paid cash Rs.950 Bir & Co. in full settlement of their account.


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Ledger

A summary of all business transactions

relating to a person, asset, expense or income,

which have taken, place during a given periodof time and show their net effect.

It is the compilation of all corresponding

entries with reference to a particular account.This compilation is prepared in an accounting

format which is known as Ledger.


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Specimen format of a ledger a/cDr Cr

Date Particulars J.F. Amount Date Particulars J.

F.

Amount


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LEDGER

When all accounts of the ledger are in

balance, a Trial Balance is prepared. A Trial

Balance is a listing of all accounts and theirrespective balances . Trial Balance is the

statement of debit balances and credit

balanced from ledger accounts on a particular

date. A Trial Balance is, thus, a summary of

all the Ledger Balances outstanding as on

particular date.


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Performa of Trial Balance

Sr. No. Name of the account Debit Rs. Credit Rs.

It must be stated here that total of debit balance column must be

equal to total of credit balances column. This is so becauseunder double entry system , for each item of debit there is

corresponding credit and secondly all the transactions recorded

in the books of original entry are transferred to ledger.


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# Capital and Revenue


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Classification of Expenses

Expenses are classified as revenue expenses,

capital expenses, and deferred revenue

expenses.

Expenditure

Revenueexpenses

Capitalexpenses

Deferredrevenue exp.


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Illustration 1

State whether the following items are of

capital or revenue in nature.

1.

Machinery purchased for Rs. 100000.2. Salary paid Rs. 5000.

3. Preliminary expenses paid Rs. 23000.

4. Freight and insurance paid Rs. 5000 on purchase of

new machinery.5. Expenses on foreign tour Rs. 40000 for purchase of

new machinery.


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Illustration 2

State with reason whether the following items

are of capital or revenue in nature.

1.

Customs duty paid Rs.5000 on import of machinery.2. Wages paid for erection of the plant Rs. 3000.

3. Repairing expenses Rs. 5000 before putting to use a

second hand car purchased.

4. Rs. 4300 paid for replacing a worn out part of amachine with the new part.

5. Amount of Rs. 500 paid for repairs of existing plant.


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Illustration 3


are of capital or revenue in nature.1. An amount of Rs. 15000 paid for replacing petrol driven engine with

diesel engine.

2. Rs. 800000 paid for the advertisement for launching a new product

into the market. The benefit of such advertisement will be accrued for

4 to 5 years.

3. White washing of a factory Rs. 10000.

4. Expenses for providing uniform to the factory workers Rs. 25000.

5. Heavy amount of Rs. 100000 paid for preparing a project report for

implementing a new project.


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Illustration 4


are of capital or revenue in nature.1. Rs. 100000 paid to the employee as compensation as he was

retrenched.

2. Interest on a term loan for purchase of machinery. The commercial

production has not begun till the last date of a year.

3. Interest on a term loan for purchase of machinery. The commercial

production has already begun.

4. Compensation paid Rs.1000 for breach of contract for acquiring

stock-in-trade.

5. Amount of Rs.140000 paid for renovating a cinema hall which will

increase its sitting capacity.


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# Depreciation


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DEPRECIATION EXPENSES

TheInstitute of Chartered Accountants of India definesdepreciation as follows in accounting standard AS-6 onDepreciation Accounting.

Depreciation is a measure of wearing out, consumption orother loss of value of depreciable asset arising from use, timeor obsolescence through technology and market changes.Depreciation is allocated so as to charge a fair proportion ofthe depreciable amount in each accounting period during the

expected useful life of the asset. Depreciation includesamortization of assets whose useful life is pre-determined.

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DEPRECIATION EXPENSES

In short, depreciation is the allocated cost of

services given up by a tangible long-term

operating asset (other than land) during aperiod of time.

It can be said that amount of depreciation

recorded in books of account is only an

estimate.

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CAUSES OF DEPRECIATION

Wear and Tear

Obsolescence

Time Accidents

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OBJECTIVES OF

DEPRECIATION

Correct income measurement

True position statements

Funds for replacement

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EFFECTS OF NOT PROVIDING

FOR DEPRECIATION

Periodic expenses will be understated,

Profits will be overstated;

Asset valuation will be overstated; Capital depletion will take place;

Cost of production will be understated;

Price determination will be in appropriate;and

Net worth will be overstated.

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The following are the important factors which cause some

reduction in the value of fixed asset. The difference between the

original value and reduced value is called depreciation.

Physical depreciation Depreciation is caused mainly from wear and tear when the asset is in

use and from erosion rust, rot and decay from being exposed to wind,

rain, sun and other elements of nature.

Economic factor These may be said to be those that cause the asset to be put out of use

even though it is in good physical condition. These arise due to

obsolescence and inadequacy.

Time factors There are certain assets with a fixed period of legal life such as lease,

patents and rights. Provision for the consumption of these assets is

called amortization rather than depreciation.


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Depletion Some assets are of a wasting character perhaps due to the extraction

of raw materials from them Natural resources such as mines, quarries

and oil wells come under this heading. To provide for the

consumption of an asset of a wasting character is called provision for

depletion.

Accident An asset may reduce in value because of meeting an accident,

obsolescence, etc.


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Method of Providing Depreciation

Methods ofDepreciation

Straight LineMethod

DiminishingValue Method

Asset DisposalMethod

Change ofDepreciation

Method

Annuity Method

Depreciatio

n FundMethod

Insurance

Policy Method

RevaluationMethod

DepletionMethod

Sum of DigitsMethod

Machine Hourrate method


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Example 1:

A company purchased a second hand plant for

Rs 60000. It immediately spent on it Rs

10000. The plant was put to use on 1-1-02.After having used it for 6 years, it was sold

for Rs 30000. You are requested to prepare

the plant a/c for all the six years providing

depreciation at 10 % p.a on original cost.


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Example 2

On 1st January 2004 Machinery was purchased by X for

Rs.50, 000. On 1st July 2005 additions were made to the

extent of Rs. 10,000. On 1st April 2006, further additions

were made to the extent c Rs.6,400. On 30th

June 2007Machinery the original value of which was Rs.8,000-on 1st

January 2004 was sold for Rs.6,000,'X closes his books on

31st December each year. Show the machinery account for

four years from 2004 to 2007 in the books of X if

depreciation is charged at 10% s original cost method


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Example 3

On 1s" January 2004 Machinery was purchased by X for

Rs.50, 000, On 1st July 2005 additions made to the extent of

Rs. 10,000. On 1st April 2006, further additions were made to

the extent of is 6, 400. On 30th

June 2007 Machinery theoriginal value of which was Rs.8, 000 on 1st January 2004

was sold for Rs.6, 000. X closes his books on 31s1 December

each year. Show the machinery account for four years from

2004 to 2007 in the books of X if depreciation is charged at

10% at diminishing balance method.


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Example 4

On 1.1.2006 machinery was purchased for Rs.80,000.

On 1.1.2007 additions were made to the amount of

Rs.40, 000. On 31.3.08 machinery purchased on 1.1.07,

costing Rs.12, 000 was sold for Rs 11,000 and on30.6.08 machinery purchased on 1.1.06 costing Rs.32,

000 was sold for Rs.26, 700. On 1.10.08 additions were

made to the amount of Rs.20,000. Depreciation was

provided at 10% p.a. on the diminishing balance

method. Show the machinery account for the three years

2006 to 2008 (year ended on December 31.)


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Final Accounts


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Ratio Analysis


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Questions:

Convert balance sheet into vertical form.

Calculate the following ratios

Current ratio, Quick ratio, Debt to equity ratio,

Propriety ratio, and Capital gearing ratio.


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Operating net profit ratio, Net profit ratio, Stock turnover ratio and

Gross profit ratio.


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introduction to account