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An Introduction to Accounting Courtesy: Dr Gagan Pareek
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Dr Gagan Pareek alias Dr Harish Pareek M.Com, A.I.C.W.A, PhD
Area of Expertise : Accounting & Finance, Credit Risk Management Strategic Management
Corporate Trainer & Key Resource Person : In the area of Finance and Strategy, Leadership, Team Building and Motivation
Email: [email protected] ; Mobile:+919831865258
Research: Awarded PhD degree on “Operation of NBFCs in India- a changing profile “ in the Dept of Commerce, Calcutta University. Industry Exp: Having 12 years of experience in the area of accounting and finance, credit and risk analysis. Worked for companies like Kesoram Industries Ltd (B.K. Birla Group of Companies), UTI-ISL, Magma Fincorp Ltd. He has also been associated with academic research for the last 9 years.www.gaganpareek.com
Accounting
It enables a person to ascertain accurately and with little trouble as possible
The amount he has gained or lost in the business during a given periodThe amount of his assets, liabilities and capital on any particular date.How the amount he has gained or lost is made up.What amount is owing to him by each of his customers or debtors.What amount is owing by him to each of his creditors.What is his liability for payment of taxes to Govt.How his business stands in comparison to other similar business.
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Accounting is a must……
for
Capital MaintenanceProductive CapitalProfitable Operations
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Accounting World
Events/Actions affecting the business
Rules /Management Decisions
Financial Statements
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Accounting WorldFinancial Accounting translates events
into financial statements
Events/Actions affecting the business
Rules /Management Decisions
Financial Statements
GeneralAcceptedAccountingPrinciples
Selection of different alternatives rules on the basis of GAAP
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InvestorsCommunity
Board of Directors
Management
Employees
Suppliers
Employees
CreditorsCustomers
Analysts
Government
Users of Accounting InformationUsers of Accounting Information
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Double Entry
Double entry is the only system of book keeping by the employment of which all the objectives of accounting can be achieved.
It enable the businessmen to obtain the permanent record of his dealings with those with whom he transacts his business, and of the exact state of relationship with each of those individuals at any given date.
It further helps him to ascertain whether the result of his transactions has been profitable or otherwise, and what his exact financial position is at any time
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Assets
Probable future economic benefits What a business “owns” Examples
Cash Investments Buildings Plant and machinery Patents and copyrights
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Liabilities
Probable future sacrifices of economic benefits What a business “owes” Contractual, statutory, or constructive Examples
Loans payable Warranty obligations Pensions payable Income tax payable
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Equity
Residual interest of owners Examples
Share capital Share premium Revenues Expenses Dividends Retained profit
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Financial Statements
Profit and loss account Statement of financial performance
Balance sheet Statement of financial position
Statement of cash flows Statement of cash receipts and cash payments
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Types of Account
Personal Account: These accounts record a traders dealings with other persons, firms or companies.
A separate account is kept for each person, firm or company from whom goods have been purchased or to whom goods have been sold on credit, so that the amount owing to and by the trader can be readily ascertained at any time.
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Real Account
• These accounts record dealings in or with property, assets or possessions.
• A separate account is kept for each class of property such as cash, stock in trade, plant &machinery, furniture etc, so that by recording therein particulars of each such assets received or given away, the trader can ascertain
the value of each asset on hand on any particular date.
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Nominal Account• These accounts record a trader’s expenses or
gains.
• A separate account is opened for each head of expenditure or income, such as rent, salaries, wages, printing, stationery, cartage, interest, discount, commission etc, so that the trader can see the amount expended lost or gained under each heading.
• Each such account is debited when an expense is incurred and is credited when there is any gain.
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Rules of Debits and Credits:Golden Rule
• Personal Accounts- Debit the receiver , and credit the giver
• Real Accounts- Debit what comes in, and credit what goes out.
• Nominal Accounts-Debit expenses and losses, and credit gains.
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Ledger• The ledger is the chief books of accounts, and it is in this
book that all the business transactions would ultimately find their place under their respective accounts in a duly classified form.
• The process of transferring the transactions which have been previously recorded in the Journal into the appropriate accounts in the Ledger is called POSTING.
• The debit aspects of the transactions as entered in the debit column of the Journal are posted to the debit side of the Ledger Accounts concerned, while the credit aspects are entered on the credit side.
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Balancing of Account
• The difference between the debit total and the credit total in any account is called the balance.
• If the debit total is larger, the balance is a debit balance. This balance will be placed on the credit side to make the two side equal, and will be again brought down on the debit side, after closing the account.
• If the credit total is heavier, the balance is a credit balance. This balance will be placed on the debit side to make the two sides equal, and will be again brought down on the credit side after closing the account.
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Dr Cash A/C Cr5/1 8,000 5/2 2,500
5/25 75 5/8 3,000 5/29 750 5/28 150
5/31 50 5/31 3,125 Bal.
Receipts of cash are on
the debit side.
Payments of cash are on the credit
side.
The difference between the debit total and the
credit total is called the balancing figure
The difference between the debit total and the
credit total is called the balancing figure
Debit and Credit Entries
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Entries
Types Opening Entries Transfer from one account to another Rectification of errors Adjustment Entries Closing Entries
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Accounting Concepts
• Entity Concept• Dual Aspect Concept• Going Concern Concept• Periodicity Concept• Money Measurement Concept• Revenue Recognition Concept• Matching Concept• Accrual Concept
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Entity Concept
The business is treated as a unit or entity apart from its owners, creditors and others.
The proprietor of an enterprise is always considered to be separate and distinct from the business which he controls.
The proprietor is treated as a creditor to the extent of his capital.
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Dual Aspect Concept
• In each transaction there are two aspects to be recorded from the point of view of entity.
E.g. If there is purchase of goods- it involves two aspects: One aspect is the receipt of goods The other aspect is the immediate payment of cash(in
case of cash purchase) or the acknowledgment of the debt to the supplier (in case of credit purchases).
• The recognition of two aspects of every transactions is known as dual aspect
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Going Concern Concept
• This concept assumes the enterprise will continue to exist in the foreseeable future.
• It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of its operation.
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Accounting Period Concept
• Time duration for which the income/loss is measured is called the accounting period .
• Under the Companies Act, and Banking Regulation Act, financial statements are to be prepared for a twelve month period.
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Money Measurement Concept
• It underlines that the fact that in accounting, every worth recording event, happening or transactions is recorded in terms of money.
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Cost Concept
• The underlying idea of cost concept is that:
a) Asset is recorded at the price paid to acquire it, that is, at cost, and
b) This cost is the basis for all subsequent accounting for that asset.
• The cost concept also implies that if nothing has been paid for acquiring something then it would not be shown in the accounting books as an asset.
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Revenue Recognition ConceptAt what stage the revenue should be recognized and recorded.
If we take for instance of sale of goods, there are several stages
– like the receipt of order from the customer, – the production of goods after the receipt of order – delivering the goods to the customer & invoicing– receipt of cash from the customer.
Usually, enterprise dispatch the goods to the customer and an invoice is simultaneously made out. At this stage sale is recorded.
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Matching Concept
• After the revenue recognition, all costs, which are applicable to the revenue of the period, should be charged against that revenue in order to determine the net income of the business.
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Accrual Concept• Revenue recognition depends on its realisation and
not on actual receipt, likewise costs are recognised when they are incurred and not when they are paid.
• In relation to revenue, the amount should exclude amount relating to subsequent period and provide for revenue recognised but not received in cash.
• In relation to costs, the accounts should provide for costs incurred but not paid and exclude costs paid for subsequent periods.
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Objectivity Concept
All accounting must be based on objective evidence. The transaction records should be supported by verifiable documents.
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Accounting Conventions
1.Conservatism:
“Anticipate no profit but provide for all possible losses”. In other words the policy of playing safe. The inventory is valued at “cost or market price which ever is less”.
Similarly a provision is made for possible bad and doubtful debts out of current years profits.
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2.Full Disclosure:
Accounting reports should disclose fully and fairly the information they purport to represent. They should be honestly prepared and sufficiently disclose information which is of material interest to shareholders, present and potential creditors and investors.
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3.Consistency :
Accounting practices should remain unchanged 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.
Necessary for the purposes of comparison.
Does not forbid introduction of improved accounting techniques.
However, if adoption of such a technique results in inflating or deflating the figures of profit as compared to the previous years, a note to the effect should be given in the financial statements.
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4.Materiality:
Material details to be provided and ignore insufficient details.
This is because otherwise accounting will be unnecessarily overburdened with minute details.
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Accounting Standards-setting Organization in Selected Countries
Country Policy Setting Board
Australia Australian Accounting Standards Board (AASB) sets GAAP
Canada Canadian Accounting Standards Board (CASB) of the Canada Institute of Chartered Accountants (CICA) sets GAAP
India Accounting Standards Board (ASB) of the Institute of
Chartered Accountants of India (ICAI) is the body entrusted with the work of preparing the standards.
U.K. Accounting Standards Board (ASB) is comprised of nine members drawn from different user groups.
U.S.A. Financial Accounting Standards Board (FASB) is the body solely in charge of issuing standards.
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TRANSACTION (a)
Dr. X starts a Medical Health Care Unit, by investing Rs50,000 in his practice.
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Assets = Liabilities + Equity
Cash = + Capital
Invested 50,000 +
50,000
Cash Flows Balance Sheet
Income Statement
Dr. X invests Rs50,000 to start a Medical Health Unit
Financing 50,000
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TRANSACTION (b)
Medical Health Care Unit , borrows Rs20,000 to finance the practice.
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Assets = Liabilities + Equity
Cash = Loan Capital
Bal 50,000 50,000Loan 20,000 = 20,000
Bal 70,000 = 20,000 + 50,000
Cash Flows Balance Sheet
Income Statement
Receipt of Loan
Financing 20,000
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TRANSACTION (c)
Medical Health Care Unit, bought Equipments worth Rs 10,000/=for practice.
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Assets = Liabilities + Equity
Cash + Equipment = Loan + Capital
Balance 70,000 20,000 50,000
Equipments -10,000 + 10,000
Balance 60,000 + 10,000 = 20,000 + 50,000
Cash Flows Balance Sheet
Income Statement
Bought Equipments for Rs 10,000
Equipments -10,000
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TRANSACTION (d)
Family Health Care, received fees for providing services to patients.
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Assets = Liabilities + Equity
Cash + Equipment = Loan + Capital+ Revenue
Balance 60,000 + 10,000 =
20,000 + 50,000
Fees 15,000 =
15,000
Balance 75,000 + 10,000 =
20,000 + 50,000 + 15,000
Cash Flows Balance Sheet
Income Statement
Receipt of Fees
Fees(cash) 15,000FeesEarned 15,000
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TRANSACTION (e)
Medical Health Care Unit paid wages, rent, electricity bills, interest and miscellaneous expenses.
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Assets = Liabilities + Equity
Cash + Equipments = Loan + Capital + Revenue
Balance 75000 + 10,000 =
20,000 + 50,000 + 15,000
Expenses -9,000 -9,000
Balance 66,000 + 10,000 =
20,000 + 5,0000 + 6,000
Cash Flows Balance Sheet
Income Statement
Paid monthly expenses
Operating -9,000
Wages 5,000Rent 1,000Electricity 2,000Interest 500Misc. 500Total 9,000
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TRANSACTION (f)
Family Health Care, paid a dividend to Dr. X.
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Assets = Liabilities + Equity
Cash + Equipments = Loan + Capital + Revenue
Balance 66,000 + 10,000 = 20,000 + 50,000 + 6,000
Dividend -2,000 - 2,000
Balance 64,000 +10,000 = 20,000 + 50,000 + 4,000
Cash Flows Balance Sheet
Income Statement
Paid Dividend
Financing –2,000
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Assets = Liabilities + Equity
Cash + Equipment = Loan + Capital + Revenue
Invested 50,000 +
50,000
Loan 20,000 = 20,000
Land -10,000 + 10,000
Fees 15,000 = 15,000
Expenses -9,000 9,000
Dividend -2,000 -2,000
Balance 64,000 +10,000 =
20,000 + 50,000 + 4,000
Cash Flows Balance Sheet
Income Statement
Integrated Financial Statement Framework
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A = L + OEASSETS
Debit for Increase
Credit for
Decrease
EQUITIES
Debit for Decrease
Credit for Increase
LIABILITIES
Debit for Decrease
Credit for Increase
The effect of Debits and Credits on an account are as follows
Debit and Credit Rules
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A = L + OEDebit
balancesCredit
balances=Every transaction is recorded by equal amounts of
debits and credits.Every transaction is recorded by equal amounts of
debits and credits.
Double Entry AccountingThe Equality of Debits and Credits
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Dr Account Name Cr
Particulars Particulars
An account is a summarized record of the transactions affecting one person, one kind of property or one class of gains or losses
Left side of an account is the “Debit” side
Right side of an account is the “Credit” side
Account
T- Form Account
The Account
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Double-entry accounting system
Each transaction must affect two or more accounts to keep the basic accounting equation in balance.
Recording done by debiting at least one account and crediting another.
DEBITS must equal CREDITS.
Debits and Credits
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Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will have a debit balance.
Rs10,000 Transaction #2Rs3,000
Rs15,000
8,000Transaction #3
Balance
Transaction #1
Debits and Credits
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Account Name
Debit / Dr. Credit / Cr.
If Debits are greater than Credits, the account will have a debit balance.
Rs10,000 Transaction #2Rs3,000
Balance
Transaction #1
Rs1,000
8,000 Transaction #3
Debits and Credits
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Chapter 3-23
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal Balance
Expense
Chapter 3-24
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owners’ Equity
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal Balance
Revenue
Normal Balance Credit
Normal Balance Credit
Normal Balance Debit
Normal Balance Debit
Debits and Credits Summary
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Balance Sheet Income Statement
= + =-Asset Liability Equity Revenue Expense
Debit
Credit
Debits and Credits Summary
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Debits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
Review Question
Debits and Credits Summary
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Discussion Question
X, a beginning accounting student, believes debit
balances are favorable and credit balances are
unfavorable. Is X correct? Discuss.
Debits and Credits Summary
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Assets - Debits should exceed credits.
Liabilities – Credits should exceed debits.
The normal balance is on the increase side.
Chapter 3-23
Assets
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-24
Liabilities
Debit / Dr. Credit / Cr.
Normal Balance
Assets and Liabilities
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Owner’s investments and revenues increase owner’s equity (credit).
Owner’s drawings and expenses decrease owner’s equity (debit).
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owners’ Capital
Chapter 3-23
Owners’ Drawing
Debit / Dr. Credit / Cr.
Normal Balance
Chapter 3-25
Debit / Dr. Credit / Cr.
Normal Balance
Owners’ Equity
Owner’s Equity
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The purpose of earning revenues is to benefit the owner(s).
The effect of debits and credits on revenue accounts is the same as their effect on Owner’s Capital.
Expenses have the opposite effect: expenses decrease owner’s equity.
Chapter 3-27
Debit / Dr. Credit / Cr.
Normal Balance
Expense
Chapter 3-26
Debit / Dr. Credit / Cr.
Normal Balance
Revenue
Revenue and Expenses
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Accounts that normally have debit balances are:
a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings.
d. assets, owner’s drawings, and expenses.
Review Question
Debits and Credits Summary
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Account Title Ref. Debit Credit
Oct. 1 Cash A/ C Dr 15,000
To Capital A/ C 15,000
(Cash investment by the proprietor)
Date
In the Books of X
Journal
E2-4 (Facts) Presented below is information related to X Agency.
X begins business as a merchandiser with a cash investment of Rs15,000.Oct. 1
Journalizing
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THE RECORDING PROCESS
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Debits and credits
Expansion of basic equation
Steps in the Recording Process
Steps in the Recording Process
The Trial BalanceThe Trial Balance
Locating errors
The Recording ProcessThe Recording Process
Recording of Journal Entries
Ledger Posting
Balancing of Accounts
The AccountThe Account
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Book of original entry (General Ledger).
Transactions recorded in chronological order.
Contributions to the recording process:
1. Discloses the complete effects of a transaction.
2. Provides a chronological record of transactions.
3. Helps to prevent or locate errors because the debit and credit amounts can be easily compared.
The Journal
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Journalizing - Entering transaction data in the journal.
Presented below is information related to X Agency.
X begins business as a merchandiser with a cash investment of Rs15,000.
Oct. 1
Purchases office furniture for Rs1,900, on account from Soma.3
Sold goods to Krishna; bills Krishna Rs3,200 .6
Pays Rs700 on balance related to transaction of Oct. 3. 27
Pays the administrative assistant Rs2,500 salary for Oct.30
Journalize the transactions
Journalizing
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Account Title Ref. Debit Credit
Oct. 3 Offi ce f urniture A/ C Dr 1,900
To Soma A/ C 1,900
(Purchased f urniture)
Date
General Journal
Purchases office furniture for Rs1,900, on account from Soma.Oct. 3
Journalizing
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Account Title Ref. Debit Credit
Oct. 6 Krishna A/ C Dr 3,200
To Sales A/ C 3,200
(Goods sold on credit)
Date
General Journal
Sold goods to Krishna; bills Krishna Rs3,200.Oct. 6
Journalizing
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Account Title Ref. Debit Credit
Oct. 27 Soma A/ C Dr 700
To Cash A/ C 700
(Payment on account)
Date
General Journal
Pays Rs700 on balance related to transaction of Oct. 3.Oct. 27
Journalizing
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Account Title Ref. Debit Credit
Oct. 30 Salary A/ C Dr 2,500
To Cash A/ C 2,500
(Payment f or salaries)
Date
General Journal
Pays the administrative assistant Rs2,500 salary for Oct.Oct. 30
Journalizing
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Simple Entry – Two accounts, one debit and one credit.
Compound Entry – Three or more accounts.
Example – On June 15,purchased equipment from UV Ltd for Rs15,000 by paying cash of Rs10,000 and the balance on account (to be paid within 30 days)
Account Title J .F Debit Credit
J une 15 Equipment A/ C Dr 15,000
To Cash A/ C 10,000
To UV Ltd A/ C 5,000
(Purchased equipment)
Date
General Journal
Journalizing
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Ledger contains the entire group of accounts maintained by a company.
A general ledger contains all the asset, liability, owner’s equity, revenue, and expense accounts.
Chart of Accounts
The ledger
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Accounts arranged in sequence in which they are presented in the financial statements.
X AgencyChart of Accounts
Cash X's CapitalBills receivable X's, DrawingPrepaid InsurancePlant & Machinery
Land & BuildingSales
Bills payable Advertising expenseCreditors Depreciation expenseSalaries payable Insurance expenseInterest payable Salaries expenseCommission due but not recd Rent expense
Interest expense
Liabilities
Assets Owner's Equity
Revenues
Expenses
Chart of Accounts
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T-account form used in accounting textbooks.
In practice, the account forms used in ledgers aremuch more structured.
Explanation J.F Debit CreditOct. 1 15,000 15,000
27 700 14,300 30 2,500 11,800
CashDate
No. 101Balance
Standard Form of Account
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Posting – the process of transferring amounts from the journal to the ledger accounts.
Cash Acct. No. 101
Date Explanation J .F Debit Credit Balance
General Ledger
Account Title L.F Debit Credit
Oct. 1 Cash A/ C Dr 15,000
To Capital A/ C 15,000
(Owner's investment in business)
Date
General Journal
Oct. 1 Capital A/C 15,000 15,000
101
J1
Posting
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Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the journal.
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.
Review Question
Posting
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A list of accounts and their balances at a given time.
Purpose is to prove that debits equal credits.
Debit CreditCash A/C Rs11,800Krishna A/C 3,200 Office furniture A/C 1,900 Soma A/C Rs 1,200Capital A/C 15,000 Sales A/C 3,200 Salaries A/C 2,500
Rs 19,400 Rs 19,400
X AgencyTrial Balance
October 31, 2008
The Trial Balance
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The trial balance may balance even when
1. a transaction is not journalized,
2. a correct journal entry is not posted,
3. a journal entry is posted twice,
4. incorrect accounts are used in journalizing or posting, or
5. offsetting errors are made in recording the amount of a transaction.
Limitations of a Trial Balance
Trial Balance
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A trial balance will not balance if:
a. a correct journal entry is posted twice.
b. the purchase of supplies on account is debited to Supplies and credited to Cash.
c. a Rs100 cash drawing by the owner is debited to Owner’s Drawing for Rs1,000 and credited to Cash for Rs100.
d. a Rs450 payment on account is debited to Accounts Payable for Rs45 and credited to Cash for Rs45.
Review Question
The Trial Balance
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X is confused about how accounting information flows through the accounting system. She believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
b. Business transaction occurs.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Is X correct? If not, indicate to X the proper flow of the information.
Case
Recording Process
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Accounting Cycle
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The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
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Steps in Accounting Cycle
1. Analyze transactions
2. Record transactions in the journal
3. Post journal entries to the ledger accounts
4. Prepare a trial balance
5. Journalise and post adjusting entries and prepare adjusted trial balance
6. Prepare financial statements
7. Journalise and post closing entries: temporary accounts(transfer to profit and loss account)
8. Carry forward the balance sheet accounts to the next accounting period: permanent accounts
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The Accounting Cycle
• For a new business, begin by setting up ledger accounts.
• For an established business, begin with account balances carried over from the previous period.
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The Accounting Work Sheet
• What is the work sheet?• A work sheet is a multi-columned
document used by accountants to help move data from the trial balance to the financial statements.
• It is an internal document.
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Use the work sheet
to complete theaccounting
cycle.
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The work sheet identifies the accountsthat requiresadjustments.
Adjustmentof the accountsrequiresjournalizingand posting of theadjustment entries.
Recording theAdjusting Entries
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Recording theAdjusting Entries
• The adjusting entries are recorded in the journal when the accounts are adjusted on the work sheet.
• Adjustment entries are posted just before the closing entries.
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Close the revenue,expense, and
withdrawal accounts.
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Closing the Accounts
• Closing of the accounts that prepares the accounts for recording transactions during the next period.
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Closing Entries
RevenuesincreaseOwner’s Equity.
Expenses and WithdrawalsdecreaseOwner’s Equity.
Closing the Accounts
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Closing the Accounts
• Revenues and Expense accounts are closed to Income Summary.
• Income Summary is closed to Capital.• Withdrawals are closed to Capital.• In a corporation, Dividends are closed to
Retained Earnings.
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Income Summary
A credit balance represents net income.
A debit balance represents net loss.
Closing the Accounts
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Postclosing Trial Balance
• The accounting cycle ends with the post closing trial balance.
• The post closing trial balance is dated as of the end of the period for which the statements have been prepared.
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Recording of Journal Entries
Ledger Posting
and balancing of accounts
Preparing trial balance.
Year end Adjustment
Entries.
Closing of accounts
Preparing
adjusted trial balance.
Prepare financial statements.
Prepare after
closing trial balance.
Journalizing
and post closing entries.
The Accounting Cycle
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Permanent Accounts• What accounts never close?– Assets– Liabilities– Owner’s equity• Balances of permanent accounts carry
over to the next period.
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Classify assets and liabilities
as current or long-term.
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Current Assets• Current assets are cash, or will be
converted to cash, in one year or within the normal business operating cycle.
• What are some other examples?– short-term receivables– inventory– prepaid expenses
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Current Liabilities• Current liabilities are debts or obligations
due within one year or within the operating cycle.
• What are some examples?– accounts and salary payables– short-term notes payable– unearned revenue
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Long-term Assets and Liabilities
• Long-term assets include all other assets.– property, equipment, and intangibles• Long-term liabilities are all other debts due
in longer than one year or the entity’s operating cycle.
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Debit sideCurrent assetsLong-term assets
Credit sideCurrent liabilitiesLong-term liabilities
Listed in the orderof decreasingliquidity
Listed in the orderof how soon theymust be paid
The Classified Balance Sheet
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Assets LiabilitiesCurrent assets: Current liabilities:Cash 4,000Accounts payable 2,000Accounts receivable 3,000 Salary payable
3,000Closing Stock 1,500 Unearned revenue 1,500 Total current assets 8,500 Total Current liabilities
6,500Gross Block Owner’s equity Equipment 15,000 Capital
10,000 Less Accum. deprec. 7,000 8,000 Total liabilities and
Total assets 16,500owner’s equity 16,500
XYZ LtdMarch 31, 20XX
The Classified Balance Sheet
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Transactions Effecting Balance Sheet
Possibility Example
An increase in assets followed by an increase in liabilities and vice versa
Purchase of a machinery through bank loan
A decrease in assets followed by a decrease in liabilities and vice versa
Repayment of a bank loan
An increase in assets followed by an increase in equity and vice versa
Interest earned on the savings deposit increasing the net worth
A decrease in assets followed by a decrease in equity and vice versa
Theft of some personal possessions leads to decrease in owners equity
An increase in an asset followed by a decrease in another asset and vice versa
Purchase of car in cash
An increase in a liability followed by a decrease in another liability and vice versa
Payment to a creditor through bank loan
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The following are typical accounts that are classified as assets, liabilities, and , equity accounts
Assets Liabilities Equity Accounts
LandBuildingEquipmentVehiclesInventoryPrepaid expensesAccounts receivableCash
Mortgage payableUnearned revenueTaxes payableSalaries payableAccounts payable
Capital Retained Earnings
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A good general rule of thumb is that any account that hasthe word receivable in its title will be an asset, and any
accountthat has the word payable in its title will be a liability. Any
account that has the word expense in its title is likely to beclassified as an expense on the Income Statement, except for the account Prepaid expenses, which is an asset. Any
accountwith the word income or revenue in its title is classified as
revenueon the Income Statement, except for the account Unearned
revenue, which is a liability.
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References:
1. Williams Haka Bettner Meigs , Financial & Managerial Accounting, 12th Edition, The McGraw Hill Companies , Inc,2002.
2. Prof. Ramachandran. N. & Prof. Kakani Ram Kumar , Financial Accounting for Management ,Tata McGraw Hill.
3. Prof. Mukherjee. A. & Prof Hanif. M, Modern Accountancy, 2nd Edition,, Tata McGraw Hill.
4. Duchac , Reeve, & Warren ,Financial Accounting, 2nd Edition,, Thomson South-Western, a part of The Thomson Corporation. Thomson.
5. Narayanaswamy. R, Financial Accounting: A Managerial Perspective 2nd Edition, Prentice Hall of India Pvt Ltd
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