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Basic Accounting Level II By Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM Global Technology Services LLc, UAE

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Presentation on theme: "Basic Accounting Level II By Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM Global Technology Services LLc, UAE"— Presentation transcript:

1 Basic Accounting Level II By Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM Global Technology Services LLc, UAE

2 2 Agenda What is Accounting What is Accounting Mode of Learning Accounting Mode of Learning Accounting Accounting and Finance - Difference Accounting and Finance - Difference Accounting Concepts / Conventions Accounting Concepts / Conventions Accounting Events Accounting Events Rules of Accounting Rules of Accounting Preparation of Financial Statements Preparation of Financial Statements A Simple Case Study A Simple Case Study

3 3 Accounting is defined as the art of Recording, Classifying and Summarizing transactions in monetary terms (in Money terms) for the preparation of Financial Statements JOURNAL PAYMENT Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholders Equity Contributed Capital Retained Earnings Total Stockholders Equity $4,456 $5,714 $ $11,151 ====== $3,830 $ $4,246 ====== $2,365 $ $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholders Equity Contributed Capital Retained Earnings Total Stockholders Equity $4,456 $5,714 $ $11,151 ====== $3,830 $ $4,246 ====== $2,365 $ $2,732 ====== Vision Enterprises Financial Statement at December 31, 1997 Assets Cash Account Receivable Land Total Assets Liability Account Payable Notes Payable Total Liability Stockholders Equity Contributed Capital Retained Earnings Total Stockholders Equity $4,456 $5,714 $ $11,151 ====== $3,830 $ $4,246 ====== $2,365 $ $2,732 ====== ? What is Accounting

4 4 Accounting is the art of recording, classifying and Summarizing financial transactions in the Preparation of Financial Statements Accounting is the art of recording, classifying and Summarizing financial transactions in the Preparation of Financial Statements Recording refers to creating Journal entry for every financial transaction with Debit and Credit amounts. Recording refers to creating Journal entry for every financial transaction with Debit and Credit amounts. Classifying refers to Classifying each of the Debit / Credit Transaction to Capital or Revenue and Asset, Liability, Revenue or Expense Classifying refers to Classifying each of the Debit / Credit Transaction to Capital or Revenue and Asset, Liability, Revenue or Expense Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses and preparing the Financial Statements (Trading, Profit and Loss Account and Balance Sheet) Summarizing refers to Grouping the Transactions of Asset, Liability, Revenue and Expenses and preparing the Financial Statements (Trading, Profit and Loss Account and Balance Sheet) In case of In case of Trading, Manufacturing and Customer Service oriented Organization, the sum of all income and expenses is referred to as Profit and Loss accountTrading, Manufacturing and Customer Service oriented Organization, the sum of all income and expenses is referred to as Profit and Loss account Social Service oriented Organization like Schools, Hospitals and Government Organizations, Banks it is referred to as Income and Expenditure account.Social Service oriented Organization like Schools, Hospitals and Government Organizations, Banks it is referred to as Income and Expenditure account. Note:- Trial Balance is not a Financial Statement. It is only a summary of all Debit and Credit Transactions.

5 5 Mode of Learning Accounting Change your mindset that accounting means only Debit and Credit Change your mindset that accounting means only Debit and Credit Do not blindly learn Accounting Rules and apply the rules of Debit and Credit Do not blindly learn Accounting Rules and apply the rules of Debit and Credit The Best way to Learn Accounting is The Best way to Learn Accounting is Learn the Accounting Concepts Learn the Accounting Concepts Understand the Accounting Conventions Understand the Accounting Conventions Classify the Accounting Event Classify the Accounting Event Apply the Accounting Rules Apply the Accounting Rules Record, Classify and Summarize the Journal Record, Classify and Summarize the Journal You are Confused. Am I right?You are Confused. Am I right? Do not become panic and move forward, you will understand Do not become panic and move forward, you will understand

6 6 Mode of Learning Accounting Learn Accounting Concepts (Ten Fundamental Accounting Concepts) Understand Accounting Conventions (Three major conventions) Classify the Accounting Events (Capital, Revenue, Deferred Revenue Expenditure) Apply the Accounting Rules (Personal, Real and Nominal Rules) Record the Transaction as a Journal (Entering the Debit and Credit Side of Transaction) Classify the Transaction (Asset, Liability, Revenue or Expense) Summarize the Transaction (Prepare Trial Balance, Trading, P&L and Balance Sheet)

7 7 Finance and Accounting - Difference FinanceAccounts Procurement and Utilization of Funds Recording of an Accounting Event Leads to Investment Decisions Expressed in Monetary Terms Financing Decisions Recording, Classifying and Summarizing Transactions Futuristic Preparation of Financial Statements (Trading, Profit and loss Account and Balance Sheet) Cost of Capital Historical Cash Flow / Fund Flow Compliance with Statutory Matters like companies Act, Income Tax Act, Sales Tax Act Etc., Project Appraisal Ratio Analysis

8 8 Accounting Concepts/Conventions (US GAAP/UK GAAP/IFRS/SOX) The Concepts and conventions of accounting are developed by IASC (International Accounting Standards Committee) which is in-charge of releasing International Accounting Standards (IAS) The Concepts and conventions of accounting are developed by IASC (International Accounting Standards Committee) which is in-charge of releasing International Accounting Standards (IAS) The IASC Decides the preferred Accounting practices worldwide and encourages the worldwide acceptance The IASC Decides the preferred Accounting practices worldwide and encourages the worldwide acceptance There are 41 International Accounting Standards There are 41 International Accounting Standards Now IFRS (International Financial Reporting Standards) and SOX (Sarbanes Oxley) Act gain more importance which came up from US GAAP and UK GAAP Now IFRS (International Financial Reporting Standards) and SOX (Sarbanes Oxley) Act gain more importance which came up from US GAAP and UK GAAP

9 9 Difference between Concepts and Conventions The Accounting Concepts / Principles evolved out of the Practice and Procedures followed by different countries and later on established by the International Statutory Accounting Bodies like The Institute of Chartered Accountants of India, The Institute of Chartered Accountants of England and Wales etc to become an Accounting Principle statutorily need to be followed while preparing the Financial Statements. In nutshell this has evolved out of standard Practice followed by several countries while preparing the Trading, Profit and Loss Account and Balance Sheet. The Accounting Concepts / Principles evolved out of the Practice and Procedures followed by different countries and later on established by the International Statutory Accounting Bodies like The Institute of Chartered Accountants of India, The Institute of Chartered Accountants of England and Wales etc to become an Accounting Principle statutorily need to be followed while preparing the Financial Statements. In nutshell this has evolved out of standard Practice followed by several countries while preparing the Trading, Profit and Loss Account and Balance Sheet. The Accounting Conventions / Practices are basically assumptions and expected to be followed while preparing the Financial Statements. The Accounting Conventions / Practices are basically assumptions and expected to be followed while preparing the Financial Statements.

10 10 Accounting Concepts / Principles Business Entity Concept Business Entity Concept Money Measurement Concept Money Measurement Concept Dual Aspect Concept Dual Aspect Concept Cost Concept Cost Concept Accounting Period Accounting Period Conservatism Conservatism Realization Concept Realization Concept Matching Concept Matching Concept Materiality Concept Materiality Concept Objectivity Objectivity

11 11 Accounting Conventions / Practices Going Concern Going Concern Consistency Consistency Accrual Accrual

12 12 Accounting Concepts Business Entity Concept Business Entity Concept Accounts can be kept only for Entities, which are different from the persons who are associated with these entities 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. Accounts need to be maintained separate from the Owners and providers of capital. If you understand the simple logic, then you know 30% of Accounting. Just Recall Fundamentals of Accounting from Oracle Perspective Level I Example of Siva, Oracle and Bank. 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

13 13 Types of Entities Type of Organization Example Sole Proprietary Siva & Co Partnership Firm Ganesan Bros Private Company Oracle India Pvt Ltd (A Private Company in which shares are not traded in Stock Exchange and members cannot exceed 50) Public Company Hindustan Unilever Ltd (A Public Company in which Shares are traded in Stock Exchange) Closely Held Company Cadbury India Ltd (A Public Company in which shares are not traded but shares are held by more than 50 persons) Trust Hutchinson Private Trust Society Sembur Co-op Society Association of Persons ICAI, ICWAI, ICSI, Rotary Club Body of Individuals (one Man Corp) President of India, Governor of State Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the Investment and Properties for the benefit of Family members.

14 14 Accounting Concepts Business Entity Concept Business Entity Concept Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole Proprietor/Individual Owner of the Business. The entire capital amount for the Business is provided by you. In this case also for the purpose of accounting you need to maintain Two set of books. Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole Proprietor/Individual Owner of the Business. The entire capital amount for the Business is provided by you. In this case also for the purpose of accounting you need to maintain Two set of books. One set of books for the purpose of Textile Business in which, Business owes you equivalent to the Capital Provided (Capital + Profit earned) or (Capital – Losses)One set of books for the purpose of Textile Business in which, Business owes you equivalent to the Capital Provided (Capital + Profit earned) or (Capital – Losses) In your own Books the amount of Capital invested will be shown as an Investment in Business as an Asset. This need not be maintained as a Normal Set of Books but required to know the Cash Inflow and Cash Outflow from Income Tax Perspective.In your own Books the amount of Capital invested will be shown as an Investment in Business as an Asset. This need not be maintained as a Normal Set of Books but required to know the Cash Inflow and Cash Outflow from Income Tax Perspective. 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? 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)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 USD which he goes and deposit directly into your Bank account - How many accounting Entities involved in this case? Ex 3: You run your own Business in Software Consulting and your Friend has agreed to provide a Loan of 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)If you say 3, You are right, it is only Three. (You, Your Friend and Bank)

15 15 Accounting Concepts Money Measurement Concept 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) 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 2. Very Famous Indian Example – Rama Killed Ravana. Can this be Accounted? – NO Ex 3. My wife Loves me so much – Can this be accounted? – A Big NO (Hahhah). This is Flaw in Financial Accounting as it does not understand the human values Ex 4. My Father in Law gave his Personal Property to start my Business. Can this be Accounted – Yes (If the Value of the Property is provided)

16 16 Accounting Concepts Money Measurement Concept Money Measurement Concept A Normal Doubt comes to your mind in the first and fourth example in previous slide how to get the value. We should not be taking the Purchase value, but we should take the Market value on the date of transferring the assets to Business. This is an exception to cost concept only in case of transfer to another business Ex 5: Siva started his software consulting Business with his own Property (Cost Price 1 Million USD and Market Value 1.5 Million USD) and Furniture's Cost price worth Market Value USD - In this case, You can record Siva Capital ( ) and Building and Furniture as Assets LiabilitiesAssets Siva Capital Building Furniture Total

17 17 Accounting Concepts Dual Aspect Concept Dual Aspect Concept The Value of the Assets owned by the concern is equal to the claims on the Assets The Value of the Assets owned by the concern is equal to the claims on the Assets ASSETS = LIABILITIES + OWNERS EQUITY ASSETS = LIABILITIES + OWNERS EQUITY OWNERS EQUITY = ASSETS – LIABILITIES OWNERS EQUITY = ASSETS – LIABILITIES LIABILITIES = ASSETS – OWNERS EQUITY LIABILITIES = ASSETS – OWNERS EQUITY Ex: If Owners Equity is and Liabilities are , then Total Asset = Asset Owners Equity + Liabilities Liabilities Assets – Owners Equity Owners Equity Assets - Liabilities

18 18 Accounting Concepts Cost Concept Cost Concept Assets are always shown at their Cost and not at their current Market Value 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 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 Ex 2. You are acquiring a Business for a Million USD and its value as per Books is 0.8 Million, then the difference of 0.2 Million is termed as Goodwill and you should records the assets and liabilities at the price you have paid for the Business (i.e.) 1 Million

19 19 Accounting Concepts Accounting Period Accounting Period Accounting measures activity for a specified interval of time, usually a year Accounting measures activity for a specified interval of time, usually a year (e.g) Calendar Year (Jan07-Dec07) (e.g) Calendar Year (Jan07-Dec07) Fiscal Year (Apr07-Mar08) 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 A Company in India can have for Company Law Purpose (Jan-Dec) Year and Income Tax Purpose (Apr-Mar) Year and for own internal Reporting (Jul-Jun) Year Note: The Entities cannot change their accounting period without getting proper approval only in case of Companies Act and not possible with Income Tax Authorities.

20 20 Accounting Concepts Conservatism Conservatism Anticipate no Profits but provide for all possible losses. Anticipate no Profits but provide for all possible losses. Accountants are by nature Conservative and also to protect the interest of the Shareholders and Creditors it is required to provide for all losses. Ex 1. A pharmaceutical Company going to Loose the case filed for Patent Right filed for a medicine Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract. Note: This rule should not be misinterpreted to provide anticipated reduction in market price of a Product and Providing Losses Ex 3: You are a Government Company and there is a possibility that Government will withdraw the subsidy for Fertilizers in the forthcoming budget, You cannot provide loss of subsidy as a loss now itself. Ex 4: The Government is likely to increase the Price of petrol which is one of the essential input for your business, then you cannot provide for losses. Ex 5:There is a Fire in your in your Factory and Goods were lost and the Goods are insured, then the claim you submitted can be booked to the satisfaction of Insurance Company and Auditors.

21 21 Accounting Concepts Realization Concept 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 Ex 1: A Sales invoice for Rs.1 Million Credit Note for Rs received Credit Note for Rs received Ex 2: For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in one lump sum but rather it would be divided over time according to the work that is actually being done. Ex 2: For instance, if a company is awarded a contract to build an office building the revenue from that project would not be recorded in one lump sum but rather it would be divided over time according to the work that is actually being done.

22 22 Accounting Concepts Matching Concept Matching Concept When an Event affects both the revenues and expenses, the effect on each should be recognized in the same accounting period When an Event affects both the revenues and expenses, the effect on each should be recognized in the same accounting period Ex 1: Generally Employees Salaries are paid for the previous month at the beginning of the next month. But they have rendered their services to produce goods and sold and Sales revenue is recognized in previous month. So to match the cost with the revenue earned, we need to make provision for Salaries in previous month itself. (i.e.) March Salary paid in April, but a Salary Payable provision will be made in March itself EX 2: Insurance Premium paid for Jan- Dec whereas your accounting period closes on March. In this case only three months premium need to be treated as Expense and balance 9 months treated as advance premium paid as an asset

23 23 Accounting Concepts Materiality concept Materiality concept Insignificant events would not be recorded, if the benefit of recording them does not signify the cost 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. This concept need to read in conjunction with accounting events which signifies the transaction into Capital, Revenue and deferred revenue expenditure.

24 24 Accounting Concepts Objectivity Concept Objectivity Concept An Evidence of the happening of the Transaction should support every Transaction in the form of paper. External Evidence is considered to be more authenticated proof than Internal Evidence. This rule is more important from Audit perspective as Auditors always consider and bound to get more external evidences than internal Evidences. An Evidence of the happening of the Transaction should support every Transaction in the form of paper. External Evidence is considered to be more authenticated proof than Internal Evidence. This rule is more important from Audit perspective as Auditors always consider and bound to get more external evidences than internal Evidences. Ex 1: Third Party Evidence (Credit Note from Supplier) Ex 2: Auditors Collect Statements from Customer and Suppliers for the amount showing as Outstanding from Customers and amounts Payable to Suppliers. Ex 3: The Sales Invoices alone is not considered as an objective evidence unless it is not supported by Delivery challan and acknowledgement of Goods Received by Customer.

25 25 Accounting Conventions Going Concern Going Concern Accounting Records, Events and Transactions on the assumption that the entity will continue to operate for an indefinitely Long period of time Accounting Records, Events and Transactions on the assumption that the entity will continue to operate for an indefinitely Long period of time Ex. An Entity will not be started with an intention to close within the specified time period. Business is always not started with an intention to close and it is expected to continue forever.

26 26 Accounting Conventions Consistency Consistency The Accounting Policies and methods followed by the company should be the same every year 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.

27 27 Accounting Conventions Accrual 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 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) The Company Law / Income Tax Act Prescribes all Companies to follow Accrual Basis of Accounting except for Professional Firms and Government Organizations which are allowed to follow Cash Basis of Accounting.

28 28 Classification of Accounting Event Capital Item: Any expenditure that creates an asset, for example: Capital Item: Any expenditure that creates an asset, for example: Purchase of plant or machinery Purchase of plant or machinery Improvements to assets that increase their usefulness or extend their effective useful life of the asset Improvements to assets that increase their usefulness or extend their effective useful life of the asset Expenditure incurred in transporting an asset to its site and preparing it for use. Expenditure incurred in transporting an asset to its site and preparing it for use.

29 29 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 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 Revenue, Interest Income, Salary Payable, Bonus Payable, Tax Payable etc., Ex: Salary and wages, Printing and Stationery, Sales Revenue, Interest Income, Salary Payable, Bonus Payable, Tax Payable etc., In Simple terms this is an event which generates revenue and the related cost to earn the revenue are accounted as expense. In Simple terms this is an event which generates revenue and the related cost to earn the revenue are accounted as expense.

30 30 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. 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 is likely to be obtained over a period more than one year (E.g.) PepsiCo Pays USD 2 Million to Sachin Tendulkar for an Advertisement Contract for two Years and benefit of which is expected to be for four years Ex 1: Advertisement Expenditure the benefit of which is likely to be obtained over a period more than one year (E.g.) PepsiCo Pays USD 2 Million to Sachin Tendulkar for an Advertisement Contract for two Years and benefit of which is expected to be for four years Ex 2: Royalty paid to the author of the book for five years Ex 2: Royalty paid to the author of the book for five years

31 31 Rules of Accounting Accounts Personal Impersonal RealNominal Debit the Receiver Credit the Giver Debit what comes in Credit what goes out Debit Expenses and Losses Credit Revenue and Income Ex: Sole Prop, Company Ex: Cash, Bank, Building,InvEx: Sales, Power, Rent

32 32 Application of Accounting Rule Check whether is there a Money Transaction Involved? Check whether is there a Money Transaction Involved? Is that transaction affects your set of books? Is that transaction affects your set of books? Check whether does the transaction falls under which accounting period. Check whether does the transaction falls under which accounting period. Does the transaction involve a personal account (i.e.) Siva as a Person or a Company or any other entity as mentioned in Business entity concept Does the transaction involve a personal account (i.e.) Siva as a Person or a Company or any other entity as mentioned in Business entity concept Is that person is receiver or giver in the transaction and accordingly debit or credit the person account. Is that person is receiver or giver in the transaction and accordingly debit or credit the person account. Does the transaction involves any Cash inflow or Cash outflow? (i.e.) Cash or Bank involved Does the transaction involves any Cash inflow or Cash outflow? (i.e.) Cash or Bank involved If there is no cash involvement then the choices are as follows If there is no cash involvement then the choices are as follows Both can be real ( Debit and credit both real accounts) Both can be real ( Debit and credit both real accounts) One real and one nominal (Either Debit/Credit for Real or Credit/ Debit for Nominal accounts) One real and one nominal (Either Debit/Credit for Real or Credit/ Debit for Nominal accounts)

33 33 Accounting Rule of Thumb Nature of Transaction IncreaseDecrease AssetDebitCredit LiabilityCreditDebit RevenueCreditDebit ExpenseDebitCredit ProfitCreditDebit LossesDebitCredit

34 34 Combination of Rules Dr Personal A/c Cr Real A/c Ex:Drawings or Advance to Employee, Payment to Supplier Dr Real A/c Cr Personal A/c Ex:Capital invested, Payment Received from Customer Dr Real A/c Cr Nominal A/c Ex: Interest Recd by Cash, Cash Sales Dr Nominal A/c Cr Real A/c Ex: Rent Paid by Cash Dr Personal A/c Cr Nominal A/c Ex: Interest Accrued on Investment, Dividend accrued on Investment Dr Nominal A/c Cr Personal A/c Ex: Hire Purchase Charges accrued, Interest Payable, Salary Payable Dr Real A/c Cr Real A/c Ex:Purchase of Inventory by Cash Dr Real A/c Cr Real A/c Ex: Cash withdrawal or Deposit

35 35 Combination of Accounting Rules CombinationPersonalRealNominal PersonalX Real Nominal X Debit Credit

36 36 Combination of Accounting Rules Both Debit and Credit cannot be Personal Accounts Both Debit and Credit cannot be Personal Accounts EX 1: Siva paid Cash to Ajay. The Entry Cannot be EX 1: Siva paid Cash to Ajay. The Entry Cannot be Ajay A/c DrAjay A/c Dr Siva A/c CrSiva A/c Cr The Correct entries are as follows. In Ajay set of Books The Correct entries are as follows. In Ajay set of Books Cash A/c Dr 1000 Siva A/c Cr 1000 Ajay A/c Dr 1000 Cash A/c Cr 1000 In Siva set of Books Similarly Both Debit and Credit cannot be Nominal Accounts Note: Remember this important aspect and therefore You will not commit any mistake in Debit and Credit

37 37 Recording of Accounting Transactions Recording of an Accounting event is known as Journal entry Recording of an Accounting event is known as Journal entry Recording is made in Primary and Secondary Books in Manual Accounting system Recording is made in Primary and Secondary Books in Manual Accounting system Primary Books Primary Books General Ledger General Ledger Cash Book Cash Book Secondary Books Purchase Register Purchase Register Sales Register Sales Register Fixed Assets Register Fixed Assets Register Returns (Purchase return/Sales Return) Returns (Purchase return/Sales Return) Journal Register Journal Register In Oracle ERP System GL is called Main Ledger and the Transactions emanating from Modules are referred to as Sub Ledger In Oracle ERP System GL is called Main Ledger and the Transactions emanating from Modules are referred to as Sub Ledger

38 38 Recording of Accounting Transactions First the transactions are entered as Journal First the transactions are entered as Journal Then Second step is they are posted to individual account as T Accounts – In Oracle or any other ERP system this happens immediately when a transaction is created Then Second step is they are posted to individual account as T Accounts – In Oracle or any other ERP system this happens immediately when a transaction is created Prior to ERP system except for Non cash charges, Journals are directly posted in Primary and secondary ledger with supporting Document reference Number (like Invoice Number), date, amount and a cross reference ledger folio number (Page Number) of respective Debit and Credit Entries in Ledger. Prior to ERP system except for Non cash charges, Journals are directly posted in Primary and secondary ledger with supporting Document reference Number (like Invoice Number), date, amount and a cross reference ledger folio number (Page Number) of respective Debit and Credit Entries in Ledger. Journals are entered only for year end Provision Entries. Journals are entered only for year end Provision Entries. Then the balance from each T account is taken and which becomes a Trial Balance with Sum of Debits and Sum of Credit which should be equal. Then the balance from each T account is taken and which becomes a Trial Balance with Sum of Debits and Sum of Credit which should be equal. Trial Balance forms the basis for preparation of Financial Statements and in ERP systems including Oracle Applications Debit is shown as Positive and Credit is shown as Negative Trial Balance forms the basis for preparation of Financial Statements and in ERP systems including Oracle Applications Debit is shown as Positive and Credit is shown as Negative In ERP systems the chance of Trial Balance not matching or not tallying issue is very minimal. In case of manual Accounting this will happen most of the time and unless it is corrected and balanced, the accountant should not proceed to prepare Financial Statements In ERP systems the chance of Trial Balance not matching or not tallying issue is very minimal. In case of manual Accounting this will happen most of the time and unless it is corrected and balanced, the accountant should not proceed to prepare Financial Statements

39 39 Preparation of Financial Statements Preparation of Trial Balance Preparation of Trial Balance Balances Extracted from General Ledger Balances Extracted from General Ledger Sum of debit and credit balances = 0 Sum of debit and credit balances = 0 Preparation of Trading, Profit & Loss Account or Income & Expenditure Account and Balance sheet Preparation of Trading, Profit & Loss Account or Income & Expenditure Account and Balance sheet Trial Balance is the base for preparing Financial Statements Trial Balance is the base for preparing Financial Statements Adjustment entries are made in adjustment period and passed as Journal Vouchers before making the financial statements Adjustment entries are made in adjustment period and passed as Journal Vouchers before making the financial statements Trading and Profit and Loss Account is Always for a period say for an Year (Jan - Dec or Apr - Mar), Quarterly for 3 months or Half yearly for 6 months Trading and Profit and Loss Account is Always for a period say for an Year (Jan - Dec or Apr - Mar), Quarterly for 3 months or Half yearly for 6 months Balance Sheet is always as on Date (As on or ) Balance Sheet is always as on Date (As on or )

40 40 A Simple Case Study Accounting Concepts

41 41 Case Study Siva started Business in dealer in Computer Spare parts and Computer Stationery on 01-APR-2007 and following events occurred in the month of April. Siva started Business in dealer in Computer Spare parts and Computer Stationery on 01-APR-2007 and following events occurred in the month of April. Siva invested USD Cash and USD worth of furniture Siva invested USD Cash and USD worth of furniture Siva purchased USD worth of goods on credit Siva purchased USD worth of goods on credit Siva friend Ajay promised him to give a loan of USD Siva friend Ajay promised him to give a loan of USD Siva sold USD worth of good for USD Siva sold USD worth of good for USD Siva paid rent USD 2000 for two months Siva paid rent USD 2000 for two months Siva paid Salary to Staff USD 5000 Siva paid Salary to Staff USD 5000 Siva incurred USD 5000 on interior decoration which will last for two years. Siva incurred USD 5000 on interior decoration which will last for two years. Siva sold USD worth of goods on credit for USD Siva sold USD worth of goods on credit for USD Siva has a Bank account with Citi Bank which credited USD 5000 wrongly of John account Siva has a Bank account with Citi Bank which credited USD 5000 wrongly of John account Purchased Vehicle for USD paid through Bank Purchased Vehicle for USD paid through Bank Cash Deposited by Siva into Bank USD Cash Deposited by Siva into Bank USD

42 42 ARE YOU READY FOR THE GAME Accounting is very simple

43 43 Accounting Terminologies Before creating Accounting Transactions let us recall and learn few 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 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) 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 REVENUE: Amount earned out of the Sale Proceeds and the amount earned on Investments EXPENSES: Amount incurred or expended to earn the revenue EXPENSES: Amount incurred or expended to earn the revenue PROFIT: TOTAL REVENUE – TOTAL EXPENSES PROFIT: TOTAL REVENUE – TOTAL EXPENSES LOSS: If the Total Expenses is more than Total Revenue it is termed as Loss 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) 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) 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 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. 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) 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) DEBTORS: Goods or Money Provided / sold on Credit by the Business (Customers)

44 44 Accounting Terminologies You should also understand the same accounting terminology is referred or used by different people in different context 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 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 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 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 ModelLets See Each of this in a Formula Model

45 45 Accounting Calculation and Formula Receivables (or) Debtors Reconciliation Opening Receivables 100 (+) Add Credit Sales 2500 (+) Debit Memo 150 (+) Positive Adjustments 75 (-) Less Cash Received 2000 (-) Less Credit Memo (Sales Return) 125 (-) Negative Adjustments 50 Closing Receivables 650 Payables (or) Creditors Reconciliation Opening Payables 200 (+) Add Credit Purchases 2000 (+) Debit Memo 150 (+) Positive Adjustments 75 (-) Less Cash Paid 1500 (-) Less Credit Memo (Purc. Return) 125 (-) Negative Adjustments 50 Closing Payables 750

46 46 Accounting Calculations and Formula Purchased Inventory Reconciliation Opening Purchased Inventory 100 (+) Add Purchases 2500 (-) Less Issued to Production 2000 (-) Less Purchase Return 125 Closing Purchased Inventory 475 Finished Goods (FG) Reconciliation Opening stock of FG 200 (+) Add Production 2000 (+) Sales Return 100 (-) Less Sales 1500 Closing FG Inventory 800

47 47 Accounting Calculations and Formula Cash Reconciliation Opening Cash Balance 100 (+) Add Cash Receipts 2500 (Cash Sales, Cash Recd from Receivables, Cash with drawl from Bank) (-) Less Cash Payments 2000 (Cash Purchases, Expenses paid By Cash, Cash Deposited into Bank) Closing Cash Balance 600 Bank Balance Reconciliation Opening Balance of Bank 200 (+) Add Bank Receipts 2000 (Cash Deposits, Cheque Received From Debtors, Interest Credited) (-) Less Payments from Bank 1500 (Paid to Creditors by Cheque, Expenses paid by cheque, Cash With drawl from bank) Closing Bank Balance 700

48 48 Accounting Entries for the Case Study Sl No Description Nature of Account Dr (in USD) Cr (in USD) 1 Cash A/c Dr Furniture A/c Dr (Cash and Furniture Real Tangible Asset. Hence apply the Real Rule – Debit What comes in) To Siva Capital A/c (Siva is a Person running the business as a Proprietor in this case. Hence apply the Rule for Personal – Credit the giver) RealRealPersonal (Also using the Business Entity Concept Siva being owner is also treated as a Creditor for the purpose of Business. If the Business is wind up Business has to pay back Siva) Inventory A/c Dr (Real Tangible Asset) To Creditors A/c (Person be an Individual or Company gives the goods on Credit) RealPersonal

49 49 Accounting Entries for the Case Study Sl No Description Nature of Account Dr (in USD) Cr (in USD) 3 No Entry (Mere Promise to give does not tantamount to Monetary Transaction) No Entry (Money Measurement Concept – No Monetary transaction involved ) 4 Two Entries involved (One for sale of goods and one for reduction in inventory) Cash / Bank A/c Dr (Real – Debit what comes in) To Revenue (Sales) A/c (Nominal Rule - Credit all Income and Revenue) Cost of Goods Sold A/c Dr (Nominal – Debit Expenses) To Inventory A/c (Reduction in Inventory) Real A/c Nominal A/c Real A/c

50 50 Accounting Entries for the Case Study Sl No Description Nature of Account Dr (in USD) Cr (in USD) 5 Rent A/c Dr (Debit Expense – Nominal) Rent Advance A/c Dr (This is like Cash Advanced to Landlord. Hence it should be treated as Personal - Debit the Receiver) To Cash A/c (Real – Credit what goes out) Nominal A/c Personal A/c Real Salary A/c Dr (Nominal – Debit Expense) To Cash A/c (Real – Credit what goes out) Nominal A/c Real A/c

51 51 Accounting Entries for the Case Study Sl No Description Nature of Account Dr (in USD) Cr (in USD) 7 Advertisement Exp A/c Dr Advt Exp Adv A/c Dr (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) NominalRealReal Receivables A/c Dr To Revenue A/c Cost of Goods Sold A/c Dr To Inventory A/c RealNominalNominalReal

52 52 Accounting Entries for the Case Study Sl No Description Nature of Account Dr (in USD) Cr (in USD) 9 No Entry (This is a Mistake done by Bank. Bank has to make correction and in Sivas Book there is no accounting entry required) No Entry 10 Vehicles A/c Dr (Real Tangible Asset Debit what comes in) To Bank A/c (Real asset – Credit what goes out) RealReal Bank A/c Dr (Real asset- Debit what comes in To Cash A/c (Real Asset – Credit what goes out) RealReal

53 53 T Accounts Dr USD Cr USD To Bal By Cash By Furniture Total Dr USD Cr USD To Siva Cap By Bal Total Siva Capital Account Furniture Account Dr USD Cr USD To Siva Cap To Sales By Rent 1000 By Rent Adv 1000 By Salary 5000 By Advt Adv 2500 By Advt exp 2500 By Bank By Balance Total Dr USD Cr USD To Creditors By COGS By COGS By Bal Total Cash AccountInventory Account

54 54 T Accounts Dr USD Cr USD To Bal By Invent Total Dr USD Cr USD To Cash 1000 By Bal 1000 Total 1000 Creditors AccountRent Account Dr USD Cr USD To Cash 1000 By Bal 1000 Total 1000 Dr USD Cr USD To Bal By Cash By Rece Total Rent Advance Account Revenue / Sales Account Salary AccountAdvertisement Exp Account Dr USD Cr USD To Cash 5000 By Bal 5000 Total 5000 Dr USD Cr USD To Cash 2500 By Bal 2500 Total 2500

55 55 T Accounts Dr USD Cr USD To Cash 2500 By Bal 2500 Total 2500 Dr USD Cr USD To sales By Bal Total Advt Exp Advance AccountReceivables Account Dr USD Cr USD To Inventory To Inventory By Bal Total Dr USD Cr USD To Bank By Bal Total Cost of Goods Sold Account Vehicle Account Bank Account Dr USD Cr USD To Cash By Vehicle By Bal Total 50000

56 56 Trial Balance Debit USD Credit USD Furniture (A) Cash (A) Bank (A) COGS (E) Salary (E) 5000 Rent (E) 1000 Rent Advance (A) 1000 Advertisement Exp (E) 2500 Advt Exp Advance (A) 2500 Inventory (A) Vehicle (A) Receivable (A) Siva Capital (L) Sales / Revenue (R) Creditors (L) Total Trial Balance for the Month of APRIL 2007 A – Asset, L – Liability, R – Revenue, E - Expense

57 57 Profit and Loss Account For APR 2007 Expenses USD Revenue USD COGS (E) Salary (E) 5000 Rent (E) 1000 Advertisement Exp (E) 2500 To Profit Sales / Revenue (R) Total

58 58 Balance Sheet as on 30-APR-2007 Liabilities USD Assets USD Siva Capital Add Profit Siva Capital Creditors Furniture Vehicle Cash Bank Receivables Inventory Rent Advance 1000 Advt Exp Advance 2500 Total

59 59 Important Points to Remember Accounting can be learnt only by Practice and not by reading Accounting can be learnt only by Practice and not by reading Try to learn by creating Journal entries with Examples Try to learn by creating Journal entries with Examples Cash Balance can never have negative balance at any point of time Cash Balance can never have negative balance at any point of time Land will never Depreciate and it will have only Appreciation Land will never Depreciate and it will have only Appreciation Bank can have negative balance if you have Overdraft facility 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 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 In the above, Example the bank account in your Books and in Bank Books will be as follows Dr USD Cr USD To Cash By Vehicle By Balance Total Dr USD Cr USD To Vehicle To Balance By Cash Total Siva Books Bank Account Bank Books Siva Account

60 60 Case Study for Practice Take your own Personal Account and try to create the following Take your own Personal Account and try to create the following On First of July 2007 You had a Cash balance of USD2500 which is your Capital On First of July 2007 You had a Cash balance of USD2500 which is your Capital On 3 rd July You have received Salary of USD On 3 rd July You have received Salary of USD On 5 th Paid Rent of USD 1200 by cheque On 5 th Paid Rent of USD 1200 by cheque On 7 th You purchased provision for house for 800 USD On 7 th You purchased provision for house for 800 USD On 10 th You spent for outing through your credit card USD 500 On 10 th You spent for outing through your credit card USD 500 On 15 th You withdraw Cash USD 8000 On 15 th You withdraw Cash USD 8000 On 20 th You Invested in Fixed Deposit USD Interest Per annum On 20 th You Invested in Fixed Deposit USD Interest Per annum On 22 nd you have given a Loan of USD 2000 to friend James On 22 nd you have given a Loan of USD 2000 to friend James On 25 th You spent for Car Repairs 500 USD On 25 th You spent for Car Repairs 500 USD On 28 th Your wife gave USD 200 to your Neighbor from her pocket On 28 th Your wife gave USD 200 to your Neighbor from her pocket On 30 th You Deposited Cash 1000 USD to your Bank Account On 30 th You Deposited Cash 1000 USD to your Bank Account

61 61 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 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 The simple way to Learn Accounting is as follows Do not go for advanced level books without understanding the basics 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 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 This is more than sufficient for any non accounting candidate to work on Oracle Applications Never try to memorize the concepts and rules Never try to memorize the concepts and rules Try to understand and apply 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 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 Read and Practice Level I and II at least Three times

62 62 " 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

63 63 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 Get Ready for Learning Accounting in Oracle Applications


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