Presentation on theme: "Basic Accounting Level II By"— Presentation transcript:
1 Basic Accounting Level II By Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIMGlobal Technology Services LLc, UAE
2 Agenda What is Accounting Mode of Learning Accounting Accounting and Finance - DifferenceAccounting Concepts / ConventionsAccounting EventsRules of AccountingPreparation of Financial StatementsA Simple Case Study
3 What is AccountingVision EnterprisesFinancial Statementat December 31, 1997AssetsLandAccount ReceivableCashTotal AssetsNotes PayableAccount PayableLiabilityTotal LiabilityContributed CapitalStockholder’s EquityTotal Stockholder’s EquityRetained Earnings$ 981$5,714$4,456======$11,151$ 416$3,830$4,246$2,365$ 367$2,732?JOURNALPAYMENTAccounting is defined as the art of Recording, Classifying and Summarizing transactions in monetary terms (in Money terms) for the preparation of Financial Statements
4 What is AccountingAccounting is the art of recording, classifying and Summarizing financial transactions in the Preparation of Financial StatementsRecording 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 ExpenseSummarizing 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 ofTrading, Manufacturing and Customer Service oriented Organization, the sum of all income and expenses is referred to as Profit and Loss accountSocial 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 Mode of Learning Accounting Change your mindset that accounting means only Debit and CreditDo not blindly learn Accounting Rules and apply the rules of Debit and CreditThe Best way to Learn Accounting isLearn the Accounting ConceptsUnderstand the Accounting ConventionsClassify the Accounting EventApply the Accounting RulesRecord, Classify and Summarize the JournalYou are Confused. Am I right?Do not become panic and move forward, you will understand
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 Finance and Accounting - Difference AccountsProcurement and Utilization of FundsRecording of an Accounting EventLeads to Investment DecisionsExpressed in Monetary TermsFinancing DecisionsRecording , Classifying and Summarizing TransactionsFuturisticPreparation of Financial Statements (Trading, Profit and loss Account and Balance Sheet)Cost of CapitalHistoricalCash Flow / Fund FlowCompliance with Statutory Matters like companies Act, Income Tax Act, Sales Tax Act Etc.,Project AppraisalRatio Analysis
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 IASC Decides the preferred Accounting practices worldwide and encourages the worldwide acceptanceThere are 41 International Accounting StandardsNow IFRS (International Financial Reporting Standards) and SOX (Sarbanes Oxley) Act gain more importance which came up from US GAAP and UK GAAP
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 Conventions / Practices are basically assumptions and expected to be followed while preparing the Financial Statements.
12 Accounting ConceptsBusiness Entity ConceptAccounts can be kept only for Entities, which are different from the persons who are associated with these entitiesEx. Sole Proprietary, Partnership firm, CompanyThis 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 Types of Entities Type of Organization Example Sole Proprietary Siva & CoPartnership FirmGanesan BrosPrivate CompanyOracle India Pvt Ltd (A Private Company in which shares are not traded in Stock Exchange and members cannot exceed 50)Public CompanyHindustan Unilever Ltd (A Public Company in which Shares are traded in Stock Exchange)Closely Held CompanyCadbury India Ltd (A Public Company in which shares are not traded but shares are held by more than 50 persons)TrustHutchinson Private TrustSocietySembur Co-op SocietyAssociation of PersonsICAI, ICWAI, ICSI, Rotary ClubBody of Individuals (one Man Corp)President of India, Governor of StateAny other Legal Entity (HUF)A Hindu Undivided Family Jointly holding the Investment and Properties for the benefit of Family members.
14 Accounting Concepts 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.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.Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with Bank of America and You have Bank Account with Citi Bank and the salary at end of every month is transferred from Bank of America to Citi Bank. How many accounting Entities involved in this case?If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi Bank)Ex 3: You run your own Business in Software Consulting and your Friend has agreed to provide a Loan of 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)
15 Accounting Concepts Money Measurement Concept Record should be made only of that information which can be expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be recorded unless a Value of Furniture is known in monetary valueEx 2. Very Famous Indian Example – Rama Killed Ravana. Can this be Accounted? – NOEx 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 valuesEx 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 Accounting Concepts 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 businessEx 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 AssetsLiabilitiesAssetsSiva CapitalBuildingFurnitureTotal
17 Accounting Concepts Dual Aspect Concept Asset The Value of the Assets owned by the concern is equal to the claims on the AssetsASSETS = LIABILITIES + OWNER’S EQUITYOWNER’S EQUITY = ASSETS – LIABILITIESLIABILITIES = ASSETS – OWNER’S EQUITYEx: If Owners Equity is and Liabilities are , then Total Asset =AssetOwner’s Equity + LiabilitiesLiabilitiesAssets – Owner’s EquityOwner’s EquityAssets - Liabilities
18 Accounting Concepts Cost Concept Assets are always shown at their Cost and not at their current Market ValueEx 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 PriceEx 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 Accounting Concepts Accounting Period Accounting measures activity for a specified interval of time, usually a year(e.g) Calendar Year (Jan’07-Dec’07)Fiscal Year (Apr’07-Mar’08)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 ReportingA 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) YearNote: 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 Accounting Concepts Conservatism 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 medicineEx 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 LossesEx 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 Accounting Concepts Realization Concept The Sales is considered to have taken place only when either the cash is received or some third party becomes legally liable to pay the amount. Revenues are recognized when they are earned or realized. Realization is assumed to occur when the seller receives cash or a claim to cash (receivable) in exchange for goods or servicesEx 1: A Sales invoice for Rs.1 MillionCredit Note for Rs receivedEx 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 Accounting Concepts Matching Concept When an Event affects both the revenues and expenses, the effect on each should be recognized in the same accounting periodEx 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 itselfEX 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 Accounting Concepts Materiality concept Insignificant events would not be recorded, if the benefit of recording them does not signify the costEx: 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 Accounting Concepts 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.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 Accounting Conventions Going ConcernAccounting Records , Events and Transactions on the assumption that the entity will continue to operate for an indefinitely Long period of timeEx. 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 Accounting Conventions ConsistencyThe Accounting Policies and methods followed by the company should be the same every yearEx 1. Period should not be changed frequently from Jan-Dec to Apr-MarEx 2. Inventory Valuation change from FIFO to LIFO or Weighted Average not permitted frequentlyEx 3. Changing Depreciation Policy from Straight Line to Reducing Balance Method frequentlyNote: 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 Accounting Conventions AccrualIn General it is assumed that Accounts are always prepared based on Accrual basis. However there are entities which follow Cash Basis of Accounting AlsoEx: 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 Classification of Accounting Event Capital Item: Any expenditure that creates an asset, for example:Purchase of plant or machineryImprovements to assets that increase their usefulness or extend their effective useful life of the assetExpenditure incurred in transporting an asset to its site and preparing it for use.
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 BooksEx: 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.
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.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 yearsEx 2: Royalty paid to the author of the book for five years
31 Debit Expenses and Losses Credit Revenue and Income Rules of AccountingAccountsPersonalImpersonalDebit the ReceiverCredit the GiverEx: Sole Prop, CompanyRealNominalDebit what comes inCredit what goes outDebit Expenses and LossesCredit Revenue and IncomeEx: Cash, Bank, Building,InvEx: Sales, Power, Rent
32 Application of Accounting Rule Check whether is there a Money Transaction Involved?Is that transaction affects your set of books?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 conceptIs 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 involvedIf there is no cash involvement then the choices are as followsBoth 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)
33 Accounting Rule of Thumb Nature of TransactionIncreaseDecreaseAssetDebitCreditLiabilityRevenueExpenseProfitLosses
34 Combination of Rules Dr Personal A/c Cr Real A/c Dr Real A/c Ex:Drawings or Advance to Employee, Payment to SupplierDr Real A/cCr Personal A/cEx:Capital invested, Payment Received from CustomerDr Real A/cCr Real A/cEx:Purchase of Inventory by CashDr Real A/cCr Real A/cEx: Cash withdrawal or DepositDr Real A/cCr Nominal A/cEx: Interest Recd by Cash, Cash SalesDr Nominal A/cCr Real A/cEx: Rent Paid by CashDr Personal A/cCr Nominal A/cEx: Interest Accrued on Investment, Dividend accrued on InvestmentDr Nominal A/cCr Personal A/cEx: Hire Purchase Charges accrued, Interest Payable, Salary Payable
35 Combination of Accounting Rules DebitCombinationPersonalRealNominalXCredit
36 Combination of Accounting Rules Both Debit and Credit cannot be Personal AccountsEX 1: Siva paid Cash to Ajay. The Entry Cannot beAjay A/c DrSiva A/c CrThe Correct entries are as follows. In Ajay set of BooksCash A/c Dr1000Siva A/c CrIn Siva set of BooksAjay A/c Dr1000Cash A/c CrSimilarly Both Debit and Credit cannot be Nominal AccountsNote: Remember this important aspect and therefore Youwill not commit any mistake in Debit and Credit
37 Recording of Accounting Transactions Recording of an Accounting event is known as Journal entryRecording is made in Primary and Secondary Books in Manual Accounting systemPrimary BooksGeneral LedgerCash BookSecondary BooksPurchase RegisterSales RegisterFixed Assets RegisterReturns (Purchase return/Sales Return)Journal RegisterIn Oracle ERP System GL is called Main Ledger and the Transactions emanating from Modules are referred to as Sub Ledger
38 Recording of Accounting Transactions First the transactions are entered as JournalThen 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 createdPrior 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.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 NegativeIn 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 Preparation of Financial Statements Preparation of Trial BalanceBalances Extracted from General LedgerSum of debit and credit balances = 0Preparation of Trading, Profit & Loss Account or Income & Expenditure Account and Balance sheetTrial Balance is the base for preparing Financial StatementsAdjustment entries are made in adjustment period and passed as Journal Vouchers before making the financial statementsTrading 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 monthsBalance Sheet is always as on Date (As on or )
41 Case StudySiva 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 furnitureSiva purchased USD worth of goods on creditSiva friend Ajay promised him to give a loan of USD 25000Siva sold USD worth of good for USDSiva paid rent USD 2000 for two monthsSiva paid Salary to Staff USD 5000Siva incurred USD 5000 on interior decoration which will last for two years.Siva sold USD worth of goods on credit for USD 18000Siva has a Bank account with Citi Bank which credited USD 5000 wrongly of John accountPurchased Vehicle for USD paid through BankCash Deposited by Siva into Bank USD
42 ARE YOU READY FOR THE GAME Accounting is very simple
43 Accounting Terminologies Before creating Accounting Transactions let us recall and learn few accounting terminologiesASSETS: Any property or Investment which can be convertible into cashLIABILITIES: 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 InvestmentsEXPENSES: Amount incurred or expended to earn the revenuePROFIT: TOTAL REVENUE – TOTAL EXPENSESLOSS: If the Total Expenses is more than Total Revenue it is termed as LossFIXED ASSETS: Amount Invested in Long Term Assets which is not intended to be sold within a Year (Ex. Machinery, Land)CURRENT ASSETS: Amount invested in Short Term Assets which is intended and rotated to earn Revenue (Ex. Inventory)NOTE: The Fixed Asset and Current asset vary from Person to PersonEx: For a Dealer in Refrigerator it is a Current asset which becomes Fixed Asset for you when you buy.CREDITORS: Person who provide Money or Goods on Credit to the Business (Supplier)DEBTORS: Goods or Money Provided / sold on Credit by the Business (Customers)
44 Accounting Terminologies You should also understand the same accounting terminology is referred or used by different people in different contextReceivables also known as Trade Debtors, Debtors, Account Receivables, Sundry Debtors, Trade Receivables, Amount ReceivablesLiability is also known as Trade Creditors, Account Payable, Sundry Creditors, Amount Payable, Trade Liabilities, CreditorsCost 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 requirementLet’s See Each of this in a Formula Model
45 Accounting Calculation and Formula Receivables (or) Debtors ReconciliationOpening Receivables(+) Add Credit Sales(+) Debit Memo(+) Positive Adjustments(-) Less Cash Received(-) Less Credit Memo (Sales Return) 125(-) Negative AdjustmentsClosing ReceivablesPayables (or) Creditors ReconciliationOpening Payables(+) Add Credit Purchases(-) Less Cash Paid(-) Less Credit Memo (Purc. Return)Closing Payables
46 Accounting Calculations and Formula Purchased Inventory ReconciliationOpening Purchased Inventory(+) Add Purchases(-) Less Issued to Production(-) Less Purchase ReturnClosing Purchased InventoryFinished Goods (FG) ReconciliationOpening stock of FG(+) Add Production(+) Sales Return(-) Less SalesClosing FG Inventory
47 Accounting Calculations and Formula Cash ReconciliationOpening Cash Balance(+) Add Cash Receipts(Cash Sales, Cash Recd fromReceivables, Cash with drawl fromBank)(-) Less Cash Payments(Cash Purchases, Expenses paidBy Cash, Cash Deposited into Bank)Closing Cash BalanceBank Balance ReconciliationOpening Balance of Bank(+) Add Bank Receipts(Cash Deposits, Cheque ReceivedFrom Debtors, Interest Credited)(-) Less Payments from Bank(Paid to Creditors by Cheque,Expenses paid by cheque, CashWith drawl from bank)Closing Bank Balance
48 Accounting Entries for the Case Study Sl NoDescriptionNature of AccountDr (in USD)Cr (in USD)1Cash A/c DrFurniture 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)RealPersonal(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)500001000002Inventory A/c Dr(Real Tangible Asset)To Creditors A/c(Person be an Individual or Company gives the goods on Credit)75000
49 Accounting Entries for the Case Study Sl NoDescriptionNature of AccountDr (in USD)Cr (in USD)3No Entry(Mere Promise to give does not tantamount to Monetary Transaction)(Money Measurement Concept – No Monetary transaction involved )4Two 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/cNominal A/c10000050000
50 Accounting Entries for the Case Study Sl NoDescriptionNature of AccountDr (in USD)Cr (in USD)5Rent 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/cPersonal A/cReal100020006Salary A/c Dr(Nominal – Debit Expense)Real A/c5000
51 Accounting Entries for the Case Study Sl NoDescriptionNature of AccountDr (in USD)Cr (in USD)7Advertisement Exp A/c DrAdvt 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)NominalReal250050008Receivables A/c DrTo Revenue A/cCost of Goods Sold A/c DrTo Inventory A/c1800010000
52 Accounting Entries for the Case Study Sl NoDescriptionNature of AccountDr (in USD)Cr (in USD)9No Entry(This is a Mistake done by Bank. Bank has to make correction and in Siva’s Book there is no accounting entry required)10Vehicles A/c Dr(Real Tangible AssetDebit what comes in)To Bank A/c(Real asset – Credit what goes out)Real2500011Bank A/c Dr(Real asset- Debit what comes inTo Cash A/c(Real Asset – Credit what goes out)50000
53 T Accounts Furniture Account Siva Capital Account Cash Account Dr USDCr USDTo BalBy CashBy Furniture 50000TotalTotalDr USDCr USDTo Siva Cap 50000By BalTotalTotalCash AccountInventory AccountDr USDCr USDTo Siva Cap 50000To SalesBy RentBy Rent AdvBy SalaryBy Advt AdvBy Advt expBy BankBy BalanceTotalTotalDr USDCr USDTo CreditorsBy COGSBy COGSBy BalTotalTotal
55 T Accounts Advt Exp Advance Account Receivables Account Dr USDCr USDTo CashBy BalTotalTotalDr USDCr USDTo salesBy BalTotalTotalVehicle AccountCost of Goods Sold AccountDr USDCr USDTo Inventory 50000To Inventory 10000By BalTotalTotalDr USDCr USDTo BankBy BalTotalTotalBank AccountDr USDCr USDTo CashBy VehicleBy BalTotalTotal
56 Trial Balance Trial Balance for the Month of APRIL 2007 Debit USD A – Asset, L – Liability, R – Revenue, E - ExpenseDebit USDCredit USDFurniture (A)Cash (A)Bank (A)COGS (E)Salary (E)Rent (E)Rent Advance (A)Advertisement Exp (E)Advt Exp Advance (A)Inventory (A)Vehicle (A)Receivable (A)Siva Capital (L)Sales / Revenue (R)Creditors (L)TotalTotal
57 Profit and Loss Account For APR 2007 Expenses USDRevenue USDCOGS (E)Salary (E)Rent (E)Advertisement Exp (E)To ProfitSales / Revenue (R)Total
58 Balance Sheet as on 30-APR-2007 Liabilities USDAssets USDSiva CapitalAdd ProfitSiva CapitalCreditorsFurnitureVehicleCashBankReceivablesInventoryRent AdvanceAdvt Exp AdvanceTotal
59 Important Points to Remember Accounting can be learnt only by Practice and not by readingTry to learn by creating Journal entries with ExamplesCash Balance can never have negative balance at any point of timeLand will never Depreciate and it will have only AppreciationBank can have negative balance if you have Overdraft facilityThe Bank which maintains your account will have exactly opposite entries of what is shown in your Bank AccountIn the above, Example the bank account in your Books and in Bank Books will be as followsSiva BooksBank AccountBank BooksSiva AccountDr USDCr USDTo CashBy VehicleBy BalanceTotalTotalDr USDCr USDTo VehicleTo BalanceBy CashTotalTotal
60 Case Study for Practice Take your own Personal Account and try to create the followingOn First of July 2007 You had a Cash balance of USD2500 which is your CapitalOn 3rd July You have received Salary of USD 12000On 5th Paid Rent of USD 1200 by chequeOn 7th You purchased provision for house for 800 USDOn 10th You spent for outing through your credit card USD 500On 15th You withdraw Cash USD 8000On 20th You Invested in Fixed Deposit USD Interest Per annumOn 22nd you have given a Loan of USD 2000 to friend JamesOn 25th You spent for Car Repairs 500 USDOn 28th Your wife gave USD 200 to your Neighbor from her pocketOn 30th You Deposited Cash 1000 USD to your Bank Account
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 learnThe simple way to Learn Accounting is as followsDo not go for advanced level books without understanding the basicsStart 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 exercisesThis is more than sufficient for any non accounting candidate to work on Oracle ApplicationsNever try to memorize the concepts and rulesTry to understand and apply the concepts and RulesThere 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 themRead and Practice Level I and II at least Three times
62 "There is a difference between an objective and actions "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 Hope You find this article useful Accounting in Oracle Applications 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 YouHope You find this article usefulGet Ready for LearningAccounting in Oracle Applications