Presentation on theme: "An Introduction to Accounting Courtesy: Dr Gagan Pareek"— Presentation transcript:
1 An Introduction to Accounting Courtesy: Dr Gagan Pareek
2 Dr Gagan Pareek alias Dr Harish Pareek M.Com, A.I.C.W.A, PhD Area of Expertise : Accounting & Finance, Credit Risk ManagementStrategic ManagementCorporate Trainer & Key Resource Person : In the area of Finance and Strategy, Leadership, Team Building and Motivation; Mobile: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.
3 AccountingIt enables a person to ascertain accurately and with little trouble as possibleThe 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.
4 Accounting is a must…… for Capital MaintenanceProductive CapitalProfitable Operations
5 Accounting World Events/Actions affecting the business Rules /Management DecisionsFinancial Statements
6 Events/Actions affecting the business Accounting WorldFinancial Accounting translates events into financial statementsGeneralAcceptedAccountingPrinciplesEvents/Actions affecting the businessRules /Management DecisionsSelection of different alternatives rules on the basis of GAAPFinancial Statements
7 Users of Accounting Information InvestorsGovernmentCommunityBoard of DirectorsManagementEmployeesAnalystsSuppliersEmployeesCustomersCreditors
8 Double EntryDouble 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
9 Assets Probable future economic benefits What a business “owns” ExamplesCashInvestmentsBuildingsPlant and machineryPatents and copyrights
10 Liabilities Probable future sacrifices of economic benefits What a business “owes”Contractual, statutory, or constructiveExamplesLoans payableWarranty obligationsPensions payableIncome tax payable
11 Equity Residual interest of owners Examples Share capital Share premiumRevenuesExpensesDividendsRetained profit
12 Financial Statements Profit and loss account Statement of financial performanceBalance sheetStatement of financial positionStatement of cash flowsStatement of cash receipts and cash payments
13 Types of AccountPersonal 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.
14 Real AccountThese 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.
15 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.
16 Rules of Debits and Credits: Golden Rule Personal Accounts- Debit the receiver , and credit the giverReal Accounts- Debit what comes in, and credit what goes out.Nominal Accounts-Debit expenses and losses, and credit gains.
17 LedgerThe 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.
18 Balancing of AccountThe 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.
19 Debit and Credit Entries 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
20 Entries Types Opening Entries Transfer from one account to another Rectification of errorsAdjustment EntriesClosing Entries
22 Entity ConceptThe 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.
23 E.g. If there is purchase of goods- it involves two aspects: Dual Aspect ConceptIn 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 goodsThe 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
24 Going Concern ConceptThis 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.
25 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.
26 Money Measurement Concept It underlines that the fact that in accounting, every worth recording event, happening or transactions is recorded in terms of money.
27 Cost Concept The underlying idea of cost concept is that: Asset is recorded at the price paid to acquire it, that is, at cost, andThis 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.
28 Revenue Recognition Concept At what stage the revenue should be recognized and recorded.If we take for instance of sale of goods, there are several stageslike the receipt of order from the customer,the production of goods after the receipt of orderdelivering the goods to the customer & invoicingreceipt 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.
29 Matching ConceptAfter 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.
30 Accrual ConceptRevenue 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.
31 Objectivity ConceptAll accounting must be based on objective evidence. The transaction records should be supported by verifiable documents.
32 Accounting Conventions 1 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.
33 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.
34 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.
35 4.Materiality:Material details to be provided and ignore insufficient details.This is because otherwise accounting will be unnecessarily overburdened with minute details.
36 Accounting Standards-setting Organization in Selected Countries CountryPolicy Setting BoardAustraliaAustralian Accounting Standards Board (AASB) sets GAAPCanadaCanadian Accounting Standards Board (CASB) of the Canada Institute of Chartered Accountants (CICA) sets GAAPIndiaAccounting 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.
37 TRANSACTION (a)Dr. X starts a Medical Health Care Unit, by investing Rs50,000 in his practice.
38 Dr. X invests Rs50,000 to start a Medical Health Unit Cash FlowsIncome StatementBalance SheetAssets =LiabilitiesEquityCash =+CapitalInvested50,000Financing 50,000
39 TRANSACTION (b)Medical Health Care Unit , borrows Rs20,000 to finance the practice.
40 Receipt of Loan Assets = Liabilities + Equity Cash = Loan Capital Bal Cash FlowsIncome StatementBalance SheetAssets =LiabilitiesEquityCash =LoanCapitalBal50,00020, =20,00070, =20,Financing 20,000
41 TRANSACTION (c)Medical Health Care Unit, bought Equipments worth Rs 10,000/=for practice.
50 The effect of Debits and Credits on an account are as follows Debit and Credit RulesThe effect of Debits and Credits on an account are as followsA = L + OEASSETSDebit for IncreaseCredit for DecreaseLIABILITIESDebit for DecreaseCredit for IncreaseEQUITIESDebit for DecreaseCredit for Increase13
51 Double Entry AccountingThe Equality of Debits and Credits A = L + OE=Debit balancesCredit balancesEvery transaction is recorded by equal amounts of debits and credits.13
52 The Account Left side of an account is the “Debit” side An account is a summarized record of the transactions affecting one person, one kind of property or one class of gains or lossesLeft side of an account is the “Debit” sideRight side of an account is the “Credit” sideAccountT- Form Account
53 Debits and Credits 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.
54 Debits and Credits Transaction #1 Rs10,000 Rs3,000 Transaction #2 If Debits are greater than Credits, the account will have a debit balance.Transaction #1Rs10,000Rs3,000Transaction #2Transaction #38,000BalanceRs15,000
55 Debits and Credits Transaction #1 Rs10,000 Rs3,000 Transaction #2 If Debits are greater than Credits, the account will have a debit balance.Transaction #1Rs10,000Rs3,000Transaction #28,000Transaction #3BalanceRs1,000
56 Debits and Credits Summary Normal Balance DebitNormal Balance Credit
57 Debits and Credits Summary Balance Sheet Income StatementAsset=Liability+EquityRevenue-Expense=DebitCredit
58 Debits and Credits Summary Review QuestionDebits:increase both assets and liabilities.decrease both assets and liabilities.increase assets and decrease liabilities.decrease assets and increase liabilities.
59 Debits and Credits Summary Discussion QuestionX, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Is X correct? Discuss.X is incorrect. A debit balance only means that debits amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.
60 Assets and Liabilities Assets - Debits should exceed credits.Liabilities – Credits should exceed debits.The normal balance is on the increase side.
61 Owner’s EquityOwner’s investments and revenues increase owner’s equity (credit).Owner’s drawings and expenses decrease owner’s equity (debit).
62 Revenue and ExpensesThe 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.
63 Debits and Credits Summary Review QuestionAccounts that normally have debit balances are:assets, expenses, and revenues.assets, expenses, and owner’s capital.assets, liabilities, and owner’s drawings.assets, owner’s drawings, and expenses.
64 Journalizing Oct. 1 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. 1In the Books of XJournal
66 The Recording Process The Account Steps in the Recording Process The Trial BalanceDebits and creditsExpansion of basic equationLocating errorsRecording of Journal EntriesLedger PostingBalancing of Accounts
67 The Journal Book of original entry (General Ledger). Transactions recorded in chronological order.Contributions to the recording process:Discloses the complete effects of a transaction.Provides a chronological record of transactions.Helps to prevent or locate errors because the debit and credit amounts can be easily compared.
68 Journalizing Journalizing - Entering transaction data in the journal. Presented below is information related to X Agency.Oct. 1X begins business as a merchandiser with a cash investment of Rs15,000.3Purchases office furniture for Rs1,900, on account from Soma.6Sold goods to Krishna; bills Krishna Rs3,200 .27Pays Rs700 on balance related to transaction of Oct. 3.30Pays the administrative assistant Rs2,500 salary for Oct.Journalize the transactions
69 Journalizing Oct. 3 General Journal Purchases office furniture for Rs1,900, on account from Soma.General Journal
70 Journalizing Oct. 6 General Journal Sold goods to Krishna; bills Krishna Rs3,200.General Journal
71 Journalizing Oct. 27 General Journal Pays Rs700 on balance related to transaction of Oct. 3.General Journal
72 Journalizing Oct. 30 General Journal Pays the administrative assistant Rs2,500 salary for Oct.General Journal
73 Journalizing 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)General Journal
74 The ledgerLedger 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
75 Chart of AccountsAccounts arranged in sequence in which they are presented in the financial statements.
76 Standard Form of Account T-account form used in accounting textbooks.In practice, the account forms used in ledgers aremuch more structured.
77 PostingPosting – the process of transferring amounts from the journal to the ledger accounts.General JournalJ1101General LedgerOct. 1Capital A/C15,00015,000
78 Posting Review Question Posting: normally occurs before journalizing. transfers ledger transaction data to the journal.is an optional step in the recording process.transfers journal entries to ledger accounts.
79 The Trial BalanceA list of accounts and their balances at a given time.Purpose is to prove that debits equal credits.
80 Trial Balance Limitations of a Trial Balance The trial balance may balance even whena transaction is not journalized,a correct journal entry is not posted,a journal entry is posted twice,incorrect accounts are used in journalizing or posting, oroffsetting errors are made in recording the amount of a transaction.
81 The Trial Balance Review Question A trial balance will not balance if: a correct journal entry is posted twice.the purchase of supplies on account is debited to Supplies and credited to Cash.a Rs100 cash drawing by the owner is debited to Owner’s Drawing for Rs1,000 and credited to Cash for Rs100.a Rs450 payment on account is debited to Accounts Payable for Rs45 and credited to Cash for Rs45.
82 Recording Process Case X is confused about how accounting information flows through the accounting system. She believes the flow of information is as follows.Debits and credits posted to the ledger.Business transaction occurs.Information entered in the journal.Financial statements are prepared.Trial balance is prepared.Is X correct? If not, indicate to X the proper flow of the information.No, X is not correct . The proper sequence is as follows :( b ) Business transaction occurs.( c ) Information entered in the journal.( a ) Debits and credits are posted to the ledger.( e ) Trial balance is prepared.( d ) Financial statements are prepared.
84 The Accounting CycleThe accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
85 Steps in Accounting Cycle Analyze transactionsRecord transactions in the journalPost journal entries to the ledger accountsPrepare a trial balanceJournalise and post adjusting entries and prepare adjusted trial balancePrepare financial statementsJournalise and post closing entries: temporary accounts(transfer to profit and loss account)Carry forward the balance sheet accounts to the next accounting period: permanent accounts
86 The Accounting CycleFor a new business, begin by setting up ledger accounts.For an established business, begin with account balances carried over from the previous period.
87 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.
88 Use the work sheet to complete the accounting cycle.
89 Recording the Adjusting Entries The work sheetidentifies the accountsthat requiresadjustments.Adjustmentof the accountsrequiresjournalizingand posting of theadjustment entries.
90 Recording the Adjusting 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.
91 Close the revenue, expense, and withdrawal accounts.
92 Closing the AccountsClosing of the accounts that prepares the accounts for recording transactions during the next period.
93 Closing the Accounts Closing Entries Revenues increase Owner’s Equity. Expenses and WithdrawalsdecreaseOwner’s Equity.
94 Closing the AccountsRevenues 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.
95 Closing the Accounts Income Summary A debit balance represents net loss.A credit balance represents net income.
96 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.
97 The Accounting Cycle Recording of Journal Entries Ledger Posting and balancing of accountsPreparing trial balance.Year end Adjustment Entries.Closing of accounts Preparingadjusted trial balance.Prepare financial statements.Prepare afterclosing trial balance.Journalizingand post closing entries.3
98 Permanent Accounts What accounts never close? Assets Liabilities Owner’s equityBalances of permanent accounts carry over to the next period.
99 Classify assets and liabilities as current or long-term.
100 Current AssetsCurrent 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 receivablesinventoryprepaid expenses
101 Current LiabilitiesCurrent liabilities are debts or obligations due within one year or within the operating cycle.What are some examples?accounts and salary payablesshort-term notes payableunearned revenue
102 Long-term Assets and Liabilities Long-term assets include all other assets.property, equipment, and intangiblesLong-term liabilities are all other debts due in longer than one year or the entity’s operating cycle.
103 The Classified Balance Sheet Debit sideCurrent assetsLong-term assetsCredit sideCurrent liabilitiesLong-term liabilitiesListed in the orderof decreasingliquidityListed in the orderof how soon theymust be paid
104 The Classified Balance Sheet XYZ LtdMarch 31, 20XXAssets LiabilitiesCurrent assets: Current liabilities:Cash ,000 Accounts payable ,000Accounts receivable ,000 Salary payable ,000Closing Stock ,500 Unearned revenue ,500Total current assets 8, Total Current liabilities 6,500Gross Block Owner’s equityEquipment 15, Capital ,000Less Accum. deprec. 7, ,000Total liabilities andTotal assets 16,500 owner’s equity ,500
105 Transactions Effecting Balance Sheet PossibilityExampleAn increase in assets followed by an increase in liabilities and vice versaPurchase of a machinery through bank loanA decrease in assets followed by a decrease in liabilities and vice versaRepayment of a bank loanAn increase in assets followed by an increase in equity and vice versaInterest earned on the savings deposit increasing the net worthA decrease in assets followed by a decrease in equity and vice versaTheft of some personal possessions leads to decrease in owners equityAn increase in an asset followed by a decrease in another asset and vice versaPurchase of car in cashAn increase in a liability followed by a decrease in another liability and vice versaPayment to a creditor through bank loan
106 The following are typical accounts that are classified as assets, liabilities, and , equity accounts LandBuildingEquipmentVehiclesInventoryPrepaid expensesAccounts receivableCashMortgage payableUnearned revenueTaxes payableSalaries payableAccounts payableCapitalRetained Earnings
107 A good general rule of thumb is that any account that has the word receivable in its title will be an asset, and any account that has the word payable in its title will be a liability. Any account that has the word expense in its title is likely to be classified as an expense on the Income Statement, except for the account Prepaid expenses, which is an asset. Any account with the word income or revenue in its title is classified as revenue on the Income Statement, except for the account Unearned revenue, which is a liability.
108 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