BASIC ACCOUNTANCY

Important accountancy terms DEBIT: Account has received a benefit CREDIT: Account has parted with the benefit DEBTOR: Person from whom we have to recover money CREDITOR: Person to whom we have to pay money CAPITAL: Amount excess of assets over liabilities ASSET: Anything convertible to cash or equivalent LIABILITIES: Debts for which trader is responsible for payment INVOICE: Business document sent by seller of goods to purchaser of goods

Assets and Liabilities -Fixed : Land, Building, Office equipment, etc -Current : Cash in Hand, Cash at Bank, Debtors, etc Liabilities -Fixed : Loans, Debentures, Capital, etc -Current : Creditors, Bills payable, etc

Double Entry Book Keeping Method assumes that every transaction has two-fold effect and in each transaction there are two parties or accounts One account receives benefit and other account gives benefit Account receiving the benefit is debited and other account parting with benefit is credited Double entry book keeping system is defined as system of recording two fold effect of each and every transaction in proper set of books

CLASSIFICATION OF ACCOUNTS Personal A/c Impersonal A/c Real A/c Nominal A/c Personal A/c are those of individuals, firm or company e.g. Capital A/c, Drawings A/c, Bajaj Co. A/c, etc Real A/c record transactions relating to property and material things e.g. Cash A/c, Goods A/c, Furniture A/c, etc Nominal A/c record transactions relating to expenses, losses, income and gains e.g. Rent A/c, Salary A/c, Commission A/c, Interest A/c, etc

Rules for Debit and Credit 1)Personal A/c : Debit the receiver, Credit the giver 2)Real A/c : Debit what comes in, Credit what goes out 3)Nominal A/c : Debit the expenses and losses, Credit the income and gains e.g. 1) Paid to Rohit for salary Rs.1000 2) Withdraw from bank for personal use Rs.2000 No. A/c Affected Type DB/CR Reason 1 Salary Nominal DB Salary is expense Cash Real CR Cash going out 2 Drawings Personal DB Received benefit Cash Real CR Cash going out

Journal - Maintains original and detailed record of transactions - Original record which provides base for subsequent accounting work JOURNAL ENTRY Transaction- Sold goods for cash Rs.1000

Ledger - Principle book of account in which all transactions are finally posted from journal in summarised and classified manner - Can prepare financial statements like profit & loss A/c, Balance-sheet, etc with help of ledger - Posting is act of transferring entries from journal to ledger - Processing of finding out difference between total of debit side and credit side of an account

Types of Ledger General Ledger: Maintains all impersonal i.e. real and nominal accounts Sales Ledger: Maintains accounts of debitors to whom goods are sold on credit basis Purchase Ledger: Maintains accounts of creditors from whom goods are purchased on credit basis Private Ledger: Maintains personal account i.e. Capital A/c, Drawings A/c, P & L A/c, Balance-sheet, etc

Closing of Account - Essential for preparing P & L A/c and Balance-sheet 1)Personal A/c: Closed by carrying over balance to the next period Show balance of debtors and creditors 2)Real A/c: Closed by carrying over balance to the next period Show balance of asset and property 3)Nominal A/c: Closed by transferring difference to P & L A/c

Example Journal

LEDGER ACCOUNT Cash Account Dr. Cr. Date Particulars Rs. Date Particulars Rs. Mar Mar 1 To Capital A/c 7500 15 By Expenses A/c 1000 17 To Revenue A/c 400 28 By Accounts 25 To Accounts payable A/c 500 receivable A/c 425 31 By Balance c/d 6825 8325 8325

Trial Balance The total of the accounts on the debit and credit side is referred to as the trial balance. If the debits do not equal the credits, then an error has occurred somewhere in the process If the trial balance is not in balance, then an error has been made somewhere in the accounting process. Common errors that would result in an unbalanced trial balance Summation error for the debits and credits of the trial balance Error transferring the ledger account balances to the trial balance columns Error in the calculation of a ledger account balance Error in posting a journal entry to the ledger Error in the journal entry

Trial Balance

Bank Reconciliation Statement Cash Book: Records all cash transactions i.e. cash receipts and cash payments Pass Book (Bank’s Ledger): Account maintained by bank for each customer in which deposits and withdrawals are recorded Bank Reconciliation Statement: Prepared to reconcile difference between Cash Book Balance and Pass Book Balance on particular date

Final Accounts Trading Profit & Loss Balance-sheet Trading A/c: -Gives gross profit or loss earned by business -Gross profit or loss is transferred to P & L A/c Profit & Loss A/c:- Gives net profit or loss earned by business at the end of year - Shows all indirect expenses and incomes - The period a Profit and Loss Statement covers is called the accounting period. If Credit side > Debit side => Profit If Debit side > Credit side => Loss

Final Accounts(contd…) Balance Sheet: Shows financial position of business i.e. position of assets, liabilities and capital on particular day Left side shows liabilities and capital Right side shows assets After net profit (or loss) is added to (or subtracted form) capital account, total of both sides of Balance-sheet should be same i.e. Assets = Capital + Liabilities

Profit & Loss Account for year ended 31-3-93 Dr. Cr. Particulars Rs. Particulars Rs. To Salaries 3900 By Gross Profit transferred from Trading A/c 17000 To Advertising 500 By Discount received 400 To Travelling expenses 1100 By Interest received 500 To Printing & Stationary 400 By Rent received 1000 To Office Expenses 200 To Discount Allowed 300 To Net Profit transferred to Capital A/c 12500 18900 18900

Balance Sheet as on 31-3-93 Liabilities Rs. Assets Rs. Current Liabilities Current Assets Outstanding Expenses Cash in Hand Income received in advance Cash at Bank Creditors Outstanding Income Bills payable Closing Stock Bank Overdraft Debtors Bills Receivable Long Term Liabilities Investments Loans Capital Fixed Assets Add: Interest on capital Furniture Add: Net profit Plant & Machinery Less: Drawings Land & property Less: Interest on drawings Goodwill

Statement of Earnings

Assignment Please have a read of this material. This is a wrap-up material from the beginning till today material. As your assignment, I want you to make Balance Sheet/Statement of Financial Position and Statement of Earnings/Profit and Loss Statement in rupiahs in this year 2015. You can make it by yourself. See the format from your handbook or this powerpoint material. Later make the ratio analysis which includes gross profit margin, debt/asset ratio, working capital, so on. (the more complete, the better). You can have Indonesian format in making the Balance Sheet/Statement of Financial Position and Statement of Earnings/Profit and Loss Statement. Work in group of three (3) to make it. Should have the group as same as the group in Performance of Welcoming Visitor. Submit it next week and be ready also for the short drama performance. THANK YOU, HAVE A NICE DAY 