Financial Reporting, Statements and Analysis Module 2 FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Module 2 – Accounting Cycle Learning Outcome: Identify various processes in accounting cycle leading to trial balance Accounting Process Books of Accounts Journal Cash Book Bank Reconciliation Statement Preparation of Trial Balance. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Account An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. For example, the company would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.) In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T account. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Debits and Credits The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Debit means left Credit means right Debits and Credits Debit means left Credit means right Generally these types of accounts are increased with a debit: Dividends (Draws) Expenses Assets Losses You might think of  D - E - A - L when recalling the accounts that are increased with a debit. Generally these types of accounts are increased with a credit: Gains Income Revenues Liabilities Stockholders' (Owner's) Equity You might think of G - I - R - L - S  when recalling the accounts that are increased with a credit. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Debit and Credit Procedure For Assets and Liabilities Revenues and Expenses FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Classification of Accounts Personal Personal Accounts are those that are accounts of individuals and organisations like banks, individuals, customers, capital account, drawings account etc Trial Balance as on 31st Jan 2013 Capital 200,000 Mr. F Creditor 20,000 Mrs. G Debtor 40,000 Income 80,000 Salaries 50,000 Material Cost 70,000 Power & Fuel 10,000 Machinery 125,000 Cash 5,000 TOTAL 300,000 300,000 Items Debit Credit Personal Personal Personal Nominal Nominal Accounts are those accounts of income and expenditure like salaries, interest, commission etc. Nominal Nominal Nominal Nominal Real Real Accounts are those that are 'real' like land, building, goodwill, furniture etc Real Real FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Exercise Answers Identify which type of Accounts do the following belong to: Capital Bank Borrowing Stock in Hand (Inventory) Revenue from sale of clothes Machinery Commission Income Creditors Electricity Charges Investments in Mutual Funds Repairs and Maintenance Personal Real Real Nominal Real Nominal Personal Nominal Real Nominal FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Principles of Accounting Entries Personal Debit: The Receiver Credit: The Giver Debit: All expenses and losses Nominal Credit: All incomes and gains Debit: What comes in Real Credit: What goes out FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Accounting Cycle 1 Identify Business Transactions Record Transactions in the Journal 2 3 Post Transactions in the General Ledger Preparation of Trial Balance 4 5 Adjust Entries Adjust Trial Balance (Worksheet) 6 Prepare Financial Statements 7 Close the Books – Annual Report 8 FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Journal Entries in the Books of M/s. ………. A Journal as the book of original or prime entry containing chronological record of the transactions from which posting is done to the ledger. The transactions are recorded first in the journal in the order in which they occur. The process of recording the transactions in a journal’s called as journalizing. Journal Entries in the Books of M/s. ………. Date Particulars LF No. Debit (Rs.) Credit (Rs.) 2010- August – 01 (Year-Month-Date) ……….. A/c (Account) Dr. To ………. A/c (Narration: Being …………..) LF No. Ledger Folio (Ledger Book Page ) Number FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Compound Journal Entry For Commencement(Start) of Business: Date Particulars LF No. Debit (Rs.) Credit (Rs.) 2010- August – 01 (Year-Month-Date) Cash A/c (Account) Dr. Bank A/c Dr. Fixed Assets A/c Dr. To Capital A/c (Narration: Being the business commenced with capital of Rupees…………..) FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Ledger The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances. A ledger is a book of main entry and it contains various accounts such as personal, real and nominal accounts .It is the principal book of accounts where identical transactions related to specific person or thing are entered. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Ledger Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner’s equity accounts, as shown in Illustration FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Standard Form of Account The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration shows a typical form, using assumed data from a cash account. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Standard Form of Account FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Cash Book It records daily cash (including bank) receipts and payments. Its unique feature is that it serves the purpose of both a book of prime entry and a book of secondary entry. In other words, the cash book is a journal as well as a ledger. The simplest form of cash book is a single column cash book which records only cash (no bank) receipts and payments. The double column cash book has two amount columns on either side-one for cash and the other for bank. If a business unit has more than one bank account, a separate column should be devoted to each bank account. The highest form of cash book is a triple column cash book- one column for cash, the second column for bank and the third column for discount. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Cash Book Specimen of Triple Column Cash Book Dr. CASH BOOK OF M/s……….. Cr. Receipts Payments Date Particulars L.F. Cash Bank Discount Allowed Discount Received   FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Bank Reconciliation Statement A bank reconciliation statement is prepared as on a particular date to reconcile the balances as per the cash book and as per the bank statement as on that date by identifying the causes of the difference and showing their impact. Causes of Difference Cheques issues to suppliers not yet presented for payment. Cheques deposited to the bank for collection. Cheques received by the bank directly not yet intimated. Insurance premium paid by the bank as per standing instructions not yet intimated. Dividend received by the bank directly. Bank charges not yet intimated. Cheques dishonoured but not yet intimated. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Format of Bank Reconciliation Bank Reconciliation Statement as on…………………. Particulars Amount (Rs.) A Balance as per Cash Book   *** B Add: Cheques issued but not presented for payment Interest credited by bank but not recorded in cash book Debtors directly paid into bank but not recorded in cash book Wrongly credit by banker Collections by banker as per customer standing instructions Total B C (Total A + B) D Less: Cheques deposited but not credited by the bank Dishonoured cheques appeared in the pass book but not entered in the cash book Bank charges as per pass book Wrong debit by banker Payments as per standing instructions Total (D) Balance as per pass book (C- D) FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Trial Balance A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column. The trial balance proves the mathematical equality of debits and credits after posting. In the trial balance, the closing balances of the accounts in the general ledger are shown along with balances from the cash book. As the primary and secondary books are maintained on the double entry concept, the balances in the trial balance must tally FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Trial Balance Steps for preparing a Trial Balance Purpose 1. List the account titles and their balances in the appropriate debit or credit column. 2. Total the debit and credit columns. 3. Prove the equality of the two columns. Purpose The purpose of preparing trial balance is not only to check the arithmetical accuracy of ledger balances, but also to have an overview of the operations of the business as on a particular date. A trial balance is prepared not only at the year end but also weekly, monthly, quarterly and half yearly. These interim trial balances are used as control steps. A trial balance is not a part of books of account. It is drawn as a separate statement, and this becomes the source document for preparing external financial statements, i.e. profit and loss account and the balance sheet. A trial balance consists of all the elements of financial statements- assets, liabilities, equity, income and expenses. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

Trial Balance Trial Balance As at………… S.No.   Ledger Accounts L.F. Dr. Amount Cr. Amount (Total or Balance) Rules of Preparing the Trial Balance Following rules should be taken into care: The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings (v) cash and bank balances are placed in the debit column of the trial balance. The balances of all (i) liabilities accounts (ii) income accounts (iii) profits (iv) profits are placed in the credit column of the trial balance. FRSA – Module 2 – 2019-20 SV/GS/PSR/SKK

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