ACCOUNTING MECHANISM

Accounting Documents and Records

Flow of data 1. Recording transactions in journal – passing journal entries through double entry system 2. Posting into a ledger - classifying all entries of a similar account into a ledger 3. Ledger balancing – closing all ledger accounts and finding out the balance in each ledger account. 4. Preparing trial balance – Listing all ledger balances into debit and credit balances. 5.Passing adjustment entries / closing entries 6. Preparation of Profit & Loss A/c and Balance Sheet.

Account : A record of transactions related to a particular item of expense, income, assets or liabilities Expenses : Salaries,repairs, traveling, audit fees, printing & stationary etc. Income : Sales, dividend, interest, commission etc. Assets : Buildings, Machinery, Furniture, Debtors, Prepaid expenses, Cash, Bills receivable Liabilities : Debentures, loans, creditors, expenses payable, Bills payable, Provisions Capital : Share capital, Reserves, Retained earnings

Classification of accounts 1.Real Accounts, Personal Accounts, Nominal Accounts 2.Asset Accounts, Liability Accounts, Income Accounts, Payment Accounts Understanding Outstanding and prepaid accounts and the concept of Matching principle Outstanding Expenses – Liability Outstanding Income - Asset Prepaid expenses - Asset Pre received income - Liability

Rules of debit / credit Double entry system of recording entries : Every transaction recorded must have equal debits and credits Analysis of transactions Accounting equation can be expanded as : Liabilities + Capital+ Revenues =Assets +Expenses+ Dividends Effect Asset, Expenses, Dividend Liability,Capital,Revenue Basic DebitCredit Increase Debit Credit Decrease CreditDebit

Class exercise 1 Put a cross in the appropriate column to indicate the type of account and the accounts normal balance Type of account Normal balance Asset Liability Capital Debit Credit Salaries Miscellaneous expenses Prepaid rent Share capital Office supplies Interest income Commission earned Rent expense Proprietors drawings Bills receivable Margin money deposit Cash Debtors Creditors Advance to suppliers Unearned professional fees Advance from debtors Electricity charges Professional fees earned Income tax payable Income tax earned Dividends Bills Payable Outstanding expenses Debentures Reserves Provision for tax Bank balance Telephone expenses Bad debts

Class exercise 1 Classify the following ledger balances into debit and credit balances and prepare a trial balance. Building Telephone expenses 500 Office equipment Share capital Cash14000 Loan taken 5000 Creditors Prepaid insurance 1000 Debtors Unpaid repairs expenses 500 Bills payable 3000 Dividend received 200 Purchases Reserves 2000 Sales Provision for tax 2000 Salaries 5000 Depreciation 1500 Electricity 1000 Advertisement 1000

Class exercise 2 Venus Music corner provides is in the business of providing audio CDs to customers. During March the accounts were maintained by a professional accountant On March 31, the records showed a balance of Rs in his capital account. Since he could not afford an accountant, he starts maintaining the accounting records himself. He prepared the statements for the month of April 2006 and was shocked to find that his business had not fared well. He wants you to review his statements.

Profit & Loss A/c for the month ended April’10 Expenses Revenues Salaries 5600 Investments by owner 3000 Electricity 410 Service revenue recd 600 Advertisement 130 in advance Rent 300 Drawings 4000 Loss for the month Balance Sheet as on April 30, 2010 Liabilities Assets Creditors 2510 Recording equipment Service revenue Supplies 2190 earned Debtors 1210 Capital Cash

Schedule VI Part I – Balance Sheet The company’s balance Sheet may be in horizontal or vertical form It shall disclose current years as well as previous years figures Details may be given in Schedules attached to Balance Sheet Figures may be rounded off to the nearest ’00 or ’000. It can also be in format.

Format of Horizontal Balance Sheet P.Y Liabilities C.Y P.Y Assets C.Y 1. Share Capital 1. Fixed Assets 2. Reserves & Surplus 2. Investments 3. Secured Loans 3. Current Assets, Loans 4. Unsecured Loans and Advances 5. Current Liabilities and A. Current Assets and Provisions B. Loans and Advances A. Current liabilities 4. 1 Miscellaneous Expenditure B. Provisions 2. Profit and Loss A/c Dr bal Footnote : Contingent liabilities

Vertical form of Balance Sheet I. Sources of funds 1. Shareholders funds Share capital Reserves & Surplus 2. Loan Funds Secured loans Unsecured loans II. Application of funds 1. Fixed Assets 2. Investments 3. Current assets, loans and advances less: Current liabilities and provisions 4. Miscellaneous expenditure. Footnote for contingent liabilities

Z Schedule VI Part II – Profit & Loss Account General requirements It shall disclose every material factor w.r.t Incomes & Expenditures Any item> 1% of the turnover or Rs.5000 whichever is higher should be shown separate item and not under miscellaneous expenses. 1.Turnover 2. Commission paid to selling agents, brokerage and discount allowed 3. Value of raw material consumed 4. Opening and closing stock of goods and raw materials 5. Depreciation 6. Interest paid 7. Income tax 8. Transfer to reserves / withdrawals from reserves 9. Stores and spare parts 10.Rent, power & fuel, repairs, insurance, rates and taxes, Auditors fees 11.Salaries, contribution to staff welfare schemes 12 Profit and loss from unusual sources 13.Earnings / expenditure in foreign currency ( notes to accounts ) 14. FOB value of exports

Format of Vertical Profit & Loss Account Income Sales Others Expenditure Materials consumed and purchases Manufacturing

The trial balance of Trendy Leather Products is given below Particulars Debit Credit Store equipment Accumulated depreciation 2000 Opening stock Office supplies 2730 Debtors 9700 Cash 2870 Store rent Insurance 6000 Creditors 7580 Share capital Retained earnings 7100 Sales Sales returns 1170 Sales Discounts 1030 Purchases Purchase returns 1180 Purchase discounts 2150 Freight 4200 Salaries 5100 Selling expenses 9600 Advertisement expenses 2300 Delivery expenses 1130 Telephone expenses 910 Advance to suppliers

1. Depreciation on equipment Rs Closing stock Rs Rent is paid for the period Jun’09 – Rs.1000 p.m 4. Insurance charges is paid for the year ended Estimated income tax Rs Salaries are unpaid to the extent of Rs.3000