basics of accountancy

8/8/2019 Basics of Accountancy

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BASICS OF ACCOUNTING


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Understanding the flow ..

ACTIVITIES IN OUT

Operating Cash Sales Cash Purchases

Collections from Debtors Payments to Creditors

Financing Raising Finances Repayment of Borrowings

Investing Sale of Fixed Assets Purchase of Fixed Assets


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ACCOUNTINGPROCESS

IDENTIFICATION OF THE ECONOMIC EVENTS

MEASUREMENT IN RUPEES

RECORDING THE BUISNESS TRANSACTIONS

ANALYSING AND INTERPRETING THE BUSINESS TRANSACTIONS


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ACCOUNTING CYCLE

TRANSACTIONS

PREPARATION OF JOURNAL AND SUBSIDIARY BOOKS

LEDGER POSTINGS

EXTRACTING TRIAL BALANCE

PREPARING FINANCIAL STATEMENTS, TRADING AND PROFIT AND LOSS ACCOUNTSAND BALANCE SHEET


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The Accounting Equation

LIABILITIES

OWNERSEQUITY

ASSETS


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Concepts

Entity Concept:Accounting is carried out for a given entity,as distinct from its promoters.


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Concepts

Going Concern Concept:At the time of preparing the FinancialStatements it is assumed that the entity

would continue to operate normally in thefuture.


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Concepts

M onetary Concept:A company s Balance Sheet reports whateverwas objectively measurable in money terms


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Concepts

Historical Cost Concept:Fixed assets are recorded at original cost,depreciation being provided for.


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Concepts

Accounting Equivalence Concept:Assets = Liabilities.

The Balance Sheet prepared at any point in

time reflects that total sources of fundse q ual the total uses of funds.


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Concepts

Accounting period Statement:The income statement is always prepared fora specified accounting period.


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Concepts

Conservatism Concept:P rofits are recognised only if they are sure tooccur.

Losses are recognised even if there is a merepossibility of occurring.


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Concepts

Realisation Concept:The amount recognised as revenue is theamount that is reasonably certain to be

ultimately collected as cash.


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Concepts

M atching Concept:All expenses related to the revenuerecognised for an accounting period should

be reflected in the income statement.


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Accounting Policies

Revenue Recognition:

This policy provides guidelines with respect

to the timing and the amount of revenue tobe recognised.

The policy of revenue recognition essentiallydepends on the concepts of conservatismand realisation.


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Accounting Policies

Inventory Valuation:Inventory (Stock) is valued at cost.

Inventory can be valued using WeightedAverage M ethod, First- In-First-Out (F IFO) orLast- In-First-Out (L IFO)


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Accounting Policies

Fixed Assets & Depreciation:

The matching concept re q uires that an asset

cannot be treated as an expense in the firstyear, but should be depreciated over itsuseful life.


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Debit or Credit?

BALANCE SHEET PROFIT & LOSSACCOUNT

BALANCE SHEET

DEBIT + ASSETS EXPENSES

CREDIT - LIABILITIES INCOMES OWNER S EQUITY

+/- System of notation instead of using addition & subtraction


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Asset Increase Debit, Decrease Credit

Liability Increase Credit, Decrease DebitEquity Increase Credit, Decrease DebitIncome Increase Credit, Decrease DebitExpense Increase Debit, Decrease Credit


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T Accounts

Let s you visualize both sidesof an account


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RULES OF DEBIT AND CREDIT

T - ACCOUNT

DR CR

ASSET

(INCR EASE)+DEBIT

(DECR EASE)-CR EDIT

LIABILITIES

(DECR EASE)-DEBIT

(INCR EASE)+

CR EDIT

CAPI TAL

(DECR EASE)

-DEBIT

(INCR EASE)

+CR EDIT


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RULES OF DEBIT AND CREDIT

T - ACCOUNT

DR CR

EXPENSES/LOSSES

(INCREASE)+DEBIT

(DECREASE)-

CREDIT

REVENUES/GAINS

(DECREASE)-DEBIT

(INCREASE)+

CREDIT


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Ledger

When we put several transactions togetherinto one account, we are creating a ledger

Every transaction is entered twice in twoledgers Once as a Credit and Once as aDebit


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LEDGER

DR CR

DATE PARTICULARS

J.F AM OUNT(R S)

DATE PARTICULARS

J.F AM OUNT R S.


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Journal

M aster page (under manual system) orbook of first entry

The entry is then copied to the

appropriate individual ledgers.


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JOURNAL FORMAT

DATE PARTICULARS L.F DEBIT RS. CREDIT RS.


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BOOKS STAY IN BALANCE ASTOTAL OF ALL CR EDITS

EQ UALS TOTAL OF ALL DEBITS


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Normal Balance

Also called Usual Balance:Asset Debit

Liability CreditEquity CreditIncome Credit

Expense - Debit


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CLASSIFICATIONOF ACCOUNTS

1 ) P ER SONAL ACCOUNTS

2) R EAL ACCOUNTS

3) NO M INAL ACCOUNTS


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PERSONAL ACCOUNTS

ACCOUNTS OF P HYSICAL P ER SONS

EG. DANIEL SACCOUNT

ACCOUNTS OF LEGAL P ER SONS

EG., CANAR A BANK SACCOUNT

R EPR ESENTATIVE P ER SONAL ACCOUNTS

EG., OUTSTANDING EXP ENSES


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REAL & NOMINAL ACCOUNTS

R EALACCOUNTS R EPR ESENT THE PR OP ER TY

OF THE BUSINESS.

NOM INAL ACCOUNTS R EPR ESENT EXP ENSESOR LOSSES OR INCOMES OR GAINS OF A

BUSINESS.


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CONCEPT OF DEBIT AND CREDIT

FOR PERSONAL ACCOUNTS DEBIT THE RECEIVERCREDIT THE GIVER

FOR R EAL ACCOUNTS DEBIT WHAT COMES INCR EDIT WHAT GOES OUT

NOM INALACCOUNTS DEBIT ALLEXP ENSES AND LOSSESCR EDIT ALLINCOMES AND GAINS


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CASH BOOK

CASH BOOK KEEP S R ECOR DS OF ALL CASH TR ANSACTIONS I.E CASH R ECEIP TS AND CASH PAYMENTS. ALLR ECEIP TS AR E R ECOR DED ONRI GHT SIDE AND ALLPAYMENTS ON LEFT SIDE.

CASH BOOK IS BOOK OF ORI GINAL ENTR Y.


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CASH BOOK FORMAT

DR. CRDATE PAR TI

CULAR S

R .NO L.F CASH BANK DISCOUNT

DATE PAR TICULAR S

VR .NO.

LF CASH BANK DISCOUNT


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RECORD KEEPING BASISRECORDING: JOUR NALISING AS AND WHEN TR ANSACTION TAKES P LACE.JOUR NAL IS BOOK OF ORI GINAL OR FIR ST ENTR Y.

CLASSIFYING: ALLENTRI ES IN JOUR NAL OR SUBSIDIAR YBOOKS AR E P OSTED TO LEDGER ACCOUNT(P OSTING) TO FIND OUT AT A GLANCE THE TOTALEFFECT OF ALL SUCH TR ANSACTIONS. LEDGER IS BOOK OF

SECONDAR YENTRY.SUMMARISING: LAST STAGE IS TO PR EPAR E THE TRI AL BALANCE ANDFINALACCOUNTS WITH A VIEW TO ASCER TAIN THE PR OFIT OR LOSSDURI NG PAR TICULAR P ERI OD.IT IS CUSTOMAR YTO USE TO AND BYWHILE P OSTING IN THE LEDGER .

BALANCING AN ACCOUNT MEANS EQUALIZTING TWO SIDES.IF DEBIT SIDE OF ACCOUNT EXCEED CR EDIT SIDE, DIFFER ENCE IS P UT ONCR EDIT SIDE AND IT IS SAID TO HAVE DEBIT BALANCE AND VICE VER SA..

basics of accountancy

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