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FINANCIAL ACCOUNTING
GROWTH OF ACCOUNTING
Accounting is as old as money itself. However, the act of accounting was not as
developed as it as today because in the early stages of civilization, the numbers of
transactions to be recorded were so small that each businessman was able to
record and check for himself all his transactions. Accounting was practiced in India
twenty-three centuries ago as is clear from the book named ARTHASHASTRA
written by Kautilya, King Chandraguptas minister. This book not only relates to
politics and economics, but also explains the art of proper keeping of accounts. The
chapter The Business of keeping up Accounts in the office of Accountants describes
records of accounts to be maintained in accountants office and methods of checking
accounts. However, the modern system of accounting is based on the principles of
Double Entry System, which owes its origin to Fra Luca Pacioli who first published
the principles of Double Entry System in 1494 at Venice in Italy. Thus, the art of
accounting has been practiced for centuries but it is only in the late thirties that the
study of the subject Accounting has been taken up seriously.
In the recent years large-scale production, cut - throat competition, widening
of the market and changes in the technology have brought remarkable changes in
the field of Accounting. In the words of Gordon and Shilinglaw: It has come to be
recognized as a tool for mastering the various economic problems which a business
organization may have to face. It provides information that can be drawn upon by
those responsible for decisions affecting the organizations future. This history is
written mostly in quantitative terms. It consists partly of files of data, partly of reports
summarizing various portions of these data, and partly of the plan established by
management, to guide its operations.
ACCOUNTING MATERIAL
MEANING OF ACCOUNTING
The main purpose of accounting is to ascertain profit or loss during a specified
period, to show financial conditions of the business on a particular date and to have
control over the firms property. Such accounting records are required to be
maintained to measure the income of the business and communicate the information
so that managers, owners and other parties may use it. Accounting is a discipline
which records, classifies, summarizing and interprets financial information about the
activities of a concern so that intelligent decisions can be made about the concern.
The American Institute of Certified Public Accountants has defined the Financial
Accounting as The art of recording, classifying and summarizing in a significant
manner in terms of money transactions and events which in part, at least of a
financial character and interpreting the results thereof.
American Accounting
ACCOUNTING RECORDS
The Traders are required to maintain at least two registers for recording
Accounting transactions of their business they are Journal and Ledger. Every
transaction that takes place in the business should be recorded in the journal in the
order of its happening. Separate accounts should be opened in the ledger in the
names of all these persons with whom the trader deals, in respect of all his assets
and liabilities and also incomes and expenses. The transactions relating to each
account should be posted to the respective accounts from the journal either daily or
weekly, Ledger shows the clear picture of transactions relating to each account.
ACCOUNTING MATERIAL
In big business units clear picture of transactions are more and work of bookkeeping is required to be divided between two or three persons, the Journal is subdivided into Purchases Journal, Sales Journal, Purchases Returns Journal, Sales
Returns Journal, Cash Book and Journal Proper. However one ledger is maintained
for all accounts. This system of bookkeeping is known as Practical System of BookKeeping .
An account is nothing but a summarized record of business transactions
relating to a person, assets, liability, income or expenditure. Each account is opened
on a separate page. Left hand side of the account is called Debit side and Right
hand side is called Credit side. Some transactions are to be recorded on the Debit
side and some on the Credit side of an account to ascertain the final result of each
account. It is known as Debiting an account and Crediting an account respectively.
Single and Double Entry System of Accounting: - In business accounting, both
single and Double entry system of accounting is in use. But among them the double
accounting form of accounting are being used widely because of its advantages, like
accuracy, completeness and durability Etc.
Single Entry System: - This system is based on cash accounting i.e. transactions
are recorded only when cash is received or paid. This system ignores credit
transactions and accruals. It is used only in Government accounting.
ACCOUNTING MATERIAL
Double Entry System: - This system is widely used by non-government
organizations. Under this System transactions are recorded on accrual
basis. i.e. irrespective of whether cash is paid or not. For example where
salary is due at the end of a month, it is recorded as an expense of that
particular month, though cash is paid in the subsequent month. Further all
transactions have two aspects namely debit and credit. This is the reason
why the system is called Double Entry System. This system is been
developed by Luca Picalio, an French statistician and he is known as Father
of Modern Accounting System.
(* Accrual = The amount which is due or yet to be receivable from others)
CLASSIFICATION OF ACCOUNTS
1. Personal Account: The accounts, which are related to persons, companies,
organizations and institutions that should be called as Personal Account.
Example: Person Names, Company Names, Organization Names and Institution
Names etc.
Debit Rule: The Receiver
Credit Rule: The Giver
Ex: 1) Raju gives a gift to Rajesh & Co Rs.10,000
Rajesh & Co A/c Dr. 10,000
To Raju A/c
10,000
2. Real Account: The Accounts, which are related to companys property that
accounts should be called as Real Account. Companys property divided in to two
types
A) Fixed Assets: Fixed Assets are those, which provide long-term benefits for
running the business. Change in the value of these assets is minimum. For example,
Land and Buildings; Plant and Machinery.,Furniture for office use.
ACCOUNTING MATERIAL
B) Current Assets: Current Assets are those which dedicate their benefits for
running the business and which change in value within a short span of time. For
example, Goods, Debtors, Cash and Investments etc., Values of these assets
always change.
10,000
20,000
ACCOUNTING MATERIAL
Debit Rule : All Expenses, Losses
Credit Rule: All Incomes, Gains
500
ACCOUNTING MATERIAL
5) Creditors: Creditors are those persons who have advanced money or supplied
goods on credit to the business. However the suppliers of goods on credit can be
referred as Trader Creditors.
6) Debtors: The term Debtor refers to the person from whom the amounts are due
for goods sold or services rendered or in respect of contractual obligations. The
debtors for purchases of goods on credit can be referred as Trade Debtors.
7) Capital: The money or moneys worth invested by a businessman in his business
is called Capital. It is the lifeblood of every business. In accountancy capital is
treated as an amount borrowed by the business from its proprietor.
8) Drawings: The money or goods taken by the proprietor from his business for his
private expenses or domestic use is known as Drawings.
9) Stock: The term Stock refers to tangible property held for sale in the ordinary
course of business or for consumption the production of goods or services for
sale.
10)Business: Business is a generic term including any activity undertaken for the
purpose of making profits. It refers to any establishment or organization set up for
the conduct of trade, commerce or industry.
11) Profession: Profession is a practice of intellectual skill by a person in a definite
field, requiring specialized training on the part of the person engaged in that field,
e.g. a doctor, a lawyer, an accountant, an architect etc.
12)Voucher: A Voucher is a written document originating and supporting a business
transaction. It is the basis of recording a transaction in the books of account. For
example: Cash memos, Pay-in-slips, invoices, etc.
13)Goods: The articles, commodities and merchandise in which a businessman
deals in his business are called Goods. In other words, goods mean those
commodities which are purchased by a businessman for the purpose of reselling
them for the profit in his business. Ex: Purchase A/c
EXPENSES: - Expenses are divided into two types
1. Direct Expenses
2. Indirect Expenses
ACCOUNTING MATERIAL
Direct Expenses: Expenses are incurred for manufacturing of stock item or these
expenses are incurred for purchasing of stock item (or) simply the expenses, which
will be shown in trading account Debit side.
Those are: Wages
Carriage on purchase or Carriage Inwards
Fuel Expenses
Gas, Coal and Power expenses
Factory Lighting
Indirect Expenses: Expenses are incurred for selling of stock item and expenses
relating to office administration (or) the expenses, which comes of profit and loss
account debit side.
INCOMES: Incomes are divided into two types
1. Direct Income
2. Indirect Income
Direct Income: The income, which we received from the sale of stock item or the
closing stock, related expressions will be created under direct incomes (closing
stock will be considered as the direct income only in computer accounting packages
not in general sense).
Indirect Income: The income which we received other than selling of stock items
only the income received from operation of business (or) simply the incomes showed
on the credit side of the profit & loss account.
Trial Balance: After posting the accounts in the ledger statement is prepared to
show separately the debit and credit balances such a statement is known as Trail
Balance. Listing the each and every account and entering in separate columns the
total of the debit and credit sides may also prepare it. Whichever it is prepared the
totals of two columns should agree. An agreement indicates reasonable accuracy of
ACCOUNTING MATERIAL
the accounting work. If the two sides dont agree then it is simply an arithmetical
error.
Dr.
Particular
Amount
Particular
To Opening stock
To Purchase
To Wages
To Gas, coal and Power
Expenses
To Factory Lighting
To Factory Rent
To Handling Charges
To Carriage on Purchase
Or Carriage Inwards
To Fuel Expenses
To Gross Profit C/d
By Sales
By Closing Stock
By Handling charges received
By Gross Loss C/d (if any)
Cr.
Amount
ACCOUNTING MATERIAL
To Interest on Loans
To Provision for Bad debts
To Net Profit (Transferred
,to Balance sheet)
Amount
Assets
Fixed Assets
Tangable Assets
Land & Buildings
Furniture
Machinery
Motor Vehicles
Computer
Printer
In-tangable Assets
Goodwill
Current Assets
Deposits Given
Sundry Debtors
Bills Receivable
Cash-in- Hand
Bank Account
Closing Stock
Loan given
Prepaid Expenses
Incomes Accrued
Investments
Long-term Investment
Short-term Investment
Miscellaneous Expenses
Preliminary Expenses
10
Amount
ACCOUNTING MATERIAL
Increase in Asset
Debit
Decrease in Asset
Credit
Decrease in Expenses
Credit
Increase in Liabilities
Credit
Decrease in Income
Increase in Income
Credit
Debit
Stock Groups
b)
Units of Measures
c)
Stock Items
d)
F11 Features
b)
Balance Sheet
11
ACCOUNTING MATERIAL
c)
Trail Balance
d)
Day Book
e)
f)
Stock Status
g)
h)
Ratio Analysis
Grouping
Profit & LossA/C
Expenses
Direct
Expenses
Incomes
Indirect
Expenses
Direct
Income
Indirect
Income
Balance Sheet
Liabilities
Share
Capital
Sundry
Creditors
Assets
Current
Liabilities
Bills
Payable
Fixed
Assets
Loans
& Advances taken
12
Current
Assets
ACCOUNTING MATERIAL
Sundry
Debtors
Bills
Receivable
Cash
in
Hand
Cash
at
bank
Closing
Stock
Voucher Types
1.
2.
3.
Purchase (F9) : Only Stock Items are purchase for cash or credit.
4.
Sales (F8) : Only Stock Items are sold for cash or credit.
5.
6.
Contra (F4) :
1. Cash deposited into bank
Bank A/c Dr.
To Cash A/c
2. Cash withdrawn from bank
Cash A/c Dr.
To Bank A/c
13
ACCOUNTING MATERIAL
1. Ravi Electricals
1 April,2009
1. Ravi started business with cash Rs.3,00,000
2. Purchased LG Washing Machine Rs.10,000 for cash
3. Purchased Samsung Washing Machine Rs.12,000 each from Samsung Ltd.
4. Paid Carriage on Purchase Rs.1,200
5. Sold LG Washing Machine Rs.12,000 for cash
6. Sold Samsung Washing Machine Rs.15,000 each to M.K.Enterprises
7. Paid Salaries Rs.1,200 and Rent Rs.1,000 by cash
14
ACCOUNTING MATERIAL
Gross Profit
: Rs.3,800
Net Profit
: Rs.1,600
Balance Sheet
: Rs.3,13,600
2. Ravi Electricals
1 April,2009
1. Ravi started business with cash Rs.3,00,000
2. Purchase 10 LG Washing Machines @ Rs.10,000 each for cash
3. Purchase 10 Samsung Washing Machines @ Rs.12,000 each from Samsung Ltd
4. Paid Carriage on Purchase Rs.1,200
5. Sold 10 LG Washing Machines @ Rs.12,000 each for cash
6. Sold 10 Samsung Washing Machines @ Rs.12,000 each to M.k.Enterprises
7. Paid Salaries Rs.12,000 and Rent Rs.1,000 by cash
15
ACCOUNTING MATERIAL
Gross Profit
: Rs.18,800
Net Profit
: Rs.5,800
Balance Sheet
: Rs.4,25,800
3. Friend Computers
1 April,2009
1. Rajesh started business with cash Rs.3,20,000
2. Shiva started business with cash Rs.2,40,000
3. Srinu started business with cash Rs.1,60,000
4. Cash deposited into ICICI Bank Rs.50,000
5. Purchase Furniture for cash Rs.2,500 for office use
6. Personal Drawings Rajesh Rs.2,000 ; Shiva Rs.1,000 ; Srinu Rs.500 by cash
7. Bought 10 Computers @ Rs.22,500 from Hcl Computers
8. Sold 5 Computers @ Rs.28,500 each to Kumar & Co.
9. Sold 1 Computer @ Rs.22,500 for cash 10% Discount
10. Salaries paid for Rs.23,000 ; Rent Rs.2,800 by cash
11. Carriage Rs.2,500 ; Legal Expenses Rs.2,750 by cash
12. Commission paid to Naresh Rs.1,800 by cash
13. Interest on Capital of Rajesh Rs.6,000 ; Shiva Rs.4,000 and Srinu Rs.2,000
14. Interest on Drawings of Rajesh Rs.200 ; Shiva Rs.100 and Srinu Rs.50
15. Depreciation on Furniture @ 10%
16
ACCOUNTING MATERIAL
Closing Stock
: Rs. 90,000
Gross Profit
: Rs.25,250
Net Loss
: Rs.17,000
Balance Sheet
: Rs.9,53,150
17
ACCOUNTING MATERIAL
Gross Profit
: Rs. 19,500
Net Profit
: Rs.9,500
Balance Sheet
: Rs.9,39,500
ACCOUNTING MATERIAL
Closing Stock
Gross Profit
Net Profit
Balance Sheet
:
:
:
:
Rs. 2,28,000
Rs. 33,000
Rs. 13,000
Rs.15,69,000
6. Bhaskar Furnitures
1 April,2009
1. Bhaskar started business with cash Rs.5,00,000
2. Purchases from A - Z Furnitures
50 Tables @ Rs.200 each
200 Chairs @ Rs.150 each
3. Cash Purchases
20 Boards @ Rs.250 each
4. Sales to Princess School
5 Boards @ Rs.400 each
50 Chairs @ Rs.200 each
20 Tables @ Rs.250 each
5. Cash Sales
10 Boards @ Rs.400 each
100 Chairs @ Rs.200 each
20 Tables @ Rs.250 each
6. Returned to A Z Furnitures
5 Tables ; 10 Chairs
7. Paid to A Z Furniture Rs.15,000
8. Received cash from Princess School in full settlement of his account
9. Paid Salaries Rs.5,000 and Rent Rs.2,000
Closing Stock
: Rs. 8,250
19
ACCOUNTING MATERIAL
Gross Profit
: Rs.11,750
Net Profit
: Rs. 4,750
Balance Sheet
: Rs.5,27,250
Closing Stock
: Rs.1,80,000
20
ACCOUNTING MATERIAL
Gross Profit
: Rs.44,400
Net Profit
: Rs.15,900
Balance Sheet
: Rs.8,41,100
Closing Stock
: Rs.5,00,000
Gross Profit
: Rs.1,20,000
21
ACCOUNTING MATERIAL
Net Profit
: Rs.1,15,000
Balance Sheet
: Rs.12,07,800
Amount Rs.
Raj Capital
LG Electronics
3,10,000
24,000
Assets
Amount Rs.
Furniture
Electrical Equipment
SBH
Sam Sum Bros
Closing Stock
54,000
20,000
40,000
20,000
50,000
(5 Refrigerators
@ Rs.10,000 each)
Cash
3,34.000
1,50,000
3,34,000
1 April,2009
1. Purchase 40 Refrigerators @ Rs.10,000 each from LG Electronics ; VAT 4%
2. Paid Carriage on Purchase Rs.1,000
3. Sold 20 Refrigerators @ Rs.12,000 for cash ; VAT 4%
4. Sold 20 Refrigerators @ Rs.12,000 to Sam Sum Bros ; VAT 4%
5. Paid cash to LG Electronics Rs.3,50,000
6. Paid Salaries Rs.5,000 and Rent Rs.3,000
7. One Refrigerator returned to LG Electronics
8. One Refrigerator returned by Sam sum Bros
9. Received cash from Sam sum Bros in full settlement of his account
Closing Stock
: Rs. 50,000
22
ACCOUNTING MATERIAL
Gross Profit
: Rs.77,000
Net Profit
: Rs.69,000
Balance Sheet
: Rs.4,58,600
Gross Profit
: Rs.19,750
23
ACCOUNTING MATERIAL
Net Profit
: Rs.14,250
Balance Sheet
: Rs.5,84,250
Closing Stock
: Nil
Gross Profit
: Rs.30,000
24
ACCOUNTING MATERIAL
Net Profit
: Rs.23,450
Balance Sheet
: Rs.5,74,700
Amount Rs.
Vinay Capital
Usha & Co.
25,800
28,800
Assets
Cash
Ramesh
Closing Stock
Equipment
Furniture
54,600
1 April,2009
1. Purchased Goods from Usha & Co. Rs.13,500
2. Purchased a Machine from Tisco Ltd. Rs.800
3. Sold Ramesh on account Goods worth Rs.18,200
4. Received from Ramesh Rs.15,000
5. Paid Rs.18,200 to Usha & Co.
6. Paid Insurance Premium Rs.120
7. Made Cash Payment :
Wages Rs.1,500 (Vinay)& rajesh1000
Other Expenses Rs.1,140
8. Paid Rent of Rs.660
9. Proprietor withdraw Rs.200 for his personal use
10. Depreciation on Equipment Rs.35 & Furniture Rs.55
11. Closing Stock Rs.24,700
Gross Profit
: Rs.7,700
25
Amount Rs.
11,000
14,100
21,700
2,400
5,400
54,600
ACCOUNTING MATERIAL
Net Profit
: Rs.3,190
Balance Sheet
: Rs.53,690
26
ACCOUNTING MATERIAL
27