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ACCOUNTING

Vidya.k.nair
ACCOUNTING

• Language of business…

• Communicates the results of business


to various parties…….

• Proprietor, creditors, investors,


government etc……
• Though accounting is generally
associated with business but it is not
only business which make use of
accounting….

• Persons like housewives, government


and other individuals also make use of
accounting…..

• E.g., a housewife
It helps to know………
sources from which cash was
received and the purposes for which
it was utilized

whether the receipts are more than


payments or vice versa…

The balance of cash in hand or


deficit, if any, at the end of a period
Business……..
• What he owns ?
• What he owes ?
• Whether he has earned a profit or
suffered a loss on account of running
a business ?
• What is his financial position ?
Definition
• American Institute of Certified Public
Accountants

Accounting is the art of recording, classifying


and Summarising in a significant manner and
in terms of money, transactions and events
which are, in part, at least of a financial
character and interpreting the results
thereof.
American Accounting Association

• Accounting is the process of


identifying, measuring and
communicating economic information
to permit informed judgments and
decisions by users of the
information.
Accounting may be defined as the
process of recording, classifying,
summarising, analysing and
interpreting the financial
transactions and communicating the
results thereof to the persons
interested in such information…..
Functions of accounting:-
• Recording
• Classifying
• Summarising
• Deals with financial transactions
• Analyses and interprets
• communicates
Recording
• Basic unction of accounting

• Journal

• -cash journal, purchases journal, sales


journal etc…

• Orderly manner
Classifying
• Systematic analysis of the recorded data,
with a view to group transactions or
entries of one nature at one place.
• ledger
• Separate- account heads or each items
• Eg;- advertising, stationery, tavelling
expenses etc…
• Total expenditure incurred under each
head
summarising
• Presenting the classified data in a
manner which is understandable and
useful to interested parties…

• Trial balance
• Profit and loss account
• Balance sheet
Deals with financial transactions

• Records only those transactions and


events in terms of money which are of
a financial character.

• Non-financial items cannot be recorded

• Eg;-dedicated employees
Analyses and interprets
• Analyzed and interpreted in a manner
that the end users can make a
meaningful judgement about the
financial condition and profitability
of the business operations..
• Analysis - methodical classification
of data
• Interpretation-explaining the
meaning and significance of data.
communicates
• In a proper from and manner to the proper
person

• Preparation and distribution o accounting


reports

• P& L A/c, B/S, Ratios, Graphs, diagrams,


Cash flow and fund flow statement etc
ACCOUNTING
PRINCIPLES
• Accounting principles may be defined
as those rules of action or conduct
which are adopted by the
accountants universally while
recording accounting transactions
Accounting principles

Accounting Accounting
Concepts conventions
Accounting concepts

• These are the basic assumptions or


conditions upon which the science of
accounting is based.
Accounting concepts

Sepa- Money Accoun


Going Dual Match Reali
rate Measur cost Ting
concern aspect ing sation
entity ement period
Separate entity concept

• Business is considered to be a
separate entity from the proprietor..

• An economic unit which owns its


assets and has its own obligations..
Money measurement concept
• Each transaction and event must be
expressible in monetary terms.

• If an event cannot be expressed in


terms of money, it cannot be
considered for accounting purpose

Record should be made only of that


information
that can be expressed in monetary terms
Going concern concept

• It is assumed that the business will


continue for a fairly long time

• There is neither the intention nor


the necessity to liquidate the
particular business in the
foreseeable future.
Cost concept

» An asset is ordinarily entered in the


accounting records at the price paid
to acquire it, and
» This cost is the basis or all
subsequent accounting or the assets..

Assets are always shown at their cost and not at their current
market value
Dual aspect concept

• Every business transaction has dual


effect.

• Asset = liabilities + capital

The value of the assets owned by the concern is


equal to the
claims on these assets
Accounting period concept

• The life o the business is divided into


appropriate segments for studying the results
shown by the business after each segment…

• Such segment or time interval is called


accounting period

Accounting measures activity for a specified


interval
of time, usually a year
Matching concept
• This is based on the accounting
period concept..
• The paramount objective of running a
business is to earn profit.
• In order to ascertain the profit
made by the business during a period,
it is necessary that ‘revenues’ of the
period should be matched with the
cost (expenses) of the period.
• The term matching means
appropriate association of related
revenues and expenses.

• In other words income made by the


business during the period can be
measured only when the revenue
earned during the period is compared
with the expenditure incurred for
earning that revenue…
• The question when the payment
was received or made is irrelevant
Realisation concept

• Revenue is recognised when the sale


is made.
• Sale is considered to be made at the
point when the property in goods
passes to the buyer and he becomes
legally liable to pay…
• Eg:- “A” places an order with “B” for
supply of certain goods yet to be
manufactured. On receipt of order, B
purchases raw materials, employs workers,
produces the goods and delivers them to
A…. A makes payment on receipt o goods…
in this case the sales will be presumed to
have been made not at the time of receipt
of order for the goods but at the time
when goods are delivered to A
Accounting conventions…

• The term conventions includes those


customs or traditions which guide the
accountant while preparing the
accounting statements….
It includes:-

Convention of conservatism

Convention o full disclosure

Convention o consistency

Convention of materiality
Convention of conservatism

• Anticipate no profit but provide for all


losses…
• The accountant follows the policy of
“playing safe”….
• eg:- inventory is valued at cost price or
market price whichever is less..
• Provision for bad debts….

Recognize profit only when they are reasonably


certain
Recognize losses as soon as they are reasonably
possible
Convention of full disclosure
• Accounting reports should disclose
fully and fairly the information..

• They should be honestly prepared


and sufficiently disclose
information which is o material
interest to proprietors, present and
potential creditors and investors…
Convention of consistency
• Accounting practices should remain
unchanged from one period to
another.
• Eg:- if the stock is valued at cost
price or market price which ever is
less, this principle should be followed
year after year
• DEPRECIATION
• It is necessary for comparison…
The accounting policies and methods followed by
the company should be the same year after year..
Convention of materiality
• Accountant should attach importance
to material details and ignore
insignificant details..
• Otherwise accounting will be
unnecessarily overburdened with
minute details….
• Subjective term
• An accountant should regard an item
as material if there is reason to
believe that knowledge of it would
influence the decision of the
investor….
JOURNAL
Journalizing transactions

• Journal:- journal records all daily


transactions of a business into the
order in which they occur..
• The journal may therefore be
defined as a book containing a
chronological record of transactions..
• It is the book in which the
transactions are recorded first of all
under the double entry system..

• Journal is the books, of original


record
JOURNALIZING
• Entering transaction data in the
journal is known as journalizing.
• Separate journal entries are made for
each transaction.
• A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be
debited and credited,
3 a brief explanation of transaction.
JOURNAL
• Date:- the date on which the transaction was entered is
recorded here.

• Particulars:-the two aspects of transactions are


recorded in this column…( accounts which have to be
debited and credited)

• L.F:- it means Ledger Folio. The transactions entered in


the journal are later on posted to the ledger. The page
number of the ledger on which the posting has been
done is mentioned in L.F column of the journal.

• Debit:- in this column, the amount to be debited is


entered.

• Credit:- in this column, the amount to be credited is


entered.
Rules of debit and credit

• The transactions are recorded on the


basis of the rules of debit and
credit.

• For this purpose the business


transactions have been divided into
three categories .
Transactions relating to persons

Transactions relating to properties


and assets.

Transactions relating to incomes and


expenses
On this basis, it becomes necessary
for the business to keep an account
of:-
Each person with whom it deals
( personal account)

Each property or asset which the


business owns. (Real account)

Each item of income or expense.


( Nominal account)
accounts

personal Real Nominal

Expenses Incomes
natural artificial representative and and
losses gains

tangible intangible
Personal accounts

• Personal accounts includes the


accounts of persons with whom the
business deals…3 categories
• Natural personal account- natural
persons means persons who are the
creations of the god….. mohan’s
account etc
• Artificial personal -these accounts
include accounts of corporate bodies
or institutions which are recognized
as persons in business dealings….
Account o a limited company. Account
of a co-operative society, club,
Government….
• Representative personal account -these are the
accounts which represent certain person or
group of persons..

• Salaries due to the employees but not paid… so


an outstanding salary account should be opened….
This outstanding salary account represent the
accounts of the persons to whom the salaries
have to be paid.

• Pre-paid
Rule…………

DEBIT THE RECEIVER

CREDIT THE GIVER


Real account

• These are the accounts related to


the assets or properties owned by
the organization….
• Tangible real accounts – are those
which relate to such things which can
be touched, felt, seen, measured
etc……..cash a/c, building a/c, stock
a/c, furniture a/c…..

• intangible real accounts –are those


which can not be touched…… but can
be measured in terms of money…………
patent’s a/c, goodwill a/c….
Rule……….

DEBIT WHAT COMES IN


CREDIT WHAT GOES OUT
Nominal account

• Nominal accounts include accounts


o all expenses, losses, incomes and
gains……rent, lighting, insurance,
salary, loss by fire……
Rule……….

DEBIT ALL EXPENSES AND LOSSES


CREDIT ALL GAINS AND INCOMES
Classification of goods account
• The term goods include article
purchased by the business for resale.

• Goods purchased by the business may


be returned back to the supplier.
• Similarly, goods sold by the business
to its customers can also be returned
by the customers back to the
business due to certain reasons.
• In business, it is desired that a
separate record be kept of all sale,
purchase and return of goods. Hence,
goods account can be classified into
four categories…..
• Purchases account
• Sales account
• Purchases returns account
• Sales returns account
• Purchases account:- the account is
meant for recording all purchases of
goods. Goods “come in” on purchasing
of goods and, therefore, the
purchases account is debited on
purchase of goods.
• Sales account:- the account is
meant for recording of selling of
goods. The goods “go out” on selling
of goods ad therefore, on sale of
goods, the sales account is
credited.
• Purchases returns account:- the
account is meant for recording
return of goods purchased. The
goods “go out” on returning of goods
to the suppliers and , therefore, the
account should be credited on
returning goods purchased.
• sales returns account:- the account is
meant for recording return of goods
sold, by the customers. The goods
“come in” and , therefore, sales
return account should be debited on
returns of goods.
Compound journal entry
• Sometimes there are a number of
transactions on the same date relating to
one particular account or of the one
particular nature……
• Such transactions may be recorded by
means of a single journal entry instead of
passing several journal entries…
• Such entry regarding recording a number
of transactions is termed as a compound
journal entry.
Opening entry

• In case of a running business, the


assets and liabilities appearing in the
previous year’s balance sheet will
have to be brought forward to the
current year. This is done by means
of a journal entry which is termed a
“opening entry”
• All assets accounts are debited while
all liabilities accounts are credited.

• The excess of assets over liabilities


is the proprietor's capital and is
credited to his capital account..
• Eg:-pass the opening entry on Jan.1,2009 on the
basis o the following information taken from the
business of Mr. Sunil:

I. Cash in hand Rs.2000


II. Sundry debtors Rs.6000
III. Stock of goods Rs.4000
IV. Plant Rs.5000
V. Land and buildings Rs.10,000
VI. Sundry creditors Rs.10,000
JOURNAL

2009 Cash A/c Dr 2000


Jan 1 Sundry Debtors A/c Dr 6000
Stock A/c Dr 4000
Plant A/c Dr 5000
Land and building A/c Dr 10000

To sundry creditors 10000


To capital (balance) 17000
( Being balances brought forward
From the last year)
LEDGER
LEDGER

• After recording the


transactions in the journal, the
next stage is the transfer of
transactions in the respective
account opened in the ledger.
LEDGER

• LEDGER is a principal book which


contains all the accounts (assets
accounts, liabilities accounts, revenue
accounts, expenses accounts) to
which the transactions recorded in
the books of original entry are
transferred……
• Books of final entry

• It is considered as a permanent and


is more frequently referred to.
Utility of a ledger
o It provides complete information about all
accounts in one book..

o It enables to ascertain what are the main items


of revenues..

o It enables to ascertain what are the main items


of expenses..

o It enables to ascertain what are the assets and


of what values..
o It enables to ascertain what are the
liabilities and of what amounts..

o It facilitates the preparation of final


accounts.
Ledger may be kept in two
forms……

• Bound ledger

• Loose leaf ledger


Format of a ledger account

Dr. ……..Name of the account…….. Cr.

Date particulars J/F amount date particulars J/ amount


F
POSTING

• Transferring the debit and


credit items from the
journal to their respective
accounts in the ledger..
• The exact names of the
accounts used in the
journal should be carried
to the ledger……
• Posting may be done at any
time …

• However it should be
completed before the financial
statements are prepared.
Distinction between journal
and ledger
Basis of journal ledger
distinction
Nature of Book of original Book of final
book or prime entry or secondary
entry
Basis for Prepared on the Prepared on
preparation basis of source the basis of
documents of journal
transactions
Stage of Recording in the Recording in the
recording journal in the ledger is the
first stage. second stage

It is prepared to It is prepared
object record all to know the net
transactions in effect of
chronological various
order.. transactions
affecting the
particular
account
In journal there are 5 In ledger there
column- are identical four
format Date, particulars, L/F, column on debit
debit amount, credit and credit column.
amount. Date, particulars,
J/F, amount

all ledger
Journal is not accounts
Balancing balanced ( except nominal
accounts) are
balanced in
ledger
Narration is No narration
narration written for each is given.
entry.

Name of
the process journalizing posting
of recoding

Basis of Journal directly Ledger serves


preparation does not serve as the basis or
of final basis for the the
accounts… preparation of preparation of
final accounts. final accounts.
Procedure for posting of an
account which has been debited in
a transaction
• Enter the date of the transaction, in
the ‘date column’ on the debit side…

• Record the name of the account


credited in the journal, in the
‘particulars column’ on the debit side as
‘To…(name of the account credited)…..
• Enter the relevant amount in the
amount column on the debit side.
Procedure for posting of an
account which has been credited in
a transaction
• Enter the date of the transaction, in the
‘date column’ on the credit side…

• Record the name of the account debited in


the journal, in the ‘particulars column’ on
the credit side as ‘By…(name of the
account debited)…..
• Enter the relevant amount in the
amount column on the credit side.
BALANCING OF THE ACCOUNTS
• After posting into the ledger, the next
stage is to ascertain the net effect of all
transactions posted to an account..

• The process of ascertaining the


difference between the total of debits
and total o credits appearing in an account
is known as ‘balancing of an account’
Balance of an account
• Balance of an account is the
difference between the total of
debit and total of credit appearing in
an account.

• It may be a debit balance or a credit


balance or a nil balance depending
upon whether the debit or credit
total is higher.
Procedure for balancing

Make a total of both the debit amount


column and credit amount column and
ascertain the difference between
them….

If the debit side total exceeds credit side total, put such
difference on the credit side in ‘credit amount column,
write the date on which balancing is being done in the
‘date column’ and the words ‘By Balance c/d’ in
particulars column.
Procedure for balancing

If the credit side total exceeds debit side total, put such
difference on the debit side in ‘debit amount column, write
the date on which balancing is being done in the ‘date
column’ and the words ‘To Balance c/d’ in particulars
column.

Make a total of both the debit amount


column and credit amount column and put
the total on both the sides and draw a
double line immediately beneath the totals.
Procedure for balancing

Enter the date of beginning of next period in ‘


date column’ and bring down the debit balance
on the debit side along with the words ‘To
Balance b/d’ in particulars column and bring
down the debit balance on the debit side along
with the words ‘By Balance b/d’ in particulars
column
ledger account

Dr. Cash account Cr.

Date particulars J/ amt date particulars J/ amt


F F
D1 To capital a/c 2000 D 13 By drawings a/c 500
D 31 By balance c/d 1500
2000 2000

Jan To balance b/d 1500


1
TRIAL BALANCE
Trial balance

• In case, the various debit balances


and the credit balances of the
different accounts are taken down in
a statement, the statement so
prepared is termed as TRIAL
BALANCE……
• It is a statement containing the
various ledger balances on a
particular date…
Objects of preparing a trial balance:-

• Checking the arithmetical accuracy of the


accounting entries…

• Basis for financial statements

• Summarized ledger

• Help in locating errors


Trial balance errors

• The errors of trial balance can be


classified into four categories….

Error of omission
Error of commission
Error of principle
Compensating errors
Error of Omission
• This error arises when a transaction is
completely or partially omitted to be
recorded in the books of accounts--two
types

Error of complete omission

Error of partial omission


Error of complete omission

• This error arises when the


transaction is not recorded in the
books of original entry at all or the
transaction is recorded in general
journal but is not posted in the
ledger at all.. This error does not
affect the trial balance.
Eg:-

Goods purchased on credit from Ram


not recoded in the purchase book.

Goods sold on credit to Shyam not


recorded in sales book

Furniture sold on credit to Mohan


recorded in journal proper but omitted
to be posted
Error of partial omission

• An error of omission other than an


error complete omission is called an
error of partial omission..

• This error affects the trial balance.


Example:-
• Transactions correctly recorded in
the books of original entry ( other
than journal proper) but not posted
in the ledger account at all..

• omission in carrying forward the


total from one page to the other.

• Omission to balance an account.


Error of commission

• This error arises due to-


• wrong recording,
• wrong casting,
• wrong carry forward,
• wrong posting,
• wrong balancing etc..
It can be classified as-

Error of recording - it arises when


any transaction is incorrectly
recorded in the books of original
entry.
• This error does not affect the trial
balance.
• eg; goods of Rs.200 purchased on
credit from Ram are recorded in
the purchase book for Rs.2,200.

• goods of Rs.200 purchased on


credit from Ram are recorded in
the sales book.
 Error of casting – this error arises
when a mistake is committed in
totaling. This error affects the trial
balance.

Eg- purchase book is totaled as


Rs.1000 instead of Rs.100

sales book is totaled as Rs.5000


instead of Rs.500
 Error in carrying forward -This error
arises when a mistake is committed in
carrying forward a total of one page
on the next page.

Eg;-Total of purchases book is carried


forward as Rs.1000 instead o Rs.100.
 Error of posting – this error arises
when the information recorded in the
books of original entry are
incorrectly entered in the ledger.

It may or may not affect the trial


balance
Error of principle
• An error of principle is one that is
contrary to the fundamental
principles, concepts and assumptions
of accounting.
• For instance, if you record capital
expenditure as revenue expenditure
or treat withdrawals by the business
owner as an expense, these go
against the fundamental principles
and held concepts in accounting
compensating error

• Error in computation or in recording


of accounting data, that is
neutralized (counter balanced) by an
equal and opposite error
SUBSIDIARY BOOKS
• Special journals( subsidiary books)
refer to the journals meant for
specific transactions of similar nature.

• The proforma and number of special


journals vary according to the
requirements of each enterprise.
Specific transactions to be recorded in special
journals

Name of the special journal Specific transactions to be


recoded

CASH JOURNALS
• Simple cash book Cash transactions
• Cash book with bank column Cash & bank transactions
• Cash book with bank and discount Cash, bank & discount
column Transactions
Petty cash book Petty cash transactions
Specific transactions to be recorded in special
journals

Name of the special journal Specific transactions to be


recoded

2. GOODS JOURNAL

• Purchase book Credit purchase of goods


• Sales book credit sale of goods
• Sales return book Goods returned by customers
Purchase return book Goods returned to suppliers
Specific transactions to be recorded in special
journals

Name of the special journal Specific transactions to be


recoded

BILLS JOURNALS
Cash transactions
• Bills receivable book

• Bills payable book


Cash & bank transactions
Specific transactions to be recorded in special
journals

Name of the special journal Specific transactions to be


recoded

JOURNAL PROPER Transactions not covered elsewhere


Advantages of special journal

• Facilitates division of work

Accounting work can be divided among


many persons
• Permits the installation of internal
check system.

The accounting work can be divided in


such a manner that the work of one
person is automatically checked by
another person. With the internal
check, the possibility of occurrence
of error/fraud may be avoided.
• Permits the use of specialized skills.

The accounting work requiring


specialized skill may be assigned to
a person possessing the required
skill. With the use of a specialized
skill, prompt, economical and more
accurate supply of accounting
information may be obtained..
• Time and labour saving in journalizing and
posting…

When a sales book is kept, the name of


the sales account will not be required to be
written down in the journal as many times
as the sales transaction and at the same
time sales account will not be required to
be posted again and again since only a
periodic total of sales book is posted to
the sales account..
Cash book

A cash book is a special journal


which is used for recording all cash
receipts and payments….
Both a journal and a ledger
• A cash book is a book of original entry
since transactions are recorded for the
first time from the source data.

• It is a ledger in the sense that it is


designed in the form of a cash account
and records cash receipts on the debit side
and cash payments on the credit side.
types of cash book

Types of cash
book

Cash book with


Single column Cash book with
Bank and discount Petty cash book
book Discount column
column
Single column cash book

• Single column cash book has one


amount column on each side.

• All cash receipts are recorded on the


debit side and all cash payments on
the credit side.
Format of a single column
cash book
Dr Cr
Date Particular L/F Amount Date Particulars L/F Amount.
Rs Rs.
Two (double) column cash book
• Such cash book has two columns-
cash column and discount column

• Cash column is meant for recording


cash receipts and payments while
discount column is meant for
recoding discount received and
discount allowed
• The discount column on the debit
side represents the discount allowed
while discount column on the credit
side represents the discount
received.
Format of a double column
cash book
Dr Cr
Date Disc cash Disco cash
.
Particulars L/F ount Rs Date Particulars L/F unt Rs
(Rs) (Rs)
Three column cash book
• This types of cash book contains the
following three columns on each side-

Cash column for cash received and cash


paid
Discount column for discount received and
discount allowed
Bank column for money deposited and
money withdrawn from the bank
Format of a three column
cash book
Dr Cr
D Disc c B D Disco C B.
A Particular L/ oun A A A Particulars L/ unt A A
T F t S N T F Rs S N
(Rs)
E h K E H K
Petty Cash Book

• Petty cash book is the book which is used for


the purposes of recording the payment of
petty cash expenses…
Petty cashier

• Petty cashier is a person who is


authorized to make payments of
petty cash expenses and to record
them in petty cash book
Features of petty cash book

• The amount of cash received from


main cashier is recorded on the left
hand side column.

• The payments of petty cash expenses


are recorded on the right hand side
in the respective column
• It can never show a credit balance
because the cash payment can never
exceed the cash receipts.

• Its balance represents unspent petty


cash in hand.
• Recording is done on the basis of
internal as well as external vouchers
Whenever external vouchers are not
received, internal vouchers are
prepared and got verified by an
authorized person.
• All the columns of expenses are
totalled periodically and such totals
are individually posted to the debit
side of the respective expense
accounts in the ledgers by writing
‘To sundries as per petty cash book’
in the particulars column.
• Petty cash book is both a book of
original entry as well as a book of
final entry.
Purchases journal
• The purchases journal is meant for
recording credit purchases of goods.

• It is also known as purchase or bought day


book.

• It records neither the cash purchases of


the merchandise or purchase of any asset
other than the merchandise
Usually the following information is
provided in this-

• Date of purchase
• Purchase invoice number
• Name of the supplier
• Page number of the ledger on which
supplier’s account appears and
• Amount of purchase
Sales journal
• This journal is used for the purpose
of recording the sale of goods on
credit..

• It records neither the cash sales of


merchandise nor sale of any asset
other than merchandise.
Information provided in sales book

• Date of sales
• Sales invoice number
• Name of the customer
• Page number of the ledger on which
the customer’s account appears and
• Amount of sales
Purchase returns book

• This book is used or recording return


of goods purchased on credit.
• The goods purchased for cash and
returned are not recorded in this
book.
Usually the following information is
provided in this-

• Date of return
• Debit note number
• Name of the supplier
• Page number of the ledger on which
supplier’s account appears and
• Amount of goods returned to the
supplier
Sales returns book

• Sales return book is used or the


purpose of recording the return of
goods sold on credit.

• The goods sold for cash and returned


do not find place in the sales return
journal.
Contents of sales return
book
• Date of return
• credit note number
• Name of the customer
• Page number of the ledger on which
customer’s account appears and
• Amount of goods returned by the
customer
Bills journal

• The journal is meant for recording all


bills of exchange or promissory notes
received or issued by the business.

 Bills receivable journal


 Bills payable journal
• Bills receivable journal--- it is meant for
recording all bills of exchange or promissory
notes received by the business from its
debtors..

• Bills payable journal--- it is meant for


recording all bills of exchange or promissory
notes issued by the business in favour of its
creditors
General journal (journal proper)

• It is meant for recording all such


transactions for which no special
journal has been kept by the business

• It is meant for recording such


transactions which do not occur
frequently in the business…..
Eg-
• opening entries
• Closing entries
• Adjustment entries
• Transfer entries
• Rectification entries
• purchase of fixed assets

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