3. Book Keeping Vs. Accounting
Book keeping is the systematic recording of
financial and economic transactions, while as
accounting is the analysis and interpretation
of book keeping records.
Definition: Accounting is the art of
recording, classifying and summarizing 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.
4. Characteristics/ attributes:
Only financial transactions/events
Records should reflect the importance of
the transactions are recorded
It should be recorded in such a way so
that the end users are able to understand it.
5. Basic Assumptions of Accounting:
Accounting entity assumption
Monetary unit assumption
Accounting period assumption and
Going concern assumption
6. The Accounting Process:
Identification of transaction
Preparation of business documents
Recording of transaction in Journal
Posting of ledgers
Preparation of unadjusted Trial Balance
Passing of Adjusting Entries Profit & Loss
Account
Preparation of adjusted Trial Balance
Balance Sheet
7. The Indian Accounting standards,
International Accounting Standards,
forming the theoretical base of
accountancy, and the Double Entry
Bookkeeping for recording the
transactions provide the practical base of
the system.
8. Financial Statements/ Final Accounts:
Manufacturing Account/ Trading Account
Profit and Loss Account and
Balance Sheet
9. Objectives of Accountancy:
• Means of recording the monetary transactions and
events
• To know the earnings of the organization
• To identify the assets and liabilities of the
organization
• Compulsory to maintain by certain government and
regulatory bodies.
• To help in financial decision making
• To provide the information to the investors,
customers and employees.
10. The Major Purposes of these
statements are:
To providing information in decision making
To depict the financial health of the
organization
To help in policies formulation
To enable the management to discharge
their obligations
11. Financial Accounting consists of creation
of financial information and the
subsequent use of such information.
Three steps in creation:
Recording
What to record
When to record
How to record (double entry system)
What value to be recorded- historical cost, PV etc.
12. Classifying: income , expenses etc.
Summarizing: trial balance
Classification of Accounting:
Accounting
Financial Cost Management
Accounting Accounting Accounting
14. Financial Analysis is Meant for whom:
Usually it is carried out to study the
financial position of the organization from
the point of view of:
o Shareholders
o Debentures holders
o Banks (for working capital)
15. o Financial Institutions (like State Finance
Corporation, IDBI, Etc.)
o Statutory Agencies (Stock exchanges,
Registrar of Companies)
o Others ( potential buyers of the
organization in takeovers or mergers)
16. Format of Manufacturing Account:
Particulars Amt. Particulars Amt.
To opening stock of WIP **** By sale of scrap ****
To R M Consumed
Opening stock RM **
+ Purchase **
+ Carriage inward **
+ Carriage inward **
+ Freight inwards **
- Return outward **
- Closing stock ** ****
To Wages ****
To salaries of works Mgr. ****
To power, elect. Etc. ****
To fuel ****
17. Continued...
Particulars Amt. Particulars Amt.
To postage & telephone ****
To depreciation on:
Plant & Machinery **
Factory L & B ** ****
To Repairs to:
Plant & Machinery **
Factory L & B ** ****
To Insurance on : By Trading Account ****
Plant & Machinery ** (Cost of goods produced
Factory L & B ** **** transferred)
To rent & taxes **** By closing stock of WIP ****
To general expenses ****
To royalty on production ****
18. Format of Trading Account:
Particulars Amt. Particulars Amt.
To opening stock ** By sales **
+ Purchase ** - Sales return ** ****
- Purchase return ** ****
To direct expenses **** By abnormal loss of stock ****
To Wages & salaries **** By gross loss transferred ****
to P & L A/c. (Balancing
figure) ##
To freight inwards ****
To carriage inward ****
To cartage inward ****
To other direct exp. ****
To GP transferred to P & **** By Closing stock ****
L A/c. (Balancing figure)
19. In the books of … XYZ Co. Ltd.
Profit and Loss Account for the year ended ……
Particulars Amt. Particulars Amt.
To GP b/d ## **** By G P b/d ## ****
To salaries & wages **** By interest earned ****
To rent rates & taxes **** By commission earned ****
To fire insurance premium **** By rent earned ****
To repairs & maintenance **** By profit on sale of FA ****
To depreciation **** By income from invest. ****
To Audit fees **** By sale of scrap ***
To bank charges **** By miscellaneous ****
income
To legal charge ****
20. Particulars Amt. Particulars Amt.
To misc. expenses ****
To discount allowed ****
To carriage outward ****
To freight outward ****
To commission to sales ****
To traveling expenses ****
To entertainment expenses ****
To sales promotion exp. ****
To advertising & publicity ****
Continued..
21. Particulars Amt. Particulars Amt.
To bad debt ****
To packing expenses ****
To interest on loan ****
To loss by theft ****
To loss by fire **** By net loss transferred ****
to capital account
(balancing figure) ###
To loss by embezzlement ****
(misuse)
To net profit transferred to ****
capital account (balancing
figure) ###
**** ****
22. In the books of XYZ Co. Ltd.
Trading and Profit & Loss Account for the year ending……
Particulars Amt. Particulars Amt.
To opening stock (WIP& FG) *** By Sales ***
###
To manufacturing expenses *** By closing stock ***
To GP c /d (balancing figure)
**** ****
To administrative exp. *** By GP b/d ***
To marketing exp. ***
To depreciation ***
To interest ***
To provision for tax ***
To NP c /d ***
***** *****
Continued..
23. Particulars Amt. Particulars Amt.
To dividends *** By balance b /f (last ***
year’s)
To transfer to GR *** By net profit for the ***
year (balancing figure)
To balance c /d (balancing *** ***
figure) transferred to B/S
24. Generally accepted format of Income Statement
Profit and loss Account of XYZ Co. Ltd. For the year ended…..
Particulars Amt.
Income:
Sales **
Other income (loss) ** ***
****
Expenditure:
Materials & other expenditure **
Interest **
Depreciation ** ***
PBT ****
- Provision for tax ***
PAT ****
25. -Prior period adjustment ***
Profit available for appropriations ****
Appropriations:
Investment allowance reserves **
Dividends **
General Reserve ** ***
Surplus carried to Balance Sheet ****
26. Contents of Balance Sheet
ASSETS:
Fixed assets:
Tangible (L& B, P &M)
Intangible (Good Will, Patents, Trademarks)
Investments:
Long term (Equity in other firm)
Short term (short term financial securities).
Current Assets, Loans and Advances
27. Miscellaneous Expenditure (preliminary expenses)
Profit and Loss Account (Losses)
Contingent assets (position for a patent applied for
out of the firm’s own research)
28. LIABILITIES:
Share capital:
Equity
Preference
Reserve and surplus
Revenue Reserves ( accumulated retained
earnings from the profits of normal business e.g. general
reserve, dividend equalization reserve,
Capital Reserves (arise out of gains from non
related business e.g. premium on issue of shares, gain on
revaluation of assets etc.
29. Secured Loans (debentures, loans from financial
institutions, etc.)
Unsecured Loans (fixed/public deposits, loans and
advances from promoters etc.)
Current Liabilities and Provisions: (creditors,
tax provision, short term loans, accruals/ unpaid
expenses, advance payments received from customers.
Contingent Liability: (arrears of dividends on
cumulative preference shares, bills of exchange
discounted, suit for damages against the company which
it is defending.)
30. Balance Sheet of ABC Co. Ltd. as on 31.03.05
Liabilities Amt. Rs. Assets Amt. Rs.
Share capital: Fixed Assets:
Authorized: Building :
5000 shares of Rs. 100 5,00,000 Cost 2,90,000
each -Depr. 50,000 2,40,000
Issued: Machinery:
2000 shares of Rs. 100 2,00,000 Cost 1,00,000
each - Depr. 55,000 45,000
Subscribed: 2000 @100 2,00,000
Reserves & Surplus: Investments:
General reserve: 12000 shares of A 1,20,000
Opening balance 40,000 Ltd. @ Rs.10each,
+ addition 7,600 47,600 Rs. 8 paid up
P & L A/c. 43,400
31. Liabilities Amt. Rs. Assets Amt. Rs.
Secured Loans: Current Assets,
14% debentures 2,00,000 Loans & Advances:
Current Liabilities & i).C.A.:
provisions: Loose tools 23,000
i). C.L.: Closing stock 90,000
Sundry creditors 92,000 Debtors: 1,25,000
Interest accrued but not 14,000 -provision 5,000 1,20,000
due on debentures Bank 30,000
Outstanding salaries 2,000 Interest accrued on 2,000
Unclaimed dividend 5,000 investment.
ii). Provision: ii.) loans &
Proposed dividend advances:
50,000
Provision for tax Advance income tax.
76,000 60,000
7,30,000 7,30,000
32. Contents of Income Statement:
Cost of Goods Sold
Gross Profit
Operating Expenses
Operating Profit
Non-operating Income (income from
investments and gains from disposal of assets)
PBIT
34. Users of Financial Statements:
Internal Users External Users
Management Group: Financing Public Group:
Group:
Board of Directors Govt. Agencies
Investors
Partners Employees
Lenders
Managers Customers
Suppliers
Officers Others –
academicians,
researchers, analysts,
etc.
35. Generally Accepted Accounting
Principles (GAAP), Conventions and
Concepts:
Accounting concepts are ideas and assumptions
which are fundamental to accounting practice.
Conventions are based on what is practicable and
based on logical considerations. E.g. dividing a
centimeter into ten equal parts is a convention rather than
a concept.
36. Generally Accepted Accounting
Principles which are followed in
several countries are as follows:
Materiality Concept: True and fair preparation. All
relatively relevant items, the knowledge of which might
influence the decision of the users of the financial
statements should be disclosed in the financial statement.
Which information is more relevant than other is largely a
matter of judgment.
Information is material if its misstatement could influence
the economic decisions of user.
Both, quantity and quality of misstatements need to be
considered in determining materiality.
37. Money Measurement Concept: Only monetary
transactions are recorded and not the events/transactions
which can not be converted in to money e.g. death of the
chairman of the organization.
Cost Concept: Cost price to be recorded not market
price.
Time period concept: Income or loss is measured
for a specified interval of time, called the accounting
period.
Conservatism Principle: It requires that in the
situation of uncertainty and doubt, the business transactions
should be recorded in such a manner that the profits and
assets are not overstated.
38. Consistency Concept: consistency should be
maintained in evaluating assets.
Business Entity Concept:
Going Concern Concept:
Duality or Accounting Equivalence
Concept: Increase in liability and decrease in assets
represent sources of funds, and vice versa. Owners’
equity + outside liability = Assets.
Realization Concept:
Timeliness Principle:
39. Matching Concept: It is an accrual concept since,
it disregards the timing and the amount of actual cash
inflow or cash outflow and concentrates on the
occurrence of revenue and expenses. If revenue is
recognized on all goods sold during a period, cost of
those goods should also be charged to that period. This
concept calls for adjustments to be made in respect of
prepaid expenses, outstanding expenses, accrued
revenue. It is wrong to recognize revenue on all sales, but
charge expenses only on such sales as are collected in
cash till that date.
