chap3 accounting process lecture ppt

8/6/2019 Chap3 Accounting Process Lecture Ppt

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AccountingProcess


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Business Transaction

y Activities which are in cash terms.

y For e.g.,

selling goods on cash & credit

Collecting payment Making payment to supplier

Carriage bills

y Exchange of values between two parties.

y Transactions are recorded in two accounts.


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Business Transaction

y Involves give and take aspect.

y Debit Take Aspect.

y Credit Give Aspect.

y For e.g., a computer purchased for office usefor cash; Delivery of computer Take aspect = Debit

Payment of cash Give aspect = Credit


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Journal

y Book of accounts.

y Day to day business transactions are recordedin chronological order.

y Transactions are recorded for the first time.

y Also known as: Book of original record

Book of primary entry


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Journal

y Business transactions are classified into: Assets A/c

Liabilities A/c

Capital A/c Revenue A/c

Expenditure A/c

y Journal is divided into various categories of

books Special Journal. Sales book

Cash book


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Journal

Journal

SpecialJournal

CashJournal

SimpleCash

Journal

BankColum

nJourna

l

GoodsJourna

l

Purchase

Journal

SaleJournal

PurchaseReturnJournal

SaleRetur

nJourn

al

BillJournal

BillsReceivableJournal

Bills

PayableJournal

JournalProper


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Journal

y Special Journal Recording transactions of repetitive nature.

For e.g., all cash related transactions, credit purchase

related transactions.y Cash Journal Recording all cash transactions receipts & payments.

Balance of cash in hand at any point of time.

Two types of cash journal: Simple Cash book

Bank Column Journal


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Journal

y Purchase Journal Recording of all credit purchases.

Purchases of assets are not recorded.

y Sales Journal Recording of all credit sales.

y Purchase Return/Return Outward Journal Goods returned by the buyer to the supplier.

y Sales Return/Return Inward Journal Goods returned by the customer to the businessman.


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Journal

y Bills Receivable Journal Bills ofExchange = Goods sold on credit date &

period of payment agreed signed by buyer & seller.

Buyer Bills Payable Seller Bills Receivable

For e.g.,

Priyanka sells goods to Meena on credit for Rs.5000/-, adocument is prepared and signed by both.

Priyanka Bills Receivable Recorded in Bills ReceivableJournal.

Meena Bills Payable Recorded in Bills Payable Journal.


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Journal

y Bills Payable Record of those bills on which firm has given its

acceptance for making payment on later date.

y Journal Proper Recording of all transaction for which no specialjournal has maintained.

For e.g., machinery purchased on credit recorded injournal proper in cash book only cash purchase of

machinery is recorded.

For e.g.,

Outstanding expenses Drawings

Prepaid expenses Credit purchase & sales of FA

Depreciation Income received in advance


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Compound Entries

y Entry contains more than one debit or credit orboth.

y For e.g., Bad debts Debtor fails to pay full

amount due to him. A business concern receives Rs.8000/- of Rs.10000/- due

from Harish. He is unable to pay the balance amount, thus,the remaining amount becomes a bad debt for the business.

Bank A/c Dr. Rs.8000

Bad Debt A/c Dr. Rs.2000To Harish A/c Rs.10000

(Receipt of Rs.8000/- from Harish & remaining due amountof Rs.2000/- is treated as bad debt).


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Compound Entries

y For e.g., Discount Allowed encouragecustomers to make payment before due date. Bank A/c Dr.

Discount A/c Dr.To Customer (Debtors) A/c

y For e.g., Discount Received Creditors A/c Dr.

To Bank A/cTo Discount A/c


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Cash Discount

y Allowed by seller to any debtor.

y Encourage the debtor to pay within a specifiedperiod of time.

y Need to be accounted for in the books deducted from gross selling price.

y Allowed only when there is a cash receipt /payment including cheques.

y The discount rate varies with the customer.

y Calculated on net amount payable.


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Cash Discount

y For e.g., 10% cash discount is allowed on goodsworth Rs.320/-.

Total Amount Rs.320

Less: Cash discount @10% Rs.32Total Amount Payable Rs.288


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Trade discount

y Given by manufacturer / wholesaler to aretailer & not to others.

y Not accounted fro in the books net amount

is shown i.e. after deducting discount.y Allowed only when there is a sale either cash

or credit.

y Given at same rate which is applicable to all

customers.

y Calculated on gross selling price.


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Trade discount

y For e.g., One bag of tea costing Rs.40 each.Trade discount allowed is 20% & cashdiscount allowed is 10%. Calculate the net

amount payable by the customer for 10 bagsof tea.Value of 10 bags of tea @Rs.40 Rs.400

Less: Trade discount @20% Rs.80

Net Selling price Rs.320Less: Cash discount @10% Rs.32

Net Amount payable Rs.288


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Adjusting Entries

y Entries made to adjust for outstanding expenses outstanding rent.

prepaid expenses insurance premium paid in

advance. accrued income Rent has become due but not

received.

income received in advance commission receivedthough not yet due.


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Adjusting Entries

y For e.g., Outstanding expenses Expense for current accounting period debited.

If same expense not paid during the year becomes

outstanding for that period. Becomes the liability for that year.

Expense outstanding A/c credited liabilities arecredited for increase.

If salaries are outstanding for Rs.5000/- for Dec. 2000

then,Salaries A/c Dr. Rs.5000

To Salaries Outstanding A/c Rs.5000

(Salaries remaining unpaid for the month)


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Adjusting Entries

y For e.g., Prepaid expenses Expenses related to next year paid in advance i.e.,

current year.

Should notbe treated as Expense for current year.

Should be treated as Asset for current year. Prepaid expenses A/c debited assets are debited for

increase.

If insurance is prepaid for 2007 in 2006 for Rs.3000/-then,

Prepaid Insurance A/c Dr. Rs.3000

To Insurance Premium A/c Rs.3000

(Insurance paid in advance)


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Adjusting Entries

y For e.g., Accrued income Income earned but not has been received till now.

It is an Asset.

Accrued Income A/c debited assets are debited forincrease.

If rent (receivable) is outstanding for the month ofNov. 2006 for Rs.4000/- then,

Accrued Rent A/c Dr. Rs.4000

To Rent A/c Rs.4000

(Being rent due but not yet received for the period)


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Adjusting Entries

y For e.g., Income received in advance It is the income received for next year in the current.

Should not be included in the current years income.

Next years income cannot be treated as current yearincome but treated as liability.

Income Received in Advance A/c credited liabilitiesare credited for increase.

If rent is received in advance for Dec. 2007 in Dec.

2006 Rs.9000/- then,Rent A/c Dr. Rs.9000

To Rent received in advance A/c Rs.9000

(Rent received in advance for 2007 in 2006)


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Ledger

y A book of accounts.

y Contains all types of accounts relating to:

Assets,

Liabilities. Capital,

Expenses,

Revenue.

y Complete set of accounts of a businessenterprise.


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Importance of Ledger

y Knowledge of business results.

y Knowledge of book value of assets.

y Useful for management.

y Knowledge of financial position.

y Instant information.


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Types of Ledger

y Asset Ledger.

y Liabilities Ledger.

y Revenue Ledger.

y Expense Ledger.

y Debtors Ledger.

y Creditors Ledger.

y General Ledger.


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Balancing of different types of accounts

y Assets account Always have a Debit balance.

y Liabilities account Always have a Credit balance.

y Capital account Have a Credit balance.

y Expense & Revenue account Not balanced but totaled.

Debit total ofExpense/loss show the expenses orlosses.

Credit total of Revenue/Income show the increase inincome.


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Trial Balance

y A statement of accounts which containsbalances of all ledger accounts on a particulardate.

y Trial balance consist of: Debit column with debit balance of accounts.

Credit column with credit balance of accounts.

y Trail balance must tally.

y If not, it means that the ledger posting isarithmetically incorrect.


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Objectives of Trial Balance

y To check arithmetical accuracy.

y To help in preparing financial statements.

y Helps in locating errors.

y Helps in comparison.

y Helps in making adjustments.


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Trial Balance & Suspense A/c

y If trial balance does not tally a separate a/ci.e., Suspense A/c is opened with thedifference in amount.

y The amount of difference will entered in theSuspense A/c be put on the lesser side ofTrial balance.

y A temporary arrangement to make trial

balance tally.y Suspense A/c will disappear as soon as the

errors are rectified.


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Errors not disclosed by Trial Balance

y Error of Omission Transaction not at all recorded in the books of

accounts.

y Error of commission

Any variation in the figure/amount in both sides ofledger account.

y Error of principle W

rong posting is made in the books of accounts.y Error of mis posting

Wrong posting is made to wrong account.

y Compensating error

One error is compensated by another error.


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Bank Reconciliation Statement

y A statement prepared to reconcile thedifference between the balance as per, Bank column of cash book

Pass bookOn any given date.

y Helps in: Detecting any error in recording the transaction

Ascertaining the correct bank balance

On a particular date.


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Reasons for Difference

y Cheques issued by the firm but not yetpresented for payment.

y Cheques deposited into bank but not yet

collected.y Amount directly deposited in the bank

account.

y Bank charges.

y Interest & dividend received by the bank.


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Reasons for Difference

y Direct payment made by bank on behalf ofcustomer.

y Dishonor of cheque.

y Errors committed in recording transactions byfirm.

y Errors committed in recording transactions bybank.


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Preparation ofBank Reconciliation Statement

y Dr. side of Bank column = Cr. side of passbook & vice versa.

y Cash book : Debit Favorable balance.

y Cash book : Credit Unfavorable / Overdraft.y Pass book : Debit Unfavorable / Overdraft.

y Pass book : Credit Favorable balance.


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y When Dr. balance as per cash book / creditbalance as per pass book (favorable balance)is given: T

ake balance as a starting point say balance asper cash book.

Add all transactions that have resulted inincreasing the balance ofpass book.

Deduct all transactions that have resulted in

decreasing the balance ofpass book. Extract the net balance -- which should be same

as shown in the pass book.


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y When Cr. balance as per cash book / Dr.balance as per pass book is given: Overdraft balance is to be shown in the Minus

Column of the statement as the starting point.

The other steps will remain same.

chap3 accounting process lecture ppt

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