Download - Mms2,3 2011
FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTING
Session II – Accounting Mechanics – Preparation of Journal entries & General Ledgers
Session I – Introduction to Accounting Concepts of Accounting (GAAP)
SESSION 2
Recap
Presentation of Assignment on Survey of Indian Industry 2010
What is accounting
According to AICPA, Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are of financial nature and interpreting the results thereof.
This accounting process continues as financial statements and reports that are provided to users.
Accounting is the language of business
Recap
Classifying means to get information on different transactions individually. The book of account used for classification is called is called “Ledger”
Recording of financial transactions
Summarizing - Once classified information is available in the ledger, it is used to make summaries in the form of Income Statement & Balance Sheet. ie. Financial result and financial position
Recap
What is accounting cycle?
Recap
What is the need for “financial accounting”?
The important functions of management; decision making, planning & controlling cannot be executed without correct and timely information in the form of accounting data. A business man would like to periodically know the position of his business
The two systems of accounting are:
Cash basis Accrual basis
Forms of business organization
Sole Proprietorship, Partnership & Company
The three branches of accounting are:
Recap
Management Accounting refers to providing information to various management levels as a basis for management decisions.
Cost Accounting refers to recording classifying allocating and reporting current and prospective costs.
Financial Accounting refers to accounting for revenues, expenses, assets & liabilities.
Users of financial reports
Shareholders
Creditors
Government
Board of Directors
Employees
Bankers
Accounting Period Concept Money-Measurement
Cost Concept Matching Principle
Going Concern
Generally Accepted Accounting Principles (GAAP).
Business Entity Concept `
Realization Concept Conservatism
Materiality Concept Consistency
Dual Aspect Concept
This can be best understood by understanding the role of the finance department in an organization
To ensure efficient management of cash flow
Role of Financial Accounting in business
maintenance of accurate accounts making and reviewing policies & procedures,
by providing accurate and timely information for decision making in order to maximize profitability
control income and expensesguide all departments
Session 2 - Capital & Revenue Items
Segregation of Income and Expenses into Capital & Revenue Items is an important aspect of Accounting
To ascertain the correct Revenue from business
To ascertain the correct Value of the business
We may overstate or understate profits in the Profit & Loss Account in case of incorrect classification
We may overvalue or undervalue the business in the Balance Sheet in case of incorrect classification
Revenue Items
Revenue Items include revenue receipts and revenue expenses and are reflected in the P & L A/c
Revenue receipts includes Sales & all other income earned from the business on a regular basis
Revenue expenses include all expenses that are incurred in the usual course of business on a regular basis
Examples of Revenue receipts are- Sales, Interest received, Commission received, Dividend recd. Examples of Revenue expenses – Freight, Purchases, Depreciation, Interest paid, Factory expenses.
Capital Items
Capital items include capital receipts and capital expenses.
Increase the useful life of an asset
Capital expenses is incurred to
Buy a fixed asset
Increase the productive capacity of fixed assets
Make an asset usable or reusableIncrease the profitability of the business by achieving operating efficiency
Capital Items are reflected in the Balance Sheet of the Business.
Deferred Revenue Expenditure
Sometimes a revenue expenses may be of the nature of a deferred revenue expenditure
These expenses are written off over a period of time
The benefits of the expense may last for more than a year but are definitely not capital in nature. Eg. Advertisement & Publicity
Preliminary expenses, brokerage or commission paid on issue of debentures are some examples
Capital & Revenue Expenses
Rs. 1 lakh spent on purchase of machine. A loan was taken for the same.
Rs.50,000 spent on preventive maintenance of a machine
The machine started production on 1st October 2009Interest paid Rs. 12000 upto September 2009 on loan Interest from October to March - Rs. 12,000
Rs.20,000 spent on brokerage & commision expenses for issue of sharesRs.20,000 spent on machinery to increase its capacity
Rs.5 lakh spent on advertisement which will be publicised for 3 years
Rs. 10,000 was spent on freight to bring the machine
Saurav has received 2,00,000 from his father on joining the MMS course on 1st April 2010. He buys a laptop for Rs. 40,000 in May 2010. He buys a cupboard for Rs. 10,000 in June 2010. His rent expenses are Rs. 2500 per month which he pays on 5th of every month. He purchases a mobile for Rs. 10,000 in July 2010. He receives Rs. 30,000 from his mother on his birthday in August 2010. He pays his fees of Rs. 100,000 in September 2010. His day to day expenses on food & laundry is Rs. 2000 per month. He takes his friends out for dinner in November 2010 on getting a first class in the first semester and spends Rs. 5000. He pays his exam fees of Rs. 2000 in February 2010. He buys a gift of Rs. 3000 for his parents on their anniversary in March 2011. Prepare a month wise diary of his income and expenditure and his cash balance on 31st March 2011.
Divya receives an education loan of Rs. 300000 on joining the MMS course on 1st April 2010. She buys a laptop for Rs. 50,000 in May 2010. She buys a cupboard for Rs. 10,000 in June 2010. Her hostel rent expense is Rs.3000 per month which she pays on 5th of every month. She purchases a mobile for Rs. 10,000 in July 2010. She pays her fees of Rs. 150,000 in September 2010. Her day to day expenses on food & laundry is Rs. 3000 per month. She buys clothes worth Rs. 5000 on her birthday. She pays her exam fees of Rs. 2000 in February 2010. She buys 10 shares at the price of Rs. 50000. She spends Rs. 3000 on a gift for her brother on his birthday in March 2011. Prepare a month wise diary of her income and expenditure and her cash balance on 31st March 2011.
While recording transactions the accounts involved are Debited and Credited
The two aspects of a transaction are identified as two “Accounts”
All accounts are classified in the following categories
Journal entries
Personal Account is an account of a person eg. Ms. Jyoti, Mr. Ram, Debtors account, Creditors account etc.
Personal Account / Real Account /Nominal Account
Real accounts are accounts of assets of the business eg. Stock, furniture, land, building, Goodwill, Bank account
Nominal Account are accounts of expenses, income, losses, gains, interest, stationery etc.
Printing & Stationery account
Goods account
Repairs to machinery account
Classify the following
Land account
Vinay’s account
Salary account
Debtors account
Furniture account
Debit the receiver
Personal Account
Credit the giver
Golden Rules
Debit what comes in
Real Account
Nominal Accounts
Journalise the transaction – Cash brought in as capital to start business in Jyoti & Company Rs. 1 lakh
Credit what goes out
Credit all income and gains
Debit all expenses and losses
Format of a journal entryIN THE BOOKS OF JYOTI & CO.
Cr.
J.V NO. DATE PARTICULARS L.F. Dr (Rs.). Cr (Rs.)
01 11/11/08 Cash a/c Dr. 21
100000
4.50
To Capital a/c 22
100000
(Being cash brought in as capital to start business)
He buys office building space for Rs. 50,000 and furniture of Rs. 25,000 in cash on 20th November
Mr. A starts a Company called M/s. Jyoti & Company with a cash investment of Rs. 1,00,000 on 15th November
He purchase 1000 pens for Rs. 10,000 on 25th November.
Pass Journal entries for the following transactions
He pays salary to staff of Rs. 2000 on 30th November
He pays for advertising expenses Rs. 1900 on 20th November.
He pays for water Rs.500 and Rs.600 for electricity on 30th November
He buys office stationery for Rs. 1000 on 22nd November
He sells the pens for Rs. 15,000 on 29th November
Ledgers
Classification of data
Collecting all transactions of a similar type or category at one single place so as to give complete information
The book used to classify transactions is called “Ledger”
For an individual type of transaction an individual “account” is maintained in the ledger book used to classify transactions is called “Ledger”
Format of a ledger account
Bank Loan Account
Dr. Cr.
Date Particulars JF Rs. Date Particulars JF Rs.
5/31/99 To Bal c/d 4.50 5/1/99 By Bank a/c 4.50
4.50 4.50
Once the process of posting to the ledger accounts is complete, these accounts are balanced
Balancing the ledgers
If debit side is higher, the account has a debit balance and vice versa
The trial balance is a statement of balances of the ledger accounts
The Trial Balance totals match as the double entry system is followed
Assignment
Presentation of Companies in different sectors
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