ACCOUNTING DATA FOR

PREPARATION OF THE POST OF ACCOUNTS

ASSISTANT PAPER IN NTDC.

PREPARED BY: ZAHID MUNEER

JR. CLERK (ACCOUNTS) O/O C.E (MP&M)
NTDC 8TH FLOOR SHAHEEN COMPLEX,
LAHORE.
TYPES OF ACCOUNTS:

Personal Accounts:
Ledger accounts that contain transactions related to individuals or other
organizations with whom your business has direct transactions are known as
personal accounts. Some examples of personal accounts are customers, vendors,
salary accounts of employees, drawings and capital accounts of owners, etc.

The golden rule for personal accounts is: debit the receiver and credit the
giver.Example: Payment of salary to employees

Real Accounts:
The ledger accounts which contain transactions related to the assets or liabilities of
the business are called Real accounts. Accounts of both tangible and intangible
nature fall under this category of accounts, i.e. Machinery, Buildings, Goodwill,
Patent rights, etc.

Nominal Accounts
Transactions related to income, expense, profit and loss are recorded under this
category. These components actually do not exist in any physical form but they
actually exist. For example, during the purchase and sale of goods, only two
components directly get affected i.e money and stock.

TYPES OF ASSETS:
1. Current Assets
Current assets are assets that can be easily converted into cash and cash equivalents
(typically within a year). Current assets are also termed liquid assets and examples of
such are:

 Cash
 Cash equivalents
 Short-term deposits
 Accounts receivables
2. Fixed or Non-Current Assets

Non-current assets are assets that cannot be easily and readily converted into cash and
cash equivalents. Non-current assets are also termed fixed assets, long-term assets, or
hard assets. Examples of non-current or fixed assets include:

 Land
 Building
 Machinery

3. Tangible Assets

Tangible assets are assets with physical existence (we can touch, feel, and see them).
Examples of tangible assets include:

 Land
 Building
 Machinery

4. Intangible Assets

Intangible assets are assets that lack physical existence. Examples of intangible assets
include:

 Goodwill
 Patents
 COPY RIGHTS

TYPES OF LIABILITIES:

Current Liabilites:

Current liabilities are short-term debts and obligations due within one year. Some
common examples of current liabilities are:

 Accounts payable: Money the company owes to lenders, clients,

customers, and suppliers
 Short-term loans: Loans with repayment periods of one year or less
Non-Current Liabilities:

Non-current or long-term liabilities are debts and obligations due in the future but not
in the next year. Some types of non-current liabilities are:

 Bonds: A type of marketable security that has a specified maturity date

(when payment is due in full) and interest rate
  Deferred tax: Federal, state, and local taxes owed, though not due
immediately
 Long-term debt: Loans and other debts that are not due within the year,
including remaining principal amounts on loans paid in increments.

Contingent Liabilities

Contingent liabilities are a special type of debt or obligation that may or may not
happen in the future. These are contingent (or dependent on) certain events. The most
common example of a contingent liability is legal costs related to the outcome of a
lawsuit.

1. Accounts Payable (AP)

Accounts Payable include all of the expenses that a business has incurred but has
not yet paid. This account is recorded as a liability on the Balance Sheet as it is a
debt owed by the company.

2. Accounts Receivable (AR)

Accounts Receivable include all of the revenue (sales) that a company has
provided but has not yet collected payment on. This account is on the Balance
Sheet, recorded as an asset that will likely convert to cash in the short-term.

3. Accrued Expense

An expense that been incurred but hasn’t been paid is described by the term
Accrued Expense.

4. Asset (A)

Anything the company owns that has monetary value. These are listed in order of
liquidity, from cash (the most liquid) to land (least liquid).

5. Balance Sheet (BS)

A financial statement that reports on all of a company’s assets, liabilities, and

equity. As suggested by its name, a balance sheet abides by the equation <Assets =
Liabilities + Equity>.

6. Book Value (BV)

As an asset is depreciated, it loses value. The Book Value shows the original value
of an Asset, less any accumulated Depreciation.
7. Equity (E)

Equity denotes the value left over after liabilities have been removed. Recall the
equation Assets = Liabilities + Equity. If you take your Assets and subtract your
Liabilities, you are left with Equity, which is the portion of the company that is
owned by the investors and owners.

8. Inventory

Inventory is the term used to classify the assets that a company has purchased to
sell to its customers that remain unsold. As these items are sold to customers, the
inventory account will lower.

9. Liability (L)

All debts that a company has yet to pay are referred to as Liabilities. Common
liabilities include Accounts Payable, Payroll, and Loans.

13. Gross Margin (GM)

Gross Margin is a percentage calculated by taking Gross Profit and dividing by

Revenue for the same period. It represents the profitability of a company after
deducting the Cost of Goods Sold.

>>Supporting Post: How to Calculate Gross Profit Margin

The gross profit margin formula is generally done in two steps:

Gross Profit = Total Revenue – COGS

Gross Profit Margin = Gross Profit / Revenue

14. Gross Profit (GP)

Gross Profit indicates the profitability of a company in dollars, without taking

overhead expenses into account. It is calculated by subtracting the Cost of Goods
Sold from Revenue for the same period.

Cash Flow (CF)

Cash Flow is the term that describes the inflow and outflow of cash in a business.
The Net Cash Flow for a period of time is found by taking the Beginning Cash
Balance and subtracting the Ending Cash Balance. A positive number indicates
that more cash flowed into the business than out, where a negative number
indicates the opposite.

36. Overhead

Overhead are those Expenses that relate to running the business. They do not
include Expenses that make the product or deliver the service. For example,
Overhead often includes Rent, and Executive Salaries.

37. Payroll

Payroll is the account that shows payments to employee salaries, wages, bonuses,
and deductions. Often this will appear on the Balance Sheet as a Liability that the
company owes if there is accrued vacation pay or any unpaid.

41. Trial Balance (TB)

Trial Balance is a listing of all accounts in the General Ledger with their balance
amount (either debit or credit). The total debits must equal the total credits, hence
the balance.

Current Assets
Different types of assets are listed on the balance sheet, including current and
fixed assets. Current assets are those that are likely to be turned into cash
within one fiscal year, including cash, debt securities, accounts receivable
and inventory.

11. Fixed Assets

Unlike current assets, fixed assets are those that are likely to last longer than
one fiscal year. These are long-term assets, such as buildings, land, company
vehicles, machinery and equipment.

12. Liabilities
Another aspect of accounting involves keeping track of how much a business
owes, also referred to as its liabilities or debts.

13. Net Income

Net income, also commonly referred to as net profit, describes the total
amount of money a business has earned within a certain period. This can be
calculated by subtracting all expenses from a company’s revenue.

14. Profit and Loss Statement

A profit and loss statement, also referred to as a P&L statement or income
statement, shows the expenses, costs and revenues for a company during a
specific time period. This is used, along with the cash flow statement and
balance sheet, to provide a snapshot of a business’s financial health and
ability to generate profit.

Operating Expenses

Operating Expenses refer to the costs incurred in the regular operations of a

business. These expenses include salaries, rent, utilities, marketing, and other
operational costs. Operating expenses are deducted from Revenue to determine
operating Income.

ACCOUNTING CONCEPTS:
The Entity Concept
Your business is distinct from you, and the concept of “entity” conveys this. There is a
distinct difference between a company’s owner and the company’s owner. The entity
is recognised as a legal person under the law. A set of financial statements and records
of business transactions must be prepared and kept by the company.
The Money Measurement accounting concept
Only monetary transactions are measured and recorded according to the Money
Measurement concept. To put it another way, books of accounts solely record
financial transactions.

Periodicity Concept
The notion of periodicity asserts that an organisation or business must keep financial
records for a specific period, usually a calendar year. Monthly, quarterly and annually
are all options for drawing financial statements. Such accounting concepts aid in
determining any changes that have occurred throughout time.
Accrual Concept
The transaction is recorded on a mercantile basis by the basic accounting concepts of
accrual accounting. For the period to which the transaction relates, transactions must
be recorded as they occur, not as currency is received or paid.
Matching Concept
The Accrual and Periodicity concepts are linked to the matching concept in
accounting. An entity must only account for expenditures related to the period in
which revenue is considered. This matching concept in accounting indicates that the
entity must record revenue and expenses over the same period.
The Concept of “Going Concern”
The going concern accounting period concept assumes that the business will
continue to operate on an ongoing basis. As a result, the company’s financial records
are set up to last for many years to come.
The Cost Concept
According to the cost concept, an asset’s acquisition cost should be documented as its
current market worth rather than its historical cost.
The Realization Concept
In some ways, this term is similar to the accounting concept of cost. An asset should
be recorded at a cost under the realisation principle until its realisable value is
achieved. When an asset is sold or otherwise disposed of, the company should record
the realised value of that asset in its books.
Dual Aspect Concept
The double-entry accounting system is built on this principle. There are two sides to
every transaction: debit and credit. An entity has to keep track of every transaction,
including the debit and credit components.

Conservatism
An essential part of this conservative philosophy is that businesses establish and
preserve their financial records with caution. The accounting period concept of
conservatism holds that the company must set aside money to cover any potential
losses or expenses, but it ignores the possibility of future profits.
Consistency
To compare the financial statements of different periods or, for that matter, several
entities, the accounting policies are constantly followed.
Materiality
Financial statements should reflect all of the factors that significantly impact a
company’s bottom line, according to the idea of materiality. There is an exception for
items that do not significantly influence the company’s business and do not justify the
work required to document them.
CASH BOOK & TYPES:
A cash book is a financial journal that contains all cash receipts and disbursements,
including bank deposits and withdrawals.
Single column cash book: Single column cash book is also called a simple cash book.
It presents entries for cash received (receipts) on the left side or debit side and cash
payments on the right hand side or credit side.
Double Column cash book: In a double column cash book, there is an additional
column that is reserved for the discounts. Therefore, in a double-column cash book,
also known as two-column cash book, the cash receipts and transactions are recorded
in one column while the second column records discounts received and discounts
provided.
Triple column cash book: In a triple column cash book, the two columns are similar
to the double column cash book. While the additional column is for bank transactions.
Petty cash book: Petty cash book, as the name suggests, is for very small transactions
that take place in an organisation. Such transactions can occur in a day and are
repetitive in nature, which can put undue load on the general cash book. For this
reason, it is maintained separately.

TYPES OF CHEQUES-

1) Bearer Cheque
Bearer cheques are the cheques which withdrawn to the cheque's owner. These types
of cheques normally used for a cash transaction.

For example - Ram has a savings account in HDFC bank. He brought a cheque from
his chequebook to the HDFC bank branch where he has an account. He can present
the cheque to the bank and withdraw money from his account. This type of cheque is
known as Bearer Cheque.

1. Bearer Cheque
When the words "or bearer" appearing on the face of the cheque are not cancelled, the
cheque is called a bearer cheque. The bearer cheque is payable to the person specified
therein or to any other else who presents it to the bank for payment. However, such
cheques are risky, this is because if such cheques are lost, the finder of the cheque can
collect payment from the bank.

2. Order Cheque
When the word "bearer" appearing on the face of a cheque is cancelled and when in its place
the word "or order" is written on the face of the cheque, the cheque is called an order cheque.
Such a cheque is payable to the person specified therein as the payee, or to any one else to
whom it is endorsed (transferred).
3. Uncrossed / Open Cheque

When a cheque is not crossed, it is known as an "Open Cheque" or an "Uncrossed Cheque".

The payment of such a cheque can be obtained at the counter of the bank. An open cheque
may be a bearer cheque or an order one.

4. Crossed Cheque

Crossing of cheque means drawing two parallel lines on the face of the cheque with or
without additional words like "& CO." or "Account Payee" or "Not Negotiable". A crossed
cheque cannot be encashed at the cash counter of a bank but it can only be credited to the
payee's account.

5. Anti-Dated Cheque

If a cheque bears a date earlier than the date on which it is presented to the bank, it is called
as "anti-dated cheque". Such a cheque is valid upto three months from the date of the cheque.

6. Post-Dated Cheque

If a cheque bears a date which is yet to come (future date) then it is known as post-
dated cheque. A post dated cheque cannot be honoured earlier than the date on the
cheque.

7. Stale Cheque

If a cheque is presented for payment after three months from the date of the cheque it
is called stale cheque. A stale cheque is not honoured by the bank.

TYPES OF ENTRIES:
(I) Simple Entries:
Simple entries are those entries in which only two accounts are affected,
one account is related to debit and another account is related to credit.
(II) Compound Entries:
Compound entries are those entries in which there are at least two debits
and at least one credit or at least one debit and two or more credit items.
Compound entries are recorded for those transactions which are similar in
nature and occur on the same day.

(III) Opening Entry:

Opening entries are those entries which record the balances of assets and
liabilities, including capital brought forward, from a previous accounting
period. In the case of going concerns, there is always a possibility of
having balances of assets and liabilities, including capital, which were
lying in the previous accounting year. To show true and fair view of the
business concern, it is necessary that all previous balances are to be
brought forward in the next year by way of passing an opening entry.
(IV) Transfer Entries:
Transfer entries are those entries through which amount of an account are
transferred to another account. Usually, these entries are recorded for those
transactions when wrong booking has been made in respect of any
account.

(V) Closing Entries:

Closing entries are those entries through which the balances of revenue
and expenses are closed by transferring their balances to the Trading
Account or Profit and Loss Account.

(VI) Adjustment Entries:

Adjusting entries are those entries through which assets and liabilities are
recorded at their true values and revenues are matched with the expenses.
(VII) Rectifying Entries:
Rectifying entries are those entries which are passed to make some
corrections in the books of original entries or some accounts in the ledger.

TYPES OF ERRORS:

Error of Principle: Error of principle is said to occur when the accountant records a
transaction that does not comply with the rules of accounting. As per accounting rules,
for every debit, there should be a corresponding credit.
For eg: An asset is purchased and is recorded as an expense in the account.
Errors of Omission: Errors of omission are those types of errors that are generated
when the accountant forgets to record an entry.
Examples

Complete omission – Failure to record the purchase of an asset

Partial omission – Credit sales of ₹5000 to Raj, in this transaction, the sales entry is
recorded, but the entry for Raj’s Account is not done, it leads to partial omission.

Errors of Commission: These types of error result from the negligence of the person
who is in charge of recording the transactions. These types of errors have an impact on
the trial balance and the examples of such errors can be the recording of incorrect
amounts and incorrect totalling in the ledger or subsidiary books or posting at the
wrong side of ledger accounts.

Compensating errors: Compensating errors occur when one wrong entry neutralises
the impact of another incorrect entry. These entries cancel the other error that is
recorded.

For e.g: If Jay has purchased some goods amounting to 4000 and the same has been
recorded as a debit on his account as 400. The impact of such a transaction will be the
reduction of the debit side by 3600.

TYPES OF RATIOS:

Liquidity ratios

Liquidity ratios calculate how capable your company is of paying its debts. They
typically measure current business liabilities and liquid assets to determine your
company’s likelihood of repaying short-term debts.

Common liquidity ratios include the following:

 Current ratio = current assets ÷ current liabilities. This ratio measures if

your company can currently pay off short-term debts by liquidating your
assets.
 Quick ratio = quick assets ÷ current liabilities. This ratio is similar to the
current ratio above. However, to measure “quick” assets, you only consider
your accounts receivable plus cash plus marketable securities.
 Net working capital ratio = (current assets – current liabilities) ÷ total
assets. The net working capital ratio calculates your assets’ liquidity. An
increasing net working capital ratio indicates that your business is investing
more in liquid assets than fixed assets.
 Cash ratio = cash ÷ current liabilities. This ratio tells you how capable
your business is of covering its debts using only cash. No other assets are
considered in this ratio. For example, your accounts receivable and accounts
payable aren’t considered because they represent future incoming client
payments and future outgoing vendor payments.
 Cash coverage ratio = (earnings before interest and taxes +
depreciation) ÷ interest. The cash coverage ratio is similar to the cash ratio.
However, it considers depreciation and calculates the likelihood of your
business being able to pay interest on its debts.
 Operating cash flow ratio = operating cash flow ÷ current
liabilities. This ratio tells you how your current liabilities are covered
by cash flow.
Profitability ratios

Accountants use profitability ratios to measure a company’s earnings

versus business expenses. Common profitability ratios include the following:

 Return on assets = net income ÷ average total assets. The return-on-assets

ratio indicates how much profit companies make compared to their assets.
 Return on equity = net income ÷ average stockholder equity. This ratio
shows your business’s profitability from your stockholders’ investments.
 Profit margin = net income sales. The profit margin is an easy way to
determine how much of your income is from sales.
 Earnings per share = net income ÷ number of common shares
outstanding. The earnings-per-share ratio is similar to the return-on-equity
ratio. However, this ratio indicates your profitability from the outstanding
shares at the end of a given period.

Leverage ratios

A leverage ratio helps you see how much of your company’s capital comes from
debt and how likely it is to meet its financial obligations. Leverage ratios are
similar to liquidity ratios. However, leverage ratios consider your totals, while
liquidity ratios focus on current assets and liabilities.

 Debt-to-equity ratio = total debt ÷ total equity. This ratio measures your
company’s leverage by comparing your liabilities — or debts — to your
value as represented by your stockholders’ equity.
 Total debt ratio = (total assets – total equity) ÷ total assets. Your total
debt ratio is a quick way to see how much of your assets are available
because of debt.
 Long-term debt ratio = long-term debt ÷ (long-term debt + total
equity). Similar to the total debt ratio, this formula shows you your assets
available because of debt for longer than one year.

Turnover ratios

Turnover ratios measure your company’s income against its assets. There are many
different types of turnover ratios, including the following:

 Inventory turnover ratio = costs of goods sold ÷ average

inventories. The inventory turnover rate shows how much inventory you’ve
sold in a year or other specified period.
 Assets turnover ratio = sales ÷ average total assets. This ratio is an
indicator of how effectively your company is using assets to produce
revenue.
  Accounts receivable turnover ratio = sales ÷ average accounts
receivable. You can use this ratio to evaluate how quickly your company
can collect funds from its customers.
 Accounts payable turnover ratio = total supplier purchases ÷
((beginning accounts payable + ending accounts payable) ÷
2). The accounts payable turnover ratio measures the speed at which a
company pays its suppliers.

DEPRECIATION:
 a reduction in the value of an asset over time, due in particular to wear and tear.
 "provision should be made for depreciation of fixed assets".

DEPLETION:
Depletion is an accrual accounting technique used to allocate the cost of
extracting natural resources such as timber, minerals, and oil from the earth.

AMORTIZATION:
Amortization definition: In accounting, the amortization of intangible assets refers to
distributing the cost of an intangible asset over time.