Accounting for Management

MBA 1st Semester Amity Global Business School Ms. Kavitha Menon

Module I

Introduction Recording of Transactions

Double Entry System

Records dual effects of each transaction Each transaction affects at least two accounts Each transaction is recorded with at least

One debit One credit

Total debits must equal total credits

According to Pacioli, Double-entry accounting is based on a simple concept: Each party in a business transaction will receive something and give something in return. In accounting terms, what is received is a debit and what is given is a credit. The T account is a representation of a scale or balance. Scale or Balance

Luca Pacioli Developer of Double-Entry Accounting

Receive DEBIT

Give CREDIT

Debits and Credits

Two of the most familiar accounting terms are

debits and credits . In the double-entry system,

debits must always equal credits for the accounting equation. Debit (from the Latin word debere) means left. It is often abbreviated as dr. Credit (from the Latin word credere) means right. It is often abbreviated as cr.
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Rules of Debit and Credit

The first and the last are increased with a debit

Remember: Just ask ALICE!

Debit + + A = Assets L = Liabilities I = Income* C = Capital E = Expenses Credit + + + -

The middle three are increased with credits

* Really, this is revenues, but r just doesnt fit in!

Golden Rules of Accounting

KINDS OF ACCOUNTS

PERSONAL

REAL

NOMINAL

Dr. The receiver

Dr. What comes in

Dr. All expenses & losses Cr. All incomes & gains

Cr. The giver

Cr. What goes out

Types of a/c Meaning Personal Relate to natural accounts persons, artificial persons & representative persons. Real accounts Nominal accounts Relate to tangible or intangible assets Relate to expense, losses, incomes and profits

E.g. Natural Rams a/c Artificial Ram & co.s a/c Representative Outstanding salary a/c Tangible Land a/c Intangible Goodwill a/c Expenses Purchase a/c Loss Loss by fire a/c Income Sales a/c Profit Profit on sale of furniture

Accounting Cycle
Step 1: Transactions Step 2: Journal

Step 5 : Financial Statements Step 4: Trial Balance

Step 3: Ledger

An Account

An account is an individual accounting record of increases and decreases labeled as debits and credits. Represented by the letters a/c There are separate accounts for each classification type such as cash, salaries, furniture, debtors, creditors etc.

Journal

Also called A book of original or prime entry All business transactions are first entered in this book Transactions are recorded in chronological order i.e. in the order in which they occur Process of recording a transaction in the journal is called journalizing. Separate journal entries are made for each transaction

JOURNAL
Date Particulars L.F. Debit Amount (Rs.) Credit Amount (Rs.)

(Narration)

Trade discount
A reduction granted by a supplier from the list price of goods or services on business consideration ( such as quantity bought, trade practices etc.) other than prompt payment List price is the selling price as printed on the product or in the catalogue of products. Never shown in the books of accounts but shown in the invoice

Cash Discount
Reduction granted by supplier from the invoice price in consideration of immediate payment or reduction within a stipulated period. Shown in the books of accounts

Ramesh started business with cash Rs. 200,000 and stock Rs. 100,000 and furniture Rs. 50,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Opened a current account with Rs. 100,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Purchased a computer from Axis Traders Rs. 15,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Paid Salary Rs. 3000, rent Rs. 4000 and electricity Rs. 700. Paid by cheque

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Purchased goods from Jojo for cash Rs. 50,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Sold goods to Kundu & Co. Rs. 35000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Issued a cheque to Axis Traders Rs. 3,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Sold goods costing Rs. 30,000 to Gagan Ltd. at a profit of 20% on sales less 10% trade discount and 2% cash discount

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Paid life insurance premium Rs. 1,000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Cash embezzled by an employee Rs. 500

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Purchased goods worth Rs. 20,000 from Mohan Bros.

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Withdrew goods for personal use Rs. 1000

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Charged depreciation @ 10% on furniture and 15% on computer

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Paid Rs. 19800 to Mohan Bros. in full and final settlement

Date

Particulars

L.F. Dr. (Rs.) Cr. (Rs.)

Source of Documents of Accounting

Cash Memo Invoice and Bill Vouchers Cash Vouchers Debit Vouchers for cash payments Credit Vouchers for cash receipts Non-cash Vouchers or Transfer Vouchers

Voucher
Entries are recorded first on vouchers. Vouchers are prepared by all firms in their own names. A separate vouchers for each transaction is prepared. It specifies the accounts to be debited or credited. It serves as documentary evidence in future.

A principal book which contains all the accounts (assets accounts, liabilities accounts, capital account, revenue accounts and expenses accounts) to which transactions recorded in the journal are transferred. Book of Final or secondary entry Format - T account Process of transferring the debit and credit entries from the journal to the ledger POSTING

Useful in the following ways: Provides complete information about all accounts in one book. Enables to ascertain the amount due from each customer or how much firm has to has to pay to its creditors Enables to ascertain the amount spent on each head of expenditure and amount earned on account of each head of income. Facilitates in the preparation of Final Accounts

Format of a ledger account

Dr.
Date Particulars To

Name of account
J.F. Rs. Date Particulars By

Cr.
J.F. Rs.

Balancing of ledger accounts

The act of ascertaining the net effect of all transactions posted to an account

Balance of an Account
The difference between the total of debits and total of credits appearing in an account It may be a debit balance or credit balance or a nil balance depending upon whether the debit or the credit side total is higher Normally, Personal Accounts and Real Accounts are balanced Nominal Accounts are not usually balanced but are closed by transfer to Trading and Profit and Loss Account

Balancing of Personal Accounts

May have a debit balance when the individual is regarded as a debtor or a credit balance when he is creditor If both sides are equal, the person is neither a debtor or a creditor and the account has a no balance.

Balancing of Real Accounts

These are accounts that represent the account of assets owned by the business Such accounts have either a debit balance or no balance but never a credit balance Exception- purchases, sales, purchase returns and sales returns accounts

Balancing of Nominal Accounts

These accounts are not balanced Transferred at the end of each trading period to the trading account or profit and loss account.

Subsidiary Books
Also known as special journals Journals meant for specific transactions of similar nature Used in any large business

Types of Subsidiary Books

Specific Transactions Cash Receipts & cash payments Petty cash payments Credit purchases of goods Credit sale of goods Goods returned by customers Goods returned by suppliers Bills receivable Bills payable For residuary transactions Name of special journal Cash book Petty Cash book Purchases book Sales book Sales returns book Purchases returns book Bills receivable book Bills payable book Journal Proper

THE TRIAL BALANCE

The trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove debits = credits after posting. Prepared with the help of ledger balances If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.

Purpose of Trial Balance

To ascertain the arithmetical accuracy To locate the errors To provide summary of ledger accounts For preparation of Final accounts

Limitations of a Trial Balance

Does not guarantee that all transactions have been correctly analyzed and posted in proper accounts Can be prepared only by those enterprises making use of double entry system of accounting Does not ensure that all transactions have been actually recorded in the subsidiary books If the trial balance is not prepared accurately, the final accounts prepared would not be reliable. Hence not useful for users.

Trial Balance of Varun Bros. as on 31st March 2010 Name of Accounts L.F. Dr. Balance Cr. Balance

Total

Note:The following rules will help for the preparation of trial balance DEBIT BALANCES : assets, drawings, debtors, losses and expenses CREDIT BALANCES: liabilities, capital, creditors, gains and incomes

Suspense Account
The trial balance is used to locate errors. In case errors cannot be located, the difference in trial balance is transferred to a new account called SUSPENSE ACCOUNT. In this way the trial balance is tallied. Afterwards when errors are located, they will be rectified through the suspense account.