Financial Management

B. Pharm MBA Semester 7

SVKM’s NMIMS Deemed-to-be University

Unit 2
Accounting Cycle

Ashique Ali K A
Assistant Professor (Finance)
School of Law
SVKM’s NMIMS Deemed-to-be University
Hyderabad
 Accounting Cycle/ Accounting Process

Communicati
ng results
Analysing &
Interpreting
Summarising transactions
transactions
Classifying
transactions
Recording
transactions
 Accounting Cycle
(Procedures of Accounting)
Using Financial Information (Users of
Generating Financial Information
Accounting Information)
• Recording transactions (Journal) • Owners
• Classifying transactions (Ledger) • Investors
• Summarising transactions (Trial • Employees
Balance and Financial Statements) • Lenders
• Analysing transactions (Analysis of • Suppliers
Financial Statements) • Customers
• Interpreting the results • Government
• Communicating the Results (Financial
Reports)
Users of Accounting Information

• Investors
• Lenders

External •
•
•
Suppliers/Creditors
Customers
Government and Regulatory agencies
• Security analysts and Advisers

• Management
Internal • Employees
 Users Uses

Investors Ability of the business to survive, prosper and pay returns.

Whether to hold, buy or sell investment

Lenders Creditworthiness; Ability to Repay principal loan and to make payment

of interest

Suppliers/Creditors The ability of the firm to pay their dues. Whether to continue the
supply or not;

Customers How the firm from which we buy is performing

Government and agencies Regulate the activities; control prices; collect taxes; protect the people
from exploitation

Public Employability of the enterprise;

Management For taking right decisions at right time

Employees Ability of the firm to provide remunerations, incentives, and other

benefits
 Rules for Debit and Credit
Traditional or English Approach
Golden Rule of Accounting
Type of Account Rules for Debit Rules for Credit
Real Assets – Cash, Building, What comes in What goes out
Machinery, Furniture

Personal Accounts relating persons with

whom business deals

1. Natural person’s Shadin’s A/c, Adeeb’s A/c

A/c
The receiver The giver
2. Artificial Person’s Company’s A/c, Bank A/c
A/c
3. Representative Outstanding expense, Prepaid
expense
person’s A/c
Nominal Incomes, Expenses, Gain, loss, All expenses All incomes and
Fictitious
Salary, Sales, Rent and Losses gains
 Rules for Debit and Credit
Modern or American approach
Types of Rules for Debit Rules for Credit
Accounts
Assets Increase Decrease
Liabilities Decrease Increase
Income Decrease Increase
Capital Decrease Increase
Expenses Increase Decrease
 Accounting Equation
● It is also known as Balance sheet equation.

Assets = Equity
Assets = Creditor’s Equity + Owner’s Equity
Assets = Liabilities + Capital
Assets – Liabilities – Capital = 0
 • Account: A summary of relevant business transactions at one place
relating to a particular head.
• Each transaction has two aspects (Dual aspect principle). Identify the
two aspects (or Accounts) and classify them as per the English or
American approach to record in the books of accounts

Sold good to Noufal on credit. Sold good to Noufal on credit.

A) Noufal – Personal – the receiver - Debit A) Noufal – Debtor (Assets) – Increase –
B) Sales – Nominal – Income - Credit Debit
Salary Paid B) Sales – Income – Increase – Credit
A) Salary – Nominal – Expense - Debit Salary Paid
B) Cash - Real – Goes out - Credit A) Salary – Expense – Increase – Debit
B) Cash – Assets – Decrease – Credit
 Classify the following accounts into Personal
account, Real account and Nominal account
• Building account • Drawings account

• Salary account • Nirmal’s account

• Machinery • Malabar Ltd. Account

• Canara Bank account • Discount received account

• Shiva’s Account • Commission receivable account

• Carriage account • Depreciation account

• Wage account • Cochin stock exchange account

• Prepaid insurance account
• Outstanding wage account
• Furniture account
• Purchase account
• Loan account
• Sales account
• Bank overdraft account
• Cash account
• Trademark account
• Stock account
• Dividend account
• Capital account
• Bills Receivables account
Sl No Name of Account Type of Account (English) Reason Type of Account (Amercian)

1 Building account Real Asset Asset

2 Salary Nominal Expense Expense

3 Machinery account Real Asset Asset

4 Canara Bank account Personal Artificial person Asset

5 Shiva’s account Personal Natural Person

6. Carriage account Nominal Expense Expense

7. Wages account Nominal Expense Expense

8. Outstanding wages Personal Representative person Liability

9. Purchase Real/Nominal Asset/ Expense Asset/Expense

10. Sales Real/Nominal Asset/ Income Income

11. Cash Real Asset Asset

12. Stock Real Asset Asset

13. Capital Personal Owner’s investment Capital

14. Drawings Personal Withdrawal by owner Capital

15. Nirmal’s account Personal Natural person

Sl No Name of Account Type of Account (English) Reason Type of Account
(American)
16. Malabar Ltd. account Personal Artificial person

17. Discount received account Nominal Income/ Gain Income

18. Commission receivable a/c Personal Representative person Asset
19. Depreciation account Nominal Loss or expense Expense
20. Cochin stock exchange a/c Personal Artificial person
21. Prepaid insurance account Personal Representative person Asset
22. Furniture account Real Asset Asset
23. Loan account Personal Liability Liability
24. Bank overdraft Personal Liability Liability
25. Trademark account Real Intangible asset Asset
26. Dividend received account Nominal Income Income
27. Bills receivables Real Asset Asset
JOURNAL
• To record the business transactions
• Chronological order – transactions are recorded in the journal in the
order in which they occur i.e., in the order of dates.
• French word ‘Jour’ (Day)
• Journal is also called a Day Book
• Aka ‘Books of Prime entry’ and ‘Books of Original entry’
 ABC Ltd.
Journal
Date Particulars L.F Debit Credit
Amount Amount
15.12.2023 Cash A/c Dr. 10,000
To Sales A/c 10,000
(Sold goods for cash Rs. 10000)

16.12.2023 Purchase A/c Dr. 5000

To Cash A/c 5000
(Purchased goods for cash Rs. 5000)
• Journalising : The process of recording transactions in the journal
• Journal entry: The record of each transaction in a journal
• Narration: A brief explanation of a transaction
• L.F (Ledger Folio): It is used for recording the page number of the
ledger to which the journal entry is posted
JOURNAL AND ITS SUBDIVISIONS
Recording of transactions
Journal and Subsidiary books
1. Journal Proper – To record transactions which do not recorded in any of
the other subsidiary books of journals
2. Cash book – to record only cash transactions
3. Purchase day book – to record only credit purchase of goods
4. Sales day book – to record only credit sales of goods
5. Purchase return book – to record only return of goods purchased on credit
6. Sales return book – to record only return of goods sold on credit
7. Bills receivable book – to record bills receivables
8. Bills payable book – to record bills payables
LEDGER
• Journal – Recording of transactions
• Ledger – Classifications of transactions
• Books of Principal entry
• Books of Secondary entry
• Ledger is a collection of accounts relating to different items
• Posting – It is the process of entering transactions into Ledger
• ‘T’ form account
 LEDGER
Dr. Cash A/c Cr.
Date Particulars J.F Amount Date Particulars J.F Amount

2020 To Capital A/c 70000 Sep 2 By Bank A/c 40000

Sep 1
5 By Purchase 10000
17 To Sales 5000 10 By Cartage 50
12 By Postage 60
30 Balance c/d 24890

75000 75000

Oct 1 Balance b/d 24890

Trial Balance
• This statement shows the balances of all the accounts which appear in
ledger.
• The debit balances are shown in one column and the credit balances are
shown in the other column.
• It is prepared before preparing final accounts.
• The purpose is to check the arithmetical accuracy of the ledger accounts.
• The total of debit must be equal to the total of credits
• Methods of preparing trial balance
• Total Method
• Balance Method
 Trial Balance as on 31.03.2014
Name of Accounts L.F Debit Balance Credit Balance

Capital 100000
Drawings 16000
Machinery 20000
Sales 200000
Purchase 210000
Sales return 20000
Purchase return 30000
Wages 40000
Goodwill 60000
Interest received 15000
Discount allowed 6000
Bank overdraft 22000
Bank Loan 90000
Sundry debtors 75000
Sundry creditors 60000
Cash 54000
Opening stock 16000

Total 517000 517000

Financial Statements
• The basic financial statements of a business include Profit and Loss
Account (Income Statement) and Balance Sheet (Position Statement).
• P&L A/c shows the revenues and expenses of the current period. The
difference between revenue and expense constitute profit or loss
made during the year.
• Balance sheet shows the assets and liabilities (including capital) of
the business.
• Apart from this, the companies may prepare other financial
statements such as Cash flow statement, Fund Flow statement,
Statement of Changes in Equity, etc.
 Capital Expenditure
● Gives long term benefits
● Expenditure for acquiring an asset, extension or
improvement of an existing asset
● Money spent on raising the capital such as brockerage,
underwriting etc.
● Spreads over several accounting period
● Usually, non-recurring in nature.
● Expenditure incurred for increasing the earning capacity
● Shown on the asset side of B/S
 Revenue Expenditure
● Also knows as expenses which are incurred to generate
revenue.
● Benefits the current period.
● Recurring in nature.
● It maintains the earning capacity
● Cost of maintaining fixed assets
● Debited to P & L account
 Deferred Revenue Expenditure
● Part of revenue expenditure which is incurred during a
particular year but the benefit of which may extend to a
number of years
● The utilized portion of the expenditure is debited to P & L
A/c and the unutilized is shown as an asset in B/S.
● Heavy Advertisement expenses
 Capital Receipts
● Non-recurring in nature.
● Sale of fixed assets, capital invested, issue of debentures,
bank loans etc.
● These create liability.
 Revenue Receipts
● Amount received in the ordinary course of a business.
● Recurring incomes via normal business operations, i.e.,
sales
● These do not create liability
● Shown in P & L A/c
 Capital Profit or Loss
● Profit or loss earned or suffered on the sale of fixed assets or
in connection with raising capital
● Arises in the abnormal circumstances
● Capital profit – profit on sale of fixed assets, profit on issue of
forfeited shares, premium on issue of shares etc. (shown on
the liability side of B/S)
● Capital loss – loss on sale of fixed assets, discount on issue of
securities, loss on redemption of debentures etc. (shown on
the asset side of B/S, and later adjusted against capital profits)
 Revenue Profit or Loss
● Profit or loss from normal course of business
● It can be seen from P/L A/c
● Revenue loss includes bad debt also.