Journal Entries

 Purchases in cash

Purchase Account Dr.

To Cash Account

 Purchase on credit
Purchases Account Dr.
To Creditor Account/Accounts Payable

 Purchase Returns
Creditor Account/Accounts Payable
To Purchase Returns A/C

 Sales in cash
Cash A/c Dr.
To Sales A/C
 Sales on credit

Debtor/ Accounts Receivable Account Dr.

To Sales A/C

 Sales Return

Sales Return Account Dr.

To Debtor/Accounts Receivable Account

 Furniture purchased in cash

Furniture Account Dr.

To Cash A/C

 Depreciation on fixed asset like furniture, machinery etc

Depreciation A/C Debit

To Accumulated Depreciation/Fixed asset Account

 When you create a provision for bad debts

 Bad debts account Dr.

To provision for bad debts

 When you write off bad debts

Provision for bad debts account debit

To Debtor / Accounts receivable account

 Take loan from a bank

Bank account debit
To Bank loan account

 Interest accrued on the above bank loan

Interest expense account debit
To Accrued Interest account

 When you paid prepaid rent for 3 months totalling 9000

Prepaid Rent account Debit (asset account)

To Bank account

 Accrued expenses (Salaries payable, rent payable – all outstanding expenses)

Expenses Account Debit

To Accrued expenses account

 Capital invested by proprieter

Cash account or fixed asset account debit
To Capital account

 Amount of 3000 withdrawn for personal use (drawings)

Drawings accounts debit

To Cash
Accounting terminology

1. What are golden rules of accounting

There are three types of accounts real, personal and nominal account. The golden rule for
each is

For Real Account: Debit what comes in, credit what goes out

For Personal account: Debit the receiver, credit the giver

For Nominal account: Debit all expenses and losses, credit all incomes and gains

2. What is the accounting equation

The accounting equation is Asset = Liabilities + Owners Equity (or Capital)

3. What are fixed assets?

Fixed assets are those assets which are not bought or sold in normal course of
business, they are not for resale. They are used in future production of goods and
services over extended period of time, typically greater than one year. Examples are
plant and machinery, furniture, fixture, land and building. Fixed assets are
depreciated over its estimated useful life

4. What are intangible assets?

Intangible assets are those assets that cannot be touch or felt. Examples includes
copyrights, patents, trademarks. Intangible assets are amortized over its estimated
useful life. They are shown on assets side of the balance sheet.

5. What are current assets:

Current assets are liquid assets that can be easily converted into cash typically less
than one year. Examples are cash, bank, inventory, accounts receivable, prepaid
expenses

6. What are current liabilities?

 Current liabilities are those obligations or liabilities that are due to be paid in short
duration typically less than one year. Examples include accounts payable, bills
payable, notes payable, bank overdraft, accrued expenses

7. What is contingent liability?

Contingent liabilities are those liabilities which may or may not happen. They are
contingent or dependant on a future event, which may or may not happen. Example
is a lawsuit or a legal proceeding. They are not reported as a liability in the balance
sheet. If it is significant it will be reported into the notes to account in the financial
statements

8. What is prepaid expenses

Prepaid expenses are those expenses for which cash has already been paid but for
this benefits will be derived in future accounting period. Example is rent paid in
advance, salary paid in advance, insurance premiums paid in advance.

9. What are accrued expenses?

Accrued expenses are those expenses for which benefit has already been received
but for which payment has not been made. Examples are salaries payable, rent
payable, wages payable. Accrued expenses create a liability in the books of accounts

10. What is accrued revenue?

Accrued revenues are those amounts that have been received in advance but for
which goods or services have not yet been delivered. They cannot be booked as
revenue and will be books as a liability in the balance sheet.

11. What is deferred revenue expenditure?

Deferred revenue expenditure are those expenses which have been paid for in the
current accounting period but for which benefit will be derived over an extended
period of time, typically 2-3 years. Examples are advertisement costs, marketing
expenses, product launch expenses. Deferred revenue expenditure creates a non
current asset on the balance sheet.

12. What is bank reconciliation statement (BRS)?

Bank reconciliation statement reconciles the difference in the bank balance

as per the cash book with the bank balance shown as per the pass book.
They are many reasons for the differences such as

a. Check deposited in bank but not cleared

 b. Checks issued but not presented for payment
c. Bank charges
d. Interest expenses
e. Interest credited by bank
f. Amounts deposited directly into bank
g. Expenses paid directly by bank
h. Check bounced or check dishonoured

13. What is accounts payable?

Accounts payable is the amount that is due to the vendors for the goods and services
purchased on credit. It is part of the current liabilities in the balance sheet.

14. What is depreciation?

Depreciation is the reduction in the value of the fixed assets due to factors such as
wear and tear, technological changes or passage of time. Fixed assets are
depreciated over their estimated useful life. There are different methods of
depreciation such as straight line method, written down value method.

15. What is amortization?

Amortization is the reduction in the value of intangible assets such as copyright,
patents, trademarks.

16. What is double entry bookkeeping?

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named
because every entry to an account requires a corresponding and opposite entry to a
different account. For instance, to record making $100 of cash sales would require
making two entries: a debit entry of $100 to an account called "Cash" and a credit
entry to an account called "sales." To decide which account should be debited and
which should be credited the golden rules of accounting are used.

17. What is a trial balance?

Trial balance is a listing of all ledger accounts with their respective debit and credit
balances. It also provides a initial check on arithmetical accuracy to ensure that the
debit and credit balances are matching.

18. What is a Balance sheet?

Balance sheet shows the financial position of the company as on a specific date. It
shows assets, liabilities and owners equity. Assets include current assets, fixed
assets, intangible assets and investments. Liabilities include current liabilities and
long term liabilities. Equity includes capital and drawings.
19. What is income statement or profit and loss statement?

Income statement or profit and loss statement shows the financial performance of
the company for a particular period of time. It shows the net profit or net loss made
by the business in the particular period. It includes all nominal accounts – expenses,
losses, incomes and games.

20. What are financial statements?

Financial statements include Income statement, balance sheet, cash flow statement,
statement of change in shareholder equity and notes to account.

21. What is working capital?

The capital of a business which is used in its day-to-day trading operations,
calculated as the current assets minus the current liabilities. It shows the liquidity
position of the company, the ability of the company to pay its short term liabilities
from sources of short term assets.

22. What is reserve vs. Provisions

Reserve is created against the charge of the profit and loss appropriation account.
Provision is created against the charge of the profit and loss account.

Main objective of reserve is to strengthen the financial position and to meet future
unknown losses and liabilities. Objective of provision is to meet known losses and
liabilities the amount of which is not certain.

Reserve is created when there is enough profit in the business. Provision is created
even if there is loss in the business.

Provision is created on known liability where as reserve is created on unknown

liability.
Provision is created even if there is no profit where as reserve is created when there
is enough profit.

23. Current ratio

Also known as ‘working capital’ ratio. It measures the difference between current
assets and current liabilities. This ratio measures the ability of a company to pay its
current obligations using current assets. Current assets/Current Liabilities.
 24. What is lease vs. A loan

Loan

Ownership of asset is with the company

secondary security is required for securing loan
Down payment is required 20% of loan
Interest portion expensed to P&L and asset value is depreciated
Debt is higher - impacts solvency rations - higher leverage

Lease

Ownership is with the Leasing company with option to buy

Leased asset is the only security
No down payment required - only one month advance lease payment
Entire lease payment is expensed
Debt is lower - favourable solvency ratio - lower leverage

25. What is error of omission and error of commission error of Principal

An error of commission occurs when you record an incorrect value in posting.

Such errors include original entry errors, transposition errors (456 written as say
465) , calculation errors. They require an adjustment or rectification entry to
correct the error.

An error of principle is one that is contrary to the fundamental principles,

concepts and assumptions of accounting. For instance, if you record capital
expenditure as revenue expenditure or treat withdrawals by the business owner
as an expense, these go against the fundamental principles and held concepts in
accounting. Such errors will skew the figures in the income statement and
statement of financial position.

Errors of omission can be one of the more difficult errors to detect, since they
involve failing to record a transaction partially or completely. An error of omission
may be hard to detect because it could lead to a balanced accounting equation

26. What is compensating error

Error in computation or in recording of accounting data, that is neutralized

(counter balanced) by an equal and opposite error. Since compensating errors do not show
up in the total, they are difficult to locate through statistical methods. Sometimes they are
deliberately introduced in a computation to cancel the effect of another (known) error.
Compensating Errors – This error means that the debit side of an account is compensated
by another error of the same/equal amount on the credit side in another account.

27. Trade Discount and Cash Discount

-Trade Discounts: offered at the time of purchase for example when goods are
purchased in bulk or to retain loyal customers.

Trade Discount Trade discounts are generally ignored for accounting purposes in
that they are omitted from accounting records. Therefore, sales, along with any
receivables in the case of a credit sale, are recorded net of any trade discounts
offered.

-Cash Discount: offered to customers as an incentive for timely payment of their

liabilities in respect of credit purchases.

Cash Discount Cash discounts result in the reduction of sales revenue earned during
the period. However, not all customers may qualify for the cash discount. It is
therefore necessary to record the initial sale and receivables at the gross amount
(after deducting any trade discounts!) and subsequently decreasing the sale revenue
and accounts receivable by the amount of discount that is actually allowed.

In Seller books
Cash Account Debit
Discount Account Debit
To Accounts Receivable

If in vendor books

Accounts Payable Account Debit

To Cash Account
To Discount Received account

28. Single Double and Triple column cash book

Single column cash book records only cash receipts and payments. It has only
one money column on each of the debit and credit sides of the cash book.

A double column cash book or two column cash book is one which consists
of two separate columns on the debit side as well as credit side for recording
cash and discount.
A three column cash book or treble column cash book is one in which there
are three columns on each side - debit and credit side. One is used to record
cash transactions, thesecond is used to record bank transactions and third is
used to record discount received and paid.

29. What is cash flow statement

In financial accounting, a cash flow statement, also known as statement of cash flows,[1] is
a financial statement that shows how changes inbalance sheet accounts and income
affect cash and cash equivalents, and breaks the analysis down to operating, investing, and
financing activities. Essentially, the cash flow statement is concerned with the flow of cash in
and out of the business
30. Difference between cash flow and fund flow

Basis of Funds Flow Statement Cash Flow Statement

Difference

1. Basis of Funds flow statement is based on Cash flow statement is based on narrow
Analysis broader concept i.e. working capital. concept i.e. cash, which is only one of the
elements of working capital.

2. Source Funds flow statement tells about the Cash flow statement stars with the
various sources from where the opening balance of cash and reaches to
funds generated with various uses to the closing balance of cash by proceeding
which they are put. through sources and uses.

3. Usage Funds flow statement is more useful Cash flow statement is useful in
in assessing the long-range financial understanding the short-term phenomena
strategy. affecting the liquidity of the business.

4. Schedule of In funds flow statement changes in In cash flow statement changes in current
Changes in current assets and current liabilities assets and current liabilities are shown in
Working are shown through the schedule of the cash flow statement itself.
Capital changes in working capital.

5. End Result Funds flow statement shows the Cash flow statement shows the causes
causes of changes in net working the changes in cash.
capital.

6. Principal of Funds flow statement is in alignment In cash flow statement data obtained on
Accounting with the accrual basis of accounting. accrual basis are converted into cash
basis.

Accounting concepts and principles

31. Separate Entity: A business is considered a separate entity from the owner(s) and
should be treated separately. Any personal transactions of its owner should not be
recorded in the business accounting books, vice versa. Unless the owner’s personal
transaction involves adding and/or withdrawing resources from the business.
32. Monetary Measurement: The business financial transactions recorded and reported
should be in monetary unit, such as $ USD, INR, etc. Thus, any non-financial or non-
monetary information that cannot be measured in a monetary unit are not recorded
in the accounting books, but instead, a memorandum will be used.

33. Going concern: It assumes that an entity will continue to operate indefinitely. In this
basis, assets are recorded based on their original cost and not on market value.
Assets are assumed to be used for an indefinite period of time and not intended to
be sold immediately.

34. Realization: With this convention, accounts recognise transactions (and any profits
arising from them) at the point of sale or transfer of legal ownership - rather than
just when cash actually changes hands. For example, a company that makes a sale to
a customer can recognise that sale when the transaction is legal - at the point of
contract. The actual payment due from the customer may not arise until several
weeks (or months) later - if the customer has been granted some credit terms.

35. Matching principle: This principle requires that revenue recorded, in a given
accounting period, should have an equivalent expense recorded, in order to show
the true profit of the business.

36. Accrual: This principle requires that revenue should be recorded in the period it is
earned, regardless of the time the cash is received. The same is true for expense.
Expense should be recognized and recorded at the time it is incurred, regardless of
the time that cash is paid.

37. Consistency: This principle ensures consistency in the accounting procedures used by
the business entity from one accounting period to the next. It allows fair comparison
of financial information between two accounting periods.

38. Materiality: Ideally, business transactions that may affect the decision of a user of
financial information are considered important or material, thus, must be reported
properly. This principle allows errors or violations of accounting valuation involving
immaterial and small amount of recorded business transaction.

39. Objectivity: This principle requires recorded business transactions should have some
form of impartial supporting evidence or documentation. Also, it entails that
bookkeeping and financial recording should be performed with independence, that’s
free of bias and prejudice.

40. Conservatism: This principle states that given two options in the valuation of
business transactions, the amount recorded should be the lower rather than the
higher value.
41. The accounting cycle is a series of steps that businesses follow to record, process,
and report their financial transactions accurately. It helps organizations maintain
their financial records systematically and ensures compliance with accounting
principles and regulations. The cycle typically consists of the following steps:
Identify Transactions: The first step is to identify and analyze all financial
transactions, such as sales, purchases, expenses, and payments, that occurred during
a specific period.
Record Transactions: Once the transactions are identified, they are recorded in the
company's books of accounts. This process involves creating journal entries, which
detail the specific accounts affected by each transaction.
Post to Ledger: The recorded journal entries are then transferred to the general
ledger, which is a comprehensive record of all the company's accounts.
Prepare Trial Balance: After posting the transactions to the ledger, a trial balance is
prepared. It summarizes the balances of all accounts, ensuring that debits equal
credits. This step helps identify any errors before generating financial statements.
Adjusting Entries: To accurately represent the financial position, some adjustments
are made at the end of the accounting period. This includes recording accrued
expenses, prepayments, depreciation, and other adjustments.
Prepare Adjusted Trial Balance: The adjusted trial balance is prepared after
incorporating the adjusting entries to ensure the books are in balance.
Prepare Financial Statements: Using the adjusted trial balance, the company can
create financial statements, including the income statement, balance sheet, and cash
flow statement.
Closing Entries: At the end of the accounting period, temporary accounts like
revenues and expenses are closed, and their balances are transferred to the retained
earnings account.
Prepare Post-Closing Trial Balance: This trial balance ensures that all temporary
accounts have been properly closed and only permanent accounts remain.
Financial Analysis and Interpretation: Finally, the company analyzes the financial
statements to evaluate its financial performance, make informed decisions, and
comply with reporting requirements.
By following the accounting cycle, businesses can maintain accurate and reliable
financial records, enabling effective financial management and decision-making.