Accounting

and

Financial
Management

Introduction to
Accounting

Accounting
& Financial
Management

Introduction

to

Accounting

Accounting An Information Process

Users of Accounting Information
GAAP
The Accounting Equation
Double Entry System

Accounting...
isis the
the language
language of
of business.
business.

Accounting..
isis an
an information
information system
system that...
that...
measures
measures business
business activities,
activities,
processes
processes information,
information, and...
and...
communicates
communicates financial
financial information.
information.
5

Accounting
The Language of Business
Accounting
Accounting isis the
the information
information system
system that...
that...
measures
measures business
business activities,
activities,
processes
processes data
data into
into reports,
reports, and
and
communicates
communicates results
results to
to decision
decision makers.
makers.
6

Accounting

- a process of identifying, recording,

summarizing, and reporting
economic information to decision
makers in the form of financial
statements.
7

Definitions of Accounting
The process of identifying, measuring, and communicating
economic information to permit informed judgements and
decisions by users of the information.
American Accounting Association (AAA)

A service activity whose function is to provide quantitative

information, primarily financial in nature, about economic
entities that is intended to be useful in making economic
decisions.
American Institute of Certified Public Accountants (AICPA)

Primary Functions of Accounting

Recording data about business transactions- In the
Egyptian era they used a quill pen to record the data
and stored it on papyrus scrolls. Today we might use
a bar code and scan data into a computer system and
store it on a magnetic disk.
Summarizing results of business activity into useful
report- The balance sheet and income statement have
been standard reports for many years. More recently
we added a statement of cash flows. However,
managers in today's environment demand more
detailed reports like sales by district or sales by
product type.
9

Providing assurances that the business is operating as

intended and that the assets of the organization are
protected- All parties to a business event have looked to
accountants to provide assurance that the transaction is
properly handled, accurately recorded, and accurately
reported. Throughout most of this century the assurance
has been based on a system of internal controls and an
audit of the published financial statements.

10

Accounting as an Aid to
Decision Making
Accounting helps in decision making by showing
where and when money has been spent, by
evaluating performance, and by showing the
implications of choosing one plan instead of
another.
Fundamental relationships in the decision-making
process:
Event

Accountants
analysis and
recording

Financial
statements

Users

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

12

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

User
Information
Needs

13

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

User
Information
Needs

Accounting
System

14

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

User
Information
Needs

Economic Data
and Activities

Accounting
System

15

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

User
Information
Needs

Economic Data
and Activities

Accounting
System

Reports

16

Accounting
Accounting
An
An Information
Information Process
Process
Identification
of Users

User
Information
Needs

Economic Data
and Activities

Accounting
System

Reports

User
Decisions

17

The Flow of Accounting

Information
1. Business transactions
occur
2. Businesses prepare reports to
Show the results of their operations

3. People make decisions.

18

The Flow of Accounting

Information
Accounting systems are designed to meet the
needs of the decision makers who use the financial
information.
Every business maintains some type of accounting
system.
These accounting systems may be very
complex or very simple, but the real value of
any accounting system lies in the information
that the system provides.
19

Users
Users of
of Accounting
Accounting Information
Information

Individuals

Government
regulatory
agencies

Businesses

Taxing
authorities

Investors and
creditors

Nonprofit
organizations
20

Users
Users of
of Accounting
Accounting Information
Information

Financial Accounting
EXTERNAL USERS

investors
creditors
regulators
customers
competitors

21

Users
Users of
of Accounting
Accounting Information
Information

Financial Accounting
EXTERNAL USERS

investors
creditors
regulators
customers
competitors

Financial Accounting
INTERNAL USERS

owners
managers
employees

22

Users
Users of
of Accounting
Accounting Information
Information

Users of Accounting Information

External
External users
users
make
make decisions
decisions
about
about the
the entity.
entity.

Internal
Internal users
users
make
make decisions
decisions
for
for the
the entity.
entity.

23

Financial Accounting
Its focus is on reporting to external parties.
It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

24

Management Accounting
It measures and reports financial and
nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization.

25

Cost Accounting
It provides information for both management
accounting and financial accounting.
It measures and reports financial
and nonfinancial data.

26

Some Definitions to remember:

Inventory - goods held by a firm for resale to
customers
Account payable - a liability that results from the
purchase of goods or services on account
Compound entry - a transaction that affects more
than two accounts
Creditor - one to whom money is owed
Debtor - one who owes money

27

Assets
What is an asset?
It is something a company owns which
has future economic value.
land
building
equipment
goodwill
28

Liability

What is a liability?
It is something a company owes.
money
service
product

29

Revenues
What are revenues?
They are amounts received or to be received
from customers for sales of products or
services.
sales
performance of services
rent
interest
30

 What are Expenses?

They are amounts that have been paid or will
be paid later for costs that have been
incurred to earn revenue.
salaries and wages
utilities
supplies used
advertising
31

Owners Equity
What is owners equity?
It is whats left of the assets after liabilities
have been deducted.
the same as net assets
the owners claim on the entitys assets

32

Transactions that Affect

Owners Equity
OWNERS EQUITY
INCREASES

OWNERS EQUITY
DECREASES
Owner Withdrawals
from the Business

Owner Investments
in the Business
Owners Equity

Revenues

Expenses
33

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY

34

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY
decreased by

35

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY
decreased by

Owners withdrawals
Expenses

36

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY
increased by

37

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY
increased by

Owners investments
Revenues

38

Effects
Effects of
of Transactions
Transactions on
on Owners
Owners Equity
Equity
OWNERS EQUITY
decreased by

increased by

Owners withdrawals

Owners investments

Expenses

Revenues

39

The Accounting Equation

40

The Accounting Equation

Assets

Economic
Resources

Liabilities + Owners Equity

Claims to
Economic
Resources
41

The Accounting Equation

Resources

What are an organizations resources called?

42

The Accounting Equation

Resources

Sources

Assets

Resources used
in the business

What are the

sources of the
assets?

43

The Accounting Equation

Resources

Sources

Liabilities
Assets

Resources used
in the business

Owners
Equity
Resources
supplied by
creditors and
owners

44

The Basic Accounting

Equation
Accounting data is represented by the
following relationship among the
assets, liabilities and owners equity of
a business:
Assets = Liabilities + Owners Equity

The equation must be in balance after

every recorded transaction in the
system.

Business
Business Transactions
Transactions
a. Sachin deposits RS 25,000 in a bank account
for ABC Ltd
LIABILITIES

ASSETS

OWNERS EQUITY

46

Business
Business Transactions
Transactions
a. Sachin deposits RS 25,000 in a bank account
for ABC Ltd.
LIABILITIES

ASSETS

Cash
25,000

OWNERS EQUITY

47

Business
Business Transactions
Transactions
a. Sachin deposits RS 25,000 in a bank account
for ABC Ltd.
LIABILITIES

ASSETS

Cash
25,000

OWNERS EQUITY

Sachin, Capital
25,000

48

Business
Business Transactions
Transactions
b. ABC Ltd. buys land for Rs 20,000.

LIABILITIES

ASSETS

OWNERS EQUITY

49

Business
Business Transactions
Transactions
b. ABC Ltd. buys land for Rs 20,000.

LIABILITIES

ASSETS

Cash
(20,000)

OWNERS EQUITY

50

Business
Business Transactions
Transactions
b. ABC Ltd buys land for RS 20,000.

LIABILITIES

ASSETS

Cash
(20,000)
Land
20,000

OWNERS EQUITY

51

Business
Business Transactions
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to
pay the supplier in the near future.
LIABILITIES

ASSETS

OWNERS EQUITY

52

Business
Business Transactions
Transactions
c. ABC Ltd buys goods for RS1,350, agreeing to
pay the supplier in the near future.
LIABILITIES

ASSETS

Purchases
1,350

Accounts Payable
1,350
OWNERS EQUITY

53

Business
Business Transactions
Transactions
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;
utilities, Rs 450; and miscellaneous, Rs 275.
LIABILITIES

ASSETS

OWNERS EQUITY

54

Business
Business Transactions
Transactions
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;
utilities, Rs 450; and miscellaneous, Rs 275.
LIABILITIES

ASSETS

Cash
(3,650)

OWNERS EQUITY

55

Business
Business Transactions
Transactions
e. ABC Ltd paid: wages Rs 2,125; rent, Rs 800;
utilities, Rs 450; and miscellaneous, Rs 275.
LIABILITIES

ASSETS

Cash
(3,650)

OWNERS EQUITY

Expenses
(3,650)

56

Business
Business Transactions
Transactions
f. ABC Ltd pays Rs 950 to creditors on account.
LIABILITIES

ASSETS

OWNERS EQUITY

57

Business
Business Transactions
Transactions
f. ABC Ltd pays Rs 950 to creditors on account.
LIABILITIES

ASSETS

Cash
(950)

OWNERS EQUITY

58

Business
Business Transactions
Transactions
f. ABC Ltd pays Rs 950 to creditors on account.
LIABILITIES

ASSETS

Cash
(950)

Accounts Payable
(950)
OWNERS EQUITY

59

Business
Business Transactions
Transactions
h. Sachin withdraws Rs 2,000 in cash.
LIABILITIES

ASSETS

OWNERS EQUITY

60

Business
Business Transactions
Transactions
h. Sachin withdraws Rs 2,000 in cash.
LIABILITIES

ASSETS

Cash
(2,000)

OWNERS EQUITY

61

Business
Business Transactions
Transactions
h. Sachin withdraws Rs 2,000 in cash.
LIABILITIES

ASSETS

Cash
(2,000)

OWNERS EQUITY

Sachins, Drawing
(2,000)

62

Transaction
Transaction Summary
Summary
LIABILITIES

ASSETS
Cash
Purchases
Land

6,700
550
20,000

OWNERS EQUITY

63

Transaction
Transaction Summary
Summary
LIABILITIES
Accts. Payable 400

ASSETS
Cash
Purchases
Land

6,700
550
20,000

OWNERS EQUITY

64

Transaction
Transaction Summary
Summary
LIABILITIES
Accts. Payable 400

ASSETS
Cash
Purchases
Land

6,700
550
20,000

OWNERS EQUITY
Sachin, Capital
Sachin, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Misc. Expense

25,000
(2,000)
7,500
(2,125)
(800)
(450)
(275)

65

Role of Accounting
Good managers plan for the future.
They develop a budget.
A budget is a formal plan
stated in monetary terms.
66

Role of Accounting
Accounting helps banks decide
to whom they will lend money.
Accounting provides information
that helps investors pick stocks.

67

Role of Accounting
Budgeting
Information systems design
Cost accounting
Internal auditing
68

Role of Accounting

Consulting

Assurance
services
including
auditing

Tax
accounting
69

Accounting as an Aid to
Decision Making
Accounting information is useful to anyone who makes
decisions that have economic results.
Owners want to know which employees are productive.
investors want to know if a company is a good investment.
Legislators want to know how a proposed law will affect budgets.
Managers want to know if a new product will be profitable.
Creditors want to know if they should extend credit, how much to
extend, and for how long.

ABUSIVE ACCOUNTING
PRACTICES
CREATIVE ACCOUNTING PRACTICES
ENRON
DEBTS NOT REPORTED
RECOGNITION OF LOSSES WAS
POSTPONED
REPORT INCOME BEFORE BEING
EARNED
71

Generally Accepted
Accounting Principles

72

Financial Accounting
Its focus is on reporting to external parties.
It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

73

Generally Accepted
Accounting Principles
What is the primary objective of financial
Accounting and Reporting?
To
Toprovide
provide information
information useful
useful
for
for making
making investment
investment and
and
lending
lending decisions
decisions
74

Generally Accepted Accounting

Principles and Basic Concepts
If every accountant used his or her own rules for
recording transactions, the financial statements
would be useless in making comparisons.
Therefore, accountants have agreed to apply a
common set of measurement principles (a
common language) to record information for
financial statements. Otherwise, decision makers
could not use or compare financial statements.
75

Accounting:
Principles and Concepts
Accountants
Accountants follow
follow professional
professional guidelines.
guidelines.
The
The rules
rules that
that govern
govern accounting
accounting are
are called
called GAAP
GAAP
(generally
(generally accepted
accepted accounting
accounting principles).
principles).

76

Generally Accepted Accounting

Principles and Basic Concepts
Generally accepted accounting principles
(GAAP) - a term that applies to the broad
concepts or guidelines and detailed
practices in accounting, including all the
conventions, rules, and procedures that
make up accepted accounting practice at a
given time
77

REGULATION OF THE
ACCOUNTING PROFESSION
Securities And Exchange Commission
(SEC)
Financial Accounting Standards Board
(FASB)
American Institute Of Certified Public
Accountants (AICPA)

78

Standard Setting Bodies

In the United States, GAAP is set primarily
by the private sector with government
oversight.
In many other countries, such as France,
the government actually sets accounting
standards.

79

Standard Setting Bodies

Securities and Exchange Commission
(SEC) - the agency designated by the U.S.
Congress to hold the ultimate responsibility
for authorizing GAAP for companies whose
stock is held by the general investing public
The SEC has informally delegated the power to
make accounting rules to the FASB.
80

Standard Setting Bodies

Financial Accounting Standards Board
(FASB) - responsible for establishing
GAAP in the United States;
A private sector body consisting of seven fulltime members and a large support staff

81

Standard Setting Bodies

International Accounting Standards Board
(IASB) - an organization representing over
143 accountancy boards from 104 countries
that is developing a common set of
accounting standards to be used throughout
the world

82

Standard Setting Bodies

Interest in harmonizing accounting standards
around the world by eliminating differences in
accounting principles has grown.
Investors are committing more of their money
worldwide.
Many multinational companies voluntarily issue
their financial statements in conformity with the
IASB standards.
83

IMPORTANT CONCEPTS
ENTITY ASSUMPTION
GOING CONCERN
ASSET VALUATION
HISTORICAL COST
MARKET VALUE

LIABILITY RECOGNITION
84

IMPORTANT CONCEPTS
ACCOUNTING PERIOD
REVENUE RECOGNITION
MATCHING EXPENSES TO REVENUES

UNIT OF MEASUREMENT
CONSERVATISM
FULL DISCLOSURE
85

Generally Accepted Accounting

Principles and Basic Concepts
The Entity Concept
An accounting entity is an organization that
stands apart from other organizations and
individuals as a separate economic unit.
The entity concept helps relate events to a
clearly defined area of accountability.

86

The Entity Concept

An accounting entity is an
organization that stands apart
as a separate economic unit.

87

The Entity Concept Example

Assume that John decides to open up a
gas station and coffee shop.
The gas station made Rs 250,000 in profits,
while the coffee shop lost Rs 50,000.

88

The Entity Concept Example

How much money did John make?
At a first glance, we would assume that
John made Rs 200,000.
However, by applying the entity concept we
realize that the gas station made Rs 250,000
while the coffee shop lost Rs 50,000.

89

Generally Accepted Accounting

Principles and Basic Concepts
The Going Concern Concept
The
The entity
entity will
will continue
continue
to
to operate
operate in
in the
the future.
future.

90

Generally Accepted Accounting

Principles and Basic Concepts
Going Concern Convention
The assumption that in all ordinary situations an entity
persists indefinitely
This notion implies that a companys existing resources
will be used to fulfill the business needs of the
company rather than be sold.
If the continuity of an entity is in doubt, a liquidation
approach to the balance sheet is taken, and the assets
and liabilities are valued as if the entity were to be
liquidated in the near future.
91

Record fixed assets at original cost and

depreciate over a period of time.
Take prepaid expenses as assets.
Business is concerned with net income or
earning capacity as compared to market
values.
92

Generally Accepted Accounting

Principles and Basic Concepts
Materiality Convention
A financial statement item is material if its
omission or misstatement would tend to
mislead the reader of the financial
statements under consideration
Materiality often depends on the size of the
organization what is material to one company
might not be material to another company.
93

 AAA defines
An item should be regarded as material if there is
reason to believe that knowledge of it would
influence the decision of informed investor
Disclose only material information.
No overburdening with minute details
Material information differs organization to
organization year to year (change in depreciation
method)
Materiality may depend upon amount or may not
be.
94

Generally Accepted Accounting

Principles and Basic Concepts
Convention of Conservatism: Anticipate no profits but provide for all possible
losses
Policy of caution & playing safe
Policy of safeguarding against possible losses in
world of uncertainty
95

Kobler defines :Conservatism as a guideline which chooses between

acceptable accounting alternatives for recording
events or transactions so that the least favorable
immediate effect on assets , income and owners
equity is reported.
Example:Making the provision for doubtful debts and discounts
on debtors in anticipation of actual bad debts and
discount
96

Generally Accepted Accounting

Principles and Basic Concepts
Cost-Benefit Criterion
A system should be changed when the
expected additional benefits of the change
exceed its expected additional costs
The benefits of information should exceed the
cost of providing that information.

Benefits > Costs

97

Generally Accepted Accounting

Principles and Basic Concepts
The Stable-Monetary-Unit
Concept
The
The purchasing
purchasing
power
power isis
stable.
stable.
98

Generally Accepted Accounting

Principles and Basic Concepts
Stable Monetary Unit
The monetary unit is the principle means
for measuring assets and equities.
It is the common denominator for quantifying
the effects of transactions.
A stable monetary unit is one that
is not expected to significantly
change in value over time.
99

Generally Accepted Accounting

Principles and Basic Concepts
The Cost Principle
Assets
Assets and
and services
services
acquired
acquired
should
should be
be recorded
recorded
at
at their
their actual
actual cost.
cost.
100

Record assets at price paid to acquire and take it as base

for subsequent years.
Makes financial statements more objective.
Limitations
Financial statements become irrelevant in case of
inflation
Remove cost of fixed assets by writing off their cost
while asset may be in good condition
Dont show as asset for which no payment has been
made for e.g knowledge ,skill of Human Resources.

101

Accrual Basis
Reporting Revenue and Expense
TWO METHODS
Cash Basis of Accounting
Accrual Basis of Accounting

102

Cash Basis of Accounting

Revenue reported when cash is received

Expense reported when cash is paid

Does not properly match revenues and

expenses

103

Accrual Basis of Accounting

Revenue reported when earned

Expense reported when incurred

Properly matches revenues and expenses

in determining net income

Requires adjusting entries at end of period

It just sounds mean it really isnt

104

ACCRUAL VS CASH
ACCOUNTING
ACCRUAL
ACCOUNTING FOCUSES ON THE
ECONOMIC
IMPACT OF
TRANSACTIONS
FIRM MAXIMIZES
ASSETS

CASH
ACCOUNTING FOCUSES ON
WHEN CASH IS
RECEIVED AND
PAID OUT
FIRM MAXIMIZES
CASH
105

Full Disclosure Principle

Illustration 1-14

106

Revenue Principle
When is revenue recognized?
When it is deemed earned.
Recognition of revenue and cash receipts
do not necessarily occur at the same time.

107

Revenue Principle
The revenue principle governs two things:
When to record revenue and
the amount of revenue to record.
108

Revenue Principle
I plan to have you
make my travel
arrangements.

Air & Sea

Travel, Inc.

Air & Sea

Travel, Inc.
April 2

March 12

photo
s

ney
Dis orld
W

Situation
Situation11
No
Notransaction
transactionhas
hasoccurred.
occurred.
Do
DoNot
NotRecord
RecordRevenue
Revenue

Situation
Situation22
The
Theclient
clienthas
hastaken
takenaatrip
triparranged
arrangedby
by
Air
Air&&Sea
SeaTravel.
Travel.Record
RecordRevenue
Revenue

109

Recognition of Revenues
Recognition - a test to determine whether
revenues should be recorded in the financial
statements for a given period
To be recognized, revenue must be:
Earned - goods are delivered or a service is
performed
Realized - cash or a claim to cash (credit) is
received in exchange for goods or services
110

The Matching Principle

What is the matching principle?
It is the basis for recording expenses.
Expenses are the costs of assets and the
increase in liabilities incurred in the earning
of revenues.
Expenses are recognized when the benefit
from the expense is received.
111

The Matching Principle

It is the basis for recording
expenses and includes two steps:
Identify all the expenses incurred
during the accounting period.
Measure the expenses and match
expenses against revenues earned.
112

The Matching Principle

Revenue
Revenue

Expense
Expense

Net income
income
= Net
113

The Matching Principle

Revenue
Revenue

Expense
Expense

(Net
(Net loss)
loss)
114

Example
May
Matching Expenses
with
Revenues
Revenues
Cost of goods sold
Net income

Rs 15,000
8,000
Rs 7,000

115

Accounting Period concept

Managers
Managers adopt
adopt an
an
artificial
artificial period
period of
of time
time
to
to evaluate
evaluate performance.
performance.

116

Accounting Period concept

It requires that accounting information be
reported at regular intervals.
Interacts
Interacts with
with the
the
revenue
revenue principle
principle and
and
the
the matching
matching principle
principle

Requires
Requires that
that income
income
be
be measured
measured
accurately
accurately each
each period
period

117

Accounting Period concept

The Time-Period Concept
Businesses need regular progress reports,
so accountants prepare financial statements
for specific periods and at regular intervals.
Monthly
Quarterly

118

Dual concept
Accounting information is based on the
double entry system.
Under this system, the two-sided
effect of a transaction is recorded in
the appropriate accounts.
The recording is done by means of a
debit-credit convention (set of rules)
applying to all accounts.
119

The Accounting Equation

Assets are the economic resources
of a business that are expected to
produce a benefit in the future.
Liabilities are outsider claims,
or economic obligations
payable to outsiders.
Owners equity represents the
insider claims of a business.
120

The Reliability Concept

The quality of information that assures
decision makers that the information
captures the conditions or events it
purports to represent
Reliable data are supported by convincing
evidence that can be verified by independent
parties.
The impact of events should be measured in a
systematic, reliable manner.
121

The Reliability (Objectivity) concept

Information
Information must
must
be
be reasonably
reasonably
accurate.
accurate.

Information
Information must
must
be
be free
free from
from bias.
bias.

Information
Information must
must
report
report what
what
actually
actually
happened.
happened.

Individuals
Individuals would
would
arrive
arrive at
at similar
similar
conclusions
conclusions using
using
same
same data.
data.
122

The Double Entry System

123

Double-Entry
Double-Entry Accounting
Accounting
Double-entry accounting is based on a
simple concept: each party in a business
transaction will receive something and give
something in return. In bookkeeping 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

T account
Left Side
Receive
DEBIT

Receive
DEBIT

Give
CREDIT

Right Side
Give
CREDIT

124

TheDouble
Double-Entry
System
The
Entry
System
Each transaction is recorded with at least:
One debit

One credit

Total debits must equal total credits.

125

The
Entry
System
TheDouble
Double-Entry
System
Each transaction must still be analyzed to
determine which accounts are involved,
whether the accounts increase or decrease,
and how much the balance will change.

126

The
Entrysystem
System
TheDouble
Double-Entry
Some businesses enter into thousands of
transactions daily or even hourly.
Accountants must carefully keep track of and
record these transactions in a systematic
manner.

Accountants use a double-entry accounting

system in which at least two accounts are
always affected by each transaction.
127

Classification of Accounts

There are some asset accounts?

Cash
Notes Receivable
Accounts Receivable
Prepaid Expenses
Land
Building
Equipment
128

Classification of Accounts

There are some liability accounts?

Notes Payable
Accounts Payable
Accrued Liabilities (for expenses incurred
but not paid)
Long-term Liabilities (bonds)
129

Classification of Accounts

There are some owners equity accounts?

Capital or owners interest in the business
Withdrawals
Revenues
Expenses

130

Classification of Accounts
Real Account =

Debit What comes in

Credit- what goes out
Personal Account = Debit Receiver
Credit - Giver
Nominal Account =Debit Expenses/Losses
Credit- Incomes/Gains
131

TheDouble
Double-Entry
The
Entrysystem
System
The system records the two-sided
effect of transactions
Transaction

Two-sided effect

Bought furniture for cash

Decrease in one asset

Increase in another asset

Took a loan in cash

Increase in an asset
Increase in a liability

The Double Entry System

Note that the accounting equation equality is
maintained after recording
each transaction.

XYZ
XYZ Ltd.
Ltd.
A
ASole
Sole Proprietorship
Proprietorship
On November 1, 2002, A started a sole
proprietorship called XYZ Ltd. The following
double-entry transactions show how amounts
received (debits) always equal amounts given
(credits).

134

Business Transactions
Amit (investor)

Entry A.
Amit deposits
Rs25,000 in a
bank account for
XYZ Ltd..
receive
Debit

XYZ Ltd
(investee)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/1

135

Business Transactions
Amit (investor)

Entry A.
Amit deposits
Rs25,000 in a
bank account for
XYZ Ltd..

Cash

receive
Debit

give
give
Credit
Credit

XYZ Ltd.
(investee)

l Journal
Date

Description

11/1

Cash

Debit

Credit

25,000

136

Business Transactions
Amit (investor)

Entry A.
Amit deposits Rs
25,000 in a bank
account for XYZ
Ltd..

Cash

receive
Debit

A promise
to the owner
give
give
Credit
Credit

XYZ Ltd.
(investee)

Journal
Date

Description

11/1

Cash
Amit, Capital

Debit

Credit

25,000
25,000

137

Business Transactions
Land Owner (seller)

Entry B.
XYZ Ltd. buys land
for Rs20,000.

receive
Debit

XYZ Ltd(buyer)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/5

138

Business Transactions
Land Owner (seller)

Entry B.
XYZ Ltd. buys land
for Rs20,000.

Land

receive
Debit

XYZ Ltd(buyer)

give
give
Credit
Credit

General Journal
Date

Description

11/5

Land

Debit

Credit

20,000

139

Business Transactions
Land Owner (seller)

Entry B.
XYZ Ltd. buys land
for Rs 20,000.

Land

receive
Debit

Cash

XYZ Ltd(buyer)

give
give
Credit
Credit

Journal
Date

Description

11/5

Land
Cash

Debit

Credit

20,000
20,000

140

Business Transactions
Supplier (seller)

Entry C.
XYZ Ltd. buys
supplies for
Rs1,350, agreeing
to pay in the near
future.
receive
Debit

XYZ Ltd
(buyer)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/10

141

Business Transactions
Supplier (seller)

Entry C.
XYZ Ltd. buys
goods for Rs1,350,
agreeing to pay in
the near future.

Supplies

receive
Debit

XYZ Ltd.
(buyer)

give
give
Credit
Credit

General Journal
Date

Description

Debit

11/10

Purchases

1,350

Credit

142

Business Transactions
Supplier (seller)

Entry C.
XYZ Ltd. buys
goods for Rs1,350,
agreeing to pay in
the near future.

Supplies

receive
Debit

A promise
to pay later
give
give
Credit
Credit

XYZ Ltd.
(buyer)

Journal
Date

Description

Debit

11/10

purchases
Accounts Payable

1,350

Credit

1,350

143

Business Transactions
Customer (buyer)

Entry D.
XYZ Ltd. earns
fees of Rs7,500,
receiving cash.

receive
Debit

XYZ Ltd.
(seller)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/18

144

Business Transactions
Customer (buyer)

Entry D.
XYZ Ltd. earns
fees of Rs7,500,
receiving cash.

Cash

receive
Debit

XYZ Ltd.
(seller)

give
give
Credit
Credit

Journal
Date

Description

Debit

11/18

Cash

7,500

Credit

145

Business Transactions
Customer (buyer)

Entry D.
XYZ Ltd. earns
fees of Rs7,500,
receiving cash.

Cash

receive
Debit

Services

give
give
Credit
Credit

XYZ Ltd.
(seller)

Journal
Date

Description

Debit

11/18

Cash
Fees Earned

7,500

Credit

7,500

146

Business Transactions
Various suppliers

Entry E.
XYZ Ltd. paid:
wages, Rs 2,125;
rent, Rs 800;
commissions,
Rs450; and misc,
Rs275.

receive
Debit

XYZ Ltd.
(buyer)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

147

Business Transactions
Entry E.

Various suppliers

XYZ Ltd. paid: wages,

Rs 2,125; rent, Rs 800;
commissions, Rs450;
and miscellaneous,
Rs275.

Services,
benefits

receive
Debit

XYZ Ltd.
(buyer)

give
give
Credit
Credit

Journal
Date

Description

Debit

11/18

Wages Expense
Rent Expense
Commission
Misc. Expense

2,125
800
450
275

Credit

148

Business Transactions
Various suppliers

Entry E.
XYZ Ltd. paid:
wages, Rs 2,125;
rent, Rs 800;
commissions, Rs
450; and misc Rs
275.

Services,
benefits

receive
Debit

Cash

XYZ Ltd.
(buyer)

give
give
Credit
Credit

Journal
Date

Description

Debit

11/18

Wages Expense
Rent Expense
Commission
Misc. Expense
Cash

2,125
800
450
275

Credit

3,650

149

Business Transactions
Supplier (payee)

Entry F.
XYZ Ltd. pays
Rs950 to creditors
on account.

receive
Debit

XYZ Ltd.
(payor)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/30

150

Business Transactions
Supplier (payee)

Entry F.
XYZ Ltd. pays
Rs950 to creditors
on account.

Reduction in
obligation

receive
Debit

XYZ Ltd.
(payor)

give
give
Credit
Credit

Journal
Date

Description

11/30

Accounts Payable

Debit

Credit

950

151

Business Transactions
Supplier (payee)

Entry F.
XYZ Ltd. pays
Rs950 to creditors
on account.

Reduction in
obligation

receive
Debit

Cash

give
give
Credit
Credit

XYZ Ltd.
(payor)

Journal
Date

Description

11/30

Accounts Payable
Cash

Debit

950

Credit

950

152

Business Transactions
Entry H.

Amit (payee)

Amit withdraws
Rs
2,000 in cash.

receive
Debit

XYZ Ltd.
(payor)

give
give
Credit
Credit

Journal
Date

Description

Debit

Credit

11/30

153

Business Transactions
Entry H.

Amit (payee)

Amit withdraws
Rs 2,000 in cash.

Reduction in
obligation

receive
Debit

XYZ Ltd.
(payor)

give
give
Credit
Credit

Journal
Date

Description

Debit

11/30

Amit, Drawing

2,000

Credit

154

Business Transactions
Entry H.

Amit (payee)

Amit withdraws
Rs 2,000 in cash.

Reduction in
obligation

receive
Debit

Cash

give
give
Credit
Credit

XYZ Ltd.
(payor)

Journal
Date

Description

Debit

11/30

Amit, Drawing
Cash

2,000

Credit

2,000

155

The Accounting Cycle

156

The Accounting Cycle:

Steps
1. Analyze the transaction
2. Journalize the transaction
3. Post the transaction to accounts in ledger
4. Prepare the trial balance
5. Prepare financial statements

The Recording Process

The sequence of steps in recording
transactions:
Transactions

Financial
Statements

Documentation

Journal

Trial
Balance

Ledger

158

The Recording Process

The process starts with source documents,
which are the supporting original records of
any transaction.
Examples are sales slips or invoices, check
stubs, purchase orders, receiving reports, and
cash receipt slips.

159

The Recording Process

In the second step, an analysis of the
transaction is placed in the book of original
entry, which is a chronological record of
how the transactions affect the balances of
applicable accounts.
The most common example is the
general journal - a diary of all events
(transactions) in an entitys life.
160

The Recording Process

In the third step, transactions are entered
into the ledger.
Remember that a transaction is not entered in
just one place; it must be entered in each
account that it affects.
Depending on the nature of the organization,
analysis of the transactions could occur
continuously or periodically.
161

The Recording Process

The fourth step includes the preparation of
the trial balance, which is a simple listing of
all accounts from the ledger with their
balances.
Aids in verifying accuracy and
in preparing the financial statements
Prepared periodically as necessary
162

The Recording Process

In the final step, the financial statements are
prepared.
Financial statements may be prepared after each
quarter of the year.
December 2002
the companies may prepare
financial statements at
various other intervals to
meet the needs of their users.
163

Journal, Ledger, Trial Balance

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

164

Journal, Ledger, Trial Balance

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

2. Transactions are posted

from journal to ledger.
Journal

Ledger

165

Journal, Ledger, Trial Balance

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

2. Transactions are posted

from journal to ledger.
Journal

Ledger

3. Trial balance is prepared.

Trial Balance

166

Manual Accounting Cycle

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

167

Manual Accounting Cycle

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

2. Transactions are posted

from journal to ledger.
Journal

Ledger

168

Manual Accounting Cycle

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

2. Transactions are posted

from journal to ledger.
Journal

Ledger

3. Trial balance is prepared,

Trial balance

169

Manual Accounting Cycle

1. Transactions are analyzed
and recorded in journal.
Documents

Journal

2. Transactions are posted

from journal to ledger.
Journal

Ledger

3. Trial balance is prepared,

4. Financial statements are

prepared and distributed.

IS

SOE

BS

Financial Statements

170

Computerized Accounting Cycle

1. Transactions are analyzed
and entered in the computer.
Documents

Computer

171

Computerized Accounting Cycle

1. Transactions are analyzed
and entered in the computer.
Documents

2. Preliminary reports are

analyzed, adjustments are
prepared and entered in the
computer.

Computer
Reports

Computer

Computer

172

Computerized Accounting Cycle

1. Transactions are analyzed
and entered in the computer.
Documents

2. Preliminary reports are

analyzed, adjustments are
prepared and entered in the
computer.

Computer
Reports

Computer

Computer

3. Financial statements are

printed and distributed.

173

Computerized Accounting Cycle

1. Transactions are analyzed
and entered in the computer.
Documents

2. Preliminary reports are

analyzed, adjustments are
prepared and entered in the
computer.
3. Financial statements are
printed and distributed.

Computer
Reports

SOE

IS

Computer

Computer

BS

SCF

Financial Statements

4. Reports are analyzed and

interpreted for decisionmaking purposes.

174

JOURNAL

175

Journal
What is a journal?
It is a list in chronological order of all the
transactions for a business.
1 Identify transaction from source documents.
2 Specify accounts affected.
3 Apply debit/credit rules.
4 Record transaction with description.
176

Journal entry
Journal entry - an analysis of the effects
of a transaction on the accounts, usually
accompanied by an explanation of the
transaction
This analysis identifies the accounts to be
debited and credited.

177

Journal entry

What does a journal entry include?

date of the transaction
title of the account debited
title of the account credited
amount of the debit and credit
description of the transaction (narration)
178

Record transactions
in the journal.

179

Journalizing
Journalizing
It is the process of entering
transactions into the journal

180

JOURNALIZING
TRANSACTIONS
THE JOURNAL IS A CHRONOLOGICAL LISTING OF
TRANSACTIONS.
ENTER DATE IN FIRST COLUMN
IDENTIFY APPROPRIATE ACCOUNTS
ENTER THE TITLE OF THE ACCOUNT DEBITED
ENTER THE TITLE OF THE ACCOUNT TO BE
CREDITED
INSERT APPROPRIATE AMOUNTS IN DEBIT AND
CREDIT COLUMN
INSERT A BRIEF DESCRIPTION OF TRANSACTION

181

Recording Transactions
On April 2, Garge invested Rs 30,000 in Gay
GillenTravel.
What is the journal entry?
Date
Particulars
Debit
Credit
April
Rs
2
Cash Account Dr
30,000
To Garge Capital
30,000 (Received initial investment from owner)
182

Types of journal entries:

Types of journal entries:
Simple entry - an entry for a transaction that
affects only two accounts
Compound entry - an entry for a transaction
that affects more than two accounts

Remember: whether the entry is simple or

compound, the debits (left side) and credits
(right side) must always equal.
183

Ledger

184

Ledger
What is a ledger?
It is a digest of all accounts utilized by an
entity during an accounting period.
Loose leaf
pages

Computer
printout

Bound
books

Cards
185

Ledger Accounts
Ledger - a group of related accounts kept
current in a systematic manner
Ledger

Think of a ledger as a book with

one page for each account.

186

Ledger
Ledger

Cash

Accts. Receivable

Supplies

Accts. Payable

187

Ledger
Ledger

Cash

Customer Accounts

Accts. Receivable
A

Supplies

Accts. Payable

188

Ledger
Ledger

Cash

Customer Accounts

Accts. Receivable
A

Supplies

Creditor Accounts

Accts. Payable
A

189

Ledger Accounts

A simplified version of a ledger account is called

the T-account.
They allow us to capture the essence of the accounting
process without having to worry about too many
details.
The account is divided into two sides for recording
increases and decreases in the accounts.
Account Title
Left Side

Right Side
190

Debits and Credits

Debit (dr.) - an entry or balance on the left
side of an account
Credit (cr.) - an entry or balance on the right
side of an account
Remember:
Debit is always the left side!
Credit is always the right side!
191

Post from the journal

to the ledger.

192

Posting
What is posting?
It is the transfer of information from the
journal to the appropriate accounts in the
ledger.

193

POSTING TO THE LEDGER

POSTING REFERS TO TRANSFERRING
THE INFORMATION IN A JOURNAL ENTRY
TO THE APPROPRIATE LEDGER
ACCOUNT
ENTER DATE
ENTER AMOUNT IN PROPER DEBIT OR
CREDIT COLUMN
ENTER JOURNAL SOURCE INFO
194

Proforma for Account

Debit
Date Particulars L.f Amt. Date

Credit
Particulars L.f Amt.

195

The Account
Account Title
Debit

Credit

LEFT SIDE

196

The Account
Account Title
Debit

Credit

RIGHT SIDE

197

Ledger Accounts
Balance - difference between total left-side
amounts and total right-side amounts at any
particular time
Assets have left-side balances.
Increased by entries to the left side
Decreased by entries to the right side

Liabilities and Owners Equity have right-side

balances.
Decreased by entries to the left side
Increased by entries to the right side

198

Details of Journals and Ledgers

Journal
Date Particulars
April 2 Cash
Garge Capital
(Received initial
investment from owner)

Page 1
Debit Credit
30,000
30,000

199

Posting
Debit
Date

April 2

Cash Account
Ref. Particulars Amount

Date Ref

Credit
Particulars

Amount

1 To G. Cap 30,000

Insert the number of the journal page.

200

Recording and Posting an Entry

Journal

Page 1

L.F.
Date

Description

Debit

12/1

Prepaid Insurance
Cash

2,400

Credit

2,400

1. Analyze and record the transaction as shown.

2. Post the debit side of the transaction.
3. Post the credit side of the transaction.

201

Recording and Posting an Entry

Journal

Page 1

L.f
Date

Description

12/1

Prepaid Insurance
Cash

Debit

15

Credit

2,400
2,400

Ledger
Prepaid Insurance Account
Dr.
Date

Particulars Fol Amt. Date

.
12/1

To Cash 1

Cr.
Particulars Fol Amt.

.
2400

202

Recording and Posting an Entry

Journal

Page 1

Date Description
Credit

Debit

12/1
1

Prepaid Insurance
Cash

15
11

L.f.

2,400
2,400
3

Ledger

Page No.15
Prepaid insurance Account

Dr.

Cr.

Date

Particulars Fol. Amt. Date

12/1

To Cash

Particulars Fol. Amt.

2400
203

TRIAL BALANCE

204

TRIAL BALANCE
What is a Trial balance?
It is an internal document.
It is a listing of all the accounts with their
related balances.
It provide a check on accuracy by showing
whether total debits equal total credits.
205

TRIAL BALANCE
A listing of all accounts with balances at the
end of the accounting period after all
transactions have journalized and posted
Purpose
to determine that debits = credits
to identify accounts to be adjusted
206

TRIAL BALANCE
A listing of all accounts with balances at the
end of the accounting period after all
transactions have journalized and posted
To determine that debits = credits

207

Preparing the Trial Balance

The purposes of the trial balance:
To help check on accuracy of posting by
proving whether the total debits equal the
total credits
To establish a convenient summary of
balances in all accounts for the
preparation of formal
financial statements
208

Preparing the Trial Balance

The trial balance is usually prepared with the
balance sheet accounts first, followed by the
income statement accounts.
An example of a trial balance:
Account
NumberAccount Title

Debit

Credit

(Rs)

100 Cash
3,50,000
3,50,000
130 Merchandise inventory
150,000
150,000
202 Note payable
100,000
100,000
300 Paid-in capital
400,000
400,000
500,000 500,000
==================

===================

209

Locating Trial Balance Errors

Note that a trial balance may balance even when errors
were made in recording or posting.
A transaction may be recorded as different amounts
in two different accounts.
A transaction may be recorded in a wrong account.
In both situations, the total debits will still equal total
credits on the trial balance.

Dr. = Cr.
210

Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect

Ledger Posting
not posted

211

Correcting Errors
Three Types of Errors
Journal Entry
1. incorrect
2. correct

Ledger Posting
not posted
incorrectly posted

212

Correcting Errors
Three Types of Errors
Journal Entry

1. incorrect
2. correct
incorrect

Ledger Posting

not posted
incorrectly posted

213

Locating Trial Balance Errors

What if it doesnt balance ?

Is the addition correct?
Are all accounts listed?
Are the balances listed correctly?

DEBITS

CREDITS
214

Locating Trial Balance Errors

Divide the difference by two.
Is there a debit/credit balance for this
amount posted in the wrong column?
Check journal postings.
Review accounts for reasonableness.
Computerized accounting programs usually
prohibit out-of-balance entries.
215

Subsidiary Books
Cash
Cash

All subsidiary
books
combined
make up
the ledger.

Cash transactions

Accounts
Accounts
Payable
Payable

Ledger
Ledger
liability accounts

Purchase
Purchase
Book
Book
Credit purchases

216

Special Journals
SELLING

BUYING

217

Special Journals
SELLING

Rendering of services on account

recorded
in

Sales Book

BUYING

218

Special Journals
SELLING

Rendering of services on account

recorded
Sales Book
in
Receipt of cash from any source
recorded
in

Cash Book

BUYING

219

Special Journals
SELLING

Rendering of services on account

recorded
Sales Book
in
Receipt of cash from any source
recorded
in

Cash Book

BUYING

Purchase of items on account

recorded
in

Purchases Book

220

Special Journals
SELLING

Rendering of services or selling of product on account

recorded
Sales Book
in
Receipt of cash from any source
recorded
in

Cash Book

BUYING

Purchase of items on account

recorded
Purchases Book
in
Payment of cash for any purpose
recorded
in

Cash Book
221

The Sales Journal

Page 35

Sales Journal
Invoice
Date No.

3/2
3/6
3/18
3/27

615
616
617
618

Particulars

MyMusicClub.com
RapZone.com
Web Cantina
MyMusicClub.com
Totals

Details

Amount

2,200
1,750
2,650
3,000
9,600

All sales on credit are recorded in this journal. Each

sales invoice is listed in numerical order. This
journal is often referred to as an invoice register.

222

The Purchases Journal

Purchases Journal
Date

3/3
3/7
3/19
3/27

Particulars

Page 11
Details

Amount

Howard Supplies
Donnelly Supplies
Donnelly Supplies
Howard Supplies

600
420
1,450
960

Totals

3,430

All purchases on account are recorded in this journal.

223

Cash journals
Single column Cash Book
= Simple cash Book
Double column Cash Book
= Cash Book with bank column
Triple column Cash Book
=Cash Book with Bank & Discount Column
Petty Cash Book
= Record small cash payouts
224

The Financial Statements

The financial statements are a picture
of the company in financial terms.
Each financial statement relates to a specific
date or covers a particular period.

225

Information Reported on the

Financial Statements
Question

Answer

1. How well did the

company perform
(or operate) during
the period?

Revenues
Direct Expenses
Gross income (Gross loss)

1. How well did the

company perform
(or operate) during
the period?

Gross Profit
Indirect Expenses
Net income (Net loss)

Financial
Statement
Trading
Account

Profit and
Loss
Account
226

Information Reported on the

Financial Statements
Question

Answer

3. What is the companys

financial position at the
end of the period?

Assets
= Liabilities
+ Owners equity

4. How much cash did

the company generate
and spend during
the period?

Financial
Statement
Balance
sheet

Operating cash flows

Statement
Investing cash flows
of
Financing cash flows
cash
Increase or decrease in cash
flows
227

Income Statement
The income statement,
reports the companys revenues,
expenses, and net income
or net loss for the period.

228

Introduction to the
Income Statement

The income statement is a financial

tool that provides information about
a companys past performance.

229

The Income Statement

Revenues

Expenses

= Net income
(or Net loss)
230

Income Statement Format

Sales revenues
Selling and
Cost of goods sold administrative =
Gross profit
expenses

Operating
income

Add: Other revenues and gains

Less: Other expenses and losses
231

Income Statement
Revenue

- the proceeds that come from sales to customers

Cost of Goods Sold - an expense that reflects the cost of the product
or good that generates revenue. .
Gross Margin

- also called gross profit, this is revenue minus

COGS

Operating Expenses

- any expense that doesn't fit under COGS

such as administration and marketing expenses.

Net Income before Interest and Tax - net income before taking interest
and income tax expenses into account.
Interest Expense
outstanding debt.

- the payments made on the company's

Income Tax Expense

- the amount payable to government.

Net Income

232

- the final profit after deducting all expenses from

The Income Statement can be divided

into:
Trading Account
Profit and Loss Account

233

The Accounting Terms

Revenues are inflows or other
enhancements of assets to an entity.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entitys major or central operations.
234

The Accounting Terms

Expenses are outflows or
other using up of assets.
They result from delivering or
producing goods, rendering services,
or other activities that constitute the
entitys major or central operations.
235

The Accounting Terms

Gross profit (gross margin) - excess of sales
revenue over the cost of inventory that was sold
Operating expenses - a group of recurring
expenses that pertain to a firms routine
operations
Operating income (operating profit) - gross
profit less all operating expenses
Other revenues and expenses - items not
directly related to the main operations of a firm
236

The Accounting Terms

Net income - the remainder after all
expenses (including income taxes) have
been deducted from revenue
Often seen as the bottom line

Net loss - the excess of expenses over

revenues
237

The Income Statement

DANIELS COMPANY
Income Statement
for the Year Ended June 30, 2002
Sales
Expenses:
Wages expense
Rent expense
Carriage
Depreciation expense
Total expenses
Net Income

Rs98,600
Rs45,800
12,000
6,500
5,000
69,300
Rs29,300
==============

238

Proforma for the Trading

Account for the year ending on
31.12.2005

239

Particulars
Opening stock
Purchases
Less:- Returns
:-Drawings
Direct Expenses:Carriage inward

Wages

Fuel & Power

Manf. Expenses

Coal, water & gas

Foreman/Works

Managers salary

Royalty on manf.

Goods
Gross profit c/d(bal)

Amount

Particulars

Amount

Sales
Less: Returns
Closing stock
Goods Lost by fire
(Gross Loss c/d)

240

Proforma for the Profit and

Loss Account for the year
ending on 31.12.2005

241

Profit and Loss Account for the period ending on

-----Debit
Particulars
Amount Particulars
Amount
Credit
Gross loss b/d
Selling & Dist Exp : Advertisement
Travellers Salary, exp.
& commission
Bad Debts
Administration Expenses
Rent, Rates & Taxes
Office salaries
Printing & Stationary

Gross Profit b/d

Interest Received
Discount Received
Comm. Received
Net Loss c/d

Net Profit c/d (bal)

242

Introduction to the
Balance Sheet
The balance sheet is the financial
tool that focuses on the present
condition of a business.

243

The Balance Sheet

The Balance sheet shows the financial
position of a company at a particular point
in time.
The balance sheet is also referred to as the
statement of financial position or the statement
of financial condition.

The left side lists assets the right side lists

liabilities and owners equity
244

The Accounting Elements

Probable future economic benefits

obtained or controlled by a
particular entity as a result
of past transactions events.

245

The Accounting Elements

Probable future sacrifices of economic

benefits arising from present obligations
of a particular entity to transfer assets
or provide services to other entities
in the future as a result of past
transactions or events.
246

The Accounting Elements

The residual interest in the assets
of an entity that remains after
deducting its liabilities.

Investment
by owners

Earned
equity
247

Formats of Balance Sheets

Balance sheet formats:
Report format - a classified balance sheet with
assets at the top and liabilities and equity below
Account format - a classified balance sheet with
assets at the left and liabilities and equity at the
right

Regardless of format, balance sheets always

contain the same basic information.
248

Balance Sheet Transactions

The balance sheet is affected by every
transaction that an entity encounters.
Each transaction has counterbalancing
entries that keep total assets equal to
total liabilities and owners equity.
249

BALANCE SHEET
RESOURCES
AVAILABLE FOR
USE BY THE FIRM
(ENTITY)
ASSETS PROBABLE
FUTURE
ECONOMIC
BENEFITS

HOW RESOURCES
ARE FINANCED
LIABILITIES - DEBT
OWED TO OTHERS
OWNERS EQUITY
- INVESTMENT BY
OWNERS
DIRECT
INDIRECT
250

The Balance Sheet

STEVENS COMPANY
Balance Sheet as on June 30, 2005
Liabilities
Owners Equity
Hamilton, capital
Reserves
Secured Loans
Unsecured Loans
Current
liabilities:
Wages payable
Tax payable
Bills Payable

Assets
Fixed Assets:
Land
Plant
Equipment
Total Fixed Asset
Current assets:
Bank balance
Cash balance
Bills Receivable

251

PROFORMA BALANCE SHEET

LIABILITIES
SHARE CAPITAL
Authorised
Issued
Subscribed
Less:- Calls unpaid
Add:- Forfeited shares
RESERVES AND SURPLUS
SECURED LOANS
UNSECURED LOANS:
CURRENT LIABILITIES AND
PROVISIONS:
A. CURRENT LIABILITIES:
a)
Acceptances.
b)
Sundry Creditors
c)
Subsidiary companies.
d)
Advance Payments
e)
Unclaimed dividends
f)
Other liabilities (if any)
g)
Interest accrued but not due on loans.
B. PROVISIONS
a)
Provision for taxation.
b)
Proposed dividends.
c)
For contingencies.

ASSETS
FIXED ASSETS
a)
Land , b) Buildings, c) Goodwill,
d) Plant and Machinery e) Furniture and
fittings f) Patents, trade marks and designs.
INVESTMENTS:
a) Investments in Government or Trust
Securities, in shares, debentures or bonds,
b) Immovable Properties.
CURRENT ASSETS, LOANS AND
ADVANCES:
(A) Current Assets:
a) Interest accrued on Investments.
b) Stores and Spare Parts,c) Loose Tools
d) Stock in trade, e) Works in progress.
f) Sundry Debtors, g) Cash balance on
hand
h) Bank balances
(B) LOANS AND ADVANCES:
a) Advances and loans to subsidiaries.
b) Bills of Exchange.
c) Advances recoverable in cash or in kind
MISCELLANEOUS EXPENDITURE:
a) Preliminary expenses.
b) Expenses including commission or
brokerage on underwriting or subscription of
shares or debentures.
c) Discount allowed on the issue of shares
or debentures.

252

The Balance Sheet

Elements of the balance sheet:
Assets - resources of the firm that are expected to
increase or cause future cash flows (everything the firm
owns)
Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of the firm)
Owners Equity - the residual interest in, or remaining
claims against, the firms assets after deducting
liabilities (rights of the owners)
253

Classifying Assets and Liabilities

Current assets
Long-term assets
Current liabilities
Long-term liabilities
254

XYZ Ltd.
Trial Balance
November 30, 2002
Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense

5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900

32,900

255

XYZ Ltd.
Trial Balance
November 30, 2002

Balance
Sheet

Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense

5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900

32,900

256

XYZ Ltd.
Trial Balance
November 30, 2002

Income
Statement

Cash
Purchases
Land
Accounts Payable
Amit, Capital
Amit, Drawing
Fees Earned
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous Expense

5,900
550
20,000
400
25,000
2,000
7,500
2,125
800
450
800
275
32,900

32,900

257

XYZ Ltd.

1.
11
12
14
15
17
18

Balance Sheet
Assets
Cash
Accounts Receivable
purchases
Prepaid Insurance
Land
Office Equipment

2.
21
23

Liabilities
Accounts Payable
Unearned Rent

3.
31
32

Owners Equity
Amit, Capital
Amit, Drawing

4.
41
5.
51
52
54
55
59

Income Statement
Revenue
Sales
Expenses
Wages Expense
Rent Expense
Commission
Supplies Expense
Miscellaneous
Expense

258

Summary
Original evidence
records

Accounting
records

Source
documents

Journals

Financial
Statements

Profit and Loss

Ledger
Trial
Balance
Closing
Entries

Statement
Balance Sheet

Statement of
cash flows

259