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Accounting Process & Records: Foundation Course

1) The document outlines the key accounting concepts and processes including the accounting equation, balance sheet, income statement, assets, liabilities, owners' equity, accounting cycle, journal entries, and financial statements. 2) It describes the key components of the balance sheet and income statement and how they are used to evaluate the financial position and performance of a business. 3) The accounting process involves recording transactions, classifying accounts, summarizing, and analyzing information to prepare financial statements and reports.

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Vishwa Kishor
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48 views29 pages

Accounting Process & Records: Foundation Course

1) The document outlines the key accounting concepts and processes including the accounting equation, balance sheet, income statement, assets, liabilities, owners' equity, accounting cycle, journal entries, and financial statements. 2) It describes the key components of the balance sheet and income statement and how they are used to evaluate the financial position and performance of a business. 3) The accounting process involves recording transactions, classifying accounts, summarizing, and analyzing information to prepare financial statements and reports.

Uploaded by

Vishwa Kishor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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ACCOUNTING

PROCESS & Foundation Course

RECORDS
BALANCE SHEET

Reflects the basic accounting equation,


which is
Resources = Claims against those resources

Assets = Liabilities + Owners’ equity


INCOME
STATEME
NT OR
PROFIT
AND LOSS
ACCOUNT
ASSETS
•Economic resources that provide a
future benefit.
•A resource:
• controlled by the entity
• as a result of past events
• and from which future economic benefits are
expected to flow to the entity.

•Examples:
• Cash
 Inventory
 Equipment
 Land
 Buildings
RECOGNITION
• Recognised as an asset? (i. e. reported in the balance sheet)?
• Only if-
• It is probable that the future economic benefits will flow to the entity
• and the asset has a cost or value that can be measured reliably.

Recognise or not?
Recognise Not recognise
Land and buildings Workforce
Raw materials Advertising campaign
Why? Why?
Relative certainty of future Uncertainty of benefits: lack of
benefit evidence that cash will flow to the
business in the future.
LIABILITIES
Outsiders claims to assets
 Include debts payable to creditors
Definition
 a present obligation of the entity (legal or as a result of commercial reality)
 arising from past events (normally receiving goods or services or borrowing money),
 the settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits (cash or other resource leaving the
business).
Examples:
Accounts payable –
liability for goods or
services purchased on
credit
Loan payable – written
promise to pay on a
certain date (bank loan)
OWNERS’ EQUITY
Owners’ claim on a business
Assets minus liabilities
 What’s left after debts are paid

A corporation’s equity is called stockholders’ equity


The term net assets is used as a shorter way of saying 'total assets
less total liabilities'.
Recognition totally dependent on the recognition of assets and
liabilities.
ACCOUNTING EQUATION
Every transaction of a company or entity affects the balance sheet
equation
 An entity is an organization that stands apart from other organizations and
individuals as a separate economic unit for which the balance sheet is being prepared
 A transaction is any event that affects the financial position of that entity and that
can be reliably recorded in money terms

At least two accounts will be affected for every entry recorded


(compound entry = > 2 accounts)

Assets = Liabilities + Owners Equity


ACCOUNTING EQUATION
EXAMPLE
Assets = Liabilities + Owners’ Equity

(a) $70,000 $50,000 $20,000

(b) $30,000 $20,000 $10,000

(c) $40,000 $15,000 $25,000


SHAREHOLDERS’ EQUITY

Paid-in capital Retained Earnings


Amounts invested by Amounts earned and kept for use
stockholders in the company
Common stock Increased by Revenues
Decreased by Expenses
NET INCOME
Revenues
 Earned by delivering goods or services

Expenses
 Costs of doing business
 Rent, utilities, insurance

Revenues minus expenses equal net income


 If expense are greater then revenues, a net loss occurs
DIVIDENDS
Distributions of assets (usually cash) to shareholders
Decrease Retained Earnings
Do NOT impact net income
Revenues

minus

Expenses

Beginning plus minus Equals Ending


Net Dividends Retained
Retained Income Earnings
Earnings
DOUBLE ENTRY BOOK KEEPING
SYSTEM

The Dual Aspect Concept


 Each accounting transaction effects at-least two
accounts in such a way that
 Assets = Liabilities
 Assets = External Liabilities + Owners’ Equity
 Assets + Receivables = External Liabilities + Owners’
Capital + (Income – Expenses)
 Assets + Expenses = External Liabilities + Owners’
Capital + Revenue
Accounting equation
Assets equal Liabilities plus
Ownership interest
LEFT-HAND SIDE
Assets Increase Decrease

RIGHT HAND SIDE


Liabilities Decrease Increase

Ownership Decrease Increase


interest
ACCOUNTING PROCESS
Accounting is the art of recording, classifying and
summarising information that can be expressed in terms
of money and analysing the result thereof
 Recording Journal Entry
 Classifying Ledger Posting
 Summarising Trial Balance,
Financial Statements
 Analysing Cash Flow Statement
Ratio Analysis
Other analytical tools
RECORDING
Types of Accounts
 Personal Accounts
 All persons – natural and artificial
 Receivable/ Payables
 Non-Personal Accounts
 Real Accounts
 Assets
 Nominal Accounts
 Income/ Gains/ Receipts
 Expenditure / Losses

EMP2006
RECORDING RULES
Personal Accounts
 Debit the receiver
 Credit the Giver

Real Accounts
 Debit what comes in
 Credit what goes out

Nominal Accounts
 Debit all expenses/losses
 Credit all receipts/ income/ gains

EMP2006
JOURNAL ENTRIES
Analyze transactions to identify two or more aspects getting effected
Ascertain the type of account – real, nominal, personal
Apply the recording rule to Debit one or more accounts and Credit
one or more accounts in such a way that Total Debit = Total Credit

EMP2006
CLASSIFICATION
Process of posting transactions recorded in respective
accounts
Also called `Ledger Posting’
An account is a `T shaped’ statement with the left hand
side called the Debit Side (Dr.) and the right hand side
called Credit side (Cr.)
Machinery Account

Debit Credit
SUMMARIZING

Balancing Accounts
 For each account find the total of the Debit Side and
Credit Side
 If Dr. > Cr., post the difference on the credit side and
balance both sides
 The account is said to have a Debit Balance
 If Dr. < Cr., post the difference on the debit side and
balance both sides
 The account is said to have a Credit Balance
SUMMARIZING
Trial Balance
 A list of the accounts names and the balances in each account as on a given date
 Debit balances are shown in one column and the credit balances are shown in the
other
 Total of Dr. side = Total of Cr. Side
 A measure of arithmetic accuracy
TRIAL BALANCE
Debit Trial Balance as on Credit

Real Accounts
-Assets
Personal Accounts Personal Accounts
-Receivables - Payables
Nominal Accounts Nominal Accounts
-Expenses/Losses - Receipts/Gains
Total Total
ADJUSTMENT AND
CLOSING ENTRIES
Adjustment Entries
 Certain accounting transactions to modify accounts balances so as
to show a fair picture for the period
 Example – closing stock, depreciation, outstanding expenses,
prepaid expenses etc.
Transfer Entries
 To transfer nominal accounts to the Profit & Loss account
 After transfer entries all the nominal accounts are closed
 Nominal accounts are also called `Temporary accounts’
 Real and Personal Accounts are not closed but are carried forward
to the next accounting period
FINANCIAL STATEMENTS

Profit & Loss Account for the period


 By matching nominal accounts for a particular period
 Nominal accounts with Credit Balances (income) are
transferred to the credit side of P& L A/c
 Nominal accounts with Debit Balances (expenses/losses) are
transferred to the debit side of P& L A/c
 If Cr. Side > Dr. Side – Profit
 If Dr. Side < Cr. Side - Loss
 The Profit or Loss shown in the P&L Account is transferred
to the Balance Sheet
FINANCIAL STATEMENTS
Balance Sheet as on a date
 Statement of Assets and Liabilities on a particular date
 Liabilities Side
 All accounts of personal nature with a Credit Balance
 Assets Side
 All Real Accounts with a Debit Balance
 Liabilities = Assets
ACCOUNTING FLOW
Accounts

Personal Impersonal

Real Account Nominal Account

Revenue in Nature

Unwritten Off Written Off


Portion Portion

Balance Sheet Profit & Loss Account


SUMMARY
Accounting steps
 Recording – Journal Entries
 Classifying – Posting to Ledger
 Summarizing
 Balancing the accounts
 Trial Balance
 Adjustment Entries
 Transfer Entries
 Financial Statements
 Profit & Loss Account
 Balance Sheet

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