Accounatancy

ITM EEC, Batch 13B

Financial Accounting � Term I (0.1) Page 1

Classification of Accounts

Personal Account Real Account Nominal Account

If the a/c head relates to any person or artificial person. In final a/c such personal a/c are located only in balance sheet. Personal a/c implies any resemblance with name of any person

Real a/c deals with assets Fixed tangible assets (see, feel ,touch) & fixed intangible assets (documents & promise) Real a/c appears in balance sheet on assets side. It never appears in trading & p/l a/c

All Expense Accounts All Income Accounts Trading Account Profit & Loss Account

If the amount is receivable from any person eg debtors or If the amount is payable to any person eg creditors, Then such person�s a/c is personal a/c.

Fixed tangible Assets Land & Bldg Plant & Machinery Furniture & Fixtures Vehicles & Equipments Computer Livestock

Expenses Purchases Wages Inward expenses Factory Expenses Administrative Expenses Selling & Distribution Expenses

REPRESENTATIVES A/C Outstanding expenses (expense payable) Pre received income Prepaid income/expense paid in advance Outstanding income

FIXED INTANGIBE ASSETS Goodwill Patent Copyright Trademark Licenses Franchises

Outward Expenses Interest paid on Loan given Depreciation All Losses Bad Debts Discount Allowed. ETC

BUSINESS HAS TO RECEIVE FROM OR PAY TO Cash Bills Receivable Investments. Stock of Goods is a real a/c (see feel touch)

Income Sales Rent received Commission Received

ITM EEC, Batch 13B


Journal Entry

Personal Account Real Account Nominal Account

o Debit the Receiver o Receivable from any Person that Person is

Debited (eg Debtors or Loan Given) o Credit the Giver o Payable To Any Person that Person is

Credited (eg Capital ,Loan Taken,Creditors.)

o Debit what Comes in o Credit what Goes Out o Debit means Increase Of Asset o Credit means Decrease of Asset

o Debit Expenses & Losses o Credit Incomes & gains

Date / Sr. no. Particulars LF Dr Cr

1 Cash A/c. Dr 5000

To Sales A/c. Cr 5000

(Being Sales made)

2 Purchase A/c Dr 5000

To Cash A/c Cr 5000

(Being cash purchase of goods)

3 Sale return a/c Dr 5000

To Cash a/c Cr 5000

(Being goods returned to us by customers & we paid tjhem

ITM EEC, Batch 13B


cash back)

4 Cash a/c. Dr 5000

To Purchase return a/c Cr 50000

(Being purchased goods returned to supplier and recd cash

back)

5 Purchase A/c Dr

To Creditors a/c Cr

(Being purchase of goods on credit from supplier)

6 Debtors a/c Dr

To Sales a/c Cr

(Being Credit sale of goods to customer)

7 Saurav a/c Dr

To Sales a/c Cr

(Being goods sold on credit to saurav)

8 Purchase a/c Dr

To Amol a/c Cr

(Being goods purchased from amul on credit)

9 Amul a/c Dr

ITM EEC, Batch 13B


To Purchase Return a/c Cr

(Being purchase return of the above goods to amul)

10 Sale return a/c Dr

To Saurav a/c Cr

Rule : Any exps incurred for purchase/construction/installation/acquisition of the asset is to be debited to that particular asset.

Important

1 Plant & Machinery a/c Dr

To cash a/c Cr

(Being wages paid on installation of P & M)

2 Land & Building a/c Dr

To Cash / Bank a/c Cr

(Being stamp duty & registration paid on purchase of property)

3 Cash a/c Dr 4000

P & M a/c Dr 3000

Stock a/c Dr 2000

Bank a/c Dr 1000

ITM EEC, Batch 13B


To Capital / Owners Capital a/c Cr 10000

(Being Cash Rs 4000/-, P&M Rs 3000/-, Stock Rs 2000/- brought

by owner & converted his savings a/c into current a/c Rs.

1000/-

4 Interest on Cap A/c Dr

To owners cap. a/c Cr

(Being interest on capital payable to owner)

5 Salary to Partner a/c Dr

To owners / partners cap a/c Cr

(Being salary payable to partner)

6 Interest on partners loan a/c Dr

To Partners Loan a/c Cr

(Being Interest on partners loan payable)

7 Commission to partner a/c Dr

To Partners Cap a/c Cr

(Being commission to partner payable)

8 Owners Drawing a/c Dr

To Interest on Drawing a/c Cr

ITM EEC, Batch 13B


(Being Interest on Drawing receivable)

9 Drawings a/c Dr 4000

Goods withdrawn a/c Dr 3000

Asset taken over a/c Dr 2000

LIC / Medical Dr 1000

To Cash / Bank a/c Cr 5000

To Goods a/c Cr 3000

To Asset a/c Cr 2000

(Being Cash withdrawn Rs. 4000/-, Goods withdrawn Rs. 3000/-,

Asset taken over Rs. 2000/-, LIC/Mediclaim/Club

bill/House Rent/I.T/ Sons Fees/Wifes Gift paid through

chq. Rs. 1000/- from business)

1 Loss by fire a/c Dr

To Goods Cr

(Being Goods Loss by fire)

2 Loss by fire a/c Dr 2000

ITM EEC, Batch 13B


Insurance Claim a/c Dr 3000

To Goods loss by fire Cr 5000

(Being goods loss by fire Rs.5000/-, Insurance Claim admitted

Rs. 3000/-)

3 Cash a/c Dr

To Insurance Claim a/c Cr

(Being above insurance claim recd)

4 Cash a/c Dr 4000

loss by fire a/c Dr 1000

To Goods Cr 5000

(Being goods lost by fire Rs. 5000/-, Ins. Co. settled for Rs.

4000/-)

5 Cash a/c Dr 4950

Discount a/c Dr 50

To Sales a/c Cr 5000

6 Purchase a/c Dr 5000

To Cash a/c Cr 4950

To Discount recd. a/c Cr 50

ITM EEC, Batch 13B


(Goods purchased for 5000/- & recd discount of Rs. 50/-)

Closing Entries

1 Closing Stock a/c Dr

To Trading a/c. Cr

(Being Closing Stock valued at cost of market value whichever is

lower)

2 Depreciation a/c Dr

To Fixed Asset a/c Cr

(Being Depreciation of fixed Tangible Asset)

3 Profit & Loss a/c Dr

To Reserve for Doubtful Debts (R.D.D.) a/c Cr

(Being R.D.D Created)

4 Expenses a/c Dr

To expenses payable / outstanding exps a/c Cr

(Being Outstanding Expenses payable)

5 Electricity a/c Dr

To outstanding electricity a/c Cr

ITM EEC, Batch 13B


(Being electricity bill payable)

6 Prepaid Salary a/c Dr

To Salaries Cr

(Being prepaid salaries)

7 Outstanding Rent a/c Dr

To Rent a/c Cr

(Being outstanding rent payable)

8 Commission a/c Dr

To Pre received commission a/c Cr

(Pre received commission from Amul)

ITM EEC, Batch 13B


Trading Account

Trading Account is prepared by the trader generally on the last date of any year to get either gross profit or gross loss.

Trading Account is prepared from the trial balance.

Trading Account is the mixture of goods account and factory related expenses.

Goods when comes in are recorded on the Debit Side.

Goods when goes out are recorded on the Credit Side. (Eg. Net Sales, Loss By Theft or Fire, Goods distributed as Free Samples).

Closing Stock is valued at cost or market value, whichever is less.

o Based on principle of Conservation which says �Provide for known losses, do not provide for known gains.�

All the losses of goods & goods distributed as free samples are to be recorded at cost unless instructed otherwise.

In Trading and Profit & Loss Account on the DEBIT side, Expenses & Losses are recorded and on the CREDIT side, Income & Gains are

recorded. Therefore gross profit from Trading Account is transferred to Profit & Loss Account on CREDIT side, Therefore gross loss from

Trading Account is transferred to DEBIT side.

ITM EEC, Batch 13B


XYZ Corporation Trading Account for year ended 31 March 2008

Dr. Cr. Particulars Amount Total Particulars Amount Total To Opening Stock By Sales To Purchases (-) Less Sales Return (-) Less Purchase Return By Closing Stock To Factory Expenses To Wages / Salaries By Loss of Goods By Flood/Famine To Lightning & Heating By Loss of Goods by Theft To Buying Expenses By Loss of Goods by Fire To Import Duty By Goods Distributed As Free Sample To Clearing Charges To Custom Duty By Drawing of Goods By The Owner/Partner To Port Charges To Carriage Inward By Gross Loss (Balancing Figure) To Freight Inward To Octroi Duty To Unloading Charges To Inward Expenses To Primary Packing To Works Manager Salary To Factory Manager Salary To Royalty On Production To Motive Power To Consumables Or Stores (eg. Coal, Coke, Oil Gas)

To Gross Profit (Balancing Figure) Total Total

ITM EEC, Batch 13B


Profit & Loss Account

Profit & Loss Account conceptually records payments related to third parties (not owners) for example Payments related to Auditors,

Lawyers, Government, Suppliers (Interest on delay payment to suppliers), Electricity etc.

Profit & Loss Account on the CREDIT side records all the incomes other than Sales

Land Never depreciates but building does from day one.

Profit & Loss Account � 3rd Party Related i.e. Non Owners

ITM EEC, Batch 13B


XYZ Corporation Profit & Loss Account for year ended 31 March 2008

Dr. Cr. Particulars Amount Total Particulars Amount Total To Gross Loss B/D By Gross Profit B/D To Office & Admin Expenses By Bad Debts Recovered To Salaries (Office Staff) To Printing & Stationary To Staff Welfare To Postage / Telegram To Rent / Rates / Taxes To Repairs & Maintenance To Office Insurance To Telephone Expenses To General Expenses To Audit Charges To Legal Charges To Director Fees To Bank Charges To Bonus To Interest on loan taken To Interest on delay in payment to supplier To Selling & Distribution Expenses To Carriage outward To Discount Allowed To Travelling & Sales Conveyance To Salesman Salaries To Sales Manager Salaries To Sales Commission To Depreciation on Office Furniture

ITM EEC, Batch 13B


To Depreciation on Fixed Assets To Provision for Taxation To Provision for Doubtful Debts To Provision for Reserve for Discount on

Debtors.

To Loss on Sale on Investment To Loss on Sale on Fixed Asset To Net Profit (Transfer to P&L Appropriations Account)

Total Total

ITM EEC, Batch 13B


XYZ Corporation Profit & Loss Appropriation Account

Dr. Cr. Particulars Amount Total Particulars Amount Total To Drawings By Net Profit B/D (a) Partner 1 By Interest on Drawings (b) Partner 2 To Preference Dividend To Equity Dividend To Transfer To Reserves To Retained Earnings (Reserves & Surplus)

To Interest on Capital (to Owner/Partner)

To Salary to Owner / Partner To Commission to owners To Interest Paid on Partner Loan Taken

Total Total

ITM EEC, Batch 13B


XYZ Corporation Capital Account

Dr. Cr. Particulars Amount Total Particulars Amount Total To Drawings By Balance B/D

(Opening Capital)

To Interest on Drawings By Profit

To Additional Drawings By Interest on Capital

Personal Expenses By Salary To Partner

Personal Insurance (LIC/Mediclaim)

By Brokerage / Commission to Partner

Personal Expenses (Son�s Fees, Wife�s Gift)

Income Tax

To Balance Closing (Closing Captal)

Total: Total:

ITM EEC, Batch 13B


Trial Balance

All Expenses & Assets � DEBIT BALANCE

All Income & Liabilities � CREDIT BALANCE

Trial Balance is the List of Balance Amount which is prepared from closing the ledger account.

Closing Debit Balance of any account will be given DEBIT in the Trial Balance. Typically all the expenses & Assets will show debit balance.

If any account shows closing credit balance in the ledger account it will be given CREDIT in trial balance.

Any amount payable to any person will have CREDIT balance, while any amount receivable from any person will have DEBIT balance.

Trial Balance MUST tally.

RDD = Reserve for Doubtful Debts

RFDD = Reserve for Discount on Debtors

NRDD = New Reserve for Doubtful Debts

ORDD = Old Reserve for Doubtful Debts

RFDC = Reserve For Discount on Creditors

DEBIT

Account Dr. Cr.

CREDIT

Account Dr. Cr.

Receivable

Expenses

Assets

Debtors

Drawings

Payable

Income

Liabilities

Creditors

Capital

ITM EEC, Batch 13B


XYZ Corporation Trial Balance as at 31 March 2008

Sr. No. Particulars Debit Amount Credit Amount

Owner�s Capital

Owner�s Drawings

Furniture & Fixtures (Fixed Assets)

Plant & Machinery (Fixed Assets)

Loans Taken

Carriage Inward

Carriage Outward

Discount Received

Commission Received

Discount Allowed

Rent Received

Purchase

Sales

Return Inward (Sale Return)

Return Outward (Purchase Return)

Investment

Bank Overdraft

Debtors

Creditors

Goodwill

ITM EEC, Batch 13B


Cash Credit

Cash In Hand

Advertisement

Prepaid Expenses

Outstanding Expenses

Pre-received Income

Outstanding Income

Investment in KVP / NSC

Bills Payable

Bills Receivable

Bad Debts Recovered

Bad Debts

Profit from Sale of Investment or Fixed Asset

Suspense Account

Total

Suspense Account on Debit Side means any asset or expense has been unrecorded.

Suspense Account on Credit Side means any liabilities or income has been unrecorded.

ITM EEC, Batch 13B


Balance Sheet

Not an Account, Just a statement or Report as on a given Date or Time. Also known as financial statement.

Will not have a Debit or Credit Side.

Shows position of Assets or Liabilities.

In India (Horizontal Format), Balance Sheet is divided into 2 sides I.e. Liabilities (LHS) and Assets (RHS)

Asset = Receivable, Application of Fund, Funds Deployed.

Liabilities = Payable Side, Source of Funds.

Assets are depreciated every year from balance sheet. It is shown as fixed assets less depreciation.

Classification

Liabilities Assets

Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions

Capital for Ownership or Partnership firm Opening Capital

o (+) Profits o (+) Salary to owner o (+) Brokerage to Owner o (-) Drawings o (-) Personal Expenses o (-) Losses

Capital for Company (Pvt. Ltd. / Ltd. etc) Authorised capital/registered capital/nominal capital Equity share capital(issued ,subscribed & paid) Preference share capital(issued ,subscribed & paid)

Reserves & Surplus for Company Accumulated Profits Retained Earnings

Fixed Assets Investments Current Assets & Loans & Advances Miscellaneous Expenses Not Written Off

Intangible Assets

Goodwill Patents Copyrights Trademarks Rights Franchise

Fixed Assets Fixed assets are the long term assets which are used for

production of goods & services for years to come Land & building Plant & machinery Furniture & fixtures Vehicles & equipment Capital WIP (Work In Progress) Computers

ITM EEC, Batch 13B


Capital Reserves Securities Premium Revaluation Reserves General Reserves

Secured Loan Bank loan (secured against fixed assets) Mortgage loan

Unsecured Loan Loan from friends Loan from relatives Loan from wife

Current Liabilities Cash credit Bank overdraft Creditors Suppliers Accounts payable Suppliers ledger balance Bills payable Outstanding expenses Expense payable Expenses due Expenses accrued Pre-received income Income received in advance

Provisions Provision for taxation Provision for gratuity fund.

Books Loose tools Car Fan Cupboard (-) Depreciation

Investments Investments in shares of other company Investment in debentures of other company Investment in government securities Investment in mutual funds Investment in bank fixed deposits Investments in gold Investment in postal schemes.

Current Assets Cash /Cash In Hand/Cash At Box Bank/ Bank Balance/Cash At Bank Debtors A/C Receivable /Book Debts /Sales Ledger Balance Customer Account (Dr. Bal I.E. Receivable) Bills Receivable Outstanding Income/Income Receivable Commission Receivable Prepaid Expenses/Expense Paid In Advance Advance Salaries ,Advance Tax Loan To Someone (For Less Than 12 Months)

Miscellaneous Expenses Not Written Off Heavy advertisement expenses Preliminary exp not written off Formation exp not written off Underwriting commission not written off Heavy losses not written off

ITM EEC, Batch 13B


Profit & Loss Account (Dr. Balance i.e. Profit)

ITM EEC, Batch 13B


XYZ Corporation Balance Sheet As At 31 March 2008

Liabilities Assets Particulars Amount Total Particulars Amount Total Capital (-) Drawings

Fixed Assets (-) Provision for Depreciation

Reserves & Surplus Closing Stock (-) Stock Reserve

Secured Loans Investments Unsecured Loans Current Assets & Loans & Advances Current Liabilities & Provisions Miscellaneous Expenses Not Written Off Creditors (-) Reserve for Discount on Creditors

Debtors (-) Reserve for Doubtful Debts (-) Reserve for Discount on Debtors

Total Total

ITM EEC, Batch 13B


Cost Sheet

Cost Account Financial Account

In Books of Manufacturer In Books of Trader

Manufacturer � Buys Raw Material & Sells Finished Goods Trader � Buys Finished Goods & Sells Finished Goods

Cost Sheet Trading Account, Profit & Loss Account, Balance Sheet

Prepared at the Start of the Year Prepared at the End of the Year

To know selling price per unit (for that it is important to know cost per

unit.)

To determine profit.

Factory, Admin, Sales & Distribution � Are ESTIMATED Factory, Admin, Sales & Distribution � Are ACTUALS

Exclude Financial Income & Expenses Include All Financial Income & Expenses

Prime Cost / Direct Cost = Direct Material + Direct Labour + Direct Expense Indirect Cost = Factory Overheads + Administrative Overheads + Selling & Distribution Overheads Factory (/Works) Cost = Prime Cost +Factory Overheads � Sale Of Scrap + Opening Stock WIP � Closing Stock WIP Cost Of Production = Factory Cost + Administrative Overheads Production Cost of Goods Sold = Cost Of Production + Opening Stock of Finished Goods � Closing Stock of Finished Goods Cost of Sales = Production Cost of Goods Sold + Selling and Distribution Cost Sales = Profit + Cost of Sales OR Profit = Sales � Cost of Sales From start (Direct Material) till cost of Production, all calculation will be made on Production Unit (Units Produced) AND Production Cost

of Goods Sold (PCOGS) till Sales (End), all calculations will be based on Sales Unit (Units Sold).

ITM EEC, Batch 13B


Factory Overheads are Calculated as % of Direct Wages Administrative Overheads are calculated as % of Factory Cost Sales & Distribution Overheads are calculated as % of Sales COP = Cost Of Production COPPU = Cost Of Production Per Unit Concept of Valuation of Closing Stock in the Cost Sheet

o In the absence of Information, Closing stock of finished goods is to be valued at Cost Of Production Per Unit. o Based on FIFO Principle, Opening stock of Finished Goods is fully sold out. o Closing Stock of Finished Goods forms a part of current year�s production unit. o Current Year�s Production Unit is valued at Cost of Production Per Unit. o Closing Stock of Finished Goods is valued at Cost of Production Per Unit.

Pure Financial Expenses are excluded/ignored i.e. Bad Debts Written Off, Interest on Capital, Dividends, Write Offs.

Inward Expenses / Buying Expenses o Custom duty o Import duty o Dock charges o Clearing charges

o Octori duty o Unloading charges o Buying expness/Inward expenses

Factory Overheads

o Supervisor salary o Indirect wages o Indirect labour o Unproductive wages o Unproductive labour o Factory manager salary o Worker manger salary o Salary of watchman o Indirect material o Indirect expness o Factory insurance

o Machinery upkeep o Oil/ grease/ coal/ crude oil/Coke/fuel/cotton. o Depreciation on factory assets o Depreciation on plant and machinery o Manufacturing expness o Production expenses o Power / fuel/ motive power o Consumables & stores. o Factory cleaning o Excise duty o Research and laboratory expness

ITM EEC, Batch 13B


o Repairs and maintenance of machinery o Factory lighting and heating

o Employees state insurance corporation.

Administrative Overheads

o Office overheads o Office on cost o General expenses o Legal expenses o Audit charges/ bank charges o Salary on staff o Administration manager salary o Director fees / remuneration o Printing and stationary

o Depreciation on office building o Depreciation on office computer o Rent and rates of offices o Estimation expenses o Stationary and consumables o Postage / fax / telex o Office upkeep o General office manager salary

Selling & Distribution Overheads o Selling on- cost o Selling burden/ overheads o Sales promotion expenses o Advertisement o Depreciation on delivery vans/vehicles o Secondary packing o Packing o Packing material o Carriage/ freight outward o Commission on sale o Salary�s to sales staff

o Rent/repairs/lighting/depreciation of show room o Depreciation of warehouse o Sales of sales office o Travelers salary o Traveling and conveyance o Loading expenses o Upkeep of delivery van o Sales manager salary o Donation of goods o Discount allowed o Rent of warehouse

ITM EEC, Batch 13B


XYZ Corporation Cost Sheet

Elements Units Amount Amount CostPerUnit

Raw Material Consumed + Opening Stock of Raw Material + Purchase of Raw Material - Return of Raw Material + Inward Expenses - Closing Stock of Raw Material

Direct Labour

Direct Expenses

(1) Prime Cost

Factory Overheads + Factory Rent + Factory Insurance - Sale Of Scrap + Opening Stock of WIP - Closing Stock of WIP

(2) Factory Cost

Administrative Overheads + Bank Charges + Legal & Audit Charges

(3) Cost of Production

Opening Stock of Finished Goods - Closing Stock Of Finished Goods

(4) Production Cost Of Goods Sold

Selling & Distribution

ITM EEC, Batch 13B


Cost of Sales

Profit

Sales

Documents

Accounatancy