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BOOK KEEPING
It is that branch of knowledge which tells us how to keep a record of financial transaction Book keeping is the science and art of recording correctly in books of accounts all those business transactions that result in the transfer of money or moneys worth Book keeping is the art of applying the principles of accounting in keeping of books of accounts The process of analyzing ,classifying and recording transaction in accordance with pre-conceived plan.
ACCOUNTING
Accounting is often called the language of business. The basic function of any language is to serve as the means of communication. Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof. Accounting is a means of collecting ,summarising ,analysing and reporting in monetary terms, information about the business.
So accounting is a
Identifying and measuring business transactions in terms of money Recording in terms of money ,business transactions of financial nature, soon after their occurrence Classifying the entries found in journal into ledger Summarizing or presenting at the end of accounting period the information found in ledger accounts Analyzing and interpreting the financial statements Communicating the results of interpretations of financial statements to the end users for making sound decisions
Features of accounting
Identifying Measuring Recording Classifying Summarizing Analysis and Interpretation Communicating
Difference Between Book Keeping & Accounting Basis Book keeping Accounting
nature The nature of job is clerical The nature of accounting job requires initiative and judgment besides training Special knowledge is required It has a wide scope It is advance stage and it begins where book keeping ends It has to depend on book keeping for getting the required information from accounting records and for making them useful for planning, control and decision making Financial position can be known through preparation of balance sheet.
Simple knowledge is required It has limited scope It is primary stage of accounting It has to depend on accounting for making the accounting records more useful
Financial position
Need of Accounting
Profit to business is like a food to human body To earn a profit businessman enters into number of transactions Keep a record of all transactions It is helpful in planning , controlling and directing activities related to business Helpful for the investors
Objectives of accounting
Maintain proper records of business transactions Ascertaining the profit or loss of business Knowing the sources of revenue and items of expenses Ascertaining of financial position of the business Ascertaining to amounts due to business and amount due from business Ensuring effective control over the performance of business Protection of the properties of business Prevention of errors and frauds Satisfying legal requirements Making financial information available to various groups of persons
investors
employees
Public consumers
Creditors Researchers
Branches of accounting
Financial Accounting
Branches of Accounting
Cost Accounting
Management Accounting
Accounting cycle
Business Transaction
Final Accounts
Journal
Trial Balance
Ledger
Accounting standards
An Accounting Standard is selected set of accounting policies or broad guidelines issued by a an accounting body,regarding the principles and methods to be chosen out of several alternatives,that are followed for the preparation of financial statements. The adoption and use of accounnting standards show uniformity,comparability and qualitative improvement in the preparation and presentation of financial statements.
Objects /Advantages
Removal of confusing variation Uniform presentation of accounts Avoidance of manipulation Globalised business Disclosure beyond law Facilitates comparison
Finalize draft
Submission of draft
Position statement
posting
balance
Accounting Terminology
EQUITY: It refers to the total claims against the enterprise. It is of two types: capital and liability CAPITAL: Capital is the amount which the investor, proprietor, owner has invested in the firm or company and can claim from the firm or company. It is written on the liability side in the balance sheet.
Proprietor/Owner: proprietor is the person who makes the investment and bears all the risks connected with the business.
ASSETS: Assets are anything which will enable the firm or company to get cash or benefit in future. An asset may be defined as anything of use to future operations of the enterprise and belonging to the enterprise. Types of assets: Fixed assets: These assets are purchased for purpose of operating the business and not for sale. The assets of durable nature which are used in business and are acquired and intended to be retained permanently for the purpose of carrying on the business. These are also called capital assets, capital expenditure, long lived assets or Block Examples:land,buliding,machinery,furniture,plant etc
Current assets: These assets of business are kept for short term converting into cash or resale. These are temporarily held assets which are meant for resale or which frequently undergo change. These are also called Floating assets, Circulation assets. Examples: cash in hand ,cash in bank, stock, bill receivable, debtors, stores
LIABILITIES: Liability is the amount which the firm/company owe to the outsider(pay to outsider) Types of Liabilities: Fixed Liabilities:these are liabilities which are to be redeemed after a long period of time. The amount to be paid more than one year or after one year These are also called long term liabilities. Examples:long term loans
Current liability/liabilities:This is the amount to be paid within one year. Those liabilities which are to be redeemed in near future usually within one year. These are also called short term liabilities Examples:creditors,bank loan(short term)bills payable etc
Debtor:A person who owe(have to pay) money to the firm/company on account of credit sales of goods . Debtor is the person from whom amounts are due for goods sold or services rendered . Also called sundry debtor, trade debtor, accounts receivable
Bills receivable: when the firm/company acquire documentary proof from debtor then it becomes bill receivable or accounts receivable
Creditor: A person /firm/company to whom the firm/company owe (to pay) money. It is amount owed by the enterprise on account of goods purchased or services rendered . Also called sundry creditor, trade creditor, accounts payable Bills payable: when the firm/company has to give documentary proof to the creditor this becomes bills payable or accounts payable
Transaction/Business transaction: Any exchange (dealing) of goods or services ,for cash or credit by business/person/firm/company with any other business/person/firm/company Goods: Includes also merchandise commodities which are purchased and sold in the usual course of business
Drawings: Money or value of goods belonging to the business used by the proprietor/owner for his personal/domestic use.
Entry: The record of transaction or event in the books of accounts is known as entry. Events: these are occasions which cause changes in the value due to time element. Example: Interest,depriciation Depriciation: It is the permanent decrease in the value of an asset due to use/lapse of time. It is the permanent and continuous decrease in the quality, quantitiy or value of an asset
Revenue/Income: It is monetary value of the goods or services sold to the customers during the period.
Expense/Cost: It is the amount spent in order to produce and sell goods and services which proceeds revenue.
Loss/Net loss:it refers to the result of the revenue for a period when expense exceeds the revenue It also describes those efforts which fail to earn revenue Example:Fire,theft,accident etc
Profit/Net Profit:The excess of revenue over expense/cost during a particular period. Gain:profit of irregular nature
Discount:Discount is the reduction in the price of goods by the businessman to the customers
Tangible/tangible assets:things which have physical shape and can be touched,seen ,purchased,sold Like buliding,land, machinery Intangible/intangible assets:things which have no physical shape and can not be touched like goodwill,patent etc
Bad debts:The amount which is not paid by debtor is called bad debts.
Accounting Equation
CAPITAL=ASSETS -LIABILITIES
Accounting Principles
Accounting principles are general law or rule adopted as guide to action a basis of practice. Also called accounting concepts Materiality It refers to the importance of an item or event Material details should be given Do not include insignificant details Details with full accuracy up to paisa should be given to debtor In case of management figures can be rounded
Accounting period
Though the business is a continues process but still it has to present results at a specific period Financial year Ist April to 31st March Final accounts are prepared for the accounting period Financial position of business is shown
Realisation
This principle says profit should be considered only when it realized Profit occurs only when goods or services are passed to the buyer No profit should be taken credit of
In case of long term installments system of purchase and sale are exceptions
Conservatism
According to this concept the revenue requires better evidence/proof then recognition of expense Revenues are to be recognized only when they are certain and expenses are recognized as soon as they are reasonably possible
Disclosure
According to this concept the information related to all business transactions should be given in the accounts Any party or person interested in the accounts can ask any relevant information
Types of Accounts
Personal Accounts
Accounts
Real Accounts
Nominal Accounts
Natural Persons personal Account Personal Accounts Artificial/Impersonal Persons personal Accounts
Personal accounts: Accounts recording transactions relating to individual or firms or company or bank or institution or club are known as personal accounts Natural persons personal accounts:These account recording transactions relating to individual human being are natural persons personal accounts like Rajs account, Anands accounts, sahils account, shivams account Artificial/Impersonal persons personal account:The account recording transaction relating to bank,company,firm,club,institute are artificial persons personal account like bfgi account,HDFC bank Mittal & sons company ,the lions club account etc.
Real accounts: The accounts recording transactions relating to tangible things like building, land ,machinery, cash,plant are called tangible real accounts The accounts recording transactions relating to intangible things like intangible things like patent,goodwill,trademarks etc are known as intangible real accounts.
Real accounts
Nominal accounts:The accounts recording trasactions relating to the loss,gain,expense,income like salary,wages,commission,interest,bad debts are known as nominal accounts
Journal
The basic book of accounting is called Journal It is the book of prime entry and called Day Book or Diary The process of recording transactions into journal is called journalising The transaction written in journal is known as journal entry In journal the transactions are recorded in chronological order means in order of date It has two columns for transactions debit and credit Each Transactions are analyze into debit and credit Transactions are recorded first in this book Each entry has narration written in brackets with it to describe its nature. Debit =Credit
The journal or daily record as originally used was a book of prime entry in which transactions were copied an order of date from a waste book .The entries as they were copied were classified into debits and credits, so as to facilitate their being correctly posted afterwards in the ledger. A journal is a book, employed to classify or sort out transactions in a form convenient for their subsequent entry in the ledger
Types of Journal
General Journal: This journal keeps the chronological records of transaction. Special Journal: It is divided into Cash Book, Sales day book, Bills payable book, bills receivable book, return inward book, return outward book. These books are called subsidiary books.
Advantages of Journal
Transactions are recorded chronological order thus reducing the chance of omitting any transaction Transactions are written with narration to understand true nature of transaction Debit and credit amounts are written side by side it reduces chances of wrong entry
Personal Accounts
Real accounts
Nominal Accounts
Format of Journal
Date (1) Particulars (2) L/F (3) Debit Dr Amount (4) Credit Cr Amount (5)
Dr
Assets
Liabilities
Voucher
The document prepared for the purpose of recording business transactions in the books of accounts is called Voucher A voucher may be defined as documentary evidence/proof in support of an entry appearing in the books Vouchers are printed by all enterprise /Companies in their name A separate voucher is prepared for each transaction and specifies debit and credit columns Vouchers are preparared by accountant and signed by authorized person of the company Each voucher is serially numbered
Vouchers
Cash Vouchers
Cash vouchers
These vouchers are documentary proof of cash receipts and payments Debit Vouchers: These vouchers are prepared when cash payments are made.Transactions of cash payments are recorded like; Payments of goods purchased Payment of expenses Cash purchase of assets Payments of creditors Information contained in Debit voucher: Name and address of the organisation Date of preparing Voucher number Source document number Name of the accounts to be debited Net amount payment Brief description of transaction Signature of the person who prepared the voucher Signature of authorized person Document in support of voucher to be attached
Credit voucher These vouchers are documentary proof of cash received.These vouchers are prepared to record the transaction of cash received like: For cash sale of fixed assets For cash received for various incomes For cash received from credit customers For cash received on account of sale of investment For taking loan For withdraw cash from bank Information contained in Credit voucher: Name and address of the organisation Date of preparing Voucher number Name of the accounts to be credited Net amount received Brief description of transaction Signature of the person who prepared the voucher Signature of authorized person Document in support of voucher to be attached
Non Cash voucher/transfer voucher These vouchers are the documentary proof of all non cash transactions of the business These vouchers are prepared for transactions like: Credit sale of fixed assets For return of goods by customers For return of goods to suppliers Credit sale of investment Charging depreciation For writing off bad debts Information contained in Non cash voucher: Name and address of the organisation Date of preparing Voucher number Name of the accounts to be credited or debited Net amount of transaction Brief description of transaction Signature of the person who prepared the voucher Signature of authorized person Document in support of voucher to be attached
It is numbered serially and filed accordingly which helps the audit to voucher easily
Sub-division of Journal
Subsidiary books: In order to make quick efficient and accurate recording of business transaction, the need for sub-division of journal arises. The journal is sub-divided into many subsidiary books ,also called Day books as they facilitate the preparation of ledger book. It is also called Sub-Journal or Subsidiary book. The system under which transactions of similar nature are entered in the relevant subsidiary book and on the basis of which ledger is written is called practical system of book keeping. This system reduces the labor and time of recording transactions.
Source document
Source document contains full detail of transaction It is evidence for transaction
SUB-Division of Journal
Goods Journal
Bill Journal
Journal Proper
Cash Book
Cash book consists cash and bank accounts taken out of ledger and maintained separately It is a substitute of ledger for cash and bank accounts It is also a book of original entry because cash and bank transactions are not recorded in any other subsidiary book It is a primary book in which cash and bank transactions are recorded date wise with a brief narration Cash book is a journal in the sense that all cash transactions are primarily recorded are recorded in cash book with narration Cash book is also a ledger as it serves the purpose of cash account and bank account It is known as journalised ledger
In cash account posting are done from ledger or from cash book In cash account posting is not followed by narration
It records both aspects of transaction in cash and bank column to complete double entry posting
Simple
Analytical
Date
Particulars V. No
Date
Particulars V. No
Discount
Discount is a deduction or concession from nominal or actual amount.
Discount Trade discount Cash Discount Bankers Discount
Trade discount
It is reduction grated by supplier from the list price of goods or services It is allowed by producer to wholesaler or wholesaler to retailer Its object is to promote sale and to leave fair margin of profit to retailer It is allowed only at the time of sale whether cash or credit It is shown by way of deduction in the invoice(bill) itself Trade discount account is not opened in the ledger The rate of discount may vary with quantity of purchased Goods purchased or sold may be returned. It is deducted from any goods returned
Trade discount is concession or reduction granted by the producers to the wholesalers or by the wholesalers to the retailers on the bulk purchase in accordance with customers of each trade. It is allowed by way of reduction in the list price or catalogue price. Trade discount is usually deducted in purchase book, sales book or returns book.
Cash Discount
It is reduction by supplier from the amount due It is allowed by creditor to debtor Its object is to encourage debtors to make prompt payment It is allowed only when there is cash/bank receipt or payment before due date It is not shown in invoice Cash discount account is opened in the ledger The rate of discount vary with the time period within which payment is made Cash return is not possible.
Cash discount is an allowances made on the prompt payment It is allowed when payment is made by customers before time.
Bankers Discount
The amount of interest deducted in advance by banker is called bankers discount It is the sort of interest for the amount advanced against the bill for the period of use of money
Its object is to promote sale and to leave fair margin of profit to retailer
It is allowed only at the time of sale whether cash or credit
The rate of discount vary with the time period within which payment is made
Cash return is not possible.
Cr
Cr
Cr
Cr
Cr
Ordinary system
Ordinary system : In this system advance is given to petty cashier as per needs. The amount and period is not fix. It is flexible system and changes as per need The amount given in advance is not same beginning for all the time
Imprest/Float system: Under this system the amount estimated to meet the expected possible petty expenses for certain period is fixed. The amount is given to the petty cashier in the beginning to make a fixed balance in hands in the beginning. The petty cashier submit the statement of expenses incurred to the head cashier and reimburse by head cashier The amount reimbursed with unspent balance will restore the original sum in the hands of the cashier with which he started. Ex: Suppose petty cashier is given Rs.500 for a month. He paid Rs.375 for petty expense and have the balance of Rs.125 at the end of the month. The petty cashier will be reimbursed Rs.375 in the beginning of next month and again he will have Rs.500 for next month
Purchase book
All the credit purchase are recorded in this book. It is also known as purchase journal, bought day book, invoice book, purchase day book, purchases register Cash purchase and purchase of assets on cash or credit is not recorded in this book
Invoice
Transactions of credit purchase or credit sale are recorded in purchase book from invoices called bills An invoice is a document giving the detail of goods bought or sold as to their quantity, quality, brand, price etc. Invoice is a source of prime entry both for seller and buyer. It is known as purchase invoice or inward invoice for buyer and sales invoice or outward invoice for seller
Sales book
All the credit sale are recorded in this book. It is also known as sales journal, sales day book, Sold day book, sales register Cash sale and sale of assets on cash or credit is not recorded in this book
Capital Expenditure
These are those expenditure which are made for acquiring fixed assets of the business, for making fixed assets serviceable, for increasing business assets ,for increasing earning capacity
Revenue Expenditure
It is the expenditure which is incurred on the maintenance of business It is consumed within same accounting period means one year Like salaries ,wages, rent ,taxes
Capital expenditure These are incurred in acquisition of fixed assets These expenditure increases the value of assets These are related to installation of fixed assets They increase the earning capacity of business They are non-recurring in nature Legal expenses incurred due to making some defaults regarding goods then they are not capital expenditure Income tax appeal expenses are capital expenses
Revenue expenditure These are incurred in acquisition of raw material They do not increase value of assets These are related to day to day running expenditure They incurred to maintain earning capacity of business They are recurring in nature When default is made in sending goods then legal expenses are revenue expenditure
Final Statements
The two statements means trading and profit & loss account and balance sheet are prepared to give the final results of the business that is why these both are called final accounts Final accounts are the summary statements which are prepared to show periodic performance of the business organisation and its financial position at the end of year The composition of the final accounts varies according the nature of the business
Manufacturing Organisation
Final accounts
Manufacturing account
Trading account
Balance sheet
Trading Organisation
Final accounts
Trading account
Balance sheet
Trading account
Trading account is the first part of financial statements which shows the results of buying and selling of goods and services during the accounting period. The trading account shows the results of buying and selling of goods. In preparing this account the general establishment charges are ignored and only the transactions in goods are included Trading account is a nominal account Gross profit: The amount of net sales is more then cost of goods sold it is called gross profit. Gross loss: The amount of cost of goods sold is more then the net sales it is called gross loss.
Gross profit is the profit added by the owner in the cost of goods sold to sell the goods to the customer. It gives idea about covering the indirect expenses. Example: If an article is purchased for 500 and 100 Rs is incurred on freight then its cost is 600 to the seller .Bt if seller sell it for Rs.800 then 200 is gross profit. Added to fix selling price
Dr Particulars
Direct expenses: These expense refer to the expenses incurred in purchasing and manufacturing of goods. Direct expenses are: Wages: wages incurred in the purchase or manufacturing of goods are direct wages also called productive wages, factory wages, manufacturing wages. If nothing is mention whether direct or indirect wages it is considered direct wages and shown on the debit side of trading account. Note: wages spent on construction of fixed assets are not included in trading account
Freight:The expenses incurred for bringing the goods to the godown of the buyer from the pace of the seller are called Freight. Also called fright inward, fright on purchase, freight In These are paid for transportation These expenses are part of cost of goods purchased so shown on the debit side of trading account. Note: Freight spent on purchases of fixed assets are not included in the trading account
Carriage and cartage: These are the expenses paid on carriage of goods from railway station to godown . These are also called cartage, carriage, carriage on purchase, carriage inward These are shown on debit side of trading account Clearing charges/port charges/dock dues: These expenses are paid to the port authorities, dock authorities, railway authorities for using facilities installed at airport, railway station, dock yard for the purpose of taking delivery of goods. Post charges and dock dues are paid in case of imported goods and railway charges are paid within country
Import duty/custom duty: In case of imported goods import duty/custom duty are to be paid. Octroi: When goods are bought into the municipal limits, states, cities octroi have to be paid to the concerned authorities. Motive power: Coal,gas, water,fuel,electricity which are used for running the machines.
Manufacturing expenses: All expenses incurred for manufacturing the goods like factory rent, factory insurance, depreciation on machines and plant,factory lighting
Consumable stores: Nuts, bolts, grease, oil, cotton, waste cloth are collectively included under the name stores consumed
Packing charges: These are of three types: Ordinary/primary packing: these packing are necessry for handling the products without which the product cannot be sold like, bottle in case of ink, water etc. These packing charges are the part of finished goods .These are shown on the debit side of trading account Distribution packing: these packing are required to transport goods from one place to another like containers, boxes. These are indirect expenses and shown on the debit side of profit and loss account. Fancy packing: These packing is used for attracting the customers. These are indirect expenses and shown in the debit side of profit & loss account
Royalty: Royalty refers to payment made for acquiring the right to use patent, copyrights, mine . If the royalty is paid on the basis of production it is shown on the debit side of trading account but if royalty is paid on the basis of sales the it is shown on the debit side of profit & loss account Commission on purchase: It is direct expense and shown on the debit side of trading account.
Excise duty: It is a tax on production paid by the manufacturer to the government on the goods manufactured. It is direct expense and shown on the debit side of trading account. Insurance premium: Insurance premium on goods purchased, factory building are recorded on debit side of trading account Note: Expenses on fixed assets are not recorded in the trading account
Important Terms
Indirect expenses: These are those expenses which help in the maintenance and running of business Apprentice ship premium: Some business organisation impart training to workers in various trades and charge fee from the concern organisation.This fee is called apprentice ship premium Bad debts: Bad debt denotes the amount lost from debtors to whom goods were sold on credit. Depreciation: It is the decrease in the value of assets due to getting old, wear and tear, usage etc.
Cr
Amount (Rs)
Selling & distribution Expenses Advertisement Salaries & commission of sales department Show room rent, show room lighting, show room insurance, depricition on show room building, Travelling expenses, Free samples Commission on sales, sales promotion charges, forwarding charges(indirect) Delivery van expenses Cost of printing catalogue Bad debts, Provision for doubtful debt Export duty, Insurance on goods sold Carriage outward Packing charges(Indirect) Brokerage, Stable charges, Godown rent/warehouse rent
Financial expenses Interest on loan Bank charges Interest on capital Discount allowed Commission paid for raising loan