Contains of Balance Sheet :-
The Balance sheet contains two parts i.e.
1. Left hand side i.e. the Liabilities
2. Right hand side i.e. the Assets
ASSETS:
Assets represent everything which a business owns and has money value. Assets are always shown as debit balance in the ledger. Assets are classified as follows.
1. Tangible Assets:
Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are classified into two:
a. Fixed Assets: Assets which are durable in nature and used in business over and again are known as Fixed Assets. e.g. land and Building, Machinery, Trucks, etc.
b. Floating Assets or Current Assets: Current Assets are i. Meant to be converted into cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock, Sundry Debtors.
2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill, Patent.
3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S. are known as Fictitious assets: E.g. Preliminary expenses, Discount or creditors.
LIABILITIES:
All that the business owes to others are called Liabilities. It also includes Proprietor’s Capital. They are known as credit balances in ledger.
Classification of Liabilities:
1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years E.g. Capital, Long Term Loans.
2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan.
3. Contingent Liabilities: Liabilities, which have the following features, are called contingent liabilities. They are:
a. Not actual liability at present
b. Might become a liability in future on condition that the contemplated event occurs. E.g. Liability in respect of pending suit
OBJECTIVES OF BALANCE SHEET:-
1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.
4. The accuracy of final accounts is verified by this statement
5. It shows the profit or Loss arrived through Profit & Loss A/c.
BALANCE SHEET and DEFINITION:-
Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively, Besides the Proprietor wants
i. To know the total Assets invested in business
ii. To know the Position of owner’s equity
iii. To know the liabilities of business.
DEFINITION
The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.”
On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities.
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.
A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Another way to look at the same equation is that assets equals liabilities plus owner's equity. Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity). Balance sheets are usually presented with assets in one section and liabilities and net worth in the other section with the two sections "balancing."
A business operating entirely in cash can measure its profits by withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, many businesses are not paid immediately; they build up inventories of goods and they acquire buildings and equipment. In other words: businesses have assets and so they can not, even if they want to, immediately turn these into cash at the end of each period. Often, these businesses owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities
PROFIT AND LOSS ACCOUNT :-
Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account.
Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year.
profit and loss statement (P&L) or Income statement, statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.
The income statement can be prepared in one of two methods. The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.Items appearing on Debit side of the Profit & Loss A/c
The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial Expenses.
Item appearing on Credit side of Profit and Loss A/c.
Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the businessare shown on the credit side. Typical of such gains are items such as Interest received, Rent received, Discounts earned, Commission earned.
Advantages of Trading Account :-
1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary expenses could be eliminated.
4. Comparison of trading account details with previous years details help to draw better administrative policies.
Closing Entries of Trading A/c :-
Trading A/c is a ledger account. Hence, no direct entries should be made in the tradingaccount. Several items such as Purchases, Sales are first recorded in the journal and then posted to the ledger. The Same accounts are closed by the transferring them to the trading account. Hence it is called as closing entries.
TRADING ACCOUNT :-
Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and Cost price. If the selling price exceeds the cost price, it will bring Gross Profit. For example, if the cost price of Rs. 50,000 worth of goods are sold for Rs. 60,000 that will bring in
Gross Profit of Rs. 10,000. If the cost price exceeds the selling price, the result will be Gross Loss. For example, if the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will result in Gross Loss of Rs.10,000. Thus the Gross Profit or Gross Loss is indicated in Trading Account.
Items appearing in the Debit side of Trading Account.
1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the Opening Stock.
2. Purchases: It indicates total purchases both cash and credit made during the year.
3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account.
4. Direct Expenses on Purchases: Some of the Direct Expenses are.
i. Wages: It is also known as Productive wages or Manufacturing wages.
ii. Carriage or Carriage Inwards:
iii. Octroi Duty: Duty paid on goods for bringing them within municipal limits.
iv. Customs duty, dock dues, Clearing charges, Import duty etc.
v. Fuel, Power, Lighting charges related to production.
vi. Oil, Grease and Waste.
vii. Packing charges: Such expenses are incurred with a view to put the goods in the Saleable Condition.
Items appearing on the credit side of Trading Account
1. Sales: Total Sales (Including both cash and credit) made during the year.
2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to get Net sales. Net Sales will be shown.
3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears outside the Trial balance. It represents the value of goods at the end of the trading period.
FINAL ACCOUNTS :-
So far, we have discussed that how the business transactions are recorded in Journal and ledger and how to detect and rectify the errors and how to prepare Trial Balance.Is quite natural that the businessman is interested in knowing whether his business is running on Profit or Loss and also the true financial position of his business. The main aim of Bookkeeping is to inform the Proprietor, about the business progress and the financial position at the right time and in the right way. Preparation of Final accounts is highly possible only after the preparation of Trial Balance.
Final Accounts
Trading & Profit and Loss A/c
Balance sheet
1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.
2. Balance Sheet is prepared to find out financial position a if concern.
Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account.
Revenue account of trading concern is divided into two-part i.e.
1. Trading Account and
2. Profit and Loss Account.
Methods of preparing Trial Balance
(i) Balance Method
(ii) Total Method
(ii) Balance Totals Method
(i) Balance Method
In this Balance method, the balance of each account (which may be debit
balance or credit balance) is extracted and written against each account;
we write debit balance in the debit column and credit balance in the
credit column.
(ii) Total Method
In this method the total of both sides of every account in the ledger
is written against the name of the respective account without balancing
them in the form of debit and credit balances respectively.
(iii) Balance totals Method
Trial Balance is prepared by combining the first and second methods.
However, in practice the trial balance is prepared with debit and credit
balances of various accounts in the ledger. Normally balance method is
used.
Trial Balance and Suspense account
suppose the Trial Balance does not agree i.e. there is a difference of
some amount in the totals of the two columns of the Trial Balance. What
will you do with this difference? A different account i.e Suspense Account
is opened with the difference in amount put in this account. This will result
in agreement of Trial Balance. The suspense account with the amount of
difference will be put on the lesser side of the Trial Balance. For example
total of the debit column exceeds the total of the credit column by Rs.500.
This amount of Rs 500 will be written on the credit column against Suspense
Account to make the Trial Balance tally.
The suspense A/c is however a temporary arrangement to make the Trial
Balance agree. This account will remain till the error or errors are rectified,
this account will disappear as soon as the error or errors are rectified
Steps to prepare Trial Balance
(i) At first ascertain the balance account wise of all the ledger accounts.
(ii) Write the name of the ledger account in the ledger account column.
(iii) Write against the name of the ledger account, the balance amount/total
amount, debit balance/total in the debit column; and credit balance/
total in the credit column.
(iv) Add the debit balance/total amount column and credit balance/total
amount column.
Objectives of Preparing a Trial Balance
(i) To check arithmetical accuracy
Arithmetical accuracy in ledger posting means writing correct amount,
in the correct account and on its correct side while posting transactions
from various original books of accounts, such as Cash Book, Purchases
Book, Sales Book, etc. It also means not only the correct balance of
ledger account but also the totals of the special purpose Books.
(ii) To help in preparing Financial Statements
The ultimate objective of the accounting is to prepare financial
statements i.e. Trading and Profit and Loss Account, and Balance sheet
of a business enterprise at the end of an accounting year. These
statements contain balances of various ledger accounts. As Trial
Balance contains balances of all ledger accounts, in financial statements
the balances of ledger accounts are carried from the Trial balance for
proper analysis.
(iii) Helps in locating errors
If total of two columns of the trial balance agrees it is a proof of
arithmetical accuracy in the ledger posting. However, if the totals of
the two columns do not tally it indicates that there is some mistake
in the ledger accounts. This prompts the accountant to find out the
errors.
(iv) Helps in comparison
Comparison of ledger account balances of one year with the
corresponding balances with the previous year helps the management
taking some important decisions. This is possible by using the Trial
Balances of the two years.
(v) Helps in making adjustments
While making financial statements adjustments regarding closing
stock, prepaid expenses, outstanding expenses etc are to be made. Trial
balance helps in identifying the items requiring adjustments in preparing
the financial statements.
Trial Balance is generally prepared at the end of the year. However
it can be prepared at any time during the accounting year to check the
accuracy of the posting
Trail Balance :-
A trial balance is a list of all the accounts contained in the ledger of a business. This list will contain the name of the nominal ledger account and the value of that nominal ledger account. The value of the nominal ledger will hold either a debit balance value or a credit value balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the trial balance.
The name comes from the purpose of a trial balance which is to prove that the value of all the debit value balances equal the total of all the credit value balances. Trialing, by listing every nominal ledger balance, ensures accurate reporting of the nominal ledgers for use in financial reporting of a business's performance. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts. This error must be found before a profit and loss statement and balance sheet can be produced.
The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values
Totaling and Balancing of an Account :-
At the end of the each month or year or on any particular day it may be necessary to ascertain the balance in an account. In an account there may be as many debits and as many credits. The difference between two sides of an account is known as account balance.
In order to balance an account we should total up the two side roughly on a separate piece of paper. The total of the side which is heavier, is put on both side leaving a little space just above the total for carrying down the balance (c/d) at the lower side. Again the difference in the account, i.e., balance in that account, should be brought down (b/d) on the heavier side. These closing balance will be the opening balance for the next period.
In case the total of both the sides of an account are equal, then that account is said to have no balance at all.
In order to balance an account we should total up the two side roughly on a separate piece of paper. The total of the side which is heavier, is put on both side leaving a little space just above the total for carrying down the balance (c/d) at the lower side. Again the difference in the account, i.e., balance in that account, should be brought down (b/d) on the heavier side. These closing balance will be the opening balance for the next period.
In case the total of both the sides of an account are equal, then that account is said to have no balance at all.
Ledger (How can post) :-
Posting (Journal in to Ledger) :-
The process of transferring the entries recorded in the journal into appropriate account in the ledger is called posting.
Steps
-Take the Debit aspect of journal entry
-Look in to the account opened to be debited in the ledger
-In the particulars column write the name of other aspect appearing in the second line of journal entry.
-Take the Credit aspect of same journal entry
-Post in to the Credit of that account opened for crediting it.
-Then the other aspect should be written in the particulars column
Ledger - Meaning :-
The term ledger is derived from Dutch word ‘Legger’ which means to lie.
Ledger, therefore means a book in which various accounts are kept. A ledger is a collection or set of accounts. It is a secondary record, where transactions similar nature is grouped together in one place in the form of an account. It contains the accounts of persons with whom the business deals, assets or things possessed by the business, liabilities they have as well as the expenses incurred and income earned by the business. As all the transactions are finally entered it, it is also called ‘Book of Final Entry’.The ledger account will have two sides – Debit side and Credit side. The left hand side of an account is known as the Debit side and is for writing debit entries. The right hand side is known as the Credit side and is meant for writing credit entries. As the top left corner the letter ‘Dr’ (Debit) and at the top right corner the letter ‘Cr’ (Credit) should be written.
Steps Required For Journalising :-
Inorder to enter a transaction in the journal, firstly we should analysis the transaction and find out the two account involved in the transaction. Then we should find out to what types of account, these two accounts belong (Assets, Liabilities, Expenses, Incomes). Then we apply the rules for Debit and Credit applicable to these two accounts. Then we change in to the Journal format.
JOURNAL-Definition:-
A Journal is a day book keep in the business
where in the complete history of transactions of
accounting nature include Debit and Credit aspect
is shone chronologically.
where in the complete history of transactions of
accounting nature include Debit and Credit aspect
is shone chronologically.
Some more examples of Transactions(Accounting Problem -1) :-
Journalise the Following transactions .
Jan 1st 2011 :- Madhavan Started business with Cash Rs. 1,00,000
Jan. 2:- He opened an Account with Federal bank Rs. 15,000
4 :- Purchased goods from Chandran Rs. 15,000
5 : - Cash Purchases Rs . 50,000
7 :- Returned goods to Chandran Rs. 500
9 :- Sold goods for Cash Rs . 1500
10 :- Settled Chandrans due by Cheque.
13 :- Sold goods to Vinayak Rs. 3,500
15 :- Vinayak returned us goods Rs. 300
18 :- Commission Paid Rs. 100
20 :- Purchase office Stationary items Rs. 150.
22 :- Received cheque from Vinayak in Full Settlement
of his Account.
24 :- Paid cheque in to Bank for Collection
27 :- Vinayak’s cheque dishonored and returned
30 :- Paid salary Rs . 700
31 :- Withdraw goods Rs . 800 for residential Purpose
N/L = 59950
B/S = 99200
Transactions(eg) :-
Journalize the following transactions of ABC Ltd:-
1. Ram started business with cash Rs. 250000
2. Brought furniture for Rs. 21000
3. Purchased goods from KP traders, Rs. 28500
4. Cash sales Rs. 35000
5. Sold goods on credit to Manoharan Rs.25000
6. Paid for office stationary Rs. 250
7. Cash received from Manoharan Rs. 10000
8. Interest on investment received RS. 1500
9. Paid rend RS. 5500
10. Paid salary Rs. 3000
Double entry System(eg):-
Shaji started business with a capital of
rupees 50000/-
There are two aspects of the transactions,
rupees 50000/-
There are two aspects of the transactions,
- One is Business has received cash from shaji at rupees 50000/- (Assets)
- Second one is Business has to pay sum of rupees 50000/- to Shaji (Liabilities).
Accounting Equations:-
“Assets = Liabilities + Capital” (10=4+6)
“Capital = Assets - Liabilities” (6=10-4)
“Liabilities = Assets - Capital” (4=10-6)
“Assets - Capital - Liabilities = 0” (10-6-4=0)
Basic Tearms:-
1. Assets
a. Current Assets
b. Fixed Assets
c. Liquid Assets
2. Liabilities
a. Current Liabilities
b. Fixed Liabilities
3. Expenses
a. Direct expenses
b. Indirect expenses
b. Indirect incomes
5. Goods
6. Purchases
7. Sales
8. Stokes
9. Debtors
10. Creditors
11. Drawings
a. Current Assets
b. Fixed Assets
c. Liquid Assets
2. Liabilities
a. Current Liabilities
b. Fixed Liabilities
3. Expenses
a. Direct expenses
b. Indirect expenses
4. Incomes
a. Direct incomesb. Indirect incomes
5. Goods
6. Purchases
7. Sales
8. Stokes
9. Debtors
10. Creditors
11. Drawings
Users of Accounting information:-
1. Owners
2. Management
3. Potential Inventories
4. Creditors and Bankers
5. Employees
6. Government(for Tax)
7. Researchers
2. Management
3. Potential Inventories
4. Creditors and Bankers
5. Employees
6. Government(for Tax)
7. Researchers
Objectives of Accounting :-
1. To maintaining records of business.
2. Calculation of profi t or loss.
3. To know fi nancial position.
4. To Make information available to
Various users.
2. Calculation of profi t or loss.
3. To know fi nancial position.
4. To Make information available to
Various users.
Book Keeping and Accounting:-
The book keeping denotes the
recording business transactions in a set
of books an it is a part of accounting.
Accounting is a broude tearm
which describes recording os transactions
and systematic appraisal of the results
thus accounting is more analytic in
nature.
recording business transactions in a set
of books an it is a part of accounting.
Accounting is a broude tearm
which describes recording os transactions
and systematic appraisal of the results
thus accounting is more analytic in
nature.
Definition of Accounting:-
Accounting is a information system
which receives data and inputs, processes
the same and gives the out put
which receives data and inputs, processes
the same and gives the out put
the form of information which is
useful for decision making.
useful for decision making.
Accounting and Luca Pacioli :-
The necessity of accounting in
business arose due to the limitations of
human memory. The business transactions
are to be recorded in the books in a systematic manner.
The modern system of accounting owns
its origin to LUCA PASSIOLI an Italian,
who fi rst published on DOUBLE ENTRY
SYSTEM of accounting in 1494.
Luca Pacioli was born in 1447 in Sansepolcro (Tuscany).
He moved to Venice around 1464 and he
known as father of Accounting
business arose due to the limitations of
human memory. The business transactions
are to be recorded in the books in a systematic manner.
The modern system of accounting owns
its origin to LUCA PASSIOLI an Italian,
who fi rst published on DOUBLE ENTRY
SYSTEM of accounting in 1494.
Luca Pacioli was born in 1447 in Sansepolcro (Tuscany).
He moved to Venice around 1464 and he
known as father of Accounting
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