Tuesday, 25 April 2017

BASIC ACCOUNTANCY

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·       The Journal is the beginning. It is the place of systematically recording all business transactions

  • ·      Transactions are routed through various types  of  Accounts
    ·       All accounts are classified either as Personal or impersonal in nature
    ·       All personal accounts can be defined as related to persons: living or  dead, real or artificial, physical or legal, individual or any constitutional formation of more than one individual person
    ·       The rule in Personal Account is, “DEBIT THE RECEIVER, CREDIT THE GIVER”
    ·       ALL impersonal accounts are further sub divided into Real and Nominal accounts
    ·       Real accounts are related to all tangible asset accounts having definite shape and size. Here the rule is: “DEBIT WHAT COMES IN, CREDIT WHAT GOES OUT
    ·       NOMINAL accounts are name sake intangible transactions happening only as book entries without having any physical evidence. This may be part of asset or liability or both or income & expenditure. Here the rule  is: “DEBIT ALL EXPENSES & LOSSES, CREDIT ALL INCOMES & GAINS”
    ·       THE two unique words DEBIT AND CREDIT are used as noun, verb and adjective
    Posting
    ·       The task of posting ledger accounts on the basis of journal is known as posting
    ·       Journalizing is more important because it is the first point to decide which account is to be debited and which one to be credited
    ·       In capital account, debit decreases and credit increases the value
    ·       In asset account, debit increases and credit decreases the value
    ·       In liability account, debit decreases and credit increases the value
    ·       In expenditure account, debit increases and credit  decreases the balance
    ·       In income account, debit decreases and credit increases the balance
    ·       It is well established that on receipt of cash, cash a/c is debited and on payment of cash; the a/c is credited
    ·       On the above basis, the cash a/c can be prepared straightaway without the transaction being first journalized. Since the cash transactions will be numerous, it is better to keep a separate book to contain only the cash transactions. The book is known as CASH BOOK
    ·       Cash discounts comprise cash receipts from customers and payment to suppliers. The column on the debit side of cash book will record discount received from suppliers and the one on the credit side will record discount allowed to customers

    Cash book

    ·       The CASF BOOK which contains columns for discount in addition to usual cash column is known as DOUBLE COLUMN CASH BOOK
    ·       CASH AND BANK accounts are usually one and same thing from Accountancy point of view. But for clarity in recording, when a CASH BOOK apart from the cash and discount  columns contains the additional column for Bank transactions, it is called as TRIPLE COLUMN CASH BOOK
    ·       THERE may be large number of small payments which if taken to CASH BOOK, would make it bulky and undesirably voluminous. Usually, such payments are made through PETTY CASH account
    ·       In IMPREST system petty cash, all small payments are recorded as sundry items without the head for expenditure
    ·       In ANALYTICAL system, the petty cash items are properly analyzed and distinctly accounted for in books
    ·       A petty cash cycle is fixed period say a week or a fortnight or a month
    ·       An asset a/c  will show debit balance
    ·       A liability a/c will show credit balance
    ·       A capital a/c will show credit balance
    ·       An expenditure a/c will show debit balance
    ·       An income a/c will show credit balance
     TRIAL BALANCE

    ·       It helps us to check the accuracy of our accounting work
    ·       If the total of debit entries made in various accounts are listed and similarly, if another list is prepared with all credit entries; then the total of these two lists must be equal
    ·       If it is not equal, it means there is some error- needs to be rectified/verified
    ·       The two lists of debit and credit balances if combined in one statement, it would be known as Trial Balance: a baby Balance Sheet
    ·       It facilitates, apart from checking the arithmetic accuracy of ledger postings/entries; the preparation of Profit & Loss A/c and Balance Sheet smoothly
    ·       Errors disclosed by a Trial Balance usually are:
    ·       Wrong totaling of subsidiary books
    ·       Posting of the wrong amount
    ·       Posting an amount on the wrong side
    ·       Omission of an account from ledger accounts
    ·       Omission of an amount from Trial Balance

    Errors are of two types: principles and clerical error
    ·       Clerical errors are further subdivided into errors of omission, errors of commission and compensating errors
    ·       Errors of principles are major errors which does not affect the Trial Balance, but the Balance Sheet
    ·       Treating an asset as expenditure and vice versa, treating a liability as income and vice versa are examples of errors of principle
    ·       Errors of omission may be total or may be partial. If it is total i.e. omitted from both debit and credit sides, then it will not affect the Trial Balance. Only in case of partial omission, it will affect the Trial Balance
    ·       Errors of commission may take any of the following forms:
    Trial balance
    ·       Wrong amount posted in subsidiary books not affecting Trial Balance
    ·       Posting in wrong account not affecting Trial Balance
    ·       Wrong amount posted in ledger account affecting Trial Balance
    ·       Posting in the wrong side of the ledger affecting the Trial Balance
    ·       Wrong totaling of subsidiary books affecting the Trial Balance

    BANK RECONCILIATION:

    ·       CASH transactions are reflected in Cash Book
    ·       Bank transactions through cheques and pay-in-slips are reflected in passbooks/statements furnished by the Bank periodically
    ·       However, the passbook balance seldom agrees with that of cash book in totality
    ·       The main reasons of difference maybe cheques issued but not yet paid by the bank, outstation cheques which has already been accounted for in the cash book are yet to be collected by the Bank, entries of bank charges/interest/commission etc. do not find a place in cash book unless notified by Bank
    ·       Entries that have been made in Cash Book, but not in the Passbook
    ·       Entries that have been made in the Passbook, but not in the Cash Book
    ·       The reconciliation flow chart would be beginning with the balance as per Bank Passbook, jotting down items of differences sorted out as above and concluding with balance as per Cash Book
    ·       All expenses of recurring nature the utility of which is not beyond 1 year are classified as Revenue Expenditure
    ·       All expenses of huge nature the utility of which are spread over a number of years  by creating an asset are classified as Capital Expenditure
    ·       All huge expenses of occasional nature yet the utility are not lasting beyond a certain period are classified as deferred capital expenditure. It is first capitalized to be treated as revenue expenditure for a number of years
    ·       Trading and Profit & Loss account includes all revenue items like purchases, sales, and manufacturing/trading/establishment expenses etc. in form of both incomes and expenses. The net result is either profit or loss
    ·       This account is usually divided into two portions. The first portion is known as Trading account showing the broad results of trading or manufacturing activities
    ·       In trading concerns, the sales proceeds are compared with the amount paid for purchases together with the expenses directly related to purchases. The difference between the amount realized by sale and purchase price paid is GROSS PROFIT. If the purchase price is more than the sales price, there is a gross loss
    ·       In case of a manufacturing concern, the sales proceeds will be compared to the total cost incurred in making or manufacturing goods. If the sales proceeds exceed the cost of manufacturing, it will be gross profit or else gross loss for an opposite position
    TRADING AND PROFIT & LOSS ACCOUNT:

    ·       ONLY revenue receipts and revenue expenses to be entered
    ·       Expenses and incomes relating to the period only for which the accounts are being prepared only need to be considered
    ·       All expenses and incomes relating to the period concerned should be considered even if the expenses are not yet been paid by cash or income has yet been received by cash
    ·       While preparing Trading and Profit & Loss account, distinction should be made between the personal items and business items of income & expenditure
    ·       Domestic &  household expenses and Income Tax paid not to appear in Profit & Loss Account
    ·       The BALANCE SHEET is always prepared at a certain date unlike the Profit & Loss account which is prepared for a year or less. Even one single transaction will change the position of ASSETS & LIABILITIES
    ·       The ASSETS and LIABILITIES can be arranged either in order of liquidity or in the order of permanence
    THE SELF BALANCING LEDGER SYSTEM

    ·       It is a way to condense the TRIAL BALANCE and thus help in locating the area in which the error lies. The method is simply to divide up the main ledger and to prove the accuracy of each part separately
    ·       The distinct advantages of this system:
    ·       Errors are localized and thus quickly located and rectified
    ·       Work can be done simultaneously on all ledgers and thus completed soon
    ·       Figures for the total amounts owing by debtors and owing to the creditors will be readily available
    The total debtors and total creditors are posted in totals and kept in main ledger. This will show up inaccuracies or mischief, if any
    ·       When in a subsidiary ledger, only one sided entries are made containing either debit or credit balances alone; no trial balance is possible in this case. A system like this is called as “SECTIONAL LEDGER

    DEPRECIATION
    ·       It means a fall in value of the asset. The net result of an asset’s depreciation is that sooner or later the asset will become useless. Land is usually not considered for depreciation
    ·       The main causes of depreciation are:
    ·       Wear and tear by using the tangible asset
    ·       Mere passage of time
    ·       Obsolescence: when it becomes out of demand
    ·       Accidents/breakdowns
    ·       Fall in demand/market prices
    ·       The most interesting part of depreciation is that it is not visible like other expenses till the very end. For, there is no actual payment made for it, though it is treated as an expense in Profit & Loss account
    ·       Depreciation helps in setting the assets in the Balance Sheet at their proper values. It helps in reporting correct figures of profit/loss. It ensures retention of enough funds for replacement of the asset at the end of the estimated life
    ·       The basic factors for calculating depreciation are the original cost of the asset item, the estimated number of years of its commercial life and the estimated residual or scrap value at the end of life
    ·       Methods for providing depreciation are:
    o   Fixed percentage on original cost or straight line method
    o   Fixed percentage on diminishing balance
    o   Annuity method in time value of money
    o   Sinking fund method
    o   insurance policy method
    o   revaluation method
    o   depletion method
    o   machine hour rate method

    PROVISIONS FOR BAD & DOUBTFUL DEBTS:

    ·        this estimate is prepared in actual practice by carefully considering the position of each individual person, who owes money to the firm
    ·       Profit & Loss account is debited and provision for bad debts account is credited
    o   5 of 19
    ·       Thus, profit will be reduced. Provision is carried forward to next year and deducted from sundry debtors while preparing the Balance Sheet. At the end of the year, the bad debts account will be transferred to the Provision account, not the P & L account
    ·       DISCOUNT RECEIVED AND RESERVE FOR DISCOUNT ON CREDITORS: this amount will represent a gain which is expected to arise in the following year but in respect of present creditors
    ·       Reserve for discount on creditors account is debited and profit & loss account is credited
    ·       This reserve for discount account is carried forward showing a debit balance and deducted from Sundry creditors while preparing the Balance Sheet
    ·       DISCOUNT ALLOWED AND PROVISION FOR DISCOUNT ON DEBTORS: DISCOUNT ALLOWED to debtors is a loss to the firm and thus debited to Profit & Loss account
    ·       Provision also may be made by passing entry of profit & loss a/c debited and provision for discount on debtors credited
    ·       Sundry debtors stand reduced by the amount of discount
    ·       Main features of Partnership firms are:
    ·       Fixed and fluctuating capital
    ·       Interest on capital brought in by partners including the sleeping partner
    ·       Interest on drawings made by partners
    ·       Valuation of goodwill on the occasions of CHANGE IN PROFIT SHARING RATIO, ADMISSION OF A NEW PARTNER, RETIREMENT, DEATH, DISSOLUTION AND AMALGAMATION OF FIRMS
    ·       CONCEPT OF super profit, average profit and capital employed
    ·       Goodwill= super profit/normal rate of return*100
    ·       Capital employed= total tangible assets minus total outside liabilities
    ·       Treatment of annual premium and maturity proceeds to Capital a/c of partners  of joint life policy in profit sharing ratio
    ·       In absence of specific insertion in partnership deed, the Partnership Act, 1932 becomes applicable. As per the bindings of the Act:
    §  Partners share profit/loss equally
    §  No partner is entitled to remuneration
    §  No interest on capital is allowed
    §  No interest on drawings is charged
    §  Loan given by partners to carry interest @6% pea
    ·       Transfer of general reserves to existing partners in the old profit sharing ratio and debiting the new partner’s capital account in the new profit sharing ratio
    ·       Revaluation of Assets and Liabilities

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