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Financial Accounting

And
Analysis
Chapter 2: Accounting Process
• Describe the accounting process
• Explain the stages of the accounting process
• Describe the meaning and format of journal
• Describe the meaning and format of ledger
• Discuss subsidiary books
Accounting Process

• The accounting process starts


when a financial transaction is
made.
• The main objective of this
process is recording financial
transactions systematically and
accurately in the journal and
process them to prepare the
financial statements.
Stages in Accounting Process

Identification of Financial Transactions

Preparation of Vouchers

Recording Entries in the Books of Original


Entry

Posting to the Ledger

Preparation of Trial Balance and Financial


Statements
Stages in Accounting Process

1. Identification of financial transactions: In this step, the business transactions that


are financial in nature are identified. It should be noted that the financial transactions
should have documentary evidence, such as invoices of purchases and sales, credit
and debit notes, cash memo, pay-in-slips and payment vouchers. Financial
transactions result in monetary changes in the assets and liabilities of an organisation.
Therefore, these changes are recorded in the journal, books of accounts.
2. Preparation of vouchers: In this step, documentary evidences are prepared. This
helps in notifying the business transactions. A voucher refers to an authorised
consent of the payments made and provides information about the accounts that are
to be debited or credited. After recording the payment entries in the voucher, they
are next recorded in the journal.
Stages in Accounting Process

3. Recording entries in the books of original entry: In this step, the financial transactions are
recorded from the vouchers to the books of accounts or journals. You must note that the
financial transactions are recorded in chronological order in these books. If the same type of
transaction takes place a large number of times, then a subsidiary book can be maintained
to record the credits.
4. Posting to the ledger: In this step, the recorded transactions are transferred from the
journal books to the ledger. This process is called the ledger posting. Same type of entries of
financial transaction collectively forms an account. In other words, in an account we put
financial transactions that are classified as per their type. For example, sales account
contains entries of the product/services sold. The book in which the accounts are
maintained is known as a ledger. Therefore, a ledger is a collection of accounts and also the
principal book in double entry bookkeeping. Classification of transactions enables the
organisation to get information related to total purchases, total sales, total expenses,
creditors and debtors.
5. Preparation of trial balance and financial statements: In this step, a balance in each
ledger account is determined and the trial balance is prepared. In the trial balance, the debit
and credit balances of each account are put in their respective columns. The total of the
debit balance and the credit balance must tally. This would indicate arithmetic accuracy. The
financial statements are prepared with the help of the trial balance.
Classifying accounts into financial statement elements

• Assets

• Liabilities

• Owner’s Equity

• Revenue

• Expenses
Accounting Equation

Accounting Equation
• An accounting equation refers to a
statement that states that a firm has equal
assets and liabilities. Dual entry concept is
the basis of the accounting equation.
• For an accounting equation, it is required
to first analyse the transaction in terms of
variables, such as assets, liabilities, capital,
revenue and income. After that, decide the
effect of the transaction in terms of
increase and decrease on variables, and
then record the effect on the transaction
in the relevant side of the equation.
Transaction Analysis – MCQ’s

• Machine purchased on credit


• Payments to creditors
• Capital commenced in business
by owner
• Cash withdrawn by owner
• Machine purchased on cash
• Outstanding expenses recorded
Accounting Equation

Accounting Equation
• An accounting equation refers to a
statement that states that a firm has equal
assets and liabilities. Dual entry concept is
the basis of the accounting equation.
• For an accounting equation, it is required
to first analyse the transaction in terms of
variables, such as assets, liabilities, capital,
revenue and income. After that, decide the
effect of the transaction in terms of
increase and decrease on variables, and
then record the effect on the transaction in
the relevant side of the equation.
Consider the following transactions pertaining to A’ s business -

1. Started business with cash

2. Purchased goods for cash

3. Purchased goods on credit

4. Purchased furniture for cash


Consider the following transactions pertaining to A’ s business -

5. Deposited Rs50000 in bank account

6. Sold goods costing Rs 15000 for RS18000 on credit

7. Sold goods costing Rs 30000 for RS36000 in cash

8. Paid rent Rs 10000 and salaries Rs 20000


Consider the following transactions pertaining to A’ s business -

9. Withdraw Rs 15000 to pay private expenses

10. Received cash against goods sold on credit Rs 18000


Journal

Meaning and Format of Journal


• A journal refers to a primary book of accounts in which all transactions of
a business are recorded.
• The process of recording a transaction in a journal is known as
journalising.
Date Particulars L.F. Debit Credit
• Format of a Journal Amount (Rs.) Amount (Rs.)
  Name of the debited account      
Dr.
To Name of the credited account
(Narration)
         
Journal

Process of Journalising
Ledger

Meaning and Format of Ledger


• A ledger refers to a book or register in which financial transactions are

permanently recorded after being summarised and classified.

• Ledgers help in preparing a trial balance, after which the final statement

is prepared.
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)
               
 
Ledger

Ledger Balancing
Subsidiary Books

Cash Book Includes the records of all the receipts and


payments made by cash and cheques. it functions
as a Journal and a Ledger with regard to the cash
and bank transactions respectively.

Purchase Book Only records the credit purchases of goods.

Sales Book Involves the records of all the credit sales of goods.
However, it does not record the cash sales of
goods or credit sales of assets. It is also known as
Sales Journal.
Purchase Returns Also called to Return Outward Book.
Book

Sales Returns Book: Also known as the Return Inwards Book.


Debit and Credit Rules

• In case of personal accounts: Debit the receiver and credit the giver.
• In case of real accounts: Debit what comes in and credit what goes out.
• In case of nominal accounts: Debit all expenses and losses and credit all
incomes and gains.
Traditional Approach for Recording Transactions

• Personal Account: Debit the


receiver and credit the giver
• Real Account: Debit what comes
in and credit what goes out.
• Nominal Account: Debit all
expenses and losses and credit
all incomes and gains.
Debit and Credit Rules

• Live examples
MCQ’s

1. Cash memo, pay-in-slips helps in …..


a) Identification of Financial Transactions
b) Preparation of Vouchers
c) Recording Entries in the Books of Original Entry
d) Posting to the Ledger

2. ledger posting happens post transactions are recorded in…


a) Voucher
b) Journal
c) Pay slip
d) Trial Balance
Case Study @ page Number 66

• Journal Entries

• Impact of above transactions


MCQ’s

1. Asset purchased for cash Rs50000,will affect which two accounts


a) Assets, Income
b) Assets, Expenses
c) Assets, Assets
d) Asset, liabilities

2. Salary payable will result in …


a) Increase in assets
b) Decrease in assets
c) Increase in liabilities
d) Decrease in liabilites
MCQ’s

1. Paid for office stationery will affect …..


a) Assets, Income
b) cash, Expenses
c) Assets, Assets
d) Asset, liabilities

2. Dividend received in bank account will result in …


a) Increase in assets
b) Decrease in assets
c) Increase in liabilities
d) Decrease in liabilities