Accounting

Introduction

Accounting is the language of business. It is a standard set of rules for measuring a firms financial performance Accounting is required in almost all activities and all organization which require money. Assessing a companys financial performance is important for many groups, including: -The Firms officers (managers and employees) -Investors (Current and potential shareholder) -Lenders (banks) -General public

Objectives of Accounting

To keeping systematic record To ascertain the results of the operation To ascertain the financial position of the business To portray the liquidity position To protect business properties To facilitate rational decision-making To satisfy the requirements of law

Importance of Accounting

Making Corporate Decisions

Making Investment Decision

Functions of Accounting

Record Keeping Function

Managerial Function
Legal Requirement Function

Advantages of Accounting

It helps in having complete record of business transaction It provides useful information form making economic decisions It facilitates comparatives study of current years profit, sales, expenses etc. It provides users with factual information about transaction It helps in complying with certain legal formalities

Limitations of Accounting

Accounting is historical in nature Accounting is limited to monetary transaction only Accounting statements do not always present comparable data Cost concept is found in accounting. Price changes are not considered. Accounting statements do not show the impact of inflation.

Concepts and Conventions and Principles of Accounting

Concepts of Accounting

Money Measurement Concept Entity Concept Going Concern Concept Cost Concept Dual Aspect Concept Accounting Period Concept

Concepts and Conventions and Principles of Accounting

Conventions and Principles of Accounting -Matching Conventions o Revenue aspect o Expenses aspect Consistency Convention Materiality Convention Objectivity Convention

Process of Accounting

Identification of Business transaction Recording Classification Summarization Interpretation Communication

Journal Ledger Trail Balance Trading and Profit & Loss A/c Balance Sheet

Golden Rules Of Accounting and Journal

PERSONAL ACCOUNT These are accounts of parties

with whom the business is a carried on. Personal accounts may be:

Accounts of natural or physical persons. Ex: Rama Account, Krishna Account

Accounts of artificial or legal persons. Ex: ABC & Co. Representative personal account. Ex: O/S Expenses Account, O/S income Account, Prepaid Expenses Account, Income Received in Advance.

Rules of Accounting: Debit the Receiver Credit the Giver

Real Account

These are asset accounts that appear in the Balance Sheet. They are referred to as Real Account (or Permanent Accounts) as these are owned by businesses and the balances in these accounts at the end of an accounting period will be carried over to the next period. Ex: Cash Account, Land Account, Building Account etc.

Rules of Accounting: Debit what comes in Credit what goes out

Nominal Account
These are accounts of expenses and losses which a business incurs and income & gains which a business earn in the course of business. Ex: Rent Account, Interest Account.

Rules of Accounting: Debit all expenses and losses Credit all income and gains

Types of Accounting

Financial Accounting Cost Accounting Management Accounting

Other Accounting: Tax Accounting Social Responsibility Accounting

Ledger Accounts
INTRODUCTION The recorded transactions in the journal are classified and grouped into by preparation of accounts and the book, which contains all set of accounts, i.e., Personal, Real and Nominal Accounts. This process is known as Ledger. The ledger is also known as principal books of account.

FORMAT OF LEDGER ACCOUNTS

Trial Balance

INTRODUCTION

After posting the accounts in the ledger, a statement is prepared to show the separately the debit and credit balances. Such a statement is known as Trial Balance.
OBJECTIVE OF PREPARING TRIAL BALANCE Trial balance helps to check the arithmetical accuracy of the accounts. The financial statements as prepared based on the trial balance. The trial balance serves as a summary of what is contained in the ledger.

METHODS

Total Method: Under this method, every ledger account is totaled and that total amount (both credit and debit side) is transferred to trial balance. The difference of totals of each ledger account is the balance of that particular account. This method is not commonly used as it cannot help in the preparation of financial statements. Balance Method: Under this method, every ledger account is balanced and those balances only are carried forward to the trial balance. Financial statements are commonly prepared on the basis of this method. Total and Balance Method: As name shows it is combination of above two methods. Under this method, statement of trial balance shows to balance contains the balance in both ways as explained in the above two methods.

From the following ledger balances, prepare a trial balance of ABC Corporation as on 31st December 2011.

RULES

Following are the rules to prepare trial balance from Ledger balances: 1) The following balances must be placed in the debit side of the trial balance: Asset Accounts Expenses Accounts Losses Drawings Cash and Bank Balances 2) The following balances must be placed in the credit side of the trial balance: Liabilities Accounts Income Accounts Profits Capital Account

Balance Sheet

INTRODUCTION The Balance Sheet may be defined as a statement which sets out all the assets and liabilities of a firm or an institution as at certain date. It shows the financial position of a firm

FORMAT OF BALANCE SHEET

CLASSIFICATION OF ASSETS AND LIABILITIES

ASSETS

Fixed Assets: The assets those are meant to be used by firm over a long period of time and not sold are known as fixed assets. Current Assets: The assets those are meant to be converted into cash as quickly as possible (ideally within one year) known as current assets. Tangible Assets: The assets those can be seen physically known as tangible assets. Intangible Assets: The assets which cannot be seen physically known as intangible assets

LIABILTIES

Long Term Liabilities: The liabilities those will be paid after one year are known as long term liabilities. Short Term Liabilities: The liabilities those will be paid within one year are known as short term or current liabilities. Contingent Liabilities: There are some outstanding claims pending against a firm, which may or may not be payable by firm are known as contingent liabilities. Note: All assets and expenses have debit balance and All Liabilities and incomes have credit balance.