1. Mechanics of Accounting

8/9/2019 1. Mechanics of Accounting

1/69

The Accounting Information System

Dr Ashish Varma

Ph.D, FICWA, PGDBM

Asstt Prof.

IMT ,Gzb.

1Financial Accounting/ DR ASHISH /IMT / 2010


2/69

The Accounting Cycle



3/69


Financial Accounting/ DR ASHISH /IMT / 2010

3

1. Analyze transactions


4/69



4

1. Analyze transactions2. Record the effect of

transactions in a journalentry


5/69



5



3. Summarize the effects oftransactionsa. Post journal entries to

the ledgerb. Prepare a trial

balance


6/69



6



3. Summarize the effects oftransactionsa. Post journal entries to

the ledgerb. Prepare a trial

balance

4. Prepare reportsa. Make adjusting

entriesb. Prepare financial

statements

c. Close the books


7/69

Transaction AnalysisUsing Debits and Credits



8/69

Events and Transactions

An event is a happening of consequence to an entity.

An event could be an internal happening or external

happening.

External events that involve transfer of value ( in

monetary terms) between two entities (within or

outside) are called transactions.

Thus, a transaction is an external event that affects thefinancial position of an entity.

Financial Accounting: An introduction

1-5



9/69

Recording of Transactions: The

Double Entry Principle

Each transaction has two aspects (or side): Debitand

Credit.

Every debit has an equal and opposite credit.

Each transaction should be recorded in such a way that

it affects two sides- debit and credit- equally.

Thus, the first and foremost step in recording a

transaction is to identify the debit and credit elements.


1-6



10/69

Basic Accounting Concepts

An understanding of accounting concepts is vital to

understand the process of accounting.

Accounting concepts underlying the recording of

transactions: Entity Concept

Money Measurement Concept

Accrual Concept

Cost Concept


1-7



11/69

Transaction Analysis Using

Debits and Credits

The accounting equation

Assets = Liabilities + Owners Equity

The spreadsheet analysis format based on theaccounting equation is not practical when acompany has thousands of transactions


11


12/69

Accounting Equation

The relationship among three elements of the balance

sheet can be expressed through an equation, known as

fundamental accounting equation:

Assets (A) = Liabilities (L) + Equity (E)

The unique feature of the above equation is that all

transactions will affect the equation in such a way that

the equality will always be maintained.

This happens due to double entry rule.


1-21



13/69

Transaction Analysis Using

Debits and Credits

All transactions relating to a specific item are

recorded in an account


13

The most simple

form of an account iscalled a T- account


14/69

The T- Account


14

ACCOUNT TITLE

DEBIT CREDIT

(Left Side) (Right Side)


15/69


16/69

A/C stands for Account.

Notice that theentry is posted on thedebitside of DebtorsAccount and simultaneously on thecreditside of Sales

Account.

JF refers to the page number of the journal where theparticular transaction is recorded.

Use of To (on thedebitside) and By (on thecreditside) iscustomary.

3-7

Postings in the Secondary Books

Dat Particulars JF Amount Dat Particulars JF Amount

6.3.

2006

To, Sales

A/C

? 10,00,000

Dr. Debt rs cc t r.

Dat Particulars JF Dat Particulars JF Amount

6.3.

2006 A/C

?

Dat Particulars JF Amount Dat Particulars JF Amount

By, Debtors A/C ? 10,00,000

Dr. Sales cc t r.

Dat Particulars JF Dat Particulars JF Amount

6.3. ? 10,00,000

2006



17/69

Debits and Credits:

Balance Sheet Accounts

Increase Decrease

Assets Debit

Liabilities Credit

Equity Credit

17Financial Accounting/ DR ASHISH / IMT / 2010


18/69

Debits and Credits:


Increase Decrease

Assets Debit Credit

Liabilities Credit Debit

Equity Credit Debit



19/69

Debits and Credits:



19

ASSET LIABILITY EQUITY

DEBITDEBIT CREDITCREDIT DEBITDEBIT DEBITDEBITCREDITCREDIT CREDITCREDIT

++ ++ ++-- -- --


20/69

Debits and Credits:

Revenues, Expenses, and Dividends

Increase Decrease

Revenues Credit

Expenses Debit

Dividends Debit



21/69

Debits and Credits:


Increase Decrease

Revenues Credit Debit

Expenses Debit Credit

Dividends Debit Credit



22/69

Debits and Credits:


Financial Accounting/ DR ASHISH /IMT / 2010 22

REVENUE EX ENSE DIVIDEND

DEBITDEBIT CREDITCREDIT DEBITDEBIT DEBITDEBITCREDITCREDIT CREDITCREDIT

++ ++ ++-- -- --


23/69

Debits and Credits All Accounts


Assets LiabilitiesOw ersEq ity

Dr.Dr. Dr.Dr. Dr.Dr.Cr.Cr. Cr.Cr. Cr.Cr.

++ ++ ++-- -- --

aid-iCapital

Retai edEarnings

Dr.Dr. Dr.Dr.Cr.Cr. Cr.Cr.

++ ++-- --

Expenses Revenues

Dividends

Dr.Dr. Dr.Dr.

Dr.Dr.

Cr.Cr. Cr.Cr.

Cr.Cr.

++ ++

++

-- --

--

= +


24/69

RecordingJournal Entries



25/69

Recording the Effects

of Transactions

Thejournal is a book

in which all

transactions arerecorded in

chronological order

Each journal entryhas its debit

amounts equal to

its credit amounts

to ensure that theaccounting

equation remains

in balanceFinancial Accounting/ DR ASHISH /IMT / 2010 25

DR = CRDR = CR


26/69


of Transactions

Journalizing involves a three-step process:

1. Identify which accounts are involved

2. For each account, determine if it is increased or

decreased

3. For each account, determine by how much it

changed



27/69


of Transactions

The account debited is always listed first,

followed by the account credited

The credit entry is indented

Some selectedtransactions from Veda

Landscape Solutions are presented next as

examples



28/69

Transaction 1


Investment of$700,000 cash intothe business.

Tx # Account Titles Ref Debit Credit 1 Cash 700,000

Paid-In Capital 700,000


29/69

Transaction 2


Borrowed $300,000cash from the bank.

2 Cash 300,000Bank Loan ayable 300,000


30/69

Transaction 3


Purchased land costing $50,000and buildings costing $400,000.Paid $100,000 in cash andsigned a mortgage for thebalance.

3 Land 50,000Buildings 400,000

Cash 100,000

Mortage ayable 350,000


31/69

Transaction 4


Purchased equipmentfor $650,000 in cash.

4 Equi ment 650,000Cash 650,000


32/69

Transaction 7


Purchased inventorycosting $90,000 for $10,000in cash and the remaining$80,000 on account.

7 Inventory 90,000Cash 10,000

Accounts ayable 80,000


33/69

Transaction 8


Paid $15,000 cash for aninsurance policy.

8 re ai Insurance 15,000Cash 15,000


34/69

Transaction


Performed landscapingconsulting services andbilled clients $200,000for these services.

11 Accounts Receivable 200,000Consulting 200,000


35/69

Transaction


Collected $820,000 cashfrom customers aspayment on theiraccounts.

14 Cash 820,000Accounts Receivable 820,000


36/69

Transaction


Paid $1,200,000 in cashto suppliers as paymenton account.

15 Accounts ayable 1,200,000Cash 1,200,000


37/69

Transaction


Paid cash of $150,000 foradvertising, utilities, andoffice supplies.

18 SG&AExpense 150,000Cash 150,000


38/69

Transaction


Paid cashdividends of$5,000.

23 Divi ends 5,000Cash 5,000


39/69

Postingand the Trial Balance



40/69

Posting

Posting involves transferring the the debits

and credits from the journal entries to the

individual accounts

Posting is purely mechanical in nature and

requires no analysis

The collection of all of a companys accounts

is called a ledger



41/69

Example:

Posting Transaction 1

Cash 700,000

Paid-in Capital 700,000


Cash aid-in Capital

700,000 700,000


42/69

Trial Balance

A trial balance is a listing of all of the ledger

accounts and their balances

The total of the debit balance accounts should

equal the total of the credit balance accounts

The equality of the debits and credits providessome assurance that the posting process has

been completed correctly


DR = CRDR = CR

Veda Landscape Solutions


43/69


Debit edit

ash $130,400

ccounts ecei able 120,

In entory 490,

Prepaidinsurance

Land 50,uildings 38 ,

Equipment 5 ,

ccountspayable $18 ,

Wagespayable 40,

Unearned franchiserevenue 5 ,Interest payable 58,

ankloanpayable 300,

Mortgagepayable 35 ,

Paid-incapital 700,000

Retainedearnings (beginningof year) 0

Salesrevenue 1,100,000

Consultingrevenue 200,000

Landscapingrevenue 500,000Cost ofgoodssold 800,000

Landscapingsuppliesexpense 100,000

Wagesexpense 500,000

Selling, general, andadministrativeexpens 174,600

Interest expense 58,000

Depreciationexpense 150,000

D

ividends 5,000

otals $3,478,000 $3,478,000

VedaLandscapeSolutionsTrial alance

December31, 2006


44/69


45/69

1-45

Permanent Accounts

= real accounts = balance sheet accounts.

Reported on balance sheet.

Carried forward into next period: In this sense, they are permanent.



46/69

1-46

Temporary Accounts

Revenue and expense accounts.

Details of income statement and changes in

retained earnings (RE).

Helps summarize operating activity.

Avoids cluttering RE account.

At end of accounting period, amounts are totaled,

combined and transferred to RE. Balances at beginning of each period are 0.



47/69

Adjusting andClosing Entries

47



48/69

Adjusting Entries

Adjusting entries are made at the end of the

accounting period

to properly reflect the balances of all asset,

liability, and owners equity accounts

to recognize all revenues and expenses on an

accrual basis



49/69

Adjusting Entries

New information

requires an

adjustment to a

transaction thathas already been

recorded

A transaction has

not yet been

recorded even

though a businessevent has occurred


Adjustments result from one of twosequences of events:


50/69

An Event Already Recorded

Assume a company purchases a one-yearinsurance policy paying $1,200 on October

1, 2006, resulting in the following journalentry


Prepaid Insurance 1,200Cash 1,200


51/69

An Event Already Recorded

At December 31, 2006, the followingadjusting journal entry is required:

Insurance Expense 300

Prepaid Insurance 300


$1,2 (12 mont s $100 rmont )

ctober1 eptember30

|-----------------------||-------------------------------------------|

December31

3 mont s used up 9mont sstill an asset


52/69

An Event Not Yet Recorded

Assume that a chemical spill during November 2006

at a factory will require a cleanup costing $23,000.

The cleanup will take place in 2007, and nothing yethas been recorded. The following adjustment is

necessary at December 31, 2006:

Chemical Cleanup Expense 23,000 Chemical Cleanup Liability 23,000



53/69

Closing Entries

Closing entries

Transfer the amounts in the revenue, expense,

and dividend accounts to Retained Earnings

Zero-out these temporary accounts for the start

of the next accounting period



54/69

Closing Entries

Comprised of three journal entries:

1. Close the revenue accounts to RetainedEarnings

2. Close the expense accounts to Retained

Earnings

3. Close the dividends account to Retained

Earnings



55/69

Computers and Accounting

The time spent performing routine tasks within theaccounting cycle has been greatly reduced as a resultof using computers

Personal computers are being used for financial analysis

accounting functions

word processing

database management inventory control

credit analysis of customers



56/69

Computers and Accounting

Through networking (Internet and intranet),

personal computers are speeding up the

exchange of information among users

It is still important, however, to be familiar

with the accounting cycle in order to

understand the flow of information withinan organization


1 8


57/69

Basic Accounting Concepts

Accounting concepts underlying financial reporting:

Going Concern Concept

Periodicity Concept

Matching Concept Prudence

Substance over form

Consistency


1-8

57


1 9


58/69

Accounting Concepts: Entity and

Money Measurement

Entity Concept:

A business entity is an economic unit distinct from its

owner(s). Such entity owns its assets and has its own

obligations. Only those transactions and events which affectthe financial position of the business entity will be recorded

in its books of accounts.

Money Measurement Concept:

Only transactions and events which are measurable in

monetary terms should be recorded.


1-9

58


Accounting Concepts: Accrual and1 10


59/69

Accounting Concepts: Accrual and

Cost

Accrual Concept: Income and expenses should be recognised as and when they

are earned and incurred, irrespective of whether money is

received or paid in connection thereof. An alternative of

accrual basis of accounting is cash basis where transactionsare recorded only when cash is received or paid.

Cost Concept:

Assets and liabilities should be recorded at historical cost. The

recent trends in accounting show that policy makers favour

fair value accounting in place of historical cost accounting.


1-10

59


1 11


60/69

Accounting Concepts: Going Concern

and Periodicity

Going Concern Concept:

An entity is said to be a going concern if it has neither the

intention nor the necessity of liquidation or of curtailing

materially the scale of the operations. The valuation

principles of assets and liabilities depend on this concept.

Periodicity Concept:

Accounts are prepared for a defined accounting period. Such

period could be a quarter, half year, a year or, in exceptional

circumstances, more than one year. This concept is essentialto measure financial performance.


1-11

60Financial Accounting/ DR ASHISH /

IMT / 2010

1 12


61/69

Accounting Concepts: Matching and

Prudence

Matching Concept:

While measuring periodic financial results, revenue earnedduring an accounting period is matched with expensesincurred (to earn the revenue) in the same accounting

period. Thus, expenditure incurred during construction phaseshould be withheld till the business starts commercial activityand earns revenue.

Prudence Concept:

This concept suggests that all possible expenses and losses

should be estimated and recorded, but anticipated gainsshould be ignored. This concept is also called the concept ofconservatism.


1-12


IMT / 2010

1-13


62/69

Accounting Concepts: Substance overform and Consistency

Substance over form: While recording transactions more emphasis needs to be given

to the substance of the transactions and not merely to their legalform. A transaction may appear to be an expense when lookedat from legal angle (e.g., construction of road by a business

entity on land owned by the municipality), but the substance ofthe matter may demand such expense be shown as asset (e.g., ifsuch road is primarily used by the business entity for its businesspurposes).

Consistency:

A business entity frames accounting policies that lay down rulesfor presentation of financial statements. Accounting policies,once framed, should be consistently followed. However, suchpolicies may be changed if circumstances so warrant.


1-13

62

Financial Accounting/ DR ASHISH /

IMT / 2010

1-14


63/69

Financial tatements: O jective

To provide information about thefinancial

position,performance and cash flows of an

enterprise that is useful to a wide range of users

in makingeconomic decisions.

Financial statements do not necessarily provide

non-financial information.


1-14

63


IMT / 2010

1-15


64/69

Financial tatements: QualitativeCharacteristics

Understandability

Relevance

Reliability

Faithful representation

Substance over form

Prudence

Neutrality

Comparability


1 15

64


IMT / 2010

1-17


65/69

Financial Elements: Definition

Assets are economic resources controlled by theenterprise as a result ofpast events from which

future economic benefits are expected to flow to

the enterprise.

Liabilities are present obligations of the enterprisearising from past events, the settlement of which

is expected to result in an outflow from the

enterprise of resources embodying economic

benefits.

Equityis the residual interest in the assets of the

enterprise after deducting all its liabilities.


1 17

65


IMT / 2010

1-18


66/69

Financial Elements: Definition

Income is increase in economic benefits during theaccounting period in the form of inflows or enhancement

of assets or decreases of liabilities that result in increases

in equity, other than those relating to contributions from

equity participants. Expenses are decreases in economic benefits during the

accounting period in the form of outflows or depletion of

assets or incurrence of liabilities that result in decreases

in equity, other than those relating to distributions to

equity participants.


1 18

66


IMT / 2010

1-19


67/69

Corporate Financial Statements

What are the corporate financial statements?

Balance Sheet

Shows the financial position (position of assets,

liabilities and equity) as on the reporting date. Profit & Loss Account

Shows the financial results (profit or loss) for an

accounting period.

Cash Flow Statement Shows the net increase /decrease in cash and cash

equivalents during the accounting period.


9


IMT / 2010

1-20


68/69

Fundamental AccountingAssumptions

What are the fundamental accountingassumptions?

Accrual

Going concern Consistency.

Why are they called Fundamental?

Financial Accounting: An introduction68


IMT / 2010


69/69

69

Internal Accounting Controls

Basic Principle: make it as difficult as is

practical for people to be dishonest or

careless.

Activities that reduce possibility of theft, or

intentional or unintentional mistakes.


Date post:	29-May-2018
Category:	Documents
Upload:	racs25
View:	220 times
Download:	0 times

1. Mechanics of Accounting

Documents