Basics of Accounting Mechanics-Processing Accounting Information

Welingkar’s Distance Learning Division

Financial Accounting

CHAPTER-1. Accounting Mechanics: Processing Accounting Information

We Learn – A Continuous Learning Forum

Financial Accounting Accounting Mechanics :

Processing Accounting Information Chapter Two

ImportanceImportance

‘ Accounting Mechanics ’ shows us how

Accountants collect and record accounting data for

preparation of principal financial statements

required by GAAP.



Concept & Operation of ‘ Account ’Concept & Operation of ‘ Account ’

‘ Account ’ is a summary device to record transactions in Company’s books of accounts.

It is a label to record changes in assets, liabilities and shareholders’ equity.

Account Head _________________________________________

Debit Credit

The balance in an account is the difference between the totals of debits and credits.



Cash vs. Accrual AccountingCash vs. Accrual Accounting

‘

Accrual Accounting Cash Accounting

Record Income When earned. When money received.

Record Expense When Incurred When Paid.

Use Universal Small units.

Mandatory Yes. GAAP Not Recognized. Requirement.

In this course we will use the accepted accrual system of accounting.




‘

Accounts are classified as :

Personal Accounts

Real Accounts

Non Personal Accounts }

Nominal Accounts




‘

Accounts are classified as :

Personal Accounts – related to persons like debtor, creditor, supplier or customer.




‘

Accounts are classified as :• Personal Accounts

Real Accounts – related to assets, of the firm but not its debt. e.g. Land , Buildings, Plant, Cash etc.




‘

Accounts are classified as :• Personal Accounts• Real Accounts

Nominal Accounts – related to expenses, incomes, losses and gains. e.g. salaries, interest, travel etc.




‘

Accounts are classified as :• Personal Accounts• Real Accounts• Nominal Accounts – related to

expenses, incomes, losses and gains. e.g. salaries,

interest, travel etc.

‘ net result of all the nominal accounts is reflected as P & L for the

accounting year.’




‘

Golden rules of double entry #1 For real accounts; debit (dr) what comes in, and credit (cr) what goes out.

Purchased materials – dr Inventory.Issued cheque for it - cr Bank




‘

Golden rules of double entry #1 - For real accounts; debit (dr) what comes in, and credit (cr) what goes out.

# 2 - For personal accounts; debit (dr) the receiver, and credit (cr) the giver.

Issued cheque to Sachin – dr SachinRecd. cheque from Sachin – cr Sachin




Golden rules of double entry #1 - For real accounts; debit (dr) what

comes in, and credit (cr) what goes out.

#2 - For personal accounts; debit (dr) the receiver, and credit (cr) the giver.

#3 - For nominal accounts; debit (dr) expenses / assets, and credit (cr) income /liabilities.

Distributed salaries – dr SalariesRecd. Interest cheque – cr Interest




Golden rules of double entry :

You buy a machine for Rs 15,000/- & issue cheque.

Dr Machinery ( Rule # 3 – dr expenses )Cr Bank ( Rule # 1 – cr what goes out )





You issue cheque of Rs 10,000/- for car hire.

Dr Travel ( Rule # 3 – dr expense )Cr Bank ( Rule # 1 – cr what goes out )





You receive cheque of Rs 10,000/- for interest on Fixed Deposit.

Dr Bank ( Rule # 1 – dr what comes in )Cr Interest ( Rule # 3 – cr incomes )




Golden rules of double entry :You sell goods worth Rs. 10,000/- and offer 5% quantity ( trade ) discount. You receive cheque.

Dr Bank Rs 9,500/- Cr Sales Rs 9,500/-

‘trade discount is a reduction in market price. Market price is not relevant in accounting, & is ignored.




Golden rules of double entry :You sell goods worth Rs. 10,000/- and offer 5% cash discount. You receive cheque.

Dr Bank Rs 9,500/-Dr Discount allowed Rs 500/-

Cr Sales Rs 10,000/-

Cash discount is an extra discount allowed (or earned) for early cash settlement, hence

recorded in the books’



‘ Journal & Ledger’‘ Journal & Ledger’

The Journal

‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’




The Journal ‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’

The General Ledger

‘ is the book where details of all accounts are maintained.’

Entries in the Journal are periodically posted to the respective accounts in the Ledger.




The Journal ‘is the Book of Prime Entry where all entries are first recorded in a chronological order.’ The General Ledger ‘ is the book where details of all accounts are maintained.’

“ in computerized environment these two stages get rolled into one “



‘ Accounting Process ’‘ Accounting Process ’

1 Identify the transaction.

- recognizable, recordable event with monetary impact.




1 Identify the transaction. 2 Prepare a voucher

- a source document bearing approved monetary value e.g. cash receipt, cheque, customer invoice, deposit slip, supplier invoice, material receipt etc.




1 Identify the transaction. 2 Prepare a voucher

3 Analyze and classify transaction - identify accounts affected, find out whether to be debited or credited & by how much.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction

4 RecordBy preparing entry in appropriate journal ( manual accounting)




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record

5 Post journal entry into ledger account Thus all transactions on an account are available at one place & net balance can be arrived at




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger

6 Prepare a trial balance a simple listing of all the accounts with their net balances. Ensure debits equal credits to eliminate recording errors.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger

6 Prepare a trial balance Remember balanced listing does not eliminate compensating errors or missing entries.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger6 Prepare a trial balance

7 Prepare adjusting entries for deferrals, accruals & depreciation.





Deferral : An adjustment for which the business paid or received cash in advance.






Accrual : An expense or a revenue occurring before the business pays or

receives cash.






Accrual : An expense or a revenue occurring before the business pays or

receives cash.Depreciation : An allocation of the cost of a

plant asset to expense over the asset’s useful life.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.

8 Prepare adjusted trial balance.- include adjusting entries




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.8 Prepare adjusted trial balance.

9 Prepare principal financial statements.





Income Statement

- from the revenue, expenses, gains and losses.




9 Prepare principal financial statements.$ Income Statement

$ Balance Sheet

- prepared from the assets, liabilities and equity accounts.




9 Prepare principal financial statements.$ Income Statement $ Balance Sheet

$ Statement of Retained Earnings

- prepared from the net income and dividend information.




9 Prepare principal financial statements.$ Income Statement $ Balance Sheet

$ Statement of Retained Earnings

$ Cash Flow Statement- prepared from other financial

statements by direct or indirect method ( discussed in Chapter Five later).





$ Income Statement $ Balance Sheet

$ Statement of Retained Earnings $ Cash Flow Statement

With these four you are in compliance with GAAP.




1 Identify the transaction. 2 Prepare a voucher3 Analyze and classify transaction 4 Record 5 Post in the Ledger6 Prepare a trial balance7 Prepare adjusting entries and post into ledger.8 Prepare adjusted trial balance.9 Prepare principal financial statements.

and the job is complete!




and the job is complete!

However, you have still toi) prepare closing journal entries that

close temporary accounts & post them to Ledger




and the job is complete!However, you have still to

i) prepare closing journal entries that close temporary accounts & post them

to Ledgerii) prepare after-closing trial balance

‘ to make sure that debits equal credits’




and the job is complete!However, you have still to

i) prepare closing journal entries that close temporary accounts & post them to Ledgerii) prepare after-closing trial balance

iii) Prepare reversing journal entries;this way you have ensured that accruals and deferrals of this year do not result in double accounting next year.



“ The importance of “accounting mechanics : processing accounting information “ is to collect, process, classify, compile, check and present meaningful financial data for decisions that have to taken in the modern business world!”

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Basics of Accounting Mechanics-Processing Accounting Information

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