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Slide 1: ITM EEC, Batch 13B Classification of Accounts Personal Account If the a/c head relates to any person or artificial person. In final a/c such personal a/c are located only in balance sheet. Personal a/c implies any resemblance with name of any person Real a/c deals with assets Fixed tangible assets (see, feel ,touch) & fixed intangible assets (documents & promise) Real a/c appears in balance sheet on assets side. It never appears in trading & p/l a/c If the amount is receivable from any person Fixed tangible Assets eg debtors or If the amount is payable to any Land & Bldg person eg creditors, Then such person’s a/c is Plant & Machinery personal a/c. Furniture & Fixtures Vehicles & Equipments Computer Livestock REPRESENTATIVES A/C FIXED INTANGIBE ASSETS Outstanding expenses (expense payable) Goodwill Pre received income Patent Prepaid income/expense paid in advance Copyright Outstanding income Trademark Licenses Franchises Cash BUSINESS HAS TO RECEIVE FROM OR PAY TO Bills Receivable Investments. Stock of Goods is a real a/c (see feel touch) All Expense Accounts All Income Accounts Trading Account Profit & Loss Account Real Account Nominal Account Expenses Purchases Wages Inward expenses Factory Expenses Administrative Expenses Selling & Distribution Expenses Outward Expenses Interest paid on Loan given Depreciation All Losses Bad Debts Discount Allowed. ETC Income Sales Rent received Commission Received Financial Accounting – Term I (0.1) Page 1
Slide 2: ITM EEC, Batch 13B Journal Entry Personal Account o o o o Debit the Receiver Receivable from any Person that Person is Debited (eg Debtors or Loan Given) Credit the Giver Payable To Any Person that Person is Credited (eg Capital ,Loan Taken,Creditors.) o o o o Debit what Comes in Credit what Goes Out Debit means Increase Of Asset Credit means Decrease of Asset o o Debit Expenses & Losses Credit Incomes & gains Real Account Nominal Account Date / Sr. no. 1 Cash A/c. Dr 5000 Particulars LF Dr Cr To Sales A/c. (Being Sales made) 2 To Cash A/c (Being cash purchase of goods) 3 To Cash a/c (Being goods returned to us by customers & we paid tjhem Cr 5000 Sale return a/c Dr 5000 Cr 5000 Purchase A/c Dr 5000 Cr 5000 Financial Accounting – Term I (0.1) Page 2
Slide 3: ITM EEC, Batch 13B cash back) 4 To Purchase return a/c (Being purchased goods returned to supplier and recd cash back) 5 To Creditors a/c (Being purchase of goods on credit from supplier) 6 To Sales a/c (Being Credit sale of goods to customer) 7 To Sales a/c (Being goods sold on credit to saurav) 8 To Amol a/c (Being goods purchased from amul on credit) 9 Amul a/c Dr Cr Purchase a/c Dr Cr Saurav a/c Dr Cr Debtors a/c Dr Cr Purchase A/c Dr Cr 50000 Cash a/c. Dr 5000 Financial Accounting – Term I (0.1) Page 3
Slide 4: ITM EEC, Batch 13B To Purchase Return a/c (Being purchase return of the above goods to amul) 10 To Saurav a/c Cr Sale return a/c Dr Cr  Rule : Any exps incurred for purchase/construction/installation/acquisition of the asset is to be debited to that particular asset. Important 1 To cash a/c (Being wages paid on installation of P & M) 2 To Cash / Bank a/c (Being stamp duty & registration paid on purchase of property) 3 P & M a/c Stock a/c Bank a/c Dr 1000 Dr 2000 Dr 3000 Cash a/c Dr 4000 Cr Land & Building a/c Dr Cr Plant & Machinery a/c Dr Financial Accounting – Term I (0.1) Page 4
Slide 5: ITM EEC, Batch 13B To Capital / Owners Capital a/c (Being Cash Rs 4000/-, P&M Rs 3000/-, Stock Rs 2000/- brought by owner & converted his savings a/c into current a/c Rs. 1000/4 To owners cap. a/c (Being interest on capital payable to owner) 5 To owners / partners cap a/c (Being salary payable to partner) 6 To Partners Loan a/c (Being Interest on partners loan payable) 7 To Partners Cap a/c (Being commission to partner payable) 8 To Interest on Drawing a/c Cr Owners Drawing a/c Dr Cr Commission to partner a/c Dr Cr Interest on partners loan a/c Dr Cr Salary to Partner a/c Dr Cr Interest on Cap A/c Dr Cr 10000 Financial Accounting – Term I (0.1) Page 5
Slide 6: ITM EEC, Batch 13B (Being Interest on Drawing receivable) 9 Goods withdrawn a/c Asset taken over a/c LIC / Medical To Cash / Bank a/c To Goods a/c To Asset a/c (Being Cash withdrawn Rs. 4000/-, Goods withdrawn Rs. 3000/-, Asset taken over Rs. 2000/-, LIC/Mediclaim/Club bill/House Rent/I.T/ Sons Fees/Wifes Gift paid through chq. Rs. 1000/- from business) Cr 2000 Cr 3000 Cr 5000 Dr 1000 Dr 2000 Dr 3000 Drawings a/c Dr 4000 1 To Goods (Being Goods Loss by fire) 2 Loss by fire a/c Dr 2000 Cr Loss by fire a/c Dr Financial Accounting – Term I (0.1) Page 6
Slide 7: ITM EEC, Batch 13B Insurance Claim a/c To Goods loss by fire (Being goods loss by fire Rs.5000/-, Insurance Claim admitted Rs. 3000/-) 3 To Insurance Claim a/c (Being above insurance claim recd) 4 loss by fire a/c To Goods (Being goods lost by fire Rs. 5000/-, Ins. Co. settled for Rs. 4000/-) 5 Discount a/c To Sales a/c 6 To Cash a/c To Discount recd. a/c Cr 50 Cr 4950 Purchase a/c Dr 5000 Cr 5000 Dr 50 Cash a/c Dr 4950 Cr 5000 Dr 1000 Cash a/c Dr 4000 Cr Cash a/c Dr Cr 5000 Dr 3000 Financial Accounting – Term I (0.1) Page 7
Slide 8: ITM EEC, Batch 13B (Goods purchased for 5000/- & recd discount of Rs. 50/-) Closing Entries 1 To Trading a/c. (Being Closing Stock valued at cost of market value whichever is lower) 2 To Fixed Asset a/c (Being Depreciation of fixed Tangible Asset) 3 To Reserve for Doubtful Debts (R.D.D.) a/c (Being R.D.D Created) 4 To expenses payable / outstanding exps a/c (Being Outstanding Expenses payable) 5 To outstanding electricity a/c Cr Electricity a/c Dr Cr Expenses a/c Dr Cr Profit & Loss a/c Dr Cr Depreciation a/c Dr Cr Closing Stock a/c Dr Financial Accounting – Term I (0.1) Page 8
Slide 9: ITM EEC, Batch 13B (Being electricity bill payable) 6 To Salaries (Being prepaid salaries) 7 To Rent a/c (Being outstanding rent payable) 8 To Pre received commission a/c Cr (Pre received commission from Amul) Commission a/c Dr Cr Outstanding Rent a/c Dr Cr Prepaid Salary a/c Dr Financial Accounting – Term I (0.1) Page 9
Slide 10: ITM EEC, Batch 13B Trading Account       Trading Account is prepared by the trader generally on the last date of any year to get either gross profit or gross loss. Trading Account is prepared from the trial balance. Trading Account is the mixture of goods account and factory related expenses. Goods when comes in are recorded on the Debit Side. Goods when goes out are recorded on the Credit Side. (Eg. Net Sales, Loss By Theft or Fire, Goods distributed as Free Samples). Closing Stock is valued at cost or market value, whichever is less. o Based on principle of Conservation which says “Provide for known losses, do not provide for known gains.” All the losses of goods & goods distributed as free samples are to be recorded at cost unless instructed otherwise. In Trading and Profit & Loss Account on the DEBIT side, Expenses & Losses are recorded and on the CREDIT side, Income & Gains are recorded. Therefore gross profit from Trading Account is transferred to Profit & Loss Account on CREDIT side, Therefore gross loss from Trading Account is transferred to DEBIT side.   Financial Accounting – Term I (0.1) Page 10
Slide 11: ITM EEC, Batch 13B XYZ Corporation Trading Account for year ended 31 March 2008 Dr. Particulars Amount Total Particulars Amount Total Cr. To Opening Stock To Purchases (-) Less Purchase Return To Factory Expenses To Wages / Salaries To Lightning & Heating To Buying Expenses To Import Duty To Clearing Charges To Custom Duty To Port Charges To Carriage Inward To Freight Inward To Octroi Duty To Unloading Charges To Inward Expenses To Primary Packing To Works Manager Salary To Factory Manager Salary To Royalty On Production To Motive Power To Consumables Or Stores (eg. Coal, Coke, Oil Gas) To Gross Profit (Balancing Figure) Total By Sales (-) Less Sales Return By Closing Stock By Loss of Goods By Flood/Famine By Loss of Goods by Theft By Loss of Goods by Fire By Goods Distributed As Free Sample By Drawing of Goods By The Owner/Partner By Gross Loss (Balancing Figure) Total Financial Accounting – Term I (0.1) Page 11
Slide 12: ITM EEC, Batch 13B Profit & Loss Account  Profit & Loss Account conceptually records payments related to third parties (not owners) for example Payments related to Auditors, Lawyers, Government, Suppliers (Interest on delay payment to suppliers), Electricity etc. Profit & Loss Account on the CREDIT side records all the incomes other than Sales Land Never depreciates but building does from day one. Profit & Loss Account – 3rd Party Related i.e. Non Owners    Financial Accounting – Term I (0.1) Page 12
Slide 13: ITM EEC, Batch 13B XYZ Corporation Profit & Loss Account for year ended 31 March 2008 Dr. Particulars Amount Total Particulars Amount Total Cr. To Gross Loss B/D To Office & Admin Expenses To Salaries (Office Staff) To Printing & Stationary To Staff Welfare To Postage / Telegram To Rent / Rates / Taxes To Repairs & Maintenance To Office Insurance To Telephone Expenses To General Expenses To Audit Charges To Legal Charges To Director Fees To Bank Charges To Bonus To Interest on loan taken To Interest on delay in payment to supplier To Selling & Distribution Expenses To Carriage outward To Discount Allowed To Travelling & Sales Conveyance To Salesman Salaries To Sales Manager Salaries To Sales Commission To Depreciation on Office Furniture By Gross Profit B/D By Bad Debts Recovered Financial Accounting – Term I (0.1) Page 13
Slide 14: ITM EEC, Batch 13B To Depreciation on Fixed Assets To Provision for Taxation To Provision for Doubtful Debts To Provision for Reserve for Discount on Debtors. To Loss on Sale on Investment To Loss on Sale on Fixed Asset To Net Profit (Transfer to P&L Appropriations Account) Total Total Financial Accounting – Term I (0.1) Page 14
Slide 15: ITM EEC, Batch 13B XYZ Corporation Profit & Loss Appropriation Account Dr. Particulars Amount Total Particulars Amount Total Cr. To Drawings (a) Partner 1 (b) Partner 2 To Preference Dividend To Equity Dividend To Transfer To Reserves To Retained Earnings (Reserves & Surplus) To Interest on Capital (to Owner/Partner) To Salary to Owner / Partner To Commission to owners To Interest Paid on Partner Loan Taken By Net Profit B/D By Interest on Drawings Total Total Financial Accounting – Term I (0.1) Page 15
Slide 16: ITM EEC, Batch 13B XYZ Corporation Capital Account Dr. Particulars Amount  To Drawings  To Interest on Drawings To Additional Drawings Personal Expenses Personal Insurance (LIC/Mediclaim) Personal Expenses (Son’s Fees, Wife’s Gift) Income Tax       By Balance B/D (Opening Capital) By Profit By Interest on Capital By Salary To Partner By Brokerage / Commission to Partner  Total Particulars Amount Total Cr.     To Balance Closing (Closing Captal) Total: Total: Financial Accounting – Term I (0.1) Page 16
Slide 17: ITM EEC, Batch 13B Trial Balance             All Expenses & Assets – DEBIT BALANCE All Income & Liabilities – CREDIT BALANCE Trial Balance is the List of Balance Amount which is prepared from closing the ledger account. Closing Debit Balance of any account will be given DEBIT in the Trial Balance. Typically all the expenses & Assets will show debit balance. If any account shows closing credit balance in the ledger account it will be given CREDIT in trial balance. Any amount payable to any person will have CREDIT balance, while any amount receivable from any person will have DEBIT balance. Trial Balance MUST tally. RDD = Reserve for Doubtful Debts RFDD = Reserve for Discount on Debtors NRDD = New Reserve for Doubtful Debts ORDD = Old Reserve for Doubtful Debts RFDC = Reserve For Discount on Creditors DEBIT Account Dr.     Cr. Dr. Cr. Account CREDIT Receivable Expenses Assets Debtors Drawings Payable Income Liabilities Creditors Capital Financial Accounting – Term I (0.1) Page 17
Slide 18: ITM EEC, Batch 13B XYZ Corporation Trial Balance as at 31 March 2008 Sr. No. Particulars Debit Amount Credit Amount  Owner’s Capital  Owner’s Drawings  Furniture & Fixtures (Fixed Assets)  Plant & Machinery (Fixed Assets)  Loans Taken  Carriage Inward  Carriage Outward  Discount Received  Commission Received  Discount Allowed  Rent Received  Purchase  Sales  Return Inward (Sale Return)  Return Outward (Purchase Return)  Investment  Bank Overdraft  Debtors  Creditors  Goodwill Financial Accounting – Term I (0.1) Page 18
Slide 19: ITM EEC, Batch 13B  Cash Credit  Cash In Hand  Advertisement  Prepaid Expenses  Outstanding Expenses  Pre-received Income  Outstanding Income  Investment in KVP / NSC  Bills Payable  Bills Receivable  Bad Debts Recovered  Bad Debts  Profit from Sale of Investment or Fixed Asset  Suspense Account  Total     Suspense Account on Debit Side means any asset or expense has been unrecorded. Suspense Account on Credit Side means any liabilities or income has been unrecorded. Financial Accounting – Term I (0.1) Page 19
Slide 20: ITM EEC, Batch 13B Balance Sheet        Not an Account, Just a statement or Report as on a given Date or Time. Also known as financial statement. Will not have a Debit or Credit Side. Shows position of Assets or Liabilities. In India (Horizontal Format), Balance Sheet is divided into 2 sides I.e. Liabilities (LHS) and Assets (RHS) Asset = Receivable, Application of Fund, Funds Deployed. Liabilities = Payable Side, Source of Funds. Assets are depreciated every year from balance sheet. It is shown as fixed assets less depreciation. Classification Liabilities      Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions     Fixed Assets Investments Current Assets & Loans & Advances Miscellaneous Expenses Not Written Off Assets Capital for Ownership or Partnership firm  Opening Capital o (+) Profits o (+) Salary to owner o (+) Brokerage to Owner o (-) Drawings o (-) Personal Expenses o (-) Losses Capital for Company (Pvt. Ltd. / Ltd. etc)  Authorised capital/registered capital/nominal capital  Equity share capital(issued ,subscribed & paid)  Preference share capital(issued ,subscribed & paid) Reserves & Surplus for Company  Accumulated Profits  Retained Earnings Intangible Assets  Goodwill  Patents  Copyrights  Trademarks  Rights  Franchise Fixed Assets  Fixed assets are the long term assets which are used for production of goods & services for years to come  Land & building  Plant & machinery  Furniture & fixtures  Vehicles & equipment  Capital WIP (Work In Progress)  Computers Page 20 Financial Accounting – Term I (0.1)
Slide 21: ITM EEC, Batch 13B  Capital Reserves  Securities Premium  Revaluation Reserves  General Reserves Secured Loan  Bank loan (secured against fixed assets)  Mortgage loan Unsecured Loan  Loan from friends  Loan from relatives  Loan from wife Current Liabilities  Cash credit  Bank overdraft  Creditors  Suppliers  Accounts payable  Suppliers ledger balance  Bills payable  Outstanding expenses  Expense payable  Expenses due  Expenses accrued  Pre-received income  Income received in advance Provisions  Provision for taxation  Provision for gratuity fund.  Books  Loose tools  Car  Fan  Cupboard  (-) Depreciation Investments  Investments in shares of other company  Investment in debentures of other company  Investment in government securities  Investment in mutual funds  Investment in bank fixed deposits  Investments in gold  Investment in postal schemes. Current Assets  Cash /Cash In Hand/Cash At Box  Bank/ Bank Balance/Cash At Bank  Debtors  A/C Receivable /Book Debts /Sales Ledger Balance  Customer Account (Dr. Bal I.E. Receivable)  Bills Receivable  Outstanding Income/Income Receivable  Commission Receivable  Prepaid Expenses/Expense Paid In Advance  Advance Salaries ,Advance Tax  Loan To Someone (For Less Than 12 Months) Miscellaneous Expenses Not Written Off  Heavy advertisement expenses  Preliminary exp not written off  Formation exp not written off  Underwriting commission not written off  Heavy losses not written off Financial Accounting – Term I (0.1) Page 21
Slide 22: ITM EEC, Batch 13B Profit & Loss Account (Dr. Balance i.e. Profit) Financial Accounting – Term I (0.1) Page 22
Slide 23: ITM EEC, Batch 13B XYZ Corporation Balance Sheet As At 31 March 2008 Liabilities Particulars Amount Total Particulars Amount Total Assets Capital (-) Drawings Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions Creditors (-) Reserve for Discount on Creditors Fixed Assets (-) Provision for Depreciation Closing Stock (-) Stock Reserve Investments Current Assets & Loans & Advances Miscellaneous Expenses Not Written Off Debtors (-) Reserve for Doubtful Debts (-) Reserve for Discount on Debtors Total Total Financial Accounting – Term I (0.1) Page 23
Slide 24: ITM EEC, Batch 13B Cost Sheet Cost Account In Books of Manufacturer Manufacturer – Buys Raw Material & Sells Finished Goods Cost Sheet Prepared at the Start of the Year To know selling price per unit (for that it is important to know cost per unit.) To determine profit. Factory, Admin, Sales & Distribution – Are ESTIMATED Exclude Financial Income & Expenses Include All Financial Income & Expenses Factory, Admin, Sales & Distribution – Are ACTUALS Prepared at the End of the Year Trading Account, Profit & Loss Account, Balance Sheet Trader – Buys Finished Goods & Sells Finished Goods In Books of Trader Financial Account        Prime Cost / Direct Cost = Direct Material + Direct Labour + Direct Expense Indirect Cost = Factory Overheads + Administrative Overheads + Selling & Distribution Overheads Factory (/Works) Cost = Prime Cost +Factory Overheads – Sale Of Scrap + Opening Stock WIP – Closing Stock WIP Cost Of Production = Factory Cost + Administrative Overheads Production Cost of Goods Sold = Cost Of Production + Opening Stock of Finished Goods – Closing Stock of Finished Goods Cost of Sales = Production Cost of Goods Sold + Selling and Distribution Cost Sales = Profit + Cost of Sales OR Profit = Sales – Cost of Sales  From start (Direct Material) till cost of Production, all calculation will be made on Production Unit (Units Produced) AND Production Cost of Goods Sold (PCOGS) till Sales (End), all calculations will be based on Sales Unit (Units Sold). Financial Accounting – Term I (0.1) Page 24
Slide 25: ITM EEC, Batch 13B    Factory Overheads are Calculated as % of Direct Wages Administrative Overheads are calculated as % of Factory Cost Sales & Distribution Overheads are calculated as % of Sales   COP = Cost Of Production COPPU = Cost Of Production Per Unit  Concept of Valuation of Closing Stock in the Cost Sheet o In the absence of Information, Closing stock of finished goods is to be valued at Cost Of Production Per Unit. o Based on FIFO Principle, Opening stock of Finished Goods is fully sold out. o Closing Stock of Finished Goods forms a part of current year’s production unit. o Current Year’s Production Unit is valued at Cost of Production Per Unit. o Closing Stock of Finished Goods is valued at Cost of Production Per Unit.  Pure Financial Expenses are excluded/ignored i.e. Bad Debts Written Off, Interest on Capital, Dividends, Write Offs.  Inward Expenses / Buying Expenses o Custom duty o Import duty o Dock charges o Clearing charges  Factory Overheads o Supervisor salary o Indirect wages o Indirect labour o Unproductive wages o Unproductive labour o Factory manager salary o Worker manger salary o Salary of watchman o Indirect material o Indirect expness o Factory insurance o o o o o o o o o o o Machinery upkeep Oil/ grease/ coal/ crude oil/Coke/fuel/cotton. Depreciation on factory assets Depreciation on plant and machinery Manufacturing expness Production expenses Power / fuel/ motive power Consumables & stores. Factory cleaning Excise duty Research and laboratory expness o o o Octori duty Unloading charges Buying expness/Inward expenses Financial Accounting – Term I (0.1) Page 25
Slide 26: ITM EEC, Batch 13B o o o Repairs and maintenance of machinery Factory lighting and heating Employees state insurance corporation.  Administrative Overheads o Office overheads o Office on cost o General expenses o Legal expenses o Audit charges/ bank charges o Salary on staff o Administration manager salary o Director fees / remuneration o Printing and stationary o o o o o o o o Depreciation on office building Depreciation on office computer Rent and rates of offices Estimation expenses Stationary and consumables Postage / fax / telex Office upkeep General office manager salary  Selling & Distribution Overheads o Selling on- cost o Selling burden/ overheads o Sales promotion expenses o Advertisement o Depreciation on delivery vans/vehicles o Secondary packing o Packing o Packing material o Carriage/ freight outward o Commission on sale o Salary’s to sales staff o o o o o o o o o o o Rent/repairs/lighting/depreciation of show room Depreciation of warehouse Sales of sales office Travelers salary Traveling and conveyance Loading expenses Upkeep of delivery van Sales manager salary Donation of goods Discount allowed Rent of warehouse Financial Accounting – Term I (0.1) Page 26
Slide 27: ITM EEC, Batch 13B XYZ Corporation Cost Sheet Elements Raw Material Consumed + Opening Stock of Raw Material + Purchase of Raw Material - Return of Raw Material + Inward Expenses - Closing Stock of Raw Material Direct Labour Direct Expenses (1) Prime Cost Factory Overheads + Factory Rent + Factory Insurance - Sale Of Scrap + Opening Stock of WIP - Closing Stock of WIP (2) Factory Cost Administrative Overheads + Bank Charges + Legal & Audit Charges (3) Cost of Production Opening Stock of Finished Goods - Closing Stock Of Finished Goods (4) Production Cost Of Goods Sold Selling & Distribution Units Amount Amount CostPerUnit Financial Accounting – Term I (0.1) Page 27
Slide 28: ITM EEC, Batch 13B Cost of Sales Profit Sales Financial Accounting – Term I (0.1) Page 28