Accounting Mechanics Processing Accounting Information

Importance
Importance

‘ 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 Accounting
Cash 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

‘


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

‘

• Personal Accounts

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

‘

• Real Accounts

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

‘

• 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

‘

#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 Sachin
Recd. cheque from Sachin – cr Sachin


#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 Salaries
Recd. 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 )


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.


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.’

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

Journal & 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.

Accounting Process


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.

Accounting Process

2 Prepare a voucher

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

Accounting Process

2 Prepare a voucher
4 Record
By preparing entry in
appropriate journal ( manual
accounting)

Accounting Process

2 Prepare a voucher
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

Accounting Process

2 Prepare a voucher
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.

Accounting Process

2 Prepare a voucher
4 Record
Remember balanced listing does not
eliminate compensating errors or
missing entries.

Accounting Process

2 Prepare a voucher
4 Record

7 Prepare adjusting entries for
deferrals, accruals & depreciation.

Accounting Process


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

Accounting Process


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

Accounting Process


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.

Accounting Process

2 Prepare a voucher
4 Record
7 Prepare adjusting entries and post into ledger.

Accounting Process

2 Prepare a voucher
4 Record
8 Prepare adjusted trial balance.
- include adjusting entries

Accounting Process

2 Prepare a voucher
4 Record

9 Prepare principal financial statements.

Accounting Process


Income Statement

- from the revenue, expenses,
gains and losses.

Accounting Process

$ Income Statement

$ Balance Sheet

- prepared from the assets,
liabilities and equity accounts.

Accounting Process

$ Income Statement
$ Balance Sheet

$ Statement of Retained Earnings

- prepared from the net income and
dividend information.

Accounting Process

$ Income Statement
$ Balance Sheet
$ Cash Flow Statement
- prepared from other financial
statements by direct or indirect
method ( discussed in Chapter Five
later).

Accounting Process


$ Income Statement
$ Balance Sheet
$ Cash Flow Statement

With these four you are in compliance with GAAP.

Accounting Process

2 Prepare a voucher
4 Record

and the job is
complete!

Accounting Process

and the job is complete!

However, you have still to
i) prepare closing journal entries that
close temporary accounts & post them to
Ledger

Accounting Process

Ledger
ii) prepare after-closing trial balance

‘ to make sure that debits equal credits’

Accounting Process

Ledger
ii) 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.

“ Theimportance 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!”

Accounting Mechanics Processing Accounting Information

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