1. Basic Accounting Level II
By
Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM
Global Technology Services LLc, UAE
Email:sivakumar3009@gmail.com
2. Agenda
What is Accounting
Mode of Learning Accounting
Accounting and Finance - Difference
Accounting Concepts / Conventions
Accounting Events
Rules of Accounting
Preparation of Financial Statements
A Simple Case Study
2
3. What is Accounting
Vision Enterprises
Financial Statement
at December 31, 1997
Vision Enterprises
Assets Financial Statement
Cash at December 31,$4,456
JOURNAL
1997
Account Receivable Vision$5,714
Enterprises
Land Assets $ 981
Financial Statement
Cash --------- 1997
at December 31,$4,456
Total Assets
Account Receivable $11,151$5,714
Land Assets ======$ 981
Liability Cash --------- $4,456
Total Assets
Account Payable $3,830$11,151$5,714
Account Receivable
Land $ 416======$ 981
Notes Payable --------- ---------
Liability
Total Assets $4,246 $3,830$11,151
Total Liability Payable
Account
======$ 416======
Notes Payable $2,365---------
Liability
PAYMENT Stockholder’s Equity $ 367$4,246 $3,830
Contributed Liability Payable--------- ======$ 416
Account
Total Capital
Retained Earnings Payable $2,732 $2,365---------
Notes
Total Stockholder’s Equity
Equity Stockholder’s ======$ 367$4,246
Contributed Liability
Total Capital --------- ======
Retained Earnings $2,732 $2,365
Total Stockholder’s Equity
Equity Stockholder’s ======$ 367
Contributed Capital ---------
Retained Earnings $2,732
Total Stockholder’s
Equity ======
?
Accounting is defined as the art of Recording,
Classifying and Summarizing transactions in
monetary terms (in Money terms) for the
preparation of Financial Statements
3
4. What is Accounting
Accounting is the art of recording, classifying and Summarizing
financial transactions in the Preparation of Financial Statements
Recording refers to creating Journal entry for every financial
transaction with Debit and Credit amounts.
Classifying refers to Classifying each of the Debit / Credit
Transaction to Capital or Revenue and Asset, Liability, Revenue or
Expense
Summarizing refers to Grouping the Transactions of Asset,
Liability, Revenue and Expenses and preparing the Financial
Statements (Trading, Profit and Loss Account and Balance Sheet)
In case of
• Trading, Manufacturing and Customer Service oriented
Organization, the sum of all income and expenses is referred to
as Profit and Loss account
• Social Service oriented Organization like Schools, Hospitals and
Government Organizations, Banks it is referred to as Income
and Expenditure account .
Note:- Trial Balance is not a Financial Statement. It is only a summary
of all Debit and Credit Transactions.
4
5. Mode of Learning Accounting
Change your mindset that accounting means
only Debit and Credit
Do not blindly learn Accounting Rules and
apply the rules of Debit and Credit
The Best way to Learn Accounting is
Learn the Accounting Concepts
Understand the Accounting Conventions
Classify the Accounting Event
Apply the Accounting Rules
Record, Classify and Summarize the Journal
• You are Confused. Am I right?
Do not become panic and move forward, you will understand
5
6. Mode of Learning Accounting
Learn Accounting Concepts
(Ten Fundamental Accounting Concepts)
Understand Accounting Conventions
(Three major conventions)
Classify the Accounting Events
(Capital, Revenue, Deferred Revenue Expenditure)
Apply the Accounting Rules
(Personal, Real and Nominal Rules)
Record the Transaction as a Journal
(Entering the Debit and Credit Side of Transaction)
Classify the Transaction
(Asset, Liability, Revenue or Expense)
Summarize the Transaction
(Prepare Trial Balance, Trading, P&L and Balance Sheet)
6
7. Finance and Accounting - Difference
Finance Accounts
Procurement and Utilization of Recording of an Accounting
Funds Event
Leads to Investment Decisions Expressed in Monetary Terms
Financing Decisions Recording , Classifying and
Summarizing Transactions
Futuristic Preparation of Financial
Statements (Trading, Profit and
loss Account and Balance
Sheet)
Cost of Capital Historical
Cash Flow / Fund Flow Compliance with Statutory
Matters like companies Act,
Income Tax Act, Sales Tax Act
Etc.,
Project Appraisal
Ratio Analysis 7
8. Accounting Concepts/Conventions
(US GAAP/UK GAAP/IFRS/SOX)
The Concepts and conventions of accounting are
developed by IASC (International Accounting Standards
Committee) which is in-charge of releasing International
Accounting Standards (IAS)
The IASC Decides the preferred Accounting practices
worldwide and encourages the worldwide acceptance
There are 41 International Accounting Standards
Now IFRS (International Financial Reporting Standards)
and SOX (Sarbanes Oxley) Act gain more importance
which came up from US GAAP and UK GAAP
8
9. Difference between Concepts and Conventions
The Accounting Concepts / Principles evolved out of the
Practice and Procedures followed by different countries
and later on established by the International Statutory
Accounting Bodies like The Institute of Chartered
Accountants of India, The Institute of Chartered
Accountants of England and Wales etc to become an
Accounting Principle statutorily need to be followed
while preparing the Financial Statements. In nutshell this
has evolved out of standard Practice followed by several
countries while preparing the Trading, Profit and Loss
Account and Balance Sheet.
The Accounting Conventions / Practices are basically
assumptions and expected to be followed while
preparing the Financial Statements. 9
12. Accounting Concepts
Business Entity Concept
Accounts can be kept only for Entities, which are different from the
persons who are associated with these entities
Ex. Sole Proprietary, Partnership firm, Company
This is one of the most Important and fundamental accounting
principle with which Double entry system of accounting has evolved.
Accounts need to be maintained separate from the Owners and
providers of capital. If you understand the simple logic, then you know
30% of Accounting. Just Recall Fundamentals of Accounting from
Oracle Perspective Level I Example of Siva, Oracle and Bank.
See Next Slide for More Examples. If you cannot understand this
Concept Please Do not Proceed Further and try to understand by
reading again Level I and Level II Material
12
13. Types of Entities
Type of Organization Example
Sole Proprietary Siva & Co
Partnership Firm Ganesan Bros
Private Company Oracle India Pvt Ltd (A Private Company in which
shares are not traded in Stock Exchange and
members cannot exceed 50)
Public Company Hindustan Unilever Ltd (A Public Company in
which Shares are traded in Stock Exchange)
Closely Held Company Cadbury India Ltd (A Public Company in which
shares are not traded but shares are held by more
than 50 persons)
Trust Hutchinson Private Trust
Society Sembur Co-op Society
Association of Persons ICAI, ICWAI, ICSI, Rotary Club
Body of Individuals (one Man Corp) President of India, Governor of State
Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the
Investment and Properties for the benefit of
13
Family members.
14. Accounting Concepts
Business Entity Concept
Ex 1: You are running your own Textile Showroom as a Dealer in Cloth as a Sole
Proprietor/Individual Owner of the Business. The entire capital amount for the
Business is provided by you. In this case also for the purpose of accounting you
need to maintain Two set of books.
• One set of books for the purpose of Textile Business in which, Business
owes you equivalent to the Capital Provided (Capital + Profit earned) or
(Capital – Losses)
• In your own Books the amount of Capital invested will be shown as an
Investment in Business as an Asset. This need not be maintained as a Normal
Set of Books but required to know the Cash Inflow and Cash Outflow from
Income Tax Perspective.
Ex 2: You are working for Oracle Corporation and Oracle has a Bank Account with
Bank of America and You have Bank Account with Citi Bank and the salary at end
of every month is transferred from Bank of America to Citi Bank. How many
accounting Entities involved in this case?
• If your answer is 4, then you are right (You, Oracle Corp, Bank of America, Citi
Bank)
Ex 3: You run your own Business in Software Consulting and your Friend has
agreed to provide a Loan of 50000 USD which he goes and deposit directly into
your Bank account - How many accounting Entities involved in this case?
• If you say 3, You are right, it is only Three. (You, Your Friend and Bank)
14
15. Accounting Concepts
Money Measurement Concept
Record should be made only of that information which can be
expressed in Monetary Terms (i.e.) Currency value (USD,GBP,INR)
Ex 1. Sole Proprietor had 40 Tables & Chairs. This cannot be
recorded unless a Value of Furniture is known in monetary value
Ex 2. Very Famous Indian Example – Rama Killed Ravana. Can
this be Accounted? – NO
Ex 3. My wife Loves me so much – Can this be accounted?
– A Big NO (Hahhah). This is Flaw in Financial Accounting as it
does not understand the human values
Ex 4. My Father in Law gave his Personal Property to start my
Business. Can this be Accounted – Yes (If the Value of the
Property is provided) 15
16. Accounting Concepts
Money Measurement Concept
A Normal Doubt comes to your mind in the first and fourth
example in previous slide how to get the value. We should not be
taking the Purchase value, but we should take the Market value on
the date of transferring the assets to Business. This is an
exception to cost concept only in case of transfer to another
business
Ex 5: Siva started his software consulting Business with his own
Property (Cost Price 1 Million USD and Market Value 1.5 Million
USD) and Furniture's Cost price 50000 worth Market Value 30000
USD
- In this case, You can record Siva Capital (1530000) and Building
1500000 and Furniture 30000 as Assets
Liabilities Assets
Siva Capital 1530000 Building 1500000
Furniture 30000
Total 1530000 Total 1530000
16
17. Accounting Concepts
Dual Aspect Concept
The Value of the Assets owned by the concern is equal to the claims on
the Assets
ASSETS = LIABILITIES + OWNER’S EQUITY
OWNER’S EQUITY = ASSETS – LIABILITIES
LIABILITIES = ASSETS – OWNER’S EQUITY
Ex: If Owners Equity is 600000 and Liabilities are 400000, then Total
Asset = 1000000
Asset Owner’s Equity + Liabilities
Liabilities Assets – Owner’s Equity
Owner’s Equity Assets - Liabilities
17
18. Accounting Concepts
Cost Concept
Assets are always shown at their Cost and not at
their current Market Value
Ex 1. A Land Purchased for Rs.5 Lacs will be
recorded only at Rs.5 Lacs even though Market value
may be lower say Rs.4 Lacs or Higher Rs.6 Lacs than
the Cost Price
Ex 2. You are acquiring a Business for a Million
USD and its value as per Books is 0.8 Million, then
the difference of 0.2 Million is termed as Goodwill
and you should records the assets and liabilities at
the price you have paid for the Business (i.e.) 1
Million
18
19. Accounting Concepts
Accounting Period
Accounting measures activity for a specified interval of time, usually
a year
(e.g) Calendar Year (Jan’07-Dec’07)
Fiscal Year (Apr’07-Mar’08)
Choosing the Accounting period is the entities choice, but there are
legal rules like Companies Act and Income Tax Act which prescribes
the period in which the entity has to report to them.
Remember still Entities can have different accounting period for their
own Internal Management Reporting
A Company in India can have for Company Law Purpose (Jan-Dec)
Year and Income Tax Purpose (Apr-Mar) Year and for own internal
Reporting (Jul-Jun) Year
Note: The Entities cannot change their accounting period without
getting proper approval only in case of Companies Act and not
19
possible with Income Tax Authorities.
20. Accounting Concepts
Conservatism
Anticipate no Profits but provide for all possible losses.
Accountants are by nature Conservative and also to protect the interest of the
Shareholders and Creditors it is required to provide for all losses.
Ex 1. A pharmaceutical Company going to Loose the case filed for Patent
Right filed for a medicine
Ex 2.Company is likely to Win a Major Legal Dispute or a Sales Contract.
Note: This rule should not be misinterpreted to provide anticipated reduction
in market price of a Product and Providing Losses
Ex 3: You are a Government Company and there is a possibility that
Government will withdraw the subsidy for Fertilizers in the forthcoming
budget, You cannot provide loss of subsidy as a loss now itself.
Ex 4: The Government is likely to increase the Price of petrol which is one of
the essential input for your business, then you cannot provide for losses.
Ex 5:There is a Fire in your in your Factory and Goods were lost and the
Goods are insured, then the claim you submitted can be booked to the
satisfaction of Insurance Company and Auditors.
20
21. Accounting Concepts
Realization Concept
The Sales is considered to have taken place only when either the cash
is received or some third party becomes legally liable to pay the
amount. Revenues are recognized when they are earned or realized.
Realization is assumed to occur when the seller receives cash or a
claim to cash (receivable) in exchange for goods or services
Ex 1: A Sales invoice for Rs.1 Million
Credit Note for Rs.15000 received
Ex 2: For instance, if a company is awarded a contract to build an
office building the revenue from that project would not be recorded in
one lump sum but rather it would be divided over time according to the
work that is actually being done.
21
22. Accounting Concepts
Matching Concept
When an Event affects both the revenues and expenses, the effect on
each should be recognized in the same accounting period
Ex 1: Generally Employees Salaries are paid for the previous month at
the beginning of the next month. But they have rendered their
services to produce goods and sold and Sales revenue is recognized
in previous month. So to match the cost with the revenue earned, we
need to make provision for Salaries in previous month itself. (i.e.)
March Salary paid in April, but a Salary Payable provision will be
made in March itself
EX 2: Insurance Premium paid for Jan- Dec whereas your accounting
period closes on March. In this case only three months premium need
to be treated as Expense and balance 9 months treated as advance
premium paid as an asset
22
23. Accounting Concepts
Materiality concept
Insignificant events would not be recorded, if the
benefit of recording them does not signify the
cost
Ex: A calculator worth Rs.500 not recorded asset
rather than charged off as an Expense even
though the benefit is enduring in nature.
This concept need to read in conjunction with
accounting events which signifies the transaction
into Capital, Revenue and deferred revenue
expenditure. 23
24. Accounting Concepts
Objectivity Concept
An Evidence of the happening of the Transaction should support
every Transaction in the form of paper. External Evidence is
considered to be more authenticated proof than Internal Evidence.
This rule is more important from Audit perspective as Auditors
always consider and bound to get more external evidences than
internal Evidences.
Ex 1: Third Party Evidence (Credit Note from Supplier)
Ex 2: Auditors Collect Statements from Customer and Suppliers for
the amount showing as Outstanding from Customers and amounts
Payable to Suppliers.
Ex 3: The Sales Invoices alone is not considered as an objective
evidence unless it is not supported by Delivery challan and
acknowledgement of Goods Received by Customer.
24
25. Accounting Conventions
Going Concern
Accounting Records , Events and Transactions on the
assumption that the entity will continue to operate for an
indefinitely Long period of time
Ex. An Entity will not be started with an intention to close
within the specified time period. Business is always not
started with an intention to close and it is expected to
continue forever.
25
26. Accounting Conventions
Consistency
The Accounting Policies and methods followed by the
company should be the same every year
Ex 1. Period should not be changed frequently from Jan-
Dec to Apr-Mar
Ex 2. Inventory Valuation change from FIFO to LIFO or
Weighted Average not permitted frequently
Ex 3. Changing Depreciation Policy from Straight Line to
Reducing Balance Method frequently
Note: If any Company decides to change the policy, then
that Company has to report on the effect of Profit/Loss
due to the change for past 5 Years.
26
27. Accounting Conventions
Accrual
In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are
entities which follow Cash Basis of Accounting Also
Ex: Salary Payable to employees (March salary paid in
April), Interest Receivable on Investments (NSC
interest), Dividend Receivable on shares, Tax Payable to
Government (March sales Tax and Annual Income Tax)
The Company Law / Income Tax Act Prescribes all
Companies to follow Accrual Basis of Accounting except
for Professional Firms and Government Organizations
which are allowed to follow Cash Basis of Accounting.
27
28. Classification of Accounting Event
Capital Item: Any expenditure that creates an asset, for
example:
Purchase of plant or machinery
Improvements to assets that increase their
usefulness or extend their effective useful life of the
asset
Expenditure incurred in transporting an asset to its
site and preparing it for use.
28
29. Classification of Accounting Event
Revenue Item: An Income or Expenditure and the
benefit of which will be exhausted within a year (i.e.) The
Calendar Year or the Financial Year whichever is set up
for the Set of Books
Ex: Salary and wages, Printing and Stationery, Sales
Revenue, Interest Income, Salary Payable, Bonus
Payable, Tax Payable etc.,
In Simple terms this is an event which generates
revenue and the related cost to earn the revenue are
accounted as expense.
29
30. Classification of Accounting Event
Deferred Revenue Expenditure: It is neither a Capital
nor Revenue and the benefit of which will be realized for
more than a year (Exceeding beyond the Calendar year
for the set of books) and does not result in creation of
an asset.
Ex 1: Advertisement Expenditure the benefit of which
is likely to be obtained over a period more than one
year (E.g.) PepsiCo Pays USD 2 Million to Sachin
Tendulkar for an Advertisement Contract for two
Years and benefit of which is expected to be for four
years
Ex 2: Royalty paid to the author of the book for five
years
30
31. Rules of Accounting
Accounts
Personal Impersonal
Debit the Receiver
Credit the Giver
Ex: Sole Prop, Company
Real Nominal
Debit what comes in Debit Expenses and Losses
Credit what goes out Credit Revenue and Income
Ex: Cash, Bank, Building,Inv Ex: Sales, Power, Rent
31
32. Application of Accounting Rule
Check whether is there a Money Transaction Involved?
Is that transaction affects your set of books?
Check whether does the transaction falls under which accounting
period.
Does the transaction involve a personal account (i.e.) Siva as a
Person or a Company or any other entity as mentioned in
Business entity concept
Is that person is receiver or giver in the transaction and
accordingly debit or credit the person account.
Does the transaction involves any Cash inflow or Cash outflow?
(i.e.) Cash or Bank involved
If there is no cash involvement then the choices are as follows
Both can be real ( Debit and credit both real accounts)
One real and one nominal (Either Debit/Credit for Real or Credit/ Debit
for Nominal accounts)
32
33. Accounting Rule of Thumb
Nature of Transaction Increase Decrease
Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Profit Credit Debit
Losses Debit Credit
33
34. Combination of Rules
Dr Personal A/c Dr Real A/c
Cr Real A/c Cr Personal A/c
Ex:Drawings or Advance to Employee,
Ex:Capital invested, Payment Received
Payment to Supplier
from Customer
Dr Real A/c Dr Real A/c
Cr Real A/c Cr Real A/c
Ex:Purchase of Inventory by Cash Ex: Cash withdrawal or Deposit
Dr Real A/c Dr Nominal A/c
Cr Nominal A/c Cr Real A/c
Ex: Interest Recd by Cash, Cash Sales Ex: Rent Paid by Cash
Dr Personal A/c Dr Nominal A/c
Cr Nominal A/c Cr Personal A/c
Ex: Interest Accrued on Investment, Ex: Hire Purchase Charges accrued, Interest
Dividend accrued on Investment Payable, Salary Payable
34
35. Combination of Accounting Rules
Debit
Combination Personal Real Nominal
Personal X
Credit
Real
Nominal X
35
36. Combination of Accounting Rules
Both Debit and Credit cannot be Personal Accounts
EX 1: Siva paid Cash to Ajay. The Entry Cannot be
• Ajay A/c Dr
• Siva A/c Cr
The Correct entries are as follows. In Ajay set of Books
Cash A/c Dr 1000
Siva A/c Cr 1000
In Siva set of Books
Ajay A/c Dr 1000
Cash A/c Cr 1000
Similarly Both Debit and Credit cannot be Nominal Accounts
Note: Remember this important aspect and therefore You
will not commit any mistake in Debit and Credit
36
37. Recording of Accounting Transactions
Recording of an Accounting event is known as Journal
entry
Recording is made in Primary and Secondary Books in
Manual Accounting system
Primary Books
General Ledger
Cash Book
Secondary Books
Purchase Register
Sales Register
Fixed Assets Register
Returns (Purchase return/Sales Return)
Journal Register
In Oracle ERP System GL is called Main Ledger and the
Transactions emanating from Modules are referred to as
Sub Ledger 37
38. Recording of Accounting Transactions
First the transactions are entered as Journal
Then Second step is they are posted to individual account as ‘T’
Accounts – In Oracle or any other ERP system this happens
immediately when a transaction is created
Prior to ERP system except for Non cash charges, Journals are
directly posted in Primary and secondary ledger with supporting
Document reference Number (like Invoice Number), date, amount and
a cross reference ledger folio number (Page Number) of respective
Debit and Credit Entries in Ledger.
Journals are entered only for year end Provision Entries.
Then the balance from each T account is taken and which becomes a
Trial Balance with Sum of Debits and Sum of Credit which should be
equal.
Trial Balance forms the basis for preparation of Financial Statements
and in ERP systems including Oracle Applications Debit is shown as
Positive and Credit is shown as Negative
In ERP systems the chance of Trial Balance not matching or not
tallying issue is very minimal. In case of manual Accounting this will
happen most of the time and unless it is corrected and balanced, the
accountant should not proceed to prepare Financial Statements
38
39. Preparation of Financial Statements
Preparation of Trial Balance
Balances Extracted from General Ledger
Sum of debit and credit balances = 0
Preparation of Trading, Profit & Loss Account or Income &
Expenditure Account and Balance sheet
Trial Balance is the base for preparing Financial
Statements
Adjustment entries are made in adjustment period and
passed as Journal Vouchers before making the financial
statements
Trading and Profit and Loss Account is Always for a
period say for an Year (Jan - Dec or Apr - Mar), Quarterly
for 3 months or Half yearly for 6 months
Balance Sheet is always as on Date (As on 31-12-2007 or
31-03-2008)
39
41. Case Study
Siva started Business in dealer in Computer Spare parts and
Computer Stationery on 01-APR-2007 and following events occurred
in the month of April.
Siva invested USD 50000 Cash and USD 50000 worth of furniture
Siva purchased USD 75000 worth of goods on credit
Siva friend Ajay promised him to give a loan of USD 25000
Siva sold USD 50000 worth of good for USD 100000
Siva paid rent USD 2000 for two months
Siva paid Salary to Staff USD 5000
Siva incurred USD 5000 on interior decoration which will last for two
years.
Siva sold USD 10000 worth of goods on credit for USD 18000
Siva has a Bank account with Citi Bank which credited USD 5000
wrongly of John account
Purchased Vehicle for USD 25000 paid through Bank
Cash Deposited by Siva into Bank 50000 USD
41
42. ARE YOU READY FOR THE
GAME
Accounting is very simple
42
43. Accounting Terminologies
Before creating Accounting Transactions let us recall and learn few
accounting terminologies
ASSETS: Any property or Investment which can be convertible into cash
LIABILITIES: Amount Payable to providers of goods and Services
(Creditors) and Providers of Capital (Owners)
REVENUE: Amount earned out of the Sale Proceeds and the amount
earned on Investments
EXPENSES: Amount incurred or expended to earn the revenue
PROFIT: TOTAL REVENUE – TOTAL EXPENSES
LOSS: If the Total Expenses is more than Total Revenue it is termed as
Loss
FIXED ASSETS: Amount Invested in Long Term Assets which is not
intended to be sold within a Year (Ex. Machinery, Land)
CURRENT ASSETS: Amount invested in Short Term Assets which is
intended and rotated to earn Revenue (Ex. Inventory)
NOTE: The Fixed Asset and Current asset vary from Person to Person
Ex: For a Dealer in Refrigerator it is a Current asset which becomes Fixed
Asset for you when you buy.
CREDITORS: Person who provide Money or Goods on Credit to the
Business (Supplier)
DEBTORS: Goods or Money Provided / sold on Credit by the Business
(Customers)
43
44. Accounting Terminologies
You should also understand the same accounting
terminology is referred or used by different people in
different context
Receivables also known as Trade Debtors, Debtors, Account
Receivables, Sundry Debtors, Trade Receivables, Amount
Receivables
Liability is also known as Trade Creditors, Account Payable,
Sundry Creditors, Amount Payable, Trade Liabilities, Creditors
Cost of Goods Sold: It varies with Company to Company the way
they do set up and use it. The Cost of Goods Sold comprise of
Material Cost, Resource Cost (Labor and Machinery) and
Overheads. There are few companies which will have only Material
Cost and will not add up Resource Cost and Overheads. You
Should talk to client and understand their requirement
• Let’s See Each of this in a Formula Model
44
46. Accounting Calculations and Formula
Purchased Inventory Finished Goods (FG)
Reconciliation Reconciliation
Opening Purchased Inventory 100 Opening stock of FG 200
(+) Add Purchases 2500 (+) Add Production 2000
(+) Sales Return 100
(-) Less Issued to Production 2000 (-) Less Sales 1500
(-) Less Purchase Return 125
Closing Purchased Inventory 475 Closing FG Inventory 800
46
47. Accounting Calculations and Formula
Cash Reconciliation Bank Balance Reconciliation
Opening Cash Balance 100 Opening Balance of Bank 200
(+) Add Cash Receipts 2500 (+) Add Bank Receipts 2000
(Cash Sales, Cash Recd from (Cash Deposits, Cheque Received
Receivables, Cash with drawl from From Debtors, Interest Credited)
Bank)
(-) Less Cash Payments 2000 (-) Less Payments from Bank 1500
(Cash Purchases, Expenses paid (Paid to Creditors by Cheque,
By Cash, Cash Deposited into Bank) Expenses paid by cheque, Cash
With drawl from bank)
Closing Cash Balance 600
Closing Bank Balance 700
47
48. Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
1 Cash A/c Dr Real 50000
Furniture A/c Dr Real 50000
(Cash and Furniture Real
Tangible Asset. Hence Personal 100000
apply the Real Rule – Debit (Also using the Business Entity
What comes in) Concept Siva being owner is
To Siva Capital A/c also treated as a Creditor for
(Siva is a Person running the purpose of Business. If the
the business as a Business is wind up Business
Proprietor in this case. has to pay back Siva)
Hence apply the Rule for
Personal – Credit the giver)
2 Inventory A/c Dr Real 75000
(Real Tangible Asset)
To Creditors A/c Personal 75000
(Person be an Individual or
Company gives the goods
on Credit) 48
49. Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
3 No Entry No Entry
(Mere Promise to give does (Money Measurement Concept
not tantamount to Monetary – No Monetary transaction
Transaction) involved )
4 Two Entries involved (One
for sale of goods and one
for reduction in inventory)
Cash / Bank A/c Dr
(Real – Debit what comes
in)
Real A/c 100000
To Revenue (Sales) A/c
(Nominal Rule - Credit all
Income and Revenue)
Nominal A/c 100000
Cost of Goods Sold A/c Dr
(Nominal – Debit Expenses)
To Inventory A/c Nominal A/c 50000
(Reduction in Inventory)
Real A/c 50000
49
50. Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
5 Rent A/c Dr Nominal A/c 1000
(Debit Expense – Nominal) Personal A/c 1000
Rent Advance A/c Dr
(This is like Cash Advanced
to Landlord. Hence it
should be treated as
Personal -
Debit the Receiver)
To Cash A/c
Real 2000
(Real – Credit what goes
out)
6 Salary A/c Dr Nominal A/c 5000
(Nominal – Debit Expense)
To Cash A/c
(Real – Credit what goes Real A/c 5000
out)
50
51. Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
7 Advertisement Exp A/c Dr Nominal 2500
Advt Exp Adv A/c Dr Real 2500
(This is like a Deferred
Revenue Expense needs to
be charged in two years.
50% need to be Current
Year Expense and Balance
50% is carried Forward and
treated as Expense in next
Year)
To Cash A/c
(Real – Credit what goes
out)
Real 5000
8 Receivables A/c Dr Real 18000
To Revenue A/c Nominal 18000
Cost of Goods Sold A/c Dr Nominal 10000
To Inventory A/c Real 10000
51
52. Accounting Entries for the Case Study
Sl Description Nature of Account Dr (in Cr (in
No USD) USD)
9 No Entry No Entry
(This is a Mistake done by
Bank. Bank has to make
correction and in Siva’s
Book there is no
accounting entry required)
10 Vehicles A/c Dr Real 25000
(Real Tangible Asset
Debit what comes in)
To Bank A/c
(Real asset – Credit what Real 25000
goes out)
11 Bank A/c Dr Real 50000
(Real asset- Debit what
comes in
To Cash A/c Real
(Real Asset – Credit what 50000
goes out)
52
53. T Accounts
Siva Capital Account Furniture Account
Dr USD Cr USD Dr USD Cr USD
To Siva Cap 50000 By Bal 50000
To Bal 100000 By Cash 50000
By Furniture 50000
Total 50000 Total 50000
Total 100000 Total 100000
Cash Account Inventory Account
Dr USD Cr USD Dr USD Cr USD
To Siva Cap 50000 By Rent 1000
To Sales 100000 By Rent Adv 1000 To Creditors 75000 By COGS 50000
By Salary 5000 By COGS 10000
By Advt Adv 2500 By Bal 15000
By Advt exp 2500
By Bank 50000
By Balance 88000 Total 75000 Total 75000
Total 150000 Total 150000
53
54. T Accounts
Creditors Account Rent
Dr USD Cr USD Dr Account
USD Cr USD
To Bal 75000 By Invent 75000 To Cash 1000 By Bal 1000
Total 1000 Total 1000
Total 75000 Total 75000
Rent Advance Account Revenue / Sales Account
Dr USD Cr USD Dr USD Cr USD
To Cash 1000 By Bal 1000 To Bal 118000 By Cash 100000
By Rece 18000
Total 1000 Total 1000 Total 118000 Total 118000
Salary Account Advertisement Exp Account
Dr USD Cr USD Dr USD Cr USD
To Cash 5000 By Bal 5000 To Cash 2500 By Bal 2500
Total 5000 Total 5000 Total 250054 Total 2500
55. T Accounts
Advt Exp Advance Account Receivables Account
Dr USD Cr USD Dr USD Cr USD
To Cash 2500 By Bal 2500 To sales 18000 By Bal 18000
Total 18000 Total 18000
Total 2500 Total 2500
Cost of Goods Sold Account Vehicle Account
Dr USD Cr USD Dr USD Cr USD
To Inventory 50000 By Bal 60000 To Bank 25000 By Bal 25000
To Inventory 10000
Total 60000 Total 60000 Total 25000 Total 25000
Bank Account
Dr USD Cr USD
To Cash 50000 By Vehicle 25000
By Bal 25000
Total 50000 Total 50000
55
56. Trial Balance
Trial Balance for the Month of APRIL 2007
A – Asset, L – Liability, R – Revenue, E - Expense
Debit USD Credit USD
Furniture (A) 50000 Siva Capital (L) 100000
Cash (A) 88000 Sales / Revenue (R) 118000
Bank (A) 25000 Creditors (L) 75000
COGS (E) 60000
Salary (E) 5000
Rent (E) 1000
Rent Advance (A) 1000
Advertisement Exp (E) 2500
Advt Exp Advance (A) 2500
Inventory (A) 15000
Vehicle (A) 25000
Receivable (A) 18000
Total 293000 Total 56 293000
57. Profit and Loss Account For APR 2007
Expenses USD Revenue USD
COGS (E) 60000 Sales / Revenue (R) 118000
Salary (E) 5000
Rent (E) 1000
Advertisement Exp (E) 2500
To Profit 49500
Total 118000 Total 118000
57
58. Balance Sheet as on 30-APR-2007
Liabilities USD Assets USD
Siva Capital 100000 Furniture 50000
Add Profit 49500 Vehicle 25000
Siva Capital 149500 Cash 88000
Bank 25000
Creditors 75000 Receivables 18000
Inventory 15000
Rent Advance 1000
Advt Exp Advance 2500
Total 224500 Total 224500
58
59. Important Points to Remember
Accounting can be learnt only by Practice and not by reading
Try to learn by creating Journal entries with Examples
Cash Balance can never have negative balance at any point of time
Land will never Depreciate and it will have only Appreciation
Bank can have negative balance if you have Overdraft facility
The Bank which maintains your account will have exactly opposite
entries of what is shown in your Bank Account
In the above, Example the bank account in your Books and in Bank
Books will be as follows
Siva Books Bank Books
Bank Account Siva Account
Dr USD Cr USD Dr USD Cr USD
To Cash 50000 By Vehicle 25000 To Vehicle 25000 By Cash 50000
By Balance 25000 To Balance 25000
Total 50000 Total 50000 Total 25000 Total 25000
59
60. Case Study for Practice
Take your own Personal Account and try to create the following
On First of July 2007 You had a Cash balance of USD2500 which is
your Capital
On 3rd July You have received Salary of USD 12000
On 5th Paid Rent of USD 1200 by cheque
On 7th You purchased provision for house for 800 USD
On 10th You spent for outing through your credit card USD 500
On 15th You withdraw Cash USD 8000
On 20th You Invested in Fixed Deposit USD 5000 @5% Interest Per
annum
On 22nd you have given a Loan of USD 2000 to friend James
On 25th You spent for Car Repairs 500 USD
On 28th Your wife gave USD 200 to your Neighbor from her pocket
On 30th You Deposited Cash 1000 USD to your Bank Account
60
61. How to Approach to Learn
I tried my best to teach Accounting in simple way. This
is only a beginning. You have to Practice a Lot to learn
The simple way to Learn Accounting is as follows
Do not go for advanced level books without understanding the
basics
Start with (+1) Accounting book in case of people in India and
Pre-University book in case of other Countries. Practice the
examples given in that book and exercises
This is more than sufficient for any non accounting candidate to
work on Oracle Applications
Never try to memorize the concepts and rules
Try to understand and apply the concepts and Rules
There are areas like Depreciation, Provision and Amortization
etc might not have been covered in this presentation. I do not
want you to go to advanced level without understanding the
basics. If you understand the Concepts and Rules then You can
handle all of them
Read and Practice Level I and II at least Three times
61
62. "There is a difference between an objective and
actions. Unless you understand your objective,
you will be wasting your time in actions. Know your
objective first " - Swami Vivekananda
62
63. Disclaimer: This Document was created with my own
assumptions to explain the concept of accounting
and the names of the companies used in this article
are only to explain the accounting concept with data
assumptions and none of the Company is not
responsible for the Data provided in this article.
Thank You
Hope You find this article useful
Get Ready for Learning
Accounting in Oracle Applications
63
