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Accounting Equation & Accounting C
Accounting Equation & Accounting C
Resources
Resources = Sources
Assets
Resources = Sources
Liabilities
Assets
Owner’s
Equity
Resources
Resources used supplied by
in the business creditors and
owners
The Accounting Equation
At any point of time, the resources of a business
entity must be equal to the claims of the persons
who have financed these resources.
Economic Claims to
Resources Economic
Resources
The Basic Accounting Equation
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
25,000
= OWNER’S EQUITY
Sachin, Capital
25,000
Total Total
25,000 25,000
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(20,000)
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
Cash
(20,000)
(20,000)
Land = OWNER’S EQUITY
20,000
Land
20,000
Total Total
25,000 25,000
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Accounts Payable
1,350
Purchases
1,350 = OWNER’S EQUITY
Total Total
26,350 26,350
Business
Business Transactions
Transactions
d.
d.Receive
Receivefees
feesfor
forservices
servicesperformed,
performed,Rs.7,500
Rs.7,500
ASSETS LIABILITIES
Cash
7,500
= OWNER’S EQUITY
Fees earned
7,500
Total Total
33,850 33,850
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(3,650)
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(3,650)
= OWNER’S EQUITY
Expenses
(3,650)
Total Total
30,200 30,200
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(950)
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Accounts Payable
(950)
Cash
(950)
= OWNER’S EQUITY
Total Total
29,250 29,250
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Purchases
(800) = OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Purchases
(800) = OWNER’S EQUITY
Cash
900
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Purchases
(800) = OWNER’S EQUITY
Profit
Cash 100
900
Total Total
29,350 29,350
Business
Business Transactions
Transactions
ASSETS LIABILITIES
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(2,000)
= OWNER’S EQUITY
Business
Business Transactions
Transactions
ASSETS LIABILITIES
Cash
(2,000)
= OWNER’S EQUITY
Sachin’s, Drawing
(2,000)
Total Total
27,350 27,350
Transaction
Transaction Summary
Summary
ASSETS LIABILITIES
ASSETS LIABILITIES
Accts. Payable 400
ASSETS LIABILITIES
Accts. Payable 400
Personal Impersonal
Accounts Accounts
Nominal Real
Accounts Accounts
Natural Artificial Representative
Persons’ Persons’ Persons’ Tangible Intangible
Accounts Accounts Accounts Accounts Accounts
A: PERSONAL ACCOUNT:
1. Natural Person’s Personal Account. An account recording transactions with an
individual human being is known as a natural person’s Personal Account, e.g., Aneesh’s
Account.
2. Artificial Person’s Personal Account. An account recording financial transactions
with an artificial person created by law or otherwise is called an artificial person’s personal
account, e.g., ABC Industries Ltd., Bank Account, S &. Co. etc.
3. Representative Personal Account. An account indirectly representing a person or
persons is known as a representative personal account. When accounts are of a similar
nature and their number is large, it is better to group them under one head and open a
representative personal account. Examples of such types of accounts can be: Rent
Outstanding Account, Interest Outstanding Account, Prepaid Salary Account etc. Rent
Outstanding Account is a personal account representing rent payable to. .
B: REAL ACCOUNT:
1. Tangible Real Account. Such type of account relates to an asset which can be touched,
Felt, seen and measured e.g., Plant Account, Cash Account, BuildingAccount, Stock
Account etc.
2. Intangible Real Account. Such type of account relates to an asset which cannot be
touched physically but can be measured in value. For example, Goodwill Account, Patents
Account, Trade Marks Account, Copy Rights Account etc.
C. NOMINAL ACCOUNTS.
These accounts deal with expenses, incomes, profits and losses.
Rules For Double Entry System
on the Basis of Traditional Classification
• Liabilities Accounts
– Eg. Creditors, bills payable, unearned revenue, other
short-term liabitlities, long term liabilities(secured and
unsecured)
• Equity Accounts
– Eg capital/share capital a/c, drawings a/c, retained
earnings,Revenue Accounts, Expense Accounts,
dividends
Rules For Double Entry System on Basis of
Accounting Equation
• Regarding assets:
Increases in assets - DEBIT
Decreases in assets - CREDIT
• Regarding Liabilities:
Increases in liabilities - CREDIT
Decreases in liabilities - DEBIT
• Regarding Capital:
Increases in capital - CREDIT
Decreases in capital - DEBIT
• Regarding Expenses and Revenue:
Expenses, Drawings, Dividends - DEBIT
Revenue - CREDIT
• Regarding Incomes or Profits and Losses :
Incomes or profits - CREDIT
Losses - DEBIT
Analysis
Analysis of
of Transactions
Transactions
• Analysis of transactions is necessary for correct
recording of transactions.
• Steps:
Identify the accounts involved in the transaction to
be recorded.
Classify the accounts identified as personal, real or
nominal; or as asset, liabilities, capital, revenue or
expense
Determined the rules of debit and credit applicable to
the accounts involved
Finally determine the account(s) to be debited and
the account(s) to be credited.
Example
Example
Steps:
1.Identify transaction from source documents.
2.Specify accounts affected.
3.Apply debit/credit rules.
4.Record transaction with description.
Steps Involved in Journalizing
Transactions
• Analyse the transaction in source document to identify
appropriate accounts affected
• Determine which accounts are to be debited and those
to be credited based on rules of debit and credit
• Enter date in first column(date column)
• In particulars column enter the name of the account
debited at extreme left of column and abbreviation Dr.
at right end of particulars column.
• Write amount in Debit column
Steps Involved in Journalizing
Transactions
Totals 3,430
Ledger
– Think of a ledger as a book with
one page for each account.
Ledger
Ledger
General Ledger
A B C D
A B C D
Ledger
Ledger
General Ledger
A B C D
Cash Book
A B C D
Ledger Account
• What is posting?
• It is the transfer of information from the
journal to the appropriate accounts in the
ledger.
Posting
• The account debited in the journal should also be
debited in the ledger and account credited should also
be credited in the ledger
• Steps:
• Enter date
• Enter name of the other account being debited or
credited.
• Enter amount in proper debit or credit column
• Enter journal source info
– Usually the words ‘to’ and ‘by’ are used on the
debit and credit side of the account respectively.
Recording and Posting an Entry
Journal Page 1
Date Particulars Debit Credit
April 2 Cash 30,000
Garge Capital 30,000
(Received initial
investment from owner)
Recording and Posting an Entry
Ledger
Sales Rs98,600
Expenses:
Wages expense Rs45,800
Rent expense 12,000
Carriage 6,500
Depreciation expense 5,000
Total expenses 69,300
Net Income Rs29,300
==============
The Income Statement can be divided
into:
• Trading Account
• Profit and Loss Account
Trading Account
• This account is prepared to know the trading results or
gross profit (gross margin) on trading of the business, i.e.,
buying and selling of goods during a particular period.
• The difference between the sales and cost of goods sold
is gross profit.
• The balance of this account represents gross profit or loss
and is transferred to the profit and loss account.
• Only the transactions in goods and expenses related to
purchase of goods and manufacturing of goods (direct
expenses) are included and indirect expenses (admin.
Expenses, selling & distrib expenses, financial expenses)
are ignored
Gross Profit
• Gross profit = Sales – cost of goods sold
Cost of goods sold = Opening Stock + Net Purchases (i.e.
Purchases – Return outwards) + Direct Expenses - Closing
Stock
• Therefore,
• Gross Profit = Sales – (Opening Stock + Net Purchases +
Direct Expenses - Closing Stock)
• Gross Profit = Sales – Opening Stock - Net Purchases -
Direct Expenses + Closing Stock
• Opening Stock + Net Purchases + Direct Expenses +
Gross Profit = Sales + Closing Stock
• The left hand side of this equation depicts debit sided and
right hand side depicts credit side of the Trading Account.
Example
1. Compute the cost of goods sold from the following
information:
Opening stock, Rs. 11,000; Purchases, Rs 210,000;
purchase returns Rs 7,000, Carriage inwards 18,000,
closing stock Rs 17,000.
Wages
Fuel & Power
Customs/Import duty
Gross profit c/d(bal)
Trading account
For the year ended 31st March, 20XX
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock By Sales
” Purchases Less : Sales Returns
Less : Purchases Returns By Closing Stock
To Direct Expenses By Gross Loss* c/d
Carriage Inward
Wages
Fuel and Power
Manufacturing Expenses
Coal, Water and Gas
Motive Power
Octroi
Import duty
Custom Duty
Consumable Stores
Foreman/ Works Manager’s
Salary
Royalty on Manufactured
Goods
To *Gross Profit c/d
Closing Entries of Trading Account
• For closing of Debit Accounts
Trading A/c Dr.
To Opening Stock
To Purchases A/c
To Sales Return A/c
To Direct Expenses (eg. Wages, carriage inwards,
freight inwards)
• For Closing of Credit Accounts
Sales A/c Dr.
Closing Stock A/c Dr.
Loss of goods by fire A/c Dr.
To Trading Account
Closing Entries of Trading Account
• For closing Trading Account
Trading A/c Dr.
To Profit and Loss A/c
(Gross Profit, if credit side exceeds the debit side)
OR
Profit and Loss A/c Dr.
To Trading Account
(Gross Loss, if debit side exceeds the credit side)
Proforma for the
Profit and Loss Account
for the year ending on
Profit and Loss Account
Debit for the period ending on ----- Credit
Particulars Amount Particulars Amount
Gross loss b/d Gross Profit b/d
Administration Expenses Interest Received
Rent, Rates & Taxes Discount Received
Office salaries Comm. Received
Printing & Stationery
Dividend from shares
Telephone charges
Rent from property
Insurance
Audit fees Profit on sale of fixed
Selling & Dist Exp :- assets/investments
Advertisement Net Loss c/d
Traveller’s Salary, exp. &
commission
Bad Debts
Carriage outwards
Bank charges
Net Profit c/d (bal)
Closing Entries For Profit and Loss Account
• For transfer of various expenses to Profit and Loss A/c
Profit and Loss A/c Dr.
To Various Expenses A/c
(eg. Salaries, carriage outwards, Insurance,
advertisement)
• For transfer of various incomes and gains to Profit and
Loss A/c
Various Incomes and Gains A/c Dr.
To Profit and Loss Account
• For Net Profit •For Net Loss
Profit and Loss A/c Dr. Capital A/c Dr.
To Capital A/c To Profit and Loss A/c
Income Statement
For the year ended…………. (All figures in Rs. ‘000)
Sales 16,000
Less: Cost of Goods Sold:
Raw materials consumed 7,800
Consumables 800
Direct Labour 750
Other Direct Expenses 480 9830
Gross Profit 6170
Less: Operating Expenses
Administration Expenses 1200
Selling Expenses 260
Depreciation 700 2160
Operating Profit 4010
Add: Non Operating Income 50
4060
Less:Non-Operating Expenses 100
Net Profit before Interest & Tax 3960
Less: Interest Paid 360
Net Profit Before Tax 3600
Less: Income Tax @ 50% 1800
Net profit after tax 1800
For the year ended…………. (All figures in Rs. ‘000)
Revenue from Sales
Gross Sales XXXX
Less: Sales Returns XXXX
Net Sales XXXX
Less: Cost of Goods Sold:
Opening Stock XXXX
Purchases XXXX
Less: Purchase Returns (XXXX)
XXXX
Add Carriage Inwards XXXX
Net cost of Purchases XXXX
Cost of goods available for sale XXXX
Less: Closing Stock (XXXX)
Cost of Goods Sold XXXX
Gross Profit XXXX
Less: Operating Expenses
Administration Expenses XXXX
Selling Expenses XXXX
Depreciation XXXX XXXX
Operating Profit/ Profit Before Interest and Taxes XXXX
Less: Interest Paid (XXXX)
Net Profit Before Tax XXXX
Less: Income Tax (XXXX)
Net profit after tax XXXX
The Accounting Terms- Income Statement
Revenue - the proceeds that come from sales to customers
Cost of Goods Sold (COGS) - an expense that reflects
the cost of the product or good that generates revenue.
Gross profit (gross margin) - excess of sales revenue
over the cost of inventory that was sold. This is revenue
minus COGS
Operating expenses - a group of recurring expenses that
pertain to a firm’s routine operations. It includes any
expense that doesn't fit under COGS such as
administration and marketing expenses.
The Accounting Terms- Income Statement
Operating income (operating profit) - gross profit less
all operating expenses
Other revenues and expenses - items not directly related
to the main operations of a firm
Net Income before Interest and Tax - net income before
taking interest and income tax expenses into account. It is
the remainder after all expenses have been deducted from
revenue
Net loss - the excess of expenses over revenues
The Accounting Terms- Income Statement