ACCOUNTING MECHANISM
Accounting Documents and Records
Flow of data
1.
Recording transactions in journal – passing
journal entries through double entry system
2.
Posting into a ledger - classifying all entries of a
similar account into a ledger
3.
Ledger balancing – closing all ledger accounts and
finding out the balance in each ledger account.
4.
Preparing trial balance – Listing all ledger
balances into debit and credit balances.
5.
Passing adjustment entries / closing entries
6.
Preparation of Profit & Loss A/c and Balance
Sheet.
Account : A record of transactions related to a
particular item of expense , income , assets or liabilities
Expenses : Salaries ,repairs, traveling , audit fees ,
printing & stationary etc.
Income
: Sales , dividend , interest , commission etc.
Assets : Buildings, Machinery , Furniture , Debtors,
Prepaid expenses, Cash, Bills receivable
Liabilities : Debentures, loans, creditors, expenses
payable, Bills payable, Provisions
Capital : Share capital, Reserves, Retained earnings
Classification of accounts
1.Real Accounts, Personal Accounts, Nominal
Accounts
2.Asset Accounts, Liability Accounts, Income
Accounts, Payment Accounts
Understanding Outstanding and prepaid
accounts and the concept of Matching principle
Outstanding Expenses – Liability
Outstanding Income - Asset
Prepaid expenses
- Asset
Pre received income - Liability
Rules of debit / credit
Double entry system of recording entries : Every transaction recorded must
have equal debits and credits
Analysis of transactions
Accounting equation can be expanded as :
Liabilities + Capital+ Revenues =Assets +Expenses+ Dividends
Effect
Basic
 Increase
 Decrease

Asset, Expenses, Dividend
Debit
Debit
Credit
Liability,Capital,Revenue
Credit
Credit
Debit
Class exercise 1
Put a cross in the appropriate column to indicate the type of account and the accounts normal balance
Type of account
Asset Liability Capital

Salaries

Miscellaneous expenses

Prepaid rent

Share capital

Office supplies

Interest income

Commission earned

Rent expense

Proprietors drawings

Bills receivable

Margin money deposit

Cash

Debtors

Creditors

Advance to suppliers

Unearned professional fees

Advance from debtors

Electricity charges

Professional fees earned

Income tax payable

Income tax earned

Dividends

Bills Payable

Outstanding expenses

Debentures

Reserves

Provision for tax

Bank balance

Telephone expenses
Normal balance
Debit
Credit
Class exercise 1
Classify the following ledger balances into debit and
credit balances and prepare a trial balance.
Building
Office equipment
Cash
Creditors
Debtors
Bills payable
Purchases
Sales
Salaries
Electricity
25000
20000
14000
Telephone expenses
Share capital
Loan taken
500
50000
5000
10000 Prepaid insurance
1000
21700 Unpaid repairs expenses 500
3000
Dividend received
200
12000 Reserves
2000
30000 Provision for tax
2000
5000 Depreciation
1500
1000
Advertisement
1000
Class exercise 2
Venus Music corner provides is in the business of providing audio
CDs to customers. During March the accounts were maintained
by a professional accountant On March 31 , the records showed a
balance of Rs.21140 in his capital account. Since he could not
afford an accountant , he starts maintaining the accounting
records himself. He prepared the statements for the month of
April 2006 and was shocked to find that his business had not
fared well. He wants you to review his statements.
Profit & Loss A/c for the month ended April’10
Expenses
Revenues
Salaries
5600
Investments by owner
3000
Electricity
410
Service revenue recd
600
Advertisement
130
in advance
Rent
300
Drawings
4000
Loss for the month
6840
10440
10440
Balance Sheet as on April 30, 2010
Liabilities
Assets
Creditors
2510
Recording equipment
25500
Service revenue
Supplies
2190
earned
12660
Debtors
1210
Capital
14300
Cash
570

29470
29470
Schedule VI Part I – Balance Sheet
The company’s balance Sheet may be in
horizontal or vertical form
It shall disclose current years as well as
previous years figures
Details may be given in Schedules attached to
Balance Sheet
Figures may be rounded off to the nearest ’00
or ’000. It can also be in 00.00 format.
Format of Horizontal Balance Sheet
P.Y
1.
2.
3.
4.
5.
Liabilities
C.Y
Share Capital
Reserves & Surplus
Secured Loans
Unsecured Loans
Current Liabilities and
and Provisions
A. Current liabilities
B. Provisions
Footnote :
Contingent liabilities
P.Y
Assets
C.Y
1. Fixed Assets
2. Investments
3. Current Assets, Loans
and Advances
A. Current Assets
B. Loans and Advances
4. 1 Miscellaneous Expenditure
2. Profit and Loss A/c Dr bal
Vertical form of Balance Sheet
I. Sources of funds
1. Shareholders funds
Share capital
Reserves & Surplus
2. Loan Funds
Secured loans
Unsecured loans
II. Application of funds
1. Fixed Assets
2. Investments
3. Current assets , loans and advances
less: Current liabilities and provisions
4. Miscellaneous expenditure.
Footnote for contingent liabilities
Z
Schedule VI Part II – Profit & Loss Account
General requirements
It shall disclose every material factor w.r.t Incomes & Expenditures
Any item> 1% of the turnover or Rs.5000 whichever is higher should be
shown separate item and not under miscellaneous expenses.
1.Turnover
2. Commission paid to selling agents, brokerage and discount allowed
3. Value of raw material consumed
4. Opening and closing stock of goods and raw materials
5. Depreciation
6. Interest paid
7. Income tax
8. Transfer to reserves / withdrawals from reserves
9. Stores and spare parts
10.Rent, power & fuel, repairs, insurance, rates and taxes, Auditors fees
11.Salaries , contribution to staff welfare schemes
12 Profit and loss from unusual sources
13.Earnings / expenditure in foreign currency ( notes to accounts )
14. FOB value of exports
Format of Vertical Profit & Loss Account
Income
Sales
Others
Expenditure
Materials consumed and purchases
Manufacturing
The trial balance of Trendy Leather Products is given below
Particulars
Debit
Credit
Store equipment
20000
Accumulated depreciation
2000
Opening stock
17400
Office supplies
2730
Debtors
9700
Cash
2870
Store rent
12000
Insurance
6000
Creditors
7580
Share capital
35000
Retained earnings
7100
Sales
115760
Sales returns
1170
Sales Discounts
1030
Purchases
69230
Purchase returns
1180
Purchase discounts
2150
Freight
4200
Salaries
5100
Selling expenses
9600
Advertisement expenses
2300
Delivery expenses
1130
Telephone expenses
910
Advance to suppliers
5400
-------------170770
170770
1. Depreciation on equipment
Rs.1000
2. Closing stock
Rs.
23100
3. Rent is paid for the period Jun’09 –
May’10 @ Rs.1000 p.m
4. Insurance charges is paid for the year
ended 31.10.10
5. Estimated income tax Rs.5000
6. Salaries are unpaid to the extent of
Rs.3000