Basic Accounting Level II

By
Sivakumar Ganesan B. Sc, ACA, ICWA, PMP, PDIM
Global Technology Services LLc, UAE
Email:[email protected]
 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
 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 $ Statement
Financial 981
Cash ---------
at December 31,$4,456
1997
Total Assets
Account Receivable $11,151$5,714
Land Assets ======$ 981
Liability Cash --------- $4,456
Total Assets
Account Payable Account $3,830
Receivable $11,151 $5,714
Land $ 416======$ 981
Notes Payable --------- ---------
Liability
Total
Account Assets
Payable $4,246 $3,830$11,151
Total Liability ======$ 416======
Notes Payable $2,365---------
Liability
PAYMENT Stockholder’s Equity
Contributed Account Payable$ 367$4,246 $3,830
Capital
Total Liability ---------======$ 416
Retained Earnings
Notes Payable $2,732 $2,365---------
Total Stockholder’s
Equity Stockholder’s Equity ======$ 367$4,246
Contributed Capital
Total Liability ---------======
Retained Earnings $2,732 $2,365
Total Stockholder’s
Equity Stockholder’s Equity ======$ 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
 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
 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
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
Finance and Accounting - Difference
Finance Accounts
Procurement and Utilization of Recording of an Accounting Event
Funds
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
 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
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
Accounting Concepts / Principles
 Business Entity Concept
 Money Measurement Concept
 Dual Aspect Concept
 Cost Concept
 Accounting Period
 Conservatism
 Realization Concept
 Matching Concept
 Materiality Concept
 Objectivity
10
Accounting Conventions / Practices
 Going Concern
 Consistency
 Accrual

11
 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
 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 Family
members. 13
 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
 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
 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
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 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
 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
 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 possible with
Income Tax Authorities.

19
 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
 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
 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
 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
 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
 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
 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
 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
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
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
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
 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
 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
 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
 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
 Combination of Accounting Rules
Debit

Combination Personal Real Nominal

Personal X  

Credit
Real   

Nominal   X
35
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
 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
 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
 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
 Accounting Concepts

A Simple Case Study

40
 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
ARE YOU READY FOR THE
GAME
Accounting is very simple

42
 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
 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
 Accounting Calculation and Formula

Receivables (or) Debtors Reconciliation Payables (or) Creditors Reconciliation

Opening Receivables 100 Opening Payables 200

(+) Add Credit Sales 2500 (+) Add Credit Purchases 2000
(+) Debit Memo 150 (+) Debit Memo 150
(+) Positive Adjustments 75 (+) Positive Adjustments 75

(-) Less Cash Received 2000 (-) Less Cash Paid 1500
(-) Less Credit Memo (Sales Return) 125 (-) Less Credit Memo (Purc. Return) 125
(-) Negative Adjustments 50 (-) Negative Adjustments 50

Closing Receivables 650 Closing Payables 750

45
 Accounting Calculations and Formula

Purchased Inventory Reconciliation Finished Goods (FG) 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
 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
 Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in Cr (in
USD) USD)
1 Cash A/c Dr Real 50000
Furniture A/c Dr Real 50000
(Cash and Furniture Real
Tangible Asset. Hence apply Personal 100000
the Real Rule – Debit What (Also using the Business Entity
comes in) Concept Siva being owner is also
To Siva Capital A/c treated as a Creditor for the purpose
(Siva is a Person running the of Business. If the Business is wind
business as a Proprietor in this up Business has to pay back Siva)
case. 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)
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 Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in Cr (in
USD) USD)
3 No Entry No Entry
(Mere Promise to give does not (Money Measurement Concept – No
tantamount to Monetary Monetary transaction involved )
Transaction)
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)
To Revenue (Sales) A/c Real A/c 100000
(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

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 Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in Cr (in
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 – Credit what goes out) Real 2000

6 Salary A/c Dr Nominal A/c 5000

(Nominal – Debit Expense)

To Cash A/c
(Real – Credit what goes out) Real A/c 5000

50
 Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in Cr (in
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
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 Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in Cr (in
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 goes Real 25000
out)

11 Bank A/c Dr Real 50000

(Real asset- Debit what comes
in
To Cash A/c Real
(Real Asset – Credit what goes 50000
out)

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 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

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 T Accounts
Creditors Account Rent
Dr USD Cr USD Dr USDAccount
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 2500 Total 2500

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 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

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 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 293000 56

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

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 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

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 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

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 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

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 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

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 "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
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
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