Financial and

Management
Accounting By:
BITS Pilani Hema N C
[email protected]
Work Integrated Learning
Programmes Division
 BITS Pilani
Work Integrated Learning
Programmes Division

Balance Sheet
Profit & Loss Statement
Journal – Chapter 3 – T1
 Balance Sheet

Total Assets = Liabilities + Owners’ Equity

Assets:
• Economic Resource
• Two types of Assets:
• Fixed Assets – Tangible and Intangible
• Current Assets – Comprise of Inventories, Receivables, Bank balances etc

Liabilities:
• Obligation to be settled / commitments to be met
• Two types of Liabilities:
• Long-term liabilities and
• Current Liabilities

Owners’ Equity
• Owner’s investment in the business entity
• Consists of
• Shareholder’s Equity and
• Retained Earnings

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 Balance Sheet as at March 31, xxxx

Liabilities CY PY Assets CY PY
Shareholders Funds Fixed Assets (less Depreciation)
Share capital Land and Buildings
Retained earnings Plant and Machinery
Equipments

Long-term Liabilities Current Assets

Debentures Cash & Bank Balances
Bonds Marketable securities
Long-term Debt Accounts receivables (Debtors)
Inventories
Prepaid expenses

Current Liabilities Other Assets

Accounts payables (creditors) Investments
Taxes payables Intangible assets
Accrued expenses
Deferred revenues
Current portion of long-term debt

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 X Ltd.
Income Statement for the Year Ended March 31, xxxx
Particulars Amount Amount
Revenue from Operations XXX
(less) Expenses XXX
Gross Profit XXX
(less) R & D Expenses XXX
Sales & Distribution Expenses XXX
Administration and General Expenses XXX XXX
Earning Before Depreciation, Interest & Tax (EBDIT) XXX
(less) Depreciation XXX
EBIT or Operating Income XXX
(less) Interest XXX
EBT XXX
(less) Tax XXX
EAT or PAT or Net Profit XXX
(less) Dividend XXX
Retained Earnings XXX

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 Journal Entries
• Journal is a book of Accounts recording day-to-day business transactions in a
chronological order.
• Journal is also known as ‘Book of Original Record’ or ‘Book of Primary Entry’.
• A journal entry has the transaction date, the individual accounts and related debit
and credit amounts, and a brief explanation of the transaction.
• Journalizing is the process of recording transactions in the journal.
• Follow Double-entry System: every transaction must have equal debits and credits.
• Total of debits must equal to total of credit
• The transaction for which the Journal entry passed is explained in the form of
narration to the entry.

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 Accrual vs Cash Basis of
Accounting
There are two types of accounting.

During a given period “Revenues are not the same as Cash receipts and Expenses are not
the same as Cash payments”

Based on the above, the accounting records are maintained on two different basis
• Accrual Basis of Accounting
• Cash Basis of Accounting

Accrual Basis of Accounting –

• Transaction is recorded at the time when it takes place and not when the settlement takes place

• Assets, Liabilities, revenues and expenses are recognised as and when transactions relating to
them are entered into

• Revenue is recognised as earned when the goods are sold / services are rendered and the
obligation to pay them has been accepted by the receiver (irrespective of whether the amount is
received or not on that date)
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 Accrual vs Cash Basis of
Accounting - contd
Accrual basis contd..
• Expense is regarded as incurred as and when it has been incurred and an obligation
to pay for the same has been assumed (irrespective of whether the amount has been
paid or not on that date)
• Under this system, outstanding / prepaid expenses, accrued income / income
received in advance are adjusted to determine the profit or loss for the period

Cash Basis of Accounting

• Transactions are recorded in the books only upon receipt or payment of cash i.e
credit purchases/ credit sales etc are not recorded
• Difference between cash receipts and cash payments is the profit or loss of the
enterprise. Ex: Receipts and Payments account prepared for charitable
institutions
• The disadvantages of this system of accounting are:
• Does not give a true and fair view of the profit or loss
• Does not follow the matching principle of accounting

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Classification of Accounts

Accounts

Personal Impersonal
Accounts Accounts

Real Account Nominal

Artificial or Groups or (tangible and Account
Natural
Legal Representative non-tangible (revenue and
assets) expenses)

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 Classification of Accounts
Personal Accounts – accounts of individuals, firms, companies, capital account,
drawings etc
• Natural accounts- Accounts of natural persons including drawings, capital a/c
etc
• Artificial Accounts – Include accounts of firms, companies, institutions etc
• Representative – These accounts are called Representative personal accounts
as they represent a person or a group of persons.
O/S rent, Prepaid exps unearned interest etc

Real Accounts – relate to tangible or intangible assets excluding debtors

Nominal Accounts – relate to expenses, losses, revenue.

Net result of all the nominal accounts is a profit or loss, which is transferred to
the capital account

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 Journal Entries
Modern Approach for classification of Accounts is

1. Asset Accounts – Land & Buildings, Plant & machinery, Furniture, Patents,
Inventory, Bank/ Cash etc

2. Liability Accounts – Lenders accounts, Creditors, Debentures etc

3. Capital Accounts- Capital accounts, Reserves, Drawings etc

4. Revenue Accounts- Sales, Discount received, Interest received, commissions

received, etc

5. Expenses Accounts – Purchases, Wages & Salaries, Depreciation, Discount

allowed, Rent etc

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 Journal Entries
Debit and Credit Rule
Personal Accounts
Debit (Dr.) Credit (Cr.)
Receiver Giver

Real Accounts

Debit (Dr.) Credit (Cr.)

Comes in to the Business Goes out from the Business

Nominal Accounts
Debit (Dr.) Credit (Cr.)
Expenses or Loss of the Business Income or Profit of the Business

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Journal Entries: Debit and Credit
Rule
Assets Accounts
Debit Credit
Increase in asset Decrease in Assets
Liabilities Accounts

Debit Credit

Decrease in Liabilities Increase in Liabilities

Owner’s Equity Accounts

Debit Credit
Decrease in Owners’ Equity Increase in Owners’ Equity
Revenue and Expenses
Debit Credit
Expenses or Loss of the Business Revenue or Income or Profit of the
Business

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 Journal Entries: Debit and Credit
Rule
Assets: Increase in the account - Debit asset account
Decrease in the account - Credit asset account

Liabilities & Equity: Increase in the Liability / Equity - Credit liability or

equity account
Decrease in liability & equity – Debit liability
or equity account

Income & Expenditure: Debit all expenses

Credit all income

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 Steps to Analyse each
Transaction

Analysis
Increase and
Rules Entry Accounts
decrease in
asset, liability Record Present the
Debit and
and equity, according to related
Credit Rule
Income and Rule accounts
expenses

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 Exercise Journal Entries
On which side will increase in the following accounts be recorded. State the nature
of the account on the basis of Modern Approach for classification of Accounts
Item Account Debit/ Credit
i) Machinery Asset Debit
ii) Creditors’ account Liability Credit
iii) Capital account Equity Credit
iv) Cash account Asset Debit
v) Sales account Revenue Credit
vi) Interest Payable account Liability Credit
vii) Rent account Expense Debit
viii) Debtors account Asset Debit
ix) Salaries account Expense Debit
x) Interest Income Revenue Credit

01/29/2023 BITS Pilani, WILPD

 Exercise Journal Entries
On which side will decrease in the following accounts be recorded. State the nature
of the account on the basis of Modern Approach for classification of Accounts
Item Account Debit/ Credit
i) Bank Asset Credit
ii) Furniture account Asset Credit
iii) Capital account Equity Debit
iv) Creditors account Liability Debit
v) Purchases account Expense Credit
vi) Salary outstanding account Liability Debit
vii) Advertisement account Expense Credit
viii) Interest Income Revenue Debit
ix) Loan account Liability Debit
x) Insurance premium paid Expense Credit

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 Format of Journal Entry

Date Particulars Ledger Folio Debit Credit

(L/F) (Amount) (Amount)

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Exercise : Journal Entries
Ganesh started Woodcraft Company on September 1, 20XX. The transactions for the month
are as under:

Date Transactions
Sept 1 Invested cash in share capital, Rs.100,000/-
Sept 4 Paid two months’ rent in advance for a shop, Rs.14,000/-
Sept 5 Bought equipment for cash, Rs.12000/-
Sept 7 Bought Material on credit, Rs.12,500/-
Sept 10 Received payment for re-modelling a kitchen, Rs.18,600/-
Sept 14 Paid for an advertisement, Rs.10,400/-
Sept 17 Received payment for furnishing an office, Rs.25000/-

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Exercise:
Ganesh started Woodcraft Company Cont..

Date  Transactions
Sept 23 Billed customers for work done, Rs.13,100/-
Sept 25 Paid assistant’s wages, Rs.2,500/-
Sept 28 Paid electricity charges, Rs.2400/-
Sept 29 Received payment from customers billed on September 23, Rs.4,800/-
Sept 30 Paid a dividend, Rs.2,500/-

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Exercise: Solution
Sept 1 Invested cash in share capital, Rs.100,000/-
Analysis Asset (Cash) increased. Equity (Share Capital) increased
Rule Debit asset to record increase. Credit equity to record increase
Entry Sept 1 Cash A/C Dr………………………………………………1,00,000/-
To Share Capital A/C.…………………………………1,00,000/-
Accounts Cash Account, Share Capital Account

Sept 4 Paid two months rent in advance Rs.14,000/-

Analysis Asset (Prepaid rent) increased. Asset (Cash) decreased.
Rule Debit asset to record increase. Credit asset to record decrease
Entry Sept 4 Prepaid Rent A/C Dr…………………………………14,000/-
To Cash A/C ……………………………………. 14,000/-
Accounts Prepaid Rent A/C, Cash A/C

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Exercise: Solution
Sept 5 Bought Equipment in cash for Rs.12,000/-
Analysis Asset ( Equipment) increased. Asset (Cash) decreased
Rule Debit Asset to record increase. Credit asset to record decrease
Entry Sept 5 Equipment A/C Dr…………………………………12,000/-
To Cash A/C.…………………………………………..12,000/-
Accounts Equipment A/C, Cash A/C

Sept 7 Bought material on Credit Rs.12,500/-

Analysis Expense (Purchases) increased. Liability (trade payables) increased

Rule Debit expense to record increase. Credit liability to record increase

Entry Sept 7 Purchases A/C Dr…………………………………12,500/-

To Trade Payables ………………12,500/-

Accounts Purchases A/c, Trade Payable A/C

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 Exercise: Solution
Sept 10 Received payment for remodelling kitchen Rs.18,600/-
Analysis Asset (Cash) increased. Revenue (Sales) Increased.
Rule Debit asset to record increase. Credit Sales to record increase.
Entry Sept 10 Cash A/C Dr…………………………18,600/-
To Sales (Revenue from Services) A/C 18,600/-

Accounts Cash a/c and Sale a/c

Sept 14 Paid for Advertisement Rs.10,400/-

Analysis Expenses (Advertisement) increased. Asset (Cash) decreased.
Rule Debit Expense to record increase. Credit asset to record decrease.
Entry Sept 14 Advertisement A/C Dr…………………………10,400/-
To Cash A/C ………………………………………10,400/-

Accounts Advertisement A/C, Cash A/C

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Exercise: Solution
Sept 17 Received payment for furnishing office – Rs.25,000/-
Analysis Asset (Cash) increased. Revenue (Sales) increased.
Rule Debit asset to record increase. Credit revenue to record increase.
Entry Sept 17 Cash A/C Dr……………………………………………25,000/-
To Sales A/C ………………………………………………25,000/-
Accounts Cash A/C, Sales A/C

Sept 23 Billed customers for work done Rs.13,100/-

Analysis Asset (Trade receivables) increased. Revenue (sales) increased

Rule Debit asset to record increase. Credit Sales to record increase.

Entry Sept 23 Trade Receivable A/C Dr…………………………………13,100/-

To Sales A/C………………………………………………………13,100/-

Accounts Trade Receivable A/C, Sales A/C

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Exercise: Solution
Sept 25 Paid Assistant’s wages Rs.2500/-
Analysis Expense (Wages) increased. Asset (Cash) decreased
Rule Debit expense to record increase. Credit asset to record decrease.
Entry Sept 25 Wages A/c Dr…………………………………3,500/-
To, Cash A/C ….……………………………..3,500/-
Accounts Wages A/C, Cash A/c

Sept 28 Paid Electricity charges Rs.2,400/-

Analysis Expenses (Electricity charges) Increased, Asset (cash) decreased

Rule Debit expense to record increase. Credit asset to record decrease.
Entry Sept 28 Electricity charges A/C Dr……………………………2,400/-
To, cash…………………………………………………….. …2400/-
Accounts Electricity charges A/C, Cash A/C

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Exercise: Solution
Sept 29 Received payment from customers billed on September 23, Rs.4,800/-
Analysis Asset (Trade receivables) decreased. Assets (Cash) increased.
Rule Debit Asset (Cash) to record increase. Credit assets (trade receivable) to
record decrease.
Entry Sept 29 Cash A/C Dr…………………………………4,800/-
To Trade Receivables A/C ……………4,800/-
Accounts Trade receivables A/C, Cash A/C

Sept 30 Paid a dividend, Rs.2,500/-

Analysis Dividends (Dividends) increased. Asset (Cash) decreased

Rule Debit dividends to record increase. Credit asset to record decrease.
Entry Sept 30 Dividend A/C Dr………………………………….2,500/-
To, Cash A/C Cr……………..…………………………2,500/-
Accounts Dividends A/C, Cash A/C

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Practice Problem 4: Journal Entries

Analyse each of the following transactions, apply the debit-credit rule and
pass journal entries.
1. April 1, Deposited cash into Bank Rs.1,00,000/- for opening an account.
2. April 1, Availed loan from Bank Rs.2,00,000/-
3. April 2, bought equipments for cash, Rs.13000
4. April 4, Withdrew cash from Bank for Personal use- Rs.10,000/-
5. April 5, purchased stationery for office use Rs.15,000/- in cash
6. April 5, Paid two month’s rent in advance, Rs.12000/-
7. April 6, billed customers for services rendered, Rs.8500/-
8. April 8, bought supplies on credit, Rs.14,600/-
9. April 12, Collected amounts due from customers sold on April 6th Rs. 1500/-
10. April 21, paid electricity charges, Rs.1200
11. April 24, paid for supplies bought on April 8th, Rs.10000/-
12. Paid interest on loan to the Bank Rs.15000/-

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