Introduction Recording of business transactions in a systematic way is required to know the profit or loss of the business. Accounting is the tool which thus is required in every business organisation to record business transactions and preparation of required accounts Meaning of book keeping According to Carter “Book keeping is the science and art of correctly recording in the books of accounts all those transactions that result in the transfer of money or money’s worth.”

Meaning of Accounting The American Institute of Certified Public Accountants (AICPA) has defined the Financial Accounting as “the art of recording, classifying and summarising in a significant manner in terms of money transactions and events which in part, at least of a financial character and interrupting the results thereof.” The attributes of accounting are: It is the art of recording the business transactions. It is the art of classifying the business transactions. The transactions of a business must be recorded in monetary terms. It is the art of summarising financial transactions. It is an art of analysis and interpretation of these transactions. The results of such analysis must be communicated to the person who are to make decisions or form judgements.

Objects of Accounting: To ascertain whether the business operations have been profitable or not. To ascertain the financial position of the business. To generate information. Functions of Accounting: Systematic record of business transactions. Protecting the property of the business. Communicating results to interested parties. Compliance3 with legal requirements.

IS ACCOUNTING A SCIENCE OR AN ART ?

Distinction between Book-Keeping and Accounting Users of Accounting Information: Owners Creditors Investors Employees Government Public Research scholar Managers Branches of Accounting: Financial Accounting Cost Accounting Management Accounting

Advantages of Accounting Limitations of Accounting Replacement of memory Evidence in court Settlement of taxation liabilities Comparative study Sale of business Assistance to insolvent person Assistance to various parties Limitations of Accounting Records only monetary transactions Effect of price level changes not considered No realistic information Personal bias of Accountant affects the accounting statement Permits alternative treatments No real test of managerial performance Historical in nature

Relationship of Accounting with other subjects: Accounting and Economics Accounting and Mathematics Accounting and Statistics Accounting and Law Accounting and Engineering Accounting and sociology Basis of Accounting: Cash Basis of Accounting Accrual basis of Accounting Hybrid or Mixed basis of Accounting

Accounting Equation Introduction: The equation is based on the principal that the accounting deals with property and rights to property and the sum of properties owned is equal to the sum of the rights to the properties. The properties owned by a business are called assets and rights to properties are known as liabilities or equities of the business. Equities may be divided into equities of creditors representing debts of the business known as liabilities and equity of the owner known as capital. Keeping in view the two types of equities the equation given above can be as under Assets = Liabilities + Capital

Rules of Accounting Equation: Increases in assets are debits and decreases in assets are credits. Increase in liabilities are credits and decreases are liabilities are debits. Increase in Capital are credits and decreases are Capital are debits. Increase in expenses are debit and decreases in liabilities are credits. Increase in incomes or profits are credits and decreases in incomes or profits are debits.

Double Entry System Introduction: The double entry system owes its origin to an Italian merchant named Luco Pacioli who wrote the first book entitled ‘De Computis et Scripturis’ on double entry accounting in the year 1494. Double entry system is the method of recording business transactions in dual way i.e. for every debit there will be equal amount of credit or in other words when we receive something we give something in return e.g. when you purchase goods for cash we receive goods and give cash in return. Thus on any date the debts will be equal to the credits. Rules of Double Entry System: Personal account – Debit the Receiver Credit the giver Real account – Debit what comes in and credit what goes out Nominal Account –Debit all expenses and losses and credit all incomes and gains

Advantages of Double Entry System: Complete record of financial transactions Provide accurate information Arithmetical accuracy of accounts Helpful in preventing frauds and errors Helpful in ascertaining profit or loss Acceptable by income tax and sales tax authorities. Disadvantages of Double entry system: Maintenance of number of books of accounts Costly No guarantee of accuracy Accounting Cycle: Recording Classifying Summarising

Journal Source Documents: Cash memo Invoice or bill Receipt Pay in slip Cheque Debit and credit notes

Rules for Journalising: Based on Accounting Equation: Increases in assets are debits and decreases in assets are credits. Increase in liabilities are credits and decreases are liabilities are debits. Increase in Capital are credits and decreases are Capital are debits. Increase in expenses are debit and decreases in liabilities are credits. Increase in incomes or profits are credits and decreases in incomes or profits are debits. Bases on Traditional approach: Personal account – Debit the Receiver Credit the giver Real account – Debit what comes in and credit what goes out Nominal Account –Debit all expenses and losses and credit all incomes and gains

Points to be noted before Journalising: Capital Account Drawing account Cash / Credit transactions Goods given as charity Casts and carry forwards Compound journal entry Opening journal entry Cash discount Trade discount Purchase of share Sale of share Expenses incidental to the purchase of fixed assets Insurance of life policy Carriage paid on buyers accounts Goods distributed as free samples Bad debts Interest due on loans Loss of stock by fire Commission

Advantages of Journal: Limitations of Journal: Chronological record Information of every transaction Reduces the possibilities of error Helpful in remembering the business transactions Limitations of Journal: Too lengthy Difficult to ascertain daily cash balance Difficult to post every transaction from journal to ledger

Ledger and Trial Balance A ledger account may be defined as a summary statement of all the transactions relating to a person, assets, expenses or income which have taken place during a given period of time and shows their net effect. Performa of ledger

Trial Balance A Trial Balance may be defined as a statement of debit and credit totals or balances extracted from the various account in the ledger with a view to test the arithmetical accuracy of the books. Methods of trial balance: Total Method Balance method

Errors Error of omission Error of principal Compensating error Posting an item to the correct side but in the wrong account A Wrong entry in a subsidiary book

Cash Book A cash book is maintained to record the transactions relating to cash. As cash control is very essential in a business house, in order to avoid the embezzlement of cash, maintenance of the cash book becomes integral part of every business concern. Kinds of cash book: Simple Cash Book Two Column Cash Book Three column Cash Book Multi columnar Cash Book

This book is kept to record all credit purchase of goods. Subsidiary Cash Book In order to keep the general ledger free from unnecessary details separate books are kept for sales , purchases , sales return , return inward, bills receivable and bills payable. Purchase Book: This book is kept to record all credit purchase of goods.

This book is kept to record credit sales of goods. Sales Book This book is kept to record credit sales of goods.

Journal Proper Purchase Return Book This book keeps records of return of credit purchase of goods. Sales Return book This book keeps records of return of credit sales of goods. Bills receivable book and Bill Payable book These books keep full record of all the bills accepted and drawn by the business. Journal Proper Only those transactions which can not be recorded in any of the above mentioned subsidiary books are recorded here e.g. Opening entries, closing entries, bad debts, credit purchase/sale of assets etc.

Final Accounts Final accounts are prepared to find out profit or loss made by the business at the end of a regular periodic interval and to ascertain the financial position of the business on a given date. Thus final accounts include the preparation of: Trading and Profit and Loss account Balance Sheet

Balance Sheet

Adjustments Closing Stock Outstanding expenses Prepaid expenses Accrued income Income received in advance Depreciation Interest on capital Interest on drawings Provision for doubtful debts Provision for discount on debtors Reserve for discount on creditors Deferred revenue expenditure Loss of stock by fire Reserve fund Goods distributed as free samples Manager’s commission Goods on sale or approval basis Hidden adjustments

Depreciation, Provisions and Reserves Depreciation is a permanent, continuing and gradual decrease in the value of fixed assets. Causes of Depreciation: Physical Depreciation Economic factors Time factors Depletion Accidents Methods of recording Depreciation: Straight line method Diminishing balance method Sum of digits method Annuity method Depreciation fund method Insurance policy method Revaluation method Depletion method Machine hour rate method

Provisions and Reserves Meaning of Provisions: Future is uncertain and to reduce the risk of uncertainly of business it is necessary to make Provisions and Reserves. Meaning of Provisions: If any amount is kept aside for known liability ait is known as provisions. Meaning of Reserves: If any amount is kept aside for unknown liability ait is known as Reserves. It can be capital reserve or revenue reserve.

Branches not keeping full system of accounting:- Following are the main features of such branches: Such branches sell only those goods which are received from head office and are not usually allowed to make purchases in the open market except with the express permission of the head office. Goods are supplied by head office to such branches either at cost price or at invoice price. All expenses of the branch are paid by the head office. For small expenses either simple petty cash or impress system is used. The amount received from cash sale or cash received from the debtors is either remitted to head office daily or deposited in the account of head office. The branch manager is normally expected to sell the goods for cash only but he may be authorised to sell goods on credit in certain cases.

Voyage Account Voyage account is prepared by shipping companies Dealing with large number of ships in the sea. Voyage    

Name of the Ship

Voyage in progress When the voyage is not complete special treatment is required for the following items: Freight received on incomplete journey Expenses related to incomplete journey Expenses related to freight Expenses not related to freight

Insurance claims Stock Insurance:-   The stock kept in business premises is subject to risk of fire to protect it against such loss the business takes the fire insurance policy covering the loss of stock by fire in which the insurance company undertakes to compensate loss of stock by fire in consideration of payment called premium.

Calculation of the amount of claim of the loss of stock by fire: Calculation of GP ratio Preparation of Memorandum trading Account Detect the value of stock salvaged from the value of stock Average Clause: Value of Stock destroyed X Value of Insurance Policy __________________________ Value of Stock on the date of fire.

Consequential Loss Of profit Insurance: Explanation of certain Terms: Gross Profit Net Profit Insured Standing Charges Turn Over Annual Turn Over Standard Turn Over Rate of Gross Profit Indemnity Period

Computation of Claim for loss of Profit: Calculate short sales Calculate gross profit ratio GP Ratio = Net Profit + Insured Standing Charges _______________________________ X 100 Sales of the financial year proceeding the year of Fire Calculation of loss of profit on short sales:   Increased cost of working expenses Actual increased working expenses Net Profit + Insures constant expenses ______________________________ X Increased working Cost Net Profit + All constant Expenses   Or Gross profit proceeding on 12 months sales ___________________________________ X Additional Expenses Gross profit proceeding on 12 months sales + Uninsured expenses

Gross profit on sales from increased working expense V Gross profit on sales from increased working expense   V. Detect the amount of expense saved from the total claim. VI. Apply Average clause i.e.   Gross claim X Amount of policy ________________ Gross profit on 12 months (Adjusted) Sales immediately preceding the date of fire.  

Branch Accounting Meaning: When business expands then it open its branches to other places as it is not possible to meet the demand of the customer from the single place. To reach close to the customer branches of the main business is opened in different places/states/countries etc. Types of Branches: Branches not keeping full system of accounting Branches keeping full system of accounting Foreign branches

Branches not keeping full system of accounting:- Following are the main features of such branches: Such branches sell only those goods which are received from head office and are not usually allowed to make purchases in the open market except with the express permission of the head office. Goods are supplied by head office to such branches either at cost price or at invoice price. All expenses of the branch are paid by the head office. For small expenses either simple petty cash or impress system is used. The amount received from cash sale or cash received from the debtors is either remitted to head office daily or deposited in the account of head office. The branch manager is normally expected to sell the goods for cash only but he may be authorised to sell goods on credit in certain cases.

Accounting Record for head office or system of accounting for branch:- The following are the main ways in which the head office may keep branch accounts in its books: Debtor system Final account system Stock and debtor system Wholesale branch system

When goods are send to branch (A) Debtor System : Journal entry When goods are send to branch Branch account Dr. Goods sent to branch account For return of goods to head office Goods sent to branch account Dr. Branch account For Transferring balance of goods sent to branch Purchases A/c (In trading concern) Trading A/c (In mgf. Concern) When cheque or draft is sent for branch expenses Branch A/c Dr. Bank A/c

When cheque or draft is received for remittance Bank A/c Dr. Branch A/c For closing balance of assets Branch Assets A/c Dr. For beginning Balance of assets Branch A/c Dr. Branch Assets A/c For closing balance of liabilities Branch Liabilities A/c For opening balance of liabilities Branch Liabilities A/c Dr. For branch profit General Profit and loss A/c For branch loss General Profit and loss A/c Dr.

Goods can be invoiced to branch either at cost price or at invoice price. When it is invoiced at invoice price accounting adjustments required in head office book are as under:- For adjustment of excess price of opening stock at branch Stock reserve A/c Dr. Branch A/c For adjustment of excess price of closing stock at branch Branch A/c Dr. Stock reserve A/c For adjustment of excess price of goods sent to branch less return to head office Goods sent to branch A/c Dr.

(B) Final Account System According to this system the branch trading and profit and loss account is prepared at cost price. All the expenses whether paid by the branch or by H.O. (Head Office) is debited to trading and profit and loss account. The profit calculated here is exactly the same as it is calculated under debtor system. Under this method if branch account is prepared it is considered as personal account. Under such situation the debit balance represents the net balance available at the branch at the end of accounting period.

(C) Stock and debtor system: This method is used where branch turn over is sufficiently large and greater control is required by the H.O. In this method various accounts are opened for various transactions such as branch stock account, branch debtors’ account, goods sent to branch account, branch expenses account etc.

Journal Entries: For Goods sent to branch Branch Stock A/c Dr. Goods sent to branch A/c For Goods returned by branch Goods sent to branch A/c Dr. Branch Stock A/c Cash Sales at Branch remitted to H.O. Branch Cash A/c Dr. Credit sales at branch Branch Debtors A/c Dr. Returns from Customers Branch Debtors A/c Bad debt and discount etc. Branch expenses A/c Dr. Branch debtors A/c

Cash Received from branch debtors sent to H.O. Branch Cash A/c Dr. Branch debtors A/c Shortage of goods in branch stock Branch Profit and loss A/c Dr. Branch Stock A/c Surplus of goods in branch stock Branch Stock A/c Dr. Branch Profit and loss A/c Expenses paid by H.O. Branch Expenses A/c Dr. Cash A/c Transfer of Branch Expenses to Branch Profit and Loss account Branch P & L A/c Dr. Branch Expenses A/c Goods in Transit Goods in transit A/c Dr.

Goods lost in transit being abnormal loss P& L A/c Dr. Branch Stock A/c Transfer of branch gross profit Branch stock A/c Dr. Branch P & L A/c Transfer of Branch net profit Branch P & L A/c Dr. General P & L A/c

We can have three different situations here: Goods charged to branch at cost price: Accounts prepared under this situation are: Branch Stock Account ( It shows G.P or G.L) Goods sent to branch account Branch debtors account Branch Petty cash account Branch P & L Account Branch cash account Goods sent to branch at sales price: Branch stock account (it shows shortage or surplus) Branch adjustment account (it shows G.P or G. L) Goods sent to branch account Branch profit and loss account Stock reserve/suspense account Expenses account, branch debtors’ account, branch cash account, branch assets account etc.

Journal Entries: When goods are sent to branch Branch stock A/c Dr. Goods sent to branch A/c When sales are made by Branch Cash A/c / Debtors A/c Dr. Branch Stock A/c When cash is received from debtors Cash A/c Dr. Branch debtors A/c For discount allowed, allowances and bad debts Branch expenses Dr. Branch stock A/c For agreed allowances to customers off selling price already taken into account while invoicing Branch adjustment A/c Dr. When goods are returned by branch debtors Branch Debtors A/c

When goods are returned by branch debtors direct to H.O. Goods sent to Branch A/c Dr. (cost) Branch adjustment A/c Dr. (Loading) Branch Debtors A/c For normal loss of stock Branch adjustment A/c Dr. (Invoice price) Branch Stock A/c For abnormal loss, waste or leakage or shortage of stock Branch P & L A/c Dr. (cost) Branch Stock A/c (Invoice price) When goods are transferred from one branch to another branch Transferor branch: Goods sent to branch A/c Dr. (cost) Branch adjustment A/c Dr. (Load) Branch stock A/c (invoice price)

Transferee Branch: Branch Stock A/c Dr. (Invoice price) Goods sent to branch A/c Dr. (cost) Branch adjustment A/c Dr. (Load) For apparent profit over the invoice price Branch stock A/c Dr. Branch Adjustment A/c For branch expenses paid in cash Branch expenses A/c Dr. Cash a/c For closing branch expenses A/c (Excluding cash in hand at the end) to branch P & L Account Branch Adjustment A/c (with N.R expenses) Branch P & L A/c (with Recurring expenses) Branch expenses A/c For adjustment of excess price of opening stock Stock reserve A/c Dr. Branch adjustment A/c For adjustment of excess price of closing Branch adjustment A/c Dr. Stock reserve A/c For adjustment of excess price of goods sent to branch Goods sent to branch A/c Dr.

For insurance claim recoverable Insurance claim A/c Dr. Branch P & L A/c For transfer of balance of branch adjustment A/c (That is G. P) Branch adjustment A/c Dr. For transfer of P & L A/c to general P & L A/c (Profit) Branch P & L A/c Dr. General P& L A/c For closing the goods sent to branch account Goods sent to branch A/c Dr. Purchases A/c / Trading A/c

Normal loss in this case is entered in the branch stock account. When goods are sent to branch at cost plus certain fixed percentage on a cost: Account prepared under this method is similar to the situation as when goods are sent to branch at sales price, but in this case: Branch stock account represents either apparent profit or apparent loss. Normal loss in this case is entered in the branch stock account. Branch adjustment account shows G. P / G.L Branch P & L Account N.P or N.L

(D) Wholesale branch system: The goods are sent by the H.O. to the branches at WP and if all the goods are sold there is no problem but if some goods remain unsold then unsold goods must be reduced to cost price by making a stock reserve and it will be debited to H.O. P & L A/c.

Goods in Transit In the books of H.O. Goods in transit A/c Dr. Branch A/c

Foreign Branches:-

Assistant Prof. (Commerce) Post Graduate Govt. College Sector 11 Presented By Tajinder Kaur Assistant Prof. (Commerce) Post Graduate Govt. College Sector 11 Chandigarh (UT)

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