1. Financial Reporting, Statements and Analysis
Module 2
FRSA – Module 2 – SV/GS/PSR/SKK

2. Module 2 – Accounting Cycle
Learning Outcome: Identify various processes in accounting cycle leading to trial balance
Accounting Process
Books of Accounts
Journal
Cash Book
Bank Reconciliation Statement
Preparation of Trial Balance.
FRSA – Module 2 – SV/GS/PSR/SKK

3. Account
An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item. For example, the company would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on. (Note that whenever we are referring to a specific account, we capitalize the name.)
In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T account.
FRSA – Module 2 – SV/GS/PSR/SKK

4. Debits and Credits
The term debit indicates the left side of an account, and credit indicates the right side.
They are commonly abbreviated as Dr. for debit and Cr. for credit.
They do not mean increase or decrease, as is commonly thought.
FRSA – Module 2 – SV/GS/PSR/SKK

5. Debit means left Credit means right
Debits and Credits
Debit means left Credit means right
Generally these types of accounts are increased with a debit:
Dividends (Draws) Expenses Assets Losses
You might think of 
D - E - A - L when recalling the accounts that are increased with a debit.
Generally these types of accounts are increased with a credit:
Gains Income Revenues Liabilities Stockholders' (Owner's) Equity
You might think of G - I - R - L - S  when recalling the accounts that are increased with a credit.
FRSA – Module 2 – SV/GS/PSR/SKK

6. Debit and Credit Procedure
For Assets and Liabilities
Revenues and Expenses
FRSA – Module 2 – SV/GS/PSR/SKK

7. Classification of Accounts
Personal
Personal Accounts are those that are accounts of individuals and organisations like banks, individuals, customers, capital account, drawings account etc
Trial Balance as on 31st Jan 2013
Capital ,000
Mr. F Creditor ,000
Mrs. G Debtor ,000
Income ,000
Salaries ,000
Material Cost ,000
Power & Fuel ,000
Machinery ,000
Cash ,000
TOTAL , ,000
Items Debit Credit
Personal
Personal
Personal
Nominal
Nominal Accounts are those accounts of income and expenditure like salaries, interest, commission etc.
Nominal
Nominal
Nominal
Nominal
Real
Real Accounts are those that are 'real' like land, building, goodwill, furniture etc
Real
Real
FRSA – Module 2 – SV/GS/PSR/SKK

8. Exercise
Answers
Identify which type of Accounts do the following belong to:
Capital
Bank Borrowing
Stock in Hand (Inventory)
Revenue from sale of clothes
Machinery
Commission Income
Creditors
Electricity Charges
Investments in Mutual Funds
Repairs and Maintenance
Personal
Real
Real
Nominal
Real
Nominal
Personal
Nominal
Real
Nominal
FRSA – Module 2 – SV/GS/PSR/SKK

9. Principles of Accounting Entries
Personal
Debit: The Receiver
Credit: The Giver
Debit: All expenses and losses
Nominal
Credit: All incomes and gains
Debit: What comes in
Real
Credit: What goes out
FRSA – Module 2 – SV/GS/PSR/SKK

10. Accounting Cycle 1
Identify Business Transactions
Record Transactions in the Journal 2 3
Post Transactions in the General Ledger
Preparation of Trial Balance 4 5
Adjust Entries
Adjust Trial Balance (Worksheet) 6
Prepare Financial Statements 7
Close the Books – Annual Report 8
FRSA – Module 2 – SV/GS/PSR/SKK

11. Journal Entries in the Books of M/s. ……….
A Journal as the book of original or prime entry containing chronological record of the transactions from which posting is done to the ledger.
The transactions are recorded first in the journal in the order in which they occur.
The process of recording the transactions in a journal’s called as journalizing.
Journal Entries in the Books of M/s. ……….
Date
Particulars
LF No.
Debit (Rs.)
Credit (Rs.)
2010- August – 01
(Year-Month-Date)
……….. A/c (Account) Dr.
To ………. A/c
(Narration: Being …………..)
LF No. Ledger Folio (Ledger Book Page ) Number
FRSA – Module 2 – SV/GS/PSR/SKK

12. Compound Journal Entry
For Commencement(Start) of Business:
Date
Particulars
LF No.
Debit (Rs.)
Credit (Rs.)
2010- August – 01
(Year-Month-Date)
Cash A/c (Account) Dr.
Bank A/c Dr.
Fixed Assets A/c Dr.
To Capital A/c
(Narration: Being the business commenced with capital of Rupees…………..)
FRSA – Module 2 – SV/GS/PSR/SKK

13. Ledger
The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances.
A ledger is a book of main entry and it contains various accounts such as personal, real and nominal accounts .It is the principal book of accounts where identical transactions related to specific person or thing are entered.
FRSA – Module 2 – SV/GS/PSR/SKK

14. Ledger
Companies may use various kinds of ledgers, but every company has a general ledger. A general ledger contains all the asset, liability, and owner’s equity accounts, as shown in Illustration
FRSA – Module 2 – SV/GS/PSR/SKK

15. Standard Form of Account
The simple T-account form used in accounting textbooks is often very useful for illustration purposes. However, in practice, the account forms used in ledgers are much more structured. Illustration shows a typical form, using assumed data from a cash account.
FRSA – Module 2 – SV/GS/PSR/SKK

16. Standard Form of Account
FRSA – Module 2 – SV/GS/PSR/SKK

17. Cash Book
It records daily cash (including bank) receipts and payments.
Its unique feature is that it serves the purpose of both a book of prime entry and a book of secondary entry.
In other words, the cash book is a journal as well as a ledger.
The simplest form of cash book is a single column cash book which records only cash (no bank) receipts and payments.
The double column cash book has two amount columns on either side-one for cash and the other for bank.
If a business unit has more than one bank account, a separate column should be devoted to each bank account.
The highest form of cash book is a triple column cash book- one column for cash, the second column for bank and the third column for discount.
FRSA – Module 2 – SV/GS/PSR/SKK

18. Cash Book Specimen of Triple Column Cash Book
Dr CASH BOOK OF M/s……… Cr.
Receipts
Payments
Date
Particulars
L.F.
Cash
Bank
Discount
Allowed
Discount Received
FRSA – Module 2 – SV/GS/PSR/SKK

19. Bank Reconciliation Statement
A bank reconciliation statement is prepared as on a particular date to reconcile the balances as per the cash book and as per the bank statement as on that date by identifying the causes of the difference and showing their impact.
Causes of Difference
Cheques issues to suppliers not yet presented for payment.
Cheques deposited to the bank for collection.
Cheques received by the bank directly not yet intimated.
Insurance premium paid by the bank as per standing instructions not yet intimated.
Dividend received by the bank directly.
Bank charges not yet intimated.
Cheques dishonoured but not yet intimated.
FRSA – Module 2 – SV/GS/PSR/SKK

20. Format of Bank Reconciliation
Bank Reconciliation Statement as on………………….
Particulars
Amount (Rs.) A
Balance as per Cash Book
*** B
Add:
Cheques issued but not presented for payment
Interest credited by bank but not recorded in cash book
Debtors directly paid into bank but not recorded in cash book
Wrongly credit by banker
Collections by banker as per customer standing instructions
Total B C
(Total A + B) D
Less:
Cheques deposited but not credited by the bank
Dishonoured cheques appeared in the pass book but not entered in the cash book
Bank charges as per pass book
Wrong debit by banker
Payments as per standing instructions
Total (D)
Balance as per pass book (C- D)
FRSA – Module 2 – SV/GS/PSR/SKK

21. Trial Balance
A trial balance is a list of accounts and their balances at a given time.
Customarily, companies prepare a trial balance at the end of an accounting period.
They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column.
The trial balance proves the mathematical equality of debits and credits after posting.
In the trial balance, the closing balances of the accounts in the general ledger are shown along with balances from the cash book.
As the primary and secondary books are maintained on the double entry concept, the balances in the trial balance must tally
FRSA – Module 2 – SV/GS/PSR/SKK

22. Trial Balance Steps for preparing a Trial Balance Purpose
1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.
Purpose
The purpose of preparing trial balance is not only to check the arithmetical accuracy of ledger balances, but also to have an overview of the operations of the business as on a particular date.
A trial balance is prepared not only at the year end but also weekly, monthly, quarterly and half yearly. These interim trial balances are used as control steps.
A trial balance is not a part of books of account. It is drawn as a separate statement, and this becomes the source document for preparing external financial statements, i.e. profit and loss account and the balance sheet.
A trial balance consists of all the elements of financial statements- assets, liabilities, equity, income and expenses.
FRSA – Module 2 – SV/GS/PSR/SKK

23. Trial Balance Trial Balance As at…………
S.No.
Ledger Accounts
L.F.
Dr. Amount
Cr. Amount
(Total or Balance)
Rules of Preparing the Trial Balance
Following rules should be taken into care:
The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings (v) cash and bank balances are placed in the debit column of the trial balance.
The balances of all (i) liabilities accounts (ii) income accounts (iii) profits (iv) profits are placed in the credit column of the trial balance.
FRSA – Module 2 – SV/GS/PSR/SKK

24. Thanks
FRSA – Module 2 – SV/GS/PSR/SKK