Learning objectives: • To understand the Accounting mechanism • To understand the Double Entry system • To understand the meaning of account and classification of accounts • Conceptual frame work of Financial Accounting • To know how to prepare the Final Accounts.
Double Entry System • It recognizes that every transaction has a twofold effect. • The method of writing every transaction in to two accounts, of these two accounts, one A/c is given ‘Debit’ while other one is given ‘Credit’ with an equal amount so that the Accounting Equation is always in balance. • On any date Total Debits = Total Credits
The Recording Process • The sequence of steps in recording transactions: Transactions Documentation Journal Financial Statements Trial Balance Ledger
ACCOUNTING MECHANISM • Recording • Journalizing 2. Classifying • Ledger preparation 3. Summarizing • Balancing the ledger • Preparation of Trial Balance • Preparation of Profit and Loss A/c • Preparation of Balance Sheet 4. Interpreting the results.
JOURNAL • The book of original entry. • Recording of entries in the journal is known as Journalising. • Large Firms/Concerns maintain special journals also known as Subsidiary Books.
SUBSIDIARY BOOKS • Cash Book: • Simple • Two column • Three column 2. Purchase Book 3. Purchase returns Book 4. Sales Book 5. Sales returns book 6. Bills Receivable book 7. Bills Payable Book 8. Journal Proper
LEDGER • It is set of all accounts. • It contains a classified summery of all transactions recorded in journal.
ACCOUNT - MEANING • An individual record of increases and decreases in an item that is likely to be of interest or importance. • It is “T” shaped Debit is left side of “T” account Credit is right side of “T” account
TRIAL BALANCE • A statement of Debit and Credit totals or balances extracted from the various accounts in the Ledger. • Objectives: • To facilitate the preparation of Final Accounts. • To check the arithmetical accuracy of the books.
CAPITAL AND REVENUE ITEMS • Capital Expenditure: • The benefit of which is not fully derived in one year but spread over several periods. • Eg: Acquisition of assets, additions to fixed assets • Revenue Expenditure: • The benefit of which is derived in the year in which the expenditure was incurred. • Eg: Raw material, Rent, wages and salaries.
FINAL ACCOUNTS • Include preparation of: • Trading and Profit and Loss A/c • To know the operating performance of the business i.e.profitability. • Balance Sheet • To know the financial position of the firm on a particular date.