Corporate Accounting Notes (1) PDF

Unique Academy A C A DEM Y FO R CO M M ERC E For Commerce CS EXECUTIVE NEW SYLLABUS CORPORATE accounting...

Unique Academy A C A DEM Y FO R CO M M ERC E For Commerce CS EXECUTIVE NEW SYLLABUS CORPORATE accounting All India Rankers AIR 1 AIR 1 AIR 1 AIR 2 AIR 2 AIR 2 AIR 2 AIR 2 AIR 3 AIR 6 AIR 6 AIR 7 Chiraag Yogita Vaishnavi Swathi S Sonia Sanskruti Rakesh Aparna Khushi Manav Harsh Ishika Agarwal Daswani Biyani Boob Saraf Chaudhary Agarwal Mehta Shingari Chaudhari Basu AIR 9 AIR 9 AIR AIR AIR 12 AIR 12 AIR 1313 AIR 14 AIR 14 AIR 14 AIR 14 AIR 15 11 11 Dolly Ummay Ashita Ekta Saumya S Shyam Asmita Vaibhav Mayank Akash Alefiya Kevalrama Goyal Motwani rajpurohit jinde Wable Sakshi Oswal llyas Raja Rabab Oruba Agarwal Unique Academy For Commerce www.uniqueacademyforcommerce.com A C A DEM Y FO R CO M M ERC E 8007916622 8007916633 Shop NO.25, Kumar Prestige Point, Behind Telephone Exchange, 283, Bajirao Rd, Near Chinchechi Talim, Shukrawar Peth, Pune, Maharashtra 411002  Dil se… ❤️❤️ Unique Academy For Commerce has been the pioneer of quality education propagating zero boundaries when it comes to hard work, and a result oriented classroom approach. 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Lesson 1 Fundamental of Accounting 1.1 – 1.12 Accounting Cycle & Analysis of 2 2.1 – 2.4 Transaction Lesson 1 3 Journal Entry 3.1 – 3.8 4 Ledger & Trial Balance 4.1 – 4.6 5 Final Account 5.1 – 5.6 6 Classification of Journal & Ledger 6.1 – 6.6 Lesson 2 7 Introduction to Corporate Accounting 7.1 – 7.20 Issue Forfeiture and Reissue of 8 8.1 – 8.23 Shares 9 Bonus Issue 9.1 – 9.7 Lesson 4 10 Redemption of Preference Shares 10.1 – 10. 11 Buy Back of Equity Shares 11.1 – 11.11 12 Employees Stock Option Plan (ESOP) 12.1 – 12.5 13 Underwriting 13.1 – 13.7 14 Issue of Debentures 14.1 – 14.16 Lesson 5 15 Redemption of Debentures 15.1 – 15.9 Lesson 7 16 Consolidation 16.1 – 16.13 Lesson 9 17 Cash Flow Statement 17.1 – 17.23 Lesson 8 18 Financial Statement Analysis 18.1 – 18.13 Lesson 10 19 Forecasting Financial Statement 19.1 – 19.7 Accounting Standards (AS) Lesson 3 20 *This chapter will be covered from ICSI Study Material * Lesson 6 “Related Aspect of Company Account” of ICSI Study material has been covered under different topic above. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.1 Fundamental of Accounting This chapter is 1st Part of “Lesson 1: Introduction to Financial Accounting” of study material issued by ICSI for New Course Question: Explain different forms of business organizations? Answer: Different forms of business organizations are as follows: ⚫ Sole proprietorship: A sole proprietorship, also known as a sole trader, is owned, management and control by one person and operates for their benefit. All assets of the business belong to a sole proprietor. ⚫ Partnership: A partnership is a business owned by two or more people. In most forms of partnerships, each partner has unlimited liability for the debts incurred by the business. Types of partnerships: General partnerships, limited partnerships, and limited liability partnerships. ⚫ Corporation: The owners of a corporation have limited liability and the business has a separate legal personality from its owners. Forms of Corporations- Government-owned or privately owned - and they can organize either for profit or as nonprofit organizations. ⚫ Co-operative: Often referred to as a “co-op”, a co-operative is a limited-liability business that can organize as for-profit or not-for-profit. A cooperative differs from a corporation in that it has members, not shareholders, and they share decision-making authority. ⚫ Franchises: A franchise is a system in which entrepreneurs purchase the rights to open and run a business from a larger corporation. ⚫ Company: A company is a natural legal entity formed by the association and group of people to work together towards achieving a common objective. A company limited by guarantee: The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise, they have no economic rights in relation to the company. A company limited by guarantee may be with or without having share capital. Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. A company limited by shares: A limited company is a “company in which the liability Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.2 of each shareholder is limited to the amount individually invested” with corporations being “the most common example of a limited company.” The most common form of the company used for business ventures. A company limited by guarantee with a share capital: A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return. An unlimited company with or without a share capital: A hybrid entity, a company where the liability of members or shareholders for the debts (if any) of the company are not limited. In this case, the doctrine of a veil of incorporation does not apply. Questions: Define Accounting and its attributes. Answer: Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non-financial information about economic entities such as businesses and corporations. Accounting, which has been called the “language of business”, measures the results of an organization’s economic activities and conveys this information to a variety of stakeholders, including investors, creditors, management, and regulators. According to American Institute of Certified Public Accountants (‘AICPA’) “Accounting is “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character and interpreting the results thereof”. Attributes of Accounting 1. Accounting is an Art - Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, that is, operating profit and financial position through analysis and interpretation of financial data which requires special knowledge, experience and judgment. 2. It involves recording, classifying and summarizing – Recording means systematically writing down the transactions and events in account books soon after their occurrence. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger), understandable and useful to management and other interested parties. This involves preparation of final accounts namely profit and loss account and balance sheet. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.3 3. It records transactions in terms of money - All transactions are recorded in terms of common measure, i.e., money which increases the understanding of the state of affairs of the business. 4. It records only those transactions and events which are of financial character - If an event has no financial character then it will not be capable of being measured in terms of money; it will not be, therefore, recorded. 5. It is the art of interpreting the results of operations - to determine the financial position of the enterprise, the progress it has made and how well it is getting along. Question: What are the different objectives of Accounting? Answer: Different objectives of Accounting are as follows: 1. Systematic Recording of Transactions To ensure radiality and precision for the accounting measurements, it is necessary to keep a systematic record of all financial transactions of a business enterprise which is ensured by book-keeping. 2. Ascertainment the results (Income Result) of above Transactions Difference between these revenue incomes and revenue expenses is known as the result of business transactions identified as profit/loss. As this measure is used very frequently by stake-holders for rational decision making, it has become the objective of accounting. 3. Ascertain the Financial Position of Business Financial position is identified by preparing a statement of ownership meaning Assets, and owing meaning Liabilities of the business as on a certain date commonly known as Balance Sheet. 4. To Know the Solvency Position Balance Sheet and Profit and Loss Account provide useful information to stockholders regarding potential of the entity to meet their obligations in the short as well as in the long run. 5. Providing Information to the Users for Rational Decision making Accounting provides useful information for decision-making to stakeholders such as owners, management, creditors and investors and other stake holders. Various outcomes of business activities such as costs, prices, sales volume, value under ownership and return on investment are measured in the accounting process. All these accounting measurements are used by stakeholders in decision making process. Hence, accounting is identified as the language of a business. Question: Define book-keeping and its functions? Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.4 Answer: As defined by Carter, “Book-Keeping is a science as well as art of correctly recording in books of accounts all those business transactions that result in transfer of money or money‘s worth”. Book-keeping is an activity concerned with recording and classifying financial data related to business operations in order of occurrence. Functions of Book Keeping 1. Collection of basic financial information 2. Identification of events and transactions with financial character, i.e., economic transactions 3. Measurement of economic transactions in terms of money 4. Recording of financial effects of economic transactions in order of its occurrence 5. Classifying effects of economic transactions 6. Preparing organized statement known as Trial Balance Question: Explain the Distinction between Book-Keeping and Accounting. Answer: Difference between Book-keeping and Accountancy can be explained as follows: Book-Keeping Accounting Output of book-keeping is an input for Output of accounting permits informed accounting. judgments and decisions by the user(stakeholders) of accounting information. Purpose of book-keeping is to keep Purpose of accounting is to find results systematic record of transactions and of operating activity of a business and events of financial character in order of to report its financial strength. occurrence. Book-keeping is the foundation of Accounting is considered as a language accounting. of business. Book-keeping is carried out by the junior Accounting is done by the senior staff staff. who have skills of analysis and interpretation. Objective of book-keeping is to Object of accounting is not only book- summarize the cumulative effect of all keeping but also analyzing and economic transactions of business for a interpreting reported financial given period by maintaining permanent information for informed decisions by record of each business transaction with the stake-holders or user of financial Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.5 its evidence and financial effects on statement. accounting variable. Basic Accounting Terms Question: Explain the term “Transactions” and “Events”. Transaction: It means a business activity which involves exchange of money or money‘s worth between parties. The transactions can be measured in terms of money and changes the financial position of a entity. Types: Cash transaction or Credit transaction. When the parties settle the transaction immediately by making payment in cash or by cheque, it is called a cash transaction. On the other hand, in credit transactions, the payment is settled at a future date as per agreement between the parties. Example: Purchase of goods would involve receiving material and making payment or creating an obligation to pay to the supplier at a future date. Event: In an accounting sense, an event is the final outcome of a business activity that can affect the account balances of the company if it is financial in nature. Therefore, it can change the fundamental accounting equation and can be expressed monetarily. Example: Whenever there is an increase or decrease in the company’s assets or liabilities, an accounting event takes place. Question: Explain Goods / Services? Answer: Goods are tangible article or commodities in which a business deal. These articles or commodities are either bought and sold or produced and sold. Services: The services are intangible in nature and are rendered with or without the object of earning profits. At times, what may be classified as goods to one business firm may not be goods to the other firm, e.g., for a machine manufacturing company, the machines are goods as they are frequently made and sold. But for the buying firm, it is not goods as the intention is to use it as a long-term resource and not sell it. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.6 Question: Explain Capital Expenditure and Revenue Expenditure? Capital Expenditure: This represents expenditure incurred for the purpose of acquiring a fixed asset for increasing efficiency which is intended to be used over long term for earning profits there from, They are generally Non-recurring (low frequency) in nature. Capital expenditure forms a part of the Balance Sheet. Example: Amount paid to buy a computer for office use is a capital expenditure. Revenue Expenditure: This represents expenditure incurred to earn revenue of the current period. The benefits of revenue expenses get exhausted in the year of the incurrence. The revenue expenditure results in the reduction in profit or surplus. It becomes part of the Income statement. Example repairs, insurance, salary and wages to employees, travel, etc. Question: Define Profit, Loss, Income Statement (Profit & Loss Account) and Balance Sheet. Answer: Profit: The excess of revenue over expenses is called profit. Loss: The excess of expense over income is called loss. Profit and Loss Account or Income Statement: This account shows the revenue earned by the business and the expenses incurred by it to earn that revenue. This is prepared usually for a particular accounting period, which could be a month, quarter, half a year or a year. The net result of the Profit and Loss Account shows profit earned or loss suffered by the business entity. Balance Sheet: It is the statement of the financial position of the business entity on a particular date. It lists all assets, liabilities and capital. It is important to note that this statement exhibits the state of affairs of the business as on a particular date only. It describes what the business owns and what it owes to outsiders (this denotes liabilities), and to the owners (this denotes capital). It is prepared after incorporating the resulting Profit/Loss or Income Statement. Question: Explain the Distinction between Trade Discount and Cash Discount. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.7 Answer: Distinction between Trade Discount and Cash Discount Basis Trade Discount Cash Discount It is a reduction granted by a A reduction granted by a supplier from the List Price of supplier from the Invoice goods or services on business Price in consideration of 1. Meaning considerations (such as quantity immediate payment or bought, trade practices, etc.,) payment within a credit other than for prompt payment. period allowed. It is allowed to promote the sales It is allowed to encourage the 2. Purpose or as a trade practice. prompt payment. 3. Time when it is allowed at the time of It is allowed at the time of allowed purchase/ sale of goods. payment made. 4. Disclosure in It is shown by way of deduction It is not shown in the invoice. the Invoice in the invoice itself. Trade Discount Account is not Cash Discount Account is 5. Ledger opened in the ledger i.e. it is not opened in the ledger i.e. it is Account recorded in the books of recorded in the books of account. account. It may vary with the period It may vary with the quantity 6. Variation within which the payment is purchased. made. Question: Explain Assets and its classifications. Asset: Asset is a resource owned by a business with the purpose of using it for generating future profits. Assets can be tangible and intangible. Classifications of Assets Tangible Assets Intangible Assets Non-Current Current Assets Non-Current Current Assets Assets Assets Tangible Assets: Tangible Assets are the capital assets which have some physical existence. Example: Plant & Machinery, Furniture & Fittings, Land & Buildings, Books, Computers & Vehicles. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.8 Intangible Assets: The capital assets which have no physical existence and whose value is limited by the rights and anticipated benefits that possession confers upon the owner are known as intangible assets. Example: Goodwill, Patents, Trade-Marks, Copyrights, Brand Equity, Designs & Intellectual Property, Etc. Current Assets – An asset can be classified as Current if it satisfies any of the following: i. It is expected to be realized in, or is intended for sale or consumption in the company‘s normal Operating cycle; ii. It is held primarily for the purpose of being traded; iii. It is due to be realized within 12 months after the Reporting Date; or iv. It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the Reporting Date. Non-Current Assets – Other than Current Assets, all other assets are classified as Non- Current Assets, e.g., Machinery held for Long-term, etc. Fictitious Assets: Fictitious assets are not assets at all since they are not represented by any tangible possession. They appear on the asset side simply because of a debit balance in a particular account not yet written off, e.g., provision for discount to creditors, discount on issue of shares, etc. Wasting Assets: Such assets as mines, quarries, etc., that become exhausted or reduce in value by their workings are called wasting assets. Question: What are Investments? Explain its classification also. Answer: Investments are the assets held for earning the income of interest, dividend, rent, royalty, capital appreciation or of like nature. Types of investments: Current Investments Non- Current Investments Current Investments: Current investments are investments that are by their nature readily realizable and are intended to be held for not more than one year from the date on which such investment is made. Example: 11-months Commercial Paper is an example of current investment. Non-Current Investments: Non-Current Investments are investments which are held beyond the current period for sale or disposal. Example: Fixed Deposit for 5 years. Question: Explain Liabilities and its classifications. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.9 Answer: Liability: It is an obligation of financial nature to be settled at a future date. It represents amount of money that the business owes to the other parties. Example: Loan taken from bank, Creditors, Bills Payable etc. Types of Liabilities Depending upon the period of holding, these obligations could be further classified into long term or Non-current liabilities, and short term or current liabilities. Current Liabilities – A liability is classified as current when it satisfies any of the following: i. It is expected to be settled in the company‘s normal Operating Cycle; ii. It is held primarily for the purpose of being traded; iii. It is due to be settled within 12 months after the Reporting Date; or iv. The company does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Non-Current Liabilities – Other than Current Liabilities, all other liabilities shall be classified as Non- Current Liabilities. Example: loan taken for 5 years, Debentures issued etc. Question: Describe Contingent Liability and its treatment with example. Contingent Liability: It represents a potential obligation that could be created depending on the outcome of an event. Contingent liability is not recorded in books of account, but disclosed through a note in the financial statements. Example: Pending legal suit, Guarantee Taken, Bills Discounted etc. Question: Define the term Debtors and Creditors. Debtor: The sum total or aggregate of the amounts which the customer owes to the business for the purchase of goods on credit or services rendered or in respect of other contractual obligations, is known as Sundry Debtors or Trade Debtors, or Trade Payable, or Book-Debts or Debtors. These debtors may again be classified as under: (a) Good Debts: The debts which are sure to be realized are called good debts. (b) Doubtful Debts: The debts which may or may not be realized are called doubtful debts. (c) Bad Debts: The debts which cannot be realized at all are called bad debts. Creditor: A creditor is a person to whom the business owes money or money‘s worth. For example, money payable to the supplier of goods or provider of service. Creditors are generally classified as Current Liabilities. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.10 Question: Briefly Explain Capital, Drawings and Net worth. Capital: Capital is the amount invested in a business by its owners. It may be in the form of cash, goods, or any other asset which the proprietor or partners of business invest in the business. Drawings: It represents the amount of cash, goods or any other assets which the owner withdraws from business for his or her personal use. Drawings will result in a reduction in the owners‘ capital. The concept of drawing is not applicable to the corporate bodies like limited companies. Example: the life insurance premium of the proprietor or a partner of the firm is paid from the business, Goods or cash or any other assets withdrawn from business for personal use. Net worth: It represents the excess of total assets over total liabilities of a business. Technically, this amount is made available to be distributed to the owners in the event of closure of the business after payment of all liabilities. Question: Explain Single entry and Double Entry System of Accounting in detail. Answer: Single entry system/ Single Entry Accounting: Single-entry bookkeeping is a method of bookkeeping that relies on a one-sided accounting entry to maintain financial information. In case of single entry system, the business houses for their convenience and more practical approach ignore the strict rules of double entry system. Under this system both the aspects of business transactions and events are not recorded, usually a cash book and personal accounts are maintained. According to a Dictionary of Accountancy by Kohler, “A system of book-keeping in which as a rule only records of cash and of personal accounts are maintained, it is always incomplete double entry varying with the circumstances.” Double Entry System: In case of double entry system of book- keeping both the aspects of every transaction are recorded. In this system, the first entry is made to the debit of an account, and the second entry to the credit of second account. It was in 1494 that Luca Pacioli, the Italian mathematician, first published his comprehensive treatise on the principles of Double Entry System. Features of Double Entry System (a) Every transaction has two-fold aspects, i.e., one party giving the benefit and the other Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.11 receiving the benefit. (b) Every transaction is divided into two aspects, debit and credit. One account is to be debited and the other account is to be credited. (c) Every debit must have its corresponding and equal credit. Advantages of Double Entry System (a) Since personal and impersonal accounts are maintained under the double entry system, both the effects of the transactions are recorded. (b) It ensures arithmetical accuracy of the books of accounts, for every debit, there is a corresponding and equal credit. This is ascertained by preparing a trial balance periodically, or at the end of the financial year. (c) It prevents and minimizes error. Moreover frauds can be detected early. (d) Errors can be checked and rectified easily. (e) The balances of receivables and payables are determined easily, since the personal accounts are maintained. (f) The businessman can compare the financial position of the current year with that of the past years. (g) The businessman can justify the standing of his business in comparison with the previous year purchase, sales, and stocks, incomes and expenses with that of the current year figures. (h) Helps in decision-making. (i) The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year ended and the financial position can be ascertained by the preparation of the Balance Sheet. (j) It helps the Government to decide sickness of business units and extend help accordingly. (k) The other stakeholders, like suppliers and banks can take a proper decision regarding grant of credit or loans. Limitations of Double Entry System (a) The system does not disclose all the errors committed in the books of accounts. (b) The Trial Balance prepared under this system does not disclose certain types of errors i.e. compensating error. (c) It is costly as it involves maintenance of numbers of books of accounts. Question: Define accounting concept. Explain important accounting concept also. Answer: Accounting concepts are the generally accepted rules and assumptions that assist accountants in preparing financial statements. In layman’s terms, they are the fundamental building blocks of the transactions of the business. Unique Academy For Commerce MO. 8007916622 8007916633  Fundamental of Accounting C l a s s N o t e s | 1.12 The following are some Accounting Concepts that’s need to be kept in mind while recording the transaction in books of accounts. 1. Accruals Concept: An accrual is a journal entry that is used to recognize revenues and expenses that have been earned or consumed, respectively, and for which the related cash amounts have not yet been received or paid out. Accruals are needed to ensure that all revenues and expenses are recognized within the correct reporting period, irrespective of the timing of the related cash flows. 2. Conservatism Concept: Revenue is only recognized when there is a reasonable certainty that it will be realized, whereas expenses are recognized sooner, when there is a reasonable possibility that they will be incurred. This concept tends to result in more conservative financial statements. 3. Consistency Concept: Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, financial statements prepared in multiple periods can be reliably compared. 4. Economic Entity Concept: The transactions of a business are to be kept separate from those of its owners. By doing so, there is no intermingling of personal and business transactions in a company’s financial statements. 5. Going Concern Concept: Financial statements are prepared on the assumption that the business will remain in operation in future periods. Under this assumption, revenue and expense recognition may be deferred to a future period, when the company is still operating. Otherwise, all expense recognition in particular would be accelerated into the current period. 6. Matching Concept: The expenses related to revenue should be recognized in the same period in which the revenue was recognized. By doing this, there is no deferral of expense recognition into later reporting periods, so that someone viewing a company’s financial statements can be assured that all aspects of a transaction have been recorded at the same time. 7. Materiality Concept: Materiality is an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements using GAAP standards. A material issue can have a major impact on the financial, economic, reputational, and legal aspects of a company, as well as on the system of internal and external stakeholders of that company. Both nature and volume of a transaction is capable to make it material. Unique Academy For Commerce MO. 8007916622 8007916633  Accounting Cycle & Analysis of Transaction C l a s s N o t e s | 2.1 Accounting Cycle & Analysis of Transaction This chapter is 2nd Part of “Lesson 1: Introduction to Financial Accounting” of study material issued by ICSI for New Course Question: Define Accounting Cycle and explain its sequence? Answer: The Accounting Cycle is a sequence of activities performed by an accountant to document and report an organisation’s financial transactions during an accounting period. Identifying Transaction s Drafting Financial Recording in Statements Journal Closing the The Accounting Posting to Books Ledger Cycle Drafting Unadjusted Trial Balance Trial Balance Adjustment Entries Stages of Accounting Cycle The accounting cycle consists of the following sequential steps: 1. Identifying transactions: The first step in the accounting cycle is to analyze events to determine if they are “transactions”. Transactions are the starting point from which the rest of the accounting cycle will follow. 2. Recording transactions in Books of Original Entry: The second step in the accounting cycle is to record the identified transactions in the relevant Books of Original Entry as journal entries. 3. Posting to the ledger: The next step is to record a summary of the activities in relevant account in the ledger (referred to as Posting). 4. Drafting of Unadjusted Trial Balance: At the end of an accounting period, data from the ledger accounts may be taken to draft a trial balance. It is prepared for identifying Unique Academy For Commerce MO. 8007916622 8007916633  Accounting Cycle & Analysis of Transaction C l a s s N o t e s | 2.2 any errors that may have occurred during the initial stages of the accounting cycle. However, this step is not mandatory. 5. Passing of adjustment entries: Identification of necessary adjustments and passing of adjusting entries make up the fifth step in the cycle. 6. Drafting of Adjusted Trial Balance: Once all adjusting entries are completed, then an Adjusted Trial Balance can be prepared. This happens to be the last step before the preparation of the financial statements. 7. Closing of books: In this stage of the accounting cycle, the ledger accounts are closed and balanced (also referred to as “zeroed out”) at the end of every accounting period. 8. Drafting the Financial Statements: In the last stage of the accounting cycle, the Income Statement is prepared with the closing balances of the nominal accounts, while the balances of real and personal accounts gets reflected in the Balance Sheet. Financial statements are prepared in the following order:  Income Statement,  Statement of Retained Earnings,  Balance Sheet and  Statement of Cash Flows. Question: Define Accounting Equation. Answer: The fundamental accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities, and owner's equity of a person or business. It is the foundation for the double-entry bookkeeping system. Assets = liabilities + Capital (Equity) Unique Academy For Commerce MO. 8007916622 8007916633  Accounting Cycle & Analysis of Transaction C l a s s N o t e s | 2.3 Practical Questions Q 1: Mr. Shyam had the following transactions: a. Commenced business with cash ₹ 1,50,000. b. Purchased goods for cash ₹ 40,000 and credit ₹ 50,000. c. Sold goods for cash ₹ 70,000, costing ₹ 40,000. d. Rent paid ₹ 15,000. e. Rent outstanding ₹ 1,000. f. Bought furniture ₹ 25,000 on credit. g. Bought refrigerator for personal use ₹ 15,000. h. Purchased building worth ₹ 2,50,000 by paying cash ₹ 50,000 and balance through loan. Use accounting equation to show the effect of the above transactions on his assets, liabilities and capital. Q 2: Fill in the blanks: Equities Case Total Assets ₹ Internal ₹ External ₹ Total ₹ I 1,50,000 ? Nil ? II ? 1,25,000 1,30,000 ? III 2,60,000 1,25,000 ? ? IV 1,70,000 ? 1,25,000 ? V ? ? 1,35,000 2,50,000 Unique Academy For Commerce MO. 8007916622 8007916633  Accounting Cycle & Analysis of Transaction C l a s s N o t e s | 2.4 Practice Questions [PQ] PQ 1: Prove that the accounting equation is satisfied in all the following transactions of Moon: a. Commenced business with Cash Rs. 70,000. b. Paid rent in advance Rs. 1,500. c. Purchased goods for Cash Rs. 50,000 and credit Rs. 30,000. d. Sold goods for Cash Rs. 50,000 costing Rs. 30,000. e. Paid salary Rs. 5,000 and Salary Outstanding Rs. 1,000. f. Bought motorcycle for personal use Rs. 15,000. Solution: Accounting Equation: Assets = Liabilities + Capital T. Assets Liabilities Capital Transactions = + No. Rs. Rs. Rs. Commenced business with Cash a. + 70,000 0 + 70,000 Rs. 70,000 Accounting Equation 70,000 = 0 + 70,000 (-) 1,500 b. Rent paid in advance Rs. 1500 0 0 (+) 1500 Revised Accounting Equation 70,000 = 0 + 70,000 Purchased Goods for Cash Rs. + 80,000 c. +30,000 0 30,000 and credit Rs. 20,000 (-) 50,000 Revised Accounting Equation 1,00,000 = 30,000 + 70,000 Sold Goods for Cash Rs. 50,000 + 50,000 d. 0 + 20,000 costing Rs. 30,000 (-) 30,000 Revised Accounting Equation 1,20,000 = 30,000 + 90,000 Paid Salary Rs. 5,000 and Salary e. (-) 5,000 + 1,000 (-) 6,000 outstanding Rs. 1,000 Revised Accounting Equation 1,15,000 = 31,000 + 84,000 Bought Motorcycle for Personal f. (-) 15,000 (-) 15,000 use Rs. 15,000 Revised Accounting Equation 1,00,000 = 31,000 + 69,000 Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.1 Journal Entry This chapter is 3rd Part of “Lesson 1: Introduction to Financial Accounting” of study material issued by ICSI for New Course Question: What is account? Explain in details along with its classification. Answer: An account is defined as a summarized record of transactions related to a person or a thing. When a business transaction happens, one has to identify the account that will be affected by it and then apply the rules to decide its accounting treatment. Features of Account Typically, an account is expressed as a statement in the form of English letter ‘T‘. It has two sides. The left-hand side is called as the Debit side, and the right-hand side is called as the Credit side. The debit is denoted as ‘Dr’. and the credit as ‘Cr‘. The convention is to write the Dr. and Cr. labels on both sides as shown below Classification of Account Traditional Approach Modern Approach OR Accounting Equation Approach Impersonal Asset Personal Account Account Liability Real Nominal Capital Account Account Revenue Expenses Traditional Classification 1. Personal Account: It deals with the accounts relating to individual and takes the following forms- Natural Person: Example: The name of an individual, the suppliers and buyers, say, Mohan, Sohan, John, Aman, Abhay etc. Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.2 Artificial Person: Example: Bank (e.g. Asix Bank, PNB, SBI etc.), Firm (e.g. AB & Co.), Association (BCCI), Company (Reliance Ltd., Eichor Motors) etc. Representative Personal Account: These are the accounts which represents natural person or artificial person while doing accounting. Example: Outstanding Rent A/c represent landlord to whom rent is payable, Outstanding Salary A/c represent those employees to whom salary is still payable, Capital A/c and Drawings A/c represent owner. etc., i.e. Rent Payable a/c etc. 2. Impersonal Account a. Real Account: It stands for properties and assets which are broadly classified as tangible and intangible Example: Tangible Assets - Plant, Cash, Land, Building etc.; Intangible Assets - goodwill, patent, trade mark etc. b. Nominal Account: All those accounts which are related to revenue income and revenue expenses comes under nominal account. Example: Rent, Salary, Purchase, Sales etc. Alternative Classification/ Modern Classification / Classification based on Accounting Equations 1. Assets: These arc resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Example: Cash, Stock of Goods, Land, Buildings, Machinery etc. 2. Liabilities: These are financial obligations of an enterprise other than owners' funds. Example: Long-Term Loans, Creditors, Outstanding Expenses etc. 3. Capital: It generally refers to the amounts invested in an enterprise by its owner(s), the accretion to it or a reduction in it. Since capital is affected by expenses and incomes of revenue nature, there are two more categories of accounts, namely expenses and incomes. The difference between incomes and expenses known as profit or loss are taken into capital account. 4. Expenses: These represent those accounts which show the amount spent or even lost in carrying on operations. 5. Revenue/ Incomes: These accounts relate of the amount charged for goods sold or services rendered or permitting others to use enterprise’s resources yielding Interest, Royalty or Dividend. Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.3 Rules of Debit and Credit Question: Explain the rule of debit and credit. Rules for Debit & Credit Traditional Approach Debit the receiver/the person who takes the Personal benefit/the person from whom something is Account receivable Credit the giver/the person who sacrifices the benefit/the person to whom we are liable to give/pay Real Debit What comes into the business Account Credit What goes out of the business Debit All Expenses/losses Nominal Account Credit All Incomes/gains Rules for Debit & Credit Modern Approach OR Accounting Equation Approach Asset Capital Expenses Increase Decrease Increase Decrease Increase Decrease Debit Credit Revenue Debit Credit Credit Debit Liability Increase Decrease Increase Decrease Credit Debit Credit Debit Meaning of Journal, Journalising and Journal Entry Question: Define the term Journal, Journalising & Journal Entry? Also give advantages of Journal. Answer Journal: A Journal is a book in which transactions are recorded in the order in which they occur i.e., in chronological order. A Journal is called a book of primary entry (also called of original entry) because all business transactions are entered first in this book. Journalising: The process of recording a transaction in a journal is called Journalising. Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.4 Journal Entry: A recorded transaction/ event in the journal is called a Journal Entry. Format of Journal Date Particulars Voucher No. L.F. Dr. (Rs.) Cr. (Rs. ) Advantages of Journal The following are the advantages of a journal: (a) Chronological Record: It records transactions as and when it happens. So it is possible to get detailed day-to- day information. (b) Minimizing the possibility of errors: The nature of transaction and its effect on the financial position of the business is determined by recording and analyzing into both debit and credit aspects. (c) Narration: It means explanation of the recorded transactions. (d) Helps to finalize the accounts: Journal is the basis of ledger posting and the ultimate Trial Balance. The Trial Balance helps to prepare the final accounts. Practical Questions Q No. 1: Point out the accounts which will be debited and credited for each one of the following transactions: ⚫ Cash received from X and discount allowed to him. ⚫ Cash paid to Y and discount received from him. ⚫ Credit Sales to Z. ⚫ Cash Sales to A. ⚫ Purchases from B on credit. ⚫ Salary paid to clerk by means of cheque. ⚫ Payment of cash to landlord for rent. ⚫ Depreciation on furniture. ⚫ Interest due but not yet paid. ⚫ Interest provided on capital. Q No. 2: Give Journal Entries of the following transaction: ⚫ Started business with cash Rs. 36,000 ⚫ Paid rent in advance Rs. 800 ⚫ Purchased goods for cash Rs.10,000 and on credit Rs. 4,000 ⚫ Sold goods for cash Rs. 8,000 Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.5 ⚫ Rent paid Rs. 2000 and rent outstanding Rs. 400 ⚫ Bought cycle for personal use Rs. 16,000 ⚫ Purchased equipments for cash Rs. 10,000 ⚫ Paid to creditors Rs. 1,200 ⚫ Some business expenses paid Rs. 1,800 ⚫ Depreciation on equipment Rs. 2,000. Practice Questions [PQ] PQ 1: Transactions of Ramesh for April are given below. Journalise them. 2020 Rs. April 1 Ramesh started business with 10,00,000 “3 Bought goods for cash 50,000 “5 Drew cash from bank 10,000 “ 13 Sold to Krishna- goods on credit 1,50,000 “ 20 Bought from Shyam goods on credit 2,25,000 “ 24 Received from Krishna 1,45,000 Allowed him discount 5,000 “ 28 Paid Shyam cash 2,15,000 “ Discount allowed 10,000 “ 30 Cash sales for the month 8,00,000 Paid Rent 50,000 Paid Salary 1,00,000 Answer: JOURNAL Date Dr. Cr. Particulars L.F. 2020 Amount Amount Bank Account Dr. 10,00,000 April To, Capital Account 10,00,000 1 (Being the amount invested by Ramesh in the business as capital) Purchases Account Dr. 50,000 “3 To, Bank Account 50,000 (Being goods purchased for cash) Cash Account Dr. 10,000 “5 To, Bank Account 10,000 (Being cash withdrawn from bank) Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.6 Krishna Dr. 1,50,000 “ 13 To, Sales Account 1,50,000 (Being goods sold to Krishna on credit) Purchases Account Dr. 2,25,000 “ 20 To, Shyam 2,25,000 (Being goods bought from Shyam on credit) Bank Account Dr. 1,45,000 Discount Account Dr. 5,000 “ 24 To, Krishna 1,50,000 (Being cash received from Krishna and discount allowed to him) Shyam Dr. 2,25,000 To, Bank Account 2,15,000 “ 28 To, Discount Account 10,000 (Being cash paid to Shyam and discount allowed by him) Bank Account Dr. 8,00,000 “ 30 To, Sales Account 8,00,000 (Being goods sold for cash) Rent Account Dr. 50,000 Salaries Account Dr. 1,00,000 “ 30 To, Bank Account 1,50,000 (Being the amount paid for rent and salary) Total 27,60,000 27,60,000 PQ 2: Journalise the following transactions. Also state the nature of each account involved in the Journal entry. 2020 Transactions Rs. December 1, Ajit started business with capital 4,00,000 December 3, he withdrew cash for business from the Bank 2,000 December 5, he purchased goods making payment through bank 15,000 December 8, he sold goods Rs. 16,000 and received payment through bank. December 10, he purchased furniture and paid by cheque 2,500 December 12, he sold goods to Arvind 2,400 December 14, he purchased goods from Amrit 10,000 December 15, he returned goods to Amrit 500 Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.7 December 16, he received from Arvind Rs. 2,300 in full settlement. December 18, he withdrew goods for personal use 1,000 December 20, he withdrew cash from business for personal use 2,000 December 24, he paid telephone charges 110 December 26, amount paid to Amrit in full settlement 9,450 December 31, Paid for stationery 200 “ Rent 5,000 “ Salaries to staff 2,000 December 31, Goods distributed by way of free samples 2,000 Answer: JOURNAL Debit Credit Date Particulars L.F. (Rs.) (Rs.) Bank Account ----Dr. 4,00,000 Dec. 1 To, Capital Account 4,00,000 (Being commencement of business) Cash Account ----Dr. 2,000 Dec. 3 To, Bank Account 2,000 (Being cash withdrawn from the Bank) Purchases Account ----Dr. 15,000 Dec. 5 To, Bank Account 15,000 (Being purchase of goods for cash) Bank Account ----Dr. 16,000 Dec. 8 To, Sales Account 16,000 (Being goods sold for cash) Furniture Account ----Dr. 2,500 Dec. 10 To, Bank Account 2,500 (Being purchase of furniture, paid by cheque) Arvind ----Dr. 2,400 Dec. 12 To, Sales Account 2,400 (Being sale of goods) Purchases Account ----Dr. 10,000 Dec. 14 To, Amrit 10,000 (Being purchase of goods from Amrit) Amrit ----Dr. 500 Dec. 15 To, Purchases Returns Account 500 (Being goods returned to Amrit) Bank Account ----Dr. 2,300 Dec. 16 Discount Account ----Dr. 100 To, Arvind 2,400 Unique Academy For Commerce MO. 8007916622 8007916633  Journal Entry C l a s s N o t e s | 3.8 (Being cash received from Arvind in full settlement and allowed him Rs. 100 as discount) Drawings Account ----Dr. 1,000 Dec. 18 To, Purchases Account 1,000 (Being withdrawal of goods for personal use) Drawings Account ----Dr. 2,000 To, Cash Account 2,000 Dec. 20 (Being cash withdrawal from the business for personal use) Telephone Expenses Account ----Dr. 110 Dec. 24 To, Bank Account 110 (Being telephone expenses paid) Amrit ----Dr. 9,500 To, Bank Account 9,450 Dec 26 To, Discount Account 50 (Being cash paid to Amrit and he allowed Rs. 50 as discount) Stationery Expenses ----Dr. 200 Rent Account ----Dr. 5,000 Dec. 31 Salaries Account ----Dr. 2,000 To, Bank Account 7,200 (Being expenses paid) Advertisement Expenses Account ----Dr. 2,000 To, Purchases Account 2,000 Dec. 31 (Being distribution of goods by way of free samples) Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.1 Ledger & Trial Balance This chapter is 4th Part of “Lesson 1: Introduction to Financial Accounting” of study material issued by ICSI for New Course Question: Explain the term ledger and ledger posting. Answer: Ledger: The book of account in which transactions are recorded in respective account, after they have been entered in the journal is called the Ledger. It is the book of account in which the transactions are recorded in a classified and permanent manner. It is the final destination of all the accounts, and hence, it is also called the Book of Final Entry. It is the book of account in which transactions are recorded from the journal. It contains various ‘ledger accounts’. Since finding information pertaining to the financial position of a business emerges only from the accounts, the ledger is also called the Principal Book. all the necessary information relating to any account is available from the ledger. This is the most important book of the business and hence is rightly called the “King of All Books”. Posting: The process of recording the entry in the ledger is technically known as Posting The transactions are recorded in each of the relevant ledger accounts in a chronological order. It reflects the final position of each account on any particular date. It forms the basis for preparation of Trial Balance. A ledger account has a specific format, as under: ………………. Account Dr. Cr. Date Particulars J.F. (₹) Date Particulars J.F. (₹) Question: Explain Subdivisions of Ledger. Answer: On the basis of the nature of accounts maintained, ledger can be classified into Personal Ledger and Impersonal Ledger. Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.2 Subdivisions of Ledger Personal Ledger Impersonal Ledger Debtors’ OR Creditor OR Cash General Ledger Customers’ OR Supplier OR Book Sales ledger Purchase OR Bought ledger Private Nominal Ledger Ledger Personal Ledger: The ledger where the details of all transactions about persons who are related to the accounting unit are recorded is called Personal Ledger. Again, Personal Ledger may be divided into two groups: viz. (a) Debtors Ledger, and (b) Creditors Ledger. Debtors’ Ledger: The ledger where the details of transactions about the persons to whom goods are sold, cash is received, etc., are recorded is called Debtors Ledger. Creditors’ Ledger: The ledger where the details of transactions about the persons from whom goods are purchased on credit, cash paid to them, etc., are recorded, is called Creditors Ledger. Impersonal Ledger: The ledger where details of all transactions about assets, income & expenses, etc., are recorded is called Impersonal Ledger. Impersonal Ledger may, again be divided into two group, viz., (a) Cash Book; and (b) General Ledger. Cash Book: The book wherein all cash & bank transactions are recorded is called Cash Book. General Ledger: The ledger where all transactions relating to real accounts, nominal accounts are recorded is called General Ledger. General Ledger may again be divided into two groups, viz., Nominal Ledger & Private Ledger. Nominal Ledger: The ledger where all transactions relating to income and expenses are recorded is called Nominal Ledger. Private Ledger: The Ledger where all transactions relating to assets and liabilities are recorded is called Private Ledger. Question: Define Trial Balance. Explain its features and purpose. Answer: Trial Balance may be defined as a statement or a list of all ledger account balances taken from various ledger books on a particular date to check the arithmetical accuracy. According to Rolland Trial Balance is defined as “a list or abstract of the balances or of Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.3 total debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establish a basic summary for financial statements”., Eric. L. Kohler “The final list of balances, totaled and combined, is called Trial Balance”. Features of Trial Balance (i) It is a list of debit and credit balances which are extracted from various ledger accounts. (ii) It is not an account. It is only a statement of account. (iii) It is not a part of the financial statements. (iv) The purpose is to establish arithmetical accuracy of the transactions recorded in the Books of Accounts. (v) It is usually prepared at the end of the accounting year but it can also be prepared anytime as and when required like weekly, monthly, quarterly or half-yearly. (vi) It is a link between the Books of Accounts, Profit and Loss Account and Balance sheet. Purpose of Trial Balance (i) To check the arithmetical accuracy of the recorded transactions. (ii) To ascertain the balance of any ledger account. (iii) To serve as an evidence of the fact that the double entry has been completed in respect of every transaction. (iv) To facilitate the preparation of final accounts promptly. Question: What are the different method of preparing trial balance? Answer: Different Methods of preparing trial balance are as follows: (a) Total Method or Gross Trial Balance. (b) Balance Method or Net Trial Balance. (c) Compound Method. These are explained as hereunder: (a) Total Method or Gross Trial Balance: Under this method, two sides of the accounts are totalled. The total of the debit side is called the “debit total”, and the total of the credit side is called the “credit total”. Debit totals are entered on the debit side of the trial balance while the credit total is entered on the credit side of the trial balance. If a particular account has total in one side, it will be entered either in the debit column or the credit column as the case may be. Advantages: (i) It facilitates arithmetical accuracy of the accounts. Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.4 (ii) Extraction of ledger balances is not required at the time of preparation of trial balance. Disadvantages: Preparation of final accounts is not possible. (b) Balance Method or Net Trial Balance: Under this method, all the ledger accounts are balanced. The balances may be either “debit-balance” or “credit balance”. Advantages: (i) It helps in the easy preparation of final accounts. (ii) It saves time and labour in preparing a trial balance. Disadvantages: Errors may remain undisclosed irrespective of the agreement of trial balance. (c) Compound Method: Under this method, totals of both the sides of the accounts are written in separate columns. Along with this, the balances are also written in the separate columns. Debit balances are written in the debit column and credit balances are written in the credit column of the trial balance. Advantages: It offers the advantage of both the methods. Disadvantages: It is a lengthy process and more time is consumed in the preparation of a trial balance Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.5 Practical Question Q 1: Post the following transactions into ledger and prepare trial balance. 1. Started business with cash ₹ 2,00,000 2. Purchased goods for cash ₹ 60,000 3. Sold goods to Shyam 60,000 4. Sold goods for cash 20,000 5. Received cash from Shyam 40,000 6. Goods purchased from Ram 40,000 7. Cash paid to Ram 20,000 8. Paid office rent 4,000 9. Paid salaries to staff 20,000 10. Returned goods by Shyam 10,000 11. Goods returned to Ram ₹ 5,000 12. Purchased Machinery for ₹ 49,500 13. Paid wages for installation of machinery of ₹ 500. Q 2: Prepare Debtors Account from the following information: Debtors as on 01.04.2017 1,25,000 Credit sales during the year 5,00,000 Discount allowed to debtors during the year 30,000 Bad Debts written off during the year 20,000 Debtors as on 31.03.2018 1,30,000 Q 3: Prepare Creditors Account from the following information: Opening Balance of Creditors 50,000 Payment to Creditors during the year 3,00,000 Discount Received from Creditors during the year 15,000 Allowances received from creditors 25,000 Closing Balance of Creditors 70,000 Q 4: From the following ledger account balances, prepare a Trial Balance of Mr. Sen for the year ended 31st March, 2022. Capital ₹ 80,000; Sales ₹ 10,00,000; Current A/c (Cr) ₹ 10,000; Petty Cash ₹ 10,000; Creditors ₹ 60,000; Discount Allowed ₹ 10,000; Carriage Outward ₹ 6,000; Prepaid Insurance ₹ 2,000; Outstanding Expenses ₹ 10,000; Loan A/c (Cr) ₹ 66,000; Cash at Bank ₹ 80,000; Stock at 01.04.2021 ₹ 1,20,000; Bad Debts Recovered ₹ 2,000; Investment 20,000; Unique Academy For Commerce MO. 8007916622 8007916633  Ledger & Trial Balance C l a s s N o t e s | 4.6 Accrued Interest 4,000; Carriage Inwards ₹ 4,000; General Reserve ₹ 20,000. Depreciation ₹ 4,000; Purchase ₹ 8,00,000; Profit & Loss A/c(Cr) ₹ 20,000; Sales ₹ 1,20,000; Interest Received ₹ 10,000; Salaries ₹ 24,000; Bank Loan ₹ 6,000; Building ₹ 80,000; Practice Question PQ 1: From the following ledger balances, prepare a trial balance of Anu Traders as on 31st March, 2020: Account Head Rs. Account Head Rs. Capital 1,00,000 Trade receivables 75,000 Sales 1,66,000 Trade payables 25,000 Purchases 1,50,000 Investments 15,000 Sales return 1,000 Cash at bank and in hand 37,000 Discount allowed 2,000 Interest received on investments 1,500 Expenses 10,000 Insurance paid 2,500 Solution: Trial Balance of Anu Traders as on 31.03.2020 Dr. balance Rs. Cr. Balance Rs. Purchases 1,50,000 Capital 1,00,000 Sales return 1,000 Sales 1,66,000 Discount allowed 2,000 Trade payables 25,000 Expenses 10,000 Interest received on investments 1,500 Trade receivables 75,000 Investments 15,000 Cash at bank and in hand 37,000 Insurance paid 2,500 Total 2,92,500 Total 2,92,500 Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.1 Final Accounts This chapter is 5th Part of “Lesson 1: Introduction to Financial Accounting” of study material issued by ICSI for New Course Question: Explain Final Accounts with its components. Answer: The primary function of accounting includes computing the net result of operations of the business for the current period. To meet out this purpose, Trading Accounts, Income statement and Balance sheet are prepared. These documents are popularly called as Final Accounts. It is the last phase of Accounting Process. Component of Final Accounts The components of final accounts depend upon the type of entity. For Non-manufacturing entities (i) Trading Account, (ii) Profit and Loss Account and (iii) Balance Sheet For Manufacturing entity (i) Manufacturing Account, (ii) Trading Account, (iii) Profit and Loss Account and (iv) Balance Sheet. Trading Account: J. R. Batlibboi “The Trading Account shows the result of buying and selling goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods are included.” It shows the trading results of the business, example- gross profit earned or gross loss sustained by the business. It records the direct expenses of a business firm. Profit and Loss Account: This account is prepared to ascertain the net profit/loss (Overall Profit) during an accounting year. It records the indirect expenses of a business firm, like rent, salaries, and advertising expenses. Profit and loss a/c includes expenses and losses as well as income and gains, which have Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.2 occurred in business other than the production of goods and services. Balance Sheet: The balance statement demonstrates the financial position of a business on a specific date. The financial position of a business is found by tabulating its assets and liabilities on a particular date. The excess of assets over liabilities represents the capital sunk into the business and reflects the financial soundness of a company. Manufacturing accounting Manufacturing Account is prepared by an enterprise engaged in manufacturing activities to ascertain the cost of goods manufactured during an accounting period. Practical Question Q No. 1: The following Trial Balance has been extracted from the books of Mr. Agarwal as on 31.3.2022: Trial Balance as on 31.3.2022 Particulars Dr. (₹) Particulars Cr. (₹) Purchase 6,80,000 Sales 8,38,200 Sundry Debtors 96,000 Capital Account 1,97,000 Drawings 36,000 Sundry Creditors 1,14,000 Bad Debts 2,000 Outstanding Salary 2,500 Furniture & Fixtures 81,000 Sale of Old Papers 1,500 Office Equipments 54,000 Bank Overdraft (PP Bank) 60,000 Salaries 24,000 Advanced Salary 1,500 Carriage Inward 6,500 Miscellaneous Expenses 12,000 Travelling Expenses 6,500 Stationery & Printing 1,500 Rent 18,000 Electricity & Telephone 6,800 Cash in Hand 5,900 Cash at Bank (SBI) 53,000 Stock (1.4.2021) 50,000 Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.3 Repairs 7,500 Motor Car 56,000 Depreciation: Furniture 9,000 Office Equipment 6,000 15,000 12,13,200 12,13,200 Closing stock is of Rs. 75,000. Mr. Agarwal requests you to prepare a Trading and Profit & Loss Account for the year ended 31.3.2022 and a Balance Sheet as on that date. Q No. 2: The following Trial Balance has been prepared from the books of Mrs. Sexena as on 31st March, 2022 after making necessary adjustments for depreciation on Fixed Assets, outstanding and accrued items and difference under Suspense Account. Trial Balance as at 31st March, 2022 Particulars Debit (₹) Particulars Credit (₹) Machineries 1,70,000 Sundry Creditors 82,000 Furniture 49,500 Capital Account 2,45,750 Sundry Debtors 38,000 Outstanding Expenses: Drawings 28,000 Salaries 1,500 Travelling Expenses 6,500 Printing 600 Insurance 1,500 Audit Fees 1,000 Audit Fees 1,000 Bank Interest 1,200 Salaries 49,000 Discounts 1,800 Rent 5,000 Sales (Less Return) 6,80,000 Cash in Hand 7,800 Cash at Bank 18,500 Stock-in-Trade (01.04.2021) 80,000 Prepaid Insurance 250 Miscellaneous Expenses 21,200 Discounts 1,200 Printing & Stationery 1,500 Purchase (Less Returns) 4,60,000 Depreciation: Machineries 30,000 Furniture 5,500 Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.4 Suspense Account 39,400 10,13,850 10,13,850 Closing stock on physical verification amounted to ₹ 47,500 You are requested to prepare a Trading and Profit & Loss Account for the year ended 31st March 2022 and a Balance Sheet as on that date so as to represent a True and Correct picture. Practice Question PQ 1: From the following information, prepare the Trading Account for the year ending on 31st March 2020: Opening Stock Rs. 1,50,000, Cash Sales Rs. 60,000, Credit Sales Rs. 12,00,000, Returns Outwards Rs. 10,000, Wages & Salaries Rs. 4,000, Carriage Inward Rs. 2,000, Freight Inward Rs. 3,000, Cartage Inward Rs. 1,000, Cash Purchases Rs. 50,000, Credit Purchases Rs. 10,00,000, Returns Inward Rs. 20,000, Cost of Closing Stock Rs. 90,000 but its market value is Rs. 84,000. Solution Trading Account for the year ending 31st March, 2020 Particulars Rs. Particulars Rs. To Opening Stock 1,50,000 By Sales To Purchases: Cash Sales 60,000 Cash Purchases 50,000 Credit Sales 12,00,000 Credit Purchases 10,00,000 Total Sales 12,60,000 Total Purchases 10,50,000 Less: Return (20,000) 12,40,000 Inward Less: Return (10,000) 10,40,000 By Closing Stock 84,000 Outwards To Freight Inward 3,000 (valued at Cost or Net Realizable Value To Carriage Inward 2,000 whichever is lower) To Cartage Inward 1,000 To Wages & Salaries 4,000 To Gross Profit t/f to P & L A/c 1,24,000 13,24,000 13,24,000 PQ 2: From the following information, prepare the Profit & Loss Account of a Trader for the year ending on 31st March, 2020: Particulars Rs. Particulars Rs. Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.5 Gross Profit 5,00,000 Commission Allowed 5,000 Salaries & Wages 10,000 Commission Received 17,000 Wages & Salaries 1,000 Interest on loan 3,000 Carriage Inwards 2,000 Interest Received 4,000 Carriage Outwards 5,000 Rent Paid 4,000 Freight Inward 3,000 General Expenses 1,000 Freight Outward 5,000 Rent Received 5,000 Discount Allowed 1,000 Brokerage Allowed 3,000 Discount Received 2,000 Loss on Sale of Fixed Assets 7,000 Dividend Received 3,000 Profit on Sale of Fixed Assets 5,000 Solution Profit & Loss Account (for the year ending 31st March, 2020) Particulars Rs. Particulars Rs. To Salaries & Wages 10,000 By Gross Profit 5,00,000 To Carriage Outwards 5,000 By Discount Received 2,000 To Freight Outwards 5,000 By Commission Received 17,000 To Discount Allowed 1,000 By Interest Received 4,000 To Commission Allowed 5,000 By Rent Received 5,000 To Rent Paid 4,000 By Dividend Received 3,000 To General Expenses 1,000 By Profit on Sale of Fixed Assets 5,000 To Brokerage Allowed 3,000 To Interest on Loan 3,000 To Loss on Sale of Fixed Asset 7,000 To Net Profit t/f to Capital A/c 4,92,000 5,02,000 5,02,000 PQ 3: From the following information, prepare a Balance Sheet of Mr. X as at 31 March, 2020 Particulars Rs. Particulars Rs. Plant and Machinery 1,00,000 Furniture and fixtures 20,000 Prepaid Expenses 1,000 Accrued Income 2,000 Income received in advance 2,000 Outstanding Expenses 1,000 Bills Payable 3,000 Bills Receivables 2,000 Sundry Debtors 1,00,000 Sundry Creditors 99,000 Bank Overdraft 10,000 Investments in Shares of X Ltd. 10,000 Long-term Loan from bank 1,00,000 Closing Stock 85,000 Capital 2,00,000 Building 1,00,000 Land 10,000 Goodwill 10,000 Drawings 10,000 Net Profit 60,000 Cash-in-hand 5,000 Cash at bank 19,00C Income Tax Paid 1,000 Unique Academy For Commerce MO. 8007916622 8007916633  Final Account C l a s s N o t e s | 5.6 Solution Balance Sheet of Mr. X as at 31 march, 2018 Liabilities Rs. Assets Rs. Capital: Fixed Assets: Opening Balance 2,00,000 Goodwill 10,000 Add: Net Profit 60,000 Land 10,000 2,60,000 Building 1,00,000 Less: Drawings (10,000) Plant and machinery 1,00,000 Less: Income Tax (1,000) 2,49,000 Furniture and fixtures 20,000 Long-term Li