Multiple Reporting Currencies

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Basic Accounting Level II By Sivakumar Ganesan B.
Sc, ACA, ICWA, PMP, PDIM Global Technology
Services LLc, UAE Emailsivakumar3009_at_gmail.com
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Agenda

• What is Accounting
• Mode of Learning Accounting
• Accounting and Finance - Difference
• Accounting Concepts / Conventions
• Accounting Events
• Rules of Accounting
• Preparation of Financial Statements
• A Simple Case Study

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What is Accounting

• Accounting is defined as the art of Recording,
  Classifying and Summarizing transactions in
  monetary terms (in Money terms) for the
  preparation of Financial Statements

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What is Accounting

• Accounting is the art of recording, classifying
  and Summarizing financial transactions in the
  Preparation of Financial Statements
• Recording refers to creating Journal entry for
  every financial transaction with Debit and Credit
  amounts.
• Classifying refers to Classifying each of the
  Debit / Credit Transaction to Capital or Revenue
  and Asset, Liability, Revenue or Expense
• Summarizing refers to Grouping the Transactions
  of Asset, Liability, Revenue and Expenses and
  preparing the Financial Statements (Trading,
  Profit and Loss Account and Balance Sheet)
• In case of
• Trading, Manufacturing and Customer Service
  oriented Organization, the sum of all income and
  expenses is referred to as Profit and Loss
  account
• Social Service oriented Organization like
  Schools, Hospitals and Government Organizations,
  Banks it is referred to as Income and Expenditure
  account .
• Note- Trial Balance is not a Financial
  Statement. It is only a summary of all Debit and
  Credit Transactions.

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Mode of Learning Accounting

• Change your mindset that accounting means only
  Debit and Credit
• Do not blindly learn Accounting Rules and apply
  the rules of Debit and Credit
• The Best way to Learn Accounting is
• Learn the Accounting Concepts
• Understand the Accounting Conventions
• Classify the Accounting Event
• Apply the Accounting Rules
• Record, Classify and Summarize the Journal
• You are Confused. Am I right?
• Do not become panic and move forward, you will
  understand

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Mode of Learning Accounting
Learn Accounting Concepts (Ten Fundamental
Accounting Concepts)
Understand Accounting Conventions (Three major
conventions)
Classify the Accounting Events (Capital, Revenue,
Deferred Revenue Expenditure)
Apply the Accounting Rules (Personal, Real and
Nominal Rules)
Record the Transaction as a Journal (Entering the
Debit and Credit Side of Transaction)
Classify the Transaction (Asset, Liability,
Revenue or Expense)
Summarize the Transaction (Prepare Trial Balance,
Trading, PL and Balance Sheet)
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Finance and Accounting - Difference
Finance Accounts
Procurement and Utilization of Funds Recording of an Accounting Event
Leads to Investment Decisions Expressed in Monetary Terms
Financing Decisions Recording , Classifying and Summarizing Transactions
Futuristic Preparation of Financial Statements (Trading, Profit and loss Account and Balance Sheet)
Cost of Capital Historical
Cash Flow / Fund Flow Compliance with Statutory Matters like companies Act, Income Tax Act, Sales Tax Act Etc.,
Project Appraisal
Ratio Analysis
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Accounting Concepts/Conventions (US GAAP/UK
GAAP/IFRS/SOX)

• The Concepts and conventions of accounting are
  developed by IASC (International Accounting
  Standards Committee) which is in-charge of
  releasing International Accounting Standards
  (IAS)
• The IASC Decides the preferred Accounting
  practices worldwide and encourages the worldwide
  acceptance
• There are 41 International Accounting Standards
• Now IFRS (International Financial Reporting
  Standards) and SOX (Sarbanes Oxley) Act gain more
  importance which came up from US GAAP and UK GAAP

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Difference between Concepts and Conventions

• The Accounting Concepts / Principles evolved out
  of the Practice and Procedures followed by
  different countries and later on established by
  the International Statutory Accounting Bodies
  like The Institute of Chartered Accountants of
  India, The Institute of Chartered Accountants of
  England and Wales etc to become an Accounting
  Principle statutorily need to be followed while
  preparing the Financial Statements. In nutshell
  this has evolved out of standard Practice
  followed by several countries while preparing the
  Trading, Profit and Loss Account and Balance
  Sheet.
• The Accounting Conventions / Practices are
  basically assumptions and expected to be followed
  while preparing the Financial Statements.

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Accounting Concepts / Principles

• Business Entity Concept
• Money Measurement Concept
• Dual Aspect Concept
• Cost Concept
• Accounting Period
• Conservatism
• Realization Concept
• Matching Concept
• Materiality Concept
• Objectivity

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Accounting Conventions / Practices

• Going Concern
• Consistency
• Accrual

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Accounting Concepts

• Business Entity Concept
• Accounts can be kept only for Entities, which
  are different from the persons who are associated
  with these entities
• Ex. Sole Proprietary, Partnership firm, Company
• This is one of the most Important and
  fundamental accounting principle with which
  Double entry system of accounting has evolved.
• Accounts need to be maintained separate from the
  Owners and providers of capital. If you
  understand the simple logic, then you know 30 of
  Accounting. Just Recall Fundamentals of
  Accounting from Oracle Perspective Level I
  Example of Siva, Oracle and Bank.
• See Next Slide for More Examples. If you cannot
  understand this Concept Please Do not Proceed
  Further and try to understand by reading again
  Level I and Level II Material

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Types of Entities
Type of Organization Example
Sole Proprietary Siva Co
Partnership Firm Ganesan Bros
Private Company Oracle India Pvt Ltd (A Private Company in which shares are not traded in Stock Exchange and members cannot exceed 50)
Public Company Hindustan Unilever Ltd (A Public Company in which Shares are traded in Stock Exchange)
Closely Held Company Cadbury India Ltd (A Public Company in which shares are not traded but shares are held by more than 50 persons)
Trust Hutchinson Private Trust
Society Sembur Co-op Society
Association of Persons ICAI, ICWAI, ICSI, Rotary Club
Body of Individuals (one Man Corp) President of India, Governor of State
Any other Legal Entity (HUF) A Hindu Undivided Family Jointly holding the Investment and Properties for the benefit of Family members.
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Accounting Concepts

• Business Entity Concept
• Ex 1 You are running your own Textile Showroom
  as a Dealer in Cloth as a Sole Proprietor/Individu
  al Owner of the Business. The entire capital
  amount for the Business is provided by you. In
  this case also for the purpose of accounting you
  need to maintain Two set of books.
• One set of books for the purpose of Textile
  Business in which, Business owes you equivalent
  to the Capital Provided (Capital Profit earned)
  or (Capital Losses)
• In your own Books the amount of Capital invested
  will be shown as an Investment in Business as an
  Asset. This need not be maintained as a Normal
  Set of Books but required to know the Cash Inflow
  and Cash Outflow from Income Tax Perspective.
• Ex 2 You are working for Oracle Corporation and
  Oracle has a Bank Account with Bank of America
  and You have Bank Account with Citi Bank and the
  salary at end of every month is transferred from
  Bank of America to Citi Bank. How many accounting
  Entities involved in this case?
• If your answer is 4, then you are right (You,
  Oracle Corp, Bank of America, Citi Bank)
• Ex 3 You run your own Business in Software
  Consulting and your Friend has agreed to provide
  a Loan of 50000 USD which he goes and deposit
  directly into your Bank account - How many
  accounting Entities involved in this case?
• If you say 3, You are right, it is only Three.
  (You, Your Friend and Bank)

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Accounting Concepts

• Money Measurement Concept
• Record should be made only of that information
  which can be expressed in Monetary Terms (i.e.)
  Currency value (USD,GBP,INR)
• Ex 1. Sole Proprietor had 40 Tables Chairs.
  This cannot be recorded unless a Value of
  Furniture is known in monetary value
• Ex 2. Very Famous Indian Example Rama Killed
  Ravana. Can this be Accounted? NO
• Ex 3. My wife Loves me so much Can this be
  accounted?
• A Big NO (Hahhah). This is Flaw in Financial
  Accounting as it does not understand the human
  values
• Ex 4. My Father in Law gave his Personal
  Property to start my Business. Can this be
  Accounted Yes (If the Value of the Property is
  provided)

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Accounting Concepts

• Money Measurement Concept
• A Normal Doubt comes to your mind in the first
  and fourth example in previous slide how to get
  the value. We should not be taking the Purchase
  value, but we should take the Market value on the
  date of transferring the assets to Business. This
  is an exception to cost concept only in case of
  transfer to another business
• Ex 5 Siva started his software consulting
  Business with his own Property (Cost Price 1
  Million USD and Market Value 1.5 Million USD) and
  Furniture's Cost price 50000 worth Market Value
  30000 USD
• - In this case, You can record Siva Capital
  (1530000) and Building 1500000 and Furniture
  30000 as Assets

Liabilities Assets
Siva Capital 1530000 Building 1500000 Furniture 30000
Total 1530000 Total 1530000
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Accounting Concepts

• Dual Aspect Concept
• The Value of the Assets owned by the concern
  is equal to the claims on the Assets
• ASSETS LIABILITIES OWNERS EQUITY
• OWNERS EQUITY ASSETS LIABILITIES
• LIABILITIES ASSETS OWNERS EQUITY
• Ex If Owners Equity is 600000 and Liabilities
  are 400000, then Total Asset 1000000

Asset Owners Equity Liabilities
Liabilities Assets Owners Equity
Owners Equity Assets - Liabilities
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Accounting Concepts

• Cost Concept
• Assets are always shown at their Cost and not
  at their current Market Value
• Ex 1. A Land Purchased for Rs.5 Lacs will be
  recorded only at Rs.5 Lacs even though Market
  value may be lower say Rs.4 Lacs or Higher Rs.6
  Lacs than the Cost Price
• Ex 2. You are acquiring a Business for a
  Million USD and its value as per Books is 0.8
  Million, then the difference of 0.2 Million is
  termed as Goodwill and you should records the
  assets and liabilities at the price you have paid
  for the Business (i.e.) 1 Million

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Accounting Concepts

• Accounting Period
• Accounting measures activity for a specified
  interval of time, usually a year
• (e.g) Calendar Year (Jan07-Dec07)
• Fiscal Year (Apr07-Mar08)
• Choosing the Accounting period is the entities
  choice, but there are legal rules like Companies
  Act and Income Tax Act which prescribes the
  period in which the entity has to report to them.
• Remember still Entities can have different
  accounting period for their own Internal
  Management Reporting
• A Company in India can have for Company Law
  Purpose (Jan-Dec) Year and Income Tax Purpose
  (Apr-Mar) Year and for own internal Reporting
  (Jul-Jun) Year
• Note The Entities cannot change their
  accounting period without getting proper approval
  only in case of Companies Act and not possible
  with Income Tax Authorities.

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Accounting Concepts

• Conservatism
• Anticipate no Profits but provide for all
  possible losses.
• Accountants are by nature Conservative and also
  to protect the interest of the Shareholders and
  Creditors it is required to provide for all
  losses.
• Ex 1. A pharmaceutical Company going to Loose
  the case filed for Patent Right filed for a
  medicine
• Ex 2.Company is likely to Win a Major Legal
  Dispute or a Sales Contract.
• Note This rule should not be misinterpreted to
  provide anticipated reduction in market price of
  a Product and Providing Losses
• Ex 3 You are a Government Company and there is
  a possibility that Government will withdraw the
  subsidy for Fertilizers in the forthcoming
  budget, You cannot provide loss of subsidy as a
  loss now itself.
• Ex 4 The Government is likely to increase the
  Price of petrol which is one of the essential
  input for your business, then you cannot provide
  for losses.
• Ex 5There is a Fire in your in your Factory and
  Goods were lost and the Goods are insured, then
  the claim you submitted can be booked to the
  satisfaction of Insurance Company and Auditors.

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Accounting Concepts

• Realization Concept
• The Sales is considered to have taken place only
  when either the cash is received or some third
  party becomes legally liable to pay the amount.
  Revenues are recognized when they are earned or
  realized.  Realization is assumed to occur when
  the seller receives cash or a claim to cash
  (receivable) in exchange for goods or services
• Ex 1 A Sales invoice for Rs.1 Million
• Credit Note for Rs.15000 received
• Ex 2 For instance, if a company is awarded a
  contract to build an office building the revenue
  from that project would not be recorded in one
  lump sum but rather it would be divided over time
  according to the work that is actually being
  done. 

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Accounting Concepts

• Matching Concept
• When an Event affects both the revenues and
  expenses, the effect on each should be recognized
  in the same accounting period
• Ex 1 Generally Employees Salaries are paid for
  the previous month at the beginning of the next
  month. But they have rendered their services to
  produce goods and sold and Sales revenue is
  recognized in previous month. So to match the
  cost with the revenue earned, we need to make
  provision for Salaries in previous month itself.
  (i.e.) March Salary paid in April, but a Salary
  Payable provision will be made in March itself
• EX 2 Insurance Premium paid for Jan- Dec
  whereas your accounting period closes on March.
  In this case only three months premium need to be
  treated as Expense and balance 9 months treated
  as advance premium paid as an asset

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Accounting Concepts

• Materiality concept
• Insignificant events would not be recorded, if
  the benefit of recording them does not signify
  the cost
• Ex A calculator worth Rs.500 not recorded asset
  rather than charged off as an Expense even
  though the benefit is enduring in nature.
• This concept need to read in conjunction with
  accounting events which signifies the transaction
  into Capital, Revenue and deferred revenue
  expenditure.

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Accounting Concepts

• Objectivity Concept
• An Evidence of the happening of the
  Transaction should support every Transaction in
  the form of paper. External Evidence is
  considered to be more authenticated proof than
  Internal Evidence. This rule is more important
  from Audit perspective as Auditors always
  consider and bound to get more external evidences
  than internal Evidences.
• Ex 1 Third Party Evidence (Credit Note from
  Supplier)
• Ex 2 Auditors Collect Statements from Customer
  and Suppliers for the amount showing as
  Outstanding from Customers and amounts Payable to
  Suppliers.
• Ex 3 The Sales Invoices alone is not considered
  as an objective evidence unless it is not
  supported by Delivery challan and acknowledgement
  of Goods Received by Customer.

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Accounting Conventions

• Going Concern
• Accounting Records , Events and Transactions on
  the assumption that the entity will continue to
  operate for an indefinitely Long period of time
• Ex. An Entity will not be started with an
  intention to close within the specified time
  period. Business is always not started with an
  intention to close and it is expected to continue
  forever.

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Accounting Conventions

• Consistency
• The Accounting Policies and methods followed
  by the company should be the same every year
• Ex 1. Period should not be changed frequently
  from Jan-Dec to Apr-Mar
• Ex 2. Inventory Valuation change from FIFO to
  LIFO or Weighted Average not permitted frequently
• Ex 3. Changing Depreciation Policy from Straight
  Line to Reducing Balance Method frequently
• Note If any Company decides to change the
  policy, then that Company has to report on the
  effect of Profit/Loss due to the change for past
  5 Years.

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Accounting Conventions

• Accrual
• In General it is assumed that Accounts are
  always prepared based on Accrual basis. However
  there are entities which follow Cash Basis of
  Accounting Also
• Ex Salary Payable to employees (March salary
  paid in April), Interest Receivable on
  Investments (NSC interest), Dividend Receivable
  on shares, Tax Payable to Government (March sales
  Tax and Annual Income Tax)
• The Company Law / Income Tax Act Prescribes all
  Companies to follow Accrual Basis of Accounting
  except for Professional Firms and Government
  Organizations which are allowed to follow Cash
  Basis of Accounting.

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Classification of Accounting Event

• Capital Item Any expenditure that creates an
  asset, for example
• Purchase of plant or machinery
• Improvements to assets that increase their
  usefulness or extend their effective useful life
  of the asset
• Expenditure incurred in transporting an asset to
  its site and preparing it for use.

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Classification of Accounting Event

• Revenue Item An Income or Expenditure and the
  benefit of which will be exhausted within a year
  (i.e.) The Calendar Year or the Financial Year
  whichever is set up for the Set of Books
• Ex Salary and wages, Printing and Stationery,
  Sales Revenue, Interest Income, Salary Payable,
  Bonus Payable, Tax Payable etc.,
• In Simple terms this is an event which generates
  revenue and the related cost to earn the revenue
  are accounted as expense.

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Classification of Accounting Event

• Deferred Revenue Expenditure It is neither a
  Capital nor Revenue and the benefit of which will
  be realized for more than a year (Exceeding
  beyond the Calendar year for the set of books)
  and does not result in creation of an asset.
• Ex 1 Advertisement Expenditure the benefit of
  which is likely to be obtained over a period more
  than one year (E.g.) PepsiCo Pays USD 2 Million
  to Sachin Tendulkar for an Advertisement Contract
  for two Years and benefit of which is expected to
  be for four years
• Ex 2 Royalty paid to the author of the book for
  five years

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Rules of Accounting
Accounts
Personal
Impersonal
Debit the Receiver Credit the Giver
Ex Sole Prop, Company
Real
Nominal
Debit what comes in Credit what goes out
Debit Expenses and Losses Credit Revenue and
Income
Ex Cash, Bank, Building,Inv
Ex Sales, Power, Rent
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Application of Accounting Rule

• Check whether is there a Money Transaction
  Involved?
• Is that transaction affects your set of books?
• Check whether does the transaction falls under
  which accounting period.
• Does the transaction involve a personal account
  (i.e.) Siva as a Person or a Company or any other
  entity as mentioned in Business entity concept
• Is that person is receiver or giver in the
  transaction and accordingly debit or credit the
  person account.
• Does the transaction involves any Cash inflow or
  Cash outflow? (i.e.) Cash or Bank involved
• If there is no cash involvement then the choices
  are as follows
• Both can be real ( Debit and credit both real
  accounts)
• One real and one nominal (Either Debit/Credit for
  Real or Credit/ Debit for Nominal accounts)

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Accounting Rule of Thumb
Nature of Transaction Increase Decrease
Asset Debit Credit
Liability Credit Debit
Revenue Credit Debit
Expense Debit Credit
Profit Credit Debit
Losses Debit Credit
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Combination of Rules
Dr Personal A/c Cr Real A/c ExDrawings or
Advance to Employee, Payment to Supplier
Dr Real A/c Cr Personal A/c ExCapital invested,
Payment Received from Customer
Dr Real A/c Cr Real A/c Ex Cash withdrawal or
Deposit
Dr Real A/c Cr Real A/c ExPurchase of Inventory
by Cash
Dr Real A/c Cr Nominal A/c Ex Interest Recd by
Cash, Cash Sales
Dr Nominal A/c Cr Real A/c Ex Rent Paid by Cash
Dr Personal A/c Cr Nominal A/c Ex Interest
Accrued on Investment, Dividend accrued on
Investment
Dr Nominal A/c Cr Personal A/c Ex Hire Purchase
Charges accrued, Interest Payable, Salary Payable
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Combination of Accounting Rules
Debit
Combination Personal Real Nominal
Personal X
Real
Nominal X
Credit
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Combination of Accounting Rules

• Both Debit and Credit cannot be Personal Accounts
• EX 1 Siva paid Cash to Ajay. The Entry Cannot be
  
• Ajay A/c Dr
• Siva A/c Cr
• The Correct entries are as follows. In Ajay set
  of Books

Cash A/c Dr 1000
Siva A/c Cr 1000
In Siva set of Books
Ajay A/c Dr 1000
Cash A/c Cr 1000
Similarly Both Debit and Credit cannot be Nominal
Accounts Note Remember this important aspect
and therefore You will not commit any mistake in
Debit and Credit
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Recording of Accounting Transactions

• Recording of an Accounting event is known as
  Journal entry
• Recording is made in Primary and Secondary Books
  in Manual Accounting system
• Primary Books
• General Ledger
• Cash Book
• Secondary Books
• Purchase Register
• Sales Register
• Fixed Assets Register
• Returns (Purchase return/Sales Return)
• Journal Register
• In Oracle ERP System GL is called Main Ledger and
  the Transactions emanating from Modules are
  referred to as Sub Ledger

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Recording of Accounting Transactions

• First the transactions are entered as Journal
• Then Second step is they are posted to individual
  account as T Accounts In Oracle or any other
  ERP system this happens immediately when a
  transaction is created
• Prior to ERP system except for Non cash charges,
  Journals are directly posted in Primary and
  secondary ledger with supporting Document
  reference Number (like Invoice Number), date,
  amount and a cross reference ledger folio number
  (Page Number) of respective Debit and Credit
  Entries in Ledger.
• Journals are entered only for year end Provision
  Entries.
• Then the balance from each T account is taken and
  which becomes a Trial Balance with Sum of Debits
  and Sum of Credit which should be equal.
• Trial Balance forms the basis for preparation of
  Financial Statements and in ERP systems including
  Oracle Applications Debit is shown as Positive
  and Credit is shown as Negative
• In ERP systems the chance of Trial Balance not
  matching or not tallying issue is very minimal.
  In case of manual Accounting this will happen
  most of the time and unless it is corrected and
  balanced, the accountant should not proceed to
  prepare Financial Statements

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Preparation of Financial Statements

• Preparation of Trial Balance
• Balances Extracted from General Ledger
• Sum of debit and credit balances 0
• Preparation of Trading, Profit Loss Account or
  Income Expenditure Account and Balance sheet
• Trial Balance is the base for preparing Financial
  Statements
• Adjustment entries are made in adjustment period
  and passed as Journal Vouchers before making the
  financial statements
• Trading and Profit and Loss Account is Always for
  a period say for an Year (Jan - Dec or Apr -
  Mar), Quarterly for 3 months or Half yearly for 6
  months
• Balance Sheet is always as on Date (As on
  31-12-2007 or 31-03-2008)

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A Simple Case Study
Accounting Concepts
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Case Study

• Siva started Business in dealer in Computer Spare
  parts and Computer Stationery on 01-APR-2007 and
  following events occurred in the month of April.
• Siva invested USD 50000 Cash and USD 50000 worth
  of furniture
• Siva purchased USD 75000 worth of goods on credit
• Siva friend Ajay promised him to give a loan of
  USD 25000
• Siva sold USD 50000 worth of good for USD 100000
• Siva paid rent USD 2000 for two months
• Siva paid Salary to Staff USD 5000
• Siva incurred USD 5000 on interior decoration
  which will last for two years.
• Siva sold USD 10000 worth of goods on credit for
  USD 18000
• Siva has a Bank account with Citi Bank which
  credited USD 5000 wrongly of John account
• Purchased Vehicle for USD 25000 paid through Bank
• Cash Deposited by Siva into Bank 50000 USD

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ARE YOU READY FOR THE GAME

• Accounting is very simple

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Accounting Terminologies

• Before creating Accounting Transactions let us
  recall and learn few accounting terminologies
• ASSETS Any property or Investment which can be
  convertible into cash
• LIABILITIES Amount Payable to providers of goods
  and Services (Creditors) and Providers of Capital
  (Owners)
• REVENUE Amount earned out of the Sale Proceeds
  and the amount earned on Investments
• EXPENSES Amount incurred or expended to earn the
  revenue
• PROFIT TOTAL REVENUE TOTAL EXPENSES
• LOSS If the Total Expenses is more than Total
  Revenue it is termed as Loss
• FIXED ASSETS Amount Invested in Long Term Assets
  which is not intended to be sold within a Year
  (Ex. Machinery, Land)
• CURRENT ASSETS Amount invested in Short Term
  Assets which is intended and rotated to earn
  Revenue (Ex. Inventory)
• NOTE The Fixed Asset and Current asset vary from
  Person to Person
• Ex For a Dealer in Refrigerator it is a Current
  asset which becomes Fixed Asset for you when you
  buy.
• CREDITORS Person who provide Money or Goods on
  Credit to the Business (Supplier)
• DEBTORS Goods or Money Provided / sold on Credit
  by the Business (Customers)

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Accounting Terminologies

• You should also understand the same accounting
  terminology is referred or used by different
  people in different context
• Receivables also known as Trade Debtors, Debtors,
  Account Receivables, Sundry Debtors, Trade
  Receivables, Amount Receivables
• Liability is also known as Trade Creditors,
  Account Payable, Sundry Creditors, Amount
  Payable, Trade Liabilities, Creditors
• Cost of Goods Sold It varies with Company to
  Company the way they do set up and use it. The
  Cost of Goods Sold comprise of Material Cost,
  Resource Cost (Labor and Machinery) and
  Overheads. There are few companies which will
  have only Material Cost and will not add up
  Resource Cost and Overheads. You Should talk to
  client and understand their requirement
• Lets See Each of this in a Formula Model

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Accounting Calculation and Formula
Receivables (or) Debtors Reconciliation Opening Receivables 100 () Add Credit Sales 2500 () Debit Memo 150 () Positive Adjustments 75 (-) Less Cash Received 2000 (-) Less Credit Memo (Sales Return) 125 (-) Negative Adjustments 50 Closing Receivables 650 Payables (or) Creditors Reconciliation Opening Payables 200 () Add Credit Purchases 2000 () Debit Memo 150 () Positive Adjustments 75 (-) Less Cash Paid 1500 (-) Less Credit Memo (Purc. Return) 125 (-) Negative Adjustments 50 Closing Payables 750
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Accounting Calculations and Formula
Purchased Inventory Reconciliation Opening Purchased Inventory 100 () Add Purchases 2500 (-) Less Issued to Production 2000 (-) Less Purchase Return 125 Closing Purchased Inventory 475 Finished Goods (FG) Reconciliation Opening stock of FG 200 () Add Production 2000 () Sales Return 100 (-) Less Sales 1500 Closing FG Inventory 800
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Accounting Calculations and Formula
Cash Reconciliation Opening Cash Balance 100 () Add Cash Receipts 2500 (Cash Sales, Cash Recd from Receivables, Cash with drawl from Bank) (-) Less Cash Payments 2000 (Cash Purchases, Expenses paid By Cash, Cash Deposited into Bank) Closing Cash Balance 600 Bank Balance Reconciliation Opening Balance of Bank 200 () Add Bank Receipts 2000 (Cash Deposits, Cheque Received From Debtors, Interest Credited) (-) Less Payments from Bank 1500 (Paid to Creditors by Cheque, Expenses paid by cheque, Cash With drawl from bank) Closing Bank Balance 700
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Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in USD) Cr (in USD)
1 Cash A/c Dr Furniture A/c Dr (Cash and Furniture Real Tangible Asset. Hence apply the Real Rule Debit What comes in) To Siva Capital A/c (Siva is a Person running the business as a Proprietor in this case. Hence apply the Rule for Personal Credit the giver) Real Real Personal (Also using the Business Entity Concept Siva being owner is also treated as a Creditor for the purpose of Business. If the Business is wind up Business has to pay back Siva) 50000 50000 100000
2 Inventory A/c Dr (Real Tangible Asset) To Creditors A/c (Person be an Individual or Company gives the goods on Credit) Real Personal 75000 75000
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Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in USD) Cr (in USD)
3 No Entry (Mere Promise to give does not tantamount to Monetary Transaction) No Entry (Money Measurement Concept No Monetary transaction involved )
4 Two Entries involved (One for sale of goods and one for reduction in inventory) Cash / Bank A/c Dr (Real Debit what comes in) To Revenue (Sales) A/c (Nominal Rule - Credit all Income and Revenue) Cost of Goods Sold A/c Dr (Nominal Debit Expenses) To Inventory A/c (Reduction in Inventory) Real A/c Nominal A/c Nominal A/c Real A/c 100000 50000 100000 50000
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Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in USD) Cr (in USD)
5 Rent A/c Dr (Debit Expense Nominal) Rent Advance A/c Dr (This is like Cash Advanced to Landlord. Hence it should be treated as Personal - Debit the Receiver) To Cash A/c (Real Credit what goes out) Nominal A/c Personal A/c Real 1000 1000 2000
6 Salary A/c Dr (Nominal Debit Expense) To Cash A/c (Real Credit what goes out) Nominal A/c Real A/c 5000 5000
51
Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in USD) Cr (in USD)
7 Advertisement Exp A/c Dr Advt Exp Adv A/c Dr (This is like a Deferred Revenue Expense needs to be charged in two years. 50 need to be Current Year Expense and Balance 50 is carried Forward and treated as Expense in next Year) To Cash A/c (Real Credit what goes out) Nominal Real Real 2500 2500 5000
8 Receivables A/c Dr To Revenue A/c Cost of Goods Sold A/c Dr To Inventory A/c Real Nominal Nominal Real 18000 10000 18000 10000
52
Accounting Entries for the Case Study
Sl No Description Nature of Account Dr (in USD) Cr (in USD)
9 No Entry (This is a Mistake done by Bank. Bank has to make correction and in Sivas Book there is no accounting entry required) No Entry
10 Vehicles A/c Dr (Real Tangible Asset Debit what comes in) To Bank A/c (Real asset Credit what goes out) Real Real 25000 25000
11 Bank A/c Dr (Real asset- Debit what comes in To Cash A/c (Real Asset Credit what goes out) Real Real 50000 50000
53
T Accounts
Furniture Account
Siva Capital Account
Dr USD Cr USD
To Siva Cap 50000 By Bal 50000
Total 50000 Total 50000
Dr USD Cr USD
To Bal 100000 By Cash 50000 By Furniture 50000
Total 100000 Total 100000
Cash Account
Inventory Account
Dr USD Cr USD
To Siva Cap 50000 To Sales 100000 By Rent 1000 By Rent Adv 1000 By Salary 5000 By Advt Adv 2500 By Advt exp 2500 By Bank 50000 By Balance 88000
Total 150000 Total 150000
Dr USD Cr USD
To Creditors 75000 By COGS 50000 By COGS 10000 By Bal 15000
Total 75000 Total 75000
54
T Accounts
Creditors Account
Rent Account
Dr USD Cr USD
To Bal 75000 By Invent 75000
Total 75000 Total 75000
Dr USD Cr USD
To Cash 1000 By Bal 1000
Total 1000 Total 1000
Revenue / Sales Account
Rent Advance Account
Dr USD Cr USD
To Cash 1000 By Bal 1000
Total 1000 Total 1000
Dr USD Cr USD
To Bal 118000 By Cash 100000 By Rece 18000
Total 118000 Total 118000
Salary Account
Advertisement Exp Account
Dr USD Cr USD
To Cash 5000 By Bal 5000
Total 5000 Total 5000
Dr USD Cr USD
To Cash 2500 By Bal 2500
Total 2500 Total 2500
55
T Accounts
Advt Exp Advance Account
Receivables Account
Dr USD Cr USD
To Cash 2500 By Bal 2500
Total 2500 Total 2500
Dr USD Cr USD
To sales 18000 By Bal 18000
Total 18000 Total 18000
Vehicle Account
Cost of Goods Sold Account
Dr USD Cr USD
To Inventory 50000 To Inventory 10000 By Bal 60000
Total 60000 Total 60000
Dr USD Cr USD
To Bank 25000 By Bal 25000
Total 25000 Total 25000
Bank Account
Dr USD Cr USD
To Cash 50000 By Vehicle 25000 By Bal 25000
Total 50000 Total 50000
56
Trial Balance
Trial Balance for the Month of APRIL 2007
A Asset, L Liability, R Revenue, E - Expense
Debit USD Credit USD
Furniture (A) 50000 Cash (A) 88000 Bank (A) 25000 COGS (E) 60000 Salary (E) 5000 Rent (E) 1000 Rent Advance (A) 1000 Advertisement Exp (E) 2500 Advt Exp Advance (A) 2500 Inventory (A) 15000 Vehicle (A) 25000 Receivable (A) 18000 Siva Capital (L) 100000 Sales / Revenue (R) 118000 Creditors (L) 75000
Total 293000 Total 293000
57
Profit and Loss Account For APR 2007
Expenses USD Revenue USD
COGS (E) 60000 Salary (E) 5000 Rent (E) 1000 Advertisement Exp (E) 2500 To Profit 49500 Sales / Revenue (R) 118000
Total 118000 Total 118000
58
Balance Sheet as on 30-APR-2007
Liabilities USD Assets USD
Siva Capital 100000 Add Profit 49500 Siva Capital 149500 Creditors 75000 Furniture 50000 Vehicle 25000 Cash 88000 Bank 25000 Receivables 18000 Inventory 15000 Rent Advance 1000 Advt Exp Advance 2500
Total 224500 Total 224500
59
Important Points to Remember

• Accounting can be learnt only by Practice and not
  by reading
• Try to learn by creating Journal entries with
  Examples
• Cash Balance can never have negative balance at
  any point of time
• Land will never Depreciate and it will have only
  Appreciation
• Bank can have negative balance if you have
  Overdraft facility
• The Bank which maintains your account will have
  exactly opposite entries of what is shown in your
  Bank Account
• In the above, Example the bank account in your
  Books and in Bank Books will be as follows

Siva Books Bank Account
Bank Books Siva Account
Dr USD Cr USD
To Cash 50000 By Vehicle 25000 By Balance 25000
Total 50000 Total 50000
Dr USD Cr USD
To Vehicle 25000 To Balance 25000 By Cash 50000
Total 25000 Total 25000
60
Case Study for Practice

• Take your own Personal Account and try to create
  the following
• On First of July 2007 You had a Cash balance of
  USD2500 which is your Capital
• On 3rd July You have received Salary of USD 12000
• On 5th Paid Rent of USD 1200 by cheque
• On 7th You purchased provision for house for 800
  USD
• On 10th You spent for outing through your credit
  card USD 500
• On 15th You withdraw Cash USD 8000
• On 20th You Invested in Fixed Deposit USD 5000
  _at_5 Interest Per annum
• On 22nd you have given a Loan of USD 2000 to
  friend James
• On 25th You spent for Car Repairs 500 USD
• On 28th Your wife gave USD 200 to your Neighbor
  from her pocket
• On 30th You Deposited Cash 1000 USD to your Bank
  Account

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How to Approach to Learn

• I tried my best to teach Accounting in simple
  way. This is only a beginning. You have to
  Practice a Lot to learn
• The simple way to Learn Accounting is as follows
• Do not go for advanced level books without
  understanding the basics
• Start with (1) Accounting book in case of people
  in India and Pre-University book in case of other
  Countries. Practice the examples given in that
  book and exercises
• This is more than sufficient for any non
  accounting candidate to work on Oracle
  Applications
• Never try to memorize the concepts and rules
• Try to understand and apply the concepts and
  Rules
• There are areas like Depreciation, Provision and
  Amortization etc might not have been covered in
  this presentation. I do not want you to go to
  advanced level without understanding the basics.
  If you understand the Concepts and Rules then You
  can handle all of them
• Read and Practice Level I and II at least Three
  times

62
"There is a difference between an objective and
actions. Unless you understand your objective,
you will be wasting your time in actions. Know
your objective first " -  Swami  Vivekananda
63

• Disclaimer This Document was created with my
  own assumptions to explain the concept of
  accounting and the names of the companies used in
  this article are only to explain the accounting
  concept with data assumptions and none of the
  Company is not responsible for the Data provided
  in this article.

Thank You Hope You find this article useful Get
Ready for Learning Accounting in Oracle
Applications