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AFM UNIT 1final accounts and problems.pptx
- 1. SBV OPEN -Online Program for EducatioN Book-keeping and Accounting
- 2. Book-keeping – Meaning Book-keepingis the systematic process of recording financial transactions of a business chronologically. It is the foundation of the accounting process — like laying bricks before building a house. Without book-keeping, there is no accurate basis for preparing accounts.
- 3. Book-keeping – Definition Classicaldefinitions: R.N. Carter: “Book-keeping is the science and art of correctly recording in the books of account all those business transactions that result in the transfer of money or money’s worth.” American Institute of Certified Public Accountants (AICPA): “Book-keeping is the art of recording, classifying, and summarizing transactions and events in a significant manner in terms of money.”
- 4. Accounting – Meaning Accountingis a broader process than bookkeeping. It involves: Recording transactions (Book-keeping stage). Classifying transactions (Ledger accounts). Summarizing (Trial balance, final accounts). Analyzing & interpreting (ratios, trends, performance indicators). Communicating the information to stakeholders (through reports & financial statements).
- 5. Accounting – Definition AmericanAccounting Association (AAA): “Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.” 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 financial character, and interpreting the results thereof.”
- 6. Book-keeping vs. Accounting AspectBook-keeping Accounting Scope Recording and classification only Recording, classifying, summarizing, interpreting Objective Maintain systematic records Provide useful information for decision-making Stage First stage of accounting process Next stage after book-keeping Nature Clerical work Analytical work Skills needed Basic knowledge of accounting principles Analytical ability, decision- making skills End Product Journal, ledger, trial balance Financial statements, reports, ratios
- 7. Why businesses needbook-keeping & accounting: Legal requirement for taxation & audits. Helps in performance tracking. Provides data for decision-making. Facilitates detection of fraud and errors. Builds investor and lender confidence.
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- 9. Objectives of FinancialAccounting Recording Financial Transactions Determining Profit or Loss Ascertain the Financial Position Providing Information to Stakeholders Compliance with Legal Requirements Assisting in Decision-Making Facilitating Comparison Evidence in Legal Matters Safeguarding Assets Establishing Accountability
- 10. Objective Description Example RecordTransactions Keep systematic records Daily sales journal Determine Profit/Loss Find net result of business P&L account Ascertain Financial Position Show assets & liabilities Balance Sheet Provide Information Share with stakeholders Loan appraisal Legal Compliance Follow laws & standards Companies Act Decision-making Support managerial choices Expansion decision Comparison Evaluate trends Year-on-year sales Legal Evidence Proof in disputes Tax case Safeguard Assets Prevent misuse Asset register Accountability Assign responsibility Dept. cost tracking
- 11. Branches of Accounting FeatureFinancial Accounting Cost Accounting Management Accounting Users External (investors, creditors, regulators) Internal (cost controllers, production managers) Internal (top/middle management) Nature Historical Both historical and present Forward-looking Regulation Governed by standards/laws Not mandatory for all; rules vary No statutory requirement Purpose Report financial position & performance Control costs, set prices Decision-making, planning Time Frame Past period Per product/job/period Future projections
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- 13. Accounting Concepts Business EntityConcept Money Measurement Concept Going Concern Concept Cost Concept Dual Aspect Concept Realization Concept Matching Concept Accrual Concept
- 14. Accounting Conventions Convention ofConservatism (Prudence) Convention of Consistency Convention of Materiality Convention of Full Disclosure
- 15. JOURNAL Meaning The Journal isthe primary book of accounts in which all business transactions are recorded in chronological order (date-wise) as they occur. It is also called the Book of Original Entry because it’s the first place transactions are formally recorded after they happen. Definition “The journal is a complete record of all transactions in chronological order, showing which accounts are to be debited and which credited, together with a brief explanation.” — Kohler’s Dictionary for Accountants
- 16. Objectives of Journal Chronological Record Dual Aspect Recording Complete Transaction Record Basis for Ledger Posting Uniform Format Helps in Error Detection Legal Evidence
- 17. Format of aJournal Date Particulars L.F. Debit (₹) Credit (₹) 01-04- 25 Cash A/c Dr. 1,00,000 To Capital A/c 1,00,000 (Being business commenced with cash)
- 18. Steps in Journalizing 1.Identify the accounts affected. 2. Classify the accounts as Personal, Real, or Nominal. 3. Apply the rules of debit and credit: o Personal A/c: Debit the receiver, Credit the giver. o Real A/c: Debit what comes in, Credit what goes out. o Nominal A/c: Debit expenses/losses, Credit incomes/gains. 4. Record debit entry first, credit entry second (indented). 5. Write narration to explain the transaction.
- 19. Example 1 –Simple Entry 1st April: Started business with ₹1,00,000 cash. Cash A/c (Real) – what comes in → Debit. Capital A/c (Personal) – giver → Credit. Date Particulars L.F. Debit (₹) Credit (₹) 01-04-25 Cash A/c Dr. 1,00,000 To Capital A/c 1,00,000 (Being business commenced with cash)
- 20. Example 2 –Credit Transaction 3 April: Purchased goods from Meena on credit ₹20,000. Purchases A/c (Nominal) – expense → Debit. Meena A/c (Personal) – giver → Credit. Date Particulars L.F. Debit (₹) Credit (₹) 03-04-25 Purchases A/c Dr. 20,000 To Meena A/c 20,000 (Goods purchased on credit from Meena)
- 21. Example 3 –Compound Entry 10 April: Paid salaries ₹5,000 and rent ₹2,000 in cash. Salaries A/c (Nominal) – expense → Debit ₹5,000. Rent A/c (Nominal) – expense → Debit ₹2,000. Cash A/c (Real) – what goes out → Credit ₹7,000. Date Particulars L.F. Debit (₹) Credit (₹) 10-04-25 Salaries A/c Dr. 5,000 Rent A/c Dr. 2,000 To Cash A/c 7,000 (Paid salaries and rent in cash)
- 22. Ledger – Meaning TheLedger is known as the book of final entry in accounting. It contains all the accounts of a business, where transactions recorded in the journal are classified and summarized under separate account heads.
- 23. Features of aLedger Book of Final Entry Classification of Transactions Double-Entry Effect Separate Account for Each Item Helps in Trial Balance Preparation
- 24. Format of LedgerAccount A T-shaped format is common: Debit Side (Dr) Credit Side (Cr) Date Particulars JF Amount (₹) Date Particulars JF Amount (₹)
- 25. Post each JournalEntry to the Ledger Journal Entry 1 – 01 Jan 2025 Cash A/c........Dr ₹1,00,000 To Capital A/c................₹1,00,000 Effect: o Cash A/c → Debit ₹1,00,000 (To Capital) o Capital A/c → Credit ₹1,00,000 (By Cash) Journal Entry 2 – 03 Jan 2025 Furniture A/c........Dr ₹50,000 To Cash A/c..................₹50,000 Effect: o Furniture A/c → Debit ₹50,000 (To Cash) o Cash A/c → Credit ₹50,000 (By Furniture)
- 26. Post each JournalEntry to the Ledger Journal Entry 3 – 05 Jan 2025 Cash A/c........Dr ₹20,000 To Sales A/c.................₹20,000 Effect: o Cash A/c → Debit ₹20,000 (To Sales) o Sales A/c → Credit ₹20,000 (By Cash) Journal Entry 4 – 08 Jan 2025 Rent A/c........Dr ₹5,000 To Cash A/c..................₹5,000 Effect: o Rent A/c → Debit ₹5,000 (To Cash) o Cash A/c → Credit ₹5,000 (By Rent)
- 27. Ledger Accounts afterPosting Date Particulars JF Amount (₹) Date Particulars JF Amount (₹) 01 Jan 25 To Capital A/c 1 1,00,000 03 Jan 25 By Furniture A/c 2 50,000 05 Jan 25 To Sales A/c 3 20,000 08 Jan 25 By Rent A/c 4 5,000 Cash A/c
- 28. Ledger Accounts afterPosting Capital A/c Date Particulars JF Amount (₹) Date Particulars JF Amount (₹) 01 Jan 25 By Cash A/c 1 1,00,000 Furniture A/c Date Particulars JF Amount (₹) Date Particulars JF Amount (₹) 03 Jan 25 To Cash A/c 2 50,000
- 29. Ledger Accounts afterPosting Date Particulars JF Amount (₹) Date Particulars JF Amount (₹) 05 Jan 25 By Cash A/c 3 20,000 Date Particulars JF Amount (₹) Date Particulars JF Amount (₹) 08 Jan 25 To Cash A/c 4 5,000 Rent A/c Sales A/c • Debit all assets and expenses; Credit all liabilities, capital, and income.
- 30. Importance of aLedger Centralization of All Accounting Information Classification of Transactions Foundation for Trial Balance Facilitates Preparation of Final Accounts Provides a Complete Financial Picture Helpful for Decision-Making Legal and Audit Purposes Time-Saving and Convenience
- 31. Trial Balance Meaning ofTrial Balance • A Trial Balance is a statement prepared at a certain date, showing all the ledger account balances (both debit and credit) in order to check the arithmetic accuracy of the accounts. • It is not an account but a list of balances extracted from the ledger to test whether the total of debit balances equals the total of credit balances.
- 32. Features of aTrial Balance Summary of Ledger Balances Prepared at a Specific Date Helps in Arithmetic Accuracy Check Two-column Format Not a Part of Double Entry System Basis for Final Accounts
- 33. Objectives of aTrial Balance Check Arithmetic Accuracy of Books Facilitate Preparation of Financial Statements Provide a Summary of Ledger Accounts Assist in Error Detection Save Time and Effort Act as a Link Between Ledger and Final Accounts
- 34. Example of aTrial Balance Journal Entries & Ledger Balances (Jan 2025): Date Particulars Dr (₹) Cr (₹) 01 Jan 2025 Cash A/c 1,00,000 Capital A/c 1,00,000 03 Jan 2025 Furniture A/c 50,000 Cash A/c 50,000 05 Jan 2025 Cash A/c 20,000 Sales A/c 20,000 08 Jan 2025 Rent A/c 5,000 Cash A/c 5,000
- 35. Example of aTrial Balance Ledger Balances Extracted: Cash A/C Date Particulars Debit (₹) Credit (₹) Balance 01 Jan To Capital A/c 1,00,000 Dr 1,00,000 03 Jan By Furniture A/c 50,000 Dr 50,000 05 Jan To Sales A/c 20,000 Dr 70,000 08 Jan By Rent A/c 5,000 Dr 65,000
- 36. Example of aTrial Balance Date Particulars Debit (₹) Credit (₹) Balance 01 Jan By Cash A/c 1,00,000 Cr 1,00,000 Date Particulars Debit (₹) Credit (₹) Balance 03 Jan To Cash A/c 50,000 Dr 50,000 Capital A/c Date Particulars Debit (₹) Credit (₹) Balance 05 Jan By Cash A/c 20,000 Cr 20,000 Furniture A/C Sales A/c Date Particulars Debit (₹) Credit (₹) Balance 08 Jan To Cash A/c 5,000 Dr 5,000 Rent A/c
- 37. Example of aTrial Balance Trial Balance as on 08 Jan 2025 Account Debit (₹) Credit (₹) Cash A/c 65,000 Furniture A/c 50,000 Rent A/c 5,000 Capital A/c 1,00,000 Sales A/c 20,000 Total 1,20,000 1,20,000
- 38. Errors Not Disclosedby a Trial Balance Even if the trial balance tallies, errors can still exist: Errors of Omission (transaction not recorded at all) Errors of Commission (posted to the wrong account of the same type) Errors of Principle (violating accounting rules) Compensating Errors (two errors cancel each other out)
- 42. SBV OPEN -Online Program for EducatioN THANK YOU