Post on 02-Feb-2023
Accounting Cycle: Capturing Business Activities Every business organization, irrespective of the size, nature, form, and ownership undertakes several transactions on the day-to-day basis. It will be difficult for the business owners, managers, and employees to remember such transactions. That explains the need for recording the transactions in a systematic manner. Recording of transactions in systematic and scientific manner is called accounting. One of the ways of understanding the business transaction is to understand the accounting equation. The concept of accounting equation was discussed in detail the Chapter – In this chapter we will understand the following:
Rules for capturing business transactions Process of recording the business
transactions AccountsAccount is an accounting record of increase or decrease in afinancial item. For examples: A company can have several accounts, viz. Cash Account, Furniture Account, Building Account, Bank Account, Capital Account, Loan Account, Customer Account, Supplier Account etc. An Account is generally shown in the following form:
Stock AccountDate
Particulars
Debit Amount
Date
Particulars
Credit Amount
1 2 3 4 5 6
Where:1 & 4: Date of transaction2 & 5: Particulars: Details of the transaction3 & 6: Debit and Credit Amount respectively
You may be having the following questions at this juncture;
What transactions will appear on the debit side or credit side?
Is there is method for remembering the process of recording the items on the debit side or credit side?
Are these rules apply to all types of business transactions?
To answer the above questions, it is necessary to classify the financial items. The financial items1[1] can be divided into the following three types of accounts;
a) a) Real Accountsb) b) Persona Accountsc) c) Nominal Account
1[1] Another form of classifying the financial items has been discussed in the previous chapter.
Real Accounts: Represent the physical properties belonging to the business. Land, Building, Furniture, Stock, Cash are some of the examples of real accounts. These are also calledthe assets of the business. Let us take a look the nature ofchange that can happen with these items (assets):
Increase: When you acquire or revalue the asset.
Decrease: When you sell/ Just reduction in the value i.e. depreciation
So for the purpose of recording of transactions relating to the these items, we classify these transactions as follows:
Increase in Assets : Debit Decrease in Assets: Credit
In typical accounting language,
When we purchase assets: Debit the Asset Account
When we sell assets: Credit the Asset Account
When assets are depreciated: Credit the Asset Account
Personal Accounts: Represent individuals, corporate entities, and other artificial legal juridical entities. Ramor Peter (a natural person) Account, Capital Account ( represents the owners), Bank Account, Infosys Limited (corporate entities) , are some of the examples of personal accounts. These individuals and the organisations can be divided into two categories
Persons who owe money to the business (Debtors)
Persons to whom the business owe money (Creditors/Shareholders/Loan giver)
Let us take a look the nature of change that can happen withthese items (assets):
Increase in debtors: Debit
Decrease in debtors: Credit Increase in Creditors/Shareholders/Loan
giver: Credit Decrease in Creditors/Shareholders/Loan
giver: Debit So in typical accounting language:
When a customer purchases on credit: Increase in Debtors: Debit the person’s account
When the customer makes the payment: Decrease in Debtors: Credit the person’s account
When the business purchases goods on credit:Increase in Creditors: Credit the person’s account
When the business makes payment to the supplier: Decrease in Creditors: Debit the person’s account
When we purchase stock on credit from Mr. X(supplier): Credit the Supplier’s account
When sell stock on Credit to Mr. Y(Customer): Debit the customer’s account
In other words, a person either receives something (for service, sale of goods, loan given ) or pays something (for service taken, purchase of goods, loan taken|)So we can alsosay the following Nominal Accounts: Refer to the expenses, losses, incomes andgains. Salary, Interest received or given, commission, rent etc. are some of the examples of nominal accounts. Some of the transactions relating to these accounts are as follows:
Salary paid: Debit the salary Account Interest received : Credit the interest
account Interest paid: Debit the interest account
So one can say the following:
All expenses: Debit All Incomes : Credit
Now let us summaries the above discussion; Financial items can be classified into the following three types of accounts
Real Accounts Personal Accounts Nominal Accounts
To facilitate the recording of the financial transactions the following rule can be used:
Real Accounts: Debit what comes in (increasein asset) and Credit what goes out (Decrease in asset)
Personal Accounts: Debit the receiver (increase in debtor, decrease in creditor), and credit the giver (decrease in debtor, increase in creditor)
Nominal Accounts: Debit all expenses/losses,and credit all incomes and gains
Increase in asset: Debit Decrease in asset: Credit Increase in loan(liability): Credit Decrease in Loan (liability): Debit Increase in expense/loss: Debit Increase in income/profit: Credit
Debit and Credit can also be explained as followings
Debit CreditIncrease in
AssetIncrease in
LiabilitiesIncrease in
DebtorIncrease in
CreditorDecrease in Increase in
Loan LoanDecrease in
CreditorDecrease in
DebtorIncrease in
ExpenseDecrease in
ExpenseDecrease in
IncomeIncrease in
Income Now we will understand the use of debits and credits for recording transactions. Steps required for recording the transactions are as follows
Read the transaction Identify the two (debit and credit) financial
items affected by the transactions Use the above debit and credit rule discussed
in the previous section.
1. 1. A and B started AB ltd. A contributed cash Rs. 100,000 as capital and B transferred two computers worth of Rs. 50,000 to the business.
Two Items:
Cash (Real Account): Cash is coming into the business: Debit Cash Account
Capital Account (Representative Personal Account): The owners are giving the money: Credit the Capital Account
Recording of Transaction
Debit CreditCash 10000 Capital 10000
Increase incash
Increase in
2. 2. They took 10% loan from IDBI: Rs.100 000.
Two Items: Cash (Real Account): Cash is coming into the business:
Debit Cash Account Bank Account (Personal Account): The owners are giving
the money: Credit the Bank Account
Recording of Transaction
Debit
CreditCash 10000 Bank Loan 10000
3. 3. Purchased machinery costing Rs.20 000 for cash.
Two Items: Cash (Real Account): Cash is going out of the business:
Credit Cash Account Machinery (Rea Account): Machinery is coming into the
business: Debit the Capital Account
Recording of Transaction
Debit CreditMachinery 20000 Cash 20000
Increase inmachinery
Decrease
Increase in cash
Increase in
4. 4. Purchase furniture on credit from X ltd for Rs. 30 000.
Two Items: It is a credit transaction
Mr. X (Personal Account): Mr. X extended loan: Credit M. X Account
Furniture (Real): Machinery is coming into the business: Debit the Furniture Account
Recording of Transaction
Debit CreditFurniture 30,000 X 30,000
5. 5. Purchased land for cash Rs. 50 000. It is a cash transaction
Cash (Real Account): Cash is going out of the business: Credit Cash Account
Land (Real): Land is coming into the business: Debit the Land Account
Recording of Transaction
Debit
CreditLand 50,000 Cash 50,000
6. 6. Purchased goods worth of Rs. 50 000 for cash. It is a cash transaction
Increase in Furniture
Increase in
Increase in Land
Decrease in
Cash (Real Account): Cash is going out of the business: Credit Cash Account
Goods (Real): Goods is coming into the business: Debit the Goods (stock) Account
Recording of Transaction
Debit
CreditGoods 50,000 Cash 50,000
Increase in Land
Decrease in
7. 7. Purchased goods worth of Rs. 70 000 on credit
from Y Ltd.
It is a credit transaction Y (personal Account): Y extended credit: Credit Y
Account Goods (Real): Goods is coming into the business: Debit
the Goods Account Recording of Transaction
Debit
CreditGoods 50,000 Y 50,000
8. 8. Sold all goods for Rs. 160 000 on credit to Mr. Z
It is a credit transaction
Z (Personal Account): Z receives goods and owes money to the business: Debit Z Account
Goods (Real): Goods is going out of the business: Credit Debit the Goods (stock) Account
Recording of Transaction
Debit
CreditZ 160,000 Goods 160000
9. 9. Sold all goods for Rs. 150 000 for cash
It is a cash transaction
Increase in Land
Increase in
Increase in Goods
Decrease
Cash (Real Account): Cash is coming into the business: Debit Cash Account
Goods (Real): Goods is going out of the business: Credit Debit the Goods (stock) Account
Recording of Transaction
Debit CreditCash 50,000 Goods 50,000
Sold all goods for Rs.
175000 on credit to Mr. Z Sold 75% of the stock on
credit at profit of 25% on cost
The above process is called journalizing the transactions. After recording all transactions, it is necessary to post the same to ledger accounts. Ledger accounts show all information relating to a particular account at one place. So ‘Cash Account’ will showall transactions (receipts and payments) relating to cash. The process of transferring the financial items from Journalto Leger is called Posting. See the following diagrammatic representation of posting
Purchase of land for Rs. 50,000
Debit CreditCash 80000 Goods 80000
Increase in Cash
Decrease
Let us see another transaction Sold goodsfor cash: Rs. 80000
GoodsParticulars
Dr. Amount
Particulars
Cr. Amount
By Cash 80000
Land Account
ParticularsDr. AmountParticularsCr. Amount
To Cash 50, 000
Cash Account
ParticularsDr. AmountParticularsCr. Amount
To Goods 80000By Cash50,000
DebitCredit
Land50,000
Cash
50,000
Balancing of Ledger Accounts After posting all transactions to the respective ledger accounts, it is necessary to balance the ledger accounts periodically (daily, monthly, quarterly, half-yearly and yearly). Steps required to balance a ledger account are as follows;
Total the debit side Total the credit side Find the difference Put the difference on the lesser side If the debit side is greater than the credit
side, it is called Debit Balance If the credit side is greater than the debit
side, it is called Credit Balance See the following ledger account
CashParticulars
Dr. Amount Particulars
Cr. Amount
To Capital 100000By Machine 50000To Sales 50000Stock 25000
Expenses
10000
By closing Balance
65000
Total 150000Total 150000 Total of Debit side: 150000Total of Credit side (excluding the closing balance) = 85000Difference between Dr. Side and Cr. Side = 150 000 – 85000 =65000Since the Dr Side > Cr. Side: 65000 is called Debit balance
Balancing
General Rules of Balancing of Ledger Accounts: Personal Accounts: There can Debit Balance
or Credit Balance or no Balance Real Accounts: There be Debit Balance or No
balance Nominal Accounts: There will be No Balance
Work To Do
1. 1. Following are some of the journal entries. You are required to explain the transactions
Debit CreditCash 10000 Bank Loan 10000 Debit CreditSalary 10000 Cash 10000 Debit CreditGoods 10000 Mr. Y 10000
Debit CreditFurniture 2500 Mr. X 2500
2. 2. Following are the transactions of X ltd. Took IDBI Loan: Rs. 10 lakhs Purchased furniture for cash: 250000 Purchased 2 computers: Rs.50000 Salary paid: Rs. 10000 Rent due but not paid
Debit CreditLoan 10000 Cash 10000
Debit CreditInterest 5000 Cash 5000
Debit CreditGoods 25000 Capital 25000
Electricity bill paid: Rs.2500 Purchased goods for sale: Rs. 250000 Sold the goods on credit to Mr. X at a
profit of 20% on Sales. Telephone charges due but not paid:
Rs.1500Required: Journal entries and the corresponding ledger accounts.
3. 3. Following are the transactions of A ltd. A ltd purchased a Machinery on credit from
Mr. R: 50000 A ltd. purchased goods on credit from Mr. X:
Rs.25000 Altd. sold 75% goods on credit and balance
for cash. Goods are sold at cost plus 25% profit. A ltd. charged depreciation on the machine:
10% on the costRequired: Journal entries
4. 4. Explain the following: A debit of Rs. 5000 to Furniture Account A debit of Rs. 5000 to Loan (taken)
Account A debit to Rs. 5000 to Loan (given)
Account A credit of Rs. 5000 to Mr. X ( Customer) A credit of Rs. 5000 to Mr. Y (Supplier) Credit balance of Rs. 5000 in the Bank
Account A credit of Rs. 5000 to Cash Account
5. 5. Classify the following financial items into
Real, Nominal and Personal Accounts
Financial ItemsCapital Cash
Outstanding Salary CustomerSalary paid UTI Bank
Rent receivedInfosys Technologies Limited
Outstanding Rent XIMBCommission Share Capital
6. 6. From the following transactions you are
required to prepare the cash account and check the balance.
Transactions for the month of January
2004
Started business with cash50000
Purchased computers for cash25000
Purchased goods on credit from X10000
Sold 50% of the goods for Cash 8000Sold 50 %of the balance goods on credit to Y 4500Rent due but not paid 5000Salary paid 8000Electricity charges paid 1000Received 50% of the money due from YPaid 5% commission on all sales to Z
7. 7. Refer to the question no.2. what will be the impact on the cash balance in the following cases (treat each case separately) Computers are purchased on credit All goods are sold on credit All expenses are paid in cash.
8. 8. X started business with cash: Rs.150000
Purchased goods on credit from Mr. Y: Rs.50000
Purchased furniture on credit from F ltd.: Rs.25000
Sold goods costing Rs. 10000 at a profit of 20% on sales for cash.
Bought goods costing Rs. 20000 for cash. Drawn for personal use: Rs. 5000 Sold the available goods to Ms. Z on
credit at a profit of 25% on cost. Paid Salaries: Rs. 80000 Rent due but not paid: Rs. 5000 Received 75% of the money due from Ms. Z Paid 50% of the money due to Mr. Y Purchased 5 shares of Infosys @ Rs.4000.
Required: Journal Entries and the corresponding ledger accounts
9. 9. Mr. A started a business on Ist January 2004. Following the transactions upto April 30th
Date Transaction Amount
1-Jan-04Started business with ownmoney
100,000
10-Jan-04Took a 12% loan from SBI
250,000
15-Jan-04Purchased computers 50,000
25-Jan-04
Purchased Satyam shares for cash 75,000
30-Jan-04Paid the following
Rent 5,000 Electricity Charges 2,000
Internet connection charges 1,500
5-Feb-04Sold 50% of the Satyam Shares 45,000
10-Feb-04Purchased SBI shares 25,000
27-Feb-04Paid the following
Rent 5,000 Electricity Charges 2,000
Internet connection charges 1,500
10-Mar-04
Purchased the shares of UTI Bank 50,000
25-Mar-Purchased Timex Shares 80,000
04
2-Apr-04Sold 50% of the Satyam Shares 55,000
Sold SBI shares 45,00015-Apr-
04Sold Timex shares 70,00030-Apr-
04Paid the following Rent 5,000 Electricity Charges 2,000
Internet connection charges 1,500
Required: Necessary Ledger Accounts up to the end of the accounting year ending March 2004
10. 10. In the above question post the transactions of the month of April in their respective ledger accounts
11. 11. Following are the transactions of GM Ltd.s
Started business with Rs. 400,000 in bank and cash in hand: 100000
Bought furniture with Rs. 50000 and paid bycheque.
Bought textile on credit from Mr. M: Rs.100000
Sold 50% of the textile at75000. Paid wages : Rs. 1000
Paid Mr. M: Rs.25000 Bought T Shirts from Tirupur: Rs.50000. Paid
by cheque Sold all Tshirts to a local retailer at Rs.
60000. Bought stationery: Rs. 5000 Paid rent: Rs.5000 Electricity charge due but not paid: Rs.2000 Insurance premium paid by cheque: Rs. 10000 Sold 10% of the balance textile on credit to
Mr. Y at Rs.7500. Mr. Y failed to make the payment on the due
date. The entire money was declared bad-debt. Required: Pass the necessary journal entries and post the transactions to the relevant ledger accounts
12. 12. Following is the Cash Account of X ltd.
Cash Account
Date ParticularsDebit Amt. Date Particulars
Credit Amt.
1..04.04
Opening Balance 500000
5.04.04 Goods 50000
goods 150000 furniture 10000
Shares of RIL 30000
Shares of RIL 50000
Old Newspapers 500 Salary 5000
Old Furniture 2000 Rent 2500
Shyam 5000 Interest 500 Loan 50000 30.04. Closing 619500
04 Balance 737500 Total 737500
Explain the transactions behind the above Cash Account. Youare also required to prepare the necessary ledger accounts.
Book Keeping :The Accounting Flow/AccountingEquation/Ledgers/Trial Balance
The book keeping is the recording of transactions in scientific and systematic manner. So book keeping is a art, as one can learn it with practice, it is a science as the recording is based on certain principles Transactions: Exchange of goods and services between two or more entities, both business and social. Let us take an hypothetical organisation called ABC ltd. andunderstand the entire process of recording in the following two different methods: 1. 1. Direct Recording in Balance Sheet and Income
Statement2. 2. Conventional Recording: Tracing the entire
accounting flow 3. 3. Computerised Recording Direct Recording: Steps: Analyse the transaction Identify the items: Transfer Incomes and Expenses to the INCOME
STATEMENT Transfer Sources and Applications to the
BALANCE SHEET The entire process can be explained as follows:
Transactions
Incomes Expens
esSources
Application
Income Statement
Balance Sheet
This requires understanding of the following concepts: Incomes and Expenses Sources The liability side of a balance sheet
represents the various sources from which a company obtains the funds which are needed for its business
Applications: The assets side of a balance sheet indicates the manner in which the resources of a company have been utilised
Balance Sheet: Balance Sheet is a statement which shows the sources and application of funds. Sourcesand application are also known as liabilities and assets respectively. Balance sheet is prepared to show the financial position of the organisation as on a particulardate. A balance sheet is always correct as on the date ofpreparation (for details see Chapter I)
Income Statement The income statement of an organisation shows the net operating result of the activities undertaken during a particular period of time.The income statement is also known as the Profit and LossAccount (P/L Account) (for details see Chapter I)
Conventional Recording: Tracing the entire accounting flow:
Transactions for Tally Exercise
Started business with Rs. 100000
Availed 12% ICICI Loan: Rs. 200 000
Transactions
Journals
Ledgers
Trial Balance
Income Statement
Balance Sheet
Promoter contributed Computer as capital:
Rs.25000
Purchased Plant for cash: Rs.25000
Purchased Furniture: Rs.10000
Paid Rent: Rs. 5000
Paid Salary: Rs.10000
Purchased goods from X on credit: Rs. 50000
Purchased goods for cash: Rs. 100000
Sold 70% of the goods to Y on credit: Rs.
150000
Sold balance stock for cash 75000
Received 50% due from Y
Depreciation on plant and furniture: 10%
SEBI (Disclosure & Investor Protection) Guidelines, 2000 asamemended till date
CHAPTER III
PRICING BY COMPANIES ISSUING SECURITIES
3.0 The companies eligible to make public issue can freelyprice their equity shares or any security convertible atlater date into equity shares in the following cases:
3.1 Public / Rights Issue by Listed Companies
3.1.1 A listed company whose equity shares are listed on astock exchange, may freely price its equity shares and anysecurity convertible into equity at a later date, offeredthrough a public or rights issue.
3.2 Public Issue by Unlisted Companies
3.2.1 An unlisted company eligible to make a public issueand desirous of getting its securities listed on arecognised stock exchange pursuant to a public issue, mayfreely price its equity shares or any securities convertibleat a later date into equity shares.
Infrastructure company
3.2.3 An eligible infrastructure company shall be free toprice its equity shares
subject to the compliance with the disclosure norms asspecified by SEBI from
time to time.
3.3 Initial public Issue by Banks
3.3.1 The banks (whether public sector or private sector)may freely price their issue of
equity shares or any securities convertible at a later dateinto equity share subject
to approval by the Reserve Bank of India.
3.4 Differential Pricing
3.4.1 Any unlisted company or a listed company making apublic issue of equity shares or securities convertible at alater date into equity shares, may issue such securities toapplicants in the firm allotment category at a pricedifferent from the price at which the net offer to thepublic is made provided that the price at which the securityis being offered to the applicants in firm allotmentcategory is higher than the price at which securities areoffered to public.
Explanation:
The net offer to the public means the offer made to theIndian public and does not include firm allotments orreservations or promoters’ contributions.
3.4.2 A listed company making a composite issue of capitalmay issue securities at differential prices in its publicand rights issue.
3.4.3 In the public issue which is a part of a compositeissue differential pricing as per sub-clause 3.4.1 above isalso permissible.
3.4.4 Justification for the price difference shall be givenin the offer document for sub-clauses 3.4.1 and 3.4.2.
3.5 Price Band
3.5.1 Issuer company can mention a price band of 20% (cap inthe price band should not be more than 20% of the floorprice) in the offer documents filed with the Board andactual price can be determined at a later date before filingof the offer document with ROCs.
3.5.2 If the Board of Directors has been authorised todetermine the offer price within a specified price band suchprice shall be determined by a Resolution to be passed bythe Board of Directors.
3.5.3 24(The Lead Merchant Bankers shall ensure that in caseof the listed companies, a 48 hours notice of the meeting ofthe Board of Directors for passing resolution fordetermination of price is given to the Designated StockExchange.)
3.5.4 The final offer document, shall contain only one priceand one set of financial projections, if applicable.
3.6 Payment of Discounts / Commissions, etc;
3.6.1 No payment, direct or indirect in the nature of adiscount, commission, allowance or otherwise shall be made
either by the issuer company or the promoters in any publicissue, to the persons who have received firm allotment insuch public issue.
3.7 Freedom to determine the denomination of shares forpublic / rights issues and to change the standarddenomination
3.7.1 An eligible company shall be free to make public orrights issue of equity shares in any denomination determinedby it in accordance with sub-section (4) of section 13 ofthe Companies Act, 1956 and in compliance with the norms asspecified by SEBI in circular no.SMDRP/POLICY/CIR-16/99dated June 14, 1999 and other norms as may be specified bySEBI from time to time.
3.7.2 The companies which have already issued shares in thedenomination of Rs.10/-
or Rs.100/- may change the standard denomination of theshares by splitting or
consolidating the existing shares.
3.7.3 The companies proposing to issue shares in anydenomination or changing the
standard denomination in terms of clause 3.7.1 or 3.7.2above shall comply with
the following:
(a) the shares shall not be issued in the denomination ofdecimal of a rupee;
(b) the denomination of the existing shares shall not bealtered to a denomination
of decimal of a rupee;
(c) at any given time there shall be only one denominationfor the shares of the
company;
(d) the companies seeking to change the standarddenomination may do so after
amending the Memorandum and Articles of Association, ifrequired;
(e) the company shall adhere to the disclosure andaccounting norms specified by
SEBI from time to time.
Footnotes:
24 Substituted for “The Lead Merchant Bankers shall ensurethat in case of the listed companies, a 48 hours notice of
the meeting of the Board of Directors for passing resolutionfor determination of price is given to the regional Stock
Exchange.” vide SEBI/CFD/DIL/DIP/Circular No. 11 datedAugust 14, 2003