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IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

Introduction to
Accounting
PGP 2021-2023
First Steps
Session 4 & Session 5

Instructor: Dr. Vishakha Bansal

Emailid: [email protected]
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Highlights:

 Processing Transactions
 Adjustments
 Deferrals and Accruals
 Temporary and Permanent Accounts
 Closing Process
 Preparation of Financial Statements

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Processing transactions

 Double entry system

 The T account, Debit, Credit and the balances
 Debit and Credit rules
 Journal
 Ledger
 Trial Balance

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Double Entry System

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Classification of accounts: Traditional Practice(Only for
awareness)

 Real Accounts – All Assets (except Debtors and Firm’s Bank A/c)
Debit what comes in
Credit what goes out

 Personal Accounts – All liabilities, debtor’s A/c and Firm’s bank A/c
Debit the receiver
Credit the giver

 Nominal Accounts – All expenses, gains, income and losses.

Debit all expenses and losses
Credit all incomes and gains

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IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Source: Financial Accounting: A Managerial Perspective

R. Narayanaswamy

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Analyzing the Effect of Transactions

 Analysis : Analyze the transactions in terms of increase and

decrease in asset, liability and equity items and specify the
relevant accounts. View the transaction from the standpoint of
the business enterprise as the reporting entity.
 Rules: Apply the rules stated in the previous slides
 Entry: Record the transaction entry showing the accounts to
debit and credit
 Accounts: Present the related accounts after recording the
transaction entry.

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Accounting Records

 Journal (or Day Book)

 Chronological record
 Systematic manner

 Ledger
 Classification of transactions
 Posting
 T account and standard form

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Trial Balance

 Total of debit balances = Total of credit balances

 Trial balance is not an accounting
record
 Detecting errors
 Correcting entries

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Errors in the trial Balance

 Errors affecting the trial balance – Suspense Account

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Measuring Income

 Revenue Recognition: The Realization principle or Revenue

recognition principle
The revenue earning process would be regarded as virtually
complete when the firm sells the product or provides a service
with assurance of payment by the customer.

 Expense Recognition: The Matching Principle

It requires that expenses be recognized in the reporting period
in which the related revenues are earned.

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

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Adjustments and closing process

 Adjustments
 helps in achieving the goal of accrual accounting
 Allocating expenses and revenues to appropriate periods

 Deferrals And Accruals

 Deferral – Lag in the recognition of an expense already paid or revenue already
received.
Ex- prepaid insurance and unearned revenue.

 Accrual – recognition of an expense incurred but not paid or revenue earned but
not received.
Ex- Salaries payable, revenue billed but not collected.

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The adjustment Process

Source: Financial Accounting: A

Managerial Perspective
IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23
R. Narayanaswamy
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Adjustments

 Prepaid expenses ( eg: insurance paid in advance)

 Office Supplies ( or stock of any item)
 Depreciation ( against use of fixed assets etc:)
 Unearned Revenue (Money received against revenue in
advance)
 Accrued Expense (outstanding expenses)
 Accrued Revenue (Receivable)

 Provisions ( doubtful debts etc: , warranty )

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Overview of the accounting cycle

 Temporary accounts
 Revenues, expenses, dividends, drawings (sole proprietorship and
partnership firms)

 Permanent accounts
 Assets, liabilities, equity

 Steps from transactions to the financial statements

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Illustration: Accounting Equation

On August 1 2015, Sriram setup Medi labs company. The following transactions took place during the first month.
a) Sriram invested Rs. 50,000 cash in the company’s share capital.
b) Bought equipment on credit, Rs.40,000 from Ram Naresh
c) Took a bank loan, Rs.30,000.
d) Invoiced customers for services Rs.15,000.
e) Provided services for cash Rs. 18,000.
f) Bought supplies for cash , Rs.3,000
g) Paid salary staff Rs. 10,000.
h) Paid electricity charges, Rs. 6,000.
i) Bought equipment for cash, Rs. 5,000
j) Repaid a part of the bank loan, Rs.10,000
k) Paid interest on bank loan Rs. 500
l) Paid dividends, Rs. 5,000.
m) Recruited 10 employees

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  Assets   Liabilities   Equity

S.no. Cash/Bank Trade Receivables Supplies Equipment ₌ Creditors Bank Loan ₊ Capital Income Expense

a 50000 0 0 0   0 0   50000 0 0

Balance 50000 0 0 0   0 0   50000 0 0

b 0 0 0 40000   40000 0   0 0 0

Balance 50000 0 0 40000   40000 0   50000 0 0

c 30000 0 0 0   0 30000   0 0 0

Balance 80000 0 0 40000   40000 30000   50000 0 0

d 0 15000 0 0   0 0   0 15000 0

Balance 80000 15000 0 40000   40000 30000   50000 15000 0

e 18000 0 0 0   0 0   0 18000 0

Balance 98000 15000 0 40000   40000 30000   50000 33000 0

f -3000 0 3000 0   0 0   0 0 0

Balance 95000 15000 3000 40000   40000 30000   50000 33000 0

g -10000 0 0 0   0 0   0 0 -10000

Balance 85000 15000 3000 40000   40000 30000   50000 33000 -10000

h -6000 0 0 0   0 0   0 0 -6000

Balance 79000 15000 3000 40000   40000 30000   50000 33000 -16000

i -5000 0 0 5000   0 0   0 0 0

Balance 74000 15000 3000 45000   40000 30000   50000 33000 -16000

J -10000 0 0 0   -10000 -10000   0 0 0

-16000
Balance 64000 15000 3000 45000   40000 20000   50000 33000

-500
K -500 0 0 0 0 0 0 0

-16500
Balance 63500 15000 3000 45000 40000 20000 50000 33000

Net profit=16500
 
k -5000 0 0 0   0 0   0
Profit -dividend=11500
Balance 58500 15000 3000 45000   40000 20000   50000
11500 (Retained Earnings)

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Statement of profit and loss for the month ending August 2015

Amount
Income:
Revenue from services 33000
Expenses:
Salary (10000)
Electricity charges (6000)
Total Expenses (16000)
Interest on loan 500
Net Profit 16500

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

Balance sheet as on 31st August, 2015
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Particulars Amount
Assets:
Equipment 45000
Trade receivables 15000
Supplies 3000
Cash 58500
Total Assets: 122000
Liabilities and Equity:
Equity:
Capital 50000
Other Equity 11500

Liabilities:
Bank Loan 20000
Creditors 40000
Total Liabilities:
IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23 122000
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Adjustments:

 Additional information: Adjustments

1. Equipment will be used for 60 months. (depreciation for the whole month is
charged when the asset is used for more than 15 days in a month else it is
ignored).
2. There were two employees kept at a salary of Rs.2500p.m. each, whose salary
has not been paid yet. (accrued /due but not paid)
3. Rs. 10,000 advance was received for services to be provided in future, recorded
under revenue, out of this services worth 2000 are yet to be provided
4. Supplies worth Rs.1000 are remaining with the business. ( Continuous
transaction)
Solution on excel “ Accounting Cycle” under tab : Effect of adjustments.

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Financial Statements

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Balance Sheet:
Items within assets, liabilities and equity follow order of permanency

• Non current assets

• Current assets
Assets

• Equity
Equity and • Non current liabilities
liabilities • Current liabilities

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23

 Non current assets
• Tangible assets 24
• Intangible assets
(kept for use in • Financial assets
business and not for • Deferred tax assets
conversion into cash
as part of operations)

• Inventories
Current assets • Financial assets
(are regularly • Accounts receivables
• Investments
converted into cash
• Cash and cash equivalents
as part of operations)

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• Equity share capital
Equity • Other equity (Retained earnings, profit)

Non – • Financial liabilities

current • Provisions/ Reserves ( employee benefits)
• Deferred tax liabilities
liabilities

Current • Financial liabilities

• Provisions
liabilities • Current tax liabilities

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Statement of profit and loss:
Income • Revenue from operations
• Other income
(Top line)

Expenses • Cost of materials consumed

• Employee benefits expense
• Finance costs

(Middle line)
• Depreciation and amortization expense
• Other expenses such as repairs and maintenance, power and fuel et:

Profit •
•
Tax expense
Profit = Revenue- Expense
• Other comprehensive income
(Bottom line) • Comprehensive income

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Statement of changes in equity

• Increased by additional share

Equity share capital • Decreased by buyback

• Increased by profit for the period

Retained earnings • Decreased by loss for the period or
dividends

Other
comprehensive • Changes as a result of gains and losses
income

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Statement of Cash Flows
Operating • Production of goods and services
activities

Investing • Acquisition and disposal of long term

assets and investments
activities

Financing • Changes in equity and borrowings

activities
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Assignment:

 Pick an annual report of any non – financial company and

study its financial statements.

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Thank You:

IIM SHILLONG FOUNDATION COURSE FRA PGP 2021-23