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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-6
Learning Objective
This lecture will cover following areas:
o  An overview of the flow of transactions.
o  An introduction to the basic books of accounts.
o  The General Ledger, and
o  The ledger balance
The Flow of Transactions
Occurrence of an Event
The Voucher
General Journal
Cash/Bank Book
General Ledger
Trial Balance
Profit & Loss Account
Balance Sheet
Event
Event is the happening of any thing but in accounting we discuss monetary events
Monetary Events
If the financial position of a business is change due to the happening of event that Event is called
Monetary Event
The Voucher
Voucher is a document in a specific format that records the details of a transaction.
It is accompanied by the evidence of transaction.
18
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Financial Accounting (Mgt-101)
VU
A Sample Voucher
Name Of Company
Type Of Voucher
Date: 1-1-20--
No:
01
Description
Code
Debit
Credit
#
Amount
Amount
Cash
01
100,000
Capital
02
100,000
Total:
100,000
100,000
Narration:
Capital Introduced in Cash by Owner
Prepared By:
Checked by:
The General Journal
The Journal used to be a chronological (day-to-day) record of business transactions. All vouchers
were first recorded in books.
It was also called the Book of Original Entry or Day Book.
But in present day accounting and especially with the introduction of computers for accounting, this
book is not in use any more.
We will, therefore, not study the use of Journal in detail but we should know that it is a book that
keeps day-to-day record of transactions.
General Ledger ­ The `T' Account
Ledger ­ is a book that keeps separate record for each account (Book of Accounts).
We know that Account or Head of Account is systematic record of transactions of one type.
An account in its simplest form is a T-shape and looks like this:
Title of Account
Left hand side.
Right hand side.
The Debit side.
The Credit side.
19
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Financial Accounting (Mgt-101)
VU
A Standard General Ledger
Since the ledger keeps record of transactions that affect one head of account, therefore, it should
provide all the information that a user may need.
Usually the ledger is required to provide following information:
o  Title of account
o  Ledger page number, called Ledger Folio / Account Code
o  Date of transaction
o  Voucher number
o  Narration / particulars of transition
o  Amount of transaction
A Standard General Ledger
Capital Account (Title of Account)
Account Code 02
Date
Voucher
Particulars /
Debit
Credit
Number
Narration
Amount Amount
20--
Jan 01
01
Capital Introduced in cash by Owner
100,000
Recording From Voucher To General Ledger
Voucher
Date: 1-1-20--
No:
01
Description
Code
Debit
Credit
#
Amount
Amount
Cash
01
100,000
Capital
02
100,000
Narration:
Capital Introduced in Cash by Owner
Capital Account (Title of Account)
Account code 02
Date
Voucher
Particulars /
Debit
Credit
Number
Narration
Amount
Amount
20--
Jan 01
01
Capital Introduced in cash by
100,000
Owner
20
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Financial Accounting (Mgt-101)
VU
Completing The Recording ­ Both Effects
Description
Code Debit
Credit
#
Amount
Amount
Cash
01
100,000
Capital
02
100,000
Narration:
Capital Introduced in Cash by Owner
Capital Account Account Code 02
Date
Voucher Particulars / Narration
Debit
Credit
Number
Amount Amount
20--
Jan 01 01
Capital Introduced in cash by
100,000
Owner
Cash Account
Account Code 01
Date
Voucher Particulars / Narration
Debit
Credit
Number
Amount Amount
20--
Jan 01 01
Capital Introduced in cash by
100,000
Owner
A Simple Presentation of a Recorded Transaction is as under:
Cash Account
Code 01
Capital
Capital Account
Code 02
Cash 100,000
21
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Financial Accounting (Mgt-101)
VU
The Ledger Balance
In the earlier lecture, we discussed that in order to have the total figure in respect of each head of
expense/income, asset/liability we need to maintain different accounts.
We had also said that each account may have figures on the debit as well as the credit side.
Therefore, the difference between the debit and the credit sides, known as the BALANCE, would
represent the required total of the particular account.
The total of all balances on the Debit side is ALWAYS equal to the total of all balances on the
Credit side. This is called the balancing of books of accounts. We will study about this concept at a
later stage.
The balance may be written out after every transaction in a third column or calculated at the end of
a specific time period (an accounting period).
A Debit balance is shown without brackets and a Credit balance is shown in brackets (XYZ).
Cash Account
Account Code 01
Date
Voucher
Narration /
Debit
Credit
Balance
Number
Particulars
Amount
Amount Dr/(Cr)
20--
Jan 01
01
Capital Introduced in cash by Owner 100,000
100,000
Jan 01
02
Cash Paid for Purchase of Building
50,000
50,000
Jan 02
03
Cash Paid for Purchase of Furniture
10,000
40,000
Capital Account
Account Code 02
Date
Voucher
Narration /
Debit
Credit
Balance
Number
Particulars
Amount
Amount Dr/(Cr)
20--
Jan 01
01
Capital Introduced in cash by Owner
100,000
(100,000)
22
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES