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Multiple Reporting Currencies

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Title: Multiple Reporting Currencies


1
Basic Accounting Level II By Sivakumar Ganesan B.
Sc, ACA, ICWA, PMP, PDIM Global Technology
Services LLc, UAE Emailsivakumar3009_at_gmail.com
2
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

3
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

4
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.

5
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

6
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)
7
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
8
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

9
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.

10
Accounting Concepts / Principles
  • Business Entity Concept
  • Money Measurement Concept
  • Dual Aspect Concept
  • Cost Concept
  • Accounting Period
  • Conservatism
  • Realization Concept
  • Matching Concept
  • Materiality Concept
  • Objectivity

11
Accounting Conventions / Practices
  • Going Concern
  • Consistency
  • Accrual

12
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

13
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.
14
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)

15
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)

16
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
17
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
18
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

19
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.

20
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.

21
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. 

22
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

23
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.

24
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.

25
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.

26
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.

27
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.

28
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.

29
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.

30
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

31
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
32
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)

33
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
34
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
35
Combination of Accounting Rules
Debit
Combination Personal Real Nominal
Personal X
Real
Nominal X
Credit
36
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
37
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

38
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

39
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)

40
A Simple Case Study
Accounting Concepts
41
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

42
ARE YOU READY FOR THE GAME
  • Accounting is very simple

43
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)

44
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

45
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
46
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
47
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
48
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
50
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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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

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"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
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