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ACCOUNTING CYCLE AND ACCOUNTING TERMNILOGY
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BY DR SHASHI AGGARWAL
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ACCOUNTING CYCLE
- ACCOUNT CYCLE IS A STEP BY STEP PROCESS OF RECORDING, CLASSFICATION AND
SUMMARIZATION OF ECONOMIC TRANSACTIONS OF A BUSINESS.
- IT GENERATES USEFUL FINANCIAL INFORMATION IN THE FORM OF FIANCIAL
STATEMENTS INCLUDING INCOME STATEMENTS BALAANCE SHEETS, CASH FLOW
STATEMENTS AND STATEMENT OF CHANGES IN EQUITY.
- THE TIME PERIOD PRINCIPLE REQUIRES THAT A BUSINESS SHOULD PREPARE ITS
FINANCIAL STATEMENTS ON PERIODIC BASIS.
- ACCOUNTING CYCLE IS FOLLOWED ONCE DURING EACH ACCOUNTING PERIOD.
- ACCOUNTIG CYCLE STARTS FROM THE RECORDING OF INDIVIDUAL TRANSACTIONS
AND ENDS ON THE PREPRATION OF FINANCIAL STATEMENTS
- ACCOUNTING CYCLE
- THE TIME PERIOD PRINCIPLE REQUIRES THAT A BUSINESS SHOULD PREPARE ITS
FINANCIAL STATEMENTS ON PERIODIC BASIS.
- ACCOUNTING CYCLE IS FOLLOWED ONCE DURING EACH ACCOUNTING PERIOD.
- ACCOUNTIG CYCLE STARTS FROM THE RECORDING OF INDIVIDUAL TRANSACTIONS
AND ENDS ON THE PREPRATION OF FINANCIAL STATEMENTS
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ACCOUNTING CYCLE
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STEPS
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TRANSACTION: FINANCIAL TRANSACTIONS: DOING SOMETHING IN BUSINESS THAT
INVOLVES THE EXCHNAGE OF MONEY.
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BUSINESS PAPER OR COMUPTER RECORD : DOCUMENTARY OR COMPUTER RECORD BE PREAPRED AT
THE POINT OF SALE SO THAT ACCOUNTING DEPARTMENT IS AWARE THAT A TRANSACTION HAS
OCCURRED
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ANALYZE AND CLASSIFY
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STEPS
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JOURNALIZING : FOUR PHASES IN THE ACCOUNTING PROCESS
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JOURNALIZING OF TRANSACTIONS AND EVENTS: ANALYZED AND RECORDED IN THE JOURNAL.
ACCOUNTNAT USES DIFFERENT TYPES OF JOURNALS :
1.
PURCHASE DAY BOOK
2.
SALE DAY BOOK
3.
PURCHASE RETURN BOOK
4.
SALES RETURN BOOK
5.
CASH BOOK
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JOURNAL PROPER :
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JOURNALIZING : TRANSACTIONS AND EVENTS ARE RECORDED IN THE JOURNAL IN
CHRONOLOGICAL ORDER
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THE LEDGER FOLIO IN WHICH THE
TRANSACTION IS POSTED IN THE LEDGER IS ENTERED IN JOURNAL FOR CROSS REFERENCE.
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GENERAL LEDGER:
AFTER RECORDING THE TRANSACTIONS THE NEXT PHASE IS TO PREPARE THE
ACCOUNTS IN GENERAL LEDGER. GENERAL LEDGER IS THE PRINCIPLE OF BOOK OF
ACCOUNTS. FINANCIAL STATEMENTS ARE PREPARED ON THE BASIS OF BALANCE IN THE
LEDGER ACCOUNT AT THE END OF THE ACCOUNTING PERIOD
.
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GENERAL LEDGER: AFTER RECORDING THE
TRANSACTIONS THE NEXT PHASE IS TO PREPARE THE ACCOUNTS IN GENERAL LEDGER.
GENERAL LEDGER IS THE PRINCIPLE OF BOOK OF ACCOUNTS. FINANCIAL STATEMENTS ARE
PREPARED ON THE BASIS OF BALANCE IN THE LEDGER ACCOUNT AT THE END OF THE
ACCOUNTING PERIOD
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TRIAL BALANCE: A STATEMENT LISTING OUT THE DEBIT AND CREDIT
BALANCE IN VARIOUS ACCOUNTS ARE PREPARED. KNOWN AS TRIAL BALANCE. THE TOTAL IN
THE DEBIT COLUMN OF TRIAL BALANCE SHOULD AGREE WITH THE TOTAL IN THE CREDIT
COLUMN
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FORMS THE BASIS FOR PREPARING FINANCIAL STATEMENTS.
.
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ADJUSTING ENTRIES:
JOURNAL ENTRIES RECORDED AT THE END OF ACCOUNTING PERIOF TO ADJUST INCOME AND
EXPENSE ACCOUNT SO THAT THEY COMPLY WITH ACCURAL CONCEPT OF ACCOUNTING. THEIR
MAIN PURPSOE IS TO MATCH INCOME AND EXPENSES TO APPROPRIATE ACCOUNTING PERIOD.
ADJUTMENT ENTRIES ALWAYS INVOLVE EXPENSE OR INCOME ACCOUNT.
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ADJUSTED
TRIAL BALANCE: WHICH IS PREPARED AFTER THE PREPRATION OF ADJUSTMENT
ENTRIES
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ADJUSTED TRIAL BALCNE CONTAINS BALANCE OF REVENUE AND EXPENSES ALONG WITH
THOSE OF ASSETS, LIABILITIES AND EQUITIES.
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ADJUSTED TRIAL BALANCE COULD BE USED DIRECTLY IN THE PREPRATION OF THE
STATEMENTS
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BUT IT DOES NOT PROVIDE SUFFICIENT INFORMATION FOR THE PREPRATION OF THE
CASH FLOWS.
CLOSING ENTRIES: CLOSING ENTRIES ARE JOURNALS MADE AT THE END
OF THE ACCOUNTING PERIOD WHICH TRANSFER BALANCES OF TEMPORARY ACCOUNT TO
PERMANENT ACCOUNT
CLOSING ENTRIES ARE BASED ON THE ACCOUNT
BALANCE IN THE ADJUSTED TRIAL BALANCE.
TEMPORARY ACCOUNT INCLUDE:
1.
REVENUE,INCOME AND GAIN ACCOUNTS
2.
EXPENSE AND LOSS ACCOUNT
3.
DIVIDEND OR DRAWING WITHDRAWL
4.
INCOME SUMMARY ACCOUNT
POST CLOSING TRIAL BALANCE: A TRIAL BALANCE AFTER ALL TEMPORARY ACCOUNTS
HAVE BEEN CLOSED. THE ACCOUNTS REMAINING OPEN ARE CLLED REAL ACCOUNT AND
INCLUDE ASSETS, LIABILITIES AND CAPITAL ACCOUNT
FINANCIAL STATEMENTS ARE REPORTS THAT PROVIDE INFORMATION ABOUT A
COMPNY’S FINANCIAL PERFORMANCE AND FINANCIAL POSITION AND HOW IT HAS CHNAGED
OVER A PERIOD.
A STATEMENT OF PROFIT AND LOSS ACCOUNT
BALANCE SHEET
A STATEMENT OF THE CASH FLOWS FOR THE PERIOD
STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY
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ACCOUNTING TERMNIOLOGY
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DR.SHASHI AGGARWAL
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queriesmanagement@gmail.com
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BRANCHES OF ACCOUNTING
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FINANCIAL ACCOUNTING: IS CONCERNED WITH RECORDING,CLASSIFYING AND
SUMMARISING OF FINANCAIL TRANSACTION FOR AN ACCOUNTING PERIOD TO KNOW PROFIT AND LOSS AND FINANCIAL
POSITION
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COST ACCOUNTING:-IS CONCERNED WITH
IDENTIFICATION,CLASSIFICATION MEASURMENT,RECORDING AND SUMMARISATION OF COST OF
PRODUCING GOODS /SERVICES FOR THE PURPOSE OF COST ASCERTAINMENT AND COST
CONTROL
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MGMT ACCOUNTING:-WHEN THE ACCOUNTING INFORMATION, REPORTS AND
RESULTS ARE USED FOR THE PURPOSE OF TAKING DECISIONS.
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ACCOUNTING TERMINIOLOGY
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PROPRIETOR/OWNER:-THE PERSON WHO TAKE THE INITIATIVE TO SET UP
BUSINESS AND ALSO BEAR THE RISK. HE INVEST MONEY AND IN KIND. IN SOLE
PROPREITOR HE IS THE OWNER AND IN PARTNERSHIP ALL THE PARTNERS ARE THE OWNERS.
AND IN THE COMPANY FORM THE OWNER AND MANAGEMENT AND OWNERSHIP IS IN SEPARATE
HANDS.
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BUSINESS TRANSACTION:-TRANSFER OF GOODS AND SERVICES ON THE BASIS OF
CASH OR ON THE BASIS OF CREDIT. IT COULD ALSO MEAN ANY TRANSFER OF BENEFIT
BETWENN THE BUSINESS AND THE OUTSIDERS.
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CAPITAL: - AN AMONUT INVESTED BY THE OWNER IS KNOWN AS
CAPITAL AND THAT IS LAIBILITY OF THE BUSINESS. CAPITAL CAN BE BROUGHT IN THE
FORM OF CASH OR IN KIND OR BOTH.
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DRAWING: - AN AMOUNT OF CASH OR GOODS WITHDRAWN BY THE
OWNER FOR PERSONAL USE IS CALLED DRAWING.
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GOODS/MERCHANDISE:-GOODS INCLUDE ONLY THOSE ARTICLE IN WHICH HE
DEALS. IF FUNRNITURE DEALER DEALS IN SELLING AND BUYING OF FURNITURE. THEN
FURNITURE WILL BE GOODS
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PURCHASES: REFERS TO THE TOTAL AMOUNT OF GOODS OBTAINED BY
AN ORGANIZATION FOR THE PURPOSE OF RESALE OR FOR USE IN THE PRODUCTION. IT CAN
BE CASH OR ON CREDIT. BUT IT DOES NOT INCLUDE FIXED ASSETS FURNITURE,BUILDINGS ETC
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SALES: REFERS TO THE TOTAL AMOUNT OF GOODS SOLDBY
AN ORGANIZATION ON CASH OR CREDIT... BUT IT DOES NOT INCLUDE SALE OF FIXED ASSETS FURNITURE,BUILDINGS
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PURCHASE RETURN/ RETURN OUTWARD: _GOODS PURCHASED WHICH ARE NOT UP TO MARK
DEFECTIVE ETC ARE RETURNED BACK TO SUPPLIER. A DEBIT NOTE IS PREPARED
• SALES RETURN/RETURN INWARDS- WHICH ARE RETURNED BY THE BUYER TO US BEING
DEFECTIVE.
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SUNDRY DEBTORS:-THE PERSON WHO MONEY TO THE BUSIENSS
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SUNDRY CREDITORS:-TO WHOM THE BUSINESS OWES
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STOCK:-GOODS ARE THE PURCHASED FOR RESALE BUT AT THE
END OF THE YEAR SOME GOODS REMAIN UNSOLD. UNSOLD GOODS ARE CALLED STOCK. STOCK
OF RAW MATERIAL,STOCK OF WORK IN PROGRESS AND STOCK OF FINSIHED GOODS
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ASSETS:-IMPLIES THE ITEMS OF PROPERTY OWNED BY THE BUSINESS.
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FIXED ASSETS: WHICH ARE OF PERMANENT NATURE AND WHICH ARE
NOT FOR THE PURPOSE OF RESALE.TANGIBLE ASSETS ARE THOSE ASSETS WHICH HAVE
PHYSICAL EXISENCE LIKE LAND AND BUILDING,MACHINER ETC AND INTANGIBLE WHICH IS
NOT PHYSICALL IN NATURE LIKE GOODWILL ETC
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CURRENT ASSTES:-WHICH ARE PURCHASED FOR THE PURPOSE OF RESALE
AND COULD BE CONVERTED INTO CASH LESS THAN ONE YEAR.LIKE CASH,STOCK,BILL
RECEIVABLE,PREPAID EXPENSES ETC
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FIXED ASSETS
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THESE ARE THOSE ASSETS OF PERMANENT NATURE REQUIRED FOR THE NORMAL CONDUCT
OF THE BUSINESS.
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TANGIBLE ASSETS: THOSE ASSETS WHICH HAVE PHYSICAL EXISTENCE AND
CAN BE TOUCHED AND SEEN. FURNITURE,FIXTURES,LAND AND BUILDING ETC
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INTANGIBLE ASSETS : COPY TIGHT,GOODWILL ETC
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WASTING ASSETS: ARE THOSE FIXED ASSETS WHICH WILL SURELY LOSE THIE
R VALUE BECAUSE OF USE. MINES AND OIL WELL ARE EXAMPLES
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FICTITIOUS ASSETS:-WHICH DO NOT HAVE PHYSICAL FORM AND ALSO DO NOT
HAVE REAL VALUE. KNOWN AS DEFERRED REVENUE EXPENDITURE. ALSO INCLUDE
PRELIMINARY EXPENSES,ADVERTISMENT SUSPENSE,LOSS ON THE ISSUE OF SHARE ETC
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LIABILITIES:-WHICH BUSINESS OWES TO SOMEBODY.
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LONG TERM LIABILITY:-WHICH IS DUE FOR MORE THAN ONE YEAR. EXAMPLES ARE LONG
TERM DEBT,DEBENTURES ETC
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CURRENT LAIBILITIES:-ARE TO BE PAID IN LESS THAN ONE YEAR. FOR EXAMPLE TRADE
CREDITORS,BILLS PAYABLES,OUTSTANDING EXPENSES ETC
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CONTINGNENT LIABILITIES: WHICH MAY BECOME LIABLILITY ON THE HAPPENNING OF
CERTAIN EVENT
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ACCOUNTING EQUATION
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ASSETS = CAPITAL PLUS LIABILITES
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EXPENSE:-COST RELATING TO PARTICULAR ACCOUNTING PERIOD THE
BENEFIT OF WHICH WILL NOT EXTEND BEYOND THAT PERIOD .EXAMPLE ARE SALARIES,RENT
ETC
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EXPENDITURE:-AN EXPENDITURE TAKE PLACE WHEN AN ASSET OR
SERVICES IS ACQUIRED. IT MAY BE ON THE CASH/CREDIT/BY EXCHANGE OF THE ASSET
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CLASSIFICATION OF EXPENDITURE:-
1.
CAPITAL EXPENDITURE:-NONE RECURRING IN NATURE AND BENEFIT OF WHICH IS TAKEN
FOR MANY YEARS.
2.
REVENUE EXPENDITURE: - IT IS RECURRING IN NATURE AND BENEFIT IS TAKEN IN
THAT ACCOUNTING YEAR IN WHICH THEY ARE PURCHASED. SALARY,RENT ,INSURANCE ETC
3.
DEFERRED REVENUE EXPENDITURE:-A HEAVY EXPENDITURE OF REVENUE NATURE THE
BENEFIT OF WHICH IS LIKELY TO EXTEND BEYOND CURRENT YEAR. LIKE ADVERTISEMENT
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LOSS:-UNWANTED BURDEN ON THE BUSINESS WHICH DOES NOT GENERATE ANY REVENUE
1.
NORMAL LOSS
2.
ABNORMAL LOSS: RESULT IS MISHAPPENING OR CARELESSNESS
3.
LOSS WHEN REVENUE IS LESS THAN COST
REVENUE:-RECEIPT FROM THE SALE OF GOODS OR SERVICES.
LINK FOR DOUBLE ENTRY SYSTEM NOTES
https://www.gargshashi.com/2020/12/DOUBLE-ENTRY-SYSTEM.html
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