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Semester 1: Accounting for Managers I
Meaning and scope of Accounting, Basic Accounting Concepts and Conventions, Objectives of Accounting, Accounting Transactions, Double Entry Book Keeping, Journal, Ledger, Preparation of Trial Balance
Meaning and scope of Accounting
Double Entry Book Keeping
Double entry bookkeeping is an accounting system that requires every transaction to be recorded in at least two accounts, ensuring that the accounting equation remains balanced. This system enhances the accuracy and integrity of financial records.
Journal
A journal, also known as the book of original entry, records transactions in chronological order. Each entry includes the date, accounts affected, amounts debited and credited, and a brief description.
Ledger
The ledger is a collection of all accounts that are used in the accounting system. It summarizes all transactions recorded in the journal and organizes them by account, making it easier to track financial activity.
Preparation of Trial Balance
The trial balance is prepared to ensure that the total debits equal total credits in the ledger accounts. It is an important step in the accounting cycle as it verifies the accuracy of transactions recorded before preparing financial statements.
Subsidiary book, Preparation of cash Book, Bank reconciliation statement, Rectification of errors, Suspense account
Subsidiary book, Preparation of cash Book, Bank reconciliation statement, Rectification of errors, Suspense account
A subsidiary book is a record used to capture specific types of financial transactions in detail, such as sales, purchases, and cash transactions.
Helps in effective record-keeping and reduces workload for the main ledger.
Sales Book
Purchase Book
Cash Book
Journal Proper
A cash book is a financial journal that contains all cash receipts and disbursements, including bank deposits and withdrawals.
Cash Receipts
Cash Payments
Bank Deposits
Bank Withdrawals
Single Column Cash Book
Double Column Cash Book
Triple Column Cash Book
A bank reconciliation statement is a document that compares the bank's records with the company's own records to identify any discrepancies.
Ensures accuracy in financial reporting and reveals errors or unauthorized transactions.
Outstanding Checks
Deposits in Transit
Bank Fees
Errors in Cash Book
The process of correcting errors made in the financial records.
Error of Omission
Error of Commission
Error of Principle
Compensating Error
Journal Entries
Adjusting Entries
A suspense account is a temporary account used to record uncertain or unclassified transactions until they can be properly categorized.
Used to hold transactions that cannot be assigned to a specific account due to lack of information.
Helps maintain the accuracy of financial records until proper information is available.
Preparation of Final Accounts, Adjustments, Closing stock, outstanding, prepaid and accrued, depreciation, bad and doubtful debts, provision and discount on debtors and creditors, interest on drawings and capital
Preparation of Final Accounts
Introduction to Final Accounts
Final accounts are essential financial statements prepared at the end of an accounting period. They include the income statement and the balance sheet, providing a summary of the company's financial performance and position.
Adjustments in Final Accounts
Adjustments are necessary to ensure that the financial statements reflect the true financial position. Common adjustments include closing stock, outstanding expenses, prepaid expenses, and accrued incomes.
Closing Stock
Closing stock refers to the inventory that remains unsold at the end of an accounting period. Its valuation is crucial as it affects the cost of goods sold and the overall profitability.
Outstanding Expenses
Outstanding expenses are costs that have been incurred but not yet paid by the end of the accounting period. These need to be accounted for to ensure that expenses align with the period they relate to.
Prepaid Expenses
Prepaid expenses are payments made in advance for goods or services to be received in the future. These should be recorded as current assets until they are used.
Accrued Incomes
Accrued incomes refer to revenues that have been earned but not yet received. Recognizing these ensures proper revenue matching in the financial statements.
Depreciation
Depreciation is the systematic allocation of the cost of tangible assets over their useful lives. It reflects the wear and tear and is crucial for asset valuation in the final accounts.
Bad and Doubtful Debts
Bad debts are amounts that are not expected to be collected, while doubtful debts are those that may not be collectible. Provisions should be made to reflect these in the financial statements.
Provision and Discount on Debtors and Creditors
Provisions are made for expected future losses, while discounts on debtors and creditors relate to early payment incentives. Both impact the net realizable value of accounts receivable and payable.
Interest on Drawings and Capital
Interest on drawings is charged to partners for the amount they withdraw from the business, whereas interest on capital is the return on the capital invested by partners. These entries affect the overall profit distribution.
Hire Purchase System, Default and Repossession, Hire Purchase Trading, Account Installment System
Hire Purchase System, Default and Repossession, Hire Purchase Trading, Account Installment System
Hire Purchase System
Hire purchase is a method of purchasing goods through rental payments and eventual ownership. The buyer pays an initial deposit followed by regular installment payments over an agreed period. Ownership of the goods is transferred to the buyer after the final payment is made.
Default and Repossession
Default occurs when the buyer fails to make the required payments as stipulated in the hire purchase agreement. In such cases, the seller has the right to repossess the goods. Repossession is a legal process where the lender retrieves the asset from the borrower due to non-payment.
Hire Purchase Trading
Hire purchase trading involves buying and selling goods under hire purchase agreements. Businesses may target customers who want goods without paying upfront, leveraging flexible payment options to increase sales while managing credit risk.
Account Installment System
The account installment system is similar to hire purchase but generally involves ownership transfer from the beginning. Buyers make fixed payments over time while being responsible for the goods immediately. This system often applies to larger items or high-value purchases.
Single Entry: Meaning, Features, Defects, Differences between Single Entry and Double Entry System, Statement of Affairs Method, Conversion Method
Single Entry Accounting System
Meaning
Single entry system is a method of bookkeeping that records financial transactions with a single entry for each transaction. It is simpler than double entry bookkeeping and usually records only cash transactions without maintaining comprehensive records for accounts receivable, accounts payable, and inventories.
Features
1. Simplicity: Easier to maintain as it requires less bookkeeping effort. 2. Limited Scope: Primarily used for small businesses with fewer transactions. 3. Cash Basis: Often tracks only cash receipts and payments. 4. Minimal Record Keeping: Less documentation compared to double entry.
Defects
1. Incomplete Records: Lacks detailed records for assets and liabilities. 2. Limited Financial Analysis: Difficult to prepare comprehensive financial statements. 3. Prone to Errors: Higher chance of mistakes and fraud. 4. Lack of Internal Control: Weaker checks and balances in financial reporting.
Differences between Single Entry and Double Entry System
1. Complexity: Single entry is simpler, while double entry provides a complete picture of financial transactions. 2. Record Keeping: Single entry records are limited; double entry ensures accuracy through dual records (debits and credits). 3. Financial Statements: Double entry helps produce complete financial statements; single entry does not allow for this.
Statement of Affairs Method
Statement of affairs method is used in single entry systems to determine the financial position of a business. It involves listing assets and liabilities to ascertain the net worth. It acts as a substitute for a balance sheet.
Conversion Method
Conversion method is used to translate single entry records into double entry records for preparing standardized financial statements. This involves adjusting single entry records to account for missing transactions, generating a more complete financial overview.
