Accounting

Journalizing and posting adjusting entries

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At the end of the accounting period the adjusting entries appearing in the work sheet are recorded in the journal and posted to the ledger; bringing to the ledger into agreement with the data reported on the profit and loss account and balance sheet. The adjusting entries are dated as on the last day of the accounting period, even through they are usually recorded some time later. Each entry may be supported by an explanation, but a suitable caption above the first adjusting entry, as in the illustration of the adjusting entries is sufficient. A brief explanation of each separate entry serves no useful purpose, and on the other hand, a detailed explanation would needlessly duplicate working papers and other basic documents available in the files.

The adjusting entries in the journal of XYZ, Company are presented on illustration below. The accounts to which they have been posted appear in the ledger. To facilitate identification, each adjusting entry is identified in the item section of the accounts. It is not necessary that this be done in actual practice.

Date	Description	Post. Ref.	Debit	Credit
31 31 31 31	Adjusting Entries Supplies Expense Supplies Rent Expense Prepaid Rent Depreciation Expense Accumulated Depreciation Salary Expense Accumulated Depreciation	52 14 53 15 54 19 51 22	$ 520.00 200.00 50.00 708.00	$ 520.00 200.00 50.00 708.00

What is the Capital Statement

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Capital statement is the document which presents the opening balance of the capital at the first line, and then any kind of addition in shape of investment or profit earned during the accounting period is added in the next line arriving at the total balance of capital. Deductions in form of withdrawals or loss of the business are then subtracted from the total balance of the capital arriving at the final balance of capital at the end of the accounting period.

Capital Statement

Capital, 1^st July, 2008………………………. 35,000.00

Additional investment during the year……… 6,000.00

Total………………………………… 41,000.00

Net loss for the year………………………… 8,000.00

Withdrawals….......................………………. 3,600.00

Decrease in capital………………………….. 11,600.00

Capital, 30^th June, 2009…………………….. 29,400.00

Profit and loss account and balance sheet

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The profit and loss account and balance sheet prepared from the work sheet of XYZ, Company, it will be noticed here that the profit and loss account has been prepared in two different forms; in statement form and in account form. Profit and loss accounts in both the forms give the same information. The account form of the profit and loss account is traditional and is still being used widely; but in recent years many business houses prefer to present the profit and loss account in the statement form.

The work sheet is the source of all of the data reported on the profit and loss account. Similarly, it is the source of all basic data reported on the balance sheet.

In presenting the item of capital in the balance sheet, it is necessary to refer to the capital account in the ledger to determine the balance at the beginning of the period and the amount of any additional investments that may have been made during the period. The amounts of net profit and withdrawals for the period are taken from the balance sheet columns of the work sheet, and the balance of capital at the end of the period is determined arithmetically.

The form for presentation of the capital in the balance sheet can be modified to meet the circumstances of any particular case in the illustration on above work sheet; the amount withdrawn by the owner was less than the net profit. If the withdrawals had exceeded the net profit, the order of the two items could have been reversed and the difference between the two deducted from the beginning capital. Other factors, such as additional investments or a net loss, also necessitate modifications in for, as in the following capital statement

Capital Statement

Capital, 1^st July, 2008………………………. 35,000.00

Additional investment during the year……… 6,000.00

Total………………………………… 41,000.00

Net loss for the year………………………… 8,000.00

Withdrawals….......................………………. 3,600.00

Decrease in capital………………………….. 11,600.00

Capital, 30^th June, 2009…………………….. 29,400.00

XYZ, COMPANY

Profit and Loss Account

For Month Ended 30^thJune, 2009

Sales

Operating Expenses:

Salary expense

Supplies expense

Rent expense

Depreciation expense

Miscellaneous expense

Total operating expenses

Net Profit from operations

708.00

520.00

200.00

50.00

103.00

2,540.00

1,581.00

959.00

Profit and loss account---------statement form

XYZ, COMPANY

Profit and Loss Account

For Month Ended 30^thJune, 2009

Operating Expenses:

Salary expense………………………..708.00

Supplies expense……………………..520.00

Rent expense…………………………200.00

Depreciation expense……………….. 50.00

Miscellaneous expense………………103.00

Net Profit ……………………………959.00

2,540.00

Sales………………… 2,540.00

2,540.00

Profit and loss account---------account form

XYZ, COMPANY

Profit and Loss Account

For Month Ended 30^thJune, 2009

Liabilities

$ $

Current Liabilities:

Creditors………… 1,400

Accrued salaries… 708 2,108

Capital

XYZ, Capital,

1^st July, 2008 6,300

Net profit for

The month 959

Less: withdrawals 500 459 6,759

8,867

Assets

$ $

Current Assets:

Cash…………… 1,702

Debtors………… 585

Supplies………... 230

Prepaid Rent…… 400 2,917

Fixed Assets:

Office equipment 6,000

Less accumulated

Depreciation 50 5,950

8,867

Balance Sheet

Details and Illustration of Work Sheet

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XYZ, COMPANY

Work Sheet

For Month Ended 30^TH June, 2009

ACCOUNT TITLE	TRIAL BALANCE		ADJUSTMENT		PROFIT & LOSS ACCOUNT		BALANCE SHEET
	DEBIT	CREDIT	DEBIT	CREDIT	DEBIT	CREDIT	ASSETS	LIABILITIES AND CAPITAL
Cash Debtors Supplies Prepaid Rent Office Equipment Creditors XYZ, Capital XYZ, Drawing Sales Miscellaneous Expense Supplies Expense Rent Expense Depreciation Expense Accumulated Depreciation Salary Expense Accrued Salaries Net Profit	1,702.00 585.00 750.00 600.00 6,000.00 500.00 103.00	1,400.00 6,300.00 2,540.00	a) 520.00 b) 200.00 c) 50.00 d) 708.00	a) 520.00 b) 200.00 c) 50.00 d) 708.00	103.00 520.00 200.00 50.00 708.00	2,540.00	1,702.00 585.00 230.00 400.00 6,000.00 500.00	1,400.00 6,300.00 50.00 708.00
	10,240.00	10,240.00

			1,478.00	1,478.00	1,581.00 959.00	2,540.00	9,417.00	8,458.00 959.00

					2,540.00	2,540.00	9,417.00	9,417.00

The work sheet for XYZ, Company is presented above. Note that there are three parts to the heading: (1) the name of the enterprise, (2) the title, and (3) the period of time covered. It has a column for account and eight money column, arranged in three pairs of debit and credit columns. The last tow money columns are for the balance sheet and are headed as Assets, and Liabilities and Capital. The principal headings of the four sets of money columns are as follows:

1. Trial Balance 3. Profit and Loss Account

2. Adjustments 4. Balance Sheet

Trial Balance Columns. Trial balance data may be assembled directly on the work sheet form or it may be prepared on another sheet first and then copied on the work sheet form.

Adjustments Columns. Both the debit and the credit portions of an adjustment should be inserted on the appropriate line before proceeding to another adjustment. Cross-referencing the related debit and credit of each adjustment by letters is useful to anyone who may have occasion to review the work sheet; it is also helpful later when recoding the adjusting entries in the journal. The sequence of adjustments is immaterial except that there is a time and accuracy advantage in following the order in which the adjustment data are assembled. If titles of accounts to be adjusted do not appear in the trial balance, they should be inserted below the trail balance totals as needed.

The adjustment entries for XYZ Company were explained and illustrated by T accounts earlier in the above section. In practice the adjustments are inserted directly on the work sheet on the basis of the data assembled by the accounting department.

Explanatory notes for the entries in the adjustments columns of the work sheet are as follows:

(a) Supplies. The supplies account has a debit balance of $750; the cost of the supplies on hand at the end of the period in $230; therefore, the supplies expense for June is the difference between the two amounts, or $520. The adjustment is entered by writing (1) Supplies Expense in the Account Title column, (2) $520 in the Adjustments Debit column on the same line, and (3) $520 in the Adjustments Credit column on the line with Supplies.

(b) Rent. The prepaid rent account has a debit balance of $600, which represents a payment of three months beginning with June; therefore, the rent expense for June is $200. The adjustment is entered by writing (1) Rent Expense in the Account. Title column, (2) $200 in the Adjustments Debit column on the same line, and (3) $200 in the Adjustments Credit column on the line with Prepaid Rent.

(c) Depreciation. Depreciation of the office equipment for the month is estimated at $50. This expired portion of the cost of the equipment is both an expense and a reduction in the asset. The adjustment is entered by writing (1) Depreciation Expense in the Account Title column, (2) $50 in the Adjustments Debit column on the same line, (3) Accumulated Depreciation in the Account Title column, and (4) $50 in the Adjustments Credit column on the same line.

(d) Salaries. Salaries accrued but not paid at the end of June amount to $708. This is an increase in expense and an increase in liabilities. The adjustment is entered by writing (1) Salary Expense in the Account Title column, (2) $708 in the Adjustments Debit column on the same line, (3) Accrued Salaries in the Account Title column, and (4) $708 in the Adjustments Credit column on the same line.

The final step in completing the Adjustments columns is to prove the equality of debits and credits by totaling and ruling the two columns.

Profit And Loss Account and Balance Sheet Columns. The data in the trial balance columns are combined with the adjustments data and extended to one of the remaining four columns. The amounts of assets, liabilities, capital and drawing are extended to the balance sheet columns, and the income and expenses are extended to the profit and loss account columns. This procedure must be applied to the balance of each account listed, beginning at the top and processing down the page in sequential order.

In the illustrative work sheet, the first account listed is Cash and the balance appearing in the trial balance is $1,702. Since there are no adjustments to Cash, the trial balance amount is to be extended to the appropriate column. Cash is an asset, it is listed on the balance sheet, and it has a debit balance. Accordingly, the amount of $1,702 is extended to the asset column of the balance sheet section. The balance of Debtors is extended in similar fashion. Supplies have an initial debit balance of $750 and a credit adjustment (decrease) of $520. The amount to be extended is, therefore, the remaining debit balance of $230. The same procedure is continued until all account balances, with or without adjustment as the case may be, have been all account balance, with or without adjustment as the case may be, have been extended to the appropriate commune. The balance of the capital and drawing accounts are extended to the balance sheet section. Note that for accounts listed below the trial balance total, the account balance is the amount of the adjustment. For example, Supplies Expense has no initial balance and a debit adjustment of $520 which is the amount extended to the debit column of the profit and loss account section.

After all of the balances have been extended, each of the four columns is totaled. The amount of the net profit or the net loss for the period is then determined by ascertaining the amount of the difference between the totals of the two profit and loss account columns. If the credit columns total is greater than the debit column total, the excess is the net profit. For the work sheet presented above, the computation of net profit is as follows:

Total of credit column (income)……………….. $ 2,540

Total of debit column (expenses)……………… $ 1,581

_________________

Net profit (excess of income over expenses)….. $ 959

================

Income and expenses accounts, which are in reality subdivisions of the capital account, are temporary in nature. They are used during the accounting period to facilitate the accumulation of detailed operating data in order to determine the net profit or net loss for the period after they have served their purpose, the net balance, which in the illustration is a credit or net profit of $959, will be transferred to the capital account in the ledger. This transfer is accomplished on the work sheet by entries in the profit and loss account debit column and the balance sheet liabilities and capital column, as illustrated in work sheet report. If there had been a net loss instead of a net profit, the amount would have been entered in the profit and loss account credit column and the balance sheet assets column.

After the final entry on the work sheet, each of the last four columns is totaled to verify the arithmetic accuracy of the amount of net profit or net loss transferred from the profit and loss account to the balance whet. The total of the two profit and loss account columns must be equal, as must the totals of the two balance sheet columns. If there are great many adjustments, it may be advisable to inset a section and the profit and loss account section. The arithmetic of combing the data may then be verified before extending balances to the profit and loss account and the balance sheet sections. Other variations in form may be introduced to meet special requirements or to accord with the preferences of the particular user.BlackBerry Bold 9700 Phone (AT&T)

Working Papers and Work Sheet

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Before journalizing and posting adjustments similar to those just described, it is necessary to determine and assemble the relevant data. For example, it is necessary to determine the cost of supplies on hand and the salaries accrued at the end of the period. Such details, as well as other compilations of data, preliminary drafts of the profit and loss account and balance sheet and other analyses prepared by professional accountants are characterized generally as working papers.

A particular type of working paper frequently used by accountant for the purpose of the preparation of the profit and loss account and balance sheet has come to be called a work sheet. Its use reduces the possibility of overlooking the need for an adjustment, it provides a convenient means of verifying arithmetical accuracy, and it provides for the arrangement of data in a logical form.The Twelve Sacred Traditions of Magnificent Mothers-in-Law

Complete Adjusting Process

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The entries required at the end of an accounting period to record internal transactions are called adjusting entries. In a broad sense they may be said to be corrections to the ledger. But the necessity for bringing the ledger up-to-date is a planned part of the “accounting entries” is therefore more appropriate than “correcting entries.”

The illustrations of adjusting entries that follow are based on the ledger of XYZ, Company. T accounts are used for illustrative purposes and the adjusting entries, which are presented directly in the accounts, appear in bold face type to differentiate them from items that were posted during the month.

Supplies and Prepaid Expenses

According to XYZ, Company‘s trial balance as we presented above in the trial balance section, the balance in the supplies account on 30^th June is $750. Some of these supplies (paper, ink, etc.) have been sued during the month and some are still in stock at the end of the month. If the amount of either is known, the other can be readily determined. It is more economical to determine the cost of the supplies on hand at the end of the month and to assume that the remainder has been used than it is to keep a record of those used from day to day. Assuming that the inventory of supplies on 30^th June is determined to be $230, the amount to be transferred from the asset account to the expense account is computed as follows:

Supplies available (balance on account)…………. $750

Supplies on hand (inventory)……………………... $230

Supplies used (amount of adjustment)…………… $520

Increases in expense accounts are recorded as debits and decrease in asset accounts are recorded as credit. Hence the adjusting entry required is a debit to Supplies Expense of $520 and a credit to Supplies of $520. After the adjustment, the asset account has a debit balance of $230 and the expense account has a debit balance of $520.

SUPPLIES SUPPLIES EXPENSE

______________________ ____________________

Jun. 2 400 Jun. 30 520 Jun. 30 520

20 350

Prepaid Rent is another mixed account that needs to be adjusted at the end of the accounting period. The debit balance in this account represents in part an expense of the current period and in part a prepayment of expense of future periods. The portion that is expense should be transferred to the expense account, Rent Expense.

The debit of $600 in the prepaid rent account illustrated below represents payment of rent of three months, June, July and August. At the end of June, the rent expense account should be increased (debited) and the prepaid rent account should be decreased (credited) for $200, the rental for none month. The two accounts appear as follows after the adjusting entry has been recorded:

PREPAID RENT RENT EXPENSES

_____________________________ ___________________________

Jun. 2 600 Jun. 30 200 Jun. 30 200

The prepaid rent account now has debit balance of $400, which is an asset; the rent expense account has a debit balance of $200, which is an expense.

If adjustments for these prepayments were not made, assets and capital would be both overstated on the balance sheet for 30^th June and net profit would be overstated on the profit and loss account for the month of June.

Fixed Assets

As was explained earlier, all fixed assets except land depreciate. The adjusting entry to record depreciation is similar to those illustrated in the preceding section in that there is a transfer from an asset account to an expense account. The amount to be transferred to expenses, however, must be based on an estimate rather than on verifiable fact, as in the case of expiration of rent and other prepaid expenses. Because of this and the desire to present both the original cost and the accumulated depreciation on the balance sheet, the reduction of the asset is credited to an account titled, Accumulated Depreciation.

The adjusting entry to record depreciation for June is illustrated in the T accounts below. The estimated amount of depreciation for the month is $50

OFFICE EQUIPMENT ACCUMULATED DEPRECIATION

________________________________ ________________________________

Jun. 2 4,200 Jun. 30 50

3 1,800

DEPRECIATION EXPENSE

________________________________

Jun. 30 50

The accumulated depreciation account is called a contra asset account. The increase of $50 in the account represents a subtraction from the cost recorded in the corresponding asset account. The asset account and the related contra account are component parts of the asset, the difference between the two balances being customarily referred to as the written down value or book value of the asset.

The balance in both the asset and contra asset account, together with the written down value may be presented on the balance sheet in the following manner.

Fixed assets:

Office equipment----------------------$5,000

Less accumulated depreciation----------50 $5,950

Accrued Expenses (Liabilities)

As has been explained, it is customary to pay for some type of services and commodities, such as insurance and supplies, before they are used. It is also not unusual for services or commodities to be used before payment has been made for them. An example f this type of situation, which is known as an accrual, is services performed by employees but not paid during the period. The salary expense accrues day by day but payment is made usually in the beginning of the following month.

If salaries or wages are paid in the month following that to which they related, there is an expense and a liability that must be recorded in the accounts by an adjusting entry.

The salary of part time employees of XYZ Company for the month of June amounted to $708, which was paid to them on 1^st July. This amount is an expense of June and it should, therefore, be debited to salary expense account for that month. It is also a liability as on 30^th June and it should therefore be credited to accrued salaries account. The two accounts appear as follows after the adjusting entry has been recorded:

ACCRUED SALARIES SALARY EXPENSE

_______________________________ _____________________________

Jun. 30 708 Jun. 30 708

The debit balance of $708 in salary expense account is the actual expense for the month, and the credit balance of the same amount in accrued salaries account is the liability for salaries owed to employees as on 30^th June. If the accrual is overlooked when preparing the profit and loss account and balance sheet as at the end of June, the net profit reported on the profit and loss account would be overstated; and on the balance sheet, liabilities would be understated and capital overstated.Xbox 360 12 Month Live Gold Card

What is Mixed Account and Business Operation

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An account with a balance that is partly a balance sheet amount and partly a profit and loss account amount is called mixed account. Again using supplies as an example, the balance reported on the trial balance is composed of two elements, the supplies on hand at the end of the period, which is an unexpired cost or asset, and the supplies used during the period, which is an expired cost or expense, before the profit and loss account and balance sheet are prepared, it is necessary to determine the amount allocable to the asset and the amount allocable to the expense.

The amount of the asset can be determined by counting the quantity of each of the various commodities, multiplying each quantity by the unit cost of that particular commodity and totaling the rupee amounts thus obtained. The resulting figure represents the amount of the supplies inventory (asset). The cost of the supplies consumed (expense) is then determined by deducting the amount of the inventory from the balance of the supplies account on the basis of this information, the cost of the supplies used can be transferred from the asset account to the supplies expense account.

An alternative to initially recording the cost of supplies and other prepaid expenses as assets is to record them as expense. When this procedure is adopted, supplies expenses and other expense accounts would be mixed accounts at the end of the period, and it would be necessary to transfer the unexpired cost relating to future accounting periods from the expense accounts to appropriate asset accounts. In the meantime all expenses that include prepayments of expense for future periods will be initially recorded as assets. It is important to note that, before preparing the profit and loss account and balance sheet, it is always necessary to determine the portion of mixed account allocable to asset and the portion allocable to expenses, regardless of the recording procedure employed.

Prepayment of expenses applicable solely to a particular accounting period are sometime made at the beginning of the period to which they apply. When this is the case, the expenditure is ordinarily recorded as an expense rather than as an asset. The expense account debited will be a mixed account during the accounting period, but it will be wholly expense at the end of the period. For example, if rent for March is paid on 1st March, it is almost entirely as asset at the time of payment. The asset expires gradually from day to day, and at the end of the month the entire amount has become an expense. Therefore, if the expenditure is initially recorded as a debit to rent expense, no additional attention need be given to the matter at the close of the period.

Trial Balance and Final Accounts

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The summary of the ledger at the end of an accounting period, as set forth in the trial balance, is a convenient starting point in the preparation of the profit and loss and balance sheet. Assuming no errors in journalizing or posting, many of the amounts listed are acceptable for presentation on the profit and loss account and balance sheet. For example, the balance of the cash account probably represents the amount of that asset owned by the enterprise on the last day of the accounting period. Similarly, the balance in creditors account is likely to represent the total amount of that type of liability owned by the enterprise on the last day of the accounting period.

Certain accounts listed on the trial balance are not yet ready for inclusion in the profit and loss account and balance sheet. The amounts listed on the trial balance for supplies and prepaid assets are ordinarily overstated. The reason for the overstatement is that the day to day usage or expiration of such assets has, for reasons of practicability, not yet been recorded. For example, the balance in the supplies account represents the cost of the supplies on hand at the beginning of the period plus the cost of those purchased during the period. Some of the supplies would inevitably have been consumed during the period; hence the balance listed on the trial balance is overstated. In the same manner, the balance in Prepaid Insurance represents the beginning balance plus the cost of policies acquired during the period, and no entries were made for the premiums as they expired, the benefit of which was received during the period. The effect of not recording the reduction in prepaid assets is two fold: (1) asset accounts are overstated and (2) expense accounts are understated.’

Other data needed for the profit and loss account and balance sheet may be entirely omitted from the ledger and the trial balance because of income or expense applicable to the period that has not been recorded. For example, salary for the last month of the accounting period, if paid in the following month, would not ordinarily be recorded in the accounts because salaries are customarily recorded only when they are paid. Such salaries are an expense of the period, however, because the services were rendered and benefit was received during the period; they also represent a liability on the last day of the period because they are owed to the employees.Kingston 4 GB Class 4 SDHC Flash Memory Card SD4/4GB

What is Trial Balance

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Form time to time the equality of debits and credits in the ledger should be verified. In any event the verification should be performed at the end of each accounting period. Such a verification, which is called a trial balance, may be in the form of adding machine tape or in the form illustrated below. The summary listing of both the balances and titles of the accounts is also useful in preparing the profit and loss account and balance sheet.

XYZ Company

Trial Balance

30^th June, 2009

Cash 1702

Debtors 585

Supplies 750

Prepared Rent 600

Office Equipment 6000

Creditors 1400

XYZ, Capital 6300

XYZ, Drawing 500

Sales 2540

Miscellaneous Expenses 103

10,240.00 10,240.00

As the first step in preparing the trial balance all accounts having two or more debits or credit are pencil footed. Four accounts having both debits and credit, the memorandum balance is also indicated. The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the debits and credits are equal. This proof is of value, however, because errors frequently affect the equality of debits and credits. If the two totals of a trial balance are not equal, it is probably due to one or more of the following type of errors:

1. Error in preparing the trial balance, such as:

a. One of the columns of the trial balance was incorrectly added.

b. The amount of an account balance was incorrectly recorded on the trail balance.

c. A debit balance was recorded on the trial balance as a credit, or vice versa, or a balance was omitted entirely.

2. Error in determining the account balance, such as:

a. A balance was incorrectly computed.

b. A balance was entered on the wrong side of an account.

c. One side of an account was incorrectly totaled.

3. Errors in recording a transaction in the ledger, such as:

a. An erroneous amount was posted to the account.

b. A debit entry was posted as a credit or vice versa.

c. A debit or a credit posting was omitted.

Among the types of errors that will not cause an inequality in the trial balance totals are the following:

1. Failure to record a transaction or to post a transaction.

2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.

3. Recording the same transaction more that one.

4. Posting a part of a transaction to the wrong account.

It is readily apparent that care should be exercised both in recording transactions in the journal and in posting to the accounts. The desirability of accuracy in determining account balances and reporting them on the trial balance is equally obvious.

What is Chart of Accounts

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The number of accounts maintained by a particular business is affected by the nature of its operation, its volume of business and the extent to which details are needed for taxing authorities, managerial decisions, credit purposes, etc. For example, one particular enterprise may have separate accounts for Management Salaries, Office Salaries, and Sales Salaries, while another may find it satisfactory to record all types of salaries in a single salary expense account.
In sofar as possible, the order of the accounts in the ledger should agree with the order of the items in the balance sheet and the profit and loss account. The accounts are numbered to permit indexing and also for use as posting references in the journal.

ACCOUNTS RELATING TO                    ACCOUNTS RELATING TO
     BALANCE SHEET     PROFIT AND LOSS ACCOUNT

1.         Assets                                                              4.         Income

11.       Cash                                                                41.       Sales
12.       Debtors
14.       Supplies                                                                       5.         Expenses
15.       Prepaid Rent
18.       Printing Equipment                                            51.       Wages
19.       Accumulated Depreciation                                52.       Supplies Expense
                                                     53.       Rent Expense
     54.       Depreciation Expense
            2.         Liabilities   59.       Miscellaneous Expense

21.       Creditors
22.       Accrued Wages

3.                  Capital

31.       XYZ, Capital
32.       XYZ, Drawing
33.       Profit and Loss Summary

Chart of accounts for XYZ Printing Press

Although accounts in the ledger may be numbered consecutively as in the pages of a book, a flexible system of indexing is preferable. In the chart of accounts illustrated above each account number has two digits. The first digit indicates the major division of the ledger in which the account is placed. Accounts beginning with 1 represent assets; 2, liabilities; 3, capital; 4, income; and 5, expenses. The second digit indicates the position of the account within its division. A numbering system of this type has the advantage of permitting the later insertion of new accounts in their proper sequence without disturbing the other account number. For a large enterprise with a number of department or braches, it is not unusual for each account number to have four or more digits.

Flow of Accounting Information

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The sources of transaction data and their subsequent flow into the ledger are considered before the presentation of a more detailed description of the recording processes. In practice, an initial record of each transaction, or a group of similar transactions, is evidenced by a business document such as a sales invoice, cash memo, cheque counterfoil, cash register tape. On the basis of the evidence provided by the business document, the transactions are entered in chronological order in a journal. The amounts of the debits and the credits in the journal are then transferred or posted to the accounts in the ledger. The sequences of event leading to postings to the ledger may be diagrammed as follows:

Entry Entry

Business Business recorded in posted to

TRANSACTION DOCUMENT JOURNAL LEDGER

occurs prepared

Normal Balances of Accounts

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The sum of the increase recorded in an account is customarily equal to or greater than the sum of the decreases recorded in the account; consequently; the normal balances of all accounts are positive rather than negative. For example, the total debit (increases) is an asset account will ordinarily be greater than the total credits (decreases); thus asset accounts normally have debit balances. It is entirely possible, of course, for the debits and the credits in an account to be equal in which case the account is said to be in balance.

The rules of debit and credit, and the normal balances of the various types of accounts, are summarized below. Note that drawing and expense accounts are considered in the positive sense. Increases in both types of accounts, which represent decreases in capital, are recorded as debits.

Type of Accounts Increase Decrease Normal Balance

Asset Debit Credit Debit

Liability Credit Debit Credit

Capital Credit Debit Credit

Drawing Debit Credit Debit

Income Credit Debit Credit

Expense Debit Credit Debit

When an account that normally has debit balance actually has credit balance, or vice versa, it is an indication of an accounting error or of an unusual transaction. For example, a credit balance in the office equipment account could result only from an accounting error. On the other hand, a debit balance in a creditor’s account could result from an overpayment.

Accounts relating to Income Statement

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The theory of debit and credit in its application to income and expense accounts is based on the relationship of these accounts to capital. The net profit or the net loss for a period, as reported on the income statement, is the net increase or the net decrease in capital resulting from operations.

Income increases capital; and just as increases in capital are recorded as credits, increases in income during an accounting period are recorded as credits.

Expenses have the effect of decreasing capital; and just as decreases in capital are recorded as debits, increases in expenses accounts are recorded as debits. Although debits to expenses accounts signify decreases in capital, they may also be referred to as increases in expense. The usual practice is to consider debits to expenses accounts in the positive sense (increases in expenses) rather than in the negative sense (decreases in capital). The rules of debit and credit as applied to income and expense accounts are shown in the diagram below.

CAPITAL ACCOUNTS

DEBIT CREDIT

Decreases in capital Increases in capital

Expense Accounts Income Accounts

Debit Credit Debit Credit

for for for for

increases decreases decreases increases

At the end of the accounting period, the balances of the income and expenses accounts are reported in the income statement. The accounts balances are then transferred to a summary account, after which the income and expenses accounts are said to be closed. The summary account, which represents the net income or the net loss for the period, is then closed by transferring the balance to the capital account. Because of this periodic closing of the income, expenses and summary accounts they are sometimes called nominal accounts or temporary accounts. The balance of each asset and each liability account and the balance of the capital account are carried forward to succeeding accounting periods. They are more permanent in nature and are sometimes referred to as real accounts.

What is the Drawing Account

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The owner of a sole proprietorship may form time to time withdraw cash from the business for his personal use. It is customary for the owner to do so if he devotes full time to the business or if the business is his principal source of income. Although such withdrawals reduce capital, they do not represent operating expenses. The usual practice is to record withdrawals in an account bearing the owner’s name followed by Drawing or Personal.

Debits to the drawing account may be considered wither as decreases in capital (negative sense) or as increases in drawings (positive sense). At the end of the accounting period, the balance of the drawing account is reported on the balance sheet as a deduction from capital. Ordinarily the periodic withdrawals of the owner are made in anticipation that the enterprise is operating profitability and that the total amount withdrawn during the period will not exceed the net profit.The Dark Tide

Accounts relating to Balance Sheet

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Here is explained that the left side of asset accounts is used for recording increases and the right side is used for recording decreases. It is also explained that the right side of liability and capital accounts is used to record increases; it naturally follows that the left side of such accounts is used to record decreases. The left side of all accounts, whether asset, liability or capital, is called debit and the right side is called credit. Consequently, a debit may signify either and increase or a decrease, depending on the nature of the account, and a credit may likewise signify either an increase or decrease, depending on the nature of the account. The rules of debit and credit may therefore be stated as follows:

DEBIT may signify: CREDIT may signify:

Increase in asset accounts Decrease in asset accounts

Decrease in liability accounts Increase in liability accounts

Decrease in capital accounts Increase in capital accounts

The rules of debit and credit may also be explained in relationship to the accounting equation and the balance sheet as in the diagram below.

LIABILITY ASSETS

Liability Accounts Asset Accounts

______________________ _____________________

Debit Credit Debit Credit

for for for for

decreases increases increases decreases

Capital Accounts

________________________

Debit Credit

for for

decreases increases

Every business transaction affects a minimum of two accounts. Regardless of the complexity of a transaction or the number of accounts affected, of debit and credit for each transaction can be demonstrated by the accounting equation L+C=A. The modern system of accounting in use is called as “double entry book-keeping” because each business transaction involves an equal amount of debit and credit.

The double entry book-keeping system owes its origin to an Italian, named Luca Pacioli, who wrote the first book on double entry book-keeping which was printed in Italy in the year 1494.

What is Income Statement

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The income statement, an essential part of financial statement, is prepared for a period of time, usually a month or a year as chosen by the business. The income statement is known as the profit and loss account, statement of operations and statement of income. The function of this accounting document is to show the net profit or net loss resulting from the transactions of a business during a period. The income statement is made to provide the picture of the financial performance of the business over time.

Classification of Accounts

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Before proceeding with the debit-credit analysis of additional types of transactions, considerations will be given to the customary categories or classes of accounts that compare a ledger. The exact nature and composition of the most common accounts will also be explained.

Assets

Any physical thing (tangible) or right (intangible) owned that has a money value are an asset. Assets are frequently presented on the balance sheet as two distinct groups: (1) current assets and (2) fixed assets. Theses two categories and the most common individual accounts in each are discussed in the paragraphs that follow.

Current Assets

Cash and other assets that may reasonable be expected to be realized in cash or sold or consumed usually within a year or less through the normal operations of the business are called current assets. In addition to cash, the assets in this group usually owned by a service business are bills receivable, debtors, supplies and prepaid expenses.

Cash is any medium of exchange that a bank will accept at face value; it includes bank deposit, currency, cheques, bank drafts and postal orders. Bills receivable are claims against debtors evidenced by a written promise to pay a bearer. Debtors are claims, less formal than bills that arise from sales of services or merchandise on credit. Prepaid expenses are advance payments of expenses such as subscriptions, insurance premiums, vehicle tax, etc.

Fixed Assets

Tangible assets used in the business that are of a relatively fixed or permanent nature are called fixed assets or plant assets. Such assets, with the exception of land wear out or depreciate with the passage of time. The amount of depreciation for an accounting period cannot be determined with the same degree of certainty that applies to the expiration of insurance or of other prepaid expenses; consequently the cost of the fixed assets is recorded in one account and the accumulated depreciation is recorded in another account. Typical titles of fixed assets accounts are Plant and Machinery, Equipment, Building and Land. Equipment may be further classified by functions, with separate accounts entitled Delivery Equipment, Store Equipment, and Office Equipment.

Liabilities

Liabilities are amounts owed to outsiders (creditors). They are divided into two principal classes: (1) Current Liabilities (2) Long-term Liabilities.

Current Liabilities

Liabilities that will be due within a short time usually one year or less) and that are to be paid out of current assets are called current liabilities. The most common liabilities in this group are creditors and bills payable, which are exactly like their debtors and bills receivable counterparts except that the debtors-creditor relationship is reversed. Other current liability accounts commonly found in the ledger are Accrued Salaries, Accrued Interest and Accrued Taxes.

Long-term Liabilities

Liabilities that will not be due for a comparatively long time (usually more than one year) are called long-term liabilities or fixed liabilities. As they come within the one-year range and are to be paid, such liabilities become current. If the obligation is to be renewed rather than paid at maturity, however, it would continue to be classed as long-term. When payment of a long-term debt is to be spread over a number of years, the installments due within one year from a balance sheet date is classed as a current liability.

The most common liability in this group is long-term loans. These loans may have been obtained against a mortgage of property or covered by debentures.

Capital

Capital is the term applied to the owner’s equity in the business. It is a residual claim against the assets of the business after the total liabilities are deducted. Other commonly used terms for capital are owner’s equity, proprietorship and net worth.

Income

Income is the gross increase in capital attributable to business activities. It results from the sale of merchandise, the performance of services for a customer or a client, the rental of property, the lending of money, and other business and professional activities entered into for the purpose of earning income. More specific terms employed to identify the source of income include sales, fees, commissions, fares earned and interest income. If an enterprise has several different types of income, a separate account should be maintained for each.

Expenses

Costs that have been consumed in the process of producing income are expenses or expired costs. The number of expense categories and individual expense accounts maintained in the ledger varies with the nature and the size of an enterprise. A large business with authority and responsibility spread among many employees may use an elaborate classification system and hundreds of accounts as an aid in controlling expenses. For a small service business of the type assumed here for illustrative purposes, a modest number of expense accounts are satisfactory.

What is Balance Sheet

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The balance sheet presents the financial position of a business on a certain fixed date, usually at the close of the last day of a month or a year. It lists the liabilities and capital on the one side and the assets on the other side. The totals of the tow sides must always be equal as has been demonstrated by the accounting equation.

What is accounting transaction

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A business transaction is the occurrence of an event of a condition that must e recorded. For example, the payment of monthly telephone bill of $50, the purchase of $400 of merchandise on credit. And the acquisition of land and store building for $5000 for which payment is to be made in installments are illustrative of the variety of business transactions. The first two transactions are relatively simple: a payment of money in exchange for a service, and a promise to pay within a short time in exchange for commodities. The purchase of a building and the land on which it is situated allocated between the land and the building, and the agreement usually provides for spreading the payment of a substantial part of the price over a period of years and for the payment of interests on the unpaid balance. There may be other provisions designed to safeguard the seller until the full price has been paid.

It can be readily seen that a particular business transaction may lead to an event or a condition that constitutes another transaction. For example, the purchase of commodity on credit described above will be followed by payment to the creditor, which is another transaction; and each time a portion of the merchandise is sold, another transaction occurs. Each of these events needs to be recorded. Each payment to the seller of the land and the building is a transaction, as is the payment of interest. The fact that the life of the building is limited must also be given recognition in the records.

The wearing-out of the building is not an exchange of goods or services between the business and an outsider, but it is nevertheless a significant event that must be recorded. Transactions of this type, as well as others not directly related to outsiders, are sometimes referred to as internal transactions.

The system of records begins with the recording of each transaction. There are many different methods of recording transactions. For example, a sale of a service for cash may be recorded by a hand written receipt, or it may be recorded by merely depressing the appropriate keys of a cash register. Regardless of the recording system used, the data thus accumulated provide the basis for the preparation of various summarizing reports. In addition, the supporting documents and other forms of evidence furnish a basis for subsequent reviews and verification by internal auditors, external auditors and others.

Role of accounting in business decision

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Knowledge of the past performance of an enterprise is of additional value beyond its historical aspects; it is useful in planning future operations. By comparing summaries of the most recent month with the preceding moth and with the comparable month of the preceding year, trends become apparent. Further study and analysis may develop the contributory cause of the trend and point the way to accelerating those that are favorable and to halting those that are undesirable. For example, and increase in the volume of services or merchandise sold is a favorable indication. If the increase is accompanied by increases in cost and expense of such magnitude that net profit in decreased, the end result is, of course, unfavorable. Questions such as the following should be answered : was the increased volume of sales attributable to excessive reductions in selling price. Did the cost of the merchandise increase without a comparable adjustment in selling price? What type of expenses increased and that were the causes of the increases? Which of the increase were unavoidable and which one can be reduced in the future without adverse effects?

A business that is contemplating expansions needs to give careful consideration to the probable effect of the added facilities on the future volume of business and expense. With the return on the additional investment justify the expansion? There may also be problems of financing. If money is to be borrowed, when can it be repaid? These are illustrations o the money problems that constantly confront owner and managers in planning future operations. Business records do not supply all of the answer, nor do they take the place of good judgment. The data obtainable form the records are essential however, as a partial basis for making decision.

There are many other needs of a more routine nature served by record. For example, it is necessary to know the amount owned to each creditor and by each customer and the date each payment is due. Records of property are necessary in determining the amount and type of insurance that should be carried and in ascertaining the amount of any insured loss that may occur. Knowing when to place orders for merchandise and supplies, granting credit to customers, anticipating the amount of cash required at any particular time-theses and many other essential items of information can be obtained in a timely and orderly fashion only if adequate records are maintained.

In addition to manage and owner, there are others who must be supplied with reports based on the business records. Banks customarily require periodic financial statements form businesses that owe them money. It is customary to submit annual reports to parties from whom long term loans have been obtained. Various departments of Government require reports on property, production, foreign exchange earnings, labor welfare, etc. for obtaining permission to issue debentures; a company is required to file detailed reports on business operations and financial position with government agencies. A stock exchange also requires periodic reports from companies whose shares are listed. The forgoing reasons for preparing accounting reports for outsiders are merely illustrative; there are many others.

Thus far attention has been focused on business enterprises. Records are also needed by those engaged in professional pursuits and even by persons who have retired from active participation in a business or profession. Government and semi-Government units must maintain records of their transactions as they are required to report to higher authorities. Records of the past performance also serve as background in the planning for the future. For similar reason, hospitals, educational institutions, labor unions, and other organizations must maintain records and report on their financial transactions.

Basic business operation

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The use of property is essential to the conduct of business. A place for the business must be provided in a building that is owned or rented; equipment adapted to the activities of the business must be owned or leased; if commodities are sold, they must be purchased or manufactured and stored prior to sale; of services are rendered, the equipment and the supplies needed to render the services must be available for use. Wherever there is business, property is found.

Through the sale of commodities or services at a profit, a business enterprise increases its property. Such increases, a part of which is ordinarily in the form of cash, may be retained in the business and use for business expansion or deduction of indebtedness, or the property increases may be withdrawn from the business by the owners. Those who organize a new business venture or invest in established business firms do so with the expectations that operations will yield a profit. There is always the risk, of course, that the business will unsuccessful, and the owners may lose all or part of their investment.

Bookkeeping and Accounting

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There is some confusion over the distinction between “bookkeeping” and”accounting”.

This is due in part to the fact that the two are related and that there is no universally accepted line of demarcation between bookkeeping and accounting.

In general, bookkeeping is the recording of business data in a prescribed manner. A bookkeeper may be responsible for keeping all the records of a business or only a minor segment, such as a portion of the customers’ accounts in a department store. Much of the work of the bookkeeper is clerical in nature and in large organizations it is increasingly being accomplished through the use of mechanical and electronic equipment.

Accounting is primarily concerned with the design of the system of record, the preparations of reports based on the recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeepers. The larger the firm, the greater is the number of gradations in responsibility and authoring. The work of accountants at the beginning levels may include some bookkeeping. In any event, the accountant must possess a much higher level of knowledge, conceptual understanding and analytical skill than is required of the bookkeeper.

Specialized Accounting Fields

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As in may other areas of human activity in the twentieth century, a number of specialized fields in accounting have evolved This tendency towards specialization has been caused in larges measure by growth in size of business units, mounting taxes and increasing regulation of business by lay and by governmental agencies. These influences, together with rapid technological advances and accelerated economic growth, have created the need for accountants to acquire high degree of expertness in various specialties. The term financial accounting or general accounting applies to the overall accounting for an economic unit. It is concerned with the recoding of transactions for a business for other economic unit and the periodic and special purpose reports and statements prepared from the accounting records are used to impart useful information to managers, owner, creditors, governmental agencies and the public. The accounting principles and techniques that will be developed in this book are in large part included in financial accounting.Auditing Auditing is classified under two head: external auditing and internal auditing. External auditing service is rendered by practicing accountants as required by law. These accountants examine the accounts and supporting records and express an opinion regarding the fairness and accuracy of the Balance Sheet and the Profit and loss Account. Internal auditors, as their name implies, are generally employed by large companies from amount their own staff. One of the most important duties of internal auditors is to determine the extent to which the various operating divisions observer the policies and procedures prescribed by management.

Cost Accounting

Cost accounting emphasizes the determination and the control of costs. It is concerned primarily with the cost of manufacturing processes and of manufactured products, but increasing attention is being given to selling and distribution cost. In addition, one of the principal functions of the cost accountant is to assemble and interpret cost data, both actual and prospective, for the use of management in controlling current operations an din planning for the future.

Management Accounting

Management accounting employs both historical and estimated daqta in assisting management in day-to-day operations and in planning future operations. It deals with specific problems that confront enterprise managers at various organizational levels. The management accountant is frequently concerned with identifying alternative courses of action and then helping to select the best one. For example, he may assist the finance manager of the company in preparing planning for future financing or he may develop data for the use of the sales manager in determining the selling price to be placed on a new product. In recent years, accountants have come to realize that their training and experience uniquely qualify them to advise management on policies and administration even in matters which might seem to have little relationship to accounting.

Tax accounting

Tax accounting encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or alternative courses of action. Accountants specializing in this field must be familiar with the tax laws affecting their employer or clients and also must keep up-to-day on charges in tax laws, administrative regulations and court decisions on tax cases.

Accounting System

Accounting system is the special field concerned with the creation of procedures for the accumulation and reporting of financial data. The systems accountant must devise appropriate accounting procedures to safeguard business assets and, to the fullest possible extent, provide for information flow that will be helpful to management. It is essential that he also be knowledgeable about the uses and relative merits of available mechanical and electronic data processing equipment.

Budgetary Accounting

Budgetary accounting presents the plan of financial operations for a period and, through accounts and summaries, provides comparisons of actual operations with the predetermined plan. It is a combination of planning, coordinating, and controlling future operation.Government AccountingGovernment accounting specializes in controlling the expenditure of public funds in accordance with statutory requirements. It also seeks to provide useful accounting information regarding the business aspects of public administration. There is some overlapping among the various specialized fields, and leaders in any particular field are likely to be will versed in related areas. There is also a considerable degree of specializations within the particular specialties. For example, within the field of auditing, one may become an expert in a particular classification such as oil distribution, banking, insurance and public utilities. In tax accounting one may specialize in the problem of oil and gas producing companies; or in systems one may become an expert in electronic data processing equipment.HDMI (2 meter) 6 foot cable HQ 1080P 1.3b

Accounting relationship to other fields

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Individuals engaged in such areas of business as production, marketing, personnel, and general management need not be expert accountants, but their usefulness is enhanced and their advancements is more assured if they have a good understanding of accounting principles. Everyone engaged in business activity, form the workman to the manager and owner, comes into contact with accounting. The higher the level of authority and responsibility, the greater is the need for an understanding of accounting concepts and terminology.

Many other person with specialized training in non-business areas who are employed by business organizations also make use of accounting data and need to understand accounting principles. For example, an engineer responsibility for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor. Lawyers use accounting data in cases and in lawsuits involving property ownership and damages from breach of contract. Government agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs. Finally, every person engages in business transactions and must necessarily be concerned with the financial aspects of his own life, and perhaps of others. Accounting plays an important role in modern society and, broadly speaking, it can be said that all citizens, are affected by accounting. The closer the contact with financial activity, of course, the greater the need for an understanding of an accounting concepts and terminology.Apple iPod touch 32 GB (3rd Generation) NEWEST MODEL

History of Accounting

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The accounting system, one of the integral disciplines of accountancy is as old as the civilization itself. The fundamental concepts of classifying, analyzing and interpretation of financial transactions evolved over a period of 7000 years, when trade started in the form of barter system. As the human civilization evolved and started living in a community, they realized, it was not possible for each and every household to produce the daily requirements, all by themselves. They exchanged goods in return of goods and as the scope of exchange widened, it became increasingly necessary to keep a track of the system, rather maintain an account of the goods sold and received.

Pacioli marks the history of accounting distinctly into two parts – an unwritten practice and a written practice of accounting.

The primitive form of accountancy discovered in the civilization of Babylon, Assyria and Sumeria started with keeping a track of the agricultural or the animal produce in the harvesting season and the surplus over a period of time. 10 tokens in 7000 BC primarily created to recognize the different types of produce and the transaction status grew to 350 in 3500 BC, which was increasingly used by urban shops when exchange of goods or redistribution included others forms, like garments, textiles, jewellery. The shapes of tokens – cones, spheres, were used to identify the varied forms of surplus. Complex tokens and clay tablets were made by the Sumerian people who managed the book keeping with the help of these tokens and introduced a systematic approach of accounting by employing the combination of literature and arithmetic skills. They documented financial transactions which preceded the cuneiform writing. It was found that the Neolithic accountants did not just follow the existing book keeping practices but were actively involved in coding and decoding the data and manually moved and removed the counters with the help of mathematical operations like addition, subtraction, multiplication and division.

The Romans brought the bookkeeping and accounting into limelight, they used it not only for business and financial transactions but for administrative purposes as well. They associated a value for each transaction, the expenditure on public, army, temples, religious offerings and distribution of grants. Accounting documents were accessible to the executive authority which equipped them for better planning and decision making. A yearly account of the day to day transaction, sale produce, earnings from production and expenditure helped them operate the cash in the required direction. Luca Pacioli, referred as the father of accounting first documented the rules of book keeping in written form which was widely used by merchants and their off springs to educate them on book keeping and keep a track of the their business spread overseas.

With the industrial revolution and renaissance, accounting got immense prominence, as it saved several firms from bankruptcy. The professional who provides the service of accounting is known as an accountant and his roles and responsibilities grew, and noticed refinement, as trade and business expanded. Auditing became an inevitable part of accountancy to keep out fraud and leakages from the accounting cycle. The accountant’s profession was recognized by Great Britain in 1854 and by the United States, New York in 1887. The major reasons of the systematic accounting were the complex tax laws and regulations and maintenance of uniform account for the government and public disposal. Over a period of time, accountancy was not limited to accounting cycle alone, but played a major role in several managerial decisions of the organization. It helped an entity recognize its areas of improvement and leverage the performance.