Anda di halaman 1dari 78

ACCOUNTING DEMISTIFIED FOR

EVERYONE

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
afterschoool@in.com
mobile : 91+9414430763

5 DECEMBER 09 AFTERSCHOOOL centre for social 1


entrepreneurship
What is accounting, accountancy
and bookkeeping?
Accountancy is science which gives principles
of accounting. Accounting means recording,
analysing and presenting information about
transactions involving money. Book keeping is
a part of accounting, where you undertake
recording of the day to day transactions.
Accounting has further many parts : financial
accounting, management accounting and cost
accounting etc.
5 DECEMBER 09 AFTERSCHOOOL centre for social 2
entrepreneurship
What is posting ?

When you record a transaction, it is called


posting. Traditionally we first record it in day
book or in journal and then post it in ledger.
Now a days all these processes dont take place
as you directly enter in computer software and
there is nothing like day book or journal or
posting – you straight make the entries.
5 DECEMBER 09 AFTERSCHOOOL centre for social 3
entrepreneurship
What is a day book and ledger?
We keep day book for recording day to day
transactions. Generally we have 4 types of
transactions : purchase, sale, other
expenditure, other income. These can be
against cash or credit.
Thus we keep purchase book and sale book as
our day books for recording credit purchase /
sale. All the cash transactions are recorded in
cash book. For other income and and other
expenditure,
5 DECEMBER 09
we make record in
AFTERSCHOOOL centre for social
journal proper
4
entrepreneurship
How to prepare journal entry?

Whenever you are trying to prepare an entry,


just try to visualise its impact on assets or
liabilities. Each transaction has two aspects.
Bot these aspects must be analysed in terms of
impact on assets or liabilities. Remember the
basic accounting equation :
Assets = liabilities + capital
5 DECEMBER 09 AFTERSCHOOOL centre for social 5
entrepreneurship
transaction????

Transaction means any dealing which has a


bearing on either assets or on liabilities or on
both.
Thus when you purchase raw material, your
inventory (assets) will go up and your cash
(assets) will reduce.

5 DECEMBER 09 AFTERSCHOOOL centre for social 6


entrepreneurship
Principles of posting.....

When assets increase, debit that transactions


and when liabilities increase, credit that
transaction. Thus any transaction that
increases assets must be debited. Remember,
your loss is treated as an asset and profit is
treated as liability (because profit belongs to
owner – who is external to the organisation)
5 DECEMBER 09 AFTERSCHOOOL centre for social 7
entrepreneurship
posting....

When you increase income, it is credited and


when you increase expenditure, it is debited.

5 DECEMBER 09 AFTERSCHOOOL centre for social 8


entrepreneurship
Types of accounts...

Nominal : income or expenditure – nothing


real – must be closed down at the end of the
year, unless it is related to next year (like
prepaid expenditure)
real : assets
personal: debtors, creditors, owner (capital)
etc.
5 DECEMBER 09 AFTERSCHOOOL centre for social 9
entrepreneurship
Fundamental rules to remember

Every transaction increasing assets should be debited.


Every transaction decreasing assets should be credited.
Every transaction increasing liabilities should be credited
Every transaction reducing liabilities should be debited.
All losses (expenses) are assets and all incomes / profits
are liabilities.
Capital is a liability (owner is different from firm).

5 DECEMBER 09 AFTERSCHOOOL centre for social 10


entrepreneurship
Fundamental rules – traditional
principles
Income – nominal account – Credit it
Expenditure – nominal account – debit it
Assets – real account – debit it when it
increases (debit what comes in, credit what
goes out)
liability :- personal account – credit it when it
increase (Debit the receiver, credit the giver).

5 DECEMBER 09 AFTERSCHOOOL centre for social 11


entrepreneurship
Q: X started his business with cash 100, loan from bank 100,
purchase goods 50, credit purchase from Y 50, Cash sales 100,
Credit sales to Z 50, Paid interest on loan 10, paid cash to Y
10, received cash from Z 10, Loan paid to bank 20, Drawings
10, Drawings of goods 10, Sales return by Z 10, Issue of shares
: 30, Purchased plant 100, Depreciation 10. closing stock 10
Show entries.

5 DECEMBER 09 AFTERSCHOOOL centre for social 12


entrepreneurship
st
Solution - 1 entry
Business start : it will affect two accounts – cash is
coming in and capital is created. Thus there are two
accounts cash and capital account. Cash account is a real
account, when cash increases, we debit it and capital
account is a personal account and when personal account
is a liability, it is credited (credit the creditor and debit the
debitor). It is basic principle that Credit the giver and if
you give something to some person, debit his account.
When assets increase, debit for that, when liability
increases, credit for that – here cash is debited and capital
is credited.
5 DECEMBER 09 AFTERSCHOOOL centre for social 13
entrepreneurship
Solution 2

Loan from bank : it increases cash and


liabiities also. Cash increase should be debited.
Loan taken creates loan account, which is a
personal account and when liability increases,
credit it (credit the giver). Thus Cash Debit and
Loan a/c credit.

5 DECEMBER 09 AFTERSCHOOOL centre for social 14


entrepreneurship
rd
Solution : 3 entry :

Cash purchase : both accounts are real account.


Cash is going out – (debit what comes in credit
what goes out), so credit cash account. With
purchase, goods are coming in the
organisation, so debit the purchase account.
With first aspect asset is decreasing (cash
going out) – so credit cash, with purchase,
assets are increasing, so purchase debit.
5 DECEMBER 09 AFTERSCHOOOL centre for social 15
entrepreneurship
th
Solutionn 4 entry

Credit purchase : There is one real account


(purchase account is a real account) and one
personal account (Y- the creditor is a personal
account), when we purchase, assets increase,
so debit purchase (debit what comes in). When
Y gives credit, credit his account (debit the
receiver and credit the giver).
5 DECEMBER 09 AFTERSCHOOOL centre for social 16
entrepreneurship
th
Solution : 5 entry
Cash sales : with this 2 accounts are affected :
cash and sales. Cash is a real account, when
sales happen, cash increase and so debit cash.
(when assets increase, debit them, debit what
comes in – real account). Sales is nominal
account, (Credit all income, debit all
expenses), so sales being income, should be
credited. Sales reduces assets (so if assets
reduce, credit it ).
5 DECEMBER 09 AFTERSCHOOOL centre for social 17
entrepreneurship
th
Solution : 6 entry

Credit sales to Z : it affects account of sales


and Z. Sales is nominal account – it is income
(credit all income) so credit sales account. Z is
a debtor (debit receiver, credit giver) so we
have to debit Z. Sales reduced assets (so credit
it ) and debtors increased our assets (so debit
it).
5 DECEMBER 09 AFTERSCHOOOL centre for social 18
entrepreneurship
th
Solution : 7 entry

Paid interest on loan : here we have two accounts : interest


account – it is expenditure so it is nominal account (debit
all expenses) – so we have debit it. Cash is going out – so
it is real account (credit what goes out) so we have to
credit it. Cash is reducing, so it is reducing our assets – so
it should be credited (when assets reduce, credit them)
interest payment is increasing our losses (expenditure) –
all losses are assets, when assets increase, debit them - so
interest account should be debited.

5 DECEMBER 09 AFTERSCHOOOL centre for social 19


entrepreneurship
th
Solution - 8 entry

Paid to Y : here we have two accounts – cash


(which goes out – real account ) and Y
(receiver – personal account)
Credit what goes out and Debit the receiver
so Credit cash account and debit Y's accoumt

5 DECEMBER 09 AFTERSCHOOOL centre for social 20


entrepreneurship
th
Solution 9 entry

Cash received from Z : cash comes -it will


increase assets – so debit cash account – Debit
what comes in
Personal account of Z (debtor) will also reduce,
thus assets will reduce so credit it. Credit the
giver.

5 DECEMBER 09 AFTERSCHOOOL centre for social 21


entrepreneurship
th
Solution : 10 entry

Loan paid : it affects loan account and cash account. Loan


account is personal account – Debit the receiver – so we
have to debit it
Cash goes out – it is real account – Credit what goes out,
so credit it
Loan is liability, so increase in liability is always credited
and reduction in liabiity is debited, so debit this account
and cash is asset, decrease in asset is always credited.

5 DECEMBER 09 AFTERSCHOOOL centre for social 22


entrepreneurship
th
Solution - 11 entry

Drawings : here cash is withdrawn – so there


are two accounts – cash account and capital
account – when cash reduces – credit it (credit
what goes out) – when assets decrease, we
have to credit them.
Capital account (drawings account) is a
liability- drawing reduces liability – so
decrease in liability should be debited.
5 DECEMBER 09 AFTERSCHOOOL centre for social 23
entrepreneurship
th
Solution - 12 entry :

Drawings of goods : there are two accounts –


drawings – which is personal account,
purchase – as goods are recorded in purchase
account – which is a real account. When goods
go out, assets are reduced, so credit purchase
account. When Drawings increase, they reduce
capital, so we have to debit (when liability
decrease, we have to debit it).
5 DECEMBER 09 AFTERSCHOOOL centre for social 24
entrepreneurship
th
Solution - 13 entry
Sales return by Z : sales return affects two
accounts – sales return (which is reverse of
sales), and Z's personal account (which is
personal account).
Assets will increase – as sales return increase
inventory- so sales return should be debited.
Z's personal account will reduce (Z is a
debtor), so it will reduce our assets - so it
should be credited.
5 DECEMBER 09 AFTERSCHOOOL centre for social 25
entrepreneurship
th
Solution : 14 entry

Issue of share capital : here we have two


accounts – cash and capital. Cash will increase
assets - so debit cash.
Equity capital is a liability – so increase in
liability should be credited.

5 DECEMBER 09 AFTERSCHOOOL centre for social 26


entrepreneurship
th
Solution : 15 entry

Purchase of plant : it will increase assets –


increase in assets should be debited. It will
reduce cash – which is assets - so decrease in
assets should be credited : entry :
Plant a/ c Debit
cash a.c credit

5 DECEMBER 09 AFTERSCHOOOL centre for social 27


entrepreneurship
th
Solution : 16 entry

Depreciation means reduction in value of plant. It is just


an entry - there is no physical change in assets with this
entry. When the value of plants reduce – it reduces assets
– so it should be credited. Depreciation is an expense- all
expenses are debited (all expenses / losses are assets) so
we have to debit.
Entry : depreciation a/c debit
plant account credit

5 DECEMBER 09 AFTERSCHOOOL centre for social 28


entrepreneurship
CASH BOOK

ITEMS INCREASING CASH


Capital : 100, loan from bank 100, cash sales :100 , , received
cash from Z 10, Issue of shares 10 TOTAL : 320
ITEMS DECREASING CASH : purchase goods 50 ,
Purchased plant 100,paid cash to Y 10 Paid interest on loan
10, Loan paid to bank 20, Drawings 10 TOTAL : 200
THUS CASH BALANCE = 120

5 DECEMBER 09 AFTERSCHOOOL centre for social 29


entrepreneurship
TRIAL BALANCE

Debit Sides : Purchase : (50+50) = 100 Depreciation : 10 ,


Interest 10, Cash balance 120, Drawings : 20, Sales return 10,
Plant ( 100-10) =90 Z (debtor) : 30 TOTAL : 400
Credit sides : sales : (100+50) = 150, Loan (100-20) 80,
Capital (100 + 30) = 130 Y : 40 TOTAL 400

5 DECEMBER 09 AFTERSCHOOOL centre for social 30


entrepreneurship
PROFIT AND LOSS ACCOUNT
CREDIT SIDE (all incomes + closing stock) :
SALES : CREDIT (100-10) = 90, CASH : 50
stock : 10 TOTAL : 150
DEBIT SIDE (all expenses + opening stock) :
purchase credit 50, cash 50, depreciation 10,
interest : 10 TOTAL : 130
profit : 150 – 130 = 20

5 DECEMBER 09 AFTERSCHOOOL centre for social 31


entrepreneurship
BALANCE SHEET

LIABILITIES : Capital (100-10-10)=80, +


Equity issued 30, + loan (100-20) = 80, +
Y(creditor) (50-10) = 40 profit (it is a liability,
as it belongs to owner) : 20 , TOTAL : 250
ASSETS : Plant : (100-10) =90, Z (debtor)
(50-10-10) = 30, Cash = 120 Stock =10
TOTAL =250

5 DECEMBER 09 AFTERSCHOOOL centre for social 32


entrepreneurship
Rectify the previous question

The previous question + solution contains


some mistakes – try to identify them

5 DECEMBER 09 AFTERSCHOOOL centre for social 33


entrepreneurship
Which of these accounts will
show the same balance in the next
financial year ?

Patents, Goodwill, Salary, Salary outstanding,


repairs, Outstanding rent, Prepaid expenditure,
Commission received, Purchase, Sales, capital

5 DECEMBER 09 AFTERSCHOOOL centre for social 34


entrepreneurship
solution...

Patents – real account so it will be shown, Goodwill -


yes, Salary - no closed at the end of the year as it is
nominal account, Salary outstanding - yes, repairs – no
– it is nominal account so closed at the end of year,
Outstanding rent – yes , Prepaid expenditure - yes,
Commission received – no -it is nominal account,
Purchase – it is real account, but it will be shown as
opening stock, Sales – no , capital – yes, but it may
change due to profit / loss

5 DECEMBER 09 AFTERSCHOOOL centre for social 35


entrepreneurship
What will be journal entry for the
following :
Purchase furniture by cash 100
(furniture debit, cash credit 100)
paid outstanding loan 100
loan ac debit and cash / bank credit 100
paid repairs charges Rs. 200
Repairs debit cash credit 200

5 DECEMBER 09 AFTERSCHOOOL centre for social 36


entrepreneurship
Using accounting equation
approach, try to find impact of
following :

Purchased building on credit :


assets increased and liabilities also increased.
When building is purchased, assets increase so
debit building account and liabilities is also
increased so credit the party (creditor)

5 DECEMBER 09 AFTERSCHOOOL centre for social 37


entrepreneurship
Can you identify balances of
these accounts, if they are to be
put in a trial balance, where will
they come ?
Preliminary Expenditure, Bank overdraft, loans from
relatives, patents, goodwill, Salary outstanding (to be
paid), Income acrued but not received, outstanding rent (to
be paid), Closing stock, Carriage ourward, Purchase,
Sales return

5 DECEMBER 09 AFTERSCHOOOL centre for social 38


entrepreneurship
Solution

Preliminary Expenditure- Debit, Bank overdraft - credit,


loans from relatives - credit, patents -debit, goodwill-
debit, Salary outstanding (to be paid) – will not come in
TB, Income acrued but not received- will not come in TB,
outstanding rent (to be paid)-will not come in TB, Closing
stock-will not come in TB, Carriage ourward-Debit,
Purchase-debit, Sales return-debit

5 DECEMBER 09 AFTERSCHOOOL centre for social 39


entrepreneurship
Discussion

Outstanding expenditure or acrued income –


these are adjustments that we do at the end of
the year and after preparing trial balance. At
that time our entry is to debit P&L account and
credit outstanding expenditure and Credit P&L
account and debit acrued income. Thus they
wil not appear in Trial balance (TB). Similarly
closing stock will not appear in Trial balance.
5 DECEMBER 09 AFTERSCHOOOL centre for social 40
entrepreneurship
Prepare accounts from the followng
summary of totals of various accounts
in all the ledgers that the company
has ?

Capital 10, building 4, wages 2, sales 100, interest paid 2,


purchase 30, salary 10, repairs 1, postage 1, commission
received 1, interest received 1, bad debt 1, debtors 10,
creditors 3, cash 10, investments 4, depreciation 1, plant
20, provision for bad debt 1, furniture 10, loan 20.
Provision for bad debt must be 20% of debtors. Opening
stock 10, closing stock 10

5 DECEMBER 09 AFTERSCHOOOL centre for social 41


entrepreneurship
Step 1 – trial balance
Which accounts will have debit balance ?
building 4, interest paid 2, purchase 30, salary 10, repairs 1, postage
1 , wages 2, bad debt 1, debtors 10,furniture 10 cash 10, investments
4, depreciation 1, plant 20
total : 106
Which accounts will have credit balance ?
Capital 10, sales 100, , commission received 1, interest received 1,
creditors 3, provision for bad debt 1, loan 20.
total 136
trial balance dont tally, so put 30 more in debit side till you find the
reason for diference.

5 DECEMBER 09 AFTERSCHOOOL centre for social 42


entrepreneurship
What should be the next step?

guess.....

5 DECEMBER 09 AFTERSCHOOOL centre for social 43


entrepreneurship
steps....

1. prepare a trial balance


2. prepare p& l account
3. prepare balance sheet

5 DECEMBER 09 AFTERSCHOOOL centre for social 44


entrepreneurship
Trading accout (first part of P & L
account)
Trading account shows purchase, sale, manufacturing and
other direct expendtireu and gross profit.
Credit side : (sales + closing stock)
sales 100, closing stock 10 total 110
Debit : (purchase+ opening stock+direct exp.)
opening stock 10, purchase 30, wages 2, total : 42
gross profit : 68 total :110

5 DECEMBER 09 AFTERSCHOOOL centre for social 45


entrepreneurship
Profit and loss account ...
Credit side : (income other than sales)
gross profit : 68, interest received 1
commission received 1total 70
debit side : (all expenditure)
interest paid 2, salary 10, repairs 1, postage 1 , bad debt 1,
depreciation 1, provision for bad debt 1
total : 17
net profit : (70 – 17= 53) total 70

5 DECEMBER 09 AFTERSCHOOOL centre for social 46


entrepreneurship
Working notes....

In the previous example, we have created


suspense account of 30, which must be traced
out. Accouting is like mathematics, it will not
match, if trial balance totals dont match. We
have created additional provision for bad debit
of 1, because it has to be 20% of debtors (we
already had provision of 1).
5 DECEMBER 09 AFTERSCHOOOL centre for social 47
entrepreneurship
BALANCE SHEET

LIABILITIES:
Capital 10, Profit : 53, creditors 3 loan 20. Provision for
bad debt 2 total : 98
ASSETS :
building 4, debtors 10, cash 10, investments 4, plant 20,
furniture 10, closing stock 10 suspense 30 total : 98

5 DECEMBER 09 AFTERSCHOOOL centre for social 48


entrepreneurship
What will be the journal entries ?

You have to provide for 10% provision for


bad debt – Debtors are 9000. :
solution :
P & L account Debit
to provision for bad debt account

5 DECEMBER 09 AFTERSCHOOOL centre for social 49


entrepreneurship
What will be journal entry?

By mistake, you had mentioned personal


widhdrawals of Rs. 5000 as sales.
Solution :
Sales a/c debit 5000
Drawings a/c Dr. 5000
to Cash a/c 10000
5 DECEMBER 09 AFTERSCHOOOL centre for social 50
entrepreneurship
How to judge the health of a
company ???

Look at its balance sheet and try to find out the


following aspects :
1. can it meet its liabilities
2. can it meet urgent requirements and have
cash whenever required.
3. is it able to earn sufficient profit and is it
able to use its assets properly.
5 DECEMBER 09 AFTERSCHOOOL centre for social 51
entrepreneurship
Find the health of the following
company:
LIABILITIES : equity 500, preference 150, reserves 70,
Profit :;; 125, debenture 150, bank loan 100, overdraft 45,
creditors 55, tax payable 100, dividend payable 60,
security premium 30 total : 1385
ASSETS : land 530, plant 110, furniture 20, investment
90, stock 95, debtors 175, BR 25, cash 80, prepaid exp.
15, securities 20, preliminary exp. 40, goodwill 110,
patents 75 total 1385
sales was 1300

5 DECEMBER 09 AFTERSCHOOOL centre for social 52


entrepreneurship
solution....
In the example – the total of liabilities and
assets are equal, that has to be there otherwise,
we have to create a suspense account to match
them and find the reasons for difference
(remember, the totals of assets and liabilites is
equal, and totals of debit and credit side of trial
balance is also equal). Arrange these in
liquidity order or permance order. Now look at
their financial health.
5 DECEMBER 09 AFTERSCHOOOL centre for social 53
entrepreneurship
liquidity???

Do the company has ability to meet short term liabilities


and to encash opportunities that come to the company. For
this let us judge liquidity. Compare current assets and
current liabilities.
Current assets: (175+25+80+15+20+95)=410
current liability : (45+55+100+60) =260
current assets are 1.6 times current liabilities – it must
have been at least 2 times current liabilitie.s

5 DECEMBER 09 AFTERSCHOOOL centre for social 54


entrepreneurship
Liquidity – acit test ratio
Look at those current assets which are quick
assets, - they may be used any time to encash
and pay the liabilities : (remove inventory and
prepaid exp. From current assets)
Quick assets: (175+25+80+20)=300
current liability : (45+55+100+60) =260
Quick assets are more than current liabilities – this is
good, the quick assets should always be more than curent
liabilties. Do find the quality of the quick assets- are the
debtors good enough etc.
5 DECEMBER 09 AFTERSCHOOOL centre for social 55
entrepreneurship
Find solvency of the company...

Can the company remain solvent in the long term. For finding
solvency, we have to look at the overall ability of the company
to meet its liabilities in the long term.
Total long term debt / fixed interest bearing capital :
(150+150+100) = 400
equity + reserves+profit = (500+70+125) = 695
we have treated preference shares also as debt. The company is
comfortable as Debt can be upto two times equity + reserves.

5 DECEMBER 09 AFTERSCHOOOL centre for social 56


entrepreneurship
Find profitability of the
company...
Find fixed assets turnover ratio :
total fixed assets : (110+75+530+110+90)
= 915
sales was 1300, so
fixed turnover ratio is : 1300/915 = 1.4, which is not a
very good one. But we have to compare these ratio to
other companies in the same industry. It is possible that it
is a capital intensive industry so require huge investment
in fixed assets.
5 DECEMBER 09 AFTERSCHOOOL centre for social 57
entrepreneurship
ROI / ROCE

Ultimate measure of returns is ROI and ROCE.


ROI – means return on investment – how much
returns are the shareholders getting for their
money. ROCE means return on capital
employed, how much return are you able to
generate on total investment.
Divide profit by money invested and find
overall profitability...
5 DECEMBER 09 AFTERSCHOOOL centre for social 58
entrepreneurship
ROI

Profit = 125
equity : 500 (you can take reserves also with equity, if
you wish).
so ROI = 125/500*100 = 25% which is good. If we look
at total capital employed, we can take preference shares,
and debt also to find our ROCE, then we have to take
profit before interest and taxes, but that data is not
available to us.

5 DECEMBER 09 AFTERSCHOOOL centre for social 59


entrepreneurship
Remember the basics....

DO Anticipate all losses – if there can be a loss


– make a provision for that, if there can be
some expenditure, make a provision for that
DONT anticipate your income – let the income
actually come
adopt the principles of conservatism, prudence.

5 DECEMBER 09 AFTERSCHOOOL centre for social 60


entrepreneurship
What are provisions & reserves ?

We prepare provisions for some uncertain


situation – and for a particular situation.
Reserves are general and can be used for any
purpose. We make provisions for things like
bad debts etc. Thus provisions are for those
situations which may take place in future.

5 DECEMBER 09 AFTERSCHOOOL centre for social 61


entrepreneurship
What are nominal / real / personal
accounts?
Expenditures and incomes are nominal accounts and
must be closed at the end of the year by transferring to
P&L account
assets and provisions are real accounts and will
continue for ever, so they will appear in balance sheet
every year
personal accounts include debtors, creditors, capital
account, loan account etc. And will appear in balance
sheet every year.

5 DECEMBER 09 AFTERSCHOOOL centre for social 62


entrepreneurship
What is provision for bad debt?

On the basis of your past experience, if you


know that 5% debtors dont make payments,
then you can make a provision for bad /
doubtful debt @5% of outstanding debtors.
Thus at the end of the year you have to pass a
journal entry for this purpose. Later you have
to maintain it at 5% level of debtors.
5 DECEMBER 09 AFTERSCHOOOL centre for social 63
entrepreneurship
Example : your debtors are 1 lakh
and bad debts are 5000 and make
a provision for 5% for future.
Your trial balance shows a bad
debt of 15000. what entry will
you make and for how much ?

5 DECEMBER 09 AFTERSCHOOOL centre for social 64


entrepreneurship
solution...

There are two journal entries for bad debt :


1. bad debt a/c debit and debtors a/c credit
2. p&l account debit and bad debt a/c credit
when trial balance shows bad debt of 15000, it means you
have already passed the first entry. So now pass the 2nd
entry at the time of closing the account (it is a nominal
account and has to be closed) thus the second entry will be
P& L account debit and bad debt a/c credit 15000.

5 DECEMBER 09 AFTERSCHOOOL centre for social 65


entrepreneurship
Solution ...continued...

When you find that you have 5000 more of bad


debt, just pass an entry for this :
bad debt debit and debtors credit : 5000
to make a provision for bad debt, pass another
entry :
P & L account debit and provision for bad debt
a/c credit (5% of 95000)
5 DECEMBER 09 AFTERSCHOOOL centre for social 66
entrepreneurship
Impact on balance sheet

Bad debt account is a nominal account, so it will


disappear at the end of the accounting year and
will be closed by transferring to P & L account.
Provision of bad debt will not close and will appear
in balance sheet. We have made only one entry of
this account, thus it will show credit balance and
will appear in both P & L account and balance
sheet and will continue in the next year also.

5 DECEMBER 09 AFTERSCHOOOL centre for social 67


entrepreneurship
Balances for year 2009
Capital : 25, Plant19, Depreciation 1, repairs 1,
wages 1, salares 2, income tax 1, Cash 1,
building 38, depreciation on building 1,
purchase 61, sales 125, bank overdraft 2,
acrued income 1, salaries outstanding 1, BR 5,
BP 1, Provision for bad debt 3, bad debts 1,
Discount on purchase 2, debtors 17, creditors
11, opening stock 18, closing stock 15.

5 DECEMBER 09 AFTERSCHOOOL centre for social 68


entrepreneurship
continued...
write off bad debts 2, maintain provisions of
5% on debtors, goods costing 2 sent to
customer on sale or returned basis on 1/3/9
recorded as actual sales. Rate of gross profit
was 16.67% of sales. Rent of office 1 debited
to landlord's account and were included in
debtors, manager gets 10% commission on net
profit after charging commission of work
manager and his own. Work manager gets 5%
on gross profit
5 DECEMBER 09 AFTERSCHOOOL centre for social 69
entrepreneurship
Steps

Prepare trial balance, find out adjustments to


be made, make necessary adjustment for
account finalisation and then prepare P & L
accounts, balance sheet

5 DECEMBER 09 AFTERSCHOOOL centre for social 70


entrepreneurship
Important rules.
Income will have credit balance, expenditure will
have debit balances. Assets will have debit
balances and liabilities will have credit balances,
based on these try to prepare trial balance.
Remember, all the income and expenditure
accounts are closed at the end of the year, for this
transfer their balance to trading account or P & L
account, assets and liabilities acccounts and
personal account are not closed therefore their
balances are shown in balance sheet.
5 DECEMBER 09 AFTERSCHOOOL centre for social 71
entrepreneurship
Trial balance

CREDIT SIDE : Capital : 25,bank overdraft 2, BP 1,


Provision for bad debt 3 creditors 11 Discount on
purchase 2, sales 125, salaries outstanding 1, TOTAL =
169
DEBIT SIDE : Plant 19, repairs 1, Depreciation 1,
depreciation on building 1, wages 1, salares 2, income tax
1, Cash 1, building 38, purchase 61, acrued income 1,
BR 5, , bad debts 1, debtors 19, opening stock 18,
TOTAL=169

5 DECEMBER 09 AFTERSCHOOOL centre for social 72


entrepreneurship
TRADING ACCOUNT

CREDIT SIDE :
sales : (125-2)=123, closing stock : (15 +1.67)
total :139.67
DEBIT SIDE :
Purchase (61-2)=59, wages 14, total : 73
gross profit : 66.67
5 DECEMBER 09 AFTERSCHOOOL centre for social 73
entrepreneurship
Profit and Loss account

Credit side :
gross profit 66.67, income acrued 1, Prov. For bad debt (excess) 1.25 total : 67.92
Debit side :
salaries (2+1), Depreciation 1, Depreciation on building 1, Repairs 1, rent 1, bad
debts 1, income tax 1
total : 9
outstanding commission
works manager : 3.5 Manager 5
net profit : 49.16

5 DECEMBER 09 AFTERSCHOOOL centre for social 74


entrepreneurship
Balance sheet
Liabilities :
capital 25, profit 49.16 creditors 11, bank
overdraft 2 , BP 1 outstanding salary 1,
outstanding commission 8.38 total :97.5
Assets :
building (38-1) 37, plant (18-1) 17, Debtors 15,
BR 5, Cash 1, Stock 16.67 , Acrued income 1
suspense account 5 total : 97.5
5 DECEMBER 09 AFTERSCHOOOL centre for social 75
entrepreneurship
Debtors account

Balance 19
less – sale not taking place 2
less – landlord's rent 1 = 16
less bad debt written off = 1
debtors 15
make a provision on 15 @ 5% = .75
5 DECEMBER 09 AFTERSCHOOOL centre for social 76
entrepreneurship
Provision for bad debt

Opening balance : 3
less bad debt 1
closing balance 2
but we have to keep it only .75, so remaining
amount will be transferred back to P & L
account = 1.25
5 DECEMBER 09 AFTERSCHOOOL centre for social 77
entrepreneurship
THANKS....

GIVE YOUR SUGGESTIONS AND JOIN


AFTERSCHOOOL NETWORK / START
AFTERSCHOOOL NETWORK IN YOUR
CITY
AFTERSCHOOOL@IN.COM
PGPSE – WORLD'S MOST
COMPREHENSIVE PROGRAMME IN
SOCIAL ENTREPRENEURSHIP
5 DECEMBER 09 AFTERSCHOOOL centre for social 78
entrepreneurship

Anda mungkin juga menyukai