Recommended notes 2025, Lecture notes of Accounting

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 ACCOUNTING CONCEPTS AND ASSUMPTIONS

The preparation of Income Statement and Statement of Financial Position (Balance Sheet) of a business is

based on certain assumptions. These assumptions are called Accounting Concepts. Accounting concepts are very

helpful in applying commonly established procedures in preparing financial statements.

 Business Entity (also known as Accounting Entity) Concept The owner and the business are considered as two different persons, distinct from each other. Transactions are recorded from the point of view of the business and not the owner. As such, any amount invested by the owner in the business is considered as a liability by the business. Also, only those transactions that concern the business are recorded.

 Money Measurement Concept Only those transactions that can be expressed in money terms (financial transactions) are recorded in the books. Non-financial transactions are therefore not recorded.

 Accruals Concept and the Matching Principle According to the Accruals concept, when calculating the profit of a given period, revenues earned in that period need to be matched against expenses incurred for that same period. Adjustment are made in accounts for accrued and prepaid items so that accounts reflect revenue earned (not amount received) and expenses incurred (not amount paid for). (Revenue – Expenses = Net Profit)

 Prudence (also known as Conservatism) Concept This concept prevents the anticipation of future profits before they are realized but requires making provisions for losses as soon as they are recognized. Note: Inventory of goods is valued at the lower of cost and net realizable value. Provisions for doubtful debts are made for potential loss in amount owed by credit customers.

Therefore, according to this concept, assets and revenue are not overstated while liabilities and losses are not understated.

 Consistency Concept All similar items need to be given the same accounting treatment in the same accounting period and from one period to another. Note: Unless there is a valid reason, no changes are allowed in the accounting policy chosen. This concept especially prevents accountants from manipulating the results of a business by simply changing the accounting policies.

 Materiality Concept Some items (stapler, paper clips etc.) are not considered non-current assets though they may be used by the business for a long period of time. Rather, their costs are written off at one against profit in the period they are bought.

BANK RECONCILIATION STATEMENT

Bank Statement Date Details Dr. Withdrawals Cr. Deposit Balance Balance b/d *** Deposit *** *** Deposit *** *** 10425 *** *** Bank Giro Credit *** *** Bank Charges *** *** Direct Debit *** *** Standing Order *** *** Credit Transfer *** ***

Updated Cash Book

Date Details $ Date Details $ Balance b/d or Total so far *** Balance b/d or Total so far *** Credit Transfer *** Standing order *** Bank Giro *** Bank charges *** Correction of error *** Direct debit *** Dividends Received *** Dishonor Cheques *** Correction of Error *** Balance c/d (O/D) *** Balance c/d ***

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BANK RECONCILIATION STATEMENT

Balance as per updated Cash Book *** Add. Un-presented Cheques : 1. ***

2. ---

   ---

(Less) Bank lodgement / Un-credited Cheques: 1. ***

2. *** (***) Balance as per Bank Statement ***

OR

Balance as Per Bank Statement *** (Less) Un-presented Cheques (***)

---

(Add) Un-credited Cheques *** Balance as per Updated Cash Book ***

BOOKKEEPING, ACCOUNTING AND DOUBLE ENTRY

 Explain the difference between a trading business and a service business.

o A trading business is involved with buying and selling goods. o A service business provides services which benefits others.

 Explain the difference between book-keeping and Accounting.

Book-Keeping Accounting

Bookkeeping is the process of recording data.

OR

Bookkeeping involves preparing accounts from source documents or prime entry records.

Accounting provides information for decision making. OR Accounting involves identifying, measuring and communicating financial information.

 State some advantages of maintaining full double entry records.

o Detailed recording of all transactions o Matters are not forgotten or overlooked o Can be used to check accuracy o Can be used to prepare financial statements

CAPITAL AND REVENUE EXPENDITURE

 Capital expenditure: Expenditure on the purchase of fixed assets or improvements to existing

fixed assets. The expenditure will have a long term benefit to the business – i.e. more than

one year.

For a suitable example (motor vehicles, premises)

 Revenue expenditure: Expenditure on the day to day running of the business. The

expenditure will have a short term effect on the business – i.e. less than one year.

For a suitable example (payment of rent or wages)

 Evaluate the effects of the incorrect treatment of capital and revenue expenditure on a

business:

If a business does not treat capital and revenue expenditure correctly their final accounts

will not be accurate and will not reflect a true and fair view of the businesses profits or

assets.

For example if they were to include the cost of a new motor vehicle (capital

expenditure) as an item of expenditure in the profit and loss account (revenue expenditure),

their profits would be understated and the valuation on the balance sheet would also be

understated.

 Ravi is considering investing some capital in computerizing the business’s records.

o State some possible uses of new technology to Ravi’s business.  Payroll, stock control, HR records, preparation of final accounts etc.

o Explain some advantages and disadvantages to his business of this change.

Advantages of using ICT equipment in preparing business records:  The accuracy of the bookkeeping process will improve.  The processing of financial information will be faster.  Employee will only have to make one entry and the system will process the other entry automatically.  Ability to process high volumes  Large amounts of data can be stored.  Improved security.

Disadvantages of using ICT equipment:  The cost of the hardware and software may require a fresh injection of capital.  There is a risk that data may be lost or corrupted due to computer viruses.  Ravi’s business may not benefit from this investment.

COMPUTERIZED ACCOUNTING SYSTEM

CONTROL A/C

 Sales ledger control A/C , also known as Total Debtors or Trade

Receivables A/C

 Purchases ledger control A/C, also known as Total Creditors or Trade

Payables A/C

Sales Ledger Control A/C

Balance b/d *** Balance b/d* ***

Credit Sales *** Cash/ Bank ***

Cash Refund *** Discount allowed ***

Dishonor Cheques *** Return inward ***

Interest on Debt *** Bad Debts ***

Bad Debts (now recovered) Set off (purchases ledger) ***

Balance c/d* *** Balance c/d ***

Balance b/d *** Balance b/d* ***

Purchases Ledger Control A/C

Balance b/d* *** Balance b/d ***

Cash/Bank *** Credit purchases ***

Discount Received *** Cash Refund ***

Return Outwards *** Interest on overdue A/Cs ***

Set off (sales ledger) ***

Balance c/d *** Balance c/d* ***

Balance b/d* *** Balance b/d ***

DEPRECIATION

 Give some reasons why depreciation should be charged.

o Physical deterioration (Wear &tear), passage of time, obsolescence & depletion. o To account for cost consumed / used during the financial year. o To charge a share of the cost to the income statement for the year. o Reduce the book value of non-current assets in the balance sheet. o To spread the cost over its useful economic life. o Comply with accounting principles and concepts, e.g. prudence, matching.

 Suggest few reasons why the diminishing (reducing) balance method might be the most appropriate

method for machinery. o Machinery will lose a high proportion of its value in the early years. o Low maintenance costs in early years, higher in later years. o Changes in technology may outdate the machinery.

 Explain the term depreciation.

Depreciation is the loss in the value of a non-current asset. OR Depreciation spreads the cost of a non-current asset over its useful life.

TRIAL BALANCE, ERRORS AND SUSPENSE ACCOUNTS

 State some uses of a trial balance. o To check the arithmetical accuracy of the double entry o To identify errors in the ledger o To check the debits equal credits o To provide a basis for the preparation of financial statements

 Limitations of trial balance. o Trial balance only confirms that the total of all debit balances match the total of all credit balances. Trial balance totals may agree in spite of errors. An example would be an incorrect debit entry being offset by an equal credit entry. An example would be an incorrect debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that certain transactions have not been recorded at all because in such case, both debit and credit sides of a transaction would be omitted causing the trial balance totals to still agree.

 Identify the types of errors which are not identified by a trial balance: o Errors of Commission o Errors of Omission o Errors of Principle o Errors of Original Entry o Compensating Errors o Complete reversal of entries

 State and explain all errors which do not affect a trial balance. In Short:  Error of omission – complete omission of a transaction  Error of commission – correct amount entered in incorrect account of correct class  Error of principle – item entered into incorrect class of account  Compensating error – errors cancel each other out  Error of original entry – item entered at incorrect amount in both accounts  Error of reversal – debit entry posted as credit and vice versa  Transposition error – error in sequence of numbers in both accounts

 Errors that could cause a trial balance not to balance: o Omission of the debit or credit entry o Addition errors o Entering transactions twice on the same side

 State few reason, why a suspense account would be used. o Used to balance the trial balance o To complete the double entry when the trial balance fails to agree o To enable draft financial statements to be prepared o To assist in the correction of errors

INCOME STATEMENT

Details $ $ $ Sales / Revenue / Turnover *** (Less) Return In/Sales return () Net Sales *** (Less) Cost of Sales: Opening Inventory *** Add. Purchases *** (Less) Return Out. / Purchases Return ()

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Add. Carriage Inward *** Net Purchase *** Total Inventory available for sale *** (Less) Closing Inventory () Cost of sales () GROSS PROFIT ***** (Less) Expenses: Rent & Rates *** Advertising *** Carriage Outwards *** Salaries & Wages *** Lighting & Heating *** General Expenses *** Discount allowed *** Interest on loan *** Total Expenses (*) NET PROFIT / LOSS ***

 ‘Income Statement’ is also known as Trading and Profit and Loss Account’.  Only ‘Trading Account’ means, you have to find only ‘Gross Profit’ from Income Statement.  Only ‘Profit and Loss Account’ means, you have to find only ‘Net Profit’ from Income Statement (where Gross

Profit or income will be given).

STATEMENT OF FINANCIAL POSITION (New Format)

Details $ $

Non-Current Assets:

Motor vehicle ***

Premises ***

Fixtures and fittings, etc. ***

---

Current Assets:

Closing inventory ***

Trade Receivables ***

Bank Balance ***

Cash in hand *** ***

Total Assets ***

CAPITAL and LIABILITIES:

Capital ***

Add. Net Profit ***

---

(Less) Drawing (***)

---

Non-Current Liabilities:

Loan form Bank or others ***

Current Liabilities:

Trade Payables ***

Total Capital and Liabilities ***

FINDING PURCHASE FIGURES: This may include both cash and credit purchase for the given period, Cash purchase figures are normally

given on the credit side of cash book. To obtain credit purchase figures you need to prepare a creditors account using amount paid to supplier from cash book and other related adjustments.

Total Purchase = Credit Purchase + Cash Purchase

Worked Example for your understanding how does this work to obtain total purchase for given period:

OBTAINING ACTUAL EXPENSES AND INCOMES INCURRED: In according to accrual concepts any expenses, income or revenue must be recognized within the financial period, doesn’t matter how much is paid or not yet paid. As a result the amount mention in cash book must be

adjusted with prepaid and outstanding bill to determine how much to transfer to profit & loss account. It is wise if you prepare the expenses and income account to adjust the actual expenses or incomes incurred.

OBTAINING CASH/BANK BALANCE: Cash book plays a very important role in solving incomplete records. Most the business who do not keep proper records, at least maintain a receipts and payments account, where you can find how much cash is paid and how much is received from different source of incomes. Many time candidates may require to find the closing cash balance to determine current assets or overdraft as current liabilities

ABC.

Manufacturing Account

For the year ended ………..

Details $ $ $

Opening inventory of Raw Materials xxx

(+) Purchase of Raw Materials xxx

(-) Return Outward (xx)

(+) Carriage Inward xx^ xxx

xxx

(-) Closing inventory of Raw Materials (xx)

** COST OF RAW MATERIALS CONSUMED xxxx

(+) Factory Direct Expense:

Factory wages/ Manufacturing wages* xxx

Royalties xxx

Direct labor cost xxx

Direct fuel and power xxx

Direct materials xxx

Any expenses with (Direct ) xxx

xxxx

**PRIME COST XXXX

(+) Factory Indirect/ Overhead Expense :

Factory supervisor’s salary xxx

Factory rent and rates xxx

Factory insurance xxx

Factory heating and lighting xxx

Factory production manager’s salary xxx

Depreciation: Machinery xxx

Depreciation: Plant and Power xxx

Any other expenses related to manufacturing xxx

xxxx

XXXX

(+) Opening Work-in-Progress xxx

(-) Closing Work-in-Progress (xx)

**COST OF PRODUCTION/ PRODUCTION COST XXXX

Cost of production.

Average Cost of Production = Total Unit Manufactured

Closing inventory of finished goods = Average cost of production X Closing units of finished goods