Business and Accounting Education ( Cont. )......!

  Business and Accounting Education ( Cont. )......!

 

Business and Accounting Education ( Cont. )......! 

Unit 04

Introduction to Accounting

Accounting

• Accounting is the process of providing information useful to stakeholders in a business for making decisions

Types of Accounting

1. Financial Accounting

2. Management Accounting

3. Cost Accounting

 

Financial Accounting

• Financial accounting is the accounting used to provide financial information to stakeholders in a business

 

Need/Use of Accounting

1. To know the profit and loss of a business

2. To know the financial position

3. To avoid misstatements and frauds

4. To fulfill legal requirements

5. It is also mandatory for small businesses to keep accounts

 

Financial Statements

• Financial statements are prepared to meet the requirements of accounting and to provide information to stakeholders

 

 Profit and Loss Statement

 Statement of Financial Position

 Cash Flow Statement

Note

• The main purpose of accounting is to provide information to interested parties in the business

 

Business Transactions

• Business transactions are the transactions that a business undertakes with other parties

• Changes in the resources of a business are also transactions

• Different types of business transactions are as follows

1. Measurable in terms of money

2. Not measurable in terms of money

However, only transactions that can be measured in terms of money are recorded in the accounts

• Purchase of furniture 50000

• Purchase of goods 30000

• Rent paid 20000

• Sale 100000

Events arising from unusual circumstances are considered business transactions

• Destruction of goods worth 10000

• Theft/destruction by fire of goods worth 20000

• 12000 Valued Goods Bad Debt Write-off

 

Characteristics of Business Transactions

 

• Can be measured in terms of money

 

Transactions have two outcomes and two impacts

 

Helps in management decisions

 

Cash debt arises in unusual circumstances

 

Created as a result of transactions

 

1. Assets

 

2. Liabilities

 

3. Ownership

 

4. Income

 

5. Expenses

 

Assets

 

• Resources that are controllable by the business and that provide future economic benefits to the business as a result of a past transaction/event

 

 Land, building

 

 Machinery

 

 Furniture

 

 Delivery vehicle

 

 Inventory

 

 Debtors

 

 Income receivable

 

 Prepaid expenses

 

 Bank balance

 

 Cash balance

 

Characteristics of Assets

 

• Created as a result of past transactions/events

 

 Future economic benefits in the business Assets that are controllable by the acquiring company

 

are of two types:

1. Non-current assets / long-term assets / fixed assets

2. Current assets / short-term assets

 

Non-current assets

• Non-current assets are assets that are not included in the current assets of a business and are not subject to change due to the day-to-day operations of the business.

 

 Land, building, machinery, furniture, delivery vehicles, motor vehicles

 

Current assets

• Assets that are expected to be used for resale/converted into cash within a short period of time, usually 12 months

• Current assets are assets that are found in a business that can be changed due to the day-to-day operations of a business

 

 Inventories

 Debtors

 Accounts receivable

 Prepaid expenses

 Bank balances

 Cash Remaining

 

Liabilities

• A liability is an amount that a business must pay as a result of a past transaction/event

•

 Bank loan

 Lenders

 Expenses to be paid

 

Characteristics of liabilities

• A result of a past transaction

• A flow of resources when paid or settled

• A current obligation

 

Types of liabilities

1. Non-current liability / Long-term liability

2. Current liability / Short-term liability

 

Non-current liability

• Non-current liabilities are liabilities that are not considered current liabilities and are due to be paid within a period of more than one year.

 

 Bank loan

 Block loan

 Home loan

 

Current liability

• Liabilities that are due to be paid within a short period of time, usually 12 months, are current liabilities.

 

 Lenders (providers of goods for resale)

 Expenses to be paid

 

Equity / Ownership / Net Assets

• Equity is the amount of assets owned by the owner of a business

• Equity is the amount of assets left over after the liabilities of the business have been paid

• It includes the following

 Capital

 Net Profit

Equity = Assets - Liabilities

 

01. Assets 500000 Liabilities 300000 As on 31.03.2024, find the equity

Equity = Assets - Liabilities

= 500000 – 300000

= 200000

 

 

02. The information obtained for the year ended 31.03.2024 is as follows

 Land Building 480000

 Debtors 70000

 Bank Loan 150000

 Furniture 90000

 Bank balance 25000

 Lenders 42000

 Payable Rent 15000

 Cash balance 31000

 Inventory 38000

 

I. Value of non-current assets?

Land building + furniture

= 480000 + 90000

= 570000

II. Value of non-current liabilities?

Bank balance = 25000

 

III. Value of current assets?

= Debtors + Bank balance + Cash balance + Inventory

= 70000 + 25000 + 31000 + 38000

= 164000

 

 

 

IV. Value of current liabilities?

= Creditors + Rent payable

= 42000 + 15000

= 57000

V. Find the ownership?

Ownership = Asset – Liability

= 734000 – 207000

= 527000

 

Income

• Increases in equity other than increases in equity due to capital invested by the owner are called income

• Increases in equity due to this increase in income Increases in equity due to increase in profit

 

 Sales

 Rent received

 Commission received

 Interest received

 Depreciation received

 

Expenses

• Decreases in equity other than decreases in equity due to accruals are called expenses

• Decreases in equity due to this expenditure Decreases in equity due to decrease in profit

 

 Salaries and wages

 Insurance premiums

 Cost of goods sold

 Interest expense

 Depreciation paid

 

Profit

• Profit is the amount obtained by deducting expenses from the income earned by the business during a financial year

• Profit is the difference between income and expenses.

Profit = Income – Expenses

 

01. For a business in the year ended 31.03.2024,

 Earned income – 232500

 Expenses – 165700

Calculate the profit

Profit = Income – Expenses

232500 – 165700

66800

02. For a business in the year ended 31.03.2024, the information obtained is as follows

 Sales – 162000

 Cost of sales – 145000

 Rent received – 15000

 Salary – 18000

 Insurance – 6000

 Deduction received – 4000

 Deduction given – 3000

How to calculate the profit for the year 2024?

Profit = Income – Expenses

181000 – 172000

9000

 

Debit / Credit

Equity also decreases due to the owners receiving money or goods from the business for personal use. It is called debit.

 

01. Equity in a business company named Kajiba on 01.04.2023 350000 Additional capital 50000 Profit for the year 75000 Debts for the year 20000 Find the ending equity for the year 31.03.2024?

31.03.2024 Ending equity = Beginning equity + Net profit + Additional capital – Debts

= 350000 + 75000 + 50000 – 20000

= 475000 – 20000

= 455000

 

 

 

02. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Suresh is as follows

 Capital 275000

 Surplus capital 62000

 Income for the year 83000

 Expenses for the year 38000

 Debit for the year 19000

I. To calculate the equity as on 31.03.2024

Profit = Income – Expenses

= 83000 – 38000

= 45000

31.03.2024 Final equity = Initial equity + Net profit + Surplus capital – Debits

= 275000 + 45000 + 62000 – 19000

= 363000

 

03. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Kamal is as follows

 Capital 415000

 Additional capital 103000

 Annual income 147000

 Annual expenses 118000

 Annual debits

Cash 15000

Material 10000

 

I. To calculate the equity as on 31.03.2024

Profit = Income – Expenses

= 147000 – 118000

= 25000

31.03.2024 Final equity = Initial equity + Net profit + Additional capital – Debits

= 415000 + 25000 +103000 – 25000

= 522000

 

04. The information obtained for the year ended 31.03.2024 of a sole proprietorship named Kumaran is as follows

 31.03.2024 Equity 515000

 Additional capital 63000

 Annual income 98000

 Annual expenses 46000

 Annual withdrawal 17000

I. Equity calculation

31.03.2024 Final equity = Initial equity + Net profit + Additional capital – Debit

515000 = Initial equity + 63000 + 52000 - 17000

515000 = Initial equity + 98000

Initial equity = 515000 – 98000

Initial equity = 417000

 

05. The information obtained from a sole proprietorship named Amalan is as follows:

 Bank loan

 Investment

 Rent received

 Bank loan interest

 Capital

 Sales

 Creditors

 Debit

 Furniture and equipment

 Motor repair charges

 Investment income

 Paid Brokerage

Categorize the above items as assets, liabilities, rights, income, and expenses?

 

1. Asset

• Furniture

• Investment

 

2. Liability

• Creditors

• Bank loan

 

3. Ownership

• Debit

• Capital

 

4. Income

• Sales

• Investment income

• Rent received

 

5. Expenses

• Insurance premiums

• Commission paid

• Bank loan interest

• Motor vehicle repair charges

 

06. The information obtained from a sole proprietorship named Dhanusa is as follows:

 Purchase of goods sold

 Depreciation received

 Depreciation paid

 Furniture

 Cash

 Salary

 Interest received

 Bank loan

 Investment

 Rent received

 Bank loan interest

 Capital

 Sales

 Payer

 Revenue

 Rent payable

 Debit

 Land

 Investment income

 Commission paid

The above items are classified as assets and liabilities. ,Categorize on the basis of ownership, income, expense?

 

1. Asset

• Furniture

• Investment

• Cash

• Land

• Income

 

2. Liability

• Payable

• Rent payable

• Bank loan

 

3. Ownership

• Debit

• Capital

 

4. Income

• Sales

• Discounts received

• Interest received

• Investment income

• Rent received

 

5. Expenses

• Insurance premiums

• Brokerage paid

• Bank loan interest

• Discounts given

• Salary

• Cost of goods sold

 

Double Effect of Transactions

Equation

Accounting

• The process of providing useful information to stakeholders in a business to make decisions is called accounting.

• Financial information is essential for many business decisions. The accounting used primarily to provide such financial information is called financial accounting.

Accounting Equation

 

• The values ​​expressed as assets and the values ​​expressed as equity are equal to each other. The form of equation used to show this relationship is called accounting equation

 

Creating an Accounting Equation

 

• When all the resources required for the business are provided by the owner, the accounting equation will be as follows.

Assets = Equity

A = L

• Ajith started a business with Rs. 500 000, where the business has Rs. An asset (cash) of Rs. 500,000 is obtained, and the entire value of the asset belongs to the owner of the business, Kamalan.

 

Assets = Equity

500,000 = 500,000

 

• When the owner does not have enough capital to invest, the following calculation equation is found

Asset = Equity + Liability

A = L + E

• After obtaining capital, Ajith's business obtains a bank loan of Rs. 300,000. If the assets (cash) of the business increase by Rs. 300,000, and a liability (bank loan) of Rs. 300,000 is created to be paid by the business to outsiders.

Asset = Ownership + Liability

• When the owner does not have enough capital to invest, the following calculation equation is found

Asset = Equity + Liability

A = L + E

• After obtaining capital, Ajith's business obtains a bank loan of Rs. 300,000. If the assets (cash) of the business increase by Rs. 300,000, and a liability (bank loan) of Rs. 300,000 is created to be paid by the business to outsiders.

Asset = Ownership + Liability

500000 = 500000

300000 = - + 300000

 

Ownership Change Occurrence

• Owner Capital

• Owner Debit

• Income for the Year

• Expenses for the Year

 

01. The following transactions are given to you for the first month of a computer repair business started by Suresh.

1. Rs. 500 00 was invested by the owner

2. Rs. 200 000 was obtained as a bank loan.

3. Rs. 100 000 was deposited in a fixed deposit account.

4. Income earned from computer repair is Rs. 60 000

5. Monthly rent of the business is Rs. 10 000.

6. Rs. 20 000 was taken from Suresh's business for his personal needs.

7. An equipment is purchased for Rs. 100 000 was paid.

8. Monthly telephone bill Rs. 5000 was paid.

9. Additional source of funds Rs. 50 000 was invested.

10. Repayment of installments for bank loan Rs. 20 000

 

 

 

The way in which the above transactions affect the accounting equation can be shown as follows.

 

	Asset =                                                                  Equtity+ Liability
	Equipment	Fixed Deposit	Cash	Ownership	Bank Loan
1.			+ 500000	+ 500000
2.			+ 200000		+ 200000
3.		+ 100000	+ 100000
4.			+  60000	+  60000
5.			-  10000	-  10000
6.			-  20000	-  20000
7.	+ 100000		+ 100000
8.			-   5000	-   5000
9.			+  50000	+  50000
10.			-  20000	-  20000
	100000     +  100000     + 555000    =   575000  +  180000

 

02. The following balances were found in Vijay Business on 2023.08.01

 

Assets

 Furniture 300000

 Inventory 200000

 Debtors 100000

 Cash 200000

 

Liabilities

 Bank Loan 300000

 Creditors 100000

 

Business and Accounting Education ( Cont. )......!