Financial Accounting - 1

Q1) Explain basic concepts in Accounting.

The basic concepts in accounting are-

- Capital Account: This is a primary group to hold the Capital and Reserves of the company. Accounts like Partners Capital A/c, Proprietors Capital A/c, Share Capital, Partner or Proprietors Drawings etc., belong to this group.

- Reserves and Surplus: This is a sub-group of Capital Account. Accounts like Investment Allowance Reserve, General Ledger and other such Reserves belong to this group. This group is called by the name Retained Earnings.

- Current Assets: This is a primary group. All assets of the company are placed under this head. But generally accounts are created for its sub-groups. There are six sub-groups to Current Assets. Any asset, which does not fall into six sub-groups can be created under the group Current Assets.

- Bank Accounts: This is the first sub-group of Current Assets. Any banks Savings or Current A/c’s can be placed under this group.

- Cash-in-hand: This is the second sub-group of Current Assets. This will hold Cash A/c only. Cash account is automatically created under this group, when a company is created.

- Deposits (Assets): This is the third sub-group of Current Assets. Accounts related to Deposits like Security Deposits, Fixed Deposits, and Rental Deposits etc. can be created in this group.

- Loans and Advances: This is the fourth sub-group of Current Assets. Accounts related to advances and loans of non-trading nature for example, advances against salaries, work contracts, advances to purchase fixed assets etc. can be created in this group.

- Stock-in-hand: This is the fifth sub-group of Current Assets. This is used to hold the opening and closing stock figures of certain accounts like raw materials, work in progress, finished products etc.

- Sundry Debtors: This is the 6^th sub-group of Current Assets. This group is used to create the account of customers (all parties to whom Credit sales are made).

- Current Liabilities: This is a primary group to hold the outstanding and statutory liabilities of the company, such as ESI, PF, TDS etc. It has three sub-groups.

- Duties and Taxes: This is the first sub-group in Current Liabilities. Accounts of trade duties and taxes like Excise, Local Sales Tax, Central Sales Tax etc. can be opened in this group.

- Provisions: This is the second sub-group of Current Liabilities. Account of trade creditors/suppliers (all parties from whom credit purchases are made) are created under this group.

- Fixed Assets: This is a primary group. Accounts like Building, Land, Furniture, Machinery etc., can be created under this group.

- Investments: This is a primary group. It holds the ledger accounts of all types of investments made by the company on shares, bonds, debentures and other securities of the company as well as other companies.

- Loans (Liability): This is a primary group. Accounts of loans taken by the company are created in this group. It has three sub-groups.

- Bank OD Accounts (Bank OCC Accounts): This is the first sub-group of Loans. Overdraft accounts of a bank like hypothecation accounts, bill discounting accounts etc, can be opened under this group.

- Secured Loans: This is second sub-group of loans. Accounts of Loans taken by the company from financial corporations, banks etc., against its fixed assets are created under this group.

- Unsecured Loans: This is third sub-group of loans. Accounts of Loans taken by the company unconditionally from outside parties including debtors and partners can be created under this group.

- Suspense Account: This is a primary group. Account of money received or paid by the company, the nature of which is not known like money paid as traveling advance, can be created in this group. This is a balance sheet item.

- Misc. Expenses (Assets): A rarely used primary group. Preliminary and preoperative expenses, which have been capitalized to the extent of not writing them off in the profit and loss account, will fall into this group.

- Sales Account: This is a primary group. (General Sales A/c, State Sales A/c etc. can be created under this group.)

- Purchase Account: This is a primary group. (General Purchase A/c, State Purchase A/c can be created under this group.)

- Direct Income [Income Direct]: This is a primary group. Selling the goods of the company can create accounts of direct income of the company like income by selling the goods of the company under this group.

- Indirect Income [Income Indirect]: This is a primary group. Accounts of indirect income like rent received, interest received, commission received etc., can be created under this group.

- Direct Expenses [Expenses Direct]: This is a primary group. The accounts related to payment of wages, freight, coolie, carriage, electricity bill, water bill etc., can be created under this group.

- Indirect Expenses [Expenses Indirect]: This is a primary group. The accounts of payments made for advertisement, maintenance of vehicles, salary paid to staff, depreciation on fixed assets, traveling expenses etc., can be created under this group.

- Branch/Divisions: This is a primary group. Accounts of branches, divisions, sister concerns, subsidiaries etc., of the existing company can be created under this group.

Q2) Explain depreciation accounting with an illustration.

Accounting depreciation

Generally Accepted Accounting Principles (GAAP) approach depreciation in a slightly different manner.

It is still the allocation of the cost of an asset over a specified period, but it is based on an accounting theory known as the "matching concept." This concept stands on the premise of matching revenues with the expenses incurred to generate that revenue. If an asset has a useful life of greater than one year, it will generally be expensed (depreciated) over its estimated useful life. It is similar to the method described above for assets placed in service prior to 1987.

Not much more really needs to be said for accounting depreciation other than it is still a method of allocating the cost of an asset over a specified period.

Many small businesses adopt tax depreciation as their accounting depreciation as being the same number. While technically it is not GAAP depreciation, it is often mistaken as such. The distinction is in the method of accounting shown at the top of the income statement. There are many other methods of accounting that are not GAAP full accrual. Some of them are:

Income tax basis of accounting

Cash basis method of accounting

Modified cash basis of accounting

Generally speaking, accounting depreciation is only found in larger businesses because of the cost of maintaining different calculations for tax and accounting purposes. It is also thought of as a normal reserve or sinking fund for the eventual replacement of assets.

Q3) Explain the General instructions to be followed in preparation of balance sheet.

A Balance Sheet is a statement of the financial position of the company. It displays the Capital, Assets and Liabilities of the company.

General Instructions to be followed in preparation of Balance Sheet-

- The Balance Sheet is displayed in double columnar horizontal format with the closing balances of Primary Groups of Liabilities and Assets.

- The Liabilities include the Capital Account, Current Liabilities, Loan Liabilities, Net Profit if any etc.

- The Assets include The Fixed Assets, Current Assets, Investments, Loans and Advances (Asset), Net Loss if any etc.

- To view the detailed balance sheet (to display each accounts’ balance in the group, press Alt+F1. If detailed balance sheet is displayed, then to display in condensed mode (group balances only), press Alt+F1 again.

- The Balance Sheet will be displayed for the current period (from the Books Beginning From date to current date). To display the Balance Sheet for particular period (for the quarter, half-year etc.), press F2. Tally will prompt you to enter the From and To dates, for which period the balance sheet will be displayed.

- If many companies are open, view the balance sheet of the desired company, and press F3. The open company names will be displayed. Select the name of company, the Balance Sheet of which is to be displayed.

- The closing stock is calculated based on the valuation method specified when creating the stock items. In order to change the Valuation Method for the Closing Stock in Balance Sheet, press F7. Change Valuation Method menu will be displayed. Select a valuation method like FIFO, LIFO etc.,

- To compare the balances of more than one company on the same screen, add a column by pressing Alt+C. Select a name from the list of open company names. Balance Sheet with an additional column, will appear on the screen.

- To delete the column, press Alt+D by placing the cursor in the column of company, which is to be removed. All columns from a report cannot be removed. A report must have at least one column.

Configuring Balance Sheet

The Balance Sheet can be configured by pressing the function key F12.

1. Balance Sheet can be displayed in horizontal format (with Assets and Liabilities side by side in 2 different columns) or in Vertical format (with Source of Funds followed by Application of Funds). To display vertical Balance Sheet, select Show Vertical Balance Sheet? Yes. Default is No.
2. In order to view the Balance Sheet figures with their percentage break-ups, select show percentage Yes. Default is No.
3. Instead of representing the Current Assets and Liabilities separately, to present Working Capital Analysis, select Show Working Capital Figures? Yes. Default is No.
4. By default, the Balance Sheet will display the Liabilities on the left and Assets on the right side. Assets can be displayed on the Left and Liabilities can be displayed on the right side by selecting the option from Method of Showing Balance Sheet. Default is Liabilities / Assets.
5. Different scale of factors for values are available to round off the balances to the nearest crores, lakhs, hundreds etc.,