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Accounting for entrepreneurs
1. ACCOUNTING FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763
2. What is the difference between accounting and book-keeping ? Bookkeeping focuses on record keeping, but in accounting, we are having broader objectives like reporting etc. Book keeping is a part of accounting. Accounting itself is so wide that it includes many branches like book keeping, cost accounting etc.
3. What are the systems of accounting ? Broadly There are two types : 1. cash system : record the transactions only on the basis of cash transactions – if you have actually received cash, record it, if you have actually paid cash, record it. Dont record those transactions, where there is no cash transactions. 2. acrual system/ mercantile system : whether you have paid or not – here we record on the basis of dues. If something is due, record it. Some companies go for mixture of cash+mercantile.
4. What are the fundamental principles in accounting ...? 1. believe that company will remain for ever and record transaction as if company is immortal – going concern concept. 2. record only those transactions, which can be counted in money – money measurement concept example : your friends build your confidence in your troubled time. But you cant quantify it therefore, it cant be recorded in accounting.
5. contd... 3. record all things at the price paid by you actually. If you paid Rs. 10000 for a land 10 years ago, now the price of land is 20000, you will continue to show it at 10000 – as this is the price that you have actually paid. 4. when you buy any assets, try to depreciate them – divide 95% of its value by the number of years left in the life of the assets, and that will give you depreciation (straight line method of depreciation). Charge it every year. You can also charge depreciation at certain % of the price of the assets (this is called written down value method).
6. contd.. Realisation concept : recognise an income when it has actually taken place. Realisation means when revenue is realised.
7. contd... Accounting period concept : we assume that there is an accounting period – generally from 1/4/year to 31/3/year. Thus we divide income and expenditure in this period. Thus the accounting period helps us in recognising income and expenses. The accounting period is generlly 12 months, but you can change it with the prior permission of the government of India.
8. Contd. Matching concept : match revene to expenses – revenue and expenses of the same period should be matched. Acrual concept : record something when it is actually due. For example – if rent is due – record it. If something is not due – dont record it.
9. Follow consistency Consistency means adopt same policy year after year. If you adopt some policy, adopt it every year. If you change a policy, give reason for the change. Thus consistency principle ensures that you are able to follow same policies year after year.
10. Follow conservatism Be conservative. Being conservative means – dont overestimate income and be fast in estimating expenses / liabilities. Thus it is advisable that you report less profit then to report more profit. It is advisable that you are able to record all income and expenses, you can even record likely expenses, but dont try to over estimate income.
11. Have proper disclosure Give adequate disclosure of all material information. What is material depends on situation. But in tems of accounting standards, disclose all material information.
12. You purchased furniture, but debited purchase account. How will you rectify it ? Proper entry was : furniture debit to cash / bank cr. entry made : purchase debit to cash / bank cr rectify it : Furniture Debit to purchase credit. In purchase a/c we record only raw material purchase...
13. You paid Mohan salary of Rs. 10 lakh – but you recorded in his personal a/c instead of salary ac Proper entry : salary a/c debit to bank / cash credit entry made by us : mohan a/c debit to bank / cash credit rectify it by : Salary a/c debit to mohan a/c credit . Answer
14. You have taken away goods of 1000 for personal use, but there is no entry in books of accounts. Make the following entry : drawings a/c debit to purchase a/c
15. I purchase a computer for 10000, now its book value is 3000, if I go to sell it , I will get 200 for it. If I want to replace it, I will have to spend 30000 for it. What are the various types of costs? Historical cost : 10000 (which I actually spent) Replacement cost : 30000 (which I will require to replace it). Realisable cost (current Market price) : 200 book value : 3000
16. What is double entry system ? Every transaction has two entries – one debit and one credit. There cant be debit entry without credit entry and vice versa. The total of debit and credit side is always equal. Take any transaction, it will have two impact – on on assets and one on liability or if one will increase asset, other will decrease it and if one will increase liability, other will decrease liability.
17. What are the types of accounts Broadly we have 3 types : 1. real accounts 2. personal accounts 3. nominal accounts
18. What are the basic rules of accounting : Real account : debit what comes in vice versa Personal account : debit the receiver, credit the giver example : you pay 100 to Ravi, show entry : ravi a/c debit to bank 100 (ravi is receiver) nominal account : debit all expenses, credit all income.
19. What is debit / credit ? There are two sides of accounting transactions and also in accounting books. The left side in the ledger is called debit side and the right side is called credit side. As you can understand, right side is considered to be more important, so do we consider credit side also. In business credit sides represent that part of transaction which is associated with the following : 1. income 2. liability 3. Creditors 4. goods going out Thus the following represent debit side : 1. expenditure 2. assets 3. goods coming in 4. debtors
20. What will be the accounting transactions from the following : Purchase of a building against cash ? : here building is coming in and cash is going out. Thus : building a/c debit cash a/c credit
21. Why ??? The fundamental rules are : 1. debit what comes in (assets / real account) credit what goes out 2. Debit all expenses, credit all incomes 3. debit the receiver, credit the giver
22. Alternative approach to debit and credit ???? Mathematically, balance sheet can help you in understanding debit credit. There are two sides of a balance sheet - assets and liabilities. Any part of transaction – which increases assets should be debited and the other part (which increases liabilities should be credited). Thus we have analyse each transaction mathematically in terms of its impact on balance sheet.
23. What is asset / liability ? Asset means all those machines / buildings / furnitures / equipments / goodwill / patents / funds etc. Which enable you to earn and conduct your business and which truly belongs to the business (not to some outsiders). Liability is what you owe to others – thus this represents those funds / loans / debentures / creditors / owner whom the business is liable to pay. Technically, the owner is also different from business and thus money invested by owner is also a liability to the business.
24. What are the three types of accounts? Real account : representing assets, stock etc. (which are actually physically present ) It also includes some assets which are not physical assets. Like : patents etc. Nominal account : represent income or expenditure – these are not physical entities Personal accounts : accounts of all the parties with whom you deal is called personal account. It includes debtors / creditors / bank etc.
25. What is share / debenture? Share means share in ownership. A share represent a part of capital which is contributed by an owner. They represent high risk and high reward type of investments. Shares give you return proporationate to income of the company. Thus it has variable returns as against fixed returns in debentures. Debenture represents fixed interest bearing instruments (just like Fixed deposits). These are issued by a company against security of its assets to raise funds from the market.
26. Is there a fixed interest promised in debentures / shares? In case of debentures - a fixed interest is assured by company - whatever the case may be – even if company suffers loss, it has to pay fixed interest. In case of shares, there is no guarantee regarding annual profit. It depends on quantity of profit – sometimes more – sometimes less.
27. What are the requirements regarding issue of debentures? Debentures are secured instruments, so you have to create a charge on assets and create proper register of charge. The company issuing debentures must make proper estimate / projections of future cash flow and must provide for that every year. Every year, the compay should allocate some funds to debenture redemption fund account. .
28. How to convert debentures into preference share / ordinary share? The debentures must be convertible. You must be authorised by articles you must fufill other government formalities as per requirements. Only fully paide debentures can be converted into shares.
29. What provisions are required when you issue debentures? When you issue debentures, you have to create a fund for redemption of the debenture. For this there are many options. Most popular option is to create sinking fund – which helps you in redemption of these debentures. We transfer funds from Profit and Loss account to these funds every year.
30. Basic material to download Please click on the following links and downlad these material and study http://www.docstoc.com/docs/4080910/Accounting-Fundamentals http://www.slideshare.net/tkjainbkn/basics-of-accounting-book-keeping http://www.authorstream.com/Presentation/tkjainbkn-148680-accounting-business-entertainment-ppt-powerpoint/ http://www.slideshare.net/tkjainbkn/accounting-for-business-23-october-presentation http://www.scribd.com/doc/22783825/Accounting-Process http://www.scribd.com/doc/25337225/Accounting-Demistified-for-Everyone http://www.scribd.com/doc/21985249/Accounting-for-Entrepreneurs :
31. How to start you journey of accounting ? Take up hypothetical transactions and try to prepare their accounting using complete accounting cycles : 1. prepare journal entry 2. prepare ledger posting 3. prepare trial balance 4. prepare final accounts 5 ascertain profit / loss and prepare final report
33. Purchases book was undercast by Rs. 100 what to do ? Rectifying entry : debit the purchase ledger with 100 with narration : (short totaling of purchase day book)
34. Cash paid to Pankhuri, Rs. 500 was debited to Pawan as Rs. 5,000. PANKHURI DR. 500 SUSPENSE DR. 4500 TO PAWAN CREDIT 5000
35. Purchase of furniture Rs. 3,000 was recorded in Purchases Book. FURNITURE DR. 3000 PURCHASE CREDIT 3000
36. Whitewashing charges Rs. 500 were debited to Buildings Account. REPAIRS & MAINTENANCE (WHITE WASHING) : DR. 500 BUILDING A/C CREDIT 500
37. Credit sale of Rs. 1,500 to P was correctly recorded but not posted to P’s Account. P A/C DR. TO SUSPENSE ACCOUNT
38. Sales Book for February 2007 was found overcast by Rs.100. SALES DR. 100 TO SUSPENSE 100
39. Carriage amounting to Rs. 125 paid in respect of new machinery purchased on 29th March was debited to carriage inwards account. Machinery dr. 125 carriage inward credit 125
40. Goods invoiced at Rs. 130 were returned by Neelam Stores but by mistake an entry was passed in Returns Outwards Book. Error was only in return outwards book so entry : Sales return dr. To purchase return account. 130
41. The opening balance of furniture and fittings account for 2009-10 was written as Rs. 6,700 instead of Rs. 7,600. The firm depreciates furniture and fittings @ 10% p.a. on written down value basis.
42. Solution As it is related to present year, following corrections can be done : Furniture dr. (7600-6700) = 900 to suspense (error in balance carry forward) Furniture Dr. 90 To Depreciation ac 90 (difference of depreciation to be charged and charged) P & L account 760 to Depreciation ac 760 (total depreciation transferred to P & L account)
43. A sale of goods of the value of Rs. 2,500 to Pankaj has been wrongly debited to Rahul Borar & Co. Pankaj Dr. 2500 to Rahul Borar Credit 2500
44. A payment of Rs. 250 made to Pawan Vijay for cash purchase of goods from him stands debited to his account. The mistake is only in the account of Pawan Vijay account. (there is no error in purchase account or in cash) So entry : suspense a/c dr. To Pawan Vijay Credit 250 if there is error in purchase also : the entry : purchase dr. To pawan vijay credit
45. A payment of Rs. 3,000 in respect of salary has been posted twice to salaries account. Suspense dr. To salary credit 3000
46. The total of the discount column on the debit side of the cash book for the month of March has been added short by Rs. 200. Discount a/c debit 200 to suspense 200
47. Rs. 400 relating to purchase of office stationery has been wrongly debited to the personal account of the proprietor. Office stationery ac dr. 400 to drawings a/c 400
48. A credit purchase of Rs. 750 from Vivek Borar stands wrongly credited to Rahul Borar Rahul Borar Dr. 750 to Vivek Borar Cr. 750
49. Rs. 2,500 received from the insurance company in full payment of claim for loss of stock in transit was deposited by the proprietor into his private bank account and was not recorded in the business books. Drawings ac/ dr. To insuranc claim ac credit 2500
50. Goods purchased for Rs. 2,000 were included in stock, but the invoice was not entered in the books for the period under review. Purchase Ac debit 2000 to cash / creditor credit 2000 (on entry of invoice) (we assume that stock is taken up separately as physical stock taking – so it will not tally, if we dont add this in purchase account)
51. Salary Rs. 100,000 paid to a Ajay has been debited to his personal account. Salary Ac debit 100000 to Ajay Credit 100000
52. Indicate the subsidiary book in which following transactions will be recorded Credit sales of goods in trade. Credit purchase of furniture in office Sales day book, Journal (becuase it is not regular purchase)
53. Distinguish between journal and ledger. In journal we make entries of day to day transactions (all the transactions), These entries are later posted in ledgers – which is containing record for each entity separately. Thus journal is put chronologically – all the entities together, each ledger is different for each party – so it is easier to know about status of each entity.
54. Describe the imprest system. It is a system of petty cash book – where some small amount is kept for day to day expenditure and when the money is spent, entry is made in petty cash book. There are many day to day expenses – like stationary, postage etc. For these petty cash book is maintained. Float (some small amount) is given to petty cahier to spend and record.
55. Received cheque for Rs. 12,500 in respect of sales for realising which the National Bank charged Rs. 20 and credited the balance. Journalise it Bank ac dr. 12480 Bank charges dr. 20 To sales a/c credit 12500
56. Out of cash sales of Rs. 1,32,650 a sum of Rs. 1,00,000 was deposited in the National Bank. Journalise it Cash ac/ dr. 132650 to sales credit 132650 Bank ac/ dr. 100000 To cash 100000
57. Comment : When three column-cash book is maintained, no bank account appears in the ledger. When cash book is maintained, it performs the role of journal + ledger – thus there is no need to maintain ledger of bank as it is containing all the transaction in the form of a ledger also.
58. Comment : Cash discount is allowed to encourage early payment. There are two types of discounts – cash and trade. Cash discount is for early payment – as if you are selling on credit – you generally dont give cash discount. Trade discount is to increase business volume. Thus cash discount helps you in speedier collections.
59. COMMENT Contra items in columnar cash book require no posting in the ledger. : Example : Bank ac dr. And cash ac/ credit, this is contra entry – as both the aspects of transactions are settled down in cash book only – one in debit side (bank) and one in credit side (cash), here no entry in any ledger is required – as we are not maintaining separate ledgers of bank and cash - and cash book serves the purpose of these entries.
60. COMMENT Cash book is a subsidiary book as well as a part of the main book (i.e. Ledger). : All the cash transactions are recorded for the first time in cash book – so it is subsidiary book. It is also main book – because no separate ledger is maintained for cash (real account) and so cash book is also cash ledger.
61. What do you understand by non-trading or non-profit concerns (NPO)? What are the chief characteristics of their accounts? These organisations give services. Non-trading companies earn profit. They prepare P & L account. Non- profit organisations dont work for profit – so treat profit as surplus and prepare income and expenditure account. They are registered in society registration act / trust act/ sec. 25 of company act. NPO /NGO /VO prepare income and expenditure account
62. Dr. Pawan finds that out of fees received of Rs. 1,37,400, included a sum of Rs. 400 pertaining to December, 2007 but received in January, 2008. On 31st December, 2007 Dr. Pawan finds that Rs. 140 are due from a patient for medicine for four days. Stock of medicine on 1st January, 2007 was valued at Rs. 13,000 and the same is valued at Rs. 10,200 on 31st December, 2007. A sum of Rs. 1,000 is found due to a chemist for medicines supplied by him in December, 2007. Furniture and Equipment is valued at Rs. 2,10,000 after providing a depreciation of Rs. 20,000 for the year 2007. On 31st December, cash in hand and at bank amounted Rs. 39,800.
63. Income and expenditure account Income : 137400 less difference in value of stock : (13000 – 10200) = 2800 net income : 134600
64. STATEMENT OF AFFAIRS Assets : furniture : 210000 cash : 39800 debtors 1140 stock 10200 total : 261140 liabilities : capital : 261140
65. Distinguish between Receipts and Payments Account and Income and Expenditure Account. These are maintained in non-profit organisations. Receipt and payment account shows receipts and payments on cash basis (when actually received or paid), but Income and expenditure account follows mercantile system (when something is due / acrued, it is recorded – whether actually received / paid or not). Thus it is more like P & L account. R & P account is a real account, but I & E account is a nominal account.
66. What steps will you take to prepare Income and Expenditure Account on the basis of Receipts and Payments Account? Exclude capital receipts and payments excluse opening and closing balance income and expenditure are recorded on mercantile basis – so adjust them by finding out their acruels
67. Comment : Receipts and Payments Account is summary of Cash Book. True : as it is containing only cash transactions – thus it is a summary of cash book only. It shows opening and closing balance of cash and also gives total of all heads for which we have received or paid money.
68. Is Statement of Affairs as reliable as Balance Sheet. No – balance sheet is prepared from only ledger balances, it is accurate- but statement of affairs is generally prepared on the basis of half information and some estimates, thus it is not reliable. Those firms which have single entry system or have incomplete accounts, prepare statement of affairs.
69. Professional men do not make credit for outstanding income. Generally professionals recognise income on cash basis (not on mercantile basis), so when income is received then only it is recognised.
70. Income and Expenditure Account takes the place of Profit and Loss Account in non-trading concern Yes - it is true – income and expenditure account contains totals of all income and exependiture and at the end of the year, we get surplus or deficit. Thus it is similar to profit and loss account.
71. How will you treat the following items in the final accounts of a non-trading concerns. 1 Subscriptions 2 Donations Subscriptions received and donations received are incomes and they are reported in income and expenditure account. If you have received them in advance, show in balance sheet also as liability, if something is due, you may mention it in assets column of balance sheet. NGOs generally publish magazines etc. For which they receive subscriptions. They may also make some subscriptions / donations – which will be shown in expenditure column.
72. What is the impact of the following on bank reconciliation statement : Cheques deposited but not yet credited by bank Rs. 3,610. Cheques issued but not yet presented by payees for payments in the bank Rs. 2,050. When preparing bank reconciliation statement, if you are starting with the Debit balance as per your bank account then deduct Rs. 3610 (as this amount has not yet been credited by bank) and add 2050 (as this amount has not yet been debited by bank) – to arrive at bank balance.
73. What type of error is it : Credit sale of Rs. 1,500 to P was correctly recorded but not posted to P’s Account. Broadly we have 3 types of errors : commission, ommission, principles. This is an error of omission – as here we have forgetten posting in one ledger.
74. What type of error is it : Purchases book was undercast by Rs. 100. It is an error of commission – as here we have undercast the total (commission means an act of doing here)
75. What type of error is it : Cash paid toRajul, Rs. 500 was debited to Pawan as Rs. 5,000.how will you rectify it ? Again it is a type of error of commission – as we are making a mistake here. Rajul Dr. 500 Suspense Dr. 4500 Pawan Credit 5000
76. A merchant, while balancing his books of account, finds that the trial balance shows Rs. 3,765 excess credit. Being required to prepare the final accounts, he places the difference to a newly opened suspense account, which he carries forward. In the next accounting year, he locates the following errors: purchase of Rs. 3765 was properly recorded in day book, but this amount was not taken to purchase ledger – although the creditor's account was properly posted.
77. Solution .... This is happening in the next accounting year, when we have alredy closed purchase account of the last year. So we have to transfer it straight to profit and loss adjustment account. As we cannot show this amount in this year's profit. We have to make an entry : Undercasting in last year's purchase a/c Dr. to suspence a/c credit P & L adjustment account Dr. To Undercasting in last year's purchase a/c cr.
78. Wages of Rs. 2,500 paid for the installation of machinery charged to wages account. This error is discovered in the next year. What to do? This is an error of principle. Rectification entry : Machinery Debit to P & L adjustment a/c credit (as it is discovered in the next financial year – we will not credit it to wages account – which was closed at the time of account finalisation).
79. Purchases return to Shivalker Bros. Rs. 3,100 were not recorded in purchases returns book but the account of Shivalker Bros. was duly debited for the amount. It is discovered next year. What to do? It is an error of omission. Suspense A/c Debit. P & L Adjustment account Credit
80. Drawings of goods costing 300 were not recorded in the books of account. It is discovered next year. It is an error of omission Drawings A/c Debit P & L Adjustment Account Credit (had it been the same financial year, we would have credited the purchase account, but it is the next financial year, so we will make this entry).
81. Whitewashing expenses, Rs. 670 were posted from cash book to the nominal account as Rs. 760. It is discovered next year. It is an error of commission. Suspense A/c Debit 90 to P & L Adjustment a/c credit 90
82. Returns inward book was short totalled by Rs. 650. this error is discovered next financial year. It is a type of error of commission P & L adjustment A/c Debit To Suspense Credit
83. A duplicate invoice for the purchase of machinery costing Rs. 10,000 was erroneously passed again and entered into the books. This error was discovered in next financial year This is a type of error of commission Supplier a/c debit 10000 Machinery a/c credit 10000
84. The purchase of typewriter for Rs. 5,000 was entered in the purchase day book. And it is discovered in the next financial year. How to rectify it It is a type of error of principle rectify it : Typewriter a/c debit 5000 to P & L Adjustment a/c credit 5000
85. Goods amounting to Rs. 1,000 had been returned by N. Raju and were taken into stock, but no entry was passed for the transaction. This is discovered in the next financial year. This is error of omission rectify it : P & L Adjustment A/c Debit To N. Raju Credit a/c (ensure that physical stock tallies, if there is difference in stock, you may have to make different entry).
86. Last year Schedule of debtors was totalled Rs. 16,280 instead of Rs. 16,380. Pankaj maintains a provision for bad debts @ 5%. Debtors A/c Debit 100 to Suspense a/c (mistake in totalling in the last year, you might already be having a balance of Rs. 100 in suspense account – as last year the balance was not match). P & L adjustment Debit 5 Provision for bad debts Credit 5
87. What type of error is it : Purchase of furniture Rs. 3,000 was recorded in Purchases Book and how will you rectify it It is an error of principle rectification entry : furniture debit to purchase credit 3000
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