11 Sem BBA/B.Com — FINACIAL ACCOUNTING MEANING OF ACCOUNTING Accounting is the recording of business transaction for getting final results Le.. Profit or loss. DEFINITION American Institute of Certified Public Accountants {AICPA] which defines accounting as “the art of recording, classifying and summarizing in a significant manner ond in terms of money, transactions and events, which are, in part at least, of a financial character ahd interpreting the results thereof” FEATURES OF ACCOUNTING . Monetary transaction . Historical nature . Legal requirements . External use . Disclosure of financial status . Interim reports SCOPE OF FINANCIAL ACCOUNTING 7 Book keeping- book keeping is concerned with recording of financial data relating to business operations in a systematic manner. > Financial statements- financial statements Includes profit & loss account and balance sheet. Profit & loss account is prepared to know the profitability and balance sheet is prepared to know the financial position of the business, * Analysis and interpretation of _financiai Statements. when we analyze the financial statements we get more information about the business. After analyzing the financial statements, conclusions are drawn. Drawing conclusions are known as interpretation of financial statements. > Financial reporting- the ultimate object of financial accounting Is provide Information to internal & external users for decision making. For this purpose the results of analysis and interpretations are communicated. The information is communicated in the form of reports, 7 Segment reporting- segment reporting refers to the reporting of financial information relation to different business activities of the firm. Accounting principles- financial accounting follows a set of principles. These principles are generally known as Generally Accepted Accounting Principles. These helps in preparation of financial statements. * Accounting standards- the presentation, preparation and reporting of financial accounts have to be done according to certain standards. These standards are known as accounting standards. The main objective accounting standards is to bring about uniformity www. CUStudents. ACCOUNTING POLICIES - Accounting principles ar assumptions and rules of accounting and application of these rules, methods will enable us to make perfection accounting system. It Is the general rules and procedures followed by the accountant while recording transactions and preparing final accounts. Accounting principles are generally divided in to two- accounting concepts accounting conventions ACCOUNTING CONCEPTS. these are the assumptions and conditions that is to be adopted when an accountant record the financial transactions. The major accounting concepts are as follows. Business entity concept- according to this, assumptions, a business is treated as separate entity from its owner. From this point of view of business, owner Is a creditor for the capital Money measurement concept- according to this, concept, only those transactions which can be measured in terms are to be recortied. Going concern concept: it is assumed that every, business will continue for an indefinite period of time. It Is with this assumption fixed assets are recorded at original cost less depreciation Accounting period concept- the life af a business, is divided in to different periods for preparing financial statements. Generally _ businesses adopts 12 months period for measuring the income of the concern. Cost concept: according to this concept, all transactions are recorded in the books of accounts at actual price involved not at market price Dual aspect concept- according to this concept, every transaction has two aspects. Receiving aspect & giving aspect, receiving aspect is called debit and giving aspect Is called credit Accounting equation is based on this concept > Realization concept- according to this concept, revenue is recognized when a sale Is made or a service is rendered! to customers, whether it is 3 cash sale, credit sale or as installment sale. Matching concept: according to this concept, cost or expenses of a business of particular period are matched or compared with the revenue of that period in order to ascertain profit or loss. Objectivity concept- this concept requires that accounting data should verifiable and free from personal bias of the accountant.Il Sem BBA/B.Com ~ FINACIAL ACCOUNTING ACCOUNTING _CONVENTIONS- accounting conventions are the customs or tradition which guide the accountant while preparing financial statements. > Convention of consistency this convention, follows that the basis followed in several accounting period should be consistent. This means the methods adopted in one accounting year should not be changed in another year. Convention of conservatism: this s a convention, of caution or playing safe which is followed while preparing the financial statements. This idea of this statement is to consider all possible losses and to ignore all probable profits. Convention of materiality- according to this, convention, only the material or important fact about the business are to be disclosed through financial statements. All other unimportant Information should either be totally ignored or recorded as foat note, Convention of full disclosure- the objective of accounting is to provide true and accurate information. Hence, accounting records and statements should be honest and informative. The convention of disclosure requires that all significant information should be disclosed in the financial statements. ACCOUNTING STANDARDS Accounting standards are a regulatory framework within which financial statements are prepared. They are the rules that ensure uniformity of preparation, presentation and reporting of accounting information ACCOUNTING STANDARDS IN INDIA AS 1- disclosure of accounting policies AS 2- valuation of inventory AS 3- cash flow statements AS 4- contingencies & events occurring after B/S dates AS- prior period & extra ordinary items and change in accounting policies AS 6- depreciation accounting AS 7- accounting for construction contracts AS 8 accounting for research and development AS 9- revenue recognition AS 10- accounting for fixed assets AS 11- effect of changes in foreign exchange rates. AS 12- accounting for government grants AS 13- accounting for investments AS 14- accounting for amalgamation AS 15- retirement benefits in the financial Statement of employees AS 16- borrowing costs AS 17- segment reporting AS 18- related party disclosure AS 19- leases AS 20- earning per shares AS 21- consolidated financial statements, www. Custudents. AS 22- taxes on income AS 23-investment in association with consolidate FS AS 24- discontinuing operations AS 25> interim financial reporting AS 26- intangible assets AS 27- financial reporting of interest in joint ventures AS 28- impairment of assets AS 29- provisions, contingent liabilities & assets, AS30- financial instruments-recognition & measurement AS 31° financial instruments - presentation, AS 32- financial instruments — disclosure ADVANTAGES OF ACCOUNTING STANDARDS. “Reliability of financial statements Uniformity “Elimination of ambiguity Comparison + Useful to shareholders, investors etc.. SINGLE ENTRY SYSTEM Single entry system is a system of accounting which does not follow the double entry system. Under this system only the accounts relating debtors and creditorsare maintained. Cashbook is_—_ also maintained. STATEMENT OF AFFAIRS A statement of assets and liabilities is to be prepared to know the profit or loss and financial position under single entry system, This statement is known as statement of affairs DOUBLE ENTRY SYSTEM In this system every business transaction Is having a ‘twofold effect of benefits giving and benefit receiving aspects. The recording Is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in at least two accounts with equal debits and credits. MEANING OF DEBIT & CREDIT ‘The word debit is derived from Latin word debitum. It means due for that. In short, receiving aspect of transaction, The word credit is derived from the Latin word credito, which means due to that. in Short, the giving aspect STEPS IN DOUBLE ENTRY SYSTEM (a) Preparation of Journal (b) Preparation of Ledger (¢) Trial Balance preparation: (d) Preparation of Final Account + Preparation of profit & loss a/c 4 Preparation of balance sheet11 Sem BBA/B.Com — FINACIAL ACCOUNTING ADVANTAGES OF DOUBLE ENTRY SYSTEM Sclentific system Complete record of transactions A check on the accuracy of accounts: Ascertainment of profit or loss Knowledge of the financial position of the business 6. Full details for purposes of control vii) Comparative study is possible 7. Helps management in decision making 8. No scope for fraud ACCOUNTING EQUATION Assets = liabilities + capital Capital = assets - liabilities Liabilities = assets ~ capital TRANSACTIONS Transaction is an event which involves transfer of money or money’s worth between the business and outsider including owner. Types of business transactions * Cash transaction > Credit transactions > Non cash transactions- depreciation yeene ACCOUNT In accounting we keep a separate record of each and Individual assets, liablities, expenses, Incomes, capital etc. these place where such a record is maintained is, known as account. CLASSIFICATION OR TYPES OF ACCOUNTS ** Real accounts- these are the accounts or properties of business. Eg-cash account * Personal account- these are the account relating to persons with whom business deals, Personal accounts may be of the following three types Natural person’s personal account- accounts human being Artificial person's account- accounts of artificial person created by law eg- ‘company a/c, bank a/c Representative person's _account- Indirectly representing a person. Eg- prepaid! expenses % Nominal accounts- accounts relating to income, expenses ete RULES OF ACCOUNTING English approach American approach ENGLISH APPROACH- this approach is based on type’s accounts are recorded. They are as follows, www. CUstudents. Real accounts- Debit what comes in Credit what goes out Personal account Debit the receiver Credit the giver Nominal account- Debit all expenses Credit all incomes AMERICAN APPROACH- according to this approach accounts are classified in to four — assets, liabilities, expenses and incomes Assets- Increase In asset — debit Decrease in asset- credit ies. Increase in liabilities- credit Decrease in liabilities: debit Expenses- Increase in expenses — debit Decrease in expenses ~ credit Incomes- Increase in incomes- credit Decrease in incomes: debi LIMITATIONS OF ACCOUNTING " Itprovides only past data + Itdoes not show profit of each job or process "It fails to measure control over resources * Itdoes not measure organizational efficiency + Itfalls to provide adequate data for price fixation " Itdoes not — provide data for comparison of costs "It fails to take into account the price level changes + it cannot disclose controllable & uncontrollable costs "It provide only limited information for management for decision making BRANCHES OF ACCOUNTING > Financial accounting Management accounting Cost accounting JOURNAL When the business transactions take place, the first steps to record the same in the books of original entry or subsidiary books or books of prime or journal. Thus Journal is @ simple book of accounts in which all the business transactions are originally recorded in chronological order and from which they are posted to the ledger accounts at any convenient time. Journaling refers to the act of recording eachI Sem BBA/B.Com ~ FINACIAL ACCOUNTING transaction In the Journal and the form In which It is recorded, is known as a journal entry, SUB DIVISION OF JOURNAL + Sales Day Book- to record all credit sales. * Purchases Day Book- to record all credit purchases. * Cash Book: to record all cash transactions of recelpts as well as payments. * Sales Returns Day Book- to record the return of, goods sold to customers on credit. * Purchases Returns Day 8ook- to record the return of goods purchased from suppliers on credit * Bills Receivable Book- to record the details of all the bills received. * Bills Payable Book- to record the details of all the bills accepted. * Journal Proper-to record all other items LEDGER Ledger is @ main book of account in which various accounts of personal, real and nominal nature, are opened and maintained. In journal, as all the business transactions are recorded chronologically, it Is very difficult to obtain all the transactions pertaining to one head of account together at one place. CASH BOOK In every business concern generally there is large number of transactions. For the purpose of recording all such transactions a separate book is maintained, This is called cash book, Cash book may be four types ‘+ Simple or single column cash book- it has only fone cash column, On the debit side all receipts are recorded. On the credit side all payments are recorded. * Two column cash book in the two column cash book one additional column for discount Is provided on either side to record cash discount, Thus two column cash book has two column on each side- cash column and discount column. * Three column cash book- triple column cash book contains three columns both sides, These ‘three columns are cash, bank and discount. * Petty cash book- to avoid inconvenience to main cashler and to save time, a separate book is maintained to record small expenses. This book is known as petty cash book. Thus petty cash book is a subsidiary book maintained for recording minor expenses to be paid in cash. IMPORTANT ACCOUNTING TERMS Transactions ~ it means the exchange of money or money's worth from one account to another account www.Custudents. Events like purchase and sale of goods, recelpt payment of cash for services or on personal account: loss or profit in dealings etc., are the transactions” Debtor - A person who owes money to the firm mostly ‘on account of credit sales of goods is called a debtor. For example, when goods are sold! to a person on credit ‘that person pays the price in future, he Is called @ debtor, Creditor - A person to whom money Is owing by the firm Is called creditor. For example, Madam is a creditor of the firm when goods are purchased on credit from him Capital - It means the amount which the proprietor has, invested in the firm or can claim from the firm. Itis also known as owner's equity or net worth. Owner's equity means owner's claim against the assets. It will always be equal to assets less liabilities, say Capital = Assets - Liabilities. Liability - It means the amount which the firm owes to outsiders that Is, accepting the proprietors. Proprietor- The person who makes the investment and bears all the risks connected with the business is known as proprietor. Account- itis a statement of the various dealings which occur between a customer and the firm Drawings - It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. Its usually subtracted from capital Revenue - |t means the amount which, as @ result of operations, is added to the capital. itis defined as the Inflow of assets which result in an Increase in the ‘owner's equity. It Includes all incomes like sales receipts, Interest, commission, brokerage etc. Expense - The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is ‘treated as an expense such as payment of salaries and rent. Purchases - Buying of goods by the trader for selling them to his customers Is known as purchases. Purchases can be of two types. Cash purchases and credlit purchases. Sales - When the goods purchased are sold out, it is known as sales, Here, the possession and the ownership right over the goods are transferred to the buyer. Stock -The goods purchased are for selling, if the goods are not sold out fully, @ part of the total goods purchased is kept with the trader unlit itis sold out, it is said to be a stock. If there is stock at the end of the accounting year, It is said to be a closing stock This closing stock at the year-end will be the opening stock for the subsequent year. Asset - Any physical thing or right owned that has a money value is an asset. In other words, an asset is thatIl Sem BBA/B.Com ~ FINACIAL ACCOUNTING expenditure which results in acquiring of some property or benefits of a lasting nature. Goods - It 's a general term used for the articles in which the business deals; that is, only those articles Which are bought for resale for profit are known as Goods. Trial balance - Trial balance is a statement of debit and credit balances extracted from all accounts In the ledger accounts for testing the arithmetical accuracy. Final_accounts - Final accounts ere the accounts prepared at the final stage to judge the financial position of the business. The final account consist of ‘trading profit & loss account and balance sheet, Trading account - Trading account is prepared to show ‘the result of buying and selling of goods during an accounting period. The result of trading may gross profit or gross loss. Profit & loss account - The trading account show only {gross result. [t does not show final profit or loss. Hence it Is necessary to prepare profit & loss account after preparing trading account. It s prepared to know the net profit or net loss of the business for an accounting period Balance sheet - To know the financial position of business, accountant prepare a separate statement known as balance sheet, It contain two sides that is asset side and liability side. Difference between trial bal e and balance sheet Trial Balance Balance sheet It consist of debit and | It'shows assets and credit side liabilities www.custudents. their benefits accrue to the business, patent, copy right etc + Current assets- current assets are those assets which are held temporarily in course of business and converted into cash easily. Fg cash, bank + Fictitious assets - these are not real assets. They are represented by log tangible possession. £g- preliminary expenses + Wasting assets- these are those assets which are exhausted gradually in the process of their Use. Eg: mines, oil wells ete. © Contingent assets- contingent assets are probable assets which may or may not become assets depending upon occurrence or nonoccurrence of @ specific event CLASSIFICATION OF LIABILITIES © Long term liabilities- liabilities which are repayable after @ long period of time are known as long term or fixed liabilities. Eg- debentures, long term loans etc. © Current liabilities- liabilities. which are repayable within one year are known as current liabilities or short term liabilities eg . creditors ‘+ Contingent liabilities- contingent liabilities are those liabilities which may or may not become actual liabilities In future HIRE PURCHASE & INSTALLMENTSYSTEM. It is prepared to check | Prepared to know the arithmetical accuracy of | financial position of the ledger posting business It show the balance of all | It shows assets and ledger accounts liabilities It is prepared from | It is prepared from trial various ledger accounts _| balance ee It does not contain | It contains closing stock closing stock It can be prepared at the | It is generally prepared ‘end of each month at the end of an accounting period It Is not compulsory to | It is compulsory to prepare trial balance __| prepare a balance sheet CLASSIFICATION OF ASSETS- + Fixed assets- fixed assets are those which are of a permanent nature or are used of the operation of business and not for resale. These assets helps in earning revenue. These cannot be easily converted into cash eg: machinery, land, building etc ‘+ Intangible assets- intangible assets are those assets which cannot be seen or touched, but HIRE PURCHASE Hire purchase is a system under which the buyer enters into an agreement with the seller to the price of the goods purchased in installments. The buyer gets possession of goods immediately on paying down cash. He does not get ownership. He becomes the owner only after the last installment is paid. Under this system if the fails to pay any installment the seller has a right to take back the goods. INSTALLMENT SYSTEM Under this system buyer gets both possession and ownership of goods at the time signing the agreement. This Is like a credit sale. If the buyer falls to pay any installment t , the seller has no power to take back the goods. He can only sue the buyer for the amount Difference between Hire Purchase & Installment System Hire Purchase Installment System [An agreement of hiring | An agreement of sale Buyer gets only | Buyer gets. — both, possession of goods | possession and immediately ownership immediately If the buyer falls to pay | He can sue the buyer for any installment, the | the amount due1 Sem BBA/B.Com ~ FINACIAL ACCOUNTING seller can repossess the goods The seller cannot repossess the goods In case of default, the total amount —of installment paid is forfeited and treated as hire charge The buyer cannot hire ‘out or sell the goods until the full amount is paid. In case of default, the total amount of installments paid by the buyer cannot be: forfeited The buyer can hire out and sell the goods before paying the full amount due. Goods sold can be returned by the buyer Risk of bad debt is relatively less Goods once sold cannot be returned by the buyer Risk of bad debt is relatively more www.custudents. TERMS RELATED WITH HIRE PURCHASE Hirer or hire purchaser Hirer means the person who obtains possession of goods from the owner under H.P system, > Hire vendor Hire vendor is the seller in a hire purchase agreement, He is a person who delivers or had delivered the possession of goods to the hirer under HP system > Cash price It is the original price of goods possessed under H.P system. It Is the price at which the goods can be purchased by the hirer for ready cash. Cash price does not include interest ITEMS GIVENON | ADJUSTMENTIN | ADJUSTMENT IN JOURNAL ENTRY ADJUSTMEN T TRADING P/LA/C | BALANCE SHEET ‘CLOSING STOCK TREATED ASA TREATED AS A CLOSING STOCK A/C DR DIRECT INCOME CURRENT ASSET TO TRADING A/C ‘OUTSTANDING ‘ADD TO THE TREATED ASA EXPENSES A/C DR EXPENSES CONCERNED CURRENT LIABILITY | TO OUTSTANDING EXPENSES A/C EXPENSE PREPAID EXPENSES | DEDUCT FROMTHE | TREATED ASA PREPAID EXPENSE A/C DR CONCERNED CURRENT ASSET TO EXPENSES A/C EXPENSES INCOME RECEIVEDIN | DEDUCT FROMTHE | TREATED ASA INCOME A/C DR ADVANCE CONCERNED INCOME | CURRENT LIABILITY | TO PREPAID INCOME A/C INCOME ACCRUED | ADD TO THE TREATED AS A INCOME A/C DR CONCERNED INCOME | CURRENT ASSET TO INCOME A/C ACCRUED DEPRECIATION TREATED AS AN DEDUCT FROM DEPRECIATION A/C DR EXPENSE CONCERNED ASSET _| TO ASSET A/C INTEREST ON TREATED AS AN ‘ADD TO THE CAPITAL | CAPITAL INTEREST ON CAPITALA/C DR EXPENSE TO CAPITAL A/C PROVISION FOR TREATED AS AN DEDUCT FROM PALATE DR DISCOUNT ON EXPENSE DEBTORS TO PROVISIONS FOR DIS ON DRS DEBTORS PROVISION FOR TREATED AS AN DEDUCT FROM PROVISION FOR DISONCRSA/C DR DISCOUNT ON INCOME CREDITORS, TO P/LA/C CREDITORS. ADDITIONAL BAD | ADDTOTHEBAD | DEDUCT FROM DEBT A/C DR DEBT DEBT ALREADY DEBTORS BAD TO SUNDRY DEBTORS GIVEN IN THE TRIAL NEW PROVISION FOR | DESTADDTOTHE | DEDUCT FROM PALasc OR BaD BAD DEBT ALREADY | DEBTORS TO PROVISION FOR BAD DEBT GIVEN IN THE TRIAL MANAGERS TREATED AS AN TREATED AS A COMMISSION A/C DR COMMISSION EXPENSE LABILITY TO QUTSTANDING COMMISSION GOODS WITHDRAW | DEDUCT FROM DEDUCT FROM DRAWINGS. A/C OR NBUTNOT PURCHASES CAPITAL INTHE TO PURCHASES A/C RECORDED NAME OF DRAWINGS1 Sem BBA/B.Com ~ FINACIAL ACCOUNTING > Down payment — It is the initial amount paid by the hirer to the hire vendor at the time signing of agreement under H.P system. > Hire purchase price(H.P Price) I Is the total amount payable by the hirer to the vendor for the purchase of goods made under H.P system. It includes interest or hire charge of Hire purchase agreement. So H.P price = Cash price + Interest > Hire purchase charge or interest It is the additional amount paid by the hirer to the vendor for the agreement made under Hire purchase system. This is the difference between H.P price and cash price. ference between Hire Purchase and Sales sales Hire purchase Under sales ownership is | Under hire purchase transferred at the time | ownership is transferred of purchase only after paying last Installment In the case of sale, | in case of hire purchase payment of price is | payment of price is generally paid in lump | always made by sum installments The buyer can hire out | The buyer cannot hire and sell the goods before | out or sell the goods paying the full amount | until the full amount is due. pald In the case of sale on | if the buyer fails to pay credit the seller can sue | any installment, the the buyer for the | seller can repossess the payment of price due | goods In sales position Is like | in hire purchase position owner is like Baile Incase of cash sale, price | 8ut under H.P system does not include interest | the installment includes interest METHODS OF ACCOUNTING FOR HIRE PURCHASE TRANSACTIONS FULL CASH PRICE METHOD Under this method the asset Is recorded at full price. Thus this method treats the hire purchaser as owner of the asset. Journal entries in the books of hire purchaser 1. When asset acquired on H.P Asset a/c Dr To Hire vendor a/c 2. When down payment made Hire vendor afc Dr www.cUStudents. To cash a/e 3. When interest become due Interest afe or To hire vendor 4. When installment paid{with interest) Hire vendor a/c br To cash a/e 5. When depreciation charged to asset Depreciation a/c br To asset 6. When depreciation charged to P/L a/c P/Lafe Dr To depreciation 7. When interest charged to P/La/e P/Lafe Dr To Interest a/e Journal entries in the books of hire vendor 1, When the esset sold on H.P Hire purchaser a/e Dr To HP sales 2, When down payment received Cash a/c Dr To hire purchaser a/c 3. When Interest becomes due Hire purchaser afer To interest 4. When first installment received Cash a/c or To Hire purchaser a/c 5. For closing of Interest Interest afc or To P/Lafe ACTUAL CASH PRICE PAID METHOD Under this asset is recorded at the cash actually paid. Thus the asset account should not be debited with its full cash price. Journal entries are same as full cash price method. ANTEREST SUSPENSE METHOD This method is almost similar to full cash price method with the difference that, in this method interest suspense account is prepared. The entire amount of interest payable is debited to interest suspense a/c and credited to hire vendor a/c. at the time of payment of each installment, interest is transferred from interest suspense a/c to interest a/c. REPOSSESSION OF GOODS UNDER H.P Under hire purchase system, if the hire purchaser falls to pay any of the installments, the hire ventor has the right to recover or take the goods without any compensation. This act of taking back the possession of goods by the hire vendor Is called repossession1 Sem BBA/B.Com — FINACIAL ACCOUNTING Repossessed assets are ultimately sold to Other customers after repairing {if necessary). In order to deal with repossession, the hire vendor operates an account called “goods repossessed afc’ Journal entries in the books of hire purchaser at the time of repossession 1. When asset taken back by the vendor Hire vendor afe or To asset a/c 2. For loss charged to P/L a/c PiLa/e Dr To asset a/c Journal entries in the books of hire vendor at the time of repossession 1. When asset taken back Goods repossessed a/c Dr To Hire purchaser 2. When repair expenses paid Goods repossessed a/c Or To Cash a/c 3. for sale of goods repossessed Cash a/e Or To goods repossessed a/c 4. for loss on sale of sale Phase or To goods repossessed a/c 5. for profit on sale of sale Goods repossessed a/c Dr To P/Lafc METHODS OF REPOSSESSION COMPLETE REPOSSESSION In case of complete or full repossession the hire vendor takes back all goods sold PARTIAL REPOSSESSION In case of partial repossession, the hire vendor does not taken all the goods repossessed at the time of default Calculation of toss on repossession = Book value of goods repossessed - agreed value of goods repossessed DEPARTMENTAL ACCOUNTING DEPARTMENT STORE ‘A department store is a large scale retail business firm having a number of departments or divisions each dealing in a particular kind of goods. DEPARTMENTAL ACCOUNTING Departmental accounts are accounts relating to the different departments o division of business and are used to ascertain the trading result of each department separately. Inother words, the system —of accounting which enables the businessman to fine out accurately the turnover, expenses and profit of each www.custudents. department separately Is called depart accounting ADVANTAGES OF DEPARTMENTAL ACCOUNTING > Provide an analytical idea about the affairs of each department The performance of each department can be evaluated separately on the basis of trading result > Ithelps the management to decide whether to close a department which is incurring losses it helps to improve the performance of profitable department departmental staff and managers can be rewarded properly on the basis of performance it facilitates managerial control over the working of each department. It helps to compare the result of each department It will help in ascertaining fixed cost of each department. This will helps to determine the B.E.P of each department It will helps in the preparation of departmental budgets (METHODS OF DEPARTMENTAL ACCOUNTS Unitary method; under this method each department is regarded as a separate unit and accounts are kept independently. Tabular method: under this system the accounts of each department are kept together but in columnar form. Y INTER DEPARTMENTAL TRANSFERS, Goods or services are often transferred from one department to another. When goods are transferred, it is sales for the supplying department and purchase for the receiving department, At the end, the transfer is recorded by passing the following journal entry Receiving department a/c Dr Supplying department a/c Goods may transferred at cost price or at selling price Transfer of goods at cost price When goods transferred from one department to another at cost, the receiving department should be debited and giving department should be credited. Transfer of goods at selling price or market price If the goods are transferred by one department to another at a profit and at the end of the accounting period such goods are included in the unsold stock, a reserve should be created in respect of the unrealized profit on unsold closing stock by debiting the general PéL a/c. the journal entry is. General P/L a/e DrI Sem BBA/B.Com — FINACIAL ACCOUNTING To provision for unrealized profit In order to ascertain unrealized profit we must know the inter departmental stock (unsold part goods received from the department at selling price) with the receiving department and rate of gross profit of the giving department Unrealized profit = inter departmental stock X G/P ratio of giving department Inter departmental stock = closing stock of receiving dpt X transfer of goods Purchase of goods(rec dpt) X transfer of goods Gross profit ratio (giving dpt) =Gross profit X100 ‘Sales + transfer ACCOUNTS FOR HOTELS & RESTAURANTS MEANING OF HOTELS A hotel simply refers to an enterprise that provides rooms and meals, A hotel may be defined as a place that offers accommodation, food and beveragesat cost that enables it to make a profit, CLASSIFICATION OF HOTELS 1, On the basis of location- on the basis of location, hotels can be classified into 0 city- centre hotels- these are located in the heart of the city. > Motels- these are primarily located on highways. They provide modest lodging to highway travelers with lot of parking place > Airport hotels- these are hotels set up near airports. resort hotels- they located in sea, mountain ete.., > floatels- hotels establishes luxury ships Boatels-houseboat hotels. 2. On the basis of target market- > Convention — hotels- provide convention or conference halls * Casino hotels- provide gambling facilities 3. On the basis of size- 0 Small hotels o Medium hotels o Large hotels 0 Mega hotels > Chain hotels- branch hotels 4. On the basis of level of service > Economy or budget hotels- low rate charged hotels > Ecotels- environment friendly hotels, > Condominium hotels hotels with apartments, ‘STAR RATING OF HOTELS + One star hotel- small and independent owned hotels. www.Custudents. ‘Two star hotels ~ small and medium si Provide more extensive facilities. * Three star hotels- bigger than above two. They provide higher quality facilities, * Fourstar hotels- luxury hotels * Five star hotels- more luxurious than four star hotels DEPARTMENTS OF HOTELS Revenue earning depariments Accommodation- responsible for sale of rooms. It consist the following sub-departments Front office department- functions are sell the rooms, to assign rooms, provide information etc. o Housekeeping department. responsible for cleaning of hotels 0 Maintenance department. repairs, lighting ete Laundrry- responsible for launder of bed lines, uniforms ete. Food & beverages department: it includes * Restaurant- responsible for sale food > Room service- food service to guests in their rooms. > Bars- dispenses variety of liquors > Banquets- organize parties and conventions hen- to deal with preparation of food Non-revenue departments > Finance and accounts department Human resource department Sale & marketing department Purchase department Revenue of hotels Room rent Food and meals Banquets rent Other incomes lke laundry, telephone service ete Expenses of hotels purchases and provisions kitchen expenses salaries electricity advertisement repairs other expenses. ‘TYPES OF GUESTS. > On the basis of residence 1. resident guest 2. with lodging only 3. lodging and boarding(food) vey vvvy Vyvvvvey1 Sem BBA/B.Com ~ FINACIAL ACCOUNTING 4, nonresident guests > on the basis of settlement of dues o guest with credit facility 1, guest without credit facility ADJUSTMENTS IN HOTEL ACCOUNTING Staff meals -free meals to staffs- treat as wages or salaries and add to the income from meals Staff accommodation- free accommodation to staffs- add to the salaries and add to the income from accommodation Proprietor’s meals- add to the drawings and less total drawings from capital and also add it to the income from meals Proprietor’s accommodation. add to the drawings and less total drawings from capital and also add it to the income from accommodation Books & accounts to be maintained by a hotel Cash book — to record all cash transactions Sales day book- to record all credit ales Purchase day book- to record all credit purchases Visitor's ledger- the ledger accounts of all the guests are maintained in the tabular form in the visitor's ledger. For keeping the accounts of each one of the guests, each one of the transactions relating to each guest are immediately recorded in it ROOM RATE- Room rate simply refers to room rent. It is the charge fixed by the hotel for accommodation provided to the ‘guests. It isthe rate at which the guests are charged for the rooms let out to them. BASES OF CHARGING ROOM RATES 24 hours stay system- under this system, a guest is charged a fixed amount for a stay of every 24 hours or part thereof from the time of his occupying the room in the hotel. This means he has to pay this fixed amount if he stays only @ few hours. Night stay system- under this system, the guest has to pay the room rent for every night spent in the hotel. Normally he should vacate the room before dinner of the next day. In cese he falls, he has to pay charges for another night. Check out system- Under this system, a check out time is fixed by the hotel. Generally 12 noon is taken as check out time. If any guest occupies more than the checkout time, he has to pay the day's room rent OPERATING RATIO 1. Room occupancy rate- it is the ratio of the number ofrcoms occupied by the guests to the total number of |ettable rooms available. www. cUStudents. =_No of rooms occupied X 1 No. of lettable rooms availabl Room occupancy rate 2, Bed occupancy rate- the bed occupancy rate is refers the ratio of beds occupied by the guest to the total number of beds available in the hotel. Bed occupancy rate= No. bed occupied X 100 No, of total beds available 3. Double occupancy rate- this is the ratio of double rooms occupied by the guests to the total rooms occupied by the guests. Double occupancy rate= total guests - rooms occupied X 100 No. of rooms occupied BRANCH ACCOUNTING MEANING OF BRANCH A branch is @ segment of a business. It is a chain of shops functioning in different localities under the control of the head office. BRANCH ACCOUNTING Asalready stated, branches carty on all activities under the control of head office. In order to exercise greater, control over the branches, it is necessary to ascertain the profit or loss made by each branch separately. For this, it is requires the head office and the branches to keep proper books of account, Branch accounting means accounting for branches.it is the process recording financial transaction of all branches to know the profitability and financial position of all branches separately. NEED OF BRANCH ACCOUNTING To ascertain profit or loss of each branch To ascertain the financial position of each branch To helps in controlling of branches To assess the progress and performance of each branch F To ascertain the requirement of stock and cash for each branch To ascertain whether the branch should be expanded or closed To determine the closing stock of each branch yvy \ ‘TYPES OF BRANCHES, se DEPENDENT BRANCH The branch which does not maintain a complete record of its transaction is said to be a dependent branch. It sells goods received from the head office (H.0). It has no power to purchase goods from others, Allthe transactions which take place between H.0 and the branch are recorded In the books of H.0. sh INDEPENDENT BRANCHIl Sem BBA/B.Com — FINACIAL ACCOUNTING Under this system of branch accounting, branches are treated as separate independent units, Such branches are known as independent branch. An independent branch receive goods from H.0 and also purchases from the open market. It follows its own sales strategy. Expenses are met by the branch out of its own funds, itdoes not remit cash to H.O immediately, but deposit in a bank In its own account and uses for paying all expenses. Cash may be sent to H.O if there Is a surplus or if the H.0 is in need of funds. FEATURES OF INDEPENDENT BRANCH > Branch maintain complete books of accounts The branch maintain a H.O a/c in its books > Branch prepare atrial balance and final accounts and send the copies of these statements to the Ho % After receiving copies, H.0 reconcile the statement. » Methods of maintaining accounts of dependent branches > Debtors system % Stock & debtors system > Final account system > Wholesale branch system DEBTORS SYSTEM Under this method, the head office prepares a branch a/c for each branch. Its purpose is to ascertain profit or loss made by each branch, This method is generally followed when size of the branch Is small H.0 may send goods to branch elther at cost price or selling price. Journal entries in H.O books (debtors system) 1. To record opening balances of assets Branch a/e or To Br. Stock Jo Br. Debtors To Br. Petty cash To Br. (other) assets 2. To record opening balances of liabilities Br. Liabilities a/c Dr To Branch 3. Goods sent to the branch Branch a/c or To goods sent on branch 1. Goods returned by the branch to H.O Goods sent to Branch a/c Dr Branch a/c 2. When H.O meets Br. Expenses or send cash to meet those expenses Branch a/c Dr www.CUStudents. To cash/bank When cash received from branch the branch cash sales or cash received debtors Cash / bank a/c or To Branch 4, To record closing balances of assets Br. Stock a/c Dr Br. Debtors a/c Dr Br. Petty cash a/c Or Br. (other) assets Dr To branch To record closing balances of liabilities Branch a/e Dr To Br. Liabilities 6. Transfer of profit at the branch Branch afe Dr To General P/La/e In case of goods sent at selling price some additional entries are to be passed. 7. Adjustment of loading in opening stock Stock reserve afer To branch 4. Adjusting loading in closing stock Branch a/c br To stock reserve a/c 5. Removing of loading in goods sent to branch Goods sent to Br.a/e Dr To branch a/c 6. Removing goods returned by the branch Branch a/e or To goods sent to Br. afc Proforma of branch a/c pis Al pis A To bal B/d Stock | | By bal e/¢ Liabilities Debtors Petty cash || By bank By goods Other assets To| | sent to Br(return) By goods sent to Br bal b/d Stock To bank (exp) To Debtors Other assets bal c/¢ liabilities, Petty cash STOCK & DEBTORS SYSTEM Under stock & debtors system, several accounts relating to the transactions of a branch are maintained in the books of H.0. they are: Branch stock a/c- this account shows the actual stock with the branch as the balance in this account. Its generally prepared to ascertain any shortage or surplus of stock Branch debtors a/c- this account is maintained when the branch Is sell goods on credit. This, account is prepared to ascertain elther the closing balance of debtors or the credit sales.I Sem BBA/B.Com ~ FINACIAL ACCOUNTING “Branch expenses a/c- this record all branch expenses such as bad debts, discount, salaries ete, this account is closed by transferring the balance to branch adjustment a/e Branch adjustment a/c- it records stock reserves, loading in goods sent to Br. and returns, shortage or surplus of stock, expenses: and incomes ete. itis ike trading P/L a/c Goods sent to Branch a/c- it record all goods sent by H.0 to branch. It also record return on goods sent, loading In goods sent and returns ete, Branch cash a/c- this account is generally opened when the branch is allowed to hold cash and use it for expenses and remit the balances to H.0 after certain intervals. “Branch fixed asset a/c- a separate account for each fixed asset Is opened to record any adaitions, reductions, depreciation etc. and to find out the balance at the end. Journal entries (stock & debtors system] 1. For goods sent to branch Branch Stock a/c Or To goods sent to branch a/c 2. For goods returned by branch Goods sent to branch a/c or To Branch Stock a/e 3. For cash sent to branch for expenses Br, expenses a/c br To bank/ cash 4, For cash sales at branch Bank cash a/c Dr To branch stock a/c 5. For credit sales at branch Branch debtors a/c Dr To branch stock 6. For goods returned to branch by customers Branch stock a/c Dr To branch debtors 7. For cash collected from branch debtors Bank /Cash a/c Dr To branch debtors 8. For discount and allowance to debtors & bad debts Branch expenses a/c or To branch debtors 9. For remittance to H.O Bank a/c Dr To branch cash 10. For purchase of any fixed asset at branch Branch asset a/c or To Bank 11. Depreciation on branch asset Branch P/L a/c Dr www.custudents. To Branch asset For transter of branch expenses Branch adjustment afc or To branch expenses For abnormal loss of goods Branch adjustment a/c Dr To branch stock For transferring net profit Branch adjustment a/c Dr To General P/La/c In case of goods sent to branch at selling price the following additional entries are to be passed 4, For removal of load in opening stock Stock reserve a/c Dr To branch adjustment 5. Adjusting loadingin closing stock Branch adjustment a/c Dr To stock reserve a/c 12. Removing of loading in goods sent to branch Goods sent to Br. a/c or To branch adjustment a/c 13. Removing goods returned by the branch Branch adjustment afc Dr To goods sent to Br. a/c FINAL ACCOUNT SYSTEM Under this method, the profit or loss at the branch is ascertained by preparing the memorandum branch trading profit and loss account in place of Branch a/c. it should be noted that opening stock, closing stock , goods sent to branch and returns are recorded at cost price only. This means if these items are given at invoice price, these should be converted into cash price. WHOLESALE BRANCH SYSTEM Some manufactures sell goods through wholesalers as well a5 through their own retail branches. The goods are supplied to wholesalers and retail branches at the same price, that is wholesale price, The retail branches would sell the goods to customers at a list price, This list is always higher than the wholesale price. Thus the manufacturer islikely to get additional profit. by selling goods through retail branches. GOODS IN TRANSIT Goods may be sent by H.0 to the branch on a particular day. They may reach the branch after sometimes, The H.0 will pass the journal entry on the day of sending, but the branch will pass the journal entry only when it receives the goods, These goods which are on the way are called goods in transit, CAPITAL AND REVENUE Accounting items are broadly classified In to two- capital & revenue items. It is nonrecurring in nature. InIl Sem BBA/B.Com — FINACIAL ACCOUNTING short any expenditure incurred for increasing the earning capacity of a business is called capital expenditure. Capital items are f divicied in to two. . capital expenditure . capital receipts and revenue items are further divided in to two. . Revenue expenditure . Revenue receipts CAPITAL EXPENDITURES Capital expenditure is that which gives a long term benefit to the business. It result in the acquisition of a ‘tangible fixed assets like building, machinery etc. EXAMPLES FOR CAPITAL EXPENDITURES % Any expenditure for the purpose of acquiring fixed |s a capital expenditure Any expenditure Incurred on extension or Improvement of an existing asset is a capital expenditure “Any expenditure which Increase the earning capacity of business is a capital expenditure. Any money spent for ralsing capital Is capital expenditure eg..Cost of issue of shares, brokerage ete Any expenditure incurred for acquiring intangible asset Is capital expenditure. REVENUE EXPENDITURE ‘An expenditure which benefits the current period is known as revenue expenditure. tis recurring nature. It does not increase the earning capacity of the business but maintains the earning capacity EXAMPLES OF REVENUE EXPENDITURES Expenses incurred for maintaining day to day operations such as rent, salaries etc. % Cost of purchase of raw materials *% Cost maintaining fixed asset such as depreciation *% Other examples are interest on loan, legal expenses, loss on sale of fixed assets, bad debts et. In short all expenditure which are not capital nature Is, revenue expenditure. Revenue expenditure becoming capital expenditure. There are certain revenue expenditure which becomes capital expenditures. They are- “© Repairs- repairs usually revenue expenditure. Immediate repair on secondhand assets may be taken as capital expenditure. Wages- wages are revenue expenditure. But wages paid for installing new assets may be treated! as capital expenditure. www.CUStudents. “Legal expenses- these are revenue expendi But legal expenses incurred for purchasing a fixed asset may treated as capital expenditure. “Transport expenses- they are also usually revenue expenditure but transport expense incurred for acquiring fixed asset is capital expenditure. oh Freight and carriage- carriage paid on newly purchased fixed asset is treated as capital expenditure. Difference between capital expenditure and revenue expenditure Capital expenditure | Revenue expenditure Benefits is available for | Benefits 15 available for long period ‘one financial year only Non-recurring nature | Recurring nature Shown on the asset side | Debited to P/La/e Incurred for acquisition | incurred to earn & improvement of revenue or profit assets Helps to increase the| Helps to maintain the earning capacity of | earning capacty business DEFERRED REVENUE EXPENDITURES Deferred revenue expenditure is that class of revenue expenditure which Is incurred during a particular year but the benefit of which may extend to a number years. The whole amount of such expenditure cannot be treated as the expenditure of the year in which it Is Incurred. Therefore, a portion of such expenditure Is charged every year to P/L a/e and unutilized part Is shown on the asset side of the balance sheet. FEATURE OF DEFERRED REVENUE EXPENDITURE + These are revenue nature + Thelr benefit is extended to several years * Relatively large amount EXAMPLES * Preliminary expenses * Brokerage + Underwriting commission + Heavy advertisement + Cost Issue of shares Difference between revenue expenditure _and deferred revenue expenditure Deferred revenue expenditure ‘Small amount Usually heavy amount Recurring in nature Non-recurring nature Benefits is available for one | Benefits is avaliable for financial year only long period Debited to P/L afc Portion of such expenses shown P/L afc and balance shown in the balance sheet Revenue expenditureI Sem BBA/B.Com ~ FINACIAL ACCOUNTING CAPITAL PROFIT Profit earned on sale of fixed assets or in connection with raising capital is known as capital profit. Examples includes profit on sale of fixed assets, profit on sale of forfeited shares, premium on issue of shares ete. REVENUE PROFIT Revenue profit is the profit earned in the ordinary course of business. This is the profit from operation or business. This appears on the credit side of the P/La/c, CAPITAL LOSSES Capital losses are those which occur at selling fixed assets or raising share capital. Example s includes loss on sale fixed assets, discount on Issue of shares etc REVENUE LOSSES Revenue losses are the losses which arises from ordinary course of business, This Is the loss from business or operation, These are debited to P/L a/c. ACCOUNTING FOR NON-PROFIT ORGANIZATION Non-profit organization Non-profit organization are those organization which are established not for earning profit but for promoting welfare, social service, culture, sports ete. medical association, charitable trusts, clubs, educational institutions etc are examples of such organization FINAL ACCOUNTS OF NON-PROFIT ORGANIZATION The final account of non-profit organization includes the following . Receipt & payments a/c . Income & expenditure a/c . Balance sheet "T & PAYMENT ACCOUNT Receipt & payment account is a summary of cash transactions for a particular period. It is Financial ‘Accounting prepared from cash book at the end of the year. It contains all cash receipts and payments whether they are capital nature or revenue nature or whether related to previous year or next year, It does not includes prepaid expenses & incomes. FEATURES OF RECEIPTS & PAYMENT ACCOUNT Its areal account |t is prepared fram cash book \t starts with opening cash and bank balances and ends with the closing cash and bank balance \ Y Y > |tcontains both capital and revenue nature items 7 It does not contains outstanding expenses and incomes > The receipts are entered on the debit side and payments are entered on the credit side. It does not show profit or loss during the period. book Cash book Receipt & payment a/c Itisa subsidiarybook | It is a memorandum book Transactions are | Prepared at the end of recorded throughout the | each year year Detailed form of cash | Part of book keeping transactions Summary of | Part of final accounts cash book It is prepared both | It is prepared only by trading and non-trading | non-trading concerns concerns iCOME & EXPENDITURE ACCOUNT Income and expenditure account in nature, In this account, only revenue expense and revenue receipts of the period are recorded. All expenses are shown on the debit side and all incomes are shown on the credit side. The difference between two sides is known as profit or loss. FEATURES OF INCOME & EXPENDITURE ACCOUNT Its nominal in nature It ls prepared from receipt & payment a/c Itrecord all losses and expenses on the debit side and record all incomes on the credit side It contains only revenue receipts and payments, It completely ignore capital items It take only current year's expenses and income Italso includes non-cash items such as bad debts, depreciation etc 7 It does not contain opening or closing balances of cash or bank > The closing balances represents either profit or loss. Vy Y yyy Difference between receipt _& payment a/c and income & expenditure a/c Receipt & Payment A/C Income & Expenditure Ale Itis anominal It Includes only revenue items expenses are shown on the debit side and Incomes are shown on the credit side side It does not start with opening balance Itisa real account account It includes both capital revenue items Receipts are shown on the debit side and payments are shown on the credit s It starts with opening balance of cash or bank or both It is prepared on cash basis It is prepared on accrual basis.II Sem BBA/B.Com — FINACIAL ACCOUNTING It includes item relating | it includes items of to previous year, current | current year only year It is like a cash book itis like a P/Lafe Itignore non-cash items | it record all noncash items The closing balance [The closing balance represents cash in hand | represents profit or loss or cash at bank or both Difference between income & expenditure a/c and Profit and loss a/c Income & Expenditure | Profit And Loss A/C |_ Ae | It is the revenue a/e of | it is the revenue a/c of non-profit organization _| profit organization It is prepared find out | itis prepared to find out surplus or deficit profit or loss Itdoes not start with any | it start with gross profit, balance Surplus or deficit is | Profit or loss transferred transferred to capital | to capital a/c fund ‘TREATMENT OF SOME IMPORTANT ITEMS 1, Subscription- subscription fee received by non-profit organization is treated as revenue income 2, Donation- it may be general or special. General donation is treated revenue item and special donation is treated as capital item 3. Specific fund- funds created for specific purpose like cricket fund, tournament fund etc are to be shown separately onthe liability side. 4, Government grants- when grnats Is received for specific purpose, then treated as capital receipt and if the grant is general in nature treated as revenue income. 5. Endowment fund: capital receipt 6. Legacies- gift or conation received as per the will. [tis treated as capital receipt 7, Entrance fee- admission fee. Treated as revenue receipt 8, Life membership fee- it is nonrecurring nature. So treated as capital receipt 9, Honorarium- it is an amount paid to a person invited by an organization to conduct a programme in the organization, It is revenue expenditure 10. Purchase of sports material- capital expenditure 11. Sale of fixed asset- capital receipt 12, Sale of sports material- revenue receipts 13. Subscription of journal and newspay 14, Sale of old newspaper- revenue receipts www.custudents. revenue expenditures PROBLEMS IN FINANCIAL ACCOUNTING SOLE ‘TRADERS’ ACCOUNT Record journal entries Post in to ledger accounts Preparation of trading account Preparation of profit and loss account Balance sheet Trial balance HIRE PURCHASE AND INSTALLMENT SYSTEM Record journal entries in the books of hire purchaser under full cash price method Record journal entries in the books of hire vendor under full cash price method Record journal entries in the books of hire purchaser under actual cash price paid method Record journal entries in the books of hire vendor under actual cash price paid methed Record journal entries in the books of hire purchaser under interest suspense method Record journal entries in the books of hire vendor under interest suspense method Calculation of interest when cash price, interest rate and installments are given Calculation of interest when cash price and installments are given(no interest rate) Calculation of interest when only amount of installments are given. Calculation of cash price under working back method Calculation of cash price under annuity method Repossession of goods -— complete repossess Repossession of goods- partial repossession n DEPARTMENTAL ACCOUNTING Final accounts of departments HOTEL ACCOUNTING 1. Final account of hotels Room rate Operating ratios, BRANCH ACCOUNTING Branch accounting under debtors system Branch accounting under stock and debtors system Branch accounting under final account system