FINANCIAL ACCOUNTING

AND ANALYTICS
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HI COLLEGE
SYLLABUS
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 JOURNALIZING TRANSACTIONS

JOURNAL ENTRIES
Journal entries are transactions recorded in a company's accounting journal.
They are used to document every financial transaction within a business,
including revenue, expenses, assets, liabilities, and equity. Journal entries
usually follow a standard format, including the date of the transaction, the
accounts involved, the amount of the transaction, and the direction of the
transaction (increase or decrease). The purpose of journal entries is to provide a
clear audit trail of all financial transactions in a business, which can be used to
help create accurate financial statements and identify any errors or
discrepancies in the accounting records.

COMPOUND JOURNAL ENTRIES

Compound journal entries are transactions that involve more than two
accounts. In other words, they are entries that require multiple debit and credit
accounts to complete the transaction. For example, if a business pays a supplier
for a purchase made on credit, the journal entry would involve at least three
accounts - accounts payable, cash, and the expense or inventory account
associated with the purchase. Compound journal entries are more complex
than simple journal entries and require careful consideration to ensure
accuracy. Therefore, businesses with high-volume transactions and complex
accounting practices often employ professional accountants or bookkeepers to
handle their financial records.

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 JOURNALIZING TRANSACTIONS

OPENING ENTRY
An opening entry is the initial entry made at the beginning of each accounting
period to establish the starting balances in the general ledger accounts. The
purpose of an opening entry is to bring the company's accounts back to zero
and start a new accounting period with accurate balances.

The opening entry typically involves two accounts: retained earnings and the
balance sheet account. The retained earnings account represents the
accumulated net income of the business over the past accounting periods,
while the balance sheet account represents the value of the assets, liabilities,
and equity of the company.

To make the opening entry, the accountant will credit the retained earnings
account and debit the balance sheet account for the same amount. This will
result in a zero balance for both accounts, which allows the company to start
the new accounting period with a clean slate.

The opening entry is a crucial step in the accounting cycle because it

establishes accurate starting balances for all accounts. Without an opening
entry, there may be errors in the financial statements that could impact the
decision-making process of business management and stakeholders.

LEDGER POSTING AND TRIAL BALANCE

LEDGER POSTING
Ledger posting is the process of transferring the amounts from journal entries
to the respective accounts in the general ledger. It involves the use of debits
and credits to record each transaction in the appropriate account, and this
creates a trail of every transaction carried out by a company.

The main purpose of ledger posting is to summarize the transactions recorded

in the journal entries and ensure that every account in the ledger contains
accurate information to assist in the preparation of financial statements.

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 LEDGER POSTING AND TRIAL BALANCE

TRIAL BALANCE
A trial balance is a statement of all the balances in a company's accounts after
ledger posting has been completed. The trial balance is usually prepared at the
end of an accounting period, most typically at the end of each month.

The trial balance summarises all the debit and credit balances recorded for
each account in the general ledger. This total should balance, with the total of
all debit balances equal to the total of all credit balances.

The trial balance is useful because it provides an opportunity to check for errors
in the accounting records. If the totals do not balance, it indicates that there are
errors in either the journal entry or ledger posting process. Further investigation
will then be necessary to identify and correct these errors before financial
statements can be prepared with confidence.

PREPARATION OF LEDGER
The ledger is a record of all financial transactions that have been completed by
a company. To prepare a ledger, you will need to identify every account that
your company uses to track its transactions. Each account should have a
separate page in the ledger.

When preparing the ledger, you will need to list the account name, its unique
identification number, and a brief description of the account. You should then
enter all of the financial transactions that have occurred during the accounting
period, recording all debits and credits for each transaction.

POSTING
To post an entry to the ledger, you will need to transfer the amounts from the
journal entry to the correct account in the ledger. This involves debiting or
crediting each account accordingly, as well as recording the date of the
transaction and a brief description of the transaction.

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 LEDGER POSTING AND TRIAL BALANCE

CASH BOOK
A cash book is a book that records all the cash transactions of a company. To
prepare a cash book, you should list all cash sales and cash purchases, as well as
any other cash transactions that occur in your business.

SALES AND PURCHASE BOOKS

Sales and purchase books are used to record sales and purchases respectively.
To prepare these books, you should list all sales or purchases that have been
made, as well as the date of each transaction, the name of the customer or
supplier, and any unique identification number associated with the transaction.

TRIAL BALANCE
A trial balance is a statement that shows the total amount of all debits and
credits for each account in the ledger. To prepare a trial balance, you should list
all account names and their corresponding debit and credit balances. The total
of the debit balances should equal the total of the credit balances, indicating
that your accounting records are balanced.

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 COMPANY FINAL ACCOUNTS

Final accounts, also known as financial statements, are the culmination of the
accounting process. They represent the financial position of a company at the
end of an accounting period. The two main types of financial statements are
the income statement and the balance sheet. Other statements, such as the
statement of cash flows, may also be included.

PREPARATION OF FINAL ACCOUNTS WITH ADJUSTMENTS

To prepare final accounts, you will need to follow these steps:

1. Prepare trial balance: The first step is to prepare a trial balance, which lists all
accounts and their balances. This trial balance will be adjusted to reflect any
changes occurring before the end of the accounting period.

2. Adjustments: Adjustments are necessary to ensure that the final accounts

reflect a company’s true financial position. Common adjustments include:

Accruals and Prepayments: Adjustments are made for expenses or

revenues that have not been recorded but are incurred or earned within the
accounting period.
Depreciation: This adjustment accounts for the reduction in value of fixed
assets due to wear and tear or obsolescence.
Provision for bad debts: This adjustment provides a reserve for debts that
may not be recovered.
Stock Valuation: This adjustment accounts for the value of unsold goods in
stock at the end of the period.
Interest accrued on loans: This adjustment accounts for the interest that
accrues on outstanding loans.

3. Prepare Income Statement: The income statement shows the company’s

revenue, expenses, and net income or net loss for the accounting period. It is
prepared by subtracting the total expenses from the total revenues.

4. Prepare Balance Sheet: The balance sheet provides a snapshot of the

company’s financial position at a specific point in time. It lists all of the
company’s assets and liabilities as well as the equity of the shareholders. It is
prepared by subtracting the company’s liabilities from its assets.

5. Cash flow statement: The cash flow statement shows the inflows and
outflows of cash in a company. It is useful for assessing a company's liquidity,
solvency, and overall financial health.

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 TRADING ACCOUNT

A trading account is an account that shows the revenue and expenses of a

business related to its core operations. It shows how much profit a business
made in a given period, specifically as a result of buying and selling goods.

The trading account is a component of the final accounts and is usually

prepared for a specific accounting period, usually a year. The information
contained in the trading account is used to prepare the profit and loss
statement (income statement).

The main components of a trading account are as follows:

1. Revenue: Revenue is the income earned by the business by selling its goods.
The total revenue earned by the business during the accounting period is the
first item in the trading account.

2. Cost of goods sold: This refers to the cost of the materials and labor used to
produce the goods sold during the accounting period. It is calculated by taking
the value of the opening stock and adding purchases and then deducting the
closing stock.

Cost of goods sold = Opening stock + Purchases – Closing stock

3. Gross profit: Gross profit is the difference between the revenue earned and
the cost of goods sold. It is calculated by subtracting the cost of goods sold
from the revenue earned.

Gross profit = Revenue – Cost of goods sold

4. Expenses: Expenses are any costs incurred by the business to operate its core
operations. Examples of expenses include rent, utilities, wages, and salaries.

5. Net profit (or loss): Net profit (or loss) is the final figure in the trading account.
It is calculated by subtracting the expenses from the gross profit.

Net profit (or loss) = Gross profit – Expenses

The trading account is important for businesses because it shows the efficiency
of their operations and the profitability of their goods.

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 PROFIT AND LOSS ACCOUNT

A profit and loss (P&L) account, also known as an income statement or

statement of operations, is a financial statement that summarizes the revenues,
costs, and expenses incurred by a business during a specific period, usually a
fiscal quarter or year.

The main objective of the P&L account is to calculate the net profit or loss of the
business during the period under review. The P&L account covers all the
incomes, expenses, gains, and losses that a business experiences during the
accounting period. The P&L account is prepared in a way to measure the
profitability of the business.

The main components of a P&L account are as follows:

1. Revenue: Revenue is the total income earned by the business during the
period under review. It includes all the sales of goods and services, fees, interest,
and any other income generated by the business operations.

2. Cost of goods sold: Cost of goods sold (COGS) is the direct cost incurred by
the business to produce its goods or services. COGS includes all the costs of raw
materials, labor, and overhead costs incurred to produce the product sold
during the period under review.

Gross profit = Revenue - COGS

3. Operating expenses: Operating expenses are the indirect costs incurred by

the business to operate its operations. Examples of operating expenses include
rent, salaries, utilities, and marketing expenses.

Operating profit = Gross profit - Operating expenses

4. Non-operating expenses: Non-operating expenses are the expenses that are

not related to the business's core operations. Examples of non-operating
expenses include interest expenses, tax expenses and other non-operational
expenses

5. Net profit or loss: Net profit or loss is the final result of the P&L account. It is
calculated by taking the operating profit and deducting the non-operating
expenses and taxes to arrive at the net income for the period under review.

Net profit (or loss) = Operating profit - Non-operating expenses - Taxes

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 PROFIT AND LOSS ACCOUNT
The P&L account shows the financial strength and weaknesses of a business
during the specific period and helps management identify areas where
efficiency can be improved and expense can be reduced. It is an important tool
for decision-making as it shows how profitable a company is, and this
information is important for investors and analysts who want to know the
financial health of a company.

BALANCE SHEET AS PER SCHEDULE-III OF THE

NEW COMPANIES ACT 2013
As per Schedule III of the new Companies Act 2013, the Balance Sheet is a
statement that presents the financial position of a company at a particular
point in time. It reflects the company's assets, liabilities, and equity at the end of
the accounting period.

The balance sheet is made up of two sides - assets and liabilities & equity. The
assets side lists all the resources owned by the company, and the liabilities &
equity side indicates how the company has funded these assets.

The main components of the balance sheet as per Schedule III are as follows:
ASSETS
a. Non-current assets: This includes property, plant, and equipment, intangible
assets, financial investments, and other long-term assets.

b. Current assets: This includes inventories, trade receivables, cash and cash
equivalents, and other short-term assets.

LIABILITIES
a. Non-current liabilities: This includes long-term borrowings, provisions,
deferred tax liabilities, and other non-current liabilities.

b. Current liabilities: This includes short-term borrowings, trade payables,

provisions, and other current liabilities.

LIABILITIES
This includes share capital, reserves, and surplus.
The balance sheet equation states that assets are equal to liabilities & equity.
This means that all the resources owned by the company (assets) must be
financed by either borrowing (liabilities) or by the owners' investment (equity).

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