03 - Smart Accountant Training - Day 1 - Session 4.pptx

basic accounting principles

1. Welcome to Smart Accountant class 200 Hrs 60 Hrs 140 Hrs Accounts – Entries and More 3 Months, 200 Hours 60 Hours of Class 140 Hours of Practicals

2. Registered Office M-51, Ramakrishna Vihar , IP Extn . Patparganj , New Delhi – 110092 Registered Corporate Office Office No. 404, 410 & 411 Devika Tower, Chander Nagar, Ghaziabad – 201011 Contact 0120-4113633 9560054515 7840054515 www.virtualgroup.in 3 Months, 200 Hours 60 Hours of Class 140 Hours of Practicals

3. Accounting Cycle Steps in Accounting cycle Accounting Processing Cycle Accounting Required Documentation Accounting Entry In respect of: Purchase, Sales, other Expenses Fixed Assets Accounting and Depreciation Accounts – Entries & More Interest Expenses Interest Income Accounting Processing Cycle Required Documentation Accounting Entries Entry-Fixed Assets & Dep Entry-Interest Expenses Entry-Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Classification of Accounts

4. Accounting Cycle The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

5. Accounting Cycle The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

6. Accounting Cycle For a new business, it begin by: Creation of Company code Setting up Chart of Accounts Setting up ledger accounts. For an established business, begin with account balances carried over from the previous period. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

7. Steps in Accounting cycle Analyze source documents & record business transactions in a journal Post journal entries to the ledger accounts Prepare unadjusted trial balance (TB) Journalize and post end of period adjustments (EOPA) Prepare adjusted Trial Balance Prepare / Create financial statements and reports from data in adjusted TB Journalize and post the closing entries Prepare the post-closing trial balance Prepare and post reversing entries Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

8. ACCOUNTING PROCESSING CYCLE Record & Post Adjusting Entries Source documents Transaction Analysis Record in Journal Post to Ledger Financial Statements Adjusted Trial Balance Unadjusted Trial Balance Close Temporary Accounts Post-Closing Trial Balance Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

9. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Every business deal with other “Person”, possesses “Assets”, pay “Expenses” and receive “Income”. So from the above, we can see every business has to keep An account for each person An account for each asset and Liability An account for each expense or income.

10. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Accounts in the names of persons are known as “Personal Accounts” Accounts in the names of assets and Liabilities are known as “Real Accounts” Accounts in respect of expenses and incomes are known as “Nominal Accounts”

11. POINT TO NOTE Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Whenever we use any prefix or suffix with any of the income or expense, then it will become personal. Example:- Outstanding Expenses, Prepaid Expenses, Accrued Income, Income Received in Advance.

12. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Accounts Personal Accounts Impersonal Accounts Real Accounts Nominal Accounts

13. Personal Accounts Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Accounts in the name of persons are known as personal accounts. e.g.: Babu A/C, Babu & Co. A/C , Outstanding Salaries A/C, etc.

14. Real Accounts Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature. e.g.:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch. Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.

15. Nominal Accounts Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Nominal accounts are related to those things which we can feel, but can not see and touch. All “expenses and losses” and all “incomes and gains” fall in this category. Eg :- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.

16. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Each accounts have two sides – the left side and the right side. In accounting, the left side of an account is called the “Debit Side” and the right side of an account is called the “Credit Side”. The entries made on the left side of an account is called a “Debit Entry” and the entries made on the right side of an account is called a “Credit Entry”.

17. Rules for Debit and Credit Personal Account Debit the Receiver Credit the Giver Real Accounts Debit what comes in Credit what goes out Nominal Accounts Debit all Expenses and Losses Credit all Incomes and Gains Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

18. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Steps for finding the debit and credit aspects of a particular transaction Find out the two accounts involved in the transaction. Check whether it belongs to Personal, Real or Nominal account. Apply the debit and credit rules for the two accounts.

19. Rules for Debit and Credit Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Exercise Purchased a Building for Rs.20,000 /- Paid Cash Rs.1,000/- to Satish . Paid Salary Rs.1000/-. Received Commission Rs.250/-. Sold goods for Cash Rs.3500/-.

20. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Primary Accounting Documents Receipt Vouchers Payment Vouchers Fund Transfer Vouchers/Contra Vouchers. Journal Vouchers Cash Memo Invoices for Sale & Purchase Debit Note Credit Note Bank Statement Vendor and Party Statements The purpose of maintaining docs is to help the stakeholders to make better business decisions by providing them with financial information.

21. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Financial Statements of Non Company -Trading Account -Profit and Loss Account -Profit and Loss Appropriation Account -Balance Sheet Financial Statements of Company -Balance Sheet as per Schedule III -Statement of Profit and Loss Account as per Schedule III -Notes to Accounts -Cash Flow Statement

22. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Financial Statements of Not for Profit Organizations -Receipt and Payment Account -Income & Expenditure Account -Balance Sheet For how many years books of accounts are required to be preserved: Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for how many years he should keep the records of his books of accounts. Rule 6F(5) of Income Tax Act,1961 provides that the books of accounts and other documents  are to be kept for at least 6 years from the end of relevant assessment year. That means for the assessment year 2014-15 one should keep books of accounts upto the assessment year 2020-2021 i.e. books of accounts of financial year 2013-14.

23. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Where the books of accounts should be kept: The current year’s books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F(3). There is no specific rule as to where the books of accounts of earlier years should be kept.

24. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Format of Receipts & Payments Account Receipts Amount(Rs ) Payments Amount(Rs ) To Balance b/d 1,00,00,000 By Salary 3,00,000 To Share of Taxes(SOT) 1,00,00,000 By Wages 1,00,000 To TUEP 50,00,000 By Electricity Expenses 50,000 To Property Tax 5,00,000 By Fuel 10,00,000 To Water Tax 6,00,000 By TUEP 13,00,000 By Balance c/d 2,33,50,000 2,61,00,000 2,61,00,000

25. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Format of Income & Expenditure Account Expenditure Amount( Rs) Income Amount(Rs) To Salary 10000 By Property Tax 1,00,000 Wages 5000 Add-Outstanding 50,000 1,50,000 Printing & Stationery 3000 By Water Tax 30,000 Interest 5000 By Profit on sale of refreshment(50,000-20,000) 20,000 Insurance 1000 Excess of Income over Expenditure 1,86,000 2,00,000 2,00,000

26. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Format of Balance Sheet Liabilities Amount Assets Amount Capital Fund Rs. 10,00,000 Less: Excess of Income over Exp. Rs. 1,86,000 8,14,000 Furniture 5,00,000 Loan from HUDCO 1,00,000 Cash in Hand 10,000 Outstanding Rent 20,000 Cash at Bank 3,29,000 Subscription received in advance 5,000 Stock 1,00,000 9,39,000 9,39,000

27. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Format of Trading Account

28. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Format of Profit & Loss Account

29. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts   Particulars Note No. Figures as at the end of current reporting period Figures as at the end of previous reporting period I. EQUITY AND LIABILITIES 1) Shareholder’s Funds (a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants (2) Share application money pending allotment (3) Non-Current Liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other Long term liabilities (d) Long term provisions (4) Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions Total II.Assets (1) Non-current assets(a ) Fixed assets ( i ) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances (f) Other current assets Total Format of Balance Sheet as per Schedule III

30. ACCOUNTING REQUIRED DOCUMENTATION Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

31. ACCOUNTING ENTRIES STARTING BUSINESS 1. On Jan 1, 2010, Ms. Farida invested 100,000 at the inception of the business, Express Travel Agency Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

32. ASSET PURCHASE ENTRY 2. On 2 January office furniture and equipment is purchased for 15,000 , for which 5,000 is paid in cash and the rest would be paid later in January and February 2010. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

33. PURCHASES ENTRY 3. On 10 January ,purchased Raw Material for 2.500 from M/s AB & CO. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

34. SALES ENTRY 4. During the second half of January ,the agency sold tickets to various customers and on 31 January issued a commission invoice to Kenya Airline amounting to 7,500 which will be collected in February . Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7500 No Change +7500 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

35. EXPENSE ENTRY 5. On 24 January, paid salaries of 9,000 to employees in cash. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7,500 No Change +7,500 5. -9,000 No Change -9,000 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

36. INCOME ENTRY 6. On 28 th Jan, Received rent of 50,000 by cheque . Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7,500 No Change +7,500 5. -9,000 No Change -9,000 6. +50,000 No Change +50000 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

37. DEPRECIATION ENTRY 7. Depreciate Furniture & equipment on 31 st March @ 10%. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7,500 No Change +7,500 5. -9,000 No Change -9,000 6. +50,000 No Change +50000 7. - 375 No Change -375 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

38. PREPAID ENTRY 8. Annual Insurance Premium of 12500 is paid by Bank on 31 st May this year. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7,500 No Change +7,500 5. -9,000 No Change -9,000 6. +50,000 No Change +50000 7. -375 No Change -375 8. + 2,083 - 12,500 No Change - 10,417 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

39. PREPAID ADJUST ENTRY Adjustment of Entry No.7 in Next Year. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

40. PROVISION ENTRY 9. Electricity Bill for March Rs 22000 has come. Event No Assets Liabilities Owner’s Equity 1. +1,00,000 No Change +1,00,000 2. +15,000 -5,000 +10,000 No Change 3. +2,500 +2,500 No Change 4. +7,500 No Change +7,500 5. -9,000 No Change -9,000 6. +50,000 No Change +50000 7. -375 No Change -375 8. +2,083 -12,500 No Change -10,417 9. No Change +22000 -22,000 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

41. PROVISION ADJUST ENTRY On 4 th April, Electricity bill of March paid. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

42. WRITTEN OFF ENTRIES Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

43. WRITTEN OFF ENTRIES Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

44. WRITTEN OFF ENTRIES Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

45. Fixed Assets are business purchases which will be used by the business for a few years. These assets are used for earning income and not for resale. Examples are machinery, vans and computers.   FIXED ASSETS ACCOUNTING AND DEPRECIATION Fixed Assets are classified as Assets in the  Balance Sheet , & not Expenses in the  Profit and Loss Account .   What is a Fixed Asset ? Fixed Assets fall into two categories:   • Tangible Fixed Assets- which can be seen or touched  ( eg . Cars, Machinery, Computers, Buildings, Desks)  • Intangible Fixed Assets   -which cannot be seen or touched ( eg . Goodwill, Intellectual Property,Patents,etc )   Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

46. FIXED ASSETS ACCOUNTING AND DEPRECIATION Tangible Fixed Assets The main point about the purchase of a Fixed Asset is that the business will probably own it for some time, in other words, it is not an Expense.  Tangible Fixed Assets are normally grouped into categories, especially for  Balance Sheet  reporting.  The main categories of Tangible Fixed Assets are:  • Land  • Buildings  • Furniture and Fittings  • Computers  • Motor Vehicles  • Plant & Machinery  Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

47. DEPRECIATION CONCEPTS   What is Depreciation? Depreciation is the gradual transfer of the original cost of a Fixed Asset from the  Balance Sheet  to the  Profit and Loss Account . The transfer is usually done by a  Journal . It could be said that Depreciation is  "Expensing"  a Fixed Asset - ie . a percentage of the cost of the Fixed Asset becomes an Expense, and the Fixed Asset then has a lower value on the Balance Sheet. It is usually a simple calculation which is usually made once a year by very small businesses.  Depreciation is a non cash expense. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

48. METHODS OF DEPRECIATION METHODS Straight Line Method/ Fixed %age on Original Cost Method/ Fixed Installment Method/ Equal Installment Method Written Down Value Method/ Reducing Balance Method/ Diminishing Balance Method Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

49. SLM Straight Line Method of Depreciation For example, a computer costs 1,000 , and is expected to last 4 years, ie . an annual depreciation rate of 25%. On a straight line method the annual depreciation is 250 , which is transferred to the Profit and Loss Account from the Balance Sheet every year for 4 years. So after 1 year, the Balance Sheet value becomes 750 , and the 250 has been charged as Depreciation to Profit and Loss. In the second year, the computer depreciates to 500 , and another 250 is charged to Profit & Loss. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Formula for Calculation of Depreciation by SLM = Original Cost Less Scrap/ Residual Value No of Years of Useful Life Rate of Depreciation by SLM = Depreciation/Original cost *100

50. WDV Reducing Balance Method of Depreciation Another depreciation method is the  reducing balance method . This method may be suitable when the Fixed Asset will be gradually losing its value, but its useful life cannot be precisely estimated. For example a van may cost 8,000 . In the first year 25%, ie 2,000 could be depreciated, leaving a balance of 6,000 . In year 2, 25% is depreciated from the reduced balance of 6,000 , ie . 1,500 , leaving a balance of 4,500 , and so on.  Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts Rate of Depreciation by WDV =  1 – [ s/c] 1/n Here , ‘s’ signifies the scrap value at the end of the useful life ‘n’ stands for the useful life of the asset ‘c’ stands for written down value at present.

51. Interest Expense  is an expense account and is presented as a deduction from revenues in the income statement. In a condensed income statement, is normally included under "Other Expenses" or "Finance Costs". Interest expense may be paid monthly, annually, or upon payment of the principal. It may also be paid in advance (deducted from the amount borrowed). Nonetheless, interest expense for the period must be properly recognized. Interest arises as the period lapses, regardless of when it is paid. ACCOUNTING ENTRY IN TERMS OF INTEREST EXPENSES AND INTEREST INCOME Interest Expense' Definition: Interest Expense  refers to the cost of borrowing money that is used or to be used by a business. Classification and Presentation of Interest Expense Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

52. INTEREST EXPENSE JOURNAL ENTRIES For interest that is paid monthly, the journal entry would be: Interest Expense xx.xx   Cash   xx.xx For interest that has accrued but is yet to be paid, the journal entry would be: Interest Expense xx.xx   Interest Payable   xx.xx The above is an adjusting entry and is made at the end of every period – annually, quarterly, or monthly, depending on the need of the company. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

53. INTEREST EXPENSE EXAMPLE 1. On October 1, 2017, INDIGO Company borrowed 600,000 at 10% interest from a bank. As per agreement, the principal is to be paid after 1 year while interest is payable monthly. On October 31, 2017, the company paid the first interest payment. The journal entry to record the interest would be: Interest Expense 5,000.00   Cash   5,000.00 The interest is computed as: $600,000 x 10% x 1/12 = $5,000. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

54. INTEREST INCOME CONCEPTS Classification and Presentation of Interest Income Interest receivable is the amount of interest that has been earned, but which has not yet been received in  cash . The usual journal entry used to record this transaction is a  debit  to the interest receivable account and a  credit  to the interest income account. Interest Income  is an income account and is presented in the income statement. If the company's income statement presents "Income from Operations" and "Other Income" separately, the classification of  Interest Income  will depend upon the primary operations of the business. If the business primarily makes income from interests (such as for lending companies and financial institutions), then  Interest Income  is considered "Income from Operations". Otherwise, interest income is to be presented as other income. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

55. INTEREST INCOME JOURNAL ENTRIES The journal entry to record interest earned but are still to be collected is: When the business earns and receives interest income, the journal entry is: Cash xx.xx   Interest Income   xx.xx Interest Receivable xx.xx   Interest Income   xx.xx Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

56. INTEREST INCOME EXAMPLE Cash 200.00   Interest Income   200.00 1. On December 31, 2017, GAMELI Company received the monthly interest on its bank account. The interest amounted to 200 for the month of December. The journal entry to record the receipt of the interest would be: Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

57. INTEREST INCOME EXAMPLE (a),(b) (b),(c),(d) (All) (a),(c),(d) Assuming that the total of the following prime entry books are posted at periodical intervals to the appropriate nominal account, which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

58. TEST (a),(b) (b),(c),(d) (All) (a),(c),(d) Assuming that the total of the following prime entry books are posted at periodical intervals to the appropriate nominal account, which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

59. (b),(c),(d) (a),(b) (c),(d) (All) TEST Which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

60. (b),(c),(d) (a),(b) (c),(d) (All) TEST Which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

61. TEST (a) (a),(b) (All) (a),(b),(c) Which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

62. TEST (a) (a),(b) (All) (a),(b),(c) Which of the following accounting entries are correct? Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

63. TEST A Excess debit £1,850 B Excess credit £1,850 C No impact 4 A purchase invoice is recorded in the Purchases Day Book as £18,500, without taking account of 10% of that amount offered as trade discount Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

64. TEST Excess debit £1,850 Excess credit £1,850 No impact d) A purchase invoice is recorded in the Purchases Day Book as £18,500, without taking account of 10% of that amount offered as trade discount Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

65. TEST Excess debit £19,600 Excess debit £9,800 No impact h) The total of the Returns Outwards Day Book, amounting to £9,800, has been posted to the debit of the Purchases Returns account. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

66. TEST Excess debit £19,600 Excess debit £9,800 No impact h) The total of the Returns Outwards Day Book, amounting to £9,800, has been posted to the debit of the Purchases Returns account. Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

67. TEST Which of these is not a sales promotion technique? Questionnaire Loyalty card Coupon Bonus park Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

68. TEST A machine was acquired at a cost of £130,000 on 1.1.20x1 and is expected to have a scrap value of £10,000 after ten years of use. The machine is expected to run for 900 hours in each of the first two years. In each year thereafter it is expected to run for 100 hours less than in the preceding year. Identify, by stating a, b, c, or d in the grid, the depreciation to be written off in the year ending 31 December 20x3, if the method of depreciation in use is: The straight-line method £17,778 £ 17,455 £12,000 £17,601 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

69. TEST A machine was acquired at a cost of £130,000 on 1.1.20x1 and is expected to have a scrap value of £10,000 after ten years of use. The machine is expected to run for 900 hours in each of the first two years. In each year thereafter it is expected to run for 100 hours less than in the preceding year. Identify, by stating a, b, c, or d in the grid, the depreciation to be written off in the year ending 31 December 20x3, if the method of depreciation in use is: The straight-line method £17,778 £ 17,455 £12,000 £17,601 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

70. TEST The reducing balance method, at 22.6% per annum £17,778 £17,455 £12,000 £17,601 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

71. TEST The reducing balance method, at 22.6% per annum £17,778 £17,455 £12,000 £17,601 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

72. TEST A machine was acquired at a cost of £130,000 on 1.1.20x1 and is expected to have a scrap value of £10,000 after ten years of use. The machine is expected to run for 900 hours in each of the first two years. In each year thereafter it is expected to run for 100 hours less than in the preceding year. Identify, by stating a, b, c, or d in the grid, the depreciation to be written off in the year ending 31 December 20x3, if the method of depreciation in use is: The straight-line method £17,778 £ 17,455 £12,000 £17,601 Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts

73. Thank You Accounting Processing Cycle Required Documentation Accounting Entries Entry - Fixed Assets & Dep Entry - Interest Expenses Entry -Interest Income Steps in Accounting Cycle Accounting Cycle Classification of Accounts