PREPARATION OF FINANCIAL STATEMENTS -PART 1

 

PREPARATION OF FINANCIAL STATEMENTS

Accounting Cycle: The accounting cycle is a series of steps which starts with recording of transactions and leads to the preparation of financial statements.

Transactions: The economic event that relates to a business entity is called business transaction which involves transfer of money or goods or services between two parties or two accounts. Every activity of financial nature having documentary evidence expressed in monetary term causing effect on assets, liabilities, capital revenue and expenses is termed as business transactions.

Recording Transactions: The following types of accounts to be known to record all types of business transactions:

Type of Account	Description	Example
Personal Account	Person or firms or company
·        Natural Personal Account	Individual persons	Ram’s Account
·        Artificial Personal Account	Artificial or legal bodies created by law	Ram&Co. Account
·        Representative Personal Account	Indirectly represents a person or persons	Salaries Outstanding Account Prepaid income account
Impersonal Account	Not related to persons
·        Real Account	Relates to assets	Land, Machinery ,Goodwill ,Patents, Cash in hand and at bank
·        Nominal Account	Relate to expenses, losses, gains, revenue, etc	Rent account, Salaries account

 

Accounting Rules:

• Personal Account: Debit the Receiver; Credit the Giver
• Real Account         : Debit what comes In; Credit what goes Out
• Nominal Account: Debit all Expenses and Losses; Credit all Incomes and Gains

Journal: A journal is a chronological record of transactions, also known as the “Book of Original Entry or First Entry”. The process of recording in journal is called Journalizing.

General Journal Form

Date	Particulars	Ledger Folio	Dr.	Cr.
Date of transaction	Account Debited Account Credited (Explanation of Transaction)	Reference to the main book	………………..	……………..

 Classifying transactions: Transactions recorded are classified in various accounts chronologically in order to have a consolidated view of the similar transactions in particular period.

Ledger: Ledger refers to the summary statement of all transactions relating to various transactions which have taken place during a given period of time and showing net effect, also known as “Book of Main Entry” or “Principal Book”. The process of transferring information from the journal to the ledger us called Posting.

General Ledger Form

Dr.                                                   Name of Account                                                                         Cr.

Date	Particulars	J.F.	Amount Rs.	Date	Particulars	J.F.	Amount Rs.
	To (Name of Debit A/c)				By (Name of Credit A/c)

Summarizing of Transactions:

Preparation of statement that lists the transactions of all accounts to ensure the proof of completion and correctness of the books of accounts is known as summarizing of transactions.

Trial Balance: A trial balance is a listing of accounts and their balances at a specific point of time.

General form of Trial Balance

Trial Balance as on 31.03.2019 – Mr. XYZ Book

S.No.	Name  of  Accounts	L.F.	Debit Balance Rs.	Credit Balance Rs.