Branches of Accounting

Accounting is the language of business which spreading into main three branches, Financial Accounting, Cost Accounting and Managerial Accounting.There differences are discussed in this info-graphic, you will definitely find it helpful.

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FINANCIAL ACCOUNTING

deals with the financial information based on historical/ past activities of the firm.Its primary objective is to summarized the monetary information of firm in the form of Financial statements which shows the financial performance and financial position of the firm that is basically presented to the external users of firm's information.

COST ACCOUNTING

is that branch of accounting which is primarily concerned with the determination of cost of a single unit or service. It mainly dealt with inventory valuation that means determining the cost of every type of inventory whether its Raw material inventory, Finished goods inventory, work in process inventory or merchandise inventory, it helps in measuring the profits and building balance sheet. Cost accounting is also involve in planning the allocation, saving costs i.e. part of controlling and also helps in decision making.

MANAGERIAL ACCOUNTING

Managerial accounting based upon the information provided by cost accounting but its scope is wider than cost accounting it uses advance techniques and monetary and non-monetary information for making decisions.

Adjusting Entries

Many transactions of a company affects more than one accounting period; to measure the profit of a company, the life of a company is divided into small periods having equal length generally these periods are consists of one year. This division into small periods creates the need for adjusting entries because some transactions have effects on more than one period like the purchase of insurance policy for 3 years, payment of rent for 15 months and purchase of an equipment which may have life for 5 or 6 years, these assets used over the period of time that means …………. Gradually these assets will become expense   ………. So these expenses are required to be recorded at the end of period. That is done by adjusting entries. In short adjusting entries are

• Made at the end of Financial/Accounting period 
• Made on the date of closing before preparation of financial statements
• Made for those transactions which affect more than one period
• Important for the fair calculation of profit/loss

Adjusting entries are based on two main accounting principles;

• Ø  Principle of realizing the revenue.
• Ø  Principle of matching expenses with the revenue.

Principle of realization states that revenue should be recorded in the period when it is earned that is why unrecorded revenues and previously recorded revenues are adjusted at the end of the period to realize the actual income earned whether they are unearned or earned revenues. While Matching Principle said to match the expense of the period with the revenue of that period. Because those expenses which incurred in generating the revenue should be allocated to that revenue.     

Adjusting entries following types:

ü  Entries to apportion recorded cost/ Prepaid expenses

ü  Entries to apportion unearned revenues

ü  Entries to record unrecorded revenues

ü  Entries to  record unrecorded expenses  

                                               I.          Depreciation expense adjustment

                                             II.          Bad debts adjustment

 Every adjusting entry effects both income statement and balance sheet.

•  Entries to apportion recorded cost/ Prepaid expenses

Prepaid insurance account shows a debit balance Rs.7200 representing payment of premium from May,1 to April 30, of next year.

	Debit	Credit
Prepaid Insurance	7200
Cash		7200

This entry is made for the whole 12 months while the insurance is expired for 8 months in the current accounting year, so the insurance expense for the year is 7200/12 = 600 while for 8 months is 600*8 = 4800 

	Debit	Credit
Insurance Expense	4800
Prepaid Insurance		4800

Prepaid expenses can also be recoded in the following form

The rent expense account has a balance of Rs.6000 which was a full year rent paid in advance on May 1.   

	Debit	Credit
Rent Expense	6000
Cash		6000

This 6000 rupees are charged for the whole year but it was paid on May 1, and the accounting year is January to December, that is why the rent paid is used only for 8 months i.e. (6000/12)*8 = 4000 and the remaining rent prepaid is 6000-4000 = 2000

	Debit	Credit
Prepaid Rent	2000
Rent Expense		2000

•        Entries to apportion unearned revenues

On October 1, rental income was credited for Rs.2400 representing rent for a period of 8 months starting on that date i.e.

	Debit	Credit
Cash	2400
Rental Income		2400

This entry is adjusted as 2400/8 = 300, this is the rent income of a month while the company has earned income of 3 months i.e. October to December, then for the 3 months it will be 300*3 = 900. And the rental income for other 5 years is not earned yet. Then the unearned rent income will be recorded now i.e. 2400-900 = 1500

	Debit	Credit
Rental Income	1500
Unearned rent income		1500

Unearned revenues can also be recoded in the following form

Storage fees earned amounted to Rs.2400, the storage fees received in advance Rs.10200 was initially credited to unearned storage fees, as follows:

	Debit	Credit
Cash	10200
Unearned storage fees		10200

As the above transaction says that storage fee 2400 has earned out of storage fees 10200 received in advance.

	Debit	Credit
Unearned storage fees	2400
Storage fees		2400

  

·       Entries to  record unrecorded expenses 

December 31, falls on Monday. Employees of company are paid Rs.14224 on every Thursday, for six working days. Then this salary expense has not been paid and recorded yet that is why it will be recorded as follows:

	Debit	Credit
Salary Expense	14224
Salary Payable		14224

It has effect on both income statement and balance sheet as shown below.

                    Adjustment for Depreciation expense

An office furniture was purchased on August 20 at a cost of Rs.25,000. Estimated residual value after service life of 8 years is Rs.1000.

Now the depreciation expense for the year is calculated by a simple straight line depreciation method i.e. 25000-1000/8= 3000 since the furniture is purchased in late August days so it is not used from January to August then it is used only for 4 months i.e. September to December so the depreciation for 4 months is calculated as 3000*(4/12)= 1000. Then the adjusting entry for current year depreciation is as follows:  

	Debit	Credit
Depreciation Expense	1000
Allowance for depreciation		1000

   Adjustment for Bad Debts expense

The allowance for bad debts were estimated at the rate of 5% of the year end accounts receivable balance (Account Receivable = 80000). This is calculated as 80000*5/100 = 4000.

	Debit	Credit
Bad debt expense	4000
Allowance for bad debts		4000

·       Entries to record unrecorded revenues

The company owns a Rs.6000 note receivable dated August 31, of the current year. The note bears interest at 16% , interest is recorded by the company when it is received.

But at the end of the year according to realization principle the company has to record its interest earned in that period, the interest is calculated as 6000*(16/100) = 960, this is the interest for the whole year but the note receivable is issued at August 31, that means interest is earned only for 4 months i.e. 960*(4/12) = 320.    

	Debit	Credit
Interest Receivable	320
Interest Income		320

Now you would be in a better understanding of adjustments in the end of accounting period, if you have any questions in your mind please do not hesitate to ask, just write your thought  in the comment box.