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Engineering economics (1917)
Author: Waddell, J. A. L. (John Alexander Low),
http://www.archive.org/details/engineeringecono00waddrich
Wednesday, May 21, 2008
Tuesday, May 20, 2008
Basics of Financial Accounting - II Ledger Posting
The journal entry specifies which account is to be debited and which account is to be credited.
In the ledger each account has a left side which is termed the debit site and a right side which is termed as credit side.
Thus the account has ths structure of "T" left portion being the debit side and right portion being the credit side and hence accounts are called T accounts.
From the journal, the entries are posted in various accounts in the ledger.
If in the journal, it is specified that the account is to be debited, the entry is shown in the debit side with the remark "to account name." The account name is the account which is to be credited for this transaction. Hence from a ledger account of account A, one reads a debit entry as Account A debtor to Account B.
If the account A is to be credited, the entry is shown on the credit side with the remark "by Account name". The account name specifies the account to be credited in this transaction. One can read the entry as Account A credited by Account C.
Thus, based on the journal entries, various accounts in the ledger posted. Please note that for each journal entry, two entries are made in the ledger. One entry is made in the account which is to be debited and another entry is made in the account which is to credited. Therefore, after complete ledger posting any journal entry, the total debit postingss in entire ledger is equal to the total of credit postings.
Periodically, the balances in the ledger accounts are totalled and it is verified whether the total of debit balances is equal to the total of credit balances are not. If both of them do not tally, there is some error and hence the entries are checked once again till a matched balance of debits and credits appear. The statement made for this purpose is called trial balance.
In the ledger each account has a left side which is termed the debit site and a right side which is termed as credit side.
Thus the account has ths structure of "T" left portion being the debit side and right portion being the credit side and hence accounts are called T accounts.
From the journal, the entries are posted in various accounts in the ledger.
If in the journal, it is specified that the account is to be debited, the entry is shown in the debit side with the remark "to account name." The account name is the account which is to be credited for this transaction. Hence from a ledger account of account A, one reads a debit entry as Account A debtor to Account B.
If the account A is to be credited, the entry is shown on the credit side with the remark "by Account name". The account name specifies the account to be credited in this transaction. One can read the entry as Account A credited by Account C.
Thus, based on the journal entries, various accounts in the ledger posted. Please note that for each journal entry, two entries are made in the ledger. One entry is made in the account which is to be debited and another entry is made in the account which is to credited. Therefore, after complete ledger posting any journal entry, the total debit postingss in entire ledger is equal to the total of credit postings.
Periodically, the balances in the ledger accounts are totalled and it is verified whether the total of debit balances is equal to the total of credit balances are not. If both of them do not tally, there is some error and hence the entries are checked once again till a matched balance of debits and credits appear. The statement made for this purpose is called trial balance.
Accounts in a Ledger - An Explanation
Accounts in a ledger are similar to baskets or buckets used to segregate similar items when there is a need to separately identify a group of mixed items.
Accounts maintained in a ledger are classified as
personal accounts (relating to persons - customers, suppliers, employees etc.)
Real accounts (relating to assets)
Nominal accounts (relating to incomes, expenses etc.)
How many accounts will be opened in a ledger of a firm?
The number of accounts depends on the detail required. As the firm gets bigger and bigger more number of accounts are necessary to maintain the detail required.
For example, a firm may have an account for travelling expenses. If more detail is required, another firm may maintain an account for local travel, a separate account for travel within the country, and still another account for international travel.
Accounts maintained in a ledger are classified as
personal accounts (relating to persons - customers, suppliers, employees etc.)
Real accounts (relating to assets)
Nominal accounts (relating to incomes, expenses etc.)
How many accounts will be opened in a ledger of a firm?
The number of accounts depends on the detail required. As the firm gets bigger and bigger more number of accounts are necessary to maintain the detail required.
For example, a firm may have an account for travelling expenses. If more detail is required, another firm may maintain an account for local travel, a separate account for travel within the country, and still another account for international travel.
Friday, May 16, 2008
Basics of Financial Accounting - 1
Engineers and other technical persons are responsible for the profit, revenue or cost implications of their decisions.
They need to have the ability to study the accounting information provided to them for decision making as well as for control of the functions under their supervision or management.
A brief note on the accounting system followed in business concerns is provided here.
Accounting system consists of source documents(bills, Travelling allowance bills etc.) called as vouchers in accouting jargon, a register to enter transactions serially (called a journal) and a register in which accounts are kept for various items of accounting interest (items for which the firm wants details of accounts - share capital of the firm, amount invested in buildings etc.) This register is called a ledger.
Information can be retrieved from the ledger and put in various statements to provide information relevant for various decisions and actions in the organizations.
For example, money to be received from a customer can be ascertained by preparing a statement showing the items supplied to the customers and the value of it and the amount paid by the customer so far. This information is available in the ledger of the customer in a ledger specially called customer ledger or debtors ledger. To make the job of making entries feasible, the ledger is maintained in split books called general ledger and subsidiary ledgers. Customer ledger is a subsidiary ledger.
Every year, companies have to prepare profit and loss account, balance sheet and cash flow statement and send them to their shareholders. These statements termed as financial statements are prepared using the data maintained in the ledger.
The income tax return is also an accounting statement prepared using the ledger in case of a business concern.
Thus so far we introduced the following concepts
Accounting system
Source document
Voucher
Register
Journal
Ledger
Account
Customers ledger or debtors ledger
General ledger
Subsidiary ledger
Accounting statement
Profit and loss account
Balance sheet
Cash flow statement
Financial statements
Accounting source document
When you receive payment from a cashier, you sign on say your travel bill submitted by you confirming that you received the payment claimed in the bill from cashier. This becomes the a source document for the accounting system to record the money transaction. similarly when the supplier is paid an amount through cash or through cheque he sends a receipt. If a telephone bill is paid through cash, the telephone company acknowledges the payment by stamping the receipt of the amount on bill given by them to your company. Thus source documents get generated whever there is transactions involving money.
Journal
Journal is a book or a register in which all transactions are first recorded in a chronological order (in the order of time period). You can assume that at the end of each day, all the accounting documents are passed on to an accountant and he posts the details of the transactions in the journal. In a computerised system, the journal entry is created along with the accounting source document.
The process of recording transactions in the journal is called journalising.
The journal entry indicates which account is debited and which account is credited due to the mney transaction about which the entry is being made. Accounts are maintained in the ledger, and they indicate items or revenue or expenditure, asset or liability, debtors or creditors about which or whom the firm decides to keep separate accounts.
Accounts maintained in the ledger are broadly classfied into personal accounts, real accounts and nominal accounts.
In journalising, or making entries in the journal, accounting language of debit and credit is used.
Debiting an account and crediting an account have specific meanings and they have to be understood in the relation to the category of accounts (personal, real or nominal)
Meaning of debit & credit for real accounts:
Debiting an account means there is an increase under the asset head.
The firm has acquired more of an asset category.
Crediting an account means there is a decrease under the asset head.
The firm has disposed off some portion of the asset in that category.
Popular rule for journalising real accounts
Debit what comes in
Credit what goes out
Debit-Credit Meaning – Personal Accounts
Debiting a personal account means that person has received a benefit from the firm.
He has to pay the firm in future.
Crediting a personal account means that the person has given some benefit to the firm.
The firm has to pay him in the future.
Popular rule for personal accounts
Debit the receiver
Credit the giver
Debit-credit meaning for nominal accounts
Crediting a nominal account means that revenue is earned by the firm under that account head.
Debiting a nominal account means that an expenditure is incurred by the firm under that account head.
Normally revenue accounts receive credit.
Expenditure accounts receive debit
Popular rule for nominal accounts
Debit expenses and losses
Credit incomes and profits
They need to have the ability to study the accounting information provided to them for decision making as well as for control of the functions under their supervision or management.
A brief note on the accounting system followed in business concerns is provided here.
Accounting system consists of source documents(bills, Travelling allowance bills etc.) called as vouchers in accouting jargon, a register to enter transactions serially (called a journal) and a register in which accounts are kept for various items of accounting interest (items for which the firm wants details of accounts - share capital of the firm, amount invested in buildings etc.) This register is called a ledger.
Information can be retrieved from the ledger and put in various statements to provide information relevant for various decisions and actions in the organizations.
For example, money to be received from a customer can be ascertained by preparing a statement showing the items supplied to the customers and the value of it and the amount paid by the customer so far. This information is available in the ledger of the customer in a ledger specially called customer ledger or debtors ledger. To make the job of making entries feasible, the ledger is maintained in split books called general ledger and subsidiary ledgers. Customer ledger is a subsidiary ledger.
Every year, companies have to prepare profit and loss account, balance sheet and cash flow statement and send them to their shareholders. These statements termed as financial statements are prepared using the data maintained in the ledger.
The income tax return is also an accounting statement prepared using the ledger in case of a business concern.
Thus so far we introduced the following concepts
Accounting system
Source document
Voucher
Register
Journal
Ledger
Account
Customers ledger or debtors ledger
General ledger
Subsidiary ledger
Accounting statement
Profit and loss account
Balance sheet
Cash flow statement
Financial statements
Accounting source document
When you receive payment from a cashier, you sign on say your travel bill submitted by you confirming that you received the payment claimed in the bill from cashier. This becomes the a source document for the accounting system to record the money transaction. similarly when the supplier is paid an amount through cash or through cheque he sends a receipt. If a telephone bill is paid through cash, the telephone company acknowledges the payment by stamping the receipt of the amount on bill given by them to your company. Thus source documents get generated whever there is transactions involving money.
Journal
Journal is a book or a register in which all transactions are first recorded in a chronological order (in the order of time period). You can assume that at the end of each day, all the accounting documents are passed on to an accountant and he posts the details of the transactions in the journal. In a computerised system, the journal entry is created along with the accounting source document.
The process of recording transactions in the journal is called journalising.
The journal entry indicates which account is debited and which account is credited due to the mney transaction about which the entry is being made. Accounts are maintained in the ledger, and they indicate items or revenue or expenditure, asset or liability, debtors or creditors about which or whom the firm decides to keep separate accounts.
Accounts maintained in the ledger are broadly classfied into personal accounts, real accounts and nominal accounts.
In journalising, or making entries in the journal, accounting language of debit and credit is used.
Debiting an account and crediting an account have specific meanings and they have to be understood in the relation to the category of accounts (personal, real or nominal)
Meaning of debit & credit for real accounts:
Debiting an account means there is an increase under the asset head.
The firm has acquired more of an asset category.
Crediting an account means there is a decrease under the asset head.
The firm has disposed off some portion of the asset in that category.
Popular rule for journalising real accounts
Debit what comes in
Credit what goes out
Debit-Credit Meaning – Personal Accounts
Debiting a personal account means that person has received a benefit from the firm.
He has to pay the firm in future.
Crediting a personal account means that the person has given some benefit to the firm.
The firm has to pay him in the future.
Popular rule for personal accounts
Debit the receiver
Credit the giver
Debit-credit meaning for nominal accounts
Crediting a nominal account means that revenue is earned by the firm under that account head.
Debiting a nominal account means that an expenditure is incurred by the firm under that account head.
Normally revenue accounts receive credit.
Expenditure accounts receive debit
Popular rule for nominal accounts
Debit expenses and losses
Credit incomes and profits
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