Financial Accounting For Bhu B.com Entrance Test

1.
Meaning and scope of Accounting
1) Transaction
 It means an event or business activity which involves exchange of money or money’s

worth between parties.
 The event can be measured in terms of money & changes the financial position of a
person.
 It can be cash or credit transaction.
2) Rules of transactions
 Transaction must have two sides. This is called dual aspect. That’s why we called
accounts as double entry book-keeping.
 It was invented by luca pacioli in 1494.
 Transaction is to be measured in terms of money. this is due to famous money
measurement concept.
 If any transactions cannot be measured in terms of money, it cannot be recorded in the
books of accounts.
3) Event
 An event is result of number of transactions & it has to be appear in balance sheet.

 Example: • Profit for the year.
• Closing stock: it is result of number of sale & purchases.
• Entire Balance sheet: it is financial result of the entire year’s operation.
4) Meaning of Accounting
Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events, which are of a financial character, and interpreting the
result thereof. Prepared By: Neeraj Yadav
5) Procedure Of Accounting
i) Generating financial information
ii) Using the financial information
Financial Accounting
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i) Generating financial information
• Recording- Journal
• Classifying- Ledger
• Summarizing- Trial balance, Profit & loss a/c, Balance sheet, Cash flow statements.
• Analyzing- Proper arrangement of items in Profit & loss and Balance sheet.
• Interpreting- Decision making.
• Communicating- Distribution of financial statements to end users.
ii) Using/users of the financial information
• Investors: They provide risk capital to the business. They need information to assess
whether to buy, hold or sell their investment. Also they are interested to know the ability of
the business to survive, prosper and to pay dividend.
• Employees: Growth of the employees is directly related to the growth of the organisation
and therefore, they are interested to know the stability, continuity and growth of the
enterprise and its ability to provide remuneration, retirement and other benefits and to
enhance employment opportunities.
• Lenders: They are interested to know whether their loan-principal and interest will be paid
when due.
• Suppliers and Creditors: They are also interested to know the ability of the enterprise to
pay their dues, that helps them to decide the credit policy for the relevant concern, rates to
be charged and so on.
• Customers: Customers are also concerned with the stability and profitability of the
enterprise because their functioning is more or less dependent in a vertical chain, suppose,
a company produces some chemicals used by pharmaceutical companies.
• Government and their agencies: They regulate the functioning of business enterprises for
public good, allocate scarce resources among competing enterprises, control prices, charge
excise duties and taxes, and so they have continued interest in the business enterprise.
• Management : On the basis of the accounts, management determines the effects of their
various decisions and their effects on the functioning of the organisation. This helps them to
make further managerial decisions.
6. Objectives of Accounting
Prepared By: Neeraj Yadav
 Systematic record of transactions-Book keeping.

 Ascertainment of result-Trading, Profit & loss.
 Ascertainment of financial position- Balance sheet.
 Providing information to users-financial reports.
 To know the solvency position – liquidity.
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7. Functions of Accounting
 Measurement-Accounting measures past performance of business entity & depicts its

current financial position.
 Forecasting-Accounting helps in forecasting future performance & financial position of the
enterprise using past data.
 Decision-making-relevant information to the users of accounts to aid rational decision
making.
 Comparison & evaluation
 Control- Accounting also identifies weakness of the operational system & provides
feedbacks regarding effectiveness of measure adopted to check such weakness.
 Government regulation taxation-Accounting is helpful to exercise control on the entity as
well as collection of tax revenue.
8. Distinction between Book keeping and Accounting.
Book keeping Accounting

1. It is process concerned with recording of It is process concerned with summarizing
transactions. of the recorded transactions.
2. It constitutes as base of accounting. It is considered as language of business.
3 Financial statements do not form part of Financial statements are prepared on the
this process. basis of book keeping records.
4. Managerial decisions cannot be taken Management take decision on the basis of
with the help of these records. these records.
5. There is no sub-fields of book-keeping. It has several fields like Financial
accounting, Management accounting ,Cost
accounting etc.
9. Sub-fields of Accounting
 Financial accounting
 Management accounting
 Cost accounting
 Social Responsibility accounting
 Human resource accounting
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10. Management accounting & Cost accounting
 Basic Accounting terms
11. Goods
 These are tangible article in which a business deals.

 These articles or commodities are either bought & sold or produced and sold.
12. Profit
 The excess of revenue over expense is called profit.

 It could be calculated for each transactions or for business as a whole.
13. Loss
 The excess of expenses over revenue is called loss.

 It could be calculated for each transactions or for business as a whole.
14. Asset
 It is a resource owned by the business with the purpose of using it for generating future
profit.
 Tangible assets are the capital assets which has some physical existence.
Eg land, building, plant , machinery etc.
 Intangible assets are the capital assets which do not have physical existence.
 Eg. Goodwill, patents, copy right, trade marks.
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 Current assets the assets expected to be converted into cash within 12 months after
reporting dates.
 Non-current assets are company long term investments where the full value not relies
within 12 months.
15. Liability
 It is an obligation of financial nature to be settled at a future date.

 Current liabilities are those liabilities which are expected to be settled in the company’s
normal operating cycle.
 Current liabilities to be settled within 12 months after reporting date.
 Non-Current liabilities are those liabilities which are held ≥ 12 months.
 Eg loan taken for 5 year.
 Internal liability are those amounts which are entitled to proprietor.
 Eg Capital, reserve, undistributed profits etc.
 Contingent liability is a potential liability that may occur depending on the outcome of
an uncertain future event.
16. Working capital
 The capital require in order to maintain flows of revenue from operations, every firms
needs certain amount of current assets.
 Gross working capital = total current assets.
 Net working capital = current assets – current liabilities.
17. Capital
 It is amount invested in business by its owner.

 It may be cash, goods or any other assets which the proprietor or business invest in the
business activity.
18. Drawing
 It represents an amount of cash, goods or any other assets which the owner withdraws
from business for his or her personal use.
 Drawing will result in reduction in owner’s capital.
 The concept of drawing is not applicable to the corporate bodies like limited companies.
19. Net worth
 It represents excess of total assets over total liabilities of the business.

 It is also termed as owner’s equity.
20. Non-current investments
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 Non-current investments are investments which are held beyond the current period as to
sale or disposal.
21. Current investments
 Current investments are investments that are by their nature readily realizable, and
 Intended to be held for not more than one year from the date on which such investments
is made.
22. Debtor
 Debtors are those persons from whom a business has to recover money on account of goods
sold or service rendered on credit.
 Debtors are also known as Sundry debtors, or Trade debtors, or Trade receivable, or
book debts.
23. Creditor
 A creditor is a person to whom the business owes money or money’s worth

 Eg. Money payable to supplier of goods or provider of service.
24. Capital expenditure
 The amount incurred for the purpose of acquiring a fixed asset which is intended to be used
over long term for earing profits from them.
 For example : amount paid to buy a computer for office use is a capital expenditure.
 If expenditure incurred for enhancing production capacity of machine. This is also termed
as capital expenditure.
 Capital expenditure is a part of balance sheet.
25. Revenue expenditure
 The amount incurred to earn revenue of current period.

 The benefits of revenue get exhausted in the year of incurrence.
 For example: repairs, insurance, salary& wages to employees etc.
 The revenue expenditure results in reduction of profits.
 It forms part of income statement. Prepared By: Neeraj Yadav
24. Balance sheet
 It is a statement of financial position of business entity on a particular date.

 It contain all assets, liabilities and capital.
 It describes what the business owes to outsiders and to the owners(this denotes capital).
 It is prepared after incorporating the resulting profits/loss of income statement.
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25. Profit and loss account or income statement
• This account shows the revenue earned by business and the expenses incurred by the
business to earn that revenue.
• This is prepared usually for a particular accounting period, which could be a month,
quarter, a half year, or a year.
• the net result of the profit and loss account will show profit earned or loss suffered by the
business entity.
26. Trade discount
 It is the discount usually allowed by the wholesaler to the retailer computed on the list price
or invoice price.
 Trade discount is not recorded in books of account.
 Transactions are recorded at net values only.
27. Cash discount
 This is allowed to encourage prompt payment by debtors.

 This is to be recorded in books of accounts.
 This is calculated after deducting the trade discount.
28.Steps/Phases of accounting cycle
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1) Analyzing and recording transactions via journal entries
2) Posting journal entries to ledger accounts
3) Preparing unadjusted trial balance
4) Preparing adjusting entries at the end of the period
5) Preparing adjusted trial balance
6) Preparing financial statements
7) Closing temporary accounts via closing entries
8) Preparing post-closing trial balance
29. Limitations of accounting
 Recording only monetary items.

 Time value of money.
 Recommendation of alternative methods.
 Restrain of accounting principles.
 Recording of past events.
 Allocation of problem.
 Maintaining secrecy.
 Tendency for secret reserves.
 Importance of form over substance.
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2. Accounting Concepts, Principles and conventions
1. Accounting Principles
Every science consists of principles. Since accounting is a science, it also consists of principles. A
principles may be defined as a rule of action or conduct or guide to action. Hence accounting
principles are the rules of action or conduct which are adopted by the accounted universally.
Accounting principles must satisfy the following conditions:
1. They should be based on real assumptions;

2. They must be simple, understandable and explanatory;
3. They must be followed consistently;
4. They should be able to reflect future predictions;
5. They should be informational for the users.
2. Accounting Concepts
The terms ‘accounting’ concepts includes basic assumptions or conditions upon which the science
of accounting is based .The following are the important accounting concepts
a) Business entity concept: A business and its owner should be treated separately as far as their
financial transactions are concerned.
b) Money measurement concept: Only business transactions that can be expressed in terms of
money are recorded in accounting, though records of other types of transactions may be kept
separately.
c) Dual aspect concept: For every credit, a corresponding debit is made. The recording of a
transaction is complete only with this dual aspect.
d) Going concern concept: In accounting, a business is expected to continue for a fairly long time
and carry out its commitments and obligations. This assumes that the business will not be
forced to stop functioning and liquidate its assets at “fire-sale” prices.
e) Cost concept: The fixed assets of a business are recorded on the basis of their original cost in
the first year of accounting. Subsequently, these assets are recorded minus depreciation. No
rise or fall in market price is taken into account. The concept applies only to fixed assets.
f) Accounting year concept: Each business chooses a specific time period to complete a cycle of
the accounting process—for example, monthly, quarterly, or annually—as per a fiscal or a
calendar year.
g) Matching concept: This principle dictates that for every entry of revenue recorded in a given
accounting period, an equal expense entry has to be recorded for correctly calculating profit or
loss in a given period.
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h) Realization concept: According to this concept, profit is recognised only when it is earned. An
advance or fee paid is not considered a profit until the goods or services have been delivered to
the buyer.
3. Accounting conventions
Accounting is based on usages and custom. Custom or usage is a practice, which is use since long.
Naturally accountants have to adopt that usage or custom. These are termed as conventions in
accounting “The term convention denotes customs or traditions which the accountant persue,
while preparing the accounting treatment”.
a) Conservatism
 Conservatism states that the accountant should not anticipate income and should provide
for all possible losses.
 When there are many alternative values of an asset, an accountant should choose the
method which leads to the lesser value.
b) Discloser
 All material information which is relevant for the proper disclosure of true and fair position,
should be disclosed prominently in the accounts and financial statements.
 Disclosure of specified information as required by law and accounting standards.
c) Consistency
 In order to achieve comparability of the financial statements of an enterprise through time,

the accounting policies are followed consistently from one period to another.
 A change in an accounting policy is made only in certain exceptional circumstances.
 To bring the books of accounts in accordance with the issued Accounting Standards
 To compliance with the provision of law.
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 When under changed circumstances it is felt that new method will reflect more true
and fair picture in the financial statement.
c) Materiality
 All the items having significant economic effect on the business of the enterprise should be
disclosed in the financial statements and
 Any insignificant item which will only increase the work of the accountant but will not be
relevant to the users’ need should not be disclosed in the financial statements.
 It is on the judgments, common sense and discretion of the accountant that which item is
material and which is not.
d) Timeliness
 Every transactions should be recorded on proper time

 So the need of user of financial information can be fulfill.
e) Industry practice
 Following modified accounting proactively adopted by industry.
Qualitative characteristics
a) Understandability
 An essential quality of the information provided in financial statements is that it must be

readily understandable by users.
 Having a reasonable knowledge of business and economic activities and accounting and
study the information with reasonable diligence.
b) Relevance
 To be useful, information must be relevant to the decision-making needs of users.

 Information has the quality of relevance when it influences the economic decisions of users
by helping them evaluate past, present or future events or confirming, or correcting, their
past evaluations is considered as relevant.
c) Reliability
 To be useful, information must also be reliable, Information has the quality of reliability.
 it is free from material error and bias
 Presented faithfully that which it either purports to represent or could reasonably be
expected to represent.
d) Comparability
 Users must be able to compare the financial statements of an enterprise through time in
order to identify trends in its financial position, performance and cash flows.
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 Users must also be able to compare the financial statements of different enterprises in order
to evaluate their relative financial position, performance and cash flows.
e) Faithful Representation
 financial information faces the risk of faithful presentation not primarily due to bias, but
rather to inherent difficulties.
 It is more so in fair value measurement as compared to historical cost measurement.
 However, accounting standards have set out unbiased measurement principles, application
of which will lead to faithful presentation.
f) Substance over form
 Transactions and other events should be presented in accordance with their substance and
economic reality and not merely their legal form.
 Example: Recognition of assets by economic benefits not by ownership.
g) Neutrality
 To be reliable, the information contained in financial statements must be neutral, that is,
free from bias.
 Financial statements are not neutral if, by the selection or presentation of information, they
influence the making of a decision or judgment in order to achieve a predetermined result
or outcome.
h) Prudence
 Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in
making the estimates required under conditions of uncertainty,
 Such that assets or income are not overstated and liabilities or expenses are not
understated.
i) Full, fair and adequate disclosure
 The financial statement must disclose all the reliable and relevant information about the
business enterprise to the management
 Also to their external users for which they are meant, which in turn will help them to take a
reasonable and rational decision. Prepared By: Neeraj Yadav
j) Completeness
 To be reliable, the information in financial statements must be complete within the bounds
of materiality and cost.
 An omission can cause information to be false or misleading and thus unreliable and
deficient in terms of its relevance.
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3. Accounting standards
Meaning of accounting standards
Accounting standards are written policy documents issued by expert accounting body or by
government or other regulatory body covering the aspects of recognition, treatment,
measurement, presentation and disclosure of accounting transactions and events in the financial
statements.
Objectives of Accounting Standards
The whole idea of accounting standards is centered around harmonization of accounting policies
and practices followed by different business entities so that the diverse accounting practices
adopted for various aspects of accounting can be standardized. Accounting Standards
standardize diverse accounting policies with a view to:
(i) Eliminate the non-comparability of financial statements and thereby improving the reliability of
financial statements; and
(ii) Provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards reduce the accounting alternatives in the preparation of financial

statements within the bounds of rationality, thereby ensuring comparability of financial
statements of different enterprises.
Overview of Accounting Standard in India
 In India, the Institute of Chartered Accountants of India (ICAI), being a premier accounting body
in the country, took upon itself the leadership role by constituting the Accounting Standards
Board (ASB) on 21st April, 1977.
 The main function of ASB is to formulate accounting standards so that such standards may be
established in India by the council of the ICAI.
 The council of the Institute of Chartered Accountants of India has, so far, issued 32 Accounting
Standards. Prepared By: Neeraj Yadav
 However, AS 8 on ‘Accounting for Research and Development’ has been withdrawn consequent
to the issuance of AS 26 on ‘Intangible Assets’.
 Thus effectively, there are 30 Accounting Standards at present.
 The ‘Accounting Standards’ issued by the Accounting Standards Board establish standards
which have to be complied by the business entities so that the financial statements are
prepared in accordance with generally accepted accounting principles.
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List of mandatory Accounting Standards
 AS 1 Disclosure of Accounting Policies

 AS 2 Valuation of Inventories
 AS 3 Cash Flow Statements
 AS 4 Contingencies and Events Occurring After Balance Sheet Date
 AS 5 Net profit or loss for the period for ,prior period items & changes in accounting policies
 AS 7 Construction Contracts
 AS 9 Revenue Recognition
 AS 10 Property, Plant and Equipment
 AS 11 The Effects of Changes in Foreign Exchange Rates
 AS 12 Government Grants
 AS 13 Accounting for Investments
 AS 14 Accounting for Amalgamations
 AS 15 Employee Benefits
 AS 16 Borrowing Costs
 AS 17 Segment Reporting
 AS 18 Related Party Disclosures
 AS 19 Leases
 AS 20 Earnings Per Share
 AS 21 Consolidated Financial Statements
 AS 22 Accounting for Taxes on Income
 AS 23 Accounting for Investments in Associates
 AS 24 Discontinuing Operations
 AS 25 Interim Financial Reporting
 AS 26 Intangible Assets
 AS 27 Financial Reporting of Interests in Joint Ventures
 AS 28 Impairment of Assets
 AS 29 Provisions, Contingent Liabilities and Contingent Assets
List of Recommendatory Accounting Standards
 AS 30 – Financial Instruments: Recognition and Measurement
 AS 31 – Financial Instruments: Presentation
 AS 32 – Financial Instruments: Disclosures
List of withdrawn accounting Standards

 AS 6 Depreciation accounting
 AS 8 Accounting for research and development
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4. Accounting Policies
Meaning of accounting policies
 Accounting Policies refer to specific accounting principles and methods of applying these
principles adopted by the enterprise in the preparation and presentation of financial
statements.
 There is no single list of accounting policies, which are applicable to all enterprises in all
circumstances.
 Enterprises operate in diverse and complex environmental situations and so they have to
adopt various policies.
The areas wherein different accounting policies are frequently encountered can be given as follows:
(1) Methods of depreciation, depletion and amortization

(2) Valuation of inventories
(3) Treatment of goodwill
(4) Valuation of investments
(5) Valuation of fixed assets.
Suppose an enterprise holds some investments in the form of shares of a company at the end of
an accounting period. For valuation of shares, the enterprise may adopt FIFO, LIFO, average
method etc. The method selected by that enterprise for valuation is called an accounting policy.
Different enterprises may adopt different accounting policies. Likewise, different methods of
providing depreciation on fixed assets, i.e. Straight line, written down, etc. are available to the
business enterprises which will lead to different depreciation amounts.
Selection of accounting Policies
 Choice of accounting policy is an important policy decision which affects the performance
measurement as well as financial position of the business entity.
 Selection of inappropriate accounting policy may lead to understatement or overstatement
of performance and financial position.
 Thus, accounting policy should be selected with due care after considering its effect on the
financial performance of the business enterprise from the angle of various users of
accounts.
Three major characteristics which should be considered for the purpose of selection and
application of accounting policies are:-
 Prudence
 Substance over form, and
 Materiality.
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 The financial statements should be prepared on the basis of such accounting policies, which
exhibit true and fair view of state of affairs of Balance Sheet and the Profit & Loss Account.
The basis for selecting accounting policies can be shown in the following chart as:
Change in accounting policies
A change in accounting policy should be made in following condition:

(a) For compliance with an accounting standard.
(b) Change would result in more appropriate presentation of the financial statement of the
enterprise.
(c) It is required by some statute (law).
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5. Accounting Process
Meaning of Double entry system
• Double entry system of book-keeping has emerged in the process of evolution of various
accounting techniques.
• It is the only scientific system of accounting. According to it, every transaction has two-fold
aspects–debit and credit and both the aspects are to be recorded in the books of accounts.
• For example, if a business acquires something then either it must have been given by
someone or it must have been acquired by giving up something.
• On purchase of furniture either the cash balance will be reduced or a liability to the supplier
will arise.
• This has been made clear the Double Entry System is so named since it records both the
aspects.
• We may define the Double Entry System as the system which recognizes and records both
the aspects of transactions.
Advantages of Double entry system
This system affords the under mentioned advantages:
a) By the use of this system the accuracy of the accounting work can be established, through
the device of the trial balance.
b) The profit earned or loss suffered during a period can be ascertained together with details.
c) The financial position of the firm or the institution concerned can be ascertained at the end
of each period, through preparation of the balance sheet.
d) The system permits accounts to be kept in as much details as necessary and, therefore
affords significant information for the purposes of control etc.
e) Result of one year may be compared with those of previous years and reasons for the
change may be ascertained.
Transaction
It means an event or business activity which involves exchange of money or money’s worth
between parties. The event can be measured in terms of money & changes the financial position of a
person there can be cash or credit transaction. To analyse the dual aspect of each transaction, two
approaches can be followed:
1) Accounting equation approach

2) Traditional approach
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Accounting equation approach
• The relationship of assets with that of liabilities and owners' equity in the equation form is
known as 'Accounting Equation'.
• Basic accounting equation comes into picture when sum total of capital and liabilities
equalises assets, where assets are what the business owns and capital and liabilities are
what the business owes.
• Under double entry system, every business transaction has two-fold effect on the business
enterprise where each transaction affects changes in assets, liabilities or capital in such a
way that an accounting equation is completed and equated.
• This accounting equation holds good at all points of time and for any number of
transactions and events except when there are errors in accounting process.
Now we have an equation:

Equity + Liabilities = Assets
or, Equity + Long-Term Liabilities = Fixed Assets + Current Assets - Current Liabilities.
Illustration 1: Develop the accounting equation from following information available at the
beginning of accounting period:
Capital 1,00,000
Loan 50,000
Trade Creditors 70,000
Fixed Assets 80,000
Stock 60,000
Debtors 50,000
Cash and Bank 30,000
At the end of the accounting period the balances appear as follows :
Capital ?
Loan 50,000
Trade Creditors 80,000
Fixed Assets 72,000
Stock 90,000
Debtors 50,000
Cash at Bank 60,000
(a) Reset the equation and find out profit.

(b) Prepare Balance Sheet at the end of the accounting period.
Solution-
(a) Accounting equation is given by

Equity + Liabilities = Assets
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E = Rs. 1,00,000
L= Loan + Trade Creditors
= Rs. 50,000 + Rs. 70,000 = Rs. 1,20,000
A = Fixed Assets + Stock + Debtors + Cash at Bank
= Rs. 80,000 + Rs. 60,000 + Rs. 50,000 + Rs. 30,000 = Rs. 2,20,000
E+ L = A
i.e., Rs. 1,00,000 + Rs. 1,20,000 = Rs. 2,20,000
L = Loan + Trade Creditors

= Rs. 50,000 + Rs. 80,000 = Rs. 1,30,000
A = Fixed Assets + Stock + Debtors + Cash at Bank

= Rs. 72,000 + Rs. 90,000 + Rs. 50,000 + Rs. 60,000 = Rs. 2,72,000
E = A - L = Rs. 2,72,000 - Rs. 1,30,000 = Rs. 1,42,000

Profit = Rs. 1,42,000 - Rs. 1,00,000 = Rs. 42,000
(b) Balance Sheet
Liabilities Amount Assets Amount

Capital Fixed assets 72000
Balance 100000 Inventories 90000
Add : profit 42000 142000 Trade receivables 50000
Loan 50000 Cash at bank 60000
Trade payables 80000
272000 272000
Traditional approach
Under traditional approach of recording transactions one should first understand the term
debit and credit and their rules.
Transactions in the journal are recorded on the basis of the rules of debit and credit only. For
the purpose of recording, these transactions are classified in three groups:
(i) Personal transactions.

(ii) Transactions related to assets and properties.
(iii) Transactions related to expenses, losses, income and gains.
Classification of accounts
(i) Personal Accounts
• Personal accounts relate to persons, debtors or creditors.

• Example: The account of Ram & Co., a credit customer or the account of Jhanvi & Co., a
supplier of goods.
• The capital account is the account of the proprietor and, therefore, it is also personal but
adjustment on account of profits and losses are made in it.
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This account is further classified into three categories:
(a) Natural personal accounts
• It relates to transactions of human beings like Ram, Rita, etc.
(b) Artificial (legal) personal account
• For business purpose, business entities are treated to have separate entity.
• They are recognized as persons in the eye of law for dealing with other persons.
• For example: Government, Companies (private or limited), Clubs, Co-operative societies etc.
(c) Representative personal accounts
• These are not in the name of any person or organization but are represented as personal
accounts.
• For example: outstanding liability account or prepaid account, capital account, drawings
account.
(ii) Impersonal Accounts
• Accounts which are not personal such as machinery account, cash account, rent a/c etc.
These can be further sub-divided as follows:
(a) Real Accounts
• Accounts which relate to assets of the firm but not debt.

• For example: accounts regarding land, building, investment, fixed deposits etc., are real
accounts.
• Cash in hand and Cash at the bank accounts are also real.
(b) Nominal Accounts
• Accounts which relate to expenses, losses, gains, revenue, etc. like salary account, interest
paid account, commission received account.
• The net result of all the nominal accounts is reflected as profit or loss which is transferred
to the capital account.
• Nominal accounts are, therefore, temporary.
GOLDEN RULES OF ACCOUNTING
All the above classified accounts have two rules each, one related to Debit and one related to
Credit for recording the transactions which are termed as golden rules of accounting, as
transactions are recorded on the basis of double entry system.
1. Personal account is governed by the following two rules:
Debit the receiver

Credit the giver
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2. Real account is governed by the following two rules:
Debit what comes in

Credit what goes out
3. Nominal account is governed by the following two rules:
Debit all expenses and losses

Credit all incomes and gains.
Illustration 2
Analyse transactions of M/S Sahil & Co. for the month of March, 2006 on the basis of double
entry system by adopting the following approaches:
(A) Accounting Equation Approach.

(B) Traditional Approach.
Transactions for the month of March, 2006 were as follows:
1. Sahil introduced cash Rs. 40,000.

2. Cash deposited in the City Bank Rs. 20,000.
3. Cash loan of Rs. 5,000 taken from Mr. Y.
4. Salaries paid for the month of March, 2006, Rs. 3,000 and Rs. 1,000 is still payable for the month
of March, 2006.
5. Furniture purchased Rs. 5,000.
What conclusions one can draw from the above analysis?
Solution
(A) Analysis of Business Transaction: Accounting Equation Approach
Transaction Analysis Account Rule Entry

Affected and
Nature of
account
Introduction of Cash received Cash-asset Debit increase in Debit cash

Rs. 40,000 cash Investment by asset
by the Proprietor owner
Capital-capital Credit increase Credit capital
in capital
cash deposited in Bank balance Bank-asset Debit increase in Debit bank
bank Rs 20000 decreases asset
Cash balance Cash-asset Credit increase Credit cash

increases in asset
21
Loan from y Rs Cash balances Cash-asset Debit increase in Debit cash
5000 increases asset
Creates an
obligation to Y’s loan liability Credit increase Credit Y’s loan
repay Y in liabilities
Salaries paid Salaries for Salary temporary Debit increase in Debit salary
Rs 3000 and services received capital (expense) expenses (4000)
outstanding Rs 4000 Cash-asset Credit cash
Rs 1000 paid 3000 (3000)
obligation to Salaries Credit decrease Credit salaries
repay Y outstanding in asset outstanding
liability credit increase in (1000)
liability
Furniture Increase Furniture-asset Debit increase in Debit furniture
purchased Rs furniture owned asset
5000 Cash-asset Credit decrease Credit cash
Cash decreases in asset
(B) Analysis of Business Transactions: Traditional Approach
Transaction Analysis Account Rule Entry

Affected and
Nature of
account
Introduction of Cash received by Cash-real Debit what comes Debit cash

Rs. 40,000 cash business owner in
by the Proprietor has given cash
Capital-personal Credit the giver Credit capital
cash deposited in Bank receives Bank-personal Debit the receiver Debit bank
bank Rs 20000 cash
Credit what goes
Cash goes out of Cash-real out Credit cash
business
Loan from y Rs Business get cash Cash-real Debit what comes Debit cash
5000 in
Y pays cash Y’s loan-personal Credit what goes Credit Y’s loan
out
22
Salaries paid Cost of services Salary- Nominal Debit all Debit salary
Rs 3000 and used Rs 4000 expenses (4000)
outstanding Cash goes out Cash-real Credit cash
Rs 1000 Rs3000 Credit what goes (3000)
Salaries out Credit salaries
Still outstanding outstanding- outstanding
for services personal Credit the giver (1000)
received Rs 1000
Furniture Furniture is Furniture-real Debit what comes Debit furniture
purchased Rs purchased in
5000 Cash-real Credit cash
Cash is paid Credit what goes
out
Self-Assessment Question:1
Show the classification of the following Accounts under traditional and accounting equation
Approach :
(a) Building; (b) Purchases; (c) Sales; (d) Bank Deposit; (e) Rent; (f) Rent Outstanding; (g)
Cash; (h) Adjusted Purchases; (i) Closing Stock; (j) Investments; (k) Debtors; (l) Sales Tax
Payable, (m) Discount Allowed; (n) Bad Debts; (o) Capital; (p) Drawings; (q) Provision for
depreciation account, (r) Interest Receivable account; (s) Rent received in advance account; (t)
Prepaid salary account; (u) Provision for Bad & doubtful debts account; (v) Bad debts recovered
account; (w) Depreciation account, (x) Personal income-tax account; (y) Stock reserve account;
(z) Provision for discount on creditors account.
Journal
• Transactions are first entered in this book to show which accounts should be debited and
which credited.
• Journal is also called subsidiary book.
• Recording of transactions in journal is termed as journalizing the entries.
Journalising Process
All transactions are first recorded in the journal as and when they occur; the record is
Chronological; otherwise it would be difficult to maintain the records in an orderly manner.

The form of the journal is given below:
Date Particular LF Dr. Cr.

Cash account Dr. 1 149489 149489
May 27 To Neeraj
(Being amount received from Neeraj in
payment of the amount due to him)
23
Points to be taken in journal while journalizing transactions in journal
• Journal entries can be single entry (i.e. one debit and one credit) or compound entry (i.e.
one debit and two or more credits or two or more debits and one credit or two or more
debits and credits).
• In such cases, it is important to check that the total of both debits and credits are equal.
• If journal entries are recorded in several pages then both the amount column of each page
should be totalled and the balance should be written at the end of that page and
• Also that the same total should be carried forward at the beginning of the next page.
Advantages of Journal
In journal, transactions recorded on the basis of double entry system, fetch following
advantages :
1. As transactions are recorded on chronological order, one can get complete information about the
business transactions on time basis.
2. Entries recorded in the journal are supported by a note termed as narration, which is a precise
explanation of the transaction for the proper understanding of the entry. One can know the
correctness of the entry through these narrations.
3. Journal forms the basis for posting the entries in the ledger. This eases the accountant in their
work and reduces the chances of error.
Self-Assessment Question :2
Journalise the following transactions. Also state the nature of each account involved in the
Journal entry.
1. December 1, 2005, Ajit started business with Cash Rs. 40,000.

2. December 3, he paid into the Bank Rs. 2,000.
3. December 5, he purchased goods for cash Rs. 15,000.
4. December 8, he sold goods for cash Rs. 6,000.
5. December 10, he purchased furniture and paid by cheque Rs. 5,000.
6. December 12, he sold goods to Arvind Rs. 4,000.
7. December 14, he purchased goods from Amrit Rs. 10,000.
8. December 15, he returned goods to Amrit Rs. 5,000.
9. December 16, he received from Arvind Rs. 3,960 in full settlement.
10. December 18, he withdrew goods for personal use Rs. 1,000.
11. December 20, he withdrew cash from business for personal use Rs. 2,000.
12. December 24, he paid telephone charges Rs. 1,000.
13. December 26, cash paid to Amrit in full settlement Rs. 4,900.
14. December 31, paid for stationery Rs. 200, rent Rs. 500 and salaries to staff Rs. 2,000.
15. December 31, goods distributed by way of free samples Rs. 1,000.
24
Ledger
Meaning of ledger
• After recording the transactions in the journal, recorded entries are classified and grouped
into by preparation of accounts and the book, which contains all set of accounts is known
as Ledger.
• It is known as principal books of account in which account-wise balance of each account is
determined.
Specimen of Ledger accounts
A ledger account has two sides-debit (left part of the account) and credit (right part of the
account). Each of the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal
folio i.e. page from where the entries are taken for posting and (iv) Amount.
Date Particular J.F Amount Date Particular J.F Amount
Meaning of Posting
The process of transferring the debit and credit items from journal to classified accounts in the
ledger is known as posting.
Rules regarding posting of entries in Journal
1) Separate account is opened in ledger book for each account and entries from ledger posted
to respective account accordingly.
2) It is a practice to use words 'To' and 'By' while posting transactions in the ledger. The word
'To' is used in the particular column with the accounts written on the debit side while 'By'
is used with the accounts written in the particular column of the credit side. These 'To' and
'By' do not have any meanings but are used to represent the account debited and credited.
3) The concerned account debited in the journal should also be debited in the ledger but
reference should be of the respective credit account. For example: Rent paid by cash
Rs.500. The journal entry for this transaction would be.
Balancing an Account
• To ascertain the balance in any account, what is done is to total the sides and ascertain the
difference; the difference is the balance.
• If the credit side is bigger than the debit side, it is a credit balance.
• In the other case it is a debit balance.
• The credit balance is written on the debit side as, "To Balance c/d", c/d means "carried
down".
25
Illustration 3
Journalise the following transactions in the books of a trader
Debit Balance on January 1, 2018

Cash in Hand Rs. 8,000, Cash at Bank Rs. 25,000, Stock of Goods Rs. 20,000, Building
Rs. 10,000. Sundry Debtors: Vijay Rs. 2,000 and Madhu Rs. 2,000.
Credit Balances on January 1, 2018
Sundry Creditors: Anand Rs. 5,000.
Following were further transactions in the month of January, 2018
Jan. 1 Purchased goods worth Rs. 5,000 for cash less 20% trade discount and 5% cash discount.
Jan. 4 Received Rs. 1,980 from Vijay and allowed him Rs. 20 as discount.
Jan. 8 purchased plant from Mukesh for Rs. 5,000 and paid Rs. 100 as cartage for
bringing the plant to the factory and another Rs. 200 as installation charges.
Jan. 12 Sold goods to Rahim on credit Rs. 600.
Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash Rs. 1,000.
Prepare Cash account and Bank account
Solution: Cash A/c

Jan 1 To balance b/d 8000 Jan 1 By Purchases A/c 3800
Jan 4 To Vijay 1980 Jan 8 By Plant A/c 300
Jan 15 To Rahim 300 Jan 31 By Balance c/d 7180
Jan 18 To sales a/c 1000
11280 11280
Feb 1 To balance b/d 7180
Bank A/c Prepared By: Neeraj Yadav

Jan 1 To balance b/d 25000 Jan 31 To balance c/d 25000
25000 25000
Feb 1 To balance b/d 25000
26
Self-Assessment Question : 3
Prepare the Stationery Account of a firm for the year ended 31.12.2005 duly balanced off,
from the following details:
2018 Rs.
Jan. 1 Stock in hand 480
April 5 Purchase of stationery by cheque 800
Nov. 15 Purchase of stationery on credit from Five Star Stationery Mart 1, 280
Dec. 31 Stock in hand 240
27
Trial balance
Meaning of Trial balance
• Preparation of trial balance is the third phase in the accounting process.

• After posting the accounts in the ledger, a statement is prepared to show separately
the debit and credit balances. Such a statement is known as the trial balance.
• It may also be prepared by listing each and every account and entering in separate columns
the totals of the debit and credit sides.
• Whichever way it is prepared, the totals of the two columns should agree.
• An agreement indicates reasonable accuracy of the accounting work; if the two sides do not
agree, then there is simply an arithmetic error(s).
• This follows from the fact that under the Double Entry System, the amount written on the
debit sides of various accounts is always equal to the amounts entered on the credit sides of
other accounts and vice versa.
• Hence the totals of the debit sides must be equal to the totals of the credit sides. Also total of
the debit balances will be equal to the total of the credit balances.
• Once this agreement is established, there is reasonable confidence that the accounting work
is free from clerical errors, though is not proof of cent per cent accuracy, because some
errors of
principle and compensating errors may still remain.
• Generally, to check the arithmetic accuracy of accounts, trial balance is prepared at monthly
intervals. But because double entry system is followed, one can prepare a trial balance any
time.
• Though a trial balance can be prepared any time but it is preferable to prepare it at the end
of the accounting year to ensure the arithmetic accuracy of all the accounts before the
preparation of the financial statements.
• It may be noted that trial balance is a statement and not an account.
Objectives of preparing Trail Balance
1) Trial balance helps to establish arithmetical accuracy of the books.

2) Financial statements are normally prepared on the basic of agreed trial balance; otherwise
the work may be cumbersome. Preparation of financial statements, therefore, is the second
objective.
3) The trial balance serves as a summary of what is contained in the ledger; the ledger may
have to be seen only when details are required in respect of an account. Prepared By: Neeraj Yadav
Limitations of Trial Balance
1) Transaction has not been entered at all in the journal.

2) A wrong amount has been written in both columns of the journal.
3) A wrong account has been mentioned in the journal.
4) An entry has not at all been posted in the ledger.
5) Entry is posted twice in the ledger.
28
Illustration 4
Given below is a ledger extract relating to the business of X and Co. as on March, 31, 2018.
You are required to prepare the Trial Balance by the Total Amount Method.
Cash Account
Particular Amount Particular Amount
To capital a/c 10,000 By furniture 3,000
To Ram’s a/c 25,000 By salaries a/c 2,500
To cash sales 500 By Shyam’s a/c 2,1000
By cash Purchase 1,000
By capital a/c 500
By Balance c/d 7,500
35,500 35,500
Furniture Account
To Cash a/c 3,000 By Balance c/d 30,00
3,000 3,000
Salaries Account
To Cash a/c 2,500 By Balance c/d 2,500
2,500 2,500
Shayam’s Account
To Cash a/c 2,1000 By Purchase a/c 25,000
To Purchases return a/c 500 (credit purchases)
To Balance c/d 3,500
25,000 25,000
Purchases Account
To Cash a/c (cash purchases) 1,000 By Balance c/d 26,000
To Sundries as per Purchases
book(credit purchases) 25,000
26,000 26,000 Prepared By: Neeraj Yadav
Purchases Return Account

To Balance c/d 500 By Sundries as per Purchases 500
Return Book
500 500
29
Ram’s Account
To Sales a/c (credit sales) 30,000 By Sales Return a/c 100
By Cash a/c 2,5000
By Balance c/d 4,900
30,000 30,000
Sales Account
To Balance c/d 30,500 By Cash a/c (Cash sales) 500
By Sundries as per sales book
(credit sales) 30,000
30,500 30,500
Sales Return Account

To Sundries as per Sales
Return Book 100 By Balance c/d 100
100 100
Capital Account
To Cash a/c 500 By Cash a/c 10,000
To Balance c/d 9,500
10,000 10,000
Solution:
Trial Balance of X and co. as at 31.03.2018
S.No. Name of Account Total Debit items Total Credit items
Rs. Rs.
1. Cash a/c 35,500 28,000
2. Furniture a/c 3,000
3. Salaries a/c 2,500
4. Shayam’s a/c 21,500 25,500
5. Purchases a/c 26,000
6. Purchases Return a/c 500
7. Ram’s a/c 30,000 25,100
8. Sales a/c 30,500
9. Sales Returns a/c 100

10. Capital a/c 500 10,000
1,19,100 1,19,100
Balance Method
Under this method, every ledger account is balanced and those balances only are carry forward
to the trial balance. This method is used commonly by the accountants and helps in the
preparation of the financial statements. Financial statements are prepared on the basis of the
balances of the ledger accounts.
30
S.No. Name of Account Total Debit items Total Credit items
Rs. Rs.
1. Cash a/c 7,500
2. Furniture a/c 3,000
3. Salaries a/c 2,500
4. Shayam’s a/c 21,500 3,500
5. Purchases a/c 26,000
6. Purchases Return a/c 500
7. Ram’s a/c 4,900
8. Sales a/c 30,500
9. Sales Returns a/c 100
10. Capital a/c 9,500
44,000 44,000
Total and Balance Method
Under this method, the above two explained methods are combined. Under this method
statement of trial balance contains seven columns instead of five columns. This has been
explained with the help of the following example:

S.No. Name of Account L.F Debit Credit Debit Total Credit Total
Balance Balance
1. Cash a/c 7,500 35,500 28,000
2. Furniture a/c 3,000 3,000
3. Salaries a/c 2,500 2,500
4. Shayam’s a/c 3,500 21,500 25,000
5. Purchases a/c 26,000 26,000
6. Purchases Return a/c 500 500
7. Ram’s a/c 4,900 30,000 25,100
8. Sales a/c 30,500 30,500
9. Sales Returns a/c 100 100
10. Capital a/c 9,500 500 10,000
44,000 44,000 1,19,100 1,19,100
Adjusted Trial Balance(Through suspense account)

• If the trial balance do not agree after transferring the balance of all ledger accounts
Including cash and bank balance and also errors are not located timely, then the trial
balance is tallied by transferring the difference of debit and credit side to an account
known as suspense account.
• This is a temporary account opened to proceed further and to prepare the financial
statements timely.
31
Rules of Preparing Trail Balance
While preparing the trial balance from the given list of ledger balances, following rules should
be taken into care:
1. The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings (iv)
cash and bank balances are placed in the debit column of the trial balance.
2. The balances of all (i) liabilities accounts (ii) income accounts (iii) profits (iv) capital are
placed in the credit column of the trial balance.
Self-Assessment Question 4
From the following ledger balances, prepare a trial balance of Alia Traders as on 31st
March, 2018
Account Head Rs.

Capital 1,00,000
Sales 1,66,000
Purchases 1,50,000
Sales return 1,000
Discount allowed 2,000
Expenses 10,000
Debtors 75,000
Creditors 25,000
Investments 15,000
Cash at bank and in hand 37,000
Interest received on investments 1,500
Insurance paid 2,500
Self-Assessment Question 5
An inexperienced bookkeeper has drawn up a Trial Balance for the year ended 30th June,
2018.
Dr. (Rs.) Cr. (Rs.)

Provision For Doubtful Debts 200 –

Bank Overdraft 1,654 –
Capital – 4,591
Creditors – 1,637
Debtors 2,983
Discount Received 252 –
Discount Allowed – 733
Drawings 1,200 –
Office Furniture 2,155 –
General Expenses – 829
32
Purchases 10,923 –
Returns Inward – 330
Rent & Rates 314 –
Salaries 2,520 –
Sales – 16,882
Stock 2,418 –
Provision for Depreciation on Furniture 364 –
Total 24,983 25,002
Required:
(a) Draw up a 'Corrected' Trial Balance, debiting or crediting any residual errors to a
Suspense Account.
33
Subsidiary Books
Meaning of Subsidiary Books
• In a Business most of the transactions generally relate to receipts and payments of cash,
sale of goods and their purchase.
• It is convenient to keep a separate register for each such class of transactions one for
receipts and payments of cash, one for purchase of goods and one for sale of goods.
• A register of this type is called a book of original entry or of prime entry.
• For transactions recorded in such books there will be no journal entry.
• The system by which transactions of a class are first recorded in the book, specially meant
for it and on the basis of which ledger accounts are then prepared is known as the Practical
System of Book keeping or even the English System.
• It should be noted that in this system, there is no departure from the rules of the double
entry system.
• These Books of original or prime entry are also called subsidiary books since ledger
accounts are prepared on their basis and, without the further process of ledger posting, a
trial balance cannot be taken out.
Normally, the following subsidiary books are used in a business:
Cash book to record receipts and payments of cash, including receipts into and payments
out of the bank.
1) Purchases book to record credit purchases of goods dealt in or of the materials and stores
required in the factory.
2) Purchase Returns Books to record the returns of goods and materials previously
purchased.
3) Sales Book to record the sales of the goods dealt in by the firm.
4) Sale Returns Book to record the returns made by the customers.
5) Bills receivable books to record the receipts of promissory notes or hundies from various
parties.
6) Bills Payable Book to record the issue of the promissory notes or hundies to other parties.
7) Journal (proper) to record the transactions which cannot be recorded in any of the seven
books mentioned above.
Advantages of Subsidiary Books Prepared By: Neeraj Yadav
(i) Division of work : Since in the place of one journal there will be so many subsidiary books,
the accounting work may be divided amongst a number of clerks.
(ii) Specialisation and efficiency : When the same work is allotted to a particular person over a
period of time, he acquires full knowledge of it and becomes efficient in handling it. Thus the
accounting work will be done efficiently.
(iii) Saving of the time : Various accounting processes can be undertaken simultaneously because
of the use of a number of books. This will lead to the work being completed quickly.
34
(iv) Availability of informations : Since a separate register or book is kept for each class of
transactions, the information relating to each transactions will be available at one place.
(v) Facility in checking: When the trial balance does not agree, the location of the error or errors
is facilitated by the existence of separate books. Even the commission Even the commission of
errors and frauds will be checked by the use of various subsidiary books.
Distinction between Subsidiary Books and Primary Books
 The books in which transactions are first recorded to enable processing are called subsidiary
books.
 The ledger and the cash book are the principle books since they furnish information for
preparation of the trial balance and financial statements.
The following chart will help you in understanding the difference between Subsidiary Books and
Primary Books.
35
Cash Book
Meaning of Cash Book
• Cash transactions are straightaway recorded in the Cash Book and on the basis of such a
record, ledger accounts are prepared.
• Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the cash
account and the bank account,
• The balances are entered in the trial balance directly. The Cash Book, therefore, is part of
the ledger also.
• it has also to be treated as the principal book.
• The Cash Book is thus both a subsidiary book and a principal book.
Kinds of Cash Book
The main Cash Book may be of the three types:
(i) Simple Cash Book;

(ii) Two-column Cash Book;
(iii) Three-column Cash Book.
In addition to the main Cash Book, firms also generally maintain a petty cash book but that is
purely a subsidiary book.
Meaning of Simple Cash Book
Such a cash book appears like an ordinary account, with one amount column on each side.
The left-hand side records receipts of cash and the right hand side the payments.
Illustration 5
Enter the following transactions in a Simple Cash Book:
2018 Rs.
Jan.1 Cash in hand 1,200
"5 Received from Ram 300
"7 Paid Rent 30

"8 Sold goods for cash 300
"10 Paid to Shyam 700
"27 Purchased Furniture 200
"31 Paid Salaries 100
"31 Rent due, not yet paid, for January 30
36
Solution:
Cash Book
Date Receipts L.F. Amount Date Payments L.F. Amount
Jan. 1 To Balance b/d 1,200 Jan. 07 By Rent A/c 30
"5 To Ram A/c 300 " 10 By Shyam A/c 700
"8 To Sales A/c 300 " 27 By Furniture A/c 200
" 31 By Salaries A/c 100
" 31 By Balance c/d 770
1,800 1,800
Feb. 1 To Balance b/d 770
Note: One can see the following:

(i) In the simple cash book only the cash receipts and cash payment are recorded.
(ii) The debit side is always bigger than the credit side since the payment cannot exceed the
available cash.
(iii) The simple cash book is like an ordinary account.
Double -Column Cash Book
If along with columns for amounts to record cash receipts and cash payments another column
is added on each side to record the cash discount allowed or the discount received, or a column
on the debit side showing bank receipts and another column on the credit side showing
payments through bank. It is a double column cash book.
Three-Column Cash Book
A three column cash book or treble column cash book is one in which there are three columns on
each side - debit and credit side. One is used to record cash transactions, the second is used to
record bank transactions and third is used to record discount received and paid.
Petty Cash Book
• In a business house a number of small payments, such as for telegrams, taxi fare, cartage,
etc., have to be made.
• If all these payments are recorded in the cash book, it will become unnecessarily heavy.
• Also, the main cashier will be overburdened with work.
• Therefore, it is usual for firms to appoint a person as 'Petty Cashier' and to entrust the task
of making small payments say below Rs. 20, to him. Of course he will be reimbursed for the
payments made. Later, on an analysis, the respective account may be debited.
Advantages of Petty Cash Book :
(i) Saving of time of the chief cashier;

(ii) Saving in labour in writing up the cash book and posting into the ledger; and
(iii) Control over small payments.
Imprest System of Petty Cash
37
• It is convenient to entrust a definite sum of money to the petty cashier in the beginning of a
period and to reimburse him for payments made at the end of the period.
• Thus, he will have again the fixed amount in the beginning of the new period.
Such a system is known as the imprest system of petty cash.
Self-Assessment Question-5
Ganesh commenced business on 1st April, 2018 with Rs. 2,000 as capital. He had the following
cash transactions in the month of April 2018:
.
Date Particular Rs Date Particular Rs
April 1 Purchased furniture & paid cash 250 April 7 Paid for petty expenses 15
April 2 Purchased goods 500 April 8 Cash purchases 150
April 4 Sold goods for cash 950 April 13 Paid for Typewriter 1,000
April 5 Paid cash to Ram Mohan 560 April 13 Paid Ali & Sons 400
April 6 He allowed discount 10 April 13 They allowed discount 8
April 6 Received cash from Krishna & Co. 600
Allowed discount 20
Make out the two-column Cash Book (Cash and discount column) for the month of April,
2018.
38
Capital and Revenue Expenditure and Receipts
Transactions may be classified into
1) Capital Transactions
The transactions which provides benefits or supply services to business unit for more than
one year or one operating cycle of business are known as Capital Transactions.
2) Revenue Transactions
The transactions which provides benefits or supply services to business unit for one
accounting period only are known as revenue transactions.
Capital Expenditure
• Capital expenditure is the expenditure which is incurred to acquire a fixed asset which
increases the productivity or earning capacity of the company.
• Such expenditure normally yields benefit beyond the current accounting period.
• Capital expenditure is generally of a one kind but its benefit is derived over several
accounting periods.
• Capital expenditure appears generally as asset in the balance sheet. Capital expenditure is
non – recurring in nature.
Examples of Capital Expenditure:
• Cost of machinery purchased.

• Purchase of a patent right.
• Customs duty on imported machinery.
• Purchases of technical know – how.
• Legal expenses to acquire a building.
Capital Receipt
• Capital receipts are the receipts which occur from activities which are not part of the
normal trading activities of the company.
• They do not arise from the operating activities of business.
• Capital receipts are non-recurring in nature and generally appear as liabilities in the
balance sheet.
Examples of Capital Receipt:
• Money received from shareholders.

• Money received from debentures holders.
• Loans raised
• Sale of plant & machinery
• Sale of investments.
• Insurance claim for machinery damaged.
39
Revenue Expenditure
• Revenue expenditure is the expenditure which is incurred to carry out the normal day to
day activities of the company.
• They are incurred to maintain existing productivity or earning capacity of the company.
• Revenue expenditure does not yield benefit beyond the current accounting period.
• Revenue expenditure appears generally as expense on the debit side of trading and profit
and loss account.
• Revenue expenditure is recurring in nature.
Examples of revenue expenditure
• Depreciation on asset.
• Repairs of machine after it are put to use.
• Rent paid.
• Interest paid.
• Commission paid.
• Salary paid.
Revenue receipt
• Revenue Receipts are the receipts which occur from activities which are a part of normal
business operations.
• They arise from the operating activities of the company that is why they occur again and
again however its benefit can be enjoyed only in the current accounting year as its effect is
short term.
• The income received from the day to day activities of business includes all the operations
that bring cash into the business.
Examples of revenue receipt:
• Sale of goods and services.

• Interest on investments.
• Rent received.
• Commission Received.
• Insurance claim for stock damaged. Prepared By: Neeraj Yadav
Deferred Revenue Expenditure
• Deferred revenue expenditure is the expenditure for which the payment has been made or
a liability has been incurred but which is carried forward on the presumption that it will be
of benefit over a subsequent period or periods.
• It is an expenditure which is, for the time being, deferred from being charged to income.
• Deferred revenue expenditure appears in both the trading & profit and loss account and the
balance sheet.
40
• The written off portion of deferred revenue expenditure appears on the debit side of the
trading & profit and loss account while the unwritten off portion of deferred revenue
expenditure appears on the asset side of the balance sheet.
Examples of Deferred Revenue Expenditure:
• Preliminary expenses which are incurred at the time of starting the company.
• Heavy advertising expenses to launch a new product the benefit of which will come in the
future years.
• Discount on issue of shares.
• Research & development expense.
Illustration 6
State with reasons whether the following statements are 'True' or 'False'
a) Overhaul expenses of second-hand machinery purchased are Revenue Expenditure.

b) Money spent to reduce working expenses is Revenue Expenditure.
c) Legal fees to acquire property is Capital Expenditure.
d) Amount spent as lawyer's fee to defend a suit claiming that the firm's factory site belonged
to the plaintiff's land is Capital Expenditure.
e) Amount spent for replacement of worn out part of machine is Capital Expenditure.
f) Expense incurred on the repairs and white washing for the first time on purchase of an old
building are Revenue Expenses.
g) Expenses in connection with obtaining a license for running the cinema is Capital
expenditure.
h) Amount spent for the construction of temporary huts, which were necessary for
construction of the Cinema House and were demolished when the cinema house was ready,
is Capital Expenditure.
i) Heavy advertising to introduce a new product or to explore a new market is Capital
Expenditure.
Solution-
a) False: Overhaul expenses are incurred to put second-hand machinery in working condition
to derive endurable long-term advantage. So it should be capitalised.
b) False: It may be reasonably presumed that money spent for reducing revenue expenditure
would have generated long-term benefits to the entity. It becomes part of intangible fixed
assets if it is in the form of technical know-how and tangible fixed assets if it is in the form
of additional replacement of any of the existing tangible fixed assets. So this is capital
expenditure.
c) True: Legal fee paid to acquire any property is part of the cost of that property. It is
incurred to possess the ownership right of the property and hence a capital expenditure.
d) False: Legal expenses incurred to defend a suit claiming that the firm's factory site belongs
to the plaintiff is maintenance expenditure of the asset. By this expense, neither any
endurable benefit can be obtained in future in addition to that what is presently available
nor the capacity of the asset will be increased. Maintenance expenditure in relation to an
asset is revenue expenditure.
e) False: Amount spent for replacement of any worn out part of a machine is revenue expense
since it is part of its maintenance cost.
41
f) False: Repairing and white washing expenses for the first time of an old building are
incurred to put the building in usable condition. These are the part of the cost of building.
Accordingly, these are capital expenditure.
g) True: The Cinema Hall could not be started without license. Expenditure incurred to obtain
the license is pre-operative expense which is capitalised. Such expenses are amortised over
a period of time.
h) True: Cost of temporary huts constructed which were necessary for the construction of the
cinema house is part of the construction cost of the cinema house. Therefore such costs are
to be capitalised.
i) False: The effect of heavy advertising with regard to the launching of a new product or to
explore a new market will last generally for more than one accounting period. But it does
not create any property of tangible or intangible nature and so the expenditure is spread
over the period for which its effect would remain. This type of expenditure items are
termed as deferred revenue expenditure.
Illustration 7
Classify the following expenditures and receipts as capital or revenue:

a) Rs. 10,000 spent as travelling expenses of the directors on trips abroad for purchase of
capital assets.
b) Amount received from debtors during the year.
c) Amount spent on demolition of building to construct a bigger building on the same site.
d) Insurance claim received on account of a machinery damaged by fire.
Solution
a) Capital expenditure.
b) Revenue receipt.
c) Capital expenditure.
d) Capital receipt.
42
Contingent Assets and Contingent Liabilities
Meaning of Contingent
When something is contingent it means that the possibility of an event or situation depends on the
happening of another.
Contingent Asset
• A contingent asset is a potential economic benefit dependent solely on future events that
can't be controlled by the company.
• Due to the uncertainty of the future events, these assets are not placed on the balance
sheet.
• However, upon meeting certain conditions, contingent assets are disclosed in the reports of
the approving authority (Board of Directors in the case of a company, and the
corresponding approving authority in the case of any other enterprise).
• Contingent assets are assessed continually and if it has become virtually certain that an
inflow of economic benefits will arise, the asset and the related income are recognized in
the financial statements of the period in which the change occurs.
• A contingent asset is also known as a potential asset because there is the potential for future
benefits to the company. Contingent assets may arise due to the economic value being
unknown.
• In addition, they may arise due to uncertainty relating to the outcome of an event in which
an asset may be created.
• A contingent asset occurs because of previous events, but the entirety of all asset
information will not be collected until future events occur.
Examples of Contingent Assets
• A company involved in a lawsuit with the expectation to receive compensation has a

contingent asset, because the outcome of the case is not yet known and the dollar amount is
yet to be determined.
• This is also the situation when expecting to receive money through the use of a warranty.
• Benefits to be received from an estate or other court settlement.
Conservatism Principle
• Contingent assets are ruled under the conservatism principle, which states that uncertain
events and outcomes should be reported in a manner that results in the lowest profit.
• In this case, the benefits of the asset are deferred to ensure that the financial statements are
not misleading.
• The lowest estimated asset valuation must be utilized under this principle.
• No gain may be recorded from a contingent asset until the gain actually occurs.
43
• The conservatism principle supersedes the matching principle; the asset may not be
reported until a period after associated costs were incurred.
Contingent Liability
• A contingent liability is a potential liability that may occur, depending on the outcome of an
uncertain future event.
• A contingent liability is recorded in the accounting records if the contingency is probable
and the amount of the liability can be reasonably estimated.
• If both of these conditions are not met, the liability may be disclosed in a footnote to the
financial statements or not reported at all.
BREAKING DOWN 'Contingent Liability'
• Outstanding lawsuits and product warranties are common examples of contingent

liabilities, because each outcome is uncertain.
• The accounting rules for reporting a contingent liability differ, based on an estimate of the
dollar amount and the probability that the event might occur, and these rules are in place to
ensure that financial statement readers receive sufficient information.
How to Record a Contingent Liability
• Assume that a company is facing a lawsuit from a rival firm for patent infringement.
• The company's legal department thinks that the rival firm has a strong case, and the
business estimates a $2 million loss if the firm loses the case.
• Because the liability is both probable and can be reasonably estimated, the firm posts an
accounting entry on the balance sheet to debit (increase) legal expenses for $2 million and
to credit (increase) accrued expense for $2 million.
• The accrual account is used, so that the firm can immediately post an expense without the
need for an immediate cash payment.
• If the lawsuit results in a loss, the accrued expense account is debited (reduced) and cash is
credited (reduced) by $2 million.
Examples of Contingent Liabilities
• Bills discounted
• Uncalled liability on partly paid shares
• Claims against the co. for not acknowledged as debt

• Arrears of cumulative preference dividend
• Workmen’s compensation under dispute
• Guarantees given in the respect of third parties
• Disputed income tax demand.
44
Rectification of Errors
Definition of Rectification of Errors
• Rectification of errors may be defined as correction of errors which had been done in the
books of accounts of company due to ignorance or not knowing the principles of accounting.
Sometime, errors may be due to cheating by accountant or other employees.
• At that case rectification of errors is so difficult because cheaters try to best to hide the
error.
Types of Errors
1. Errors of omission.
• These errors are incurred in those cases when a transaction is completely omitted from the
books of accounts.
• It happens when a transaction is not recorded in the books of the original entry (i.e., various
journals).
• For example, if a purchase of goods on credit from Shri Ramlal has not at all been recorded
in the books of accounts, such an error will be termed as an error of omission.
• Since, there has been neither a debit entry nor a credit entry, therefore the two sides of the
Trial Balance will not be at all affected on account of this error.
• Such errors cannot be located easily.
• They come to the notice of the businessman when statement of accounts are received from
or sent to creditors or debtors as the case might be.
2. Errors of commission.
• Such errors include errors on account of wrong balancing of an account, wrong posting,
wrong carry forwards, wrong totaling, etc.
• For example, if a sum of Rs 50 received from Mukesh is credited to his account as Rs 500,
this is an error of commission.
• Similarly, if the total of the debit side of an account is carried forward from one page to
another and the mistake is committed in such carry forward (e.g. total of Rs 996 is carried
forwards as Rs 699) such an error is an error of commission.
3. Errors of principle.
• Errors of principle are committed in those cases where a proper distinction between
revenue and capital items is not made. i.e. a capital expenditure is taken as a revenue
expenditure or vice-versa.
• Similarly, a capital receipt may have been taken as a revenue receipt or vice- versa.
• For example, a sale of old furniture of Rs 500 should be credited to the furniture account,
but if it is credited to the Sales Account, it will be termed as an error of principle.
45
• Sale of old furniture is a capital receipt. If it is credited to Sales Account, it has been taken as
a revenue receipt.
• Such errors by themselves do not affect the agreement of the Trial Balance. Therefore they
are difficult to be located.
Compensating errors
• As the name indicates, compensating errors are those errors which compensate each other.
• For example, if a sale of Rs 500 to Ram is debited as only of Rs 50 to his account, while a sale
of Rs 50 to Shyam is debited as of Rs 500 to his account, it is a compensating error.
• These errors also do not affect the agreement of the Trial Balance and, therefore their
location is also difficult.
Error affecting or disclosed by trial balance
1. Errors of additions and subtractions: Wrong totaling and balancing of ledger, totaling of
trial wrong totaling of trial balance.
2. Posting at the wrong side of an account: Instead of debiting, amounts by mistake are
written in credit.
3. Entering incorrect amount: Incorrect copying, Transposing figure (Writing 56 in place of
65), sliding figure (8000 in place of 800), doubling the wrong figure and duplicate posting.
4. Errors of omission: Not posted in subsidiary accounts, accounts are not opened in the
ledger.
5. Wrong posting in the trial balance: Instead of writing debit side accounts has posted in
credit side.
Errors not affecting by trail balance
1. Errors of omission: Transactions not recorded in books. For example goods return to
supplier not recorded.
2. Errors of principle: Disobey of accounting principles, (salary paid to manager) manager’s
accounts are debited.
3. Compensating errors: Sales of goods to Rani for Rs.100 debited to Rain's account with
Rs.10 and Rs.100 cash received for Ajay was credited to Ajay with Rs.10.
4. Incorrect account in the original book: Instead of B entry is done in C’s account .C’s
account affected by writer.

5. Posting to wrong book: Instead of writing in purchases book , sales book are opened.
46
6.Final Accounts of Non-Manufacturing Entities
Meaning of Non-Manufacturing Entities
Non-manufacturing entities are the trading entities, which are engaged in the purchase and
sale of goods at profit without changing the form of the goods.
final accounts is the next step after the preparation of trial balance which is mainly divided into
following two parts
1. Income Statement
2. Position Statement
1. Income Statement
The primary objective of the Income Statement is to present the details of various
items of income or expenditure which have contributed to the making of the profit or loss.
Income Statement is sub-divided into following two parts for a non-manufacturing concern:
(i) Trading account; and
(ii) Profit and Loss account
47
2. Position Statement
• Position statement mainly comprises of Balance Sheet, which exhibits assets and liabilities
of the business as at the close of the period.
• For proper knowledge of the financial position of the business, sometimes additional
statements are also prepared like cash flow statement, statement showing earnings per
share, value added statement etc.
• Which is not mandatory for non-corporate entities.
• These additional statements are prepared for the better understanding of the financial
position of the business.
Trading account
• Trading account is one of financial statement prepared by business concern to show the
result of buying and selling of goods and services during an accounting period.
• Trading account is prepared to determine the gross profit or gross loss of a business
concern is called trading account.
Format of Trading Account
Trading Account for the year ended
Dr. (for the period ended…….) cr.

To opening stock xxx By sales
To Purchases Less: sales return xxx
Less: Purchase return xxx By closing stock xxx
To wages xxx
To custom & import duties xxx
To carriage expenses xxx
To Royalty xxx
To Manufacturing expenses xxx
To Packing expenses xxx
Total xxxx Total xxxx
To gross profit transferred to p&l By gross loss transferred to p&l

account xxxx account xxxx
48
Illustration 8
From the following information, prepare a Trading Account and pass necessary closing entries in the
journal proper of M/s. ABC Traders for the year ended 31st March, 2018 :
Particular Amount
Opening Stock 100000
Purchases 672000
Carriage Inwards 30000
Wages 50000
Sales 1100000
Returns inward 100000
Returns outward 72000
Closing stock 200000
Solution: In the books of M/s. ABC Traders

Trading Account for the year ended 31st March,2018
Dr. Cr.
Particulars Amount Particulars Amount
To Opening stock 1,00,000 By Sales 11,00,000
To Purchases 6,72,000 Less: Return Inward 1,00,000 10,00,000
Less : Returns outward 72,000 6,00,000
By Closing stock 2,00,000
To Carriage Inwards 30,000
To Wages 50,000
To Gross profit 4,20,000
12,00,000 12,00,000
In the Books of M/s. ABC Traders

Journal Proper
Date Dr. Cr.

2018 Particular Amount Amount
Mar. 31 Returns outward A/c Dr. 72,000
To Purchases A/c 72,000
( Being the transfer of returns to purchases account)
Sales A/c Dr. 1,00,000

To Returns Inward A/c 1,00,000
(Being the transfer of returns to sales account)
Sales A/c Dr. 10,00,000

To Trading A/c 10,00,000
(Being the transfer of balance of sales a/c to trading a/c)
49
Trading A/c Dr. 7,80,000
To Opening Stock A/c 1,00,000
To Purchases A/c 6,00,000
To Wages A/c 50,000
To Carriage Inwards A/c 30,000
(Being the transfer of balances of opening
stock, purchases and wages accounts)
Closing stock a/c Dr. 2,00,000

To Trading A/c 2,00,000
(Being the incorporation of value of closing stock)
Trading A/c Dr. 4,20,000

To Gross Profit 4,20,000
(Being the amount of gross profit)
Gross profit Dr. 4,20,000

To Profit and Loss A/c 4,20,000
(Being the transfer of gross profit to Profit and loss
account )
Profit and loss account
This account shows the revenue earned by business and the expenses incurred by the business to
earn that revenue. This is prepared usually for a particular accounting period, which could be a
month, quarter, a half year, or a year. The net result of the profit and loss account will show profit
earned or loss suffered by the business entity.
Format of Profit and loss account
Profit and Loss Account

(For the period ended……)
To gross loss b/d XXX By gross profit b/d XXX

To salaries XXX By interest received XXX

To rent XXX By commission received XXX
To commission XXX
To advertisement XXX
To bad debts XXX
To discount XXX
To net profit transferred to By net loss transferred to capital
capital account XXX account XXX
50
Illustration 9
Revenue, Expenses and Gross Profit Balances of M/s ABC Traders for the year ended on 31st
March 2018 were as follows:
Gross Profit Rs. 4,20,000, Salaries Rs. 1,10,000, Discount (Cr.), Rs. 18,000, Discount (Dr.)
Rs. 19,000, Bad Debts Rs. 17,000, Depreciation Rs. 65,000, Legal Charges Rs. 25,000,
Consultancy Fees Rs. 32,000, Audit Fees Rs. 1,000, Electricity Charges Rs. 17,000, Telephone,
Postage and Telegrams Rs. 12,000, Stationery Rs. 27,000, Interest paid on Loans Rs. 70,000.
Prepare Profit and Loss Account and Journal proper of M/s ABC Traders for the year ended on
31st March, 2018.
Solution: In the Books of M/s. ABC Traders

Profit and Loss Account
(For the period ended 31st march, 2018)
To salaries 1,10,000 By gross profit 4,20,000

To legal charges 25,000 By discount received 18,000
To consultancy fees 32,000
To audit fees 1,000
To electricity charges 17,000
To telephone, postage &
telegrams 12000
To stationary 27,000
To depreciation 65,000
To discount allowed 19,000
To bad debts 17,000
To interest 70,000
To net profit transferred to
capital account 43,000
4,38,000 4,38,000
51
In the Books of M/s. ABC Traders
Journal Proper
Date Dr. Cr.

2018 Particular Amount Amount
Mar. 31 Profit & Loss Account Dr. 3,95,000

To Salaries A/c 1,10,000
To Legal Charges A/c 25,000
To Consultancy Fees A/c 32,000
To Audit Fees A/c 1,000
To Electricity Charges A/c 17,000
To Telephone, Postage & Telegrams A/c 12,000
To Stationery A/c 27,000
To Depreciation A/c 65,000
To Discount Allowed A/c 19,000
To Bad Debts A/c 17,000
To Interest A/c 70,000
(Being the transfer of balances of various expenses a/cs)
Discount Received A/c Dr. 18,000

To Profit & Loss A/c 18,000
(Being the transfer of discount received account balance)
Gross Profit A/c Dr. 4,20,000

To Profit & Loss A/c 4,20,000
(Being the transfer of gross profit from Trading Account)
Profit & Loss A/c Dr. 43,000

To Net Profit A/c 43,000
(Being the ascertainment of net profit)
Net Profit A/c Dr. 43,000

To Capital A/c 43,000
(Being the transfer of net profit to Capital A/c)
Special Items
(i) Drawings : Drawings are not expenses for the firm and should therefore not be debited to
the Profit and Loss Account. If the proprietor has enjoyed some benefit personally, like
use of the firm’s car, a suitable amount should be treated as drawing and to that extent
the charge to the Profit and Loss Account will be reduced, Drawings are debited to the
proprietor’s capital account.
52
(ii) Income Tax : In case of companies, the income tax payable is treated like other expenses.
But in the case of sole proprietorship, income tax is treated as a personal expense. It is
debited to the Capital Account and not to the Profit and Loss Account. This is because the
amount of the tax will depend on the total income of the partners or proprietor besides the
profit of the firm. In case of partnership business, firm’s tax liability is to be debited to
profit and loss account of the firm but partners’ tax liability are not to be borne by the firm.
Therefore if the firm pays income tax on behalf of partners, such payment of personal
income tax should be treated as drawings.
(iii) Discount Received and allowed : there are of two types discount. Trade discount and Cash
discount. Trade discount is allowed when the order for goods is not below a certain figure. It is
deducted from the invoice. Only the net amount of invoice is entered in books. There is no further
treatment of the trade discount. Cash discount is allowed to a customer if he makes the payment
before a certain date. It is allowance made to him for prompt payment. Discount received is really in
the nature of interest received
and similarly, discount allowed really means interest paid. Discount received is a gain
and is credited to the Profit and Loss Account. Discount allowed is debited to this account.
(iv) Rebate: It is the allowance given to a customer when his purchases during a period, say one
year, total upto a certain figure. Suppose a firm allows a rebate of 4% to those customers whose
purchases during the year are at least Rs. 5,000. One Customer’s purchases are Rs. 4,500, he will not
get any rebate. Another customer’s purchases total Rs. 5,100, he will get a rebate of Rs. 204. The
entry for rebate is made only at the end of the year. The Rebate Account is debited and is later
written in the profit and Loss Account on the debit side. Various customers who have earned the
rebate are credited.
(iv) Bad Debts: When a customer does not pay the amount due from him and all hopes of
recovering the amount are lost, it is said to be a bad debt. It is a loss to the firm. Therefore,
the bad debts account is debited, which is later on written in the Profit and Loss Account
on the debit side. Since it is no use showing the amount due still as an asset, the account of
the customer concerned is closed by being credited. The entry
Bad Debts Account Dr.

To Debtor’s (by name) Account
If later on, the amount is recovered, it should be treated as a gain. It should not be credited to
the party paying it. It should be credited to Bad Debts Recovered Account. It will be entered in
the Profit and Loss Account on the credit side.
(vi) Provision for Bad and doubtful Debts : When it is feared that some of the amount due
from customers will not be collected it is prudent to recognise the expected loss by reducing
the current year’s profit and placing the amount to the credit of a special account called
“Provision for Bad and Doubtful Debts Account”. The entry is;
Profit and Loss Account Dr.

To Provision for Bad and doubtful Debts Account
Note : The accounts of the customers concerned are not affected until the amount is actually
written off for which the entry is,
53
Bad Debts Account Dr.
To Customer’s A/c
Bad Debts when written off are debited to the provision in this respect where such a provision
exists or directly to the Profit and Loss Account the corresponding credit being given (ultimately) to
the debtor’s account.
(vii) Abnormal loss of stock by accident or fire : Some times loss of goods occurs due to fire,
theft, etc. If due to accident or fire, a portion of stock is damaged, the value of loss is first
to be ascertained. Thereafter, Abnormal Loss Account is to be debited and Purchase
Account is to be credited. Abnormal Loss Account is to be transferred to Profit & Loss Account. If
amount of loss is recoverable from insurance company, then insurance company is to be debited
instead of Profit & Loss Account. Till the money not received from the insurance company,
Insurance Company’s Account will be shown in the Assets side of the Balance Sheet. If any part of
the loss is recoverable from the insurance company, them the portion not compensated by
the insurance company should be debited to Profit & Loss Account.
For example, if goods worth Rs. 6,000 are destroyed by fire and the insurance company admits the
claim for Rs. 4,500, the Journal entries will be:-
(i) Loss by Fire Account Dr. 6,000

To Purchase Account 6,000
(ii) Insurance Company’s A/c (Insurance Claim) Dr. 4,500

Profit & Loss A/c Dr. 1,500
To Loss by Fire A/c 6,000
(viii) Sales Tax : If Sales Tax is charged from the customers, along with the price of the goods
sold, amount of sales tax should be shown separately in the sales day book. Periodically
this sales tax is to be deposited with the Sales Tax Department of the Government. The
following entries are passed-
(i) At the time of sale-

Cash/Debtors A/c Dr.
To Sales A/c
To Sales Tax Payable A/c
(ii) On payment of sales-

Sales Tax Payable A/c Dr.
To Bank A/c
If any balance remains in the Sales Tax Payable Account, it should be shown in the Balance
Sheet as liability.
(ix) Commission based on profit : Sometimes commission is payable to manager based on net
profit; in such a case calculation is done as follows:
(i) Commission on net profit before charging such commission =

Rate of commission
Profit before commission ×
100
54
(ii) Commission on net profit after charging such commission =
Rate of commission
Profit before commission ×
100+ Rate of commission
Balance sheet
Balance Sheet as on…………..
Capital and Liabilities Amount Assets Amount

Rs Rs
Capital A/c: Tangible Fixed Assets :
Balance Land and Building
Add : Net Profit/Less: Net Loss Plant and Machinery
Less : Drawings Furniture and Fixture
Vehicles
Long Term Loans :
Term Loans Intangibles :
Other Loans Goodwill
Patent Rights
Short Term Loans : Designs and Brand Names
Cash Credit
Overdrafts Deferred Advertisement Investments :
Other Loans Long term investments
Current Liabilities : Current Assets :

Sundry Creditors Stock In Trade
Bills Payable Sundry Debtors
Outstanding Expenses
Advances Taken Prepayments
Advances
Provision : Bills Receivable Bank Balances
Provision for Bad debts Cash In Hand
Provision for Retirement Benefits
Provisions for Taxation
55

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1.

Meaning and scope of Accounting

 It means an event or business activity which involves exchange of money or money’s

 An event is result of number of transactions & it has to be appear in balance sheet.

i) Generating financial information

ii) Using the financial information

ii) Using/users of the financial information

 Systematic record of transactions-Book keeping.

 Measurement-Accounting measures past performance of business entity & depicts its

8. Distinction between Book keeping and Accounting.

Book keeping Accounting

 Basic Accounting terms

 These are tangible article in which a business deals.

 The excess of revenue over expense is called profit.

 The excess of expenses over revenue is called loss.

 It is an obligation of financial nature to be settled at a future date.

16. Working capital

 It is amount invested in business by its owner.

19. Net worth

 It represents excess of total assets over total liabilities of the business.

20. Non-current investments

21. Current investments

 A creditor is a person to whom the business owes money or money’s worth

24. Capital expenditure

25. Revenue expenditure

 The amount incurred to earn revenue of current period.

24. Balance sheet

 It is a statement of financial position of business entity on a particular date.

26. Trade discount

27. Cash discount

 This is allowed to encourage prompt payment by debtors.

28.Steps/Phases of accounting cycle

Prepared By: Neeraj Yadav

29. Limitations of accounting

 Recording only monetary items.

Prepared By: Neeraj Yadav

Accounting principles must satisfy the following conditions:

1. They should be based on real assumptions;

 In order to achieve comparability of the financial statements of an enterprise through time,

 Every transactions should be recorded on proper time

 Following modified accounting proactively adopted by industry.

 An essential quality of the information provided in financial statements is that it must be

 To be useful, information must be relevant to the decision-making needs of users.

f) Substance over form

i) Full, fair and adequate disclosure

Meaning of accounting standards

Objectives of Accounting Standards

Accounting standards reduce the accounting alternatives in the preparation of financial

Overview of Accounting Standard in India

 Thus effectively, there are 30 Accounting Standards at present.

 AS 1 Disclosure of Accounting Policies

List of Recommendatory Accounting Standards

 AS 30 – Financial Instruments: Recognition and Measurement

 AS 31 – Financial Instruments: Presentation

 AS 32 – Financial Instruments: Disclosures

List of withdrawn accounting Standards

 AS 8 Accounting for research and development

(1) Methods of depreciation, depletion and amortization

Selection of accounting Policies