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Accounting
It is an art of recording business transactions in a systematic manner. It is the science of recording,
classifying and summarizing in a significant manner in terms of money , transactions and events which
are of financial , nature and interpreting the results there of.

Important terms of accounting

Assets:-

The things of value owned by the business is called asset. There are property or legal rights owned by an
individual by business to which money value can be attached.

Ex: - Furniture, Machinery, Building, Cash etc

Type of assets:-

Fixed Asset: - These are those assets purchased for the purpose of operating the business not for resale

Ex;- Land , Building, Furniture etc

Current Assets: - These are those assets of business which are kept for short term with a purpose of
convert them in cash or for resale.

Ex: - Cash in hand, Bill Receivable, Bank balance etc

Intangible asset:-These are those assets which do not have physical form; they can’t be seen or touched.

Ex: - Goodwill, Trademark, patent etc.

Liabilities:-

It means account which the business owes to outsiders.

Ex: - Creditors, Bank overdraft, Bank loan, Bills payables etc.

Capitals:-

Capital is the owner’s investment into the business and can column from it.

Capital = Asset-Liabilities

Expense:-

It is the amount in order to produce or sell the goods and services which produce revenue.

Revenue:-

It means what we earned as a result of operation.

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Income:-

It is the profit earned during a the period

Income = Revenue – Expenses

Debtor/Customer/Accounts receivable

A person who owes money to the firm generally own account of credit sales of goods is called debtor.

Ex: - When good are sold to a person on credit that person is called a debtor
because he owes money or amount to the firm.

Creditor/Vendors/Accounts Payable:-

A person to whom a firm owes money is called creditor

Ex: A is creditor of the firm when goods are purchased on credit from him.

Goods:-

They refer to the item forming part of the stock in the trade of business firm, which are purchased and
are to be resolved.

Stock/Inventory:-

It is a property held by an enterprise for the purpose of sale the ordinary course of business stock may be
by closing stock or opening stock. Closing stock means the amount of goods which are lying unsold at
the end of an accounting period. Then opening stock is the amount of stock at the beginning of the
accounting period.

Stock is valued at market price or cost price whichever is lower.

Purchases:-

The term purchase is used for the purchase of goods.

Purchases = Cash purchases + Credit purchases

Purchase Returns:-

Goods purchase may be return due to any reason and they are not as per this specification or are
defective. It is also called return outwards.

Sales:-

It means the goods sold by the firm.

Sales = cash sales + credit sales

Sale Return:-

Good sold when return by the purchaser are termed as sales returns or return inwards.

Discount:-

It means reduction in the price of goods by the business.

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Type of discount:-

1) Trade discount: - When some discount is allowed in the price of good on the basis of sale, it is
called a trade discount. It should be declare before through advertisement in order to attract to the
customers.

2) Cash Discount: - When debtors are allowed some discount in the prices of the good for timely
payment it is called cash discount. It is not declared before the management is decided this
immediately.

Transactions:-

It is a final event of the nature i.e., entered into by the parties and is recorded in the books of account.

Drawings:-

It is an amount of the money or value of goods which the proprietor takes for his domestic or personal
use. Drawing reduces the investment or capital of the owners.

Account:-

It is summarize record of relevant transactions at one place relating to a particular head. It records not
only the amount of transactions but also the effect and direction.

Short Form – A/c or a/c

Type of accounts:-

1) Personal account: - It relates to all personal accounts and company account.

Ex: - A’s a/c, A&B a/c, OASIS a/c, A’s capital a/c, A’s drawing a/c

2) Real account: - It relates to all assets.

Ex: - Furniture A/C, Building A/C, Cash A/C, Bank A/C, Goodwill A/C, Bills
Receivable A/C, Debtor’s A/C.

3) Nominal Account: - It relates to all expenses or losses and income or gain.

Ex: - Salary A/C, Rent A/C, Advertisement A/C, Insurance A/C, Discount
Received A/C, Commission A/C, Purchases A/C, Sales A/C

Depreciation: - It means fall or reducing in the value of a fixed asset because of usage or passage
of time or accident or change in fashion.

Bad Debts: - It is the amount that has become irrecoverable from the debts.

Insolvent: - It is a person or an enterprise which is not in a position to pay its debts.

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Accounting Rules

1) Personal Accounts :-
Debit the receiver
Credit the giver,
2) Real Accounts :-
Debit what comes in:
Credit what goes out:
3) Nominal Accounts :-
Debit all Expenses or losses:
Credit all incomes or gains:

Important Business Transactions

1) Started business with cash

Cash a/c Dr
Capital a/c Cr

2) Purchased goods for cash

Purchases a/c Dr
Cash a/c Cr

3) Purchased goods for Thomas

Purchases a/c Dr
Thomas a/c Cr

4) Sold goods for cash

Cash a/c Dr
Sales a/c Cr

5) Sold goods to Rajesh

Rajesh a/c Dr
Sales a/c Cr

6) Salaries Paid
Salary a/c Dr
Cash a/c Cr

7) Commission Received
Cash a/c Dr
Commission a/c Cr

8) Deposited to Bank
Bank a/c Dr
Cash a/c Cr

9) Withdrawn from Bank

Cash a/c Dr
Bank a/c Cr

10) Machinery purchased for cash

Machinery a/c Dr
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Cash a/c Cr

11) Computer purchased from computer company

Computer a/c Dr
Computer Co a/c Cr

12) Withdrawn for personal use

Drawings a/c Dr
Cash a/c Cr

JOURNAL

The term journal comes from a French word “jorun” meaning a day. In the journal all day to day
transaction is recorded in date wise or sequence. The transactions when recorded in a journal are
called journal entries. This is also known as book of original entry or prime entry.

Format of a Journal

Date Particulars L/F Debit Amount Credit Amount

2008 Rent a/c Dr Xxxx
Jan 2 To Cash a/c Xxxx
Being rent paid

2008 Bank a/c Dr Xxxxx

Jan 5 To Cash a/c Xxxx
Being deposited into bank

Xxxx xxxx

Date: - In this column of the journal, we record the date of the transactions with its month and year.
We write year only once at the top and need not repeat it with the date.

Ex: Date
1997
March 5

Particulars: - The details regarding a transaction in the accounts which have to be debited or credited
are recorded in this column. This entry is recorded in this column in the following way:

In the first line, the account which has to be debited is written & then the short form of debit i.e. ‘Dr’
is written against that account name in the corner.

In the second line after leaving some space from the left of the entry in the first line the account
which has to be credited written started with preposition ‘To’

Then third line, Narration for that entry which explains the particular transaction is written with in
bracket. Explanation should be short, complete and clear the most of the time. It started with ‘For’ or
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‘Being.’ After every journal entry, horizontal line is drawn in particulars column to separate one
entry from the other.

Ledger Folio: - The transaction entered in a journal is posted, to various related accounts in the
‘ledger’. In the ledger folio, we enter the page number where the account pertaining to the entry is
opened and posting from the journal is made.

Compound Journal Entry

In a journal entry if there is two debits or two credits or both it is called a compound journal entry

Ex: - Paid to Thomas 1190, & discount allowed by him to 10

Thomas a/c Dr 1200

To Cash a/c 1190
To Discount a/c 10

Ledger:-
It is the second step of the accounting..It is the principle book of the account which contains all the
information regarding a business transaction. It may be defined as a book or register which contains
in a summarized and classified from a permanent record of all business transaction. The process of
transferring information contained in a journal to a ledger is called Posting.

Format of a Ledger

Dr Receipt
Payment Cr

Date Particulars L/F Amount Date Particulars L/F Amount

2008 2008
Jan 1 To……………….. Jan 2 By…………………
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Trial Balance:-

It is a statement prepared to check the arithmetical accuracy of books of accounts. It is prepared from
the ledger balance.
Format of a Trial Balance

Particulars Debit Amount Credit Amount

All Asset :-
Furniture,
Machinery,
Land & Building,
Goodwill, XXXX
Debtors,
Bank,
Cash.
All Liabilities:-
Capital,
Bill Payable,
Bank Loan, XXXX
Bank overdraft,
Creditors.
All Expenses :-
Salary, XXXX
Rent,
Advertisement,
Purchases,
Sales Returns.
All Incomes :-
Commission Received
Sales,
Purchases Returns,
Discount Received. XXXX

XXXX XXXX

Cash Book:-
It is a book containing cash transaction of a business. It is a book of prime entry and also a
ledger. All cash receipts are recorded on a debit side and all cash payments are recorded on a
credit side .A balance is a struck by deducting the total cash payment from the total of cash
receipt to know the cash or bank balance on hand.

Types of cash book

1) Simple Cash Book

2) Double Column Cash Book
3) Three Column Cash Book
4) Petty Cash Book
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Features of Cash Book

1) Only cash transactions are recorded in the cash book

2) All cash receipts are recorded in the debit side and all cash payments are recorded on the
credit side.
3) All cash transaction recorded in the cash book in chronological order i.e. in order they take
place it perform the function both the journal and ledger at the same time.

Simple or Single or one column Cash Book

The cash book look like an account with one account column of each side. It is mainly prepared
by small business concerns.

Format of simple cash book

Dr Receipt Payment
Cr

Date Particulars L/F Amount Date Particulars L/F Amount

Two Column Cash Book

In this type of cash book there are two amount columns in both sides. They are cash and discount
column. At the end of the period no need of balancing the discount column just find out the balance of
amount column.

Format of Two Column Cash Book

Dr
Cr

Date Particulars L/F Dis Cash Date Particulars L/F Dis Cash
To………… By………

Three Column Cash Book

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It is a cash book with cash discount and bank column. The important of this type of cash book is we can
ascertain the cash and bank balance at the same time.

Contra Entry

An Accounting entry which is recorded on both the debit and credit sides of the cash book is known as
Contra entry. As no posting is required for such an entry in the ledger , the letter ‘C’ put in the ledger
folio column on both the sides of the cash book this includes the recording of the following two type of
transactions:-

a) Cash deposited into Bank from office.

b) Cash withdrawn from bank for office use.

Format of a three column cash book

Discoun
Particular L/ Cas Ban Dat Particular L/ Discoun Cas Ban
Date t
s F h k e s F t h k
To
Balance xxxx xxxx
b/d

a) c xxxx a) By Bank c xxxx

To cash
c xxxx b) By cash c xxxx
b) To Bank

Petty Cash Book

It is a cash book with several columns. An analytical petty cash book has two sides, the left hand side;
the left hand side is used for recording receipts of cash (which will be only from the main cashier) and
right hand side, which is used for recording payments. In the analytical petty cash book, a separate
column is provided for recording a particular item of expenditure i.e. postage, stationary, travelling,
advertisement, etc. A column is usually provided for sundries to record infrequent payments. When a
petty expense is recorded on the right hand total payment column, the same amount immediately
recorded in the appropriate expense column. At the end of the particular period, all the analysis
(expenses) columns are added and posted to the debit side of the respective accounts.
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Format of Petty Cash Book

Receipts
Payments

T. Sundry
Date Particulars Amount Total P&T Stationary Wages Carriage
E Expenses
To Cash 1000
By P&T 100 100
By 25 25
Stationary

125 100 25 0 0 0 0

To balance 875
c/d
(1000-
125)

To cash
(1000- 125
875)

Final Accounts or Financial Statement

At the end of the financial year or at the end of the accounting period, financial statements are
prepared to know profit or loss and also the financial position of the business. These statements are
presented to the users of accounting information for decision – making. It includes,

1) Trading Accounts
2) Profit and Loss Accounts
3) Balance Sheet

1. Trading Accounts :-

A trading account is a part of the financial statement which determines the gross profit or Gross
loss during an accounting year. Its main components are sales services rendered and cost of such
sales or services rendered.

Features of trading accounts

a) It is the first stage in the preparation of final accounts of trading concern.

b) It records only net sales and direct cost of goods sold.
c) The balance of this account discloses the gross profit and gross loss
d) The balance of this account is transferred to the profit and loss account.
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Format of Trading Account

Particulars Amount Particulars Amount

To Opening Stock --- By Sales ---
To Purchases ------- Less: Return Inward ---
Less : Return outward -------
--- ---
By Closing stock ---
To Direct Expenses ---
--- ---
To Wage and Salaries By Abnormal Loss of Stock
---
To Freight Inward
--- ---
To Carriage Inward --- By *Gross Loss transferred to P&L
To Cartage Inward account

To*Gross profit transferred to ---

P&L account

--- ---

Profit And Loss Account

A profit and loss account is prepared to calculate the net profit or net loss of the business for a
given accounting period. According to Prof. Carter, “A profit and loss account is an account
into which all gains and losses are collected in order to ascertain the excess of gains over the
losses or vice versa”.

Features of Profit and Loss Account

1) It is the second stage in the preparation of the final accounts.

2) It related to a particular accounting period and is prepared at the end of that period.
3) Accrual basis of accounting is followed in the preparation of the account.
4) This account is credited with the gross profit and income from other sources and
debited with indirect expenses and losses.
5) The balance of this account in the net profit or net loss.
6) The capital of the owner is increased or decreased by the balance of account ( Net
profit or Net Loss)
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Form of Profit and Loss Account

Profit and Loss A/C of M/s----------------------

Particulars Amount Particulars Amount
*To Gross Loss *By Gross Profit
To Office & Administration By Rent from tenants
Expenses By Discount (Cr)
Salaries By Commission received
Salaries & Wages By Interest from – investment
Rent, Rates & Taxes By dividend received
Printing & Stationery By income from other sources
Postage & Telegrams By Miscellaneous revenue
Lighting Receipts
Audit Fees By Difference in Exchange (Cr)
Legal charges By profit on sale of asset
Telephone Expenses By net loss transferred
Insurance Premium to capital A/c
Establishment expenses
Trade expenses
General expenses
To selling and – Distribution
Expenses
Carriage Outwards
Advertisement
Commission & Brokerage
Export Duty
Packing Charges
Bad debts
Delivery van Expenses
Travelling expenses
To Financial Expenses
Interest Paid
Interest on capital
Discount Allowed (Dr)
Sales Tax
Bank Charges
Difference in Exchange (Dr)
Depreciation & Maintains
expenses
Repairs and Renewals
Dep. on fixed Assets
To Miscellaneous Exp./
Losses
Entertainment expenses
Donation & charity
Loss on sale of asset
To Net Profit transferred
to capital account
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NOTE: There will either be Gross Profit or Gross Loss

Balance Sheet: The balance sheet may be defined as “A statement which sets out of the assets and
liabilities of a firm or an institution as at a certain date”. In the words of Francis R Stead, “A Balance
sheet is a screen picture of the financial position of a going business at a certain moment”. It is a
statement of which reports the property owned by the enterprise and the climes of the creditors and
owners against these properties. It shows the status of the business as at a given moment of a time in
so far as accounting figure can show its status.

Format of a Balance Sheet

Liabilities Amount Assets Amount

Sundry or Trade Creditors --- Cash in hand ----
Bills Payable --- (including petty cash)
Bank Overdraft --- Cash in Bank ----
Employees Provident Fund --- Bills Receivable ----
Loans (Cr) --- Sundry Debtors / Book Debts ----
Mortgage --- Loans (Dr) ----
Reserves or Reserve Fund --- Closing Stock ----
Capital ---- Loose Tools ----
Add: Interest on capital ---- Investments ----
Add: Net Profit ---- ---- --- Furniture & Fittings ----
Plant & Machinery ----
Land & Buildings ----
Less : Drawings ---- Freehold/ Leasehold Land ----
Less : Income Tax ---- Business Premises ----
Less: Interest on drawing ---- Patents & Trade Marks etc ----
Less: Net Loss ---- ---- Goodwill ----
----
------------- -----------------
------------- -----------------

Adjustments
Closing Stock

It is given outside the trial balance.

a) Credit in the trading a/c

b) Shown on the asset side of the balance sheet.

It is given inside the trial balance

a) Shown only on the asset side of the balance sheet.
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Outstanding Expenses

Outstanding Expenses which have been incurred during the year and whose benefit has been
derived during the year but not yet paid are called outstanding expenses.

Treatment: -
a) Add the related item P& L or trading a/c in the debit side.
b) Shown on the liability side of the balance sheet.

If it is given inside the trial balance

a) Shown only on the liability side of the balance sheet.

Prepaid Expenses

The benefit of the amount already spent will be available in the next accounting year also i.e.,
prepaid expenses.

Treatment: - If it is given outside the trial balance

a) Deducted from the related item in the profit and loss account or trading account.
b) Shown on the asset side of the balance sheet.

It is given inside the trial balance shown on the asset side of the balance sheet.

Depreciation:-

Diminishing value of fixed asset due to usage or change in fashion.

Treatment: -

Calculate the amount of depreciation. It is normally mentioned as percentage.

Ex: - Depreciate plant & machinery 10 %

(1, 00,000*10/100 = 10,000)

a) Show the amount of depreciation on the debit side of the profit & loss a/c
b) Deduct from the related item in the balance sheet

Liability Amount Asset Amount

Plant & Machinery
1,00,000
Less: Depreciation 90000
10,000