Financial Statements:

The income statement, balance sheet & cash flow statement are collectively
termed as financial statements. They provide information about the financial
performance, cash flow, and financial position of the business. They are also called
final accounts.
They are 3 major financial statements
A. Income Statement: (Profit & Loss Account)
It shows Summarized company’s revenues & expenses

B. Balance sheet: (Statement of Financial Position)

It shows the Summarizes the company’s assets, liabilities & equity

C. Cash Flow Statement: (Statement Accounting for Variations in Cash)

It shows the Summarizes the company’s inflows and outflows of cash.

Accounting Concepts and Assumptions:

Accounting concepts are basic assumptions on the basis of which financial

statements of a business are prepared. Accounting assumptions are broad concepts that
develop GAAP (Generally Accepted Accounting Principles) upon which all the
accounting is based.

A. Going Concern Concept

According to this concept, it is assumed that the business will run for long time &
accounting also be made for long time. The concept basically helps to determine long-
term or short-term expenses and liabilities.

B. Consistency Concept:
According to this concept, methods adopted in accounting should be remain
same from one year to another year. They should not be change year to year

C. Accrual Concept
According to this concept, the expenses and revenues that have been
incurred or earned during the month, but will be paid or received in the future has
to be recorded in the books of accounts
D. Matching Concept
According to this concept, Matching means requires proper matching of expense
with the revenue.

E. Business Entity Concept (Entity Concept)

According to this concept, all business transactions are treated & accounted for
separately from the personal transactions of its owner. It is a business unit has its
own assets & liabilities.

F. Dual Aspects Concept (Duality principle)

According to this concept, every transaction there must be two aspects, a debit &
credit of equal amounts

G. Accounting Period Concept:

The fixed accounting period for which a business prepares its accounts is known
as accounting period. In these, financial statements are produced for a period of 1 year
(max 12 months after the start date). It may be different from the calendar year.
(1st April - 31st March). It is also known as “Period of A/C”, “financial period”,
“accounting year”, “financial year”.

H. Historical cost concept: (Cost principle)

According to this concept, it indicates that the original cost of an asset is recorded
in company’s books of accounts not on the market value of the asset.

I. Money Measurement Concept:

According to this concept, only business transactions which can be recorded in
terms of money are recorded in accounting.
.
J. Revenue recognition concept: (Principle of Income Recognition)
According to this concept, the income is recorded to be earned on the date it is
realized., no matter when the amount has been paid.

K. Objectivity concept:
According to this concept, accounts should be show true & fare positions of
business. It should not be influence and bias by others.

L. Conservatism or Prudence concept

According to this concept, accountants follow the rule “anticipate no profits, but
provide for all possible losses”.
Who are the Users of Accounting Information?
There are primarily two types of users of accounting information;

a) INTERNAL USERS (PRIMARY USERS):

If a user of the information is part of the business itself then he/she is
considered as one of the internal or primary users of accounting information.
Ex: management, owners, employees, partners etc.,

b) EXTERNAL USERS (SECONDARY USERS):

If a user of the information is an external party and is not related to the
business then he/she is considered as one of the external or secondary users of
accounting information.
Ex: potential investors, lenders, vendors, customers, legal & tax authorities Suppliers,
Legal bodies, general public, government, Researches etc.,

What are Qualitative Characteristics of Accounting Information?

They are 4 qualitative characteristics of accounting information are;

a) Comparability
Comparability helps the users of financial information to differentiate, analyse,
improve, and make important decisions.
Ex: Q o Q (Quarter on Quarter) & YoY (Year on Year comparisons) should be
possible with the accounting information.

b) Understandability
The presentation of financial information should be clear & concise for better
understandability.
Ex: It should be possible for bankers, investors, employees, etc., to understand the
financial information of the business.

c)Reliability
Reliability of data depends on the traceability of data and its source documents.
Ex: An auditor must be able to verify a transaction back to its origin with the help of
invoices, memos, purchase orders, sales orders, etc.

d)Relevance
Relevance of financial information refers to the usefulness of it in decision making
process.
Ex: A firm is expected to provide the total amount owed by the debtors on the balance
sheet, whereas the total number of debtors is unimportant.

BOOK KEEPING:
Bookkeeping is the process of recording all financial transactions of a business
unit in a systematic way on a day-to-day basis
 It involves keeping track of all financial transactions such as sales, purchases,
receipts, and payments.
 Bookkeeping helps in preparing financial statements such as balance sheets,
income statements, and cash flow statements.Ex: Auditor wants to audit all
sales and purchase invoices, so you have to produce all related invoice files for
audit.

Systems of booking:
They are 2 types
a) SINGLE ENTRY BOOK KEEPING:
Single entry accounting system is also known as accounts from incomplete
records. Under a single-entry accounting system, you can’t prepare a trial balance,
income statement, and balance sheet.
Only cash book and personal accounts are maintained under this system. None of the
accounts under this system is reliable.

b) DOUBLE ENTRY BOOKING:

 Every business transaction has two accounts are involved one a/c will be debited
& another a/c will be credited, two equal amounts is known as a double entry system
of accounting.

Mention the types of accounts involved in double-entry book-keeping?

Double-entry book-keeping includes five types of accounts:
 Income accounts, Liability accounts, Expense account, Capital accounts, Asset
accounts
Differentiate between Fund Flow & Cash Flow?
Fund Flow:
 Fund flow is based on working capital.
 It shows various sources from where funds generated.
 Used for understanding long term financial strategy.
 Changes in current assets and current liabilities are shown through the schedule
of changes in working capital.

Cash Flow:
 Prepared based on one element of working capital, that is cash
 Cash flow Starts with the opening balance of cash and closes with the closing
balance of cash.
2. Used for understanding short term strategies that affects liquidity of the business
Changes in current assets & current liabilities are shown in the cash flow.
AMERICAN OR MODERN RULES OF ACCOUNTING:
There are 2 ways to apply rules of accounting, traditional and modern.
Traditional or Golden rules of accounting classify 3 types if accounts.
They are Real, Personal & Nominal accounts.

American or modern rules of accounting classify all a/c’s into 6 different types
They are Asset, Liability, Capital, Revenue, Expense & Drawings.

Classification of Accounts and Modern Rules:

Type of Accounts Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Capital Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Drawings Increase Decrease
(CRADLE)
C – Capital, R – Revenue, A – Assets, D – Drawings, L – Liability, E – Expense
Another way to look at modern rules of accounting is,

Example Journal
Entries:
Ex1: Purchased furniture for 20,000 in cash, prepare the journal entry
Accounts Involved Amount Rule Applied
Furniture A/C 20,000 Asset – Dr. the increase
To Cash A/C 20,000 Asset – Cr. the decrease

Ex2: Received 1,00,000 in the bank as a loan, prepare the journal entry
Accounts Involved Amount Rule Applied
Bank A/C 1,00,000 Asset – Dr. the increase
To Loan A/C 1,00,000 Liability – Cr. the increase
 ACCOUNTING CYCLE/FLOW/PROCESS:
 The cycle starts with identifying transactions &

 Then, the transactions are recorded in the journal entries &

 Then, the journal entries are then posted to the general ledger &

 Ledger balances are then calculating to make a trial balance.

 Calculating the adjusted trial balance is prepared to ensure the accounts are
up-to-date
 Finally, from trial balance financial statements are prepared from the adjusted
trial balance such as an income statement (P/L a/c), a trading account, and a
balance sheet

Journal:
1. It is a day-day business Transactions. It is a chronological unit of accounting.
2. It is known as the primary book of accounting or the book of original/first
3. The process of Recording Transactions in the journal is Called Journalizing
How to Prepare a Journal Entry? (Steps)
Steps to Prepare a Journal Entry:
• Identify the accounts involved in the transaction
• Determine the type of accounts involved
• Apply appropriate rules of accounting
• Record the transaction along with narration or a short description.

Ledger:
1. Ledger is a set of journal accounts are recorded in one place under the
accounting head it contains all accounts like personal, Real, Nominal accounts.
2. It is known as the principal book of accounting or the book of final entry.
3. This process is called Posting.

Trial balance:

1.It is a list of all the debit & credit balances of various A/c’s that are present in
the Ledger of a business.
2. It helps in maintaining arithmetical accuracy & in the preparation of the
financial statements.

Trading Account:
1. It is the account in which all the direct expenses, direct incomes. along with net
sales, net purchases, and opening & closing stock are recorded.
2.The balance of this account will either be Gross profit or Gross loss
3. If we get Gross Profit the amount should be transfer to P/L A/c of credit side. If
we get Gross Loss the amount should be transfer to P/L A/c of Debit side.

Profit Loss Account (Income Statement):

1.It is the account in which all the Indirect expenses & Indirect incomes are
recorded.
2.The gross profit or loss from the trading account is transferred here and the
balance of this account will either be a net profit or a net loss.
 3. If we get Net Profit we will add to capital. If we get Net Loss we will subtract to
capital.
It shows Summarized company’s revenues & expenses

Balance Sheet: (Statement of Financial Position)

It is a statement which we need to prepare end of the financial year.
It is calculated by balancing a company’s assets with its liabilities & equity.

Profit & Loss Appropriation Account – It is an extension of the profit & loss
account. The items that are an appropriation of profits such as interest on capital,
commission to partners, etc. are recorded in this account. It shows how the profit
earned during the year is distributed.
GOLDEN RULES OF ACCOUNTING:
“Golden” means prime quality. The golden rules are the mainly 3 rules used to
prepare an accurate journal entry. These rules determine which accounts should be
debited and credited.
They are also known as the traditional rules of accounting or the rules of debit &
credit.
Each accounting entry is recorded chronologically in “the book of original entry”
(journal or subsidiary books)

How to Use these Rules in a Journal Entry:

1. Identify the accounts involved
2. Determine the type of accounts
3. Apply the golden rules of accounting
4. Record the Transaction

PERSONAL A/C REAL A/C NOMINAL A/C

Dr: The Receiver Dr: what comes in Dr: All Expenses & Losses
Cr The giver Cr: What goes out Cr: All Income & gains
A. PERSONAL A/C:
If any transactions b/n person-person, company-company & firm-firm
EX: Bank a/c (SBI), Prepaid expenses, Outstanding Salary, Capital (Ram A/c),
Debtor (Loco Pvt Ltd), creditor, Drawings, Insurance Prepaid, Bank overdraft

1. Subbu gives 2,000 to Ravi.

Rule: Subbu A/c Dr. (The receiver)
To Ravi A/c Cr. (The giver)

2. TCS Company Receiving 10,000 from WIPRO Company.

Rule: WIPRO Company A/c Dr. (The receiver)
To TCS Company A/c Cr. (The giver)

3. Paid cash to Ramesh & CO. 5,0000

Rule: Ramesh A/c Dr (The receiver)
To Cash A/c Cr. (The giver)

4. Sold goods on credit to Unreal Co. for 11,000

Rule: Unreal Co. A/c Dr. (The receiver)
To Sales A/c Cr. (The giver)

B. REAL A/C
It is a combination of Tangible & Intangible Assets
EX: Cash Paid, Cash Received, Cash A/c, Stock/Inventory/Cash in hand, Land &
Building, Accumulated depreciation, Plant & Machinery, Furniture & fixture,
Vehicles, Investments, Accounts Receivable, notes payable, prepaid rent, prepaid,
copy right, goodwill , Accounts payable, Loan Payable, Equipment, Accumulated
Amortization, Leasehold improvements, Computer equipment.

1. Purchased Equipment for 10,000 (paid by Cheque)

Rule: Equipment A/c Dr. (What Comes in)
To Bank A/c Cr. (What goes out)

2. Purchased Furniture for 10,000 in cash

Rule: Equipment A/c Dr. real (What Comes in)
To Cash A/c Cr. Real (What goes out)

3. Sold goods for cash 50,000

Rule: Cash A/c Dr. (What Comes in)
 To Goods A/c Cr. (What goes out)
4. Purchase rerun a Vehicle.
Rule: Cash A/c Dr. (What Comes in)
To Vehicle A/c Cr. (What goes out)

C. NOMINAL A/C:
It indicates all expenses & losses and all income & gains
EX: Purchases, Sales A/c, Interest Income, Sales Revenue, Salary Expense,
Commission Paid, Commission Received, Wages Expense, Interest Expense, Rent
Income, Rent Expense, cost of goods sold, Depreciation Expense, Advertising
Expense, Depreciation Expense, Insurance Expense, utilities expense, Dividend
Income, gain on sale of assets, Loss on Sale of Assets, Commission Expense, Office
Supplies Expense, Bank Service Charges, Income Tax Expense, Entertainment
Expense, Bad Debts Written Off

1. Paid Salaries of 90,000 (Direct Deposit from Bank)

Rule: Salaries A/c Dr. (All expenses & Losses)
To Bank A/c Cr. (All incomes & gains)

2. Paid Rent of 5,000

Rule: Rent A/c Dr. (All expenses & Losses)
To Bank A/c Cr. (All incomes & gains)
3. Commission Received 5,000
Rule: Bank A/c Dr. (All expenses & Losses)
To Commission Received A/c Cr. (All incomes & gains)
POSTING:
Posting refers to the process of transferring an entry (debits & credits) from a
journal to a ledger account.

Ex: Journal Entry for Furniture worth 1,000 Bought in Cash

Steps of Posting the Above Journal Entry in Ledger Account
1. Identify the ledger account where the debited a/c will appear, in this case, it will
be the “Furniture A/C”.

2.Mention the date of the transaction in the “Date”. Column in debit side of a/c.

3. Enter in the debit side of the ledger a/c in “Particulars” column with the prefix
“To” write the name of the a/c which has been credited in the journal entry, in this
case, it will be “Cash A/C” (Refer to the image below).

4. Enter the Amount on the debit column as mentioned in the journal entry.
5. Identify the ledger account where the credited a/c will appear, in this case, it will
be “Cash A/C”.

6. Mention the date of the transaction in “Date”. Column on credit side of a/c.

7.Enter in the credit side of the ledger a/c in “Particulars” column with the prefix
“By” write the name of the a/c which has been debited in the journal entry, in this
case, it will be “Furniture A/C” (Refer to the image below).

8. Enter the Amount on the credit column as mentioned in the journal entry

LIABILITIES:
Liabilities are items which would likely decrease the revenue of the
company
A liability may be part of a past transaction done by the firm,
e.g., purchase of a fixed asset or current asset.
Liabilities = Assets – capital can be used to calculate total Liabilities.
Equity is a type of liability.
There are Main 3 Types of Liabilities.

(a) Current Liabilities:

The amount which is to be paid within 1 year is called current liabilities.
It is used in the calculation of current ratio.
Ex: Creditors, Bill payable, outstanding expenses, Bank overdraft, income received in
advance, short term loan, Provision for Depreciation, Sunday creditor, differed
revenue, Account Payables, Account Expenses, etc.,

(b) Non-Current liabilities:

 The amount which is to be paid after 1 year is called non-current liabilities.
Ex: Long term loan, Debentures, Long term Debt, Long term provision, Long term
Loan

(c) Contingent Liabilities:

It is liability of potential loss that may or may not occur in the future event. In case the
event does not happen, an organization is not liable to pay anything. They are shown
as a footnote to the balance sheet.
Ex: Lawsuit proceedings, Product warranty claims, Guarantee for loans

(d)Owner’s funds/Capital/Equity:
Amount owed to proprietors as capital, it is also called owner’s equity or equity.

(e) External Liabilities:

The amount which is to be paid outside the business (or) External Parties is
called External liabilities
Ex: Creditors, Bank Loan, Taxes, overdrafts, Borrowings, bills payables, o/s expenses

(f) Internal Liabilities:

It is the amount which is paid to owner in the form of profit. So, profit is
internal liability for the business.
Ex: Capital, Salaries, Accumulated Profits
As per the modern rules of accounting, an increase in liability is credited whereas
a decrease is debited.
Liabilities are shown on the left-hand side of a vertical balance sheet.

CAPITAL (OWNER, PROPRIETOR):

1.Capital is money brought & to invested in to start a business by the owner(s).
It is also known as ‘Owners Equity or Net Worth’.
2.It is the difference b/n assets and liabilities
3. Capital is shown on the Fixed Assets of a balance sheet.
4. Capital = Assets – Liabilities
5. Ex: vehicles, patents, buildings, etc.

AUTHORIZED CAPITAL (AUTHORIZED SHARED CAPITAL):

The maximum amount of share capital that a company is permitted (or)
authorized to issue legally to its shareholders as per constitutional documents.
. This amount is decided during the formation of business.
Value per share is required to be decided by the promoters at the time of
fixing the authorized capital, it can be changed with the approval of majority
Shareholders.
DRAWINGS:
Cash or Goods which are withdrawn by owner(s) for their personal use. It is also
called a withdrawal account. It reduces the total capital invested by the owner(s).
It is a Personal A/C and is adjusted from the capital. It is shown in the balance
sheet on the liability side
.Ex: A leather manufacturer withdrew cash worth 5,000 from an official bank a/c for
personal use.
Journal Entry for cash with drawn personal use:
In case of cash withdrawn for personal use from in-hand-cash
Drawings A/c Dr. 5,000
To Cash/Bank A/c Cr. 5,000
(Bank balance reduced by 5,000)

Adjustment entry to show the decrease in capital

Capital A/c Dr. 5,000
To Drawings A/c Cr. 5,000
(owner’s capital reduced by 5,000)

PROVISIONS:
1. Provisions is the profits aside to meet a known Losses/Expenses in future.
2. It is shown in the Liability side of the balance sheet of the income
statement along with expenses.
3. Provision is created by debiting the profit or loss account
Ex: Provision for doubtful debts, provision for discount on debtors, provision for
depreciation, provision for repairs & renewals, provision for audit fees, provision for
taxation, etc.
RESERVES:
1.Reserves is the profits set aside to strengthen the financial position of a
business.
2.It is shown in the Liability side of the balance sheet under the head “Reserves &
Surplus” along with share capital.
3. Reserve is created through profit and loss Appreciation account.
Ex: General reserve, Reserve for Dividends Equalization, Reserve for Expansion,
Reserve for Increased Cost of Replacement etc.
They are 2 types of reserves
A. Capital Reserve
It may not be used to distribute dividends to shareholders
Ex: Profit earned before a company’s incorporation
Premium earned on the issue of shares & debentures
Profit set aside for redemption of preference shares or debentures
Profit on sale of fixed assets
The surplus on revaluation of assets and liabilities
B. Revenue Reserve
It is reflected in profit and loss appropriation account.
Ex: Dividend to shareholders, Expansion of business, Stabilize the dividend rate
They are divided into 2 types & both are kept aside as appropriation for profits.
General Reserves:
These reserves kept aside some profits which is used for emergency purposes

Specific Reserves:
These reserves kept aside some profits which is used for specific purposes.
Examples: Dividend Equalization Reserve, Debenture Redemption Reserve,
Contingency Reserve, Capital Redemption Reserve, Reserve for Expansion, Reserve
for Increased Cost of Replacement General Reserve etc..

BAD DEBTS:
It is the amount that has become overdue & irrecoverable from a debtor. It is a
business loss and is debited to Profit & Loss account as an expense.
Few reasons for debtors to not pay their debts on time may be; filing for bankruptcy,
experiencing hardship due to losses, etc.
Entry: Bad debts A/c Dr.
To Debtors A/c Cr.
profit and loss account by recording the below journal entry.
Entry: Profit & Loss A/c Dr.
To Bad debts A/c Cr.

Let us assume that Mr Ram, a sole proprietor, was supposed to pay 1,00,000 on
an invoice to ABC Corp. so, he filed for bankruptcy & is declared insolvent.
At the time of realization (Assuming the opening balance was nil)
Bad debts A/c Dr.
To Mr. Ram A/c Cr.
At the time of transferring the amount to the P&L Account
 Profit & Loss A/c Dr.
To Bad debts A/c Cr.

BAB DEBTS PROVISION:

Entry: Bad debts a/c Dr.
To provisions a/c

BAD DEBTS RECOVERED:

We have received the amount from debtors.
EX: Received cash from ram for a bad debt written off last year Rs1000.
Entry: Cash/bank a/c Dr.
To Recovery a/c

PREPAID EXPENCES:
Prepaid expense is money paid in advance for benefits yet to be received

prepaid expense is a personal a/c. prepaid is shown on the “Assets” side of a balance
sheet under the subhead “Current Assets”.

They are also known as unexpired expenses or unexpired cost, deferred expenses,
deferrals, prepayments, prepaids, or prepaid liabilities.

Ex: Prepaid Insurance, Prepaid Salary, Prepaid Rent, Prepaid Subscription, Prepaid
Interest, Prepaid Taxes, Prepaid Bills, prepaid Loan, Prepaid EMI etc.,

Prepaid Expenses Journal Entry

Advance payment made for an expense has two steps for being recorded and
recognised. Firstly, when the prepayment is done and secondly when the related
expense becomes due.
a) At the time of advance payment of the expense.
 Prepaid Expense A/c Debit Debit the increase in asset
To Bank A/c Credit Credit the decrease in asset
(Being expense paid in advance for the period)

b) At the time when the expense becomes due to be paid.

Expense A/c Debit Debit the increase in expense
To Prepaid Expense A/c Credit Credit the decrease in asset
(Adjustment entry made to recognize the expense on the due date)

Example:
Prepaid insurance journal entry should be recorded as follows:
a) At the time insurance premium is prepaid.
Prepaid Insurance Premium A/c Debit
To Bank A/c Credit
(Being insurance premium paid in advance)

b) On the date the prepaid insurance premium becomes due.

Insurance Expense A/c Debit
To Prepaid Insurance Premium A/c Credit

(Insurance expense being recognized and the related prepaid asset being reduced)

ACCRUALS:
The word Accruals means “The act of accumulating something”. Accruals are
mainly related to prepayments and arrears.
Accruals refer to expenses and revenues that have been incurred or earned but have
not been recorded in the books of accounts.

ACCRUED INCOME: (Income receivable, Income accrued but not due,

Outstanding income & incurred accrued but not due):
An income which has been earned, but not received it. It is a personal a/c & is
shown on the asset side of a balance sheet.
Ex: Accrued interest on investment, rent earned but not collected, commission earned
but not received, etc.
Journal Entry for Accrued Income (or) Outstanding Income
Accrued Income A/C Debit
To Income A/C Credit
(Q) On December 31st 2019 Company-A calculated 50,000 as rent earned but not
received for 12 months from Jan’19 to Dec’19.
1. December 31st 2019 (Same day)
2. January 10th 2020 (When the payment is received)
1. December 31st 2019 – (Rent earned but not received)
Accrued Rent Account 50,000
To Rent Account 50,000
2. January 10th 2020 – (Received cash in lieu of accrued rent from 2019)
Cash Account 50,000
To Accrued Rent Account 50,000

INCOME RECEIVED IN ADVANCE:

Income received in advance belongs to future period. It is also known as Unearned
Revenue, Unearned Income, Income Received but not Earned
Ex: Rent received in advance, Commission received in advance, etc.
It is a personal account and is shown on the liability side of a balance sheet under
the head “Current Liabilities“.
Journal Entry for Income Received in Advance
Income A/C Debit
To Income Received in Advance A/C Credit
Ex: In March 10,000 were received in advance for rent which belonged to the month
of April.
The journal entry to record this in the current accounting period (31st March) will be
Rent Received A/C 10,000
To Rent Received in Advance A/C 10,000
ACCRUED EXPENSES: (Outstanding expenses, expenses due but not paid,
unpaid expenses, arrears, overdue expenses)
An expense which has been incurred but the payment is not made. It is a
Personal account & is shown on the Liability side of a balance sheet.
Ex: Outstanding salary, outstanding rent, outstanding subscription, outstanding wages,
outstanding Electricity bill, Outstanding commission etc

Journal Entry for Outstanding Expense

Expense A/c Debit Debit the increase in expense
To Outstanding Expense A/c Credit Credit the increase in liability
(Being expense not paid on the due date)

NOTE: It is not always possible to make & receive payments immediately, they may
be late or in advance. Outstanding expenses, prepaid expenses, accrued
income & income received in advance are all a result of held-up payments &
receipts.
SUNDRY EXPENSES:
Expenses which are not listed separately because they are usually small, rare & do
not relate to any other day to day expenses
(or)
One-time or random expenses that cannot be classified under another expense
category. They may also be referred to as Miscellaneous expenses
Ex: Bank transfer charges (WIRE), Small festival celebration, Donation (small &
unplanned), Flowers & Gifts

journal Entry for Sundry Expenses

Sundry Expense A/C Debit
To Cash/Bank A/C Credit
(Being payment of sundry expenses made by cash/bank)

SUNDRY DEBTORS (Sundry means ‘various’ or ‘several’)

1. Debtors are those persons that Who owes money to a company. (Goods or
services received in Debit basis).
2. It is shown in assets on Company’s balance sheet.
3. debtors may also be known as accounts receivable or Trade receivables.
4. A provision for doubtful debts is created for debtors.
As per the golden rules of accounting, Sundry Debtor a/c is a personal a/c.
Net Sundry Debtors = Gross Sundry Debtors – Bad Debts – Provision for Bad &
Doubtful Debts
Journal Entry
In the Books of Seller
Sundry Debtors A/C Debit
To Sales A/C Credit
(Being goods or services sold on credit)
Entry at the time when payment is received
Cash (or) Bank (or) B/R Debit
To Sundry Debtors A/C Credit
SUNDRY CREDITORS (Sundry means ‘various’ or ‘several’):
1. Creditors is to whom money is owed to a company (Goods or services paid in
credit basis) from those persons.
2. It is shown in Current Liabilities on Company’s balance sheet.
3. Creditors may also be known as accounts receivable or Trade receivables.
4. No such provision or reserve is created
As per the golden rules of accounting, Sundry Creditor a/c is a personal a/c.
Net Sundry Creditors = Gross Sundry Creditors – Provision for Discount on
Creditors
Journal Entry: sundry creditors that should be recorded to show credit purchase of
goods/services
In the Books of the Buyer
Purchases A/C Debit
To Sundry Creditors A/C Credit
(Being goods or services purchased on credit)
Rules – Debit the increase in expense & Credit the increase in liability.

At the time when payment is made by the creditor below entry is recorded.
Sundry Creditors A/C Debit
To Cash (or) Bank (or) B/P Credit
(Payment made in cash (or) by cheque (or) issue of a bill payable to the seller)

Rules – Debit the decrease in liability (Sundry Creditors) & Credit the decrease in
assets (Cash/Bank) or credit the increase in liability (Bills Payables).
ACCOUNT RECEIVABLE:
Accounts receivable represents the money owed to a company by its
customers or debtors. It is also known as trade debtors, “AR” & “O2C” (Order to
Cash). It is a Long-term debt, shown on the asset side under the head current
assets.
Ex: unpaid invoices for goods or services sold.

Journal Entries Related to Accounts Receivable

At the time of recording a credit sale and billing the customer:
Accounts Receivable A/C Debit
To Sales (on credit) A/C Credit
(This can also be recorded at a particular customer level subledger wise, in that case,
the customer who is billed will be debited)

At the time of money received from the customer

Cash A/C or Bank A/C Debit
To Accounts Receivable A/C Credit
(This can also be recorded at a particular customer level subledger wise, in that case,
the customer paying for the goods/services will be credited)

ACCONT PAYABLE:
Accounts payable represents the money owed by a company to its suppliers
or creditors. It is also known as trade creditors, “AP” & “P2P” (Procure to Pay). It
is a short-term debt, shown on the liability side under the head current liabilities.
Ex: unpaid bills for goods or services received

Journal Entries Related to Accounts Receivable

Below are two main scenarios linked to the accounts payable cycle, where, in the
first case, the credit purchase is recorded, and, in the second case, the cash paid to the
supplier is recorded in the books of accounts.

At the time of recording an invoice

Purchase A/C Debit
To Accounts Payable A/C Credit
(This can also be recorded at a particular vendor level subledger wise, in this case, the
vendor who has raised the invoice will be credited)

At the time of paying an invoice

Accounts Payable A/C Debit
To Cash or Bank A/C Credit
(This can also be recorded at a particular vendor level subledger wise, in this case, the
vendor paid will be debited)

GOOD WILL:
Goodwill refers to long-term intangible asset that facilitates a company in
making higher profits & is a result of a business’s consistent efforts over the past
years.
In other words, it is the advantageous outcome of the firm’s good name, reputation,
prestige, connections, quality services or products, etc.

It is usually shown under the head “intangible fixed assets”

Various factors affecting the value of goodwill are as follows;
 Efficiency & competency of the management,
 Nature of the business,
 Benefits of intellectual property rights – patents/trademarks/copyrights,
 Risks associated with the business & market situations,
 Past performance and so on.
Formula to calculate the value of goodwill;
(Purchased) Goodwill = Purchase price of the targeted/acquired company – (Fair
market value of the total assets of the acquired company – Fair market value of
the total liabilities of the acquired company)

Types of Goodwill
i) Inherent Goodwill:
Inherent Goodwill refers to the goodwill that is generated by a company
internally, over the years which is also termed non-purchased & self-generated
goodwill. It is the value of the business over and above the value of its net assets.
ii) Acquired Goodwill – Acquired Goodwill refers to the goodwill which is bought
against the payment of a consideration in cash or kind. Hence, it is recorded in the
books of accounts & amortized. It is also called purchased goodwill

How does the good will increase?

We can increase the goodwill by acquiring another company as a subsidiary and
paying more than the fair value of its tangible and intangible assets.
a) Acquired or purchased goodwill
Asset A/c Dr.
To Good Will A/c Cr.
(Purchase of goodwill)
B) Entry to write off existing goodwill
All Partner’s Capital or Current A/c Dr.
To Good Will A/c Cr.
(Goodwill written off in old profit-sharing ratio)

UNPAIRED COST:
Remainder cost of an asset that is expected to reap benefits in the multiple future
accounting periods and has not been written off yet is called unexpired cost. It is
shown as an asset in the company’s final accounts
Ex: Deferred Revenue Expenditure, the Net Book Value of an asset
Unexpired Cost = Cost of Asset – Revenue Generated from Asset to date
It is applicable to all costs including the cost of inventory, deferred costs, and
prepaid costs.

TRADE RECEIVABLE:
Trade receivables is the total amount receivable to a business for sale of goods or
services provided.
Trade receivables arise due to credit sales. They are treated as an asset to the
company and can be found on the balance sheet
Ex: Debtors, Bills Receivable

TRADE PAYABLE:
Trade payables is the total amount payable by a business for goods or services
purchased.
Trade payables arise due to credit purchases. They are treated as a liability for the
company and can be found on the balance sheet.
Ex: Creditor, Bills Payable

PRELIMINARY EXPENSES: (pre- operative expenses)

Preliminary expense is the cost incurred before the start of business
operations. It is shown on the asset side of a balance sheet
Ex: Legal cost (Govt. & Court related fees), Professional fees (Lawyers, Chartered
Accountants, etc.), Stamp duty, Printing fees

ASSETS:
Assets are items tangible or intangible economic value.
Assets = (Liabilities + Capital) can be used to calculate total assets.
Assets are shown on the Asset side of a balance sheet.
They are 3 Types of Assets.

1. Tangible Assets:
These assets which can be touched & have a physical existence.
There are 2 types of Intangible Assets

(a) Fixed Assets:

These assets which are held not for resale. This asset life is more than 1 year.
Fixed assets are Long-term assets. These assets are also known as non-current assets.
Ex: land & building, plant & machinery, vehicles, furniture, Computer hardware,
Computer software, office equipment etc.,
(b) Current Assets:
These assets which are held for sale. This asset life is less than 1 year. Current
assets are Short-term assets. These assets are also known as circulating assets,
circulating capital, or floating assets. & Liquid assets
Ex: Cash in hand, Cash in bank, Debtors, Stock, Prepaid Expenses, short term
investments, Bills Receivable, short term loans & advances, Accrued Income,
Account Receivable, Sunday Debtors, Inventory, Petty cash, (-) Bad debts,
They are shown as the Assets side in the balance sheet. They are used for the
calculation of current ratio

2. Intangible Assets:
These assets which cannot be touched & they do not have physical existence.
Ex: patents, licenses, copy rights, Trade mark, Brand Value, Domain Names, Good
will, logo, self-developed software’s, customer data etc.,

3) Fictitious Assets:
Fictitious assets are expense or loss that are not completely written off during the
accounting period which they occur. This are expected to be received in future years.
These assets do not have physical existence or have any resale value. They are not
assets at all, & they are shown as assets side in the balance sheet.

Examples of Fictitious Assets:

A. Promotional Expenses of a Business
The marketing expenditures of businesses are viewed as investments that are
expected to produce long-term returns in future years.
B. Preliminary Expenses
The expenses which are incurred before the incorporation of a company These
expenses such as legal fees, logo design cost, printing, registration fees, stamp duty,
C. Discount Allowed on the Issue of Shares
Whenever a company issues its shares at a price that is lower than its face value, the
discount occurs

D. Loss Incurred on Issue of Debentures(capital loss)

when a premium payable on redemption of debenture is issued at a discount.

E. Underwriting Commission
The underwriting commission is the compensation an underwriter receives from
investors for placing a new issue.
F.Net Loss Incurred by a Company
In some cases, debit balance of the P/L account is treated as a fictitious asset.

Why are they shown on the balance sheet?

 The organization will receive returns from these expenses over time, much like it
does from other assets. This is the concept behind treating such miscellaneous
expenditures as assets.

Are fictitious assets current assets?

All intangible assets are not fictitious assets; however,
Journal Entry
Journal entry at the time of payment of expense
Fictitious Asset A/c Debit
To Bank A/c Credit
At the time when an expense is paid and recognized in the financial statements.
Journal entry at the time of reclassification entry of the expense a
Expense A/c Debit
To Expense as Fictitious Asset A/c Credit
when the expense is moved back to the income statement from time to time.

Fictitious Assets are to be Transferred to Which Account?

They are to be transferred to the Partner’s Capital A/c.
The transfer entry of fictitious assets, if any, is noted as follows:
Partner’s Capital A/c Debit
To Fictitious Asset A/c Credit

DEPRICIATION:
It refers to the amount decreasing in the value of a tangible fixed assets. over
their estimated useful life.
Ex: Land, Buildings, Machinery, Furniture and vehicles.

Depreciation entry:
Depreciation Expenses a/c Dr
To Asset (or) Accumulated depreciation A/c

What are the Types of Depreciation?

There are two depreciation methods used commonly to calculate the depreciation.
A. Straight-line depreciation method
B. Diminishing value method
C. Annuity Method
 D. Units of Production Method
E. Revaluation Method
F. Sum-of-Year’s-Digits Method

A. Straight-line depreciation method:

Straight line method is the most commonly used depreciation method. The
simplest & most used method of charging such a reduction is the straight-line method.
An equal amount is allocated in each accounting period.

For example, purchased machinery (Asset value) with cost of Rs.1,10,000 and
useful life of an asset is 5 years and residual (salvage) value are Rs.10,000
Depreciation per annum = (purchase value – salvage value)
Useful life
= 1,10,000 – 10,000
5 Years
= 1,00,000/5 years = 20,000

B. Decline balance method:

It is charged on reducing balance & at a fixed rate. In this case, the written down
value is spread between the useful life of the asset. It is also known as
Written down value method, Reducing instalment method & Fixed percentage on
diminishing balance.
Sum of year digit method: This method is based on the assumption that the assets
productivity decreases with the passage of time.

Units of production method: It is a way of charging depreciation on assets. This

method is used when the asset’s value is closer to the units produces then years it is in
used.

DEPLETION:
1.Depletion is extraction of natural resources such as mineral assets.
Ex: Mines, Oilfields
OBSOLESCENCE:
The process of an asset becoming out of date and losing its economic value is called
obsolescence.

AMORTIZATION:
It refers to the periodic writing off of intangible assets over their estimated useful
life.
Ex: patents, trademarks, copyrights, etc.
Accounting & Journal Entry for Amortization
Assuming that no contra account was prepared and the reduction was done directly
from the intangible asset, the journal entry would be as follows;
 Amortization Expense A/C Debit
To Intangible Asset A/C Credit
Only to the extent related to the current financial year, the remaining amount is shown
in the balance sheet as an asset.

CONTINGENT ASSETS:
A contingent asset is a possible asset, the existence of which will be confirmed only
by the occurrence of any uncertain future event. A contingent asset is not disclosed
directly in the financial statements. It is usually disclosed as a footnote to the
balance sheet. contingent assets are not recorded even if they are probable and the
amount of gain can be estimated.
Ex: Law suite maybe an example of contingent assets disclosed & recorded in the
period when the change actually occurs

Difference between Contingent Asset & Contingent Liability?

Contingent Asset & Contingent Liability are not recorded even if they are probable
and the amount of gain can be estimated.

LIQUID ASSETS:
Liquid assets are either cash, cash equivalents or they can be converted into cash at
very short notice. Liquid assets are also known as quick assets. They are also referred
to calculate as quick ratio.
Quick Assets = "Current assets - Prepaid expenses - Inventory"
Ex: Cash and Cash Equivalents, Short-Term Loans and Advances, Bills Receivable,
Debtor – Provision for Doubtful Debts, Short-term Investments

NPA (Non-performing assets):

Term Loans become NPA if their amount remains overdue for a period exceeding 90
days. A loan qualifies as Non-Performing Asset if it is outstanding for a minimum of
90 days. Non-performing assets are also known as non-performing loans

ESTMATED USEFUL LIFE OF AN ASSET:

An assets estimated useful life is the duration for which it is expected to remain in
productive use before it becomes outdated or completely broken.
Firms use it to estimate how long the asset will be valuable to them.
Examples
Estimated useful life of a tangible asset
Estimated useful life of an intangible asset
Estimated useful life of a ‘Land’ (exceptional case)

SCRAP VALUE OF ASSET:

Scrap Value is the estimated value that can be collected by selling the asset after its
useful life. It is also known as salvage value, residual value or break-up value.
Residual value can be calculated by both Straight Line and Written Down methods

Scrap Value = Cost of Asset - Total Depreciation

Cost of Asset = Purchase Price + Freight + Installation

How do u calculate SCRAP VAUE OF ASSET?

Ex1: Scrap Value with the Straight-Line Method
Cost of machine = 50,000
Estimated life of the asset = 9 years
Depreciation (Straight Line Method) = 10% per anum

Depreciation year 1=10/100* 50,000 = 5,000 p.a.

Cost of Fixed Asset after year 1 = 50,000 – 5,000 = 45,000
Total Depreciation for 9 years = 5,000x 9 = 45,000

To Calculate Scrap Value of an Asset = Cost of Asset – Total Depreciation

After 9 years Scrap value = (50,000 – 45,000) = 5,000

How to Calculate Scrap Value of an Asset with SLM Depreciation?

SLM method = (Cost of Asset – Scrap value) / Useful Life in Years.
Unreal Corp. Pvt Ltd. purchases machinery worth 1,00,000

DISPOSAL ACCOUNT:
Asset disposal account is created to ascertain Profit/Loss on sale of fixed assets. The
balance of accumulated depreciation is transferred to this a/c. Depreciation is
charged from the beginning of the year till the date of sale. If this account shows
debit balance it means loss has been incurred on the disposal of the fixed asset
whereas credit balance in the account shows profit earned on disposal.

Entries for Disposal of Fixed Assets with Provision for Depreciation

• Gross amount of asset being sold is transferred to Asset Disposal Account (at
original cost)

• Amount of accumulated depreciation is transferred to Asset Disposal A/c

  To record the value of proceeds received from the sale of asset.

 In the case of Profit.

 In the case of Loss.

Entries for Disposal of Fixed Assets – Without Provision for Depreciation

• Gross amount of asset being sold is transferred to Asset Disposal Account (at
written down value calculated at the beginning of the year of sale)

• Depreciation is charged from the beginning of the year till the date of sale
(shown in below journal entry

 To record the value of proceeds received from the sale of the asset.

 In the case of Profit.

 In the case of Loss.

NET BOOK VALUE:

Net Book Value is the carrying value of an asset equal to the value after deducting
depreciation, depletion, amortization or accumulated impairment.
An asset is recorded at the net book value in the balance sheet. After the end of an
asset's expected useful life, its net book value equals its salvage value.

Formula to Compute Net Book Value / Net Asset Value:

Net book value = Cost of Asset – Accumulated depreciation – Accumulated
impairment
Differences between Sundry Debtors & Sundry Creditors:
 It refers to a group of people who owe money to an enterprise, but Sundry
Creditors are those to whom the enterprise owes money.
 Unlike Debtors, who are assets, creditors are liabilities.
 As per the modern rules, an increase in Debtors (asset) is to be debited,
whereas an increase in Creditors (liability) is to be credited.
 Similarly, credit a decrease in Debtors and debit a decrease in Creditors.

Net Book Value Vs. Book Value Vs. Market Value:

Both Net Book Value & Book Value simply refer to the value of unused assets left
with the organization. They are both equal to the difference between the historical cost
of an asset and the amount of depreciation/impairment accumulated on
that. Therefore, they are quite synonymous and may be used interchangeably.
Market Value is the amount that an asset will bring if it is sold in the market today. It
is the price that people are willing to pay in an open market for an asset. Any asset’s
market value and book value are usually never the same.
DIFFERENT TYPES OF ACCOUNTING:

A. Financial Accounting:
Financial Accounting is the process of recording, summarizing and reporting
financial transactions of business.

B. Cost Accounting:
Cost Accounting involves analyzing the costs of producing a product or service to
help with decision-making and cost control.

C. Management Accounting:
Management Accounting provides financial information to help with planning &
decision-making with an organization. It is primarily used for internal purposes. It is
also known as Managerial Accounting.

D. Administrative Accounting:
Asses the objectives and improve implementation strategy. Useful for making
forecast, planning actions and resources to be used.

F. Tax Accounting:
Prepare reports related to tax returns to government authority.