Module - I

BASIC ACCOUNTING
Marks 10 Hours 25

Accounting is the language of business. It helps the busines not only in finding out profits/losses
for a period and its financial position on a particular date but also helps in management of
business. It has its own well designed and established principles which are guided by some
concepts and conventions Accounting is recording of transactions in a systematic manner in
various types of books and their posting to a master book called ledger.

This module has been designed to introduce accounting to the learners. This familiarises the
learners with some basic accounting terms, accounting concepts, conventions and standards.
This enables them to prepare Journal, Cash Book and Special Purpose Books and their posting
to Ledger.

Lesson 1. Accounting - An Introduction

Lesson 2. Accounting Concepts
Lesson 3. Accounting Conventions and Standards
Lesson 4. Accounting for Business Transactions
Lesson 5. Journal
Lesson 6. Ledger
Lesson 7. Cash Book
Lesson 8. Special Purpose Books
MODULE - 1
Basic Accounting

Notes

2 ACCOUNTANCY
 MODULE - 1
Basic Accounting

ACCOUNTING - AN INTRODUCTION Notes

Whenever your mother asks you to go to the nearby grocery store to buy items of daily
use like match box, candle stick, soap cake, coffee, spices etc. you need not pay for
these items immediately. When you buy these items, the store owner immediately opens
the page of a note book on which your father’s name is written. He records the value
of items purchased. At the end of the month, your father goes to him. He again opens
the same page tells the total amount to be paid and records when your father makes the
payment. In a similar manner, he keeps the record of other customers also. Whenever
he gets commodities from suppliers he records the same and also records the payment
he makes to them. Similarly, every business small or big, sole proprietor or a firm
keeps the record of the business transactions. Have you ever thought why do they
keep record of business transactions? If they do not keep the record how will they
know how much, when and to whom they have to make payments or from whom, how
much and when they have to receive payments or what they have earned after a particular
period and so on. Recording of transactions by a businessman in proper books and in
a systematic manner is known as accounting. In this lesson you will learn about this in
detail.

OBJECTIVES
After studying this lesson you will be able to
explain the meaning of Book-Keeping;
state the meaning and nature of accounting;
distinguish between book keeping and accounting;
explain the advantages & limitations of accounting;
explain the branches of accounting;

ACCOUNTANCY 3
MODULE - 1 Accounting - An Introduction
Basic Accounting
state the functions and objectives of financial accounting;

explain accounting as an information system for decision making by the interested

users and

explain various accounting terms.

1.1 BOOK KEEPING AND ACCOUNTING

Notes A business undertakes number of transactions. Can you estimate the number of
transactions a business undertakes? It depends upon the size of a business entity. Every
day business transactions may be around hundreds/thousands. Can a businessman
remember all these transactions in every respect? Not at all. So it becomes necessary
to record these business transactions in details and in a systematic manner. Recording
of business transactions in a systematic manner in the books of account is called book-
keeping. Book-Keeping is concerned with recording of financial data. This may be
defined as.

“The art of keeping a permanent record of business transactions is

book-keepng”.

From books of accounts important details such as total sales, total purchases, total
cash receipts, total payments, etc. may be ascertained. As you know the main objective
of business is to earn profits. In order to ascertain the profit earned during a period,
mere recording of business transactions is not enough. Accounting involves not only
book keeping but also many other activities. In 1941, the American Institute of Certified
Public Accountants (AICPA) defined accounting as

“The art of recording, classifying, summarising, analysing and

interpreting the business transactions systematically and communicating
business results to interested users in accounting”

Accounting is identified with a system of recording of business transactions that create

economic information about business enterprises to facilitate decision making. The
function of accounting is to provide quantitative information, primarily financial in nature,
about economic entities, that is intended to be useful in making economic decisions.

The American Accounting Association defined accounting as :

“It is the process of identifying, measuring, recording and communicating the

required information relating to the economic events of an organisation to the
interested users of such information.

4 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
In order to appreciate the nature of accounting it is necessary to understand the following
relevant aspects of the definition of accounting:

z Economic events : It is the occurring of the consequence to a business organisation

which consists of transactions that are measurable in monetary terms. Purchase of
a Machinery, installing and keeping it ready for manufacturing is an economic event
which consists of a number of financial transactions. These transactions are (a)
buying the machine, (b) transporting the same, (c) preparing the site for its installation Notes
and (d) incurring expenditure on installing the same.

z Identification, Measurement, Recording and Communication :

Identification implies determining what transactions are to be recorded i.e. items

of financial character are to be recorded. For example, goods purchased for cash
or on credit will be recorded. Items of non-financial character such as changes in
managerial policies, etc. are not recorded in the books of accounts.

Measurement means quantification of business transactions into financial terms

by using monetary unit. If an event cannot be quantified in monetary terms, it is not
considered fit for recording in the books of the firm. That is why important items
like appointment, signing of contracts, etc. are not shown in the books of accounts.

Recording : Having identified and measured the economic events in financial terms,
these are recorded in the books of accounts in monetary terms date wise. The
recording of the business transactions is done in such a manner that the necessary
financial information is summarized according to well established accounting
practices.

Communication : The economic events are identified, measured and recorded in

such a manner that the necessary relevant information is generated and communicated
in a certain form to the management and other internal and external users of
information. The financial information is regularly communicated through accounting
reports.

z Organisation : refers to a business enterprise whether for profit or not for profit
motive.

z Interested users of information. Many users need financial information to make

important decisions. These users can be investors, creditors, labour unions, Trade
Associations, etc.

ACCOUNTANCY 5
MODULE - 1 Accounting - An Introduction
Basic Accounting
Evolution of Accounting
As per Indian mythology Chitra Gupta is responsible for maintaining accounts
in God’s court.
A book on Arthashasthra written by Kautilya who was a minister in Chandra
Gupta’s kingdom twenty three centuries ago mentions about the accounting
practices in India. It describes how accounting records have to be maintained.
Notes In China and in Egypt accounting was used for maintaining revenue records of
the government treasury.
A book on Arithmetica Geometrica, Proportion at Proportionality
(Review of Arithmetic and Geometric proportion) by an Italian Luca Pacioli is
considered as the first authentic book on double entry book keeping. In his
book he used the present day popular terms of accounting Debit (Dr.) and
Credit (Cr). He also discussed the details of memorandum, journal, ledger and
specialised accounting procedures. He also stated that, “all entries have to be
double entries, i.e. if you make one creditor you must make some debtor.

Accounting process can be summarised as

The Accounting
Process

Accounting links decision Communicating

Economic makers with economic Accounting
Events activities and with the results Information
of their decisions

Decision makers
(internal and
external users)

Accounting Process

Difference between book keeping and accounting : Book keeping and accounting can
be differentiated on the basis of nature, objective, function, basis, level of knowledge,
etc.

6 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Difference between Book Keeping and Accounting
Basis of Book-keeping Accounting
Difference
Nature It is concerned with identifying financial It is concerned with summarizing the
transactions; measuring them in monetary recorded transactions, interpreting
terms; recording and classifying them. them and communicating the results.
Objective It is to maintain systematic records of It aims at ascertaining business
financial transactions. income and financial position by
maintaining records of business Notes
transactions.
Function It is to record business transactions. So its It is the recording, classifying,
scope is limited. summarizing, interpreting business
transactions and communicating the
results. Thus its scope is quite wide.
Basis Vouchers and other supporting documents Book-keeping works as the basis for
are necessary as evidence to record the accounting information.
business transactions.
Level of It is enough to have elementary For accounting, advanced and in-
Knowledge knowledge of accounting to do book- depth knowledge and understanding
keeping. is required.
Relation Book-keeping is the first step to Accounting begins where book-
accounting. keeping ends.

INTEXT QUESTIONS 1.1

I. Fill in the blanks with suitable word/words:
i. Keeping systematic record of business transactions is known as ___________.
ii. The next step after classification of recorded transactions is ___________.
iii. The whole process of recording, classifying, summarizing and interpreting the
business transactions systematically and communicating business results to the
interested users of financial information is known as ___________.
iv. Interested users of accounting information are ___________.
II. Identify transactions related to book-Keeping or accounting and write B
for book-keeping and A for accounting against the space provided:
i. Credit Sales/Purchases (................)
ii. Cash Purchases/Sales (................)
iii. Calculation of business profits (................)

ACCOUNTANCY 7
MODULE - 1 Accounting - An Introduction
Basic Accounting
iv. Find out total debtors (................)
v. Find out financial position of the business enterprise (..................)

1.2 BRANCHES AND OBJECTIVES OF ACCOUNTING

Branches of Accounting
The changing requirements of the business over the centuries have given rise to specialized
branches of accounting and these are :
Notes
Financial Accounting
It is concerned with recording the transactions of financial character, summarising and
interpreting them and communicating the results to the users. It ascertains profit earned
or loss incurred during a period (usually one year as accounting year) and the financial
position as on the date when the accounting period ends. It can provide financial
information required by the management and other parties. The word accounting and
financial accounting are used interchangeably. At present we are concerned with financial
accounting only.
Cost Accounting
It analyses the expenditure so as to ascertain the cost of various products manufactured
by the firm and fix the prices. It also helps in controlling the costs and providing necessary
costing information to management for decision making.
Management Accounting
It is concerned with generating information relating to funds, cost and profits etc. This
enables the management in decision making. Basically, it is meant to assist the
management in taking rational policy decisions and to evaluate the impact of its decisions
and actions and the performance of various departments.
Tax Accounting
This branch of accounting has grown in response to the difficult tax laws such as relating
to income tax, sales tax etc. An accountant is required to be fully aware of various tax
legislations.
Social Accounting
This branch of accounting is also known as social reporting or social responsibility
accounting. It discloses the social benefits created and the costs incurred by the
enterprise. Social benefits include such facilities as medical, housing, education, canteen,
provident fund and so on while the social costs may include such matters as exploitation
of employees, industrial interest, environment pollution, unreasonable terminations, social
evils resulting from setting up industries etc.

8 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Objectives and Functions of Financial Accounting
The main objectives of financial accounting are as under :
Finding out Various Balances
Systematic recording of business transactions provides vital information about various
balances like cash balance, bank balance, etc.
Providing Knowledge of Transactions
Systematic maintenance of books provides the details of every transactions. Notes
Ascertaining Net Profit or Loss
Summarisation in form of Profit and Loss Account provides business income over a
period of time.
Depicting Financial Position
Balance sheet is prepared to depict financial position of business means what the business
owns and what it owes to others.
Information to All Interested Users
After analysis and interpretation, business performance and position are communicated
to the interested users.
Fulfilling Legal Obligations
Vital accounting information helps in fulfilling legal obligations e.g. sales tax, income tax
etc.
Functions of Accounting
The function of accounting is to provide quantitative information primarily financial in
nature about economic entities, which is intended to be useful in making economic
decisions. Financial accounting performs the following major functions:
Maintaining SystematicRrecords
Business transactions are properly recorded, classified under appropriate accounts
and summarized into financial statements.
Communicating the financial results
It is used to communicate financial information in respect of net profits (or loss), assets,
liabilities etc. to the interested parties.
Meeting Legal Requirements
The provisions of various Laws such as Companies Act, 1956 Income Tax and Sales/
VAT Tax Acts, require the submission of various statements i.e. Annual accounts, Income
Tax returns, Returns for VAT etc.

ACCOUNTANCY 9
MODULE - 1 Accounting - An Introduction
Basic Accounting
Fixing responsibility
It helps in computation of profits of different departments of an enterprise. This facilitates
the fixing of the responsibility of departmental heads.
Decision making
It provides the users the relevant data to enable them make appropriate decisions in
respect of investment in the capital of the business enterprise or to supply goods on
Notes credit or lend money etc.
Advantages of Accounting
1. Financial Information about Business : Financial performance during the
accounting period, i.e., profit or loss and also the financial position at the end
of the accounting period is known through accounting.
2. Assistance of Management : The management makes business plans, takes
decision and exercise control on affairs on the basis of accounting information.
3. Replace Memory : A systematic and timely recording of transactions obviates
the necessity to remember the transactions. The accounting record provides
this necessary information.
4. Facilitates Comparative Study : A systematic record enables a businessman
to compare one year’s results with those of other years and locate significant
factors leading to the change, if any.
5. Facilitates Settlement of Tax Liabilities : A systematic accounting record
immensely helps settlement of income tax, sales tax, VAT and excise duty
liabilities since it is a good evidence of the correctness of transactions.
6. Facilitates Loans : Loan is granted by the banks and financial institutions on
the basis of growth potential which is supported by the performance.
Accounting makes available the information with respect to performance.

7. Evidence in Court : Systematic record of transactions is often accepted by

the Courts as good evidence.

8. Facilitates Sale of Business : If someone desires to sell his business, the accounts
maintained by him will enable the ascertainment of the proper purchase price.

9. Assistance in the Event of Insolvency : Insolvency proceedings involve

explaining many transactions that have taken place in the past. Systematic
accounting records assist a great deal in such a situation.

10 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
10. Helpful in Partnership Accounts : At the time of admission of a partner, retirement
or death of a partner and dissolution of the firm, accounting records are of vital
importance and use. It is so because such records provide the basis to reach a
settlement.
Limitations of Accounting
1. Accounting information is expressed in terms of Money : Non-monetary
events or transactions are completely omitted. Notes
2. Fixed assets are recorded in the accounting records at the original cost :
Actual amount spent on the assets like building, machinery, plus all incidental charges
is recorded. In this way the effect of rise in prices is not taken into consideration.
As a result the Balance Sheet does not represent the true financial position of the
business.
3. Accounting information is sometimes based on estimates: Estimates are often
inaccurate. For example, it is not possible to predict the actual life of an asset for
the purpose of depreciation.
4. Accounting information cannot be used as the only test of managerial
performance on the basis of mere profits : Profit for a period of one year can
readily be manipulated by omitting certain expenses such as advertisement, research
and development, depreciation etc. i.e. window dressing is possible.
5. Accounting information is not neutral or unbiased : Accountants ascertain
income as excess of revenue over expenses. But they consider selected revenue
and expenses for calculating profit of the concern. They also do not include cost of
such items as water, noise or air pollution i.e. social cost, they may also use different
methods of valuation of stock or depreciations.

INTEXT QUESTIONS 1.2

I. Following are the statements relating to various branches of accounting.
Write against each the name of the branch of accounting to which the
same belongs:
i. It analyses the expenditure so as to ascertain the cost of products manufactured
by the concern.
ii. Accounting that discloses the social benefits and the costs incurred by the
business enterprises.

ACCOUNTANCY 11
MODULE - 1 Accounting - An Introduction
Basic Accounting
iii. Accounting that is concerned with generating information that will enable the
management in decision making.
II. How each of the following statements is a limitation of accounting?
i. Fixed assets are recorded in the accounting records at the original cost.
ii. Accounting information is sometimes based on estimates.
iii. Accounting information cannot be used as the only test of managerial
Notes performance on the basis of mere profit.
iv. Accounting information is expressed in terms of money.
III. How each of the following statements is an advantage of Accounting :
i. Evidence in Court
ii. Replaces Memory
iii. Financial Information about Business.

1.3 ACCOUNTING AS AN INFORMATION SYSTEM AND

ITS USERS
In 1970, the Accounting Principles Board of The American Institute of certified Public
Accountants (AICPA) emphasized that the function of accounting is to provide
quantitative information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions. Accounting is often called the
“Language of Business”. It is the common language used to communicate financial
information to individuals, organisations, government agencies about various aspects
of business such as financial position, operating results (i.e. Profit or loss) and cash
flows. Users, both inside and outside the business, have to make decisions concerning
the allocation of limited economic resources. In order to ensure that resources are
allocated in an efficient and effective manner, users require financial information
for the purpose of making decisions. Accounting provides information that is useful in
making business and economic decisions. It is the primary means of communicating
financial information to owners, lenders, managers,. Government and its regulatory
agencies ‘-and -others- who have interest in an enterprise. It helps the users in taking
better decisions by providing relevant, reliable and timely information on the financial
and operational position of an enterprise.
It is observed that almost all business enterprises maintain detailed accounting records.
Even the most intelligent manager with a sharp memory would find it difficult to remember
the daily transactions simply by observing them. So he/she must rely upon the accounting
process which begins with the recording of business transactions and ends up with the
preparation of summarized financial statements. Thus, Accounting as an information
system is necessitated by great complexity of modern business organisations.

12 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Accounting as a Source of Information
“Accounting is a service activity. It’s function is to provide qualitive information,
primarily financial in nature, about economic entities that is intended to be useful
in making economic decisions.”

As an information system, accounting collects data and communicates economic

information about the organisation to a number of users whose decisions and actions
are related to its performance. Accounting begins with the identification of transactions Notes
of financial nature and ends with the preparation of financial statements (i.e., Income
Statement and Balance Sheet). Each step in the process of accounting generates
information. Generation of information is not an end in itself, it is a way to facilitate the
dissemination of information among users of accounting information. Accounting
information is used for predicting, comparing and evaluating the earning power and
financial position of a business enterprise. Therefore, dissemination of information is an
essential function of accounting.

INTEXT QUESTIONS 1.3

State whether the following statements are True or False :
i. Systematic record of transactions is often accepted by the Courts as good evidence.
ii. The balance sheet makes available the information about the financial health of the
enterprises.
iii. Creditors are internal users of accounting information
Users of Accounting Information

Users of Accounting Information may be categorised into Internal Users and External
Users.
Internal Users
i. Owners : Owners contribute capital in the business and thus, are exposed to
maximum risk. Naturally, they are interested in knowing the profit earned or loss
suffered by the business besides the safety of their capital. The financial statements
give the information about profit or loss and financial position of the business.
ii. Management : The management makes extensive use of accounting information
to arrive at informed decisions such as determination of selling price, cost controls
and reduction, investment into new projects, etc.

ACCOUNTANCY 13
MODULE - 1 Accounting - An Introduction
Basic Accounting
iii. Employees and Workers : Employees and workers are entitled to bonus at the
year end, which is linked to the profit earned by an enterprise. Therefore, the
employees and workers are interested in financial statements. Besides, the financial
statements also reflect whether the enterprise has deposited its dues into the provident
fund and employees state insurance accounts, etc., or not.
External Users
i. Banks and Financial Institutions : Banks and financial institutions are an essential
Notes
part of any business as they provide loans to the businesses. Naturally, they watch
the performance of the business to know, whether it is making progress as projected
to ensure the safety and recovery of the loan advanced. They assess it by analysing
the accounting information.
ii. Investors and Potential Investors : Investment involves risk and also the investors
do not have direct control over the business affairs. Therefore, they rely on the
accounting information available to them and seek answers to the questions such
as - what is the earning capacity of the enterprise and how safe is their investment?
iii. Creditors : Creditors are those parties who supply goods or services on credit.
Before granting credit, creditors satisfy themselves about the credit worthiness of
the business. The financial statements help them immensely in making such an
assessment.
iv. Government and Its Authorities : The government makes use of financial
statements to compile national income accounts and other informations. The
information so available to it enables them to take policy decisions.
Government levies varied taxes such as Excise Duty, VAT, Service Tax and Income
Tax. These government authorities assess the correct tax dues from an analysis of
financial statements.
v. Researchers : Researchers use accounting information in their research work.
vi. Consumers : Consumers require accounting information for establishing good
accounting control so that cost of production may be reduced with the resultant
reduction of the prices of products they buy. Sometimes, prices of some products
are fixed by the government, so it needs accounting information to fix fair prices so
that consumers and producers are not exploited.
vii. Public : They want to see the business running since it makes substantial contribution
to the economy in many ways, e.g., employment of people, patronage to suppliers,
etc. Thus, financial accounting provides useful financial information to various user
groups for decision-making.

14 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Qualitative Characteristics of Accounting Information
Two fundamental characteristics of financial statements are their truth and fairness. An
auditor of the enterprise has to make a statement in his report whether, in his opinion,
the financial statements give a true and fair view. It means that the Balance Sheet should
give a true and fair view of the state of affairs and the Profit and Loss Account should
give the true and correct profit or loss for the period. Besides the above fundamental
characteristics, there are other qualitative characteristics (attributes) that make the
information content of the financial statements meaningful to its users. There are: Notes
1. Reliability;
2. Relevance;
3. Understandability and
4. Comparability.
Let us discuss these characteristics in detail:
1. Realiability : Accounting information must be reliable. the foremost factors that
make it reliable are that
i. it should be verifiable. It means, transactions should be evidenced by
documents. For example, purchases be evidenced by bills of purchases, sales
be evidenced by sales bills, etc.
ii. it should be free from personal bias. It means, where personal judgement is to
be exercised, it should be independent and free from bias.
Reliability of the accounting information depends on:
i. Neutrality : Neutrality means that the accounting information made available
does not suffer from bias.
ii. Prudence : The accounting information prepared on the principle of prudence
(conservatism) means that the accounting information is prepared by providing
all prospective losses while leaving all prospective profits.
iii. Completeness : The accounting information given should be complete in all
respects as incomplete information may lead to wrong interpretation.
iv. Substance Over Form : The accounting information to be meaningful, should
be governed by the substance of the information and not by its legal form
alone.
2. Relevance : The accounting information, besides disclosing statutorily required
disclosures, should disclose other informations, after judging its relevance to the

ACCOUNTANCY 15
MODULE - 1 Accounting - An Introduction
Basic Accounting
decision-making need of its users. For example, interest on borrowings is disclosed
without stating the rate of interest. Users, therefore, cannot link interest cost to
different types of borrowed funds. In the process, they fail to appreciate the rationality
of financing decisions. Generally, only the statutory (legal) required information is
disclosed. The information disclosure requirements are set after a public debate
reflecting the views of cross-sections of users. But, what is relevant information in
a particular circumstance cannot be generalised and specified. The management of
the enterprise is in the best position to decide the contents of the information. It
Notes may be noted that relevance of the information is always guided by the principle of
materiality.
3. Understandability : Understandability means that the information provided through
the financial statements be presented in a manner that the users are able to understand
it in the manner it should be. However, if an information is considered relevant for
the users’ decision-making it must be disclosed even if the information is complex
and not readily understandable by common users. The information disclosure
requirement of law must be fulfilled howsoever complex such information may be.
4. Comparability : Comparability means that the users should be able to compare
the accounting information of an enterprise of the period either with that of other
periods, known as intra-firm comparison or with the accounting information of
other enterprises, known as inter-firm comparison. It is, therefore, necessary to
follow standardised accounting policies consistently to the extent possible.
Accounting information to be useful should have all the above characteristics. The
accounting information produced in the light of Reliability and Relevance Qualitative
Characteristics can be useful but its usefulness shall be limited if it lacks understandability
and comparability. We may explain this with the help of a diagram :
Reliability Relevance

can produce

useful accounting information

which will be limited by

lack of

Understandability Comparability

16 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
1.4 ACCOUNTING TERMS
Transaction
It is an event which involves exchange of some value between two or more entities. It
can be purchase of stationery, receipt of money, payment to a supplier, incurring expenses,
etc. It can be a cash transaction or a credit transaction.
Purchases
Notes
This term is used for goods to be dealt-in i.e. goods are purchased for resale or for
producing the finished products which are meant for sale. Goods purchased may be
Cash Purchases or Credit Purchases. Thus, Purchase of goods is the sum of cash
purchases and credit purchases.
Sundry Creditors
Creditors are persons who have to be paid by an enterprise an amount for providing
goods and services on credit.
Sales
Sales are total revenues from goods or services provided to customers. Sales may be
in cash or in credit.
Sundry Debtors
Persons who have to pay for goods sold or services rendered or in respect of contractual
obligations. It is also termed as debtor, trade debtor, and accounts receivable.
Revenue (Sales)
Sales revenue is the amount by selling products or providing services to customers.
Other items of revenue common to many businesses are: Commission, Interest,
Dividends, Royalties, and Rent received, etc.
Expenses
Costs incurred by a business in the process of earning revenue are called expenses. In
general, expenses are measured by the cost of assets consumed or services used during
the accounting period. The common items of expenses are: Depreciation, Rent, Wages,
Salaries, Interest, Cost of Heating, Light and water and Telephone, etc.
Income
The difference between revenue and expense is called income. For example, goods
costing ` 25000 are sold for ` 35000, the cost of goods sold, i.e. ` 25000 is expense,

ACCOUNTANCY 17
MODULE - 1 Accounting - An Introduction
Basic Accounting
the sale of goods, i.e. ` 35000 is revenue and the difference. i.e. `10000 is income. In
other words, we can state that
Income = Revenue - Expense
Gain
Usually this term is used for profit of an irregular nature, for example, capital gain.
Loss
Notes
It means something against which the firm receives no benefit. It is a fact that expenses
lead to revenue but losses do not, such as theft.
Profit
It is the excess of revenue of a business over its costs. It may be gross profit and net
profit. Gross profit is the difference between sales revenue or the proceeds of goods
sold and/or services provided over its direct cost of the goods sold. Net profit is the
profit made after allowing for all types of expenses. There may be a net loss if the
expenses exceed the revenue.
Expenditure
Spending money or incurring a liability for some benefit, service or property received is
called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery,
etc. are some examples of expenditure. If the benefit of expenditure is exhausted within
a year, it is treated as revenue expenditure. In case the benefit of expenditure lasts for
more than one year, it is treated as an asset and also known as capital expenditure.
Expenditure is usually the amount spent for the purchase of assets. It increases the
profit earning capacity of the business. Expense, on the other hand, is an amount to
earn revenue. Expenditure is considered as capital expenditure unless it is qualified
with words like revenue expenditure on rent, salaries etc., while expense is always
considered as a revenue expense because it is always incurred to earn revenue.
Drawings
It is the amount of money or the value of goods which the proprietor takes away from
business for his/her household or private use.
Capital
It is the amount invested in an enterprise by its owners e.g. paid up share capital in a
corporate enterprise. It also refers to the interest of owners in the assets of an enterprise.
It is the claim against the assets of the business. Any amount contributed by the owner
towards the business unit is a liability for the business enterprise. This liability is also
termed as capital which may be brought in the form of cash or assets by the owner.

18 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Assets
These are tangible objects or intangible rights owned by the enterprise and carrying
probable future benefits. Tangible items are those which can be touched and their
physical presence can be noted/felt e.g. furniture, machine etc. Intangible rights are
those rights which one possesses but cannot see e.g. patent rights, copyrights, goodwill
etc. Assets are purchased for business use and are not for sale. They raise the profit
earning capacity of the business enterprise.
Notes
Assets are broadly categorized as current assets and non-current assets/fixed assets.
Current assets are those assets which are held for a short period generally one year’s
time. The balance of such items goes on fluctuating i.e. it keeps on changing throughout
the year. The balance of cash in hand may change so many times in a day. Various
current assets are cash in hand/at bank, debtors, bills receivable, stock, pre-paid
expenses.
Non-current assets : Those assets are acquired for long term use in the business.
Such assets raise the profit earning capacity of the business enterprise. Expenditure on
such assets is non-recurring and of capital nature. Expenses incurred on acquiring these
assets are added to the value of the assets.
Liability
It is the financial obligation of an enterprise other than owners’ funds.
Liabilities : Liabilities mean the amount which the business owes to outsiders, that is,
except the proprietors. In the words of Finny and Miller, “Liabilities are debts,
they are amounts owed to creditors.” Thus, the claims of those who are not owners
are called Liabilities. This can be expressed as :
Liabilities = Assets – Capital
In business, transactions are recorded taking business to be an entity distinct from its
owners. Thus, capital invested by the proprietors is a liability but an internal liability. On
the other hand, external liability is a liability that is payable to outsiders, i.e., other
than the proprietors.
External liability arises because of credit transactions or loans raised. Examples of
external liabilities are creditors, bank overdraft, bills payable, outstanding liabilities.
Liabilities can be classified into the following :
i. Long-Term Liabilities : These are those liabilities which are payable after a long-
term, (generally more than a year). Examples of Long-Term Liabilities are long-
term loans, debentures, etc.

ACCOUNTANCY 19
MODULE - 1 Accounting - An Introduction
Basic Accounting
ii. Short-Term/Current Liabilities : These are liabilities which are payable in the
near future (generally within a year). Examples of Current Liabilities are creditors,
bank overdrafts, bills payable, short-term loans, etc.
Account : Account is a summarised record of relevant transactions at one place relating
to a particular head. It records not only the amount of transactions but also their effect
and direction.
Stock or Inventory : Stock is the tangible property held by an enterprise for the
Notes purpose of sale in the ordinary course of business or for the purpose of using it in the
production of goods meant for sale or services to be rendered. Stock may be opening
stock or closing stock. In case of a manufacturing concern, Closing Stock comprises
raw materials, Work-in-Progress (i.e., semi-finished goods) and finished goods in hand
on the closing date. Similarly, Opening Stock (beginning inventory) is the amount of
stock at the beginning of the accounting period.
Goods : They refer to items forming part of the Stock-in-Trade of an enterprise, which
are purchased or manufactured with a purpose of selling. In other words, they refer to
the products in which an enterprise is dealing. For an enterprise dealing in home
appliances such as T.V., fridge, A.C., etc., these are goods. Similarly, for a stationer,
stationery is goods, whereas for others, it is an item of expense (not purchases). An
enterprise may purchase assets for use in furtherance of business or stationery for use
in the business, but they are not purchases of ‘goods’ but fixed asset and expense
respectively.
Receivables : The term ‘Receivables’ includes the outstanding amount due from others.
Sometimes, a debtor may accept a Bill of Exchange, which is payable after a certain
period. Such a bill is known as Bill Receivable. Sometimes, a debtor promises to
pay the specific amount in writing after a specified period. Such a promise is known as
a Promissory Note and is recorded as note receivable. The term – accounts
receivable includes trade debtors as well as bills receivable and promissory notes
receivable. The term receivable includes all the amounts due from others.
Payables : The term ‘Payables’ include the amounts due to other. Accounts Payable
includes trade creditors as well as bills payable and promissory notes payable. The
term payable includes all the amounts due to others.
Bill Receivable : Bill Receivable means a Bill of Exchange accepted by a debtor the
amount of which will be received on the specified date.
Bill Payable : Bill Payable means a Bill of Exchange, the amount of which will be
payable on the specified date.
Event : Any transactions in an organisation can be called as an event. Transactions in
an organisation have documentary evidence and will create a change in revenue, expense,
assets, liabilities and capital.

20 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
Cost : It is the amount of expenditure incurred on or is attributed to a specified article;
product or activity.
Voucher : It is proof of a business transaction. Cash Memo, Bill/Invoice, Credit/Debit
notes etc. are examples of voucher.
Discount : Some customers are allowed reduction in the price of goods by the business.
It is called a Discount.
Trade Discount : It is the reduction allowed by the seller to the buyer at the time of Notes
sale on the list price of goods. Trade discount is allowed on bulk purchases. Normally,
trade discount is deducted from the list price and only the balance is accounted for.
Therefore, trade discount will not be shown in the books of accounts.
Cash Discount : It is the deduction allowed by the creditor to the debtor on the
amount due by the latter. This concession is given only to those who settle their accounts
within a stipulated period. Therefore, cash discount encourage prompt settlement of
accounts. For the debtor who pays the amount, it is an income. For creditor, cash
discount is an expense.

INTEXT QUESTIONS 1.4

Fill in the blanks :
i. Stock is a ___________ asset.
ii. Liabilities = Assets - ___________
iii. Debentures are ___________ term liabilities.
iv. Creditors are ___________ term liabilities.

Role of an Accountant in Society

The accountant with his specialized knowledge, extensive training and experience is
not merely responsible for preparing accounts, rather he/she is the best equipped person
to provide other related services normally required by the management. This helps the
management to discharge their duties more effectively thereby providing for efficient
utilization of resources. The accountants’ role in the society includes the following :
To maintain the proper books of accounts which portray the true and fair view of
the results of the business.
To provide information and reports to management to enable them to discharge
their duties more effectively.

ACCOUNTANCY 21
MODULE - 1 Accounting - An Introduction
Basic Accounting
To act as auditor for attestation of accounts as per the requirement of law.
To act as an internal auditor to assist and strengthen the hands of the management.
To act as tax consultant to handle the tax matters of the business.
To act as management consultant to provide services regarding financial planning
of the business to their clients.

Notes
INTEXT QUESTIONS 1.5
I. Write against the following statements the terms for which these are made
in reference to accounting information.
i. It is a common language used to communicate financial information.
ii. Managing Director, functional managers, shareholders etc using the accounting
information.
iii. Ability of the firm to meet all its short term or current obligations as and when
they fall due.
II. State in each case, whether the items are to be regarded as goods or assets.
i. Furniture purchased by Makhan Singh, a dealer in furniture.
ii. Automatic Machine purchased by a workshop for manufacturing products.
iii. Machine manufactured by a firm for sale to a mill.
iv. Furniture purchased by Malti, a stationery shop-owner.
III. Multiple Choice Questions :
i. Goods in hand at the end of a year is called ___________.
a) Purchases b) cost c) stock d) profit
ii. A Bill of Exchange is considered as _________ from the view point of creditors.
a) Bills receivable b) Bills payable
c) Discounting d) None of the above
iii. A Bill of Exchange is ______________ from the view point of debtors.
a) Bills Receivable b) Bills Payable
c) Endorsement d) None of the above

22 ACCOUNTANCY
 Accounting - An Introduction MODULE - 1
Basic Accounting
iv. _____________ are reductions allowed either on selling price or on the amount
due.
a) Discount b) Cost
c) Bills d) All of the above

WHAT YOU HAVE LEARNT Notes

Accounting is the art of recording, classifying and summarizing in terms of money
transactions and events of a financial nature and interpreting the results thereof. It is
the process of collecting, recording, summarizing and communicating financial
information. It is an information system which generates information for decision
making by the interested parties.
Recording of business transactions in a systematic manner in the books of accounts
is called book keeping.
Accounting consists of economic events which are identified, measured, recorded
and communicated.
Branches of accounting : Financial accounting, cost accounting and management
accounting are some of the branches of accounting.
Accounting in modern times is treated as an information system which has transaction,
accounting process, decision useful financial information as the necessary
ingredients.
The accountant with his specialised knowledge extensive training and experience
helps the management and plays an important role in the society.
Important accounting terms are : Business entity, transactions, purchases, sales,
debtors, creditors, etc.

TERMINAL EXERCISE
1. What is accounting? What are its objectives and limitations?
2. Distinguish between book-keeping and accounting.
3. Explain the different branches of accounting.
4. Explain the role of an accountant in the society.
5. Explain accounting as a system of information. Enlist the parties that are interested
in the accounting information.

ACCOUNTANCY 23
MODULE - 1 Accounting - An Introduction
Basic Accounting
6. What is expense? Explain with example.
7. What is meant by liability? Explain with the help of examples.
8. State the meaning of the term ‘Asset’ with examples.

ANSWERS TO INTEXT QUESTIONS

Notes 1.1 I. i. Book keeping ii. Analysing

iii. Accounting iv.Investors, Creidtors etc.
II. i. B ii. B iii. A iv. A v. A
1.2 I. i. Cost accounting ii. Social accounting
iii. Management accounting
II. i. The effect of rise in price is not taken into consideration
ii. Estimates are sometimes inaccurate
iii. Profit can be manipulated by window dressing
iv. Non monetary transactions are completely omitted.
III. i. Systematic records are accepted as evidence in court.
ii. Systematic record keeping replaces memory.
iii. Accounting provides the financial information for decision making.
1.3 i. T ii. T iii. F
1.4 i. current ii. capital iii. long iv. short
1.5 I. i. Accounting ii. usersiii. language of business
II. i. Goods ii. Assets iii. Goods iv. Assets
III. i. c ii. a iii. b iv. a

ACTIVITY
One day you have visited your friend Shiva who runs a grocery shop and casually
talked about the accounts he maintains of his business unit. You were surprised to note
that he did not maintain accounts. Enquire from other businessmen you know about
their accounting records and about the uses and purposes of accounting. Explain them
to your friend Shiva to motivate him to maintain accounts of his business unit.

24 ACCOUNTANCY
 MODULE - 1
Basic Accounting

ACCOUNTING CONCEPTS Notes

In the previous lesson, you have studied the meaning and nature of business transac-
tions and objectives of financial accounting. In order to maintain uniformity and consis-
tency in preparing and maintaining books of accounts, certain rules or principles have
been evolved. These rules/principles are classified as concepts and conventions. These
are foundations of preparing and maintaining accounting records. In this lesson we will
learn about various accounting concepts, their meaning and significance.

OBJECTIVES
After studying this lesson, you will be able to
explain the term accounting concept and
explain the meaning and significance of various accounting concepts : Business
Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept,
Duality Aspect concept, Realisation Concept, Accrual Concept and Matching
Concept.
2.1 MEANING OF ACCOUNTING CONCEPT
Let us take an example. In India there is a basic rule to be followed by everyone that
one should walk or drive on the left hand side of the road. It helps in the smooth flow
of traffic. Similarly, there are certain rules that an accountant should follow while re-
cording business transactions and preparing accounts. These may be termed as ac-
counting concepts. Thus, it can be said that :
Accounting concepts refer to the basic assumptions, rules and principles which
work as the basis for recording of business transactions and preparing accounts.

ACCOUNTANCY 25
MODULE - 1 Accounting Concepts
Basic Accounting
The main objective is to maintain uniformity and consistency in accounting records.
These concepts constitute the very basis of accounting. All the concepts have been
developed over the years from experience and thus, they are universally accepted
rules. Following are the various accounting concepts that have been discussed in the
following sections :
Business entity concept
Money measurement concept
Notes
Going concern concept
Accounting period concept
Accounting cost concept
Duality aspect concept
Realisation concept
Accrual concept
Matching concept
2.2 BUSINESS ENTITY CONCEPT
This concept assumes that, for accounting purposes, the business enterprise and its
owners are two separate independent entities. Thus, the business and personal
transactions of its owner are separate. For example, when the owner invests money in
the business, it is recorded as liability of the business to the owner. Similarly, when the
owner takes away from the business cash/goods for his/her personal use, it is not
treated as business expense. Thus, the accounting records are made in the books of
accounts from the point of view of the business unit and not the person owning the
business. This concept is the very basis of accounting.
Let us take an example. Suppose Mr. Sahoo started business investing
`100000. He purchased goods for `40000, Furniture for `20000 and plant and
machinery of `30000. `10000 remains in hand. These are the assets of the business
and not of the owner. According to the business entity concept `100000 will be treated
by business as capital i.e. a liability of business towards the owner of the business.
Now suppose, he takes away `5000 cash or goods worth `5000 for his domestic
purposes. This withdrawal of cash/goods by the owner from the business is his private
expense and not an expense of the business. It is termed as Drawings. Thus, the business
entity concept states that business and the owner are two separate/distinct persons.
Accordingly, any expense incurred by owner for himself or his family from business will
be considered as expenses and it will be shown as drawings.

26 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
Significance
The following points highlight the significance of business entity concept :
This concept helps in ascertaining the profit of the business as only the business
expenses and revenues are recorded and all the private and personal expenses are
ignored.
This concept restraints accountants from recording of owner’s private/personal
transactions. Notes
It also facilitates the recording and reporting of business transactions from the busi-
ness point of view
It is the very basis of accounting concepts, conventions and principles.

INTEXT QUESTIONS 2.1

Fill in the blanks with suitable word/words
i. The accounting concepts are basic ___________ of accounting.
ii. The main objective of accounting concepts is to maintain ___________ and
___________ in the accounting record.
iii. ___________ concept assumes that business enterprise and its owners are two
separate independent entities.
iv. The goods drawn from business for owner’s personal use are called ___________.

2.3 MONEY MEASUREMENT CONCEPT

This concept assumes that all business transactions must be in terms of money, that is in
the currency of a country. In our country such transactions are in terms of rupees.
Thus, as per the money measurement concept, transactions which can be expressed in
terms of money are recorded in the books of accounts. For example, sale of goods
worth `200000, purchase of raw materials `100000, Rent Paid `10000 etc. are
expressed in terms of money, and so these are recorded in the books of accounts. But
the transactions which cannot be expressed in monetary terms are not recorded in the
books of accounts. For example, sincerity, loyality, honesty of employees are not
recorded in books of accounts because these cannot be measured in terms of money
although they do affect the profits and losses of the business concern.
Another aspect of this concept is that the records of the transactions are to be kept not
in the physical units but in the monetary unit. For example, at the end of the year 2013,

ACCOUNTANCY 27
MODULE - 1 Accounting Concepts
Basic Accounting
an organisation may have a factory on a piece of land measuring 10 acres, office building
containing 50 rooms, 50 personal computers, 50 office chairs and tables, 100 kg of
raw materials etc. These are expressed in different units. But for accounting purposes
they are to be recorded in money terms i.e. in rupees. In this case, the cost of factory
land may be say `12 crore, office building of `10 crore, computers `10 lakhs, office
chairs and tables `2 lakhs, raw material `30 lakhs. Thus, the total assets of the
organisation are valued at `22 crore and `42 lakhs. Therefore, the transactions which
can be expressed in terms of money is recorded in the accounts books, that too in
Notes
terms of money and not in terms of the quantity.
Significance
The following points highlight the significance of money measurement concept :
This concept guides accountants about what to record and what not to record.
It helps in recording business transactions uniformly.
If all the business transactions are expressed in monetary terms, it will easy to
understand the accounts prepared by the business enterprise.
It facilitates comparison of business performance of two different periods of the
same firm or of the two different firms for the same period.

INTEXT QUESTIONS 2.2

Put a tick mark (√) against the information that should be recorded in the
books of accounts and cross mark (×) against the information that should not
be recorded
i. Health of the managing director
ii. Purchase of factory building `10 crore
iii. Rent paid `100000
iv. Goods worth ` 10000 given as charity
v. Delay in supply of raw materials
2.4 GOING CONCERN CONCEPT
This concept states that a business firm will continue to carry on its activities for an
indefinite period of time. Simply stated, it means that every business entity has continuity
of life. Thus, it will not be dissolved in the near future. This is an important assumption
of accounting, as it provides a basis for showing the value of assets in the balance

28 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
sheet; For example, a company purchases a plant and machinery of `100000 and its
life span is 10 years. According to this concept every year some amount will be shown
as expenses and the balance amount as an asset. Thus, if an amount is spent on an item
which will be used in business for many years, it will not be proper to charge the
amount from the revenues of the year in which the item is acquired. Only a part of the
value is shown as expense in the year of purchase and the remaining balance is shown
as an asset.
Notes
Significance

The following points highlight the significance of going concern concept :

This concept facilitates preparation of financial statements.

On the basis of this concept, depreciation is charged on the fixed assets.

It is of great help to the investors, because, it assures them that they will continue to
get income on their investments.

In the absence of this concept, the cost of a fixed asset will be treated as an ex-
pense in the year of its purchase.

A business is judged for its capacity to earn profits in future.

INTEXT QUESTIONS 2.3

Fill in the blanks by selecting correct words given in the bracket/brackets:

i. Going concern concept states that every business firm will continue to carry on its
activities ___________ (for a definite time period, for an indefinite time period)

ii. Fixed assets are shown in the books at their _________ (cost price, market price)

iii. The concept that a business enterprise will not be closed down in the near future is
known as ___________ (going concern concept, money measurement concept)

iv. On the basis of going concern concept, a business prepares its ___________
(financial statements, bank statement, cash statement)

v. ___________ concept states that business will not be dissolved in near future.
(Going concern, Business entity)

ACCOUNTANCY 29
MODULE - 1 Accounting Concepts
Basic Accounting
2.5 ACCOUNTING PERIOD CONCEPT
All the transactions are recorded in the books of accounts on the assumption that
profits on these transactions are to be ascertained for a specified period. This is known
as accounting period concept. Thus, this concept requires that a balance sheet and
profit and loss account should be prepared at regular intervals. This is necessary for
different purposes like, calculation of profit, ascertaining financical position, tax
computation etc.
Notes
Further, this concept assumes that, indefinite life of business is divided into parts. These
parts are known as Accounting Period. It may be of one year, six months, three months,
one month, etc. But usually one year is taken as one accounting period which may be
a calender year or a financial year.
Year that begins from 1st of January and ends on 31st of December, is known
as Calendar Year. The year that begins from 1st of April and ends on 31st of
March of the following year, is known as financial year.
As per accounting period concept, all the transactions are recorded in the books of
accounts for a specified period of time. Hence, goods purchased and sold during the
period, rent, salaries etc. paid for the period are accounted for against that period only.
Significance
It helps in predicting the future prospects of the business.
It helps in calculating tax on business income calculated for a particular time period.
It also helps banks, financial institutions, creditors, etc to assess and analyse the
performance of business for a particular period.
It also helps the business firms to distribute their income at regular intervals as
dividends.

INTEXT QUESTIONS 2.4

Fill in the blanks with suitable word/words :
i. Recording of transactions in the books of accounts with a definite period is called
………………. concept.
ii. The commonly accepted accounting period in India is ……………….
iii. According to accounting period concept, revenue and expenses are related to a
………………. period.

30 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
iv. If accounting year begins from 1st of January, and ends on 31st of December, it is
known as ……………….
v. If accounting year begins from 1st of April and ends on 31st of March of the following
year, then accounting year is known as ……………….

2.6 ACCOUNTING COST CONCEPT

Accounting cost concept states that all assets are recorded in the books of accounts at
their purchase price, which includes cost of acquisition, transportation and installation Notes
and not at its market price. It means that fixed assets like building, plant and machinery,
furniture, etc are recorded in the books of accounts at a price paid for them. For
example, a machine was purchased by XYZ Limited for `500000, for manufacturing
shoes. An amount of `1,000 were spent on transporting the machine to the factory site.
In addition, `2000 were spent on its installation. The total amount at which the machine
will be recorded in the books of accounts would be the sum of all these items i.e.
`503000. This cost is also known as historical cost. Suppose the market price of the
same is now ` 90000 it will not be shown at this value. Further, it may be clarified that
cost means original or acquisition cost only for new assets and for the used ones, cost
means original cost less depreciation. The cost concept is also known as historical cost
concept. The effect of cost concept is that if the business entity does not pay anything
for acquiring an asset this item would not appear in the books of accounts. Thus,
goodwill appears in the accounts only if the entity has purchased this intangible asset
for a price.
Significance
This concept requires asset to be shown at the price at which it has been acquired,
which can be verified from the supporting documents.
It helps in calculating depreciation on fixed assets.
The effect of cost concept is that if the business entity does not pay anything for an
asset, this item will not be shown in the books of accounts.

INTEXT QUESTIONS 2.5

Fill in the blanks with suitable word/words
i. The cost concept states that all fixed assets are recorded in the books of accounts
at their ___________ price.
ii. The main objective to adopt historical cost in recording the fixed assets is that the
cost of the assets will be easily verifiable from the ___________ documents.

ACCOUNTANCY 31
MODULE - 1 Accounting Concepts
Basic Accounting
iii. The cost concept does not show the …………. of the business.
iv. The cost concept is otherwise known as …………. concept.

2.7 DUAL ASPECT CONCEPT

Dual aspect is the foundation or basic principle of accounting. It provides the very
basis of recording business transactions in the books of accounts. This concept as-
sumes that every transaction has a dual effect, i.e. it affects two accounts in their re-
Notes
spective opposite sides. Therefore, the transaction should be recorded at two places.
It means, both the aspects of the transaction must be recorded in the books of ac-
counts. For example, goods purchased for cash has two aspects which are (i) Giving
of cash (ii) Receiving of goods. These two aspects are to be recorded.

Thus, the duality concept is commonly expressed in terms of fundamental accounting

equation :

Assets = Liabilities + Capital

The above accounting equation states that the assets of a business are always equal to
the claims of owner/owners and the outsiders. This claim is also termed as capital or
owners equity and that of outsiders, as liabilities or creditors’ equity.

The knowledge of dual aspect helps in identifying the two aspects of a transaction
which helps in applying the rules of recording the transactions in books of accounts.
The implication of dual aspect concept is that every transaction has an equal impact on
assets and liabilities in such a way that total assets are always equal to total liabilities.

Let us analyse some more business transactions in terms of their dual aspect :

1. Capital brought in by the owner of the business

The two aspects in this transaction are :

(i) Receipt of cash

(ii) Increase in Capital (owners equity)

2. Purchase of machinery by cheque

The two aspects in the transaction are

(i) Reduction in Bank Balance

(ii) Owning of Machinery

32 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
3. Goods sold for cash
The two aspects are
(i) Receipt of cash
(ii) Delivery of goods to the customer
4. Rent paid in cash to the landlord
The two aspects are
(i) Payment of cash Notes

(ii) Rent (Expenses incurred).

Once the two aspects of a transaction are known, it becomes easy to apply the rules of
accounting and maintain the records in the books of accounts properly.
The interpretation of the Dual aspect concept is that every transaction has an equal
effect on assets and liabilities in such a way that total assets are always equal to total
liabilities of the business.
Significance
z This concept helps accountant in detecting error.
z It encourages the accountant to post each entry in opposite sides of two affected
accounts.

INTEXT QUESTIONS 2.6

Write the two aspects (effects) of the following transactions.
S.No. Transaction Ist aspect IInd aspect

(i) Owner brings cash in business

(ii) Goods purchased for cash

(iii) Goods sold for cash

(iv) Furniture purchased for cash

(v) Received cash from Sharma

(vi) Purchased machine from

Rama on credit

(vii) Paid to Ram

(viii) Salaries Paid

(ix) Rent Paid

(x) Rent Received

ACCOUNTANCY 33
MODULE - 1 Accounting Concepts
Basic Accounting
2.8 REALISATION CONCEPT
This concept states that revenue from any business transaction should be included in
the accounting records only when it is realised. The term realisation means creation of
legal right to receive money. Selling goods is realisation, receiving order is not.
In other words, it can be said that :
Revenue is said to have been realised when cash has been received or right to
Notes receive cash on the sale of goods or services or both have been created.
Let us study the following examples :
i. N.P. Jeweller received an order to supply gold ornaments worth
`5,00,000. They supplied ornaments worth `2,00,000 up to the year ending 31st
December 2013 and rest of the ornaments were supplied in January 2014.
ii. Bansal sold goods for `1,00,000 for cash in 2013 and the goods have been deliv-
ered during the same year.
iii. Akshay sold goods on credit for `50,000 during the year ending 31st December
2013. The goods have been delivered in 2013 but the payment was received in
March 2014.
Now, let us analyse the above examples to ascertain the correct amount of revenue
realised for the year ending 31st December 2013.
i. The revenue for the year 2013 for N.P. Jeweller is `200000. Mere getting an
order is not considered as revenue until the goods have been delivered.
ii. The revenue for Bansal for year 2013 is `1,00,000 as the goods have been deliv-
ered in the year 2013. Cash has also been received in the same year.
iii. Akshay’s revenue for the year 2013 is `50,000, because the goods have been
delivered to the customer in the year 2013. Revenue became due in the year 2013
itself. In the above examples, revenue is realised when the goods are delivered to
the customers.
The concept of realisation states that revenue is realized at the time when goods
or services are actually delivered.
In short, the realisation occurs when the goods and services have been sold either for
cash or on credit. It also refers to inflow of assets in the form of receivables.
Significance
It helps in making the accounting information more objective.
It provides that the transactions should be recorded only when goods are deliv-
ered to the buyer.

34 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting

INTEXT QUESTIONS 2.7

Ascertain the amount of current revenue realized for the year ending 31st De-
cember 2006

i. An order, to supply goods for `20,00,000 is received in the year 2006. The
goods have been supplied only for `10,00,000 in 2006.
Notes
ii. What will be the revenue (i) if the payment of `6,00,000 is received in cash in
2006 and the balance payment of `4,00,000 received in 2007.

iii. What will be the revenue if the goods have been sold on credit and the payment of
`1500000 is received in the year 2007, while all the goods of `20,00,000 are
supplied in the year 2006.

iv. What will be the revenue if an advance payment of `100,000 is received in the
year 2006 and the balance received in the year 2007.
2.9 ACCRUAL CONCEPT
The meaning of accrual is something that becomes due especially an amount of money
that is yet to be paid or received at the end of the accounting period. It means that
revenues are recognised when they become receivable. Though cash is received or not
received and the expenses are recognised when they become payable though cash is
paid or not paid. Both transactions will be recorded in the accounting period to which
they relate. Therefore, the accrual concept makes a distinction between the accrual
receipt of cash and the right to receive cash as regards revenue and actual payment of
cash and obligation to pay cash as regards expenses.
The accrual concept under accounting assumes that revenue is realised at the time of
sale of goods or services irrespective of the fact when the cash is received. For ex-
ample, a firm sells goods for `55000 on 25th March 2014 and the payment is not
received until 10th April 2014, the amount is due and payable to the firm on the date of
sale i.e. 25th March 2014. It must be included in the revenue for the year ending 31st
March 2014. Similarly, expenses are recognised at the time services provided, irre-
spective of the fact when actual payment for these services are made. For example, if
the firm received goods costing `20000 on 29th March 2014 but the payment is made
on 2nd April 2014 the accrual concept requires that expenses must be recorded for the
year ending 31st March 2014 although no payment has been made until 31st March
2014 though the service has been received and the person to whom the payment
should have been made is shown as creditor.

ACCOUNTANCY 35
MODULE - 1 Accounting Concepts
Basic Accounting
In brief, accrual concept requires that revenue is recognised when realised and ex-
penses are recognised when they become due and payable without regard to the time
of cash receipt or cash payment.
Significance
It helps in knowing actual expenses and actual income during a particular time
period.

Notes It helps in calculating the net profit of the business.

INTEXT QUESTIONS 2.8

Fill in the blanks with suitable word/words :
i. Accrual concept relates to the determination of ...................
ii. Goods of `50000 are sold on 25th March 2014 but payment is received on 10th
April 2014. It will be a revenue for the year ending ....................
iii. Accrual concept requires revenue is recognised when ................... and expenses
are recognised when they become ...................

2.10 MATCHING CONCEPT

The matching concept states that the revenue and the expenses incurred to earn the
revenues must belong to the same accounting period. So once the revenue is realised,
the next step is to allocate it to the relevant accounting period. This can be done with
the help of accrual concept.
Let us study the following transactions of a business during the month of December,
2006
(i) Sale : cash `2000 and credit `1000
(ii) Salaries Paid `350
(iii) Commission Paid `150
(iv) Interest Received `50
(v) Rent received `140, out of which `40 received for the year 2007
(vi) Carriage paid `20
(vii) Postage `30
(viii) Rent paid `200, out of which `50 belong to the year 2005
(ix) Goods purchased in the year for cash `1500 and on credit `500
(x) Depreciation on machine `200

36 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
Let us record the above transactions under the heading of Expenses and Revenue.
Expenses Amount Revenue Amount
` `
1. Salaries 350 1. Sales
2. Commission 150 Cash 2000
3. Carriage 20 Credit 1000 3000
4. Postage 30 2. Interest received 50
5. Rent paid 200 3. Rent received 140
Less for 2005 -50 150 Less for 2007 (40) 100
6. Goods purchased Notes
Cash 1500
Credit 500 2000
7. Depreciation on machine 200

Total 2900 Total 3150

In the above example expenses have been matched with revenue i.e (Revenue `3150-
Expenses `2900) This comparison has resulted in profit of `250. If the revenue is
more than the expenses, it is called profit. If the expenses are more than revenue it is
called loss. This is what exactly has been done by applying the matching concept.
Therefore, the matching concept implies that all revenues earned during an accounting
year, whether received/not received during that year and all cost incurred, whether
paid/not paid during the year should be taken into account while ascertaining profit or
loss for that year.
Significance
It guides how the expenses should be matched with revenue for determining exact
profit or loss for a particular period.
It is very helpful for the investors/shareholders to know the exact amount of profit
or loss of the business.

INTEXT QUESTIONS 2.9

Fill in the blanks with suitable word/words :
i. Expenses are matched with ___________ generated during a period.
ii. Goods sold for cash is an example of ___________.
iii. Salaries paid is an example of ___________.
iv. Income is the excess of ___________ over ___________.
v. ___________ concept states that the revenue and the expenses incurred to earn
the revenue must belong to the same accounting period

ACCOUNTANCY 37
MODULE - 1 Accounting Concepts
Basic Accounting
vi. ___________ concept states how the expenses should be compared with rev-
enues for ascertaining exact profit or loss for a particular period

WHAT YOU HAVE LEARNT

Accounting concepts refer to the basic assumptions which serve the basis of re-
cording actual business transactions.
Notes
The important accounting concepts are business entity, money measurement, going
concern, accounting period, cost concept, duality aspect concept, realisation con-
cept, accrual concept, and matching concept.
Business entity concept assumes that for accounting purposes, the business enter-
prise and its owner(s) are two separate entities.
Money measurement concept assumes that all business transactions must be re-
corded in the books of accounts in terms of money.
Going concern concept states that a business firm will continue to carry on activi-
ties for an indefinite period of time.
Accounting period concept states that all the business transactions are recorded in
the books of accounts on the assumption that profits of transactions is to be ascer-
tained for a specified time period.
Accounting cost concept states that all assets are recorded in the books of ac-
counts at their cost price.
Dual aspect concept states that every transaction has a dual effect.
Realisation concept states that revenue from any business transaction should be
included in the accounting records only when it is realised
Matching concept states that the revenue and the expenses incurred to earn the
revenue must belong to the same accounting period

TERMINAL EXERCISE
1. Explain meaning and significance of going concern concept.
2. What do you mean by business entity concept?
3. State meaning and significance of money measurement concept.
4. Write short notes on the following
(a) Cost concept (b) Accrual concept

38 ACCOUNTANCY
 Accounting Concepts MODULE - 1
Basic Accounting
(c) Matching concept (d) Accounting period concept
5. What do you mean by accounting concept? Explain any four accounting concepts.

ANSWERS TO INTEXT QUESTIONS

2.1 (i) rules (ii) uniformity and consistency
(iii) Business entity concept (iv) drawings
Notes
2.2 (i) × (ii) √ (iii) √ (iv) √ (v) ×
2.3 (i) for an indefinite time period (ii) cost price
(iii) going concern concept (iv) financial statements (v) Going concern
2.4 (i) accounting period (ii) one year (iii) particular
(iv) calender year (v) financial year
2.5 (i) purchase (ii) supporting (iii) true net worth (iv) historical cost
2.6 (i) Owner’s capital, cash (ii) Goods received, cash
(iii) Cash received, goods sold (iv) Furniture, cash
(v) Cash, Sharma (vi) Machine, Rama (vii) Ram, cash
(viii) Salaries, cash (ix) Rent, cash (x) Cash, rent
2.7 (i) `10,00,000 (ii) `10,00000 (iii) `20,00,000 (iv) `1,00,000
2.8 (i) income (ii) 31st March, 2006 (iii) realised, due
2.9 (i) revenue (ii) revenue (iii) expense (iv) revenue, expenses
(v) matching (vi) matching

ACTIVITY
In our country business concerns are not following the same accounting period every
year. Enquire from various sources and list various such periods prevailing in our country.
One for example is given
1. Year ending 31st March (financial year)
2. ____________________________________________
3. ____________________________________________

ACCOUNTANCY 39
MODULE - 1
Basic Accounting

Notes ACCOUNTING CONVENTIONS AND

STANDARDS

In the previous lesson, you have studied the accounting concepts like business entity,
money measurement, going concern, accounting period, cost, duality, realisation, accrual
and matching. These concepts or assumptions or principles are working rules for all
accounting activities.
You may visit some business units doing a particular kind of business. Enquire them and
find out how unsold goods are being valued. You will find that they follow the same
method of valuation of unsold stock of goods. If you ask them, why do they value the
unsold goods at cost or market price, whichever is lower, even though the market price
is higher than the cost price, the businessman may answer that it is the convention,
tradition or practice or custom of the business, that business is following year after
year. In accounting, there are many conventions or practices which are used while
recording the transactions in the books of accounts. Apart from these, the Institute of
Chartered Accountants of India (ICAI), which is the main regulatory body for
standardisation of accounting policies in the country has issued a number of accounting
standards from time to time to bring consistency in the accounting practices. We shall
study about accounting conventions and standards in detail in this lesson.

OBJECTIVES
After studying this lesson, you will be able to :
explain the meaning of accounting convention;
explain the meaning and significance of accounting consventions like consistency,
full disclosure, materiality and conservatism;
state the meaning of the term Generally Accepted Accounting Principles (GAAP);

40 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting
explain the concept of accounting standards and enumerate the various accounting
standards issued by the Institute of Chartered Accountants of India.

3.1 MEANING OF ACCOUNTING CONVENTIONS

An accounting convention refers to common practices which are universally followed
in recording and presenting accounting information of the business entity. They are
followed like customs, traditions, etc. in a society. Accounting conventions are evolved
through the regular and consistent practice over the years to facilitate uniform recording
Notes
in the books of accounts. Accounting Conventions help in comparing accounting data
of different business units or of the same unit for different periods. These have been
developed over the years. The most important conventions which have been used for
a long period are :
Convention of consistency.
Convention of full disclosure.
Convention of materiality.
Convention of conservatism.

3.2 CONVENTION OF CONSISTENCY

The convention of consistency means that same accounting principles should be used
for preparing financial statements year after year. A meaningful conclusion can be drawn
from financial statements of the same enterprise when there is a comparison between
them over a period of time. But this can be possible only when accounting policies and
practices followed by the enterprise are uniform and consistent over a period of time.
If different accounting procedures and practices are used for preparing financial
statements of different years, then the result will not be comparable.
Generally a businessman follows the undermentioned general practices or methods
year after year.
While charging depreciation on fixed assets or valuing unsold stock, once a particular
method is used it should be followed year after year so that the financial statements can
be analysed and compared provided that the depreciation on fixed assets is charged or
unsold stock is valued by using particular method year after year. This can be further
clarified as : in case of charging depreciation on fixed assets accountant can decide to
adopt any one of the methods of depreciation such as diminishing value method or
straight line method.
Similarly, in case of valuation of closing stock it can be valued at actual cost price or
market price or whichever is less. However precious metals like gold, diamond, minerals
are generally valued at market price only.

ACCOUNTANCY 41
MODULE - 1 Accounting Conventions & Standards
Basic Accounting
Types of consistency

There are three types of consistency namely :

i. Vertical consistency (Same organisation) : It is to be found within the group of

inter-related financial statements of an organisation on the same date. It occurs
when fixed assets have been shown at cost price and in the interrelated income
statement depreciation has also been charged on the historical cost of the assets.
Notes ii. Horizontal consistency (Time basis) : This consistency is to be found between
financial statements of one entity from period to period. Thus, it helps in comparing
performance of the business between two years i.e. current year with past year.

iii. Dimensional consistency (Two organisations in the same trade) : This

consistency is to be found in the statements of two different business entities of the
same period. This type of consistency assists in making comparison of the
performance of one business entity with the other business entity in the same trade
and on the same date.

Therefore, as per this convention the same accounting methods should be adopted
every year in preparing financial statements. But it does not mean that a particular
method of accounting once adopted can never be changed. Whenever a change in
method is necessary, it should be disclosed by way of footnotes in the financial statements
of that year.
Significance

It facilitates comparative analysis of the financial statements.

It ensures uniformity in charging depreciation on fixed assets and valuation of closing

stock.

INTEXT QUESTIONS 3.1

Fill in the blanks with suitable word/words

i. Convention of consistency means that same accounting principles should be used

for preparing financial statements ...………

ii. Unsold goods are valued at cost price or ...……… whichever is ...………

iii. Precious metals, like gold, mineral and others are generally valued at…………

iv. As per the convention of …………. year after year same methods are followed.

42 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting
3.3 CONVENTION OF FULL DISCLOSURE
Convention of full disclosure requires that all material and relevant facts concerning
financial statements should be fully disclosed. Full disclosure means that there should
be full, fair and adequate disclosure of accounting information. Adequate means sufficient
set of information to be disclosed. Fair indicates an equitable treatment of users. Full
refers to complete and detailed presentation of information. Thus, the convention of full
disclosure suggests that every financial statement should fully disclose all relevant
information. Let us relate it to the business. The business provides financial information Notes
to all interested parties like investors, lenders, creditors, shareholders etc. The
shareholders would like to know profitability of the firm while the creditors would like
to know the solvency of the business. In the same way, other parties would be interested
in the financial information according to their requirements. This is possible if financial
statements disclose all relevant information in full, fair and adequate manner.
Let us take an example. As per accounts, net sales are `1,50,000, it is important for
the interested parties to know the amount of gross sales which may be `2,00,000 and
the sales return `50,000. The disclosure of 25% sales returns may help them to find
out the actual sales position. Therefore, whatever details are available, that must be
honestly provided. Additional information should also be given in the financial statements.
For example, in a balance sheet the basis of valuation of assets, such as investments,
inventories, land and building etc. should be clearly stated. Similarly, any change in the
method of depreciation or in making provision for bad debts or creating any reserve
must also be shown clearly in the Balance Sheet. Therefore, in order to achieve the
purpose of accounting, all the transactions of a business and any change in accounting
policies, methods and procedures are fully recorded and presented in accounting.
To ensure proper disclosure of material accounting information, the Companies Act
1956, under schedule VI has provided a format for the preparation of Profit and Loss
account and Balance Sheet of a company. It is necessary for every company to follow
this format. The regulatory bodies like Securities and Exchange Board of India (SEBI)
has also made compulsory for complete disclosures by registered companies.
Significance
It helps in meaningful comparison of financial statements of the different business
units.
This can also help in the comparison of financial statements of different years of the
same business unit.
This convention is of great help to investor and shareholder for making investment
decisions.
The convention of full disclosure presents reliable information.

ACCOUNTANCY 43
MODULE - 1 Accounting Conventions & Standards
Basic Accounting

INTEXT QUESTIONS 3.2

Fill in the blanks with appropriate word/words :
i. The shareholders would like to know about the ___________ of the business.
ii. The convention of full disclosure requires that there should be full, ___________
and ___________ disclosure of accounting information.
Notes
iii. The creditors are interested to know the ___________ of the business.
iv. All relevant material facts should be ___________ in the financial statements.
v. The full disclosure convention presents ___________ information.

3.4 CONVENTION OF MATERIALITY

The convention of materiality states that, to make financial statements meaningful, only
material facts i.e. important and relevant information should be supplied to the users of
accounting information. The question that arises here is what is a material fact. The
materiality of a fact depends on its nature and the amount involved. Material fact means
the information of which will influence the decision of its user.
For example, a businessman is dealing in electronic goods. He purchases T.V.,
Refrigerator, Washing Machine, Computer etc. for his business. In buying these
items he uses larger part of his capital. These items are significant items; thus,
these should be recorded in the books of accounts in detail. At the same time to
maintain day to day office work he purchases pen, pencil, match box, scented
stick, etc. For this he will use very small amount of his capital. But to maintain
the details of every pen, pencil, match box or other small items is not considered
of much significance. These items are insignificant items and hence they should
be recorded separately. Thus, the items that are significantly important in recording
the details are termed as material facts or significant items. The items that are of
less significance are immaterial facts or insignificant items.
Thus according to this convention, important and significant items should be
recorded in their respective heads and all immaterial or insignificant transactions
should be clubbed under a different accounting head.
Significance
It helps in minimising the errors of calculation.
It helps in making financial statements more meaningful.
It saves time and resources.

44 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting

INTEXT QUESTIONS 3.3

Fill in the blanks with suitable word/words :
i. ___________ convention states that to make financial statements more meaningful,
only significant and important items should be supplied to the users.
ii. Convention of materiality states that significant items should be disclosed under
___________. Notes

iii. ___________ convention keeps accounts manager to focus on important /significant

items.
iv. ___________ means the information which will influence the decision of its users.

3.5 CONVENTION OF CONSERVATISM

This convention is based on the principle that “Anticipate no profit, but provide for
all possible losses”. It provides guidance for recording transactions in the books of
accounts. It is based on the policy of playing safe in regard to showing profit. The main
objective of this convention is to show minimum profit. Profit should not be overstated.
If profit shows more than actual, it may lead to distribution of dividend out of capital.
This is not a fair policy and it will lead to the reduction in the capital of the enterprise.
Thus, this convention clearly states that profit should not be recorded until it is realised.
But if the business anticipates any loss in the near future, provision should be made in
the books of accounts for the same. For example, valuing closing stock at cost or
market price whichever is lower, creating provision for doubtful debts, discount on
debtors, writing off intangible assets like goodwill, patent, etc. The convention of
conservatism is a very useful tool in situation of uncertainty and doubts.
Significance
It helps in ascertaining actual profit.
It is useful in the situation of uncertainties and doubts.
It helps in maintaining the capital of the enterprise.

INTEXT QUESTIONS 3.4

Give your decision in the following situations :
i. A business has unsold stock at the end of year. The cost price is
`2,00,000 and the market price is `2,50,000. At which price the unsold stock be
recorded ?

ACCOUNTANCY 45
MODULE - 1 Accounting Conventions & Standards
Basic Accounting
ii. What will be your decision if the cost price in the above case is
`2,10,000 ?
iii. A businessman anticipates that it may not be possible to collect
`50,000 from one of his debtors. will he record this transaction in the books
of accounts and at what value?

3.6 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Notes (GAAP) AND ACCOUNTING STANDARDS
In order to maintain uniformity and consistency in accounting records throughout the
world, certain rules and principles have been developed which are generally accepted
by the accounting profession. These rules/principles are called by different names such
as principles, concepts, conventions, postulates, assumptions. These rules/principles
are judged on their general acceptability rather than universal acceptability. Hence,
they are popularly called Generally Accepted Accounting Principles (GAAP). The term
“generally accepted” means that these principles must have support, that generally
comes from the professional accounting bodies. Thus, Generally Accepted Accounting
Principles (GAAP) refer to the rules or guidelines adopted for recording and reporting
of business transactions of financial statements. These principles have evolved over a
long period of time on the basis of past experiences, usages or customs, etc. These
principles are also referred as concepts and conventions, which have already been
discussed.
Accounting standards : Concept and Objectives
The term standard denotes a discipline, which provides both guidelines and yardsticks
for evaluation. As guidelines, accounting standards provide uniform practices and
common techniques of accounting. As a general rule, accounting standards are
applicable to all corporate enterprises. They are made operative from a date specified
in the standards. The Institute of Chartered Accountants of India (ICAI) constituted
the Accounting Standards Board (ASB) in April, 1977 for developing accounting
standards. However, the International Accounting Standards Committee (IASC) was
set up in 1973, with its headquarter in London (U.K.).
The Accounting Standards Board is entrusted with the responsibility of formulating
standards on significant accounting matters keeping in view the international
developments, and legal requirements in India.
The main function of the ASB is to identify areas in which uniformity in standards is
required and to develop draft standards after discussions with representatives of the
Government, public sector undertakings, industries and other agencies.

46 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting
In the initial years, the standards are of recommendatory in nature. Once an awareness
is created about the benefits and relevance of accounting standards, steps are taken to
make the accounting standards mandatory for all companies. In case of non compliance,
the companies are required to disclose the reasons for deviations and its financial effects:
Till date, the IASC has brought out 40 accounting standards. However, the ICAI has
so far issued 29 accounting standards. These are :
AS-1 Disclosure of accounting policies (January 1979). This standard deals with
the disclosure of significant accounting policies in the financial statements. Notes

AS-2 Valuation of Inventories (June 1981). This standard deals with the principles
of valuing inventories for the financial statements.
AS-3 (Revised) Cash flow statement (June 1981, Revised in March 1997). This
standard deals with the financial statement which summarises for a given period
the sources and applications of an enterprise.
AS-4 Contingencies and events occurring after the Balance Sheet date (November
1982, Revised in April, 1995) This standard deals with the treatment of
contingencies and events occurring after the balance sheet date.
AS-5 Net profit or loss for the period, prior period (period before the date of balance
sheet) items and changes in accounting policies (November 1982, Revised in
February 1997). This standard deals with the treatment in financial statement of
prior period and extraordinary items and changes in accounting policies.
AS-6 Depreciation Accounting (November 1982). This standard applies to all
depreciable assets. But this standard does not apply to assets in the category
of forests, plantations and similar natural resources and wasting assets.
AS-7 Accounting for construction contracts (December 1983, revised in April
2003). This standard deals with accounting for construction contracts in the
financial statements of contractors.
AS-8 Accounting for Research and Development (January 1985). This standard
deals with the treatment of costs of research and development in financial
statements.
AS-9 Revenue Recognition (November 1985). This standard deals with the bases
for recognition of revenue in the statement of profit and loss of an enterprise.
AS-10 Accounting for fixed assets (November 1991). This standard deals with
recognition of fixed assets grouped into various categories, such as land,
building, plant and machinery, vehicles, furniture and gifts, goodwill, patents,
trading and designs.

ACCOUNTANCY 47
MODULE - 1 Accounting Conventions & Standards
Basic Accounting
AS-11 Accounting for the effects of change in foreign exchange Rates. (August 1991
and Revised in 1993). This standard deals with the issues relating to accounting
for effect of change in foreign exchange rates.
AS-12 Accounting for Government grants (April 1994). This standard deals with
the accounting for government grants.
AS-13 Accounting for investments (September 1994). This standard deals with
accounting aspect concerning investments in the financial statements.
Notes
These include classification, determination of cost for initial recognition,
disposal and re-classification of investment.
AS-14 Accounting for amalgamation (October 1994). This standard deals with
accounting treatment of any resultant goodwill or reserves in
amalgamation of companies.
AS-15 Accounting for retirement Benefits in the financial statements of
employers (January 1995). This standard deals with accounting for
retirement benefits in the financial statements of employers.
AS-16 Borrowing Costs (April 2000). This standard deals with the uses involved
relating to capitalization of interest on borrowings for purchase of fixed
assets.
AS-17 Segment reporting (October 2000). This standard applies to companies
which have an annual turnover of `50 crores or more. These companies
have to present segment wise financial statements and consolidated
financial statements.
AS-18 Related party disclosures (October 2000 revised 1st July 2003). This
standard requires certain disclosure which must be made for transactions
between the enterprise and related parties.
AS-19 Leases (January 2001). This standard deals with the accounting treatment
of transactions related to lease agreements.
AS-20 Earning per share (April 2001). This standard deals with the presentation
and computation of earning per share (EPS).
AS-21 Consolidated financial statements (April 2001). This standard deals with the
preparation of consolidated financial statements with an intention to provide
information about the activities of a group.
AS-22 Accounting for taxes on Income (April 2001). This standard deals with
determination of the account of tax expenses for the related revenue.

48 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting
AS-23 Accounting for investments in Associates in consolidated financial statements
(July 2001). This standard deals with the principles and procedures to be
followed for recognising, in the consolidated financial statement.

AS-24 Discontinued operations (February 2002). This standard deals with the
principles of discontinuing operations of an enterprise with the activities which
are continuing.

AS-25 Interim financial reporting (February 2002). This standard deals with the Notes
minimum content of interim financial report.

AS-26 Intangible Assets (February 2002). This standard prescribed the accounting
treatment for intangible assets which are not covered by any other specific
accounting standard.

AS-27 Financial reporting of interest for joint venture (February 2002). This standard
sets principles and procedures for accounting for interest in joint venture.

AS-28 Impairment of Assets (2004). This standard prescribed procedures to ensure

that an asset is carried at no more than its carrying amount and procedures as
to when to recognise an asset as impaired.

AS-29 Provision for contingent labilities and contingent assets (2004). This standard
deals with measurement and recognition criteria in three areas, namely
provisions, contingent liabilities and contingent assets.

All the above standards issued by the Accounting Standards Board are recommended
for use by companies listed on a recognized stock exchange and other large commercial,
industrial and business enterprises in the public and private sectors.

INTEXT QUESTIONS 3.5

Fill in the blank with appropriate words

i. AS1 deals with ..........................

ii. AS29 deals with ..........................

iii. AS26 deals with ..........................

iv. AS20 deals with ..........................

v. AS21 deals with ..........................

ACCOUNTANCY 49
MODULE - 1 Accounting Conventions & Standards
Basic Accounting
vi. AS22 deals with ..........................
vii. GAAP stands for ..........................
viii. Accounting standard Board (ASB) was established ..........................
ix. International Accounting Standard Committee was established ......................
x. AS2 deals with ..........................

Notes

WHAT YOU HAVE LEARNT

Accounting conventions are common practices which are followed in recording
and presenting accounting information of business.

Convention of consistency states that the same accounting methods should be

adopted every year in preparing financial statements.

Convention of disclosure states that all material and relevant facts relating to financial
statements should be fully disclosed.

Convention of materiality states that, to make financial statements more meaningful

only significant information should be shown in the financial statements.

Convention of conservatism states that, profit should not be recorded until it is

realised. But if business anticipates any loss in near future provision should be
made in the books of account.

Generally accepted accounting principles refer to the rules or guidelines adopted

for recording and reporting of business transactions in order to bring uniformity in
the preparation and presentation of financial statements.

TERMINAL EXERCISE
1. Explain the convention of consistency with example.

2. Explain the accounting convention of conservatism with example.

3. What do you mean by accounting standards? Enumerate the accounting standard

issued by the ASB from time to time.

4. Explains the convention of materiality.

5. Explain the accounting convention of full disclosure with example.

50 ACCOUNTANCY
 Accounting Conventions & Standards MODULE - 1
Basic Accounting

ANSWERS TO INTEXT QUESTIONS

3.1 (i) year after year (ii) market price, lower
(iii) market price (iv) consistency

3.2 (i) profitability (ii) fair, adequate (iii) solvency

(iv) disclosed (v) reliable
Notes
3.3 (i) Materiality (ii) separate head
(iii) Materiality (iv) Material fact

3.4 (i) cost price i.e. `2,00,000 (ii) Cost price i.e.`21,00,000
(iii) Yes, as a bad debt `50,000
3.5 (i) Disclosure of accounting policies
(ii) Provisions, contingent liabilities and contingent assets
(iii) Intangible assets (iv) Earning per share
(v) Consolidated financial statements
(vi) Accounting for taxes on income
(vii) Generally Accepted Accounting principle
(viii) April, 1977 (ix) 1973 (x) Inventory valuation

ACTIVITY
Visit a number of business units and enquire from the accountants how do they deal
with the following while preparing the accounts :
1. Valuation of the stock at the end of the accounting period.
2. At what intervals do they close their account books?
3. What method of depreciation did they use in the last three or four years?
4. Have they ever suffered losses or earned profits because of the lethargic attitude or
loyality towards the organisation?
Complete the answer and draw the conclusion whether they are following some
accounting concepts or not. If yes, name the accounting conventions/accounting
concepts.

ACCOUNTANCY 51
MODULE - 1
Basic Accounting

Notes ACCOUNTING FOR BUSINESS

TRANSACTIONS

You visit the shop of a person known to you and observe the activities he/she is doing.
He/she is selling goods for cash and on credit, collecting payments, making payments
to suppliers, instructing the worker to deliver the goods in time, making payments for
telephone, carriage, etc. These are all business activities, but cash is not involved in all
of them at the time of making transactions. Activities which are in cash terms are called
business transactions. You will also find that for every transaction, he/she makes use of
a document like bills, cash memos, receipts, etc. These are termed as vouchers. In this
lesson, you will learn about business transactions, accounting vouchers, accounting
equation and the basic mechanism of accounting.

OBJECTIVES
After studying this lesson, you will be able to
explain the meaning of source documents and accounting vouchers;
explain the preparation of accounting vouchers;
explain the meaning of accounting equation;
explain the effect of business transactions on the accounting equation;
explain the rules of accounting;
explain the bases of accounting and
explain the double entry mechanism.
4.1 SOURCE DOCUMENTS AND ACCOUNTING VOUCHERS
Accounting process begins with the origin of business transactions and it is followed by
analysis of such transactions. A business transaction is a transaction, which involves
exchange of values between two parties. Every transaction involves Give and Take

52 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
aspect. The debit represents Take aspect and credit represents the Give aspect in a
transaction. For example, when a computer is purchased for office use for cash, then
the delivery of computer represents Take aspect and payment of cash represents Give
aspect. Thus , business transactions are exchange of goods or services between two
parties and effects of these transactions are recorded in two accounts.
Source Documents and vouchers
All business transactions are based on documentary evidence. A Cash memo showing
cash sale, an invoice showing sale of goods on credit, the receipt made out by the Notes
payee against cash payment, are all examples of source documents. A document which
provides evidence of the transactions is called the Source Document or a voucher. It is
the primary evidence in support of a business transaction. A source document is the
first record prepared for a business transaction and is the basis for entries in the books
of accounts. There are certain items, which have no documentary proof, such as petty
expenses. In such case necessary voucher is prepared showing the necessary details.
All such documents are kept in a separate file in chronological order and are serially
numbered. All recording in books of accounts is done on the basis of accounting vouch-
ers. A Voucher is documentary evidence in support of a transaction. It is a document to
record the accounting transaction. A transaction with one debit and one credit is a
simple transaction and voucher prepared for such transaction is known as transaction
voucher. The format of transaction voucher is as follows:
Transaction Voucher
Firm Name
Voucher No.
Date:
Debit account:
Credit account:
Amount (`) :
Narration :
Authorised By : Prepared By:
Specimen of transaction voucher

Preparation of Accounting Vouchers

Accounting vouchers are the written documents containing the analysis of business
transactions for accounting and recording purpose. These are prepared by the ac-
countant and countersigned by authorised person. Features of Accounting vouchers
are as :
It is a written document.
It is prepared on the basis of evidence of the transaction.

ACCOUNTANCY 53
MODULE - 1 Accounting for Business Transactions
Basic Accounting
It contains an analysis of a transaction i.e. which account has to be debited and
which has to be credited.

It is prepared by an accountant and countersigned by the authorised signatory.

Accounting voucher may be classified as Cash voucher i.e., debit voucher, credit voucher,
and non-cash voucher i.e., transfer voucher.

Types of Accounting Voucher

Notes

Cash Voucher Non-Cash Voucher

Debit voucher Credit voucher (Transfer voucher)

[For Cash Payments] [For Cash Receipts] [For Non-cash Transaction]

Debit Vouchers

These vouchers are prepared for recording of transactions involving cash payments
only. Cash payments in the business are made on account of :

Expenses Purchases of Goods

Purchases of Assets Payment to creditors

Repayment of loans Drawings and advances etc.

In all cash payments, one aspect is cash and the other is either the party to whom the
payment is made, or an expense or an item of property for which the payment is made.
A format of debit voucher is as follows:

Firm’s Name

Debit Voucher

Voucher No. : Date:

Debit Account:

Amount:

54 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(` )

Authorised By: Prepared By:

Notes
Specimen of Debit voucher

Illustration 1
On September 21, 2014 M/s Mohit Chemicals paid `40,000 in Cash and balance
amount of `1,60,000 by Banker’s Cheque to HT Chemicals Ltd., Prepare Debit
Voucher.
Solution:
Mohit Chemicals
Debit Voucher
Voucher No.: 22 Date: 21.9.2014
Debit Account: HT Chemicals Ltd
Amount : ` 200000.
Credit Accounts
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

1. Cash 40,000 Paid Part payment in cash and

2. Bank 1,60,000 balance by bank draft.

Authorised By: Prepared By:

Credit Vouchers

These vouchers are prepared for recording of transactions involving cash-receipts only.
Cash receipts in the business are accepted on account of:

Cash sales of goods

cash sales of assets

ACCOUNTANCY 55
MODULE - 1 Accounting for Business Transactions
Basic Accounting
revenue income like interest, rent, etc. received in cash
Cash receipts from debtors.
Loan taken
Cash withdrawn from bank
receipts of advances, etc.

Notes In all cash receipts, one aspect is cash and the other is either person or party from
whom cash is received or revenue on account of which cash is received or the property
on sale of which cash is received. A format of credit voucher is as follows:
Credit Voucher
Firm Name
Voucher No. : Date:
Debit Account:
Amount:
Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

Authorised By: Prepared By:

Fig. 4.3 Specimen of Credit voucher

Illustration 2
`25000 Office furniture is purchased from Modern Furniture on July 4, 2014 and
`15000 are paid by cash immediately and `10000 is still payable. Prepare Credit
Voucher.
Solution:
Credit Voucher
Modern Furniture
Voucher No. : 125 Date: July 4,2014
Debit Account: Furniture
Amount: `25000.

56 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Credit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

1. Cash 15,000 Purchase of Office furniture from

2. Modern Furniture 10,000 Modern Furniture. Cash paid.
`15,000, for the Balance
Liability created as per terms
Notes
of purchase.

Authorised By: Prepared By:

Transfer Vouchers
With the expansion of business, the role of credit transactions is increasing at a
fast pace. For recording of these credit transactions, a voucher is prepared known
as transfer voucher. These transfer vouchers are prepared to record non-cash trans-
actions of the business involving:
Credit purchases
Credit sales
Return of goods sold
Return of goods purchased on credit
Depreciation on Assets
Bad Debts etc.
These vouchers are prepared both in debit and credit forms simultaneously.
Firm Name
Transfer Voucher
Voucher No. : Date:
Amount:
Debit Account
S.No. Account Name Amount Narration (i.e. Explanation)
(`)

ACCOUNTANCY 57
MODULE - 1 Accounting for Business Transactions
Basic Accounting
Credit account
S.No. Account Name Amount Narration (i.e. Explanation)
(` )

Authorised By: Prepared By:

Notes
Fig. 4.4 Specimen of Transfer voucher

Illustration 3
Stationery Mart furnishes the following information:

April 1,2014

Opening Balances:

(i) Cash `13000

(ii) Bank `5000

(iii) Furniture `22000

(iv) Land and Building `125000

(v) Trade Debtors :

Puneet `16000

Mohan `14000

(vii) Secured Bank Loan `70000

(viii) Trade creditors:

Gopi `18000

Sumit `24000

Vipin `8000

Prepare transfer Voucher.

Solution :

58 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Stationery Mart
Transfer Voucher
Voucher No. Date: April 1,2014
Amount:
Debit Account
S.No. Account Name Amount Narration (i.e. Explanation)
Notes
(` )

1 Cash 13000 Opening Balance

2 Bank 5000 Opening Balance
3 Furniture 22000 Opening Balance
4 Land and Building 125000 Opening Balance
5 Trade debtors: 30000 Opening Balance
Puneet 16000
Mohan 14000

Credit Account
S.No. Account Name Amount (`) Narration (i.e. Explanation)

1. Secured Bank Loan 70000 Opening Balance

2 Trade creditors:
Gopi 18000
Sumit 24000
Vipin 8000 50000 Opening Balance
3 Capital 120000 Balancing Figure
(i.e.240000-120000)

Authorised By: Prepared By:

INTEXT QUESTIONS 4.1

I. Classify the following into Business and Non-business Transactions:
i. Manav commences business with cash `200000.
ii. He deposited cash into bank `160000.
iii. He purchased goods for cash `25000.

ACCOUNTANCY 59
MODULE - 1 Accounting for Business Transactions
Basic Accounting
iv. He took out cash from the shop and handed over to his wife for purchasing
household goods `3000.
v. He attended a family function and got a gift worth `1500.
vi. He paid monthly salary to his business employees `3,000.
II. Fill in the blanks with suitable word or words:
i. The accounting vouchers are based on ......................
Notes
ii. Invoice/bill is a ...................... document.
iii. Both debit and Credit aspects of a transaction are shown by ......................
Vouchers.
iv. A Credit voucher is prepared for ...................... receipts.
v. A debit voucher is prepared for ...................... payments.

4.2 ACCOUNTING EQUATION AND EFFECTS OF

TRANSACTIONS ON IT
The recording of business transactions in the books of account is based on a funda-
mental equation called Accounting Equation. Whatever business possesses in the form
of assets is financed by proprietor or by outsiders. This equation expresses the equality
of assets on the one side and equity on the other side i.e., the claims of outsider [liabili-
ties] and owners or proprietors funds on the other side. In mathematical form,

Assets = Equity

Equity = Liabilities + Capital

As an asset is introduced in the business, a corresponding liability also emerges.

Effect of business transactions on accounting equation

These transactions increase or decrease the assets, liabilities, or capital. Every business
has some assets. For example, Sunil started business with cash `3,00,000 as Capital.
In this transaction, asset in the form of cash is created for the business. Hence,

Cash (Asset) Capital (Equity)

`3,00,000 = `3,00,000

Sunil purchased Machinery for `40,000 and Furniture for `20,000. Thus, the position
of the assets and capital is as:

60 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Cash + Machinery + Furniture = Capital
2,40,000 + 40,000 + 20,000 = 3,00,000
The above transaction shows that
Assets = Capital
Or
Capital = Assets Notes
Increase or decrease in capital will result in the corresponding increase or decrease in
assets. For example Sunil withdrew cash for personal use `5,000. Thus, the position
of the assets and capital is as under :
Cash + Machinery + Furniture = Capital
2,40,000 + 40,000 + 20,000 = 3,00,000
[–5,000] + 0 + 0 = [–5,000]
2,35,000 + 40,000 + 20,000 = 2.95.000
Business enterprise borrows money in the form of loan from outsiders to carry on its
activities. In other words, every business concern owes money from outsiders. Money
borrowed from outsiders is called as liability. For example, `1,50,000 were borrowed
from Shipra. Thus, the position of the assets and capital will be as under
Cash + Machinery + Furniture = Liabilities + Capital
2,35,000 + 40,000 + 20,000 = 0 2,95,000
+1,50,000 + 0 + 0 = 1,50,000 + 0
3,85.000 + 40,000 + 20,000 = 1,50,000 + 2,95.000
The fact that business receives funds from proprietors and creditors and retains all of
them in the form of assets, can be presented in the terms of an accounting equation as
under
Assets = Liabilities + Capital or A= L+ C
OR
Liabilities = Assets – Capital or L= A – C
OR
Capital = Assets – Liabilities or C =A– L

ACCOUNTANCY 61
MODULE - 1 Accounting for Business Transactions
Basic Accounting
Expenses and Revenue also affect the accounting equation. Their effect is always on
the capital.

A business concern has to meet some expenses in its normal course of operations such
as payment of salary, rent, insurance premium, postage, wages, repairs etc. Payment
of these expenses reduces the cash. These expenses reduce the net income of the
business. All the income is the income of proprietor, which is added in the capital
account, so all these expenses are deducted from the capital. Similarly, business con-
Notes
cern receives some revenues during normal course of operations, such as rent re-
ceived, commission received, etc. Revenue is added to the cash balance as it is re-
ceived in terms of cash. Revenue increases the net income of the business and hence, it
is added to the capital. Now, the accounting equation is represented by

Assets = Liabilities + Capital

+ Revenue [Cash] = + Revenue

– Expenses [Cash] = – Expenses

Accounting equation is thus, affected by every business transaction. Any increase or

decrease in assets, liabilities, and capital can be identified by preparing accounting
equation. It shows that every business transaction satisfies the dual aspect concept of
accounting. It also serves as the basis for preparing the Balance Sheet.

Effect of Transactions on the Accounting Equation

You have learnt that assets, liabilities and capital are the three basic elements of every
business transaction, and their relationship is expressed in the form of accounting equa-
tion which always remains equal. At any point of time, there can be a change in the
individual asset, liability or capital, but the two sides of the accounting equation always
remain equal. Let us verify this fact by taking up some transactions and see how these
transactions affect the accounting equation :

1. Namita started business with cash `3,50,000 introduced as capital. Thus the equation
is as:

Assets = Liabilities + Capital

3,50,000 = 0 + 3,50,000

This transaction shows that `3,50,000 have been introduced by Namita in terms
of cash, which is the capital for the business concern. Hence on one hand, the asset
[cash] has been created to the extent of `3,50,000.

62 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
2. She purchased goods for cash `90,000.
Thus the accounting equation is as :
Assets = Liabilities + Capital

Cash + Goods

old equation 3,50,000 = 0 + 3,50,000

Effect of Transaction –90,000 + 90,000 = 0 + 0 Notes

New equation 2,60,000 + 90,000 = 0 + 3,50,000

Goods purchased is an asset and cash paid is also an asset. Hence in this transac-
tion, there is an increase in one asset [Goods] and decrease in the other asset
[cash]. There is no change in capital and liabilities. i.e. the other side of the ac-
counting equation.
3. She purchased goods from Mohit for `60,000 on credit
Thus the equation is as:
Assets = Liabilities + Capital

Cash + Goods

Old equation 2,60,000 + 90,000 = 0 + 3,50,000

Effect of Transaction 0 + 60,000 = 60,000 + 0

New equation 2,60,000 + 1,50,000 = 60,000 + 3,50,000

In this transaction goods have been purchased on credit from Mohit , hence there
is an increase in the assets [goods] by `60,000 and also an increase in the liabilities
by `60,000 as the business concern now owes money to Mohit.
4. She sold goods to Anish for `40,000 (Cost `25,000) and received Cash `10,000
and balance after one month. Thus the accounting equation is as:
Assets = Liabilities + Capital

Cash + Goods + Debtors

Old equation 2,60,000 + 1,50,000 + 0 = 60,000 + 3,50,000

Effect of
Transaction 10,000 + [–25,000] + 30,000 = 0 + 15,000

New equation 2,70,000 + 1,25,000 + 30,000 = 60,000 + 3,65,000

ACCOUNTANCY 63
MODULE - 1 Accounting for Business Transactions
Basic Accounting
In this transaction goods have been sold on credit and some on cash to Anish, so
there is a decrease in the assets [goods] by `25,000, and increase in the assets
(Anish) by `30,000 and [Cash] by `10,000. In this process the proprietor has
gained an amount of `15,000 which is added to his capital.
5. She paid salaries to employees for `16,000.
Assets = Liabilities + Capital

Notes Cash + Goods + Debtors

Old equation 2,70,000 + 1,25,000 + 30,000 = 60,000 + 3,65,000

Effect of [-16,000] + 0 + 0 = 0 + [–16,000]

Transaction

New equation 2,54,000 + 1,25,000 + 30,000 = 60,000 + 3,49,000

In this transaction, salaries paid to employees are expenses for the business con-
cern. Salaries are paid in terms of cash, hence cash as an asset is reduced by
`16,000 and as all expenses reduce the capital, so capital is also reduced by
`16,000.
From the above transactions, it is obvious that how every transaction has its effect
on the accounting equation without disturbing the equality of the two sides of the
equation.
Illustration 4
Prepare accounting equation from the following Transactions:
`
1. Hemant started business with cash 3,00,000
2. Purchased goods for cash 80,000
3. Sold goods[costing `30,000] for 45,000
4. Purchased goods from Monika 70,000
5. Salary paid 7,000
6. Commission received 5,000
7. Paid Cash to Monika in full settlement 69,000
8. Goods sold to Rahul {Costing `20,000} for 25,000

64 ACCOUNTANCY
 Solution

S. Transaction Assets = Equity

ACCOUNTANCY
No. Cash + Goods + Debtors Total Liabilities + Capital Total
1. Started business with cash 3,00,000 + 0 + 0 3,00,000 0 + 3,00,000 3,00,000
2. Purchased goods for cash -80,000 + 80,000 + 0 0 + 0
New Equation 2,20,000 + 80,000 + 0 3,00,000 0 + 3,00,000 3,00,000
3. Sold goods for cash 45,000 + -30,000 + 0 0 + 15,000
New Equation 2,65,000 + 50,000 + 0 3,15,000 0 + 3,15,000 3,15,000
4. Purchased goods from Monika 0 + 70,000 + 0 70,000 + 0
Accounting for Business Transactions

New Equation 2,65,000 + 1,20,000 + 0 3,85,000 70,000 + 3,15,000 3,85,000

5. Salary paid -7,000 + 0 + 0 0 + -7,000
New Equation 2,58,000 + 1,20.000 + 0 3,78,000 70,000 + 3,08,000 3,78,000
6. Commission received 5,000 + 0 + 0 0 + 5,000
New Equation 2,63,000 + 1,20,000 + 0 3,83,000 70,000 + 3,13,000 3,83,000
7. Paid Cash to Monika in -69,000 + 0 + 0 –70,000 + 1,000
full settlement
New Equation 1,94,000 + 1,20.000 + 0 3,14,000 0 + 3,14,000 3,14,000
8. Goods sold to Rahul 0 + -20,000 + 25,000 0 + 5,000
New Equation 1,94,000 + 1,00,000 + 25,000 3,19,000 0 + 3,19,000 3,19,000

65
Notes
Basic Accounting
MODULE - 1
MODULE - 1 Accounting for Business Transactions
Basic Accounting
Illustration 5
Prepare accounting equation from the following Transactions:
`
1. Nutan started business with cash 4,00,000
2. Purchased goods from Rohit 60,000

Notes 3. Sold goods[costing `25,000] for cash 22,000

4. Purchased goods for cash 50,000
5. Salary outstanding 3,000
6. Rent received 6,000
7. Paid Cash to Rohit on account 35,000
8. Goods sold to Bharti {Costing `30,000} for 40,000

INTEXT QUESTIONS 4.2

Fill in the blanks with suitable word/words:

i. Accounting equation satisfies the ................... concept of accounting.
ii. Assets = ................... + Liabilities
iii. Capital = Assets – ...................
iv. Accounting Equation serves as a basis for preparing ...................
v. Liabilities = ................... – Capital

4.3 RULES OF ACCOUNTING

Using Debit and Credit
In Double Entry accounting both the aspects of the transaction are recorded. Every
transaction has two aspects and according to this system, both the aspects are re-
corded. If the business acquires something, it must have been acquired by giving some-
thing. While recording each transaction, the total amount debited must be equal to the
total amount credited. The terms ‘Debit’ and ‘Credit’ indicate whether the transaction
is to be recorded on the left hand side or right hand side of the account. In its simplest
form, an account looks like the English Language Letter ‘T’. Because of its shape, this
simple form of account is called T-account (refer figure 4.5) . Have you observed that

66 ACCOUNTANCY
 Solution : (Illustration 5)
S.No Transaction Assets = Equity
Cash Goods Debtors Total Liabilities Capital Total

ACCOUNTANCY
1. Started business with cash 4,00,000 + 0 + 0 4,00,000 0 + 4,00,000 4,00,000
2. Purchased goods from Rohit 0 + 60,000 + 0 60,000 + 0
New Equation 4,00,000 + 60,000 + 0 4,60,000 60,000 + 4,00,000 4,60,000
3. Sold goods for cash 22,000 + [-25,000] + 0 0 + [-3,000]
New Equation 4,22,000 + 35,000 + 0 4,57,000 60,000 + 3,97,000 4,57,000
4. Purchased goods for cash [-50,000] + 50,000 + 0 0 + 0
New Equation 3,72,000 + 85,000 + 0 4,57,000 60,000 + 3,97,000 4,57,000
Accounting for Business Transactions

5. Salary outstanding 0 + 0 + 0 3,000 + [-3,000]

New Equation 3,72,000 + 85,000 + 0 4,57,000 63,000 + 394,000 4,57,000
6. Rent received 6,000 + 0 + 0 0 + 6,000
New Equation 3,78,000 + 85,000 + 0 4,63,000 63,000 + 4,00,000 4,63,000
7. Paid Cash to Rohit on [-35,000] + 0 + 0 [-35,000] + 0
account
New Equation 3,43,000 + 85,000 + 0 4,28,000 28,000 + 4,00,000 4,28,000
8. Goods sold to Bharti 0 + [–30000] + 40,000 0 + 10,000
New Equation 3,43,000 + 55,000 + 40,000 4,38,000 28,000 + 4,10,000 4,38,000

67
Notes
Basic Accounting
MODULE - 1
MODULE - 1 Accounting for Business Transactions
Basic Accounting
the ‘T’ format has a left side and a right side for recording increases and decreases in
the item? This helps in ascertaining the ultimate position of each item at the end of an
accounting period. For example, if it is an account of a supplier all goods/materials
supplied shall appear on the right (Credit) side of the Supplier’s account and all pay-
ments made on the left (debit) side.

In a‘T’ account, the left side is called debit (usually abbreviated as Dr.) and the right
Notes side is known as credit (as usually abbreviated Cr.).

Account Title

(Left Side) (Right Side)

Fig.4.5: Specimen of T-account.

Rules of Accounting

All accounts are divided into five categories for the purpose of recording of the busi-
ness transactions:

(i) Assets, (ii) Liability, (iii) Capital,

(iv) Expenses/Losses, and (v) Revenues/Gains.

Two Fundamental Rules are followed to record the changes in these accounts:

1. For recording changes in Assets/Expenses/Losses

“Increase in Asset is debited, and decrease in Asset is credited.”

“Increase in Expenses/Losses is debited, and decrease in Expenses/Losses is

credited.”

2. For recording changes in Liabilities and Capital/Revenue/Gains

“Increase in Liabilities is credited and decrease in Liabilities is debited.”

“Increase in Capital is credited and decrease in Capital is debited.”

“Increase in revenue/gains is credited and decrease in revenue/gain is deb-

ited”.

The rules applicable to the five kinds of accounts are summarised in the following chart:

68 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Rules of Accounting
Assets Liabilities

(Increase) (Decrease) (Decrease) (Increase)

+ – – +

Debit Credit Debit Credit

Capital Expenses/Losses
Notes
(Decrease) (Increase) (Increase) (Decrease)

– + + –

Debit Credit Debit Credit

Revenue/Gains

(Decrease) (Increase)

– +

Debit Credit

I. Analysis of Rule Applied to Assets Accounts

Rohan Purchased Furniture for `80,000.
Analysis of Transaction : In this transaction, the affected accounts are Cash account
and Furniture account. Cash account is an assets account and has decreased. As per
rule if asset decreases the affected account is credited, so cash account credited. Fur-
niture is also an asset and it has increased. As per rule asset if increases the affected
account is debited thus, furniture account is debited.
Cash Furniture
Decrease Increase
80,000 80,000
[–] Credit [+] Debit

II. Analysis of Rule Applied to Liabilities Accounts:

Purchased Machinery for `60,000 on credit from M/s Indian Machinery Mart.
Analysis of Transaction: In this transaction, the two accounts affected are machin-
ery and M/s Indian Machinery Mart. Machinery is an asset, an asset has increased,
therefore machinery account is debited. M/s Indian Machinery Mart is the creditor on
account of supply of machinery and constitutes, the liability for the buying firm which

ACCOUNTANCY 69
MODULE - 1 Accounting for Business Transactions
Basic Accounting
has increased. Rule is that on increase of liability the concerned account is credited and
vice-versa. Thus, M/s Indian Machinery Mart A/c is credited.

M/s Indian Machinery Mart [Liability] Machinery (Assets)

Increase Increase

60,000 60,000

[+] Credit [+] Debit

Notes

III. Analysis of Rule Applied to Capital Accounts:

Cash of `50,000 introduced in business as Capital by Rakesh.

Analysis of Transaction: In this transaction, the two account affected are Cash ac-
count and Rakesh [Capital account] . Cash is an asset and Rakesh invested capital.
Rule for Capital is that if it increases the account is credited and vice-versa. So, here
capital account is credited.

Capital [Rakesh] Account Cash (Assets)

Increase Increase

50,000 50,000

[+] Credit [+] Debit

IV. Analysis of Rule Applied to Expenses/Losses Accounts:

Paid `6000 to the employees as Salary.

Analysis of Transaction: In this transaction, the two accounts affected are salary
account and Cash account. Salary account is an expense and has increased. Cash is an
asset and has decreased. Rule regarding expenses/losses is that if it increases the ac-
count is debited.

Salary Account [Expenses] Cash (Assets)

Increase Decrease

6,000 6,000

[+] Debit Credit [-]

V. Analysis of Rule Applied to Revenue/Profit Accounts:

Received interest for the month `4000.

70 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Analysis of Transaction: In this transaction, the two accounts affected are Interest
and Cash. Interest is an item of Income and Cash an item of asset. Rule regarding
Revenue/profit is, increase in revenue is credited. Cash is an asset and rule for assets is
increase in assets is debited.
Interest Account [Revenue] Cash (Assets)
Increase Increase
4,000 4,000 Notes
[+] Credit [+] Debit
Illustration 6
From the following transactions, state the titles of the accounts to be affected, types of
the accounts and the account to be debited and the account to be credited:
`
1. Ankur started business with cash 600000
2 Purchased goods for cash 80000
3. Paid salaries 10000
4. Sold goods to Rohit on credit 60000
5 Office machine purchased for cash 12000
6 He took loan from Bank 30,000
7 He received commission 4,000
8. Postage paid 500
9. Paid rent 6,000
10 Received cash from Rohit 60000
Solution
Trans- Names of Type of accounts Rules applicable to A/cs in
action accounts Debit/Credit items of
No Increase/Decrease

(1) (2) (1) (2) (1) (2)

1 Cash Capital Asset Capital Cash (Increase) Capital (Increase)

2 Purchases Cash Expense Asset Purchase ( ” ) Cash (decrease)

ACCOUNTANCY 71
MODULE - 1 Accounting for Business Transactions
Basic Accounting
3 Salaries Cash Expense Asset Salaries ( ” ) Cash (decrease)

4 Rohit Sales Asset Revenue Rohit ( ” ) Sales (Increase)

Debtor

5 Office Cash Asset Asset Office ( ” ) Cash (decrease)

machine machine

6 Cash Bank Asset Liability Cash (Increase) Bank loan

Notes laon (Increase)

7 Cash Commi- Asset Revenue Cash (Increase) Commission

ssion (Increase)

8 Postage Cash Expense Asset Printing and Cash (decrease)

Stationery
(Increase)

9 Rent Cash Expense Asset Rent (Increase) Cash (decrease)

10 Cash Rohit Asset Asset Cash (Increase) Rohit (decrease

INTEXT QUESTIONS 4.3

A list of the accounts is given below. Tick the category to which each of the
account belongs:
Type of Account
Name of Account Asset Liability Capital Revenue Expense

i. Wages

ii. Building

iii. Office Machine

iv. Cash

v. Mohan (Supplier)

vi. Krishan (Owner)

vii. Radha (Customer)

viii. Interest received

ix. Bank Overdraft

x. Commission Earned

xi. Discount allowed

72 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
4.4 BASIS OF ACCOUNTING
As we are aware that one of the most significant functions of accounting is to make us
know true and fair amount of profit earned by the business entity in a particular period.
This Profit or income figure can be ascertained by following
(i) Cash Basis of accounting
(ii) Accrual Basis of accounting
Notes
(iii) Hybrid Basis of accounting
I. Cash Basis of accounting
This is a system in which accounting entries are recorded only when cash is received or
paid. Revenue is recognized only on receipt of cash. Similarly, expenses are recorded
as incurred when they are paid. The difference between the total revenues and total
expenses represents profit or loss of an enterprise for a particular accounting period.
Outstanding and prepaid expenses and income received in advance or accrued in-
comes are not considered.
Advantages
Following are the advantages of adopting cash basis of accounting:
It is very simple as no adjustment entries are required.
It appears more objective as very few estimates and personal judgments are re-
quired.
It is more suitable to those entities which have most of the transactions on cash
basis.
Disadvantages
Following are the disadvantages of adopting cash basis of accounting:
It does not give a true and fair view of profit and loss and the financial position of
the business unit as it ignores outstanding and prepaid expenses.
It does not follow the matching concept of accounting.
Illustration 7
During the financial year 2013-14, Mela Ram had cash sales of `580000 and credit
sales of `265000. His expenses for the year were `.460000 out of which `60000 are
still to be paid. Find out Mela Ram’s Income for the year 2013-14 following the cash
basis of accounting.

ACCOUNTANCY 73
MODULE - 1 Accounting for Business Transactions
Basic Accounting
Solution:
Amount (`)
Revenue (in terms of Cash Inflows) 580000
Less: Expenses (Outflow of cash) (i.e. ` 460000- 60000) 400000
Net Income 180000
Note : Credit Sales and Outstanding Expenses are not to be considered under cash
Notes
basis of accounting.
II. Accrual Basis of accounting
Revenue and expense are taken into consideration for the purpose of income determi-
nation on the basis of accounting period to which they relate. The accrual basis makes
a distinction between actual receipts of cash and the right to receive cash for revenues
and the actual payment of cash and the legal obligation to pay expenses. It means the
income accrued in the current year becomes the income of the current year whether the
cash for that item is received in the current year or it was received in the previous year
or it will be received in the next year. The same is true of expense items. Expense item
is recorded if it becomes payable in the current year whether it is paid in the current
year or it was paid in the previous year or it will be paid in the next year. For example,
credit sales are included in the total sales of the period irrespective of the fact when
cash on account is received. Similarly, in case the firm has taken benefit of a certain
service, but has not paid within that period, the expense will relate to the period in
which the service has been utilized and not the period in which the payment for it is
made.
Outstanding Expenses are those expenses which have become due during the ac-
counting period but which have yet not been paid off. Prepaid Expenses are those
expenses which have been paid in advance. Accrued Income means income which has
been earned by the business during the accounting period but has not yet become due
for payment and therefore has not yet been received. Income received in advance
means income which has been received by the business before being earned. Costs
incurred during a particular period should be set out against the revenue of the period
to ascertain profit or loss.
Following are the advantages :
It is based on all business transactions of the year and discloses correct profit or
loss.
This method is used in all types of of business units.
It is more scientific and rational in application.

74 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Following are the disadvantages :
It is not simple one and requires the use of estimates and personal judgment.
It fails to disclose the actual cash flows.
Illustration 8
Taking the data given in the Illustration 7, find out the net income of Mela Ram as per
accrual basis of accounting.
Notes
Solution
Amount (`)
Total Sales:
Cash Sales (` 580000) + Credit Sales (` 265000) 845000
Less: Total Expenses for the year 2013-14 460000
Net Income 385000
Note: Outstanding Expenses of `60,000 relate to this accounting year and hence are
to be charged to the revenues of current year. Similarly, credit sales of `2,65,000 are
considered for this year as the transaction took place during this current year.
Difference between accrual basis of accounting and cash basis of accounting
Basis of Difference Accrual Basis of accounting Cash Basis of accounting

1. Prepaid, Outstanding There may be outstanding There is no outstanding

and received in expense, prepaid expenses, expense, prepaid expenses,
advance items accrued income and income accrued income and income
received in advance in the received in advance in the
Balance sheet. Balance Sheet

2. Effect on income of Income statement will show Income statement will show
prepaid expenses relatively higher income if relatively lower income if
and accrued income there are items of prepaid there are items of prepaid
expenses and accrued income. expenses and accrued income

3. Effect of outstanding Income statement will show a Income statement will show
expenses and lower income if there are a higher income if there are
unearned income items of outstanding expenses items of outstanding
and unearned income expenses and unearned income

4. Legal Position Companies Act 1956 Companies Act 1956 does

recognizes this basis of not recognize this basis of
accounting. accounting.

ACCOUNTANCY 75
MODULE - 1 Accounting for Business Transactions
Basic Accounting
5. Option regarding The business unit has the No such option is available
valuation of inventories option to value the inventories in regard to inventory
and methods of at cost or market, whichever valuation and method of
depreciation is less of depreciation. depreciation.

6. Reliable It is a reliable basis of It is not a reliable basis of

accounting as it records all accounting as only cash
cash as well credit transactions are recorded. It
transactions. It ascertains true fails to ascertain true profit
Notes profit or loss. or loss.

7. Users A business unit with a profit Professional people, small

motive ascertains its profit or ventures of temporary
loss as per accrual basis. nature, some Not- for-Profit
Organizations ascertain their
profit or loss as per cash basis.

III. Hybrid Basis of Accounting

Both cash basis of accounting and accural basis of accounting have their own
advantages and limitations. Cash Basis of Accounting can be used only in units
which deal exclusively in cash and are very small in size. These days the number
of transactions undertaken by an enterprise are very large and are for cash as well
as on credit. Hence, an accounting system which is the combination of both cash
as well as accural basis is in use. This system is called hybrid basis of accounting.
It has advantages of both the systems and is able to eliminate disadvantages of
the both the system.
4.5 DOUBLE ENTRY MECHANISM
Double Entry Mechanism entails recording of transactions keeping in mind the
debit and credit aspect of the transaction. To record every transaction, one ac-
count is debited and the other is credited. This is based on the principle ‘every
debit has a credit’. The Double entry Book-Keeping seeks to record every trans-
action in money or money’s worth in its dual aspect. The advantages of double
entry mechanism are :
Systematic Record: It records, classifies, and synthesizes the business trans-
action in a systematic manner. It provides reliable information for sound de-
cision making. It meets the needs of users of accounting information.
Complete Record: It maintains complete record of a business transaction. It
records both the aspects of the transaction with narration.
Accurate records: By Preparing a Summarised Statement of Account the ar-
ithmetical accuracy of the records can be checked.

76 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
Operational Results: By preparing Income Statement (Profit and Loss Account)
the business can know profit or loss due to its operations during an accounting
period.
Financial Position: By preparing Position Statement (Balance Sheet) the business
can know what it owns and what it owes to others. What are its assets and what
are its Liabilities and Capital.
Possibility of Fraud: Possibility of Frauds is minimized as complete information is
recorded under this system. Notes

INTEXT QUESTIONS 4.4

I. Answer the following with reference to cash basis of accounting
i. How it is simple?
As ____________________________________________________
ii. How it is more objective?
As ____________________________________________________
iii. To which business with it is more suitable?
Which _________________________________________________
iv. Which is the concept of accounting it does not follow?
The ___________________________________________________
v. Credit sales of `10000 taken into account for calculating profit.
II. State whether the following statements are True or False :
i. Creditors are the internal users of accounting information.
ii. Management are the internal users of accounting information.
iii. Hybrid basis of accounting has advantages of both the systems (Cash & Accural)
of accounting.
III. Answer the following question referring to double entry mechanism:
i. How possibility of frauds are minimised.
ii. How can arithmetical accuracy of the records can be checked?
iii. Name the concept on which to record every transaction one account is debited
and other is credited is based.

ACCOUNTANCY 77
MODULE - 1 Accounting for Business Transactions
Basic Accounting

WHAT YOU HAVE LEARNT

z Business Transaction : A business transaction is a transaction, which involves
exchange of values between two parties. Every transaction involves Give and Take
aspect.
z Source Documents and vouchers : All business transactions are based on docu-
Notes mentary evidence. A Cash memo showing cash sale, an invoice showing sale of
goods on credit, the receipt made out by the payee against cash payment, are all
examples of source documents. A Voucher is documentary evidence in support of
a transaction.
z Types of Accounting Vouchers : Accounting vouchers are the written docu-
ments, containing the analysis of business transactions for accounting and
recording purpose.
Types of Accounting Vouchers

Cash Voucher Non-Cash Voucher

Debit vouchers Credit vouchers [Transfer vouchers]

[For Cash Payments] [For Cash Receipts] [For Non-cash Transaction]

z Accounting Equation : The recording of business transaction in the books

of account is based on a fundamental equation called Accounting Equation.
Assets = liabilities + Capital
z Rules of Accounting
Using Debit and Credit
Two Fundamental Rules are followed to record the changes in these accounts:
For recording changes in Assets/Expenses/Losses
“Increase in Asset is debited, and decrease in Asset is credited.”
“Increase in Expenses/Losses is debited, and decrease in Expenses/Losses is
credited.”

78 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
For recording changes in Liabilities and Capital/Revenue/Gains
“Increase in Liabilities is credited and decrease in Liabilities is debited.”
“Increase in Capital is credited and decrease in Capital is debited.”
“Increase in revenue/gains is credited and decrease in revenue/gain is debited”.
z There can be three basis of Accounting (i) Cash basis (ii) Accrual basis and (iii)
Hybrid Basis
Notes
In cash basis accounting entries are recorded only when cash is received or paid.
In accrual basis of accounting revenue and expense are taken into consideration
for the purpose of income determination on the basis of accounting period to which
they relate.
z Hybrid Basis : This is an accounting system which is the combination of both
cash as well as on credit.
Double Entry Book Keeping Mechanism: Double Entry Book Keeping
Mechanism entails recording of transactions keeping in mind the debit and credit
aspect of the transaction.

TERMINAL EXERCISE
1. State the meaning of business transaction.
2. What is meant by accounting voucher ? Explain in brief different types of account-
ing vouchers.
3. State the fundamental rules followed to record the changes in various accounts.
4. Explain in brief cash basis of accounting and differentiate it with accrual basis of
accounting.
5. What is meant by double entry mechanism? Give its advantages.
6. “Accounting equation remains intact under all circumstances” Justify the statement
with the help of examples.
7. Prepare accounting equation on the basis of the following :
(i) Anup started business with cash ` 2,50,000
(ii) Purchased goods for cash ` 35,000
(iii) Purchased office furniture for cash ` 12,000
(iv) Paid rent ` 7,000

ACCOUNTANCY 79
MODULE - 1 Accounting for Business Transactions
Basic Accounting
(v) Sold goods (costing ` 30,000) for ` 50,000 for cash
8. Show the accounting equation on the basis of the following transactions :
(i) Manu started business `
Cash 6,00,000
Goods 1,00,000
Notes (ii) Purchased office machine for cash 90,000
(iii) Sold goods (costing ` 60000) for credit to Asha 70,000
(iv) Purchased building for cash 1,30,000
(v) Cash received from Ashu 80,000
(vi) Purchased goods on credit from M/S Ashok Traders 70,000
(vii) Salaries paid 6,000
(viii) Insurance prepaid 10,000
(ix) Cash paid to M/s Ashok Traders in full settlement 68,000
9. Prepare necessary accounting vouchers from the following transactions:
(i) Building purchased for ` 6,00,000
(ii) Goods sold on credit to M/s Reema Trader ` 1,10,000
(iii) Salary paid to ` 1,00,000
(iv) Withdrew cash for personal use ` 6,000
(v) Cash receipts from debtors M/s Ankit Bros ` 22,000

ANSWERS TO INTEXT QUESTIONS

4.1 I. Business transactions Non-business transactions
(i), (ii), (iii) (vi), (iv), (v)
II. (i) supporting document (ii) source (iii) Transfer
(iv) Cash (v) Cash
4.2 (i) Dual (ii) Capital (iii) Liabilities
(iv) Balance sheet (v) Assets

80 ACCOUNTANCY
 Accounting for Business Transactions MODULE - 1
Basic Accounting
4.3 Asset Liability Capital Revenue Expense
(i) √
(ii) √
(iii) √
(iv) √
(v) √ Notes
(vi) √
(vii) √
(viii) √
(ix) √
(x) √
(xi) √
4.4 I. (i) No adjustment entries are required
(ii) Very few estimates and personal judgement are required.
(iii) Have most of the transactions on cash basis
(iv) Matching concept
(v) Should not
II. (i) False (ii) True (iii) True
III. (i) As complete information is recorded under this system
(ii) By preparing summarised statement of account.
(iii) Every debit has a credit.

ANSWERS TO TERMINAL EXERCISE

7. Assets Cash ` 2,46,000 + Goods ` 5,000 + Office furniture ` 12,000 = Capital `

2,63,000
8. Assets cash ` 3,76,000 + Goods ` 1,10,000, Office machine ` 90,000 + Building
` 1,30,000 + Prepaid insurance ` 10,000 = liabilities ` 7,16,000

ACCOUNTANCY 81
MODULE - 1
Basic Accounting

Notes JOURNAL

In the preceeding lessons you have learnt about various business transactions and Book
keeping i.e. recording these transactions in the books of accounts in a systematic manner.
Curosity may arise in your mind that what are these books? Why businessman keeps
many books? How does he records various transactions in these books? You have
learnt about the double entry system of maintaining accounts i.e. rules of debit and
credit in relation to various accounts. A book that is prepared by every businessman,
small or big. is a book in which business transactions are recorded datewise and in the
order in which these transactions take place is known as journal. In this lesson you will
learn about its meaning, objectives and its preparation.

OBJECTIVES
After studying this lesson, you will be able to :
z explain the meaning of journal;
z draw format of Journal;
z explain the process of journalising;
z journalise the simple and compound transactions;
z classify journal into Special Journals and Journal Proper.
5.1 JOURNAL : MEANING AND FORMAT
Journal is a book of accounts in which all day to day business transactions are recorded
in a chronological order i.e. in the order of their occurence. Transactions when recorded
in a Journal are known as entries. It is the book in which transactions are recorded for
the first time. Journal is also known as ‘Book of Original Record’ or ‘Book of Primary
Entry’.

82 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
Business transactions of financial nature are classified into various categories of accounts
such as assets, liabilities, capital, revenue and expenses. These are debited or credited
according to the rules of debit and credit, applicable to the specific accounts. Every
business transaction affects two accounts. Applying the principle of double entry, one
account is debited and the other account is credited. Every transaction can be recorded
in journal. This process of recording transactions in the journal is’ known as ‘Journalising’.

In small business houses generally one Journal Book is maintained in which all the Notes
transactions are recorded. But in case of big business houses as the transactions are
quite large in number, therefore journal is divided into various types of books called
Special Journals in which transactions are recorded depending upon the nature of
transaction i.e. all credit sales in Sales Book, all cash transactions in Cash Book and so
on.

Format of Journal

Every page of Journal has the following format. It is a columnar book. Each column is
given a name written on its top. Format of journal is given below:

Journal

Date Particulars Ledger Folio Dr. Amount Cr. Amount

(` ) (` )

(1) (2) (3) (4) (5)

Column wise details of journal is as :

1. Date

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

Example :

Date

2014

April 15

ACCOUNTANCY 83
MODULE - 1 Journal
Basic Accounting
2. Particulars

The accounts affected by a transaction i.e the accounts which have to be debited or
credited are recorded in this column. It is recorded in the following way :

In the first line, the account which has to be debited is written and then the short form
of Debit i.e. Dr. is written against that account’s name in the extreme right of the same
column.
Notes
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 is written starting with preposition ‘To’. Then in the
third line, Narration for that entry which explains the transaction, the affected accounts
of which are entered, is written within Brackets. Narration should be short, complete
and clear. After every journal entry, horizontal line is drawn in the particulars column to
separate one entry from the other.

Example : Rent paid in cash on 1st April, 2014

Date Particulars

2014 Rent A/c ............................... Dr

April 1 To Cash A/c .................

(Rent paid in cash)

3. Ledger Folio

The transaction entered in a Journal is posted to the various related accounts in the
‘ledger’ (which is explained in another lesson). In ledger-folio column we enter the
page-number where the account pertaining to the entry is opened and posting from the
Journal is made.

4. Dr. Amount

In this column, the amount to be debited is written against the same line in which the
debited account is written.

5. Cr. Amount

In this column, the amount to be credited. is written against the same line in which the
credited account is written.

84 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
Example : Paid ` 4,000 rent on 1st April 2014.
Journal
Date Particulars L.F. Dr. Amount Cr. Amount
(`) (` )
2014
April 1 Rent A/c ........ Dr 4000
To Cash A/c 4000 Notes

(Rent paid in Cash)

At the end of each page, both the Dr. and Cr. columns are totalled up. The total of both
these columns should be equal as the same amount is entered in the debit as well as in
the credit columns. The totals are carried forward to the next page with the words
‘total carried forward (c/f) and then at the top of the next page in Particulars column,
we write totals brought forward (b/f) and the amount of totals is written in the respective
amount columns.

INTEXT QUESTIONS 5.1

I. What is journal? Write in your own words.
................................................................................................................
................................................................................................................
II. Complete the following sentences with the appropr:ate word/words:
i. Journalising is the process of entering transactions in
ii. Another name for Journal is ..................... ..........................................
iii. Transactions, when recorded in Journal, are known as .....................
iv. The explanation of a Journal entry is known as .....................
v. In a Journal entry preposition ..................... is used before the name of the
account to be credited

5.2 PROCESS OF JOURNALISING

Following steps are taken for the preparation of a journal :
z Identify the Accounts : First of all, the affected accounts of an accounting
transaction are identified. For example, if the transaction of “goods worth `10000

ACCOUNTANCY 85
MODULE - 1 Journal
Basic Accounting
are purchased for Cash”, then ‘Purchases’A/c and ‘Cash’A/c are the two affected
accounts.
z Recognise the type of Accounts : Next we determine the type of the affected
accounts e.g. in the above case, ‘Purchases A/c and Cash A/c are expense and
asset account respectively.
z Apply the Rules of Debit and Credit : Then the rules of ‘debit’ and ‘credit’ are
applied to the affected accounts. You are aware of these rules. However, for the
Notes revision purposes, these are given below :
(a) Assets and Expenses Accounts are debited if there is an increase and credited
if there is decrease :
(b) Liability, Capital and Revenue Accounts are debited if there is decrease and
credited if there is increase.
In the example given when goods are purchased, as the assets are increasing, therefore,
Purchases Account will be debited and as payment is made in cash, assets are
decreasing, Cash Account will be credited.
Now, the journal entry will be made in the Journal alongwith a brief explanation i.e.
narration. The corresponding amounts will be written in the debit and credit columns.
After completing one entry, an horizontal line is drawn before entry for the next
transaction is made in the journal.
The transaction, given above in the example, is journalised in the following manner:
Date Particulars L.F. Dr. Amount Cr. Amount
(`) (` )
Purchases A/c .............. Dr 10000
To Cash A/c 10000
(Goods purchased for Cash)

Illustration 1
Analyse in Tabular form and Enter the following transactions in the Journal of Bhagwat
and Sons
2014 `
January 1 Tarun started business with cash 1,00,000
January 2 Goods purchased for cash 20,000
January 4 Machinery Purchased from Vibhu 30,000

86 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
January 6 Rent paid in cash 10,000
January 8 Goods purchased on credit from Anil 25,000
January 10 Goods sold for cash 40,000
January 15 Goods sold on credit to Gurmeet 30,000
January 18 Salaries paid. 12,000
January 20 Cash withdrawn for personal use 5,000 Notes
Solution
As explained above, before making the journal entries, it is very essential to determine
the kind of accounts to be debited or credited. This is shown in the Table :
Tabular Analysis of Business Transactions
Date Transaction Affected Kind of Increaseor Debited Credited
Accounts Accounts Decrease Accounts Accounts
in Accounts Dr. Cr.
2014
Jan.1 Cash received Cash Asset Increase Cash A/c
from the owner Capital Capital Increase Capital A/c
Tarun
Jan. 2 Goods purcha- Goods Asset Increase Purchases A/c
ses for cash Cash Asset Decrease Cash A/c
Jan. 4 Machinery Machinery Asset Increase Machinery
purchased Vibhu Liability Increase A/c Vibhu A/c
on Credit
from Vibhu
Jan. 6 Rent paid Rent Expense Increase Rent A/c
in cash Cash Asset Decrease Cash A/c
Jan. 8 Goods on Purchases Asset Increase Purchases
purchased Anil Liability Increase A/c Anil A/c
Credit from (creditor)
Anil
Jan.10 Goods sold Cash Asset Increase Cash A/c
for cash sales Revenue Increase Sales A/c
Cash
Jan.15 Credit sales to Gurmeet Asset Increase Gurmeet
Gurmeet (Debtor) Revenue Increase Sales A/c
Sales
Jan.18 Salaries paid Salaries Expense Increase Salaries A/c
in cash Cash Asset Decrease Cash A/c

ACCOUNTANCY 87
MODULE - 1 Journal
Basic Accounting
Jan.20 Cash Drawings Capital Decrease Drawings A/c
withdrawn for Cash Asset Decrease Cash A/c
personal use

On the basis of the above table, following entries can be made in the Journal
Journal of Tarun
Dr. Cr.
Date Particulars L.F. Amount Amount
Notes ` `

2014

Jan. 1 Cash A/c Dr. 1,00,000

To Tarun Capital A/c 1,00,000
(Capital brought in by Tarun)

Jan. 2 Purchases A/c Dr. 20,000

To Cash A/c 20,000
(Goods purchased for Cash)

Jan. 4 Machinery A/c Dr. 30,000

To Vibhu’s A/c 30,000
(Machinery purchased from Vibhu
on credit)

Jan. 6 Rent A/c Dr. 10,000

To cash A/c 10,000
(Rent paid)

Jan. 8 Purchases A/c Dr. 25,000

To Anil’s A/c 25,000
(Good purchased on credit)

Jan.10 Cash A/c Dr. 40,000

To Sales A/c 40,000
(Goods sold for Cash)

Jan.15 Gurmeet’s A/c Dr. 30,000

To Sales A/c 30,000
(Goods sold on credit to Gurmeet)

Jan.18 Salaries A/c Dr. 12,000

To Cash A/c 12,000
(Salaries paid)

Jan.20 Drawings A/c Dr 5,000

To Cash A/c 5,000
(Cash withdrawn by the owner
for personal use)

Total 2,72,000 2,72,000

88 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting

INTEXT QUESTIONS 5.2

I. Below are given certain transactions. Write the names and kinds of affected
accounts in the given columns of debit and credit :
Dr. Cr

Transaction Name Type Name Type

of A/c of A/c of A/c of A/c Notes

i. Started business with cash Cash A/c Assets Capital Capital

ii. Credit purchases of goods

iii. Commission paid by cheque

iv. Cash deposited into Bank

v. Interest received in cash

vi. Furniture purchased from

Mukesh

vii. Goods sold by Ramesh

II. Write down the narration for the following Journal entries in the space
provided :

(i) Cash A/c Dr. (ii) Purchases A/c Dr.

To sales A/c To Vinay’s A/c

( ) ( )

III.Complete the following journal entries :

(i) Amit’s A/c Dr. (ii) ..................... Dr.

To ............. A/c To Cash A/c

(Goods sold to Amit) (Commission paid in Cash)

(iii) Cash A/c Dr. (iv) Goods A/c Dr

To ............. A/c To ............. A/c

(Interest received in Cash) (Goods purchased from Rohit

for Cash)

ACCOUNTANCY 89
MODULE - 1 Journal
Basic Accounting
5.3 COMPOUND AND ADJUSTING ENTRIES
The journal entries that you have learnt so far are simple and affect two accounts only.
There can be entries that affect more than two accounts; such entries are called
compound or combined entries.
A simple journal entry contains only one debit and one credit. But if an entry contains
more than one debit or credit or both, that entry is known as a compound journal entry.
Actually, a compound journal entry is a combination of two or more simple journal
Notes
entries.
Thus, a compound journal entry can be made in the following three ways:
(i) By debiting one account and crediting more than one account.
(ii) By debiting more than one account and crediting one account.
(iii) By debiting more than one account and also crediting more than one account.
Two simple journal entries are as :
Journal
Dr. Cr.
Date Particulars L.F. Amount Amount
` `
2014
Nov. 30 Salary A/c Dr. 6,000
To Cash A/c 6,000
(Salary paid in Cash)
Nov. 30 Rent A/c Dr. 12,000
To Cash A/c 12,000
(Rent paid in Cash)
The above two simple entries have been converted into compound Journal entry as
under :
2014
Nov. 30 Salary A/c Dr. 6,000
Rent A/c Dr. 12,000
To Cash A/c 18,000
(Payment of Salary and Rent in Cash)
Note : To make the compound entry, it is necessary that the transactions must be of
the same date and one account is common.

90 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
If you match the first two simple entries with the converted compound entry, you will
find that there is no difference between them so far as the accounting effect is concerned.
The compound entries save time and space. Such compound entries are made in the
following cases:
(a) When two or more transactions occur on the same day.
(b) One aspect i.e. either the Debit account or Credit account is common.
A few more examples of compound entries are : Notes

1. Bad Debts
When a debtor fails to pay the full amount due to him, the unpaid amount is known as
bad debts.
For example, A business concern receives ` 8000 out of ` 10,000 due from Harish.
He is unable to pay the balance amount, thus, the remaining amount becomes a bad
debts for the business.
The compound entry for this transaction will be :
Bank A/c Dr. 8,000
Bad Debts A/c Dr. 2,000
To Harish’s A/c 10,000
(Receipt of ` 8,000 from Harish and remaining due
amount of ` 2,000 is treated as bad debts)
2. Discount Allowed and Received
To encourage a customer to pay the amount due before due date, discount is allowed.
This is called cash discount. If such discount is received the compound entry will be :
a) Creditor A/c Dr.
To Bank A/c
To Discount A/c
b) Similarly, when cash discount is allowed, the journal entry will be
Bank A/c Dr.
Discount A/c Dr.
To customer’s (Debtor’s) A/c

ACCOUNTANCY 91
MODULE - 1 Journal
Basic Accounting
Note : When the customer buys goods in bulk or in large quantity some discount may
be allowed to him. This is to encourage him to buy more and more. This discount is
called Trade Discount. When the bill is prepared for the purchase of goods, the amount
of trade discount is deducted from the total amount payable. No entry is made for this
type of discount in the journal i.e. it is not recorded in the books of accounts.
Illustration 2
Enter the following transactions in the books of Supriya, the owner of the business:
Notes
2014
Jan. 8 Purchased goods worth ` 5,000 from Sarita on credit.
Jan. 12 Neha Purchased goods worth ` 4,000 from Supriya on credit.
Jan. 18 Received a Cheque from Neha in full settlement of her account `3,850.
Discount allowed to her `150
Jan. 20 Payment made to Sarita ` 4,900. Discount allowed by him ` 100.
Jan. 22 Purchased goods for cash ` 10,000.
Jan. 24 Goods sold to Kavita for ` 15,000.
Trade discount @ 20% is allowed to her.
Jan. 29 Payment received from Kavita by Cheque.
Solution
The above transactions will be entered in the journal as follows :
Journal of Supriya
Dr. Cr.
Date Particulars L.F. Amount Amount
` `
2014
Jan.8 Purchases A/c Dr. 5,000
To Sarita A/c 5,000
(Goods Purchased on credit from Sarita)
Jan. 12 Neha’s A/c Dr. 4,000
To Sales A/c 4,000
(Goods sold on credit to Neha)

92 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
Jan. 18 Bank A/c Dr. 3,850
Discount A/c Dr. 150
To Neha’s A/c 4,000
(Payment recived from Neha and
discount allowed)
Jan. 20 Sarita’s A/c Dr. 5,000
To Cash A/c 4.900
To Discount A/c 100 Notes
(Payment made and discount
allowed by Sarita)
Jan. 22 Purchases A/c Dr. 10,000
To Cash A/c 10,000
(Goods purchased for cash)
Jan. 24 Kavita A/c Dr. 12,000
To Sales A/c 12,000
(Sold goods to Kavita on credit of
` 15000 less Trade Discount @20%)
Jan. 29 Bank A/c Dr. 12,000
To Kavita’s A/c 12,000
(Payment received from Kavita
by Cheque)
Total 52,000 52,000
Adjusting Entry
To satisfy the principle of matching cost and revenue, amount of every expense and
revenue should pertain to the period for which accounts are being prepared. Thus,
there can be two situations : (a) Amount has been received or paid which belongs to
more than one accounting year (b) amount of expense or of revenue for the current
year stands due and not paid. In the above two cases adjustments need to be made.
Any journal entry made to adjust these amounts is called adjusting journal entry.
Journal entries made to adjust for outstanding expenses such as rent outstanding, prepaid
expenses such as insurance premium paid in advance, accrued income such as rent
(income) has become due but not received and income received in advance such as
commission has been received though not yet due are examples of adjusting journal
entries.
Following are the items for which adjustment is required :

ACCOUNTANCY 93
MODULE - 1 Journal
Basic Accounting
1. Outstanding Expenses
An expense for the current accounting peirod should be debited (as increase in expense
is to be debited). It is immaterial whether it is paid in that accounting period or not. In
case the same expense is not paid during the year, it becomes outstanding for that
particular year. It is the liability of the business for that year and, thus, expense outstanding
account will be credited, because liabilities are credited for increase.
For example, if salaries are outstanding for ` 5,000 for December 2014 then the entry
Notes
will be made as follows:
2014 Salaries A/c Dr. 5,000
Dec.31 To Salaries outstanding A/c 5,000
(Salaries remaining unpaid for the month of December)
2. Prepaid Expenses
This is an expense relating to the next year that has been paid in advance during the
current year. Thus, in such a case, this amount should not be treated as an expense for
this year. It should be treated as an asset in the current year as the services will be
received only in the next year (but the payment has been made in this year). As an
increase in asset is debited, so prepaid expense account will also be debited.
If, for example, Insurance is prepaid for 2015 in 2014 for ` 3,000 then entry will be
made as follows:
2014 Prepaid Insurance A/c Dr. 3,000
Dec. 14 To Insurance Premium A/c 3,000
(Insurance paid in advance)
3. Accrued Income
In case, income has been earned but it has not been recieved till now, it is an accrued
income. Accrued Income is an asset, as there will be an increase in the asset, it will be
debited.
For example, Rent (receivable) is outstanding for the month of November `4,000. The
entry in such a case will be:
Accrued Rent A/c Dr. 4,000
To Rent A/c 4,000
(Being Rent due but not yet received for the period)
Note : Here Rent Income A/c has been credited for the increase to be made in the
amount of Rent for the period of November, which has to be included in the total Rent
Income.

94 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
4. Income Received in Advance

Whenever Income is received in advance during the current year i.e. it is received for
the next year, it should not be included in the current year’s income. As this income
pertains to the next year, it cannot be treated as income in the current year, so it becomes
a liability. As there is an increase in the liability, it should be credited.

For example, if Rent is received in advance for the period January and February 2015
in December 2014, ` 9,000. Then the entry will be Notes

Rent A/c Dr. 9,000

To Rent Received in Advance A/c 9,000

(Rent received in advance for January and

February 2015 in the month of December 2014)

Note : Here Rent Income A/c has been debited as it has to be decreased by ` 9,000
being Rent in advance for January and February 2015 which should not be included in
the month of December 2014 as the services have not yet been rendered.

Miscellaneous Entries

(a) Depreciation

Depreciation means decline in the value of an asset due to its wear and tear. It is an
expense for the business. Increase in expenses and losses are debited, so depreciation
is also to be debited. The value of the asset will also be reduced because of depreciation.
As decrease in assets is credited, so the same asset account will be credited.

For example, Depreciation on furniture ` 3,000 is charged for the year, Journal entry
will be :

Depreciation A/c Dr. 3,000

To Furniture A/c 3,000

(Depreciation charged on furniture)

(b) Interest on Capital

Business may allow interest to its proprietor on his/her capital. It is an expense for the
business. As the expense is debited for the increase, interest on capital will be debited.
The other account involved here is capital account. As Capital is increasing, it will be
credited with the amount of interest on capital.

ACCOUNTANCY 95
MODULE - 1 Journal
Basic Accounting
For example, Interest allowed on capital is ` 2,500. Thus, the journal entry will be :

Interest on Capital A/c Dr. 2,500

To Capital A/c 2,500

(Interest on Capital is allowed)

(c) Drawings
Notes
When the proprietor withdraws some money from the business for his personal or
domestic use, it is known as Drawings. Drawings reduce the amount of Capital. As
decrease in Capital is debited, drawings will also be debited. As Cash will be decreased
as an asset, it will be credited.

For example, Cash withdrawn by the proprietor for his peronal use is ` 4,000. So the
journal entry will be :

Drawings A/c Dr. 4,000

To Cash A/c 4,000

(Drawings made in cash)

INTEXT QUESTIONS 5.3

I. Fill in the blanks with sutiable word/words:

i. A cominbaiton of two or more simple journal entries is known as

...........................

ii. Bad debts are ........................... in the journal, as they are loss to the Business.

iii. In journal, only ........................... discount is recorded.

iv. No entry is made for ........................... discount in the Journal.

v. Prepaid Expenses are ........................... in the journal.

vi. Accrued Income is ........................... on the journal.

vii. Depreciation reduces the value of an ...........................

viii. When the proprietor- withdraws money from the business for his personal use,
then ........................... A/c is debited and ........................... A/c is credited.

96 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
II. Complete the following journal entries:
(i) Drawings A/c ................... Dr.
To ................... A/c
(Money withdrawn from Bank for Personal use)
(ii) Cash A/c ................... Dr.
...................................... Dr. Notes
To Rohit’s A/c
(Payment received form Rohit in full and final settlement of his A/c)
(iii) ................... A/c Dr.
To Rent A/c
(Rent paid in advance)
(iv) Interest on Capital A/c Dr.
To ................... A/c
(Interest allowed on capital)
(v) ................... A/c Dr.
To Commission outstanding A/c
(Commission outstanding for December)
(vi) Cash A/c ................... Dr.
................... A/c Dr.
To Satish’s A/c
(Part payment of a debt received due to insolvency of Satish)

5.4 CLASSIFICATION OF JOURNAL

Journal is a book in which transactions are recorded in chronological order/ date wise,
therefore it will be practically difficult to record if the number of transactions is large. To
take the benefit of division of labour, journal should be divided into number of journals.
Journal can be classified into various special journals and Journal proper. Special journals
are also known as special purpose books.
Classification of Journal can be explained with the help of the following chart:

ACCOUNTANCY 97
MODULE - 1 Journal
Basic Accounting
Journal

Special Journal Journal Proper

Cash Journal Goods Journal Bill Journal

Notes
Purchase Sales Purchase Return Sales Returns
Journal/Book Journal/Book Journal/Book Journal/Book

Simple Cash Bank Column Bill Receivables Bill Payables

Journal/Book Cash Journal/ Journal/Book Journal/Book
Book

These journals are explained below :

I. Special Journals
Special journals are those journals which are meant for recording all the transactions of
a repetitive nature of a particular type. For example, all cash related transactions may
be recorded in one book, all credit purchases in another book and so on. These are :
(i) Cash Journal/Cash Book : Cash Journal or Cash Book is meant for recording
all cash transactions i.e., all cash-receipts and all cash payments of the ‘business.
This book helps us to know the balance of Cash in hand at any point of time.
It is of two types :
a) Simple Cash Book : It records only receipts and payments of cash. It is like
an ordinary Cash Account.
b) Bank Column Cash Book : This type of Cash Book contains one more
column on each side for the Bank transactions. This Book provides additional
information about the Bank transactions.
You will learn more details about the Cash Book in the lesson on Cash Book.
ii. Purchases Journal/Purchases Book : This journal is meant for recording all
credit purchases of goods only as Cash purchases of goods are recorded in the
Cash Book. In this journal, purchases of other things like machinery, typewriter,
stationery, etc. are not recorded. Goods means articles meant for trading or the
articles in which the business deals.
iii. Sales Journal/Sales Book : This journal is meant for recording all credit sales
of goods made by the firm. Cash Sales are recorded in the Cash Book and not

98 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
in the Sales Book. Credit Sale of items other than the goods dealt in like sale
of old furniture, machinery, etc. are not entered in the Sales Journal.
iv. Purchase Returns or Returns Outward Journal : Whenever, the goods are
not as per the specifications, the buyer may return these goods to the supplier.
These returns are entered in a book known as Purchase Returns Book. It is also
known as Returns Outward Journal/Book.
v. Sale Returns or Returns Inward Journal : Sometimes, when the goods are
sold to the customer and they are not satisfied with the goods, they may return Notes
these goods to the businessman. Such returns are known as Sales Returns. Just
like Purchase Returns, they are also recorded in a separate Book which is known
as Sales Returns or Returns Inward Journal/Book.
Note : You will learn more details about these Special journals in the subsequent
lessons.
vi. Bill Receivables Journal/Book : When goods are sold on credit and the date
and period of payment is agreed upon between the seller and the buyer, this is
duly signed by both the parties. This written document is called a Bill of exchange.
For the seller it is a bill receivable and for the buyer it is a bill payable. Bills
Receivable Journal/Book and Bills Payable Journal Book are two journals
prepared by a businessman. For example : Pranaya sells goods to Gunakshi on
credit for `5,000 payable after three months. A document is prepared containing
these facts and is duly signed by Pranaya and Gunakshi. For Pranaya, it is a Bills
Receivable and she will record this transaction in Bill Receivable Book. For
Gunakshi, it is a Bill Payable and she will record the transaction in her Bill Payable
Book.
vii. Bill Payable Journal : This is a journal in which record of those bills is kept
on which the firm has given its acceptance for making payments on later dates.
Note : Bill books are not now in practice.
II. Journal Proper
This journal is meant for recording all such transactions for which no special journal has
been maintained in the business. Therefore, in this journal, all such transactions are
recorded which do not occur frequently and for these transactions, no special journal is
required. For example, if Machinery is purchased on credit, it will be recorded in the
journal proper, because in the Cash Book, we will record only cash purchases of
machinery. Similarly, many other transactions, which do not find their place in the special
journals, will be recorded in the Journal Proper such as
(i) Outstanding expenses – Salaries outstanding, Rent outstanding, etc.
(ii) Prepaid expenses – Prepaid Rent, Salaries paid in advance

ACCOUNTANCY 99
MODULE - 1 Journal
Basic Accounting
(iii) Income received in advance – Rent received in advance, interest received in
advance, etc.
(iv) Accrued Incomes – Commission yet to be received, interest yet to be received.
(v) Interest on Capital
(vi) Depreciation
(vii) Credit Purchase and Credit Sale of fixed Assets – Machinery, Furniture.
Notes
(viii) Bad debts.
(ix) Goods taken by the proprietor for personal use.

INTEXT QUESTIONS 5.6

Fill in the blanks with suitable word/words:
i. Return of goods purchased by the businessman to the suppliers will be entered in
___________ Journal.
ii. In ___________ Journal, credit purchases of assets is not recorded.
iii. When the payment is to be made by the debtor, under a written agreement it is
___________ for him.
iv. An order made by the creditor to his debtor to make the payment on a specified
date is known as ___________.
v. In ___________ all such transactions are recorded for which no special journals
are maintained.
vi. Assets sold on credit are entered in ___________.

WHAT YOU HAVE LEARNT

z The Book in which all business transactions are recorded, datewise i.e. chronological
order is known as Journal.
z A Journal contains the following columns:
1. Date: 2. Particulars; 3. Ledger folio; 4. Debit Amount; 5. Credit Amount.
z Brief explanation of a journal entry is known as Narration.
z A combination of two or more simple journal entries is known as compound entires.
z Cash discount is recorded in the journal whereas no entry is made for Trade Discount.

100 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
z When the amount paid or received is partly utilised by the end of an accounting
year, and balance is for services to be provided in the next year or amount is yet to
be paid or to be received for the services availed of in the current year, adjustment
is required and adjusting entries will be made.
z In big business houses, a journal is classified into various special journals which
record transactions of similar and repetitive nature.
z All those transactions which arise occasionally or do not find place in any of the
special journals are recorded in Journal proper. Notes

z Special Journals : These are used for recording specific nature transactions:

Cash Purchase Sales Purchase Sale Bill Bill

Book Book Book Returns Returns Receivable Payable
Book Book

TERMINAL EXERCISE
1. Write the meaning of the following in one sentence each:
(i) Narration
(ii) Ledger folio
(iii) Bad debts
(iv) Cash Discount
2. The following journal entries have been made by a learner. You are required to
make correct entries wherever you think them to be wrong :
(i) Proprietor brought capital into Business
Capital A/c ................... Dr.
To Cash A/c
(ii) Goods Sold for Cash
Cash A/c ................... Dr.
To Goods A/c
(iii) Machinery Purchased in Cash
Purchases A/c ................... Dr.
To Cash A/c

ACCOUNTANCY 101
MODULE - 1 Journal
Basic Accounting
(iv) Goods sold to Ram for cash
Ram A/c ................... Dr.
To Sales A/c
(v) Salary paid to the Accountant
Accountant’s personal A/c ................... Dr

Notes To Salary A/c

(vi) Rent paid in advance
Prepaid Rent A/c ................... Dr
To Cash A/c
3. Distinguish between Special Journals and Journal Proper.
4. Journalise the following transactions :
(i) Started business with cash ` 3,00,000.
(ii) Bought Goods on credit for ` 5,000.
(iii) Sold Goods for cash ` 12,000 and on credit ` 8,000.
5. Explain the process of journalising the transactions with suitable examples.
6. What are compound entries? Explain with suitable examples.
7. What are adjusting entries? Give examples of any two such entries.
8. Enter the following transactions in Journal
2014
Jan. 1 Sushil & Co. started business with cash 1,00,000
Jan. 2 Paid into Bank 60,000
Jan. 4 Purchased Machinery and paid by cheque 30,000
Jan. 6 Bought goods from Naresh 20,000
Jan. 14 Paid salaries 5,000
Jan. 15 Sold goods to Rajesh Kumar 15,000
Jan. 17 Paid for Sundry Expenses 8,500
Jan. 18 Cash deposited into Bank 20,000
Jan. 19 Received Rent 6,000
Jan. 22 Paid Naresh by cheque in full settlement of his A/c 19,750

102 ACCOUNTANCY
 Journal MODULE - 1
Basic Accounting
Jan. 24 Withdrawn cash for personal use 8,000
Jan. 26 Salary paid in advance to Surjeet 2,500
Jan. 28 Rajesh made the payment on A/c 10,000
Jan. 30 Cash Sales for the month 16,500

9. The following are the transactions of Kumar Swami for the month of January 2014.
Journalise these transactions.
2014 Notes
`
Jan. l Capital paid into Bank 3,00,000
Jan. 1 Bought Stationery for cash 400
Jan. 2 Bought Goods for cash 25,000
Jan. 3 Bought Postage Stamps 600
Jan. 5 Sold Goods for Cash 10,000
Jan. 6 Bought Office Furniture from Mahendra Bros. 40,000
Jan.11 Sold goods to Jacob 12,000
Jan.12 Received cheque from Jacob 12,000
Jan.14 Paid Mahendra Bros. by cheque 40,000
Jan.16 Sold goods to Ramesh & Co 5,000
Jan.20 Bought from S. Seth & Bros 15,000
Jan.23 Bought Goods for cash from S.Narain & Co 22,000
Jan.24 Sold Goods to P.Prakash 17,000
Jan. 26 Ramesh & Co. Paid on account 2,500
Jan.28 Paid S.Seth & Bros. by cheque in full settlement 14,800
Jan.31 Paid Salaries 2,800
Jan.31 Rent is due to S. Sharma but not yet paid 2,000

ANSWERS TO INTEXT QUESTIONS

5.1 I. Journal is a book of accounts in which all day to day transactions are
recorded in the order of their occurence.
II. (i) the journal (ii) original book of entries/Primary Book of entries
(iii) entires (iv) narration (v) ‘to’

ACCOUNTANCY 103
MODULE - 1 Journal
Basic Accounting
5.2 I.
Debit Credit

S.No. Name of A/c Kind of A/c Name of A/c Kind of A/c

(ii) Goods A/c Asset Creditors A/c Liability

(iii) Commission A/c Expense Bank A/c Asset

(iv) Bank A/c Asset Cash A/c Asset

Notes
(v) Cash A/c Asset Interest A/c Revenue

(vi) Furniture A/c Asset Mukesh A/c Liability

(vii) Ramesh A/c Asset Goods A/c Asset

II. (i) Goods sold for cash (ii) Goods purchased from Vinay on credit
III. (i) Goods A/c (ii) Commission A/c (iii) Interest (iv) Cash A/c
5.3 I. (i) Compound entry (ii) Debited (iii) Cash (iv) Trade
(v) Debited (vi) Debited (vii) Asset (viii) Drawings, Cash
II. (i) Cash A/c (ii) Discount (iii) Prepaid Rent
(iv) Capital A/c (v) Commission A/c (vi) Bad Debts A/c
5.4 (i) Purchase Returns - Journal (ii) Purchase Journal
(iii) Bill Payable (iv) Bill of Exchange (v) Journal proper (vi) Journal proper

104 ACCOUNTANCY
 MODULE - 1
Basic Accounting

LEDGER Notes

You have learnt that business transactions are recorded in various special purpose
books and journal proper. The accounting process does not stop here. The transactions
are recorded in number of books in chronological order. Such recording of business
transactions serves little purpose of accounting. Items of same title in different books of
accounts need to be brought at one place under one head called an account. There are
numerous account titles of items/persons or accounts. All the accounts, if brought in
one account book, will be more informative and useful. The account book so maintained
is called Ledger.
In this lesson, you will learn about Ledger and posting of items entered in various
books of accounts to ledger.

OBJECTIVES
After studying this lesson, you will be able to:
z state the meaning, features and importance of ledger;
z enumerate the various types of ledger;
z state the meaning of posting and explain the steps of posting journal into ledger;
z calculate the balance of the account in the ledger.
6.1 LEDGER : MEANING, IMPORTANCE AND TYPES
You have already learnt about accounts. Each transaction affects two accounts. In
each account transactions related to that account are recorded. For example, sale of
goods taking place number of times in a year will be put under one Account i.e. Sales
Account.

ACCOUNTANCY 105
MODULE - 1 Ledger
Basic Accounting
All the accounts identified on the basis of transactions recorded in different journals/
books such as Cash Book, Purchase Book, Sales Book etc. will be opened and
maintained in a separate book called Ledger. So a ledger is a book of account; in
which all types of accounts relating to assets, liabilities, capital, expenses and revenues
are maintained. It is a complete set of accounts of a business enterprise.
Ledger is bound book with pages consecutively numbered. It may also be a
bundle of sheets.
Notes Thus, from the various journals/Books of a business enterprise, all transactions recorded
throughout the accounting year are placed in relevant accounts in the ledger through the
process of posting of transactions in the ledger. Thus, posting is the process of transfer
of entries from Journal/Special Journal Books to ledger.
Features of Ledger
z Ledger is an account book that contains various accounts to which various business
transactions of a business enterprise are posted.
z It is a book of final entry because the transactions that are first entered in the
journal or special purpose Books are finally posted in the ledger. It is also
called the Principal Book of Accounts.
z In the ledger all types of accounts relating to assets, liabilities, capital, revenue
and expenses are maintained.
z It is a permanent record of business transactions classified into relevant
accounts.
z It is the ‘reference book of accounting system and is used to classify and
summarise transactions to facilitate the preparation of financial statements.
Format of a Ledger Sheet
The format of a ledger sheet is as follows :
Title of An Account
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

106 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
You must have noticed that the format of a ledger sheet is similar to that of the format of
an Account about which you have already learnt. A full sheet page may be allotted to
one account or two or more accounts may be opened on one sheet. It depends upon
the number of items related to that account to be posted.
Importance of Ledger/Utility of Ledger
Ledger is an important book of Account. It contains all the accounts in which all the
transactions of a business enterprise are classified. At the end of the accounting period,
each account will contain the entire information of all the transactions relating to it. Notes
Following are the advantages of ledger.
z Knowledge of Business Results : Ledger provides detailed information about
revenues and expenses at one place. While finding out business results the revenue
and expenses are matched with each other.
z Knowledge of Book Value of Assets : Ledger records every asset separately.
Hence, you can get the information about the Book value of any asset whenever
you need.
z Useful for Management : The information given in different ledger accounts will
help the management in preparing budgets. It also helps the management in keeping
the check on the performance of business it is managing.
z Knowledge of Financial Position : Ledger provides information about assets
and liabilities of the business. From this we can judge the financial position and
health of the business.
z Instant Information : The business always need to know what it owes to others
and what the others owe to it. The ledger accounts provide this information at a
glance through the account receivables and payables.
Types of Ledger
In large scale business organisations, the number of accounts may run into hundreds. It
is not always possible for a businessman to accommodate all these accounts in one
ledger. They, therefore, maintain more than one ledger.
These ledgers may be as follows :
1. Assets Ledger : It contains accounts relating to assets only e.g. Machinery account,
Building account, Furniture account, etc.
2. Liabilities Ledger : It contains the accounts of various liabilities e.g. Capital (Owner
or partner), Loan account, Bank overdraft, etc.
3. Revenue Ledger : It contains the revenue accounts e.g.. Sales account,
Commission earned account, Rent received account, interest received account,
etc.

ACCOUNTANCY 107
MODULE - 1 Ledger
Basic Accounting
4. Expenses Ledger : It contains the various accounts of expenses incurred, e.g.
Wages account, Rent paid account, Electricity charges account, etc.
5. Debtors Ledger : It contains the accounts of the individual trade debtors of the
business. Individuals, firms and institutions to whom goods and services are sold
on credit by business become the ‘trade debtors’ of the business.
6. Creditors Ledger : It contains the accounts of the individual trade Creditors of
the business. Individuals, firms and institutions from whom a business purchases
Notes
goods and services on credit are called ‘trade creditors’ of the business.
7. General Ledger : It contains all those accounts which are not covered under any
of the above types of ledger. For example Landlord A/c, Prepaid insurance A/c
etc.

INTEXT QUESTIONS 6.1

I. Fill in the blanks with a suitable word or words :
i. Ledger contains various ...................... in it.
ii. The process of transfer of entries from Journal and special purpose books to
ledger is called ......................
iii. Ledger is also called ......................
iv. Ledger is a ...................... book of accounting system.
II. Match the column A with column B :
A B
i. Book containing accounts (a) Ledger
ii. Pages number of the ledger (b) Liabilities ledger
iii. Machinery account, Building (c) Revenue ledger
account, furniture Accounts, etc.
iv. Loan’s account, Bank overdraft (d) Expenses ledger
account, etc.
v. Rent paid, wages paid, (e) Folio
electricity charges
vi. Sales account, commission account, (f) Assets ledger
interest received account etc.

108 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
6.2 POSTING OF JOURNAL PROPER INTO LEDGER
You know that the purpose of opening an account in the ledger is to bring all related
items of this account which might have been recorded in different books of accounts on
different dates at one place. The process involved in this exercise is called posting in
the ledger. This procedure is adopted for each account.
To take the items from the journal to the relevant account in the ledger is called posting
of journal. Following procedure is followed for posting of journal to ledger : Notes
1. Identify both the accounts ‘debit’ and ‘credit’ of the journal entry. Open the two
accounts in the ledger.
2. Post the item in the first account by writing date in the date column, name of the
account to be credited in the particulars column and the amount in the amount
column of the ‘debit’ side of the account.
3. Write the page number of the journal from which the item is taken to the ledger in
Folio column and write the page number of the ledger from which account is written
in L.F. column of the journal.
4. Now take the second Account and give the similar treatment. Write the date in the
‘date’ column, name of the account to be debited in the particulars column and the
amount in the ‘particulars’ column of the account on its credit side in the ledger.
5. Write page number of journal in the ‘folio’ column of the ledger and page number
of the ledger in the ‘LF’ of column of the journal.
Illustration 1
Journalise the following transactions.
2014 `
January 1 Commenced business with cash 50,000
January 3 Paid into bank 25,000
January 5 Purchased furniture for cash 5,000
January 8 Purchased goods and paid by cheque 15,000
January 8 Paid for carriage 500
January 14 Purchased Goods from K. Murthy 35,000
January 18 Cash Sales 32,000
January 20 Sold Goods to Ashok on credit 28,000

ACCOUNTANCY 109
MODULE - 1 Ledger
Basic Accounting
January 25 Paid cash to K. Murthy in full settlement 34,200

January 28 Cash received from Ashok 20,000

January 31 Paid Rent for the month 2,000

January 31 Withdrew from bank for private use 2,500

Solution :
Notes Journal

Dr. Cr
Date Particulars LF Amount Amount
` `
2014

Jan 1 Cash A/c Dr. 50,000

To Capital A/c 50,000
(Commenced business with cash)

Jan 3 Bank A/c Dr 25,000

To cash A/c 25,000
(Cash paid into the Bank)

Jan 5 Furniture A/c Dr 5,000

To Cash A/c 5,000
(Purchased furniture for cash)

Jan 8 Purchases A/c Dr 15,000

To Bank A/c 15,000
(Purchased goods and paid by cheque)

Jan 8 Carriage A/c Dr 500

To Cash A/c 500
(Cash paid for carriage charges)

Jan 14 Purchases A/c Dr 35,000

To K. Murthy 35,000
(Goods purchased on credit)

Jan 18 Cash A/c Dr 32,000

To Sales A/c 32,000
(Goods sold for cash)

110 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
Jan 20 Ashok Dr 28,000
To Sales A/c 28,000
(Goods sold to Ashok credit)
Jan 25 K Murthy Dr 35,000
To Cash A/c 34,200
To Discount A/c 800
(Cash paid to K. Murthi and discount
allowed by them) Notes

Jan 28 Cash A/c Dr 20,000

To Ashok 20,000
(Cash received from Ashok on Account)
Jan 31 Rent A/c Dr 2,000
To Cash A/c 2,000
(Cash paid for rent)
Jan 31 Drawings A/c Dr 2,500
To Bank A/c 2,500
(Cash withdrawn from bank for
domestic use)

INTEXT QUESTIONS 6.2

I. State the meaning of ledger posting :
____________________________________________________________
____________________________________________________________
II. Following are the steps of posting of journal to ledger but are not in proper
order. Write them in correct order :
i. Write the page number of journal in the JF column of ledger and that of
ledger on which account has been taken from journal.
ii. Identify the two affected accounts in the journal and open these accounts
in the ledger
iii. Take date and amount of the debit account, and name of the credit account
from journal to ledger in their respective columns.
iv. While posting the credit account from journal in the ledger write page
number of the journal from which item is taken to ledger in JF column of
ledger and page number of ledger on which item is taken on the LF column
of the journal.

ACCOUNTANCY 111
MODULE - 1 Ledger
Basic Accounting
Posting Scheme
Posting from the Journal to the ledger-Dedit Account

Open the page of Journal

Read the title of the debit account

Notes

Does the account No Open the ledger and

exist in the ledger put title on blank page

Yes

Open the respective page

Make entry on debit side

Put month and Date in

Date Column

Write the name of the credit

account in 'particulars' column

Write the amount of transaction

in 'Amount' column

Put folio number of this ledger page in

'Folio' column of journal

Go to Next entry

112 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
Posting Scheme
Posting from the Journal to the ledger-Credit Account

Open the page of the journal

Read the title of the credit account Notes

Does this account No Open the ledger and

exist in the ledger put title on blank page

Yes

Open the respective page

Make entry on credit side

of the account

Put month and Date in

Date' Column

Write the name of the debit

account in 'particulars' column

Write the amount of transaction

in 'Amount' column

Put folio number of this ledger page in

'Folio' column of journal and vice versa

Go to Next entry

ACCOUNTANCY 113
MODULE - 1 Ledger
Basic Accounting
6.3 BALANCING OF AN ACCOUNT
Balancing of an account is the process of finding out the difference between the total of
debits and total of credits of an account. If debit side total is more than the credit side,
the account shows a debit balance. Similarly, the balance will be credit balance if the
credit side total of an account is more than the debit side total. This process of ascertaining
and writing the balance of each account in the ledger is called balancing of an account.
An account has two sides : debit and credit. Items by which this account is debited are
Notes entered on its debit side with their amounts and items by which this account is credited
are entered on its credit side with their amounts so all items related to an account are
shown at one place in the ledger. But then you would like to know the net effect of this
account i.e. the balance between its debit amount and credit amount. The following
steps are followed in Balancing the Ledger Account :
z Total the two sides of an Account on a rough sheet.
z Determine the difference between the two sides. If the credit side is more than the
debit side, the balance calculated is a credit balance.
z Put the difference on the ‘Shorter side’ of the account such that the totals of the
two sides of the account are equal.
z If the difference amount is written on debit side (i.e., if credit. side is bigger) then
write as “Balance c/d” (c/d stands for carried down). If difference is written on the
credit side (i.e., if debit side is bigger) then write it as “Balance c/d.
z Finally at the end of the year all the ledger accounts are closed by taking out the
balance of each account.
z The Balance then should be brought down or carried forward to the next period. If
the difference was put on credit side as “Balance c/d” it should now be written on
the debit side of the account as “Balance b/d” (b/d stands for brought down) and
vice-a-versa. Thus, debit balance will automatically be brought down on the debit
side and a credit balance on the credit side.
Balancing of Different Types of Accounts
Assets : All asset accounts are balanced. These accounts always have
a debit balance.
Liabilities : All Liability accounts are balanced. All these accounts have a
credit balance.
Capital : This account is always balanced and usually has a credit
balance.

114 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
Expense and : These Accounts are not balanced but are simply totalled up.
Revenue The debit total of Expense/Loss will show the expense/Loss.
In the same manner, credit total of Revenue/Income will show
increase in income. At the time of preparing the Trial Balance,
the totals of these are taken to the Trial Balance.
The Balance of Assets, Liabilities and Capital Accounts will be shown in Balance Sheet
whereas total of Expense/Loss and Revenue/Income will be taken to the Trading and
Profit and Loss Account. These Accounts are, thus, closed. Notes
If two sides of an Account (usually Assets, Liabilities and Capital) are equal there will
be no balance. The Account is then simply closed by totalling up of the two sides of the
account.
Illustration 2 : Taking ledger accounts of illustration 1, ledger posting and balancing is
as follows :
Solution
Ledger : Cash A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `
2014 2014

Jan 1 Capital A/c 50,000 Jan 3 Bank A/c 25,000

” 18 Sales A/c 32,000 Jan 5 Furniture 5,000
” 28 Ashok 20,000 Jan 8 Carriage 500
Jan 25 K. Murthi 34,200
Jan 31 Rent A/c 2,000
Jan 31 Balance c/d 35,300

1,02,000 1,02,000

Feb 1 Balance b/d 35,300

Capital A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `
2014 2014

Jan 31 Balance c/d 50000 Jan 1 Cash A/c 50000

50000 50000

Feb 1 Balance b/d 50000

ACCOUNTANCY 115
MODULE - 1 Ledger
Basic Accounting
Bank A/c
2014 2014

Jan 2 Cash A/c 25000 Jan 8 Purchases A/c 15000

Jan 31 Drawings A/c 2500
Jan 31 Balance c/d 7500

25000 25000

Notes Feb 1 Balance b/d 7500

Furniture A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 Cash A/c 5000 2014 Balance c/d 5000

Jan 1 5000 Jan 31 5000

Feb 1 Balance b/d 5000

Purchase A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 8 Bank 15,000 Trading A/c 50,000

Jan 14 K. Murthy 35,000

50,000 50,000

Carriage A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 8 Cash 500 Trading A/c 500

500 500

116 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
K. Murthy A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 25 Cash 34,200 Jan 14 Purchases 35,000

Jan 25 Discount 800
Notes
35,000 35,000

Sales A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 1 Trading A/c 60,000 Jan 18 Cash 32,000

Jan 20 Ashok 28,000

60,000 60,000

Ashok A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 20 Sales A/c 28,000 Jan 28 Cash 20,000

Jan 31 Balance c/d 8,000

28,000 28,000

Feb 1 Balance b/d 8,000

Rent A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Cash A/c 2,000 Profit and Loss A/c 2,000

2,000 2,000

ACCOUNTANCY 117
MODULE - 1 Ledger
Basic Accounting
Drawing A/c
Dr. Cr.

Date Particulars JF Amount Date Particulars JF Amount

` `

2014 2014

Jan 10 Bank 2,500 Jan 31 Balance c/d 2,500

Notes
2,500 2,500

Feb 1 Balance b/d 2,500

INTEXT QUESTIONS 6.3

I. Fill in the blanks with suitable word/words :
i. The debit accounts from the journal are entered on the ___________ side of
respective account in the ledger.
ii. The ___________ of the account in the ledger should be the same as that is
used in the Journal.
iii. The page number of the journal is entered in the ___________ column in the
ledger account.
iv. The Figures appearing in the amount column of the ___________ and the
amount column of the respective ___________ in the ledger must be the same.
II. Fill in the blanks with suitable word or words :
i. The balance of asset accounts are ..................... balance.
ii. The balance of liability accounts are always ..................... balance.
iii. The capital Account generally has ..................... balance.
iv. The Revenue and expense accounts are closed by taking the balances to
.......................

WHAT YOU HAVE LEARNT

z Ledger is a register with pages ruled in account form to enable the preparation of
accounts.

118 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting
z Ledger is a permanent record of business transactions which are classified according
to various accounts to which they pertain.
z Ledger may be Assets Ledger, Liabilities Ledger, Revenue ledger, Expense ledger,
Debtors’ ledger, Creditors’ ledger and General ledger.
z The debit item of journal is posted to the credit side of the relevant account in the
ledger.
z The credit item of journal is posted to the Debit Side of the relevant account in the Notes
ledger.
z Name of the account in the journal is entered in ‘Particulars’ column of the relevant
account in the ledger.
z The page No. of journal from where entries are being posted is entered in folio
column of the various relevant accounts.
z In the ledger Book, the balances of Assets, Liabilities and Capital are carried forward
to the next period. Revenue and Expense accounts are closed by transferring their
totals to Trading and Profit and Loss A/c.
z The balance of an account is written on the side having lower total, so that its total
becomes equal to the total of the other side.

TERMINAL EXERCISE
1. What is meant by ledger? Why is ledger prepared?
2. Why is ledger known as the primary book or the principal -book of accounts? Can
profit of the business and its financial position be known without maintaining ledger?
3. Enumerate the various types of ledgers which may be maintained by a business.
4. What is the rule for posting the debit account from the journal into the ledger
account?
5. What is rule for posting the credit items of the journal into the ledger accounts?
6. What are the advantages of maintaining a ledger?
7. What is meant by balancing of an account? Explain the various steps taken while
balancing accounts.
8. How do we balance the following types of accounts?
(a) Assets (b) expense (c) capital (d) Revenue

ACCOUNTANCY 119
MODULE - 1 Ledger
Basic Accounting
9. Following are the transactions of Dhani Ram and Sons for the month of July 2014.
Make journal entries, post them into ledger and balance the account.
2014 `
July 1 Commenced business with cash 60,000
July 2 Paid into bank 40,000
July 5 Purchased furniture for cash 5000
Notes July 7 Purchased Goods and paid for them by cheque 20000
July10 Sold Goods to Lata Gupta for cash 12000
July12 Sold Goods to Mahavir on credit 24000
July18 Purchased Goods from Harish 30000
July19 Withdrew cash for domestic use 2500
July20 Received a cheque from Mahavir on account 18900
Allowed him discount 100
July27 Paid to Harish cash on account 16800
Discount allowed by him 200
July31 Paid salary by cheque 1800
Paid cash for telephone bill 600

ANSWERS TO INTEXT QUESTIONS

6.1 I. (i) accounts (ii) posting (iii) Principal Book of Account (iv) reference book
II. (i) a (ii) e (iii) f (iv) b (v) d (vi) c
6.2 I. Taking the items from the journal to the relevant account in the ledger is called
ledger posting
II. Correct order b, c, a, d
6.3 I. (i) credit (ii) ledger (iii) JF (iv) journal, account
II. (i) debit (ii) credit (iii) credit (iv) Trading and Profit and
Loss A/c

ANSWERS TO TERMINAL EXERCISE

9. Total of journal ` 2,25,400

120 ACCOUNTANCY
 Ledger MODULE - 1
Basic Accounting

ACTIVITY
Contact someone who may be your friend’s father or a relative who is in business. He
operates his accounts and he collects computerised statements received from the banks.
You compare their format with the ledger accounts which you have learnt in your school
or the businessman in question are maintaining and find the difference with regards to :
Traditional Computerised Notes
A/c A/c
1. Format of the account
2. How the accounts are debited/credited
3. Balancing of accounts
4. Additional information

ACCOUNTANCY 121