INDEX : ACCOUNTING

Chapter
1 Introduction and Fundamental to Accounts 01 - 22

Chapter Accounting Process -

2 23 - 47
BOA and Trial Balance and Theory

Chapter
3 Rectification of Errors 48 - 53

Chapter
4 Bank Reconciliation Statement 54 - 58

Chapter
5 Inventories 59 - 69

Chapter
6 Depreciation and Ammortization 70 - 77

Chapter
7 Bills of Exchange and Promissory Notes 78 - 87

Chapter
8 Final Accounts of STC and Manufacturer 88 - 103

Chapter
9 Final Accounts for Not for Profit Organisations 104 - 112

Chapter
10 Single Entry System 113 - 161

Chapter
11 Partnership and LLP Accounts 162 - 170

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12 Dissolution of Partnership Firms and LLPs 171 - 190

Chapter
13 Piecemeal Distribution 191 - 207

Chapter
14 Company Accounts – Issue of Shares 208 - 224

Chapter
15 Company Accounts – Issue of Debentures 225 - 230

Chapter
16 Company Accounts – Format (Sch III) 231

Chapter
17 Company Accounts – Bonus and Right Issue 232 - 273

Chapter Company Accounts –

18 274 - 312
Redemption of Preference Shares

Chapter Company Accounts –

19 313 - 333
Redemption of Debentrues

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CHAPTER 1
INTRODUCTION AND FUNDAMENTAL
TO ACCOUNT

THEORY SECTION

UNIT I – MEANING AND SCOPE OF ACCOUNTING

Although accounting is used by almost all the persons and institutions but accounting,
as an organized activity is associated with everyday business. Due to importance of
accounting for a business, accounting is called the "Language" of business. According to
Amercian Accounting Association, "accounting is the process of identifying, measuring
and communicating economic information to permit informed judgements and decisions
by users of the information". Accounting can be viewed as an information system which
has input processing methods and output.

1. Accounting is process comprising

(a) Recording of transactions.
(b) Classifying and summarizing of transactions.
(c) Interpreting the results.
(d) Communicating the results to interested parties.
2. Accounting requires transactions to be expressed in monetary terms.
3. It is not confined only to recording but also related to interpreting the results.
4. It helps in communicating information to various groups interested in them.

Transaction & events:

All economic activities are performed through transactions & events. Transaction means
performance of business act & events means consequence of transaction. e.g. profits,
closing stock are events.

What is procedure / objective of accounting?

1. Recording – recording all transactions / events in subsidiary books from source
documents.

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2. Classifying (grouping / marshalling) – grouping transaction of same nature at

one place i.e. posting in ledger a/c.

3. Summarising – i.e. preparing trial balance, P & L a/c & balance sheet. (Stage
upto preparation of trial balance is book keeping).

4. Analysing – Classification of data in financial statement e.g. fixed assets are

separated from current asset in balance sheet.

5. Interpretation – explaining meaning & significance of data in financial statements

so that user can have judgement about position & profitability of business.

6. Communication – Of above accounting information to end users through

accounting reports.

Who are users of accounting information?

There are two users

Internal External
Boards of directors, Investors, lenders
partners management, supplier / customers,
employees government

Financial Accounting - making financial statements & communicating the same

Management Accounting - Internal reporting to management by grouping information &

preparing reports.

Cost Accounting- finding cost of goods & services & controlling it.

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Social reporting Accounting - accounting for social costs & benefits of enterprise.

Human resource Accounting - attempt to quantify & report investment made in human
resource by an organisation.

Functions of accounting
1. Measurement of past performance.
2. Forecasting future performance based on past data.
3. Facilitates decision making based on data.
4. Control of weakness in systems .
5. Provide data for regulation and tax.

Distinguish between Bookkeeping & Accounting

Book keeping Accounting

1 Concerned with recording of Concerned with summarising of
transactions. recorded transaction.
2 It is a base of accounting. It is a language of business.
3 No subfield. It has several subfields.
4 Financial statements are not part Financial statement are prepared in
of bookkeeping and so financial accounting and so financial position
position cannot be ascertained. can be ascertained.
5 Managerial decision cannot be taken Management takes decisions based on
on basis of these records. these records.

Root cause of financial accounting

In its oldest form, accounting aided the stewards to discharge their stewardship function.
The wealthy men employed stewards to manage their property; the stewards in turn
rendered an account periodically of their stewardship. This ‘Stewardship Accounting’ was
the root of financial accounting system.

Limitations of Accounting
1. Balance Sheet shows the position of the business on the day of its preparation and
not on the future date while the users of the accounts are interested in knowing the
position of the business in the near future and also in long run and not for the past
date.

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2. Accounting ignores changes in some money factors like inflation etc.

3. There are occasions when accounting principles conflict with each other.
4. Certain accounting estimates depend on the sheer personal judgement of the
accountant, e.g., provision for doubtful debts, method of depreciation adopted,
recording certain expenditure as revenue expenditure or capital expenditure, selection
of method of valuation of inventories and the list is quite long.
5. Financial statements consider those assets which can be expressed in monetary
terms. Human resources although the very important asset of the enterprise are
not shown in the balance sheet.
6. Different accounting policies for the treatment of same item are followed.

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UNIT II – ACCOUNTING CONCEPTS, CONVENTIONS AND PRINCIPLES

What are concept, Conventions & principles

Concept = Assumption having universal application based on which financial statements
are prepared.

Conventions = Rules as per usage, practice & customs.

Principle = rules relating to theory & procedures.

Above are known as GAAP (Generally Accepted Accounting Principles) which is backbone
of accounting system.

(1) Business Entity or Entity Concept:

Entity concept states that business enterprise is a separate identity apart from its
owner. Accountants should treat a business as distinct from its owner. Business
transactions are recorded in the business books of accounts and owner’s transactions
in his personal books of accounts.

Summary of the Concept:

 Business & owners are considered as separate entities.
 Capital is considered as liability.
 Personal Expenses are considered as Drawings.
 Interest is provided on Capital & charged on Drawings.

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(2) Money Measurement :

As per this concept, only those transactions, which can be measured in terms of money
are recorded. Transactions, even if, they affect the results of the business materially,
are not recorded if they are not convertible in monetary terms. Transactions and events
that cannot be expressed in terms of money are not recorded in the business books.

Summary of the Concept:

 Only those transactions / events are recognised which can be expressed in terms
of money.
 Qualitative aspects of business are ignored. E.g.Quarrel between partners,
efficiency of employees, change in fashions and change in government policies.
 According to Money measurement currency transactions & events are recorded
in books of accounts in the ruling currency of the country in which books of
accounts are prepared.

(3) Dual Aspect

 Every Business transaction has two effects on assets and liabilities of Business.
This gives rise to basic accounting equation
i.e. Equity + Liabilties = Assets or
Equity = Assets – Liabilities or
Equity + longterm liability + Current Liability = Fixed asset + Current Asset or
Equity = Fixed assets + working Capital – Longterm liabilities

 Impacts of Every transaction

(a) ↑ in some assets & ↓ in some liabilities.
(b) ↑ in some assets & ↓ in some liabilities.
(c) ↑ in some assets & ↓ in some assets.
(d) ↑ in some liabilities & ↓ in some liabilities.

(4) Going Concern / Continuity:

 Financial Statements are normally prepared on assumption that business has
indefinite Life.
 This concept enables distinction between capital and Revenue.
 This concept determines value of fixed asset and depreciation. It also forms
basis of bifurcation of asset into fixed asset and current assets.
 This concept not applicable to Joint Venture business.

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(5) Cost Concept :

 As per this concept, assets are recorded at historical cost (Price paid for it) and
not at current market value.
 This is done because cost is objective and assets are held to earn revenue.

(6) Realisation
As per this concept-
 Income / Revenue of a period should be recognised only when it is certain that
amount will be realised and ownership of goods transferred.
 Asset should not be valued at market price i.e. any change in the value of asset
to be recorded only when realised.

(7) Periodicity Concept (also called concept of definite accounting period):-

 Indefinite life of the business is classified in small intervals called as accounting
years for measuring performance and financial position.
 According to this concept accounts should be prepared every year & not at end
of life of entity, thus making comparison of financial statements of different
periods possible.

(8) Matching
 Revenue / sales of current period should be matched with expenditure incurred
to generate that revenue.
 Profit = periodic revenue – matched expenses
 This concept determines expenses and closing stock.

(9) Accural
 Income / Expenses are recognised when they are earned / incurred and not
when money is received / paid.
 As per this concept profit = Revenue – Expenses whereas as per the cash basis
of accountancy profit = Cash Received – Cash Paid.
 This concept leads to accounting for prepaid expenses / pre received income or
outstanding expenses / income receivable.
 e.g.: Mr. J D buys clothing of 50,000 paying cash 20,000 and sells at 60,000
of which customers paid only 50,000. Therefore profit of J D as per accrual
concept is 10,000.

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(10) Disclosure
 As per this concept, all material facts are to be disclosed in or below financial
statements.
 This will help readers of financial statements to take rationale decisions.
 As per this concept all significant accounting policies used in financial
statements, contingent liabilities & Events occurring after Balance sheet date
are disclosed as foot note to financial statements.

(11) Materiality (Relative importance)

 All material information should be separately shown and all immaterial
information can be clubbed in financial statements.
 Material information depends upon amount, size of business, nature of
information, etc.
 E.g. depreciation on small items like books, calculator, to be taken at 100% in
the year of purchase it self, stationery stock is normally debited to stationery
expenses, paises in any financial items are rounded off to nearest rupee.

(12) Consistency
 An accounting policy (methods) selected once should be consistently followed
year after year e.g. depreciation methods, inventory methods etc.
 This is to achieve comparability of financial statements of enterprise over a
period of time.
 Change is accounting policy is allowed only when
(a) Required by Law or accounting standards.
(b) For improvement of Reporting / Presentation of financial statements.
 Comparison of performance of organisation from year to year is based on
horizontal consistency.

(13) Conservatism (Prudence)

 As per this concept, all anticipated losses are provided for but anticipated profit
are ignored.
 Because of this convention closing stock is valued at cost or market price
whichever is lower.
 This convention leads to Reserve for Doubtful Debts & Reserve for Discount on
Debtors creation.
 This convention denies Reserve for Discount on Creditors.

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 This concept leads to under statement of assets and incomes and over statement
of liabilities and expenses.

Fundamental Accounting Assumptions

There are three fundamental accounting assumptions :
(i) Going Concern
(ii) Consistency
(iii) Accrual

If nothing has been written about the fundamental accounting assumption in the
financial statements then it is assumed that they have already been followed in
their preparation of financial statements. However, if any of the above mentioned
fundamental accounting assumption is not followed then this fact should be
specifically disclosed.

Qualitative characteristics of financial statements

(a) Principal characteristics

1. Understandability – Information provided in financial statements should be
readily understandable to users.

2. Relevance – Information in financial statements must be relevant to make

decision of future for users.

3. Reliable – Information in Financial statements should be free from errors so

that users can take rationale decisions.

4. Comparability – Financial statements should be comparable over period of time

& with financial statements of other enterprises. Compliance with Accounting
Standards & disclosure of accounting policies in financial statements helps
comparability.

(b) Other characteristics

1. Faithful representation – transactions & events should be represented as it is in
financial statements.

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2. Substance over form – Accounting to be done as per substance or facts, reality

& not merely as per its legal form e.g. where immovable property sold but
legal formalities pending, sales / purchase of such property should still be
recorded in books.

3. Neutral – information in financial statement should be free from bias.

4. Materiality - explained earlier

5. Prudence - (degree of caution to be exercised in preparation of financial

statements.) this concept is similar to conservatism.

6. Adequate disclosure – explained earlier.

7. Completeness – information in financial statements should be complete as

omission can cause information to be false and misleading.

Difference Between Cash & mercantile system of accounting

Cash System Mercantile System

1 Transaction is recognized only when cash Transaction is recognized only when
is received or paid. liability / asset is created.
2 Entries are made only when cash is Entries are made when amount becomes
received or paid. due for payment / receipt irrespective of
whether actual cash is paid or received.
3 Normally followed by professionals, This is generally accepted accounting
educational institutions or NPO. system by business entities.

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UNIT III – CONCEPT OF CAPITAL AND REVENUE

Capital and Revenue Expenditure

Expenditure

Capital (fixed asset) Revenue Deferred Revenue

1 Acquisition of Assets Day to Day Expenses Non-recurring

(recurring) (long benefit period)
2 Expenditure incidental
to purchase of
asset i.e. first time
expenditure to bring Benefit period < 1 Also called as

asset to working year Fictitious assets

condition (includes some non-

recurring

3 Interest on Borrowings Expense with no

during construction extended benefit)

period

4 Overhauling/special Appears in Appears in Balance

repairs which will Trading /P& L a/c sheet as
increase life or
efficiency or earning "Miscellaneous
capacity of asset Expenditure"

5 Acquisition of rights

à Non Recurring in nature

à Benefit Period > 1 year
à Appears as Fixed Assets in
Balance-sheet

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Note: Bifurcation of expenditure into capital and revenue also depends upon nature of
business e.g. Furniture is revenue expenditure (purchase) for furniture dealer but it is
capital expenditure for other organisations.

Examples of Capital Expenditure

(1) Purchase of Tangible Assets.
(2) Acquisition of Intangible Assets.
(3) Non- recuring Expenses incurred at the time of purchase of assets like installation of
machine, Registration of vehicles, Legal Expenses, first time white wash of factory.
(4) Expenses by which efficiency or life of assets will increases e.g. renovation expenses
which increases seating capacity of cinema hall or overhauling of machinery.
(5) Interest on loan for construction Period of assets.
(6) First time repairs of secondhand asset.
(7) Money spent to reduce working expenses.
(8) Expenses in connection with obtaining a licence for running the cinema.
(9) Amount spent for construction of temporary huts which were necessary for
construction of cinema house & were demolished when cinema house was ready.
(10) Petrol driven engine of passenger bus was replaced by diesel engine.

Examples of Revenue Expenditure

(1) All day to day expenses like salaries, printing & stationery, postage, wages,
travelling, Advertising etc. (no enduring benefits).
(2) Even some non-recurring expenses with no future benefit.
(a) Accident compensations paid.
(b) Bonus payment to employees.
(c) Replacement of defective parts of machine.
(d) Research & development expenses of project abondoned.
(e) Purchase of uniform for employees.
(f) White washing of factory.
(g) Compensations for breach of contract.
(h) Renewal of licence.
(i) 1000 paid for removal of stock to new site.
(j) Inanguration expenses of 25 lakhs incurred on opening new manufacturing
unit in existing business.
(k) Renewal fees for patents.
(l) Custom duty on material.

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Examples of Deferred Revenue Expenditure:(Fictitious assets):

(1) Special Advertisement for launching a new product.
(2) Preliminary Expenses to start a new company.
(3) Discount/ Issue Expenses on shares/Debentures.
(4) Underwriting commission.
(5) Inauguration Expenses of new office/factory.
(6) Research and Development Expenses.
(7) Expenses on preparation of Project Report.
(8) Compensation of 2.5 crores paid to workers who opted for voluntary retirement.
(9) Amount paid to management company for consultancy to reduce working
expenses.

Note: revenue expenditure wrongly recorded as capital expenditure will lead to

overstatement of profit and asset and vice versa.

Receipts

Capital Revenue
(obtained in course of
normal business activity)

Non Recurring in nature Recurring in nature

(Affects long term items (Affects Short term items
in the Balance Sheet) Balance Sheet and & P& L A/c)

Examples of Capital Receipts:

(1) Issue of Shares/Debentures.
(2) Capital brought by proprietor/partner.
(3) Bank Loan Raised.
(4) Sale of Fixed Assets / Investments.
(5) Legacies/Admission fees/ Entrance fees received.
(6) Insurance claim received on account of machinery damaged by fire.
(7) Entrance frees received by social club.
(8) Term loan taken from bank.

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Examples of Revenue Receipts:

(1) Brokerage Received by Broker.
(2) Commission Received by Agent.
(3) Interest/Dividend on Investments.
(4) Collection from debtors.
(5) Bad debts Recovered.
(6) Bill Receivable honoured.
(7) Advance from customers.
(8) Subsidy of 40,000 received from government for working capital by manufacturing
concern.

Capital and Revenue Payments

Payments

Capital Revenue

Non Recurring in nature Recurring in nature

(Affects long term items (Affects Short term items
in the Balance sheet in the Balance Sheet

Examples of capital payments:

(1) Redemption of Shares/Debentures
(2) Capital withdrawn by proprietor/ partner
(3) Bank Loan repaid
(4) Investments made
(5) Deposits placed

Examples of Revenue payments:

(1) Payment to Creditors
(2) Bills payable honoured
(3) Outstanding Expenses of last year paid
(4) Advance to suppliers.

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Treatment of sale of fixed assets:

A. Sale of fixed asset at loss

e.g. Original cost = 10,000
WDV = 4,000
Selling price = 2,500

Interpretation
Capital receipt = 2500
Revenue loss = 1500

B. Sales of fixed asset at profit (sale proceeds < original cost)

e.g. Original cost = 10,000
Selling price = 6,500
WDV = 4,000

Interpretation
Capital receipt = 4,000
Revenue profit = 2,500

C. Sale of fixed asset at profit (Sale proceeds > original cost)

e.g. Selling price = 11,000
Original cost = 10,000
WDV = 4,000

Interpretation
Capital receipt = 4,000
Capital Profit = 1,000
Revenue Profit = 6,000

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Distinguish between

1. Going Concern concept and Cost concept

Going Concern concept Cost concept
This is a fundamental accounting This is not a fundamental accounting
assumption and is assumed to be assumption.
followed is financial statement.
In this concept it is assumed that the According to this concept the value of an
enterprise will continue in operation asset is to be determined on the basis of
for foreseeable future and there is no historical cost (acquisition cost).
intention to close down the business.
This concept affects all items of financial This concept affects fixed assets.
statements, if not followed.

2. Capital and Revenue

Basis Capital Expenditure Revenue Expenditure
Purpose Incurred for acquiring fixed Incurred for day to day operations of
assets to be used in business. business.
Earning Increase. Remains Same.
Capacity
Treatment Is shown in balance sheet. Is shown as a part of Trading and
Profit and Loss A/c.
Nature Non recurring in nature. Recurring in nature.
Examples (i) Cost of fixed assets. (i) Depreciation of fixed
(ii) Installation expenses. Assets.
(ii) Repairs and maintence of
plant and machinery.

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UNIT IV – CONTINGENT ASSETS AND CONTINGENT LIABILITIES

Distinguish Between

Provisions Reserves Contingent Liabilites Contingent assets

1. Profit kept Profit kept Liabilities arising Assets arising from
aside for aside for from past events and past events and whose
known liability. unknown whose existence is existence is confirmed
liability. confirmed by future by future uncertain
uncertain events. events (arises out of
unplanned & uncertain
future events).
2. Amount – Estimate of liability Estimate of asset cannot
cannot be cannot be made be made with reliability.
determined reliably.
with accuracy
but reliably
estimated.
3. Satisfies Shown in Does not satisfy As per prudence not
recognition balance sheet recognition criteria shown in accounts
criteria & (liability) & shown as notes to but shown in report of
shown in Further it is balance sheet (below approving authority
Balance Sheet appropriation balance sheet). such as Directors report.
(liability). out of profits.
Further it is
charge against
profit.
4. Out flow of No outflow of Outflow of economic Possibility of inflow of
economic resources. resource not probable resources (probable) but
resource & if probable cannot not certain.
probable. be estimated.
5. e.g. e.g. retained e.g. Claims in court e.g. Legal cases
depreciation profit cases, guarentees,
RDD, tax bill discounting,
liability uncalled investments,
arrears of preference
dividend.
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UNIT V – ACCOUNTING POLICIES

Accounting Policies
Accounting policy refers to specific accounting principles and method of applying this
principles adopted by an organisation in preparing financial statements.

Areas where different accounting policies may be followed are

(1) Method of Valuation of Investments.
(2) Method of Valuation of Inventories.
(3) Method of Valuation of Goodwill.
(4) Method of Depreciation.
(5) Method of Calculation of Retirement benefit of Employees.

Accounting policies followed in the financial statements change from concern to concern

An accounting policy selected once should be consistently followed. However, change in

accounting policy is permitted in following 3 cases:
(a) Required by law
(b) Required by Accounting Standard
(c) Required for better presentation of accounts.

Selection of an accounting policy depends on following factors:

(a) Prudence
(b) Substance over form
(c) Materiality

 All significant accounting policies followed in financial statements should be

disclosed. But disclosure of accounting policies in financial statements cannot
rectify a wrong treatment of an accounting items.

 Choice of accounting policies affect performance & financial position of

organization. Selection of wrong accounting policies may lead to over or under
statement of performance & financial position.

 If accounting policies are changed effect of such change should be stated &
quantified in financial statement.

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UNIT VI – Accounting as a Measurement Discipline – Valuation Principles, Accounting Estimates

Accounting as a measurement discipline

 Measurment is vital aspect of accounting
 Transactions and events are measured in terms of money
 Measurement deals with three elements viz
1. Indentification of events
2. Selection of standard / scale of measurement
3. Evaluation of dimension of such scale

 In accounting money is a scale of measurement but money as a scale has no universal

denomination, it takes the shape of currency ruling in a country e.g. in india it is ,
in US it is USD. Since rate of exchange fluctuates between two currencies over time,
money as a scale also becomes volatile.

 Further money as a measurement scale is not stable. There occures continuous changes
in input output prices. Same quantity of money may not have ability to buy same
quantity of identical goods at different date. Thus information of one year measured in
money terms may not be comparable with that of another year. (i.e. due to inflation).

 Since accounting measures information in money terms (which is not stable scale in
respect of universal application and with respect to dimension for comparision over
period of time) accounting is not an exact measurement discipline.

Valuation principles
Assets & Liabilities can be valued as per following alternative principles–
1. Historical cost:
(a) Assets are valued at amount paid for it at time of acquisition.
(b) Liabilities are valued at amount received in exchange for such liability / at
amount expected to be paid to satisfy it.

2. Current cost:
(a) Assets are valued at amount that would have to be paid if same / similar asset
was acquired currently.
(b) Liabilities are valued at amount that would be required to settle the liabilities
currently.

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3. Realisable Value:
(a) Assets are valued at amount that would be currently received by selling the
asset.
(b) Liabilities are valued at amount required to settle / pay the liabilities in ordinary
course.

4. Present value :
(a) Assets are valued at discounted value of future net cash inflows expected out
of such asset in normal course of busness.
(b) Liabilities are valued at discounted value of future net cash outflows expected
to settle the liabilities & in normal course of business.

Accounting Estimates
 Management makes various estimates or assumptions with regards to assets,
liabilities, expenses & incomes due to uncertainties inherent in business.

 Such estimates are made in connection with depreciation, amortization, RDD,

outstanding expenses, employee retirement benefits, determining bad debts, useful
life / residual value of fixed assets, Inventory obsolescence.

 Changes in accounting estimate means difference arising between

Parameters estimated earlier &

reestimated in current or Actual results achieved in

year current year

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UNIT VII – ACCOUNTING STANDARDS

What is an accounting standard?

Accounting standard is document issued by ICAI which deals with

Recognisation of events & Its measurement,

& transactions presentation & disclosure
in financial statement

What are objectives / advantages of accounting standard?

1. Eliminates variation in accounting treatment i.e. harmonises accounting treatment.
2. Standardise accounting policies & norms.
3. Above 2 objectives facilitates transparency, consistency, comparability & reliability
of financial statements of different organizations.
4. Standard may require disclosure of certain important information in financial
statements which may not be required as per law.

What are limitation of accounting standards ?

1. Sometimes accounting standard may recommend more that one alternative
accounting treatment. Then choice between two accounting treatment may be
difficult.
2. Accounting standards cannot override statute (law).

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UNIT VIII – INDIAN ACCOUNTING STANDARD (IND AS)

Write a note on Ind AS

1. A need was felt for standard accounting norms world over to facilitate comparability
& transperancy of financial statements of organization of different countries.

2. So International Accounting Standard board (IASB) issued International financial

reporting standard (IFRS) to standardize accounting norms world over.

3. This standardization would help has follows –

à Raise capital from foreign country.
à Facilitate global listing of shares of company & consequently facilitate global
flow of money.
à Facilitate comparability of financial statement of companies in different
countries.
à Boost confidence of global investors.

4. In India, government along with Accounting standard board of ICAI decided to

converge & not adopt IFRS. So Ind AS are IFRS converged standards issued by central
government under supervision & control of accounting standard board (ASB) of ICAI
& in consultation with national advisory committee on accounting standard (NACAS).

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