d

CHAPTER 1: INTRODUCTION TO ACCOUNTING

1. ACCOUNTING
In layman’s language, Accounting means to record business transactions

Layman’s Means to record financial transactions

language
Accounting
Using the rules of “Accounting is the art of recording,
Debit & Credit Classifying and summarizing in a
significant manner and in terms of
Technical money, transactions and events which
language are, in part at least, of a financial
character and interpreting the results
thereof”

ATTRIBUTES OF ACCOUNTING

It is an ART

Interpreting Recording,
the results of Classifying &
operations Summararizing
Attributes of
Accounting

Recording in
Financial
terms of
Character
Money

1. Accounting is an Art - Accounting is classified as an art, as it helps us in

attaining our aim of ascertaining the financial results, that is, operating profit
and financial position through analysis and interpretation of financial data
which requires special knowledge, experience and judgment.

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2. It involves recording, classifying and summarizing - Recording means
systematically writing down the transactions and events in books of account
immediately after their occurrence. Classifying is the process of grouping
transactions or entries of the same type at one place. This is done by opening
accounts in a book called ledger. Summarizing involves the preparation of
reports and statements from the classified data (ledger), understandable and
useful to management and other interested parties. This involves preparation
of final accounts namely profit and loss account and balance sheet.

3. It records transactions in terms of money - All transactions are recorded in

terms of common measure, i.e., money which increases the understanding of
the state of affairs of the business.

4. Recording of those transactions and events which are of financial character - If

an event has no financial character then it will not be capable of being
measured in terms of money; it will not be, therefore, recorded.

5. It helps interpreting the results of operations - to determine the financial

position of the enterprise, the progress it has made and how well it is getting
along.

OBJECTIVES OF ACCOUNTING
• To maintain systematic recording of Transactions- To ensure reliabity and
precision for the accounting measurements, it is necessary to keep a
systematic record of all financial transactions of a business enterprise which
is ensured by book-keeping.
• To ascertain the financial position of the business- Financial position is
identified by preparing a statement of ownership meaning Assets, and owing
meaning Liabilities of the business as on a certain date. This statement is
popularly known as Balance Sheet. This statement may be used by various
stakeholders for taking financing and investment decisions.
• To ascertain the financial performance- Profit/Loss is a core accounting
measurement done and measured by preparing a Profit and Loss Account for
a particular period.
• To communicate information to users for Rational Decision Making- Accounting
provides useful information for decision-making to stakeholders such as
owners, management, creditors and investors and other stake holders.
Various outcomes of business activities such as costs, prices, sales volume,
value under ownership and return on investment are measured in the
accounting process.
• To know the Solvency Position- Balance Sheet and Profit and Loss Account
provide useful information to stockholders regarding potential of the entity
to meet their obligations in the short as well as in the long run.

# Other reasons for accounting:

To Know..
1. the amount receivable from the various persons
2. the amount payable to the various persons
3. the expenses incurred during the year
4. the income earned during the year, etc.

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2. BOOK – KEEPING
As per Carter: “Book-Keeping is a science as well as art of correctly recording in
books of accounts all those business transactions that result in transfer of money or
money’s worth”
Book-keeping is an activity concerned with recording and classifying financial
data related to business operations in order of occurrence.
Book-keeping involves:
1. Collection of basic financial information
2. Identification of events and transactions with financial character, i.e.,
economic transactions
3. Measurement of economic transactions in terms of money
4. Recording of financial effects of economic transactions in order of its
occurrence
5. Classifying effects of economic transactions
6. Preparing organized statement known as Trial Balance

Distinction between Book-Keeping & Accounting

Particulars Book-Keeping Accounting

Meaning Book-keeping is the foundation Accounting is considered as a
of accounting. language of business.

Output Output of book-keeping is an Output of accounting permits

input for accounting. informed judgments and
decisions by the user
(stakeholders) of accounting
information.
Purpose To keep systematic record of To find results of operating
transactions and events of activity of a business & to
financial character in order of report its financial position.
occurrence.
Level Book-keeping is carried out by Accounting is done by the
the junior staff. senior staff who have skills of
analysis & interpretation.

Objective To summarize the cumulative Object of accounting is not

effect of all economic only book-keeping but also
transactions of business for a analyzing and interpreting
given period by maintaining reported financial information
permanent record of each for informed decisions by the
business transaction with its stake-holders or user of
evidence and financial effects financial statement.
on accounting variable.

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3. BASIC ACCOUNTING TERMS

Business
 Set of activities to earn profit (Profit Motive)
 Regularly carried on by a person or Organization
 Business may be: Manufacturing; Trading or Service

Goods/ Services
 These are tangible article or commodities in which a business
deals. These articles or commodities are either bought and sold or
produced and sold.
 The services are intangible in nature and are rendered with or
without the object of earning profits.

Transactions
 It means an event or a business activity which involves exchange
of money or money‘s worth between parties.
 The event can be measured in terms of money and changes the
financial position of an entity.
 Transactions are those activities of a business, which involve
transfer of money or goods or services between two persons or two
accounts.
 Ex- purchase of goods would involve receiving material and
making payment or creating an obligation to pay to the supplier
at a future date

Event
 An event may be described as any incidence that occurs as a
result of something.
 In an accounting sense, an event can be understood as the final
outcome of a business activity that can affect the account balances
of the company if it is financial in nature
 Whenever there is an increase or decrease in the company’s
assets or liabilities, an accounting event takes place.
 Ex- purchase of goods would create Closing Stock.

Profit & Loss Account

 This account shows the revenue earned by the business and the
expenses incurred by it to earn that revenue.
 This is prepared usually for a particular accounting period, which
could be a month, quarter, half a year or a year.
 The net result of the Profit and Loss Account shows profit earned
or loss suffered by the business entity.

Balance Sheet
 It is the statement of the financial position of the business
entity on a particular date.
 It describes what the business owns (assets) and what it owes to
outsiders (liabilities), and to the owners (capital).
 It is important to note that this statement exhibits the state of
affairs of the business as on a particular date only.
 It is prepared after incorporating the resulting Profit/Loss or
Income Statement.

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Asset
• Asset is a resource owned by a business with the purpose of using
it for generating future profits.

Liabilities
• It is an obligation of financial nature to be settled at a future date.
It represents amount of money that the business owes to the other
parties.

Capital
• Amount (in money / money's worth ) Invested by the owner into
the business

Drawing
• Cash / Goods / Assets withdrawn by the owner for his personal
purpose. It decreases the owner's capital.

Debtors
• The sum total or aggregate of the amounts which the customer
owes to the business for the purchase of goods on credit or services
rendered or in respect of other contractual obligations.

Creditors
• A creditor is a person to whom the business owes money or
money‘s worth. For example, money payable to the supplier of
goods or provider of service.

Expenses
• Operating Payments for immediate benefit. For eg. Rent paid for
the benefit of Business.

Losses
• Amount spent but no benefits is derived. For eg. Bad Debt, Stocks
lost due to earthquake, etc.

Incomes
• Any amount received or receivable arising out of the regular
operations (ef. Sales) of the business. For eg. Interest, commission
due or received, etc.

Gain
• Benefit received without any hardwork. Ex- Winning a Lottery.

Purchase
• Buying of goods / raw materials for consideration. Sale for one
person is purchase for another person.

Sales
• Sales refers to Transfer of ownership in goods from one person to
another for consideration.

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 Discount
• Discount is an allowance or concession in price. Discount is given
so that the buyer is induced to place an order and later to make
payment in time.
• Trade Discount- It is the discount usually allowed by the
wholesaler to the retailer computed on the list price or invoice
price. Trade discount is not recorded in the books of accounts. The
transactions are recorded at net values only.
• Cash Discount- It is allowed to encourage prompt payment by the
debtor. It has to be recorded in the books of accounts. It is
calculated after deducting the trade discount.

Inventory
• Inventory is technical term for "stock" (Unsold Goods / Unsued
raw materil ).
• It includes Raw Material stock, work in progress and finished
goods stock.

Net Worth
•It represents the excess of total assets over total liabilities of a
business. Technically, this amount is made available to be
distributed to the owners in the event of closure of the business
after payment of all liabilities.

Revenue Expenditure
Revenue Expenditure is an expenditure which is incurred
(a) To maintain productivity or earning capacity of business.
(b) To carry out operating activity in normal course of
Meaning
business.
The benefits of revenue expenses get exhausted in the year
of the incurrence.
Accounting Debited to Trading / P&L Account

Expenses for replacement of worn out part of machine,

Examples
Repairs of an existing machine.

Capital Expenditure
An expenditure which is incurred —
- To acquire an asset (intended to be used for earning
profits for long period of time) or
Meaning
- To acquire or bring into existence an advantage of
enduring nature, or
- To increase productivity or earning capacity
Accounting Forms part of Balance Sheet
Expenses incurred before the asset is put to use, Repairs of
Examples
a newly purchased old machine, Purchase of new machine.

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4. DOUBLE ENTRY SYSTEM
“Double Entry System is most scientific method of recording transactions”.
Double-entry bookkeeping, also known as double-entry accounting, is a method
of bookkeeping that relies on a two-sided accounting entry to maintain financial
information. Every entry to an account requires a corresponding and opposite
entry to a different account. The double-entry system has two equal and
corresponding sides known as debit (dr.) and credit (cr.).
It was in 1494 that Luca Pacioli, the Italian mathematician, first published his
comprehensive treatise on the principles of Double Entry System. The use of
principles of double entry system made it possible to record not only cash but
also all sorts of mercantile transactions.

FEATURES OF DOUBLE ENTRY SYSTEM

 Every transaction has two-fold aspects, i.e., one party giving the benefit and
the other receiving the benefit.
 Every transaction is divided into two aspects, debit and credit. One account
is to be debited and the other account is to be credited.
 Every debit must have its corresponding and equal credit.

2 A/c: One is
Two Effects receiver of If One A/c is
benefit & Dr. other Dr. = Cr.
(Dr. & Cr. ) other is must be Cr.
giver

ADVANTAGES OF DOUBLE ENTRY SYSTEM

a) Since personal and impersonal accounts are maintained under the double entry
system, both the effects of the transactions are recorded.
b) It ensures arithmetical accuracy of the books of accounts, for every debit, there is
a corresponding and equal credit. This is ascertained by preparing a trial balance
periodically, or at the end of the financial year.
c) It prevents and minimizes error. Frauds & Errors can be detected early and
rectified easily.
d) The balances of receivables and payables are determined easily, since the
personal accounts are maintained.
e) The net operating results can be calculated by preparing the Trading and Profit
and Loss A/c for the year ended and the financial position can be ascertained by
the preparation of the Balance Sheet.
f) The businessman can compare the financial position of the current year with
that of the past years. The businessman can justify the standing of his business
in comparison with the previous year purchase, sales, and stocks, incomes and
expenses with that of the current year figures.
g) Helps in decision-making.
h) It helps the Government to decide sickness of business units and extend help
accordingly.
i) The other stakeholders, like suppliers and banks can take a proper decision
regarding grant of credit or loans.
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 LIMITATIONS OF DOUBLE ENTRY SYSTEM

a) The system does not disclose all the errors committed in the books of accounts.
b) The Trial Balance prepared under this system does not disclose certain types of
errors i.e. compensating error.
c) It is costly as it involves maintenance of numbers of books of accounts.

5. TYPES OF ACCOUNTS (TRADITIONAL APPROACH):

Golden Rules of
TYPES OF ACCOUNTS
Accounting
Ex: Suresh's A/C, Arjun's A/C,
Natural Shruti's A/C
Companies, Bodies Corporate
or Association of Persons or
Artificial Partnerships
Ex: Reliance Industries, Excel DEBIT the
Personal Educational Institute etc. Receiver,
CREDIT the Giver
Ex: Capital A/C (representing
Owner of the business),
Representative Salary Payable A/C
(representing employees to
whom salary is due).
Tangible Assets
(Assets that have physical
existence and can be seen
and touched, like Machinery
A/c, Stock A/c, Cash A/c,
Vehicle A/c, and the like)
Intangible Assets
DEBIT what
(Possession of properties
Real comes in, CREDIT
that have no physical
what goes out.
existence but can be
measured in terms of money
and have value attached to
Impersonal them like Goodwill A/c, Trade
Mark A/c, Patents & Copy
Rights A/c and Intellectual
Property Rights A/c)
These accounts are related
to expenses or losses and
incomes or gains. DEBIT all
Ex: Salary and Wages A/c, expenses &
Nominal Rent and Rates A/c, losses, CREDIT all
Travelling Expenses A/c, Incomes & Gains.
Commission received A/c and
Loss by fire A/c.

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6. ACCOUNTING EQUATION

Assets Liabilities Capital

7. CLASSIFICATION OF ACCOUNTS (MODERN APPROACH)

■ Dr. Balance Dr. ↑ ↓ Cr. ■ Cr. Balance Cr. ↑ ↓ Dr.

 Assets  Liabilities
 Drawing  Capital
 Debtors  Creditors
 Expenses  Incomes
 Losses  Gains

8. ACCOUNTING CYCLE

Transaction/ Event • Transaction or Event of Financial Charater Occurs

• The transactions are recorded in the journal/ subsidiary

Journal
books chronologically.

• All journals entries are posted into ledger

Ledger chronologically in a classified manner.

• After taking all the ledger account closing balances, a

Trial Balance Trial Balance is prepared at the end of the period for the
preparation of financial statements.

• All the adjustment entries are to be recorded properly

Adjustment Entries and adjusted accordingly before Adjustment preparing
financial statements.

Adjusted Trial • An adjusted Trial Balance is prepared basis adjustement

Balance entries.

• All the nominal accounts are to be closed by

Closing Entries transferring them to Trading Account, and Profit and
Loss Account.

• Financial statements can now be easily prepared which

Final Accounts will exhibit the true financial position and operating
results of the entity.

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9. JOURNAL
Journal Is the Book of Prime Entry or Book of Original Entry. Here transactions
are recorded in their chronological order. Process of recording transaction in a
journal is called ‘Journalization’. Entry made in this book is called ‘journal entry’

Advantages of Journal
(a) Chronological Record: It records transactions as and when it happens. So it is
possible to get detailed day-to- day information.
(b) Minimizing the possibility of errors: The nature of transaction and its effect on
the financial position of the business is determined by recording and analyzing
into both debit and credit aspects.
(c) Narration: It means explanation of the recorded transactions.
(d) Helps to finalize the accounts: Journal is the basis of ledger posting and the
ultimate Trial Balance.

Specimen of a Journal Book

Journal Entries in the Books of xxx
Voucher
Date Particulars Ledger folio Debit (₹) Credit (₹)
Number
dd- Name of A/c to be - Reference of - -
mm- debited page number
yy Name of A/c to be of the A/c in
credited ledger

(narration
describing the
transaction)

(a) Date Column: This column contains the date of the transaction.
(b) Particulars: This column contains which account is to be debited and which
account is to be credited. It is also supported by an explanation called
narration.
(c) Voucher Number: This column contains the number written on the voucher of
the respective transaction.
(d) Ledger Folio (L.F.): This column contains the folio (i.e., page no.) of the ledger,
where the transaction is posted.
(e) Dr. Amount and Cr. Amount: This column shows the financial value of each
transaction. The amount is recorded in both the columns, since for every debit
there is a corresponding and equal credit.

Sub-division of Journals

Journal

General Special

Cash Return Retrun Bils Bills

Purchase Sales day
day book Book
Inward Outward Receibale Payable
Book Book Book Book Book

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(i) General Journal
(a) This book contains chronological record of transactions.
(b) This book records those transactions which occur so infrequently that
they do not warrant the setting up of special journals.
Examples of such entries: (i) opening entries (ii) closing entries (iii)
rectification of errors.

The form of this general journal, is as under:

JOURNAL
Voucher
Date Particulars Ledger folio Debit (₹) Credit (₹)
Number

(ii) Special Journal

It is sub-divided into Cash Book, Purchase Day Book, Sales Day Book, Returns
Inward Book, Returns Outward Book, Bills Receivable Book and Bills Payable Book.
These books are called subsidiary books.

10. SUBSIDIARY BOOKS

Subsidiary books are books for specific transactions of similar nature. These
books are also known as special journals or day books. To overcome shortcoming
of the use of the journal only as a book of original entry, the journal is sub-
divided into specific journals or subsidiary books.

The sub-division of journal is done as follows:

Transaction Subsidiary Book

All cash and bank transactions Cash Book has columns
for cash, bank & cash
discount
All credit purchase of goods — only those goods Purchase Day Book or
that are purchased for resale are covered here Purchase Register
Sales Day Book or Sales
All credit sale of goods
Register
All purchase returns — i.e., return of goods back Purchase Return Book or
to suppliers due to defects Return Outward Book
All sales returns — i.e., return of goods back Sales Return Book or
from Customers Return Inward Book
All bill receivables — these are bills accepted by Bills Receivable Book
Customers to be honored at an agreed date

All bills payable - these are bills accepted by Bills Payable Book
the business to be honored by paying to
suppliers at an agreed date
For all other transactions not covered in any of Journal Proper
the above categories — i.e., purchase or sale of
assets, expense accruals, rectification entries,
adjusting entries, opening entries & closing
entries

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CASH BOOK
• Is a special journal, used for recording all cash receipts & cash payments.
• It is a book of original entry since transactions are recorded for the first time
from the source documents.
• The Cash Book is also ledger since it records cash receipts on the debit side &
cash payments on the credit side.
• Thus, the Cash Book is both a journal and a ledger.

Types of Cash Book

Cash Book

Single Double Triple Multi

Petty Cash
column Cash column Cash column Cash column Cash
Book
Book Book Book Book

(a) Single Column Cash Book- Single Column Cash book has one amount column
on each side. All cash receipts are recorded on the debit side and all cash
payments on the payment side; this book is nothing but a Cash Account and
there is no need to open separate cash account in the ledger.

Dr. Specimen of Single Column Cash Book Cr.

Receipts Payments
Date Particulars L.F. Cash Date Particulars L.F. Cash

(b) Double Column Cash Book- The Double Column Cash Book has two amounts
columns on each side as under:
(i) Cash and discount columns
(ii) Cash and bank columns
(iii) Bank and discount columns

Dr. Specimen of Double Column Cash Book Cr.

Receipts Payments
Disc. Disc.
Date Particulars L.F. Cash Date Particulars L.F. Cash
Allowed Received

(c) Triple Column Cash Book- Triple Column Cash Book has three amount columns,
one for cash, one for bank and one for discount on each side. All cash receipts,
deposits into book and discounts allowed are recorded on the debit side and all
cash payments, withdrawals from bank and discounts received are recorded on
the credit side. In fact, a triple-column cash book serves the purpose of both
Cash Account and Bank Account. Thus, there is no need to create these two
accounts in the ledger.

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 Dr. Specimen of Triple Column Cash Book Cr.
Receipts Payments

Disc. Disc.
Date Particulars L.F. Cash Bank Date Particulars L.F. Cash Bank
Allowed Received

(d) The multi-column cash book has multiple columns on both sides of the cash
book.
(e) Petty cash book

PURCHASE DAY BOOK

The purchase day book records the transactions related to credit purchase of goods
only. Any cash purchase or purchase of things other than goods is not recorded
in the purchase day book.
Periodically, the totals of purchase day book are posted to purchase account in the
ledger.

A specimen of purchase day book is given below:

In the Books of……………Purchase Day Book

Name of the Suppliers
Invoice Amount
Date and Details of Goods L.F. Remarks
Reference (Rs.)
purchased

The format for Purchase Return Book is the same; hence separate illustration is
not given.

SALES DAY BOOK

The sales day book records transactions of credit sale of goods to customers. Sale
of other things, even on credit, will not be entered in the sales day book, but is
entered in Journal. If goods are sold for cash, it is entered in the cash book.
Total of sales day book is periodically posted to the sales account in the ledger.

A specimen of a sales day book is given below:

In the Books of Sales Day Book

Particulars Invoice Amount

Date L.F. Remarks
reference (Rs.)

The format of sales return book is exactly the same; hence a separate illustration
is not given.

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OTHER SUBSIDIARY BOOKS
1. Return Inward Book- The transactions relating to goods which are returned by
the customers for various reasons (e.g. goods are not according to sample, or
not up to the mark) are recorded in return inward book. It is also known as
Sales Return Book. Generally, when a customer returns goods to suppliers, he
issues a Debit Note for the value of the goods returned by him. Similarly, the
supplier who receives those goods issues a Credit Note.
Returns Inward Day Book

Outward
Date Particulars L.F. Details Totals Remarks
Invoice

2. Return Outward Book- This book records the transactions relating to goods that
are returned by us to our creditors, e.g., goods broken in transit, or not matching
with the sample, etc. It is also known as Purchase Return Book.

Return Outward Day Book

Debit
Date Particulars L.F. Details Totals Remarks
Note

3. Bills Receivable Book- It is a book where all bills received are recorded and from
there posted directly to the credit of the respective customer’s account. The
total amounts of the bills so received during a period is to be posted in one
sum to the debit of Bills Receivable A/c.

Bills Receivable Day Book

Date of Name Name How

No. of From Name of Date Due Amt
Receipt of the of L.F. disposed
Bills whom Acceptor of Bill Date of Bill
of Bill Receiver Drawer off

4. Bills Payable Book - Here all the particulars relating to bills accepted are recorded
& therefrom posted directly to the debit of the respective creditors account.
Total amounts of the bills so accepted during the period (either at the end of
the week or month) is posted in one sum to the credit of Bills Payable a/c.

Bills Payable Day Book

Amount
To Name of Bill
No. of Date of Name of Name of Date Due
whom of L.F. How
Bills Acceptance Drawer Payable of Bill Date
given Payee disposed
off

JOURNAL PROPER
Credit transactions that cannot be entered in any other subsidiary book are
entered in journal proper. It will cover purchase or sale of assets, expense
accruals, rectification entries, adjusting entries, opening entries and closing
entries. The format of journal proper is same as the Journal.

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11. LEDGER ACCOUNTS

The book which contains accounts is known as the ledger. Since finding
information pertaining to the financial position of a business emerges only from
the accounts, the ledger is also called the Principal Book. As a result, all the
necessary information relating to any account is available from the ledger.
This is the most important book of the business and hence is rightly called the
“King of All Books”.

Dr. Specimen of Ledger Account Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)

LEDGER POSTING
As and when the transaction takes place, it is recorded in the journal in the
form of journal entry. This entry is posted again in the respective ledger
accounts under double entry principle from the journal. This is called ledger
posting.

SUB-DIVISION OF LEDGER

Ledger

Personal Ledger Impersonal Ledger

Debtors Ledger Creditors Ledger Cash Bank General Ledger

Nominal Ledger Private Ledger

1. Personal Ledger: Details of all transactions about persons who are related to the
accounting unit are recorded. Again, Personal Ledger may be divided into:
i) Debtors’ Ledger: Details of transactions about the persons to whom goods are
sold, cash is received, etc., are recorded.
ii) Creditors’ Ledger: Details of transactions about the persons from whom
goods are purchased on credit, cash paid to them, etc., are recorded.
2. Impersonal Ledger: Details of all transactions about assets, income & expenses,
etc., are recorded. Impersonal Ledger may, again be divided into:
i) Cash Book: All cash & bank transactions are recorded
ii) General Ledger: All transactions relating to real accounts, nominal accounts
are recorded. General Ledger is further divided into Nominal Ledger (Incomes &
Expenses) and Private Ledger (Assets & Liabilities).

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Example: Journalise the following transactions in the books of Accounts
1. Akshay Kumar commenced business with Cash Rs. 95,000; Furniture Rs. 5,000;
Machinery Rs. 80,000. Of the Cash Rs. 8,000 was borrowed from sumit
personally by owner.
First Step Second Step Third Step
Amount
(Identification of A/C) (Classification) (Apply the RULE)
Cash A/C Dr. Balance Inc Dr., Dec Cr. Dr. 95,000
Furniture A/C Dr. Balance Inc Dr., Dec Cr. Dr. 5,000
Machinery A/C Dr. Balance Inc Dr., Dec Cr. Dr. 80,000
Capital A/C Cr. Balance Inc Cr., Dec Dr. Cr. 1,80,000

2. Purchased Machinery from kent & Co, for Rs. 18,000 & paid Rs. 800 as freight
on our account. LE)
First Step Second Step Third Step
Amount
(Identification of A/C) (Classification) (Apply the RULE)
Machinery A/c Dr. Balance Inc Dr., Dec Cr. Dr. 18,800
Kent & Co. A/c Cr. Balance Inc Cr., Dec Dr. Cr. 18,000
Cash A/c Dr. Balance Inc Dr., Dec Cr. Cr. 800

3. Paid Wages on Erection of Machinery Rs. 2,000.

First Step Second Step Third Step
Amount
(Identification of A/C) (Classification) (Apply the RULE)
Machinery A/c Dr. Balance Inc. Dr., Dec. Cr. Dr. 2,000
Cash A/c Dr. Balance Inc. Dr., Dec. Cr. Cr. 2000

4. Received an order from M/s Pushpalata for goods Rs. 8,000.

First Step
Second Step Third Step
(Identification
(Classification) (Apply the RULE)
of A/C)
No entry will be recorded for this event

5. Cash of Rs. 200 was stolen by the cashier who is absconding.

First Step Second Step Third Step
Amount
(Identification of A/C) (Classification) (Apply the RULE)
Loss by theft A/c Dr. Balance Inc. Dr., Dec. Cr. Dr. 200
Cash A/c Dr. Balance Inc. Dr., Dec. Cr. Cr. 200

6. Executed pushpalata’s order & paid transport charges on her account Rs. 100.
First Step Second Step Third Step
Amount
(Identification of A/C) (Classification) (Apply the RULE)
Pushpalata A/c Dr. Balance Inc. Dr., Dec. Cr. Dr. 8,100
Sales A/c Cr. Balance Inc. Cr., Dec. Dr. Cr. 8,000
Cash A/c Dr. Balance Inc. Dr., Dec. Cr. Cr. 100

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12. CLOSING BALANCE AND OPENING BALANCE

“Balance of the nominal accounts” is

The debit or credit balance that we
closed by transferring to trading
get at end of the accounting period
account, & profit & loss account
is known as closing balance of that
which shows the net operating
account.
results — net profit or net loss.

“Balance of personal accounts & real

accounts” representing assets,
These balances are transferred as
liabilities, owner’s equity are
opening balance in the succeeding
reflected in Balance Sheet, which
accounting period.
shows financial position of a
business on a particular date.

Some terms used:

 Casting — totaling
 Balancing — to find the difference between debit side total and credit side total
of an account.
C/d -Carried down B/d -Brought down
C/o - Carried over B/o - Brought over
C/f - Carried forward B/f - Brought forward

13. TRIAL BALANCE

Trial Balance is a statement or a list of all ledger account balances taken from
various ledger books on a particular date to check the arithmetical accuracy.

Preparation of Trial Balance

The accounts containing

The ledger accounts are
debit-balance are The sum total of both
balanced first. They will
written on the debit the balances must be
have either “debit-
column, and those with equal for “Every debit
balance” or “credit
credit-balance are has its corresponding
balance” or “nil-
written on the credit and equal credit”.
balance”
column.

Method of Preparation

Total Method or Balance Method or

Compound Method
Gross Trial Balance. Net Trial Balance.

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 Features of a Trial Balance Purpose of a Trial Balance
 list of debit and credit balances • To check the arithmetical
 does not prove arithmetical accuracy of recorded
accuracy transactions
 is not an account. It is only a • To ascertain the balance of any
statement ledger account
 not a part of the final • To serve as evidence of the fact
statements that the double entry has been
 Usually prepared at the end of completed
the accounting year but if it can • To facilitate the preparation of
also be prepared any time final accounts
 Link between the Books of
Accounts, Profit & Loss Account
and Balance sheet

• It forms the basis for the preparation of financial

Trial Balance – statements,
Utility and • ensures the arithmetical accuracy of the entries made
Interpretation • can easily find out the balance in any ledger account
without actually referring to the ledger
• can do a quick time analysis. Hence, listing is usually
done in the sequence of Asset accounts, Liability
accounts, Capital accounts, Owner’s equity accounts,
Income or gain accounts and Expenses or Losses
accounts in that order

14. FINAL ACCOUNTS

To meet out this

purpose, Trading
The primary Accounts, Income
function of statement and
The components of
accounting includes Balance sheet are
final accounts
computing the net prepared. These
depend upon the
result of operations documents are
type of entity.
of the business for popularly called as
the current period. Final Accounts. It is
the last phase of
Accounting Process.

It is mainly divided into following two parts:

1. Income Statement: It is prepared to find out the net result of the operations. It
is sub-divided into two parts:
a) Trading Account
b) Profit and Loss Account
2. Position Statement: It includes Balance Sheet showing the status of assets and
liabilities as at a particular point of time.

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 Profit & Loss
Trading Account Balance Sheet
Account

A trading
This account is
account shows
prepared to The balance
the results of
ascertain the statement
the buying and
net profit/loss demonstrates the
selling of goods.
and expenses of financial position
a business of a business on a
during an specific date.
accounting year.

This sheet is
prepared to
demonstrate the
difference
between the
selling price and
It records the The financial
the cost price.
indirect position of a
expenses of a business is found
business firm, by tabulating its
like rent, assets and
salaries, and liabilities on a
It show the advertising particular date.
trading results expenses.
of the business,
example- gross
profit earned or
gross loss
sustained by the
business.
Profit and loss
The excess of assets
a/c includes
over liabilities
expenses and
represents the
losses as well as
capital sunk into
income and
the business and
gains, which
reflects the
It records the have occurred in
financial soundness
direct expenses business other
of a company. Now
of a business than the
it is known as the
firm production of
statement of
goods and
financial position of
services.
the company.

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15. DIFFERENT FORMS OF ORGANIZATION
Sole  A sole proprietorship is owned by one person and
proprietorship operates for their benefit.
 All assets of the business belong to the sole proprietor,
including, a computer infrastructure, any inventory,
manufacturing equipment, or retail fixtures, as well as
any real property.
Partnership  A partnership is a business owned by two or more people.
 In most forms of partnerships, each partner has
unlimited liability for the debts incurred by the business.
 The three most prevalent types of for-profit
partnerships are general partnerships, limited
partnerships, and limited liability partnerships.
Corporation  The owners of a corporation have limited liability and the
business has a separate legal personality from its
owners.
 Corporations can be either government-owned or
privately owned, and they can organize either for profit
or as nonprofit organizations.
Co-operative  Often referred to as a “co-op”, a co-operative is a
limited-liability business that can organize as for-profit or
not-for-profit.
 A cooperative differs from a corporation in that it has
members, not shareholders, and they share decision-
making authority.
Franchise A franchise is a system in which entrepreneurs purchase
the rights to open and run a business from a larger
corporation.
Company limited The members guarantee the payment of certain (usually
by Guarantee nominal) amounts if the company goes into insolvent
liquidation, but otherwise, they have no economic rights in
relation to the company. A company limited by guarantee
may be with or without having share capital.
Company limited A limited company is a “company in which the liability of
by Shares each shareholder is limited to the amount individually
invested” with corporations being “the most common
example of a limited company.”
Company limited A hybrid entity, usually used where the company is formed
by guarantee with for non-commercial purposes, but the activities of the
a share capital company are partly funded by investors who expect a
return.
Unlimited A hybrid entity, a company where the liability of members
company with or or shareholders for the debts (if any) of the company are
without a share not limited. In this case, the doctrine of a veil of
capital incorporation does not apply.

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16. ACCOUNTING CONCEPT
Accounting concepts are the generally accepted rules and assumptions that assist
accountants in preparing financial statements. In layman’s terms, they are the
fundamental building blocks of the transactions of the business.

Recognize revenues and expenses that have been

Accruals earned or consumed, respectively, even if the related
cash amounts have not yet been received or paid out.

Revenue is only recognized when there is a reasonable

certainty that it will be realized, whereas expenses are
Conservatism recognized when there is a reasonable possibility that
they will be incurred.

Once a business chooses to use a specific accounting

method, it should continue using it on a go-forward
Consistency basis. By doing so, financial statements prepared in
multiple periods can be reliably compared.

The transactions of a business are to be kept separate

Economic from those of its owners. By doing so, there is no
Entity intermingling of personal and business transactions in
a company’s financial statements
Accounting Concepts

Financial statements are prepared on the assumption

that the business will remain in operation in future
Going
periods. Under this assumption, revenue and expense
Concern recognition may be deferred to a future period, when
the company is still operating. period.

The expenses related to revenue should be recognized

Matching in the same period in which the revenue was
recognized.

The concept of money measurement associates to

such transactions of a business, which can be recorded
Money in terms of money in the books of accounts. The
Measurement records are to be kept in monetary units alone and not
in physical. All the assets are consequently shown in
monetary terms for accounting purposes.

Accounting period is the timeframe at the end of

Accounting which, the financial statements of a business are
Period prepared, to evaluate its profits and losses, and to
learn the status of its assets and liabilities.

All the assets must be recorded in the books of

Historical accounts at the price at which they were bought,
Cost which involves the cost incurred for transportation,
installation and acquisition.

Determines whether the omission or misstatement

of information in a financial report would impact a
reasonable user's decision-making. If information is
Materiality
significant, it is material. If the information is
insignificant or irrelevant, it is said to be
immaterial.

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17. SINGLE ENTRY SYSTEM
 Single-entry bookkeeping, also known as, single-entry accounting, is a
method of bookkeeping that relies on a one-sided accounting entry to
maintain financial information.
 In case of double entry system of book-keeping both the aspects of every
transaction are recorded. In this system, the first entry is made to the debit
of an account, and the second entry to the credit of second account. However,
in case of single entry system, the business houses for their convenience and
more practical approach ignore the strict rules of double entry system.
 The users of this system maintain only the essential records. In other words,
it is a system which may not keep some books of subsidiary records, and some
ledger accounts too which otherwise are kept in case of double entry system.
 According to a Dictionary of Accountancy by Kohler, “A system of book-keeping
in which as a rule only records of cash and of personal accounts are maintained,
it is always incomplete double entry varying with the circumstances.
 ”Thus, under the so-called single entry system both the aspects of business
transactions and events are not recorded. Under the single entry system
usually a cash book and personal accounts are maintained.

18. ADDITIONAL BASIC TERMS RELATED TO ACCOUNTING

A. Types of Assets

Classification of Assets

Tangible Assets & Intangible Assets Current Assets & Non Current Assets

Tangible Asset- Non Current Asset-

Current Assets-
Capital assets which have Other than Current Assets,
An asset can be
some physical existence. all other assets are
classified as Current if it
These can be seen, touched classified as Non-Current
satisfies any of the
and felt, e.g., plant and Assets, e.g., Machinery held
following:
machinery, furniture, land for Long-term, etc.
and buildings, computers
and vehicles.
It is expected to be realized in, or is intended
for sale or consumption in the company‘s
normal Operating cycle;
Intangible Asset-
Capital assets which have
no physical existence and It is held primarily for the purpose of being
whose value is limited by traded;
the rights that possession
confers upon the owner.
These cannot be seen or felt
It is due to be realized within 12 months after
although these help to
the Reporting Date; or
generate revenue in future,
e.g., goodwill, patents,
trade-marks, copyrights,
brand equity, designs and It is Cash or Cash Equivalent unless it is
intellectual property, etc. restricted from being exchanged or used to
settle a liability for at least 12 months after
the Reporting Date.

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Other Types of Assets:

1. Fictitious Assets: Fictitious assets are not assets at all since they are not
represented by any tangible possession. They appear on the asset side simply
because of a debit balance in a particular account not yet written off, e.g.,
provision for discount to creditors, discount on issue of shares, etc.

2. Wasting Assets: Such assets as mines, quarries, etc., that become exhausted or
reduce in value by their workings are called wasting assets.

B. TYPES OF LIABILITIES

Classification of Liabilities

Current & Non Current Liabilities Contingent Liabilities

Non Current It represents a potential

Current Liabilities- obligation that could be
Liabilities- created depending on the
Other than Current outcome of an event.
A liability is Liabilities, all other
classified as For example, if a supplier of a
liabilities shall be business files a legal suit, it
current when it classified as Non
satisfies any of will not be treated as a
Current Liabilities. liability because no obligation
the following: For example loan is created immediately. If the
taken for 5 years, verdict of the case is given in
Debentures issued favour of the supplier then
only the obligation is created.
Till that time it is treated as a
contingent liability.

Please note that contingent

It is expected to be settled in the liability is not recorded in
company‘s normal Operating Cycle; books of account, but disclosed
through a note in the financial
statements.

It is held primarily for the purpose of being

traded;

It is due to be settled within 12 months

after the Reporting Date; or

The company does not have an

unconditional right to defer settlement of
the liability for at least 12 months after the
reporting date

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C. Types of Investment
1. Current Investments: Current investments are investments that are by their
nature readily realizable and are intended to be held for not more than one
year from the date on which such investment is made. 11-months
Commercial Paper is an example of current investment.

2. Non-Current Investments: Non-Current Investments are investments which

are held beyond the current period for sale or disposal, like a Fixed Deposit
for 5 years.

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