Page |1

COMPUTERISED ACCOUNTING SYSTEM (SEC 2.1)

Comprehensive Course Notes

UNIT 1: INTRODUCTION TO ACCOUNTING

1.1 Accounting Fundamentals

• Definition: Accounting is the systematic process of identifying, recording, measuring,

classifying, verifying, summarizing, interpreting, and communicating financial information. It
reveals profit or loss for a given period and the value and nature of assets, liabilities, and
owners' equity.

• Importance:

o Provides essential financial data for management decision-making

o Facilitates comparison of current performance with previous periods

o Creates a permanent record of business activities

o Enables stakeholders to evaluate business health and prospects

o Serves as evidence in legal matters and disputes

• Need:

o Businesses cannot rely on memory to track numerous financial transactions

o Regulatory bodies require standardized financial reporting

o Investors demand transparent financial information

o Management needs accurate data for operational and strategic decisions

o Tax authorities require systematic financial records

1.2 Objectives of Accounting

• Systematic Record Maintenance: Creating a methodical and chronological record of

financial transactions using specialized techniques and established principles

• Profit/Loss Determination: Calculating the net result of operations during specific periods
through income statements

• Financial Position Assessment: Preparing the balance sheet to show the true financial state
of the business on particular dates

• Information Provision: Supplying quantitative financial information to various stakeholders

for rational decision-making

• Control: Implementing systems to protect business assets and ensure operational efficiency

• Legal Compliance: Meeting statutory requirements related to business operations and

taxation

COMPILED BY CA. GYATI GUPTA

 Page |2

• Performance Evaluation: Facilitating the assessment of management efficiency through

financial metrics

1.3 Relevance to Various Entities

• Business Establishments:

o Sole Proprietorships: Maintains records for tax compliance, loan applications, and
business evaluation

o Partnerships: Helps track partner contributions and profit distribution

o Corporations: Facilitates shareholder reporting, regulatory compliance, and

management accountability

o SMEs: Provides essential information for growth decisions and financing applications

• Other Organizations:

o Non-profits: Demonstrates stewardship of donations and grants

o Government Agencies: Ensures accountability for public funds

o Educational Institutions: Helps manage budgets and endowments

o Healthcare Organizations: Assists in cost control and service pricing

• Individuals:

o Personal Budget Management: Tracking income and expenses

o Tax Planning and Compliance: Organizing financial information for tax returns

o Investment Decision-making: Evaluating financial position for investment choices

o Retirement Planning: Projecting future financial needs

o Estate Planning: Organizing assets for inheritance purposes

1.4 Accounting Information

• Meaning: Processed financial data presented in a structured format that provides insights
into an entity's economic activities, performance, and position.

• Users:

o Internal Users:

▪ Management: For planning, controlling, and decision-making

▪ Employees: For job security assessment and wage negotiations

▪ Owners: For evaluating returns on investment

o External Users:

▪ Investors: For assessing investment potential and risks

▪ Creditors: For determining creditworthiness

COMPILED BY CA. GYATI GUPTA

 Page |3

▪ Government: For tax collection and regulatory oversight

▪ Customers: For assessing entity stability and reliability

▪ Researchers: For economic and industry analysis

▪ Competitors: For benchmarking performance

• Utilities:

o Planning: Setting financial targets and budgets

o Decision-making: Choosing between alternative courses of action

o Control: Monitoring actual performance against plans

o Performance Evaluation: Assessing efficiency and effectiveness

o Resource Allocation: Determining optimal use of limited resources

o Compliance: Meeting regulatory and contractual requirements

o Communication: Conveying financial status to stakeholders

1.5 Sources of Accounting Information

• Primary Sources:

o Sales Invoices: Document details of goods/services sold

o Purchase Orders and Invoices: Record acquisition of goods/services

o Receipts: Acknowledge received payments

o Payment Vouchers: Document outgoing payments

o Bank Statements: Show cash movements and balances

o Payroll Records: Document employee compensation

o Contracts and Agreements: Establish terms of business relationships

o Asset Purchase Documents: Record acquisition of capital items

• Secondary Sources:

o Journal Entries: Initial recording of transactions

o Ledger Accounts: Categorized record of transactions

o Trial Balance: Summary of ledger account balances

o Financial Statements: Structured presentation of financial information

• External Sources:

o Industry Reports: Provide benchmarking data

o Economic Indicators: Influence business context

o Market Research: Informs business strategy

COMPILED BY CA. GYATI GUPTA

 Page |4

o Competitor Information: Provides comparative context

1.6 Basic Accounting Terms

Business Transaction Components

• Transaction: Any event involving the exchange of value that can be measured in monetary
terms and affects the financial position of an entity (e.g., purchasing inventory, selling goods,
paying salaries).

• Account: A systematic record that tracks increases and decreases in a specific asset, liability,
equity, revenue, or expense. Represented as a T-account with debit entries on the left and
credit entries on the right.

• Asset: Resources owned or controlled by the business that will provide future economic
benefits (e.g., cash, inventory, equipment, buildings, patents, accounts receivable).

o Current Assets: Convertible to cash or consumable within one operating cycle

(usually a year)

o Non-current Assets: Benefits extending beyond one year (fixed assets, intangible
assets, long-term investments)

• Liability: Present obligations arising from past events, settlement of which is expected to
result in an outflow of resources (e.g., loans, accounts payable, accrued expenses).

o Current Liabilities: Due within one operating cycle

o Non-current Liabilities: Due beyond one year

• Capital/Equity: Residual interest in the assets after deducting liabilities (owner's capital,
retained earnings, reserves).

o Owner's Capital: Direct investment by proprietor/partners

o Share Capital: Funds raised through share issuance

o Retained Earnings: Accumulated profits not distributed to owners

Financial Performance Terms

• Expenditure: Outflow of money or incurrence of liability for acquisition of goods, services, or

assets.

o Revenue Expenditure: Benefits consumed within the accounting period (e.g., rent,
salaries)

o Capital Expenditure: Benefits extending beyond the current accounting period (e.g.,
machinery purchase)

• Expense: Costs incurred in the ordinary course of business to generate revenue within the
accounting period (e.g., rent, utilities, salaries, depreciation).

• Income: Inflow of money, receivables, or other consideration arising from business activities.

• Revenue: Income generated from the primary activities of the business (e.g., sales of
goods/services).

COMPILED BY CA. GYATI GUPTA

 Page |5

• Gain: Increase in net assets from peripheral or incidental transactions (e.g., profit on sale of
fixed assets, foreign exchange gains).

• Profit: Excess of total revenues and gains over total expenses and losses for a period.

o Gross Profit: Sales revenue minus cost of goods sold

o Operating Profit: Gross profit minus operating expenses

o Net Profit: Operating profit plus other income minus other expenses and taxes

• Surplus: In non-profit contexts, excess of income over expenditure.

• Loss: Excess of expenses over revenue in a period.

• Deficit: In non-profit contexts, excess of expenditure over income.

Recording Mechanism Terms

• Debit: Entry on the left side of an account, representing increases in assets and expenses or
decreases in liabilities, equity, and revenues.

• Credit: Entry on the right side of an account, representing increases in liabilities, equity, and
revenues or decreases in assets and expenses.

• Double Entry: Accounting system where each transaction affects at least two accounts, with
total debits equal to total credits.

• Journal: Chronological record of transactions before posting to ledger accounts.

• Ledger: Collection of all accounts used by a business.

• Trial Balance: List of all general ledger accounts with their debit or credit balances to verify
arithmetic accuracy.

Timeframe Terms

• Accounting Year/Period: Specific timeframe (usually 12 months) for which financial

statements are prepared.

• Financial Year: Official 12-month period used for external reporting and tax purposes (varies
by country and organization).

• Fiscal Year: Government's financial year.

Guiding Concepts

• Financial Accounting Principles: Fundamental concepts and guidelines that govern the
preparation and presentation of financial statements.

o Going Concern: Assumption that the entity will continue operating indefinitely

o Consistency: Using the same accounting methods across periods

o Accrual Basis: Recording revenues when earned and expenses when incurred,
regardless of cash flow timing

COMPILED BY CA. GYATI GUPTA

 Page |6

o Prudence/Conservatism: Not overstating assets/income or understating

liabilities/expenses

o Materiality: Information is material if its omission or misstatement could influence

users' decisions

o Substance Over Form: Transactions recorded based on economic reality, not just
legal form

COMPILED BY CA. GYATI GUPTA

 Page |7

UNIT 2: RECORDING OF BUSINESS TRANSACTIONS AND PREPARATION OF FINANCIAL STATEMENTS

2.1 Features of Recordable Transactions and Events

• Financial Impact: Must cause a measurable change in the financial position of the entity

o Example: Purchase of equipment affects cash/liability and assets

o Non-example: Hiring an employee (until compensation is involved)

• Monetary Measurability: Must be expressible in monetary terms

o Example: Acquisition of inventory for $10,000

o Non-example: Employee morale improvement (not directly measurable)

• Verifiability: Must be supported by objective evidence

o Example: Sales transaction documented by invoice

o Challenge: Estimations like depreciation requiring documentation of methodology

• Business Relatedness: Must pertain to the business entity, not to owners' personal affairs

o Example: Business utility expenses

o Non-example: Owner's personal grocery purchases

• Completed Event: Must have occurred, not just been planned

o Example: Goods delivered to customer

o Non-example: Planned future expansion

• Exchange of Value: Typically involves giving or receiving something of value

o Example: Service delivery in exchange for payment

o Exception: Some non-reciprocal events like donations received

2.2 Types of Accounts

• Personal Accounts: Relating to persons, organizations, or representative entities

o Natural Persons: Individuals with whom the business has financial dealings

▪ Examples: Customer accounts, employee accounts, proprietor's drawings

account

▪ Accounting treatment: "Debit the receiver, Credit the giver"

o Artificial Persons: Legal entities separate from their owners

▪ Examples: Corporate customer accounts, bank accounts, supplier company

accounts

▪ Accounting treatment: Same as natural persons

o Representative Persons: Accounts representing future obligations or benefits

COMPILED BY CA. GYATI GUPTA

 Page |8

▪ Examples: Prepaid expenses, outstanding expenses, accrued income, income

received in advance

▪ Accounting treatment: Represent individuals/entities who will receive/give

value in future

• Real Accounts: Relating to properties and assets owned by the business

o Tangible Real Accounts: Physical assets that can be seen and touched

▪ Examples: Building, machinery, inventory, cash

▪ Accounting treatment: "Debit what comes in, Credit what goes out"

o Intangible Real Accounts: Non-physical assets with economic value

▪ Examples: Goodwill, patents, trademarks, copyrights, software

▪ Accounting treatment: Same as tangible real accounts

• Nominal Accounts: Relating to income, expenses, gains, and losses

o Income/Revenue Accounts: Accounts representing earnings

▪ Examples: Sales, commission received, rent received, interest earned

▪ Accounting treatment: "Debit expenses and losses, Credit incomes and

gains"

o Expense Accounts: Accounts representing costs incurred

▪ Examples: Rent expense, salary expense, depreciation, insurance

▪ Accounting treatment: Opposite of income accounts

o Gain/Loss Accounts: Accounts for non-operating activities

▪ Examples: Profit on sale of assets, loss by fire, foreign exchange gain/loss

▪ Accounting treatment: Same principle as income/expense accounts

2.3 Rules for Debit and Credit

• Golden Rules of Accounting:

1. Personal Accounts: "Debit the receiver, Credit the giver"

▪ Example: When goods are sold on credit to Smith, Smith's account is debited
(receiver of goods)

▪ Example: When payment is received from Smith, Smith's account is credited

(giver of money)

2. Real Accounts: "Debit what comes in, Credit what goes out"

▪ Example: When machinery is purchased, Machinery account is debited

(asset coming in)

COMPILED BY CA. GYATI GUPTA

 Page |9

▪ Example: When inventory is sold, Inventory account is credited (asset going

out)

3. Nominal Accounts: "Debit expenses and losses, Credit incomes and gains"

▪ Example: When salary is paid, Salary Expense account is debited

▪ Example: When commission is earned, Commission Income account is

credited

• Modern Approach to Debit/Credit Rules:

o Accounts that increase with a debit:

▪ Asset accounts

▪ Expense accounts

▪ Drawings accounts

▪ Losses

o Accounts that increase with a credit:

▪ Liability accounts

▪ Equity/Capital accounts

▪ Revenue/Income accounts

▪ Gains

2.4 Double Entry Bookkeeping System

• Core Principle: Every transaction affects at least two accounts, and the total of debit
amounts equals the total of credit amounts

• Accounting Equation: Assets = Liabilities + Owner's Equity

o This equation must remain balanced after every transaction

o Any transaction can be analyzed in terms of its effect on this equation

• Expanded Accounting Equation: Assets = Liabilities + Capital + Revenues - Expenses -

Drawings

• Transaction Analysis Process:

1. Identify the accounts affected by the transaction

2. Classify each account (asset, liability, equity, revenue, expense)

3. Apply debit/credit rules to each account

4. Ensure total debits equal total credits

5. Record the transaction in the appropriate journal

• Benefits:

COMPILED BY CA. GYATI GUPTA

 P a g e | 10

o Self-balancing System: Mathematical accuracy can be verified

o Comprehensive Record: Complete effect of each transaction is captured

o Error Detection: Discrepancies are revealed in the trial balance

o Fraud Prevention: Makes manipulation of accounts more difficult

o Financial Statement Preparation: Facilitates automatic generation of statements

• Example of Double Entry: Purchase of equipment for $5,000 cash:

o Equipment (Asset) account is debited $5,000 (increase in asset)

o Cash (Asset) account is credited $5,000 (decrease in asset)

2.5 Journalizing Transactions

• Journal: Chronological record of transactions showing affected accounts, amounts, and

explanation

• Purpose:

o Provides chronological record of all transactions

o Shows complete effect of each transaction in one place

o Prevents direct alteration of ledger accounts

o Explains the nature of each transaction through narration

o Reduces posting errors to ledger

• Journal Entry Components:

o Date of transaction

o Accounts debited (listed first)

o Accounts credited (indented/marked with "To")

o Amounts

o Narration/explanation (in parentheses)

o Reference numbers for supporting documents

• Types of Journals:

o General Journal: For transactions that don't fit specialized journals

o Sales Journal: For credit sales only

o Purchases Journal: For credit purchases only

o Cash Receipts Journal: For all cash inflows

o Cash Disbursements Journal: For all cash outflows

o Payroll Journal: For employee compensation transactions

COMPILED BY CA. GYATI GUPTA

 P a g e | 11

• Compound Journal Entry: Entry affecting more than two accounts

o Example: Purchase of equipment for $10,000, paying $4,000 cash and balance on
credit

▪ Equipment A/c Dr. $10,000

▪ To Cash A/c $4,000

▪ To Accounts Payable A/c $6,000

▪ (Narration: Being equipment purchased partially on credit)

2.6 Preparation of Ledgers

• Ledger: Group of accounts where transactions are recorded according to their type

• Process of Posting:

1. Enter the date of transaction from journal

2. Record transaction in the appropriate side (debit/credit) of the relevant account

3. Enter amount from journal entry

4. Write journal page number in folio column of ledger

5. Write ledger account number in folio column of journal

6. Update running balance where applicable

• Balancing Ledger Accounts:

1. Total both debit and credit sides

2. Find the difference between totals

3. Enter the difference on the side with smaller total as "Balance c/d" (carried down)

4. Bring down balance to opposite side as "Balance b/d" (brought down) for the next
period

• Types of Ledger Balances:

o Debit Balance: When debit side total exceeds credit side total

▪ Normal for: Assets, expenses, drawings

o Credit Balance: When credit side total exceeds debit side total

▪ Normal for: Liabilities, capital, revenues

o Nil Balance: When debit total equals credit total

▪ Indicates account has zero balance

2.7 Fundamental Accounting Equation

• Basic Equation: Assets = Liabilities + Owner's Equity

• Extended Equation: Assets = Liabilities + Capital + Revenue - Expenses - Drawings

COMPILED BY CA. GYATI GUPTA

 P a g e | 12

• Significance:

o Forms the foundation of double-entry accounting

o Must remain in balance after every transaction

o Serves as the basis for the balance sheet

o Connects all financial statements

• Transaction Effects on Equation:

1. Asset Increase: Debit asset account, credit another account

▪ If another asset decreases: A↑ - A↓ = 0 (equation unchanged)

▪ If liability increases: A↑ = L↑ (equation balanced)

▪ If equity increases: A↑ = E↑ (equation balanced)

2. Asset Decrease: Credit asset account, debit another account

▪ If another asset increases: A↓ + A↑ = 0 (equation unchanged)

▪ If liability decreases: A↓ = L↓ (equation balanced)

▪ If equity decreases: A↓ = E↓ (equation balanced)

3. Liability/Equity Changes: Also follow the balancing principle

• Examples of Effects on Accounting Equation:

o Owner invests $10,000 cash in business:

▪ Assets (+$10,000 Cash) = Liabilities (unchanged) + Equity (+$10,000 Capital)

o Purchase $2,000 equipment on credit:

▪ Assets (+$2,000 Equipment) = Liabilities (+$2,000 Accounts Payable) + Equity

(unchanged)

o Pay $500 rent:

▪ Assets (-$500 Cash) = Liabilities (unchanged) + Equity (-$500 via Rent

Expense)

2.8 Preparation of Trial Balance

• Definition: List of all ledger account balances at a specific date to verify arithmetic accuracy

• Purposes:

o Check mathematical accuracy of ledger postings

o Ensure the accounting equation remains balanced

o Provide a summary of all ledger accounts

o Serve as the basis for preparing financial statements

o Help identify certain types of errors

COMPILED BY CA. GYATI GUPTA

 P a g e | 13

• Preparation Steps:

1. Balance all ledger accounts

2. Extract the closing balance of each account

3. List account names and their balances in the appropriate column (debit/credit)

4. Total both columns

5. Verify that debit and credit totals are equal

• Errors Not Detected by Trial Balance:

o Error of Omission: Transaction completely omitted from books

o Error of Commission: Entry made to correct accounts but with wrong amounts

o Error of Principle: Transaction recorded in wrong type of account

o Compensating Errors: Errors that cancel each other out

o Error of Original Entry: Wrong amount recorded in journal and ledger

o Complete Reversal of Entries: Debit and credit aspects interchanged

2.9 Concept of Revenue and Capital

• Revenue Items: Expenses and incomes affecting profit/loss in the current period

o Revenue Expenditure Characteristics:

▪ Recurring in nature

▪ Benefits consumed within the accounting period

▪ Maintains existing asset capacity

▪ Relatively small amounts

▪ Examples: Rent, salaries, utilities, repairs, interest

o Revenue Income Characteristics:

▪ Derived from normal business operations

▪ Earned within the accounting period

▪ Examples: Sales, commission, interest earned, rent received

• Capital Items: Affect long-term financial position

o Capital Expenditure Characteristics:

▪ Non-recurring in nature

▪ Benefits extend beyond the current accounting period

▪ Increases asset base or earning capacity

▪ Relatively large amounts

COMPILED BY CA. GYATI GUPTA

 P a g e | 14

▪ Examples: Land purchase, building acquisition, major equipment

o Capital Receipts Characteristics:

▪ Not derived from normal operations

▪ Affect balance sheet rather than income statement

▪ Examples: Share capital, loan proceeds, asset sale proceeds

• Distinction Impact:

o Financial Statement Classification:

▪ Revenue items appear in income statement

▪ Capital items appear in balance sheet

o Profitability Measurement:

▪ Incorrect classification distorts profit figures

▪ Capital items treated as revenue reduce reported profits

▪ Revenue items treated as capital inflate reported profits

o Taxation Implications:

▪ Revenue expenses are typically tax-deductible immediately

▪ Capital expenditures are usually depreciated over time for tax purposes

• Borderline Cases and Treatment:

o Repairs vs. Improvements: Repairs maintain assets (revenue), improvements

enhance assets (capital)

o Research vs. Development: Research is revenue expenditure, successful

development may be capitalized

o Pre-operating Expenses: May be capitalized as startup costs

2.10 Preparation of Financial Statements (Manual)

• Sequential Preparation Process:

1. Prepare Trial Balance to ensure accounting records are arithmetically accurate

2. Create Trading Account to determine gross profit/loss

3. Prepare Profit & Loss Account to calculate net profit/loss

4. Develop Balance Sheet to show financial position

• Trading Account:

o Purpose: Calculate gross profit/loss from buying and selling goods

o Components:

COMPILED BY CA. GYATI GUPTA

 P a g e | 15

▪ Debit Side: Opening inventory, purchases, direct expenses (carriage inwards,

import duties)

▪ Credit Side: Sales, closing inventory

• Profit & Loss Account:

o Purpose: Determine net profit/loss after considering all expenses and incomes

o Components:

▪ Debit Side: Indirect expenses (administrative, selling, distribution, financial)

▪ Credit Side: Gross profit b/d, other incomes

• Balance Sheet:

o Purpose: Show financial position at a specific point in time

o Components:

▪ Assets Side: Fixed assets, investments, current assets

▪ Liabilities Side: Capital, long-term liabilities, current liabilities

COMPILED BY CA. GYATI GUPTA

 P a g e | 16

UNIT 3: COMPUTERISED ACCOUNTING SYSTEM

3.1 Basics of Computerised Accounting Systems

• Definition: A method of recording, processing, and reporting financial transactions using

specialized software that applies accounting principles and practices automatically.

• Key Components:

o Hardware: Physical equipment including computers, servers, network devices,

printers

▪ Requirements depend on business size, volume of transactions, and

software specifications

o Software: Accounting application that processes financial data

▪ Ranges from simple single-user to complex enterprise-level systems

o Data: Financial information entered into the system

▪ Must be accurate, complete, and properly classified

o Procedures: Documented methods for using the system

▪ Includes data entry guidelines, processing schedules, backup procedures

o Controls: Mechanisms to ensure system integrity and data security

▪ User access restrictions, validation checks, audit trails

• System Architecture:

o Database Structure: Organization of financial data

▪ Relational database with linked tables for accounts, customers, suppliers,

inventory

▪ Chart of accounts as the structural foundation

o User Interface: How users interact with the system

▪ Data entry forms, reports, dashboards, navigation menus

▪ Should be intuitive and align with accounting workflows

o Processing Modules: Functional components for different accounting tasks

▪ General ledger, accounts receivable, accounts payable, inventory, payroll

▪ Each module handles specific transaction types

o Reporting System: Generation of financial information

▪ Standard financial statements, tax reports, management reports

▪ Report customization and export capabilities

o Integration Points: Connections to other business systems

COMPILED BY CA. GYATI GUPTA

 P a g e | 17

▪ ERP, CRM, e-commerce platforms, banking systems

▪ APIs and data exchange protocols

• Accounting Cycle in Computerised Environment:

1. Source Document Analysis: Identifying and collecting documentation

2. Data Entry: Recording transactions in the system

3. Processing: Automatic posting to ledger accounts

4. Period-End Procedures: Adjustments, accruals, deferrals

5. Reporting: Generating financial statements and reports

6. Closing: Finalizing accounts for the period

3.2 Difference Between Manual and Computerised Accounting Systems

Aspect Manual System Computerised System Practical Implications

Slow and labor- Business can handle growth

Speed of Fast processing of high
intensive; entries made without proportional increase
Processing transaction volumes
by hand in accounting staff

Prone to human More reliable financial

Automatic calculations
Accuracy calculation errors; information for decision-
reduce errors
arithmetic mistakes making

Lower initial setup cost; Higher initial

ROI analysis needed to
Cost Factors Higher ongoing labor investment; Lower long-
determine break-even point
cost term operational cost

Limited by human
Transaction Can efficiently handle
capacity; becomes Scalability for growing
Volume large volumes of
unwieldy with high businesses
Capacity transactions
volumes

Real-time Delayed reporting; Immediate access to up- Timely decision-making and

Information information compiled to-date financial responsiveness to market
Access periodically information changes

Physical vulnerability to
Backup and
damage, theft; Manual
Security
back

COMPILED BY CA. GYATI GUPTA