Account
Account
Account
Book-keeping : Book-keeping is the science and art of correctly recording in books of account all those business transaction that result in the transfer of money or moneys worth. Accounting : Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events which are in part at least of financial character and interpreting the result there off.
It is an art It is a science Only financial transaction Recorded in terms of money Recorded in special book Records made with particular objective Records are correctly made Records are continuous Even service transactions recorded
Information about business transaction Information about income and expense Gross profit is known Net profit is known Comparison with the past Financial position is known Useful for comparison Tax liability can be determined Control over employees Useful to outsider Useful for policy decisions
Incomplete transaction results in wrong records Misleading result from incomplete understanding Chances of dishonesty and untruth Misguiding financial picture during inflation Accounting does not give the complete picture
Branches of Accounting
Financial accounting Cost accounting Management accounting Others-inflation accounting, value added accounting, human resource accounting, social responsibility accounting
To maintain accounting records. To calculate the result of operations. To ascertain the financial position. To communicate the information to users.
An accounting cycle is a
Accountancy refers to a systematic knowledge of accounting. It explains why to do and how to do of various aspects of accounting. It
academic knowledge of
accountancy into practice.
Book-keeping
is a part of
Every transaction has two effects one debit and the other credit. The method of recording transaction giving two fold effect can be termed as double entry system of accountng.
Account written scientifically Account written are consistent Full details are available Different type of information available Trial balance can be prepared Profit & loss can be ascertained Gives an idea of financial position Corrective steps can be taken Errors detected Reduced the possibility of fraud and error
Expensive Limited utility for small firms Cannot prevent fraud and error
Transactions: Transactions are those activities of a business, which involve transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing from bank, lending of money, salaries paid, rent paid, commission received and dividend received. Transactions are of two types, namely, cash and credit transactions.
Cash Transaction is one where cash receipt or payment is involved in the transaction.
For example, When Ram buys goods from Kannan paying the price of goods by cash immediately, it is a cash transaction.
Credit Transaction is one where cash is not involved immediately but will be paid or received later. In the above example, if Ram, does not pay cash immediately but promises to pay later, it is credit transaction.
Proprietor: A person who owns a business is called its proprietor. He contributes capital to the business with the intention of earning profit. Capital: It is the amount invested by the proprietor/s in the business. This amount is increased by the amount of profits earned and the amount of additional capital introduced. It is decreased by the amount of losses incurred and the amounts withdrawn.
Assets:
Tangible Assets: These assets are those having physical existence. It can be seen and touched. For example, plant & machinery, cash, etc.
Intangible Assets: Intangible assets are those assets having no physical existence but their possession gives rise to some rights and benefits to the owner. It cannot be seen and touched. Goodwill, patents, trademarks.
Liabilities: Liabilities refer to the financial obligations of a business. These denote the amounts which a business owes to others, e.g., loans from banks or other persons, creditors for goods supplied, bills payable, outstanding expenses, bank overdraft etc. Drawings: It is the amount of cash or value of goods withdrawn from the business by the proprietor for his personal use. It is deducted from the capital.
Debtors: A person (individual or firm) who receives a benefit without giving money or moneys worth immediately, but liable to pay in future or in due course of time is a debtor.
Creditors: A person who gives a benefit without receiving money or moneys worth immediately but to claim in future, is a creditor. The creditors are shown as a liability in the balance sheet. In the above example Mr.B is a creditor to Mr.A till he receive the value of the goods.
Purchase:
purchases.
Purchases Return or Returns Outward: When goods are returned to the suppliers due to defective quality or not as per the terms of purchase, it is called as purchases return. To find net purchases,
Sales:
Sales Return or Returns Inward: When goods are returned from the customers due to defective quality or not as per the terms of sale, it is called sales return or returns inward. To find out net
Stock:
Stock includes goods unsold on a particular date. Stock may be opening and
closing stock. The term opening stock means goods unsold in the beginning of the accounting period. Whereas the term closing stock includes goods unsold at the end of the accounting period. For example, if 4,000 units purchased @ Rs. 20 per unit remain unsold, the closing stock is Rs.80,000. This will be opening stock of the subsequent year.
Revenue: Revenue means the amount receivable or realized from sale of goods and earnings from interest, dividend, commission, etc.
Expense:
It is the amount spent in order to produce and sell the goods and services.
For example, purchase of raw materials, payment of salaries, wages, etc.
Income:
Voucher: It is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. It may be in the form of cash receipt, invoice, cash memo, bank
Invoice:
Receipt:
Receipt is an acknowledgement for cash received. It is issued to the party paying cash. Receipts form the basis for entries in cash book.
Cash discount allowance Profit or gain Debit Credit Journal Subsidiary book Account Ledger Posting and to post Liability Asset Solvent
Insolvent Bad debt Discount Trade discount Loss Gross profit Net profit Loans Bills receivable Bills payable Gross loss Net loss
Account Account is a summary of relevant business transactions at one place relating to a person, asset, expense or revenue named in the heading. An account is a brief history of financial transactions of a particular person or item. An account has two sides called debit side and credit side.
Transactions can be divided into three categories. i. Transactions relating to individuals and firms ii. Transactions relating to properties, goods or cash iii. Transactions relating to expenses or losses and incomes or gains. Therefore, accounts can also be classified into Personal, Real and Nominal. The classification may be illustrated as follows
I. Personal Accounts : The accounts which relate to persons. Personal accounts include the following. i.Natural Persons : Accounts which relate to individuals. For example, Mohans A/c, Shyams A/c etc. ii. Artificial persons : Accounts which relate to a group of persons or firms or institutions. For example, HMT Ltd., Indian Overseas Bank, Life Insurance Corporation of India, Cosmopolitan club etc. iii. Representative Persons: Accounts which represent a particular person or group of persons. For example, outstanding salary account, prepaid insurance account, etc. The proprietor being an individual his capital account and his drawings account are also personal accounts.
1.
2.
3. 4. 5. 6. 7. 8. 9.
Capital Sales Drawings Outstanding salary Cash Rent Interest paid Indian Bank Discount received
10.
11.
12. 13.
14. 15.
Solution: 1. Personal account 2.Real account 3. Personal account 4. Personal (Representative) account 5. Real account 6. Nominal account 7. Nominal account 8. Personal (Legal Body) account
9. Nominal account 10. Real account 11. Personal account 12. Personal account 13. Personal account 14. Nominal account 15. Real account
Golden Rules of Accounting All the business transactions are recorded on the basis of the following rules.