Unit -1

Introduction to accounting
Introduction and definition .
Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money transactions and events which are of a financial character and interpreting
the results thereof .

Book keeping
Book-keeping is concerned with the recording of business transactions in a systematic manner.
This work in mechanical and repetitive in nature. It does not need specialized and knowledge.
It is usually entrusted to the junior level employees of the accounts department who are as
book –keepers.

Objectives of accounting
 Maintenance of accounting records
 Ascertainment of profit or loss.
 Depiction of financial position
 Providing information
Advantages
 Systematic records
 Preparation of financial statement
 Assessment of progress
 Aid to decision making
 Statutory requirement
 Information to interest groups
 Evidence in court
 Taxation problems
 Merger of firms

Limitations
Accounting relies on estimated, and forecasts in several important matters like useful life of
machinery, market value of inverstment .similarly subjective opinions of the accountant can
influence valuation of stocks, provision on debtors for doubtful debts and discounts etc
accounting results may not be accurate and reliable due to such estimates and subjective
influence of individual accountants.

Methods of accounting
 Single entry

The term single entry is vaguely used to define the method of maintaining accounts which do
not conform to strict principles of double entry. The term single entry does not mean that
there is only one entry for each transactions.

 Double entry

According to this system, every transactions have two aspects. One is benefit receiving aspect
or incoming aspects and the other one is benefit giving aspect or outgoing aspect. For every
transaction one account is to be debited and another account is to be credited.

Meaning of debit and credit

The word debit is derived from the Latin word debitum which means due for that. in short the
benefit receiving aspect of a transactions is known as debit.

The word credit is derived from the Latin word creder which means due to that . the benefit
giving aspect of a transactions is known as credit.

Bases of accounting
 Accounting on cash basis.
 Accrual basis of accounting or mercantile system
 Mixed of hybrid basis of accounting

As history gives visible shapes to the past of human race, accounting provides systematic
visible shapes to business transactions. It records classifies and summarizing all the financial
transactions taking place in a business.

Characteristics of accounting and concepts and conventions

 The accounting principles are developed for practical purposes. They cannot be
validated or proved like the principles of mathematics, physics and chemistry.
They are the best possible suggestions base on practical experiences ,reasoning
and observation of the professional accountants.
  The principles are for common usage to ensure uniformity and understanding.
they are not rigid. they can be adapted the usefulness of the data and
circumstances of business units. They enhance the usefulness of the data relating
to the activities of a firm
 They are not specifically made or legislated by any government or legal authority.
They are not legally enforceable.
 They are in the process of evolution are likely to change as per the dictates of
changing circumstances and technology.

Meaning and classification of accounting concepts and conventions

 The enity concepts

 The money measurement concept
 Going concern concept
 Dual aspect concept
 Cost concept
 Accounting period concept
 Revenue recognition concept or realization concept
 Matching concept
 Objective evidence concept
 Accrual concept

Fundamental concepts

Non fundamental concepts

Accounting concepts

 Business entity concept

 Going concern concepts
 Money measurement concepts
 Dual aspect concept

Capital+liabilities=assets or capital=assets-liabilities

 Accounting period concept or periodicity concepts

 Cost concept
 Pealisation concept or revenue recognition concept
 Matching concept
 Accrual concept
  Objective evidence concept

Accounting conventions

 Convention of full disclosure

 Convention of consistency
 Convention of materiality
 Convention of conservation

Accounting equation

Assets=equities

Capital+liabilities=assets or capital=assets-liabilities

Journal

Journal is a book of primary entry or original entry. All transactions are initially recorded
in the journal. The ruling of the journal is such that any business transactions can be
analysed under the heads of debit and credit. A thorough understanding of the
principles of debit and credit which are the basis for journal is essential for every
student of accountancy to get a thorough grasp of the subject

The followings a specimen ruling of journal

date particulars Dr(rs) Cr(rs)

1.8.99 Raman’s A/c 5000
To sales A/C 5000
(being credit sale made)

Ledger

Ledger is the main book of accounts in a business. Subsidiary books though books of
original entry are of secondary importance only .ledger and the accounts it contains are core
of accounting process.

Posting of ledger

Cash received and paid is posted to the respective accounts in the ledger just as in simple cash
book. Discount shown on the credit side of cash book is immediately credited to discount
received account in the ledger. Similarly, discount shown on the debit side of the cash book is
debited to the discount allowed account in the ledger. The discount columns are separately
totaled at the time of balancing of the cash book. The totals represent discount allowed and
discount received during the period .

 Two column cash book with bank and discount column

 Three columnar cash book

Some special items

 Contra entities
 Cheques received
 Cheques dishonored
 Balance of cash book

Petty cash book

Meaning and purpose

Petty is derivation of the French word PETIT which means small. So it means to be small
cash book, not in physical size but in recording small payments. A business makes
numerous routine small payments day after day like postages, stationary,
cartage,refreshment,cleaning etc. if all these payments are recorded in the main cash book
it becomes too bulky and all principal cashier becomes over burdened.

UNIT-II
 FINAL ACCOUNTS

Introduction
The primary function of accounting is to accumulate accounting data in a manner that the
amount of profit made or loss suffered during a period can be determined.

Manufacturing account
Those concerns which are converting raw materials into finished goods and then sell the
finished goods, are required to prepare manufacturing account besides preparing trading and
profit and loss account.

Features of manufacturing account

(a) Stock of finished goods

(b) Raw-materials consumed

Cost of Raw material consumed

-------------------------------------------------------------------------------------------------------------

Opening stock of raw materials xxx I

Add: Purchase of raw materials xxx I

--------- I

Less: Closing stock of raw materials xxx I xxx

--------- I

-------------------------------------------------------------------------------------------------------------

(c) Work-in-progress (partly finished stock)

(d) Factory expenses

(e) Sale of scrap

(f) Cost of production

Trading account
 Trading accout is prepared for a specific period to know the trading results of the
business.

Preparation of Trading Account

Trading account is a ledger account. Therefore, its form and construction conform to the
rules of double entry principles of debit and credit.

Items appearing on the debit side of Trading account

1. Opening Stock

2. Purchases

3. Purchase returns or Returns outwards

4. Direct expenses

Items appearing on the credit side of trading account

1. Sales

2. Sales return

3. Closing stock

Closing entries in respect of trading account

The following entries are passed in the journal to transfer the relevant ledger balances to
be trading account.

(i) For transferring opening stock, net purchases and direct expenses to trading
account.

(ii) For transferring net sales and closing stock to trading account

(iii) (a)For gross profit (b)For gross loss

Profit & Loss Account

According to Prof. Carter,"Profit and Loss account is an account into which all gains and
losses are collected in order to ascertain the excess of gains over the losses or vice versa".

Items appearing on debit side of profit & loss A/c

The business expenses are divided into two types. Direct expenses which are recorded in
the trading A/c and indirect expenses which are recorded in the debit side of profit & loss A/c.
Indirect expenses can be further divided into two varieties:

(i) Operating expenses and (ii) Non-operating expenses

Items appearing on credit side of profit & loss A/c

 Gross profit is shown on the credit side of profit &loss account. Also other gains and
incomes of the business are shown on the credit side. The other incomes are generally
classified into two types. i.e.,

(a) Operating income (b) Non-operating income

Closing entries for profit & loss A/c

(i) For transferring the various expenses to profit & loss A/c.

(ii) For transferring the various incomes & gains to profit & loss A/c.

(iii) (a) For net profit (b) For net loss

Balance Sheet
It is a classified summary of balances remaining open in the General ledger after all the
income and expenditure accounts have been closed off by transfer to trading and profit &
loss account.

Classification of assets and liabilities:

Assets
Assets represents everything which a business owns and has money value. Assets are
always shown as debit balances. The various types of assets are:

(i) Fixed assets

(ii) Current assets

(iii) Liquid assets

(iv) Fictitious assets

(v) Contingent assets

(vi) Washing assets

Liabilities
All that the business owes to others are called liabilities. Liabilities may be classified into
four categories:

(i) Proprietor's capital or networth

(ii) Long-term liabilities

(iii) Current liabilities

(iv) Contingent liabilities

Grouping and Marshalling of assets and liabilities
A balance sheet is usually prepared in the form of a statement, with assets on the right-
hand side and liabilities and capital on the left-hand side. Such an arrangement of the items in
a balance sheet is known as 'Marshalling'. There are two ways in which the assets and
lianilities can be arranged in balance sheet. They are:

(a) order of permanence; (b) order of liquidity.

Adjustments
(i) Closing stock

(ii) Outstanding expenses

(iii) Prepaid expenses

(iv) Accrued income

(v) Income recieved in advance

(vi) Depreciation of assets

(vii) Interest on capital

(viii)Interest on drawings

(ix) Bad debts

(x) Provision for bad and doubtful debts

(xi) Provision for discount on debtors

(xii) Provision for discount on creditors

(xiii)Loss of stock by accident, fire etc.

UNIT-III
 ACCOUNTS OF NON-PROFIT ORGANISATIONS
Introducdtion
All business concerns can be divided into two categories - trading concerns and
Non-trading concerns. Basic distinction between trading and non-trading concerns is
that they have different reasons for their existence.

Final Accounts of Non-profit Organisations

Final accpimts pf Non-Trading concerns usually consist of the following which are
explained in details below.

(i) Receipts and Payments Account.

(ii) Income and Expenditure Account, and

(iii)Balance Sheet

(i) Receipts and payments Account

It is simply a summary of all Cash and Bank transactions for a year. This account
starts with the opening balance of Cash in hand and with bank on debit side. It closes
with the closing balances of Cash and bank on the credit side.

(ii) Income and Expenditure Account

Income and expenditure A/c is a nominal account in nature. It is prepared at the
end of the year, if the credit total exceeds debit total, the difference is 'Surplus', known
as 'Excess of income over expenditure'.

Steps to prepare Income and Expenditure Account:

In order to prepare an Income and expenditure account from a receipts and
payments accounts and other information supplied, the following step should be
carefully followed:

(i) Exclude the opening and closing balances of cash and bank in receipts and
payments A/c as they are balance sheet items.

(ii) Exclude all capital receipts and capital payments. Only revenue receipts will
appear on the credit side (i.e., income side) and revenue expenses on the debit side
(i.e., expenditure side) of income and excpenditure account.
 (iii) Make all adjustments relating to prepaid or outstanding expenses, Income
accrued or received in advance, Provision or depreciation etc.

(iv) Take items only for the current period i.e., items relating to the preceding and
succeeding periods are to be ignored in the light of the following:

(a) Exclude income of the Previous period or any income received in advance
relating to future period.

(b) Provide for accrued income i.e., income earned during the current period but
not received.

(c) Exclude expenditure either orf proceeding period or of the succeeding period.

(d) Provide for expenditure due for that the current period but not yet paid.

(v) Ascertain the difference which represents surplus (esxcess of income and
expenditure) or deficit (excess of expenditure over income). Transfer this to the Capital
fund.

(iii) Balance Sheet

The method f preparing a BNalance sheet of a non-trading concern is similar to
the method of preparing Balance sheet of a trading concern. It is prepared from the
balances of Capital nature that remain after all items of revenue nature have been
transferred to income and expenditure account.

Steps necessary to prepare Balance sheet

The following steps are to be taken while preparing a balance sheet:

(i) All opening assets after adding any additions, reducing any sale of assets and
deducting depreciation, should ne shown on the assets side.

(ii) All opening liabilities, after making additions and deducting all relevant payments,
should be recorded on the liabilities side.

(iii) Accrued Incomes and prepaid ecpenses are recorded in the assets side and
outstanding expenses and incomes received in advance on the liabilities side.

(iv) If amount paid to creditors is given in the payment side of receipts and payments
account, then this amount should ne deducted from the amount of opening creditors
and amount or new credit purchases ne added to ot. The amount, thus arrived at, is
recorded in the liabilities side of balance sheet.
(v) If there is any specific fund exsisting, due adjustments are made for its incomes
and expenses in the said fund on the liabilities side.

(vi) Closing cash and bank balances from receipts and payments account should bne
recorded in the assets side of balance sheet.

(vii) Previous year's capital fund is adjusted for current year's surplus or deficit and
shown on the liabilities side.

(viii) Special receips like donations for building not shown in the income and
expenditure account are shown on the liabilities side.

Items peculiat to Nontrading concerns-Their meaning and

treatment
1. Entrance fees (Or) Admission fees

2. Life membership fees

3. Subscriptions

4. Donations

5. Legacy

6. Sale of an asset

7. Sale of old newspapers

8. Government Grant

9. Capital Fund

10. Sale of used sports materials

11. Endowment fund

12. Special funds

13. Honorarium

14. Subscription lfor periodicals

15. Outstanding expenses and prepaid expenses

16. Accrued Income and Income received in advance

17. Other capital payments

 18. Other revenue receipts

UNIT 4

DEPRECIATION

INTRODUCTION:
Depreciation is the process of spreading the cost of fixed assets over the different
accounting periods which derive the benefit from their use.

DEFINITION:
Depreciation is a permanent decline in the value of an asset. The gradual decrease both in
the value and usefulness of an asset due to its nature and usage is termed as depreciation.

CAUSES OF DEPRECIATION:
 Use
 Lapse
 Inadequacy
 Depletion of time
 Obsolescence
 Accidents
 Disuse

OBJECTIVES OF DEPRECIATION:
 Ascertainment of true profits
 Presentation of true financial position
 Replacement
 No distortion of divisible profits

BASIC FACTORS AFFECTING DEPRECIATION:

 Original cost of the asset
 Estimated scrap or residual value
 Estimated or commercial or legal life

METHODS OF DEPRECIATION

STRAIGHT LINE METHOD:

Under this method depreciation is charged evenly every year throughout the effective life
of an asset.
Depreciation = Cost of the fixed asset-Estimated scrap value
Number of years of expected life

r = amount of depreciation
cost of depreciation

DIMINISHING BALANCE METHOD:

Under this method, depreciation is charged at fixed rate on the reducing balance ( cost less
depreciation).
 r = 1- ⁿ√ s
c

UNIT 5

SINGLE ENTRY SYSTEM

INTRODUCTION:
There is no system of accounts called single entry system. The term single entry is vaguely
used to refer to any method of maintaining accounts which does not conform to strict
principles of double entry.

DEFINITION:
According to R.N.Carter “single entry cannot be termed as a system , as it is not based on
any scientific system like doble entry system. For this purpose , single entry is nowadays
known as preparation of accounts from incomplete records”.

SALIENT FEATURES OF SINGLE ENTRY:

 Absence of uniformity
 Records maintained
 Mixing of transactions
 Suitability
 Dependence on original vouchers
 Finalisation of accounts

DISTINCTION BETWEEN BALANCE SHEET AND STATEMENT OF AFFAIRS:

 Basis of preparation
 System
 Trial balance
 Omission of assets and liabilities
 Objective and purpose
 Capital

PROFORMA OF A TOTAL DEBTORS A\c

Rs. Rs.
To balance b\d Xxx By cash received Xxx
To bills receivable Xxx By bank Xxx
To freight Xxx By bills receivable Xxx
To interest on Xxx By discounts Xxx
overdue
To cash Xxx By return Xxx
inwards
To credit sales Xxx by bad debts Xxx
by transfer to Xxx
creditors
By balance c\d Xxx

xxx xxx

PROFORMA OF TOTAL CREDITORS A\C

Rs. Rs.
To cash paid Xxx By balance b\d Xxx
To bank Xxx By cash Xxx
To bills payable Xxx By bills payable Xxx
to return Xxx By credit Xxx
outwards purchases
To discounts Xxx
received
To allowances Xxx
and rebates
To transfer from Xxx
debts
To balance c\d Xxx
xxx Xxx

PROFORMA OF A BILLS RECEIVABLE A\C

RS. RS.
To balnce b\d Xxx by cash Xxx
To sundry Xxx By sundry Xxx
debtors debtors(dishonoured)
 By balance c\d Xxx
xxx xxx

PROFORMA OF A BILLS PAYABLE A\C

RS. RS.
To cash Xxx By balance b\d Xxx
To sundry Xxx By sundry Xxx
creditors creditors
To balance c\d Xxx
xxx xxx