Economics and Financial

Accounting Module
By :
Mrs. Shubhangi Dixit

1
DAY 7

2
Day 7

• Branches Of Accounting
• Methods of Accounting
• The Accounting Cycle
• How to prepare Journal and subsidiary books

3
BASES OF ACCOUNTING

• There are three bases of accounting in common usage. Any one

of the following bases may be used to finalize accounts.
• 1. Cash basis
• 2. Accrual or Mercantile basis
• 3. Mixed or Hybrid basis.

4
Accounting on Cash basis

• Under cash basis accounting, entries are recorded only when

cash is received or paid. No entry is passed when a payment or
receipt becomes due. Income under cash basis of accounting,
therefore, represents excess of receipts over payments during
an accounting period.

5
Accrual Basis of Accounting or Mercantile
System
• Under accrual basis of accounting, accounting entries are made
on the basis of amounts having become due for payment or
receipt. Incomes are credited to the period in which they are
earned whether cash is received or not. Similarly, expenses and
losses are debited to the period in which, they arc incurred,
whether cash is paid or not.

6
Mixed or Hybrid Basis of Accounting

• When certain items of revenue or expenditure are recorded in

the books of account on cash basis and certain items on
mercantile basis, the basis of accounting so employed is called
‘hybrid basis of accounting’.

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BRANCHES OF ACCOUNTING

• i) Financial accounting;
• ii) Cost accounting; and
• iii) Management accounting.

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Financial Accounting

• The accounting system concerned only with the financial state

of affairs and financial results of operations is known as
Financial Accounting. It is the original form of accounting. It
is mainly concerned with the preparation of financial
statements for the use of outsiders like creditors, debenture
holders, investors and financial institutions.

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Cost Accounting

• It is that branch of accounting which is concerned with the

accumulation and assignment of historical costs to units of
product and department, primarily for the purpose of valuation
of stock and measurement of profits. Cost accounting seeks to
ascertain the cost of unit produced and sold or the services
rendered by the business unit with a view to exercising control
over these costs to assess profitability and efficiency of the
enterprise. The process of cost accounting based on the data
provided by the financial accounting.

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Management Accounting

• It is an accounting for the management i.e., accounting which

provides necessary information to the management for
discharging its functions. According to the Anglo-American
Council on productivity, “Management accounting is the
presentation of accounting information is such a way as to
assist management in the creation of policy and the day-to-day
operation of an undertaking.” Management accounting is not
only confined to the area of cost accounting but also covers
other areas (such as capital expenditure decisions, capital
structure decisions, and dividend decisions) as well.

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Methods of Accounting

• Single Entry
• Double Entry

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Methods of Accounting

• Single Entry: It is incomplete system of recording business

transactions. The business organization maintains only cash
book and personal accounts of debtors and creditors. So the
complete recording of transactions cannot be made and trail
balance cannot be prepared.
• Double Entry: In this system every business transaction is
having a two fold effect of benefits giving and benefit
receiving aspects. The recording is made on the basis of both
these aspects. Double Entry is an accounting system that
records the effects of transactions and other events in atleast
two accounts with equal debits and credits.

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Double-entry Bookkeeping

• Newton’ Third Law of Motion

• For every action there is an equal and opposite reaction
• Accounting rules
• For every Debit there is an equal and opposite Credit recorded in
the accounting records

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Advantages of Double Entry System

i) Scientific system
ii) Complete record of transactions
iii) A check on the accuracy of accounts
iv) Ascertainment of profit or loss
v) Knowledge of the financial position of the business
vi) Full details for purposes of control
vii) Comparative study is possible
viii) Helps management in decision making
ix) No scope for fraud

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Double-entry Bookkeeping

• Double-entry bookkeeping is the accepted accounting

mechanism for recording and classifying the monetary events
of a business entity
• The T-account format:

Title and Account #

+ Debit side + Credit side

• For every monetary event there is at least one entry on the

debit side of at least one account and the credit side of another
account. 16
17
Steps involved in Double entry system

(a) Preparation of Journal: Journal is called the book of original

entry. It records the effect of all transactions for the first time.
Here the job of recording takes place.
(b) Preparation of Ledger: Ledger is the collection of all
accounts used by a business. Here the grouping of accounts is
performed. Journal is posted to ledger.
(c) Trial Balance preparation: Summarizing. It is a summary of
ledger balances prepared in the form of a list.
(d) Preparation of Final Account: At the end of the accounting
period to know the achievements of the organization and its
financial state of affairs, the final accounts are prepared.
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Journal

• When the business transactions take place, the first step is to

record the same in the books of original entry or subsidiary
books or books of prime or journal. Thus journal is a simple
book of accounts in which all the business transactions are
originally recorded in chronological order and from which they
are posted to the ledger accounts at any convenient time.
Journalsing refers to the act of recording each transaction in
the journal and the form in which it is recorded, is known as a
journal entry.

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The specimen journal is as follows:

Date Particulars L.F. Debit(RS) Credit(Rs.)

Jan 1 2020 Cash a/c…………Dr. 25 10,000
To Capital a/c 10,000

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Types of Accounts

• The object of book-keeping is to keep a complete record of all

the transactions that place in the business. To achieve this
object, business transactions have been classified into three
categories:
• (i) Transactions relating to persons.
• (ii) Transactions relating to properties and assets
• (iii) Transactions relating to incomes and expenses.

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Types of Accounts

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Personal Accounts

• The rule for personal accounts is:

• Debit the receiver
• Credit the giver

• Ex: Persons, Artificial persons, Debtors a/c , Creditors a/c,

Bank a/c, ABC ltd co. a/c

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Real Accounts

• The rule for Real accounts is:

• Debit what comes in
• Credit what goes out

• Ex: All Assets- Cash a/c, Bank a/c, Land a/c, Building a/c etc

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Nominal Accounts

• The rule for Nominal accounts is:

• Debit all expenses and losses
• Credit all incomes and gains

• Ex- Salary a/c, Rent a/c, Commission a/c, etc

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Subsidiary Books

• Journal is subdivided into various parts known as subsidiary

books or subdivisions of journal. Each one of the subsidiary
books is a special journal and a book of original or prime entry.
There are no journal entries when records are made in these
books.

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KINDS OF SUBSIDIARY BOOKS

• Purchases Book
• Sales Book
• Purchases Returns Books
• Sales Returns Books
• Bills Receivable Books
• Bills Payable Books
• Journal Proper
• Cash Book

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Purchases Book

• This book is used to record all credit purchases made by the

business concern from its suppliers. This book is also known
as ‘Purchases Books’, ‘Purchases Journal’ or ‘Invoice Book’.

Date Particulars L.F. Inward Amount

Invoice Rs.
Number

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Sales books

• This book is used to record all credit sales effected by the

business to its customers. This book is also called as ‘Sales
Book’, ‘sales Journal’ or ‘Sold Book’.

Date Particulars L.F Outward Invoice Amount

Number Rs.

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Purchases Returns Books

• This book is used to record all transactions relating to the

goods returned to suppliers. This book is also known as
‘Purchases Returns journal’ or ‘Returns Outward Book’,
• A debit note represents a note sent to the supplier for the value
of goods retuned by the business.
Date Name of L.F. Debit Amount
Supplier Note Rs

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Sales Returns Books

• This book is used to record all transactions relating to goods

returned by customers This book is also known as ‘Sales
Return Journal’ or ‘Returns Inwards Book’, A credit note
represents a note sent to the customer for the value of the
goods returned by him.

Date Name of L.F. Credit Amount

Customer Note Rs.

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Bills Receivable Book

• This book is used to record all the bills received by the

business from its customers. It contains details regarding the
name of the acceptor, date of the bill, place of payment, term
of the bill, due date and the amount of the bill.

Sl. Date of L.F. Drawer Acceptor Term Due Rs. Remarks

No. Receipt Date

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Bills Payable Book:

• This book is used to record all the bills accepted by the

business drawn by its creditors. It contains details regarding
the name of the drawer, payee and date of acceptance, due
date, place of payment, term and amount of the bill.

Sl. Date Draw Payee L.F Where Date Term Due Rs. R
No. of er Payable of Date e
Accep bill m
tance a
r
k 33
s
Bill of Exchange

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Parties to a bill of Exchange

• Drawer
• Drawee
• Payee

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Journal Proper

• This book is used to record all the residual transactions which

cannot find in any of the subsidiary books. For example.
• 1. Opening entries and closing entries.
• 2. Adjusting entries
• 3. Transfer entries from one account to another account.
• 4. Rectification entries.
• 5. Bills of Exchange Entries
• 6. Credit Purchase/sale of an asset other than goods.

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Cash Book

• Cash Book is a sub-division of Journal recording transactions

pertaining to cash receipts and payments. Firstly, all cash
transactions are recorded in the C.B wherefrom they are posted
subsequently to the respective ledger accounts. The C.B. is
maintained in the form of a ledger with the required
explanation called as narration and hence, it plays a dual role
of a journal as well as ledger. The C.B. will always show a
debit balance since payments cannot exceed the receipts at any
time.

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Kinds of Cash Book

• a) Single Column Cash Book

• b) Two Column Cash Book or Cash Book with cash and
discount columns.
• c) Three Columnar Cash Book or Cash Book with cash, bank
and discount
• columns.
• d) ‘Bank’ Cash Book or Cash Book with bank and discount
columns.
• e) Petty Cash Book.

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 Single Column Cash Book

• Dr. Cr.

Date Particular R. L.F. Rs. Date Partic V.No. L.F. Rs.

s N ulars
o.

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Day 8

40
Day 8

• Ledger and Trial Balance with solved examples

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1. Journalise the following transactions
• June 1 Started business with cash of 60,000 and
• June 2 also paid into bank 30,000
• June 4 Purchased goods from Kamal on credit 10,000
• June 6 Paid to Shriram 4,920
• June 6 Discount allowed by him 80
• June 8 Cash Sales 20,000
• June 12 Sold to Hameed 5,000
• June 15 Purchased goods from Bharat on credit 7,500
• June 18 Paid Salaries 4,000
• June 20 Received from Prem 2,480
• June 20 Allowed him discount 20
• June 25 Withdrew from bank for office use 5,000
• June 28 Withdraw for personal use 1,000 42
• June 30 Paid Hanif by cheque 3,000
 Solution
Date Particulars L.F. Debit(RS) Credit(Rs.)

June 1 Cash a/c----------------------------------Dr. 60,000

To Capital a/c 60,000
June 2 Bank a/c----------------------------------Dr 30,000
To Cash a/c 30,000
June 4 Purchase a/c-----------------------------Dr 10,000
To Kamal 10,000
June 6 Shriram------------------------------------Dr. 5,000
To cash a/c 4,920
80
To Discount a/c
June 8 Cash a/c------------------------------------ 20,000
Dr. 20,000
To Sales a/c
June 12 Hamid--------------------------------------Dr. 5,000
To Sales a/c 5,000
June 15 Purchase a/c-----------------------------Dr 7,500
To Bharat 7,500 43
Total b/d 1,37500 1,37,500
Solution
Date Particulars L.F. Debit(RS) Credit(Rs.)
Total c/f 1,37,500 1,37,500
June 18 Salaries a/c-------------------------------Dr. 4,000
To Casha/c 4,000
June 20 Cash a/c------------------------------------ 2,480
Dr. 20
Discount a/c------------------------------Dr. 2,500
To Prem.
June 25 Cash a/c------------------------------------ 5,000
Dr. 5,000
To Banka/c
June 28 Drawings a/c------------------------------Dr. 1,000
To Bank a/c 1,000
June 30 Hanif----------------------------------------Dr. 3,000
To Banka/c 3,000
Total 1,53,000 1,53,000 44
Journalise the following transactions:

• June 1 Purchased goods worth Rs.300 from Vimal and Rs.500

from Kamal on credit.
• June 3 Sale of goods worth Rs.1,000 to Balram and Rs.700 to
Dhanram.
• June 5 Cash of Rs.900 received from Ramasamy and Rs.800
from Krishnasmy.
• June 7 Paid Rs.800 to Pradeep and Rs.500 to kuldeep.
• June 9 Withdrawn from bank Rs.600 for office use and Rs.300
for personal use.

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Journalise the following transactions in the
books of Sabitha and post them in
the Ledger:
• Apr. 1 Bought goods for cash Rs. 15,000
• Apr. 3 Sold goods for cash Rs. 19,000
• Apr. 5 Bought goods on credit from Prerna Rs. 12,000
• Apr. 6 Sold goods on credit to Ravindra Rs. 16,000
• Apr. 8 Received from Ravindra Rs. 12,000
• Apr. 10 Paid to Prerna Rs. 7,500
• Apr. 25 Bought furniture for cash Rs. 4,500

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Ledger

• A ledger account may be defined as a summary statement of all

the transactions relating to a person, asset, expense, or income
or gain or loss which have taken place during a specified
period and shows their net effect ultimately.

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 The ruling of a ledger account is as follows:

Dr. Cash a/c Cr.

Date Particular J. Rs. Date Particular J.F. Rs.
F.
June 1 To Capital a/c 60,000 June By Bank a/c 30,000
2
June 8 To Sales A/c 20,000 June By Shriram 4,920
6 a/c
June 20 To Prem a/c 2,480 June By salaries 4,000
18 a/c
June 25 To Banka/c 5,000 30 By Bal c/d 48,560
June

June 30 Total 87,480 June Total 87,480

30
1July To bal b/d 48,560 48
 The ruling of a ledger account is as follows:

Dr. Capital a/c Cr.

Date Particular J.F. Rs. Date Particular J.F. Rs.

30 To Bal c/d 60,000 1june By Cash a/c 60,000
June
June Total 60,000 June Total 60,000
30 30
1july By Bal b/d 60,000

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 The ruling of a ledger account is as follows:

Dr. Bank a/c Cr.

Date Particular J.F. Rs. Date Particular J.F. Rs.

June 2 To Cash a/c 30,000 June By Cash ac 5,000
25
June By Drawings 1,000
28 a/c
June By Hanif 3,000
30
30 By Bal c/d 21,000
June
June Total 30,000 June 30,000
30 30
1 July To Bal b/d 21,000
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 The ruling of a ledger account is as follows:

Dr Purchase a/c Cr.

Date Particular J.F. Rs. Date Particular J.F. Rs.

June To Kamal 10,000 30 By Bal c/d 17,500
4 June
June To Bharat 7,500
15
June Total 17,500 June Total 17,500
30 30
1 July To Bal b/d 17,500

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 The ruling of a ledger account is as follows:

Dr. Shriram A/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Cash a/c 4,920 June By Bal c/d 5,000
e6 30
Jun To Discount 80
e6 a/c
Jun Total 5,000 June Total 5,000
e 30 30
1 To Bal B/d 5,000
July

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 The ruling of a ledger account is as follows:

Dr. Kamal A/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Bal c/d 10,000 June By Purchase 10,000
e 30 4 a/c

Jun Total 10,000 June Total 10,000

e 30 30
July By Bal b/d 10,000
1

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 The ruling of a ledger account is as follows:

Dr. Sales A/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Bal c/d 25,000 June By Cash a/c 20,000
e 30 8
June By Hamid 5,000
12 a/c
Jun Total 25,000 June Total 25,000
e 30 30
July By Bal b/d 25,000
1

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 The ruling of a ledger account is as follows:

Dr. Discount Received a/c Cr.

Date Particular J.F. Rs. Date Particular J.F. Rs.

June To Bal C/d 80 June By Shriram 80
30 6

June Total 80 June Total 80

30 30
July By Balb/d 80
1

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 The ruling of a ledger account is as follows:

Dr. Discount Allowed a/c Cr.

Date Particular J.F. Rs. Date Particular J.F. Rs.

June To Prem 20 June By Bal c/d 20
20 30

June Total 20 June Total 20

30 30
1 To Bal b/d 20
July

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 The ruling of a ledger account is as follows:

Dr. Hamid a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Sales a/c 5,000 June By Bal c/d 5,000
e12 30

Jun Total 5,000 June Total 5,000

e 30 30
July To Bal b/d 5,000
1

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 The ruling of a ledger account is as follows:

Dr. Bharat a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Bal c/d 7,500 June By Purchases 7,500
e 30 15

Jun Total 7,500 June Total 7,500

e 30 30
1 By Bal b/d 7,500
July

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 The ruling of a ledger account is as follows:

Dr. Prem a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Balc/d 2,500 June By Cash a/c 2,480
e 30 20
June By Discount 20
20 a/c
Jun Total 2,500 June Total 2,500
e 30 30
July By Bal b/d 2,500
1

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 The ruling of a ledger account is as follows:

Dr. Salary a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Cash a/c 4,000 June By Balc/d 4,000
e 18 30

Jun Total 4,000 June Total 4,000

e 30 30
1 To Balb/d 4,000
July

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 The ruling of a ledger account is as follows:

Dr. Drawing a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Bank a/c 1,000 June By Bal c/d 1,000
e 28 30

Jun Total 1,000 June Total 1,000

e 30 30
July To Bal b/d 1,000
1

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 The ruling of a ledger account is as follows:

• Dr. Hanif a/c Cr.

Dat Particular J.F. Rs. Date Particular J.F. Rs.

e
Jun To Bank a/c 3,000 June By Bal c/d 3,000
e 30 30

Jun Total 3,000 June Total 3,000

e 30 30
1 To Bal b/d 3,000
july

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Trial Balance

• Trial balance is a statement prepared with the balances or total

of debits and credits of all the accounts in the ledger to test the
arithmetical accuracy of the ledger accounts. As the name
indicates it is prepared to check the ledger balances. If the total
of the debit and credit amount columns of the trail balance are
equal, it is assumed that the posting to the ledger in terms of
debit and credit amounts is accurate.

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 Specimen of Trial Balance
Particular Amount(Dr.) Amount(Cr.)

Or

Dr. Cr.
Particular Amount Particular Amount

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 Trial Balance (As on 31 st… …… )
Particular Amount( Amount
Dr.) (Cr.)
Capital a/c 60,000
Cash a/c 48,560
Purchase a/c 17,500
Sales a/c 25,000
Shriram a/c 5,000
Kamal 10,000
Prem a/c 2,500
Discount Allowed a/c 20
Discount Received a/c 80
Bank a/c 21,000
Salaries a/c 4,000
Drawings a/c 1,000
Hamid’s A/c 5,000
Bharat 7,500
Hanif 3,000
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Total 1,05,080 1,05,080
DISTINCTION BETWEEN BOOK-
KEEPING AND ACCOUNTING
Transactions
B.K.-Recording of transactions in books of original entry.
Accounting-To examine these recorded transactions in order to
find out their accuracy.
Posting
B.K.-To make posting in ledger
Accounting-To examine this posting in order to ascertain its
accuracy.
Total and Balance
B.K.-To make total of the amount in journal and accounts of
ledger.
Accounting-To ascertain balance in all the accounts. To prepare 66
trial balance with the help of balances of ledger accounts
DISTINCTION BETWEEN BOOK-KEEPING AND
ACCOUNTING
Income Statement and Balance Sheet
B.K.-Preparation of trading, Profit & loss account and balance sheet
is not book keeping
Accounting-Preparation of trading, profits and loss account and
balance sheet is included in it.
Rectification of errors
B.K.-These are not included in book-keeping
Account-These are included in accounting.
Special skill and knowledge
B.K.-It does not require any special skill and knowledge as in
advanced countries this work is done by machines.
Accounting-It requires special skill and knowledge.
 Liability
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A book-keeper is not liable for accountancy work.
An accountant is liable for the work of book- keeper.
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