UNIT 1

MEANING
Accounting is the systematic process of identifying, measuring, recording, classifying,
summarising, interpreting and communicating financial information. Accounting gives information
on:
(i) the resources available
(ii) how the available resources have been employed and
(iii) the results achieved by their use.
DEFINITION
According to the American Institute of Certified Public Accountants “Accounting is the art of
recording, classifying and summarising in a significant manner and in terms of money,
transactions and events which are in part, at least of a financial character and interpreting the
results thereof ”.
Accounting cycle
Objectives of Accounting
i) To keep a systematic record of financial transactions and events
ii) To ascertain the profit or loss of the business enterprise
iii) To ascertain the financial position or status of the enterprise
iv) To provide information to various stakeholders for their requirements
v) To protect the properties of an enterprise and
vi) To ascertain the solvency and liquidity position of an enterprise
 ACCOUNTING CONCEPTS

1.Business entity
2. Going concern

3.Money measurement
4.ACCOUNTING PERIOD

The period of time covered by a company's financial statements.

5.Cost concept
5. Dual Aspect concept

From this concept arises the basic accounting equation, that is,
Capital + Liabilities = Asset
6.Realisation concept
Any change in value of an asset is to be recorded only when the business
realises it. When assets are recorded at historical value, any change in value is
to be accounted only when it realises.

7. Matching concept
6. Materiality
7. Consistency
Personal Accounts:
This rule is applicable to all individuals. The individuals are three types shown as following: –
1. Persons: – Natural Person.
2. Artificial persons: – The person created by humans.
3. Representative persons: – Those accounts which represent the person or group of persons.

Example of accounts on which the Personal Account is applicable: –

● Examples of Persons: – Amanpreet, Jazz, Pawan Kumar, Vijay, Amir Khan. Etc.
● Examples of Artificial persons: – Ram And Sons., HAPPSS Store., Bank A/c (SBI), Reliance Industries Ltd.
Etc.
● Examples of Representative persons: – Outstanding Salary, Prepaid Expenses, Accrued Income, Pre-
received Income, Etc.
Real Accounts:
The real account is a ledger account relating to all assets of the business enterprise. This rule is applicable to
the following business transactions: –
● Purchase of assets,
● Sale of assets,
● Depreciation charged on the assets, and
● Dispose of an asset.

The example of assets on which the Real Account is applicable:-

● Land and Building,
● Furniture
● Plant and Machine
● Vehicles
● Cash
● Trademarks
● Copyright
Nominal Accounts:
The accounts which are related to the expenses, income, losses, and gains are included in the
nominal account.

Example of all accounts on which the Nominal Account is applicable:-

● Expenses Accounts: –Salary, Wages, Purchases, Electricity bill, Telephone, and mobile Rent,
Transportation charges, Rent Paid, Etc.
● Incomes Accounts: – Sales, Commission Received, Rent on sublet building received, Etc.
● Losses Accounts: – Loss on sale of an asset, Loss by Theft, Loss by fire, loss by an accident, Etc.
● Profits Accounts: – Profit on sale of an asset, Etc.
Format of Journal
1. Real Accounts: Example No. 1: Purchase Furniture for Rs 10,000/-

Steps Purchase Furniture for Rs. 10,000/-

1st Scan and select affected Accounts (From Furniture 10,000/-

the transaction) Cash

2nd Select What type of Accounts these are Asset Account Asset
(separately) Account

3rd Select the rule which will be applied to Real Account Real
these accounts Account

4th What will be the effect of this transaction Purchased Payment

on these accounts made

5th Which condition of the golden rule is Comes in Goes out

applied to these accounts

6th Now, In the end, you got the name of the Debit (What comes in) Credit
Debit and the credit account. (What
goes
out)
Journal entry

Date Particulars L.F. Debit Credit

Furniture a/c Dr. 10,000

To Cash a/c 10,000

(Being Furniture purchased)

2. Personal Accounts: Purchase of Furniture For Rs. 10,000/- from Aman on Credit.
Journal entry

Date Particulars L.F. Debit Credit

Furniture a/c Dr. 10,000

To Aman a/c 10,000

(Being Furniture purchased on credit from Aman)

3. Nominal Accounts:Salary paid to employees Rs. 5000/-.
Journal entry

Date Particulars L.F. Debit Credit

Salary a/c Dr. 10,000

To Cash a/c 10,000

(Being salary paid to employees)

Journalizing the following transactions.
Cash paid to Rahul ` 4,000
Jeyaseeli is a sole proprietor having a provisions store. Following are the transactions during
the month of January, 2018. Journalise them.
Jan. `
1 Commenced business with cash 80,000
2 Deposited cash with bank 40,000
3 Purchased goods by paying cash 5,000
4 Purchased goods from Lipton & Co. on credit 10,000
5 Sold goods to Joy and received cash 11,000
6 Paid salaries by cash 5,000
7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan
8 Bought furniture by cash 4,000
9 Paid electricity charges by cash 1,000
10 Bank paid insurance premium on furniture as per standing instructions 80
Valluvar is a sole trader dealing in textiles. From the following transactions, pass journal
entries for the month of March, 2018.
March
1 Commenced business with cash 90,000 with goods 60,000
2 Purchased 20 readymade shirts from X and Co. on credit 10,000
3 Cash deposited into bank through Cash Deposit Machine 30,000
4 Purchased 10 readymade sarees from Y and Co. by cash 6,000
5 Paid X and Co. through NEFT
6 Sold 5 sarees to A and Co. on credit 4,000
7 A and Co. deposited the amount due in Cash Deposit Machine
8 Purchased 20 sarees from Z & Co. and paid through debit card 12,000
9 Stationery purchased for and paid through net banking 6,000
10 Bank charges levied 200
 Ledger

Ledger account is a summary statement of all the transactions

relating to a person, asset, liability, expense or income which has
taken place during a given period of time and it shows their net
effect. From the transactions recorded in the journal, the ledger
account is prepared. Ledger is known as principal book of accounts.
It is a book which contains all sets of accounts, namely, personal,
real and nominal accounts. Accountwise balance can be determined
from the ledger. The ledger accounts are prepared based on journal
entries passed.
 Format of ledger account

Following are the details contained in the various columns in the ledger:
Date : Date of the transaction is recorded in this column.
Particulars : The account debited or credited is recorded in this column. On the debit side,
the entries are made starting with ‘To’ and on the credit side, entries are made starting with
‘By’.
Journal Folio (J.F.): In this column, the page number of the journal or subsidiary books
from which the entry has been posted to the ledger is noted.
Amount : The amount of the transaction is recorded in this column.
 Procedure for posting
The process of transferring the debit and credit items from the journal to the ledger accounts is called posting.
The procedure of posting from journal to ledger is as follows:
a) Locate the ledger account that is debited in the journal entry. Open the respective account in the ledger,
if already not opened. Write the name of the account in the top middle. If already opened, locate the
account from the ledger index. Now entries are to be made on the debit side of the account.
b) Record the date of the transaction in the date column on the debit side of that account.
c) Record the name of the account credited in the journal with the prefix ‘To’ in particulars column.
d) Record the amount of the debit in the ‘amount column’.
e) Locate the ledger account that is credited in the journal entry. Open the respective account in the ledger,
if already not opened. Write the name of the account in the top middle. If already opened, locate the
account from the ledger index. Now entries are to be made on the credit side of the account. Record the
date of the transaction in the date column. Record the name of the account debited in the journal entry in
the particulars column with the prefix ‘By’ and write the amount in the amount column.
Pass journal entries for the following transactions and post them in the ledger accounts.
2017
June
1 Basu started business with cash ` 50,000
4 Purchased furniture by paying cash for ` 6,000
7 Purchased machinery on credit from Harish ` 10,000
10 Bought goods for cash ` 4,000
18 Paid insurance premium ` 100
Procedure for balancing an account
Thamizhanban started book selling business on 1st January, 2018. Following are the transactions
took place in his business for the month of January, 2018. Pass journal entries and prepare ledger
accounts.
2018
Jan. 1 Started business with cash ` 3,00,000
2 Opened bank account by depositing ` 2,00,000
5 Goods bought from Tamilnadu Textbook Corporation for cash ` 10,000
15 Sold goods to MM Traders for cash ` 5,000
22 Purchased goods from X and Co. for ` 15,000 and the payment is made through net
banking.
25 Sold goods to Y and Co. for ` 30,000 and the payment is received through NEFT
 Direct ledger posting
Prepare cash account from the following transactions for the month of January 2018.
Jan
1 Commenced business with cash ` 62,000
3 Goods purchased for cash ` 12,000
10 Goods sold for cash ` 10,000
12 Wages paid ` 4,000
25 Furniture purchased for cash ` 6,000
 Trial balance

Trial balance is a statement containing the debit and credit

balances of all ledger accounts on a particular date. It is arranged
in the form of debit and credit columns placed side by side and
prepared with the object of checking the arithmetical accuracy of
entries made in the books of accounts and to facilitate preparation
of financial statements.
Though the trial balance can be prepared on any day (at the end of
the month, quarter, etc.), it is normally prepared at the end of the
accounting period
Trial balance is prepared in the following format under the balance method: