Chapter 1

• Accounting is often called the language of business. Its purpose is to

communicate or report the results of business operations and its various
aspects.
• It is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the
information.
• Accounting is the process of organizing, analyzing, and
communicating financial information that is used for decision-making.
• “Accounting is the language of business.”
• “Accounting is the language of life.”
Definition of MA
• The term accounting has been defined by different authors as under:
• According to the American Institute of Certified Public Accountants [AICPA];
“Accounting is the art of recording, classifying and summarizing in a
significant manner and terms of money, transactions and events, which are,
in part at least, of a financial character and interpreting the result thereof”.
• According to R.N Anthony, “nearly every business enterprise has accounting system. It is a
means of collecting, summarizing, analyzing and reporting in monetary terms, information’s
about business”.

According to Smith and Ashburne, “accounting is the art of recording, classifying and
summarizing 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 result thereof”.
Objectives Of Accounting
• The following are the objectives of accounting:
a. To record the business transactions in a systematic manner.
b. To determine the gross profit and net profit earned by a firm during a specific
period.
c. To know the financial position of a firm at the close of the financial year by way of
preparing the balance sheet
d. To facilitate management control.
e. To assess the taxable income and the sales tax liability.
f. To provide requisite information to different parties, i.e., owners, creditors,
employees, management, Government, investors, financial institutions, banks etc
Scope of accounting
Functions Of Accounting
• The following are the functions of accounting:
a. Recording: Accounting records business transactions in terms of money. It is
essentially concerned with ensuring that all business transactions of financial
nature are properly recorded. Recording is done in journal, which is further
subdivided into subsidiary books from the point of view of convenience.
b. Classifying: Accounting also facilitates classification of all business
transactions recorded in journal. Items of similar nature are classified under
appropriate heads. The work of classification is done in a book called the
ledger.
c. Summarizing: Accounting summarizes the classified information. It is
done in a manner, which is useful to the internal and external users. Internal
users interested in these information's are the persons who manage the
business. External users of information are the investors, creditors, tax
authorities, labour unions, trade associations, shareholders, etc.
d. Interpreting: It implies analyzing and interpreting the financial data
embodied in final accounts. Interpretation of the data helps the
management, outsiders and shareholders in decision making.
 Book

keeping

Accounting

Accountancy
9
Book-keeping
•Book-keeping is a part of accounting and
•is concerned with records keeping & maintenance of
books of accounting which is often routine & clerical
in nature and can be accomplished through the use of
mechanical and electronic equipments.
• Accounting starts where book keeping ends. It refers to the actual process of preparing and
presenting the accounts.
• In others words, it is the art of putting the academic knowledge of accountancy into
practices .
• It covers the following activates :
• Summarizing the classified transaction and events in the form of income Statement and
Position Statement etc.
• Analysing the summarised results.
• Interpreting the analysed results.
• Communicating the interpreting information to the
• interest of users.
Accountancy
• Accountancy refers to a systematic knowledge of accounting
concerned with the principle & techniques which are applied in
accounting, It tells how to prepare the books of accounts, how
to summaries the accounting information and how to
communicate it to theinterested parties.
 Different Branches of Accounting

• The following are the main branches of accounting:

(a) Financial accounting:

Financial Accounting is that branch of accounting which involves identifying, measuring,
recording, classifying, summarising the business transactions, i.e. it involves the steps
from Identifying, Recording of transactions to Summarisation, and communicating the
financial data.
(b) Cost accounting:
Cost Accounting is that branch of accounting which is concerned with the process of
ascertaining and controlling the cost of products or services.
(c) Management accounting
Management accounting refers to that branch of accounting which is concerned with
presenting the accounting information in such a way that helps the management in
planning and controlling the operations of a business and in decision making.
Difference Between Bookkeeping and Accounting

• In financial phrasing, the terms bookkeeping and

accounting are almost used interchangeably. However,
these concepts are different. While bookkeeping is all about
recording of financial transactions, accounting deals with
the interpretation, analysis, classification, reporting and
summarization of the financial data of a business.
 Bookkeeping
• Bookkeeping is the process of systematic recording and classification of financial
transactions of an organisation.
• Bookkeeping is said to be the basis of accounting, whereas accounting forms a part of
the broader scope in finance.
• The most important focus of bookkeeping is to maintain an accurate record of all the
monetary transactions of a business. Companies use this information to take major
investment decisions.
• The bookkeeper maintains bookkeeping records. Accurate bookkeeping is critical for
business as it gives a piece of reliable information on the performance of a company.
• Bookkeeping process consists of the following steps:

1.Identifying a financial transaction

2.Recording a financial transaction
3.Preparing a ledger account
4.Preparing trial balance
Accounting
• Accounting is the systematic process of recording, measuring and
communicating information about the financial transaction taking place
in a business. Accounting helps in determining the financial position of a
firm and present the same to stakeholders.
• It helps a business in the short and long term decision making and also
conveys the credibility of a company to the market.
• It is also known as the language of business.
• The purpose of accounting is to provide a clear view of financial
statements to its users, which includes investors, creditors, employees,
and government.
Bookkeeping Accounting

Bookkeeping deals with identifying and Accounting refers to the process of

recording financial transactions only summarizing, interpreting and
communicating the financial data of an
organisation.
Decision making
Data provided by bookkeeping is not Management can take important decisions
sufficient for decision making based on the data obtained from accounting

Preparation of Financial Statement

Data provided by bookkeeping is not Management can take important decisions
sufficient for decision making based on the data obtained from accounting

Preparation of Financial Statement

Not done in the case of bookkeeping Financial statements are a part of the
accounting process

Analysis
No analysis is required in the bookkeeping Accounting analyses the data and creates
insights for the business
Bookkeeping Accounting

Persons Involved
The person concerned with bookkeeping is The person concerned with accounting is
known as a bookkeeper known as an accountant
Determining Financial Position
Bookkeeping does not show the financial Accounting helps in showing a clear picture
position of a business of the financial position of a business
Level of Learning
No high-level learning required High-level learning required for
understanding and analysing accounting
concepts
Cost Accounting

• Cost accounting is referred to as a form of managerial accounting that is used

by businesses to classify, summarize and analyse the different costs with the
purpose of cost control and cost reduction and thereby helping management in
making better decisions.
• The primary function of cost accounting is said to be arranging, recording and
identifying suitable investment allocation for investment to determine the costs
of goods and services. It also helps in presenting relevant data to the
management related to service, contract or finding shipment cost.
• It also includes information related to cost of production, distribution and selling
Financial Accounting

• Financial accounting is a branch of accounting that is concerned with

the summarizing, recording and reporting of financial transactions that
take place in a business concern over a time period.
• Financial accounting is used for the preparation of various financial
statements that can be used by companies to showcase their financial
performance to the various users of financial information like creditors,
investors, customers and suppliers etc
Difference Between Cost Accounting And Financial Accounting

Cost Accounting Financial Accounting

Definition

Cost accounting is referred to as a form of Financial accounting is a branch of

managerial accounting that is used by accounting that is concerned with the
businesses to classify, summarize and summarizing, recording and reporting of
analyse the different costs with the purpose financial transactions that take place in a
of cost control and cost reduction and business concern over a time period.
thereby helping management in making
better decisions.
Type of Information documented

Documents the data associated with the Documents the data that are in monetary
labour and material which are utilised in the terms.
manufacturing procedure.

Estimation of Stock

Stock value is estimated at cost Stock value is estimated based on the lesser
value between net realisable value or Cost
Cost Accounting Financial Accounting

Analysis of Profit

Normally, the gains are investigated for a Profits, Income and expenditure are
specified job, batch, product and procedure investigated together for a specific period of
the entire trading concern
Primary Objective

Controlling and reducing cost Towards maintaining the complete record of

the financial transactions
 Difference Between Financial Accounting and
Management Accounting

FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Meaning
Financial Accounting is an accounting The accounting system which provides
system that focuses on the preparation of relevant information to the managers to
financial statement of an organization to make policies, plans and strategies for
provide the financial information to the running the business effectively is known as
interested parties. Management Accounting.
Information
Monetary information only. Monetary and non-monetary information
Objective
To provide financial information to To assist the management in planning and
outsiders. decision making process by providing
detailed information on various matters.
Format
Specified Not specified
 FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Time Frame
Financial Statements are prepared at The reports are prepared as per the need
the end of the accounting period and requirements of the organization.
which is usually one year.
User
Internal and external parties Only internal management.
Reports
Summarized Reports about the Complete and Detailed reports regarding
financial position of the organization various information.
Publishing and auditing
Required to be published and audited Neither published nor audited by
by statutory auditors statutory auditors.
 Advantages of Accounting

The following are the main advantages of accounting:

1. Provide information about financial performance
Accounting provides factual information about financial performance during a given period of
time
Like, profit earned or loss incurred over a period and financial position at a particular point of
time.
2. Provide assistance to management
Accounting helps management in business planning, decision making and in exercising control.
For this, it provides financial information in the form of reports.
3. Facilitates comparative study
By keeping systematic records and preparation of reports at regular intervals, accounting helps
in making a comparison.
4. Helps in settlement of tax liability
Systematic accounting records help in settlement of various tax
liabilities. Such as – Income Tax, GST, etc.
5. Helpful in raising loan
Banks and Financial Institutions grant a loan to the firm on the basis of
appraisal of the financial statement of the firm.
6. Helpful in decision making
Accounting provides useful information to the management for taking
decisions.
Limitations of Accounting

• Following are the limitations of accounting:

• Accounting is not precise: Accounting is not completely free from personal
bias or judgment.
• Accounting is done on historic values of assets: Accounting records assets
at their historical cost less depreciation. It does not reflect their current market
value.
• Ignore the effect of price level changes: Accounting statements are prepared
at historical cost. So changes in the value of money are ignored.
• Ignore the qualitative information: Accounting records only monetary
transactions. It ignores the qualitative aspects.
• Affected by window dressing: Window dressing means manipulation in
accounting to present a more favourable position of the business than the actual
position.
Accounting as a source of information

• Information generated through

financial statement such as profit
loss account, balance sheet, cash
flow statements, etc. facilitate by
different users of groups whether
inside or outside the business
enterprises. and enables them to
take appropriate decisions.
Users of Accounting Information

• The accounting process provides financial data for a broad

range of individuals whose objectives in studying the data
vary widely. Three primary users of accounting
information were previously identified, Internal users,
External users, and Government/ IRS. Each group uses
accounting information differently, and requires the
information to be presented differently.
 Internal users of Accounting
information
• Internal users are that individual who runs, manages and operates the daily
activities of the inside area of an organization.
• So who are the internal users of account information;

1.Owners and Stockholders.

2.Directors,
3.Managers,
4.Officers.
5.Internal Departments.
6.Employees
7.Internal Auditor.
• Managerial accounting identifies, measures, analyzes and communicates the
financial information needed by management to plan, control, and evaluates a
company’s operations for the internal users.
External users of Accounting information

• External users are those individuals who take interest in the account
information of an organization but they are not part of the organization’s
administrative process.
• External users have a direct or indirect interest in accounting information.
• Examples of external users of accounting information are;
• Creditors.
• Investors.
• Government.
• Trading partners.
• Regulatory agencies.
• International standardization agencies.
• Journalists.
ACCOUNTING CONCEPTS
AND CONVENTIONS.
 Accounting Principle are based on certain concepts and
conventions.
33

By Nisha Pawar
 Accounting convention
The term convention relates to customs or traditions as
a guide to the preparation of accounting statements.
 Accounting concept
Accounting concept is a basic assumptions
concerning the economic environment in which
accounting exists.
Accounting concept
1. Business Entity Concept :
Accountants treat a business as a distinct entity, separate from the persons who own it. Thus, it
becomes possible to record the transactions of the business with the proprietor also. If the
businessman introduces cash into the business, he becomes a creditor of the business, and his
contribution is recorded as capital. Thus business affairs are not mixed up with the private affairs.

2. Money Measurement Concept :

Accounting records only those transactions which are expressed in monetary terms. Non-
monetary events are ignored, even if they are otherwise important, thus, the purchase of furniture
will be recorded in the books of accounts while the death of a very efficient manager will be
ignored though it may greatly affect the business.
3. Cost Concept :
Transactions are recorded in the books of account at the amounts actually involved. No
arbitrary values put on transactions are considered. Thus, Purchase a plot for Rs 80000 the
market price of which is Rs 84000 while recording it in the accounts the entry must be made
with Rs 80000 only. However, in some cases estimated values are taken into consideration, e.g.
depreciation, etc.

4. Going Concern Concept :

It is assumed that the business will exist for a long time and transactions will be recorded with
that end in view. This concept classifies expenditure into capital and revenue. Expenditure that
will render benefit over a long period is called capital expenditure while the expenditure which
will be exhausted quickly, say, within a year, is termed as revenue expenditure. The purchase of
a building is a capital expenditure because it will render benefit over a long period while
purchase of stationery is revenue expenditure because stationery will be consumed in a short
period say, in a year.
5. Realization Concept:
Accounting is a historical record of transactions. It records what has happened but does not record anticipated
events. It means legal transfer of goods and services either in cash or on credit creating a legal obligation to pay
in future. However, adverse effects of events that have already occurred are usually recorded. Thus, cash
realized or a legal obligation to pay is recorded in the books.

6. Accrual Concept:
If an event has occurred, its consequence will follow. If a transaction is not settled in cash, nevertheless it is
proper to record the event in the books. Thus expected future cash receipts and payments are considered in
accounting. As for example; unpaid salaries and wages, prepaid rent etc. are taken into account.
7. Matching Concept:
Though the business is a continuous affair, its continuity is artificially split into several accounting years for
determining the periodical results. Thus, expenses of a particular period are compared with the revenues of
that period to determine the net operational results of that accounting period. As for example; rent for twelve
months whether paid or not is matched against the revenues earned during these twelve months.
Accounting Conventions

• Accounting conventions were established with a motive to

bring uniformity in the books of accounts at the time of
preparing them. Conventions are like customs/traditions
that help the accountant to communicate clear accounting
picture. In other words, accounting convention sets the
guideline for the accountant that in turn helps him/her to
prepare accounting statements and reports. Now lets us
see the important accounting conventions:
Conservatism Convention
• As per the Conservatism convention at the time of recording any financial
transaction, you should recognize no profit but provide for all possible losses.
This is the most important convention as it depends upon the theory that the
future is uncertain. For instance, the value of inventory is recorded at cost or
market price whichever is less. In a similar way, the provision for doubtful
debts is also created. However, conservatism impacts current assets and
liabilities.
• Nowadays the conservatism convention is being criticized as it conflicts with
full disclosure convention. As through this convention, there are possibilities
that an accountant may create secret reserves such as depreciation
provisions. And due to this, the financial statements do not show a true and
fair view of a business.
Convention of Full Disclosure

• Full disclosure convention helps the user in the proper interpretation of the financial
statements of the company. As per this convention at the time of preparing records,
full disclosure of financial information shall be made by the accountant.
• Full disclosure can be made in two ways:
• Either in the body of the financial statements, or
• In notes accompanying such financial statements
• However, in case if there are any financial events that occur between the
balance sheet preparation date and its publication. Then in such a case, the relevant
information about such event shall also be disclosed.
• In a nutshell, full disclosure of every single accounting record is a need so as to make
such record helpful. So through this, we can conclude that the convention of full
disclosure is a very significant convention.
Consistency Convention
• According to the convention of consistency once the company has decided to follow a method of
accounting then it shall consistently follow the same method throughout. Along with this,
changing the accounting method often would make the comparison of its own financial
statements of different period difficult for the company.

• Moreover, the convention of consistency helps the management to analyze the financial
statement of different periods and ensure that corrective decisions are taken, if needed.
However, if a change is necessary for the accounting method then there shall be a sound reason
for such change.

• Through the above statements, we can conclude that consistency convention helps in

• Promoting accuracy

• Enhancing comparability

• Decision making

• Moreover, it does not bar any accounting method change but if there is any change, then such
change shall be disclosed in the financial statements.
Accounting Convention of Materiality

• As per the accounting convention of materiality, an item is material if it can

influence the decision of users of the financial statements. This convention is
related to the significant importance of any event or item. Moreover, the
materiality of an item depends on its amount and an events materiality
depends upon its nature.
• The materiality convention enables the users to ignore all such events or
items that are not relevant or material. For instance, most companies publish
their financial statements in round figures and do not include paise. Such
omission is irrelevant or immaterial when figures are in crores or lakhs.
• Therefore we can conclude that all relevant information should be disclosed
as per the convention of materiality that may help the user to understand the
financial statements clearly.
 System of Accounting
• System of accounting
• There are following two systems of recording transactions in the books of
accounts:
• Double Entry System
• Single Entry System
Single Entry System

• Single entry system is an incomplete system of accounting, followed by small

businessmen, where the number of transactions is very less. In this system of
accounting, only personal accounts are opened and maintained by a business
owner. Sometimes subsidiary books are maintained and sometimes not. Since
real and nominal accounts are not opened by the business owner, preparation of
profit & loss account and balance sheet is not possible to ascertain the correct
position of profit or loss or financial position of business entity.
Double Entry System

• Double entry system of accounts is a scientific system of accounts followed all

over the world without any dispute. It is an old system of accounting. It was
developed by ‘Luco Pacioli’ of Italy in 1494. Under the double entry system of
account, every entry has its dual aspects of debit and credit. It means, assets of
the business always equal to liabilities of the business.
• Assets = Liabilities
• If we give something, we also get something in return and vice versa.
47
 Personal account
As the name says, personal accounts are accounts of persons. They,
therefore, bear the names of persons. Such persons can be credit
customers or credit suppliers. Therefore, personal accounts are kept
in either:
• Sales ledger,
or
• Purchases ledger
Note that in accounting, persons refer not only to individuals but also
to companies, partnerships or any form of organization with whom
there may be transactions.
Personal Accounts, in practices may be of following types:
• Natural Personal Account
• Artificial or Legal Persons Accounts
• Representative or Groups Personal Accounts 46
49
• Natural Personal Account
Such as the accounts of proprietor, supplier or receiver
of goods or money, etc., in the name of natural persons
such as Albert Account, James Account etc.
 • Artificial or Legal Persons Accounts
50
Such as the accounts of legal entities in the nature of
limited companies accounts,
(example : Hindustan Lever Limited , ITC Limited.),
Such as the accounts of legal entities in the nature of
Partnership Firms Accounts
(example: Radhey Ram Nath Bros.)
Such as the accounts of legal entities in the nature of
Government agencies
(Example: Sports Authority of India)
Such as the accounts of legal entities in the nature of
Institutional accounts
(example: Delhi Collage of Arts and Commerce);

Such as the accounts of legal entities in the nature of

Clubs Accounts
(example: Lions club)
51
• Representative or Groups Personal Accounts

The group or representative personal accounts are

the accounts of different persons of the same nature but
more than one in numbers.

In the account books, the accounts are opened in the names of

individual persons. But since they are of same nature ,
they are grouped into one accounts

Example : Sundry Debtors Account and Sundry Creditors Account.

52
Impersonal accounts

Accounts which are not personal such as machinery account, cash

account, rent account etc.

As seen in the previous slide, impersonal accounts are of

two types:
1. Real accounts
2. Nominal accounts

All impersonal accounts are kept in the General ledger.

 .• Real accounts
53
Real account stands for the resources or properties of a business
enterprises, which can be intangible and tangible.

Tangible accounts refer to properties having

physical existence , like cash, building, stock of
goods, furniture etc.

Intangible refer to those which can not be

physically felt or touched but are capable of
monetary measurement such as Goodwill
patent rights, trademarks, copyrights, etc.
 • Nominal accounts
• Nominal accounts relates to expenses, revenues, capital
and drawing. Examples of accounts are:

 Loan account
 Sales account
 Commission received account,
 Salaries account,
 Rent account,
 Capital account,
 Drawings account
 Purchases Return Account
 Sales Return Account 52
 ENTITY: BASIC ACCOUNTING TERMS
Entity means a thing that has a definite individual existence. When an
accounting system is devised for a business entity, it is called an
accounting entity. For example Big Bazar, Bhargav Paints Pvt. Ltd. etc.

TRANSACTION:
A event involving some monetary value between two or more entities,
and is capable of changing the financial position of the enterprise.
We can also say that transaction is a activity of a financial nature
having documentary evidence, capable of being presented in
numerical, monetary term causing effect on assets, liabilities, capital,
revenue and expenses. it can be in both forms cash or credit.

Transaction can be purchase of goods, collection of money, payment to

creditors for goods and services, etc.
54
 Assets
Assets are economic resources of an enterprise that can be useful
expressed in monetary terms.they are those resources that the
business owns. These are the items of value used for the operations of
the business enterprise and also includes the Assets = Capital +
Liabilities due to it from others. some of the examples of assets are
money owing by debtors, stock of goods, cash, furniture, machines,
building, etc.

Assets = Capital + Liabilities

Assets can be broadly classified into two types :
 Fixed Assets
 Current Assets
55
 FIXED ASSETS
Fixed assets are those assets which are
purchased for the purpose of operating the
business and not for resale i.e., held by the
business enterprise for long term purpose.
Examples of fixed assets are building,
machinery, furniture, etc.

CURRENT ASSTES:
Current assets are those which are held on the short
term basis with the intention of converting them into
cash during the normal business operations of the
company. Examples of current assets are -unsold
stock, debtors, bills receivables bank balance, cash in
56
hand, etc.
58
Liquid Assets
Liquid Assets liquid assets are those which yield cash in a very short
period of time current assets excluding inventory and prepaid
expenses are included in liquid assets

Liquid Assets = Current assets - Prepaid expenses - Inventory

Intangible Assets
Intangible assets are those which can't be seen and touched but
we can feel them for example goodwill, trademark, etc.

Tangible Assets
Tangible assets are those which can be seen and touched . For
example furniture car building etc.
59
Liabilities :
Liabilities are obligation or debt that an enterprise has to pay at
some time in the future. They represent the creditors’ claim on the firms’
assets, or we can say that they are claims of those who are not owners.
They can be expressed as :
Liabilities = Assets - Capital
Liabilities can be classified into following:
Long term Liability are those that are usually payable after the
period of one year. They are also known as Fixed Liabilities.
For example, long-term loan, debenture, public deposit, etc.

Short term Liability are those which are payable with in a year from
the date of balance sheet and paid out of current asset. For example,
bank overdraft, bills payable, outstanding expenses.
 Capital :
Amount (in terms of money and asset having monetary value)
invested by the owner in the firm is known as capital. For the
firm, it is liability towards the owner, since owner is treated to
be separate from the business. Capital is also known as
owner’s equity and is always equal to assets less liabilities.
This can be expressed as:

• Capital = Assets – Liabilities

•Goods :
•Goods refers to product and services in which the business unit is dealing i.e., in terms of which it
buying and selling or producing or producing and selling . They are the physical item of trade. Here
should be noted that items which are purchased of stationery dealer, purchase of stationery will be
goods for him but for others stationery is just an item of expense

59
Sales:
Sales are total revenue from goods or services sold or provided to
customers when the goods are sold to cash, they are cash sales
but if good are sold and payment is not received at the time of the
sale, it is termed as credit sale. Some customers might return the
goods, that returned portion is sale return which is deducted from
the total sales but sales of fixed assets is not termed as sales.

Purchases
Purchases are total, amount of goods procured by a business on
credit and on cash, for use or sale. In manufacturing, raw material
are purchased, processed further into finished goods and are
then sold. In trading concern, purchases are made of
merchandise for resale with or without processing.
Revenues
Revenues are the amount of the business earned by
selling the goods or services to the customers, they are
the inflow of asset which results in an increase owner
capital sales of goods and services, earning from
interest, dividends, rent, commission etc., are some
example of revenue.

61
 Expenses
Costs incurred by the business in the process of
earning revenue are known as expenses. They are
the amount spend in order to produce the revenue. It
decreases the capital. Expenses may include : Cost of
sales, depreciation, general business expenses such
as salary, advertisement, commission, rent, etc.
Expenses may classified into

Outstanding Expenses.
It refers to those Expenses which have become due during the
accounting period but which yet not paid. They are liability of the firm.

Prepaid expenses:
It refers to those expenses which are not due yet but are paid well
in advance. They are treated as an advances.
Expenditure:
Expenditure may be define as money spend or liability incurred for
some benefit, service or receiving property. Some of the example of
expenditures are – Payment of rent, Salaries, Purchase of Goods,
Purchase of Machinery, Purchase of Furniture, etc. Expenditure may
be classified into :
Capital Expenditure :
Those Expenditure which are incurred for acquiring fixed assets like
Building, machinery ,furniture etc, are referred to as a capital
expenditure , and are shown in the balance sheet as assets
Revenue Expenditure:
Those expenditure which are incurred in the current year and
benefit
of which is also taken in the same in the same accounting year .
These expenditure
expenditure do not
is termed result in income of the firm. All revenue
as expenses 63
 Profit
The excess of revenues of a period over its
related expenses during any accounting
year is profit.
 Gross Profit
Gross Profit It is difference between ales
revenue or the proceeds of goods or services
sold over. its direct cost
 Net Profit.
It is the profit made after allowing for all
expenses.
 Gain
Profit that arise from events or transactions which is incidental to
winning
business oiscourt case,
termed appreciation
as gain. Exampleingo
value
gainofare:
fixed assets,
sale etc.asset,64
of fixed
66

The excess of expenses of a period over its related

revenues is termed as loss. It decreases the owner’s equity.

Loss = Expenses-Revenue
It is also referred to such activities of business which do
not yield any benefit.
For example : Loss due to accident, theft etc. It also include
loss on sale of fixed assets
67
Income
Income is the profit earned during a period of time or we can say
that the difference between revenue and expense is called income.

Income =Revenue – Expenses

Income can be classified into followings :

 Income received in advance :

It refers to that part of income which has been received by business
well in advance or before being actually earned. It is liability for
the firm.
 Accrued Income
It refers to that part of income which has been earned by the
business during the accounting year but yet not to become due, and
therefore not yet received. It is treated as an asset for the firm.
 Discount :
Discount is the deduction in the price of the goods sold.
Discount can be classified into two types :
1. Trade Discount
2. Cash Discount
Trade Discount
Offering any deduction at agreed percentage of sale price at the
time of selling the goods, is termed as Trade Discount. It is generally
offered by manufacture to whole seller or whole seller to retailer.
It is always deducted from the sale price and no entry is made in the
books of accounts.

Cash Discount
When the buyer is allowed some discount to induce them to
make prompt payment, it is called cash discount. It is recorded
in books of accounts. 67
Drawings:
Any type of withdrawal i.e. in monetary terms of goods, by the owner
from the business for personal use, is known as drawings. It is to be
noted that drawings reduce the owner’s equity in the business

Debtors:
Those persons who owes money to the firm generally on account of
credit sale of goods is called a Debtor. The total amount standing to
the favour of such person and/or entity on the closing date , is
shown in the balance sheet as Sundry Debtors on the asset side.
Creditor:
A person to whom the firm owes money is called a creditor. They
are
the persons and/or rather entities who have to be paid by an
enterprise on amount for providing the goods on credit.
The total amount standing to the favour of such person and/or entity
on the closing
balance sheet.date is shown as Sundry Creditors on the liability side68 of
70
Dual Aspects Principle

This principle is based on the

famous Newton’s Law of Motions
i.e. to every action there is always
an equal and contrary reaction.

Thus every debit balance must have a corresponding credit

and vice-versa and upon this dual aspect whole
superstructure of Double Entry System of Accounting has
been raised.
 Golden Rules Of
Accounting
There are 3 golden rules or types of accounts. These are:-
1.Rules of Accounting: Debit Debit the Receiver,
Credit the Giver
2.Debit what
• the Receiver
Credit the Giver.

• Rules of Accounting:
Debit what comes in
Credit what goes
• Rules of Accounting: out
Debit all expenses and losses
Credit all income and gains 71
 Journal
book
Journal a book of primary record and
often called a book of original entry.
This is also called a day book, perhaps
because of its name having been
derived from a French word jour
meaning “day.”

72
STEPS IN JOURNALISING
In the process of journalizing the accounts by each and every
transaction are debited and credited separately. Its involves the
following steps:
Step 1 : Ascertaining the names of accounts after examining the
business transaction.
Step 2: Choosing the approach to follow i.e. Traditional O‘
Modern.

Step 3: Analyse the nature of accounts involved in the transaction

based upon the selected approach.
Step 4 :Examine the name of accounts to be debited or credited.
Step 5: Fill in the related information in all the five columns of
the
Step 6: Write the narration of the transaction. 73
journal.
74 Ledger
The ledger is a book of final entry in which the accounts are recorded
in a classified and summarised form. It is, therefore, the PRINCIPLE
BOOK which supplies detailed information about the trancations
connected with a individual account at a glance.

A ledger Account may be defined

as a summary statement of all the
transactions relating to person,
asset, expense or income which
have taken place during a given
period of time and shows their net
effect.
 FORMAT OF LEDGER ACCOUNTS:
75

A Ledger account has two sides –

Debit (left part of the accounts) and
Credit (right part of the account) as
shown below:
76
POSTING:
The process of transferring the debit and credit items from journal to classified
accounts in the ledger is known as ‘Posting’.

Rules regarding Posting:

Separate account is opened in ledger book for each account and entries from
ledger posted to respective account accordingly.

Use the words ‘To” (identifies the accounts to be written on the debit side) and
‘By’ (identifies the accounts to be written on the credit side)

The concerned account debited in the journal should also be debited in the
ledger but reference should be of the respective credit account
77
BALANCING
At the end of the each month or year or any specific day it is necessary to determine the
balance in an account. To do that, add the totals of both sides (Debit and credit sides) and
find out the difference in both the side. The difference in both the sides is ‘Balance’. If the
Debit is greater than the credit side, it is a Debit balance or vice-versa.

The Debit balance is written on the Credit side as, “By Balance c/d” (carried down)
or the Credit balance is written on the Debit side as, “To Balance c/d. By doing this,
two sides will be equal.

While preparing the Ledger accounts for next period, this balance would be transferred
from last period Ledger accounts as ‘To Balance b/d’ (brought down) if there was debit
balance or ‘By Balance b/d’ if there was credit balance in the last period Ledger.

It should be noted that Nominal accounts are not balanced, instead the balance at
end need to be transferred to the Profit and Loss Account.
78

A Trail Balance is a statement of debit

and credit totals or balances, extracted
from the ledger with the view to test the
arithmetical accuracy of the books .

Trail Balance is neither a part of double entry system, nor it appear in the
actual account. It is merely a working paper. Always remember a trail
balances just a statement, not as account.

It is always prepared on a particular date and not a particular period.

79
METHODS:
Total Method:
Under this method, every ledger account is totalled and that total amount (both
credit and debit side) is transferred to trial balance. The difference of totals of
each ledger account is the balance of that particular account. This method is not
commonly used as it cannot help in the preparation of financial statements.

Balance Method:
Under this method, every ledger account is balanced and those balances only are
carried forward to the trial balance. Financial statements are commonly prepared on
the basis of this method.

Total and Balance Method:

As name shows it is combination of above two methods. Under this method,
statement of trial balance shows to balance contains the balance in both ways
as explained in the above two methods.
80 RULES:
Following are the rules to prepare trial balance from Ledger balances:

1) The following balances must be placed in the debit side of the trial
balance:
Asset Accounts
Expenses Accounts
Losses
Drawings
Cash and Bank Balances

2)The following balances must be placed in the credit side of the trial
balance:
Liabilities Accounts
Income Accounts
Profits
Capital Account
81
Trading Account
“The Trading Account shows the result of
buying and selling of goods. In preparing
this account, the general establishment
charges are ignored and only the
transactions in goods are included.”

Profit & Loss account

According to Prof. Carter, “A Profit & Loss account is
an account into which all gains and losses are
collected in order to ascertain the excess of gains over
losses or vica versa.”
 New format of Profit & Loss account as per Revised schedule 6 Revised:

82
83

In financial accounting, a balance sheet or statement of

financial position is a summary of the financial balances
of a sole proprietorship, a business partnership, a
corporation or other business organization, such as an LLC
or an LLP. Assets, liabilities and ownership equity are listed
as of a specific date, such as the end of its financial year.
business' calendar year.

A balance sheet is often described as a "snapshot of a company's financial

condition". It is also known as position statement.
 TRADITIONAL FORMAT OF BALANCE
84 SHEET :
New Format of balance sheet as per schedule 6 (Revised)

By Nisha Pawar 85
Accounting cycle is a step -by-step process of
recording , Classifying and summarization of
economic transactions of business
.Its generates useful financial information n the
form of financial statement including income
statements, Balance sheet, cash flow statements
and statement of change in equity.

86
Main steps in an accounting cycle:
1. Collect & verify source data
2. Analysing the transactions
3. Recording transaction via Journal Entries
4. Posting Journal Entries to Ledger Account
5. Preparing the trail balance
6. Preparing worksheet
7. Preparing Financial statements
8. Preparing adjusted entries at the end of the
period.
9. Preparing post- closing trail balance
87
88

By Nisha Pawar