1.
INTRODUCTION
1. MEANING
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 financial character, and interpreting the results
thereof.
- American Institute of Certified Public Accountants (AICPA)
-
2. CYCLE
Identification
& Preparation of
Vouchers
Communication
Recording in
and Interpretation
Journal
of Results
Summarising in Trial
Balance & Final Classifying in Ledger
Accounts
3. USERS
Internal Users
i. Directors
ii. Managers
External Users
i. Shareholders
ii. Financial Institutions
iii. Government
iv. Tax Authorities
v. Stock Exchange Board
4. BRANCHES OF ACCOUNTING
Financial Accounting
Financial Accounting can be called as the first stage of accounting. In this, accountants identify, record,
classify and summarise the data relating to monetary business transactions of the organisation.
Management Accounting
Management Accounting deals with interpreting the results of what financial presents. This job includes
analysis and taking decisions on the basis of the results.
Cost Accounting
Cost Accounting deals with decisions relating to the cost of the products and othe direct and indirect
expenses.
5. QUALITATIVE CHARACTERISTICS OF ACCOUNTING
i. Reliability
ii. Relevance
iii. Comparability
iv. Understandability
6. BASIC TERMS
i. Entity: A reality having its individual existence.
ii. Transactions: Event between 2 or more entities involving some value.
iii. Assets: Economic resources.
iv. Current Assets: Short term assets lasting for less than a year.
v. Non-Current Assets: Assets lasting for over a year.
vi. Liquid Assets: Current assets which are very likely to be converted in cash at the very
moment. These don’t include stock and prepaid expenses.
vii. Fixed Assets: Non-current assets which are tangible. E.g. plant & machinery, land, etc.
viii. Intangible Assets: Non-current assets which can’t be touched or seen, but their presence
affect the business. E.g. Goodwill, patents, copyrights, etc.
ix. Fictitious Assets: Deferred expenses which appear in balance sheet which have lasting
effect. E.g. Advertisement expenses which are made today but have effect for coming 5
years.
x. Liability: Debts or Obligations which an entity owes to others.
xi. Current Liability: Liability which is expected to be settled within a year.
xii. Non-Current Liability: Liability which is expected to take more than a year to settle.
xiii. Contingent Liability: A ‘to be liability’ predicted based on uncertain future.
xiv. Capital: Amount invested by the owner(s) in the form of cash, bank balance or any other
asset.
xv. Sales: Total revenue generated from providing products to customers.
xvi. Revenue: Amount earned by providing commodities to the customers.
xvii. Expenses: Amount incurred by business in the process of earning revenue through sales.
xviii. Expenditure: Amount or liability incurred in order to acquire assets or for some benefit.
xix. Profit: Excess of revenue over its related expenses in an accounting period.
xx. Loss: Excess of expenses over its related revenue in an accounting period.
xxi. Gain: Benefit aroused form the sales of fixed assets, or any other such incidental
transactions and not from regular business operations.
xxii. Discount: Deduction in the price of goods sold.
xxiii. Trade Discount: Discount received or provided at the time of transaction based upon the
quantity of goods.
xxiv. Cash Discount: Discount received or provided at the time of payment because of timely and
appropriate payment.
xxv. Goods: Products in which business deals.
xxvi. Purchases: Total amount of goods procured by the business.
xxvii. Stock: Measure of on-hand goods, spares and other purchases.
xxviii. Drawings: Withdrawal of money or other assets by the owner(s) for personal use.
xxix. Debtors: Entities who owe money to another entity.
xxx. Creditors: Entities to whom one owes money.
xxxi. Voucher: Documentary evidence in support of a transaction.
2. THEORY BASE
1. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
GAAPs refer to the rules or guidelines adopted for recording and reporting of business transactions, to
bring uniformity in preparation and presentation of financial statements.
These principles include ‘Concepts’ and ‘Conventions’. Concepts are the necessary assumptions and
ideas which are fundamental to accounting. Conventions are the traditions working as a guide for
accounting.
2. LIST
i. Business Entity: It is assumed as business has distinct and separate entity from its owner(s).
ii. Going Concern: Business would continue its operations indefinitely, i.e., it would carry its
operations for a fairly long time and would not end in near future.
iii. Money Measurement: Only those transactions which involve monetary value can be
recorded in financial statements.
iv. Accounting Period: It is assumed that business would carry on indefinitely. So, it becomes
necessary to prepare a summary of transactions in some period repeatedly to present to its
stake holders.
v. Historical Cost: All assets are to be recorded in their original value and their value would not
change in accounts regarding market price or inflation or deflation.
vi. Dual Aspect: Every transaction has two-fold effect, i.e., for every debit, there would be
equal credit, and vice versa.
vii. Consistency: Accounting must be done following the same routine and guidelines so as to
maintain consistency in results and make it easier to compare.
viii. Materiality: Accounting must focus on material facts only which help in determination of
financial status directly. E.g. Leaving of loyal worker reduces the sales, but his/her leaving
would not be counted as a loss.
ix. Objectivity: Accounting info must be free from bias and must serve the objectives of
stakeholders.
x. Conservatism or Prudence or Revenue Recognition or Realisation: Expenses must be
recorded as and when made even if not realised. Revenues must be recorded only when
realised.
xi. Full Disclosure: Financial Statements must disclose in full all the affairs of business to the
end users.
xii. Matching: Revenues must be deducted with only the related expenses which have been
recorded.
3. BASIS OF ACCOUNTING
i. Cash Basis: Entries in the book of accounts are made when cash is received or paid and not
when the receipt or payment becomes due.
ii. Accrual Basis: Revenues and costs are recognized in the period in which they occur rather
when they are paid. A distinction is made between the receipt of cash and the right to
receive cash and payment of cash and legal obligation to pay cash.
4. ACCOUNTING STANDARDS
Accounting standards are written policy documents covering the aspects of recognition, measurement,
treatment, presentation and disclosure of accounting transactions in financial statements.
In India, AS are issued by Institute of Chartered Accountants in India (ICAI). They publish these with help
of their unit Accounting Standards Board.
3. RECORDING
1. ACCOUNTING EQUATION
Assets = Liabilities + Capital
2. RULES OF RECORDING
i. For Real Accounts
Debit what comes in, credit what goes out.
ii. For Nominal Accounts
Debit all the expenses and loses, credit all the incomes and gains.
iii. For Personal Accounts
Debit the receiver, credit the giver.
3. BOOKS OF ORIGINAL ENTRY
For businesses having fewer transactions, only Journal is enough.
For businesses having many transactions, 8 subsidiary books are there.
i. Cash Book (for cash and bank transactions)
ii. Purchases Book (for credit purchases of goods)
iii. Purchases Return Book (for goods which are returned to the seller)
iv. Sales Book (for credit sales)
v. Sales Return Book (for return of goods by buyer)
vi. Bills Receivables Book (for all the bills of which amount is receivable)
vii. Bills Payables Book (for all the bills of which amount is owed to other entities)
viii. Journal Proper (for the transactions which are not recorded in the other books)
4. SPECIAL ENTRIES
i. Interest on Capital allowed
Interest on Capital A/c
To Capital A/c
ii. Interest on Drawings
Drawings A/c
To Interest on Drawings A/c
iii. Insolvency (Partial Receipt)
Cash/Bank A/c
Bad Debts A/c
To XYZ
iv. Bad Debts Recovered
Bank/ Cash A/c
To Bad Debts Recovered A/c
v. Advance Income Received
Banks/Cash A/c
To Advance Income A/c (Current Liability)
vi. Paid Expenses in Advance
Prepaid Expense A/c
To Bank/Cash A/c
4. SUBSIDIARY BOOKS
1. INTRODUCTION
Small businesses are able to record all the transactions into a journal. But, it is impractical for businesses
having many transactions, especially of repetitive nature, to record all in one journal. So, extra books are
prepared which are called Subsidiary Books or Day Books or Special Journals. All these books together
with the Journal Proper are called Books of Original Entry.
These are called Books of Original Entry because these are the first books in which any transaction is
entered after being identified and proofed in vouchers.
2. CASH BOOK
All the transactions regarding cash receipt and/or payment are recorded in the cash book. E.g. Goods
sold for cash.
There are multiple kinds of Cash Books:
i. Single Column (Only Cash Column)
ii. Double Column (Cash and Bank/Discount Column)
iii. Triple Column (Cash, Bank and Discount Column)
2.1 Cash Book v/s Cash Account
Book Account
Both a journal and a ledger. A ledger.
Original Entry. From journal.
Multiple balances like cash, bank and Only cash balances.
discount.
2.2 Formats
Single Column Cash Book
Cash & Bank Column Cash Book
2.3 Special Entries
In a Cash & Bank Column Cash Book, transactions between cash and bank accounts are
entered as ‘Contra’ entries, and are indicated by ‘C’ in L.F. column.
If cheque is received but not deposited in the bank the same day, it is not recorded in
Cash Book’s bank column. Instead, it is recorded in Journal Proper as Cheques-in-Hand
A/c or entered as a Cash entry since cheque-in-hand is somewhat as liquid as cash.
For businesses might have multiple small expenses such as conveyance, printing and
stationary, telephone charges, etc.; accountants might tend to create another kind of
cash book called Petty Cash Book. At the beginning of every month, the accountant
receives certain amount of cash, and he/she records all the petty expenses. At the end
of the month, the amount that has to be refilled is given to the accountant. For
recording and settling, Petty Cash A/c is opened.
3. PURCHASES BOOK
Purchases Book, also called as Purchases Day Book or Purchases Journal, is a book of original entry
which records all the credit purchases.
E.g.
Date Invoice No. Particulars L. F. Amount (₹)
2017
Aug 4 3250 M/s Neema Electronics
20 Mini-size TV @ ₹2,000/pc 40,000
15 Tape recorders @ ₹12,500/pc 1,87,500
2,27,500
Less: Trade Discount @ 20% 45,500 1,82,000
1,82,000
4. SALES BOOK
Sales Book, also called as Sales Day Book or Sales Journal, is a book of original entry which records all the
credit sales.
E.g. Two water purifiers @ ₹2,100 each and five buckets @ ₹130 each to M/s Raman Traders (Invoice
no. 178 dated April 06, 2017).
Date Invoice No. Particulars L. F. Amount (₹)
2017
April 6 178 M/s Raman Traders
2 Water Purifiers @ ₹2,100/pc 4,200
5 Buckets @ ₹130/pc 650 4,850
4,850
5. PURCHASES RETURN BOOK
This journal is used to record return of goods to suppliers bought on credit. Purchases Return Book is
supported by source document called ‘Debit Note’. This note is prepared in duplicate at the time of
returning goods to the supplier, and it notifies that the supplier’s account has been debited back with
the same account.
There are multiple alternative names to Purchases Return Book:
i. Purchases Return Day Book
ii. Purchases Return Journal
iii. Return Outwards Book
E.g. Refer to the Purchases Book, you will notice that 20 mini size T.V.’s and 15 tape- recorders were
bought from Neema Electronics for ₹1,82,000. However, on delivery 2 Mini TVs and 1 Tape recorders
were found defective and were returned back vide debit note no. 03/2017.
Date Debit Note No. Particulars L. F. Amount (₹)
2017
Aug4 03/2017 M/s Neema Electronics
2 Mini TV@ ₹2,000/pc 4,000
1 Tape recorders @ ₹12,500/pc 12,500
16,,500
Less: Trade Discount @ 20% 3,300 13,200
13,200
6. SALES RETURN BOOK
This journal is used to record return of goods by customers to them on credit. A credit note is prepared
in duplicate notifying the customers that their account has been credited.
There are multiple names for a Sales Return Book:
i. Sales Return Journal
ii. Sales Return Day Book
iii. Return Inwards Book
E.g. Reverse the transaction in the example of Sales Book.
Date Credit Note Particulars L. F. Amount (₹)
No.
2017
April 6 178 M/s Raman Traders
2 Water Purifiers @ ₹2,100/pc 4,200
5 Buckets @ ₹130/pc 650 4,850
4,850
7. JOURNAL PROPER
Records the following:
i. Opening Entry of Non-Cash Assets
ii. Adjustment Entries
iii. Rectification Entries
iv. Settlement Entries (e.g. drawings accounts is transferred to capital account at end of year)
v. Purchase/sales of assets
vi. Advertisement, etc.