This Study Note includes

1.1 Introduction
1.2 Definitions
1.3 Accounting Cycle
1.4 Objectives of Accounting
1.5 Basic Accounting Terms
1.6 Generally Accepted Accounting Principles
1.7 Accounting Concepts and Conventions
1.8 Events and Transactions
1.9 Voucher
1.10The Concepts of “Account”, “Debit” and “Credit”
1.11Types of Accounts
1.12The Accounting Process
1.1 INTRODUCTION

Business is an economic activity undertaken with the motive of earning profits and to maximize the wealth for the
owners. Business cannot run in isolation. Largely, the business activity is carried out by people coming together
with a purpose to serve a common cause. This team is often referred to as an organization, which could be in
different forms such as sole proprietorship, partnership, body corporate etc. The rules of business are based on
general principles of trade, social values, and statutory framework encompassing national or international
boundaries. While these variables could be different for different businesses, different countries etc., the basic
purpose is to add value to a product or service to satisfy customer demand.
The business activities require resources (which are limited & have multiple uses) primarily in terms of material,
labour, machineries, factories and other services. The success of business depends on how efficiently and
effectively these resources are managed. Therefore, there is a need to ensure that the businessman tracks the use
of these resources. The resources are not free and thus one must be careful to keep an eye on cost of acquiring
them as well.
As the basic purpose of business is to make profit, one must keep an ongoing track of the activities
undertaken in course of business. Two basic questions would have to be answered:
(a) What is the result of business operations? This will be answered by finding out whether it has made profit or
loss.
(b) What is the position of the resources acquired and used for business purpose? How are these
resources financed? Where the funds come from?
The answers to these questions are to be found continuously and the best way to find them is to record all the
business activities. Recording of business activities has to be done in a scientific manner so that they reveal correct
outcome. The science of book-keeping and accounting provides an effective solution. It is a branch of social science.
This study material aims at giving a platform to the students to understand
 basic principles and concepts, which can be applied to accurately measure performance of business. After studying
the various chapters included herein, the student should be able to apply the principles, rules, conventions and
practices to different business situations like trading, manufacturing or service.
Over years, the art and science of accounting has evolved together with progress of trade and commerce at
national and global levels. Professional accounting bodies have been doing intensive research to come up with
accounting rules that will be applicable. Modern business is certainly more complex and continuous updating of
these rules is required. Every stakeholder of the business is interested in a particular facet of information about
the business. The art and science of accounting helps to put together these requirements of information as per
universally accepted principles and also to interpret the results. It is interesting to note that each one of us has an
accountant hidden in us. We do see our parents keep track of monthly expenses. We make a distinction between
payment done for monthly grocery and that for buying a house or a car. We understand that while grocery is a
monthly expense and buying a house is like creating a resource that has indefinite future use. The most common
accounting record that each one of us knows is our bank passbook or a bank statement, which the bank maintains
for us. It tracks each rupee that we deposit or withdraw from our account. When we go to supermarket to buy
something, the cashier at the counter will record things we buy and give us a ‘bill’ or ‘cash memo’. These are source
documents prepared for the transaction between the supermarket and us. While these are simple examples, there
could be more complex business activities. A good working knowledge of keeping records is therefore necessary.
Professional accounting bodies all over the world have been functioning with the objective of providing this body
of knowledge. These institutions are engaged in imparting training in the field of accounting. Let us start with some
basic definitions, concepts, conventions and practices used in development of this art as well as science.
1.2 DEFINITIONS

In order to understand the subject matter with clarity, let us study some of the definitions which depict the scope,
content and purpose of Accounting. The field of accounting is generally sub-divided into:
(a) Book- keeping
(b) Financial Accounting
(c)Cost Accounting and
(d) Management Accounting
Let us understand each of these concepts.
(a) Book- keeping
The most common definition of book-keeping as given by J. R. Batliboi is “Book-keeping is an art of
recording business transactions in a set of books.”
As can be seen, it is basically a record keeping function. One must understand that not all dealings are, however,
recorded. Only transactions expressed in terms of money will find place in books of accounts. These are the
transactions which will ultimately result in transfer of economic value from one person to the other. Book-keeping
is a continuous activity, the records being maintained as transactions are entered into. This being a routine and
repetitive work, in today’s world, it is taken over by the computer systems. Many accounting packages are
available to suit different business organizations.
It is also referred to as a set of primary records. These records form the basis for accounting. It is an art because,
the record is to be kept in such a manner that it will facilitate further processing and reporting of financial
information which will be useful to all stakeholders of the business.
(b) Financial Accounting
It is commonly termed as Accounting. The American Institute of Certified Public Accountants defines Accounting as
“an art of recoding, 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 results thereof.”
The first step in the cycle of accounting is to identify transactions that will find place in books of accounts.
Transactions having financial impact only are to be recorded. E.g. if a businessman negotiates with the customer
regarding supply of products, this will not be recorded. The negotiation is a deal which will potentially create a
transaction and will have exchange of money or money’s worth. But unless this transaction is finally entered into,
it will not be recorded in the books of accounts.
Secondly, the recording of the business transactions is done based on the Golden Rules of accounting (which are
explained later) in a systematic manner. Transaction of similar nature are grouped together and recorded
accordingly. e.g. Sales Transactions, Purchase Transactions, Cash Transactions etc. One has to interpret the
transaction and then apply the relevant Golden Rule to make a correct entry thereof.
Thirdly, as the transactions increase in number, it will be difficult to understand the combined effect of the same
by referring to individual records. Hence, the art of accounting also involves the step of summarizing them. With
the aid of computers, this task is simplified in today’s accounting world. The summarization will help users of the
business information to understand and interpret business results.
Lastly, the accounting process provides the users with statements which will describe what has happened to the
business. Remember the two basic questions we talked about, one to know whether business has made profit or
loss and the other to know the position of resources that are used by the business.
It can be noted that although accounting is often referred to as an art, it is a science also. This is because it is based
on universally applicable set of rules. However, it is not a pure science as there is a possibility of different
interpretation.
(c) Cost Accounting
According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined as
“application of costing and cost accounting principles, methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability as well as the presentation of information for the purpose of
managerial decision-making.”
It is a branch of accounting dealing with the classification, recording, allocation, summarization and reporting of
current and prospective costs and analyzing their behaviours. Cost Accounting is frequently used to facilitate
internal decision making and provides tools with which management can appraise performance and control costs of
doing business. It primarily involves relating the costs to the different products produced and sold or services
rendered by the business. While Financial Accounting deals with business transactions at a broader level, Cost
Accounting aims at further breaking it up to the last possible level to indentify costs with products and services. It
uses the same Financial Accounting documents and records. Modern computerized accounting packages like ERP
systems provide for processing Financial as well as Cost Accounting records simultaneously.
This branch of accounting deals with the process of ascertainment of costs. The concept of cost is always applied
with reference to a context. Knowledge of cost concepts and their application provide a very sound platform for
decision making. Cost Accounting aims at equipping management with information that can be used for control on
business activities.
(d) Management Accounting
Management Accounting is concerned with the use of Financial and Cost Accounting information to managers
within organizations, to provide them with the basis in making informed business decisions that would allow them
to be better equipped in their management and control functions. Unlike Financial Accounting information (which,
for public companies, is public information), Management Accounting information is used within an organization
(typically for decision-making) and is usually confidential and its access available only to a selected few.

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the process
of identification, measurement, accumulation, analysis, preparation, interpretation and communication of
information used by management to plan, evaluate and control within an entity and to assure appropriate use of
and accountability for its resources. Management Accounting also comprises the preparation of financial reports
for non management groups such as shareholders, creditors, regulatory authorities and tax authorities”
Basically, Management Accounting aims to facilitate management in formulating strategies, planning and
constructing business activities, making decisions, optimal use of resources, and safeguarding assets of business.
These branches of accounting have evolved over years of research and are basically synchronized with the
requirements of business organizations and all entities associated with them. We will now see what are they and
how accounting satisfies various needs of different stakeholders.

1.2.1 Difference between Book-keeping and Accountancy

The Significant difference between Book-keeping and Accountancy are : -
S Points Book Keeping Accountancy
l of
N differenc
 o e
.
1. Meaning Book-keeping is considered as end. Accountancy is considered
as beginning.
2. Functions The primary stage of The overall accounting functions are
accounting function is called Book- guided by accountancy.
keeping.
3 Depends Book-keeping can provide the base of Accountancy depends on
Accounting. Book- keeping for its complete functions.
4. Data The necessary data about financial Accountancy can take its decisions,
performances and financial positions are prepare reports and statements from the
taken from Book-keeping. data taken from Book-keeping.
5. Recording Financial transactions are recorded on the Accountancy does not take any principles,
of basis of accounting principles, concepts concepts and conventions from Book-
Transaction and conventions. keeping.
s
1.2.2 Difference between Management Accounting and Financial Accounting

The significant difference between Management Accounting and Financial Accounting are :
Management Accounting Financial Accounting
1. Management Accounting is primarily based on 1. Financial Accounting is based on
the data available from Financial Accounting. the monetary transactions of the enterprise.
2. It provides necessary information to the 2. Its main focus is on recording and classifying
management to assist them in the process of monetary transactions in the books of accounts
planning, controlling, performance evaluation and preparation of financial statements at the
and decision making. end of every accounting period.

3. Reports prepared in Management Accounting are 3. Reports as per Financial Accounting are meant for
meant for management and as per the management as well as for shareholders
management requirement. and creditors of the concern.
4. Reports may contain both subjective and 4. Reports should always be supported by relevant
objective figures. figures and it emphasizes on the objectivity of
data.
5. Reports are not subject to statutory audit. 5. Reports are always subject to statutory audit.
6. It evaluates the sectional as well as the 6. It ascertains , evaluates and exhibits the
entire performance of the business. financial strength of the whole business.

1.3 ACCOUNTING CYCLE

When complete sequence of accounting procedure is done which happens frequently and repeated in same
directions during an accounting period, the same is called an accounting cycle.

Steps/Phases of Accounting Cycle

The steps or phasesof accounting cycle can be developed asunder:

 Adjusted Trial
Recording of Closing Trial Adjustmen Balance
Financial Entries Balance t Entries
Transaction Journal Ledger
Statement

ACCOUNTING CYCLE

(a) Recording of Transaction:- As soon as a transaction happens it is at first recorded in subsidiary

book.
(b) Journal : The transactions are recorded in Journal chronologically.
(c) Ledger : All journals are posted into ledger chronologically and in a classified manner.
(d) Trial Balance : After taking all the ledger account’s closing balances, a Trial Balance is prepared
at the end of the period for the preparations of financial statements.
(e) Adjustment Entries : All the adjustments entries are to be recorded properly and adjusted
accordingly before preparing financial statements.
)Adjusted Trial Balance : An adjusted Trail Balance may also be prepared.
(g) Closing Entries : All the nominal accounts are to be closed by the transferring to Trading Account
and Profit and Loss Account.
(h) Financial Statements : Financial statement can now be easily prepared which will exhibit the true financial
position and operating results.

1.4 OBJECTIVES OF ACCOUNTING

The main objective of Accounting is to provide financial information to stakeholders. This financial information is
normally given via financial statements, which are prepared on the basis of Generally Accepted Accounting
Principles (GAAP). There are various accounting standards developed by professional accounting bodies all over the
world. In India, these are governed by The Institute of Chartered Accountants of India, (ICAI). In the US, the
American Institute of Certified Public Accountants (AICPA) is responsible to lay down the standards. The Financial
Accounting Standards Board (FASB) is the body that sets up the International Accounting Standards. These
standards basically deal with accounting treatment of business transactions and disclosing the same in financial
statements.
The following objectives of accounting will explain the width of the application of this knowledge stream:
(a) To ascertain the amount of profit or loss made by the business i.e. to compare the income earned versus the
expenses incurred and the net result thereof.
(b) To know the financial position of the business i.e. to assess what the business owns and what it owes.
(c) To provide a record for compliance with statutes and laws applicable.
(d) To enable the readers to assess progress made by the business over a period of time.
(e) To disclose information needed by different stakeholders.
Let us now see which are different stakeholders of the business and what do they seek from the accounting
information. This is shown in the following table.
Stakeholder Interest in business Accounting Information
Owners / Investors / Profits or losses Financial statements, Cost Accounting
existing and potential records, Management Accounting reports

Lenders Assessment of capability of the Financial statement and analysis thereof,

business to pay interest and reports forming part of accounts,
principal of money lent. Basically, valuation of assets given as security
they monitor the solvency of
business
Customers and suppliers Stability and growth of the business Financial and Cash flow statements to
assess ability of the business to offer
better business terms and ability to
supply the products and services
 Government Whether the business is complying Accounting documents such as vouchers,
with various legal requirements extracts of books, information of
purchase, sales, employee obligations
etc. and financial statements
Employees and trade Growth and profitability Financial statements for negotiating pay
unions packages
Competitors Performance and possible tie-ups in Accounting information to find out
the era of mergers and acquisitions possible synergies
1.4.1 Users of Accounting Information
Accounting provides information both to internal users and the external users. The internal users are all the
organizational participants at all levels of management (i.e. top, middle and lower). Generally top level
management requires information for planning, middle level management which requires information for
controlling the operations. For internal use, the information is usually provided in the form of reports, for instance
Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, whether to retain or replace an
equipment decision reports, project appraisal report, and the like.

There are also the external users (e.g. Banks, Creditors). They do not have direct access to all the records of an
enterprise, they have to rely on financial statements as the source of information. External users are basically,
interested in the solvency and profitability of an enterprise.
1.4.2 Types of Accounting Information
Accounting information may be categorized in number of ways on the basis of purpose of accounting information,
on the basis of measurement criteria and so on. The various types of accounting information are given below:
I. Accounting information relating to financial transactions and events.
(a) Financial Position- Information about financial position is primarily provided in a Balance Sheet. The financial
position of an enterprise is affected by different factors, like -
(i) Information about the economic resources controlled by the enterprise and its capacity in the past to alter
these resources is useful in predicting the ability of the enterprise to generate cash and cash
equivalents in the future.
(ii) Information about financial structure is useful in predicting future borrowing needs and how future
profits and cash flows will be distributed among those with an interest in the enterprise; it is also useful
in predicting how successful the enterprise is likely to be in raising further finance.
(iii) Information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its
financial commitments as they fall due. Liquidity refers to the availability of cash in the near future to
meet financial commitments over this period. Solvency refers to the availability of cash over the longer
term to meet financial commitments as they fall due.
(b) Financial Performance- Information about financial performance is primarily provided in a
Statement of Profit and Loss which is also known as Income Statement.
Information about the performance of an enterprise and its profitability, is required in order to assess
potential changes taking place in the economic resources that it is likely to control in the future.
Information about variability of performance is also important in this regard. Information about
performance is necessary in predicting the capacity to generate cash flows from its available resource.
It is an important input in forming judgments about the effectiveness of an enterprise to utilize
resources.
(c) Cash Flows— Information about cash flows is provided in the financial statements by means of a
cash flow statement.
Information concerning cash flows is useful in providing the users with a basis to assess the ability of the
enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash
and cash equivalent.
These information may be classified as follows:
(i) on the basis of Historical Cost, (ii)on the basis of Current Cost, (iii) on the basis of Realizable
Value, (iv)on the basis of Present Value
II. Accounting information relating to cost of a product, operation or function.
III. Accounting information relating to planning and controlling the activities of an enterprise for internal reporting.
 This information may further be classified as follows:
(i) Information relating to Finance Area
(ii) Information relating to Production Area
(iii) Information relating to Marketing Area
(iv) Information relating to Personnel Area
(v) Information relating to Other Areas (such as Research & Development)

IV. Accounting information relating to Social Effects of business decisions.

V. Accounting information relating to Environment and Ecology.
VI. Accounting information relating to Human Resources.

1.4.3 Qualitative Characteristics of Accounting Information

Qualitative characteristics are the attributes that make the information provided in financial statements
useful to its users.
Qualitative Characteristics of Accounting Information can be segregated in the following categories
(i) Reliability
(ii)Relevance
(iii) Materiality
(iv) Understandability
(v) Comparability
(i) Reliability - To be useful, information must also be reliable. Information has the quality of reliability when it is
free from material error and bias and can be depended upon by users to represent faithfully that which it
either portrays to represent or could reasonably be expected to represent. Information may be relevant but
so unreliable in nature or representation that its recognition may be potentially misleading and so it becomes
useless. Reliability of the financial statements is dependent on the following:
a)Faithful Representation- To be reliable, information must represent faithfully the transactions and other events which either
portrays to represent or could reasonably be expected to represent. Most financial information is subject to some risks of being
less than faithful representation of that which it purports to portray. This is not due to bias, but rather to enhance difficulties
either in identifying the transactions or other events to be measured in devising or applying measurements and presentation
techniques that can convey messages that correspond with those transactions and events.
b)Substance Over Form- If information is to represent faithfully the transactions and other events that it portrays to represent, it
is necessary that they are accounted for and presented in accordance with their substance and economic reality and not
merely by their legal forms. The substance of transactions or other events is not always consistent with that which is apart
from their legal or contrived form.
)Neutrality - To be reliable the information contained in financial statements must be neutral. Financial statements are not
neutral if by selective presentation of information, they infl uence the making of a decision or judgment in order to achieve a
predetermined result or outcome.
d)Prudence - The preparers of financial statements have to contend with uncertainties that inevitably surround many events and
circumstances. Such uncertainties are recognized by the disclosure of their nature and extent and by exercise of prudence in
the financial statements. Prudence is the inclusion of a degree of caution. In the exercise of judgement needed in making the
estimate required under conditions of uncertainties so that assets or income are not overstated and liabilities or expenses are
not understated. However, the exercise of prudence does not allow the creation of hidden reserves or excessive provisions, i.e.
the deliberate understatement of assets or income or deliberate over statement of liabilities or expenses.
)Completeness - To be reliable the information in the financial statements must be complete within the bounds of materiality and
cost. An omission can cause information to be false or misleading and thus, unreliable and deficient in terms of its relevance.
(ii) Relevance- To be useful, information must be relevant to the decision-making needs of users.
Information has the quality of relevance when it infl uences the economic decisions of the users
by helping them to evaluate past, present or future events or confirming or correcting their past evaluation.
The productive and confirmatory roles of information are interrelated. For example, information about the
current level and structure of asset-holding has value to users when they endeavour to predict the ability of
the enterprise to take advantage of opportunities and its ability to react to adverse situations. The same
information plays a confirmatory role in respect of past prediction about, for example, the way in which the
enterprise would be structured or the outcome of planned operations.
(iii) Materiality- The relevance of information is affected by its nature and materiality. Information is material if its
 omission or mis-statement could infl uence the economic decisions of users made on the basis of financial statements.
Materiality depends on the size of the item or error judged in the particular circumstance of its omission or
mis-statement. Thus, materiality provides a threshold or a cut-off point rather than being a primary
qualitative characteristic which information must have if it is to be useful.
(iv) Understandability- The information provided in financial statements must be easily understandable by users.
For this purpose, users are assumed to have a reasonable knowledge of business and economic activities,
accounting and a willingness to study the information with reasonable diligence. However, information about
complex matters that should be included in the financial statements because of its relevance to the decision
making needs of users and should not be excluded merely on the grounds that it may be too difficult for
certain users to understand.
(v) Comparability- The financial statements of an enterprise should be comparable. For this purpose users should
be informed of the accounting policies, any changes in those policies and the effects of such changes. This
qualitative characteristic requires pursuance of consistency in choosing accounting policies. Lack of
consistency may disturb the comparability quality of the financial statement information. Accordingly,
accounting standard on disclosure of accounting policies consider consistency as a fundamental accounting
assumption along with accrual and going concern.
1.5 BASIC ACCOUNTING TERMS

In order to understand the subject matter clearly, one must grasp the following common expressions always used in
business accounting. The aim here is to enable the student to understand with these often used concepts before
we embark on accounting procedures and rules. You may note that these terms can be applied to any business
activity with the same connotation.
(i) Transaction: It means an event or a business activity which involves exchange of money or money’s worth
between parties. The event can be measured in terms of money and changes the financial position of a
person e.g. purchase of goods would involve receiving material and making payment or creating an obligation
to pay to the supplier at a future date. Transaction could be a cash transaction or credit transaction. When the
parties settle the transaction immediately by making payment in cash or by cheque, it is called a cash
transaction. In credit transaction, the payment is settled at a future date as per agreement between the
parties.
(ii) Goods/Services : These are tangible article or commodity in which a business deals. These articles or
commodities are either bought and sold or produced and sold. At times, what may be classified as ‘goods’ to
one business firm may not be ‘goods’ to the other firm. e.g. for a machine manufacturing company, the
machines are ‘goods’ as they are frequently made and sold. But for the buying firm, it is not ‘goods’ as the
intention is to use it as a long term resource and not sell it. Services are intangible in nature which are
rendered with or without the object of earning profits.
(iii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated for each
transaction or for business as a whole.
(iv) Loss: The excess of expense over income is called loss. It could be calculated for each transaction
or for business as a whole.

(v) Asset: Asset is a resource owned by the business with the purpose of using it for generating future profits.
Assets can be Tangible and Intangible. Tangible Assets are the Capital assets which have some physical
existence. They can, therefore, be seen, touched and felt, e.g. Plant and Machinery, Furniture and Fittings,
Land and Buildings, Books, Computers, Vehicles, etc. The capital assets which have no physical existence and
whose value is limited by the rights and anticipated benefits that possession confers upon the owner are
known as lntangible Assets. They cannot be seen or felt although they help to generate revenue in future,
e.g. Goodwill, Patents, Trade-marks, Copyrights, Brand Equity, Designs, Intellectual Property, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following :
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s normal
Operating Cycle,
(b) It is held primarily for the purpose of being traded ,
(c)It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a
Liability for at least 12 months after the Reporting Date.
 Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held
for long term etc.
(vi) Liability: It is an obligation of financial nature to be settled at a future date. It represents amount of money
that the business owes to the other parties. E.g. when goods are bought on credit, the firm will create an
obligation to pay to the supplier the price of goods on an agreed future date or when a loan is taken from
bank, an obligation to pay interest and principal amount is created. Depending upon the period of holding,
these obligations could be further classified into Long Term on non-current liabilities and Short Term or
current liabilities.
Current Liabilities – A liability shall be classified as Current when it satisfies any of the following :
(a) It is expected to be settled in the Company’s normal Operating Cycle,
(b) It is held primarily for the purpose of being traded,
(c)It is due to be settled within 12 months after the Reporting Date, or
(d) The Company does not have an unconditional right to defer settlement of the liability for at least 12 months
after the reporting date (Terms of a Liability that could, at the option of the counterparty, result in its
settlement by the issue of Equity Instruments do not affect its classification)
Non-Current Liabilities – All other Liabilities shall be classified as Non-Current Liabilities. E.g. Loan
taken for 5 years, Debentures issued etc.
(vii) Internal Liability : These represent proprietor’s equity, i.e. all those amount which are entitled to the
proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.
(viii) Working Capital : In order to maintain flows of revenue from operation, every firm needs certain amount of
current assets. For example, cash is required either to pay for expenses or to meet obligation for service
received or goods purchased, etc. by a firm. On identical reason, inventories are required to provide the link
between production and sale. Similarly, Accounts Receivable generate when goods are sold on credit. Cash,
Bank, Debtors, Bills Receivable, Closing Stock, Prepayments etc. represent current assets of firm. The whole
of these current assets form the working capital of a firm which is termed as Gross Working Capital.

Gross Working Capital = Total Current Assets

= Long term internal liabilities plus long term debts plus the current liabilities
minus the amount blocked in the fixed assets.
There is another concept of working capital. Working capital is the excess of current assets over current
liabilities. That is the amount of current assets that remain in a firm if all its current liabilities are paid. This
concept of working capital is known as Net Working Capital which is a more realistic concept.
Working Capital (Net) = Current Assets – Currents Liabilities.
(ix) Contingent Liability : It represents a potential obligation that could be created depending on the outcome of an
event. E.g. if supplier of the business files a legal suit, it will not be treated as a liability because no obligation
is created immediately. If the verdict of the case is given in favour of the supplier then only the obligation is
created. Till that it is treated as a contingent liability. Please note that contingent liability is not recorded in
books of account, but disclosed by way of a note to the financial statements.
(x) Capital : It is amount invested in the business by its owners. It may be in the form of cash, goods, or any other
asset which the proprietor or partners of business invest in the business activity. From business point of view,
capital of owners is a liability which is to be settled only in the event of closure or transfer of the business.
Hence, it is not classified as a normal liability. For corporate bodies, capital is normally represented as share
capital.
(xi) Drawings : It represents an amount of cash, goods or any other assets which the owner withdraws from
business for his or her personal use. e.g. if the life insurance premium of proprietor or a partner of business is
paid from the business cash, it is called drawings. Drawings will result in reduction in the owners’ capital. The
concept of drawing is not applicable to the corporate bodies like limited companies.
(xii) Net worth : It represents excess of total assets over total liabilities of the business. Technically, this amount is
available to be distributed to owners in the event of closure of the business after payment of all liabilities.
That is why it is also termed as Owner’s Equity. A profit making business will result in increase in the owner’s
equity whereas losses will reduce it.
(xiii) Non-current Investments : Non-current Investments are investments which are held beyond the
 current period as to sale or disposal. e. g. Fixed Deposit for 5 years.
(xiv) Current Investments : Current investments are investments that are by their nature readily realizable and are
intended to be held for not more than one year from the date on which such investment is made. e. g. 11
months Commercial Paper.
(xv) Debtor : The sum total or aggregate of the amounts which the customer owe to the business for purchasing
goods on credit or services rendered or in respect of other contractual obligations, is known as Sundry
Debtors or Trade Debtors, or Trade Receivable, or Book-Debts or Debtors. In other words, Debtors are those
persons from whom a business has to recover money on account of goods sold or service rendered on credit.
These debtors may again be classified as under:
(i) Good debts : The debts which are sure to be realized are called good debts.
(ii) Doubtful Debts : The debts which may or may not be realized are called doubtful debts.
(iii) Bad debts : The debts which cannot be realized at all are called bad debts.
It must be remembered that while ascertaining the debtors balance at the end of the period certain adjustments may
have to be made e.g. Bad Debts, Discount Allowed, Returns Inwards, etc.
(xvi) Creditor : A creditor is a person to whom the business owes money or money’s worth. e.g. money payable to
supplier of goods or provider of service. Creditors are generally classified as Current Liabilities.

(xvii) Capital Expenditure : This represents expenditure incurred for the purpose of acquiring a fixed asset which is
intended to be used over long term for earning profits there from. e. g. amount paid to buy a computer for
office use is a capital expenditure. At times expenditure may be incurred for enhancing the production
capacity of the machine. This also will be a capital expenditure. Capital expenditure forms part of the Balance
Sheet.
(xviii) Revenue expenditure : This represents expenditure incurred to earn revenue of the current period. The
benefits of revenue expenses get exhausted in the year of the incurrence. e.g. repairs, insurance, salary &
wages to employees, travel etc. The revenue expenditure results in reduction in profit or surplus. It forms
part of the Income Statement.
(xix) Balance Sheet : It is the statement of financial position of the business entity on a particular date. It lists all
assets, liabilities and capital. It is important to note that this statement exhibits the state of affairs of the
business as on a particular date only. It describes what the business owns and what the business owes to
outsiders (this denotes liabilities) and to the owners (this denotes capital). It is prepared after incorporating
the resulting profit/losses of Income Statement.
(xx) Profit and Loss Account or Income Statement : This account shows the revenue earned by the business and the
expenses incurred by the business to earn that revenue. This is prepared usually for a particular accounting
period, which could be a month, quarter, a half year or a year. The net result of the Profit and Loss Account
will show profit earned or loss suffered by the business entity.
(xxi) Trade Discount : It is the discount usually allowed by the wholesaler to the retailer computed on the list price or
invoice price. e.g. the list price of a TV set could be ` 15000. The wholesaler may allow 20% discount thereof
to the retailer. This means the retailer will get it for ` 12000 and is expected to sale it to final customer at the
list price. Thus the trade discount enables the retailer to make profit by selling at the list price. Trade
discount is not recorded in the books of accounts. The transactions are recorded at net values only. In above
example, the transaction will be recorded at ` 12000 only.
(xxii) Cash Discount : This is allowed to encourage prompt payment by the debtor. This has to be recorded in the
books of accounts. This is calculated after deducting the trade discount. e.g. if list price is
` 15000 on which a trade discount of 20% and cash discount of 2% apply, then first trade discount
of ` 3000 (20% of ` 15000) will be deducted and the cash discount of 2% will be calculated on
` 12000 (` 15000 – ` 3000). Hence the cash discount will be ` 240/- (2% of ` 12000) and net payment will be `
11,760 (` 12,000 - ` 240)