Chapter 1st: Introduction to Accountancy

Meaning and Definition of Accountancy:

Book-keeping is a part of Accounting. It is the primary stage in accounting. It is the process of
recording transactions in the books of accounts. Accounting is part of Accountancy. Accountancy
is the practice of recording, classifying, and reporting of business transactions for a business.
Accounting principles are the basic norms and assumptions developed and established as the basis
for accounting system. These principles are adopted by the accountants universally.
Definitions:
1) “Accountancy refers to the entire body of the theory and process of accounting.” By Kohler.
2) Prof. Robert N. Anthony has defined accounting as “Nearly every business enterprise has an
accounting system. It is a means of collecting, summarizing, analyzing and reporting in monetary
terms information about the business transactions.”
Qualitative characteristics of accounting information
Accounting means the numerical qualitative presentation of business transactions of financial
nature. While recording accounting information in the books of accounts, we must observe the
following qualitative characteristics of accounting.
1. Reliability of the Accounting Information: Reliability is described as one of the two primary
qualities (relevance and reliability) that make accounting information useful for decision-making:
Reliable information is required to form judgements about the earning potential and financial
position of a business firm. Reliability differs from item to item. Some items of information
presented in an annual report may be more reliable than others. For example, information regarding
plant and machinery may be less reliable than certain information about current assets because of
differences in uncertainty of realization.
2. Relevance of the Accounting Information: Relevant accounting information must be capable
of making a difference in a decision by helping users to form predictions about the outcomes of
past, present and future events or to confirm or correct expectations. The accounting information
related by the books of accounts and financial reports must be relevant. Accounting information
should not include unnecessary and irrelevant information. All the information is said to be
relevant which would have changed the outcomes of the business if disclosed i.e. All useful and
related information must find a place in the books of accounts and the information must have
timelessness, dedicative and feedback value.
3. Understandability of the Accounting Information: Understandability is the quality of
information that enables users to perceive its significance. The benefits of information may be
increased by making it more understandable and hence useful to a wider circle of users. Thus,
understandable financial accounting information presents data that can be understood by users of
the information and is expressed in a form and with terminology adapted to the user's range of
understanding.
4. Comparability of the Accounting Information: In making decision, the decision-maker will
make comparisons among alternatives, which is facilitated by financial information.
Comparability implies to have like things reported in a similar fashion and unlike things reported
differently. Information, if comparable, will assist the decision-maker to determine relative
financial strengths and weaknesses and prospects for the future, between two or more firms or
between periods in a single firm.

Basic Accounting Terminologies

In order to have better understanding of accounting, it is necessary to know the meanings of certain
basic terms used in accounting. Accounting is a versatile system which serves a large number of
purposes in the modern business world. Hence, the following terminologies need to be understood.
Entity
Entity means a reality that has a definite individual existence. Business entity means a specifically
identifiable business enterprise like Super Bazaar, Hire Jewelers, ITC Limited, etc. An accounting
system is always devised for a specific business entity (also called accounting entity).
Transaction
An event involving some value between two or more entities. It can be a purchase of goods, receipt
of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit
transaction.
Assets
Assets are economic resources of an enterprise that can be usefully expressed in monetary terms.
Assets are items of value used by the business in its operations. For example, Super Bazar owns a
fleet of trucks, which is used by it for delivering foodstuffs; the trucks, thus, provide economic
benefit to the enterprise. This item will be shown on the asset side of the balance sheet of Super
Bazaar.
Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time in the future. They
represent creditors’ claims on the firm’s assets. Both small and big businesses find it necessary to
borrow money at one time or the other, and to purchase goods on credit. Super Bazar, for example,
purchases goods for` 10,000 on credit for a month from Fast Food Products on March 25, 2005. If
the balance sheet of Super Bazaar is prepared as at March 31, 2005, Fast Food Products will be
shown as creditors on the liabilities side of the balance sheet.
Capital
Amount invested by the owner in the firm is known as capital. It may be brought in the form of
cash or assets by the owner for the business entity capital is an obligation and a claim on the assets
of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.
Sales
Sales are total revenues from goods or services sold or provided to customers. Sales may be cash
sales or credit sales.
Revenues
These are the amounts of the business earned by selling its products or providing services to
customers, called sales revenue. Other items of revenue common to many businesses are:
commission, interest, dividends, royalties, rent received, etc. Revenue is also called income.
Expenses
Costs incurred by a business in the process of earning revenue are known as expenses. Generally,
expenses are measured by the cost of assets consumed or services used during an accounting
period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater,
light and water, telephone, etc.
Expenditure
Spending money or incurring a liability for some benefit, service or property received is called
expenditure. Purchase of goods, purchase of machinery, purchase of furniture, etc. are examples
of expenditure. If the benefit of expenditure is exhausted within a year, it is treated as an expense
(also called revenue expenditure). On the other hand, the benefit of an expenditure lasts for more
than a year, it is treated as an asset (also called capital expenditure) such as purchase of machinery,
furniture, etc.
Profit
The excess of revenues of a period over its related expenses during an accounting year is profit.
Profit increases the investment of the owners.
Gain
A profit that arises from events or transactions which are incidental to business such as sale of
fixed assets, winning a court case, appreciation in the value of an asset.
Loss
The excess of expenses of a period over its related revenues its termed as loss. It decreases in
owner’s equity. It also refers to money or money’s worth lost
Discount
Discount is the deduction in the price of the goods sold. It is offered in two ways. Offering
deduction of agreed percentage of list price at the time selling goods is one way of giving discount.
Such discount is called ‘trade discount’. It is generally offered by manufactures to wholesalers and
by wholesalers to retailers. After selling the goods on credit basis the debtors may be given certain
deduction in amount due in case if they pay the amount within the stipulated period or earlier. This
deduction is given at the time of payment on the amount payable. Hence, it is called as cash
discount. Cash discount acts as an incentive that encourages prompt payment by the debtors.
Voucher
The documentary evidence in support of a transaction is known as voucher. For example, if we
buy goods for cash, we get cash memo, if we buy on credit, we get an invoice; when we make a
payment we get a receipt and so on.
Goods
It refers to the products in which the business unit is dealing, i.e. in terms of which it is buying and
selling or producting and selling. The items that are purchased for use in the business are not called
goods. For example, for a furniture dealer purchase of chairs and tables is termed as goods, while
for other it is furniture and is treated as an asset. Similarly, for a stationery merchant, stationery is
goods, whereas for others it is an item of expense (not purchases)
Drawings
Withdrawal of money and/or goods by the owner from the business for personal use is known as
drawings. Drawings reduces the investment of the owners.
Purchases
Purchases are total amount of goods procured by a business on credit and on cash, for use or sale.
In a trading concern, purchases are made of merchandise for resale with or without processing. In
a manufacturing concern, raw materials are purchased, processed further into finished goods and
then sold. Purchases may be cash purchases or credit purchases.
Stock
Stock (inventory) is a measure of something on hand-goods, spares and other items in a business.
It is called Stock in hand. In a trading concern, the stock on hand is the amount of goods which are
lying unsold as at the end of an accounting period is called closing stock (ending inventory). In a
manufacturing company, closing stock comprises raw materials, semi-finished goods and finished
goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount
of stock at the beginning of the accounting period.
Debtors
Debtors are persons and/or other entities who owe to an enterprise an amount for buying goods
and services on credit. The total amount standing against such persons and/or entities on the closing
date, is shown in the balance sheet as sundry debtors on the asset side.
Creditors
Creditors are persons and/or other entities who have to be paid by an enterprise an amount for
providing the enterprise goods and services on credit. The total amount standing to the favor of
such persons and/or entities on the closing date, is shown in the Balance Sheet as sundry creditors
on the liabilities side.
Accounting Concepts, Conventions and Principles
Meaning and Importance of Accounting Concepts
Accounting is means of communicating the results of business operations to various parties
interested in or connected with the business viz., the owners, creditors, investors, banks and
financial institutions, Government and other agencies. Hence, it is rightly called as the language
of business. Accounting is not only associated with business, but also with everybody, who is
interested in keeping an account of the monetary transactions. Generally, the term 'accounting'
refers to financial accounting. Book-keeping and Accountancy is an art of recording, classifying
and summarizing transactions of business concern in a systematic manner.
Importance of Accounting Concepts:
1) Reliable financial statements.
2) Uniformity in presentation.
3) Generally acceptable basis of measurement.
4) Proper information to all.
5) Valid and appropriate assumptions.

Some of the important concepts are as follows:

1) Business Entity: This concept implies that a business unit is separate and distinct from the
owner or owners, that is, the persons who supply capital to it. Based on this concept, accounts are
prepared from the point of view of the business and not from the owner's point of view. Hence, the
business is liable to the owner for the capital contributed by him/her. According to this concept,
only business transactions are recorded in the books of accounts. Personal transactions of the
owners are not recorded. But, their transactions with the business such as capital contributed to the
business or cash withdrawn from the business for the personal use will be recorded in the books
of accounts. It implies that the business itself owns assets and owes liabilities. e.g. Half of the
building is used for business office and other half of the building is used for the residence of the
proprietor. It the total rent of the building is ` 50,000/- then only ` 25,000/- will deducted as
drawings from proprietor’s capital.
2) Money Measurement: This concept implies that only those transactions, which can be
expressed in terms of money, are recorded in the books of accounts. Since money serves as the
medium of exchange transactions expressed in money are recorded and the ruling currency of a
country is the measuring unit for accounting. Transactions which do not involve money will not
be recorded in the books of accounts. For example, working conditions in the work place, strike
by employees, efficiency of the management, etc. will not be recorded in the books, as they cannot
be expressed in terms of money. It helps in understanding of the state of affairs of the business as
money serves as a common measure by means of which heterogeneous facts about the business
are recorded. For example, if a business has 5 computers, 2 tables and 3 chairs, the assets cannot
be added to give useful information, unless, they are expressed in monetary terms ` 1,50,000/- for
computers, `15,000/- for tables and ` 2,500/- for chairs.
3) Cost Concept: An asset is recorded in the books on the basis of the historical cost, that is, the
acquisition cost. Cost of acquisition will be the base for all further accounting. It does not mean
that the asset will always be shown at cost. It is recorded at cost at the time of its purchase, but is
systematically reduced in its book value by charging depreciation. e.g. : Furniture is purchased for
` 3,00,000/- and same cost has been recorded in the books. In case the market value goes to `
1,00,000/- or ` 1,50,000/- It will not be considered.
4) Consistency Concept: Any policy adopted for accounting should be continuous or consistent
throughout the business and it need not be changed generally unless and until circumstances
demand. However, it does not stop any improvement of new techniques. But that should be
disclosed with a note. e.g.: A company adopts fixed installment method for charging depreciation
on fixed asset from the beginning till the end of estimated life of asset.
5) Conservatism: While recording the business transactions we have to anticipate no profit but
provide for all possible losses. It encourages the certain secret reserves by making excess provision
to prevent losses. The income statement may show lower income and the Balance Sheet overstates
the liabilities and understates the assets. This policy of recording is asking the accountant ‘to play
safe’ while writing the accounts.
6) Going Concern: It is the basic assumption that business is a going concern and will continue
its operations for future. Going concern concept influences accounting practices in relation to
valuation of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and
prepaid expenses and accrued and unearned revenues. For example, assets are generally valued at
historical cost. Any increase or decrease in the value of assets in the short period is ignored.
7) Realization: Income is recorded only when it is realized i.e. either it is received or earned.
Revenues are recorded only when sale are affected or the services are rendered. Sales revenues are
considered as recognized when sales are affected during the accounting period irrespective of the
fact whether cash is received or not. e.g. A company gets an order for sale of goods ` 1,00,000/- in
May 2017. Goods of only
` 60,000/- are sold and delivered in June 2017. Cash is received for ` 60,000/- in Sept, 2017. As
per the principle of realization, sale is to be recorded in June 2017.
8) Accrual: Income is recorded when it accrues(earned) and expenses are recorded when they
accrue (become payable). All expenses and revenues related to the accounting period are to be
considered irrespective of the fact the revenues are received in cash or not or expenses are paid in
cash or not. e.g. A company invested ` 100,000/- with a bank for one year on 1stOct 2015, Bank
has to pay interest at 10% p.a on its maturity i.e 30th Sept, 2016.
9) Dual Aspect: According to this concept, every transaction or event has two aspects, i.e., dual
effect. For example, when Akshay starts a business with cash ` 5,00,000/- , on one hand, the
business gets cash of ` 5,00,000/- and on the other hand, a liability arises, that is, the business has
to pay Akshay a sum of ` 5,00,000/-. This is the concept which recognizes the fact that for every
debit, there is a corresponding and equal credit. This is the basis of the entire system of double
entry book-keeping. From this concept the basic accounting equation, arises that is, Capital +
Liabilities = Assets.
10) Disclosure: The accounts must disclose all material information. The accounting reports
should disclose full and fair information to the related parties. The financial position and
performance should be disclosed very honestly to all the users. The financial position means the
Balance Sheet of the business and financial performance means business results in terms of profits
or losses and income and expenses in profit and loss account. All the information disclosed should
be relevant, reliable, comparable and understood by all the concerned authorities.
11) Materiality: According to this convention, financial statements should disclose all material
items which might influence the decisions of the users of financial statements. Hence, any item
which is not significant and is not relevant to the users need not be disclosed in the financial
statements. This principle is basically an exception to the full disclosure principle. The term
materiality is subjective in nature. Materiality depends on the amount involved in the transaction,
size of the business, nature of information, requirements of the person making decision, etc. An
item material to one person may be immaterial to another person.
12) Matching Concept: According to this concept, revenues during an accounting period are
matched with expenses incurred during that period to earn the revenue during that period. This
concept is based on accrual concept and periodicity concept. Periodicity concept fixes the time
frame for measuring performance and determining financial status. All expenses paid during the
period are not considered, but only the expenses related to the accounting period are considered.
On the basis of this concept, adjustments are made for outstanding and prepaid expenses and
accrued and unearned revenues. Also due provisions are made for depreciation of the fixed assets,
bad debt, etc., relating to the accounting period. Thus, it matches the revenues earned during an
accounting period with the expenses incurred
during that period to earn the revenues before sharing any profit or loss.
Accounting Standards (AS)
Accounting Standards provide the framework and norms to be followed in accounting so that the
financial statements of different enterprises become comparable. It is necessary to standardize the
accounting principles to ensure consistency, comparability, adequacy and reliability of financial
reporting. In the words of Kohler: “Accounting standards are codes of conduct imposed by
customs, laws or professional bodies for the benefit of public accountants and accountants
generally”. Thus, Accounting Standards are written policy documents issued by the expert
accounting body or by government or other regulatory body covering the aspects of recognition,
measurement, treatment, presentation and disclosure of accounting transactions and events in the
financial statements.

Need for accounting standards:

The need for accounting standards is as follows:
i) To promote better understanding of financial statements.
ii) To help accountants to follow uniform procedures and practices.
iii) To facilitate meaningful comparison of financial statements of two or more entities.
iv) To enhance reliability of financial statements.
v) To meet the legal requirements effectively.
Advantages of Accounting Standards:
 Uniformity & Comparability: Standardized rules mean financial statements can be easily
compared across different companies and time periods, helping users analyze performance
effectively.
 Reliability & Credibility: They ensure financial data is prepared according to recognized
guidelines, increasing trust among investors, creditors, and regulators
 Transparency: Clear, consistent reporting reduces ambiguity and promotes open
communication about a company's financial health.
 Fraud Prevention: Prescribed methods for recording transactions limit opportunities for
manipulation and earnings management.
 Simplified Auditing: Standards provide auditors with a clear framework, making verification
processes more efficient and less risky.
 Informed Decision-Making: Investors and analysts can make better, data-driven decisions
about investments and lending.
 Management Accountability: Standards hold management accountable for financial
performance and policy choices.
 Global Acceptance: They facilitate international investment by creating a globally understood
financial reporting language.
 Legal Compliance: Following standards helps businesses meet legal and regulatory
requirements, reducing penalties.

Chapter 2nd: Introduction of Double Entry system

Meaning and Definition of Double Entry Book-Keeping:
Double Entry Book-keeping System is the most scientific method of recording all monetary
transactions in the books of accounts. This system owes its origin to Italian Merchant “LUCA D.
BARGO PACIOLI” on 10th November 1494 and this day is celebrated as International
Accounting Day. This system of Book- keeping is based on the fact that there are two aspects of
every business transaction. Every business transaction involves two persons or accounts or parties
where in one is the receiver of the benefit and the other is the giver of the benefit. If something
comes into the business, something goes out from the business. Recording of two aspects of
monetary transactions in the Books of Account in terms of Debit (Dr.) and Credit (Cr.) is called as
"Double Entry" System of Book-keeping.
According to modern approach, every business transaction is concerned with Assets, Liabilities,
Capital, Expenses and Income. Whenever there is an increase in assets and expenses it is debited
and decrease in assets and expenses are credited.
Methods of Recording accounting information:
Indian System:
Indian system maintains, records in Indian languages, such as Marathi, Hindi, Urdu, Gujrati etc.
It is called Mahajani Deshinama system. In this system transactions are recorded or maintained
in long books, known as Bahi-Khata and Kird. This system of accounting is not based on Double
Entry system of accounting. Thus, is not a scientific accounting system. Even today this system
is used in India for small business organization.
2) English System:
A) Single Entry System:
This system of accounting records only Cash book and Personal accounts. It is unscientific method
and also known as an incomplete recording system, because it changes with the convenience of
business for recording transactions. This system of accounting does not provide accurate
information about the financial position of business and it is suitable for small business.
B) Double Entry System:
Double Entry System is the most scientific method of recording all business transactions in the
books of accounts. Under this system double or two fold effects of each transaction is recorded.
According to Double Entry Book-keeping System, one account is to be debited and another
account is to be credited with equal amount.
Definition of Double Entry System
Definition of Double Entry System is as follows-
“Every business transaction has a twofold effect and that it affects two accounts in opposite
directions and if a complete record is to be made of each such transaction it would be necessary to
debit one account and credit another account. It is this recording of two-fold effect of every
transaction that has given rise to the term Double Entry.” – J.R. Batliboi.
Principles of Double Entry Book-keeping System:
1) In every business transaction there must be minimum two effects i.e debit and credit.
2) Two Accounts means one is the Receiver of the benefit and other is the Giver of the benefit.
3) If one account is debited other account must be credited.
4) Every debit has an equal and corresponding credit of the same amount.
Advantages of Double Entry Book-keeping System:
1) Complete Record:
Under this system all business transactions are recorded. This method is scientific and records
both the aspects of each transaction.
2) Accuracy:
In this system both aspects are recorded in the books of accounts so it gives complete accuracy
in accounting work. It also checks arithmetical accuracy.
3) Business Results:
All expenses, losses, income, gains, liabilities, assets, debtors and creditors all these transactions
are recorded, therefore it helps to find out accurate business results of particular accounting period.
4) Common Acceptance:
It is widely accepted since it follows universal accounting principles. Double Entry System is
accepted by financial institutions, government authorities etc.

Classification of Accounts: -
Meaning of Account:
An account is a summarized record of transactions relating to a particular person, asset, liability,
particular head of expense or income recorded at one place. In day to day business activity large
number of business transactions takes place. It affects the several accounts. At the end of certain
period of time, it is necessary for the businessman to balance the accounts to find out the
information. like total capital, total liabilities and assets, total incomes and expenses etc. of the
business.
Definition of Account:
“An account is summarized record of transactions affecting one person, one kind of property or
one class of gain or loss.” – [Link]
“An account is a ledger record in a summarized form of all the transactions that have taken place
with the particular person or thing specified.” – Carter

1) Personal Accounts:
This account represents a person and group of persons with whom business deals. These accounts
are classified into following three categories: -
a) Natural Person's Account: Accounts relating to individual human beings. for e.g. Rajesh’s
A/c, Sumit's A/c, Sushma's A/c, Vaibhav’s A/c etc.
b) Artificial Person's Account: Artificial persons mean includes accounts of organizations,
associations which are created by law, for E.g. Bank of Maharashtra A/c, ABC & Co A/c,
Recreation Club A/c.
c) Representative Personal Account:
These Accounts represent a certain person or group of person in business dealing. Accounts
relating to outstanding and prepaid items are called representative personal account
E.g. Outstanding Rent A/c, Income received in advance A/c, Prepaid Wages A/c etc.
2) Impersonal Account:
Impersonal Accounts are classified into following two categories; -
1. Real Accounts: This account represents assets and properties owned by the business. The
following are the types of Real Account.
a) Tangible Real Account:
Tangible real account means the Assets and properties, which can be seen, touched and felt. e.g.
Machinery A/c, Motor Car A/c, Stock of Goods A/c etc.
b) Intangible Real Account:
Intangible Real account means assets which cannot be seen, touched, or felt but they can be
measured in terms of money e.g. Goodwill A/c, Patents A/c, Trademark A/c, Copyright A/c etc.
2. Nominal Accounts:
The account of expenses, losses, income and gains are called as Nominal accounts e.g. Wages A/c,
Stationery A/c, Salary A/c, Depreciation A/c Commission Received A/c, Discount Received A/c
etc.
Debit and Credit
1) Debit (Dr.): Left hand side of an Account is called Debit (Dr) side.
2) Credit (Cr): Right hand side of an Account is called Credit (Cr) side.

Golden Rules of Debit and Credit (Traditional Approach):

Personal Accounts (Individuals/Organizations):
 Debit: The Receiver.
 Credit: The Giver.
 Example: If Cash is paid to supplier John, debit John (receiver) and credit Cash.
Real Accounts (Assets/Properties):
 Debit: What comes in.
 Credit: What goes out.
 Example: Buying machinery with cash means debiting Machinery (comes in) and
crediting Cash (goes out).
Nominal Accounts (Expenses/Income):
 Debit: All expenses and losses.
 Credit: All incomes and gains.
 Example: Paying rent means debiting Rent Expense and crediting Cash