Evaluation of Accounting No social study has ever been static it has always evolved.

. Necessarily, the presentday shape and contents of accounting are a product of history. The origin of accounting as a social study can be traced back to very ancient days. Indeed, it is as old as the beginning of the use of money itself. Even under the barter system, some primitive form of accounting existed. For, otherwise, how could loss and gain have been calculated? The object of gain has always been the driving force of any exchange and this gave birth to the need for accounting. But, till the 13th Century, the mode of keeping accounts was primitive. Book of business were no more than mere notebook transactions. A French merchant wrote in his book: Lent 10 gold coins to a man last year, I forgot his name. In Europe, calculations were made largely in Roman numerals, and sums were very often wrong. Long divisions were regarded as something of a mystery, and the use of zero was not clearly comprehended. Is it surprising, therefore, that a system of accounting, as we know, could not have been developed? However, it did develop in the 15th century and its genesis can be traced to Double Entry Book-keeping which is said to have been fashioned by Fra Luca Pacioli (about 1445-1520), the multi-talented mathematician and philosopher of Venice. His treatise Summa De Arithmetic, Geometrica, Preportioni at preportionalita was published in 1494. (However, Pacioli is not regarded as the inventor of the system; he is said to have just collated the different aspects of it in a comprehensive tract). Of course, for a considerable time, the Double Entry System remained ignored in Europe; the people thereof continued following what is called Stewardship Accounting, the method of keeping accounts of household expenses followed stewards. (In our country, it may be called the munim system of accounting. For it was the munims who kept accounts of big households.) When, with advent of joint stock companies, ownership was separated from the management, the idea financial accounting based on the Double Entry Principle came to be recognized and was valued as a principle of action. The shareholders, an others interest were to be safeguarded; They were to be acquainted with the performance of the companies. The need was statutorily recognized, and there emerged as an information the dimension of this financial information system for the investors and others such statements as Balance Sheet, Profit and Loss Account, etc, By and by. The

dimension of this financial information system expanded and it come to be allpervasive. Since business and other concerns operate in the social setting, evolution of accounting could not come to a halt just at providing information to the investors and managers alone. Social cost as well as social benefit had to be assessed. This brought into being social accounting, an important adjunct to the system of measuring making a living, and which again, in money-economy are nothing other than money-earning and money-spending activities. Accounting as a Measurement Discipline Measurement is the assessment of numbers (numerical values) to objects, events or situations in accordance with some rule or guideline. Measurement requires that the asset, liability or change in equity must have a relevant attribute that can be quantified in monetary units with sufficient reliability. Accounting is the technique of measuring and communicating financial information. Since accounting has to follow the measurement procedure, it has come to be regarded as a measurement discipline. This discipline has three components: (a) Selection of the objects that are to be measured; (b) Selection of the procedure, i.e., standard or scale to be used in measurement; (c) Ascertaining the dimension of the standard or scale used for measurement. (a) Selection of the objects that are to be measured Accounting involves identification, measurement and communication of information for the purpose of acquaintances and decision-making by people concerned. From this standpoint , accounting may be regarded as the process of information-measurement. Those who made decisions, do need information relating to the past and present and those which are likely to occur in the future(there cannot really be any future information for it has to be conjectual nature). For those who are not involved in the decision-making process, i.e., for the external users, the information relating to the past should be regarded as adequate. Thus, the Balance Sheet or a Profit and Loss Account or nay other picture of the working of the business concern which the outsiders get, relates to the past. In addition , the decision-makers require information regarding the present as ell as the projection in the future, but what varies from concern to concern is that the decisions that are to be made are not uniform. For example, the concern of the

one business unit may be cash management at the moment, while of another may be making advances. The first will require all information relating to the cash, while the second will be bothered about creditworthiness of the prospective loanee. It may be reiterated here that while the past and the present lend themselves to acute measurement, future measurement must be necessity of conjectural. Therefore, decision-makers are required to have recourse to prediction. Thus prediction. Thus, prediction becomes a part of measurement . Predictions are of course not made from vacuum. They are made from past and present information as well as from the forecasting ability of the decisionmakers. (b) Selection of the procedure, I.e. standard or scale to be used in measurement In todays money economy almost everything is measured in terms of money. It is said that one of the main functions of money is to act as a measure of value. The discipline of accounting has also submitted itself to the measurement of this scale-through money. Of course, in some cases, quantitative information is also demanded and conveyed. Money is no universal measurement scale, for the simple reason that currency, which remains current as money at the point of time, varies from country to country. For example, in India, the accountant uses the currency unit Rupee to measure financial position at a point of time and income for a period of time. While it is pound sterling in U.K and dollar in the U.S.A. that are the purposes. For the purpose of international transaction. It is necessary to determine the rates of exchange among the different currencies of the World. But the rates so determined are more unstable than not. This gives rise to the problem of fixing and refixing exchange rates. In the days of gold standard, there was no difficult in this respect. Exchange rates were determined by the gold content of the different currencies. If, for example, the gold value of the Indian rupee was onetenth of an American dollar then the Indian rupee could be had for an American dollar. But now-a days, under the currency system, exchange rates are to be determined- fixed and re-fixed constantly according to the dictates of the simple laws of demand and supply. If more of Indian currency were demanded in America the rate of exchange should move in its favour. i.e. more dollars can be had for the same amount to dollars. This variability in exchange rates is an obstacle to the mechanism of international trade. And it underscores the fact that as a measurement standard, representative or paper money is not ideal. Yet, no better alternative standard has been devised and, therefore, accounting too, has adopted this as its own standard.

( c) Dimension of the measure. That money is no ideal measure may be elaborated a little more. If it were, many a problem could have been solved and the need for indexing would not have arisen. Money does not have stables value and especially since the World War II, its value i.e., its purchasing power has been steadily declining. The phenomenon is referred to as inflation, under which all money economies have been suffering more or less. Likewise, during the last thirties, there was the phenomenon or deflation increasing purchasing power of monies and necessarily decreasing prices of goods and services. Because of this instability in the value of money, information pertaining to one year may not be of much use in another. A comparison between the two may not be realistic, and as such, may convey a wrong nation. For example, in 2006 a firm sold 1,00,000 units of a commodity at Rs, 10 per unit and thus realized Rs. 10,00,000 in 2007. The price was raised to Rs. 15 per unit, and because of elasticity of demand, the firm was able to dispose to only 80,000 units. Its sale proceeds reached the figure of Rs. 12,00,000. The national that there was increase in sales is a wrong one. Actually, the sale fell by 20% , even though sale proceeds went up by the same measure. For such anomalies, the aforesaid process of indexing has been introduced and operated and the practice is spreading in different fields of measure including accounting. Measurement and Valuation. In economics, value is measured both cardinally and ordinally, while accounting has to depend upon cardinal measure alone. Thus, while the economists says that X is preferable to Y, the accountant measures the value of either. If X is measured at Rs. 2,00,000 and Y at Rs. 1,80,000, then X should be preferred to Y. Thus, to the accountant, value is always cardinal measured in cardinal numbers, whether it is for acquisition or for current evaluation or for realization by disposing of the stock. Value In accounting , the term is used to express the monetary equivalent of an asset, or service, or other accounting entity. Because of differences of methods, values are often different and, therefore, precisions is difficult. Valuation Valuation is ascribing a monetary amount to an asset (or a liability), It is the appraised value of a specified assets. Valuation is also described as process that links risk and return to determine the worth of an asset. The valuation of assets is the process of measuring financial attributes (past, present or future) of assets

or aggregation of assets. Since measurement is a broader concept than valuation, accountants favour the concept of measurement which includes valuation. Attributes of the Measurement of Value. Accounting is a measurement process. It should be sufficiently well defined to be reliable and relevant to the users of accounting information. The management process should specify the attribute or attributes of value that are to be used, because the ratios of income and capital are largely dependent on valuation concepts. Attribute refers to the traits or aspects of an element to be qualified or measured, such as historical cost, current cost, etc. Attribute is a narrower concept than measurement, which includes not only identifying the attribute to be measured but also selecting a scale of measurement. There are generally five attributes of all classes of assets that may be measured. They are: (a) Historical Cost (historical proceeds) Property, plant and equipment and most inventories are reported at their historical cost, which is the amount of cash, or its equivalent, paid to acquire an asset. Liabilities that involve obligation to provide goods or services to customers are generally reported at historical proceeds, which is the amount of cash, or its equivalent, received when the obligation was incurred. ( b) Current Cost Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent, that would have to be paid if the same or an equivalent asset were acquired currently. ( c) Current Market Value Some, investments in marketable securities are reported at their market value, which is the amount of cash, or its equivalent, that could be obtained by selling an asset in orderly liquidation. Current market value is also generally used for assets expected to be sold at prices lower than previous carrying amounts. Some liabilities that involved marketable commodities and securities, for example, the obligations of writers or options or sellers of common shares who do not own the underlying commodities or securities, are reported at current market value. ( d) Ne Realizable (settlement) value Short-term receivables and some inventories are reported at their net realizable value, which is the non-discounted amount of cash, or its equivalent; into which as assets is

expected to be converted in the course of business less direct costs, if any, necessary to make that conversion. Liabilities that involve known or estimated amounts of money, payable at unknown future dates, for example, trade payables or warranty obligations, generally are reported at their net settlement value, which is the non-discounted amount of cash, or its equivalent, expected to be paid to liquidate an obligation in the course of business, including direct costs, if any, necessary to make that payment. (e) Present (or discounted) value of Future Cash Flows Long-term receivables are reported at their present value (discounted at the implicit or historical rate), which is the present or discounted value of future cash inflows into which as asset is expected to be converted in the course of business less present values of cash outflows necessary to obtain those inflows. Long-term payables are similarly reported at their present value (discounted at the implicit or historical rate) which is the present or discounted value of future cash outflows expected to be required to satisfy the liability in course of business Statement of Financial Accounting Concept (SFAC). Historical cost method underlies the conventional accounting system, and buildings, plant and machinery furniture and fixture, stocks, etc., are recorded at historical or acquisition cost. Current cost is also used in , measuring and valuing stocks. Current exit value is usually used for marketable securities. Expected exit value is often used to sundry debtors and sundry creditors. Present value of expected cash flows is frequently used for long-term receivables and payables. The money unit of measurement used in accounting is nominal unit of money. These units are unadjusted for changes as purchasing power of money over time.

ACCOUNTNG PROCESS Accounting process Accounting process refers to the sequence of accounting procedures used to record, classify and summarize the business transactions. It begins with the identification of business transactions and ends with the reverse entries for prepaid and outstanding expenses. A business enterprise has numerous transactions everyday during an accounting period. Unless the transactions are analyzed and recorded individually, it is not possible to determine the impact of each transaction in the financial statements. The purpose of accounting is to ascertain the cumulative effect of the transactions. For accounting, the following steps are followed. Passing of Identification Business Reverse Entries of Documents Transactions are prepared or Received Passing of Closing Entries Preparation of Final Accounts

Transactions Are recorded in Books of Original entry If not last transaction Of the period if last transaction Of the period. Transactions are posted to

Passing of Adjustments Entries Preparation of Trial balance

Transaction Meaning A transaction is a particular type of external event, which can be expressed in terms of money and brings change in the financial position of a business unit. A transaction involves transfer of something of value between two or more entities. A transaction may be an exchange in which each party receives as well as sacrifices value. In other words, in every transaction, there is a movement of goods from the seller to the buyer and a movement of cash from the buyer to the seller. A transaction can also be a non-reciprocal transfer in which a business unit incurs a liability (penalty imposed by a local authority) or transfer an asset to another entity (payment of income tax) or receives an asset (subsidy received from Government) or cancellation of a liability (provision for workmens compensation) without directly receiving (or giving) value in exchange. Transactions may be external between a business entity and a second party. E.g. goods sold on credit to X ) or internal (not involving , second party, for instance , depreciation charged on the machinery). Feature 1. A transaction is a completed action, not an expected or possible future action. 2. A transaction is an even which involves an exchange of property or services( or a combination of both between two or more parties. 3. Each transaction has an effect on the assets and liabilities (or capital) of a business unit, and hence, ca change the resources and obligations of that business unit. 4. Each transaction requires recognition in the accounting system, because any accounting system is essentially based on transactions. 5. Transactions are recorded from the information provided on business documents. 6. A transaction may be for a particular accounting system, because any accounting system is essentially based on transactions. 7. Transactions may be internal (without involving an outsider e.g. providing depreciation on machinery or external (involving an outsider, e.g. purchased goods on credit). 8. Since each transaction involves two accounts, it can be expressed in terms of debit and credit entry. 9. After each transaction, the total assets of a business must equal the total liabilities and capital. Therefore, the equality of the Balance Sheet cannot be destroyed by any transaction. 10. All transactions are recorded in the journal and these are numbered for reference. 11. The nature of each transaction is carefully analysed since it affects the operations or financial status of a business unit. Transactions are analysed since it affects the operations or financial status of a business unit. Transactions are analysed in terms of accounts to be maintained for (a) assets; (b) liabilities; (c) Capital; (d) revenues; (e) expenses.

12. Adequate evidence of the transaction is essential for both control and financial reporting. IIIlustration 1 State with reasons whether the following events are transactions or not to Mr. X (Proprietor). (i) Mr. X started business with capital (brought in cash) Rs. 40,000 (ii) Paid salaries to staff Rs. 5,000 (iii) Purchased machinery for Rs. 20,000 in cash (iv) Placed an order with Sen & Co., for goods for Rs. 5,000 (v) Opened a bank account by depositing Rs. 4,000 (vi) Received pass book from bank (vii) Appointed Mr B. Sen as manger on a salary of Rs. 4,000 per month. (viii) Received interest from bank Rs. 500

Event Meaning Event is an occurrence, happening, change, or incident, which may or may not bring any change in the financial position of a business unit. It may be an internal event that occurs within a business unit. e.g. using new materials in production, death of general manger or threat by a labour union to call a strike. It may be an external event that involves interaction between a business unit and its environment, e.g. change in the price of a product that the business unit buys or sells, or an improvement in technology by a competitor. Features 1. An event is an occurrence, happening, change or incident 2. An event may or may not bring any change in the financial position of a business unit. 3. An event may or may not be expressed in terms of money. 4. An event may be an external (involving interaction between a business unit and its environment) of internal (within a business unit). 5. All events are not recorded in the books of account. 6. An event may be a completed action, or an expected or possible future action. 7. An event can cause a reconstruction or liquidation of a business unit. 8. An event does not require exchange between different parties. 9. An event may result in another event. Relationship between Event and Transaction Event is an occurrence, happening , change or incident, which may or may not bring any change in the financial position of the business. Again an event may or may not be expressed in terms of money.

Transactions are those events which satisfy both the conditions stated below: (i) It must be expressed in terms of money; and (ii) Bring changes in the financial position of a business unit. If any event cannot satisfy both the above conditions, it will not be treated as transaction. Many events may occur in the business which cannot be measured in terms of money or which can bring any change in the financial position of the business unit. Therefore, it can be concluded that all transactions are events but all events are not transactions. IIIustration 2 State whether the following events are transactions or not to Mr. Ram. (1) Ram started business by transferring Rs. 100,000 from his own bank to business bank account. (2) Purchased goods for re-sale on credit for Rs. 24,000 from Rahim. (3) Placed an order with Bombay Safe for purchase of an almirah. (4) Paid rent for Warehouse Rs. 1,000 by cheque. (5) Borrowed long-term loan Rs. 50,000 from State Bank of India (6) Appointed Mr .X as Sales Manager at a salary of Rs. 5,000 p.m. (7) Sold goods for cash Rs. 30,000 (8) Paid Rahim by cheque. (9) Received a quotation from a supplier. (10) Purchased a computer for Rs. 50,000 for office use. (11) Mr. X General Manger resigned from the organisation (12) Received cash from a Debtor Rs. 3,000. Classification of Transactions Cash Transaction. A transaction which involves immediate cash/cheque receipt or payment is called a Cash Transaction. For example, goods sold to X for cash Rs. 5,000 In a cash transaction, the name of the party to whom goods are sold or from whom goods are purchased, is not recorded. This is because it serves no purpose. Credit Transaction. An external transaction not immediate cash receipt or payment is called a Credit Transaction. For example, Purchase of goods on credit from Y. In a credit transaction delivery of goods and receipt/payment of money takes place on two different dates. In a credit transaction, the name of the party is recorded to ascertain how much is owed to or from him. External Transaction. A transaction which involves the business entity and a second party is called an External Transaction. For example, goods sold to Ram for Rs. 2,000 on credit. Internal Transaction. A transaction which does not involve a second party is called Internal Transaction . For example, depreciation charged on machinery. The occurrence of an event may or may not be under the control of a business unit. Rules for Determining Cash or Credit Transaction

Students sometimes experience a little difficult in deciding whether a transaction is for cash or on credit. The rules shown in the next page will help: 1. Cash purchases, cash sales and all transactions whether the word paid is mentioned are to be treated as cash transactions, for example, Salary paid; goods sold for cash etc. 2. When a personal name or the name of a firm is mentioned in the transaction. It will be treated as credit transaction, it will be treated as a cash transaction. For example, Goods sold to X for Rs. 500. 3. When both cash and personal name are mentioned in the transaction , it will be treated as a cash transaction. For example. Goods sold to Y for cash Rs. 1,000. IIIustration 3 State whether the following are cash transactions or credit transactions: 1. Sachin commenced business with Rs. 1,00,000 2. Paid rent in advance Rs. 5,000 3. Purchased a typewriter for Rs. 7,000 from Sen & Co., 4. Bought furniture from M/s. Modern Furniture for cash Rs. 3,000 5. Purchased goods from Sohan Brothers for cash Rs. 30,000 6. Sold goods to Shyam for Rs. 25,000 7. Bought goods from Ramesh Rs. 20,000 8. Paid rent Rs. Rs. 1,000 9. Paid salary to staff Rs. 4,000 10. Received cash from Shyam Rs. 20,000 11. Paid Romesh Rs. 19,000 12. Withdrew cash from business for personal use Rs. 2,000.

IIIustration 4 State whether the following are external transactions or internal transactions: 1. Purchased a computer from HCL on credit for Rs. 60,000 2. Goods destroyed by fire Rs. 1,000 (not insured) 3. Purchased an Electronic typewriter for cash Rs. 20,000 4. Changed depreciation on furniture Rs. 400 and Rs. 200 0n typewriter.

Source Documents Source documents are basically external documents or documents relating to external activities, which are the first input to the accounting system. These source documents come into company through a variety of departments, in particular, and most obviously the sales and purchasing departments, and they head towards the accounting department for processing. Source documents include the following:

1. Sales order: A customer place order in writing or signs an order for goods and services he wishes to buy 2. Purchase order: A business make an order from another business for the purchase of goods or services. 3. Invoices and credit notes: These are discussed further below. 4. Petty cash voucher: It is prepared for petty cash expenses. 5. Credit card sales voucher: When goods are sold against credit card, a credit card sales voucher is prepared by the seller and signed by the customer. Credit card sales are entered in the cash book as cash sales. Invoices An invoice relates to a sales order or a purchase order. When a business sells goods or services on credit to a customer, it sends out an invoice. It shows the goods sold , with descriptions, quantities , prices and trade discounts. The details in the invoice should match with details on the sales order. It may include additional charges- for insurance, carriage and container. It also shows the total amount due from the customer. When a business buys goods or services on credit it receives an invoice from the supplier. The details in the invoice should match with the details on the purchase order. An invoice is often prepared on multi-part stationery or carbon copied. The top copy is sent to customer and other copies are used by the different departments within the business. Credit Note. In all business goods are turned for different reasons. They may have been damaged in transit , the wrong size or make may have been supplied; or the goods were found to be faulty. When goods are returned by the customers a document is prepared called credit note and sent it to customer to intimate him that his account has been credited. Credit note are similar in style and layout to invoices, but they are usually smaller and printed in red. A credit note I also sent to the customer in the following cases: 1. When allowances is granted for defective goods. 2. When containers are returned by the customers. 3. When excessive charge was made by mistake. Voucher The voucher is a document which provides the authorization to pay and specifies the accounts to be debited and credited. It is prepared for each expenditure, regardless of whether the expenditure covers services merchandise for resale or assets for use in the business. A voucher is attached to each incoming invoice and given an identification number.

The voucher has space for listing the data from the invoice. Space is also provided for approval of signatures for each step in the verification and approval of the liability. It contains written evidence that: 1. All expenditures have been incurred on the basis of proper authorization, for example, against purchase order. 2. The goods and services have been received in full. 3. The payment has been made only for the goods and services received.

Features of voucher The form of a voucher will vary from organisation to organisation. Regardless of the specific from of the vouchers, the following features are usually present: 1. A separate voucher for every incoming invoice. 2. Consecutive numbering of vouchers. 3. Name and address of creditor listed on voucher. 4. Description of liability 5. Amount due and terms of payment. 6. Approval of signature for : (a) verification of invoice; (b) recording in accounts; ( c) payment of liability. 7. Cheque number and date of cheque listed on voucher.

Preparing a voucher A clerk prepares a voucher by filling in the appropriate blanks with data taken from the invoice, such as the invoice date, invoice number and amount, and creditors name and address. The voucher with invoice attached is then sent to the employees responsible for verifying and comparing prices, quantities and terms with those specified in the purchase order. After verification, the voucher and supporting documents are sent to an employee of the accounting department, who indicates on the voucher the accounts to be debited and credited. The voucher is now ready to be recorded. But before recording it is submitted to accounts officer for final approval. After receiving this executive approval, the voucher is entered in the books of original entry. IIIustrative Example 1 The following is a typical business transaction: (a) The purchase of goods on credit (b) Allowance to credit customers upon the return of faulty goods. (c) Refund from petty cash to an employee of an amount spent on entertaining a client. (d) Credit card sales. For each transaction, identify clearly the original document(s) for the data:

Definition of an Account An account is a formal record, in the ledger, of all transactions relating to changes in a particulars item. It is used to convey information on transaction. Similar types of transactions are gathered at one place in an account. Account is the basis for recording transactions in the books of accounts. At the time of recording transaction under double entry system one account is debited and the other account is credited. Sometimes, a group of accounts are debited and the other group of accounts are credited. Classification of Accounts Accounts can be classified in two ways: (a) Traditional classification ; (b) Modern classification. Traditional classification of Accounts This is a very old system of classifying accounts. Nowdays, in advanced countries this system of classification of accounts is hardly used. Under this system, accounts are classified into four types. 1. Personal Accounts These accounts show the transactions with the customers, suppliers, money lenders, the bank and the owner. A business may have many credit transactions with the above persons or organisations. A separate account is to be prepared for each of them. Persons or organisations with whom the business has credit transactions are either debtors or creditors. If they have to give some money to the firm, they are called debtors. Conversely, if the firm is to pay them some money they are known as creditors. The main purpose of preparing personal accounts is to ascertain the balances due to or due from persons or organisations. 2. Real Accounts These accounts are accounts of assets and properties such as land, building, plant, machinery, patent, cash investment, inventory, etc. When machinery is purchased for cash, the two accounts involved are machinery and cash- both are Real Accounts. But if the same machine is purchased from Z & Co on credit, the two accounts involved will be those of Machinery and Z & Co., the former being a Real Account and the latter being a Personal Account. 3. Nominal Accounts These are the accounts of incomes, expenses, gains and losses. Examples are : Wages paid, discount allowed or received, purchase, sales etc. These accounts generally accumulate the data required for the preparation of income statement i.e. the Trading and Profit and Loss Account. 4. Valuation Accounts Value is a measure, in terms of money, of the usefulness of desirability of an asset. Valuation is the process of attaching a monetary value to some asset (or liability). It is an adjustment usually made to an asset account, in order to allow for, or provide for, a fall in value as a result of e.g. depreciation or doubtful

debts. Where fixed assets are maintained in the books of accounts at original cost, to reflect the actual book value of the assets, a provision for depreciation account on the credit maintained. In the Balance Sheet , it is shown as a deduction from the original cost of the asset. Similarly, if the Debtors personal accounts are retained at total amount due, a valuation account on the credit A provision for doubtful debts is required. In the Balance Sheet, it is shown as a deduction from Sundry Debtors Account to reflect estimated realizable value. IIIustration 5 Classify the following into Real, Nominal, Personal and Valuation Accounts: (i) Plant and Machinery; (ii) Purchases; (iii) Investment ; (iv) Bank; (v) Provision for Bad and Doubtful Debt; (vi) Tata Iron and Steel Co., Ltd.,; (vii) Rent (viii) Land and Building; (ix) Carriage Outwards; (x) Capital; (ix) Leasehold property; (ix) Trade Mark; (xiii) Returns outwards; (xiv) Import duty; (xv) Provision for depreciation.

Double Entry Book-Keeping Meaning Double entry is an almost universally used system of business record keeping. It is a system of recording business transactions which recognizes that each transaction has a dual aspect. It is so named because the principles of double entry book-keeping are based upon every transaction having two aspects or two parts, i.e. two accounts are always affected by each transaction. Under this system each transaction is seen as a flow of value from one account to another. The receiving account is debited with the amount and the giving account is credited. Therefore, every debit has an equal an and offsetting credit. If only two accounts are affected (as in the purchase of building fir cash), one account, Building is debited and other account, Cash is credited for the same amount. If more than two accounts are affected by a transaction, the sum of the debit entries must be equal to the sum of the credit entries. Features 1. This method records both aspects of each transaction. Equal debit and credit entries are made for every transaction in two different accounts. 2. Under this system, all transactions are recorded fully. 3. Under this system, it is possible to prepare a Trial Balance and check the arithmetical accuracy of the books of account because it records all transactions in full. 4. Under this system, profit/loss can found out by showing in detail the expenses and incomes. 5. Under this system, Balance Sheet can be prepared in detail.

Advantages 1. A complete record of all the transactions relating to a business unit are maintained systematically. 2. The financial position of the firm can be ascertained. 3. The arithmetical accuracy of the books of account can be ensured. 4. Location and rectification of errors are possible. 5. The system can applied to any form of organisation.

6. Consistency can bee maintained in the books of account, which will help to make a comparative study of current years figures with those of the previous year(s). 7. The profits earned or losses suffered for an accounting period can be ascertained. 8. Amount due to suppliers and due from customers can be easily ascertained. 9. The amount of cash balance available at any point of time can be ascertained. 10. It helps in taking managerial decisions. 11. Greater control over the affairs of the business can be exercised, and thereby, frauds and misappropriations can be minimised. 12. The business transactions do not get mixed up with private transactions of the owner(s).

Disadvantages 1. This system adopts money as its basic unit of measurement. But money is an inelastic yardstick for measurement. 2. Many important events cannot be recorded in the books of account simply because they cannot be expressed in monetary terms. 3. Transactions are all historical records and not future probabilities. 4. If any transaction is not recorded at all in the books of account, it may remain undiscovered. 5. If the amount of a transaction is wrongly recorded in the books of original entry, it is difficult to detect the error. 6. A compensating error may also remain undetected. 7. This system requires personal judgement of the accountant. 8. This system is not suitable for small business where the owner(s) can directly control the affairs of the business.

Accounting Equation The accounting equation is the basis for double entry system of accounting. Total assets of the business unit are provided by the creditors/lenders and the owners. Therefore, at any point of time, the total assets of the business are equal to total liabilities. Amounts owing to the outsiders are known as liabilities but liability to the owners, in accounting, is referred to as capital. The relationship

that exists among assets, liabilities and the capital can be expressed in the form of an accounting equation which is an follows: Total Assets= Total Liabilities OR Total Assets= Liabilities + Capital Concept of Debit, Credit and Duality The rules of Debit and Credit are as follows: 1. Debit: Any increase on the left hand side of the equation 2. Credit: Any decrease on the left hand side of the equation 3. Debit: Any decrease on the right hand side of equation 4. Credit: Any increase on the right hand side of the equation. IIIustration 10 (a) The liabilities of a business is Rs. 75,000 and the capital is Rs. 85,000. Find out the total assets. (b) A business has assets of Rs. 54,321 and owners equity is Rs. 34,215. What is the amount of liability? (c) Ascertain the capital if: Cash Rs. 10,000; Stock Rs. 15,000; Building Rs. 10,000; Machinery Rs. 1,80,000; Debtors of Rs. 45,000 and Creditors Rs. 27,500. IIIustration 11 Calculate as direct using accounting equation (a) If the total assets of a business are Rs. 1,50,000 and capital is Rs. 75,000 calculate creditors. (b) If the capital of a business is Rs. 80,000 and the liabilities are Rs.60,000, calculate the total assets of the business. (c) Calculate total assets if: (i) Capital is Rs. 50,000; (ii) Creditors Rs. 30,000; (iii) Revenue during the period Rs. 52,000; and (iv) Expenses during the same period are Rs. 38,000.

IIIustration 12 From the following information calculate total assets of the business. Capital Rs. 40,000; Creditors Rs. 30,000; Revenue earned during the period Rs. 75,000; Expenses incurred during the period Rs. 20,000. Value of stocks unsold Rs. 20,000. IIIustration 14 Show the accounting equations on the basis of the following transactions.

(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x)

D. Mahapatra commenced business with cash Rs. 50,000. Purchased goods for cash Rs. 8,000 Sold goods costing Rs. 6,000 for Rs. 9,000 Purchased furniture Rs. 20,000 Took a loan of Rs. 10,000 from bank Paid salary Rs. 4,000 and insurance Rs. 2,000 Received rent Rs. 3,000 and interest Rs. 1,500 Paid Rs, 800 as premium of life insurance policy Purchased a bicycle for the owners son Rs. 1,200 Depreciation furniture by Rs. 300.