m
 

 
 
? An art of recording, classifying and
summarizing in a significant manner
and in terms of money, transactions
and events which are in part at least of
a financial character, and interpreting
the results thereof
V
 
? wervice activity.
? Referred to as the language of business.
? It is the measurement of financial activities.
? Provides quantitative information.
? Useful in decision making.
? Helps in making choices.
6
 
? maintenance of business records.
? Calculation of profit or loss.
? Depiction of financial position.
? Changes in financial position.
? Provides information on economic resources
and obligations of an enterprise.



 
? Provides information to make decisions.
? It provides information to various interested
people.
? It acts as an evidence in court of law.
? It helps in comparison of financial
information.
? It helps to track all the financial transactions
of the company.



? Historical in nature.
? Current revenues and historical costs are
compared.
? Increase in value of assets are not
considered.
? It does not provide qualitative information.
? Accounting principles and methods vary
with organizations.
J

   


? V

 


he accounting system that is
concerned only with the financial affairs of the
business, with the aim to know the financial status of
the business.
? 3 


his accounting system basically
involves the analysis of various elements of cost,
estimating future cost and to exercise cost control and
cost reduction.
? m





Accounting which
provides information to management which helps
them in making policies and decisions.
J  


 


? Jook keeping is concerned with identifying
financial transactions; measuring them in money
terms; recording and classifying them.
? Accounting is concerned with summarizing
recorded transactions, interpreting them and
communicating the results.
? 


     



 



?he knowledge of how to
make accounting is called
as accountancy.
’
 
   

 



 


? 6wners
? whareholders (in case of companies)
? Investors
? Creditors
? Lenders
? Employees
? managers
? Government
ë’ë

   


’
 
? money measurement Concept: All transactions
entered in books must be expressed in terms of
money.
? Dual Concept: Joth the aspects i.e., debit and credit
should be recorded. Assets= Liabilities + Capital
? Going Concern Concept: Accounting is done based on
the assumption that business will run for ever.
? Periodicity Concept: accounts are generally compiled
for one full year which is April to march.
3


? Accrual Concept: ransactions are recorded based on
their occurrence and not on the receipt or payment of
money.
? matching Concept: Revenue should match with the
expenses incurred.
? Realisation Concept: Revenue should be brought into
account only when it is realised.
? materiality Concept: Facts which are material should
be disclosed in the books.
3



? Consistency Concept: Uniform accounting practices
and policies are followed without changing them
frequently.
? Conservatism Concept: Recognize all losses and
anticipate no gains.
? Historical Cost Concept: ransactions are recorded in
the books at the cost on the` date of transaction and
market value is not considered.
3


? heoretical Concepts:
1. Jusiness Entity Concept: Jusiness is different from
its owner. Liabilities + Capital = Assets.
2. Proprietary Concept: his concept insists the
importance of proprietor in a business.
Assets Ȃ Liabilities = Proprietorship.
3. Fund Concept: Funds allocated for specific
purpose is used only for that purpose.
 

’  
? Identification of financial transactions
? Recording
? Classifying
? wummarising
? Analysis and interpretation.
M   

? After financial transactions are identified, transactions
are recorded in the books based on the documentary
evidences in a chronological order.
? his book is called as Journal and the act of recording
is called as º
 


? instead of journal transactions are recorded into
different books called as the subsidiary books which is
discussed later.
3



? Here transactions of similar nature are grouped under
a particular head called a ledger and this process is
called posting.
? ransactions are grouped under a particular head
called Account.
? Account is a part of ledger.
? Account is classified to three different types which is
discussed in the later slides.
w







  


? wummarising ? he summarised

involves drafting accounts are
of trial balance, informed to the
trading and profit interested parties,
& loss account, used to take
Jalance sheet. decisions.
 


 
 


? wummarised record of relevant transactions at one
place pertaining to a particular head.
? It records not only the amount of transaction and also
their effect and direction.
? Every account has two sides called as debit (Dr.) and
credit (Dr.)
? Debit denotes the left side while Credit denotes the
right side.
   

? Accounts are broadly classified into three:
1. Personal Account: Accounts related to individuals,
persons and artificial persons. Ex. Ram, Capital,
Jank, etc.
2. Real Account: Accounts related to things that can be
touch and felt i.e., tangible. Ex. Cash, furniture, etc.
3. Nominal Account: Accounts which are related to
things which are intangible, they cannot be touch
and felt. hey exist only for accounting purpose. Ex.
walaries, Wages, Rent, etc.
’ 

 

? Debit: ? Credit:
he receiver. he giver.
Ex. Cash given to Ram. Ex. Cash received from
Here Ram receives money. Ram. Here Ram gives
wo Ram A/c is debited. money. wo Ram A/c is
credited.
M
 

? Debit: ? Credit:
What comes in. Ex. Cash What goes out. Ex. Cash
received from Ram. Here paid to Ram. Here cash
cash comes in. goes out.
wo Cash A/c is debited. wo Cash A/c is credited.
è 

 

? Debit: ? Credit:
All the expenses and All the incomes and gains.
losses. Ex. Rent received. his is
Ex. walaries paid. walaries an income. wo, Rent A/c
are expenses. wo, walaries is credited.
A/c is debited.
M  

 
 
M  
? Receipts are broadly classified in to Capital Receipts
and Revenue Receipts.
? Capital Receipts: hose which are not available for
distribution as profits, without which a business can
survive. Ex. Fresh issue of shares, wale of machinery.
? Revenue Receipts: hose which are received in the
ordinary course of business, without which a business
cannot exist; also can be utilised for distribution as
profits. Ex. wales.
 

? Expenditure can be broadly classified as Capital
Expenditure and Revenue Expenditure.
? Capital Expenditure: hose which are incurred for
more than one accounting period; not recurring in
nature; can be incurred even before the
commencement of business; which eventually
becomes revenue expenditure in the long run i.e. by
depreciation. Ex. Purchase of land, furniture, etc.
? Revenue Expenditure: hose which are incurred for
the current period or 1 year; recurring in nature. Ex.
Purchases, Rent, etc.
º 


m





? Journal is called as the book of prime entry, where
transactions are recorded regularly in the
chronological order, as and when they occur.
? A model journal book is available in the books.
? 6nly after recording transactions in journal
transactions are posted into the respective ledger
account.
w  




? Identify the financial element in transaction.
? Find the parties involved.
? Apply the rules of debit and credit.
? Find which account is to be debited and which account
is to be credited.
? Journalise the transaction as:
Account to be debited Dr.
o Account to be credited.
 
  



Cash received from Ram Rs.1000
1. Financial element rs. 1000
2. Accounts involved: two, Cash and Ram
3. Cash: Real Account- comes in- so debit
4. Ram: Real Account- giver- so credit.
5. wo the journal will be:
Cash A/c Dr.
o Ram A/c
[Jeing cah received from Ram]
w  
J 


m




wubsidiary books are those books of prime entry, which can
be used instead of journal.
wubsidiary books are of different types:
1. Cash book: Where transactions relating to cash are
recorded. Cash book are of different types: a) wingle
column cash book: where transactions related to cash
alone are recorded.
b) Double column cash book: where transactions related
to cash and bank are recorded.
c) hree column cash book: where transactions related
to cash and bank are recorded along with discount
columns.
3



2. Purchases Day book: where credit purchases are
recorded. his book is totaled every month and the
figure is taken to the debit side of the Purchases A/c as
Ǯo wundry Purchasesǯ
3. wales Day Jook: where credit sales are recorded. his
book is also totaled every month and that figure is
taken to the credit side of wales A/c
4. Purchases Returns Jook: where returns outward are
recorded, the total is taken to the credit side of
ǮPurchases Returns A/cǯ.
3


5. wales Returns Jook: where returns outwards will be
recorded, totaled and taken to the debit side of Ǯwales
Returns A/cǯ
6. Jills Receivable Jook: where transactions related to
bills receivable are recorded.
7. Jills Payable Jook: where transactions related to bills
payable are recorded.
8. Journal Proper: where transactions which do not fall
into any of the above books.
3


? In all the books except the last one, one aspect is
recorded in the respective subsidiary book and the
other aspect is recorded in the other aspect
Account.
? When Cash Jook is maintained there is no need to
maintain Cash A/c and Jank A/c.
? ransactions in Journal Proper are treated as
journal and posting is done as usual on to the
accounts.
  
? It is grouping of transactions relating to a particular
head under an Account.
? An Account is a  shaped format with two sides as Dr.
and Cr.
? After transactions are journalised they are posted into
the ledger accounts.
? Entries in the debit side are posted with word starting
Ǯoǯ and those of the credit side are posted with the
word starting ǮJyǯ.
J




  
 

? otal both the sides.
? Write the biggest total in both the sides.
? he step explained below is called as balancing an
account.
? wubtract the lowest total from the highest total and
write the balance on the side having low total and
write it as Ǯo balance c/dǯ or ǮJy balance c/dǯ and write
the balance figure on the opposite side of the next
month as ǮJy balance b/dǯ or Ǯo balance b/dǯ.
? Accounts are generally balanced once in a month.
 
J




? rial Jalance is a statement which shows the balances
of all the accounts as on a particular date.
? he debit balances and credit balances are recorded
and both are totaled.
? When both the sides total are equal then it is called as
tally of trial balance.
? A trial balance is prepared to check the arithmetical
accuracy of recording transactions.
? When there are errors the trial balance do not tally.
hen those errors are called as errors disclosed by trial
balance.
3


? At certain cases the trial balance tallies even when
there are errors, then those errors are called as
errors not disclosed by trial balance.
? A sample trial balance is available in the book.
? Final accounts of a business are prepared only after
preparation of trial balance.
      




? Partial 6mission: 6mission to record one of the
aspects of a transaction. Ex. When cash is received
from Ram- if we debit Cash A/c and do not credit Ram
A/c or vice versa it is called as partial omission.
? Debit/Credit entries either not posted or posted twice.
Ex. When Cash is received from Ram- Either Cash A/c
is debited twice or Ram A/c is credited twice.
? Debits wrongly posted as credit and vice-versa. Ex.
When cash is received from Ram- Ram A/c is debited
or Cash A/c is credited.
3


? Wrong totaling of subsidiary books. From here the
totals are taken to respective ledger accounts. wo
obviously this leads to an disagreement of debit and
credit. Ex. Purchases day book actual total is rs. 10000
but totaled as Rs. 11000 and taken to Purchases A/c.
? Difference in amount between entry: When Cash Is
received from Ram rs.10000, Cash A/c is debited for
Rs10000 while Ram A/c is credited for Rs1000.
? Error in computation of Account Jalance. hat is while
balancing the account.
3


? Jalance of an account wrongly recorded in in rial
Jalance. Ex. When Cash A/c balance is Rs.11000 it is
recorded in rial Jalance as Rs10000.
? 6mission of an Account Jalance in trial balance. Ex.
When all the accounts are properly maintained but
failed to take any of the account balances to the trial
balance.
? Error in Extraction of trial balance: While totaling the
debit and credit items we may make errors.
  
  

? Compensating Errors: When one error compensates
the other such. Ex. When goods sold to Ram for
Rs10000 it is recorded as Rs1000 and the same mistake
is done when cash is received from him.
? Error of principle: When error is done in the basic
stage itself. hat is, when classifying the accounts and
applying rules of debit and credit.
? Error of complete omission: When one entry is
completely omitted to be recorded.
V

 


? Final accounts implies rading Account, Profit & Loss
Account and Jalance wheet.
? Final Accounts are usually prepared once in a year.
hat is, at the end of an accounting year.
? Final Accounts are prepared to find out the profits and
also the position of the business.
? rading and Profit & Loss A/c gives details on profits
while Jalance wheet shows the overall financial
position of the business.


 

? rading Account is prepared for a period ending which
is usually one year.
? It is prepared in order to find out gross profit.
? Gross profit is found out by finding difference between
net sales and all direct costs involved to make create
value to the goods or to make them salable.
? Direct expenses include all factory and direct expenses
like wages, factory rent, purchases, fuel and power, etc.
? Gross Profit= wales Ȃ Cost of goods sold.
  
 


? Items of debit side:
1. 6pening stock (available in balance sheet)
2. Net Purchases (purchases- purchase returns)
3. Direct expenses (available in trial balance, exercise
caution while finding out)
4. Carriage inwards (but not carriage outwards)
Items on Credit side:
1. Net wales (wales- wales Returns)
2. Closing stock (Available in adjustments)
3


? otal the credit side.
? ake that total to the debit side also.
? Find the difference in the debit side.
? hat difference amount will be the gross profit.
? he above steps are almost usual for every sum, but
vice-versa is applicable when the debit balance is more
than credit balance, where we get gross loss.
? his is to solve a simple problem without adjustments.
? Additional steps will be done if there are adjustments
which will be explained in the later part.
’   

? his is prepared to find out Net Profit/Net Loss.
? Net returns are found out by adjusting all other
incomes and expenses to the gross profit/gross loss.
? All 6ther Income are shown on the credit side below
the gross profit.
? All other expenses like discount, carriage allowed,
management expenses, selling expenses, provisions are
shown on the debit side and balanced in the same
manner of rading Account and Net Profit/Net Loss
are found out.
? he balancing figure in debit side is Net Profit while
the balancing figure in credit side is Net Loss.
3


? he above steps are common for all sums, except for
special adjustments which will follow in the later parts.
? most of the adjustments like bad debts, provisions for
bad debts, provision for discounts, outstanding and
prepaid expenses, depreciation, etc. will have to be
made only in Profit & Loss A/c.
J


 w 
? While rading and Profit & Loss A/c are called as the
income statements Jalance wheet is called as the
Position wtatement.
? Jalance wheet shows the position of a business as on a
particular date.
? As other accounts and statements are divided into
debit and credit, the balance sheet is divided into
Assets side and Liabilities side.
? Assets are those which are owned by the business,
either to generate current revenues or future revenues.
3


Liabilities are those that a firm is liable to pay to the
outsiders, including to the proprietor.
? A general tip is that information given outside the trial
balance appears usually in two places, once in the trading
a/c or profit & loss a/c and other on the balance sheet.
? In any sum the Assets side total and the Liabilities side
total should be equal. If not there is mistake in the sum or
in solving the sum.
? Jalance sheet is either prepared in horizontal form or
vertical form. And the arrangement of assets and liablities
can be either in the order of liquidity or in the order of
permamanency.