Definition :

“Accounting is a systematic process of identifying , recording,

classifying, summarising and communicating financial information of a
business to the users or authorities for decision making.”

Objectives of Accounting:

1. To keep systematic records of business transactions

2. To calculate profit or loss
3. To determine the financial position of a business
4. To provide information to various parties
5. To protect business assets
6. To prevent and detect errors and frauds
7. To assist the management

Functions of Accounting :

1. Maintaining complete and systematic records

2. Communicating the financial results to various parties
3. Protecting the assets of the business
4. Providing assistance to the management
5. Compliance of legal needs
6. Fixing responsibilities

Characteristics of Accounting:

1. Accounting is an art as well as science.

2. Recording financial transactions only.
3. Recording in terms of money.
4. Interpretation of the results.
5. Communicating.

Types (or) Sub- fields of Accounts.

Branches of Accounting :

1. Financial Accounting : In financial accounting we record the business

transaction in a systematic manner to ascertain the Profit and Loss of the
accounting period by preparing profit & loss a/c and to present the
financial position of the business by preparing a balance sheet.

2. Cost Accounting : Cost accounting is most commonly used in the

manufacturing industry. An industry that has a lot of resources and costs to
manage. It is a type of accounting used internally to access a company’s
operations.

3. Management Accounting : The main purpose of management

accounting is to present the accounting information in such a way as to
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assist the management in planning and controlling the operation of a
business. Ratio analysis , budgetary control, Funds flow statement & cash
flow statement.

4. Tax Accounting: The branch of accounting which is used for tax purpose
is called Tax Accounting. Income Tax and GST are computed on the basis of
this accounting system. Tax accounting also analyzes tax related business
decisions and any other issues related to taxes.

Advantages (or) Uses of Accounting:

1. Provide complete and systematic record

2. Replaces memory
3. Information regarding profit and loss
4. Information regarding financial position
5. Enables comparative study
6. Helpful in management of business
7. Helpful in assessment of tax liability
8. Helpful in partnership accounts
9. Helpful in raising loans

10. Helpful in prevention and detection of errors and frauds.

Limitations of Accounting :

1. Accounting is not fully exact.

2. Accounting does not indicate the realisable value.
3. Unrealistic information
4. Incomplete information
5. Affected by window dressing
6. Unsuitable for forecasting

Accounting Concepts:

1. Going concern concept: This concept states that a business will

expected to operate for longer duration and there is no probability of ending
in future.

2. Separate Entity concept : This concept states that a business is

separate from its owner. Owner’s capital is a liability to the business

3. Money measuring concept: Only those items will be recorded in the

books of accounts that can be measured in terms of money.

4. Dual concept : This concept states that there should be two parties
involved in any transaction. A single person can not do any transaction.

Assets = Capital + Liability

5. Accounting year concept: As per this concept there should be

accounting year books of accounts should be prepared for a particular
period of time.
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6. Cost concept: This concept states that all the fixed assets should be
recorded m book value not on market value

7. Realisation concept: whenever we sell an asset only that cost to be

considered but not on the current price

Accounting conventions:

1. Full disclosure: As per this convention it is the responsibility of a

company to disclose its accounting information correctly because this
information is important to all the shareholders
2. Conservation: This convention says that you should not recognised
future profit but it there are any chances of future loss should be
recognised
3. Consistency: All the methods of accounting used by company should
not be deferred in two accounting periods there should be consistency
in use of accounting methods
4. Materiality: Material t means importance only those transactions will
be regarded in the books of accounting which are important for
business

JOURNAL

“Journal is a book of primary entry or a book of original entry in which

transactions are first recorded in a chronological order from the accounting
vouchers that are prepared on the basis of source documents.”

“The book in which all the business transactions are entered

systematically for the first time is known as journal.”

Journal entry : an entry records in journal is called journal entry

Journalising : the process of recording a transaction in the journal is called

journalising

Narration: After each entry a brief explanation of the transaction together

with necessary details is given. This explanation is called narration.

Compound journal entry : sometimes two or more transactions relating to

one particular account take place on the same date. In such cases instead
of passing separate entries for all such transactions only one entry is
passed.

Formate of Journal

Date Particulars L.F Amount (Dr) Amount (Cr)

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Double Entry System :

“ It was invented by LOCO PACIOLI in 1914 at Venice, Italy.”

1. It is based on the dual aspect principle.

2. Every business transaction has two aspects i.e.,
3. When we receive something, we give something else in return.
4. This approach of writing both the aspects of the transactions is known
as Double Entry System of Accounting.
5. The two accounts
a. One account is given debit while
b. The other is given credit with an amount.
6. Thus, on any date the debits must be equal to the credits.

Stages of Double Entry system:

1. Transaction.
2. Original Entry
3. Transfer into appropriate Ledger.
4. Trail Balance
5. Final Accounts
6. Analysis and interpretation of Final accounts

GOLDEN RULES OF DEBIT AND CREDIT:

1) For Personal Accounts:

a. Debit the receiver
b. Credit the Giver
2) For Real Accounts:
a. Debit what comes into the Business
b. Credit what goes out from the Business
3) For Nominal Accounts
a. Debit the expenses and losses
b. Credit all Incomes and Gains

Advantages of Double Entry System:

1. Scientific system
2. Complete record of every transaction
3. Preparation of Trail Balance
4. Preparation of Trading & profit & Loss Account
5. Knowledge of financial position of the business
6. Knowledge of various information
7. Comparative study
8. Helps management in decision making.

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 Basis Double Entry System Single Entry System
Aspects of Dual aspects of a transactions Dual aspects of a
Transaction are recorded in it transactions are not
recorded in it
Types of All the accounts, Personal, Real & Only Personal accounts
Accounts Nominal are maintained under and cash book are
this system maintained under this
system
Trail Balance Trail Balance is prepared and so Trail Balance is not
arithmetical accuracy can be prepared and so
verified arithmetical accuracy
cannot be verified
Profit (Or) Loss Net Profit or Net Loss can be Actual Profit or Loss
ascertained by preparing P/L A/c cannot be ascertained
under this system because P/L is not
prepared only an
estimated profit or loss
can be determined
Financial Correct Financial Position can be Correct Financial
Position ascertained by Preparing the Position can not be
Balance Sheet ascertained because
Balance Sheet is not
prepared
Adjustments Adjustments are made at the There is no provision to
time of preparing Financial make adjustments
statements because of incomplete
of accounts

What is Contra Entry :

Contra entry refers to transactions involving Cash and bank account,

In other words any entry which effects both sides of three column cash book
is called contra entry

Contra entries recorded in the following cases:-

1. When cash deposited into bank

2. When cash is withdrawn from bank for office use
3. When a cheque received from our customer in a particular date but it
should be deposited into the bank in another date.

Imprest System of Petty Cash Book:

Imprest system is a system of controlling petty cash. Under this

system fixed sum is allocated as sufficient to meet petty cash expenditure
for an agreed period of time. At the end of the agreed period the petty
cashier submits the account of the amount spend by him.

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 The sum expended by the petty cashier is reimbursed, thus making
up the original sums. So it is called as imprest system.

Petty Cash Book :

For petty expenses where the number of transactions are numerous

the cash book it self is not often disturbed .

They are usually recorded in a special separate book for this purpose .
This special separate book is called Petty Cash Book and it is maintained in
a columnar analytical manner.

Bank reconciliation statement:

“Bank reconciliation statement is a statement prepared mainly to

reconcile the difference between the bank balance shown by the cash book
and bank passbook.”

Causes or differences in the cash book and passbook balances

A). Difference caused by time gap in recording transactions.

1. Cheques issued but not presented for payment

2. Cheque paid into the bank for collection but not collected by the bank

3. Interest allowed by the bank

4.Interest charged by the bank on overdraft

5.Direct deposit by the customer into the bank

6. Dividend and interest collected by the bank

7. Bank charges and commission entered only in passbook

B). Errors committed in recording transactions

1. Errors committed in recording transaction by the firm

2. Errors committed in recording transaction by the bank

Subsidiary books:

“Subsidiary books are those books of original entry in which

transactions of similar nature are recorded at one place and in chronological
order.”

1) Cash book, 2) purchase book, 3)sales book, 4) purchase return book,

5) sales return book 6) journal proper 7) Bills receivable book and 8)
Bills payable book.

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Ledger :

Definition

“The book which contains a classified and permanent record of all the
transactions of a business is called the ledger” L.C Cropper

Need and importance of ledger

1. Easy availability of information.

2. Preparation of trail balance and final accounts.

3. Knowledge of capital assets and liabilities.

4. It's saves time and labour.

5. Legal proof.

Format of a ledger

Dr. Cr.
Date Particulars J. Amount Date Particulars J.F Amount
F

Advantages of ledger

1. All accounts are opened on separate pages in this book.

2. Any type of information relating to the business can be easily obtained.

3. A trail balance can be prepared with the help of ledger.

4. Trading and profit and loss account can be prepared.

5. Balance sheet can be prepared.

Trail balance:

Definition

“Trail balance is a statement prepared with the debit and credit balances of
ledger accounts to test the arithmetical accuracy of the books”

J. R. Batli boi.

Features or characteristics of a trail balance:

 It is a list of balances of all ledger accounts and the cash book.

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  It is just a statement and not an account.
 It can be prepared any time during the accounting period.
 It is prepared to check the arithmetical accuracy of the ledger
accounts.
 If the books are automatically accurate that total of all Debit balances
of a trail balance will be equal to the total of all credit balances.

Objectives or Functions of Preparing Trail Balance:

1. To ascertain the arithmetical accuracy of the ledger accounts.

2. To help in locating errors.

3. To obtain a summary of the ledger accounts.

4. To help in the preparation of final accounts.

Format of a trail balance

Trail Balance of .....

Name of the Accounts L.F Balance Balance

(Debit) (Credit)

Total XXXX XXX

Financial statements:

Definition

“The financial statements provide a summary of the accounts of a business

enterprises the balance sheet reflecting the assets liabilities and capital at
on a certain date and the income statement showing the results of
operations during a certain period.”

Objectives of preparing financial statements.

1. To present a true and fair view of the financial performance.

2. To present a true and fair view of the financial position.

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Trading and profit and loss account

Trading account:

“The trading account shows the results of buying and selling of goods. In
preparing this account, the general establishment charges are ignored and
only the transactions in goods are included.”

Need and importance of trading account:

1. It provides information about gross profit or gross loss.

2. It provides information about the direct expenses.
3. Comparison of closing stock.
4. It provides safety against possible losses.

Profit and loss account :

A profit and loss account is an account into which all gains and losses or
collected in order to ascertain the excess of gains over the losses or vice
versa.

Need and importance of profit and loss account

1. To ascertain the net profit or net loss.

2. Comparison with previous year’s profits.
3. Control on expenses.
4. It is helpful in the preparation of balance sheet.

Balance sheet :

Definition :

“Balance sheet is a statement prepared with a view to measure the exact

financial position of a business on a certain fixed date.”

Main features of balance sheet

1. Balance sheet is a statement and not an account.

2. It is prepared at a particular date and not for a particular period.
3. It is a prepared after profit and loss account.
4. Balance sheet shows financial position of a business as a going
concern.

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 Balance sheet as on ...

Liabilities Amount Assets Amount

Capital Current Assets
Add: Net profit Cash in Hand
Less : Drawings Cash at Bank
Less : Net Loss Bills Receivable
Current Liabilities Sundry Debtors
Bank Overdraft Closing Stock
Bills Payable Prepaid Exp.
Sundry Creditors Fixed Assets
Outstanding Exp. Furniture
Non- Current Liabilities Motor vehicles
Long Term Loans Plant & Machinery
Lang & Buildings
Patients & Trade Marks
Goodwill

XXXX XXXX

1. Differences between book keeping and accounting?

Basis of Book-keeping Accounting

difference
Meaning Book keeping mainly related Accounting is a systematic
to recording all financial process of recording,
transactions and classifying and summarizing
information on a daily basis. and communication financial
information of an
organization.
Objective The objective of book The objectivces of accounting
s keeping is to keep the is to figure out financial
records of all financial situation and further
transactions in a proper and communicating the
systematic manner. information to the relavent
authorities.
Skill Book keeping does not Accounting requires special
required require any special skill and skills due to its analytical and
qualification limited level of complex nature.it means an
knowledge is needed. accountant have special
knowledge of accounting.
Decision Management cannot take Depending on the data
making any decisions based on the provided by the accountants
data provided by book the management can take
keeping. critical business decisions.
Financial Book keeping does not Accounting clearly shows the
position reflect the financial position financial position of a
of a company. company.
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 Branches Book keeping does not have Accounting have many
any branches. branches like financial
accounting, cost accounting
etc.,
Stage Book keeping is the primary Accounting is the secondary
stage. stage.

Suspense account:-

a. Meaning of suspense account:

Suspense account is a temporary account. It is opened

when our trial balance does not match put on shorter side. If it has debit
balance then it will appears on assets side and if it has credit balance then
it will appear on liability side.

b. Suspense account:

At the end of financial year all the organizations prepare

trial balance for the sake of preparing income statement and balance sheet.
Sometimes due to errors total of the trial balance do not agree and the
balance of debit side is different as compared to credit side. It is a
responsibility of an accountant to find out the error and balance it off when
errors cannot be found the trial balance totals can be made to agree with
each other by inserting the differences of the amount as a suspense
account.

Errors:

In Accounting an error may be defined as a ‘mistake’. Error arise out

of careless or lack of accounting knowledge of a person who is responsible
for maintaining the accounts. It may occur at the time of journalising ,
posting, balancing or preparation of trail balance.

I. Under casting & Over casting.

II. Before preparing trail balance
III. After preparing trail balance

Types of errors:-

1. Errors of principle
2. Clerical Errors

Principle Errors:

1. Accounting entries are recorded as per generally accepted accounting

principle.
2. Violation of such principle is known as errors of principle.

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 3. It may occur due to incorrect classification of expenditure or receipt
between Capital and Revenue.
4. It may occur due to incorrect classification of expenditures or receipt
between capital and revenue.
5. Correct classification is important because may have impact in
financial statements.

Clerical Errors:

 Errors of omission
 Errors of commission
 Compensatory errors
1. Errors of omission:

“Errors of omission are defined as those errors that result from a partial or complete
omission of a transaction from the account books.”.

 Errors of omission occur due to mistakes on the part of the accountant in

recording the transaction.
 Errors can be rectified in errors of omission by simply rewriting the entry.
 In errors of omission, complete omission will result in trial balance agreement,
while partial omission will not result in agreement of trial balance.
2. Errors of commission:-

Errors of commission are defined as those errors that occur due to incorrect recording of
transactions in the account books.

 Errors of commission occur due to negligence, carelessness or a lack of

knowledge of the accountant involved in recording of transactions.
 Errors can be rectified in errors of commission by either debiting or crediting the
incorrect account and posting to the correct account.
 In errors of commission, the trial balance may or may not agree.

3. Compensatory Errors:
“ It means two or more errors are committed in such a way that net
effect of these errors on debits and credits of accounts is nil. Such
errors do not affect the falling of trail balance.

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Difference between Debit Note & Credit Note

Credit Note Debit Note

Receiver / Sender A credit note is A debit note is
prepared and sent by prepared and send by a
supplier or creditor to customer or debtor to
his customer or debtor his supplier or creditors
Intimation A credit note serves as A debit note serves as
an acknowledgement of an intimation for goods
return of goods returned
Affect in account It informs the customer It informs supplier that
that his amount has his amount has been
been credited with the debited with the
amount shown amount shown
Issue A credit note generally Usually debit does not
follows a debit note i.e., follow the credit note
a credit note is sent an
receipt of a debit note
Source Credit note are the Debit note are the basis
basis for making entries for making in the
in the sales return book purchase return book

Trade discount & Cash Discount :

Trade Discount Cash Discount

When discount is allowed by a seller When discount is allowed to the
to its customers at a fixed customer for making prompt
percentage, it is called Trade payment is called Cash Discount
discount
It is allowed when goods are It is allowed when payments are
purchased in a specified quantity made on or before a specified date
It is not recorded separately in the It is recorded separately in the books
books of accounts of account.
It is deducted from the invoice It is not deducted from the invoice
It is allowed to the retailer to enable It is allowed to encourage quick
them to make some profits even if payment.
they sell the goods at their catalogue
price .

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