Accounting is defined as “the art of recording,

classifying and summarizing in terms of money

transactions and events of financial character and
interpreting the results thereof.”
Indentify – to determine the business transactions
to be recorded in the books of account.
Recording – entering in terms of money, business
transactions, as and when they occur.
Classifying – refers to the grouping of entries of
like nature into appropriate heads.
Summarizing – presentation of the information
found in the accounts in the form of relevant
financial statements.
The necessity and importance of accounting
can be understood by answering the
following questions :
 How much we have earned this year?
 How much was earned during the last year?
 Is our business improving?
 How much cash do we have?
 How much money we owe?
 How much others owe to us?
 Maintaining proper records of business transactions
 Ascertaining the profit or loss of the business
 Knowing the sources of revenue and items of
expenses
 Ascertainment of the financial position of the
business
 Ascertaining the amounts due to/ from the business
 Ensuring effective control over the performance of
the business
 Prevention of errors and frauds
 Making financial information available to
various groups i.e owners, lenders,
employees, investors, government etc.
Book keeping is the art of recording business
transactions in a systematic order.

It concerns itself with the recoding of those

transactions that result in the transfer of
money or money’s worth.
In the words of Eric Kohler “accountancy is the
theory and practice of accounting.”

The discipline which analyses the art and

principle of recording all monetary
transactions is known as Accountancy.
Financial Accounting – the objective of
financial accounting is to ascertain the result
(profit/ loss) of business operations during
the particular period and to state the financial
position as on a date at the end of the period.
Cost Accounting - the objective of cost
accounting is to find out the cost of the goods
produced or services rendered by business. It
also helps the business in controlling the cost
by indicating avoidable losses and wastage.
Management Accounting – the objective of
management accounting is to supply relevant
information at appropriate time to the
management to enable it to take decisions
and effect control.
It is necessary to understand some basic accounting terms which are
used frequently used in business world.
These are as follows:
1. Transaction: Any event which is measurable in terms of money
or money’s worth ( some value or benefit)and which changes the
financial position of the business concern.
For example purchase of goods, sale of goods, etc.
Transaction can be of 2 types:
Credit transaction
Cash transaction
2. Entity :
Something or someone having a definite separate
business as existence.

3. Proprietor :
Also known as owner of the business. Proprietor is the
person who invests money or money’s worth into the
business and bears the risk of the business.

4.Equity :
Equity means the claim against the assets of an
enterprise or rights in the assets of an enterprise.
It can be divided into two broad categories
namely:
Owner’s Equity or Owner’s Capital : It is the
claims of the owner against the assets of the
enterprise.
Outsider’s Equity or Liabilities : It is the
outsider’s claim over the assets of the
enterprise.
5. Capital :
The amount of money or money’s worth like stock of
goods, furniture, machinery, etc ,invested or
introduced by the proprietor into the business at the
time of commencement of the business is called
Capital.
Let us understand it better with the help of an example.
Suppose Mr. Ram, the proprietor of the business ,
started his business with cash of Rs.10,000, furniture
worth Rs. 5000 and machinery worth Rs. 20,000. The
capital of Mr. Ram will be Rs.35000.
Capital may also be defined as excess of total
assets of a business over its total liabilities at
any particular point of time in case of an
operational business.

Capital = Assets - Liabilities

Simply saying capital is the amount due from

the business to its proprietor.
6. ASSETS :
Assets are the physical properties or rights owned by the business that
has a money value.
It can be classified into :
Tangible Assets and Intangible Assets.
7. LIABILITIES:
It refers to the financial obligations of the business. It denotes the
amount of money that the business owes to others.
For example: loan taken from the bank, bills payable.

8. GOODS : This includes all articles , commodities or merchandise in

which the business deals.
9. Drawings: It is the amount of cash or value of goods
withdrawn from the business for personal use.

It is deducted from the capital.

10. Debtors: Debtor is the person or the firm who

receives the benefit without giving the money or
money’s worth immediately, but liable to pay in the
future period or in due course of time.

Simply saying someone who owes money is a debtor.

11. Creditor:
A person or the firm who gives benefit without
receiving money or money’s worth immediately, but
to claim in future is known as Creditor.
Simply saying Creditor is the person to whom money is
owing or payable.
12. Purchases:
It refers to the amount of goods bought by the
business for resale or use in the production activities.
It can be either Cash Purchases or Credit purchases.
13. Purchases Returns or Returns Outward : When
goods are returned to the suppliers due to its
defective quality or not as per the terms of purchase
it is called Purchases Returns.

14. Sales :
It refers to amount of goods sold that are already
bought or manufactured by the firm.

It can be either Cash Sales or Credit Sales.

15. Sales Returns or Returns Inwards:
When the goods are returned from the customers due
to defective quality or not as per the terms of sale, it is
called Sales Returns.

16. Stock: It is the goods unsold on a particular date.

Opening Stock : It means goods unsold in the beginning

of an accounting period.

Closing Stock : It means the amount of goods unsold at

the end of an accounting period.
17. Revenue:
It is the earning of the business from the sale of goods or
from the rendering of services to customers during an
accounting period.
18. Expense :
It is the cost of the things or services for the purpose of
generating revenue.
19. Net Income : Excess of revenue over expenses.
20. Turnover:
It means total trading income from cash sales and credit
sales.
21. Discounts:
When customers are allowed any type of deduction in the
prices of goods by the businessman that is called discount.
When some discount is allowed in prices of goods on the
basis of sales of the items, that is termed as trade
discount, but when debtors are allowed some discount in
prices of the goods for quick payment, that is termed as
cash discount.
22 . Solvent :
A person whose asset value exceeds his liabilities is said to
be solvent. In other words a person who is able to pay his
liabilities in full is termed as solvent.
23. Insolvent :
A person or business whose liabilities are more than the
realizable values of his assets is said to be insolvent.

24. Account:
An account is a summarized record of the transactions
relating to a particular person, thing or service which have
taken place during a particular period of time.
25. Entry :
Recording of a transaction in the books of account.
 Each and every account can be classified into
a particular type as per :

 The Traditional Approach

 American Approach
 All the business transactions are categorized
into three types:
 Transactions related to persons
 Transactions related to properties and assets
 Transactions related to income and expenses

 Depending upon the types of transactions,

the accounts under which the transactions
are recorded are classified into personal, real
and nominal accounts
 Personal account includes accounts of persons and organizations with
whom the business deals.
 Types of personal accounts:

 Natural personal accounts: It includes accounts of persons such as

John’s Account.

 Artificial personal accounts: It includes accounts of organizations

such as accounts of company, club and Government.

 Representative personal accounts: It includes accounts that

represent a group of persons such as outstanding salaries account for
employees.

 Rule of debit and credit

 Debit the receiver
 Credit the giver
 Real accounts represent accounts of properties and assets.
 Types of real accounts:
 Tangible real accounts: It represents accounts of things
that can be touched or measured, such as cash account,
furniture account and stock account, machinery account.
 Intangible real accounts: It represents accounts of things
that cannot be touched, such as patent account and
goodwill account.

 Rule of debit and credit:

 Debit what comes in
 Credit what goes out
 Nominal accounts represent accounts for incomes,
gains, expenses and losses.

 Example:
Revenues or Incomes: rent account, discount received,
interest received, etc.
Expenses and Losses: loss by fire account, salaries paid,
rent paid discount allowed, etc.

 Rule of debit and credit:

 Debit all expenses and losses
 Credit all incomes and gains
 Asset Account
 Liability Account
 Capital Account
 Income Account
 Expense Account
1. In case of Assets
Debit increase in an asset
Credit decrease in an asset
2. In case of Liabilities
Debit decrease in a liability
Credit increase in a liability
3. In case of Capital
Debit decrease in Capital
Credit increase in Capital
4. In case of Incomes and Gains

Debit decrease in an income

Credit increase in an income

5. In case of Expenses and Losses

Debit increase in an expense

Credit decrease in an expense
Classify the following accounts into:

 Personal Accounts
 Real Accounts
 Nominal Accounts
 Furniture Account
 Salaries Account
 Outstanding Wages Account
 Ram Ltd Account
 Stationary Account
 Prepaid Insurance Account
 Capital Account
 Interest Account
 Buildings Account
 Purchases Account
 Cash Account
 Bank Account
 Sales Account
 Commission Account
 Discount Account
 Drawings Account
 Loan Account
 Repairs to Machinery Account
 Stock Account
 Investment Account
 Bangalore sports club Account
 Loss of goods by fire Account
 Goodwill Account
 Depreciation Account
 Bad debts Account
 Bad debts recovered Account
 Bank overdraft Account
 Purchases returns Account
 Sales returns Account
 Postage Account
 Carriage Account
 Rent Account
 Bangalore Corporation’s Account
 Bills payable account
 Bills receivable account
1. Raj commenced business with Rs. 5000
2. Bought goods from Keshav for cash Rs 1000
3. Sold furniture to Raghav on credit Rs 500
4. Sold goods for cash Rs 800
5. Cash purchases Rs 600
6. Bought stamps Rs 50
7. Withdrew cash from business for personal
use Rs 100
8. Paid salary to manager Rs 300
9 Paid rent to landlord Rs 200
10 Received commission from George Rs 500
11 Paid for repairing machinery Rs 300
12 Received cash from Raghav on account Rs
400
13 Gave loan to Bhaskar Rs 500
14 Purchased goods from Raghu Rs 300
15 Returned goods to Raghu Rs 100
16 Opened a bank account with Rs 600
17. Charged Manohar Rs 150 commission for
service rendered to him.
18. Charlie agreed to pay interest of Rs 100 on
the amount advanced to him
19. Received loan from Shankar Rs 1000
20. Office furniture stolen Rs 500
21. Paid income tax Rs 5000
22. Paid life insurance premium Rs 300
23. Allowed discount to Karan Rs 200
24. Discount received from Gagan Rs 100
25. Amount charged by bank as bank charges
Rs 30
26. Railway freight paid on machinery
purchased Rs 1000
27. Sold goods to Ram Rs 2000
28. Ram returned goods Rs 100
 Journal is a book of original entry or first
entry because transaction is first written in
the Journal from which it is posted to Ledger.

 Journal is a book in which transactions are

recorded daily and chronologically i.e., in the
order of occurrence or order of dates.
Essential Features of Journal:
 It is a book of first or original entry in which
transactions are recorded daily in a chronological
order.
 It gives a complete picture of each transaction , as it
contains both the debit and credit aspects of each
transaction at one place with a brief explanation
called “Narration”.
 It is helpful in preparation of various accounts in the
ledger.
 It facilitates cross checking of entries from
the journal to the ledger and vice- versa.

 It serves as a legal evidence or proof of the

business transactions.
 For a large business, journal becomes very bulky
since all the transactions are first recorded there.
 Journal is not helpful to a businessman in
knowing the individual balances like cash
balance, bank balance, creditor’s balance, etc.
 A journal is only a subsidiary book and not a
book of final entry. This means it will not provide
final information on the various matters of
business.
 Rules to be followed while making entries to the
journal :
 Column 1: Date
 Column 2: Particulars
In this column the name of the account to be
debited is written first and is written close to the
left hand side margin. The word “Dr” is written
near right hand side line.
 In the next line the account to the credited is
written preceded by the word “To” leaving a few
spaces away from the left hand side margin.

 An explanation of the entry known as “

narration” is written below it.

 Column 3: Ledger Folio (L.F.)

In this column are entered the page numbers of
the ledger.
 Column 4 : Amount to be debited is entered.

 Column 5: Amount to be credited is entered.

 The process of recording a transaction in
Journal is known as Journalising.

Debit Credit
Date Particulars L.F.
Rs. Rs.
 A ledger account is defined as a summary
statement of all the transactions relating to a
person, asset, expense or income which have
taken place during a given period of time.

 It is also known as Books of Final Entry since

all the transactions recorded in the journal
are posted to the ledger.
 Utility of Ledger:

1.Complete information at a glance

2. Arithmetical Accuracy
3. Result of various transactions can be known