ACCOUNTS

FINANCIAL ACCOUNTING is an art of recording, classification & summarization

of transactions of financial nature & interpretation of the results thereof.

Features of financial accounting:

1. It is an art of recording the transactions.
2. It is an art of classification of the transactions.
3. It is an art of summarization of the transactions.
4. It records only monetary transactions.
5. It draws conclusions about profitability & financial position of the
organization.

Information generated by accounting:

1. Expenses & losses.
2. Incomes & gains.
3. Assets.
4. Liability.
5. Capital employed.
6. Net profit/loss.
7. Profitability position.
8. Financial position.

Users of accounting information:

1. Management: To take the right decision. To know about profitability &
financial position.
2. Shareholder: To know about the return on investment, appreciation in
investment, liquidity of investment, safety of investment.
3. Loan officer: To decide the ability to repay loan, ability to pay interest
regularly. Can take right decision about sanctioning loan.
4. Suppliers: Suppliers of raw materials can verify the credit worthiness of the
party.
5. Trade Union Leader: can protect the interest of the workers on the basis of
accounting information.
6. Government officers: Revenue from tax collection. Tax liability.

ACCOUNTING PRINCIPLE

CONCEPTS: CONVENTIONS:
Basic assumptions on which entire Traditions, customs & practices
accounting is based. established by the professors.
 CONCEPTS:

1. ENTITY CONCEPT:
It says that the proprietor & his business are 2 separate parties i.e. entities. A
proprietor becomes a creditor of the business by the amount invested in the business.
Creditor is a person to whom some amount is payable for supply of goods or
services.
Capital is the amount invested by a proprietor in business. Capital is the
liability of business.
Liability is the obligation on business to repay a certain amount OR it is the
claim against the property of business OR Amount payable to others is a liability.
A proprietor becomes a debtor of business by the amount taken from
business for personal expense. Drawing is the amount withdrawn by the proprietor
from business for personal expenses. Profit earned by the business belongs to the
proprietor. It increases capital.
As per entity concept, the accountant should record only those monetary
transactions which affect the business. The transactions of the proprietor which don’t
affect business shouldn’t be recorded in accounts.
Entity concept is applicable to all the organizations from accounting point of
view.

2. MONETARY CONCEPT:
Financial accounting records only monetary transactions i.e. the transactions
which can be expressed in terms of money.
Non-monetary transactions don’t find place in accounting. The transactions or
events which can’t be expressed in terms of money are non-monetary transactions.
E.g. loss due to death of an efficient manager.

3. COST CONCEPT:
As per this concept, business transactions are recorded at cost. Cost is the
sacrifice made for purchase of any goods or services. Cost is the basis of future
transactions also.
E.g. purchased goods worth Rs. 10,000 for Rs. 8,000. In this case, the cost of the
goods is Rs. 8,000. It will be recorded at Rs. 8,000.
Cost is the basis of future transactions also. Depreciation is provided on
permanent assets on the basis of the cost. If the asset is sold out, the profit/loss on the
sale will be calculated on the basis of cost.
4. GOING CONCERN CONCEPT:
A business organization is a going concern. It has a continuous life. It continues
its activities year after year. There is no intention to close down the business activities
after a certain number of years.
E.g. the proprietor invests huge amount in business, depreciation is provided on fixed
assets for replacement, huge amount is spent on training of employees.

5. ACCOUNTING PERIOD CONCEPT:

Entire life of an organization is divided into small periods for deciding the
profit/loss & ascertaining the financial positioning. Each accounting period is called
an Accounting year & consists of 12 months. Therefore all the organizations prepare
their accounts every year.

6. MATCHING CONCEPT:
The concept is employed to find out profit/loss for the year. Profit/loss is
decided by matching income for the year with the expenses for the year. Profit is the
excess of income over expenses for the year & loss is the excess of expenses over
income for the year. Before matching expenses & income it is necessary to make
adjustments about the incomes & expenses relating to the next year.
 CONVENTIONS

1. CONVENTION OF CONSISTENCY:
As per this convention, there should be uniformity in the methods of
accounting followed by the organization. Consistency means the same method of
accounting should be followed year after year. The method of accounting should not
be changed frequently. Consistency doesn’t mean that there can’t be a change in
method. The method can be changed if there are changes in circumstances. Due to
consistency, comparison between 2 accounting periods becomes meaningful.

2. CONVENTION OF CONSERVATISM:
The accountant should adopt a conservative approach while preparing the
financial statements. Conservatism doesn’t mean that the accountant must be
pessimistic about the future of the company. Conservatism implies that the accountant
should a safe approach while preparing financial statements. He should select lower
values between the 2 values given.
E.g.
Cost of stock of goods: Rs. 2,00,000
Market value: Rs. 3,00,000
The accountant should consider Rs. 2,00,000 stock for preparing the accounts.
All the anticipated losses must be provided for. Anticipated profits should not be
considered while preparing the accounts.

3. OBJECTIVE EVIDENCE:
Every transaction to be recorded in accounting must have a proper
documentary evidence. The documentary evidence is called a voucher.
E.g. Telephone charges – Telephone bill.
Salary – Salary register.
Cash purchase – cash memo.

4. CONVENTION OF MATERIALITY:
As per this convention, only material information should be disclosed in the
financial statements. Material information means significant information which has
effect on decision. Whether the information is material or not depends on the personal
judgment of the accountant.
E.g. it is immaterial to give all the details about the salary in the income statement.
Similarly fraction of the rupee should be rounded up to the nearest rupee. The breakup
of the total sales is material if it affects the decision. Cash sale of Rs. 500 in a total
sale of Rs. 1,00,000 is immaterial.
 DOUBLE ENTRY SYSTEM OF ACCOUNTING:

It is a system of accounting which records double effects of the transactions.

According to this system every transaction has 2 effects & the amount of one effect is
always equal to amount of another effect. It means the amount of debit is always equal
to the amount of credit. An account is a summarized record of transaction relating
to an asset, a liability, an expense, a loss, an income & a gain. An account is divided
into 2 sections. The left hand side section is known as the debit side which is indicated
by the abbreviation ‘Dr’. The right hand side is known as credit side which is
indicated by the abbreviation ‘Cr’.

_________________ A/C
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount

To debit the account means to record the transaction on debit side of the account.
To credit the account means to record the transaction on the credit side of the account.

CLASSIFICATION OF ACCOUNTS:

Accounts

Personal A/C
These are the accounts of
individuals, firms, Impersonal A/C
companies, association of
people, body of individuals.

Real A/C Nominal A/C

These are the accounts of
These are the accounts of
expenses & losses and
assets and properties
incomes & gains
 RULES OF RECORDING TRANSACTIONS:

DEBIT CREDIT
PERSONAL A/C Debit the receiver Credit the giver
REAL A/C Debit what comes in Credit what goes out
NOMINAL A/C Debit expenses & losses Credit incomes & gains

ACCOUNTING EQUATION:

ASSETS = CAPITAL + LIABILITIES

Transactions Assets Capital Liabilities
Cash Furniture
Invested in business Rs. 500000 500000 500000

Purchased furniture for Rs. 200000 -20000 20000

480000 20000 500000

Took loan from bank Rs. 200000 200000 200000

680000 20000 500000 200000

Paid for staff salaries Rs. 50000 -50000 -50000

630000 20000 450000 200000

Received commission Rs. 20000 20000 20000

650000 20000 470000 200000

Paid interest on loan Rs. 10000 -10000 10000

640000 20000 480000 200000

RULES OF CREDIT & DEBIT

Debit Credit
Assets A/c + -
Expenses & losses A/c + -
Capital A/c - +
Liabilities A/c - +
Incomes & gains A/c - +
 RECORDING THE TRANSACTIONS:

Transactions are identified on the basis of documentary evidence. The

transactions are first recorded in the journal on the basis of documentary evident. A
journal is a primary book of account. It is also called as a daily record of
transactions. It is maintained in columnar form as given below:

V. L.
Date No. Particulars F. Amount
Dr Cr
(Rs.) (Rs.)
(1) (2) (3) (4) (5) (6)
2
007
July
1

Column 1:
Date of the transaction is recorded systematically. First, the year is mentioned,
thereafter, the name of the month & then the date.

Column 2:
This column mentions the serial no. of the voucher for ready reference. Every
transaction is supported by a voucher. All the vouchers are properly filed & given
serial numbers.

Column 3:
In this column names of the accounts affected are mentioned. On the first line, name
of the account debited is mentioned. After the name of the account, the abbreviation
‘Dr’ is to be mentioned on the same line. On the next line small space is left &
thereafter the word ‘To’ is mentioned followed by the name of the account credited.
Below the 2 accounts mentioned, a brief explanation of the transaction (called as
narration) is written. After the narration a line is drawn in this column to show the
completion of the record of transaction.

Column 4:
Ledger folio is the page no. of the ledger on which the particular account appears. It is
necessary to get immediate reference about a particular account.

Column 5:
It mentions the amount of the account debited on the same line.

Column 6:
It mentions the amount of the account credited on the same line.
 CONCEPT OF DISCOUNT:

TRADE DISCOUNT:
It is the concession allowed by a seller to a buyer in order to enable him to
maintain the same price & earn reasonable amount of profit. It is also called as a
quantity discount because it is allowed to attract large size orders from the buyers.
The amount of trade discount is deducted from the bill itself & the net amount of the
bill is brought in the books of accounts. Therefore trade discount doesn’t appear in
the books of account.

CASH DISCOUNT:
It is a concession allowed by a creditor to a debtor in order to collect the
amount promptly. The debtor may make the payment in order to get discount. Cash
discount is a loss to a creditor & a gain to a debtor. The creditor doesn’t mind
sustaining this loss because he receives the payment from the debtor immediately. It
helps him to finance the business activity. Cash discount is recorded in the books of
accounts.

Example:
Purchased goods from A & Co. worth Rs. 20,000 on credit subject to 10% trade
discount & 5% cash discount if the payment is made within 10 days.

V.
Date No. Particulars L. F. Amount
Dr Cr
(Rs.) (Rs.)
2007
July 1 Goods A/C Dr 18000
To A & Co.'s A/C 18000
(Being purchased goods from A & Co. on
credit)

7 A & Co.'s A/C Dr 18000

To Cash A/C 17100
To Discount A/C 900
 LEDGER

After recording the transactions in the journal, they are required to be properly
classified in order to get immediate reference. Therefore a separate book known as
ledger is maintained. Ledger is the second book of accounts. It is a book of accounts
which includes all types of accounts i.e. personal A/c, real A/c & nominal A/c. A
separate page is reserved for each account. Each page of a ledger is properly
numbered. The page number of the ledger is known as ledger folio which is
mentioned in the journal for immediate reference. All the transactions recorded in the
journal are transferred to the respective accounts in the ledger. The process of
transferring the transactions from the journal to the respective account in the ledger is
called posting.

_________________ A/C
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
(1) (2) (3) (4) (1) (2) (3) (4)
To _______ A/c By ______ A/c
(Name of the (Name of the
account account
credited) debited)

Column 1:
Enter the date of the transaction systematically.

Column 2 (Debit side):

Write the word ‘To’ & thereafter mention the name of the account credited in the
journal.

Column 2 (Credit side):

Write the word ‘By’ & thereafter mention the name of the account debited in the
journal.

Column 3:
Mention the page number of the journal from where the transaction has been
transferred.

Column 4:
Write the amount of the transaction.
Journal entry:

V. L.
Date No. Particulars F. Amount
Dr Cr
(Rs.) (Rs.)
2007
April 1 Cash A/c Dr 1000000
To Capital A/c 1000000

Ledger entry:

Cash A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007
April 1 To Capital A/c 1000000

Capital A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007
April 1 By Cash A/c 1000000
 BALANCING OF ACCOUNTS:

After posting the transactions to various accounts, balancing has to be done. It

is a process of finding out a balance on the account. The process of balancing involves
the following steps.
1. Make a total of debit side & credit side of the account.
2. Find out the difference between the 2 totals.
3. Put the difference on the lighter side of the account as,
“By Balance c/d” OR “To Balance c/d” as the case may be.
4. Make the totals of both the sides equal.
5. Bring forward the balance on the next date as,
“By Balance b/d” OR “To Balance b/d” as the case may be.

Debit balance: Excess of debit over credit is called as a debit balance.

Credit balance: Excess of credit over debit is called as a credit balance.

SOLVED EXAMPLE:

“Pizza & burger huts” is a retail chain having retail outlets in almost all the
major cities in India. It has opened one more branch in Navi Mumbai 3 months ago.
The manager of this branch provides you with the following information for the
month of April 2007. you are required to prepare Journal & Ledger on the basis of the
following transactions:
Balances as on 1/4/2007:
Fixed assets Rs. 18,00,000
Stocks of materials Rs. 1,50,000
Debtors Rs. 3,50,000
Capital Rs. 15,00,000
Security deposit Rs. 5,00,000
Bank A/c Rs. 1,00,000
Bank loan Rs. 7,50,000
Creditors Rs. 7,50,000
Local taxes payable Rs. 1,00,000
Cash Rs. 2,00,000
Transactions during April 2007:
April 1 : Paid creditors Rs 1,50,000 by cheque no. 468523.
April 2 : Received cheque no. 124650 from Mr. Mahesh to whom goods were
supplied in the last year Rs. 2,50,000.
April 5 : Received cash from debtors Rs. 1,00,000.
April 10 : Paid local taxes by cheque no. 468524.
April 11: Purchased raw materials from “pizza products ltd.” on credit Rs. 500000
April 25 : Paid wages Rs 2,50,000 in cash. Electricity bill Rs. 50,000. Credit sales
Rs. 1,00,000. Cash sales Rs. 7,00,000. Interest on loan paid Rs. 20,000.
Miscellaneous expenses Rs. 50,000.
 JOURNAL

V. L.
Date No. Particulars F. Amount
Dr Cr
(Rs.) (Rs.)
2007
April 1 Fixed assets A/c Dr 18,00,000
Stock of materials A/c Dr 1,50,000
Debtor's A/c Dr 3,50,000
Security deposit A/c Dr 5,00,000
Bank A/c Dr 1,00,000
Cash A/c Dr 2,00,000
To Capital A/c 15,00,000
To Bank Loan A/c 7,50,000
To Creditor’s A/c 7,50,000
To Local taxes payable A/c 1,00,000
(Being brought forward the assets & liabilities)
Creditor's A/c Dr 1,50,000
To Bank A/c 1,50,000
(being paid to creditors by cheque no. 468523)
2 Bank A/c Dr 2,50,000
To Debtor's A/c 2,50,000
(Being received cheque from Mahesh, a debtor by
cheque no 124650)
5 Cash A/c Dr 1,00,000
To Debtor's A/c 1,00,000
(Being received cash from debtors)
10 Local taxes A/c Dr 1,00,000
To Bank A/c 1,00,000
(Being paid local taxes by cheque no. 468524)
11 Purchase A/c Dr 5,00,000
To Pizza products ltd. 5,00,000
(Being purchased raw material on credit)
25 Wages A/c Dr 2,50,000
To cash A/c 2,50,000
(Being paid for wages)
Electric Charges A/c Dr 50,000
To Cash A/c 50,000
(Being paid for electricity bill)
Debtor's A/c Dr 1,00,000
To Sales A/c 1,00,000
(Being sold goods on credit)
Cash A/c Dr 7,00,000
To Sales A/c 7,00,000
(Being sold goods for cash)

Interest on loan A/c Dr 20,000

To Cash A/c 20,000
(Being paid for interest on loan)

Miscellaneous A/c Dr 50,000

To Cash A/c 50,000
(Being paid for miscellaneous expenses)
 LEDGER

Fixed Asset A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 1800000 April 30 By bal c/d 1800000
1800000 1800000
May 1 To bal. b/d 1800000

Stock of Material A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 150000 April 30 By bal c/d 150000
150000 150000
May 1 To bal. b/d 150000

Debtor's A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 350000 April 2 By Bank A/c 250000
25 To Sales A/c 100000 5 By Cash A/c 100000
30 By bal. c/d 100000
450000 450000
May 1 To bal. b/d 100000

Security deposit A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 500000 April 30 By bal. c/d 500000
500000 500000
May 1 To bal. b/d 500000

Bank A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal. b/d 100000 April 1 By Creditor's A/c 150000
10 By Local taxes A/c 100000
30 By bal c/d 100000
350000 350000
May 1 To bal. b/d 100000
 Capital A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2207
April 30 To bal. c/d 1500000 April 1 By bal. b/d 1500000
1500000 1500000
May 1 By bal. b/d 1500000

Cash A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To bal b/d 200000 April 25 By wages A/c 250000
By electric
5 To Debtor's A/c 100000 charges A/c 50000
By Interest on
25 To Sales A/c 700000 loan A/c 20000
By
miscellaneous
expenses A/c 50000
30 By bal. c/d 630000
1000000 1000000
May 1 To bal. b/d 630000

Bank Loan A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 30 To bal. c/d 750000 April 1 By bal. b/d 750000
750000 750000
May 1 By bal. b/d 750000

Creditor's A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 1 To Bank A/c 150000 April 1 By bal. b/d 750000
April 30 To bal. c/d 1100000 11 By Purchases A/c 500000
1250000 1250000
May 1 By bal. b/d 1100000

Local taxes payable A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 10 To Bank A/c 100000 April 1 By bal. b/d 100000
100000 100000
 Purchases A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 11 To Creditor's A/c 500000 April 30 By bal. c/d 500000
500000 500000
May 1 To bal. b/d 500000

Wages A/c
Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To Cash A/c 250000 April 30 By bal. c/d 250000
250000 250000
May 1 To bal. c/d 250000

Electric charges A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To cash A/c 50000 April 30 By bal. c/d 50000
50000 50000
May 1 To bal. b/d 50000

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 30 To bal. c/d 800000 April 25 By Debtor's A/c 100000
700000
800000 800000
May 1 To bal. b/d 800000

Interest on Loan A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To Cash A/c 20000 April 30 By bal. c/d 20000
20000 20000
May1 To bal b/d 20000

Miscellaneous expenses A/c

Dr Cr
Date Particulars J.F. Amount Date Particulars J.F. Amount
2007 2007
April 25 To cash A/c 50000 April 30 By bal. c/d 50000
50000 50000
May 1 To bal b/d 50000