Afm Notes

Accounting for Managers
Accountancy is the art of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the financial statements form, that shows in money terms the economic resources under the control of management; the art lies in selecting the information that is relevant to the user and is reliable. Accounting may be defined as the process of recording, classifying, and summarizing, analyzing and interpreting the financial transactions and communicating the results thereof to the persons interested in such information. A financial transaction is an agreement between a buyer and a seller to exchange goods or services for payment. In accounting, it is recognized by an entry in the books of account. It involves a change in the status of the finances of two or more businesses or individuals. http://en.wikipedia.org/wiki/Financial_transaction
FUNCTIONS OF ACCOUNTING Recording: This is the basic function of accounting. It is essentially concerned with not only ensuring that all business transactions of financial character are in fact recorded but also that they are recorded in an orderly manner. Recording is done in the book "Journal". Classifying: Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place. The work of classification is done in the book termed as "Ledger". Summarizing: This involves presenting the classified data in a manner which is understandable and useful to the internal as well as external end-users of accounting statements. This process leads to the preparation of the following statements: (1) Trial Balance, (2) Income statement (3) Balance sheet. Analysis and Interprets: This is the final function of accounting. The recorded financial data is analyzed and interpreted in a manner that the end-users can make a meaningful judgment about the financial condition and profitability of the business operations. The data is also used for preparing the future plan and framing of policies for executing such plans. Communicate: The accounting information after being meaningfully analyzed and interpreted has to be communicated in a proper form and manner to the proper person. This is done through preparation and distribution of accounting reports, which include besides the usual income statement and the balance sheet, additional information in the form of accounting ratios, graphs, diagrams, funds flow statements etc. http://www.rajputbrotherhood.com/knowledge-hub/accounting/what-are-the-functions-of-accounting.html Accounting information is communicated using "financial statements" There are two main purposes of financial statements: To report on the financial position of an entity - Balance sheet; (2) To show how the entity has performed (financially) over a particularly period of time (an "accounting period") - Profit and Loss account also known as Income statement. NEED FOR ACCOUNTING
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Accounting is often seen as the lifeblood of business because it provides companies with the best information regarding the inner workings of their operations. Financial transactions from the business operations and financial transactions regarding company assets are all recorded and presented by internal accountants. Executive management needs accurate financial information for several reasons, including planning, decision making, and profitability reporting. Planning: Before most businesses even start operations, some level of planning is done to determine the level of success that can be achieved from operations. Businesses will examine current economic trends like consumer demand, market size, and number of competitors. This analysis helps companies determine which industry best suits their goods and services and then focuses on planning for the necessary plants and equipment needed to create successful business operations. Management Decisions: Once a business starts producing goods and services, executive managers must review each level of the company to ensure that each department is functioning at its peak. Some departments may need to be overhauled (improved) to re-create a competitive environment that produces high-quality goods and services. Additionally, management will use accounting information to decide if their company could improve operations by purchasing a competitor or enter a new market with their existing production facilities. Profitability: The biggest need for accounting information is to determine overall profitability. Sales, costs of manufacturing, inventory, and expenses are all recorded and presented to company management so the company's profit levels can be determined. Financial statements like the balance sheet or statement of cash flows may also be prepared so executive management can assess the value of the company and the cash-generating functions of business operations. Investing: Once companies have a solid understanding of their profitability, they begin to make decisions on investing their cash and retained income from business operations. Executive management will decide what amount of cash should be reinvested into the business and what amount should be invested in interestbearing securities. Companies will use these securities investments to generate cash outside business operations, giving them higher cash flows. Accountants must track these investments to ensure that the company does not take on too much investment risk. Performance Analysis: After the financial transactions of a company are properly recorded and presented in financial statements, accountants will review the information to determine the strength of business operations. Accountants use financial ratios to break down the financial statements and compare them to the industry or competitors. This analysis will help management find weak areas in the company and help allow them to find solutions for strengthening these operations. http://www.ehow.com/about_5563036_need-accounting-information.html ACCOUNTING TERMS Business Entity: Business entity means a specific identifiable business enterprise like Big bazaar, Super Bazaar, Your fathers shop, Transport limited, etc. An accounting system is always devised for specific business entity (may be called an accounting entity). For accounting, it is assumed that business has separate existence and its entity is different from that of its owner(s). Every transaction is analyzed from the point of view of a business enterprise and not that of the person(s) who are associated with it.
For example, when the owner of the business introduces cash in the business, accounting records show that business has more cash although it does not affect the overall cash (personal plus business) position of the owner; at the same time, business enterprise records that an equivalent amount is payable by the business enterprise to the owner of the business i.e. capital. Transaction: It is an event which involves exchange of some value between two or more entities. It can be purchase of stationery, receipt of money, payment to a supplier, incurring expenses, etc. It can be a cash transaction or a credit transaction. Purchases: This term is used for goods to be dealt-in i.e. goods are purchased for resale or for producing the finished products which are meant for sale. Goods purchased may be Cash Purchases or Credit Purchases (for which payments will be made later). Thus, Purchase of goods is the sum of cash purchases and credit purchases. Sundry creditors: Creditors are persons who have to be paid by an enterprise an amount for providing goods and services on credit. Sales: Sales are total revenues from goods or services provided to customers. Sales may be in cash or in credit (for which payments will be received later). Sundry debtors: Persons who are to pay for goods sold or services rendered or in respect of contractual obligations. It is also termed as debtor, trade debtor, and accounts receivable. Revenue (Sales): Sales revenue is the amount by selling its products or providing services to customers. Other items of revenue common to many businesses are: Commission, Interest, Dividends, Royalties, and Rent received, etc. Expenses: Costs incurred by a business in the process of earning revenue are called expenses. In general, expenses are measured by the cost of assets consumed or services used during the accounting period. The common items of expenses are: Depreciation, Rent, Wages, Salaries, Interest, Cost of Heating, Light and water and Telephone, etc. Income: The difference between revenue and expense is called income. For example, goods costing Rs.25000 are sold for Rs.35000 Cost of goods sold is Rs.25000 is expense and Rs.35000 is revenue Therefore the difference = sales cost of goods sold i.e. Rs.10000 is income. Or, Income = Revenue - Expense. Gain: Usually this term is used for profit of an irregular nature, for example, capital gain. Loss: It means something against which the firm receives no benefit. It is a fact that expenses lead to revenue but losses do not, such as theft. Profit: It is the excess of revenue of a business over its costs. It may be gross profit and net profit. Gross profit is the difference between sales revenue or the proceeds of goods sold and/or services provided over
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its direct cost of the goods sold. Or, Gross profit = Sales revenue - direct cost of the goods sold Net profit is the profit made after allowing for all types of expenses. There may be a net loss if the-expenses exceed the revenue. Expenditure: Spending money or incurring a liability for some benefit, service or property received is called expenditure. Payment of rent, salary, purchase of goods, purchase of machinery, etc. is some examples of expenditure. Revenue expenditure: If the benefit of expenditure is exhausted within a year, it is treated as revenue expenditure. Capital expenditure: In case the benefit of expenditure lasts for more than one year, it is treated as an asset also known as capital expenditure. Expenditure is usually the amount spent for the purchase of assets. It increases the profit earning capacity of the business. Expense, on the other hand, is an amount to earn revenue. Expenditure is considered as capital expenditure unless it is qualified with words like revenue expenditure on rent, salaries etc., while expenses is always considered as a revenue expense because it is always incurred to earn revenue. Drawings: It is the amount of money or the value of goods which the proprietor (owner) takes away from business for his/her household or private use. Capital: It is the amount invested in an enterprise by its owners e.g. paid up share capital in a corporate enterprise. It also refers to the interest of owners in the assets of an enterprise. It is the claim against the assets of the business. Any amount contributed by the owner towards the business unit is a liability for the business enterprise. This liability is also termed as capital which may be brought in the form of cash or assets by the owner. Assets: These are tangible objects or intangible rights owned by the enterprise and carrying probable future benefits. Tangible items are those which can be touched and their physical presence can be noted/felt e.g. furniture, machine etc. Intangible rights are those rights which one possesses but cannot see e.g. patent rights, copyrights, goodwill etc. Assets are purchased for business use and are not for sale. They raise the profit earning capacity of the business enterprise. Assets are broadly categorized as: a) Current assets b) Non-current assets/fixed assets. a) Current assets: Current assets are those assets which are held for a short period generally one years time. The balance of such items goes on fluctuating i.e. it keeps on changing throughout the year. The balance of cash in hand may change so many times in a day. Various current assets are cash in hand/ at bank, debtors, bills
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receivable, stock, pre-paid expenses. b) Non-current assets/fixed assets: These assets are acquired for long term use in the business. Such assets raise the profit earning capacity of the business enterprise. Expenditure on such assets is non-recurring and of capital nature. Expenses incurred on acquiring these assets are added to the value of the assets. Liability: It is the financial obligation of an enterprise to pay. THE USERS OF ACCOUNTING INFORMATION There are many potential users of accounting Information, including shareholders, lenders, customers, suppliers, government departments, employees and their organizations, and society at large. Anyone with an interest in the performance and activities of an organization is traditionally called a stakeholder. For a business or organization to communicate its results and position to stakeholders, it needs a language that is understood by all in common. Hence, accounting has come to be known as the "language of business". The users of this accounting information are split up into two categories: 1. External users: External users include shareholders, lenders, consumer groups, external auditors, customers, and government agencies. These receive limited financial information from the target company, such as general-purpose financial statements; these statements have just enough information to inform external users of the companys economic position. 2. Internal users: Internal users are users within the company such as managers, internal auditors, sales staff, budget officers, controllers, officers, and directors. For each user or category mentioned, the business accountant is responsible for supplying information in relation to each of the groups accordingly. http://bizcovering.com/accounting/who-are-the-internal-and-external-users-of-accounting-information/
Fig: Users of accounting information a) Management is interested in the information contained in the financial statements to carry out its basic
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functions such as: Planning, decision-making and control responsibilities Financing the business. Investing the resources of the business. Producing goods and services. Marketing goods and services. Managing employees. b) Investors: The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends. c) Lenders (or creditors): Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due. d) Suppliers and other trade creditors: Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer. e) Governments and their agencies: Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics. f) Employees: Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities. g) Customers: Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise. h) Public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers. Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities. BOOK-KEEPING AND ACCOUNTING Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually performed by an accountant. The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as the Single-entry bookkeeping system and the Double-entry bookkeeping system. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process.
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A bookkeeper (or book-keeper) also known as an accounting clerk or accounting technician is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the "daybooks." The daybooks consist of purchase, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct daybook, suppliers ledger, customer ledger, and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper. http://en.wikipedia.org/wiki/Bookkeeping Differences between Book Keeping and Accounting:
BASIS OF DIFFERE NCE 1 Nature It
BOOK-KEEPING
ACCOUNTING
is concerned with identifying It is concerned with summarizing the financial transactions; recorded them and communicating measuring them in monetary the results. terms; recording and classifying them. It aims ascertaining income maintaining of business transactions. is the recoding, classifying, summarizing, interpreting business transactions and communicating results. Thus its scope is quite wide.
2. Objective It is to maintain systematic records of financial transactions. 3. Function
It is to record business transactions. It So its scope is limited.
4. Basis
5. Level of Knowledge
Vouchers and other supporting documents are necessary as Book-keeping works as the basis evidence to record the business accounting information. transactions. It is enough to have elementary For accounting, advanced and inknowledge of accounting to do depth knowledge and bookkeeping. understanding is required. Book-keeping is the first step to Accounting begins accounting. keeping ends. where book-
6. Relation
ROLE OF ACCOUNTANT IN AN ORGANIZATION

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Accountants are he persons who practice the art of accounting. Accountants can be classified into two categories: 1. Accountants in Public Practice. 2. Accountants in Employment 1. Accountants in Public Practice: These are also known as professional accountants and usually are the members of professional bodies. Such two bodies in India are: 1. ICAI (Institute of Charted Accountants of India) 2. ICWAI (Institute of Cost and Works Accountants of India) These offer services for conducting: (1) (2) (3) (4) Financial audit Cos audit Designing of accounting system Rendering other professional services
2. Accountants in Employment: These are employed in non-business or business entities. Non-business entities are a diverse set of organizations including Educational Institutions, Government, Churches, Museums, and Hospitals etc. their purpose is not to earn profit. These are generally called as management accountants because they report to, and are the part of, the entitys management. Most of these are the also members of professional accounting body, but it is not necessary. These provide information for: (1) (2) (3) (4) (5) (6) Tax returns of the business Budgeting Routine operating decisions Investment decisions Performance evaluation External financial reporting
Accountants Services 1. Maintenance of Books of Accounts: An accountant keeps a systematic record of the transactions entered by a business in the normal course of its operation. This help the organization in ascertaining the profit and loss made for a particular period and also the financial position of the organization as on a particular date. The advantages of maintenance of a proper systematic record of all the transactions are: (a) Helps to management in : 1) Planning and decision making: keeping in view current performance future plans of actions. 2) Controlling: Evaluation of actual performance with respect to planned one and taking remedial action if required. 3) Co-coordinating: interlinking different divisions such as production, purchase, finance, personnel and sales departments and coordinating through departmental budgets and reports. 4) Motivating: Promote or demote, reward or penalize according to the periodical departmental
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profit and loss accounts, budges and reports. 5) Communicating: Transmission of data results to insiders as well as outsiders. (b) Replacement of Human Memory: No need to remember vast data. (c) Comparative study: with respect to own previous years performance and with other companies in industry. (d) Acceptance by tax authorities (e) Evidence in court: taken as good evidence in the court of law. (f) Sale of business: help in fetching a proper price in the event of sale of the business. 2. Auditing of Accounts: Auditing is verification of accounting data for determining the accuracy and reliability of accounting statements and reports. This function is also performed by accountants. It is classified into two categories: 1) Statutory Audit: Required to be done because of provisions of law. Companies Act requires every company to get its accounts audited by a qualified Charted Accountant (CA). The Statutory Audit has a report whether in his opinion the profit and loss account shows the true profit or loss for the year and the balance sheet shows a true and fair picture of the state of affairs of the business on the balance sheet date. 2) Internal Audit: It is a review of various operations of the company and its records by the staff specially appointed for this purpose. Many large organizations have a separate internal audit department headed by a professionally qualified accountant for this purpose 3. Taxation: An accountant assists his organization in reducing tax burden and making proper tax planning. 4. Financial Services: An accountant is familiar with legal, accounting and taxation matters so can properly advise individual firms with regard to managing their financial affairs. He can assist his clients in selecting the most appropriate investment or insurance policy. Professional accountants also provide management consulting services. Such as designing of management information system, corporate planning, conducting of feasibility studies, executive selection services etc. Source: Accounting for Managers by S N Maheshwari & S K Maheshwari Summary of accountants services include: The setting-up of manual or computerized book-keeping systems sales ledger, purchase ledger, cash book, petty cash book, debtors ledger, creditors ledger, fixed-asset register. Preparation & presentations of timely accurate financial/accounting reports to management profit and loss account, balance sheet, cash flow statement and related notes. Audited accounts which must include specified financial information, laid out in a particular way which requires the role of accountants. Recommend on the financing of your business through overdrafts, loans, leasing, hire purchase, factoring, venture capital (including business angels) or grants. They can be instrumental at advising and introducing you to viable sources of finance and also help with drafting and presenting your business case to them. Identification of areas of inefficiency & wastages of resources in industries Setting up effective system of internal & accounting controls Preparation of feasibility reports: These reports assist management in assessing the viability/profitability
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or otherwise of proposed capital expenditure such as opening of a new factory or branch Investigation of the performance/operations of competing business organizations to assist management in policy formulation Investigation of frauds within the organization: Accountant plays the role of investigation of frauds within the organization Accountant assists the organization to avoid-rather than evade tax by using his knowledge of the tax laws
http://www.blurtit.com/q950299.html http://www.small-business-accounting-guide.com/role-accountants.html
BRANCHES OF ACCOUNTING Financial accounting refers to accounting for revenues, expenses, assets, and liabilities. It involves the basic accounting processes of recording, classifying, and summarizing transactions. The main objective of Financial Accounting is to find out the profitability and to provide information about financial position of the concern. It presents a general idea of the working of the business and permits management to control in general way the major functions of a business, viz. finance, administration, production and distribution. But Financial Accounting does not give details. Financial Accounting information is used by various stakeholders of the business. Stakeholders may include management and employees, as well as vendors, suppliers, customers, bankers and regulators. The accounting practices used in compiling financial statements are referred to as "GAAP" or the generally accepted accounting principles. Cost accounting is the branch of accounting dealing with the recording, classification, allocation, and reporting of current and prospective costs. The main objective of Cost Accounting is to find out the cost of goods produced or services rendered by business. It also helps the management to detect and control all leakages, defective works, and wastage in tools and stores. It helps in coming up with detailed estimates of cost of various products, divisions, etc and also assists in pricing the products/services accordingly and in measuring the efficiency of operations. It is generally integrated along with financial accounting, but in large organizations cost accounting may be set up as a separate activity if it is very critical to the company. Cost accounting is more of an internal system and is a tool used by management to monitor operations, appraise performance, keep budgets and costs under control, etc. Managerial accounting is the branch of accounting designed to provide information to various management levels for the purpose of enhancing controls. Its primary objective is to supply relevant information at appropriate time to the management to enable it to take the decisions and effect control.
THE DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING ARE AS FOLLOWS:
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BASIS 1. Objective
FINANCIAL ACCOUNTING It provides information about the financial performance and financial position of the business. It records, classifies, presents and interprets transactions in terms of money.
COST ACCOUNTING It provides information of ascertainment of cost, to control cost and for decision making about the cost. It classifies, records, presents, and interprets in a significant manner the material, labour and overheads cost. It also records and presents the estimated/budgeted data. It makes use of both the historical costs and pre-determined costs. The cost accounting information is used by internal management at different levels.
2. Nature of Information
3. Recording of data
It records Historical data.
4. Users information
of
The users of financial accounting statements are shareholders, creditors, financial analysts and government and its agencies, etc. It shows the profit/ loss of the organization. Financial Statements are prepared for a definite period, usually a year. of A set format is used for presenting financial information. Financial accounting reports are mandatory to prepare to meet the requirement of the Companies Act and Income Tax Act. Annual Financial statements must be verified by an external.
5. Analysis of costs and profits 6. Time period
It provides the details of cost and profit of each product, process, job, contracts, etc. Its reports and statements are prepared as and when required. There are not any set formats for presenting cost information. It is generally kept willingly and is not mandatory except those covered by cost audit requirements of Companies Act 1956. There is no requirement for an independent external review.
7. Presentation information 8. Legal Requirement
9. Audit
THE DIFFERENCE BETWEEN MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING ARE AS FOLLOWS:
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BASIS 1. Objective
FINANCIAL ACCOUNTING It provides information about the financial performance and financial position of the business.
MANAGEMENT ACCOUNTING Its Primary objective is to supply relevant information at appropriate time to the management to enable it to take the decisions and effect control. It deals primarily with confidential financial reports for the exclusive use of top management within an organization. Managerial accountants make use of procedures and processes that are not regulated by any standard-setting bodies. There is no time span for producing managerial accounting statements but generally these are prepared at comparatively short intervals. There is no legal requirement for an organization to use management accounting.
2. Confidentiality
Financial accounting Reports be accessed by internal external users such as shareholders, the banks and creditors. and
can and the the
3. Regulation standardization
Financial accountants follow Generally Accepted Accounting Principles (GAAP) set by professional bodies of the country. Financial accounting statements are generally required to be produced for the period of 12 previous months. Publicly-traded firms (limited companies or whose shares are bought and sold on an open market) must, by law, prepare financial account statements. Annual Financial statements must be verified by an external. Financial accounting information is of monetary nature.
4. Time period
5. Legal Requirements
6. Audit
There is no requirement for an independent external review.
7. Monetary Measurement
Management accounting information may be monetary or alternatively non monetary. It directs its attention to the various divisions, departments of business and reports about the profitability, and performance etc. of each of them. There are no set formats for presenting management accounting information.
8. Analyzing Performance
It portrays the position of business as a whole. of A set format is used for presenting financial information.
9. Presentation information
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10. Nature
It is more objective.
It is more subjective because it is based on judgements rather than on measurement. Less emphasis on precision because it is meant for internal users only. Management accounting is an accounting for the future therefore it supplies reports for present and future. Such reports may include sales forecasting reports, Budget analysis, Feasibility studies etc.
11. Precision
More emphasis on precision because it is used by external users also. It records Historical data.
12. Recording of data
Source: Accounting for Managers by S N Maheshwari & S K Maheshwari http://wiki.answers.com/Q/Different_branches_of_accounting http://www.rajputbrotherhood.com/knowledge-hub/cost-accounting/what-are-the-difference-between-costaccounting-and-financial-accounting.html http://qna.indiatimes.com/index.php?ref=permalinkquestion&question_id=220589 http://en.wikipedia.org/wiki/Differences_between_managerial_accounting_and_financial_accounting OBJECTIVES OF ACCOUNTING 1. 2. 3. 4. 5. To keep systematic records To protect business properties To ascertain the operational profit or loss. To ascertain financial position of business To facilitate rational decision making
Source: Accounting for Managers by S N Maheshwari & S K Maheshwari LIMITATIONS OF ACCOUNTING 1. Accounting information is expressed in terms of Money: Non-monetary events or transactions are completely omitted. 2. Fixed assets are recorded in the accounting records at the original cost: Actual amount spent on the assets like building, machinery, plus all incidental charges is recorded. In this way the effect of rise in prices not taken into consideration. As a result the Balance Sheet does not represent the true financial position of the business. 3. Accounting information is sometimes based on estimates: Estimates are often inaccurate. For example, it is not possible to predict the actual life of an asset for the purpose of depreciation. 4. Accounting information cannot be used as the only test of managerial performance on the basis of mere
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profits : Profit for a period of one year can readily be manipulated by omitting certain expenses such as advertisement, research and development, depreciation etc. i.e. window dressing is possible. 5. Accounting information is not neutral or unbiased: Accountants ascertain income as excess of revenue over expenses. But they consider selected revenue and expenses for calculating profit of the concern. They also do not include cost of such items as water, noise or air pollution i.e. social cost they may use different methods of valuation of stock or depreciations.
ACCOUNTING PRINCIPLES In order to maintain uniformity and consistency in preparing and maintaining books of accounts, certain rules or principles have been evolved. Accounting principles (or standards) may be defined as those rules of action which are adopted by the accountants universally while recording transactions. These are foundations of preparing and maintaining accounting records. These rules/principles are classified as: 1. Accounting concepts. 2. Accounting conventions.
1. Accounting concepts: Accounting concept refers to the basic assumptions and rules which work as the
basis of recording of business transactions and preparing accounts. Following are the important accounting concepts: i) Business entity concept ii) Money measurement concept iii) Going concern concept iv) Accounting period concept v) Accounting cost concept vi) Duality aspect concept vii) Realization concept viii) Accrual concept ix) Matching concept i) Business entity concept This concept assumes that, for accounting purposes, the business enterprise and its owners are two separate independent entities. Thus, the business and personal transactions of its owner are separate. For example, when the owner invests money in the business, it is recorded as liability of the business to the owner. Similarly, when the owner takes away from the business cash/goods for his/her personal use, it is not treated as business expense. Thus, the accounting records are made in the books of accounts from the point of view of the business unit and not the person owning the business. This concept is the very basis of accounting. Let us take an example. Suppose Mr. Sahoo started business investing Rs100000. He purchased goods for Rs40000, Furniture for Rs20000 and plant and machinery of Rs30000. Rs10000 remains in hand. These are the assets of the business and not of the owner. According to the business entity concept Rs100000 will be treated by business as capital i.e. a liability of
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business towards the owner of the business. Now suppose he takes away Rs5000 cash or goods worth Rs5000 for his domestic purposes. This withdrawal of cash/goods by the owner from the business is his private expense and not an expense of the business. It is termed as Drawings. Thus, the business entity concept states that business and the owner are two separate/distinct persons. Accordingly, any expenses incurred by owner for himself or his family from business will be considered as expenses and it will be shown as drawings. ii) Money measurement concept This concept assumes that all business transactions must be in terms of money that is in the currency of a country. In our country such transactions are in terms of rupees. Thus, as per the money measurement concept, transactions which can be expressed in terms of money are recorded in the books of accounts. For example, sale of goods worth Rs.200000, purchase of raw materials Rs.100000, Rent Paid Rs.10000 etc. are expressed in terms of money, and so they are recorded in the books of accounts. But the transactions which cannot be expressed in monetary terms are not recorded in the books of accounts. For example, sincerity, loyality, honesty of employees are not recorded in books of accounts because these cannot be measured in terms of money although they do affect the profits and losses of the business concern. Another aspect of this concept is that the records of the transactions are to be kept not in the physical units but in the monetary unit. For example, at the end of the year 2006, an organization may have a factory on a piece of land measuring 10 acres, office building containing 50 rooms, 50 personal computers, 50 office chairs and tables, 100 kg of raw materials etc. These are expressed in different units. But for accounting purposes they are to be recorded in money terms i.e. in rupees. In this case, the cost of factory land may be say Rs.12 crore, office building of Rs.10 crore, computers Rs.10 lakhs, office chairs and tables Rs.2 lakhs, raw material Rs.30 lakhs. Thus, the total assets of the organization are valued at Rs.22 crore and Rs.42 lakhs. Therefore, the transactions which can be expressed in terms of money are recorded in the accounts books, that too in terms of money and not in terms of the quantity. iii) Going concern concept This concept states that a business firm will continue to carry on its activities for an indefinite period of time. Simply stated, it means that every business entity has continuity of life. Thus, it will not be dissolved in the near future. This is an important assumption of accounting, as it provides a basis for showing the value of assets in the balance sheet. For example, a company purchases a plant and machinery of Rs.100000 and its life span is 10 years. According to this concept every year some amount will be shown as expenses and the balance amount as an asset. Thus, if an amount is spent on an item which will be used in business for many years, it will not be proper to charge the amount from the revenues of the
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year in which t h e item is acquired. Only a part of the value is shown as expense in the year of purchase and the remaining balance is shown as an asset. iv) Accounting period concept All the transactions are recorded in the books of accounts on the assumption that profits on these transactions are to be ascertained for a specified period. This is known as accounting period concept. Thus, this concept requires that a balance sheet and profit and loss account should be prepared at regular intervals. This is necessary for different purposes like, calculation of profit, ascertaining financial position, tax computation etc. Further, this concept assumes that, indefinite life of business is divided into parts. These parts are known as Accounting Period. It may be of one year, six months, three months, one month, etc. But usually one year is taken as one accounting period which may be a calendar year or a financial year. Year that begins from 1st of January and ends on 31st of December, is known as Calendar Year. The year that begins from 1st of April and ends on 31st of March of the following year, is known as financial year. As per accounting period concept, all the transactions are recorded in the books of accounts for a specified period of time. Hence, goods purchased and sold during the period, rent, salaries etc. paid for the period are accounted for and against that period only. v) Accounting cost concept (or Historical cost concept) Accounting cost concept states that all assets are recorded in the books of accounts at their purchase price, which includes cost of acquisition, transportation and installation and not at its market price. It means that fixed assets like building, plant and machinery, furniture, etc are recorded in the books of accounts at a price paid for them. For example, a machine was purchased by XYZ Limited for Rs.500000, for manufacturing shoes. An amount of Rs.1,000 were spent on transporting the machine to the factory site. In addition, Rs.2000 were spent on its installation. The total amount at which the machine will be recorded in the books of accounts would be the sum of all these items i.e. Rs.503000. This cost is also known as historical cost. Suppose the market price of the same is now Rs 90000 it will not be shown at this value. Further, it may be clarified that cost means original or acquisition cost only for new assets and for the used ones, cost means original cost less depreciation. The cost concept is also known as historical cost concept. The effect of cost concept is that if the business entity does not pay anything for acquiring an asset this item would not appear in the books of accounts. Thus, goodwill appears in the accounts only if the entity has purchased this intangible asset for a price. vi) Duality aspect concept
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Dual aspect is the foundation or basic principle of accounting. It provides the very basis of recording business transactions in the books of accounts. This concept assumes that every transaction has a dual effect, i.e. it affects two accounts in their respective opposite sides. Therefore, the transaction should be recorded at two places. It means, both the aspects of the transaction must be recorded in the books of accounts. For example, goods purchased for cash has two aspects which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be recorded. Thus, the duality concept is commonly expressed in terms of fundamental accounting equation: Assets = Liabilities + Capital The above accounting equation states that the assets of a business are always equal to the claims of owner/owners and the outsiders. This claim is also termed as capital or owners equity and that of outsiders, as liabilities or creditors equity. The knowledge of dual aspect helps in identifying the two aspects of a transaction which helps in applying the rules of recording the transactions in books of accounts. The implication of dual aspect concept is that every transaction has an equal impact on assets and liabilities in such a way that total assets are always equal to total liabilities. Let us analyze some more business transactions in terms of their dual aspect: 1. Capital brought in by the owner of the business The two aspects in this transaction are: (i) (ii) Receipt of cash Increase in Capital (owners equity) 2. Purchase of machinery by cheque The two aspects in the transaction are (i) Reduction i n Bank Balance (ii) Owning of Machinery 3. Goods sold for cash The two aspects are (i) Receipt of cash (ii) Delivery of goods to the customer 4. Rent paid in cash to the landlord The two aspects are (i) Payment of cash (ii) Rent (Expenses incurred).
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The interpretation of the Dual aspect concept is that every transaction has an equal effect on assets and liabilities in such a way that total assets are always equal to total liabilities of the business. vii) Realization concept This concept states that revenue from any business transaction should be included in the accounting records only when it is realized. The term realization means creation of legal right to receive money. Selling goods is realization, receiving order is not. In other words, it can be said that: Revenue is said to have been realized when cash has been received or right to receive cash on the sale of goods or services or both has been created. Let us study the following examples: (i) N.P. Jeweller received an order to supply gold ornaments worth Rs.500000. They supplied ornaments worth Rs.200000 up to the year ending 31st December 2005 and rest of the ornaments were supplied in January 2006. The revenue for the year 2005 for N.P. Jeweller is Rs.200000. Mere getting an order is not considered as revenue until the goods have been delivered. (ii) Bansal sold goods for Rs.1,00,000 for cash in 2006 and the goods have been delivered during the same year. The revenue for Bansal for year 2005 is Rs.1,00,000 as the goods have been delivered in the year 2005. Cash has also been received in the same year. (iii) Akshay sold goods on credit for Rs.50,000 during the year ending 31st December 2005. The goods have been delivered in 2005 but the payment was received in March 2006. Akshays revenue for the year 2005 is Rs.50,000, because the goods have been delivered to the customer in the year 2005. Revenue became due in the year 2005 itself. In the above examples, revenue is realized when the goods are delivered to the customers. The concept of realization states that revenue is realized at the time when goods or services are actually delivered. In short, the realization occurs when the goods and services have been sold either for cash or on credit. It also refers to inflow of assets in the form of receivables. Accrual concept The meaning of accrual is something that becomes due especially an amount of money that is yet to be paid or received at the end of the accounting period. It means that revenues are recognized when they become receivable though cash is received or not received and the expenses are
18
viii)
recognized when they become payable though cash is paid or not paid. Both transactions will be recorded in the accounting period to which they relate. Therefore, the accrual concept makes a distinction between the accrual receipt of cash and the right to receive cash as regards revenue and actual payment of cash and obligation to pay cash as regards expenses. The accrual concept under accounting assumes that revenue is realized at the time of sale of goods or services irrespective of the fact when the cash is received. For example, a firm sells goods for Rs 55000 on 25th March 2005 and the payment is not received until 10th April 2005, the amount is due and payable to the firm on the date of sale i.e. 25th March 2005. It must be included in the revenue for the year ending 31st March 2005. Similarly, expenses are recognized at the time services provided, irrespective of the fact when actual payments for these services are made. For example, if the firm received goods costing Rs.20000 on 29th March 2005 but the payment is made on 2nd April 2005 the accrual concept requires that expenses must be recorded for the year ending 31st March 2005 although no payment has been made until 31st March 2005 though the service has been received and the person to whom the payment should have been made is shown as creditor. In brief, accrual concept requires that revenue is recognized when realized and expenses are recognized when they become due and payable without regard to the time of cash receipt or cash payment. ix) Matching concept The matching concept states that the revenue and the expenses incurred to earn the revenues must belong to the same accounting period. So once the revenue is realized, the next step is to allocate it to the relevant accounting period. This can be done with the help of accrual concept. Let us study the following transactions of a business during the month of December, 2006 (i) (ii) (iv) (v) (vi) C ash Sales Rs.2000 and Credit S a l e s Rs.1000 Salaries Paid Rs.350 (iii) Commission Paid Rs.150 Interest Received Rs.50 Rent received Rs.140, out of which Rs.40 received for the year 2007 Carriage paid Rs.20 (vii) Postage Rs.30 (viii) Rent paid Rs. 200, out of which Rs.50 belong to the year 2005 (ix) Goods purchased in the year for cash Rs.1500 and on credit Rs.500 (x) Depreciation on machine Rs.200
Let us record the above transactions under the heading of Expenses and Revenue. Expenses Amount Rs Revenue Amount Rs
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1. 2. 3. 4. 5. 6.
Salaries Commission Carriage Postage Rent paid 200 Less for 2005 (50) Goods purchased Cash Credit 1500 500
350 150 20 30
1. Sales Cash Credit 2000 1000 3000 50
2. Interest received 3. Rent received 140 Less for 2007 (40)
150
100
7.
Depreciation on machine 2000
In the above example expenses have been matched with revenue i.e. (Revenue Rs.3150-Expenses Rs.2900) This comparison has resulted in profit of Rs.250. If the revenue is more than the expenses, it is called profit. If the expenses are more than revenue it is called loss. This is what exactly has been done by applying the matching concept. Therefore, the matching concept implies that all revenues earned during an accounting year, whether received/not received during that year and all cost incurred, whether paid/not paid during the year should be taken into account while ascertaining profit or loss for that year. www.nos.org/srsec320newE/320EL2.pdf
2. Accounting conventions
The conventions are the traditions or practices or customs of the business, that business is following year after year. In accounting, there are many conventions or practices which are used while recording the transactions in the books of accounts. Apart from these, the Institute of Chartered Accountants of India (ICAI), which is the main regulatory body for standardization of accounting policies in India has issued a number of accounting standards from time to time to bring consistency in the accounting practices. Accounting conventions are evolved through the regular and consistent practice over the years to facilitate uniform recording in the books of accounts. Accounting Conventions help in comparing accounting data of different business units or of the same unit for different periods. These have been developed over the years. The most important conventions which have been used for a long period are: i) Convention of consistency. ii) Convention of full disclosure. iii) Convention of materiality. iv) Convention of conservatism. i ) Convention of consistency
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The convention of consistency means that same accounting principles should be used for preparing financial statements year after year. A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time. But this can be possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period of time. If different accounting procedures and practices are used for preparing financial statements of different years, then the result will not be comparable. Generally a businessman follows the under mentioned general practices or methods year after year. While charging depreciation on fixed assets or valuing unsold stock, once a particular method is used it should be followed year after year so that the financial statements can be analyzed and compared provided the depreciation on fixed assets is charged or unsold stock is valued by using particular method year after year. This can be further clarified as: in case of charging depreciation on fixed assets accountant can decide to adopt any one of the methods of depreciation such as diminishing value method or straight line method. Similarly, in case of valuation of closing stock it can be valued at actual cost price or market price or whichever is less. However precious metals like gold, diamond, minerals are generally valued at market price only. ii) Convention of full disclosure Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed. Full disclosure means that there should be full, fair and adequate disclosure of accounting information. Adequate means sufficient set of information to be disclosed. Fair indicates an equitable treatment of users. Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should fully disclose all relevant information. Let us relate it to the business. The business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc. The shareholder would like to know profitability of the firm while the creditor would like to know the solvency of the business. In the same way, other parties would be interested in the financial information according to their requirements. This is possible if financial statement discloses all relevant information in full, fair and adequate manner. Let us take an example. As per accounts, net sales are Rs.150,000, it is important for the interested parties to know the amount of gross sales which may be Rs.200,000 and the sales return Rs.50,000. The disclosure of 25% sales returns may help them to find out the actual sales position. Therefore, whatever details are available, that must be honestly provided. Additional information should also be given in the financial statement. For example, in a balance sheet the basis of valuation of assets, such as investments, inventories, land and building etc. should be clearly stated. Similarly, any change in the method of depreciation or in making provision for bad debts or creating any reserve must also be shown clearly in the Balance Sheet. Therefore, in order to achieve the purpose of accounting, all the transactions of a business and any change in accounting policies, methods and procedures are fully
21
recorded and presented in accounting. To ensure proper disclosure of material accounting information, the Companies Act 1956, under schedule VI has provided a format for the preparation of Profit and Loss account and Balance Sheet of a company. It is necessary for every company to follow this format. The regulatory bodies like Securities and Exchange Board of India (SEBI) has also made compulsory for complete disclosures by registered companies. iii) Convention of materiality The convention of materiality states that, to make financial statements meaningful, only material fact i.e. Important and relevant information should be supplied in detail, to the users of accounting information. The question that arises here is what a material fact is. The materiality of a fact depends on its nature and the amount involved. Material fact means the information which will influence the decision of its user. For example, a businessman is dealing in electronic goods. He purchases T.V., Refrigerator, Washing Machine, Computer etc. for his business. In buying these items he uses larger part of his capital. These items are significant items; thus should be recorded in books of accounts in detail. At the same time to maintain day to day office work he purchases pen, pencil, match box etc. For this he will use very small amount of his capital. But to maintain the details of every pen, pencil, match box or other small items is not considered of much significance. These items are insignificant items and hence they should be recorded separately. Thus, the items that are significantly important in recording the details are termed as material facts or significant items. The items that are of less significance are immaterial facts or insignificant items. Thus according to this convention important and significant items should be recorded in their respective heads and all immaterial or insignificant transactions should be clubbed under a different accounting head. iv) Convention of conservatism This convention is based on the principle that Anticipate no profit, but provide for all possible losses . It provides guidance for recording transactions in the books of accounts. It is based on the policy of playing safe in regard to showing profit. The main objective of this convention is to show minimum profit. Profit should not be overstated. If profit shows more than actual, it may lead to distribution of dividend out of capital. This is not a fair policy and it will lead to the reduction in the capital of the enterprise. Thus, this convention clearly states that profit should not be recorded until it is realized. But if the business anticipates any loss in the near future, provision should be made in the books of accounts for the same. For example, valuing closing stock at cost or market price whichever is lower, creating provision for doubtful debts, discount on debtors, writing off intangible assets like goodwill, patent, etc. The convention of conservatism is a very useful tool in situation of uncertainty and doubts.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP Principles)

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In order to maintain uniformity and consistency in accounting records throughout the world, certain rules and principles have been developed which are generally accepted by the accounting profession. These rules/ principles are called by different names such as principles, concepts, conventions, postulates, assumptions. These rules/principles are judged on their general acceptability rather than universal acceptability. Hence, they are popularly called Generally Accepted Accounting Principles (GAAP). The term generally accepted means that these principles must have support, that generally comes from the professional accounting bodies. Thus, Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines adopted for recording and reporting of business transactions of financial statements. These principles have evolved over a long period of time on the basis of past experiences, usages or customs, etc. These principles are also referred as concepts and conventions, which have already been discussed. http://www.nos.org/srsec320newE/320EL3.pdf KEY CHARACTERISTICS OF ACCOUNTING INFORMATION There is general agreement that, before it can be regarded as useful in satisfying the needs of various user groups, accounting information should satisfy the following criteria: Criteria Understandabilit y Relevance What it means for the preparation of accounting information This implies the expression, with clarity, of accounting information in such a way that it will be understandable to users - who are generally assumed to have a reasonable knowledge of business and economic activities This implies that, to be useful, accounting information must assist a user to form, confirm or maybe revise a view - usually in the context of making a decision (e.g. should I invest, should I lend money to this business? Should I work for this business?) This implies consistent treatment of similar items and application of accounting policies This implies the ability for users to be able to compare similar companies in the same industry group and to make comparisons of performance over time. Much of the work that goes into setting accounting standards is based around the need for comparability. This implies that the accounting information that is presented is truthful, accurate, complete (nothing significant missed out) and capable of being verified (e.g. by a potential investor). This implies that accounting information is prepared and reported in a "neutral" way. In other words, it is not biased towards a particular user group or vested interest
Consistency Comparability
Reliability
Objectivity
http://tutor2u.net/business/accounts/accounting_conventions_concepts.htm
ACCOUNTABILITY Accounting is about accountability. Most organizations are externally accountable in some way for their actions and activities. They will produce reports on their activities that will reflect their objectives and the people to
23
whom they are accountable. The table below provides examples of different types of organizations and how accountability is linked to their differing organizational objectives: ORGANISATION Private or public company (e.g. BP, Tesco) Charities (e.g. Save the Children) Public services (e.g. transport, health) OBJECTIVES -Making of profit - Creation of wealth - Achievement of charitable aims - Maximize spending on activities - Provision of public service (often required by law) - High quality and reliability of services ACCOUNTABLE TO (EXAMPLES) - Shareholders - Other stakeholders (e.g. employees, customers, suppliers) - Charity commissioners - Donors - Government ministers - Consumers
All of the above organizations have a significant role to play in society and have multiple stakeholders to whom they are accountable. How accounting information helps businesses be accountable? Accounting information serves several purposes such as: Providing a record of assets owned, amounts owed to others and monies invested; Providing reports showing the financial position of an organization and the profitability of its operations Helps management actually manage the organization Provides a way of measuring an organizations effectiveness (and that of its separate parts and management) Helps stakeholders monitor an organizations activities and performance Enables potential investors or funders to evaluate an organization and make decisions
http://tutor2u.net/business/accounts/intro_accounting.htm ACCOUNTING EQUATION AND EFFECT The recording of business transactions in the books of account is based on a fundamental equation called Accounting Equation. Whatever business possesses in the form of assets is financed by proprietor or by outsiders. This equation expresses the equality of assets on the one side and other side equity i.e., the claims of outsider [liabilities] and owners or proprietors fund on the other side. In mathematical form, Assets = Equity Equity = Liabilities + Capital As an asset is introduced in the business, a corresponding liability also emerges. Effect of business transactions on accounting equation: These transactions increase or decrease the assets, liabilities, or capital. Every business has some assets. For example, Sunil started business with cash Rs.3,00,000 as Capital. In this transaction, asset in the form of cash
24
is created for the business. Hence, Cash (Asset) = Rs.3,00,000 Capital (Equity) = Rs.3,00,000 And, Cash (Asset) 3,00,000= = Capital (Equity)
3,00,000
Sunil purchased Machinery for Rs.40,000 and Furniture for Rs.20,000. Thus, the position of the assets and capital is as: Cash + Machinery + Furniture = Capital 2,40,000 + 40,000 + 20,000 = 3,00,000
The above transaction shows that Assets = Capital Or Capital = Assets Increase or decrease in capital will result in the corresponding increase or decrease in assets also. For example Sunil withdrew cash for personal use Rs.5,000. Thus, the position of the assets and capital is as under : Cash + Machinery + Furniture = Capital 2,40,000 + [5,000] 2,35,000 + + 40,000 0 40,000 + + + 20,000 0 20,000 = = = 3,00,000 [5,000] 2.95.000
Business enterprise borrows money in the form of loan from outsiders to carry on its activities. In other words, every business concern owes money from outsiders. Money borrowed from outsiders is called as liability. For example, Rs.1,50,000 borrowed from Shipra. Thus, the position of the assets and capital is as under: Cash +Machinery + Furniture = Liabilities + Capital 2,35,000 +1,50,000 3,85.000 + 40,000 + 0 + 40,000 + + + 20,000 0 20,000 = = = 0 1,50,000 1,50,000 + + 2,95,000 0 2,95.000
The fact that business receives funds from proprietors and creditors and retains all of them in the form of assets, can be presented in the terms of an accounting equation as under: Assets = Liabilities + Capital or A= L+ C Or Liabilities = Assets Capital or L= A C Or Capital = Assets Liabilities or C=AL Expenses and Revenue also affect the accounting equation. Their effect is always on the capital account. Business concern has to meet some expenses in its normal course of operations such as payment of salary, rent, insurance premium, postage, wages, repairs etc. Payment of these expenses reduces the cash. These expenses reduce the net income of the business. All the income is the income of proprietor, which is added in the capital account, so all these expenses are deducted from the capital account. Similarly, business
25
concern receives some revenues during normal course of operations, such as rent received, commission received, etc. Revenue is added to the cash balance as it is received in terms of cash. Revenue increases the net income of the business and hence, it is added to the capital account. Now, the accounting equation is represented by Assets + Revenue [Cash} Expenses [Cash] = = = Liabilities + + Capital Revenue Expenses
Accounting equation is thus affected by every business transaction. Any increase or decrease in assets, liabilities, and capital can be identified by preparing accounting equation. It shows that every business transaction satisfies the dual aspect concept of accounting. It also serves as the basis for preparing the Balance Sheet. Effect of transactions on the accounting equation: You have learnt that assets, liabilities and capital are the three basic elements of every business transaction, and their relationship is expressed in the form of accounting equation which always remains equal. At any point of time, there can be a change in the individual asset, liability or capital, but the two side of the accounting equation always remain equal. Let us verify this fact by taking up some transactions and see how these transactions affect the accounting equation: 1. Namita started business with cash Rs.3,50,000 introduced as capital. Thus the equation is as: Assets 3,50,000 = = Liabilities 0 + + Capital 3,50,000
This transaction shows that Rs.3,50,000 have been introduced by Namita in terms of cash, which is the capital for the business concern. Hence on one hand, the asset [cash] has been created to the extent of Rs.3,50,000. 2. She purchased goods for cash Rs. 90,000. Thus the accounting equation is as: Assets = (Cash + Goods) old equation Effect of Transaction New equation 3,50,000 = 90,000 + 90,000 = 2,60,000 + 90,000 = Liabilities + Capital 0 0 0 + 3,50,000 + 0
+ 3.50,000
A goods purchased is an asset and cash is also an asset. Hence in this transaction, there is an increase in one asset [Goods] and decrease in the other asset [cash]. There is no change in capital and liabilities. i.e. the other side of the accounting equation. 3. She purchased goods from Mohit for Rs.60,000 on credit Thus the equation is as: Assets = Liabilities + Capital
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(Cash + Goods) Old equation Effect of Transaction New equation 2,60,000 0 2,60,000 + 90,000 = + 60,000 = + 1,50,000 = 0 + 3,50,000 0
60,000 +
60,000 + 3.50,000
In this transaction goods have been purchased on credit from Mohit, hence there is an increase in the assets [goods] by Rs.60,000 and also an increase in the liabilities by Rs.60,000 as the business concern now owes money to Mohit. 4. She sold goods to Anish for Rs.40,000 (Cost Rs.25,000) and received Cash Rs.10,000 and balance after one month. Thus the accounting equation is as: Assets = (Cash + Goods + Debtors) 2,60,000 + 1,50,000 + 0 = 10,000 + [25,000] +30,000 = Liabilities 60,000 0 + + + Capital 3,50,000 15,000
Old eqn. Effect of Transaction New eqn.
2,70,000 + 1,25,000 + 30,000 =
60,000
3,65,000
In this transaction goods have been sold on credit and some on cash to Anish, so there is a decrease in the assets [goods] by Rs.25,000, and increase in the assets (Anish} by Rs.30,000 and [Cash] by Rs.10,000. In this process the proprietor has gain an amount of Rs.15,000 which is added to his capital. 5. She paid salaries to employees for Rs.16,000. Assets (Cash Old equation 2,70,000 + + + + Goods 1,25,000 0 1,25,000 + + + + Debtors) 30,000 0 30,000 = = = 60,000 0 60,000 + 3,65,000 + [16,000] + 3,49,000 = Liabilities + Capital
Effect of [-16,000] Transaction New equation 2,54,000
In this transaction, salaries paid to employees are expenses for the business concern. Salaries are paid in
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terms of cash, hence cash as an asset is reduced by Rs.16,000 and as all expenses reduce the capital, so capital is also reduced by Rs,16,000. From the above transactions, it is obvious that how every transaction has its effect on the accounting equation without disturbing the equality of the two sides of the equation. Illustration 1 Prepare accounting equation from the following Transactions: Rs. 1. Hemant started business with cash 2. Purchased goods for cash 3. Sold goods[costing Rs.30,000] for 4. Purchased goods from Monika 5. Salary paid 6. Commission received 7. Paid Cash to Monika in full settlement 8. Goods sold to Rahul {Costing Rs.20,000} for Solution:
S. No 1. Started businesswith cash 2. Purchasedgoods for cash New Equation 3. Sold goods for cash New Equation 4. Purchasedgoods from Monika New Equation 5. Salary paid New Equation 6. Commissionreceived New Equation 7. Paid Cash to M onika in full settlement New Equation 8. Goods sold to Rahul New Equation 1,94,00 0 0 1,94,00 0 + + + 1,20.00 0 [-20,000] 1,00,00 0 + + + 0 25,000 25,000 3,19,000 3,14,000 0 0 0 + + + 3,14,0 00 5,000 3,19,000 3,19,000 3,14,000 Transaction Cash 3,00,00 0 [-80,000] 2,20,00 0 45,000 2,65,00 0 0 2,65,00 0 [-7,000] 2,58,00 0 5,000 2,63,00 0 (-69,000) + + + + + + + + + + + + Assets Goods 0 80,000 80,000 [-30,000] 50,000 70,000 1,20,00 0 0 1,20.00 0 0 1,20,00 0 0 + + + + + + + + + + + + Debtors 0 0 0 0 0 0 0 0 0 0 0 0 3,83,000 3,78,000 3,85,000 3,15,000 3,00,000 = Total 3,00,000 Liabilities 0 0 0 0 0 70,000 70,000 0 70,000 0 70,000 (70,000 ) + + + + + + + + + + + + Equity Capital 3,00,000 0 3,00,000 15,000 3,15,000 0 3,15,000 [-7,000] 3,08,000 5,000 3,13,000 1,000 3,83,000 3,78,000 3,00,000 3,15,000 3,85,000
Basic Accounting
Accounting for Business Transactions
3,00,000 80,000 45,000 70,000 7,000 5,000 69,000 25,000
Total 3,00,000
Notes MODULE - 1
Illustration 2 Prepare accounting equation from the following Transactions: Rs. 1. Nutan started business with cash 4,00,000 2. Purchased goods from Rohit 60,000 3. Sold goods [costing Rs.25,000] for cash 22,000
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4. Purchased goods for cash 5. Salary outstanding 6. Rent received 7. Paid Cash to Rohit on account 8. Goods sold to Bharti {Costing Rs.30,000} for Solution:
S.No Transaction Cash 1. Started business with cash 2. Purchased goods from Rohit New Equation 3. Sold goods for cash New Equation 4. Purchased goods for cash New Equation 5. Salary outstanding New Equation 6. Rent received New Equation 7. Paid Cash to Rohit on account New Equation 8. Goods sold to Bharti New Equation 3,43,00 + 0 0 85,000 + 0 4,00,00 + 0 0 + Assets Goods 0 60,000 Debtors + + 0 0 0 0 0 0 0 0 0 0 0 0
50,000 3,000 6,000 35,000 40,000

= Total 4,00,000 Equity Liabilities 0 60,000 4,60,000 60,000 0 4,57,000 60,000 0 4,57,000 60,000 3,000 4,57,000 63,000 0 4,63,000 63,000 + + + + + + + + + + + Capital 4,00,000 0 4,00,000 [-3,000] 3,97,000 0 3,97,000 [-3,000] 394,000 6,000 4,00,000 0 4,63,000 4,57,000 4,57,000 4,57,000 4,60,000 Total 4,00,000
4,00,00 + 0
60,000 +
22,000 + [-25,000] + 4,22,00 + 0 [-50,000] + 3,72,00 + 0 0 + 35,000 50,000 + +
85,000 + 0 + 85,000 + 0 + 85,000 + 0 +
3,72,00 + 0 6,000 +
3,78,00 + 0 35,000 +
[-35,000] +
4,28,000 28,000 0
+ + +
4,00,000 4,28,000 10,000 4,10,000 4,38,000
+ [30000] + 40,000
3,43,00 + 0
55,000 + 40,000 4,38,000 28,000
RULES OF ACCOUNTING Using Debit and Credit In Double Entry accounting both the aspects of the transaction are recorded. Every transaction has two aspects and according to this system, both the aspects are recorded. If the business acquires something, it must have been acquired by giving something. While recording each transaction, the total amount debited must be equal to the total amount credited. The terms Debit and Credit indicate whether the transaction is to be recorded on the left hand side or right hand side of the account. In its simplest form, an account looks like the English Language Letter T. Because of its shape, this simple form of account is called T-account (refer figure 4.5) . Have you observed that the T format has a left side and a right side for recording increases and decreases in the item? This helps in ascertaining the ultimate position of each item at the end of an accounting period. For example, if it is an account of a supplier all goods/materials supplied shall appear on the right (Credit) side of the Suppliers account and all payments made on the left (debit) side. In aT account, the left side is called debit (usually abbreviated as Dr.) and the right side is known as credit (as usually abbreviated Cr.). Account Title
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(Left Side) Specimen of T-account Rules of Accounting
(Right Side)
All accounts are divided into five categories for the purpose of recording of the business transactions: (i) Assets, (ii) Liability, (iii) Capital, (iv) Expenses/Losses, and (v) Revenues/Gains.
Two Fundamental Rules are followed to record the changes in these accounts: 1. For recording changes in Assets/Expenses/Losses Increase in Asset is debited, and decrease in Asset is credited. Increase in Expenses/Losses is debited, and decrease in Expenses/Losses is credited. 2. For recording changes in Liabilities and Capital/Revenue/Gains Increase in Liabilities is credited and decrease in Liabilities is debited. Increase in Capital is credited and decrease in Capital is debited. Increase in revenue/gains is credited and decrease in revenue/gain is debited. The rules applicable to the five kinds of accounts are summarised in the following chart: Rules of Accounting Assets (Increase) + Debit (Decrease) Credit liabilities (Decrease) Debit (Increase) + Credit Expenses/Losses (Decrease) Credit
Capital (Decrease) Debit (Increase) + Credit
(Increase) + Debit
Revenue/Gains (Decrease) (Increase) + Debit Credit I. Analysis of Rule Applied to Assets Accounts Rohan Purchased Furniture for Rs.80,000. In this transaction, the affected accounts are Cash account and Furniture account. Cash account is an assets account and has decreased. As per rule if asset decreases the affected account is credited, so cash account credited. Furniture is also an asset and it has increased. As per rule asset if increases the affected account is debited thus furniture account is debited.
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II. Analysis of Rule Applied to Liabilities Accounts: Purchased Machinery for Rs.60,000 on credit from M/s Indian Machinery Mart. In this transaction, the two accounts affected are machinery and M/s Indian Machinery Mart. Machinery is an asset, an asset has increased, therefore machinery account is debited. M/s Indian Machinery Mart is the creditor on account of supply of machinery and constitutes the liability for the buying firm which has increased. Rule is the on increase of liability the concerned account is credited and vice-versa. The M/s Indian Machinery Mart A/c is credited.
III. Analysis of Rule Applied to Capital Accounts: Cash of Rs.50,000 introduced in business as Capital by Rakesh. In this transaction, the two account affected are Cash account and Rakesh [Capital account] . Cash is an asset and Rakesh invested capital. Rule for Capital is that if it increases the account is credited and vice-versa. So capital account here is credited.
IV. Analysis of Rule Applied to Expenses/Losses Accounts: Paid Rs.6000 to the employees as Salary In this transaction, the two accounts affected are salary account and Cash account. Salary account is an expense and has increased. Cash is an asset and has decreased. Rule regarding expenses/ losses is that if it increases the account debited.
V. Analysis of Rule Applied to Revenue/Profit Accounts: Received interest for the month Rs.4000 In this transaction, the two accounts affected are Interest and Cash. Interest is an item of Income and Cash an item
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of assets. Rule regarding Revenue/profit is, increase in revenue is credited. Illustration 3 From the following transactions, state the titles of the accounts to be affected, types of the accounts and the account to be debited and the account to be credited: Rs. 1. Ankur started business with cash
2 Purchased goods for cash 3. Paid salaries 4. Sold goods to Rohit on credit 5 Office machine purchased for cash 6 He took loan from Bank 7 He received commission 8. Postage paid 9. Paid rent 10 Received cash from Rohit 600000 80000 10000 60000 12000 30,000 4,000 500 6,000 60000
Solution:
Trans action No Names accounts (1) 1 2 3 4 5 6 7 8 Cash Purchases Salaries Rohit Office machine Cas h Cas h Postage of Type of accounts Rules applicable to A/cs in Deb it/Credit items of Increase/Decrease (1) Cash (Increase) Purchase Salaries ( ) ( ) (2) Capital Cash Incr ease (decrease)
(2) Capital Cash Cash Sales Cash Ban k loa n Comm i ssion Cas h
(1) Asse t
(2) Capital
Expens e Asset Expens e Asset Asse t Debtor Asse t Asse t Asse t Expens e Revenue Asset Liabilit y Revenu e Asse t
Cash (decrease) Sales (Increase) Cash (decrease) Bank loan (Increase) Commission (Increase) Cash (decrease)
Rohit ( ) Office ( ) machine Cash (Increase) Cash (Increase) Printing and Stationery (Increase) Rent (Increase) Cash (Increase)
9 10
Ren t Cas h
Cas h Rohi t
Expens e Asse t
Asse t Asse t
Cash (decrease) Rohit (decrease
Type of account
Name of Account Asset Liability Capital Revenue Expense
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Accounting for Managers (i) (ii) (iii) (iv) Wages Building Office Machine Cash
(v) Mohan (Supplier) (vi) Krishan (Owner) (vii) Radha (Customer) (viii) Interst received (ix) Bank Overdraft
BASES OF ACCOUNTING As we are aware that one of the most significant functions of accounting is to make us know true and fair amount of profit earned; by the business entity in a particular period. This Profit or income figure can be ascertained by following: (i) Cash Basis of accounting, or (ii) Accrual Basis of accounting. I. Cash Basis of accounting This is a system in which accounting entries are recorded only when cash is received recognized only on receipt of cash. Similarly, expenses are recorded as incurred when difference between the total revenues and total expenses represents profit or loss of particular accounting period. Outstanding and prepaid expenses and income received in incomes are not considered. or paid. Revenue is they are paid. The an enterprise for a advance or accrued
Outstanding Expenses are those expenses which have become due during the accounting period but which have yet not been paid off. Prepaid Expenses are those expenses which have been paid in advance. Accrued Income means income which has been earned by the business during the accounting period but has not yet become due and therefore has not yet been received. Income received in advance means income which has been received by the business before being earned. Costs incurred during a particular period should be set out against the revenue of the period to ascertain profit or loss. Advantages: Following are the advantages of adopting cash basis of accounting: It is very simple as no adjustment entries are required. It appears more objective as very few estimates and personal judgments are required. It is more suitable to those entities which have most of the transactions on cash basis.
Disadvantages: Following are the disadvantages of adopting cash basis of accounting: It does not give a true and fair view of profit and loss and the financial position of the business unit as it ignores outstanding and prepaid expenses. It does not follow the matching concept of accounting. Illustration 4 During the financial year 2006-07, Mela Ram had cash sales of Rs.580000 and credit sales of Rs.265000. His
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expenses for the year were Rs.460000 out of which Rs. 60000 are still to be paid. Find out Mela Rams Income for the year 2006-07. Following a r e the cash basis of accounting. Solution: ting for Business Transactions Amount (Rs.) Revenue (in terms of Cash Inflows) 580000 Less: Expenses (Outflow of cash) (i.e. Rs. 460000- 60000) 400000 Net Income 180000 Note: Credit Sales and Outstanding Expenses are not to be considered under cash basis of accounting. II Accrual Basis of accounting Revenue and expense are taken into consideration for the purpose of income determination on the basis of accounting period to which they relate. The accrual basis makes a distinction between actual receipts of cash and the right to receive cash for revenues and the actual payment of cash and the legal obligation to pay expenses. It means the income accrued in the current year becomes the income of the current year whether the cash for that item is received in the current year or it was received in the previous year or it will be received in the next year. The same is true of expense items. Expense item is recorded if it becomes payable in the current year whether it is paid in the current year or it was paid in the previous year or it will be paid in the next year. For example, credit sales are included in the total sales of the period irrespective of the fact when cash on account is received. Similarly, in case the firm has taken benefit of a certain service, but has not paid within that period, the expense will relate to the period in which the service has been utilized and not the period in which the payment for it is made. Following are the advantages:

It is based on all business transactions of the year and discloses correct profit or loss. This method is used in all types of business units. It is more scientific and rational in application. It is not simple one and requires the use of estimates and personal judgment. It fails to disclose the actual cash flows.
Following are the disadvantages:

Illustration 8 Taking the data given in the Illustration 7, find out the net income of Mela Ram as per accrual basis of accounting. Solution: Amount (Rs.) Total Sales: Cash Sales (Rs. 580000) + Credit Sales (Rs. 265000) Less: Total Expenses for the year 2006-07 Net Income 845000 460000 385000
Note: Outstanding Expenses of Rs. 60000 relate to this accounting year and hence are to be charged to the revenues of this current year. Similarly, credit sales of Rs. 265000 are considered for this year as the transaction took place during this current year.
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FOLLOWING ARE THE DIFFERENCE BETWEEN ACCRUAL BASIS OF ACCOUNTING AND CASH BASIS OF ACCOUNTING: BASIS OF ACCRUAL BASIS DIFFERENCE 1. Prepaid, Outstanding There may be outstanding expense, and received in advance prepaid expenses, accrued income items and income received in advance in the Balance sheet. 2. Effect on income of Income statement will show prepaid expenses and relatively higher income if there are accrued income items of prepaid expenses and accrued income. 3. Effect of outstanding Income statement will show a lower expenses and unearned income if there are items of outstanding expenses and unearned income income 4. Legal Position 5. Option regarding valuation of inventories and methods of depreciation 6. Reliable Companies Act 1956 recognizes this basis of accounting. The business unit has the option to value the inventories at cost or market, whichever is less of depreciation. It is a reliable basis of accounting as it records all cash as well credit transactions. It ascertains true profit or loss. A business unit with a profit motive ascertains its profit or loss as per accrual basis. CASH BASIS There is no outstanding expense, prepaid expenses, accrued income and income received in advance in the Balance Sheet Income statement will show relatively lower income if there are items of prepaid expenses and accrued income Income statement will show a higher income if there are items of outstanding expenses and unearned income Companies Act 1956 does not recognize this basis of accounting. No such option is available in regard to inventory valuation and method of depreciation. It is not a reliable basis of accounting as only cash transactions are recorded. It fails to ascertain true profit or loss. Professional people, small ventures of temporary nature, some Not- forProfit Organizations ascertain their profit or loss as per cash basis.
7. Users
DOUBLE ENTRY MECHANISM Double Entry Mechanism entails recording of transactions keeping in mind the debit and credit aspect of the transaction. To record every transaction, one account is debited and the other is credited. This is based on the principle every debit has a credit. The Double entry Book-Keeping seeks to record every transaction in
35
money or moneys worth in its dual aspect. The advantages of d o u b l e entry mechanism are:
Systematic Record: It records, classifies, and synthesizes the business transaction in a systematic manner. It provides reliable information for sound decision making. It meets the needs of users of accounting information. Complete Record: It maintains complete record of a business transaction. It records both the aspects of the transaction with narration. Accurate records: By Preparing a Summarized Statement of Account the arithmetical accuracy of the records can be checked. Operational Results: By preparing Income statement (Profit and Loss Account) the business can know profit or loss due to its operations during an accounting period.
Financial Position: By preparing Position Statement (Balance Sheet) the business can know what it owns and what it owes to others. What are its assets and what are its Liabilities and Capital. Possibility of Fraud: Possibility of Frauds is minimized as complete information is recorded under this s y s t em . JOURNAL Journal is a book of accounts in which all day to day business transactions are recorded in a chronological order i.e. in the order of their occurrence. Transactions when recorded in a Journal are known as entries. It is the book in which transactions are recorded for the first time. Journal is also known as Book of Original Record or Book of Primary Entry. Business transactions of financial nature are classified into various categories of accounts such as assets, liabilities, capital, revenue and expenses. These are debited or credited according to the rules of debit and credit, applicable to the specific accounts. Every business transaction affects two accounts. Applying the principle of double entry one account is debited and the other account is credited. Every transaction can be recorded in journal. This process of recording transactions in the journal is known as Journalising. In small business houses generally, one Journal Book is maintained in which all the transactions are recorded. But in case of big business houses as the transactions are quite large in number, therefore journal is divided into various types of books called Special Journals in which transactions are recorded depending upon the nature of transaction i.e. all credit sales in Sales Book, all cash transactions in Cash Book and so on. Format of Journal Every page of Journal has the following format. It is a columnar book. Each column is given a name written on its top. Format of journal is given below: Journal
Date (1) Particulars (2) Ledger Folio (3) Dr. Amount (Rs.) (4) Cr. Amount (Rs.) (5)
Column wise details of journal are as:

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1. Date: In this column, we record the date of the transactions with its month and accounting year. We write year only once at the top and need not repeat it with every date. Example: Date 2006 April 15
2. Particulars: The accounts affected by a transaction i.e. the accounts which have to be debited or credited are recorded in this column. It is recorded in the following way: In the first line, the account which has to be debited is written and then the short form of Debit i.e. Dr. is written against that accounts name in the extreme right of the same column. In the second line after leaving some space from the left of the entry in the first line, the account which has to be credited is written starting with preposition To Then in the third line, Narration for that entry which explains the transaction, the affected accounts of which are entered, is written within Brackets. Narration should be short, complete and clear. After every journal entry, horizontal line is drawn in the particulars column to separate one entry from the other. Example: Rent paid in cash on 1st April, 2006 Date 2006 April 1 Particulars Rent A/c .............................. Dr To Cash A/c ............... (Rent paid in cash)
3. Ledger Folio: The transaction entered in a Journal is posted to the various related accounts in the ledger (which is explained in another lesson). In ledger-folio column we enter the page-number where the account pertaining to the entry is opened and posting from the Journal is made. 4. Dr. Amount: In this column, the amount to be debited is written against the same line in which the debited account is written. 5. Cr. Amount: In this column, the amount to be credited is written against the same line in which the credited account is written. Example: Date 2006 April 1
Particulars
L.F.
Dr. Amount (Rs.) 4000
Cr. Amount (Rs.)
Rent A/c ........ Dr To Cash A/c (Rent paid in Cash)
4000
6. At the end of each page, both the Dr. and Cr. columns are totalled up. The total of both these columns should be equal as the same amount is entered in the debit as well as in the credit columns. The totals are carried forward to the next page with the words total carried forward (c/f) and then at the top of the next page in Particulars column, we write totals brought forward (b/f) and the amount of totals is written in the respective amount columns.
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PROCESS OF JOURNALISING Following steps are taken for the preparation of a journal: Identify the Accounts: First of all, the affected accounts of an accounting transaction are identified. For example, if the transaction of goods worth Rs.10000 are purchased for Cash, then Purchases A/c and Cash A/c are the two affected accounts. Recognize the type of Accounts: Next we determine the type of the affected accounts e.g. in the above case, Purchases A/c and Cash A/c are both asset accounts. Apply the Rules of Debit and Credit: Then the rules of debit and credit are applied to the affected accounts. You are aware of these rules. However, for the revision purposes, these are given below: (a) Assets and Expenses Accounts are debited if there is an increase and credited if there is decrease. (b) Liability, Capital and Revenue Accounts are debited if there is decrease and credited if there is increase. In the example given when goods are purchased, as the assets are increasing, therefore, Purch ases Account will be debited and as payment is made in cash assets are decreasing, Cash Account will be credited. Now, the journal entry will be made in the Journal alongwith a brief explanation i.e. narration. The corresponding amounts will be written in th e debi t an d credi t columns . After comp leti n g on e en tr y , a horizontal line is drawn before entry for the next transaction is made in the journal. The transaction, given above in the example, is journalised in the following manner: Date Particulars Purchases A/c .............. Dr To Cash A/c (Goods purchased for Cash) Illustration 1 Enter the following transactions in the Journal of Bhagwat and sons.. 2006 January 1 January 2 January 4 January 6 January 8 January 10 January 15 January 18 January 20 Solution:
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Dr Amount (Rs) 1000
Cr Amount (Rs)
1000
Amount (Rs) Tarun started business with cash Goods purchased for cash Machinery Purchased from Vibhu Rent paid in cash Goods purchased on credit from Anil Goods sold for cash Goods sold on credit to Gurmeet Salaries paid. Cash withdrawn for personal use 1,00,000 20,000 30,000 10,000 25,000 40,000 30,000 12,000 5,000
As explained above, before making the journal entries, it is very essential to determine the kind of accounts to be debited or credited. This is shown in the Table:
Tabular Analysis of Business Transactions: Date Transaction Affected Accounts Kind of Increase Debited Accounts or DecreaseAccounts in Accounts Dr.
Asset Capital Asset Asset Asset Liability Increase Increase Increase Decrease Increase Increase Increase Decrease Increase Increase
Increase Increase
Credited Accounts Cr.

Capital A/c
2006 January 1 January 2 January 4
Cash received from the Cash Capital owner Tarun Goods cash purchased for Goods Cash Machinery Vibhu Rent Cash
Cash A/c Purchase A/c Cash A/c Machinery A/c Vibhu A/c Rent A/c Cash A/c Purchase A/c
Cash A/c Sales A/c Sales A/c Gurmeet
Machinery purchased on Credit from Vibhu Rent paid in cash Goods purchased on Credit from Anil
Goods Cash sold for
January 6 January 8
Expense Asset Purchases Asset Anil (creditor) Liability

Cash sales Asset revenue Asset revenue
Anil A/c
January10
Date
January15
Particulars
L.F.
Amount Rs. Amount Rs. 1,00,000
Credit sales to Gurmeet Dr. Cash A/c Gurmeet To Tarun Capital (Debtor) A/c (Capital brought in byGoods Tarun)
Increase 1,00,000 Increase
Salaries Dr. Expense Increase Salaries A/c 20,000 To Cash A/c Cash Asset Decrease (Goods purchased for Cash) 20,000 January20 Cash withdrawn A/c Drawings Dr. Capital Decrease Drawings Machinery for 30,000 Asset Decrease A/c personalTo Vibhus A/c Cash use (Machinery purchased from Vibhu 30,000 on credit) On the basis of the above table, following entries can be made in the Journal: Rent A/c Dr. To cash A/c 10,000 (Rent paid) 10,000 Purchases A/c Journal of Tarun Dr Dr. Cr. To Anils A/c 25000 (Good purchased on credit) January18
Purchase A/c Salaries paid in cash
Cash A/c Cash A/c
2006
January 1 January 2
January 4
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January 6
January 8
January10
Cash A/c To Sales A/c (Goods sold for Cash)
Dr
40,000
40000
January15
Gurmeets A/c Dr To Sales A/c (Goods sold on credit to Gurmeet) Salaries A/c To Cash A/c (Salaries paid) Dr.
30,000
30,000
January18
12,000
12,000
January20
Drawings A/c Dr To Cash A/c (Cash withdrawn by the owner for personal use) Total
5,000
5,000
2,72,000
2,72,000
COMPOUND AND ADJUSTING ENTRIES The journal entries that you have learnt so far are simple and affect two accounts only. There can be entries that affect more than two accounts; such entries are called compound or combined entries. A simple journal entry contains only one debit and one credit. But if an entry contains more than one debit or credit or both, that entry is known as a compound journal entry. Actually, a compound journal entry is a combination of two or more simple journal entries. Thus, a compound journal entry can be made in the following three ways: i. ii. iii. By debiting one account and crediting more than one account. By debiting more than one account and crediting one account. By debiting more than one account and also crediting more than one account.
Two simple journal entries are as: Journal

Dr. Date 2006 November 30 Particulars L.F. Amount Rs. 6000 Cr. Amount Rs. 6,000
Salary A/c To Cash A/c (Salary paid in Cash) Rent A/c To Cash A/c (Rent paid in Cash)
Dr.
November 30
Dr.
12,000
12,000
The above two simple entries have been converted into compound Journal entry as under:
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Journal
2006 November 30 Salary A/c Rent A/c To Cash A/c (Payment of Salary and Rent in Cash) Dr. Dr. 6,000 12,000 18000
Note: To make the compound entry it is necessary that the transactions must be of the same date and one account is common. If you match the first two simple entries with the converted compound entry, you will find that there is no difference between them so far as the accounting effect is concerned. The compound entries save time and space. Such compound entries are made in the following cases: (a) When two or more transactions occur on the same day. (b) One aspect i.e. either the Debit account or Credit account is common. A few more examples of c ompound entries are: 1. Bad debt: When a debtor fails to pay the full amount due to him, the unpaid amount is known as bad debt. For example, A business concern receives Rs 8000 of Rs10,000 due from Harish. He is unable to pay the balance amount, thus, the remaining amount becomes a bad debt for the business. The compound entry for this transaction will be: Bank A/c Dr. 8000 Bad Debts A/c Dr. 2000 To Harishs A/c 10,000 (Receipt of Rs8000 from Harish and remaining due amount of Rs2000 is treated as bad debts) 2. Discount Allowed and Received: To encourage a customer to pay the amount due before due date, discount is allowed. This is called cash discount. If such discount is received the compound entry for this transaction will be: Creditor A/c To Bank A/c To Discount A/c Bank A/c Discount A/c To customers (Debtors) A/c Dr.
Similarly, when cash discount is allowed, the journal entry will be: Dr. Dr.
Note: When the customer buys goods in bulk or in large quantity some discount may be allowed to him. This is to encourage him to buy more and more. This discount is called Trade Discount. When the bill is prepared for the purchase of goods, the amount of trade discount is deducted from the total amount payable. No entry is made for this type of discount in the journal i.e. it is not recorded in the books of accounts. Illustration 2 Enter the following transactions in the books of Supriya, the owner of the business. 2006 January 8 Purchased goods worth Rs.5,000 from Sarita on credit.
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January 12 Neha Purchased goods worth Rs.4,000 from Supriya on credit. January 18 Received a Cheque from Neha in full settlement of her account Rs.3,850. Discount allowed to her Rs.150 January 20 Payment made to Sarita Rs.4,900. Discount allowed by him Rs.100. January 22 Purchased goods for cash Rs.10,000. January 24 Goods sold to Kavita for Rs.15,000. Trade discount @ 20% is allowed to her. January 29 Payment received from Kavita by Cheque. Solution: The above transactions will be entered in the journal as follows: Journal Journal of Supriya
Date 2006 Jan.8 Particulars L.F. Dr. Amount Rs. 5,000 Cr. Amount Rs. 5,000
Purhcases A/c To Sarita A/c (Goods Purchased on credit from Sarita)
Dr.
Jan. 12
Jan. 18
Nehas A/c Dr. To Sales A/c (Goods sold on credit to Neha) Bank A/c Dr. Discount A/c Dr.
4,000 4,000 3,850 150 4,000
Jan. 20
To Nehas A/c (Payment recived from Neha and discount allowed) Saritas A/c Dr. To Cash A/c To Discount A/c (Payment made and discount allowed by Sarita) Purhcases A/c Dr. To Cash A/c (Goods purchased for cash) Kavita A/c Dr To Sales A/c (Sold good to Kavita on credit of Rs15000 less Trade Discount @20%) Bank A/c Dr. To Kavitas A/c (Payment received from Kavita by Cheque) Total
5,000 4.900 100 10,000
Jan. 22
10,000
Jan. 24
12000
12000
Jan. 29
12000
12000
52000
52000
Adjusting Entry: To satisfy the principle of matching cost and revenue, amount of every expense and revenue should pertain to the period for which accounts are being prepared. Thus, there can be two situations: a) Amount has been received or paid which belongs to more than one accounting year b) Amount of expense or of revenue for the current year stands due and not paid. In the above two cases adjustments need to be made. Any journal entry made to adjust these amounts is called adjusting journal entry.
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Journal entries made to adjust for outstanding expenses such as rent outstanding, prepaid expenses such as insurance premium paid in advance, accrued income such as rent (income) has become due but not received and income received in advance such as commission has been received though not yet due are examples of adjusting journal entries. Following are the items for which adjustment is required: 1. Outstanding Expenses: An expense for the current accounting period should be debited (as increase in expense is to be debited). It is immaterial whether it is paid in that accounting period or not. In case the same expense is not paid during the year, it becomes outstanding for that particular year. It is the liability of the business for that year and, thus, expense outstanding account will be credited, because liabilities are credited for increase. For example, if salaries are outstanding for Rs.5,000 for December 2006 then the entry will be made as follows: Salaries A/c Dr. 5,000 To Salaries outstanding A/c (Salaries remaining unpaid for the month of December) 5,000
2. Prepaid Expenses: This is an expense relating to the next year that has been paid in advance during the current year. Thus, in such a case, this amount should not be treated as an expense for this year. It should be treated as an asset in the current year as the services will be received only in the next year (but the payment has been made in this year). As an increase in asset is debited, so prepaid expense account will also be debited. If, for example, Insurance is prepaid for 2007 in 2006 for Rs.3,000 then entry will be made as follows: Prepaid Insurance A/c To Insurance Premium A/c (Insurance paid in advance) Dr. 3,000 3,000
Accrued Income: In case, income has been earned but it has not been received till now, it is an accrued income. Accrued Income is an asset, as there will be an increase in the asset, it will be debited. For example, Rent (receivable) is outstanding for the month of November Rs.4,000. The entry in such a case will be: Accrued Rent A/c Dr. 4,000 To Rent A/c (Being Rent due but not yet received for the period) 4,000
Note : Here Rent Income A/c has been credited for the increase to be made in the amount of Rent for the period of November, which has to be included in the total Rent Income. Income received in advance: Whenever Income is received in advance during the current year i.e. it is received for the next year, it should not be included in the current years income. As this income pertains to the next year, it cannot be treated as income in the current year, so it becomes a liability. As there is an increase in the liability, it should be credited. For example, if Rent is received in advance for the period January and February 2007 in December 2006, Rs.9,000. Then the entry will be
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Rent A/c Dr. 9,000 To Rent Received in Advance A/c 9,000 (Rent received in advance for January and February in the month of December 2006) Note : Here Rent Income A/c has been debited as it has to be decreased by Rs.9,000 being Rent in advance for January and February 2007 which should not be included in the month of December 2006 as the services have not yet been rendered. Miscellaneous entries Depreciation: Depreciation means decline in the value of an asset due to its wear and tear. It is an expense for the business. Increase in expenses and losses are debited, so depreciation is also to be debited. The value of the asset will also be reduced because of depreciation. As decrease in assets is credited, so the same asset account will be credited. For example, Depreciation on furniture Rs.3,000 is charged for the year, Journal entry will be : Depreciation A/c Dr. To Furniture A/c (Depreciation charged on furniture) 3,000 3,000
Interest on capital: Business may allow interest to its proprietor on his/her capital. It is an expense for the business. As the expense is debited for the increase, interest on capital will be debited. The other account involved here is capital account. As Capital is increasing, it will be credited with the amount of interest on capital. For example, Interest allowed on capital is Rs.2,500. Thus, the journal entry will be: Interest on Capital A/c To Capital A/c (Interest on Capital is allowed) Dr. 2,500 2,500
Drawings: When the proprietor withdraws some money from the business for his personal or domestic use, it is known as Drawings. Drawings reduce the amount of Capital. As decrease in Capital is debited, drawings will also be debited. As Cash will be decreased as an asset, it will be credited. For example, Cash withdrawn by the proprietor for his personal use is Rs.4,000. So the journal entry will be: Drawings A/c To Cash A/c CLASSIFICATION OF JOURNAL Journal is a book in which transactions are recorded in chronological order/ date wise, therefore it will be practically difficult to record if the number of transactions is large. To take the benefit of division of labour, journal should be divided into number of journals. Journal can be classified into various special journals and Journal proper. Special journals are also known as special purpose books. Classification of Journal can be explained with the help of the following chart: Dr. 4000 4000
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These journals are explained below: I. Special Journal: Special journals are those journals which are meant for recording all the transactions of a repetitive nature of a particular type. For example, all cash related transactions may be recorded in one book, all credit purchases in another book and so on. These are: (i) Cash Journal/Cash Book: Cash Journal or Cash Book is meant for recording all cash transactions i.e., all cash-receipts and all cash payments of the business. This book he1ps us to know the balance of Cash in hand at any point of time. It is of two types: a) Simple Cash Book: It records only receipts and payments of cash. It is like an ordinary Cash Account. b) Bank Column Cash Book: This type of Cash Book contains one more column on each side for the Bank transactions. This Book provides additional information about the Bank transactions. (ii) Purchases Journal/Purchases Book: This journal is meant for recording all credit purchases of goods only as Cash purchases of goods are recorded in the Cash Book. In this journal, purchases of other things like machinery, typewriter, stationery, etc. are not recorded. Goods means articles meant for trading or the articles in which the business deals. (iii) Sales Journal/Sales Book: This journal is meant for recording all credit sales of goods made by the firm. Cash Sales are recorded in the Cash Book and not in the Sales Book. Credit Sale of items other than the goods dealt in like sale of old furniture, machinery, etc. are not entered in the Sales Journal. (iv) Purchase Returns or Returns Outward Journal: Whenever, the goods are not as per the specifications, the buyer may return these goods to the supplier. These returns are entered in a book known as Purchase Returns Book. It is also known as Returns Outward Journal Book. (v) Sale Returns or Returns Inward Journal: Sometimes, when the goods are sold to the customer and they are not satisfied with the goods, they may return these goods to the businessman. Such returns are known as Sales Returns. Just like Purchase Returns, they are also recorded in a separate Book which is known as Sales Returns or Returns Inward Journal/Book. (vi) Bill Receivables Journal/Book: When goods are sold on credit and the date and period of payment is agreed upon between the seller and the buyer, this is duly signed by both the parties. This written document is called a Bill of exchange. For the seller it is a bill receivable and for the buyer it is a bill payable. Bills Receivable Journal/ Book and Bills Payable journal Book are two journals prepared by a businessman. For example: Pranaya sells goods to Gunakshi on credit for Rs 5000 payable after three months. A document is prepared containing these facts and is duly signed by Pranaya and Gunakshi. For Pranaya it is a Bills Receivable and she will record this transaction in Bill Receivable Book. For Gunakshi it is a Bill Payable and she will record the transaction in her Bill Payable Book. (vii) Bill Payable Journal: This is a journal in which record of those bills is kept on which the firm has
45
given its acceptance for making payments on later dates. Note: Bill books are not now in practice. II. Journal Proper: This journal is meant for recording all such transactions for which no special journal has been maintained in the business. Therefore, in this journal, all such transactions are recorded which do not occur frequently and for these transactions no special journal is required. For example, if Machinery is purchased on credit, it will be recorded in the journal proper, because in the Cash Book, we will record only cash purchases of machinery. Similarly, many other transactions, which do not find their place in the special journals, will be recorded in the General Journal such as: 1) Outstanding expenses Salaries outstanding, Rent outstanding, etc. 2) Prepaid expenses Prepaid Rent, Salaries paid in advance 3) Income received in advance Rent received in advance, interest received in advance, etc. 4) Accrued Incomes Commission yet to be received, interest yet to be received. 5) Interest on Capital 6) Depreciation 7) Credit Purchase and Credit Sale of fixed Assets Machinery, Furniture. 8) Bad debts. 9) Goods taken by the proprietor for personal use. CASH BOOK As the business grows, the number of business transactions increases. Recording all the transactions only in the Journal becomes very inconvenient and cumbersome. It needs to be divided into many books. There are various kinds of books that are maintained where the transactions will be recorded in these books according to their nature, such as Cash book for cash transactions, Sales Book for credit sales; Purchases Book for credit Purchases and so on. Out of these books, Cash Book plays a significant role because it records large number of cash items of a business concern. In this lesson you will learn about Cash Book, its meaning and preparation. CASH BOOK: MEANING AND SIMPLE CASH BOOK On your birthday you got gift in the form of cash from your parents, grand parents and some of your relatives. In the meantime, you got back some money that you have given to your friend as a loan. You spent this money in buying books and clothes. You went to see movies with your friends. You purchased some toys for your niece. As per habit you noted down all receipts and payments in your note book. At the end of the month, you calculated the balance of cash in hand and tallied it with the actual cash balance with you. You may maintain separate book to record these items of receipts and payments, this book is known as Cash Book. Cash Book is a Book in which all cash receipts and cash payments are recorded. It is also one of the books of original entry. It starts with the cash or bank balance at the beginning of the period. In case of new business, there is no cash balance to start with. It is prepared by all organizations. When a cash book is maintained, cash transactions are not recorded in the Journal, and no cash or bank account is required to be maintained in the ledger as Cash Book serves the purpose of Cash Account. Cash Book: Types and Preparation Cash Books may be of the following Types:
Simple Cash Book

46
Bank Column Cash Book Petty Cash Book Simple Cash Book
A Simple Cash Book records only cash receipts and cash payments. It has two sides, namely debit and credit. Cash receipts are recorded on the debit side i.e. left hand side and cash payments are recorded on the credit side i.e. right hand side. In this book there is only one amount column on its debit side and on the credit side. The format of a Simple Cash Book is as under: Format of a Simple Cash Book
Date Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs)
Column-wise explanation is as follows: Date: In this column Year, Month and Date of transactions are recorded in chronological order. Particulars: In this column, the name of the account in respect of which cash has been received or payment has been made is written. Account pertaining to the receipts of cash is recorded on the debit side and those pertaining to cash payments on the credit side. Ledger Folio: In this column, it records the page number of the ledger book on which relevant account is prepared. Amount: In this column, it records the amount received on debit side and cash paid on its credit side. Preparation of Simple Cash Book: Cash Book is in a way, a cash account with debit and credit side and Cash account is an asset account, so the rule followed is Increase in assets to be debited and Decrease in asset is to be credited. This implies that Cash Book is a book where all the receipts in terms of cash are recorded on the debit side of the Cash Book and all the payments in terms of cash are recorded on its credit side. This means: Cash Book records all transactions related to receipts and payments in terms of Cash only. On the debit side in the particulars column, the name of the account, for which cash is received, is recorded. Similarly, on the credit side, the name of account for which cash is paid, is recorded. In the amount column the actual cash paid or received is recorded. At the end of the month, cash book is balanced. The cash book is balanced in the same manner an account is balanced in the ledger. The total of the debit side of the cash book is compared with the total of the credit side and the difference if any is entered on the credit side of the cash book under the particulars column as balance c/d. In case of Simple Cash Book, the total of debit side is always more than the total of the credit side, since the payment can never exceed the available cash. The difference is written in the amount column and total of the both sides of the cash book becomes equal. The closing balance of the credit side becomes the opening balance for the next period and is written as Balance b/d on the Debit side of the Cash Book for the following period. Recording of cash transactions in the Simple Cash Book and its balancing is illustrated with the help of the
47
following illustrations: Illustration 1 Enter the following transactions in the cash book of M/s. Rohan Traders: Date
2005 December December December December December December December December December December December 01 05 08 10 14 18 22 25 28 30 31 Cash in Hand Cash received from Nitu Insurance Premium paid Furniture purchased Sold Goods for cash Purchased Goods from Naman for cash Cash paid to Rohini Sold Goods to Kanika for cash Cash Deposited into Bank Rent paid Salary paid 27,500 12,000 2,000 6,000 16,500 26,000 3,200 18,700 5,000 4,000 7,000
Details
Amount (Rs.)
Solution: Books of M/s. Rohan Traders Cash Book

Dr. Date 2005 Dec.01 Dec.05 Dec.14 Dec.25 Balance b/d Nitu Sales Sales 27,500 12,000 16,500 18,700 Particulars L.F Amount (Rs) Date 2005 Dec.08 Insurance premium Dec.10 Furniture Dec.18 Purchases Dec.22 Rohini Dec.28 Bank A/c Dec.30 Rent Dec.31 Salary Dec.31 Balance c/d 74,700 2006 Jan. 01 Balance b/d 21,500 2,000 6,000 26,000 3,200 5,000 4,000 7,000 21,500 74,700 Particulars L.F Cr. Amount (Rs)
Illustration 2 Prepare Cash Book for the month of April 2006 from the following particulars :
Date 2006 April April April April April April April Details 01 03 06 10 15 17 19 Cash in hand Purchased Goods for cash from Rena Sold Goods to Rohan Wages paid in cash Cash paid to Neena Cash Sales Commission paid
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Amount (Rs.) 17,600 7,500 6,000 500 3,500 10,000 700
April April April April
21 25 28 30
Cash received from Teena Furniture Purchased for cash Rent paid Paid Electricity bill in cash
1,500 1,700 3,000 1,300
Solution:
Cash Book
Dr. Date 2006 April 01 Balance b/d 17 Sales 21 Teena 17,600 10,000 1,500 Particulars L.F. Amount (Rs) Date 2006 April 03 Purchases 10 Wages 15 Neena 19 Commission 25 Furniture 28 Rent 30 Electricity Bill 30 Balance c/d 7,500 500 3,500 700 1,700 3,000 1,300 10,900 29,100 Particulars L.F. Cr. Amount (Rs)
2006 May 01 Balance b/d
29,100 10,900
Note: Credit transactions are not recorded in cash book (i.e. a credit sales to Rohan Rs..6,000 on April 6, 2006) Posting of Cash Book in the Ledger As we know that cash receipts are shown on debit side of Cash Book and the cash payments are shown on the credit side of Cash Book. Account appearing on the debit side of the Cash Book is posted on the credit side in the relevant ledger. Similarly, account appearing on the credit side of Cash Book is posted on the debit side of the relevant ledger. Cash Book in itself is a Cash account, so no separate cash account will be maintained in the ledger. For the posting of various cash book entries in the ledger, refer illustration No. 2. (a) Posting of Debit side of Cash Book: Sales Account
Dr. Date Cr. Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs)
49
Accounting for Managers 2006 April 17 Cash 10,000
Teena Account
Dr. Date Particulars L.F. Amount Date (Rs) 2006 April 21 Cash 1,500 Particulars Cr. L.F. Amount (Rs)
(b) Posting of credit sides of cash Book Purchases account

Dr. Date 2006 April 03 Cash 7,500 Particulars L.F. Amount Date (Rs) Particulars Cr. L.F. Amount (Rs)
Wages Account
Dr. Date 2006 April 10 Cash 500 Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs) Cr.
Neenas Account
Dr. Date 2006 April 10 Cash 3,500 Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs) Cr.
Commission Account
Dr. Date 2006 April 19 Cash 700 Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs) Cr.
Furniture Account
Dr. Date Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs) Cr.
50
Accounting for Managers 2006 April 25 Cash 1,700
Rent Account
Dr. Date 2006 April 28 Cash 3,000 Cr. Particulars L.F. Amount Date (Rs) Particulars L.F. Amount (Rs)
Electricity bills Account

Dr. Date 2006 April 30 Cash 1,300 Particulars L.F. Amount Date (Rs) Particulars (Rs) Cr. L.F. Amount
BANK COLUMN CASH BOOK When the number of bank transactions is large in an organization, it is necessary to have a separate book to record bank transactions. Instead of having a separate book to record bank transactions a column is added on each side of the Simple Cash Book. This type of cash book is known as Bank column Cash Book. All payments into bank are recorded on the debit side and all withdrawals/payments through the bank are recorded on the credit side of the cash book. The format of a Bank column cash Book is as under: Format of a Bank Column Cash Book
Dr Date Cr Particulars L.F Cash (Rs) Bank (Rs) Date Particulars L.F Cash (Rs) Bank (Rs)
Preparation of Bank column cash book: In Bank column Cash Book, the cash transactions are recorded in a similar manner as are recorded in the Simple cash book. The difference is that Bank column cash book records transactions relating to Bank also. There are some special business transactions which need special treatment in the Bank column of the Cash Book: (i) Opening balance (ii) Receipt of cheques (iii) Contra entries (iv) Endorsement of cheque (v) Bank charges The treatment given to these special transactions is as under: (i) Opening Balance: The opening cash and bank balances are recorded on the debit side of the cash book. Sometimes a businessman withdraws excess amount from the bank (from his bank account) and the closing
51
bank balance of a month is a credit balance. This balance amount is called Bank overdraft. It is written on the credit side of the bank column of the cash book as opening balance. For example, if a business firm has Rs.12,000 as cash in hand and Rs.15,000 as overdraft (credit balance) in the bank, it will be recorded as under: Bank Column Cash Book
Dr Particulars Date Balance b/d L.F. Cash (Rs) 12,000 Bank (Rs) Balance b/d Date Particulars L.F Cash (Rs) Cr Bank (Rs) 15,000
(ii) Receipt of Cheques: All cash receipts are entered in the cash column and cheques received in the bank column of Cash Book. If the cheques deposited in bank on the same date, it is entered on the debit side of bank column of the cash book. If the cheques received from customer are not deposited in the bank on same day, they are included in cash and written on the debit side in the cash column of cash book. For example: On May 2, 2006 a cheque received from Tarun for Rs.7,000 and deposited on same date. Bank Column Cash Book
Dr Date Particulars L.F Cash (Rs) 2006 May 2 Tarun 7,000 Bank (Rs) Date Particulars L.F Cash (Rs) Cr Bank (Rs)
In case, this cheque is deposited on May 10, 2006 the entry on May 02, 2006 is as under: Bank Column Cash Book
Dr Date Particulars L.F Cash (Rs) 7,000 Bank (Rs) Date Particulars L.F Cash (Rs) Bank (Rs) Cr
May 2 Tarun
iii) Contra entries: When there is a transaction that relates to both cash and bank, this will be written on one side of Bank Column and on other side of Cash Column, Such transactions are known as Contra entries. In case cash is withdrawn from bank for office use, it is entered on the credit side of bank column and also in the debit side of cash column of the cash Book. In case cash is deposited in the bank, the amount is recorded on the debit side of bank column and on the credit side of cash column of the cash book. The letter C is written in the LF column on both sides against these entries. These entries are not to be posted into ledger. For example: On May 15, 2006 Cash withdrawn from bank for office use is Rs.2,000. In this case the transaction recorded is as under: Bank Column Cash Book
Dr Date Particulars L.F Cash (Rs) Bank (Rs) Date Particulars L.F Cash (Rs) Cr Bank (Rs)
52
Accounting for Managers 2006 May 15 Bank C 2,000 May 15 Cash C 2,000
(iv) Endorsement of Cheque: When cheque received from customer is given to some other party i.e. endorsed, on receipt, it is recorded on the debit side of cash column. On endorsement of cheque, the amount is recorded on the credit side of the cash column of Cash Book. For example, on May 22, 2006 a cheque of Rs.8,000 is received from M/s J.P Traders. On May 27, 2006 it was endorsed in favour of M/s Kapila Traders. In this case the transaction recorded is as under:
Bank Column Cash Book

Dr Date Particulars 2006 May 22 J.P.Traders (Cheque) 8,000 May 27 Kapila Traders (Cheque) 8,000 L.F Cash (Rs) Bank (Rs) Date Particulars Cash Cr L.F Cash Bank (Rs) (Rs)
(v) Bank Charges: If bank charges any interest, outstation cheque collection charges etc. are entered on the credit side of the Bank column of the Cash Book. Similarly, if bank gives interest, collects commission etc., these will be recorded on the debit side on the Bank column Cash Book. Illustration 3 Record the following transactions in the Bank column Cash Book of M/s Time Zone for the month of January 2006. Date Details Amount (Rs.) 2006
January 01 01 03 08 10 15 17 20 22 24 28 Bank Balance Cash Balance Purchased Goods by cheque Goods Sold for cash Purchased Typewriter by Cheque Sold Goods and received Cheque Purchased Stationery by Cheque Cash deposited into bank Paid Cartage Cheque given to Mudit Rent paid by Cheque 32,500 12,300 5,300 9,500 5,400 7,900 (deposited on the same day) 1,000 10,000 500 7,000 3,000
30 Paid Salary Solution:

Dr 53
3,500
Bank Column Cash Book

Cr
Accounting for Managers Date 2006 Jan 1 Balance b/d 8 Sales 15 Sales 20 Cash C 12,300 32,500 Jan 3 Purchases 9,500 7,900 10,000 10 Typewriter 17 Stationery 20 Bank 22 Cartag 24 Mudt 28 Rent 30 Salary 31 Balance c/d 21,800 50,400 Feb1 Balance b/d 7,800 28,700 3,500 7,800 21,800 28,700 50,400 C 10,000 500 7,000 3,000 5,300 5,400 1,000 Particulars L.F Cash (Rs) Bank (Rs) Date Particulars L.F Cash (Rs) Bank (Rs)
Illustration 4 Enter following transactions in the Bank column cash Book of M/s Tea Traders for April 2006
Date 2006 April 01 01 05 10 15 18 20 22 25 30 Details commenced business with Cash Opened Bank account with SBI Purchased Goods by Cash Purchased Office Machine for cash Sold Goods on credit to Manjula and received cheque Cash Sales Manjula Cheque deposited into Bank Paid Wages by cheque Cash withdrawn from Bank for personal use Rent paid by Cheque Amount (Rs.) 60,000 45,000 7,000 5,000 6,000 10,000 6,000 300 3,000 2,000
Solution: Bank Column Cash Book

Dr Date 2006 April 1 Capital A/c 3 Cash 15 Manjula 18 Sales 20 Bank (cheque) C C 6,000 10,000 6,000 60,000 45,000 Particulars L.F Cash (Rs) Bank (Rs) Date Particulars 2006 Apri1 3 Bank 5 Purchases 10 Office Machine 20 Cash 22 Wages 25 Drawings 30 Rent 30 Balance c/d 76,000 May l Balance b/d 13,000 51,000 45,700 (Cheque) C C 45,000 7,000 5,000 6,000 300 3,000 2,000 13,000 45,700 76,000 51,000 L.F Cash (Rs) Cr Bank (Rs)
Illustration 5
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Prepare Bank Column Cash Book from the following information for December 2006 Date 2006 Dec 1 1 4 6 9 13 15 18 22 25 27 29 31 Details Cash in hand Bank Overdraf Paid Wages Cash Sales Cash deposited into Bank Purchased Goods and paid by cheque Cash deposited into Bank Paid Trade Expenses by cheque Rent paid Received Cash from Rahul Commission paid Salary paid Bought Goods by Cheque Amount (Rs.) 10,500 9,500 400 10,000 5,000 6,000 4,000 1,200 2,300 1,500 2,000 3,500 3,000
Solution: Bank Column Cash Book

Dr Date Particulars 2006 Dec 1 6 9 15 25 Balance b/d Sales Cash Cash Rahul C C 1,500 10,500 10,000 5,000 4,000 L.F Cash (Rs) Bank (Rs) Date Particulars 2006 Dec 1 Balance 4 b/d wages 9 Bank 13 Purchases 15 Bank 4,000 C 400 5,000 6,000 9,500 L.F Cash (Rs) Cr Bank (Rs)
Posting of Bank column Cash book in the ledger Like Cash account no separate Bank account will be opened. Account relating to Contra entries on either side of Cash book need not be posted. Other accounts on either side of Bank column of the Cash book will be maintained in the ledger in the same manner which we adopted in the case of Simple cash Book. For the posting of various cash book items in the ledger refer to illustration No.5. (a) Posting of Debit side of Bank column Cash Book
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Sales Account
Dr. Date Particulars L.F Amount (Rs) Date 2006 Dec. 6 Cash 10,000 Particulars L.F Cr. Amount (Rs)
Rahul Account
Dr. Date Particulars L.F Amount (Rs) Date 2006 Dec. 25 Cash 1,500 Particulars L.F Cr. Amount (Rs)
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SPECIAL PURPOSE BOOKS A Journal can be divided into different Journal/Books. So we may get information separately as per the nature of transactions. These journals/books are called Special Purpose Books. PURCHASES AND PURCHASE RETURNS BOOK Purchases (journal) book is also a book of original entry. This book records only Credit purchases of goods in which the firm deals. Cash purchases of goods are recorded in the cash book. Credit purchases of items not for resale are not recorded in the Purchases Book e.g., If a firm deals in Computer parts, any item of furniture purchased on credit is not recorded in the book. They are recorded in another book which is known as journal proper. In case of Purchase of goods on credit, an Invoice or Bill prepared by the supplier is received. It contains information about the date of transaction, details of items purchased at List Price less trade discount, if any, Invoice Number, and the net amount payable. Trade discount and other details of invoice need not be recorded in this book. Format of Purchases Book is as under: Purchase (Journal) Book Date Invoice No. Name of supplier L.F. Amount (Rs)
Column-wise explanation is as follows: Date: In this column Year, Month and Date of transactions are recorded in chronological order. Invoice Number: In this column, Invoice number is entered. Name of Supplier: In this column, the name of the supplier from whom the goods were purchased is written. Ledger Folio: In this column, it records the page number of the ledger book in which supplier account is maintained. Amount: In this column, it records the net amount payable to the supplier. Illustration 1 Record the following transactions for the Month of August 2006 in the Purchases Book of M/s Harsha Electronics: Date 2006 August 5 August 10 August 17 Details Purchased from M/s.Naresh Electronics (Invoice No. 250) 5 Colour T.V @ 12500 per piece. Trade Discount on all items @20%. Bought from M/s Capital Electronics: (Invoice No. 826) 20 Tape Recorders @ R s.1650 per piece; Trade Discount 10% on purchases. Purchased from M/s. East Electronics: (Invoice No. 456) 15 Stereos @ Rs.4000 per piece 2 Color T.V. 14 @ Rs. 10500 per piece; Trade Discount @5%.
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August 25 August 30 Solution:

Date 2006 August 5 August 10 August 17 August 25 August 30
Purchased form M/s. Naresh Electronics: (Invoice No. 294) 10 Small T.V. @ Rs.1,200 per piece 3 Colour T.V. 17 @ Rs.12000 per piece; Trade Discount 10%. Bought from M/s Pavitra Electronics: (Invoice No. 82) 20 Video cassettes @ Rs.150 per piece Net. Books of M/s Harsha Electronics Purchase (Journal) Book
Invoice No. 250 826 456 294 82 Name of supplier L.F. Amount (Rs) 50,000 29,700 76,950 43,200 3,000 2,02,850
Naresh Electronics Capital Electronics East Electronics Naresh Electronics Pavitra Electronics
Posting of Purchases Journal/Book into Ledger Posting from the Purchases Journal/Book is done daily to relevant supplier account on the credit side with the Invoice amount At the end of the month, the grand total of the Purchases Journal/Book is posted to the Debit side of Purchases account in the ledger, and written in the Particulars column Sundries as per Purchases Book. For the posting of Purchase Journal/ Book items into the ledger refer to Illustration No. 1. Books of M/s Harsha Electronics M/s. Naresh Electronics
Dr. Date Particulars L.F. Amount (Rs) Date 2006 Aug.05 Aug.25 Purchases Purchases 50,000 43,200 Particulars L.F. Cr. Amount (Rs)
M/s. Capital Electronics

Dr. Date Particulars L.F. Amount (Rs) Date 2006 Aug.10 Particulars L.F. Cr. Amount (Rs) 29,700
Purchases
M/s.East Electronics
Dr. Date Particulars L.F. Amount (Rs) Date 2006 Aug.17 Purchases 76,950 Particulars L.F. Cr. Amount (Rs)
M/s.Pavitra Electronics
Dr. Cr.
58
Accounting for Managers Date Particulars L.F. Amount (Rs) Date 2006 Aug.30 Particulars L.F. Amount (Rs) 3,000
Purchases
Purchases Account
Dr. Date 2006 Aug.31 Sundries as per Purchases Book 2,02,850 Cr. Particulars L.F. Amount (Rs) Date Particulars L.F. Amount (Rs)
Purchase Returns Journal Purchase Return of goods is recorded in this book. Sometimes Goods purchased from the supplier are returned for various reasons such as goods are not as per our order, or are defective. These goods are returned to the supplier. For this purpose a debit note is prepared and sent to the supplier for making necessary entries. The record of such return of goods in a journal is called Purchase Returns journal, the format of which is as under : Purchase Return (Journal) Book Date Debit Note No. Name of supplier L.F. Amount (Rs)
Column-wise explanation is as follows: Date: In this column Year, Month and Date of transactions are recorded in chronological order. Debit Note Number: In this column, the debit note number is written. Name of supplier: In this column, the Name of the supplier from whom the goods were purchased is written. Ledger Folio: In this column, it records the page number of the ledger book on which supplier account is prepared. Amount: In this column, it records the amount of the total goods returned to the supplier. Illustration 2 The Details submitted by M/s. Harsha Electronics for the month of August 2006 are as under: Date 2006 August 17 Solution:
Date
Details Goods returned to M/s. Capital Electronics vide Debit note No.016/2006. 5 Tape Recorders @ Rs.1650 per piece, Trade Discount @ 10% on purchases Books of M/s Harsha Electronics Purchase Returns (Journal) Book
Debit Note No. Name of supplier 59 L.F. Amount (Rs)
Accounting for Managers 2006 August 17 016 Capital Electronics 7,425 7,425
Posting of Purchase Returns Journal/Book into Ledger The monthly total of Purchase Returns Journal/Book is credited to the Purchase Return account in the ledger. Supplier account to whom the goods are returned is debited with the net amount of goods returned. For the posting of Purchase Returns Journal/Book into the ledger refer illustration no.2. Solution: M/s.Capital Electronics
Dr. Date 2006 Aug. 17 Purchases Returns 7,425 Particulars L.F. Amount Date Particulars (Rs) L.F. Cr. Amount (Rs)
Purchases Returns Account

Dr. Date Particulars L.F. Amount Date (Rs) 2006 Aug.31 Sundries as Per Purchase returns Book Particulars L.F. Cr Amount (Rs)
7,425
Illustration 3 Enter the following transactions in the Special Journal/Books of M/s Mohit Stationery Mart of June 2006, prepare Purchases Book and Purchase Returns Book.
Date Details
2006 June 0l June 12 June 22 June 23 June 24 June 27 June 28 June 30 Purchased from M/s.Seema Stationers as per Invoice No. 031, 50 Paper Rim @ Rs.100 Per Rim. 60 Simple Books @ Rs.20 Each 100 Pkt Pencils @ Rs.50 Per Pkt. Bought from M/s Nisha Paper Mart as per Invoice No. 1202. 200 Files @ Rs. l2 per file, Trade Discount @ 5% on purchases. Purchased from M/s. Bansal Stationers as per Invoice No. 3211. 500 Drawing Paper @ Rs.4 each, 100 Pkt Pencil Color @ Rs. 20 per pkt. Trade Discount 5%. Goods Returned to M/s Nisha paper Mart as per Debit Note No. 002, 50 Files @ 12 each, Trade Discount 5%. Purchased from M/s. Stationery Zone as per Invoice No. 6783. 200 pkt Pens @ Rs. 100 per pkt. Trade Discount 10% Purchased form M/s. Sumit Paper Mart as per Invoice No. 2340. 100 pkt water Color @ Rs. 50 per pkt. 50 pkt Paint Brushes @ Rs. 40 per pkt. Trade Discount 10% Goods Returned to M/s Bansal Stationers as per Debit Note No. 042. 50 Pkt Pencil Color @ Rs. 20 per pkt. Trade Discount 5% Bought from M/s Handa File Trader as per Invoice No. 1321. 200 Plastic Files @ 25 per file, Trade Discount 10%
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Solution: Books of M/s Mohit Stationery Mart Purchase (Journal) Book

Date 2006 June 0l June 12 June 22 June 24 June 27 June 30 031 1202 3211 6783 2340 1321 Seema Bansal Stationery Stationers Stationers Zone 11,200 2,280 3,800 18,000 6,300 4,500 46,080 Nisha Paper Mart Invoice No. Name of supplier L.F. Amount (Rs)
Sumit Paper Mart Handa File Trader
Purchase Returns (Journal) Book

Date 2006 June 22 June 28 002 042 Nisha Paper Mart Bansal Stationers 570 950 1,525 Debit Note No. Name of supplier L.F. Amount (Rs)
SALES JOURNAL/BOOK AND SALES RETURNS JOURNAL Transactions relating to Sale of goods on credit are recorded in the Sales Journal. Cash sales are recorded in the Cash Book. It means that Sales Journal records only credit sales of goods. For example sale of old furniture by a firm which is dealing in computers is not treated as goods and items relating to computer are regarded as goods. In case of sale of goods on credit, one copy of an Invoice or Bill prepared by the vendor firm is given to the customer. It contains information about the date of transaction, details of items sold at List Price less trade discount if any. Invoice Number and the amount receivable or payable by customer. When a customer purchases goods in bulk, the vendor may allow him a discount, which is called trade discount. In the invoice, trade discount is deducted from the list price of the goods and the customer is debited only with the net amount. This discount is quite different from the cash discount, which is allowed for payment within a stipulated period. The format of the Sales Journal/Book is given as under: Sales (Journal) Book Date Invoice No. Name of customer L.F. Amount (Rs)
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Column-wise explanation is as follows: Date: In this column Year, Month and Date of transactions are recorded in chronological order. Invoice No.: In this column, Invoice number is written. Name of Customer: In this column, Name of the Customer is recorded. L.F.: In this Column, page number of the ledger book in which debtors account is maintained. Amount: In this column, the amount of the total goods sold to the customer is recorded. Illustration 4 M/s Furniture Mart wants you to prepare Sales journal for the month ended March 2006, from the following details of sale of goods: Date Details 2006 March 4 Sold on Credit to M/s Mena Traders: Vide Invoice No.213 (a) Two Double Beds @ Rs.7100 each. (b) Five Chairs @ Rs.260 each March 9 Sold on Credit to M/s Kohli Furniture: Vide Invoice No. 278. 5 Tables @ RS.1400 Each March 24 Sold on Credit to M/s Handa Furniture Mart: Vide Invoice No. 302. 4 Sofa Sets @ Rs.18000 each March 30 Sold on Credit to M/s Furniture Traders: Vide Invoice No. 327, 6 Single Beds @ Rs.6,000 each Solution: Books of M/s Furniture Mart Sales (Journal) Book
Date 2006 March 4 March 9 March 24 March 30 213 278 302 327 Mena Traders Kohli Furniture Handa Furniture Mart Furniture Traders 15,500 7,000 72,000 1,30,500 Invoice No. Name of customer L.F. Amount (Rs)
Posting of Sales Journal/Book into Ledger: The monthly total of the Sales Book is posted to the credit side of the Sales account in the ledger. The net amount due from each customer is debited to customer account individually. The customers account is generally posted daily. For the posting of Sales Journal/Book into the ledger refer to Illustration No. 4 Books of M/s Furniture Mart
M/s. Mena Traders Dr. Date Particulars L.F. Amount Date (Rs) 15,500 Particulars Cr. L.F. Amount (Rs)
2006 March 4 Sales
M/s. Kohli Furniture

Dr.
62
Cr.
Date
Particulars
L.F. Amount Date (Rs) 7,000
Particulars
L.F. Amount (Rs)
2006 March 9 Sales
M/s. Handa Furniture Mart

Dr. Date Particulars L.F. Amount Date (Rs) 72,000 Particulars Cr. L.F. Amount (Rs)
2006 March 24 Sales
M/s. Furniture Traders

Dr. Date Particulars L.F. Amount Date (Rs) 36,000 Particulars Cr. L.F. Amount (Rs)
2006 March 30 Sales Dr. Particulars
Sales Account
Cr. Amount (Rs) Particulars Amount (Rs)
Sundries as per Sales Book
Sales Returns Journal/Book Goods returned by the customers are recorded in the Sales returns journal/ book. The Sales returns Book does not record the return of goods sold on cash basis. Goods supplied to the customer (Debtors) may not be as per specifications of the order, or some of the goods may get damaged during transit. The Customer returns these goods. For this purpose a credit note is made in favour of the customer. The format of Sales returns Book is as under: Sales Return (Journal) Book Date Credit Name of customer L.F. Amount Note No. (Rs)
Column-wise explanation is as follows: Date: In this column, Year, Month and Date of transactions are recorded in chronological order. Credit Note No.: In this column, the Credit note number is written. Name of customer: In this column, the Name of the customer is written. Ledger Folio: In this column, it records the page number of the ledger book on which customer account is prepared.
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Amount: In this column, it records the amount of the total goods returned from customer. Illustration 5 The Details submitted by M/s Furniture Mart for the month of March 2006 are as under: Date Details 2006 March 18 Returns from M/s Kohli Furniture: 2 Tables @ Rs.1400 Each, Vide Credit Note No. 019 Solution:
Date
Books of M/s Furniture Mart Sales Returns (Journal) Book

Debit Note No. Name of supplier L.F. Amount (Rs)
2006 March 18 019 Kohli Furniture 2,800 2,800
Posting of Sales Returns Journal/Book into Ledger: The total of the Sales Returns Journal/Book is debited to the Sales Returns account in the ledger. Each customer account from whom the goods are returned is credited with the net amount of the returns. For the posting of Sales Journal/Book into the ledger refer to illustration No.5. Solution: Books of M/s furniture Mart M/s. Kohli Furniture Dr. Cr.
Date Particular L.F. Amount Date (Rs) 2006 March 18 Sales Returns 2,800 Particulars L.F. Amount (Rs)
Sales Return Account Dr.

Date 2006 March 3l Sundries as per Sales Returns Book 2,800 Particulars L.F. Amount Date (Rs) Particulars
Cr.
L.F. Amount (Rs)
Illustration 6 Enter the following transactions in Special Purpose Book of M/s Goel Electronic for the month of August 2006 Date Details 2006 August 4 Sold on Credit to M/s.Tanaya Electronics as per Invoice No. 1248, 12 Set [6"] B.W. T.V. @ Rs.900 per set. 5 set DVD Players @ Rs.2,500 per set Less trade Discount 5% August 10 Sold on Credit to M/s Kanshik Electronic as per Invoice No. 1278, 5 Washing Machines @
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August 12 August 18 August 25 August 28 August 31 Solution:
Rs.4,500 Per Machine, 2 Color T.V. 29" @ Rs. 16,500 Per T.V. Less 10% Trade Discount M/s.Tanaya Electronics returned goods as per credit note no.73, 1 Set DVD Player Rs.2,500 per set, 1 Set [6"] BW T.V. @ Rs.900 per set. Trade Discount allowed @ 5% Sold on Credit to M/s Diamond Electronic as per Invoice No. 1290, 5 Tape Recorders Rs.1,000 each, 10 Two-in One @ Rs.1,800 each Less Trade Discount 5% Sold on Credit to M/s Electronic Zone as per Invoice No. 1299, 5 Water cooling Machines Rs.7,000 each Sold on Credit to M/s North East Electronic as per Invoice No. 1308, 10 Music Systems Rs.3,000 each Less Trade Discount 10% M/s. Electronic Zone returned goods as per credit note no.93, 1 Water cooling Machine Rs.7,000 each Books of M/s Goel Electronic Sales (Journal) Book
Invoice No. Name of customer 1248 Tanaya Electronics Kanshik Electronic Diamond Electronic Electronic Zone North East Electronic L.F. Amount (Rs) 22,135 49,950 35,000 27,000 1,55,935
@ @ @ @ @
Date 2006 August 4
August 10 1278 August 25 August 28 Total 1299 1308
Books of M/s Goel Electronic Sales Returns (Journal) Book

Date Debit Note No. Name of supplier L.F. Amount (Rs)
2006 August 12 August 31 Total 73 93 Tanaya Electronics Electronic Zone 3,230 7,000 10230
Journal Proper A Book maintained to record transactions, which do not find place in Special Journals is known as Journal Proper. Following transactions are recorded in the Journal proper: 1. Opening Entry: In order to open new set of books at the beginning of new accounting year and record therein opening balances of Assets, Liabilities and Capital, one opening entry is made in the Journal. 2. Adjustment Entries: In order to update ledger accounts on accrual basis, entries are made at the end of the accounting period. Entry for Rent outstanding, Prepaid insurance, Depreciation and Commission received in advance is made in the journal. 3. Rectification entries: To rectify any accounting error, entries are to be made in the journal proper.
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4. Transfer entries: Drawing account is transferred to capital account at the end of the accounting year. Expenses accounts and revenue accounts which are not balanced at the time of balancing are opened to record specific transactions. Accounts relating to operation of business such as Sales, Purchases, Opening Stock, Income, Gains and Expenses etc and drawing are closed at the end of the year and their Total/balances are transferred to Trading, Profit and Loss account by making the journal entries. These are also called closing entries. 5. Other entries : In addition to the above mentioned entries recording of the following transaction is done in the journal proper: At the time of a dishonor of a cheque the entry for cancellation of discount received or discount allowed earlier. Purchase/sale of items other than goods dealt- in on credit. Goods withdrawn by the owner for personal use. Goods distributed as samples for sales promotion. Endorsement and dishonor of bills of Exchange. Transaction in respect of consignment and Joint Venture, etc. Loss of goods by fire/theft/spoilage. For recording amounts which have become irrecoverable. Illustration 7 Record the following transactions in the Journal Proper of M/s Nishant Electronics: (i) Purchased on account furniture from M/s Furniture House for Rs.6,000. (ii) Purchased stationery for office use from M/s Stationery Mart Rs.700. (iii) Made full and final payment to M/s Furniture House by Cheque discount allowed by them Rs.200. (iv) Prepaid Insurance Rs. 1,000. (v) Depreciation on Machinery Rs.3,000. (vi) Goods Rs.5,000 withdrawn by the partner for personal use. (vii) Rs.600 not recovered from a debtor. Solution: Books of M/s Nishant Electronics Journal Proper
Date Particulars LF Debit amount (Rs.) 6,000 6,000 700 700 200 200 1,000 1,000
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Credit amount (Rs)
(i)
(ii)
(iii)
(iv)
Furniture A/c Dr. To M/s Furniture House (Purchase of Furniture on Credit) Stationery A/c Dr. To M/s Stationery Mart (Purchase of Stationery on Credit) M/s Furniture House Dr. To Discount Received A/c (Discount received)* Prepaid Insurance A/c Dr. To Insurance Premium A/c (Insurance premium prepaid)
(v)
Depreciation A/c Dr. 3,000 To Machinery A/c 3,000 (Depreciation charged on Machinery) (vi) Partners Capital A/c Dr. 5,000 To Purchases A/c 5,000 (Goods withdrawn for personal use) (vii) Bad Debts A/c Dr. 600 To Debtors A/c 600 (Amount not recovered from Debtors) * Entry for payment to M/s Furniture House by Cheque is made in the Bank column Cash Book.
LEDGER Business transactions are recorded in various special purpose books and journal proper after this the items of same title in different books of accounts need to be brought at one place under one head called an account. There are numerous account titles of items/persons or accounts. All the accounts, if brought in one account book, will be more informative and useful. The account book so maintained is called Ledger. LEDGER: MEANING, IMPORTANCE AND TYPES Ledger is bound book with pages consecutively numbered. It may also be a bundle of sheets. Each transaction affects two accounts. In each account transactions related to that account are recorded. For example, sale of goods taking place number of times in a year will be put under one Account i.e. Sales Account. All the accounts identified on the basis of transactions recorded in different journals/books such as Cash Book, Purchase Book, Sales Book etc. will be opened and maintained in a separate book called Ledger. So a ledger is a book of account; in which all types of accounts relating to assets, liabilities, capital, expenses and revenues are maintained. It is a complete set of accounts of a business enterprise. Thus, from the various journals/Books of a business enterprise, all transactions recorded throughout the accounting year are placed in relevant accounts in the ledger through the process of posting of transactions in the ledger. Thus, posting is the process of transfer of entries from Journal/Special Journal Books to ledger. Features of ledger Ledger is an account book that contains various accounts to which various business transactions of a business enterprise are posted. It is a book of final entry because the transactions that are first entered in the journal or special purpose Books are finally posted in the ledger. It is also called the Principal Book of Accounts. In the ledger all types of accounts relating to assets, liabilities, capital, revenue and expenses are maintained. It is a permanent record of business transactions classified into relevant accounts. It is the reference book of accounting system and is used to classify and summarise transactions to facilitate the preparation of financial statements. Format of a ledger sheet: The format of a ledger sheet is as follows: Title of an Account
Dr. Cr.
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Accounting for Managers Date Particulars JF Amount Rs. Date Particular JF Amount Rs.
You must have noticed that the format of a ledger sheet is similar to that of the format of an Account about which you have already learnt. A full sheet page may be allotted to one account or two or more accounts may be opened on one sheet. It depends upon the number of items related to that account to be posted. Importance of Ledger Ledger is an important book of Account. It contains all the accounts in which all the business transactions of a business enterprise are classified. At the end of the accounting period, each account will contain the entire information of all the transactions relating to it. Following are the advantages of ledger. Knowledge of Business results: Ledger provides detailed information about revenues and expenses at one place. While finding out business results the revenue and expenses are matched with each other. Knowledge of book value of assets: Ledger records every asset separately. Hence, you can get the information about the Book value of any asset whenever you need. Useful for management: The information given in different ledger accounts will help the management in preparing budgets. It also helps the management in keeping the check on the performance of business it is managing. Knowledge of Financial Position: Ledger provides information about assets and liabilities of the business. From this we can judge the financial position and health of the business. Instant Information: The business always needs to know what it owes to others and what the others owe to it. The ledger accounts provide this information at a glance through the account receivables and payables. TYPES OF LEDGER In large scale business organizations, the number of accounts may run into hundreds. It is not always possible for a businessman to accommodate all these accounts in one ledger. They, therefore, maintain more than one ledger. 1. Assets Ledger: It contains accounts relating to assets only e.g. Machinery accounts, Building account, Furniture account, etc. 2. Liabilities Ledger: It contains the accounts of various liabilities e.g. Capital (Owner or partner), Loanac co u n t , Bank overdraft, etc. 3. Revenue Ledger: It contains the revenue accounts e.g. Sales account, Commission earned account, Rent received account, interest received account, etc. 4. Expenses Ledger: It contains the various accounts of expenses incurred, e.g. Wages account, Rent paid account, Electricity charges account, etc. 5. Debtors Ledger: It contains the accounts of the individual trade debtors of the business. Individuals, firms and institutions to whom goods and services are sold on credit by business become the trade debtors of the business. 6. Creditors Ledger: It contains the accounts of the individual trade Creditors of the business. Individuals, firms and institutions from whom a business purchases goods and services on credit are called Trade creditors of the business. 7. General Ledger: It contains all those accounts which are not covered under any of the above types of ledger. For example Landlord A/c, Prepaid insurance A/c etc.
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POSTING OF JOURNAL PROPER INTO LEDGER You know that the purpose of opening an account in the ledger is to bring all related items of this account which might have been recorded in different books of accounts on different dates at one place. The process involved in this exercise is called posting in the ledger. This procedure is adopted for each account. To take the items from the journal to the relevant account in the ledger is called posting of journal. Following procedure is followed for posting of journal to ledger: 1. Identify both the accounts debit and credit of the journal entry. Open the two accounts in the ledger. 2. Post the item in the first account by writing date in the date column, name of the account to be credited in the particulars column and the amount in the amount column of the debit side of the account. 3. Write the page number of the journal from which the item is taken to the ledger in Folio column and write the page number of the ledger from which account is written in L.F. column of the journal. 4. Now take the second Account and give the similar treatment. Write the date in the date column, name of the account in the amount column of the account on its credit side in the ledger. 5. Write page number of journal in the folio column of the ledger and page number of the ledger in the LF of column of the journal Illustration 1 Journalise the following transactions and post them in the ledger 2006 January 1 January 3 January 8 January 8 January 14 January 18 January 20 January 25 Commenced business with cash Paid into bank Purchased goods and paid by cheque Paid for carriage Purchased Goods from K. Murthy Cash Sales Sold Goods to Ashok on credit 50000 25000 15000 500 35000 32000 28000 34200 20000 2000 2500 Journal
Dr. Date 2007 Jan 1 Jan 3 Particulars Cash A/c Dr. To Capital A/c (Commenced business with cash) Bank A/c Dr To cash A/c (Cash paid in the Bank) Furniture A/c Dr To Cash A/c (Purchased furniture for cash) LF Amount (Rs.) 50,000 25,000 Cr Amount (Rs.)
Paid cash to K. Murthy in full settlement January 28 Cash received from Ashok January 31 Paid Rent for the month January 31 Withdrew from bank for private use Solution:
50,000 25,000 5000
Jan 5
5000
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Accounting for Managers Jan 8 Purchases A/c Dr To Bank A/c (Purchased goods and paid by cheque) Jan 8 Carriage A/c Dr To Cash A/c (Cash paid for carriage charges) Jan 14 Purchases A/c Dr To K. Murthy Jan 18 Cash A/c To Sales A/c Jan 20 Ashok To Sales A/c Dr Dr 15000 500 35000 32000 28000 35000 20000 2000 2500
15,000 500
35,000 32000 28000 34200 800 20000 2000 2500
Jan 25 K Murthy Dr To Cash A/c To Discount A/c Jan 28 (CashA/c Cash paid to K. Murthi a discount Dr To Ashok Jan 31 Rent A/c Dr To Cash A/c jan 31 Drawings A/c Dr To Bank A/c
Ledger
Dr. Date Particulars JF
Cash A/c
Amount Rs. Date Particular JF
Cr. Amount Rs.
2006 Jan 1 18 28
Capital A/c Sales Ashok A/c
50000 32000 20000
2006 Jan 3 Jan 5
Bank A/c
25000 5000 500 34200 2000 Cr.
Furniture Jan 8 Carriage Jan 25 K. Murthy Jan 31 Rent A/c
Capital A/c
Amount Rs 2006 Particulars JF
Amount Rs 50000
Jan 1 Cash A/c
Dr. Date 2006 Jan 2
Bank A/c
Particulars JF Amount Rs 2006 Cash A/c 25000 Jan 31 Jan 8 Drawings A/c Purchases A/c 2006 Particulars
Cr. JF Amount Rs 2500 15000
Furniture A/c
Dr. Date Particulars JF Amount Rs. Date Particulars JF Cr. Amount Rs.
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Accounting for Managers 2006 Jan 2
Cash A/c
5000
Purchases A/c
Dr. Date Particulars JF Amount Rs. 2006 Jan 8 Jan 14 Bank A/c K. Murthy 15000 35000 Date Particulars JF Rs. Cr. Amount
Carriage A/c
2006 Jan 8 Cash A/c 500
Dr. Date 2006 Jan 25 Jan 25
K. Murthy A/c
Particulars JF Amount Rs. Date 2006 Cash A/c Discount A/c 34000 800 Jan 14 Purchases A/c Particulars JF
Cr. Amount Rs.
35000
Sales A/c
Dr. Date Particulars JF Amount Rs. Date 2006 Jan 18 Jan 20 Cash A/c Ashok 32000 28000 Particulars JF Cr. Amount Rs.
Dr. Date 2006 Jan 20 Sales A/c Particulars JF
Ashok A/c
Amount Rs. Date 2006 28000 Jan 28 Cash A/c Particulars JF
Cr. Amount Rs.
20000
Rent A/c
Amount Rs. Date Particulars JF
Cr. Amount Rs.
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Accounting for Managers 2006 Jan 3 Cash A/c 2000
Dr. Date 2006 Jan 18 Bank A/c Particulars JF
Drawings A/c
Amount Rs. Date Particulars JF
Cr. Amount Rs.
2500
Posting Scheme: Posting from the journal to the ledger-Debit account
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Posting Scheme: Posting from the Journal to the ledger-Credit Account
BALANCING OF AN ACCOUNT Balancing of an account is the difference between the total of debits and total of credits of an account. If debit side total is more than the credit side, the account shows a debit balance. Similarly, the balance will be credit if the credit side total of an account is more than the debit side total. This process of ascertaining and writing the balance of each account in the ledger is called balancing of an account. An account has two sides: debit and credit. Items by which this account is debited are entered on its debit side with their amounts and items by which this account is credited are entered on its credit side with their amounts so all items related to an account are shown at one place in the ledger. But then you would like to know the net effect of this account i.e. the balance between its debit amount and credit amount. The following steps are to be followed in Balancing the Ledger Account:
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Total up the two sides of an Account on a rough sheet. Determine the difference between the two sides. If the credit side is more than the debit side, the balance calculated is a credit balance.
Put the difference on the Shorter side of the account such that the totals of the two sides of the account are equal. If the difference amount is written on debit side (i.e., if credit. side is bigger) then write as Balance c/d (c/d stands for carried down). If difference is written on the credit side (i.e., if debit side is bigger) then write it as Balance c/d. Finally at the end of the year all the ledger accounts are closed by taking out the balance of each account. The Balance then should be brought down or carried forward to the next period. If the difference was put on credit side as Balance c/d it should now be written on the debit side of the account as Balance b/d (b/d stands for brought down) and vice-a-versa. Thus debit balance will automatically be brought down on the debit side and a credit balance on the credit side. Balancing of different types of Accounts Assets: All asset accounts are balanced. These accounts always have a debit balance. Liabilities: All Liability accounts are balanced. All these accounts have a credit balance. Capital: This account is always balanced and usually has a credit balance. Expense and Revenue: These Accounts are not balanced but are simply totalled up. The debit total of Expense/Loss will show the expense/Loss. In the same manner, credit total of Revenue/Income will show increase in income. At the time of preparing the Trial Balance, the totals of these are taken to the Trial Balance. The Balance of Assets, Liabilities and Capital Accounts will be shown in Balance Sheet whereas total of Expense/Loss and Revenue/Income will be taken to the Trading and Profit and Loss Account. These Accounts are, thus, closed. If two sides of an Account (usually Assets, Liabilities and Capital) are equal there will be no balance. The Account is then simply closed by totalling up of the two sides of the account. Illustration 2 Take ledger accounts of illustration 1 Solution: Ledger Cash A/c
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2006 Jan 1 Capital A/c 18 28 Sales Ashok A/c 50000 32000 20000 Jan 3 Bank A/c Jan 5 Furniture Jan 8 Carriage Jan 25 K. Murthi Jan 31 Rent A/c Jan 31 Balance c/d 102000 Feb 1 Balance b/d 35300 25000 5000 500 34200 2000 35300 102000
Capital A/c
Dr. 2006 Jan 31 Balance c/d 50000 Cr. 2006 Jan 1 Cash A/c Feb 1 Balance b/d 50000 50000
Bank A/c
Dr. 2006 Jan 2 Cash A/c 25000 Jan 8 Purchases A/c Jan 31 Drawings A/c Jan 31 Balance c/d 25000 Feb 1 Balance b/d 7500 15000 2500 7500 25000 Cr.
Furniture A/c
Dr. Date 2006 Jan 1 Cash A/c Feb 1 Balance b/d 5000 5000 Particulars JF Amount Rs. Date 2006 Jan 31 Balance c/d 5000 Particulars JF Cr. Amount Rs.
Purchase A/c
Dr. Date Particulars JF Amount Rs. 15000 35000 50000 Date Particulars JF Cr. Amount Rs. 50000 50000
2006 Jan 8 Bank Jan 14 K. Murthy
Trading A/c
Carriage A/c
Dr. Date Particulars JF Amount Rs. 500 Date Particulars JF Cr. Amount Rs. 500
2006 Jan 8 Cash
Trading A/c 75
Accounting for Managers 500 500
K. Murthy A/c
Dr. Date 2006 Jan 25 Cash Jan 25 Discount 34200 800 35000 Particulars JF Amount Rs. Date 2006 Jan 14 Purchases 35000 35000 Particulars JF Cr. Amount Rs.
Sales A/c
Dr. Date Particulars JF Amount Rs. 60000 60000 Date Particulars JF Cr. Amount Rs. 32000 28000 60000
2006 Jan 1 Trading A/c
2006 Jan 18 Cash Jan 20 Ashok
Ashok A/c
Dr. Date 2006 Jan 20 Sales A/c 28000 28000 Feb 1 Balance b/d 8000 Particulars JF Amount Rs. Date 2006 Jan 28 Cash Jan 31 Balance c/d 20000 8000 28000 Particulars JF Cr. Amount Rs.
Rent A/c Dr.

Date 2006 Cash A/c 2000 2000 Particulars JF Amount Rs. Date 2006 Profit and Loss A/c 2000 2000 Particulars JF
Cr.
Amount Rs.
Drawing A/c Dr.

Date 2006 Jan 10 Bank 2500 Particulars JF Amount Rs. Date 2006 Jan 31 Balance c/d 2500 Particulars JF
Cr.
Amount Rs.
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There are two broad types of accounting information: (1) Financial Accounts: geared toward external users of accounting information (2) Management Accounts: aimed more at internal users of accounting information
Principle of regularity: Regularity can be defined as conformity to enforced rules and laws.
Principle of consistency: This principle states that when a business has once fixed a method for the accounting treatment of an item, it will enter all similar items that follow in exactly the same way. Principle of sincerity: According to this principle, the accounting unit should reflect in good faith the reality of the company's financial status. Principle of the permanence of methods: This principle aims at allowing the coherence and comparison of the financial information published by the company. Principle of non-compensation: One should show the full details of the financial information and not seek to compensate a debt with an asset, a revenue with an expense, etc. (see convention of conservatism) Principle of prudence: This principle aims at showing the reality "as is" : one should not try to make things look prettier than they are. Typically, a revenue should be recorded only when it is certain and a provision should be entered for an expense which is probable. Principle of continuity: When stating financial information, one should assume that the business will not be interrupted. This principle mitigates the principle of prudence: assets do not have to be accounted at their disposable value, but it is accepted that they are at their historical value (see depreciation and going concern). Principle of periodicity: Each accounting entry should be allocated to a given period, and split accordingly if it covers several periods. If a client pre-pays a subscription (or lease, etc.), the given revenue should be split to the entire time-span and not counted for entirely on the date of the transaction. Principle of Full Disclosure/Materiality: All information and values pertaining to the financial position of a business must be disclosed in the records. Principle of Utmost Good Faith: All the information regarding to the firm should be disclosed to the insurer before the insurance policy is taken.
http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles Accounting standards The term standard denotes a discipline, which provides both guidelines and yardsticks for evaluation. As guidelines, accounting standard provides uniform practices and common techniques of accounting. As a general rule, accounting standards are applicable to all corporate enterprises. They are made operative from a date specified in the standard. The Institute of Chartered Accountant of India (ICAI) constituted the Accounting Standards Board (ASB) in April, 1977 for developing accounting standards. However, the International Accounting Standards Committee (IASC) was set up in
1973, with its headquarter in London (U.K.). The Accounting Standards Board is entrusted with the responsibility of formulating standards on significant accounting matters keeping in view the international developments, and legal requirements in India. The main function of the ASB is to identify areas in which uniformity in standards is required and to develop draft standards after discussions with representatives of the Government, public sector undertaking, industries and other agencies. In the initial years the standards are of recommendatory in nature. Once an awareness is created about the benefits and relevance of accounting standards, steps are taken to make the accounting standards mandatory for all companies. In case of non compliance, the companies are required to disclose the reasons for deviations and its financial effect : Till date, the IASC has brought out 40 accounting standards. However, the ICAI has so far issued 29 accounting standards. These are : AS-1 Disclosure of accounting policies (January 1979). This standard deals with the disclosure of significant accounting policies in the financial statements. Valuation of Inventories (June 1981). This standard deals with the principles of valuing inventories for the financial statements.
AS-2
AS-3 (Revised) Cash flow statement (June 1981, Revised in March 1997). This standard deals with the financial statement which summaries for a given period the sources and applications of an enterprise. AS-4 Contingencies and events occurring after the Balance Sheet date (November 1982, Revised in April, 1995) This standard deals with the treatment of contingencies and events occurring after the balance sheet date. AS-5 Net profit or loss for the period, prior period (period before the date of balance sheet) items and changes in accounting policies (November 1982, Revised in February 1997). This standard deals with the treatment in financial statement of prior period and extraordinary items and changes in accounting policies. Depreciation Accounting (November 1982). This standard applies to all depreciable assets. But this standard does not apply to assets in the category of forests, plantations and similar natural resources and wasting assets. Accounting for construction contracts (December 1983, revised in April 2003). This standard deals with accounting for construction contracts in the financial statements of contractors. Accounting for Research and Development (January 1985). This standard deals with the treatment of costs of research and development in financial statements. Revenue Recognition (November 1985). This standard deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise.
AS-6
AS-7
AS-8
AS-9
AS-10 Accounting for fixed assets (November 1991). This standard deals with recognition of fixed assets grouped into various categories, such as land, building, plant and machinery, vehicles, furniture and gifts, goodwill, patents, trading and designs. AS-11 Accounting for the effects of change in foreign exchange Rates. (August 1991 and Revised in 1993). This standard deals with the issues relating to accounting for effect of change in foreign exchange rates. AS-12 Accounting for Government grants (April 1994). This standard deals with the accounting for government grants. AS-13 Accounting for investments (September 1994). This standard deals with accounting aspect concerning investments in the financial statements. These include classification, determination of cost for initial recognition, disposal and re-classification of investment. AS-14 Accounting for amalgamation (October 1994). This standard deals with accounting treatment of any resultant goodwill or reserves in amalgamation of companies. AS-15 Accounting for retirement Benefits in the financial statements of employers (January 1995). This standard deals with accounting for retirement benefits in the financial statements of employers. AS-16 Borrowing Costs (April 2000). This standard deals with the uses involved relating to capitalization of interest on borrowing for purchase of fixed assets. AS-17 Segment reporting (October 2000). This standard applies to companies which have an annual turnover of Rs 50 crores or more. These companies have to present financial statements and consolidated financial statements. AS-18 Related party disclosures (October 2000 revised 1st July 2003). This standard requires certain disclosure which must be made for transactions between the enterprise and related parties. AS-19 Leases (January 2001). This standard deals with the accounting treatment of transactions related to lease agreements. AS-20 Earning per share (April 2001). This standard deals with the presentation and computation of earning per share (EPS). AS-21 Consolidated financial statements (April 2001). This standard deals with the preparation of consolidated financial statements with an intention to provide information about the activities of a group. AS-22 Accounting for taxes on Income (April 2001). This standard deals with determination of the account of tax expenses for the related revenue. AS-23 Accounting for investments in Associates in consolidated financial statements (July 2001). This standard deals with the principles and procedures to be followed for recognising, in the consolidated financial statement.
AS-24 Discontinued operations (February 2002). This standard deals with the principles of discontinuing operations of an enterprise with the activities which are continuing. AS-25 Interim financial reporting (February 2002). This standard deals with the minimum content of interim financial report. AS-26 Intangible Assets (February 2002). This standard prescribed the accounting treatment for intangible assets which are not covered by any other specific accounting standard. AS-27 Financial reporting of interest for joint venture (February 2002). This standard sets principles and procedure for accounting for interest in joint venture. AS-28 Impairment of Assets (2004). This standard prescribed procedure to ensure that an asset is carried at no more than its carrying amount and procedures as to when to recognise an asset as impaired. AS-29 Provision for contingent labilities and contingent assets (2004). This standard deals with measurement and recognition criteria in three areas, namely provisions, contingent liabilities and contingent assets. All the above standards issued by the Accounting Standards Board are recommended for use by companies listed on a recognized stock exchange and other large commercial, industrial and business enterprises in the public and private sectors. http://www.nos.org/srsec320newE/320EL3.pdf The main financial accounting statements The purpose of financial accounting statements is mainly to show the financial position of a business at a particular point in time and to show how that business has performed over a specific period. The three main financial accounting statements that help achieve this aim are: (1) The profit and loss account for the reporting period (2) A balance sheet for the business at the end of the reporting period (3) A cash flow statement for the reporting period A balance sheet shows at a particular point in time what resources are owned by a business ("assets") and what it owes to other parties ("liabilities"). It also shows how much has been invested in the business and what the sources of that investment finance were. It is often helpful to think of a balance sheet as a "snap-shot" of the business - a picture of the financial position of the business at a specific point. Whilst this is a useful picture to have, every time an accounting transaction takes place, the "snap-shot" picture will have changed. By contrast, the profit and loss account provides a perspective on a longer time-period. If the balance sheet is a "digital snap-shot" of the business, then think of the profit and loss account as the "DVD" of the business' activities. The story of what financial transactions took place in a particular period - and (most importantly) what the overall result of those transactions was.
Not surprisingly, the profit and loss account measures "profit". What is profit? Profit is the amount by which sales revenue (also known as "turnover" or "income") exceeds "expenses" (or "costs") for the period being measured. http://tutor2u.net/business/accounts/intro_accounting.htm
Financial Accounting Financial accounting is the periodic reporting of a company's financial position and the results of operations to external parties through financial statements, which ordinarily include the balance sheet (statement of financial condition), income statement (the profit and loss statement, or P&L), and statement of cash flows. A statement of changes in owners' equity is also often prepared. Financial statements are relied upon by suppliers of capital - e.g., shareholders, bondholders and banks - as well as customers, suppliers, government agencies and policymakers. (To learn more on this read, What You Need To Know About Financial Statements.) There's little use in issuing financial statements if each company makes up its own rules about what and how to report. When preparing statements, American companies use U.S. Generally Accepted Accounting Principles, or U.S. GAAP. The primary source of GAAP is the rules published by the FASB and its predecessors; but GAAP also derives from the work done by the SEC and the AICPA, as well standard industry practices. (For more on this see, What is the difference between the IAS and GAAP?) Management Accounting Where financial accounting focuses on external users, management accounting emphasizes the preparation and analysis of accounting information within the organization. According to the Institute of Management Accountants, it includes "designing and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls, and analyzing, synthesizing and aggregating informationto help drive economic value." A primary concern of management accounting is the allocation of costs; indeed, much of what now is considered management accounting used to be called cost accounting. Although a seemingly mundane pursuit, how to measure cost is critical, difficult and controversial. In recent years, management accountants have developed new approaches like activity-based costing (ABC) and target costing, but they continue to debate how best to provide and use cost information for management decision-making. Auditing Auditing is the examination and verification of company accounts and the firm's system of internal control. There is both external and internal auditing. External auditors are independent firms that inspect the accounts of an entity and render an opinion on whether its statements conform to GAAP and present fairly the financial position of the company and the results of operations. In the U.S., four huge firms known as the Big Four PricewaterhouseCoopers, Deloitte Touche Tomatsu, Ernst & Young, and KPMG - dominate the auditing of large corporations and institutions. The group was traditionally known as the Big Eight, contracted to a Big Five through mergers and was reduced to its present number in 2002 with the meltdown of Arthur Andersen in the wake of the Enron scandals. (For further information see, An Inside Look At Internal Auditors.) The external auditor's primary obligation is to users of financial statements outside the organization. The internal
auditor's primary responsibility is to company management. According to the Institute of Internal Auditors (IIA), the internal auditor evaluates the risks the organization faces with respect to governance, operations and information systems. Its mandate is to ensure (a) effective and efficient operations; (b) the reliability and integrity of financial and operational information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts. Tax Accounting Financial accounting is determined by rules that seek to best portray the financial position and results of an entity. Tax accounting, in contrast, is based on laws enacted through a highly political legislative process. In the U.S., tax accounting involves the application of Internal Revenue Service rules at the Federal level and state and city law for the payment of taxes at the local level. Tax accountants help entities minimize their tax payments. Within the corporation, they will also assist financial accountants with determining the accounting for income taxes for financial reporting purposes. Fund Accounting Fund accountingis used for nonprofit entities, including governments and not-for-profit corporations. Rather than seek to make a profit, governments and nonprofits deploy resources to achieve objectives. It is standard practice to distinguish between a general fund and special purpose funds. The general fund is used for day-to-day operations, like paying employees or buying supplies. Special funds are established for specific activities, like building a new wing of a hospital. Segregating resources this way helps the nonprofit maintain control of its resources and measure its success in achieving its various missions. The accounting rules for federal agencies are determined by the Federal Accounting Standards Advisory Board, while at the state and local level the Governmental Accounting Standards Board (GASB) has authority. Forensic Accounting Finally, forensic accounting is the use of accounting in legal matters, including litigation support, investigation and dispute resolution. There are many kinds of forensic accounting engagements: bankruptcy, matrimonial divorce, falsifications and manipulations of accounts or inventories, and so forth. Forensic accountants give investigate and analyze financial evidence, give expert testimony in court and quantify damages. http://www.investopedia.com/university/accounting/accounting2.asp ACCOUNTING INFORMATION SYSTEM An Accounting Information System (AIS) is the system of records a business keeps to maintain its accounting system. This includes the purchase, sales, and other financial processes of the business. The purpose of an AIS is to accumulate data and provide decision makers (investors, creditors, and managers) with information. While this was previously a paper-based process, most businesses now use accounting software. In an electronic financial accounting system, the steps in the accounting cycle are dependent upon the system itself. For example, some systems allow direct journal posting to the various ledgers and others do not. Not All AISs are computerized. Subsystem of a Management Information System (MIS) that processes financial transactions to provide (1) internal reporting to managers for use in planning and controlling current and future operations and for no routine
decision making; (2) external reporting to outside parties such as to stockholders, creditors, and government agencies. Accounting Information Systems (AISs) combine the study and practice of accounting with the design, implementation, and monitoring of information systems. Such systems use modern information technology resources together with traditional accounting controls and methods to provide users the financial information necessary to manage their organizations. Ais Technology Input The input devices commonly associated with AIS include: standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. In addition, many financial systems come "Web-enabled" to allow devices to connect to the World Wide Web. Process Basic processing is achieved through computer systems ranging from individual personal computers to large-scale enterprise servers. However, conceptually, the underlying processing model is still the "double-entry" accounting system initially introduced in the fifteenth century. Output Output devices used include computer displays, impact and nonimpact printers, and electronic communication devices for EDI and e-commerce. The output content may encompass almost any type of financial reports from budgets and tax reports to multinational financial statements. Management Information Systems (MIS) MISs are interactive human/machine systems that support decision making for users both in and out of traditional organizational boundaries. These systems are used to support an organization's daily operational activities; current and future tactical decisions; and overall strategic direction. MISs are made up of several major applications including, but not limited to, the financial and human resources systems. Financial applications make up the heart of an AIS in practice. Modules commonly implemented include: general ledger, payables, procurement/purchasing, receivables, billing, inventory, assets, projects, and budgeting. Human resource applications make up another major part of modern information systems. Modules commonly integrated with the AIS include: human resources, benefits administration, pension administration, payroll, and time and labor reporting. Aisinformation Systems in Context AISs cover all business functions from backbone accounting transaction processing systems to sophisticated financial management planning and processing systems. Financial reporting starts at the operational levels of the organization, where the transaction processing systems capture important business events such as normal production, purchasing, and selling activities. These events (transactions) are classified and summarized for internal decision making and for external financial reporting. Cost accounting systems are used in manufacturing and service environments. These allow organizations to track the costs associated with the production of goods and/or performance of services. In addition, the AIS can provide advanced analyses for improved resource allocation and performance tracking.
Management accounting systems are used to allow organizational planning, monitoring, and control for a variety of activities. This allows managerial-level employees to have access to advanced reporting and statistical analysis. The systems can be used to gather information, to develop various scenarios, and to choose an optimal answer among alternative scenarios. Development The development of an AIS includes five basic phases: planning, analysis, design, implementation, and support. The time period associated with each of these phases can be as short as a few weeks or as long as several years. Planningproject management objectives and techniques The first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the definition of project responsibilities, control requirements, project phases, project budgets, and project deliverables. Analysis The analysis phase is used to both determine and document the accounting and business processes used by the organization. Such processes are redesigned to take advantage of best practices or of the operating characteristics of modern system solutions. Data analysis is a thorough review of the accounting information that is currently being collected by an organization. Current data are then compared to the data that the organization should be using for managerial purposes. This method is used primarily when designing accounting transaction processing systems. Decision analysis is a thorough review of the decisions a manager is responsible for making. The primary decisions that managers are responsible for are identified on an individual basis. Then models are created to support the manager in gathering financial and related information to develop and design alternatives, and to make actionable choices. This method is valuable when decision support is the system's primary objective. Process analysis is a thorough review of the organization's business processes. Organizational processes are identified and segmented into a series of events that either add or change data. These processes can then be modified or reengineered to improve the organization's operations in terms of lowering cost, improving service, improving quality, or improving management information. This method is appropriate when automation or reengineering is the system's primary objective. Design The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow. Logical data storage designs are identified by modeling the relationships among the organization's resources, events, and agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool sets provided by specific software manufacturers. Reporting is the driving force behind an AIS development. If the system analysis and design are successful, the reporting process provides the information that helps drive management decision making. Accounting systems make use of a variety of scheduled and on-demand reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or matrices, to show complex relationships in multiple dimensions.
There are numerous characteristics to consider when defining reporting requirements. The reports must be accessible through the system's interface. They should convey information in a proactive manner. They must be relevant. Accuracy must be maintained. Lastly, reports must meet the information processing (cognitive) style of the audience they are to inform. Reports are of three basic types: A filter report that separates select data from a database, such as a monthly check register; a responsibility report to meet the needs of a specific user, such as a weekly sales report for a regional sales manager; a comparative report to show period differences, percentage breakdowns and variances between actual and budgeted expenditures. An example would be the financial statement analytics showing the expenses from the current year and prior year as a percentage of sales. Screen designs and system interfaces are the primary data capture devices of AISs and are developed through a variety of tools. Storage is achieved through the use of normalized databases that assure functionality and flexibility. Business process maps and flowcharts are used to document the operations of the systems. Modern AISs use specialized databases and processing designed specifically for accounting operations. This means that much of the base processing capabilities come delivered with the accounting or enterprise software. Implementation The implementation phase consists of two primary parts: construction and delivery. Construction includes the selection of hardware, software and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint. Delivery is the process of conducting final system and user acceptance testing; preparing the conversion plan; installing the production database; training the users; and converting all operations to the new system. Tool sets are a variety of application development aids that are vendor-specific and used for customization of delivered systems. They allow the addition of fields and tables to the database, along with ability to create screen and other interfaces for data capture. In addition, they help set accessibility and security levels for adequate internal control within the accounting applications. Security exists in several forms. Physical security of the system must be addressed. In typical AISs the equipment is located in a locked room with access granted only to technicians. Software access controls are set at several levels, depending on the size of the AIS. The first level of security occurs at the network level, which protects the organization's communication systems. Next is the operating system level security, which protects the computing environment. Then, database security is enabled to protect organizational data from theft, corruption, or other forms of damage. Lastly, application security is used to keep unauthorized persons from performing operations within the AIS. Testing is performed at four levels. Stub or unit testing is used to insure the proper operation of individual modifications. Program testing involves the interaction between the individual modification and the program it enhances. System testing is used to determine that the program modifications work within the AIS as a whole. Acceptance testing ensures that the modifications meet user expectations and that the entire AIS performs as designed. Conversion entails the method used to change from an old AIS to a new AIS. There are several methods for achieving this goal. One is to run the new and old systems in parallel for a specified period. A second method is to directly cut over to the new system at a specified point. A third is to phase in the system, either by location or system function. A fourth is to pilot the new system at a specific site before converting the rest of the
organization. Support The support phase has two objectives. The first is to update and maintain the AIS. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting. The second objective of support is to continue development by continuously improving the business through adjustments to the AIS caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications. Attestation AISs change the way internal controls are implemented and the type of audit trails that exist within a modern organization. The lack of traditional forensic evidence, such as paper, necessitates the involvement of accounting professionals in the design of such systems. Periodic involvement of public auditing firms can be used to make sure the AIS is in compliance with current internal control and financial reporting standards. After implementation, the focus of attestation is the review and verification of system operation. This requires adherence to standards such as ISO 9000-3 for software design and development as well as standards for control of information technology. Periodic functional business reviews should be conducted to be sure the AIS remains in compliance with the intended business functions. Quality standards dictate that this review should be done according to a periodic schedule. Enterprise Resource Planning (ERP) ERP systems are large-scale information systems that impact an organization's AIS. These systems permeate all aspects of the organization and require technologies such as client/server and relational databases. Other system types that currently impact AISs are supply chain management (SCM) and customer relationship management (CRM). Traditional AISs recorded financial information and produced financial statements on a periodic basis according to GAAP pronouncements. Modern ERP systems provide a broader view of organizational information, enabling the use of advanced accounting techniques, such as activity-based costing (ABC) and improved managerial reporting using a variety of analytical techniques. http://www.answers.com/topic/accounting-information-system
Accounting information system is a system of records, usually computer based, which combines accounting principles and concepts with the benefits of an information system and which is used to analyze and record business transactions for the purpose to prepare financial statements and provide accounting data to its users. Some accounting information systems are still manual, i.e. accounting records are made with a pen, paper and manual entries into accounting books. How are Such Systems Used? These systems can be customized to meet the needs of a business. For example, information technology
professionals responsible for business processes and information technology professionals responsible for the accounting information system can work together to develop and implement such a system so that it automatically gets information from other sources already in use by the business. Also, the systems can be set up to feature certain functions that are important to the business and eliminate functions minor to the business. Information can be automatically fed, or manually fed into a business accounting information system at whatever pace and however often it is necessary. What are the Benefits of Using Accounting Information System? Businesses use accounting information systems to make their accounting activities easier, quicker, and more accurate, since accounting records are analyzed and financial statements are prepared within the system, which allows to safe time of employees and avoid mistakes. Since many accounting information systems are equipped with error-reducing mechanisms and gather information regarding transactions electronically and automatically, data entry and computing errors are rare. Also, as mentioned above, since such systems are often automatically populated with transaction information, many accounting processes are less cumbersome and time-consuming when using such system. Of course implementation of such system requires investment and time to be spent on the implementation, however future benefits are much higher that the expenses incurred. Also to consider whether business needs accounting information system and what kind of system is required thorough analysis of business and accounting processes has to be made to determine precise requirements. http://ezinearticles.com/?What-is-Accounting-Information-System?&id=2340050 Revenue recognition The Revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are (1) realized or realizable, and are (2) earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting - in contrast - revenues are recognized when cash is received no matter when goods or services are sold. Cash can be received in an earlier or latter period than obligations are met (when goods or services are delivered) and related revenues are recognized that results in the following two types of accounts:

Accrued revenue: Revenue is recognized before cash is received. Deferred revenue: Revenue is recognized after cash is received.
General rule Received advances are not recognized as revenues, but as liabilities (deferred income), until the conditions (1) and (2) are met. (1) Revenues are realized when cash or claims to cash (receivable) are received in exchange for goods or services. Revenues are realizable when assets received in such exchange are readily convertible to cash or claim to cash. (2) Revenues are earned when such goods/services are transferred/rendered. Both, such payment assurance and final delivery completion (with a provision for returns, warranty claims, etc.), are required for revenue recognition.
Recognition of revenue from four types of transactions: 1. Revenues from selling inventory are recognized at the date of sale often interpreted as the date of delivery. 2. Revenues from rendering services are recognized when services are completed and billed. 3. Revenue from permission to use companys assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used. 4. Revenue from selling an asset other than inventory is recognized at the point of sale, when it takes place. In practice, this means that revenue is recognized when an invoice has been sent. Revenue vs. cash timing Accrued revenue (or accrued assets) is an asset such as proceeds from a delivery of goods or services, at which such income item is earned and the related revenue item is recognized, while cash for them is to be received in a latter accounting period, when its amount is deducted from accrued revenues. It shares characteristics with deferred expense (or prepaid expense, or prepayment) with the difference that an asset to be covered latter is cash paid out TO a counterpart for goods or services for be received in a latter period when the obligation to pay is actually incurred, the related expense item is recognized, and the same amount is deducted from prepayments. Deferred revenue (or deferred income) is a liability, such as cash received FROM a counterpart for goods or services are to be delivered in a latter accounting period, when such income item is earned, the related revenue item is recognized, and the deferred revenue is reduced. It shares characteristics with accrued expense with the difference that a liability to be covered latter is an obligation to pay for goods or services received FROM a counterpart, while cash for them is to be paid out in a latter period when its amount is deducted from accrued expenses. For example, a company receives an annual software license fee paid out by a customer upfront on the January 1. However the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year. Advances Advances are not considered to be a sufficient evidence of sale, thus no revenue is recorded until the sale is completed. Advances are considered a deferred income and are recorded as liabilities until the whole price is paid and the delivery made (i.e. matching obligations are incurred). Exceptions Revenues not recognized at delivery The general rule says that revenue from selling inventory is recognized at the point of sale, but there are several exceptions.
Buyback agreements: buyback agreement means that a company sells a product and agrees to buy it back after some time. If buyback price covers all costs of the inventory plus related holding costs, the inventory remains on the sellers books. In plain: there was no sale. Returns: companies which cannot reasonably estimate the amount of future returns and/or have extremely high rates of returns should recognize revenues only when the right to return expires. Those companies which can estimate the number of future returns and have a relatively small return rate can
recognize revenues at the point of sale, but must deduct estimated future returns. Revenues recognized before delivery Long-term contracts This exception primarily deals with long-term contracts such as constructions (buildings, stadiums, bridges, highways, etc.), development of aircraft, weapons, and space exploration hardware. Such contracts must allow the builder (seller) to bill the purchaser at various parts of the project (e.g. every 10 miles of road built).
Percentage-of-completion method says that if (1) the contract clearly specifies the price and payment options with transfer of ownership, (2) the buyer is expected to pay the whole amount and (3) the seller is expected to complete the project, then revenues, costs, and gross profit can be recognized each period based upon the progress of construction (that is, percentage of completion). For example, if during the year, 25% of the building was completed, the builder can recognize 25% of the expected total profit on the contract. This method is preferred. However, expected loss should be recognized fully and immediately due to conservatism constraint. Completed contract method should be used only if percentage-of-completion is not applicable or the contract involves extremely high risks. Under this method, revenues, costs, and gross profit are recognized only after the project is fully completed. Thus, if a company is working only on one project, its income statement will show $0 revenues and $0 construction-related costs until the final year. However, expected loss should be recognized fully and immediately due to conservatism constraint.
Completion of production basis This method allows recognizing revenues even if no sale was made. This applies to agricultural products and minerals because (1) there is a ready market for these products with reasonably assured prices, (2) the units are interchangeable, and (3) selling and distributing does not involve significant costs. Revenues recognized after delivery Sometimes, the collection of receivables involves a high level of risk. If there is a high degree of uncertainty regarding collectibility then a company must defer the recognition of revenue. There are three methods which deal with this situation:

Installment sales method allows recognizing proportional gross profit on cash collection. For example, if a company collected 45% of total product price, it can recognize 45% of total profit on that product. Cost Recovery Method is used when there is an extremely high probability of uncollectble payments. Under this method no profit is recognized until cash collections exceed the sellers cost of the merchandise sold. For example, if a company sold a machine worth $10,000 for $15,000, it can start recording profit only when the buyer pays more than $10,000. In other words, for each dollar collected greater than $10,000 goes towards your anticipated gross profit of $5,000. Deposit Method is used when the company receives cash before sufficient transfer of ownership occurs. Revenue is not recognized because the risks and rewards of ownership have not transferred to the buyer.[1]
http://en.wikipedia.org/wiki/Revenue_recognition What Does Revenue Recognition Mean?
An accounting principle under generally accepted accounting principles (GAAP) that determines the specific conditions under which income becomes realized as revenue. Generally, revenue is recognized only when a specific critical event has occurred and the amount of revenue is measurable. Investopedia explains Revenue Recognition For most businesses, income is recognized as revenue whenever the company delivers or performs its product or service and receives payment for it. However, there are several situations in which exceptions may apply. For example, if a company's business has a very high rate of product returns, revenue should only be recognized after the return period expires. Companies can sometimes play around with revenue recognition to make their financial figures look better. For example, if XYZ Corp. wants to hide the fact that it is having a bad year in sales, it may choose to recognize income that has not yet been collected as revenue in order to boost its sales revenue for the year. http://www.investopedia.com/terms/r/revenuerecognition.asp

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Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

BASIS OF DIFFERE NCE 1 Nature It

2. Objective It is to maintain systematic records of financial transactions. 3. Function

It is to record business transactions. It So its scope is limited.

ROLE OF ACCOUNTANT IN AN ORGANIZATION

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

It records Historical data.

5. Analysis of costs and profits 6. Time period

7. Presentation information 8. Legal Requirement

Accounting for Managers

can and the the

There is no requirement for an independent external review.

Accounting for Managers

12. Recording of data

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

1. Sales Cash Credit 2000 1000 3000 50

2. Interest received 3. Rent received 140 Less for 2007 (40)

Depreciation on machine 2000

Accounting for Managers

Accounting for Managers

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP Principles)

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Accounting for Managers

Old eqn. Effect of Transaction New eqn.

2,70,000 + 1,25,000 + 30,000 =

Effect of [-16,000] Transaction New equation 2,54,000

Accounting for Managers

Accounting for Business Transactions

3,00,000 80,000 45,000 70,000 7,000 5,000 69,000 25,000

Accounting for Managers

50,000 3,000 6,000 35,000 40,000

22,000 + [-25,000] + 4,22,00 + 0 [-50,000] + 3,72,00 + 0 0 + 35,000 50,000 + +

85,000 + 0 + 85,000 + 0 + 85,000 + 0 +

4,00,000 4,28,000 10,000 4,10,000 4,38,000

55,000 + 40,000 4,38,000 28,000

Accounting for Managers

(Left Side) Specimen of T-account Rules of Accounting

Capital (Decrease) Debit (Increase) + Credit

Accounting for Managers

Accounting for Managers

Cash (decrease) Rohit (decrease

Accounting for Managers

Following are the disadvantages:

Accounting for Managers