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STC SUBHASH THAKUR’S CLASSES – 65748080, 27943449 9810190005 - 1 -

1. ACCOUNTING: AN INTRODUCTION

SUMMARY

1. Business Transactions. Business Transactions involve exchange of goods or services for money’s equivalent.

2. Recording to Business Transactions. All business transactions whether perta9in to the owner or to the outsiders, are recorded in the books of business. But owner’s personal transactions are not recorded anywhere in the books of business.

3. Book – Keeping. Book-keeping is an art of keeping a permanent record of business transactions.

4. Accountancy. The whole process of recording, analyzing, classifying, summarizing, interpreting and communicating is known as Accounting.

5. Branch of Accounting. Three important branches of accounting are – Financial, Cost and Management accounting.Financial Accounting. It deals with the maintenance of books of accounts with a view to ascertain the profitability and financial status of the business.Management Accounting. It is concerned with all such accounting information that is useful to management in performing its functions of planning and decision making more effectively.Cost Accounting. This branch of accounting is concerned with ascertainment of costs of various products or services produced by the firm.Both Cost Accounting and Management Accounting are beyond the scope of this book.

6. Objectives of Financial Accounting – Main objectives of financial accounting are: - Providing knowledge of transactions- Finding out balances - Ascertaining Profit or Loss - Depicting financial position.- Providing information to all interested users. - Fulfilling legal obligations.

Functions of Financial Accounting. Important functions of financial accounting are: i. Recording business transactions,

ii. Calculation of business income, iii. Communication of business income and position and iv. Meeting legal obligations.

DEFINITIONS OF ACCOUNTINGi. Accounting may be defined as:

“The art of recording, classifying, summarizing, analyzing and interpreting the business transactions systematically and communicating business results to the interested users”. On analyzing the above definition the following characteristics of accounting emerges:

i. Accounting is the art of recording and classifying different business transaction.ii. Business transactions are described in monetary terms,

iii. In accounting process the business transactions are summarized and analyzed so as to arrive at a meaningful interpretation.

iv. In accounting business results are communicated to the interested users.ii. Write any four important features of business transactions

STC SUBHASH THAKUR’S CLASSES – 65748080, 27943449 9810190005


FEATURES OF BUSINESS TRANSACTIONS

a) Business transactions are business activities.b) Business transactions are monetary in nature.c) In cash business transactions, goods or services are exchanges for money.d) All business transactions are recorded in the books of accounts.

iii. Explain the following: (a) Classifying, (b) summarizing, (c) interpretation. iii. (a) Classification. Under this, all recorded transactions which are of the same type and nature are grouped under one head. For example, cash sales, credit sales and sales to owner, etc. are grouped as total sales. Similarly, cash purchases, credit purchases, etc. are classified as total purchases.(b) Summarizing. Under this, summary of all important business transactions is presented in a format. This summary format shows business profits financial position. These are known as financial statement or Profit and Loss Account and Balance Sheet. (c) Interpretation. With the help of analysis, useful information is obtained from financial statements. The information derived is then interpreted by the users of the informations. Such interpretation help interested parties in taking quick decisions.

Q3. Distinguish between book-keeping and accounting.

DISTINCTION BETWEEN BOOK-KEEPINGAND ACCOUNTING

Basis of distinction

Book-keeping Accounting

1. Objective The objective of Book-keeping is to maintain records of business transactions.

Accounting aims at maintaining business records, calculation of business income, depiction of financial position of business and communication of business results.

2. Function The function of Book-keeping is to record business transactions as and when they take place.

The function of Accounting is the recording, classifying, summarizing, interpreting business transactions and communicating the results.

3. Scope It has a limited scope. It is a part of accounting.

Its scope is wider. Besides Book-keeping, it includes classification, summarization, interpretation and communication.

4. Level of knowledge

It does not require special knowledge. Only elementary knowledge of accounting is sufficient.

In accounting advance and conceptual understanding is required.

5. Basic For recording business transactions, vouchers and other supporting documents are prepared.

Accounting work is carried on from records which are available from book-keeping.



OBJECTIVES FINANCIAL ACCOUNTINGQ.4 Explain the objectives of financial accounting.Ans. The important objectives of financial accounting are as under: 1. Finding out various Balances. Systematic recording of business transactions in

accounting provides vital information about various balances like cash balance, bank balance, etc.

2. Knowledge of Business Transactions. Systematic maintenance of books provides the detail of every transactions.

3. Net Profit or Loss. Summarization in form of Profit and Loss Account shows net profit or loss of business during a specified period.

4. Knowledge of Financial Position. Balance Sheet is prepared to depict financial position of business at a particular date. Position means what the business owns and what owes to others.

5. Information to all Interested Users. After analysis and interpretation, business results are communicated to the interested users.

6. Fulfilling Legal Obligations. Vital accounting information helps in fulfilling legal obligations in time eg. Sales tax, income tax etc.

FUNCTIONS OF FINANCIAL ACCOUNTINGQ.5. Explain the important functions of financial accounting.Ans. Accounting embraces of the following functions:

1. Recording Business transactions. The first function of accounting is to keep record of all business transactions.

2. Calculation of business Income and Ascertaining Financial position. In financial accounting, Profit and loss account is prepared for the calculation of business income and Balance Sheet is prepared for ascertaining financial position of business. Balance Sheet show assets and liabilities of business.

3. Communication of Business Income and Position. The third function of accounting is to communicate the information of business income and financial position to interested parties like proprietors, investors, creditors, employees.

BRANCHES OF ACCOUNTINGQ.6. Explain the different branches of accounting.Ans. Accounting has three main forms of branches, viz., financial accounting, cost accounting and management accounting. These forms of accounting have been developed to serve different objectives.1. Financial Accounting. It is an important branch of accounting. It helps in recording,

classifying and summarizing business transactions. Financial statements are prepared under Financial Accounting. These statements are Profit and Loss Account and Balance Sheet. Profit and Loss account shows the net profit or net loss and Balance Sheet shows the financial position of business. With the help of these statements, business results are communicated periodically to the interested parties or users.

2. Management Accounting. It is that branch of accounting that seeks to furnish accounting information to managers, so that they can take appropriate decisions for better management of business.

3. Cost Accounting. This branch of accounting is concerned with ascertaining of costs of various products or services produced by the firm. Cost accounting helps in control of costs incurred and also determining the selling price of products or services. Cost data provided by cost accounting also helps and guides management in making business decisions



2. ACCOUNTING ASSUMPTIONS

SUMMARY

1. Meaning of Accounting Assumptions. Accounting assumptions are the basic postulates which serve as the basis of recording actual business transactions.

2. Types of Assumptions. There are four accounting assumptions:--Business Entity Assumption.--Money Measurement Assumption.--Going Concern Assumption.--Periodicity Assumption.

Business Entity Assumption. Accounting treats business as distinct and separate from its owner. This is known as business entity assumption. Based on this assumption, proprietors personal transaction which have no relation with business are excluded from business books of accounts.Money Measurement Assumption. According to this assumption, transactions expressed in terms of money are recorded in the books of accounts with their monetary effect.Going Concern Assumption. Going Concern Assumptions assumes that a business will have an indefinite life unless it is likely to be sold or closed down in the near future.Periodicity Assumption. Transactions are recorded in the books of accounts on the assumptions that profits are to be ascertained for a specified period. This is known as Periodicity Assumption of Accounting.

BUSINESS ENTITY ASSUMPTION

Q.1.Give the meaning and any two points of the significance of Business Entity Assumption (About 30-50 words)Ans. In accounting, the entity of business is considered separate from the existence of its owner. Accounts are kept for the entity as distinct from owners.Significance:

(i) This assumption helps in ascertaining the true position of business.(ii) It guides accountants not to record owners personal transactions.

MONEY MEASUREMENT ASSUMPTION

Q.2. State the meaning and significance of money measurement assumption (about 40 words).Ans. In accounting everything is recorded in terms of money. Events or transactions which cannot be expressed in terms of money are not recorded in the books of accounts, even if they are very important or useful for the business. Purchase and sale of goods, payments of expenses and receipt of income are monetary transactions which find place in accounting.Significance:

(iii) This assumption guides accountants what to record and what not to record.

(iv) It helps in recording business transactions uniformly.

SIGNIFICANCE OF GOING CONCERN ASSUMPTION



Q.3. Give any four points which highlights the need and significance of a Going Concern Assumption.Ans. The following points show the significance of going concern assumption:

(i) On the basis of this assumption financial statements are prepared.(ii) It ensures outsiders the continuity of business activities over an

indefinite period of time.(iii) By viewing a business as an on-going concern, the fluctuating market

value of the fixed assets is not taken into consideration.(iv) It is because of this assumption that a business is judged for its

capacity to earn profits in future.

NECESSITY OF ACCOUNTING ASSUMPTIONS

Q.4. Illustrate the necessity of having Accounting Assumptions.Ans. Assumptions are fundamental to the accounting process. While recording business transactions, some problems arise. For example:

(i) Which of the transactions are record able events?(ii) Should owner’s personal transactions be recorded in the books of

business?(iii) When should business results be communicated?

The solution of these problems is based on contain postulates i.e. basic assumptions about the environment. Postulates or assumptions guide the recording o business transactions in the books of accounts. These are foundations of accounting records.

PERIODICITY ASSUMPTION

Q.5. Explain in about 80 words the meaning and significance of periodicity assumption.Ans. Under the going concern assumption it is assumed that a business entity has a reasonable expectation of continuing its business or an indefinitely period of time usually profit is derived by taking the difference between the capital introduced and capital remaining ij the business at the closure or liquidation. But a businessmen does not have patients to wait till liquidation to know his profits. According to this assumption, he wants to break the life of his business into small repetitive periods to find profits. Generally, this interval is taken as one year. Thus at the interval of one year, the businessmen measures his income and studies the financial position of his business. If the gap or interval is very big than it would not help in taking timely corrective steps.

Significance: This assumption is very useful in taking many types of business decisions, e.g.(i) Is it profitable to continue the business?(ii) ]if the profits are encouraging, should the business be expanded?(iii) If the profits are less than the expectations, what timely corrective action should be

taken so that expected profits are earned in future?

3. ACCOUNTING CONCEPTSSUMMARY

1.Meaning of Accounting Concepts. Accounting concepts are universally accepted rules for recording business transactions.



2.Important Accounting Concepts. The following are the important accounting concepts:--Matching Concepts.--Accrual Concept.--Realisation concept.--Dual Aspect Concept.

(i) Matching Concept: Under matching concept, expenses for a period are matched with the revenues of the same period from proper determination of income.

(ii) Accrual Concept: Accrual concept assumes that revenues is realized at the time of sale of goods or services irrespective of when cash is received. Accrual concept also assumes that expenses are recognized at the time the services are received and utilized in the generation of revenue irrespective of the payment made.

(iii) Realisation Concept: According to realisation concept, a revenue is realized when the cash has been received or right to receive cash has been established.

(iv) Dual Aspect Concept: Every transaction in accounting entails twofold effect and this is called dual (or double) aspect or duality of a transaction. The set of records based on this duality is called double entry system of bookkeeping.

In other words, every transaction has an equal impact on assets and liabilities in such a way that assets are always equal to total liabilities.3.Revenue: Revenue means source of inflow of assets like cash or receivables received in sale of goods and services rendered.4.Expense: Expenses are outflows of cash or usage of assets for the purpose of generating revenue in a particular period.5.Profit: Excess of revenue over expenses is called profit or income.6.Loss: Excess of expenses over revenue is called loss.7.Effect of Revenue and Expenses on Capital: Revenue increases capital and expenses decrease it.

REVENUEThis is the amount a business gains as a result of its operations, if a business sells goods to

customers, the gross income resulting from these sales is called revenue. In other words, revenue is an inflow of assets like cash and receivable (right to receive cash) from customers. Any business transaction that generates revenue is classified as revenue transaction. Revenue is related primarily to the sale of goods or supply of services.Example:(i) A firm sells goods for Rs.50, 000 for cash, the revenue for the firm is Rs.50, 000.(ii) A firm sells goods for Rs.150, 000 on credit. The revenue for the firm is Rs.150, 000.(iii) A business owns a building. A part of the building is let out for rent of Rs.4500 per

month. Every month, the business gets revenue of Rs.4500 through rent.

EXPENSESExpenses are outflows of cash or usage of assets, for the purpose of generating revenue in a particular period. In other words, expense is that cost which is incurred to earn revenue.The following are some examples of expenses:

(i) Rs.5000 is paid for the salary of a salesman every month. This is an outflow of cash and hence an expense for the firm.

(ii) A firm pays Rs.200 for postage for a month. This is an outflow of cash and hence an expense for the firm.

(iii) A firm pays Rs.200 as rent for the premises for its business. Thus is an expense for the business, as an outflow of cash.



MATCHING CONCEPT

Q.1.Give the meaning of matching concept and explain its significance in about 50 words.Ans. According to matching concept, we compare the expenses with the revenues for a particular period normally a year, in order to determine the net profit or loss of a business of the period. If revenue exceeds expense, it is called profit or income and in case expense exceeds revenue, it becomes loss. This comparison is generally made for a particular period i.e. year. The significance of this is that it guides how the expense should be compared with revenues for deriving exact profit or loss for a particular period.

ACCRUAL CONCEPTQ.2.State the meaning of accrual concept with examples in accounting in about 50 words.Ans. The meaning of Accrual is something that becomes due specially an amount of money that is yet to be paid or received at the end of the accounting period.According to this concept, revenue is realized at the time of sale of goods or services irrespective of when cash is received and expenses are recognized at the time the services received and utilized in the generation of revenue irrespective of the payment made. For example salaries of Rs.5000 for the month of Fec.1999, paid in Jan 2000, this will be taken into account while determine the income for the year 1999.

REALISATION CONCEPTQ.3.Explain with a suitable example the meaning of realization concept in about 50 words.Ans.According to this concept revenue is to be recorded only on its realization and not before. Realization does not refer to realization in cash only; it refers to inflow of assets in the form of receivables also. Revenue is realized at the time when the goods or services are actually delivered or provided.Example: Vikram sold goods on credit for Rs.25, 000 during the ending 31st Dec.1999, the goods have been delivered in 1999, but the payment was received in March 2000.Vikram’s revenue for the yeara1999 is Rs.25, 000 as the goods have been delivered to the customer in 1999 and the revenue became due in 1999, while received in 2000.

DUAL ASPECT CONCEPTQ.4. Explain the meaning and significance of Dual Aspect Concept with examples in about 50 words.Ans.This is the basic concept of accounting. Dual means two. It signifies that every transaction in accounting has two aspects. For example in the transaction goods purchased for cash, the two aspects are giving of cash and receiving of goods. Similarly each transaction in accounting has two aspects.According to this concept, at any time, the total assets of a business are equal to its total liabilities. In the equation form—Assets=Liabilities.

4. ACCOUNTING CONVENTIONS

SUMMARY



1.Meaning of Accounting Conventions. Accounting conventions are common practices, which are followed in recording and presenting accounting information of a business. They are followed like customs in a society.2.Types of Accounting Conventions. Accounting conventions can be used as follows:

(i) Convention of Consistency(ii) Convention of Full Disclosure.(iii) Convention of Materiality.(iv) Convention of Conservatism.(i) Convention of Consistency: Consistency means continuity in methods or practices. In

accounting context, consistency means followers using the same accounting methods or practices year after year. The financial results become comparable if the convention of consistency is followed.

(ii) Convention of Full Disclosure: this convention implies that accounts must be honestly prepared and all significant information must be disclosed therein.

(iii) Convention of Materiality: According to this convention of materiality only those transactions important facts and items are shown which are useful and material for the business.

(iv) Convention of Conservatism: According to the convention of conservatism, probable losses are recorded whereas profits are not recorded.

On the basis of this convention, provision for bad and doubtful debts, provision for discounts on debtors and provision for various contingent liabilities are made.

ACCOUNTING CONVENTION

Q.1.Define the term accounting convention (in 30-50 words).Ans.Accounting conventions are common practices, which are followed in recording and presenting accounting information of a business. The term convention includes those customs or traditions, which guide the accountant while preparing accounting statements. Conventions help in comparing accounting data of different business units or the same unit for different periods.

Q.2.Explain the meaning and significance of convention of consistency in about 30-50 words.Ans.According to the convention of consistency, the same accounting method should be adopted every year in preparing books of accounts.Consistency serves to eliminate personal bias because the accountant will have to follow consistent rules, practices and conventions year after year.For comparing performance of one accounting period with another is possible only because of convention of consistency. Accordingly, if a business is following straight-line method of charging depreciation of fixed assets than consistently (continuously) same method of depreciation, it should adopt every year.

MATERIAL AND IMMATERIAL TRANSACTIONS

Q.3.Distinguish between material and immaterial transactions of business (30 words).



Ans. The items that are significantly important in recording the details are termed as material facts. The terms that are of less significance are immaterial facts. In accounting, we distinguish between material and immaterial facts otherwise accounting information will be burdened with unimportant details.

CONSERVATISM CONVENTION

Q.4.Explain the meaning and significance of conservatism convention with example (about 100 words)Ans. According to this convention all anticipated or probable losses are recorded as and when they occur and anticipated profits are not recorded. Profits are recorded only when the same have been earned. On account of the convention, the inventory is valued at cost or market price whichever is less. Similarly a provision is made for possible bad and doubtful debts out of current years profits.This convention is a useful tool in situations of uncertainty and doubts.

MATERIALITY CONVENTION

Q.5.Explain the meaning and significance of materiality convention with examples.Ans. According to this convention, all relatively relevant items, the knowledge of which might influence the decision of the users of the financial statements, should be disclosed in the financial statements (profit and loss account and balance sheet). As per this convention immaterial (unimportant) items are either left out or merged with other items.Which transaction items, facts are useful and material for the business is largely a matter of judgment. For instance, accounting and recording of small calculator as an asset in the balance sheet may not be justified due to the excess of cost of recording over the benefits in terms of usefulness of recording and the accounting as asset.

5. ACCOUNTING TERMS

SUMMARY



1. Trading and Non-Trading Items. Trading items are those items, which are purchased by the businessman in order to earn profits. Non-Trading items are purchased for further use and not for sale.

2. Assets. Assets refer to items of value owned by a firm. All tangible and intangible rights carrying future benefits are also assets.

3. Liabilities. Outsider’s claims and proprietor’s claims against the assets of the firm are liabilities. Proprietors claim is called capital. Hence liabilities are obligations or debts payable by the business unit in near future.

4. Revenue. Revenue is inflow of money from the sale of goods and services provided. Amount received from sale of assets or borrowing loan is not revenue.

5. Expense. Expense refers to costs incurred in order to earn revenue.6. Expenditure. Expenditure refers to costs incurred to acquire the assets.

TRADING AND NON-TRADING ITEMS.

Ans. (a) Trading items are those items, which are purchased by the businessman in order to earn profits. In the stationery shop books, note books, pens, pencils, etc. are all trading items.Non-Trading items are purchased for further use and not for sale. For example, for a cloth merchant, different verities of cloth are trading items and racks made to store and display the cloth are non-trading items.(b) State the meaning of the term ‘Asset’ with examples.

ASSETAsset refer to the items of value which are owned by a business firm. The amount

spent by the firm in order to acquire these valuable items is also part of the assets. All tangible items (e.g. furniture, plant and machinery, building etc.) and intangible rights (e.g. copyrights, patent rights etc.) carrying future benefit are also assets. Assets are purchased for business use and are not meant for sale.

(c) Distinguish between Expense and Expenditure:

Expense Expenditure1. It is an amount to earn revenue.

2. Examples – payment made for rent, wages, salaries etc.

3. It is always considered as ‘revenue expense’ because it is always to earn revenue.

1.Expenditure is generally the amount spent for the purchase of assets. It increases the profit earning capacity of the business.

2. Examples. Furniture purchased, building purchased.

3. It is considered as ‘capital expenditure’ unless it is qualified with words like revenue expenditure on rent, salaries etc.

LIABILITY



Q.3 Define the term ‘Liability’. Distinguish between external and internal liabilities. Explain how capital is also a liability (100-150 words).Ans. Liability. Any amount which the firm owes to the proprietors and outsiders is liability for the business unit. Hence, liabilities are the obligations or debts payable by the business unit in future.

Liabilities have been classified as: i. External Liabilities. External liabilities are those liabilities which the business unit

owes to the outsiders for goods purchased on credit, for expenses, or for loans taken. For example – Creditors for Goods. Sundry creditors, Bill payable. Creditors for Expenses. Expenses yet to be paid like outstanding rent, wages etc.Creditors for Loan. Bank loan, partner’s loan.

ii. Internal Liabilities. Internal Liabilities are those liabilities which the business owes to the owners or proprietors. It is the proprietor’s claim against the assets of the business. According to Business Entity Assumption is separate from its owners. Any amount contributed by the owner towards the business concern is a liability for the business concern. This liability is also termed as ‘Capital’. Hence, the owner’s claim against the assets of the business unit is called as capital.

ASSETS

Q.4 Explain current and non-current assets. Give two examples of each (100-150 words).

Ans. Assets are broadly classified into two categories: a) Current Assets. Current Assets are those assets which are held for short time

generally a year’s time only. The balance of these assets usually, keep on changing. For example, the balance of cash in hand may change so many times during the day.Example. Cash in hand. Cash at Bank.

b) Non-current Assets. Non-current assets are those assets which are acquired for long term use in the business. These assets increase the profit earning capacity of the business. Expenditure on these assets is not regular in nature.Examples. Building, Furniture, Machinery etc.

6. ACCOUNTING EQUATION



Ans. (a) The accounting equation is the fundamental equation upon which all double entry accounting is based. Whatever business possesses in the form of assets is financed by proprietor or by outsiders. This equation expresses the equality of assets on one side and the claims of outsiders (liabilities) and owners or proprietors on the other side. In Mathematical form,

Assets = Liabilities + Capital

Whenever an asset is introduced in the business, a corresponding liability also emerges. A business does not have any amount of its own.

(b) How are revenue and expense treated in Accounting Equation? Ans. The effect of expenses and revenue is always on the capital account. Expenses

reduce the capital and revenue increases it.Business expenses reduce the net income of the business. As the net income is the income or proprietor, which is represented by the capital account, so all expenses are deducted from the capital account. On the other hand, revenue increases the net income of the business and hence, it is added to the capital account.

Q.3 “Accounting Equation remains intact under all circumstances”. Justify this statement with the help of examples (100-150 words).

Ans. Accounting equation signifies that the assets of a business are always equal to the total of liabilities and capital.This relationship is expressed as underAssets = Liabilities + Capital “Accounting Equation remains intact under all circumstances”. This statement can be proved through following examples.

Example. Suppose Mr. X starts his business and the following transactions take place:

1. He started business with cash Rs. 5,00,000 have been introduced by Mr. X 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. 5,00,000.

Assets = Capital + Liabilities Cash

Effect to the Rs. 5,00,000 = 0 + Rs. 5,00,000 transaction

This transaction means that Rs. 5,00,000 have been introduced by Mr. X in terms of cash, which is the capital for the business concern. Hence, on one hand, the assets (cash) have been created to the extent of Rs. 5,00,000.

2. He purchased furniture for cash worth Rs. 50,000.

Assets = Capital + Liabilities Cash + Furniture

Old equation 5,00,000 + 0 = 5,00,000 + 0effect of - 50,000 + 50,000 = 0 - 0Transaction New equation 4,50,000 + 50,000 = 5,00,000 + 0

This transaction has its effect only on the assets, as one asset has been purchased against the other. In this transaction, furniture is purchased against cash given. Furniture and cash both are assets. Hence furniture is introduced by Rs. 50,000.



3. He purchased goods for cash Rs. 10,000

Assets = Capital + Liabilities Cash + Furniture + Goods = Capital + Liabilities

Old eq. 4,50,000 + 50,000 + 0 = 5,00,000 + 0Effect of - 10,000 + 0 + 10,000 = 0 + 0the transaction

New equation 4,40,000 + 50,000 + 10,000 = 5,00,000 + 0

Q.4 Prepare Accounting Equation on the basis of the following: (i) Karan started business with cash Rs. 1,60,000.(ii) He purchased furniture for Cash Rs. 16,000.(iii) He paid rent Rs. 16,000.(iv) He purchased goods on credit Rs. 24,000.(v) He sold goods (cost price Rs. 16,000) for Rs. 40,000 for cash.

Q.5 Akshay had the following transactions:

(i) Commenced business with cash(ii) Purchased goods for cash(iii) Salaried paid(iv) Sold goods for cash Rs. 2,00,000 costing (v) Rent outstanding (vi) Purchased goods on credit(vii) Purchased machinery on credit(viii) Purchased motorcycle for personal use(ix) Purchased building for cash.

Rs.2,50,0001,00,000

2,5001,00,000

5001,50,000

25,00025,000

1,00,000

Q. 6 Show the Accounting Equation on the basis of the following transactions: Rs.

(vi) Shivam started business Cash 5,00,000Goods 2,00,000

(vii) He purchased machinery for cash 2,50,000(viii) He purchased goods from Ramesh 1,00,000(ix) He sold goods to Suresh (Cost Rs. 25,000) 30,000(x) Paid insurance premium 5,000(xi) Salary outstanding 10,000(xii) Depreciation of Machinery 25,000(xiii) Interest on Capital 3,000(xiv) Amount withdrawn for personal use 18,000(xv) Interest on drawings 900(xvi) Rent received in advance 1,500(xvii) Cash paid to Ramesh 50,000(xviii) Cash received from Suresh 15,000

Ans.

7. RULES OF ACCOUNTING

SUMMARY



1. Meaning of an Account. An account is a systematic record of transactions, which can be measured in terms of money and related to business during a particular period.

2. Kinds of Accounts. These are (a) Assets, (b) Liabilities, (c) Capital, (d) Revenue, (e) Expenses.

3. Examples of Assets, Liabilities, Expenses, Revenue and Capital:

Assets Liabilities Expenses Revenue Capital Cash in hand,Cash at Bank,Closing Stock,Bills Receivable,Plant & Machinery,Furniture,

Building

Creditors, Short and Long terms Loan,Bank over draft, Bills Payable, Outstanding expensesCommission Received in Advance

Payment of wages, Salaries,Rent,Carriage,Interest etc.

Receipt of interest,Commission, Discount, Dividend etc.

Owner’s investment in his Business and Owner’s withdrawals

4. Rules of accounting:

i. Debit an increase in assets and credit a decrease in assets.ii. Debit a decrease in liability and credit an increase in liability.

iii. Debit a decrease in Capital and credit an increase in Capital.iv. Debit an increase in expenses and credit a decrease in expenses.v. Debit a decrease in revenue and credit an increase in revenue.

The above-mentioned rules can be illustrated through following representation:

(i) (ii) Assets Liabilities

Debit Credit Debit Credit Increases Decreases Decreases Increases

(+) (-) (-) (+) (iii)Capital

Debit Credit Decreases (-) Increases (+)

(iv) (v) Expenses Revenue

Debit Credit Debit Credit Increases Decreases Decreases Increases

(+) (-) (-) (+)

It may be noted that debit means increase in assets as also increase in expenses [Rule (i) & (iv)]. Debit in assets (increase) is favourable to the firm but debit in expenses (increase) is not favourable. Likewise, a credit in liability (increase) is not favourable to a firm but credit in revenue (increase) is favourable [Rule (ii), 9iii) & (iv)].



Thus the use of the words debit and credit should not be understood to mean favourable or unfavorable things. They simply describe the two sides of the different accounts.

Q.4 For each of the following Items, indicate whether the amount should be entered on the debit or credit side of the account:

i. Increase in cash;ii. Decrease in machinery;

iii. Increase in wages;iv. Decrease in interest received;v. Decrease in capital;

vi. Increase in furniture;Ans. (i) Debit, (ii) Credit, (iii) Debit, (iv) Debit, (v) Debit, (vi) Debit.

Q.5 Prepare “T” accounts and enter the following amounts in these accounts:

i. Mohini started business with Rs. 65,000ii. She purchased goods for cash Rs. 19,000

iii. She deposited into bank Rs. 15,000iv. She sold goods for cash Rs. 5,000v. She sold goods on credit to Janak Rs. 5,000

vi. She paid wages Rs. 2,000vii. She received rent Rs. 2,000

viii. She paid salaries Rs. 3,000Ans.

ADDITIONAL QUESTIONS

Q.1 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:

1. Mohan started business with cash2. He purchased goods for cash3. He paid salaries4. He sold goods to Mukesh on credit5. Furniture purchased for cash6. He took loan from State Bank of India 7. He received commission 8. Postage paid 9. He paid rent 10. He received cash from Mukesh

Rs.2,00,000

30,0005,000

20,00010,00020,0001,0001,0003,000

20,000

8. JOURNAL

SUMMARY



1. Meaning of Journal. The book in which all business transactions are recorded date wise in a systematic manner, is known as Journal.In a Journal, all day-to-day business transactions are recorded in a sequence or date wise. The record of any particular transaction in Journal is called Journal Entry. The process of recording is called Journalizing.

Journal is also known as ‘Book of original record’ or ‘Book of prime entry’.2. Format of Journal:

JournalDate Particulars Ledger

Folio (L.F.)

Dr. Amount

(Rs.)

Cr. Amount

(Rs.)

1 2 3 4 5

A Journal contains the following columns: 1. Date; 2. Particulars; 3. Ledger folio; 4. Debit Amount; 5. Credit Amount.

3. Rules of Journalising:

Asset A/c : Increase Dr. : Decrease Cr.Liability A/c : Increase Cr. : Decrease Dr.Capital A/c : Increase Cr. : Decrease Dr.Revenue A/c : Increase Cr. : Decrease Dr.Expenses A/c : Increase Dr. : Decrease Cr.

4. Narration: Brief explanation of a journal entry is known as Narration.5. Compound Entries. A combination of two or more simple journal entries is known as

compound entries.6. Cash Discount and Trade Discount. Cash discount is an allowance given for making

prompt or immediate payment. To encourage payment within the specific time, seller usually allows the buyer a deduction from the amount owed. Cash discount is recorded in the books.Trade discount is usually allowed by a wholesaler to a retailer, when goods are purchase in bulk or in a large quantity. Trade discount is allowed as a deduction from the invoice, hence, no record is made in the books of trade discount while recording the transaction.

7. Adjusting Entries. When the amount paid or received is not properly utilized by the end of an accounting year, this amount is adjusted by way of adjusting entries.

8. Classification of Journal. In big business houses, a journal is classified into various special journals, which records transaction of similar and repetitive nature.

9. Process of Journalising. The following steps lead to the preparation of a journal: 1. Identifying the affected accounts. 2. Recognizing the kinds of affected accounts. 3. Applying the Rules of Debit and Credit.4. After that, the Journal entry will be passed in the Journal with narration.

10. Special Journals: These are used for recording specific transactions: i. Cash Book: for all cash receipts and cash payments.

ii. Purchased Book: for credit purchase of goods. iii. Sales book: for credit sale of goods.



iv. Purchases Return Book: for Returns of (goods) purchased by the firm.v. Sales Returns Book: for returns of sales (goods by customers).

vi. Bills receivable Book: for bills received by the business from debtors. vii. Bills payable book: for bills issued by the business to other parties.

11. General Journal. All those transactions which arise occasionally are recorded in General Journal.

Q.3. The following journal entries have been made by learner. You are required to pass correct entries wherever you think them to be wrong:

i. Proprietor brought capital into businessCapital A/c…………Rs.To Cash A/c

ii. Goods Sold for CashCash A/c……………Rs.To Goods A/c

iii. Machinery Purchased in CashPurchases A/c……….Rs.To Cash A/c

iv. Goods sold to Ram for CashRam A/cTo Sales A/c

v. Salary paid to the ClerkClerk’s A/c…………Rs.To Salary A/c

vi. Rent paid in advance Prepaid Rent A/c Rs.To Cash A/c

i. Cash A/c Dr.To Capital A/c

ii. Machinery A/c Dr.To Cash A/c

iii. Cash A/c Dr.To Sales A/c

iv. Salary A/c Dr.To Cash A/c

v. Prepaid Rent A/c Dr.To Rent A/c

SPECIAL AND GENERAL JOURNALS

Q.4. Distinguish between Special and General Journals. (30-50 words)Ans. I. Special Journal. The term ‘Special Journal’ means a journal which is meant for a special purpose. The following are the various types of special journal:

i. Cash Journal. It is meant for recording all cash transactions.ii. Goods Journal. (a) Purchase Journal, (b) Sales Journal, c) Purchase Return Journal,

(d) Sales Return Journal.iii. Bills Journal. (a) Bills Receivable Journal, (b) Bills Payable Journal. STC SUBHASH THAKUR’S CLASSES – 65748080, 27943449

9810190005


II. General Journal

It is also known as Journal Proper. It is meant for recording all, such transactions for which no special journal has been maintained in the business.

Q.5. Journalise the following transactions:

i. Started business with cash Rs. 3,00,000ii. Bought goods on credit for Rs. 5,00,000 for cash Rs. 2,000

iii. Sold goods for cash Rs. 12,000 and on credit Rs. 8,000

PROCESS OF JOURNALISING

Q.6. Explain the process of journalising the transactions with suitable examples. (100-150 words).

Ans. The following steps lead to the preparation of a journal:

i. Identifying the Affected Accounts. First of all, the affected accounts in a transaction should be identified. For example, if goods worth Rs. 20,000 are sold for cash, then goods and ‘Cash’ are the two affected accounts.

ii. Recognizing the Kinds of Affected Accounts. The kind of the affected accounts should be determined e.g. in the above case, ‘goods’ and ‘Cash’ are both asset accounts.

iii. Applying the Rules of Debit and Credit. Then the rules of ‘debit’ and ‘credit’ should be applied to the affected accounts. These rules are given below:

a) Assets and Expense Account are debited on increases and credited on decreases.b) Liability, Capital and Revenue Accounts are debited on decreases and credited on increase.

On the basis of above rules, following journal entry will be passed for the transaction, which is given in point (i):

Date Particulars L.F. Rs. Rs.

Cash A/c Dr. To Goods/Sales A/c(Being goods sold for cash)

20,00020,000

SUBSIDIARY BOOKS

Q.7. What are Subsidiary Books? Explain briefly any three of them 9100-150 words).Ans. When number of transactions are large, it is practically impossible to record all the transactions through one journal. Journal can be classified or sub-divided into various special journals and General Journal. These Books are also known as Subsidiary Books. This sub-division becomes essential as the size of the business expands.

Classification of Journal can be illustrated with the help of the following chart.

Journal



Special Journal General Journal

Cash Journal Goods Journal Bills Journal

Purchases Sales Purchases SalesJournal Journal Returns Returns

Journal Journal

Simple Two Three Bills Bills Cash Column Column Receivable Payable Journal Cash Cash Journal Journal

Journal JournalSubsidiary Books:

1. Cash Book. A cash book is a special journal, which is used for recording all cash receipts and cash payments. The cash book 9or cash account) has two sides: Debit (left hand) side for recording receipts of money; credit (right hand) side for recording payments of money. Cash book performs dual function of journal as well as ledger. All cash transactions are directly recorded in the cash book so it serves the purpose of Journal. Every page on the cash book displays a cash account hence it is not necessary to open a cash account in the ledger. Thus, the cash book fulfils the functions of a subsidiary book as also a principle book.

Types of Cash Book. The following are the different types of cash book.a) Simple Cash Book. It records only receipts and payments of cash. It is like an

ordinary Cash Account.b) Two (Double) Column Cash Book. This Cash Book has an addition discount

column on each side.c) Three Column Cash Book or Bank Cash Book. This type of Cash Book also

contains one more column on each side for the Bank transactions. This book provides additional information about the Bank Balance.

2. Purchase Book/Purchase Journal. Purchases of goods on credit in which the trader deals is recorded in this journal. For example, if a cloth merchant has purchased cloth on a credit basis, that will be recorded in the purchase book. But if he has purchased furniture on credit, it will not appear in the purchase book since it is a purchase of an asset.

3. Sales Book/Sales Journal – A separate books in maintained to record all credit sales.

Before entering the transactions in the sales book, it should be seen that the transaction satisfies the below mentioned two conditions.

i. It is a sale of articles on credit basis.ii. It is a sale of articles in which a businessman deals.

COMPOUND ENTRIES

Q.8. What are Compound Entries? Explain with suitable examples. (100-150 words)

Ans. 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 passed in the following three ways: i. By debiting one account and crediting more than one account.

ii. By crediting one account and debiting more than one account.iii. By debiting more than one account and also crediting more than one account.

Two simple journal entries are as:

JournalDate Particulars L.F. Dr. Amount

Rs.

Cr. Amount

Rs.

Nov. 25

Salary A/c Dr. To Cash A/c(Being salary paid in Cash)

5,0005,000

Rent A/c Dr. To Cash A/c(Being rent paid in Cash)

2,0002,000

The above two simple entries have been converted into compound journal entry as:

Nov. 25 Salary A/c Dr. 5,000Rent A/c Dr. 2,000

To Cash A/c 7,000(Being payment of Salaryand Rent in Cash)

If we match the first two simple entries with the converted compound entry, we find that there is no difference between them. 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.

ADJUSTING ENTRIES

Q.9. What are Adjusting Entries? Give examples of any two such entries. (100 – 150 words).

Ans. While preparing trading and profit and loss account one point that must be kept in mind is that the expenses and incomes for the full trading period are taken to trading and Profit & Loss account. This means that if an expense has been incurred but not paid during that period, a liability for the unpaid amount should be created before the accounts can be said to show the profit or loss.

All expenses and incomes should properly be adjusted through entries. These entries are called adjusted entries and are passed at the end of accounting period.

Examples of Adjusting Entries:



1. Outstanding Expenses. Those expenses which have incurred and are due but not paid are called outstanding expenses. For example Rs. 5000 p.m. is paid as salary to an employee, but during the year 1999, only Rs. 50,000 are paid as salary. Two months salary i.e. Rs. 10,000 which is due but not paid is called outstanding salary. In order to bring this fact into books of account the following adjusting entry will be passed at the end of the year.

Rs. Rs.Salary A/c Dr. 10,000

To Outstanding Salary A/c 10,000

2. Prepaid or Unexpired Expenses. Certain expenses may be paid in advance i.e. covering period beyond the accounting period. Part of the benefit of the amount paid will be available in the following period. Such a payment is called ‘prepaid expenses’.If, for example, insurance is prepaid for 1999 in 1998 for Rs. 3000 then entry will be made as follows:

Prepaid Insurance A/c Dr. 3,000To Insurance A/c 3,000

(Being insurance paid in advance)

Q.10. Enter the following transactions in Journal.

1996July 1 Sahil & Co. started business with cashJuly 2 Purchased Machinery for cashJuly 6 Bought goods from NareshJuly 14 Paid salariesJuly 15 Sold goods to Rajesh KumarJuly 17 Paid for sundry expensesJuly 18 Cash deposited into BankJuly 19 Received Rent July 22 Paid Naresh by cheque in full settlement of his A/cJuly 24 Withdrawn cash fro personal useJuly 26 Salaries paid in advance to VijayJuly 28 Rajesh Kumar made the payment in full settlement of his A/cJuly 30 Cash sales for the month

1,00,00030,00020,0005,000

15,00085,00020,0006,000

19,2508,0002,500

14,000016,500

Q.11. The following are the transactions of K.Singh & Singh Co. for the month of January. Journalise these transactions:

1997 Jan.1 Capital paid into BankJan.1 Bought stationery for cashJan.2 Bought goods for cashJan.3 Bought postage stamps

3,00,000400

25,00050



Jan.5 Sold goods for cashJan.6 Bought office furniture from Mahendra Bros.Jan.11 Sold goods to JacobJan.12 Received cheque from JacobJan.14 Paid Mahendra Bros. By chequeJan.16 Sold goods to Ramesh & Co.Jan.20 Bought from S.Seth & Bros.Jan.23 Bought goods for cash from S.Narain & Co.Jan.24 Sold goods to P.PrakashJan.26 Ramesh & Co. paid on accountJan.28 Paid S.Seth & Bros. By cheque in full settlement Jan.31 Paid salaries Jan.31 Rent is due to S.Sharma but not yet paid

10,0004,000

12,00012,00040,0005,000

15,00022,00017,0002,500

14,0002,8002,800

Q.2 What would be the journal entries for the following: (i) Depreciation, (ii) Interest on Capital (iii) Drawings.

Ans. (i) Depreciation. Depreciation means decline in the value of fixed asset due to its use. It is a loss for the business. Losses are always debited in accounting, so depreciation is also to be debited. The value of the asset will also be reduced because of depreciation. As a decrease in assets in credited, so the same asset account will be credited. For example, Depreciation on furniture is Rs. 8,000 charged for the year, Journal entry will be:

Depreciation A/c Dr. 8,000To Furniture A/c 8,000

(Being Depreciation charged on furniture)(ii) Interest on Capital. Interest on the businessman’s capital 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. 5,000. Thus, the journal entry will be: Interest on Capital A/c Dr. 5,000

To Capital A/c 5,000(Being interest on Capital allowed)

(iii) Drawings. The withdrawal of goods or cash from the business by the owner for personal use is called ‘Drawings’. Drawings reduce the amount of capital. As decrease in capital is debited, drawings will also be debited and cash will also decrease as an asset, it will be credited.

For example, Cash withdrawn by the proprietor for his personal use Rs. 10,000. So the journal entry will be:

Drawings A/c Dr. 10,000To Cash A/c 10,000

(Being amount withdrawn by the proprietor for his personal use)


unit – i - · web viewhe sold goods to suresh (cost rs. 25,000) 30,000 paid insurance...

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