1n -Accounting ¢ -introduction to JFRS, US- Do you remember the breakfast menu at home, last Sunday? Do you remember the colour and pattem of dress you wore last month on this date? Do you remember the topic discussed in the class last year, same day? Which was the last movie you watched and with whom? These are some simple questions relating to our daily life, yet not so simple to answer. When we can't remember a few transactions that happen in our personal life, how would those running a business remember thousands of transactions that take place in the business over a period of time. This indicates that there is aneed for every person (natural or artificial) to keep a record of transactions as and when they take place. May be, in personal capacity it is not so essential and important to havea record of transactions, but in the context of a business, it is essential to keep a record of all transactions that take place. ‘Assume that a business has not maintained any record of transactions that take place. Then, the owner of the business may not be able to make out the result (j.e., profit or loss) their business. ‘sgiving, the amount payable by those who have purchased goods from the business on credit, the position in which the business is in (i.e, financial position) etc. Many prosperous businesses have been ruined on account of a simple reason that there was no record of transactions that have taken place in business and tracking the progress and direction of business had not been possible. ee Scanned with CamScannerAll these indicate that there isa need to record business transactions. hers to record? Th transactions that take place in business must be recorded in a set of books called ‘Accountiy Books’. Would recording of transactions be sufficient? If transactions are just recorded, it facilitate in knowing the result and position of the business and would not be helpful enough make decisions. So, after recording the transactions in the books of accounts, they need to ba further processed to enable ascertainment of results and position of the business. [The proce that is carried out from recording of transactions till ascertaining results of the business Setting inputs for making business decisions is called ‘Accounting’) Aca Book-keeping is the art of recording business transactions in the books of accounts, in an ercerly manner. As the number of transactions in any business organisation is very huge, they need) to be recorded as and when they take place. The recording of business transactions is done bya Person called the book-kepper. The book-keeper’s work is clerical in nature. } The objects of book-keeping are: (}) Tohave a permanent record of all business transactions, and (ii) To show the effect of each transaction and the combined effect of all transactions on the financial position of the trader i.e., (a) to find out the Profit or loss during a particular period, (b) to ascertain the financial position as on a date, (c) to know how much he owes to others and how much others owe him, (d) to know his incomes, expenses, losses, gains, assets and liabilities (so that he can take rational decisions and informed judgements), : cording to American Institute of certified public Accountants, ¥ Tecording, classifying and summarising in a significant manner and ino and events which are in part atleast, ofa financial character and interpr {Un 1996, the America Accounting Association (AAA) Identifying, Measuring and Communicating economic inforr and decisions by the users of information. From the above definition, it is very clear that accounting means the Process of recording, classifying, summarising and analysing the financial transactions and communicating the result thereof to the persons interested in such information. The process of accounting contains the following steps: * Recording the transactions. + — Classifying the transactions. + Summarising the transactions. + Interpreting the transactions, * — Communication of results. 1. Recording transactions: In accountin: Fecorded. It is usually done on daily basis. The book of prime entry or journal. At the time of into account. “Accounting is the art of rms of Money transacti ‘eting the results thereof defined Accounting as “the process of mation to permit informed Judgements 8, each and every business transactions is properly book used to record such a transaction is known as recording, only the financial aspect alone is taken By Scanned with CamScanner2, Classifying the transactions: It is the process of classifying or grouping the similar items ‘one head. This work is performed after recording the transation in journal. This is done with a view to finding out the net effect of similar transactions in the books of accounts. In accounts, this type of work is technically known as “Posting” or “Ledger Entry”. 3. Summarising the transactions: It refers to presenting the classified data in a readable and understandable form. It involves preparation of financial statements which include Income statement (or Profit and Loss A/c) and Balance Sheet. Income statement (or Profit and Loss A/c) shows the result made by the business enterprise (i.e., profit or loss) for a particular period and Balance Sheet shows the financial position at a given point of time. 4, Interpreting the transactions: The financial data recorded is analysed and interpreted in such a manner that the end users can make a meaningful judgement about the financial condition of the business. 5. Communication of results: Having done all the steps above, the net result should be ‘communicated to the proper person for decision making purpose.) pean . ooo Does esta “Generally, accountancy may be described. 1g the science by means of which all operations, «as far as they are capable of being shown in figures, are accurately recorded and their results ‘ascertained and stated. It isa science by means of which all mercantile and financial transactions, whether in money or money's worth, including operations completed and engagements undertaken to be fulfilled at once or in future, however remote, may be recorded; and this science comprises a knowledge of the methods of preparing statistics, whether relating to finance or toany transactions ‘or circumstances which can be stated by numeration, and of ascertaining and ‘estimating on correct bases, the cost of any operation whether in money, in commodities, in time, in life or in any wasting property” (Encyclopaedia Britannica). N BOOK-KEEPING AND ACCOUNTING” : One of the sub-divisions of accounting is Book-keeping. Book-keeping refers to the recording of financial transactions of a business ina systematic manner so that information on point in relation to them can be quickly obtained. A book-keeper’s job is clerical in nature and can be accomplished with the help of mechanical devices. Book-keeping and accounting are often considered as identical. But they are different from each other. The differences between the two are as follows: ge Book-keeping | Accounting a Book-keeping refers to recording of ‘Accounting on the other hand involves not only business transactions in an orderly recording of transactions but presenting the manner, in the journal or subsidiary same in the form of financial statements and books or posting them to ledger accounts. interpreting the same for forming judgements. Accounting therefore is more analytical. ‘Abook-keeper only maintains information | Accounting begins where book-keeping ends. about a business, in a set of books but an Book-keeping acts as the basis for accounting. accountant analyses the same. | ‘Accounting includes the design of accounting system, preparation of financial statements and audits, development of forecasts, case studies, income tax, works analysis and interpretation of accounting information. Scanned with CamScanner_____ The most important advantages or objectives of accounting is to provide informa interested users to enable them to take business decisions. The primary objectives of a are the following: i ‘ 1. Systematic Recording of Transations: Basic objective of accounting is to systematicaly, record the financial aspects of business transaction ise., book-keeping. These recorded transa are later on classified and summarised logically for the preparation of financial statements. ‘and their analysis and interpretation. 2. Ascertainment of results of above recorded transactions: Accounting prepares Pro and loss account to know the results of business operations for a particular period of time, 1 Fevenues exceed expenses then it is said that business is running profitably but if expenses revenue then it can be said that business is running under loss. The Profit and loss acocunt helps the management and different stakeholders in taking rational decisions. For example, if busi {Snot proved to be remunerative or profitable, the cause of such a state of affair can be investigateq by the management for taking remedial steps. 3. Ascertainment of the financial position ofthe business: Businessman isnot only interested in knowing the results of the business in terms of profit and loss for a particular period but is aley anxious to know that what he owes (liability) to the outsiders and what he owns (assets) on a Boia date. To know this, accountant prepares a financial position statement popularly known ae Balance Sheet. The balance sheet is a statement of assets and liabilities of the business at ¢ Particular point of time and helps in ascertaining the financial health of the business. 4. Providing information to the users for rational decision-making: Accounting as a ‘language of business’ communicates the financial results of an enterprise to various stakeholders by means of financial statements. Accounting aims to meet the information needs of the decision-making and helps them in rational decision-making. 5. To know the solvency position: By preparing the balance sheet, management not only reveals what is owned and owed by the enterprise, but also it gives the information regarding concer ability to meet its liabilities in the short run (liquidity position) and also in the long-run (solvency position) as and when they fall aay) Sa 1e important functions of accounting are as follows: | () Measurement: Accounting measures past performance of the business entity and depicts its current financial position. (b) Forecasting: Accounting helps in forecasting future performance and financial position of the enterprise using past data. (c) Decision-making: Accounting provides relevant information to the users of accounts to aid rational decision-making. (d) Comparison and Evaluation: Accounting assesses performance achieved in relation to targets and discloses information regarding accounting policies and contingent liabilities which Play an important role in predicitng, comparing and evaluating the financial results. (e) Control: Accounting also identifies weaknesses of the operational system and provides feedbacks regarding effectiveness of measures adopted to check such weaknesses. (f) Government Regulation and Taxation: Accounting provides necessary information to the government to exercise control on the entity as well as in collection of tax reine) Scanned with CamScanner(1) eee help a concern in ascertaining its profits or losses, and also the reasons for the (2) a a are maintained every year, a comparison of the results of different years can (3) The amounts due to others and the amounts due from others can be easily known. (4) It provides information regarding the assets and liabilities of the business house which maintain the books. (5) Books act as evidence in a court of law in claiming amounts due from the debtors and for claims made by creditors, (6) Tax liability can be easily settled if proper books of accounts are maintained. (7) Planning, controlling and decision making functions become easy where books of accounts are maintained properly. There are certain misconceptions regarding financial statements. A common man presumes that-an income statement shows the correct income or loss of the enterprise and that a balance sheet depicts a perfectly true and fair picture of financial standing of that enterprise. It must be recognised that the accounting as a language has its own limitations. The figures of profit or loss generated by the accounting process are subject to various constraints within which the accounting works. The assumptions and conventions, on which the accounting is based, become the limitations of accounting. The financial statements are never free from subjectivity factor as these are largely the outcome of personal judgement of the accountant with regard to the adoption of the accounting policies. Following are certain instances: 1. The factors which may be relevant in assessing the worth of the enterprise don’t find place in the accounts as they cannot be measured in terms of money. The Balance sheet cannot reflect the value of certain factors like loyalty and skill of the personnel which may be the most valuable asset of an enterprise these days. 2. Balance Sheet shows the position of the business on the day of its preparation and not on the future date while the users of the accounts are interested in knowing the position of the business in the near future and also in long run and not for the past date. The time it takes for the annual reports to reach the users, business dynamics change. To resolve this, auditors disclose the events occurring after the balance sheet date but before approval of financial statements in the financial reports. 3. Though with the emergence of some accounting standards like AS 11, AS 26, AS 28 etc.,. market/ fair value of assets is taken into consideration but still there remains some subjectivity. Accounting ignores changes in some money factors like inflation etc. 4. There are occasions when accounting principles conflict with each other. 5. Certain accounting estimates depend on the sheer personal judgement of the accountant, €.g., provision for doubtful debts, methods of depreciation adopted, recording certain expenditure as revenue expenditure or capital expenditure, selection of method of valuation of stock-in-hand, period for writing off intangible assets, and the list is quite long. 6. Financial statements only consider those assets which can be expressed in monetary terms. Human resources although the very important asset of the enterprise are not shown in the balance Scanned with CamScanner7. Different accounting policies for the treatment of same item adds to the probabitit _ manipulations. Though Various laws and Accounting Standards, efforts are made to ‘these options to minimum but certainly could not be reduced to one. ‘In nutshell, it can be said that the language of accounting has certain practical limita and, therefore, the financial statements should be interpreted carefully keeping in mind all van factors influencing the true picture. Persons in various walks of life require accounting information relating toa business concern for various purposes. Some of the groups who use the accounting information are: 7 : / 4 Users of accounts 7 1. Owners: The owners provide funds for the operation of a business and they want to know _ whether their funds are being:properly utilised or not. They are also interested in knowing the | Profitability and financial position of their business. The financial statements prepared from time. to time satisfy their curiosity. 2. Management: The information available in the books of accounts is much helpful to the management to plan the future activities of the business. It also helps the management to evaluate the performances and to take corrective actions wherever necessary. 3. Investors: The prospective investors are in need of accounting information to judge the profitability and solvency of the concern in which they are going to invest their savings. 4, Creditors: Creditors, want to know the financial position of a concern before granting credit. The financial statements helps in judging such position. | 5. Debtors: Customers would like to have accounting information relating to profit made and financial position of the business, because the financial position helps them to know the contunity of services till the life time of the product. 3 6. Employees: Employees are interested in knowing the earning capacity of the firm. They make use of the accounting information available from the financial statements to support their claims for better emoluments, bonus, working conditions etc. ! 7. Banks and Financial Institutions: Banks and Financial Institutions expect finanical statements of a concern at least 3 to 5 years when they approache the bank for financial assistance like loans, cash credit, over draft, etc. Scanned with CamScanner_ 8. Government: Government is also interested in the accounts of various business concerns der to impose income tax, sales tax and excise duty. Moreover, such information is much Ipful to the government to frame the economic policies of our nation. iger9: General public: General public will get to know the contribution of business the society in the form of payment of tax, employment generation and contribution to socially beneficial activities. 10. Researchers: At present, research scholars also use the accounting information extensively for the purpose of their research work. Accounting can be classified on the basis of its uses as: 4. Financial accounting. 2. Cost accounting. 3. Management accounting. 4, Financial Accounting: Finalisation of accounts, preparation of financial statements, communication of accounting information to the users and interpretation thereof are the subject matter of financial accounting. The main aim of financial accounting is to ascertain the operational efficiency of the concern with the help of following statements. (a) Statement of Profit and loss account and (b) Balance Sheet. i 2. Cost Accounting: This system deals with classification, recording, allocation and summarisation of cost of products or operations. It includes (a) design costing system, its operation, (b) cost control, cost forecasting, standard costing and budgetary control. 3. Management Accounting: A system of accounting which provides information to the management to discharge its managerial function is known as management accounting. R.N.Anthony gives a imple definition; Management accounting is concemed with accounting information that is tseful to management. Information provided by such account is helpful to the management in formulating major policies and managing the day-to-day affairs of the business. Data collected from financial accounting and cost accounting are processed and supplied to the management. Normally, this work is done by the management accountant. mm a The accounting cycle refers to the complete sequence of accounting procedure which is frequently repeated in the same direction during an accounting period. The sequence is: (1) Recording of transactions in the journal or subsidiary books. (2) Posting them to varioiss ledger accounts. 3) Preparing the Trial Balance from the ledger accounts. (4) Preparing Final Accounts. After one year or a period for which the accounting records are maintained, the journal, ledger etc. are prepared again. Thus, the cycle goes on. ING TS 1. Cash basis 2. Mercantile basis or Accrual basis. ~— wrihich % wt te Scanned with CamScanner|. Cash Basis of Accounting: Cash basis of accounting is a method recording tr. _ by which Tevenues, cost, assets and liabilities are reflected in the accounts for the peri which actual ayments are made. Thus, accrued income i incomes earned but not receiv or outstanding expenses i.e., expenses incurred but not paid are completely ignored in the books of accounts. 2. Mercantile Basis or Accrual Basis; Accrual basis of accounting is a method of recorgi transactions by which revenue, cash, assets and liabilities are reflected in the accounts for ‘period in which they accrue irrespective of actual receipts or payment of cash. Under a method, there may be prepaid/outstanding expenses and accrued/unaccrued incomes in the | books of accounts (in the final accounts). | Normally, business enterprises i.e., Trading and manufacturing running their business on Profit motive, find out their Profits or losses during the year on accrual basis. On the other hand, professionals (Non-trading concerns) like Doctors, Lawyers, Chartered Accountants ete, have mostly cash transactions and they find out profit and loss on cash basis. 5 5 RECT a re 1. Transaction Transaction means transfer of money or money’s worth from one person to another. In other words, it is an event that changes the organizations financial position and / or its earnings. For example, when you deposit cash into bank, your cash balance reduces and bank balance increases, Similarly when you sell goods for cash, your cash balance increases and your stock reduces. Transactions can be classified as follows: - * Cash Transaction: A transaction where the. Payment is made immediately or the receipt is received immediately is called cash transaction. * Credit Transaction: A transaction where the payment is postponed or the receipt fs received at a future date is called credit transaction. 2. Capital Gt refers to the investment made by owners of a business enterprise (Proprietor, in case of Sole Trading Concerns, Partners in case of Partnership Firm, Shareholders in case of Joint Stock Companies, members in case of Hindu Undivided Families etc.) in any form either in Cash or in kind. 3. Drawings (Itrefers to the money or any other item if the business used or withdrawn by the owner's for personal purposes.’ 4. Goods a It refers to articles, commodities, things etc., with which business deals with. For example, for a stationery business all stationery items (i.e., books, pens, pencils, crayons, erasers, Papers etc.) are goods, for a furniture dealer, all furniture items (i.e., chairs, tables, cupboards etc.) are goods. In otherwards any thing which is purchased for re-sales is Called goods 5. Purchases (Itrefers to ‘acquisition of goods’. Other than goods when something else are acquired, the term “purchases” is not used for accounting Purposes. ine ie Scanned with CamScanner6. Purchase Returns When the goods purchased are returned to the supplier of goods on account of damage, defect, excess supply etc., it is termed as ‘purchase returns’. 7. Cash Purchases ; (acquisition of goods for immediate payment of cash is termed as ‘cash purchases’) 4. Credit Purchases (Acquisition of goods for later payment of money is termed as “credit, purchases») 9. Sales % ([trefers to “disposal of goods” for a consideration. ) 10. Sales Returns When the goods sold are returned back by customer because of damage, defect, excess supply etc., it is termed as “Sales Returns”) 11. Cash Sales Disposal § goods for immediate receipt of cash is called “Cash Sales”. It is also called as “Till Takings 12. Credit Sales isposal of goods for later receipt of consideration is termed as “credit sales”.) 13. Debtor oo who owes anything (money or any other item) to the business enterprise is a Debtor. 14, Trade Debtor Grade debtor is a person who owes to the business enterprise on account of a trade transaction (i.e., sale) between the enterprise and the person. ) 15, Loan Debtor (Loan Debtor is a person who owes to the business on account of a loan transaction between the enterprise and the person. For examples, ABC Ltd., gives a loan of “10,000 to Mr. Y. Then, MrY isa loan debtor to ABC Ltd. 16. Debt Ghe amount or worth of the item owed by a Debtor to the business enterprise is called Debt. Debt is of three types viz., Good Debt, Bad Debt and Doubtful Debt. 17. Good Debt (it refers to the debt which is certainly recoverable. 18. Bad Debt (it refers to the debt which is certainly irrecoverable. 19, Doubtful Debt It refers to the debt, the recovery of which is uncertain. ) Scanned with CamScanner| “What a business has to receive” are called Assets. For ey | , Furniture, Machinery etc., which a business has are Assets, » amount due from Debtor) is also an Asset. Assets can be classified into the folio (a) Tangible and Intangible.» (b) Fixed and current. (c) Monetary and non-monetary. »y 20. Tangible Assets {Tanetbte Assets are those which have physical existence. Examples: land, building, plant and machinery, furniture and fixture, cash in hand et | 21. co Assets Intangible Assets are those which have no physical existence like goodwill, copy rights, trade marks, patent rights, etc.) 22. Fixed Assets Fixed assets are those which are meant for long-term use and whose quantity does not vary very frequently. Examples: Land, building, furniture, fixture, plant, machinery etc.) 23. Current Assets om flootinny assity (These assets are also known as cirdulating or fluctuating assets. Current Assets are those which are meant for short-term use and whose quantity vary very ease Examples: Cash in hand, cash at bank, trade debt (i.e., Debtors), stock-in- trade etc. 24. Monetary Assets or Liquid Assets ‘Assets whose reliable value is the same as value recorded in the books, are monetary assets. Examples: cash in hand, cash at bank, accounts receivable (i.e., Debtors) etc.) 25. Non-Monetary Assets ‘Assets whose realisable value is not the same as the value recorded in the books, are non-monetary assets. Example: Land, buildings, machinery, furniture etc. 26. Fictitious Assets feictitious Assets are those which do not have real value and they are not the real assets They are called assets on legal and technical ground. They are deferred revenue expenditures they are written off in the future. For example, loss on issue of shares and preliminary expen 27. Wasting Assets Wasting Assets are those whose value declines with the passage of time. For exam mines or assets which are taken on lease. ) ple 28. Investments (they refer to enterprise usually, | assets outside the business, i.e., assets not used or required for the busines they are invested into for earning something on surplus money available or Scanned with CamScannergrow the wealth of the organisation. They may be in the form of Bullion (i.e., Gold, Silveretc.), Financial Assets (i.e., Shares, Debentures, Mutual Funds etc.) or Real Assets (j.e., Land and Buildings, Art works, Paintings, Books etc. 29. Goodwill (it refers to the good name and reputation of a business enterprise expressed in monetary yalue. It is over and above of the actual value of Assets and Liability of an enterprises.) 30. Depreciation IG refers to an arrangement made for replacing existing fixed assets, by setting aside a portion of profits each year. Every asset has an useful life. That is, no asset can be used forever on account of its wear and tear or on account of it getting obsolete due to technological advancements. By the end of the useful life of the existing fixed asset, the business must replace it with a new fixed asset to enable continuance of the operations of business. The arrangement for such replacement must be made from the time of acquiring a fixed asset. The usual arrangement is to set aside a portion of profits each year till the end of useful life of the existing fixed asset. The profits so set aside is called Depreciation. )) 34. peter (What a business has to pay” are called liabilities. So, a loan borrowed by a business enterprise, amount due to creditors, bank overdraft etc., are liabilities. Liabilities can be classified into the following types: (a) Fixed or long-term liabilities. (b) Current or short-term liabilities. 32. os of Long-term Liabilities They refer to liabilities which are repayable over a long period of time, i.e., beyond one. accounting period. Examples: Long-term loans borrowed from Banks/Financial Institutions etc. ) 33. Current or Short-term Liabilities Ghey refer to liabilities which are repayable within a short period of time, i.e., within one accounting period. Examples: Bank overdraft, Accounts payable (i.e., creditors and Bills payable) etc) 35, Creditors for Expenses €xpenses of accounting period but not paid. These expenses may be outstanding salaries, rent due, wages unpaid, etc. It is a current liability of the business. ) 36. Accounting period Gtrefers to the period for which the entire accounting process is carried out. Usually, it is fora period of one year. In India, the accounting period is the financial year which commences on the 1st of April of each year and ends on 31st of March of the following year. 37. Stock 6 refers to the unused and unsold goods lying with the business at any given point of time.) A Scanned with CamScanner38. Opening Stock 4 (it refers to the stock with the business at the beginning of the accounting period, J 39. Closing Stock (ht refers to the stock with the business at the end of the accounting period) 40. Expense (it refers to the amount spent by business enterprise, the benefit of which accrues for short-period of time. It is also called Revenue Expenditure or Revenue Expense. Examples. Salaries, Rent, Telephone expenses, etc.) 41. Expenditure It refers to the amount spent by business enterprise, the benefit of which accrue for long period of time, i-e., over one accounting period. It is also called capital expenditure! Example: Purchase of an Asset.) 42. Revenue Receipt \t refers to the receipt of the business which are recurring in nature and its availability j for a shorter duration. Example: Sales Revenue, rent received, commission received, intere received, etc:) 43. Capital Receipts (it refers to the receipt of the business which are non-recurring in nature and its availabilit is for a longer period. Example: Borrowing of loan from Banks, issue of shares, issue of debentures;) 44, Profits Profit refers to excess of Revenue Receipts over Revenue Expenses. 45. Loss (Loss refers to excess of revenue expenses over revenue receipts. 46. Credit Credit refers to making an entry on the right hand side of an account. 47. Debit Debit refers to making an entry on the left hand side of an account. 48. Distinctions between Goods and Assets Goods refers to articles, commodities, things etc., with which business deals with. example, for a stationery business all stationery items (i.e., books, pens, pencils, crayo erasers, papers etc.) are goods, for a furniture dealer, all furniture items (i-e., chairs, tabl cupboards etc.) are goods. In otherwards any thing which is purchased for re-sales is call goods. = Assets refers to the propertories that a business has and a business has to receive. Ft example, Land and Buildings, Furniture, Machinery etc., which a business has are Assets. D (i.e., the amount due from Debtor) is also an Asset. Scanned with CamScanner49. Invoice Invoice is a document supplied along with goods when the goods are sold on credit or when the goods are purchased on credit. 50. Debit Note Debit Note is a note or a document issued by the business enterprise to the supplier. It is sent to the supplier along with the goods returned. It is issued to communicate the supplier regarding the return of goods, the reason for return and to mention that his account in the business enterprise will be debited. 51. Credit Note Credit Note is a note or a document issued by the business enterprise to the customer. It issent to the customer on receipt of goods returned. It is issued to acknowledge the customer peercling the return of goods and to mention that his account in the business enterprise will be credited. 52. Purchases Book Purchases Book is a book in which credit purchases of goods are recorded. 53. Purchases Returns Book Purchase Returns Book is a book in which goods returned to suppliers and allowances given by them are recorded. 54. Sales Book Sales book is a book in which credit sales of goods are recorded. 55. Sales Returns Book Sales Returns Book is a book in which goods returned by customers and allowances given to them are recorded. 56. Cash Book Cash Book is a book in which all cash transactions (i.e., cash receipts and cash payments) are recorded. 57. Bills Receivable Book Bills Receivable Book is a book in which all transactions in relation to Bills of Exchange drawn by the business enterprise are recorded. 58. Bills Payable Book Bills Payable Book is a book in which all transactions in relation to Bills of Exchange accepted by the business enterprise are recorded. 59. Journal Proper Journal Proper is a book in which entries are made for all those transactions which cannot be recorded in other subsidiary books. 60. Journal A Journal is a book in which business transactions are entered in chronological order. A record of a single business transaction is called a journal entry. Every journal entry is supported by a voucher, evidencing the related transaction. A voucher is a document containing details of Scanned with CamScannerpurchase invoice, pay slip, rent receipt, a single transaction. For ‘example, a sales invoice, so on. Journal is defined as "a book containi under double entry system”. Every journal description about the transaction or events i the foot of each entry. The following chart gives the classification of accounts: ‘ing a chronological record of transactions ente entry is also supported by narration. It isa bri included in the ‘Journal. It is normally mentioned, Types of Accounts v v English System ‘American System v v 1. Personal Accounts 4. Asset Account 2. Real Accounts 2. Liabilities Account 3. Capital Account 4. Income Account 5. Expenditure Account Although, accounts are classified into English and American System, the normal practice in India is to classify accounts under English system. Hence, only English system is explained here.) ‘According to the English system, accounts are classified into the following three types: 1. Personal Account 2. RealAccount ! 3. Nominal Account } Personal accounts are the accounts of persons with whom the business is required to deal with, These include accounts of natural persons such as Krishna’s Account, Madhu’s Account etc. artificial persons such as companies, clubs, banks, etc., and accounts of representative persons such as drawings Account, Outstanding rent Account, Pre-paid Expenses Account, Capital Account etc. Insimple terms, it refers to the name of the person or club or bank or name of the company The rule of personal account is: 3. Nominal Accounts Debit - the receiver] and | Credit - the giver Real accounts are maintained for assets owned or possessed bi i yy the business. In other words, these are accounts of assets or properties of the business. They include tangible real accounts as accounts of cash, furniture, building etc., and intangible real accounts such as accounts goodwill, patent right, etc. The rule of real account is: Debit - what comes in and Mii Scanned with CamScannerNominal accounts are accounts where incomes and expenses are recorded. For example Salaries Received Account, Discount Allowed Account, ‘Account, Wages Account, Rent Account, Commission Discount Received Account, etc. Debit - all expenses and Losses and Credit - all Incomes and Gains. 61. Ledger Ledgers are the main or principal books of accot records are made and accounts-wise balance of eac! wunts wherein accounts-wise synthesis of primary h such account is determined. An account isa Statement of transactions affecting any particular asset, liability, expense or income. Aledger is the book in which all the accounts are maintained. 4, It is a book of original entry or First Entry or Prime Entry. 2, [tis a daily record of transaction. 3. Narration is written in the Journal. 4, It is achronological record of Transactions. Es The information relating to one account is not found at one place. or Final Entry. It is a periodical record of transaction. No narration is written in the ledger. It is an analytical record of transactions. The information relating to one account is found at one place. 62. Income Statement or Statement of Profit and Loss Itisa statement prepared to ascertain the results of the business activity . When the business activity results in a profit, itis called ‘Net Profit’ and when there is a loss from business activity, it is termed as ‘Net Loss’. Vertical Form Statement of Trading & Profit & Loss haa Net Sales Revenue [Sales - Sales Returns] Less: Cost of Goods Sold Opening Stock Net Purchases Carriage Inwards or Freight Charges Wages Manufacturing Expenses or Factory Expenses Custom Duty or Clearnce Charges Coal, Gas, Water, Power Fuel etc. Cost of Goods available for sale Less: Closing Stock Gross Profit 200K 20 2K XXX Scanned with CamScannerLess: Operating Expenses Administrative Expenses Salaries Rent, rates and taxes Printing and stationery Postage, telegrams, telephone Repair and maintenance Insurance premium Audit fee Legal charges Bank charges Depreciation Miscellaneous Expenses Selling and Distribution Expenses Trade expenses Advertisement Carriage outwards Travelling expenses ‘Commission paid Discount allowed Entertainment Expenses Bad debts Further Bad Debts Add:New reserve for doubtful debts Less: Old reserve for doubtful debts Reserve for discount on debtors ‘Add: Operating Incomes: ‘Commission received Discount received Appreciation of assets Reserve for discount on creditors Miscellaneous Incomes Operating Net Profit ‘Add: Non-operating Incomes Rent received Interest received Interest on Drawings Interest on Investment Profit on Sale of Assets Less: Non-operating Expenses Interest on capital Interest paid Loss on Sale of Assets Net Profit/Net Loss [transferred to capital account] ERESEEE ERERESREREE R ERE E RE xx ox 10% 10K 0x 00 700 100 100 20x 00 rox | x i vk | | | rox | ox ox | ot 0K 63. Balance Sheet ABalance Sheet is a statement which depicts the assets and liabilities of the business enterprise at agiven point of time. It is prepared at the end of the accounting year to ascertain the financial position of the business enterprise. The following is the format of Balance Sheet. Scanned with CamScannerGeen rameter oF Financial Accounting Preparation of Vertical Balance Sheet BALANCE SHEET As on 314% March ‘ik Capital and Liabilities 1. Owners Fund's Capital Additional capital Interest on capital Current year Net Profit REE RE Less: Drawings Interest on Drawings Net loss ¥ g 2. Non-current Liabilities Long-term Debts: Secured loans Unsecured toans 3. Current Liabilities Sundry Creditors Bills Payable Bank Overdraft Accrued Expenses 200 Incomes Received in Advance x Total | esas Pees B. Assets iat 1. Non-Current Assets: a. Fixed Assets i. Tangible Fixed Assets Furniture & Fixtures Plant and Machinery Land & Buildings fi. Intangible Fixed Assets Goodwill etc. Patents & Trade Mark, Copy Right, etc. b. Non Current Investments: . Other Non Current Assets 2. Current Assets: Stock or inventory Sundry Debtors Bills Receivable Cash at Bank Cash in hand Pre-paid Expenses Accrued Incomes RE REE Reg REE EEES Total XXX Scanned with CamScannerrk-in-progress refers to that part of work which is commenced but not yet comp Inventory refers to stock of raw material, work-in-progress, finished goods and consumab} stores of the business enterprise. 66. Incomes e It refers to the receipt of the business which are recurring in nature and its availability jg for a shorter duration. 67. Bills of Exchance ABill of exchange is a written acknowledgment of debt, given by one person to another. It states the amount due, the time and place of payment. Section 5 of the Negotiable instrument Act, 1881 defines a bill of exchange as “an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person, to pay a certain sum of money only to, or to order of a person, or tothe bearer of the instrument.” Features or Characteristics of Bills of Exchange The main features or characteristics carried by a bill of exchange include: 1. Abill of exchange needs to be in writing. 2. It should essentially include an order to pay. 3. _ It is required for the order to pay to be unrestricted. If it is, in any case, subject to the occurrence of some events, it will not be considered as a bill of exchange. 4. It is required to be duly signed and stamped by the drawer. 5. The parties to the bill (the drawer, the drawee, and the payee) should be certain and) definite individuals. 6. There should be a definite amount to be paid. 7. The payment needs to be paid in cash than in kind. 8. The bill can be either on demand or after a specific time period. 9. The bill can be payable either to the bearer as well as to the order of payee. 68. Outstanding Expenses Some amount of expenses may remain unpaid on the date of preparation of final accounts are called outstanding expenses. Adjustment is made by debiting expense account and crediting) the personal account (representative personal account) of the party to whom such amount is ta be paid. 69. Outstanding or Accrued Incomes Certain incomes like dividend on shares, interest on securities, commission etc., are earned but not received on the date of final accounts are called outstanding incomes. Af! adjustment is made by debiting accrued income account and crediting the income account. Scanned with CamScanner70. Prepaid Expenses Some amount of expenses are paid in advance like insurance premium, rent of the premises etc. Expense paid in advance is an asset because the party to whom the payment made in advance isa ‘Debtor’. 71. Income received in Advance The income received in advance means it is an income received but not actually earned and creates an obligation (liability) to return this amount. 72. Accounting Equation The accounting equation illustrate the mechanism of accounting based on ‘dual aspect of accounting. Under accounting equation mechanism, at any point of time the assets of any business entreprise are equal in monetary terms to its equities both internal and external. Internal equities are the amount contributed by proprietor as capital plus profit retained in the business. External equities are ‘Liabilities’ (j.e., amount payable to outsiders) which may be short-term or long-term liabilities. ‘Accounting is an art of recording business transactions in the books of accounts. The basic aim of such recording is to find out the profit or loss and financial position of the business. As an accountant, a person is in need of certain common accounting principles for maintaining the accounts and which is commonly accepted by the majority of the business people. In the absence of common principles, each one will have his own idea or procedure in recording the transactions and maintaining the books of accounts. Hence, some common principles need to be followed in any type of business. According to the Terminology Committee of American Institute of Certified Public Accountants (AICPA), “The word principle is used to mean a general law or rule adopted or preferred as a guide to action and a settled ground or basis of conduct or practice.” Generally Accepted Accounting Principles (GAAP) may be defined as those rules of action ‘or conduct which are derived from experience and practice and when they prove useful, they become accepted as principles of accounting. According to the American Institute of Certified Public Accountants (AICPA), the principles which have substantial authoritative support become a part of the Generally Accepted Accounting Principles (GAAP). The general acceptance of any principle usually depends on how well it meets the three criteria of (a) relevance (b) objectivity, and (c) feasibility. (a) Relevance: A principle is relevant to the extent that it results in meaningful or useful information to those who need to know about certain business. (b) Objectivity: A principle is objective to the extent that the information is not influenced by the personal bias or judgement of those who furnished it. Objectivity connotes reliability or trustworthiness which also means that the correctness of the information reported can be verified. (c) Feasibility: A principle is feasible to the extent that it can be implemented without undue complexity or cost. ‘Accourding to A.W.Johnson, Accounting Principles are “the assumptions and rules of accounting, the methods and procedures of accounting and the application of these rules and procedures to the actual practice of accounting”. Accounting principles are classified into two types. Scanned with CamScannerACCOUNTING PRINCIPLES Accounthg ‘Concepts Accounting onvertons Business Entity Concept 1. Convention of Materiality ‘Measurement Concept 2. Convention of Conservatism Dual Aspect Concept 3. Convention of Consistency Going Concem Concept 4. Convention of Full Disclosure Accounting Period Concept ‘Matching Concept Realization Concept | Cost Concept. : - Accrual Concept | 10. Legal Aspect Concept SSRs ee Fig.1.1 Accounting Principles Accounting is the language of business. To make the language convey the same meaning to all People, accountants have agreed a number of concepts or assumptions which they try to follow, These assumptions made by an accountant while recording business transactions are called accounting Concepts. The following are the important concepts or assumptions. ( 1. Business entity concept: This concept implies that a business unit is separate and distinct from the persons who supply funds to it. According to this concept business is kept separate from the proprietor so that the transaction of the business is recorded separately, when such a distinction 1s not made properly, the affairs of the business get mixed up with the personal affairs of the Proprietor and the true position of the business will not be available. For example, cash contributed by the owner is recorded as capital and it is a liability to the firm. Cash withdrawn by the owner for personal purposes is recorded as reduction in cash balance (ice., Asset) to the firm and it is treated a drawings. 2. Money measurement concept: Under this concept only those transactions which can be expressed in terms of money are recorded in the books of accounts. Non-monetary transactions such as efficiency, honesty etc., cannot be recorded in the books of accounts since they cannot be converted into real money value. 3. Dual aspect concept: Every transaction involves two fold aspects: (a) Receiving aspect and (b) Giving aspect. There must be a double entry to have a complete record of each business transaction. An entry being made for the receiving amount and a similar entry is made for the giving amount. Thus every debit must have a corresponding credit and vice versa and upon this dual aspect concept can be raised the whole super structure of double entry system, simple equation in this regard is | a Scanned with CamScanner4. Going concern concept: This concept refers to the continuous existence of the business concern. The life of the business does not come to an end within a year. It is carried on for a number of years in future. Based on this concept, the suppliers are ready to supply the goods on credit basis and the firm sells goods to its customers on credit basis. 5, Accounting period concept: This is also known as concept of definite accounting period. ‘According to this concept, the life of the business is divided into suitable accounting period. This division is made to ascertain the profit or loss of the business for a particular period (j.e., 31st March) and to know the financial position of the business on a particular date with the help of balance sheet. 6. Matching concept: According to this principle, the expenses incurred in an accounting period should be matched with the revenues recognised in that period, that is, ifrevenue is recognised ‘on all goods sold during the period, cost of those goods sold should also be charged to that period. Itshould be noted that appropriate costs have to be matched against the appropriate revenues for the accounting period. For example, cost of goods sold and commission to salesman are directly related to sales, whereas rent, interest, depreciation accruing with the passage of time and stock lost by fire are not directly related to sales revenue, yet they are charged to the accounting period to which they relate. 7. Realisation concept: As per this concept, a business has to record revenue or income, only after it has been legitimately realised. For instance, if a business sells goods or services, the value isrealised only when cash is received or when the debtor or customer agrees to pay (legal obligation to pay) cash in future i.e., when a claim is created, without either of the two, there isno realisation of revenue and therefore no profit or income can be said to have arisen. 8. Cost concept: According to this concept, an asset is recorded in the books at the price paid to acquire it and this cost is the basis for all the subsequent accounting for that asset. Assets are not recorded at their realisable values because these values keep on changing with change in price level from time to time. 9. Accrual concept: Financial position and profitability of a concern are assessed at a regular interval (i.e., on 31st March) called accounting period. While preparing Profit and Loss Account of aconcern, all revenue items relating to that period are taken into consideration irrespective of the fact that whether these items are paid or payable (outstanding). For example: outstanding salaries, prepaid Insurance etc. 40. Legal aspect concept: The accounting record should reflect the legal validity of the transaction entered in the books, where it is not possible, appropriate qualifying note should be made. For example, a firm should not say anybody as its debtors unless he is legally liable to pay to the firm.” SGAUNTING CONVENTIONS i [ee (Conventions denote customs or traditions and these conventions are used as a guide to the eparation of financial statements) In otherwords, the customs followed by an accountant while preparing the financial statements are known as accounting conventions.\The following are the important accounting conventions: ) 4. Convention of Materiality: The convention of materiality reveals that only important items should be recorded in accountin statements. It is done to make a clear and understandable accounting statement rather than preparing accounting statement with unnecessary information wl h will confuse the reader. The unimportant items are to be combined with other it ;. For example, Scanned with CamScanner‘oods unsold) at cost or market price whichever is Pete eae cic ‘valuing stock at market Price or cost price whichever is less; ae _ (©) creating Provisions against fluctuation in the prices of investments. 2. Convention of Consistency: Accounting rules, practices and conventions should b Observed and applied i.e., they should not change from one year to another. ‘esults of different years will be ‘comparable only when accounting rules are continuously obser from year to year. For instance, iatic iatic the ise decides, it should the change and its effects should be stated clearly 4. Convention of Full Disclosure: ept, the financial statements (i.e, Trading and Profit & Loss Account and Balance Sheet) should act as means of conveying and nok ‘Goncealing. The financial statements must disclose all it and reliable information, so that the information may be useful to the users, The disclosure should be full, fair and adequate so’ that the users of the financial statements can make correct assessment about the financial! Performance and position of the enterprise. Apart from legal requirements, full disclosure of all si the financial statements for example, Stock should be clearly stated in the bal: be honestly prepared According to this conc ignificant information should be made in The basis of valuation of fixed assets, Investments and ‘ance sheet. In other words, Accounting statements should strate the mechanism of accounting based on ‘dual aspect (or mount contributed by pro are ‘liabilities’ (i.e., ai may be short-term or long-term liabilities. Assets = Liabilities + Capital This equation can also be expressedas follow Asset - Liabilities = Capital Asset - Capital = Liabilities Scanned with CamScannersteps in developing an Accounting Equation: step 1 - Ascertain the variables of an equation (i.e., Assets, liabilities or capital) affected by a transaction. Step 2 - Findout the effect (i.e., increase or decrease) of a transaction on the an equation. step 3 - Show the effect on appropriate side of an equation and ensure that the total of the right hand side (i.e., Asset side) is equal to the total of left hand side (i.e., Liabilities + Capital). e variables of Effect of Transaction on Equation can be: 1. Increase in assets and increase in capital or liabilities Examples: (a) Commenced business with capital of 1,00,000. (b) Borrowed loan from Bank. (c) Borrowed loan from friend. () Purchased goods (stock) on credit from Mr.X (i.€., creditor). 2. Increase in one asset and decrease in another asset: Examples: (a) Purchase of fixed assets for cash. (b) Purchased goods for cash. (c)_ Received cash from customer (Debtor). (d)_ Paid rent-in-advance (Pre-paid expenses) by cash. 3, Decrease in asset and decrease in liability: Examples: (a) Paid cash to suppliers (creditors). (b) Repayment of loan by cash. 4, Decrease in asset and decrease in capital (.e., Equity): Examples: (a) Withdrew cash for personal use (i.e., Drawing). (b) Withdrew goods (i-e., stock) for personal use. (c)_ Payment of expenses (i.e., Rent, Salaries, Interest, etc.) by cash. (d) Goods destroyed by fire (Loss). (e) Depreciation on fixed assets. 5. Increase in liability and decrease in capital: Examples: (a) Rent due but not paid capital. (b) Interest allowed on loan (i.e., outstanding interest a liability) and expenses (i.e., rent) deducted from capital. Note: The effect of transactions pertaining to expenses or losses, such as rent paid or interest paid, salaries outstanding, Depreciation on Fixed Assets etc., decreases the capital (i.e., equity). similarly, the transactions pertaining to Incomes or gains, such as profit on sale of an | outstanding rent a liability). Expenses is deducted from Scanned with CamScannereffect will be on capital. ‘Solution: Step1 Variables affected Step2 _ Effect of Transaction on equation Step 3 Accounting equation Opened a current account with Solution: Step 1 Variables affected Step2 Effect of Transaction on equation Step3 Accounting equation Borrowed loan from Bank 50,000. Solution: Step1 Variables affected Step2 _ Effect of transaction on equation Step3 Accounting equation Purchased fixed assets for cash 710,000. Solution: Step1 Variables affected Step2 _ Effect of transaction on equation Step 3 Accounting equation interest received etc., increases the capital (i.e., equity). This is done beca Commenced business with capital %1,00,000. Canara Bank by depositing % 25,000. Asset and capital : Increase in Asset (Cash) and also Capit Asset = Liability + Capital 1,00,000 = 0 + 1,00,000 Assets only Increase in Asset (i.e., Bank) Decrease in Asset (i.e, cash) Asset = Liability + Capital 425,000. EasG00L 50 o Asset and Liability Increase in Asset (i.e., cash) and increase in liability (i.e., loan) Asset = Liability + Capital 50,000 = 50,000 + 0 Assets only Increase in Asset (i.e., Fixed Asset) and Decrease in Asset (i.e., Cash) Asset = Liabilities + Capital +10,000 =10)000:= 72° Scanned with CamScannera ee ee eee Purchased goods for cash 715,000. Solution: Step 1 Variables affected Assets only Step2 Effect of transaction on equation _ Increase in Asset (i.e., stock) and Decrease in Asset (i.e., cash) Step3 Accounting equation Asset = Liability + Capital (+)15,000 By 5,000 Bi Purchased goods on credit from Mr.X for 720,000. Solution: Step1 Variables affected Asset and Liability Step2 Effect of Transaction on equation —_Increase in Asset (ie., stock) Increase in Liability (j-e., creditors) Step3 Accounting equation Asset = Liability + Captial pease Ss with cas! 20,000. 1. Commenced busines 2. Purchased Assets for cash 25,000. 3. Sold Assets of 10,000 for % 12,000. 4. Sold Assets of %5,000 for % 4,000. 5. Goods destoryed by fire = 1,000. 6. Withdrew cash for personal use % 5,000. 7. Rent outstanding % 5,000. 8. _ Insurance paid in advance & 400. 9. _ Interest on loan allowed % 6,000. 10. Depreciation on Furniture % 2,500. Prepare accounting equation from the above transactions Solution Effect of transaction on asset, liabilities and capital Transaction Effect Assets = Liabilities + Capital 1 | Commenced business cash® 1,20,000 | ‘incash | 1,20,000 = 0 +1,20,000 * incapital New Equation 1,20,000 = 0 +1,20,000 2 | Purchased Assets for cash %25,000 | * in asset | + 25,000 Scanned with CamScannerin cash New Equation Sold Assets of 210,000 for 712,000 | 4 in cash W in asset : in capital New Equation Sold Assets of %5,000 for ¥ 4,000 @ in cash WV in asset V in capital New Equation Goods destoryed by fire € 1,000 W in stock Vin capital New Equation 1,20,000 = Withdrew cash for personal use 5,000 |W incash | - 5,000 ¥ in capital New Equation 1,15,000 Rent outstanding % 5,000 * in liability| +0 ¥ in capital New Equation 1, 15,000 Insurance paid in advance € 400“ jn asset + 400 WV jn-cash - 400 = o+ 0 New Equation 1, 15,000 5,000 +1,10,00t Interest on loan allowed % 6,000“ jn liability 0= +6,000 - 6,000| V jn capital New Equation 1,15,000 = 11,000 +1,04,000 Depreciation on Furniture €2,500. jn furniture | - 2,500 | WV jn capital : 1,12,500 Final Equation exo ay DS ih ‘rRamanashree started a business under the name of “Ramanashree & Co.” The detall of the transactions of his business are given below: Commenced business with capital of %1,00,000. Bought goods on credit from Ramesh %80,000. Bought furniture for cash 710,000. Sold goods for cash 240,000. Paid Ramesh on account 40,000. Paid shop rent 710,000. Paid salaries %5,000. Sold goods on credit to Vimal &25,000. Scanned with CamScanner9. 10. Received commission 5,000. Withdraw cash for personal use 710,000. Prepare accounting equation from the above transactions. Solution In the Books of Ramanashree & Co. Effect of transaction on asset, liabilities and capital Sl.No, Transaction Effect Asset: lities + Capital 1 | Commenced business with 4 in stock capital %1,00,000 * incapital | 1,00,000 = 0 +1,00,000 New Equation| 1,00,000 = 0 +1,00,000 2 Bought goods on credit * in stock from Ramesh %80,000 4 in creditors | +80,000 = 80,000 + 0 New Equation 1,80,000 = 80,000 +1,00,000 3. | Bought furniture for cash %10,000| 4 in furniture | +10,000 Vin cash 10,000 = O+ 0 New Equation 1,80,000 = 80,000 +1,00,000 4 | Sold goods for cash 740,000 in stock 40,000 @ incash +40,000 = O+ 0 New Equation| 7,80,000 = 80,000 +1,00,000 5. | Paid Ramesh on account %40,000 |W in cash WV increditdr ~40,000 = -40,000 + oO New Equation] 7,40,000 = 40,000 +1,00,000 6 | Paid Shop rent 10,000 ¥ in cash | Vincapital|_-10,000 = 10,000 New Equation] 1,30,000 + 90,000 7 | Paid Salary %5,000 | Vincash Vin capital] -5,000 - 5,000 New Equation| 1,25,000 + 85,000 8 | Sold goods on credit to \ in stock | +25,000 Vimal 225,000 ‘in detors|_-25,000 = o+ 0 New Equation 1,25,000 = 40,000 + 85,000 9 | Withdraw cash for personal | Vincash use 710,000 Vin capital] -10,000 = 0 - 10,000 New Equation 1,15,000 = 40,000 + 75,000 10 | Received Commission %5,000 + in cash ‘in capitall 15,000 = _0 + _5,000_ Final Equation 1,20,000 = 40,000 +80,000 ~ Scanned with CamScanner2020 Jan 1st Rajini started business with a capital of 750,000. Jan 2nd Purchased furniture for 5,000. Jan 3rd Bought goods on credit from Vinod for % 8,000. Jan 14th Sold goods to Suresh for 5,000. Jan 15th Received cash from Suresh % 3,000. Jan 18th Purchased goods for cash % 12,000. Jan 25th Sold goods for cash 8,000. Jan 28th Paid rent by cash for % 1,200. Jan 29th Paid Vinod = 3,000 on account. Jan 30th Returned goods to Vinod % 800. Jan 31st Suresh returned goods % 1,000. Prepare accounting equation from the above transactions. Solution In the Books of Rajini Effect of transaction on asset, liabilities and capital Sl.No. | Transaction Effect Assets = Liabilities + Capital 2020 Jan 1st | Commenced business with capital] 4 in cash of % 50,000 Mincapital | +50,000 = 0 + 50,000 New Equation 50,000 = 0 + 50,000 2nd_| Purchased furniture for%5,000 | 4 infurniture| +5,000 \ in cash = 5,000 = o+ 0 New Equation 50,000 = 0 + 50,000 3rd_ | Bought goods on credit from * in stock Vinod for % 8,000 ‘Mincreditor | +8,000 = + 8,000 + 0 New Equation 58,000 = + 8,000 + 50,000 14th | Sold goods to Suresh for ¥ 5,000 | 4 in debtors -5,000 \ in stock +5,000 = O+ 0 New Equation 58,000 = +8,000 + 50,000 15th | Received cash from Suresh & 3,000 | 4. in cash +3,000 | Vin detors -3,000 = O+ oO New Equation 58,000 = Scanned with CamScanner4th | Purchased goods for cash % 12,000 | # in stock Vin cash a O+ 0 New Equation 58,000 25th |Sold goods for cash & 8,000 @ in cash +8,000 = O+ 0 W in stock - 8,000 New Equation 2gth |Paid rent by cash for% 1,200 |W in cash : Vin capital New Equation 29th_| Paid Vinod % 3,000 on account 58,000 u 2 ° s s -1,200 Vin cash in creditor New Equation 30th | Returned goods to Vinod % 800 |W in stock in creditor New Equation 31st_|Suresh returned goods % 1,000 | in stock Win detors 53,000 +1,000 -1,000 48,800 ° + 0 2 New Equation | 53,000 = 4,200 + 48,800 31st_| Depreciation of Furniture ¥500 | in furniture | Vincapital | —500 = 0+ -500 Final Equation | 52,500 4,200 +48,300 March 2020 tst_Kumar started business with cash & 10,000, Plant and Machinery % 15,000 and stock % 5,000. 2nd Bought furniture from Ram % 2,000. 4th Purchased goods worth % 6,000. 6th Sold goods % 1,000. 7th Purchased goods from Venu on account % 500. Sth Sold goods to Ramesh % 2,000. 11th Returned damanged goods by Ramesh % 100. 13th Received cheque from Ramesh & 1,000. 14th Opened a current account with SBI and deposited 10,000. 16th Insurance paid in advance % 400. 18st Purchased securities for cash & 2,000. 20th Sold securities costing & 2,000 for & 2,500. 22nd Sold securities costing & 1,000 for % 800. Scanned with CamScanner24th Goods destroyed by fire 500. 26th Withdrew cash for personal use % 1,000. 27th Rent outstanding % 600. 28th Received cash for dividend on securitie < 1,000. 30th Depreciation on furniture 200. 31st Interest on loan payable % 1,000. Prepare accounting equation from the above transactions Solution In the Books of Kumar Effect of transaction on asset, liabilities and capital Transaction Effect Assets = Liabilities + Capital 2020 | Commenced business with ‘incash | +10,000 } March| cash % 10,000 Plant and Machinery] 4 inP&M | +15,000 | 1st_| & 15,000 and stock % 5,000 ‘instock | +5,000 | + in capital 0 + 30,000 | New Equation 30,000 = 0 + 30,000) 2nd | Bought furniture from lb in furniture Ram ® 2,000 on credit ln in creditor 2,000 = _2,000 + 0 New Equation 32,000 = 2,000 + 30,000 4th | Purchased goods worth 6,000 _/1\ in stock Win cash : 0+ 0 New Equation = 2,000 + 30,000 6th | Sold goods ¢ 1,000 It in cash NW in stock . o+ 0 New Equation 32,000 = 2,000 + 30,000 7th | Purchased goods from Venuon —_ | in stock account % 500 It in creditor 500= 500 + 0 New Equation | 32,500 = 2,500 + 30,000 9th | Sold goods to Ramesh % 2,000 Win stock +2,000 (Min debtors | - 2,000 = o+ 0 New Equation 32,500 = 2,500 + 30,000 41th | Returned damanged goods by WW in debtors +100 | Ramesh & 100 It in stock -100 = o+ 0 New Equation 32,500 = 2,500 + 30,000 13th | Received cheque from Ip in bank +1,000 Ramesh % 1,000 WY in debtors -1,000 = O+ oO New Equation 32,500 = 2,500 + 30,000 | “Scanned with CamScanneri ath 46th 2oth 22nd 24th 26th 27th 28th Opened a current account with SBI and deposited % 10,000 New Equation Insurance paid in advance % 400 New Equation Purchased securities for cash 2,000 New Equation Sold securities costing % 2,000 for = 2,500 New Equation Sold securities costing @ 1,000 fo 800 New Equation Goods destroyed by fire 500 New Equation Withdrew cash for personal use = 1,000 New Equation Rent outstanding % 600 New Equation Received cash for dividend on securitie 1,000(income) New Equation Depreciation on furniture % 200 (Loss) New Equation t on loan payable % 1,000 it) Final Equation @ in bank in cash in asset Win cash @ in investment Vin cash ® in cash \ ininvestment| 4 in capital 4 in cash \ in investment] Vin capital W in stock Vin capital Win cash \ in capital A in liability \ in capital ® in cash * in capital in furniture \ in capital 4 in liability Vin capital | +10,000 -10,000 32,500 +400 - 400 32,500 +2,000 = 2,000 32,500 +2,500 - 2,000 33,000 +800 = 1,000 32,800 -500 32,300 -1,000 31,300 0 31,300 +1,000 32,300 - 200 32,100 0 32,100 O+ 0 2,500 + 30,000 O+ 0 2,500 + 30,000 O+ 0 2,500 + 30,000 o+ 2,500 + o- 2,500 - we 2,500 + o- 600 - 3,100 + O+ 3,100 + o- 3,100 + 1,000 - 500 30,500 200 30,300 500 29,800 1,000 28,800 2,500 + 600 28,200 1,000 29,200 200 29,000 1,000 4,100 +28,000 Scanned with CamScannerInitially all multinational and global Com inanci panies across the world prepare financial st tot each en in which they did business, in accordance with each country’s GAAP. eae pera zt peccouting Standard (IAS) issued by International Accounting Standards Comm," Wo 1973 to 2001. During this period, a series of Accounting Standards(AS) were rele “eh ere numbered numerically starting from IAS 1 and concluded with |AS 41 in December lasted for 27 years till the year 2001. When it was restructured to become Int 6 temati Beaute paeas Board (IASB). At the time of establishment of IASB, they agreed to odor papelest jpnes issued by IASC, i.e., IAS 1 - 41, but any standards to be published ee ‘ollow a series known as International Financial Reporting Standard (IFRS). are increasingly becoming the set of it g g globally accepted accounting standards that the needs of the worlds increasingly integrated global capital markets. The adaptation of standa accounting standards facilitates investments and other economic decisi i ing f mic decision across borders, incre market efficiency and reducing cost of raise capital. - IFRS is an acronym for International Financial Reporting Standards and covers full set principles and rules on reporting of various items, transactions or situations in the finan statements. Often they are referred to as “principles based” standards because they descri principles rather than dictate rigid accounting rules for treatment of certain items. In simple words, IFRS are a set of international accounting standards, stating how particul types of transaction and other events should be reported in the financial statements. They are t! guidelines and rules set by IASB which the company and organization can follow while preparit their financial statements. 1. International Financial Reporting Standards (IFRSs) issued by [ASB 2. International Accounting Standards (IASs) issued by IASC 3. Interpretations originated from the International Financial Reporting Interpretati Committee (IFRICs) Interpretations originated Standing Interpretations Committee (SICs) IFRS are principle based standards as compared to the rule based GAAP. This means thal they have distinct advantage that transactions cannot be manipulated easily. | 2. IFRS lays down treatments based on the economic substance of various events 1 transactions rather than their legal form. 3. Under the IFRS, the historical cost concept has been abandoned and replace cost system for more accurate financial reporting. The concept of fair valu has taken over historical cost accounting in financial reporting to improve the relevan of the information contaihed in financial reports and getting the balance sheet right. 4. Presentation of financial statements (IAS 1) is significantly different from presentations) financial statements in GAAP. Which follows the schedule IIl of the companies Act, 201% dby acu re accounting Scanned with CamScannerFor example, IFRS requires clean segregation of assets and liabilities into current and non- current groups. At present the liquidity basis is preferred as per the companies. Act. 5, Indian Entities prepare financial statements in Indian rupees. Under IFRS, an entity measures its assets and liabilities and revenues and expenses in its functional currency. Functional currency is the currency of the primary environment in which the entity operates which may be different from the local currency of a country. 6. IFRS requires annual reassessment of useful life of the assets. Earlier depreciation was stopped once asset is retired from active use. But under IFRS, depreciation is to be allowed till the time of actual de-recognition of asset from the books. 7. IFRS mandates Component Accounting. Under this approach, each major part of an item of equipment with a cost that is significant in relation to the total cost of an item has to be maintained and depreciated separately. The Institute of Chartered Accountants of India (ICAl) as the accounting standards-formulating body in the country has always made efforts to formulate high quality Accounting Standards and has been successful in doing so. Indian Accounting Standards have withstood the test of time. As the world continues to globalize, discussion on convergence of national accounting standards with International Financial Reporting Standards (IFRSs) has increased significantly. The forces of globalization prompt more and more countries to open their doors to foreign investment and as businesses expand across borders the need arises to recognize the benefits of having commonly accepted and understood financial reporting standards. In this scenario of globalization, India cannot insulate itself from the developments taking place worldwide. In India, so far as the ICAI and the Governmental authorities such as the National Advisory Committee on Accounting Standards and various regulators such as Securities and Exchange Board of India and Reserve Bank of India are concerned, the aim has always been to comply with the IFRSs to the extent possible with the objective to formulate sound financial reporting standards. The ICAI, being a member of the International Federation of Accountants (IFAC), considers the IFRSs and tries to integrate them, to the extent possible, in the light of the laws, customs, practices and business environment prevailing in India. Although, the focus has always been on developing high quality standards, resulting in transparent and comparable financial statements, deviations from IFRSs were made where it was considered that these were not consistent with the laws and business environment prevailing within the country. Dees le The main advantages of IFRS are as follows: 1. Common basis of comparison Most of the countries of the European Union have switched over to IFRS. If companies in India also switched over to IFRS, it would make transactions and dealings with companies of other countries who operate under IFRS much easier. It would also give stock holders and other interested parties a common basis of comparabil 2. Clarity and Productivity Under IFRS, financial makers use their own professional judgment as to how to handle a specific transaction. This will lead to less time being spent trying to follow all rules that are coupled with rule based accounting.3. Consistent Financial Reporting Basis A consistent financial reporting basis would allow a multinational company to apply com, accounting standards with its subsidiaries worldwide which would improve internal communicati quality of reporting and group decision making. 4. Improved Access to International Capital Markets Many Indian entities are expending and making significant acquisitions in the global mar for which large amount of capital is required. The majority of the stock exchanges require finan information prepared under IFRS. 5. Lower Cost of Capital ‘Migration to IFRS will lower the cost of raising funds, as it will eliminate the need for prepa dual sets of financial statements. It will also reduce accountant’s fees abolish risk premiums ang will enable access to all major capital markets as IFRS is globally acceptable. 6. Escape Multiple Reporting Convergence to IFRS will eliminate the need for multiple reports and significant adjustments for preparing consolidated financial statements. 7. Reflect True Value of Acquisition In Indian GAAP business combinations are recorded at carrying values rather than fair value of net assets in the acquirer’s books is not reflected separately in the financial statements, instead] the amount gets added to the goodwill. IFRS will overcome this flow as it is mandates accounting of net assets taken over in a business combination at fair value. 8. Benchmarking with Global Peers Adoption of IFRS will facilitate companies to set targets and milestones based on global business environment, rather than merely local ones. el 1. Wide Gap IFRS is very much different from present accounting policies being followed. There are big differences expected in accounting for financial instruments deferred taxes, business combinations and employees benefits. 2. Increased Responsibility | The change to IFRs opens up certain choices a company will have in flow to account for some) items. This carries with it the responsibility to investors the reasons for the choices and the impact on financial statements. 3. Tax Implications IRFS convergence will have a significant impact on the financial statements and consequently tax liabilities tax authorities should ensure that there is clarity on the tax treatment of items arising from convergence of IFRS 4. Distributable Profits IFRS is fair value driven which often results in unrealized gains and losses. Whether this caf) be considered for the purpose of computing distributable profit, is still to be debated. Scanned with CamScannerIAS 21 IAS 22 IAS 23 IAS 24 IAS 25 IAS 26 1AS 27 IAS 28 1AS 29 IAS 30 ‘Information to be Disclosed in the Financial Statements ~!S1G ‘Accounting Responses to Changing Prices (09 ~ ian B® 20D 8) Statement of Cash Flows - | 99 9. Accounting Policies, Changes in Accounting Estimates and Errors ~ 200 2, ‘Accounting for Research and Development Activities Events after the Reporting Period - 20° S Construction Contracts -199 8 Income Taxes - \996 Presentation of Current Assets and Current Liabilities Segment Reporting - )9o >} Information Reflecting the Effect of Changing Prices - 2008, Property Plant and Equipment — >.< Leases - 2.502 Revenue - ) 04 2 Employee Benefits 4a 2 Accounting for Government Grants and Disclosure of Government Assistance - | @ « The Effects of Changes in Foreign Exchange Rates - 9 oc Business Combinations Borrowing Costs Related Party Disclosures ‘Accounting for Investments ‘Accounting and Reporting by Retirement Benefit Plans - |2~+ Separate Financial Statements Investments in Associates — 2 « Financial Reporting in Hyperinflationary Economies - |9 2 9 Disclosures in the Financial Statements of Banks and Similar Financial ~ |9.0> Scanned with CamScannerIAS 31 IAS 32 IAS 33, IAS 34 IAS 35, IAS 36 IAS 37 IAS 38 IAS 39 IAS 40, IFRS 2 IFRS 3 IFRS 4 IFRS 5 IFRS 6 IFRS 7 IFRS 8 IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 IFRS 14 IFRS 15 IFRS 16 IFRS 17 Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly. follo accounting rules and standards for financial reporting, Brvof coniriont ata Institutions Interests in Joint Ventures - 2002 Financial Instruments: Presentation- 200 3 Earnings per Share _ 9 00 2 Interim Financial Reporting - 199 2 0 Discontinuing Operations - | 94 2 Impairment of Assets — 2 oo.) Provisions, Contingent Liabilities and Contingent Assets — 19.9 © Intangible Assets. - 200» Financial Instrument : Recognition and Measurement — 2c02, Investment Property —9.c6 2, Agriculture - 200) First-time Adoption of Intemational Financial Reporting Standards Share-based Payment ~ 2.00 4 Business Combinations - 9 oo = Insurance Contracts (Will be superseded by IFRS 17 as of 1 January 2023) Non-current Assets Held for Sale and Discontinued Operations Exploration for and Evaluation of Mineral Resources _ < Financial Instruments: Disclosures ~ 200 Operating Segments - Financial Instruments~ 2.2 ' +» Consolidated Financial Statements - Joint Arrangements - 20) 596 Disclosure of Interests in Other Entities - 2c Fair Value Measurement - 2 0\) Regulatory Deferral Accounts _ 2 |), Revenues from Contracts with Customers ~ 20)», Leases - 2016 Insurance Contracts - 901" The specifications of GAAP, which is Scanned with CamScannerstandard adopted by the U.S. Securities and Exchange Commission (SEC), include definitions of concepts and principles, as well as industry-specific rules. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another. In most European countries, public entities are subject to IFRS and must prepare their accounts accordingly. While local GAAP is aligned to IFRS, it is here and in taxation that key differences emerge. The European Union's alignment to the International Financial Reporting Standard (IFRS) for accounting purposes makes financial reporting in Europe quite streamlined for companies. Private entities need to follow the local GAAP (Generally Accepted Accounting Principles), but in most European countries it is aligned to IFRS. Differences do exist however, and one source of difference is the fact that IFRS as adopted by the EU is sometimes behind the actual IFRS standards. This is because the EU goes through an endorsement process, and this can result in a gap of approximately six months between the implementation of a new standard, and implementation in practice. With regard to private entities and local GAAP, it is in the few European countries where this is not aligned to IFRS, in which differences occur. For example, in Italy, goodwill should be amortised, revaluation is not allowed, there are specific capitalisation rules and useful lives and only operating leases are recognised. Japanese generally accepted accounting principles (GAAP) are one of the four sets of accounting standards listed companies in Japan can currently choose to use to file their consolidated financial statements. The other three sets of accounting standards are Designated IFRS, U.S. GAAP, and Japan’s Modified International Standards (JMIS). wa a Accounting Standards are developed by the Accounting Standards Board of Japan (ASBJ) and are designated as Japanese GAAP by the Financial Services Agency of Japan. The ASBJ develops Accounting Standards in accordance with the “Rules on the Due Process for the Development of Japanese GAAP and Japan’s Modified International Standards” Define Accounting. What is book-keeping? What is meant by Accounting? Distinguish between book-keeping and Accounting, State the functions of Accounting? ‘Mention the objective of Accounting. What do you mean by ‘Accounting principles’? 1. 7 3. 4. i 6. is Scanned with CamScanner8. What do you mean by GAAP? 9. What is Business Entity concept? 10. What is ‘money measurement concept’? 11. What is accounting period concept? 12. What is ‘Going concern concept’? 13. What is ‘Dual concept’? 14. What is “Matching concept’? 15. What is ‘Convention of. consistency’? 16. What is ‘Convention of full disclosure’? 17. What is ‘Convention of conservatism’? 18. What is ‘Convention of Materiality’? 19. What is Accounting cycle? 20. Give the meaning of accounting equation. 20. What are ‘accounting standards’? 21. List any four Indian accounting standards. 22. Mention any to objectives of Indian accounting standards. 23. Which is the Authority issuing Indian Accounting Standards? 24. Give importance of Accounting standards. Sections Explain the objectives of. Accounting. What are the functions of accounting? What are the limitations of Accounting? Explain the uses of Accounting Information. Explain in brief the conventions of Accounting. Explain in brief the accounting concepts. What are accounting standards? List any four Indian accounting standards. What are ‘accounting standards"? Justify the need for accounting standards. 10. State and explain the significance of accounting standards. 11. Give a brief note of accounting standards in Indian context. 12. Explain briefly any five Indian accounting standards, 13. List any six Indian accounting standards. 14. Prepare accounting equation from the following: Commenced business with %5,00,000. Bought computers for %1,00,000. Bought goods from X for cash 50,000. Sold goods to Y for cash 270,000. Paid salaries 50,000. 15. Prepare accounting equation from the following: Commenced business with cash 5,00,000, Furniture € 2,00,000, Opened a current account in Canara Bank %2,50,000. PENAMRwNS a Scanned with CamScannerPurchased furniture for 30,000. Sold goods for cash % 60,000. Received commission ® 20,000. 16. From the following information prepare accounting equation: Purchased goods on credit from X for 1,90,000. Sold goods on credit to Y for %1,20,000. Returned goods to X % 15,000. és Returned goods by Y % 30,000. Rent paid € 25,000. 1. From the following information prepare accounting equation: Commenced business with cash % 2,20,000. Purchased Assets for cash % 45,000. Sold Assets of %30,000 for € 32,000. Sold Assets of 210,000 for % 8,000. Goods destoryed by fire ¥ 4,000. Withdrew cash for personal use t 10,000. Rent outstanding = 5,000. Insurance paid in advance € 4,000. Interest on loan allowed € 6,000. Depreciation on Furniture % 4,500. 2. From the following information prepare accounting equation: 2019 April 1st Rajini started business with a capital of 5,00,000. 2nd Purchased furniture for % 25,000. 5rd Bought goods on credit from Vinay for % 80,000. 16th Sold goods to Ramesh for % 50,000. 17th Received cash from Ramesh 30,000. 49th Purchased goods for cash € 22,000. 27th Sold goods for cash X 18,000. 29th Paid rent by cash for € 12,000. 30th Paid Vinay % 30,000 on account. 30th Returned goods to Vinay % 8,000. 31st Ramesh returned goods ¥ 4,000. Se Y Se he te Scanned with CamScanner