Study Note - 1

ACCOUNTING PROCESS

This Study Note includes

1.1 Introduction
1.2 Definitions
1.3 Accounting Cycle
1.4 Objectives of Accounting
1.5 Basic Accounting Terms
1.6 Generally Accepted Accounting Principles
1.7 Accounting Concepts and Conventions
1.8 Events and Transactions
1.9 Voucher
1.10 The Concepts of “Account”, “Debit” and “Credit”
1.11 Types of Accounts
1.12 The Accounting Process
1.13 Accounting Equation
1.14 Accrual Basis & Cash Basis of Accounting
1.15 Capital & Revenue Transactions
1.16 Accounting Standards
1.17 Double Entry System, Books of Prime Entry, Subsidiary Books
1.18 Trial Balance
1.19 Measurement, Valuation & Accounting Estimates
1.20 Journal Proper – Opening entries, Closing entries, Transfer entries and Rectification entries

1.1 INTRODUCTION

Business is an economic activity undertaken with the motive of earning profits and to maximize the
wealth for the owners. Business cannot run in isolation. Largely, the business activity is carried out by
people coming together with a purpose to serve a common cause. This team is often referred to as an
organization, which could be in different forms such as sole proprietorship, partnership, body corporate
etc. The rules of business are based on general principles of trade, social values, and statutory framework
encompassing national or international boundaries. While these variables could be different for different
businesses, different countries etc., the basic purpose is to add value to a product or service to satisfy
customer demand.
The business activities require resources (which are limited & have multiple uses) primarily in terms of
material, labour, machineries, factories and other services. The success of business depends on how
efficiently and effectively these resources are managed. Therefore, there is a need to ensure that the
businessman tracks the use of these resources. The resources are not free and thus one must be careful
to keep an eye on cost of acquiring them as well.
As the basic purpose of business is to make profit, one must keep an ongoing track of the activities
undertaken in course of business. Two basic questions would have to be answered:
(a) What is the result of business operations? This will be answered by finding out whether it has made
profit or loss.
(b) What is the position of the resources acquired and used for business purpose? How are these
resources financed? Where the funds come from?
The answers to these questions are to be found continuously and the best way to find them is to record all
the business activities. Recording of business activities has to be done in a scientific manner so that they
reveal correct outcome. The science of book-keeping and accounting provides an effective solution. It
is a branch of social science. This study material aims at giving a platform to the students to understand

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basic principles and concepts, which can be applied to accurately measure performance of business.
After studying the various chapters included herein, the student should be able to apply the principles,
rules, conventions and practices to different business situations like trading, manufacturing or service.
Over years, the art and science of accounting has evolved together with progress of trade and
commerce at national and global levels. Professional accounting bodies have been doing intensive
research to come up with accounting rules that will be applicable. Modern business is certainly more
complex and continuous updating of these rules is required. Every stakeholder of the business is interested
in a particular facet of information about the business. The art and science of accounting helps to put
together these requirements of information as per universally accepted principles and also to interpret
the results. It is interesting to note that each one of us has an accountant hidden in us. We do see our
parents keep track of monthly expenses. We make a distinction between payment done for monthly
grocery and that for buying a house or a car. We understand that while grocery is a monthly expense and
buying a house is like creating a resource that has indefinite future use. The most common accounting
record that each one of us knows is our bank passbook or a bank statement, which the bank maintains
for us. It tracks each rupee that we deposit or withdraw from our account. When we go to supermarket to
buy something, the cashier at the counter will record things we buy and give us a ‘bill’ or ‘cash memo’.
These are source documents prepared for the transaction between the supermarket and us. While these
are simple examples, there could be more complex business activities. A good working knowledge of
keeping records is therefore necessary. Professional accounting bodies all over the world have been
functioning with the objective of providing this body of knowledge. These institutions are engaged in
imparting training in the field of accounting. Let us start with some basic definitions, concepts, conventions
and practices used in development of this art as well as science.

1.2 DEFINITIONS

In order to understand the subject matter with clarity, let us study some of the definitions which depict
the scope, content and purpose of Accounting. The field of accounting is generally sub-divided into:
(a) Book-keeping
(b) Financial Accounting
(c) Cost Accounting and
(d) Management Accounting
Let us understand each of these concepts.
(a) Book-keeping
The most common definition of book-keeping as given by J. R. Batliboi is “Book-keeping is an art of
recording business transactions in a set of books.”
As can be seen, it is basically a record keeping function. One must understand that not all dealings are,
however, recorded. Only transactions expressed in terms of money will find place in books of accounts.
These are the transactions which will ultimately result in transfer of economic value from one person
to the other. Book-keeping is a continuous activity, the records being maintained as transactions are
entered into. This being a routine and repetitive work, in today’s world, it is taken over by the computer
systems. Many accounting packages are available to suit different business organizations.
It is also referred to as a set of primary records. These records form the basis for accounting. It is an art
because, the record is to be kept in such a manner that it will facilitate further processing and reporting
of financial information which will be useful to all stakeholders of the business.
(b) Financial Accounting
It is commonly termed as Accounting. The American Institute of Certified Public Accountants defines
Accounting as “an art of recoding, classifying and summarizing in a significant manner and in terms

1.2 I FINANCIAL ACCOUNTING

of money, transactions and events which are in part at least of a financial character, and interpreting
the results thereof.”
The first step in the cycle of accounting is to identify transactions that will find place in books of accounts.
Transactions having financial impact only are to be recorded. E.g. if a businessman negotiates with
the customer regarding supply of products, this will not be recorded. The negotiation is a deal which
will potentially create a transaction and will have exchange of money or money’s worth. But unless this
transaction is finally entered into, it will not be recorded in the books of accounts.
Secondly, the recording of the business transactions is done based on the Golden Rules of accounting
(which are explained later) in a systematic manner. Transaction of similar nature are grouped together
and recorded accordingly. e.g. Sales Transactions, Purchase Transactions, Cash Transactions etc. One
has to interpret the transaction and then apply the relevant Golden Rule to make a correct entry thereof.
Thirdly, as the transactions increase in number, it will be difficult to understand the combined effect
of the same by referring to individual records. Hence, the art of accounting also involves the step of
summarizing them. With the aid of computers, this task is simplified in today’s accounting world. The
summarization will help users of the business information to understand and interpret business results.
Lastly, the accounting process provides the users with statements which will describe what has happened
to the business. Remember the two basic questions we talked about, one to know whether business
has made profit or loss and the other to know the position of resources that are used by the business.
It can be noted that although accounting is often referred to as an art, it is a science also. This is because
it is based on universally applicable set of rules. However, it is not a pure science as there is a possibility
of different interpretation.
(c) Cost Accounting
According to the Chartered Institute of Management Accountants (CIMA), Cost Accountancy is defined
as “application of costing and cost accounting principles, methods and techniques to the science,
art and practice of cost control and the ascertainment of profitability as well as the presentation of
information for the purpose of managerial decision-making.”
It is a branch of accounting dealing with the classification, recording, allocation, summarization and
reporting of current and prospective costs and analyzing their behaviours. Cost Accounting is frequently
used to facilitate internal decision making and provides tools with which management can appraise
performance and control costs of doing business. It primarily involves relating the costs to the different
products produced and sold or services rendered by the business. While Financial Accounting deals
with business transactions at a broader level, Cost Accounting aims at further breaking it up to the
last possible level to indentify costs with products and services. It uses the same Financial Accounting
documents and records. Modern computerized accounting packages like ERP systems provide for
processing Financial as well as Cost Accounting records simultaneously.
This branch of accounting deals with the process of ascertainment of costs. The concept of cost is always
applied with reference to a context. Knowledge of cost concepts and their application provide a very
sound platform for decision making. Cost Accounting aims at equipping management with information
that can be used for control on business activities.
(d) Management Accounting
Management Accounting is concerned with the use of Financial and Cost Accounting information to
managers within organizations, to provide them with the basis in making informed business decisions that
would allow them to be better equipped in their management and control functions. Unlike Financial
Accounting information (which, for public companies, is public information), Management Accounting
information is used within an organization (typically for decision-making) and is usually confidential and
its access available only to a selected few.

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According to the Chartered Institute of Management Accountants (CIMA), Management Accounting

is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and
communication of information used by management to plan, evaluate and control within an entity
and to assure appropriate use of and accountability for its resources. Management Accounting also
comprises the preparation of financial reports for non management groups such as shareholders,
creditors, regulatory authorities and tax authorities”
Basically, Management Accounting aims to facilitate management in formulating strategies, planning
and constructing business activities, making decisions, optimal use of resources, and safeguarding
assets of business.
These branches of accounting have evolved over years of research and are basically synchronized
with the requirements of business organizations and all entities associated with them. We will now see
what are they and how accounting satisfies various needs of different stakeholders.

1.2.1 Difference between Book-keeping and Accountancy

The Significant difference between Book-keeping and Accountancy are : -

Sl Points of Book Keeping Accountancy

No. difference
1. Meaning Book-keeping is considered as end. Accountancy is considered as
beginning.
2. Functions The primary stage of accounting The overall accounting functions are
function is called Book-keeping. guided by accountancy.
3 Depends Book-keeping can provide the base of Accountancy depends on Book-
Accounting. keeping for its complete functions.
4. Data The necessary data about financial Accountancy can take its decisions,
performances and financial positions prepare reports and statements from
are taken from Book-keeping. the data taken from Book-keeping.
5. Recording of Financial transactions are recorded Accountancy does not take any
Transactions on the basis of accounting principles, principles, concepts and conventions
concepts and conventions. from Book-keeping.

1.2 .2 Difference between Management Accounting and Financial Accounting

The significant difference between Management Accounting and Financial Accounting are :

Management Accounting Financial Accounting

1. Management Accounting is primarily based on 1. Financial Accounting is based on the
the data available from Financial Accounting. monetary transactions of the enterprise.
2. It provides necessary information to the 2. Its main focus is on recording and classifying
management to assist them in the process monetary transactions in the books of
of planning, controlling, performance accounts and preparation of financial
evaluation and decision making. statements at the end of every accounting
period.
3. Reports prepared in Management 3. Reports as per Financial Accounting are
Accounting are meant for management meant for the management as well as for
and as per management requirement. shareholders and creditors of the concern.
4. Reports may contain both subjective and 4. Reports should always be supported by
objective figures. relevant figures and it emphasizes on the
objectivity of data.
5. Reports are not subject to statutory audit. 5. Reports are always subject to statutory audit.
6. It evaluates the sectional as well as the entire 6. It ascertains , evaluates and exhibits the
performance of the business. financial strength of the whole business.

1.4 I FINANCIAL ACCOUNTING

 1.3 ACCOUNTING CYCLE

When complete sequence of accounting procedure is done which happens frequently and repeated
in same directions during an accounting period, the same is called an accounting cycle.

Steps/Phases of Accounting Cycle

The steps or phases of accounting cycle can be developed as under:

Recording of
Transaction

Financial
Journal
Statement

Closing
Ledger
Entries

Adjusted Trial Trial

Balance Balance

Adjustment
Entries

ACCOUNTING CYCLE

(a) Recording of Transaction:- As soon as a transaction happens it is at first recorded in subsidiary

book.
(b) Journal : The transactions are recorded in Journal chronologically.
(c) Ledger : All journals are posted into ledger chronologically and in a classified manner.
(d) Trial Balance : After taking all the ledger account’s closing balances, a Trial Balance is prepared
at the end of the period for the preparations of financial statements.
(e) Adjustment Entries : All the adjustments entries are to be recorded properly and adjusted
accordingly before preparing financial statements.
(f) Adjusted Trial Balance : An adjusted Trail Balance may also be prepared.
(g) Closing Entries : All the nominal accounts are to be closed by the transferring to Trading Account
and Profit and Loss Account.
(h) Financial Statements : Financial statement can now be easily prepared which will exhibit the true
financial position and operating results.

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Accounting Process

1.4 OBJECTIVES OF ACCOUNTING

The main objective of Accounting is to provide financial information to stakeholders. This financial
information is normally given via financial statements, which are prepared on the basis of Generally
Accepted Accounting Principles (GAAP). There are various accounting standards developed by
professional accounting bodies all over the world. In India, these are governed by The Institute of
Chartered Accountants of India, (ICAI). In the US, the American Institute of Certified Public Accountants
(AICPA) is responsible to lay down the standards. The Financial Accounting Standards Board (FASB)
is the body that sets up the International Accounting Standards. These standards basically deal with
accounting treatment of business transactions and disclosing the same in financial statements.
The following objectives of accounting will explain the width of the application of this knowledge stream:
(a) To ascertain the amount of profit or loss made by the business i.e. to compare the income earned
versus the expenses incurred and the net result thereof.
(b) To know the financial position of the business i.e. to assess what the business owns and what it owes.
(c) To provide a record for compliance with statutes and laws applicable.
(d) To enable the readers to assess progress made by the business over a period of time.
(e) To disclose information needed by different stakeholders.
Let us now see which are different stakeholders of the business and what do they seek from the
accounting information. This is shown in the following table.

Stakeholder Interest in business Accounting Information

Owners / Investors / Profits or losses Financial statements, Cost Accounting
existing and potential records, Management Accounting
reports
Lenders Assessment of capability of the Financial statement and analysis thereof,
business to pay interest and principal reports forming part of accounts,
of money lent. Basically, they valuation of assets given as security
monitor the solvency of business
Customers and suppliers Stability and growth of the business Financial and Cash flow statements
to assess ability of the business to offer
better business terms and ability to
supply the products and services
Government Whether the business is complying A c c o u n t i n g d o c u m e n t s s u c h a s
with various legal requirements vouchers, extracts of books, information
of purchase, sales, employee obligations
etc. and financial statements
Employees and trade Growth and profitability Financial statements for negotiating pay
unions packages
Competitors Performance and possible tie-ups in Accounting information to find out
the era of mergers and acquisitions possible synergies

1.4.1 Users of Accounting Information

Accounting provides information both to internal users and the external users. The internal users are all the
organizational participants at all levels of management (i.e. top, middle and lower). Generally top level
management requires information for planning, middle level management which requires information
for controlling the operations. For internal use, the information is usually provided in the form of reports,
for instance Cash Budget Reports, Production Reports, Idle Time Reports, Feedback Reports, whether
to retain or replace an equipment decision reports, project appraisal report, and the like.

1.6 I FINANCIAL ACCOUNTING

There are also the external users (e.g. Banks, Creditors). They do not have direct access to all the records
of an enterprise, they have to rely on financial statements as the source of information. External users
are basically, interested in the solvency and profitability of an enterprise.
1.4.2 Types of Accounting Information
Accounting information may be categorized in number of ways on the basis of purpose of accounting
information, on the basis of measurement criteria and so on. The various types of accounting information
are given below:
I. Accounting information relating to financial transactions and events.
(a) Financial Position- Information about financial position is primarily provided in a Balance Sheet.
The financial position of an enterprise is affected by different factors, like -
(i) Information about the economic resources controlled by the enterprise and its capacity in
the past to alter these resources is useful in predicting the ability of the enterprise to generate
cash and cash equivalents in the future.
(ii) Information about financial structure is useful in predicting future borrowing needs and how
future profits and cash flows will be distributed among those with an interest in the enterprise; it
is also useful in predicting how successful the enterprise is likely to be in raising further finance.
(iii) Information about liquidity and solvency is useful in predicting the ability of the enterprise to
meet its financial commitments as they fall due. Liquidity refers to the availability of cash in the
near future to meet financial commitments over this period. Solvency refers to the availability
of cash over the longer term to meet financial commitments as they fall due.
(b) Financial Performance- Information about financial performance is primarily provided in a
Statement of Profit and Loss which is also known as Income Statement.
Information about the performance of an enterprise and its profitability, is required in order to
assess potential changes taking place in the economic resources that it is likely to control in the
future. Information about variability of performance is also important in this regard. Information
about performance is necessary in predicting the capacity to generate cash flows from its
available resource. It is an important input in forming judgments about the effectiveness of
an enterprise to utilize resources.
(c) Cash Flows—Information about cash flows is provided in the financial statements by means of
a cash flow statement.
Information concerning cash flows is useful in providing the users with a basis to assess the ability
of the enterprise to generate cash and cash equivalents and the needs of the enterprise to
utilise those cash and cash equivalent.
These information may be classified as follows:
(i) on the basis of Historical Cost, (ii)on the basis of Current Cost, (iii) on the basis of Realizable
Value, (iv)on the basis of Present Value
II. Accounting information relating to cost of a product, operation or function.
III. Accounting information relating to planning and controlling the activities of an enterprise for internal
reporting.
This information may further be classified as follows:
(i) Information relating to Finance Area
(ii) Information relating to Production Area
(iii) Information relating to Marketing Area
(iv) Information relating to Personnel Area
(v) Information relating to Other Areas (such as Research & Development)

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IV. Accounting information relating to Social Effects of business decisions.

V. Accounting information relating to Environment and Ecology.
VI. Accounting information relating to Human Resources.

1.4.3 Qualitative Characteristics of Accounting Information

Qualitative characteristics are the attributes that make the information provided in financial statements
useful to its users.
Qualitative Characteristics of Accounting Information can be segregated in the following categories
(i) Reliability
(ii) Relevance
(iii) Materiality
(iv) Understandability
(v) Comparability
(i) Reliability - To be useful, information must also be reliable. Information has the quality of reliability
when it is free from material error and bias and can be depended upon by users to represent
faithfully that which it either portrays to represent or could reasonably be expected to represent.
Information may be relevant but so unreliable in nature or representation that its recognition may be
potentially misleading and so it becomes useless. Reliability of the financial statements is dependent
on the following:
(a) Faithful Representation- To be reliable, information must represent faithfully the transactions and
other events which either portrays to represent or could reasonably be expected to represent.
Most financial information is subject to some risks of being less than faithful representation
of that which it purports to portray. This is not due to bias, but rather to enhance difficulties
either in identifying the transactions or other events to be measured in devising or applying
measurements and presentation techniques that can convey messages that correspond with
those transactions and events.
(b) Substance Over Form-If information is to represent faithfully the transactions and other events
that it portrays to represent, it is necessary that they are accounted for and presented in
accordance with their substance and economic reality and not merely by their legal forms.
The substance of transactions or other events is not always consistent with that which is apart
from their legal or contrived form.
(c) Neutrality - To be reliable the information contained in financial statements must be neutral.
Financial statements are not neutral if by selective presentation of information, they influence
the making of a decision or judgment in order to achieve a predetermined result or outcome.
(d) Prudence - The preparers of financial statements have to contend with uncertainties that
inevitably surround many events and circumstances. Such uncertainties are recognized by the
disclosure of their nature and extent and by exercise of prudence in the financial statements.
Prudence is the inclusion of a degree of caution. In the exercise of judgement needed in
making the estimate required under conditions of uncertainties so that assets or income are not
overstated and liabilities or expenses are not understated. However, the exercise of prudence
does not allow the creation of hidden reserves or excessive provisions, i.e. the deliberate
understatement of assets or income or deliberate over statement of liabilities or expenses.
(e) Completeness - To be reliable the information in the financial statements must be complete
within the bounds of materiality and cost. An omission can cause information to be false or
misleading and thus, unreliable and deficient in terms of its relevance.
(ii) Relevance- To be useful, information must be relevant to the decision-making needs of users.
Information has the quality of relevance when it influences the economic decisions of the users

1.8 I FINANCIAL ACCOUNTING

 by helping them to evaluate past, present or future events or confirming or correcting their past
evaluation. The productive and confirmatory roles of information are interrelated. For example,
information about the current level and structure of asset-holding has value to users when they
endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability
to react to adverse situations. The same information plays a confirmatory role in respect of past
prediction about, for example, the way in which the enterprise would be structured or the outcome
of planned operations.
(iii) Materiality- The relevance of information is affected by its nature and materiality. Information is
material if its omission or mis-statement could influence the economic decisions of users made on
the basis of financial statements. Materiality depends on the size of the item or error judged in the
particular circumstance of its omission or mis-statement. Thus, materiality provides a threshold or a
cut-off point rather than being a primary qualitative characteristic which information must have if
it is to be useful.
(iv) Understandability- The information provided in financial statements must be easily understandable
by users. For this purpose, users are assumed to have a reasonable knowledge of business and
economic activities, accounting and a willingness to study the information with reasonable diligence.
However, information about complex matters that should be included in the financial statements
because of its relevance to the decision making needs of users and should not be excluded merely
on the grounds that it may be too difficult for certain users to understand.
(v) Comparability- The financial statements of an enterprise should be comparable. For this purpose users
should be informed of the accounting policies, any changes in those policies and the effects of such
changes. This qualitative characteristic requires pursuance of consistency in choosing accounting
policies. Lack of consistency may disturb the comparability quality of the financial statement
information. Accordingly, accounting standard on disclosure of accounting policies consider
consistency as a fundamental accounting assumption along with accrual and going concern.

1.5 BASIC ACCOUNTING TERMS

In order to understand the subject matter clearly, one must grasp the following common expressions
always used in business accounting. The aim here is to enable the student to understand with these
often used concepts before we embark on accounting procedures and rules. You may note that these
terms can be applied to any business activity with the same connotation.
(i) Transaction: It means an event or a business activity which involves exchange of money or money’s
worth between parties. The event can be measured in terms of money and changes the financial
position of a person e.g. purchase of goods would involve receiving material and making payment
or creating an obligation to pay to the supplier at a future date. Transaction could be a cash
transaction or credit transaction. When the parties settle the transaction immediately by making
payment in cash or by cheque, it is called a cash transaction. In credit transaction, the payment
is settled at a future date as per agreement between the parties.
(ii) Goods/Services : These are tangible article or commodity in which a business deals. These articles or
commodities are either bought and sold or produced and sold. At times, what may be classified as
‘goods’ to one business firm may not be ‘goods’ to the other firm. e.g. for a machine manufacturing
company, the machines are ‘goods’ as they are frequently made and sold. But for the buying
firm, it is not ‘goods’ as the intention is to use it as a long term resource and not sell it. Services are
intangible in nature which are rendered with or without the object of earning profits.
(iii) Profit: The excess of Revenue Income over expense is called profit. It could be calculated for each
transaction or for business as a whole.
(iv) Loss: The excess of expense over income is called loss. It could be calculated for each transaction
or for business as a whole.

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(v) Asset: Asset is a resource owned by the business with the purpose of using it for generating future
profits. Assets can be Tangible and Intangible. Tangible Assets are the Capital assets which have
some physical existence. They can, therefore, be seen, touched and felt, e.g. Plant and Machinery,
Furniture and Fittings, Land and Buildings, Books, Computers, Vehicles, etc. The capital assets which
have no physical existence and whose value is limited by the rights and anticipated benefits that
possession confers upon the owner are known as lntangible Assets. They cannot be seen or felt
although they help to generate revenue in future, e.g. Goodwill, Patents, Trade-marks, Copyrights,
Brand Equity, Designs, Intellectual Property, etc.
Assets can also be classified into Current Assets and Non-Current Assets.
Current Assets – An asset shall be classified as Current when it satisfies any of the following :
(a) It is expected to be realised in, or is intended for sale or consumption in the Company’s normal
Operating Cycle,
(b) It is held primarily for the purpose of being traded ,
(c) It is due to be realised within 12 months after the Reporting Date, or
(d) It is Cash or Cash Equivalent unless it is restricted from being exchanged or used to settle a
Liability for at least 12 months after the Reporting Date.
Non-Current Assets – All other Assets shall be classified as Non-Current Assets. e.g. Machinery held
for long term etc.
(vi) Liability: It is an obligation of financial nature to be settled at a future date. It represents amount
of money that the business owes to the other parties. E.g. when goods are bought on credit, the
firm will create an obligation to pay to the supplier the price of goods on an agreed future date
or when a loan is taken from bank, an obligation to pay interest and principal amount is created.
Depending upon the period of holding, these obligations could be further classified into Long Term
on non-current liabilities and Short Term or current liabilities.
Current Liabilities – A liability shall be classified as Current when it satisfies any of the following :
(a) It is expected to be settled in the Company’s normal Operating Cycle,
(b) It is held primarily for the purpose of being traded,
(c) It is due to be settled within 12 months after the Reporting Date, or
(d) The Company does not have an unconditional right to defer settlement of the liability for
at least 12 months after the reporting date (Terms of a Liability that could, at the option of
the counterparty, result in its settlement by the issue of Equity Instruments do not affect its
classification)
Non-Current Liabilities – All other Liabilities shall be classified as Non-Current Liabilities. E.g. Loan
taken for 5 years, Debentures issued etc.
(vii) Internal Liability : These represent proprietor’s equity, i.e. all those amount which are entitled to the
proprietor, e.g., Capital, Reserves, Undistributed Profits, etc.
(viii) Working Capital : In order to maintain flows of revenue from operation, every firm needs certain
amount of current assets. For example, cash is required either to pay for expenses or to meet
obligation for service received or goods purchased, etc. by a firm. On identical reason, inventories
are required to provide the link between production and sale. Similarly, Accounts Receivable
generate when goods are sold on credit. Cash, Bank, Debtors, Bills Receivable, Closing Stock,
Prepayments etc. represent current assets of firm. The whole of these current assets form the working
capital of a firm which is termed as Gross Working Capital.

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 Gross Working Capital = Total Current Assets
= Long term internal liabilities plus long term debts plus the current liabilities
minus the amount blocked in the fixed assets.
There is another concept of working capital. Working capital is the excess of current assets over current
liabilities. That is the amount of current assets that remain in a firm if all its current liabilities are paid.
This concept of working capital is known as Net Working Capital which is a more realistic concept.
Working Capital (Net) = Current Assets – Currents Liabilities.
(ix) Contingent Liability : It represents a potential obligation that could be created depending on the
outcome of an event. E.g. if supplier of the business files a legal suit, it will not be treated as a liability
because no obligation is created immediately. If the verdict of the case is given in favour of the
supplier then only the obligation is created. Till that it is treated as a contingent liability. Please note
that contingent liability is not recorded in books of account, but disclosed by way of a note to the
financial statements.
(x) Capital : It is amount invested in the business by its owners. It may be in the form of cash, goods,
or any other asset which the proprietor or partners of business invest in the business activity. From
business point of view, capital of owners is a liability which is to be settled only in the event of closure
or transfer of the business. Hence, it is not classified as a normal liability. For corporate bodies, capital
is normally represented as share capital.
(xi) Drawings : It represents an amount of cash, goods or any other assets which the owner withdraws
from business for his or her personal use. e.g. if the life insurance premium of proprietor or a partner
of business is paid from the business cash, it is called drawings. Drawings will result in reduction in
the owners’ capital. The concept of drawing is not applicable to the corporate bodies like limited
companies.
(xii) Net worth : It represents excess of total assets over total liabilities of the business. Technically, this
amount is available to be distributed to owners in the event of closure of the business after payment
of all liabilities. That is why it is also termed as Owner’s Equity. A profit making business will result in
increase in the owner’s equity whereas losses will reduce it.
(xiii) Non-current Investments : Non-current Investments are investments which are held beyond the
current period as to sale or disposal. e. g. Fixed Deposit for 5 years.
(xiv) Current Investments : Current investments are investments that are by their nature readily realizable
and are intended to be held for not more than one year from the date on which such investment
is made. e. g. 11 months Commercial Paper.
(xv) Debtor : The sum total or aggregate of the amounts which the customer owe to the business for
purchasing goods on credit or services rendered or in respect of other contractual obligations, is
known as Sundry Debtors or Trade Debtors, or Trade Receivable, or Book-Debts or Debtors. In other
words, Debtors are those persons from whom a business has to recover money on account of goods
sold or service rendered on credit. These debtors may again be classified as under:
(i) Good debts : The debts which are sure to be realized are called good debts.
(ii) Doubtful Debts : The debts which may or may not be realized are called doubtful debts.
(iii) Bad debts : The debts which cannot be realized at all are called bad debts.
It must be remembered that while ascertaining the debtors balance at the end of the period certain
adjustments may have to be made e.g. Bad Debts, Discount Allowed, Returns Inwards, etc.
(xvi) Creditor : A creditor is a person to whom the business owes money or money’s worth. e.g. money
payable to supplier of goods or provider of service. Creditors are generally classified as Current
Liabilities.

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Accounting Process

(xvii) Capital Expenditure : This represents expenditure incurred for the purpose of acquiring a fixed asset
which is intended to be used over long term for earning profits there from. e. g. amount paid to
buy a computer for office use is a capital expenditure. At times expenditure may be incurred for
enhancing the production capacity of the machine. This also will be a capital expenditure. Capital
expenditure forms part of the Balance Sheet.
(xviii) Revenue expenditure : This represents expenditure incurred to earn revenue of the current period.
The benefits of revenue expenses get exhausted in the year of the incurrence. e.g. repairs, insurance,
salary & wages to employees, travel etc. The revenue expenditure results in reduction in profit or
surplus. It forms part of the Income Statement.
(xix) Balance Sheet : It is the statement of financial position of the business entity on a particular date.
It lists all assets, liabilities and capital. It is important to note that this statement exhibits the state of
affairs of the business as on a particular date only. It describes what the business owns and what
the business owes to outsiders (this denotes liabilities) and to the owners (this denotes capital). It is
prepared after incorporating the resulting profit/losses of Income Statement.
(xx) Profit and Loss Account or Income Statement : This account shows the revenue earned by the
business and the expenses incurred by the business to earn that revenue. This is prepared usually
for a particular accounting period, which could be a month, quarter, a half year or a year. The net
result of the Profit and Loss Account will show profit earned or loss suffered by the business entity.
(xxi) Trade Discount : It is the discount usually allowed by the wholesaler to the retailer computed on the
list price or invoice price. e.g. the list price of a TV set could be ` 15000. The wholesaler may allow
20% discount thereof to the retailer. This means the retailer will get it for ` 12000 and is expected to
sale it to final customer at the list price. Thus the trade discount enables the retailer to make profit by
selling at the list price. Trade discount is not recorded in the books of accounts. The transactions are
recorded at net values only. In above example, the transaction will be recorded at ` 12000 only.
(xxii) Cash Discount : This is allowed to encourage prompt payment by the debtor. This has to be recorded
in the books of accounts. This is calculated after deducting the trade discount. e.g. if list price is
` 15000 on which a trade discount of 20% and cash discount of 2% apply, then first trade discount
of ` 3000 (20% of ` 15000) will be deducted and the cash discount of 2% will be calculated on
` 12000 (`15000 – ` 3000). Hence the cash discount will be ` 240/- (2% of ` 12000) and net payment
will be ` 11,760 (`12,000 - ` 240)
Let us see if we can apply these in the following illustrations.

Illustration 1.
Fill in the blanks:
(a) The cash discount is allowed by _________ to the _________.
(b) Profit means excess of _________ over _________.
(c) Debtor is a person who _________ to others.
(d) In a credit transaction, the buyer is given a _________ facility.
(e) The fixed asset is generally held for _________.
(f) The current liabilities are obligations to be settled in _________ period.
(g) The withdrawal of money by the owner of business is called _________
(h) The amount invested by owners into business is called _________.
(i) Transaction means exchange of money or money’s worth for _________.

1.12 I FINANCIAL ACCOUNTING

(j) The net result of an income statement is _________ or _________.
(k) The _________ shows financial position of the business as on a particular date.
(l) The _________ discount is never entered in the books of accounts.
(m) Vehicles represent _________ expenditure while repairs to vehicle would mean _________ expenditure.
(n) Net worth is excess of _________ _________ over _________ _________.
Solution:
(a) creditor, debtor
(b) income, expenditure
(c) Owes
(d) Credit
(e) Longer period
(f) Short
(g) Drawings
(h) Capital
(i) Value
(j) Profit, loss
(k) Balance sheet
(l) Trade
(m) Capital, revenue
(n) Total assets, total liabilities

Illustration 2.
Give one word or a term used to describe the following:-
(a) An exchange of benefit for value
(b) A transaction without immediate cash settlement.
(c) Commodities in which a business deals.
(d) Excess of expenditure over income.
(e) Things of value owned by business to earn future profits.
(f) Amount owed by business to others.
(g) An obligation which may or may not materialise.
(h) An allowance by a creditor to debtor for prompt payment.
(i) Assets like brand value, copy rights, goodwill
Solution:
(a) Transaction, (b) Credit transaction, (c) Goods, (d) Loss, (e) Assets, (f) Liability, (g) Contingent Liability,
(h) Cash Discount, (i) Intangible Assets

FINANCIAL ACCOUNTING I 1.13

Accounting Process

1.6. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

A widely accepted set of rules, conventions, standards, and procedures for reporting financial information,
as established by the Financial Accounting Standards Board are called Generally Accepted Accounting
Principles (GAAP). These are the common set of accounting principles, standards and procedures that
companies use to compile their financial statements. GAAP are a combination of standards (set by policy
boards) and simply the commonly accepted ways of recording and reporting accounting information.
GAAP is to be followed by companies so that investors have a optimum level of consistency in the
financial statements they use when analyzing companies for investment purposes. GAAP cover such
aspects like revenue recognition, balance sheet item classification and outstanding share measurements.

1.7 ACCOUNTING CONCEPTS AND CONVENTIONS

As seen earlier, the accounting information is published in the form of financial statements. The three
basic financial statements are
(i) The Profit & Loss Account that shows net business result i.e. profit or loss for a certain periods
(ii) The Balance Sheet that exhibits the financial strength of the business as on a particular dates
(iii) The Cash Flow Statement that describes the movement of cash from one date to the other.
As these statements are meant to be used by different stakeholders, it is necessary that the information
contained therein is based on definite principles, concrete concepts and well accepted convention.
Accounting principles are basic guidelines that provide standards for scientific accounting practices
and procedures. They guide as to how the transactions are to be recorded and reported. They assure
uniformity and understandability. Accounting concepts lay down the foundation for accounting
principles. They are ideas essentially at mental level and are self-evident. These concepts ensure
recording of financial facts on sound bases and logical considerations. Accounting conventions are
methods or procedures that are widely accepted. When transactions are recorded or interpreted, they
follow the conventions. Many times, however, the terms-principles, concepts and conventions are used
interchangeably.
Professional Accounting Bodies have published statements of these concepts. Over years, many of these
concepts are being challenged as outlived. Yet, no major deviations have been made as yet. Path
breaking ideas have emerged and the accounting standards of modern days do require companies to
record and report transactions which may not be necessarily based on concepts that are in vogue for
long. It is essential to study accounting from the basic levels and understand these concepts in entirety.
Theory Base of Accounting

Basic Assumptions Basic Principles Modifying Priciples

(a) Business Entity Concept (a) Revenue Realization Concpet (a) Materiality Concept
(b) Going Concern Concept (b) Matching Concept (b) Consistency Concept
(c) Money Measurement Concept (c) Full Disclosure Concept (c) Conservatism Concpet
(d) Accounting Period Concept (d) Dual Aspect Concept (d) Timeliness Concept
(e) Accrual Concept (e) Verifiable Objective Evidence Concpet (e) Industry Practice Concept
(f) Historical Cost Concept
(g) Balance Sheet Equation Concpet

1.14 I FINANCIAL ACCOUNTING

A. BASIC ASSUMPTIONS
(a) Business Entity Concept
As per this concept, the business is treated as distinct and separate from the individuals who own or
manage it. When recording business transactions, the important question is how will it affect the business
entity? How they affect the persons who own it or run it or otherwise associated with it is irrelevant.
Application of this concept enables recording of transactions of the business entity with its owners or
managers or other stakeholders. For example, if the owner pays his personal expenses from business
cash, this transaction can be recorded in the books of business entity. This transaction will take the cash
out of business and also reduce the obligation of the business towards the owner.
At times it is difficult to separate owners from the business. Consider an individual, who runs a small retail
outlet. In the eyes of law, there is no distinction made between financial affairs of the outlet with that of
the individual. The creditors of the retail outlet can sue the individual and collect his claim from personal
resources of the individual. However, in accounting, the records are kept as distinct for the retail outlet
and the individual respectively. For certain forms of business entities, such as limited companies this
distinction is easier. The limited companies are separate legal persons in the eyes of law as well.
The entity concept requires that all the transactions are to be viewed, interpreted and recorded from
‘business entity’ point of view. An accountant steps into the shoes of the business entity and decides
to account for the transactions. The owner’s capital is the obligation of business and it has to be paid
back to the owner in the event of business closure. Also, the profit earned by the business will belong
to the owner and hence is treated as owner’s equity.
(b) Going Concern Concept
The basic principles of this concept is that business is assumed to exist for an indefinite period and is not
established with the objective of closing it down. So unless there is good evidence to the contrary, the
accountant assumes that a business entity is a ‘going concern’ - that it will continue to operate as usual
for a longer period of time. It will keep getting money from its customers, pay its creditors, buy and sell
goods, use assets to earn profits in future. If this assumption is not considered, one will have to constantly
value the worth of the assets and resource. This is not practicable. This concept enables the accountant
to carry forward the values of assets and liabilities from one accounting period to the other without
asking the question about usefulness and worth of the assets and recoverability of the receivables.
The going concern concept forms a sound basis for preparation of a Balance Sheet.
(c) Money Measurement Concept
A business transaction will always be recoded if it can be expressed in terms of money. The advantage
of this concept is that different types of transactions could be recorded as homogenous entries with
money as common denominator. A business may own ` 3 Lacs cash, 1500 kg of raw material, 10 vehicles,
3 computers etc. Unless each of these is expressed in terms of money, we cannot find out the assets
owned by the business. When expressed in the common measure of money, transactions could be
added or subtracted to find out the combined effect. In the above example, we could add values of
different assets to find the total assets owned.
The application of this concept has a limitation. When transactions are recorded in terms of money,
we only consider the absolute value of the money. The real value of the money may fluctuate from
time to time due to inflation, exchange rate changes, etc. This fact is not considered when recording
the transaction.
(d) The Accounting Period Concept
We have seen that as per the going-concern concept the business entity is assumed to have an
indefinite life. Now if we were to assess whether the business has made profit or loss, should we wait until
this indefinite period is over? Would it mean that we will not be able to assess the business performance
on an ongoing basis? Does it deprive all stakeholders the right to the accounting information? Would it
mean that the business will not pay income tax as no income will be computed?

FINANCIAL ACCOUNTING I 1.15

Accounting Process

To circumvent this problem, the business entity is supposed to be paused after a certain time interval. This
time interval is called an accounting period. This period is usually one year, which could be a calendar
year i.e. 1st January to 31st December or it could be a fiscal year in India as 1st April to 31st March. The
business organizations have the freedom to choose their own accounting year. For certain organizations,
reporting of financial information in public domain are compulsory. In India, listed companies must
report their quarterly unaudited financial results and yearly audited financial statements. For internal
control purpose, many organizations prepare monthly financial statements. The modern computerized
accounting systems enable the companies to prepare real-time online financials at the click of button.
Businesses are living, continuous organisms. The splitting of the continuous stream of business events into
time periods is thus somewhat arbitrary. There is no significant change just because one accounting
period ends and a new one begins. This results into the most difficult problem of accounting of how to
measure the net income for an accounting period. One has to be careful in recognizing revenue and
expenses for a particular accounting period. Subsequent section on accounting procedures will explain
how one goes about it in practice.

(e) The Accrual Concept

The accrual concept is based on recognition of both cash and credit transactions. In case of a cash
transaction, owner’s equity is instantly affected as cash either is received or paid. In a credit transaction,
however, a mere obligation towards or by the business is created. When credit transactions exist (which
is generally the case), revenues are not the same as cash receipts and expenses are not same as cash
paid during the period.
When goods are sold on credit as per normally accepted trade practices, the business gets the legal
right to claim the money from the customer. Acquiring such right to claim the consideration for sale of
goods or services is called accrual of revenue. The actual collection of money from customer could
be at a later date.
Similarly, when the business procures goods or services with the agreement that the payment will be
made at a future date, it does not mean that the expense effect should not be recognized. Because
an obligation to pay for goods or services is created upon the procurement thereof, the expense effect
also must be recognized.
Today’s accounting systems based on accrual concept are called as Accrual System or Mercantile
System of Accounting.

B. BASIC PRINCIPLES

(a) The Revenue Realisation Concept

While the conservatism concept states whether or not revenue should be recognized, the concept of
realisation talks about what revenue should be recognized. It says amount should be recognized only
to the tune of which it is certainly realizable. Thus, mere getting an order from the customer won’t make
it eligible to recognize as revenue. The reasonable certainty of realizing the money will come only when
the goods ordered are actually supplied to the customer and he is billed. This concept ensures that
income unearned or unrealized will not be considered as revenue and the firms will not inflate profits.
Consider that a store sales goods for ` 25 lacs during a month on credit. The experience and past data
shows that generally 2% of the amount is not realized. The revenue to be recognized will be ` 24.50 lacs.
Although conceptually the revenue to be recognized at this value, in practice the doubtful amount of
` 50 thousand (2% of ` 25 lacs) is often considered as expense.

(b) The Matching Concept

As we have seen the sale of goods has two effects: (i) a revenue effect, which results in increase in owner’s
equity by the sales value of the transaction and (ii) an expense effect, which reduces owner’s equity by
the cost of goods sold, as the goods go out of the business. The net effect of these two effects will reflect

1.16 I FINANCIAL ACCOUNTING

either profit or loss. In order to correctly arrive at the net result, both these aspects must be recognized
during the same accounting period. One cannot recognize only the revenue effect thereby inflating
the profit or only the expense effect which will deflate the profit. Both the effects must be recognized
in the same accounting period. This is the principle of matching concept.
To generalize, when a given event has two effects – one on revenue and the other on expense, both
must be recognized in the same accounting period.
(c) Full Disclosure Concept
As per this concept, all significant information must be disclosed. Accounting data should properly be
clarified, summarized, aggregated and explained for the purpose of presenting the financial statements
which are useful for the users of accounting information. Practically, this principle emphasizes on the
materiality, objectivity and consistency of accounting data which should disclose the true and fair
view of the state of affairs of a firm. This principle is going to be popular day by day as per Companies
Act, 1956 major provisions for disclosure of essential information about accounting data and as such,
concealment of material information, at present, is not very easy. Thus, full disclosure must be made for
such material information which are useful to the users of accounting information.
(d) Dual Aspect Concept

The assets represent economic resources of the business, whereas the claims of various parties on business
are called obligations. The obligations could be towards owners (called as owner’s equity) and towards
parties other than the owners (called as liabilities).
When a business transaction happens, it will involve use of one or the other resource of the business to
create or settle one or more obligations. e.g. consider Mr. Suresh starts a business with the investment of
` 25 lacs. Here, the business has got a resource of cash worth ` 25 lacs (which is its asset), but at the same
time it has created an obligation of business towards Mr. Suresh that in the event of business closure,
the money will be paid back to him. This could be shown as:

Assets = Liabilities + Capital

In other words,
Cash brought in by Mr. Suresh (` 25 lacs) = Liability of business towards Mr. Suresh (` 25 lacs)
We know that liability of the business could be towards owners and parties other than owners, this
equation could be re-written as:

Assets = Liabilities + Owner’s equity

Cash ` 25,00,000 = Liabilities ` nil + Mr. Suresh’s equity ` 25,00,000

This is the fundamental accounting equation shown as formal expression of the dual aspect concept. This
powerful concept recognizes that every business transaction has dual impact on the financial position.
Accounting systems are set up to simultaneously record both these aspects of every transaction; that
is why it is called as Double-entry system of accounting. In its present form the double entry system of
accounting owes its existence to an Italian expert Mr. Luca Pacioli in the year 1495.
Continuing with our example of Mr. Suresh, now let us consider he borrows ` 15 lacs from bank. The dual
aspect of this transaction-on one hand the business cash will increase by ` 15 lacs and a liability towards
the bank will be created for ` 15 lacs.

Assets = Liabilities + Owner’s equity

Cash ` 40,00,000 = Liabilities ` 15,00,000 + Mr. Suresh’s equity ` 25,00,000

The student must note that the dual aspect concept entails recognition of the two effects of each
transaction. These effects are of equal amount and reverse in nature. How to decide these two aspects?

FINANCIAL ACCOUNTING I 1.17

Accounting Process

The golden rules of accounting are used to arrive at this decision. After recording both aspects of the
transaction, the basic accounting equation will always balance or be equal.
The above concepts find the application in preparation of the Balance Sheet which is the statement of
assets and liabilities as on a particular date. We will now see some more concepts that are important
for preparation of Profit and Loss Account or Income Statement.
(e) Verifiable Objective Evidence Concept
Under this principle, accounting data must be verified. In other words, documentary evidence of
transactions must be made which are capable of verification by an independent respect. In the
absence of such verification, the data which will be available will neither be reliable nor be dependable,
i.e., these should be biased data. Verifiability and objectivity express dependability, reliability and
trustworthiness that are very useful for the purpose of displaying the accounting data and information
to the users.
(f) Historical Cost Concept
Business transactions are always recorded at the actual cost at which they are actually undertaken.
The basic advantage is that it avoids an arbitrary value being attached to the transactions. Whenever
an asset is bought, it is recorded at its actual cost and the same is used as the basis for all subsequent
accounting purposes such as charging depreciation on the use of asset, e.g. if a production equipment
is bought for ` 1.50 crores, the asset will be shown at the same value in all future periods when disclosing
the original cost. It will obviously be reduced by the amount of depreciation, which will be calculated
with reference to the actual cost. The actual value of the equipment may rise or fall subsequent to the
purchase, but that is considered irrelevant for accounting purpose as per the historical cost concept.
The limitation of this concept is that the Balance Sheet does not show the market value of the assets
owned by the business and accordingly the owner’s equity will not reflect the real value. However, on
an ongoing basis, the assets are shown at their historical costs as reduced by depreciation.
(g) Balance Sheet Equation Concept
Under this principle, all which has been received by us must be equal to that has been given by us and
needless to say that receipts are clarified as debits and giving is clarified as credits. The basic equation,
appears as :-
Debit = Credit
Naturally every debit must have a corresponding credit and vice-e-versa. So, we can write the above
in the following form –
Expenses + Losses + Assets = Revenues + Gains + Liabilities
And if expenses and losses, and incomes and gains are set off, the equation takes the following form –
Asset = Liabilities
or, Asset = Equity + External Liabilities
i.e., the Accounting Equation.

C. MODIFYING PRINCIPLES
(a) The Concept of Materiality
This is more of a convention than a concept. It proposes that while accounting for various transactions,
only those which may have material effect on profitability or financial status of the business should
have special consideration for reporting. This does not mean that the accountant should exclude some
transactions from recording. e.g. even ` 20 worth conveyance paid must be recorded as expense.
What this convention claims is to attach importance to material details and insignificant details should
be ignored while deciding certain accounting treatment. The concept of materiality is subjective and
an accountant will have to decide on merit of each case. Generally, the effect is said to be material,
if the knowledge of an event would influence the decision of an informed stakeholder.

1.18 I FINANCIAL ACCOUNTING

The materiality could be related to information, amount, procedure and nature. Error in description of
an asset or wrong classification between capital and revenue would lead to materiality of information.
Say, If postal stamps of ` 500 remain unused at the end of accounting period, the same may not be
considered for recognizing as inventory on account of materiality of amount. Certain accounting
treatments depend upon procedures laid down by accounting standards. Some transactions are by
nature material irrespective of the amount involved. e.g. audit fees, loan to directors.

(b) The Concept of Consistency

This concept advocates that once an organization decides to adopt a particular method of revenue
or expense recognition in line with the other concepts, the same should be consistently applied year
after year, unless there is a valid reason for change in the method. Lack of consistency would result in
the financial information becoming non-comparable between the different accounting periods. The
insistence of this concept would result in avoidance of window dressing the results by choosing the
accounting method by convenience and thereby either inflating or understating net income.
Consider an example. An asset of ` 10 lacs is purchased by a business. It is estimated to have useful
life of 5 years. It will follow that the asset will be depreciated over a period of 5 years at the rate of ` 2
lacs every year. The estimate of useful life and the rate of depreciation cannot be changed from one
period to the other without a valid reason. Suppose the firm applies the same depreciation rate for
the first three years and due to change in technology the asset becomes obsolete, the whole of the
remaining amount could be expensed out in the fourth year.
However, it may be difficult to be consistent if the business entities have two factories in different countries
which have different statutory requirement for accounting treatment.

(c) The Conservatism Concept

Accountants who prepare financial statements of the business, like other human being, would like
to give a favourable report on how well the business has performed during an accounting period.
However, prudent reporting based on skepticism builds confidence in the results and in the long run
best serves all the divergent interests of users of financial statements. This philosophy of prudence leads
to the conservatism concept.
The concept underlines the prudence of under-stating than over-stating the net income of an entity
for a period and the net assets as on a particular date. This is because business is done in situations of
uncertainty. For years, this concept was meant to “anticipate no profits but recognize all losses”. This
can be stated as
(i) Delay in recognizing income unless one is reasonably sure
(ii) Immediately recognize expenses when reasonably sure
This, of course, does not mean to overdo and create window dressing in reporting. e.g. if the business
has sold ` 20 Lacs worth goods on the last day of accounting period and also received a cheque for
the same, one cannot argue that the revenue should not be recognized as it is not certain whether
the cheque will be cleared by the bank. One cannot stretch the conservatism concept too much.
But at the same time, if the business has to receive ` 5 lacs from a customer to whom goods were sold
quite some time ago and no payments are forthcoming, then while determining the net income for the
period, the accountant must judge the likelihood of the recoverability of this money and the prudence
will prevail to make a provision for this amount as doubtful debtors.
Let us take another example. A business had purchased goods for ` 10 lacs before the end of an
accounting period. If sold at the usual selling price, the goods would fetch the price of ` 12.50 lacs. Due
to innovative product introduced by the competition, the goods are likely to be sold for ` 9 lacs only. At
what value should the goods be shown in the balance sheet? Would it be at ` 10 lacs being the actual
cost of buying? Or would it be at ` 9 lacs? Here, the conservatism principle will come in play. The stock
of goods will be valued at ` 9 lacs, being the lower of cost or net realisable value, as per AS-2.

FINANCIAL ACCOUNTING I 1.19

Accounting Process

(d) Timeliness Concept

Under this principle, every transaction must be recorded in proper time. Normally, when the transaction
is made, the same must be recorded in the proper books of accounts. In short, transaction should
be recorded date-wise in the books. Delay in recording such transaction may lead to manipulation,
misplacement of vouchers, misappropriation etc. of cash and goods. This principle is followed
particularly while verifying day to day cash balance. Principle of timeliness is also followed by banks,
i.e. every bank verifies the cash balance with their cash book and within the day, the same must be
completed.
(e) Industry Practice
As there are different types of industries, each industry has its own characteristics and features. There
may be seasonal industries also. Every industry follows the principles and assumption of accounting
to perform their own activities. Some of them follow the principles, concepts and conventions in a
modified way. The accounting practice which has always prevailed in the industry is followed by it.
e.g Electric supply companies, Insurance companies maintain their accounts in a specific manner.
Insurance companies prepare Revenue Account just to ascertain the profit/loss of the company and
not Profit and Loss Account. Similarly, non trading organizations prepare Income and Expenditure
Account to find out Surplus or Deficit.
CONCLUSION

The above paragraphs bring out essentially broad concepts and conventions that lay down principles
to be followed for accounting of business transaction. While going through the different topics, students
are advised to keep track of concepts applicable for various accounting treatment. One would have by
now understood the importance of these concepts in preparation of basic financial statements. More
clarity will emerge as one explores the ocean of different business transactions arising out of complex
business situations. The legal and professional requirements also have their say in deciding the accounting
treatment. Let us see if you can apply these concepts in the following illustrations.
Exercise :
Recognise the accounting concept in the following:
(1) The business will run for an indefinite period.
(2) The business is distinct and separate from its owners.
(3) The transactions are recorded at their original cost.
(4) The transactions recorded are those that can be expressed in money terms.
(5) Revenues will be recognized only if there is reasonable certainty that it will be paid for.
(6) Accounting treatment once decided should be followed period after period.
(7) Every transaction has two effects to be recorded in books of accounts.
(8) Transactions are recorded even if an obligation is created and actual cash is not involved.
(9) Stock of goods is valued at lower of its cost and realizable value.
(10) Effects of an event must be recognized in the same accounting period.

1.8 EVENTS AND TRANSACTIONS

Event is a transaction or change recognized on the financial statements of an accounting entity.

Accounting events can be either external or internal. An external event would occur with an outside
party, such as the purchase or sales of a good. An internal event would involve changes in the accounting
entity’s records, such as adjusting an account on the financial statements.
An accounting event is any financial event that would impact the account balances of a company’s
financial statements. Every time the company uses or receives cash, or adjusts an entry in its accounting
records, an accounting event has occurred.

1.20 I FINANCIAL ACCOUNTING

1.8.1 Transactions vs. Events
Transaction is exchange of an asset with consideration of money value while event is any thing in
general purpose which occur at specific time and particular place. All transactions are events but
all events are not transactions. This is because in order events to be called transaction an event must
involve exchange of values.

1.9 VOUCHER

It is a written instrument that serves to confirm or witness (vouch) for some fact such as a transaction.
Commonly, a voucher is a document that shows goods have bought or services have been rendered,
authorizes payment, and indicates the ledger account(s) in which these transactions have to be
recorded.
1.9.1 Types of Voucher - Normally the following types of vouchers are used. i.e.:
(i) Receipt Voucher
(ii) Payment Voucher
(iii) Non-Cash or Transfer Voucher
(iv) Supporting Voucher
(i) Receipt Voucher
Receipt voucher is used to record cash or bank receipt. Receipt vouchers are of two types. i.e.
(a) Cash receipt voucher – it denotes receipt of cash
(b) Bank receipt voucher – it indicates receipt of cheque or demand draft
(ii) Payment Voucher
Payment voucher is used to record a payment of cash or cheque. Payment vouchers are of two
types. i.e.
(a) Cash Payment voucher – it denotes payment of cash
(b) Bank Payment voucher – it indicates payment by cheque or demand draft.

(iii) Non Cash Or Transfer Voucher

These vouchers are used for non-cash transactions as documentary evidence. e.g., Goods sent
on credit.
(iv) Supporting Vouchers
These vouchers are the documentary evidence of transactions that have happened.

1.9.2 Source Documents

Vouchers are the documentary evidence of the transactions so happened. Source documents are the
basis on which transactions are recorded in subsidiary books i.e. source documents are the evidence
and proof of transactions.

Name of the Book Source document

(a) Cash Book Cash Memos, Cash Receipts and issue vouchers
(b) Purchase Books Inward invoice received from the creditors of goods
(c) Sales Book Outward Invoice issued to Debtors
(d) Return Inward Book Credit Note issued to Debtors and Debit Notes received from Debtors
(e) Returns Outward Book Debit Note issued to creditors and Credit Note received from
creditors.

FINANCIAL ACCOUNTING I 1.21

Accounting Process

1.10 THE CONCEPTS OF ‘ACCOUNT’, ‘DEBIT’ AND ‘CREDIT’

One must get conversant with these terms before embarking to learn actual record-keeping based
on the rules.
An ‘Account’ is defined as a summarised record of transactions related to a person or a thing. e.g. when
the business deals with customers and suppliers, each of the customers and supplier will be a separate
account. We must know that each one of us is identified as a separate account by the bank when
we open an account with them. The account is also related to things – both tangible and intangible.
e.g. land, building, equipment, brand value, trademarks etc. are some of the things. When a business
transaction happens, one has to identify the ‘account’ that will be affected by it and then apply the
rules to decide the accounting treatment.
Typically, an account is expressed as a statement in form of English letter ‘T’. It has two sides. The left
hand side is called as “Debit’ side and the right hand side is called as “Credit’ side. The debit is connoted
as ‘Dr’ and the credit by ‘Cr’. The convention is to write the Dr and Cr labels on both sides as shown
below. Please see the following example:

Dr. Cash Account Cr.

Debit side Credit side

Each side of the account will show effects, so that one can easily take totals of both sides and find out
the difference between the two. Such difference in the two sides of an account is called ‘balance’. If
the total of debit side is more than the credit side, the balance is called as ‘debit balance’ and if the
total of credit side is more than the debit side, the balance is called as ‘credit balance’. If the debit
and credit side are equal, the account will show ‘nil balance’.
The balances are to be computed at the end of an accounting period. These balances are then
considered for preparation of income statement and balance sheet. Let us see the example,

Dr. Cash Account Cr.

Particulars Amount Particulars Amount
` `
Cash brought into business 1,00,000 Paid for goods purchased 50,000
Received for goods sold 25,000 Paid for rent 15,000
Balance at the end 60,000
1,25,000 1,25,000
It can be seen from the above example that the debit side of cash account shows the receipt of cash
into the business and the credit side reflects the cash that has gone out of the business. What is the
meaning of the balance at the end? Well, it shows that cash balance available in the business.

1.11 TYPES OF ACCOUNTS

We have seen that an account may be related to a person or a thing – tangible or intangible. While
doing business transactions (that may be large in number and complex in nature), one may come
across numerous accounts that are affected. How does one decide about accounting treatment for
each of them? If common rules are to be applied to similar type of accounts, there must be a way to
classify the account on the basis of their common characteristics.
Please take look at the following chart.

1.22 I FINANCIAL ACCOUNTING

 Natural Persons

Personal Accounts Artificial Persons

Representative
Accounts Persons

Real Accounts
Impersonal (tangible and intangible)
Accounts
Nominal Accounts

Let us see what each type of account means.

(1) Personal Account : As the name suggests these are accounts related to persons.
(a) These persons could be natural persons like Suresh’s A/c, Anil’s A/c, Rani’s A/c etc.
(b) The persons could also be artificial persons like companies, bodies corporate or association
of persons or partnerships etc. Accordingly, we could have Videocon Industries A/c, Infosys
Technologies A/c, Charitable Trust A/c, Ali and Sons trading A/c, ABC Bank A/c, etc.
(c) There could be representative personal accounts as well. Although the individual identity of
persons related to these is known, the convention is to reflect them as collective accounts. e.g.
when salary is payable to employees, we know how much is payable to each of them, but
collectively the account is called as ‘Salary Payable A/c’. Similar examples are rent payable,
Insurance prepaid, commission pre-received etc. The students should be careful to have clarity
on this type and the chances of error are more here.
(2) Real Accounts : These are accounts related to assets or properties or possessions. Depending on
their physical existence or otherwise, they are further classified as follows:-
(a) Tangible Real Account – Assets that have physical existence and can be seen, and touched.
e.g. Machinery A/c, Stock A/c, Cash A/c, Vehicle A/c, and the like.
(b) Intangible Real Account – These represent possession of properties that have no physical
existence but can be measured in terms of money and have value attached to them. e.g.
Goodwill A/c, Trade mark A/c, Patents & Copy Rights A/c, Intellectual Property Rights A/c and
the like.
(3) Nominal Account : These accounts are related to expenses or losses and incomes or gains e.g. Salary
and Wages A/c, Rent of Rates A/c, Travelling Expenses A/c, Commission received A/c, Loss by fire
A/c etc.

1.12 THE ACCOUNITNG PROCESS

There are two approaches for deciding when to write on the debit side of an account and when to
write on the credit side of an account:
A. American Approach/ Modern Approach
B. British Approach/ Traditional Approach/Double Entry System
A. American approach : In order to understand the rules of debit and credit according to this approach
transactions are divided into the following five categories:
(i) Transactions relating to owner, e.g., Capital – These are personal accounts

FINANCIAL ACCOUNTING I 1.23

Accounting Process

(ii) Transactions relating to other liabilities, e.g., suppliers of goods – These are mostly personal
accounts
(iii) Transactions relating to assets, e.g., land, building, cash, bank, stock-in-trade, bills receivable
– These are basically all real accounts
(iv) Transactions relating to expenses, e.g., rent, salary, commission, wages, cartage – These are
nominal accounts
(v) Transactions relating to revenues, e.g., interest received, dividend received, sale of goods –
These are nominal accounts
The rules of debit and credit in relation to these accounts are stated as under:
(i) For Capital Account:
Debit means decrease
Credit means increase
(ii) For any Liability Account:
Debit means decrease
Credit means increase
(iii) For any Asset Account:
Debit means increase
Credit means decrease
(iv) For any Expense Account:
Debit means increase
Credit means decrease
(v) For any Revenue Account:
Debit means decrease
Credit means increase
A careful perusal of the above rules will reveal that meaning of debit is the same for the first three types
of accounts on the one side and last two types of accounts on the other. It also reveals that in the first
three cases ‘debit’ stands for decrease, and for increase in the last two cases. Similarly, ‘credit’ stands
for increase in the first three cases and for decrease in the last two cases. The meaning of debit and
credit has been diagrammatically illustrated as under:
ANY ASSET ACCOUNT
DEBIT CREDIT
↑ ↓
Record increase on this side Record decrease on this side
ANY CAPITAL ACCOUNT

DEBIT CREDIT
↓ ↑
Record decrease on this side Record increase on this side
ANY LIABILITY ACCOUNT

DEBIT CREDIT
↓ ↑
Record decrease on this side Record increase on this side

1.24 I FINANCIAL ACCOUNTING

 ANY REVENUE ACCOUNT
DEBIT CREDIT
↓ ↑
Record decrease on this side Record increase on this side
ANY EXPENSE ACCOUNT

DEBIT CREDIT
↑ ↓
Record increase on this side Record decrease on this side
The rules can be further compressed in the following way:
ANY CAPITAL, LIABILITY OR REVENUE ACCOUNT
DEBIT CREDIT
↓ ↑
Record decrease on this side Record increase on this side
ANY ASSET OR EXPENSE ACCOUNT
DEBIT CREDIT
↑ ↓
Record increase on this side Record decrease on this side

TO SUM UP

For Assets Increase in Assets Dr.

Decrease in Assets Cr.
For Liabilities Decrease in Liabilities Dr.
Increase in Liabilities Cr.
For Capital Decrease in Capital Dr.
Increase in Capital Cr.
For Incomes Decrease in Income Dr.
Increase in Income Cr.
For Expense Increase in Expense Dr.
Decrease in Expense Cr.
For Stock Increase in Stock Dr.
Decrease in Stock Cr.

Illustration 4.
Ascertain the debit and credit from the following particulars under Modern Approach.
(a) Started business with capital.
(b) Bought goods for cash.
(c) Sold goods for cash.
(d) Paid salary.
(e) Received Interest on Investment.
(f) Bought goods on credit from Mr. Y
(g) Paid Rent out of Personal cash.

FINANCIAL ACCOUNTING I 1.25

Accounting Process

Solution:
Effect of Transaction Account To be debited/Credited
(a) Increase in Cash Cash A/c Debit
Increase in Capital Capital A/c Credit
(b) Increase in Stock Purchase A/c Debit
Decrease in Cash Cash A/c Credit
(c) Increase in Cash Cash A/c Debit
Decrease in Stock Sale A/c Credit
(d) Increase in Expense Salary A/c Debit
Decrease in Cash Cash A/c Credit
(e) Increase in Cash Cash A/c Debit
Increase in Income Interest A/c Credit
(f) Increase in Stock Purchase A/c Debit
Increase in Liability Y A/c Credit
(g) Increase in Expense Rent A/c Debit
Increase in Capital Capital A/c Credit

B. British Approach or Double Entry System :

When one identifies the account that is getting affected by a transaction and type of that account,
the next step is to apply the rules to decide whether the accounting treatment is to debit or credit that
account. The Golden Rules will guide us whether the account is to be debited or credited.
There is one rule for each basic type of account i.e. personal, real and nominal. These rules are shown
in the following chart.

Debit the receiver or who owes to business

Personal Account
Credit the giver or to whom business owes

Debit what comes into business

Real Account
Credit what goes out of business

Debit all expenses or losses

Nominal Account
Credit all income or gains

We will see the following example to understand application of these rules. Consider the following
transactions:
(i) Mr. Vikas and Mrs. Vaibhavi who are husband and wife started offering consultancy services, by
investing cash of ` 5,00,000 and ` 2,50,000 respectively.
From business point of view the two effects of this transaction are: first, the cash of ` 7,50,000 has
come into business and second, there is an obligation of the business towards Mr. Vikas and Mrs.
Vaibhavi.
Now, we know that Cash is real account, so rule for real account will apply. Cash has come into
the business thereby increasing the asset. Hence, Cash Account should be debited.
We also know that Vikas’s A/c and Vaibhavi’s A/c are personal accounts, so rule for personal
account will apply. (As both Vikas and Vaibhavi are givers of cash, their respective accounts will
be credited.)

1.26 I FINANCIAL ACCOUNTING

 The answer will be Debit Cash ` 7,50,000
Credit Vikas’s Capital ` 5,00,000
Credit Vaibhavi’s capital ` 2,50,000
Please note that the total debits and total credit match. It is the reflection of the dual aspect
concept
(ii) They buy office furniture of ` 25,000 for cash.
Here, the two effects are: First, Furniture (which is an asset) has come into the business and second
cash (which is also an asset) that has gone out of business.
Since, both the accounts viz. Furniture and Cash are real accounts, rule for real account will apply.
Furniture has come in (asset increase), it will be debited and cash has gone out (asset decrease),
it will be credited.
The answer will be:- Debit Furniture ` 25,000
Credit Cash ` 25,000
(iii) They open a current account with Citi Bank by depositing ` 1,00,000
Here, the two effects are: First, cash in hand has gone out (asset decrease) and second, the business
cash at bank has increased (asset increase). Cash is a real account and Bank is a personal account.
The answer will be Debit Citi Bank ` 1,00,000
Credit Cash ` 1,00,000
(iv) They pay office rent of ` 15,000 for the month by cheque drawn on their Citi Bank to M/s Realtors
Properties.
Here, the two effects are: First, since the payment is made by cheque, bank balance will reduce
(asset decrease), and second, rent being an item of expense rent expense will increase.
Citi Bank A/c being a personal A/c, rule for personal account will apply. Citi bank A/c will be
credited.
Rent A/c being a nominal account, rule for nominal account will apply. Since, rent is paid, it is an
expense. Hence, Rent A/c will be debited.
The answer will be Debit Rent ` 15,000
Credit Citi Bank ` 15,000
In case of a cash transaction, the party with whom the transaction is made, is not recorded, but
the cash or bank account is recorded.
(v) They buy a motor car worth ` 4,50,000 from Millennium Motors by making a down payment of
` 50,000 by cheque drawn on Citi Bank and the balance by taking a loan from HDFC Bank.
Here the effects will be: First, Motor Car (which is an asset) has come into the business (increase in
asset). Second, Bank balance (which is an asset) has reduced (decrease in asset). Thirdly, there is
an obligation created towards HDFC Bank from whom loan of ` 400000 is taken (increase in liability).
Citi Bank is a personal account, so rule for personal account will apply. Citi Bank will be credited.
Motor Car is a real account is so rule for real account will apply. Motor Car has come in, so Motor
Car A/c will be debited.
HDFC Bank is provider of loan to whom money is payable by the business in future. HDFC Bank
account being a personal account, rule for personal account will apply. HDFC Bank being the giver,
it will be credited. (Note: In different opinions, we can consider Citi Bank A/c as Real Account. The

FINANCIAL ACCOUNTING I 1.27

Accounting Process

reason behind that is the balance at Citi Bank A/c belongs to the business, so it is an asset. However,
in any circumstances HDFC Bank, who has paid Millennium Motors on behalf of the business, cannot
be considered as Real Account. It is a Personal Account as it does not hold any business cash)
The answer will be Debit Motor Car ` 4,50,000
Credit Citi Bank ` 50,000
Credit Loan from HDFC Bank ` 4,00,000
(vi) Vikas and Vaibhavi carried out a consulting assignment for Avon Pharmaceuticals and raise a bill
for ` 1000000 as consultancy fees. Avon Pharmaceuticals have immediately settled ` 250000 by
way of cheque and the balance will be paid after 30 days. The cheque received is deposited into
Citi Bank.
Here the effects will be: First, the work done by Vikas and Vaibhavi has resulted in the revenue
for the business. What should be the amount of revenue considered? Is it ` 10 lac for which work
is done or only ` 2.50 lacs which is received? The revenue of entire ` 10 lac will be considered as
by doing the work the business has acquired legal claim against Avon Pharmaceutical. Second
effect will be cash that is received by way of cheque (asset increase). The third effect will be the
amount of ` 7.50 lacs, which Avon Pharmaceuticals owes to the business.
Consultancy fees received (revenue earned) being income, rule for nominal account will apply
and this account will be credited. Cheque received and deposited into Citi bank will increase the
balance at the bank. Citi Bank being a personal account will be debited. The amount receivable
from Avon is an asset, but it’s due from Avon at a future date. To be able to recover it from them,
their personal account will have to be created in books of accounts. Avon Pharmaceuticals is a
personal account and they are receiver of consultancy, it will be debited.
The answer will be Debit Citi Bank ` 2,50,000
Debit Avon Pharmaceuticals ` 7,50,000
Credit Consultancy Fees ` 10,00,000
(vii) They have employed a receptionist on a salary of ` 5,000 per month and one officer at a salary
` 10,000 per month. The salary for the current month is payable to them.
Is this a transaction to be recorded in the books? Remember accrual concept? Accordingly the
expense of salary for the current month must be recognized as the expense for the current month
even if it’s not paid for. In fact, the business owes the salary to its employees and this obligation
(which is a liability) must be shown in the books.
The effects will be: First, salary being an item of expense, is a nominal account and rule for nominal
account will be applied. So, Salary A/c will be debited. Secondly, the obligation to pay salary is
towards both employees, the convention is not to create separate employee accounts, but to
use a representative personal account named as Salary Payable account. Since, this is personal
account, rule of personal account will apply. Employees being givers of service, it will be credited.
The answer will be: Debit Salary ` 15,000
Credit Salary payable ` 15,000
Please look at the way we have approached each transaction and decided about accounting
treatment. If you follow these logical steps, you will certainly be able to grasp the basics thoroughly
Under double entry system, the accounting of a business transaction involves the following steps:
(a) Consider whether an event qualifies to be entered in books of accounts in money terms
(b) If the answer to the above is ‘yes’, then assess the two aspects of the transaction

1.28 I FINANCIAL ACCOUNTING

 (c) Determine what type of ‘account’ is affected by each of the aspects
(d) Apply the Golden Rule of ‘Debit’ and ‘Credit’
(e) Prepare the basic document such as invoice, voucher, debit note or credit note
(f) Record the transaction in the primary books or subsidiary books
(g) Carry out the posting into the ledger
(h) Prepare the list of all ledger balances and ensure it tallies
(i) Rectify the errors, if any
(j) Pass adjustment entries
(k) Prepare adjusted Trial Balance
(l) Prepare the financial statements – the Income Statement and Balance Sheet
Although it looks to be a lengthy process on paper, in practice it does not take time. In a computerised
accounting environment in fact one has to prepare basic documents and enter them into accounting
program. The computer program automatically carries out the rest of the processes to give us real
time online financial statements. To get a hang of this, students are advised to lay their hands on simple
computerized accounting packages to gain real time exposure.
Illustration 5.
Ascertain the Debit Credit under British Approach or Double Entry System. Take Previous illustration.
Solution:

Step-I Step-II Step-III Step-IV

(a) Cash A/c Real Comes in Debit
Capital A/c Personal Giver Credit
(b) Purchase A/c Nominal Expenses Debit
Cash A/c Real Goes out Credit
(c) Cash A/c Real Comes in Debit
Sales A/c Nominal Incomes Credit
(d) Salary A/c Nominal Expenses Debit
Cash A/c Real Goes out Credit
(e) Cash A/c Real Comes in Debit
Interest A/c Nominal Incomes Credit
(f) Purchase A/c Nominal Expenses Debit
Y’ A/c Personal Giver Credit
(g) Rent A/c Nominal Expenses Debit
Capital A/c Personal Giver Credit

1.13 ACCOUNTING EQUATION

The whole Financial Accounting dependes on Accounting Equation which is also known as Balance
Sheet Equation. The basic Accounting Equation is:

Assets = Liabilities + Owner’s equity

or A = L + P
or P = A - L
or L = A - P
} Where A = Assets, L = Liabilities, P = Capital

FINANCIAL ACCOUNTING I 1.29

Accounting Process

While trying to do this correlation, please note that incomes or gains will increase owner’s equity and
expenses or losses will reduce it.
Students are advised to go through the following illustration to understand this equation properly.
Illustration 6.
Prepare an Accounting Equation from the following transactions in the books of Mr. X for January, 2013 :
1 Invested Capital in the firm ` 20,000
2 Purchased goods on credit from Das & Co. for ` 2,000
4 Bought plant for cash ` 8,000
8 Purchased goods for cash ` 4,000
12 Sold goods for cash (cost ` 4,000 + Profit ` 2,000) ` 6,000.
18 Paid to Das & Co. in cash ` 1,000
22 Received from B. Banerjee ` 300 (being a debtor)
25 Paid salary ` 6,000
30 Received interest ` 5,000
31 Paid wages ` 3,000
Solution:
Effect of transaction on Assets, Liabilities and Capital
Date Transaction Assets = Liabilities + Capital
January, 2013 Invested Capital in the firm, ` 20,000 20,000 - 20,000
1
2 Purchased goods on credit from Das &
Co. ` 2,000 +2,000 +2,000 -
Revised Equation 22,000 = 2,000 + 20,000
4 Bought Plant for cash ` 8,000 +8,000 - -
-8,000
Revised Equation 22,000 = 2,000 + 20,000
8 Purchased goods for cash ` 4,000 +4,000 - -
-4,000 - -
Revised Equation 22,000 = 2,000 + 20,000
12 Sold Goods for cash (Cost ` 4,000 + Profit +6,000
` 2,000) -4,000 +2,000
Revised Equation 24,000 2,000 + 22,000
18 Paid to Das & Co. for ` 1,000 -1,000 -1,000
Revised Equation 23,000 = 1,000 + 22,000
22 Received from B.Banerjee for ` 300 +300
-300
Revised Equation 23,000 = 1,000 + 22,000
25 Paid salary for ` 6,000 - 6,000 -6,000
Revised Equation 17,000 = 1,000 + 16,000
30 Received Interest for ` 5,000 +5,000 +5,000
Revised Equation 22,000 = 1,000 + 21,000
31 Paid Wages for `3,000 -3,000 -3,000
Revised Equation 19,000 = 1,000 + 18,000

1.30 I FINANCIAL ACCOUNTING