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Vinod, AP, GAC /BBA / Fin Accounts/ Unit 1


UNIT-I
Accounting concepts - conventions - objectives of accounting - rules -principles of double entry system - journal -
ledger - subsidiary books - purchases book, sales book, returns book and cash books.

Accounting is a term which refers to a systematic study of the principles and methods of keeping accounts.
Accounting, as an information system is the process of identifying, measuring and communicating the economic
information of an organization to its users who need the information for decision making

1.1. DEFINITION OF ACCOUNTING


Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of money,
transactions and events which are, in part at least, of a financial character and interpreting the results thereof.

1.2. ACCOUNTING PRINCIPLES


The term principles refer to the rule of action or conduct to be applied in accounting. Accounting principles may be
defined as "those rules of conduct or procedure which are adopted by the accountants universally, while recording the
accounting transactions." The accounting principles can be classified into two categories: I. Accounting Concepts. II.
Accounting Conventions.

1.2.1 ACCOUNTING CONCEPTS

The important accounting concepts are discussed hereunder:


a. Business Entity Concept: It is generally accepted that the moment a business enterprise is started it attains a
separate entity as distinct from the persons who own it. In recording the transactions of a business, the
important question is: How do these transactions affect the business enterprise? The question as to how these
transactions affect the proprietors is quite irrelevant. This concept is extremely useful in keeping business
affairs strictly free from the effect of private affairs of the proprietors. In the absence of this concept the
private affairs and business affairs are mingled together in such a way that the true profit or loss of the
business enterprise cannot be ascertained nor its financial position. To quote an example, if a proprietor has
taken rs.5000/- from the business for paying house tax for his residence, the amount should be deducted from
the capital contributed by him. Instead if it is added to the other business expenses then the profit will be
reduced by rs.5000/- and also his capital more by the same amount. This affects the results of the business and
also its financial position. Not only this, since the profit is lowered, the consequential tax payment also will be
less which is against the provisions of the income-tax act.
b. Going Concern Concept: This concept assumes that the business enterprise will continue to operate for a
fairly long period in the future. The significance of this concept is that the accountant while valuing the assets
of the enterprise does not take into account their current resale values as there is no immediate expectation of
selling it. Moreover, depreciation on fixed assets is charged on the basis of their expected life rather than on
their market values. When there is conclusive evidence that the business enterprise has a limited life, the
accounting procedures should be appropriate to the expected terminal date of the enterprise. In such cases, the
financial statements could clearly disclose the limited life of the enterprise and should be prepared from the
quitting concern point of view rather than from a going concern point of view.
c. Money Measurement Concept: Accounting records only those transactions which can be expressed in
monetary terms. This feature is well emphasized in the two definitions on accounting as given by the
American institute of certified public accountants and the American accounting principles board. The
importance of this concept is that money provides a common denomination by means of which heterogeneous
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facts about a business enterprise can be expressed and measured in a much better way. For e.g. When it is
stated that a business owns rs.1,00,000 cash, 500 tons of raw material, 10 machinery items, 3000 square
meters of land and building etc., these amounts cannot be added together to produce a meaningful total of
what the business owns. However, by expressing these items in monetary terms such as rs.1,00,000 cash,
rs.5,00,000 worth raw materials, rs,10,00,000 worth machinery items and rs.30,00,000 worth land and
building such an addition is possible.
d. Cost Concept: This concept is yet another fundamental concept of accounting which is closely related to the
going-concern concept. As per this concept: (i) an asset is ordinarily entered in the accounting records at the
price paid to acquire it i.e., at its cost and (ii) this cost is the basis for all subsequent accounting for the asset.
e. Dual Aspect Concept (Double Entry System): This concept is the core of accounting. According to this
concept every business transaction has a dual aspect. Purchased furniture for rs.5,000: the effect of this
transaction is that cash is reduced by rs.5,000 and a new asset viz. Furniture worth rs.5,000 comes in, thereby,
rendering no change in the total assets of the business.
f. Accounting Period Concept: In accordance with the going concern concept it is usually assumed that the life
of a business is indefinitely long. But owners and other interested parties cannot wait until the business has
been wound up for obtaining information about its results and financial position. According to this concept
accounting measures activities for a specified interval of time called the accounting period. For the purpose of
reporting to various interested parties one year is the usual accounting period.
g. Matching Concept: Matching Concept is closely related to accounting period concept. The chief aim of the
business concern is to ascertain the profit periodically. To measure the profit for a particular period it is
essential to match accurately the costs associated with the revenue. Thus, matching of costs and revenues
related to a particular period is called as Matching Concept.
h. Realization Concept: Realization refers to inflows of cash or claims to cash like bills receivables, debtors etc.
Arising from the sale of assets or rendering of services. According to realization concept, revenues are usually
recognized in the period in which goods were sold to customers or in which services were rendered. Sale is
considered to be made at the point when the property in goods passes to the buyer and he becomes legally
liable to pay. To illustrate this point, let us consider the case of a, a manufacturer who produces goods on
receipt of orders. When an order is received from b, a starts the process of production and delivers the goods
to b when the production is complete. B makes payment on receipt of goods. In this example, the sale will be
presumed to have been made not at the time when goods are delivered to b. A second aspect of the realization
concept is that the amount recognized as revenue is the amount that is reasonably certain to be realized.
However, lot of reasoning has to be applied to ascertain.
i. Accrual Concept: Accrual Concept is closely related to Matching Concept. According to this concept,
revenue recognition depends on its realization and not accrual receipt. Likewise cost are recognized when they
are incurred and not when paid. The accrual concept ensures that the profit or loss shown is on the basis of full
fact relating to all expenses and incomes.
j. Rupee Value Concept: This concept assumes that the value of rupee is constant. In fact, due to inflationary
pressures, the value of rupee will be declining. Under this situation financial statements are prepared on the
basis of historical costs not considering the declining value of rupee. Similarly depreciation is also charged on
the basis of cost price. Thus, this concept results in underestimation of depreciation and overestimation of
assets in the balance sheet and hence will not reflect the true position of the business.

1.2.2. ACCOUNTING CONVENTIONS

a. Convention of Conservatism: It is a world of uncertainty. So it is always better to pursue the policy of


playing safe. This is the principle behind the convention of conservatism. According to this convention the
accountant must be very careful while recognizing increases in an enterprises profits rather than recognizing
decreases in profits. For this the accountants have to follow the rule, anticipate no profit, provide for all
possible losses, while recording business transactions. It is on account of this convention that the inventory is
valued at cost or market price whichever is less, i.e. When the market price of the inventories has fallen below
its cost price it is shown at market price i.e. The possible loss is provided and when it is above the cost price it
is shown at cost price i.e. The anticipated profit is not recorded. It is for the same reason that provision for bad
and doubtful debts, provision for fluctuation in investments, etc., are created. This concept affects principally
the current assets.
b. Convention of Full Disclosure: the emergence of joint stock company form of business organization resulted
in the divorce between ownership and management. This necessitated the full disclosure of accounting
information about the enterprise to the owners and various other interested parties. Thus the convention of full
disclosure became important. By this convention it is implied that accounts must be honestly prepared and all
material information must be adequately disclosed therein. But it does not mean that all information that
someone desires are to be disclosed in the financial statements. It only implies that there should be adequate
disclosure of information which is of considerable value to owners, investors, creditors, government, etc. In
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sachar committee report (1978), it has been emphasized that openness in company affairs is the best way to
secure responsible behaviour. It is in accordance with this convention that companies act, banking companies
regulation act, insurance act etc., have prescribed proforma of financial statements to enable the concerned
companies to disclose sufficient information. The practice of appending notes relating to various facts on
items which do not find place in financial statements is also in pursuance to this convention. The following are
some examples: (a) contingent liabilities appearing as a note (b) market value of investments appearing as a
note (c) schedule of advances in case of banking companies
c. Convention of Consistency: According to this concept it is essential that accounting procedures, practices
and method should remain unchanged from one accounting period to another. This enables comparison of
performance in one accounting period with that in the past. For e.g. If material issues are priced on the basis
of FIFO method the same basis should be followed year after year. Similarly, if depreciation is charged on
fixed assets according to diminishing balance method it should be done in subsequent year also. But
consistency never implies inflexibility as not to permit the introduction of improved techniques of accounting.
However if introduction of a new technique results in inflating or deflating the figures of profit as compared to
the previous methods, the fact should be well disclosed in the financial statement.
d. Convention of Materiality: The implication of this convention is that accountant should attach importance to
material details and ignore insignificant ones. In the absence of this distinction, accounting will unnecessarily
be overburdened with minute details. The question as to what is a material detail and what is not is left to the
discretion of the individual accountant. Further, an item should be regarded as material if there is reason to
believe that knowledge of it would influence the decision of informed investor. Some examples of material
financial information are: fall in the value of stock, loss of markets due to competition, change in the demand
pattern due to change in government regulations, etc. Examples of insignificant financial information are:
rounding of income to nearest ten for tax purposes etc. Sometimes if it is felt that an immaterial item must be
disclosed, the same may be shown as footnote or in parenthesis according to its relative importance.

1.2. OBJECTIVES OF ACCOUNTING

Objective of accounting may differ from business to business depending upon their specific requirements. However,
the following are the general objectives of accounting.
a. To keeping systematic record: It is very difficult to remember all the business transactions that take place.
Accounting serves this purpose of record keeping by promptly recording all the business transactions in the
books of account.
b. To ascertain the results of the operation: Accounting helps in ascertaining result i.e., profit earned or loss
suffered in business during a particular period. For this purpose, a business entity prepares either a Trading
and Profit and Loss account or an Income and Expenditure account which shows the profit or loss of the
business by matching the items of revenue and expenditure of the same period.
c. To ascertain the financial position of the business: In addition to profit, a businessman must know his
financial position i.e., availability of cash, position of assets and liabilities etc. This helps the businessman to
know his financial strength. Financial statements are barometers of health of a business entity.
d. To portray the liquidity position: Financial reporting should provide information about how an enterprise
obtains and spends cash, about its borrowing and repayment of borrowing, about its capital transactions, cash
dividends and other distributions of resources by the enterprise to owners and about other factors that may
affect an enterprises liquidity and solvency.
e. To protect business properties: Accounting provides up to date information about the various assets that the
firm possesses and the liabilities the firm owes, so that nobody can claim a payment which is not due to him.
f. To facilitate rational decision making: Accounting records and financial statements provide financial
information which help the business in making rational decisions about the steps to be taken in respect of
various aspects of business
g. To satisfy the requirements of law: Entities such as companies, societies, public trusts are compulsorily
required to maintain accounts as per the law governing their operations such as the Companies Act, Societies
Act, and Public Trust Act etc. Maintenance of accounts is also compulsory under the Sales Tax Act and
Income Tax Act.

1.3. FUNCTIONS OF ACCOUNTING

Main functions of Accounting:


a. Record Keeping: Accounting is to maintain systematic and chronological record of financial transactions and
to post them subsequently to the various Ledger Accounts and finally to prepare the Final Accounts to find out
the profit or loss of the business at the end of the Accounting Period.
b. Protecting of Properties: Accounting is to calculate the correct amount of Depreciation on Assets by
choosing the appropriate Method applicable to any particular assets. any unauthorized dissipation of any asset
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will bring the business to the threshold of insolvency. Accounting is to design a desirable system to protect the
properties and assets of the business from unauthorized and unwarranted use.
c. Communication of Results: Accounting is always to communicate the results of the recorded and
transactions to the different parties who are interested in the particular business, i.e., properties, investors,
creditors, employees, Govt. official and researchers etc.
d. Meeting Legal Requirements: Accounting is to devise and develop such a system of keeping record and
reporting the results as will always meet and legal requirements to enable the proprietor or the authority to file
various statements like Income-Tax Returns, Sales-Tax Returns etc.

1.4. RULES

Personal Accounts: Accounts recording transactions relating to individuals or firms or company are known as
personal accounts. Personal accounts may further be classified as:
a. Natural Persons personal accounts: The accounts recording transactions relating to individual human
beings e.g., Anands a/c, Rameshs a/c, Pankaj a/c are classified as natural persons personal accounts.
b. Artificial Persons Personal accounts: The accounts recording transactions relating to limited companies,
bank, firm, institution, club, etc., Delhi Cloth Mill; M/s Sahoo & Sahoo; Hans Raj College; Gymkhana
Club are classified as artificial persons personal accounts.
c. Representative Personal Accounts: The accounts recording transactions relating to the expenses and
incomes are classified as nominal accounts. But in certain cases (due to the matching concept of
accounting) the amount, on a particular date, is payable to the individuals or recoverable from individuals.
Such amount (i) relates to the particular head of expenditure or income and (ii) represent persons to whom
it is payable or from whom it is recoverable. Such accounts are classified as representative personal
accounts e.g., wages outstanding account, pre-paid Insurance account, etc.

Real Accounts: The accounts recording transactions relating to tangible things (which can be touched, purchased and
sold) such as goods, cash, building, machinery etc., are classified as tangible real accounts. Whereas the accounts
recording transactions relating to intangible things (which do not have physical shape) such as goodwill, patents and
copy rights, trade marks etc., are classified as intangible real accounts.
Nominal Accounts: The accounts recording transactions relating to the losses, gains, expenses and incomes e.g. Rent,
salaries, wages, commission, interest, bad debts etc., are classified as nominal accounts.

1.5. DOUBLE ENTRY

It this system every business transaction is having a two-fold effect of benefits giving and benefit receiving aspects.
The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects
of transactions and other events in at least two accounts with equal debits and credits.

1.5.1. Steps involved in Double entry system


a. Preparation of Journal: Journal is called the book of original entry. Journal is a historical record of business
transaction or events. It records the effect of all transactions for the first time. Here the job of recording takes
place.
b. Preparation of Ledger: Ledger is the collection of all accounts used by a business. Here the grouping of
accounts is performed. Journal is posted to ledger.
c. Trial Balance preparation: Summarizing. It is a summary of ledge balances prepared in the form of a list.
d. Preparation of Final Account: At the end of the accounting period to know the achievements of the
organization and its financial state of affairs, the final accounts are prepared.
1.6. JOURNAL

Meaning of journal: Journal is a simple book of accounts in which all the business transactions are originally
recorded in chronological order and from which they are posted to the ledger accounts at any convenient time.
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Journal entry or Journalizing refers to the act of recording each transaction in the journal and the form in which it is
recorded, is known as a journal. For each transaction, a separate entry is recorded. Before recording, the transaction is
analyzed to determine which account is to be debited and which account is to be credited.

1.6.1. Steps in journalizing process (recording in journal)


Find out what accounts are involved in business transaction.
Ascertain what is the nature of accounts involved?
Ascertain the golden rule of debit and credit is applicable for each of the accounts involved.
Find out what account is to be debited which is to be credited.
Record the date of transaction in the Date Column.
Write the name of the account to be debited very near to the left hand side in the Particulars Column along
with the word Dr on the same line against the name of the account in the Particulars Column and the
amount to be debited in the Debit Amount column against the name of the account.
Record the name of the account to be credited in the next line preceded by the word To at a few space
towards right in the Particulars Column and the amount to be credited in the Credit Amount Column in
front of the name of the account.
Record narration (i.e. a brief explanation of the transaction) within brackets in the following line in
Particulars Column.
A thin line is drawn all through the particulars column to separate one Journal entry from the other and it
shows that the entry of a transaction has been completed.

1.6.2. Journalizing

Illustration 1: Journalize the following transactions in the books of Shankar & Co. (1998)
June 1 Started business with a capital of 60,000 June 18 Paid Salaries 4,000
June 2 Paid into bank 30,000 June 20 Received from Prem 2,480
June 6 Paid to Shiram 4,920 June 20 Allowed him discount 20
June 6 Discount allowed by him 80 June 25 Withdrew from bank for office use 5,000
June 8 Cash Sales 20,000 June 28 Withdraw for personal use 1,000
June 12 Sold to Hameed 5,000 June 30 Paid Hanif by cheque 3,000
June 15 Purchased goods from Bharat on credit 7,500
Solution:

Illustration 2:
June 1 Purchased goods worth Rs.300 from Vimal and Rs.500 from Kamal on credit.
June 3 Sale of goods worth Rs.1,000 to Balram and Rs.700 to Dhanram.
June 5 Cash of Rs.900 received from Ramasamy and Rs.800 from Krishnasmy.
June 7 Paid Rs.800 to Pradeep and Rs.500 to kuldeep.
June 9 Withdrawn from bank Rs.600 for office use and Rs.300 for personal use
1.7. LEDGER
Ledger is a book which contains various accounts. In simple words, ledger is a set of accounts. It includes all accounts
of the business enterprise whether Real, Nominal or Personal. It is defined as a summary statement of all the
transactions relating to a person, asset, expense, or income or gain or loss which have taken place during a specified
period and shows their net effect ultimately.
Posting: It means transferring the debit and credit items from the Journal to their respective accounts in the ledger. It
is important to note that the exact names of accounts used in the Journal should be carried to the ledger.

Illustration 3: Journalize the following transactions, post the same in relevant ledger account and balance the same.
June 1 Karthik commenced business with Rs.20,000.
June 2 Paid into bank Rs.5,000.
June 3 Purchased Plant worth Rs.10,000 from Modi & Co.
June 4 Purchased goods worth Rs. 5,000 form Anwar.
June 6 Goods worth Rs.4,000 sold to Anbu
June 8 Sold goods worth Rs.2,000 for cash.
June 10 Goods returned by Anbu Rs.50.
June 15 Paid rent Rs.250.
June 18 Withdrawn from bank for office use Rs. 2,500.
June 20 Paid Salaries Rs.1,800.
June 25 Withdrawn for personal use Rs.250.
June 26 Goods returned to Anwar Rs.100.
June 27 Paid for office furniture Rs.1,500 by cheque.
June 28 Received Rs.3,900 cash from Anbu and discount allowed Rs.50.
June 29 Paid Anwar on account Rs.4,800 and discount allowed by him Rs.100.

Solution:
Ledger
Cash A/c

Bank A/c

Karthiks Capital
Plant A/c

Modi & Cos A/c

Furniture A/c
1.8. SUBSIDIARY BOOKS

Meaning of Subsidiary books: Subsidiary books are known as Special journals or Day books which meant for
recording specific business transactions of similar nature. These special journals are also known as Subsidiary
Books or Day. Journal is subdivided into various parts known as subsidiary books or subdivisions of journal.

1.8.1. Various types of Subsidiary Books

a. Purchases Book: It records all transactions relating to goods purchased on credit.


b. Sales Book: It records all transactions relating to goods sold on credit.
c. Purchases Return Book: It records return of goods to suppliers.
d. Sales Return Book: It records return of goods by the customers.
e. Bills Receivable Book: It records entries regarding bills receivables wherein money is to be
received.
f. Bills Payable Book: All bills which are accepted and payable by a business house are recorded
g. Journal Proper: For recording the transactions that are not recorded in any of the above books
h. Cash Book: It records all those transactions which are in cash or by cheques.

a. Purchases Book
This book is used to record all credit purchases made by the business concern from its suppliers. Whenever any credit
purchase is made, the date on which the transaction has taken place is entered in the Date Column, the name of the
party from whom the purchase has been made the particulars column, the inward invoice number with which the
purchase has been made in the inward Invoice Number Column and the money value of the purchase in the Amount
Column. The L.F. Column is to record the ledger folio number while posting is made.
Posting: The total of purchases book for a specified period is debited to the purchases account in the Ledger. The
personal accounts are posted by crediting the individual accounts .
Illustration 5: Prepare the Purchases Book for the month of Feb, 2006 from the following particulars of M/s Sharma
& Co. and also post them into Ledger.
Feb. 4 Purchased on credit from Rajesh Bros. & Co.
10 Bags of Tea @ Rs. 1000 per bag
5 Bags of Coffee @ Rs. 3000 per bag Trade discount @ 10%
Feb. 16 Purchased from Shiva Enterprises on credit
20 bags of Rice @ Rs. 800 per bag
2 bags of Wheat @ Rs. 500 per bag Trade discount @ 5%
Feb. 20 Purchased Furniture on Credit from Universal Furniture House for Rs. 3000
Feb 24 Bought on credit from Ashwani & Co.
30 tin Ghee @ Rs. 400 per tin
10 tin Oil @ Rs. 300 per tin Trade Discount 20%
Solution PURCHASE BOOK OF M/S SHARMA & CO.

Note: Purchase of furniture being an asset is not recorded in purchase book, however, it will be recorded in Journal.

Ledger PURCHASES A/C

RAJESH BORS. & CO.

SHIVA ENTERPRISES

ASHWANI & CO.

b. Sales books
This book is used to record all credit sales effected by the business to its customers. This book is also called as Sales
Book, sales Journal or Sold Book. It contains five columns, viz., Date, Particulars, L.F., Outward Invoice Number
and Amount. When any credit sales is effected, the date is entered in the Date Column, the name of the party to
whom the sale is made in the Particulars Column, the invoice number with which the sales have been effected in the
Out-ward Invoice Number Column and the money value of the sales in the Amount Column, The LF column is
entered while posting is affected.
Posting: The total of the Sales Book for a specified period is credited to the Sales Account in the Ledger. The personal
account is posted by debiting the individual accounts.

Illustration 6: Enter the following transactions in the Sales Book and post them into the ledger:2006

Nov. 1 Sold to M/s Rana and Co. 1,000 metres of Terrycot B type @ Rs. 13 per metre.
2,000 metres of cotton cloth Type A-6 @ Rs. 10 per metre. Trade discount 10%.
Nov. 16 Sold to Cloth Emporium, 1,000 pieces of Jeans @ Rs. 50 each.
500 pieces of woollen Pullovers @ Rs. 150 each. Trade discount 10%
Nov. 25 Sold to Pandit Bros. 10 Rolls of Curtains ordinary type @ Rs.1,500 per roll (Net).
150 Blankets @ Rs. 80 each (Net).
100 Blankets @ Rs. 120 each (Net).
Solution SALES BOOK

Note: The total of the sales book is transferred to credit side of the ledger as total sales as per sales book

c. Purchases Returns Books


This book is used to record all transactions relating to the goods returned to suppliers. This book is also known as
Purchases Returns journal or Returns Outward Book. A debit note represents a note sent to the supplier for the
value of goods retuned by the business. While posting, all the personal accounts are debited in the Ledger and the total
of Purchases Returns Book is credited to Purchases Returns Account.
Illustration 7: From the following transactions prepare Purchases Returns Book and also post them into Ledger. 2006
Aug.1 Returned to Varinder 10 Tables @ Rs. 100 per Table
Aug. 12 Returned to Subash 5 Chairs @ 50 per Chairs
Aug. 25 Returned to Balwinder goods values Rs. 600
Solution PURCHASE RETURN BOOK OR RETURNS OUTWARD BOOK
d. Sales Returns Books
This book is used to record all transactions relating to goods returned by customers. This book is also known as Sales
Return Journal or Returns Inwards Book. A credit note represents a note sent to the customer for the value of the
goods returned by him. While posting, all the personal accounts are credited in the Ledger and the total of sales returns
book is debited to Sales Returns Account.
Illustration 8: From the following transactions, prepare the Sales Returns Book of Jindal & Co.
Date CreditNote No Particulars
5.1.06 201 Goyal & Co., Rohtak, returned to us - 2 polyster sarees Rs. 125 per saree
10.1.06 202 Accepted return of goods (which were sold for cash) from Garg & Co.,
Bhiwani, 2 Kota sarees @ Rs. 50 per saree
17.1.06 203 Mittal & Co. Hisar returned to us - 2 silk sarees @ Rs. 325 per saree.
31.1.06 Mohan returned to us one old typewriter worth Rs. 500

Solution SALES RETURNS BOOKS

Note: Return of Kota sarees will be recorded in the Cash Book and return of typewriter will be recorded in the
Journal Proper since the Sales Returns Book records only the returns of merchandise purchased on credit.

e. Bills Receivable Book:


This book is used to record all the bills received by the business from its customers. While posting, the individual
customers accounts will be credited and the total of the Bills Receivable Book for a specified period will be debited to
the Bills Receivable Account in the Ledger.
f. Bills Payable Book:
This book is used to record all the bills accepted by the business drawn by its creditors. While posting the individual
drawer or payee account is debited and the Bills payable Account is credited with the total in the Bills Payable Book.
g. Journal Proper
This book is used to record all the residual transactions which cannot find place in any of the subsidiary books. While
recording, the entries are made in the journal covering both the aspects of the transaction. The following are some of
the examples of transactions which are entered in this book.
Opening entries and closing entries.
Adjusting entries
Transfer entries from one account to another account.
Rectification entries.
Bills of Exchange Entries
Credit Purchase/sale of an asset other than goods.

h. Cash Book
Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and payments. Firstly, all
cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger
accounts. The Cash Book is maintained in the form of a ledger with the required explanation called as narration and
hence, it plays a dual role of a journal as well as ledger. All cash receipts are recorded on the debit side and all cash
payments are recorded on the credit side. All cash transactions are recorded chronologically in the Cash Book. The
Cash Book will always show a debit balance since payments cannot exceed the receipts at any time.

Kinds of Cash Book: Depending upon the nature of business and the type of cash transactions, various types of Cash
books are used. They are:

i. Single Column Cash Book


ii. Two Column Cash Book or Cash Book with cash and discount columns.
iv. Three Columnar Cash Book or Cash Book with cash, bank and discount columns.
v. Bank Cash Book or Cash Book with bank and discount columns.
vi. Petty Cash Book.

i. Single or Simple Column Cash Book :This is the simplest form of Cash Book and is used when payments and
receipts are mostly in the form of cash and where usually no cash discount is allowed or received. But, when
transactions involving discounts are effected, it is recorded in a separate ledger account.

Illustration1: Enter the following transactions in the Cash Book of Mr. Nikhil.
March 1 Mr. Nikhil commenced business with Cash 6,500
March 3 Bought goods for cash 685
March 4 Paid to Mohan 95
March 6 Deposited in the bank 4,000
March 6 Purchased office furniture on cash 465
March 9 Sold goods for cash 3,000
March 12 Paid wages in cash 120
March 13 Paid for stationary 40
March 15 Sold goods for cash 2,500
March 17 Paid for miscellaneous expenses 45
March 19 Received cash from Tarlok 485
March 21 Withdrew for domestic use 250
March 22 Paid salary 400
March 25 Paid rent 90
March 28 Paid electricity bill 35
March 29 Paid for advertising 40
March 31 Paid into bank 2,500
Dr. CASH BOOK Cr.
ii. Two Column Cash Book or Cash Book with Cash Discount: This type of Cash Book is used when cash
transactions involving discount allowed or received are effected. Usually, discount is allowed when payments
are promptly made by the customers and discount is enjoyed when payments are promptly made by the
business. In this two column Cash Book, instead of only one column for cash as in a Single Column Cash Book,
one additional column is introduced, viz., Discount Column. The discounts allowed by the business are
entered on the debit side and discounts received are entered on the credit side of the Cash Book.

Illustration 2: Prepare the Two Column Cash Book and also post them in the Ledger. (2006)
Aug. 1 Cash in hand 25,500
Aug. 2 Received from Rakesh and 2,900 discount allowed to him 100
Aug. 5 Cash sales 6,000
Aug. 6 Purchased goods for cash 7,800
Aug. 8 Received from Neelam and 1,350 allowed her discount 50
Aug. 12 Paid to Ravinder and 3,400 received discount 200
Aug. 20 Paid rent 1,000
Aug. 25 Interest received in cash 500
Aug. 26 Paid to Kamal and 1,760 received discount 40
Aug. 28 Machinery purchased 5,200
Aug. 30 Salaries paid 3,000
Solution
Dr. CASH BOOK Cr.

Note: The discount columns are not balanced but these are totaled in respective column and posted in the ledger .

iii. Three Columnar Cash Book or Cash Book with Cash, Bank and Discount: The three columns Cash Book is
the resultant effect where in addition to cash and discount columns, bank column is also included. All cash
receipts are entered on the debit side in the cash column and all cash payments on the credit side in the cash
column of the Cash Book. Amounts paid into the bank or deposited are recorded on the debit side in the bank
column and all payments made by cheques are recorded on the credit side in the bank column.

Illustration 3: Prepare a Triple Column Cash Book from the following particulars: (2006)
Jan. 1. Cash in hand Rs. 50,000.
2. Paid into bank Rs. 10,000.
3. Bought goods from Hari for Rs. 200 for cash.
4. Bought goods for Rs. 2,000 paid cheque for them, discount allowed 1%
5. Sold goods to Mohan for cash Rs. 250.
6. Received a cheque from Shyam to whom goods were sold for Rs. 800. Discount allowed 12.5%
8. Purchased an old typewriter for Rs. 200. Spent Rs. 50 on its repairs.
9. Bank notified that Shyams cheque has been dishonored and debited to the account in respect of charges Rs. 10.
10. Received a money order for Rs. 25 from Hari.
11. Shyam settled his account by means of a cheque for Rs. 820, Rs. 20 being for interest charged.
12. Withdrew from bank Rs. 10,000.
18. Discounted a bill of exchange for Rs.1,000 at 1% through bank.
20. Honoured our own acceptance by cheque Rs. 5,000.
22. Withdrew for personal use Rs. 1,000.
24. Paid trade expenses Rs. 2,000.
25. Withdrew from bank for private expenses Rs. 1,500.
26. Purchased machinery from Rajiv for Rs. 5,000 and paid him by means of a bank draft purchased for Rs. 5,005.
27. Issued cheque to Ram Saran for cash purchase of furniture Rs. 1,575.
28. Received a cheque for commission Rs. 500 from R. & Co. and deposited into bank.
29. Ramesh who owned us Rs. 500 became bankrupt and paid us 50 paisa in a rupee.
30. Received payment of a loan of Rs. 5,000 and deposited Rs.3,000 out of it into bank.
31. Paid rent to landlord Mohan by a cheque of Rs. 500.
31. Interest allowed by bank Rs. 30.
31. Half-yearly bank charges Rs. 50.

Solution: TRIPLE COLUMN CASH BOOK

iv. Bank Cash Book or Cash Book with Bank and Discount Columns: In case of a business where all
transactions are effected through bank, i.e., all receipts are banked (deposited into the bank) on the same day and
all payments are made by cheques only, the cash column in the cash book is of no use. Hence, the Cash Book
with bank and discount columns alone is maintained.

v. Petty Cash Book: The word petty has its origin from the French word petit which means small. The petty
cash book is used to record items like carriage, cartage, entertainment expenses, office expenses, postage and
telegrams, stationery, etc. The person who maintains this book is called the petty cashier. The petty cash book
is used by many business concerns to save the much valuable time of the senior official, who usually writes up
the main cash book, to prevent over burdening of the main cash book with so many petty items and to find out
readily and easily information about the more important transactions. The amount required to meet out various
petty items is estimated and given to the petty cashier at the beginning of the stipulated period say a fortnight or
a month. When the petty cashier finds shortage of money, he has to submit the petty cash book, after making all
the entries, to the chief cashier for necessary verifications. The chief cashier in turn, verifies all the entries with
supporting vouchers and disburses cash or issues cheque for the exact amount spent.

Illustration 4: From the following particulars, prepare Petty Cash Book on imprest system of K.P. Singh & Co. for the
month of January, 2006.
Jan. 2006 .
1 Opening Balance (on imprest system) 100
2 Paid for stamps 12
3 Paid cleaners wages 15
4 Paid for fare 16
5 Paid for office tea 15
6 Paid to proprietor for personal use 10
7 Paid for advertisement 30
8 Drew imprest from head cashier
9 Paid for cartage 10
10 Paid for travelling expenses 25
11 Paid for telegram sent 15
12 Paid for entertainment to travelling salesmen 20
13 Advance to peon 10
14 Paid for printing bill 5
15 Paid for stationery 3
16 Drew imprest from head cashier

PETTY CASH BOOK

ACCOUNTING TERMINOLOGY ( for practice)


It is necessary to understand some basic accounting terms which are daily in business world. These terms are called
accounting terminology.
a. Transaction (________________________________________)
The transaction means the exchange of money or moneys worth from one account to another account Events like
purchase and sale of goods, receipt and payment of cash for services or on
Personal accounts, loss or profit in dealings etc., are the transactions. Cash transaction is one where cash receipt or
payment is involved in the exchange. Credit transaction, on the other hand, will not have cash either received or paid,
for something given or received respectively, but gives rise to debtor and creditor relationship. Non-cash transaction is
one where the question of receipt or payment of cash does not at all arise, e.g. Depreciation, return of goods etc.,
b. Debtor (________________________________________)
A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. For example,
when goods are sold to a person on credit that person pays the price in future, he is called a debtor because he owes
the amount to the firm.
c. Creditor(________________________________________)
A person to whom money owes by the firm is called creditor. For example, Madan is a creditor of the firm when goods
are purchased on credit from him
d. Capital(________________________________________)
It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or
can claim from the firm. It is also known as owners equity or net worth. Owners equity means owners claim against
the assets. It will always be equal to assets less liabilities, say: Capital = Assets - Liabilities.
e. Liability(_____________________________)
It means the amount which the firm owes to outsiders that is, excepting the proprietors. In the words of Finny and
Miller, Liabilities are debts; they are amounts owed to creditors; thus the claims of those who ate not owners are
called liabilities. In simple terms, debts repayable to outsiders by the business are known as liabilities.
f. Asset
Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure
which results in acquiring of some property or benefits of a lasting nature.
g. Goods
It is a general term used for the articles in which the business deals; that is, only those articles which are bought for
resale for profit are known as Goods.
h. Revenue
It means the amount which, as a result of operations, is added to the capital. It is defined as the inflow of assets which
result in an increase in the owners equity. It includes all incomes like sales receipts, interest, commission, brokerage
etc., However, receipts of capital nature like additional capital, sale of assets etc., are not part of revenue.
i. Expense
The terms expense refers to the amount incurred in the process of earning revenue. If the benefit of an expenditure is
limited to one year, it is treated as an expense (also know is as revenue expenditure) such as payment of salaries and
rent.
j. Purchases
Buying of goods by the trader for selling them to his customers is known as purchases. As the trade is buying and
selling of commodities purchase is the main function of a trade. Here, the trader gets possession of the goods which
are not for own use but for resale. Purchases can be of two types. viz, cash purchases and credit purchases. If cash is
paid immediately for the purchase, it is cash purchases, If the payment is postponed, it is credit purchases.
k. Sales
When the goods purchased are sold out, it is known as sales. Here, the possession and the ownership right over the
goods are transferred to the buyer. It is known as. 'Business Turnover or sales proceeds. It can be of two types, viz.,,
cash sales and credit sales. If the sale is for immediate cash payment, it is cash sales. If payment for sales is postponed,
it is credit sales.
l. Stock
The goods purchased are for selling, if the goods are not sold out fully, a part of the total goods purchased is kept with
the trader unlit it is sold out, it is said to be a stock. If there is stock at the end of the accounting year, it is said to be a
closing stock. This closing stock at the year end will be the opening stock for the subsequent year.
m. Drawings
It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. It is
usually subtracted from capital.
n. Losses
Loss really means something against which the firm receives no benefit. It represents money given up without any
return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages
payable to others,
o. Account
It is a statement of the various dealings which occur between a customer and the firm. It can also be expressed as a
clear and concise record of the transaction relating to a person or a firm or a property (or assets) or a liability or an
expense or an income.
p. Proprietor
The person who makes the investment and bears all the risks connected with the business is known as proprietor.
q. Discount
When customers are allowed any type of deduction in the prices of goods by the businessman that is called discount.
When some discount is allowed in prices of goods on the basis of sales of the items, that is termed as trade discount,
but when debtors are allowed some discount in prices of the goods for quick payment, that is termed as cash discount.