Meaning and Definition of Accounting:

Accounting is the art of recording,classifying and summarizing in a significant manner

in terms of money, transactions and events which are , in part at least, of a financial
character and interpreting the results there of. Thus accounting is the art of recording,
classifying, summarizing, analyzing and interpreting the financial transactions and
communicating the results thereof to the interested person.

Objectives of Accounting or functions of accounting

The following are the main objectives:
1. To keep systematic records.
2. To ascertain the operational profit or loss.
3. To ascertain the financial position of the business.
4. To make information available to various users.
5. To protect business properties.
6. To facilitate rational decision making.
7. To ascertain the cost of production and selling price.
8. To control expenditure of business.
9. To satisfy the requirements of law.
10.To calculate the amount due to and due from others.
11. It serves as a historical record.
12. It facilitates the preparation of financial statements.
13. It supplies information to interested persons
14. It helps the management in taking important business decisions.
15. It facilitates comparative study of the performance of business over different
periods.
16. It provides evidence in case of disputes.
17. It helps to forecast the future.
18. It provides information for judging the efficiency of business
19. It is useful in getting loans.
20. It helps in valuation of good will.
21. It helps in controlling expenses.
22. It helps in controlling employees.
23. It helps in prevention and detection of errors and frauds.

1. Business Entity Concepts: According to these concepts, a business is treated as

separate Entity distinct from its owner. This means that in accounting the business and
owner must be treated separately. Thus, when one person invests amount in to the
business, it will be deemed to the liability of the business. The concept of separate
entity is applicable to all form of business.

2. Going concern concepts: According to this, it is assumed that business will exist for
a long time. There is no intention t o liquidate the business in the immediate future.
The concept of going concern assumes that a business firm would continue to carry out
its operations indefinitely, i.e. for a fairly long period of time and would not be
liquidated in the foreseeable future. This is an important assumption of accounting as it
provides the very basis for showing the value of assets in the balance sheet. An asset
may be defined as a bundle of services.
3. Money measurement concepts: Accounting records only those transactions which
are expressed in monetary terms. Transactions which cannot be expressed in money do
not find place in the books of accounts.

The concept of money measurement states that only those transactions and happenings
in an organisation which can be expressed in terms of money such as sale of goods or
payment of expenses or receipt of income, etc. are to be recorded in the book of
accounts. All such transactions or happenings which can not be expressed in monetary
terms, for example, the appointment of a manager, capabilities of its human resources
or creativity of its research department or image of the organisation among people in
general do not find a place in the accounting records of a firm.
Another important aspect of the concept of money measurement is that the records of
the transactions are to be kept not in the physical units but in the monetary unit.

4. Cost Concepts: According to this concept, all transactions are recorded in the books
of accounts at actual price involved.

5. Dual aspect Concepts: according to this concept, every transaction has two aspects.
These two aspects are receiving aspect and giving aspect. These two aspects have to be
recorded. The basis of this principle is that for every debit, there is an equal and
corresponding credit.

6. Realization Concept: According to this principle revenue is said to be realized when

goods or services are sold to be a customer. It emphasizes the fact that the mere receipt
of an order for goods or services cannot be taken for the realization of revenue. So
advanced payment received from a customer cannot be considered as revenue earned.

7. Matching Concept: According to this concept, cost of a business of a particular

period is compared with the revenue of that period in order to ascertain net profit or net
loss.

8. Accounting period Concept: According to this assumption, the life of a business is

divided in to different periods for preparing financial statements. Generally business
concern adopt twelve months period for measuring the income of the concern. This
time interval is known as accounting period.

Accounting conventions
Accounting conventions are the customs and traditions which guide the accountant
while preparing accounting statements. Some of the accounting conventions are:-

(1) Convention of consistency: - This convention follows that the basis followed in
several accounting periods should be consistent. This means the methods adopted in
one accounting year should not be changed in another year. Then only comparison of
results is possible.
To compare the results of different years, it is necessary that accounting rules,
principles, conventions and accounting concepts for similar transactions are followed
consistently and continuously. Reliability of financial statements may be lost, if
frequent changes are observed in accounting treatment. For example, if a firm chooses
cost or market price whichever is lower method for stock valuation and written down
value method for depreciation to fixed assets, it should be followed consistently and
continuously.

Consistency also states that if a change becomes necessary, the change and its effects
on profit or loss and on the financial position of the company should be clearly
mentioned.

(2) Convention of conservatism: - This is a convention of playing safe, which is

followed while preparing the financial statements. The idea of this convention is to
consider all possible losses and to ignore all probable profits.

(3) Convention of Materiality: - Materiality means relevance or importance or

significance. It is generally accepted in the accounting circle that the accounting
statements and records must reveal all material facts.

(4) Convention of full disclosure: - The accounting convention of full disclosure

implies that accounts must be honestly prepared and all material information must be
disclosed therein.
The Companies Act, 1956, prescribed a format in which financial statements must be
prepared. Every company that fall under this category has to follow this practice.
Various provisions are made by the Companies Act to prepare these financial
statements. The purpose of these provisions is to disclose all essential information so
that the view of financial statements should be true and fair. However, the term
disclosure does not mean all information. It means disclosure of information that is
significance to the users of these financial statements, such as investors, owner, and
creditors. Information provided by financial statements are used by different groups of
people such as investors, lenders, suppliers and others in taking various financial
decisions. In the corporate form of organisation, there is a distinction between those
managing the affairs of the enterprise and those owning it. Financial statements,
however, are the only or basic means of communicating financial information to all
interested parties. It becomes all the more important, therefore, that the financial
statements makes a full, fair and adequate disclosure of all information which is
relevant for taking financial decisions. The principle of full disclosure requires that all
material and relevant facts concerning financial performance of an enterprise must be
fully and completely disclosed in the financial statements and their accompanying
footnotes. This is to enable the users to make correct assessment about the profitability
and financial soundness of the enterprise and help them to take informed decisions. To
ensure proper disclosure of material accounting information, the Indian Companies Act
1956 has provided a format for the preparation of profit and loss account and balance
sheet of a company, which needs to be compulsorily adhered to, for the preparation of
these statements. The regulatory bodies like SEBI, also mandates complete disclosures
to be made by the companies, to give a true and fair view of profitability and the state
of affairs.
JOURNAL:
A book of original entry in which transactions are recorded in the order of their
occurrence is called journal. Journal is a primary record of business transactions.

Recording of transactions in the journal is known as journalizing and recorded

transactions are called journal entries

The process of recording a transaction in a journal is called journalizing the

transactions.

Journal is a book that is maintained on a daily basis for recording all the financial
entries of the day. Passing the entries is called journal entry. Journal entries are passed
according to rules of debit and credit of double entry system.

LEDGER:
Ledger is a book, which contains various accounts it is said to be secondary books of
account.
It is a collection of all accounts debited or credited in journal. Ledger is defined as, a
book in which all the personal, real, and nominal accounts of business are kept for
permanent records so that up to date statement of an account can be easily known.

It is necessary to know the classification of accounts and their treatment in double entry
system of accounts. Broadly, the accounts are classified into three categories:

Personal accounts

Real accounts
o Tangible accounts
o Intangible accounts

Nominal accounts

Personal accounts may be further classified into three categories:

Natural Personal Account
An account related to any individual like David, George, Ram, or Shyam is called as a
Natural Personal Account.
Artificial Personal Account
An account related to any artificial person like M/s ABC Ltd, M/s General Trading,
M/s Reliance Industries, etc., is called as an Artificial Personal Account.
Representative Personal Account
Representative personal account represents a group of account. If there are a number of
accounts of similar nature, it is better to group them like salary payable account, rent
payable account, insurance prepaid account, interest receivable account, capital account
and drawing account, etc.
Real Accounts
Every Business has some assets and every asset has an account. Thus, asset account is
called a real account. There are two type of assets:
Tangible assets are touchable assets such as plant, machinery, furniture, stock, cash,
etc.

Intangible assets are non-touchable assets such as goodwill, patent, copyrights, etc.

Accounting treatment for both type of assets is same.

Nominal Accounts
Since this account does not represent any tangible asset, it is called nominal or fictitious
account. All kinds of expense account, loss account, gain account or income accounts
come under the category of nominal account. For example, rent account, salary
account, electricity expenses account, interest income account, etc.

Rules of accounting
Accounts are classified in to three namely real accounts, personal accounts and nominal
accounts. There are separate rules for each type of accounts they are as follows
1. Real accounts
An account relating to an asset or property is called real account.cash, furniture, plant
and machinery etc are examples of real accounts the debit, credit rule applicable to real
account is:
Debit what comes in
Credit what goes out

2. Personal accounts
It includes the account of person with whom the business deals. These accounts are
classified in to three categories
a) Natural personal accounts the term natural persons mean persons who are
creation of god. For e.g.;-Rajas accounts, Gupthas accounts etc
b) Artificial personal accounts-these accounts includes accounts of corporate bodies or
institutions
b) Representative personal account-these are accounts which represents certain
person or group of persons. For example salary due, rent outstanding etc

the rule of personal account is

Debit the receiver
Credit the giver
3) Nominal accounts
Accounts relating to expenses and losses and incomes and gains are called nominal
accounts.
Salary accounts, commission account etc are examples.
Debit all expenses and losses
Credit all incomes and gains
Posting
The term posting means transferring the debit and credit items from the journal to their
respective accounts in the ledger. It is the process of recording the transaction from
journal to ledger.

The following rules should be observed while posting transactions in the ledger from
the journal:
a) separate account should be opened in the ledger for posting transactions relating to
different accounts recorded in the journal
b) The concerned account, which has been debited in the journal should also be debited
in the ledger
c) The concerned account, which has been credited in the journal should also be
credited in the ledger

Posting is the process of transferring the entries from the books of original entry
(journal) to the ledger. In other words, posting means grouping of all the transactions in
respect to a particular account at one place for meaningful conclusion and to further the
accounting process. Posting from the journal is done periodically, may be, weekly or
fortnightly or monthly as per the requirements and convenience of the business.

SUBSIDIARY BOOKS:

The journal is sub divided in to the following subsidiary books

1. CASH BOOK: For recording all cash transactions

2. PURCHASES BOOK: For recording credit purchases of goods
3. SALES BOOK: For recording credit sales
4. PURCHASE RETURNS BOOKS. For recording the goods returned by the trader
to the suppliers
5. SALES RETURNS BOOK: For recording the goods returned to the trader by his
customer
6. BILLS RECIEVABLE BOOKS: For recording all bills received by the trader from
his customer
7. BILLS PAYABLE BOOK: For recording all the bills given (accepted)to suppliers
8. JOURNAL PROPER: For all transactions that do not find a place in any of the
above books
TRIAL BALANCE
Trial balance is a statement containing the various ledger balances on a particular date.
This statement is prepared to check the correctness of ledger posting and balancing of
accounts. If the total of the debit balances is equal to the credit balances. It is implied
that posting and balancing of accounts are correct.

Trial balance is a summary of all the debit and credit balances of ledger accounts. The
total of debit side and credit side of trial balance should be matched. Trial balance is
prepared on the last day of the accounting cycle.
Trial balance provides us a comprehensive list of balances. With the help of that, we
can draw financial reports of an organization.

A trial balance is a statement showing the balances, or total of debits and credits, of all
the accounts in the ledger with a view to verify the arithmatical accuracy of posting into
the ledger accounts. Trial balance is an important statement in the accounting process
as it shows the final position of all accounts and helps in preparing the final statements.
The task of preparing the statements is simplified because the accountant can take the
balances of all accounts from the trial balance instead of going through the whole
ledger. It may be noted that the trial balance is usually prepared with the balances of
accounts.

Features of trial balance

1. It is prepared on a specific date
2. It is not a part of double entry and not an account
3. It is a statement of balance of all accounts or totals of ledger accounts
4. Total of the debit and credit columns of the trial balance must tally
5. If the debit and credit columns are equal it is presumed that accounts are
arithmetically accurate
6. Difference in the debit and credit columns indicate that some mistakes have been
committed
7. Tallying of trial balance is not a conclusive proof of accuracy of books of accounts;
it serves to prove only the arithmetical accuracy of books

Objectives of trial balance

The following are the objectives of preparing trial; balance
1. To ascertain the arithmetical accuracy of the ledger accounts
2. To help in locating errors
3. To help in the preparation of final accounts

Preparation of Trial Balance

Theoritically spreading, a trial balance can be prepared in the following three ways :
(i) Totals Method
(ii) Balances Method
(iii) Totals-cum-balances Method
Systems of Accounting
The systems of recording transactions in the book of accounts are generally classified
into two types, viz. Double entry system and Single entry system.

Double entry system is based on the principle of Dual Aspect which states that every
transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each
transaction, therefore, involves two or more accounts and is recorded at different places
in the ledger. The basic principle followed is that every debit must have a
corresponding credit. Thus, one account is debited and the other is credited.

Double entry system is a complete system as both the aspects of a transaction are
recorded in the book of accounts. The system is accurate and more reliable as the
possibilities of frauds and mis-appropriations are minimised. The arithmetic
inaccuracies in records can mostly be checked by preparing the trial balance. The
system of double entry can be implemented by
big as well as small organisations.

Single Entry System

Single entry system is not a complete system of maintaining records of financial
transactions. It does not record two-fold effect of each and every transaction. Instead of
maintaining all the accounts, only personal accounts and cash book are maintained
under this system. In fact, this is not a system but a lack of system as no uniformity is
maintained in the recording of transactions. For some transactions, only one aspect is
recorded, for others, both the aspects are recorded. The accounts maintained under this
system are incomplete and unsystematic and therefore, not reliable. The system is,
however, followed by small business firms as it is very simple and flexible

Single entry system is an incomplete system of accounting, followed by small

businessmen, where the number of transactions is very less. In this system of
accounting, only personal accounts are opened and maintained by a business owner.
Sometimes subsidiary books are maintained and sometimes not. Since real and nominal
accounts are not opened by the business owner, preparation of profit & loss account
and balance sheet is not possible to ascertain the correct position of profit or loss or
financial position of business entity.
Single entry system is a system of accounting, which does not follow the double entry
system. Under this system, accounts relating to debtors and creditors are maintained.
Kohler defines single entry system as a system of book keeping which as a rule only
records of cash and personal accounts are maintained, it is always incomplete double
entry varying with circumstances
Features of single entry system
1) Maintenance of personal accounts
2) Maintenance of cashbook
3) Dependence on original vouchers
4) It does not follow strict double entry system
5) No uniformity. The system may differ from firm to firm.
6) Suitability. The system suitable in case of small firms, partnership firm etc
Double Entry System
Double entry system of accounts is a scientific system of accounts followed all over the
world without any dispute. It is an old system of accounting. It was developed by
Luco Pacioli of Italy in 1494. Under the double entry system of account, every entry
has its dual aspects of debit and credit. It means, assets of the business always equal to
liabilities of the business.
Assets = Liabilities

Inter departmental transfers

Transfer of goods or services by one department to another department are called inter
departmental transfers.
When one department transfers goods to another department, the transaction should be
considered as a sale for the supplying department and a purchase for the receiving
department. As such, the supplying department should be credited and the receiving
department should be debited with the value of goods supplied. Similarly, when one
department renders service to another department, the department rendering the service
should be credited and the department receiving the service should be debited with the
value of service rendered. Goods may be transferred either at cost price or at selling
price. If goods are transferred at selling price by the transferor department and such
goods are unsold at the end of the accounting year by the transferee department, then
profit charged on such unsold goods by the transferor department is treated as
unrealized profit and it should be debited to the general profit and loss account as stock
reserve. In the balance sheet stock reserve should be deducted from closing stock. If
unrealized profit is contained in the opening stock, such reserve should be credited to
the general profit and loss account.
Dependent branches
Dependent branches are branches, which dont maintain its own set of books. All
records have to be maintained by the head office.

The following are the features of such a branch:

1) These branches sells only such goods, which are supplied by the head office
2) The head pays all branch expenses
3) The branch manager out of petty cash book pays some petty expenses.
4) Such banks are instructed to deposit daily cash proceeds in to bank account opened
in the name of head office
5) Sales are generally made on cash basis but some branches are authorized to make
credit sales also.
6) Branches keep only some memorandum records
7) There are four methods of accounting for dependent branches namely
a. Debtors system
b. Stock and debtors system
c. Final account system
d. Wholesale branch system

INDEPENDENT BRANCHES
Independent branch means a branch which maintains its own set of books. In this
system, branches are treated as separate independent units.

Features of such branches may be summarized as below

1) They keep a full system of accounting and trial balance can be extracted from the
ledger
2) In the branch books, there will be a head of accounts and in the books of head office
there will be a branch account
3) The branch does not confine its trading to the goods sent by the head office
4) There is no need for the branch to remit all cash. It can retain the cash out of which it
can make the payment

NARRATION:
The first column in a journal is Date on which the transaction took place.
In the Particulars column, the account title to be debited is written on the first line
beginning from the left hand corner and the word Dr. is written at the end of the
column. The account title to be credited is written on the second line leaving sufficient
margin on the left side with a prefix To. Below the account titles, a brief description
of the transaction is given which is called Narration.

PASS BOOK:
Passbook is the statement of account of the customer maintained by the bank A bank
passbook is a copy of a bank account as shown by the bank records. This enable the
bank customers to check their funds in the bank regularly and update their own records
of transactions that have occurred.
The amount of balance shown in the passbook must tally with the balance as shown in
the cash book.
CONTRA ENTRY
Transaction recorded both on debit and credit side of cash book is known as contra
entry.

When the number of bank transactions is large; it is convenient to have a separate

amount column for bank transactions in the cash book itself instead of recording them
in the journal. This helps in getting information about the position of the bank account
from time to time. Just like cash transactions, all payments into the bank are recorded
on the left side and all withdrawals/payments through the bank are recorded on the right
side. When cash is deposited in the bank or cash is withdrawn from the bank, both the
entries are recorded in the cash book. This is so because both aspects of the transaction
appear in the cash book itself. When cash is paid into the bank, the amount deposited is
written on the left side in the bank column and at the same time the same amount is
entered on the right side in the cash column. The reverse entries are recorded when cash
is withdrawn from the bank for use in the office. Against such entries the word C,
which stands for contra is written in the L.F. column indicating that these entries are
not to be posted to the ledger account.

The bank column is balanced in the same way as the cash column. However, in the
bank column, there can be credit balance also because of overdraft taken from the bank.
Overdraft is a situation when cash withdrawn from the bank exceeds the amount of
deposit. Entries in respect of cheques received should be made in the bank column of
the cash book. When a cheque is received, it may be deposited into the bank on the
same day or it may be deposited on another day. In case, it is deposited on the same day
the amount is recorded in the bank column of the cash book on the receipts side. If the
cheque is deposited on another day, in that case, on the date of receipt it is treated as
cash received and hence recorded in the cash column on the receipts side. On the day of
deposit to the bank, it is shown in the Bank Column on receipt (Dr.) side and in the
Cash Column on the payment (Cr.) side. This is a contra entry.

DEBIT NOTE:
A Debit note is a document evidencing a debit to be raised against a party for reasons
other than sale on credit. On finding that goods supplied are not as per the terms of the
order placed, the defective goods are returned to the supplier of the goods and a note is
prepared to debit the supplier; or when an additional sum is recoverable from a
customer such a note is prepared to debit the customer with the additional dues. In these
two situations the note is called a debit note

CREDIT NOTE:
A Credit note is prepared, when a party is to be given a credit for reasons other than
credit purchase. It is a common practice to make it in red ink. When goods are received
back from a customer, a credit note should be sent to him.
SLEEPING PARTNER:
A silent or sleeping partner is an individual whose involvement in a partnership is
limited to providing capital to the business. A silent or sleeping partner is seldom
involved in the partnership's daily operations and does not generally participate in
management meetings.
A sleeping or dormant partner is one who does not take any active part in the
management of the business. He contributes capital and shares the profits which is
usually less than that of the active partners. He is liable for all the de of the firm but his
relationship with the firm is not disclosed to the general public.

JOINT VENTURE:
A temporary kind of business activity carried on by more than on individual with a
view to earning profit in a pre-agreed manner without giving a firm name to the
business is known as joint venture.It is a temporary partnership between two or more
persons for completing a particular adventure. The relationship between them is ceased
as soon as that particular venture is completed.
The persons who enters into the joint venture agreement are called co-ventures. The
joint venture agreement will be automatically terminated after completing the venture.
The profits or losses are shared between the co-ventures according to their pre-agreed
agreement. In the absence of agreement , the profits or losses are shared equally among
themselves.

Features Of Joint Ventures

1. Joint venture is a special partnership without a firm name.

2. Joint venture does not follow the accounting concept 'going concern'.

3. The members of joint venture are known as co-ventures.

4. Joint venture is a temporary business activity.

5. In joint venture, profits ans losses are shared in agreed proportion. If there is no
agreement regarding the distribution of profit, they will share profit equally.

6. Joint venture is an agreement for polling of capital and business abilities to be

employed in some profitable venture.

7. At the end of venture, all the assets are liquidated and liabilities are paid off: if
necessary the assets and liabilities could be shared by co-ventures.

8. Joint venture always follows cash basis of account

GAIN RATIO OF A PARTNER:
The ratio in which the continuing partners have acquired the share from the
retiring/deceased partner is called the gaining ratio.

Gaining ratio is the opposite of sacrificing ratio. This is the ratio gain to the existing
partners of a firm when they revise the profit sharing ratio, or when the profit share of
the deceased or retired partner is shared by the other partners. This ratio is calculated by
deducting the old ratio from the new ratio. The new share will be higher than the old
when there is a gain.
Gaining ratio = New ratio old ratio

PRO-FORMA INVOICE:
A pro-forma invoice is a preliminary bill of sale sent to buyers in advance of a
shipment or delivery of goods. Typically, it gives a description of the purchased items
and notes the cost along with other important information, such as shipping weight and
transport charges.

CASH SYSTEM OF ACCOUNTING:

Under the cash basis, entries in the book of accounts are made when cash is received or
paid and not when the receipt or payment becomes due. Let us say, for example, if
office rent for the month of December 2014, is paid in January 2015,it would be
recorded in the book of account only in January 2015.
Similarly sale of goods on credit in the month of January 2015 would not be recorded
in January but say in April, when the payment for the same is received.

PARTNERSHIP:
Partnership is an agreement between two or more persons (called partners) for sharing
the profits of a business carried on by all or any of them acting for all.

DEL-CREDERE COMMISSION:
Del-credere type of commission is an additional commission for a endeavor of
magnifying sales in the form of credit.It is calculated at a certain predetermined rate of
gross sales.

Debtors
Debtors are persons and/or other entities who owe to an enterprise an amount for
buying goods and services on credit. The total amount standing against such persons
and/or entities on the closing date, is shown in the balance sheet as sundry debtors on
the asset side.

Creditors
Creditors are persons and/or other entities who have to be paid by an enterprise an
amount for providing the enterprise goods and services on credit. The total amount
standing to the favour of such persons and/or entities on the closing date, is shown in
the Balance Sheet as sundry creditors on the liabilities side.
BOOK KEEPING:
Book-keeping is the recording of financial transactions, and is part of the process
of accounting in business.Transactions include purchases, sales, receipts, and payments
by an individual person or an organization/corporation.
Bookkeeping is the systematic recording and organising of financial transactions in a
company

Bookkeeping is the recording, on a day-to-day basis, of the financial transactions and

information pertaining to a business. It ensures that records of the individual financial
transactions are correct, up-to-date and comprehensive. Accuracy is therefore vital to
the process.

Bookkeeping provides the information from which accounts are prepared. It is a

distinct process, that occurs within the broader scope of accounting.

Each transaction, whether it is a question of purchase or sale, must be recorded. There

are usually set structures in place for bookkeeping that are called quality controls,
which help ensure timely and accurate records.

Bookkeeping is usually performed by a bookkeeper. A bookkeeper (or book-keeper) is

a person who records the day-to-day financial transactions of a business. He or she is
usually responsible for writing the daybooks, which contain records of purchases, sales,
receipts, and payments. The bookkeeper is responsible for ensuring that all transactions
whether it is cash transaction or credit transaction are recorded in the correct daybook,
supplier's ledger, customer ledger, and general ledger; an accountant can then create
reports from the information concerning the financial transactions recorded by the
bookkeeper.
The bookkeeper brings the books to the trial balance stage: an accountant may prepare
the income statement and balance sheet using the trial balance and ledgers prepared by
the bookkeeper.

CASH DISCOUNT:
Cash discount is also allowed by seller to his buyer; still it does not come in the
category of trade discount. Cash discount is a sort of scheme to inspire their debtors to
release their due payment in time. For example, a seller may allow 5% cash discount, if
he gets payment within a week against the time limit of 45 days.

After selling the goods on credit basis the debtors may be given certain deduction in
amount due in case if they pay the amount within the stipulated period or earlier. This
deduction is given at the time of payment on the amount payable. Hence, it is called as
cash discount. Cash discount acts as an incentive that encourages prompt payment by
the debtors.
Assets
Assets are economic resources of an enterprise that can be usefully expressed in
monetary terms. Assets are items of value used by the business in its operations. For
example, Super Bazar owns a fleet of trucks, which is used by it for delivering
foodstuffs; the trucks, thus, provide economic benefit to the enterprise. This item will
be shown on the asset side of the balance sheet of Super Bazaar.

Assets can be broadly classified into two types: Fixed Assets

and Current Assets.

Fixed Assets are assets held on a long-term basis, such as land, buildings, machinery,
plant, furniture and fixtures. These assets are used for the normal operations of the
business.

CURRENT ASSETS:
Current Assets are assets held on a short-term basis such as debtors(accounts
receivable), bills receivable (notes receivable), stock (inventory), temporary marketable
securities, cash and bank balances.

Liabilities
Liabilities are obligations or debts that an enterprise has to pay at some time in the
future. They represent creditors claims on the firms assets. Both small and big
businesses find it necessary to borrow money at one time or the other, and to purchase
goods on credit. Super Bazar,

SACRIFICE RATIO:
The ratio in which the old partners agree to sacrifice their share of profit in favour of
the incoming partner is called sacrificing ratio. The sacrifice by a partner is equal to :
Old Share of Profit New Share of Profit

CONSIGNMENT & CONSIGNEE:

The person or firm who sends the goods is known as consignor and who receives and
sells the goods on behalf and risk of the consignor is known as consignee. The goods so
sent is known as consignment. Thus, consignment is the dispatch of goods by consignor
to the consignee.
DIFFERENCE BETWEEN CONSIGNMENT AND SALE:
The difference between consignment and sales are as follows:

1. Ownership
Consignment: The ownership of the goods remains with the consignor until sales is
effected by the consignee.
Sales: The ownership of the goods immediately transferred to the buyer when sale is
effected.

2. Relationship
Consignment: The relationship between the consignor and consignee are of principal
and agent. Their relation ship are continued till terminated.
Sales: The relationship between the two parties are that of seller and buyer and
they terminated as soon as payment is made and goods are delivered.

3. Expenses
Consignment: The expenses incurred by the consignee to execute sale and the
expenses incurred by consignor to send the goods to the consignee, both are borne by
the consignor.
Sales: Any expenses incurred after the sale is not borne by the seller.

4. Risk
Consignment: The risk of goods under consignment is always with the consignor.
Sales: When the sale is made the risk is transferred to the buyer.

5. Return Of Goods
Consignment: Consignee can return goods to the consignor since those are properties of
consignor.
Sales: A buyer can not return goods unless the goods are found defective or damaged
or the seller agrees to.
6. Statement
Consignment: For giving details about the goods sold and expenses incurred by him,
consignee sends the account sales to consignor.
Sales: The buyer need not submit any account sales to the seller.

7. Stock
Consignment: The unsold stock with the consignee will be treated as a stock of the
consignor.
Sales: In case of sale, the buyer's unsold stock do not attract the seller.

8. Commission
Consignment: Commission is the main consideration of consignment. The consignee
performs the selling activity only for commission.
Sales: Profit is the main consideration of sales
DIFFERENCE BETWEEN CONSIGNMENT AND JOINT VENTURE:
The main differences between joint venture and consignment are as under:
1. Nature
Joint venture: It is a temporary partnership business without a firm name.
Consignment: It is an extension of business by principal through agent.

2. Parties
Joint venture: The parties involving in joint venture are known as co-ventures.
Consignment: Consignor and consignee are involving parties in the consignment.

3. Relation
Joint venture: The relation between co-ventures is just like the partners in partnership
firm.
Consignment: The relation between the consignor and consignee is 'principal and
agent'.

4. Sharing Profit
Joint venture: The profits ans losses of joint venture are shared among the co-ventures
in their agreed proportion.
Consignment: The profits and losses are not shared between the consignor and
consignee. Consignee gets only the commission.

5. Rights
Joint venture: The co-ventures in a joint venture have equal rights.
Consignment: In consignment, the consignor enjoys principal's right whereas
consignee enjoys the right of agent.
6. Exchange Of Information
Joint venture: The co-ventures exchange the required information among them
regularly.
Consignment: The consignee prepares an account sale which contains a details of
business activities carried on and is being sent to the consignor.

7. Ownership
Joint Venture: All the co-ventures are the owners of the joint venture.
Consignment: The consignor is the owner of the business.

8. Method Of Maintaining Accounts

Joint venture: There are different methods of maintaining accounts in joint venture.As
per agreement the co-ventures maintain their account.
Consignment: In consignment, there is only one method of maintaining account.

9. Basis Of Account
Joint venture: Cash basis of accounting is applicable in joint venture.
Consignment: Actual basis is adopted in consignment.

10. Continuity
Joint venture: As soon as the particular venture is completed, the joint venture is terminated.
Consignment: The continuity of business exists according to the willingness of both consignor and
consignee.
DIFFERENCE BETWEEN PARTNERSHIP AND JOINT VENTURE:
The differences between joint venture and partnership are stated below:
1. Parties
Joint venture: The participant in joint venture is known as co-ventures.
Partnership: The participant in partnership is known as partners.

2. Nature
Joint venture: It is temporary in nature and is terminated as soon as the venture is
completed.
Partnership: It is a going concern business.

3. Name
Joint venture: It does not need any single name to carry on the activity.
Partnership: It always bears a first name.

4. Profit
Joint venture: Profits are ascertained after the completion of each venture.
Partnership: Profits are ascertained annually.

5. Basis Of Account
Joint venture: Cash basis account is followed.
Partnership: Accrual basis of account is followed.

Petty Cash Book

In any organization, there may be many petty transactions incurring for which
payments have to be done. Therefore, cash is kept with an employee, who deals with it
and makes regular payments out of it. To make it simple and secure, mostly a constant
balance is kept with that employee.
In every organisation, a large number of small payments such as conveyance, cartage,
postage, telegrams and other expenses (collectively recorded under miscellaneous
expenses) are made. These are generally repetitive in nature. If all these payments are
handled by the cashier and are recorded in the main cash book, the procedure is found
to be very cumbersome. The cashier may be overburdened and the cash book may
become very bulky. To avoid this, large organisations normally appoint one more
cashier (petty cashier) and maintain a separate cash book to record these transactions.
Such a cash book maintained by petty cashier is called petty cash book.

Transaction
A event involving some value between two or more entities. It can be a purchase of
goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash
transaction or a credit transaction.

Voucher
The documentary evidence in support of a transaction is known as voucher. For
example, if we buy goods for cash, we get cash memo, if we buy on credit, we get
an invoice; when we make a payment we get a receipt and so on.
Depreciation
Depreciation reduces the value of assets on a residual basis. It also reduces the profits
of the current year.
Depreciation indicates reduction in value of any fixed assets. Reduction in value of
assets depends on the life of assets. Life of assets depends upon the usage of assets.
There are many deciding factors that ascertain the life of assets. For example, in case of
a building, the deciding factor is time. In case of leased assets, the deciding factor is the
lease period. For plant and machinery, the deciding factor should be production as well
as time. There can be many factors, but the life of assets should be ascertained on some
reasonable basis.
Depreciation means decline in the value of a fixed assets due to use, passage of time
or obsolescence. In other words, if a business enterprise procures a machine and uses it
in production process then the value of machine declines with its usage.

Depreciation may be described as a permanent, continuing and gradual shrinkage in the

book value of fixed assets. It is based on the cost of assets consumed in a business and
not on its market value.

Method of Depreciation
Depreciation can be calculated using any of the following methods, however the most
popular methods remain (a) Straight Line Method and (b) Written Down Value
Method.
Straight Line Method
Written Down Value Method
Annuity Method
Insurance Policy Method
Machine Hour Rate Method
Depletion Method
Revaluation Method
Depreciation Fund Method

Causes of Depreciation
These have been very clearly spelt out as part of the definition of depreciation in
the Accounting Standard 6 and are being elaborated here.

1 Wear and Tear due to Use or Passage of Time

Wear and tear means deterioration, and the consequent diminution in an assets value,
arising from its use in business operations for earning revenue. It reduces the assets
technical capacities to serve the purpose for, which it has been meant. Another aspect
of wear and tear is the physical deterioration. An asset deteriorates simply with the
passage of time, even though they are not being put to any use. This happens especially
when the assets are exposed to the rigours of nature like weather, winds, rains, etc.
2 Expiration of Legal Rights
Certain categories of assets lose their value after the agreement governing their use in
business comes to an end after the expiry of pre-determined period. Examples of such
assets are patents, copyrights, leases, etc. whose utility to business is extinguished
immediately upon the removal of legal backing to them.

3 Obsolescence
Obsolescence is another factor leading to depreciation of fixed assets. In ordinary
language, obsolescence means the fact of being out-of-date. Obsolescence implies to
an existing asset becoming out-of-date on account of the availability of better type of
asset.
It arises from such factors as:
Technological changes;
Improvements in production methods;
Change in market demand for the product or service output of the asset;
Legal or other description.

4 Abnormal Factors
Decline in the usefulness of the asset may be caused by abnormal factors such as
accidents due to fire, earthquake, floods, etc. Accidental loss is permanent but not
continuing or gradual. For example, a car which has been repaired after an accident will
not fetch the same price in the market even if it has not been used.

Current Assets: Current assets are those which are either in the form of cash or a can
be converted into cash within a year. The examples of such assets are cash in
hand/bank, bills receivable, stock of raw materials, semi-finished goods and finished
goods, sundry debtors, short term investments, prepaid expenses, etc.
Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in the
business. Such assets are not acquired for the purpose of resale, e.g. land, building,
plant and machinery, furniture and fixtures, etc. Some times the term Fixed Block or
Block Capital is also used for them.

Intangible Assets : These are such assets which cannot be seen or touched. Goodwill,
Patents, Trademarks are some of the examples of intangible assets.

Drawings : Amount withdrawn by the proprietor is termed as drawings and has the
effect of reducing the balance on his capital account. Therefore, the drawings account is
closed by transferring its balance to his capital account. However it is shown by way of
deduction from capital in the balance sheet.

STATEMENT OF AFFAIRS
statements of assets and liabilities as at the beginning and at the end of the relevant
accounting period are prepared to ascertain the amount of change in the capital during
the period. Such a statement is known as statement of affairs,
A statement of affairs is prepared from incomplete records where most of the assets are
recorded on the basis of estimates
The objective of preparing a statement of affairs is to ascertain the amount of capital
account as on that date.