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1. Introduction
2. Objectives of Book-keeping and Accounting
3. Principles of accountancy according to GAAP
4. Basic Accounting concepts & conventions
5. Journal and Ledger
6. Trial Balance
7. Classification of capital and revenue expenses
8. Final Accounts with adjustments
10. Self Assessment Questions



The main object of any business is to make profits. It is may be a
business engaged in the purchase and sales of goods or it may be
engaged in the production of goods or provision of services whatever
be it’s nature, the main object is to earn profits.
A businessman enters into business in order to earn profits. in
the businessman wishes to find out how much profit he has made
during a given period, he must be able to remember all the
transactions that have taken place in his business. But it is not possible
for any businessman to remember all the transactions that have takes
place in his business. So he has to record them in his books of

History of Accounting:
Accounting is as old as civilization itself. From the ancient relics
of Babylon, it can be will proved that accounting did exist as long as
2600 B.C. However, in modern form accounting based on the principles
of Double Entry System came into existence in 17th Century. Fra
Luka Paciolo, a Fransiscan monk and mathematician published a
book De computic et scripturies in 1494 at Venice in Italyl. This
book was translated into English in 1543. In this book he covered a
brief section on ‘book-keeping’.
Accounting in India is now a fast developing discipline. The two
premier Accounting Institutes in India viz., chartered Accountants of
India and the Institute of Cost and Works Accountants of India are
making continuous and substantial contributions. The international
Accounts Standards Committee (IASC) was established as on 29 th June.
In India the ‘Accounting Standards Board (ASB) is formulating
‘Accounting Standards’ on the lines of standards framed by
International Accounting Standards Committee.

Book-keeping is the art of recording all business transactions in

the books of account maintained by businessman for that purpose.
Keeping a separate book to recording all the business transaction
by using principle of accounting is also called Book-keeping.
Accounting is an art as well as sciences of identifying, analyzing,
recording, classifying and summarizing of business transactions which
are of a financial character and are expressed in terms of money. It
also includes interpretation aspect of the recorded information.

American Institute of Certified Public Accountants (AICPA):

“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
Thus, accounting is an art of identifying, recording, summarizing
and interpreting business transactions of financial nature. Hence
accounting is the Language of Business.


• To ascertainment of financial position of the business
• To determine the profit and loss of organization
• To knowing the information about capital employed in the
• To know the value of asset of the organization
• To Calculation of amounts due to and due by others.
• To know how much tax to pay to the government
• To comparison between the current year and the previous year’s
• To plan the organization
• To know the financial information of the other organization
• To preparation of financial statements


Double entry system of Book-keeping is simple and universal in
its application. It has the test of four hundred years continuous use. It
may be claimed that it is the only system worthy of adoption by the
practical businessman. To understand the system of double entry
system of book-keeping all that we need to remember is the
fundamental rule:

“Debit the account which receives the benefit.”

“Credit the account which gives the benefit”
Types of account
1) Personal Account
2) Real Account
3) Nominal Account
1) Personal Account: - This account deals with the individuals of the
organization these includes accounts of natural persons in varied
capacities likes suppliers and buyers of goods, lenders and borrowers
of loans etc. “Debit the receiver”
“Credit the giver”
2) Real Account: - This account deals with the group of individuals of
the organization these include combinations of the properties or assets
are known as real account.
“Debit what comes in”
“Credit what goes out”
3) Nominal Account: - Nominal accounts relate to such items which
exist in name only. These items pertain to expenses and gains like
interest, rent, commission, discount, salary etc,
“Debit all expenses and losses”
“Credit all incomes and gains”


Accounting is a system evolved to achieve a set of objectives. In

order to achieve the goals, we need a set of rules or guidelines. These
guidelines are termed here as “BASIC ACCOUNTING CONCEPTS”. The
term concept means an idea or thought. Basic accounting concepts are
the fundamental ideas or basic assumptions underlying the theory and
profit of FINANCIAL ACCOUNTING. These concepts help in bringing
about uniformity in the practice of accounting. In accountancy
following concepts are quite popular.
1. Business Entity Conept: In this concept “Business is treated as
separate from the proprietor”. All the Transactions recorded in the
book of Business and not in the books of proprietor. The proprietor is
also treated as a creditor for the Business.

2. Going Concern Concept: This concept relates with the long life of
Business. The assumption is that business will continue to exist for
unlimited period unless it is dissolved due to some reasons or the

3. Money Measurement Concept: In this concept “Only those

transactions are recorded in accounting which can be expressed in
terms of money, those transactions which cannot be expressed in
terms of money are not recorded in the books of accounting”.

4. Cost Concept: Accounting to this concept, can asset is recorded at

its cost in the books of account. i.e., the price, which is paid at the time
of acquiring it. In balance sheet, these assets appear not at cost price
every year, but depreciation is deducted and they appear at the
amount, which is cost, less classification.

5. Accounting Period Concept: every Businessman wants to know

the result of his investment and efforts after a certain period. Usually
one-year period is regarded as an ideal for this purpose. This period is
called Accounting Period. It depends on the nature of the business and
object of the proprietor of business.
6. Dual Ascept Concept: According to this concept “Every business
transactions has two aspects”, one is the receiving benefit aspect
another one is giving benefit aspect. The receiving benefit aspect is
termed as“DEBIT”, where as the giving benefit aspect is termed as
“CREDIT”. Therefore, for every debit, there will be corresponding

7. Matching Cost Concept: According to this concept “The expenses

incurred during an accounting period, e.g., if revenue is recognized on
all goods sold during a period, cost of those good sole should also Be
charged to that period.

8. Realisation Concept: According to this concept revenue is

recognized when a sale is made. Sale is Considered to be made at the
point when the property in goods posses to the buyer and he becomes
legally liable to pay.

Accounting is based on some customs or usages. Naturally
accountants here to adopt that usage or custom.They are termed as
convert conventions in accounting. The following are some of the
important accounting conventions.
1. Full Disclosure: According to this convention accounting reports
should disclose fully and fairly the information. They purport to
represent. They should be prepared honestly and sufficiently disclose
information which is if material interest to proprietors, present and
potential creditors and investors. The companies ACT, 1956 makes it
compulsory to provide all the information in the prescribed form.
2.Materiality: Under this convention the trader records important
factor about the commercial activities. In the form of financial
statements if any unimportant information is to be given for the sake
of clarity it will be given as footnotes.
3.Consistency: It means that accounting method adopted should not
be changed from year to year. It means that there should be consistent
in the methods or principles followed. Or else the results of a year
Cannot be conveniently compared with that of another.
4. Conservatism: This convention warns the trader not to take
unrealized income in to account. That is why the practice of valuing
stock at cost or market price, which ever is lower is in vague. This is
the policy of “playing safe”; it takes in to consideration all prospective
losses but leaves all prospective profits.

Branches of Accounting:
The important branches of accounting are:
1. Financial Accounting: The purpose of Accounting is to
ascertain the financial results i.e. profit or loass in the
operations during a specific period. It is also aimed at knowing
the financial position, i.e. assets, liabilities and equity position at
the end of the period. It also provides other relevant information
to the management as a basic for decision-making for planning
and controlling the operations of the business.
2. Cost Accounting: The purpose of this branch of accounting is
to ascertain the cost of a product / operation / project and the
costs incurred for carrying out various activities. It also assist
the management in controlling the costs. The necessary data
and information are gatherr4ed form financial and other
3. Management Accounting: Its aim to assist the
management in taking correct policy decision and to evaluate
the impact of its decisions and actions. The data required for
this purpose are drawn accounting and cost-accounting.
4. Inflation Accounting: It is concerned with the adjustment in
the values of assest and of profit in light of changes in the price
level. In a way it is concerned with the overcoming of limitations
that arise in financial statements on account of the cost
assumption (i.e recording of the assets at their historical or
original cost) and the assumption of stable monetary unit.
5. Human Resource Accounting: It is a branch of accounting
which seeks to report and emphasize the importance of human
resources in a company’s earning process and total assets. It is
concerned with the process of identifying and measuring data
about human resources and communicating this information to
interested parties. In simple words, it is accounting for people as
organizational resources.

In the early evaluation of book-keeping traders used to record the

business transactions in a simple manner in the Waste book or
Rough book. The waste book is a book in which a businessman briefly
notes down each transaction as soon as it takes place. Transaction is
writing in this very first so it is also called Book of Prime or First
Entry Book The Proforma of Journal is given below.

Debit Credit
Date Date Particulars L.F. no

Ledger is the secondary book of accounts all business
transactions are recorded in the first instance in the journal, but they
must find their place ultimately in the accounts in the ledger in a duly
classified form. This ledger are also called final entry book. OR
Transferring of all journals in to accounts by using accounting
principles is called ledger.

Date Particulars Lf no Amount Date Particulars Lf no Amount

The first step in the preparation of final accounts is the preparation of
trail balance. In the double entry system of book keeping, there will be
credit for every debit and there will not be any debit without credit.
When this principle is followed in writing journal entries, the total
amount of all debits is equal to the total amount all credits.

A trail balance is a statement of debit and credit balances. It is

prepared on a particular date with the object of checking the accuracy
of the books of accounts. It indicates that all the transactions for a
particular period have been duly entered in the book, properly posted
and balanced. The trail balance doesn’t include stock in hand at the
end of the period. All adjustments required to be done at the end of
the period including closing stock are generally given under the trail

Characteristic of a Trial Balance:

1. It is a statement prepared in tabular form.

2. Trial balance is a statement of closing balance but it is not an account.

It is prepared to verify the arithmetical accuracy.

3. Preparation of trial balance will leads to preparation of final accounts.


Trail balance for MR…………………………………… as on …………
Debit Balances XXXX
Purchases XXXX
Carriage inwards wages XXXX
All factory & manufacturing
exp (factory rent factory
Insurance factory lighting.) XXXX
Oil, water. Gas. XXXX
Coal. Fuel, power XXXX
excise duty.octroi XXXX
trade expenses XXXX
Salaries XXXX
Rent rates & taxes
Audit fees, legal charges XXXX
Insurance XXXX
Bad debts XXXX
Repairs XXXX
Discount allowed XXXX
Printing& stationary XXXX
Postage& telegrams
Commission paid (dr)
Interest on capital XXXX
Interest on loan XXXX
Carriage outwards XXXX
All depreciations XXXX
All management exp XXXX
All office exp XXXX
General exp
Discount on debtors
Selling exp XXXX
Cash in hand XXXX
Cash at bank XXXX
Debtors XXXX
Furniture XXXX
Buildings XXXX
Good will patents
Copy rights.
Bills receivable XXXX
Machinery XXXX
Motor car XXXX
Freehold premises
All fixed variable assets XXXX
Credit balances XXXX
Commission receive
bad debts reserve XXXX
interest received XXXX
commission receiv XXXX
interest on drawing XXXX
discount on creditors XXXX
Capital XXXX
Bank loan
Bank overdraft
Income received in advance XXXX
Creditors XXXX
Bills payable

Classification of capital and revenue expenses

1 Capital Credit Loan

2 Opening stock Debit Asset
3 Purchases Debit Expense
4 Sales Credit Gain
5 Returns inwards Debit Loss
6 Returns outwards Debit Gain
7 Wages Debit Expense
8 Freight Debit Expense
9 Transport expenses Debit Expense
10 Royalities on production Debit Expense
11 Gas, fuel Debit Expense
12 Discount received Credit Revenue
13 Discount allowed Debit Loss
14 Bas debts Debit Loss
15 Dab debts reserve Credit Gain
16 Commission received Credit Revenue
17 Repairs Debit Expense
18 Rent Debit Expense
19 Salaries Debit Expense
20 Loan Taken Credit Loan
21 Interest received Credit Revenue
22 Interest paid Debit Expense
23 Insurance Debit Expense
24 Carriage outwards Debit Expense
25 Advertisements Debit Expense
26 Petty expenses Debit Expense
27 Trade expenses Debit Expense
28 Petty receipts Credit Revenue
29 Income tax Debit Drawings
30 Office expenses Debit Expense
31 Customs duty Debit Expense
32 Sales tax Debit Expense
33 Provision for discount on debtors Debit Liability
34 Provision for discount on creditors Debit Asset
35 Debtors Debit Asset
36 Creditors Credit Liability
37 Goodwill Debit Asset
38 Plant, machinery Debit Asset
39 Land, buildings Debit Asset
40 Furniture, fittings Debit Asset
41 Investments Debit Asset
42 Cash in hand Debit Asset
43 Cash at bank Debit Asset
44 Reserve fund Credit Liability
45 Loan advances Debit Asset
46 Horse, carts Debit Asset
47 Excise duty Debit Expense
48 General reserve Credit Liability
49 Provision for depreciation Credit Liability
50 Bills receivable Debit Asset
51 Bills payable Credit Liability
52 Depreciation Debit Loss
53 Bank overdraft Credit Liability
54 Outstanding salaries Credit Liability
55 Prepaid insurance Debit Asset
56 Bad debt reserve Credit Revenue
57 Patents & Trademarks Debit Asset
58 Motor vehicle Debit Asset
59 Outstanding rent Credit Revenue

In every business, the business man is interested in knowing
whether the business has resulted in profit or loss and what the
financial position of the business is at a given time. In brief, he wants
to know (i)The profitability of the business and (ii) The soundness of
the business.
The trader can ascertain this by preparing the final accounts. The
final accounts are prepared from the trial balance. Hence the trial
balance is said to be the link between the ledger accounts and the final
accounts. The final accounts of a firm can be divided into two stages.
The first stage is preparing the trading and profit and loss account and
the second stage is preparing the balance sheet.

The first step in the preparation of final account is the
preparation of trading account. The main purpose of preparing the
trading account is to ascertain gross profit or gross loss as a result of
buying and selling the goods.

The business man is always interested in knowing his net income or

net profit.Net profit represents the excess of gross profit plus the other
revenue incomes over administrative, sales, Financial and other
expenses. The debit side of profit and loss account shows the expenses
and the credit side the incomes. If the total of the credit side is more, it
will be the net profit. And if the debit side is more, it will be net loss.


As on …………………………in the books of Mrs. ………………………….

Trading and Profit & Loss A/C
Particulars Amount Particulars Amount
To Opening stock By Sales
To Purchases Less: Sales returns
Less: Pur. Returns By Stolen goods
To Carriage inwards By Closing stock
To Wages By Gross loss (Transfer
Add. Out standings to P & L A/C Dr side)
To All factory &
manufacturing exp
(factory rent factory
insurance factory
To Oil, water. Gas.
To Freight
To Coal. Fuel, power
To Excise duty.octroi
To Trade expenses
To Gross profit
(transfer to P & L A/C By Gross Profit
Cr side) By commission received
By bad debts reserve
To Gross Loss By interest received
To Salaries By commission received
Add: outstanding By interest on drawings
To Rent rates & Taxes By discount on creditors
To Advertising
To Audit fees, legal
To Insurance
Less: prepaid insurance
To Bad debts
To Repairs
To Discount allowed
To Printing& Stationary
To Postage& Telegrams
To Commission paid (Dr)
To Interest on capital
To Interest on loan
To Carriage outwards
To All depreciations
To All management exp
To All office exp By Net loss (transfer to
To General exp capital A/C)
To Discount on debtors
To Selling exp
To Net profit (transfer
to capital A/C)

The second point of final accounts is the preparation of balance
sheet. It is prepared often in the trading and profit, loss accounts have
been compiled and closed. A balance sheet may be considered as a
statement of the financial position of the concern at a given date.
Thus, Balance sheet is defined as a statement which sets out the
assets and liabilities of a business firm and which serves to as certain
the financial position of the same on any particular date. On the left-
hand side of this statement, the liabilities and the capital are shown.
On the right-hand side all the assets are shown. Therefore, the two
sides of the balance sheet should be equal. Otherwise, there is an error


As on …………………………in the books of Mrs. ………………………….

Balance Sheet
Liabilities Amouts Assets Amounts
Capital Cash in hand
Add :Int on cap Cash at bank
Add :Net profit Debtors
or Less Bad debts
Less: Net loss Furniture
Less depreciation
Less: drawings Buildings
Less: Int on Less depreciation
drawings Good will patents
Bank loan Copy rights.
Bank overdraft Bills receivable
Income received in Machinery
advance Less Depreciation
Creditors Motor car
Less Discount on Less depreciation
creditors Prepaid
Bills payable expenses(insurance)
All other loans Freehold premises
Outstanding wages, All fixed variable assets
salaries Closing stock

We know that business is a going concern. It has to be carried on

indefinitely. At the end of every accounting year. The trader prepares
the trading and profit and loss account and balance sheet. While
preparing these financial statements, sometimes the trader may come
across certain problems .The expenses of the current year may be still
payable or the expenses of the next year have been prepaid during the
current year. In the same way, the income of the current year still
receivable and the income of the next year have been received during
the current year. Without these adjustments, the profit figures arrived
at or the financial position of the concern may not be correct. As such
these adjustments are to be made while preparing the final accounts.

The adjustments to be made to final accounts will be given under the

Trial Balance. While making the adjustment in the final accounts, the
student should remember that “every adjustment is to be made in the
final accounts twice i.e. once in trading, profit and loss account and
later in balance sheet generally”. The following are some of the
important adjustments to be made at the time of preparing of final

(i)If closing stock is given in Trail Balance: It should be shown only in the
balance sheet “Assets Side”.
(ii)If closing stock is given as adjustment :

1. First, it should be posted at the credit side of “Trading Account”.

2. Next, shown at the asset side of the “Balance Sheet”.

(i)If outstanding expenses given in Trail Balance: It should be only on the
liability side of Balance Sheet.
(ii)If outstanding expenses given as adjustment :
1. First, it should be added to the concerned expense at the
debit side of profit and loss account or Trading Account.
2. Next, it should be added at the liabilities side of the Balance Sheet.

(i)If prepaid expenses given in Trial Balance: It should be shown only in
assets side of the Balance Sheet.
(ii)If prepaid expense given as adjustment :

1. First, it should be deducted from the concerned expenses at the debit

side of profit and loss account or Trading Account.
2. Next, it should be shown at the assets side of the Balance Sheet.


(i)If incomes given in Trial Balance: It should be shown only on the assets
side of the Balance Sheet.
(ii)If incomes outstanding given as adjustment:
1. First, it should be added to the concerned income at the credit side of
profit and loss account.
2. Next, it should be shown at the assets side of the Balance sheet.
(i)If unearned incomes given in Trail Balance : It should be shown only on the
liabilities side of the Balance Sheet.
(ii)If unearned income given as adjustment :
1. First, it should be deducted from the concerned income in the credit
side of the profit and loss account.
2. Secondly, it should be shown in the liabilities side of the
Balance Sheet.

(i)If Depreciation given in Trail Balance: It should be shown only on the debit
side of the profit and loss account.
(ii)If Depreciation given as adjustment
1. First, it should be shown on the debit side of the profit and loss
2. Secondly, it should be deduced from the concerned asset in the
Balance sheet assets side.


(i)If interest on loan (or) capital given in Trail balance :It should be shown
only on debit side of the profit and loss account.
(ii)If interest on loan (or)capital given as adjustment :

1. First, it should be shown on debit side of the profit and loss

2. Secondly, it should added to the loan or capital in
the liabilities side of the Balance Sheet.

(i)If bad debts given in Trail balance :It should be shown on the debit side of
the profit and loss account.
(ii)If bad debts given as adjustment:
1. First, it should be shown on the debit side of the profit and loss
2. Secondly, it should be deducted from debtors in the assets side of the
Balance Sheet.


(i)If interest on drawings given in Trail balance: It should be shown on the

credit side of the profit and loss account.
(ii)If interest on drawings given as adjustments :
1. First, it should be shown on the credit side of the profit and loss
2. Secondly, it should be deducted from capital on liabilities
side of the Balance Sheet.

(i)If interest on the investments given in Trail balance :It should be shown on
the credit side of the profit and loss account.
(ii)If interest on investments given as adjustments :

1. First, it should be shown on the credit side of the profit and loss
2. Secondly, it should be added to the investments on assets side of the
Balance Sheet

Self Assessment Questions

1. Give a brief account on the important records of Accounting under
Double Entry System and discuss briefly the scope of each?

2. Explain the purpose of preparing the following accounts/statements

and also elaborate the various items that appear in each of them.
a) Trading Account
b) Profit & Loss Account
c) Balance Sheet

3. Explain the following concepts and illustrate their treatment with

imaginary data.
a) Depreciation
b) Prepaid expenses
c) Reserve for bad and Doubtful debts
d) Income received in advance

4. Explain the following adjustments and illustrate suitably with assumed

a) Closing stock
b) Outstanding expenses
c) Prepaid Income
d) Bad debts

5. (a) Define the concepts ‘Accounting’, Financial Accounting and

Accounting System’.
(b) Explain the main objectives of Accounting and its important

6. What is three columnar cash book? What is Contra Entry? Illustrate

7. What do you understand by Double Entry Book Keeping? What are its

8. What is Trial Balance? Why it is prepared?

Illustration: I

Journalize the following transactions and prepare a cash ledger.

1. Ram invests Rs. 10, 000 in cash.
2. He bought goods worth Rs. 2000 from shyam.
3. He bought a machine for Rs. 5000 from Lakshman on account.
4. He paid to Lakshman Rs. 2000
5. He sold goods for cash Rs.3000
6. He sold goods to A on account Rs. 4000
7. He paid to Shyam Rs. 1000
8. He received amount from A Rs. 2000

Illustration II

Journalize the following transactions and post them into Ledgers

Jan 1. Commenced business with a capital of Rs. 10000
,, 2. Bought Furniture for cash Rs. 3000
,, 3. Bought goods for cash from ‘B’ Rs. 500
,, 4. Sold goods for cash to A Rs. 1000
,, 5. Purchased goods from C on credit Rs.2000
,, 6. Goods sold to D on credit Rs. 1500
,, 8. Bought machinery for Rs. 3000 paying Cash
,, 12. Paid trade expenses Rs. 50
,, 18. Paid for Advertising to Apple Advertising Ltd. Rs. 1000
,, 19. Cash deposited into bank Rs. 500
,, 20. Received interest Rs. 500
,, 24. Paid insurance premium Rs. 200
,, 30. Paid rent Rs. 500
,, 30. Paid salary to P Rs.1000

During January 2003 Narayan transacted the following business.

Dat Transactions Amou

e nt
3 Commenced business with cash 40000
Jan. Purchased goods on credit from Shyam 30000
1 Received goods from Murthy as advance 3000
,, for goods ordered by him 500
2 Paid Wages 200
,, Goods returned to shyam 10000
3 Goods sold to Kamal 500
,, Goods returned by Kamal 500
4 Paid into Bank 750
,, Goods sold for Cash 1000.
5 Bought goods for cash 700
,, Paid salaries 1000
Journalize the above transactions and prepare cash Account

Illustration IV:

From the following list of balances prepare a Trial Balance as on 30-6-2003

i Opening Stock 1800 xiii Plant 750
ii Wages 1000 xiv Machinery 180
iii Sales 1200 xv Lighting 230
iv Bank loan 440 xvi Creditors 800
v Coal coke 300 xvii Capital 400
vi Purchases 7500 xviii Misc. receipts 60
vii Repairs 200 xix Office 250
viii Carriage 150 xx Office 60
ix Income tax 150 xxi Patents 100
x Debtors 2000 xxii Goodwill 150
xi Leasehold 600 xxiii Cash at bank 510
xii Cash in hand 20

Illustration V

Prepare a Trial Balance from the following Data for the year 2003.

Rs. Rs.
Freehold property 1080 Discount received 150
Capital 4000 Returns inwards 1590
Returns outwards 2520 Office expenses 5100
Sales 8041 Bad debts 1310
Purchases 6735 Carriage 1590
0 outwards(sales exp)
Depreciation on 1200 Carriage inwards 1450
Insurance 3300 Salaries 4950
Opening stock 1436 Book debts 11070
Creditors for 400 Cash at bank 2610
Creditors 4700

Illustration: VI

The following is the Trial Balance of Abhiram, was prepared on 31st March
2006. Prepare Trading and Profit& Loss Account and Balance Sheet.
Debit Rs. Credit
Capital ------ 22000
Opening stock 10000 ------
Debtors and Creditors 8000 12000
Machinery 20000 -------
Cash at Bank 2000 -------
Bank overdraft ------ 14000
Sales returns and Purchases returns 4000 8000
Trade expenses 12000 -------
Purchases and Sales 26000 44000
Wages 10000 -------
Salaries 12000 -------
Bills payable ------- 10600
Bank deposits 6600 -------
TOTAL 110600 110600

Closing Stock was valued at Rs.60, 000

Illustration VII
Prepare Trading and Profit &Loss A/C for the year ended 31.12.2001 and a
Balance Sheet as on that date from the following Trial Balance.

Dr, Rs. Cr, Rs.

Furniture 6500
Plant and machinery 60000
Buildings 75000
Capital 125000
Bad debts 1750
Reserve for bad debts 3000
Sundry debtors 40000
Sundry creditors 24000
Stock(1.1.2001) 34600
Purchases 54750
Sales 154500
Bank over draft 28500
Sales returns 2000
Purchase returns 1250
Advertising 4500
Interest 1180
Commission received 3750
Cash in hand 6500
Salaries 33000
General expenses 7820
Car expenses 9000
Taxes and insurance 3500
340000 340000
Closing stock valued at Rs. 50000

Illustration VIII
The following figures have been extracted from the records of Fancy Stores a
proprietary concern as on 31.12.2003.
Rs. Rs.
Furniture 1500 Insurance 6000
Capital A/C 5400 Rent 22000
Cash in hand 3000 Sundry debtors 60000
Opening stock 5000 Sales 60000
0 0
Fixed deposits 1346 Advertisement 10000
Drawings 5000 Postages & 3400
Provision for bad 3000 Bad debts 2000
Cash at Bank 1000 Printing and 9000
0 stationary
Purchases 3000 General charges 13000
Salaries 1900 Sundry creditors 40000
Carriage inwards 4100 Deposit from 6000
0 customers
Prepare Trading, Profit and loss account and Balance sheet after taking into
consideration the following information.
a) Closing stock as on 31st March was Rs. 10000.
b) Salary of Rs. 2000 is yet to be paid to an employee.

Illustration IX
Prepare Trading and Profit &Loss A/C for the year ended 31.12.2001 and a
Balance Sheet as on that date from the following Trial Balance.
Debit Rs. Credit Rs.
Purchases 45000
Debtors 60000
Interest earned 1200
Salaries 9000
Sales 96300
Purchase returns 1500
Wages 6000
Rent 4500
Sales returns 3000
Bad debts return off 2100
Creditors 36600
Capital 31800
Drawings 7200
Printing and stationary 2400
Insurance 3600
Opening stock 15000
Office expenses 3600
Furniture and fittings 6000
GRAND TOTAL 167400 167400
Adjust the following
a) Closing stock Rs.20000 b) Write off furniture @ 15% per annum.

Indian Accounting Standards

Accounting is the art of recording transactions in the best manner
possible, so as to enable the reader to arrive at judgments/come to
conclusions, and in this regard it is utmost necessary that there are
set guidelines. These guidelines are generally called accounting
policies. The intricacies of accounting policies permitted Companies to
alter their accounting principles for their benefit. This made it
impossible to make comparisons. In order to avoid the above and to
have a harmonised accounting principle, Standards needed to be set
by recognised accounting bodies. This paved the way for Accounting
Standards to come into existence.

Accounting Standards in India are issued By the Institute of Chartered

Accountanst of India (ICAI). At present there are 30 Accounting
Standards issued by ICAI.

Objective of Accounting Standards

Objective of Accounting Standards is to standarize the diverse

accounting policies and practices with a view to eliminate to the
extent possible the non-comparability of financial statements and the
reliability to the financial statements.

The institute of Chatered Accountants of India, recognizing the need to

harmonize the diversre accounting policies and practices, constituted
at Accounting Standard Board (ASB) on 21st April, 1977.

Compliance with Accounting Standards issued by ICAI

Sub Section(3A) to section 211 of Companies Act, 1956 requires that

every Profit/Loss Account and Balance Sheet shall comply with the
Accounting Standards. 'Accounting Standards' means the standard of
accounting recomended by the ICAI and prescribed by the Central
Government in consultation with the National Advisory Committee on
Accounting Standards(NACAs) constituted under section 210(1) of
companies Act, 1956.

Accounting Standards Issued by the Institute of Chatered

Accountants of India are as below:

• AS 01.Disclosure of accounting policies:

• AS 02.Valuation Of Inventories:
• AS 03.Cash Flow Statements
• AS 04.Contingencies and events Occurring after the Balance
sheet Date
• AS 05.Net Profit or loss For the period, Prior period items and
Changes in accounting Policies.
• AS 06.Depreciation accounting.
• AS 07.Construction Contracts.
• AS 08.Revenue Recognition.
• AS 09.Accounting For Fixed Assets.
• AS 10.The Effect of Changes In Foreign Exchange Rates.
• AS 11.Accounting For Government Grants.
• AS 12.Accounting For Investments.
• AS 13.Accounting For Amalgamation.
• AS 14.Employee Benefits.
• AS 15.Borrowing Cost.
• AS 16.Segment Reporting.
• AS 17.Related Party Disclosures.
• AS 18.Accounting For Leases.
• AS 19.Earning Per Share.
• AS 20.Consolidated Financial Statement.
• AS 21.Accounting For Taxes on Income.
• AS 22.Accounting for Investment in associates in Consolidated
Financial Statement.
• AS 23.Discontinuing Operation.
• AS 24.Interim Financial Reporting.
• AS 25.Intangible assets.
• AS 26.Financial Reporting on Interest in joint Ventures.
• AS 27.Impairment Of assets.
• AS 28.Provisions, Contingent, liabilities and Contingent assets.
• AS 29.Financial instrument.
• AS 30.Financial Instrument: presentation.

• AS 31.Financial Instruments, Disclosures and Limited revision to

accounting standards.

Disclosure of Accounting Policies: Accounting Policies refer to

specific accounting principles and the method of applying those
principles adopted by the enterprises in preparation and presentation
of the financial statements.

Valuation of Inventories: The objective of this standard is to

formulate the method of computation of cost of inventories / stock,
determine the value of closing stock / inventory at which the inventory
is to be shown in balance sheet till it is not sold and recognized as

Cash Flow Statements: Cash flow statement is additional

information to user of financial statement. This statement exhibits the
flow of incoming and outgoing cash. This statement assesses the
ability of the enterprise to generate cash and to utilize the cash. This
statement is one of the tools for assessing the liquidity and solvency of
the enterprise.

Contigencies and Events occuring after the balance sheet

date: In preparing financial statement of a particular enterprise,
accounting is done by following accrual basis of accounting and
prudent accounting policies to calculate the profit or loss for the year
and to recognize assets and liabilities in balance sheet. While following
the prudent accounting policies, the provision is made for all known
liabilities and losses even for those liabilities / events, which are
probable. Professional judgement is required to classify the likehood of
the future events occuring and, therefore, the question of
contingencies and their accounting arises.

Objective of this standard is to prescribe the accounting of

contigencies and the events, which take place after the balance sheet
date but before approval of balance sheet by Board of Directors. The
Accounting Standard deals with Contingencies and Events occuring
after the balance sheet date.

Net Profit or Loss for the Period, Prior Period Items and
change in Accounting Policies : The objective of this accounting
standard is to prescribe the criteria for certain items in the profit and
loss account so that comparability of the financial statement can be
enhanced. Profit and loss account being a period statement covers the
items of the income and expenditure of the particular period. This
accounting standard also deals with change in accounting policy,
accounting estimates and extraordinary items.

Depreciation Accounting : It is a measure of wearing out,

consumption or other loss of value of a depreciable asset arising from
use, passage of time. Depreciation is nothing but distribution of total
cost of asset over its useful life.

Construction Contracts : Accounting for long term construction

contracts involves question as to when revenue should be recognized
and how to measure the revenue in the books of contractor. As the
period of construction contract is long, work of construction starts in
one year and is completed in another year or after 4-5 years or so.
Therefore question arises how the profit or loss of construction
contract by contractor should be determined. There may be following
two ways to determine profit or loss: On year-to-year basis based on
percentage of completion or On cpmpletion of the contract.

Revenue Recognition : The standard explains as to when the

revenue should be recognized in profit and loss account and also
states the circumstances in which revenue recognition can be
postponed. Revenue means gross inflow of cash, receivable or other
consideration arising in the course of ordinary activities of an
enterprise such as:- The sale of goods, Rendering of Services, and Use
of enterprises resources by other yeilding interest, dividend and
royalties. In other words, revenue is a charge made to customers /
clients for goods supplied and services rendered.

Accounting for Fixed Assets : It is an asset, which is:- Held with

intention of being used for the purpose of producing or providing
goods and services. Not held for sale in the normal course of business.
Expected to be used for more than one accounting period.

The Effects of changes in Foreign Exchange Rates : Effect of

Changes in Foreign Exchange Rate shall be applicable in Respect of
Accounting Period commencing on or after 01-04-2004 and is
mandatory in nature. This accounting Standard applicable to
accounting for transaction in Foreign currencies in translating in the
Financial Statement Of foreign operation Integral as well as non-
integral and also accounting for For forward exchange.Effect of
Changes in Foreign Exchange Rate, an enterprises should disclose
following aspects:

• Amount Exchange Difference included in Net profit or Loss;

• Amount accumulated in foreign exchange translation reserve;

• Reconciliation of opening and closing balance of Foreign

Exchange translation reserve

Accounting for Government Grants : Governement Grants are

assistance by the Govt. in the form of cash or kind to an enterprise in
return for past or future compliance with certain conditions.
Government assistance, which cannot be valued reasonably, is
excluded from Govt. grants,. Those transactions with Governement,
which cannot be distinguished from the normal trading transactions of
the enterprise, are not considered as Government grants.

Accounting for Investments : It is the assets held for earning

income by way of dividend, interest and rentals, for capital
appreciation or for other benefits.

Accounting for Amalgamation : This accounting standard deals

with accounting to be made in books of Transferee company in case of
amalgamtion. This accounting standard is not applicable to cases of
acquisition of shares when one company acquires / purcahses the
share of another company and the acquired company is not dissolved
and its seperate entity continues to exist. The standard is applicable
when acquired company is dissolved and seperate entity ceased exist
and purchasing company continues with the business of acquired

Employee Benefits : Accounting Standard has been revised by ICAI

and is applicable in respect of accounting periods commencing on or
after 1st April 2006. the scope of the accounting standard has been
enlarged, to include accounting for short-term employee benefits and
termination benefits.

Borrowing Costs : Enterprises are borrowing the funds to acquire,

build and install the fixed assets and other assets, these assets take
time to make them useable or saleable, therefore the enterprises incur
the interest (cost on borrowing) to acquire and build these assets. The
objective of the Accounting Standard is to prescribe the treatment of
borrowing cost (interest + other cost) in accounting, whether the cost
of borrowing should be included in the cost of assets or not.

Segment Reporting : An enterprise needs in multiple

products/services and operates in different geographical areas.
Multiple products / services and their operations in different
geographical areas are exposed to different risks and returns.
Information about multiple products / services and their operation in
different geographical areas are called segment information. Such
information is used to assess the risk and return of multiple
products/services and their operation in different geographical areas.
Disclosure of such information is called segment reporting.

Related Paty Disclosure : Sometimes business transactions

between related parties lose the feature and character of the arms
length transactions. Related party relationship affects the volume and
decision of business of one enterprise for the benefit of the other
enterprise. Hence disclosure of related party transaction is essential
for proper understanding of financial performance and financial
position of enterprise.

Accounting for leases : Lease is an arrangement by which the lesser

gives the right to use an asset for given period of time to the lessee on
rent. It involves two parties, a lessor and a lessee and an asset which
is to be leased. The lessor who owns the asset agrees to allow the
lessee to use it for a specified period of time in return of periodic rent

Earning Per Share :Earning per share (EPS)is a financial ratio that
gives the information regarding earning available to each equiy share.
It is very important financial ratio for assessing the state of market
price of share. This accounting standard gives computational
methodology for the determination and presentation of earning per
share, which will improve the comparison of EPS. The statement is
applicable to the enterprise whose equity shares or potential equity
shares are listed in stock exchange.
Consolidated Financial Statements : The objective of this
statement is to present financial statements of a parent and its
subsidiary (ies) as a single economic entity. In other words the holding
company and its subsidiary (ies) are treated as one entity for the
preparation of these consolidated financial statements. Consolidated
profit/loss account and consolidated balance sheet are prepared for
disclosing the total profit/loss of the group and total assets and
liabilities of the group. As per this accounting standard, the
conslidated balance sheet if prepared should be prepared in the
manner prescribed by this statement.

Accounting for Taxes on Income : This accounting standard

prescribes the accounting treatment for taxes on income.
Traditionally, amount of tax payable is determined on the profit/loss
computed as per income tax laws. According to this accounting
standard, tax on income is determined on the principle of accrual
concept. According to this concept, tax should be accounted in the
period in which corresponding revenue and expenses are accounted.
In simple words tax shall be accounted on accrual basis; not on liability
to pay basis.

Accounting for Investments in Associates in consolidated

financial statements : The accounting standard was formulated with
the objective to set out the principles and procedures for recognizing
the investment in associates in the cosolidated financial statements of
the investor, so that the effect of investment in associates on the
financial position of the group is indicated.

Discontinuing Operations : The objective of this standard is to

establish principles for reporting information about discontinuing
operations. This standard covers "discontinuing operations" rather
than "discontinued operation". The focus of the disclosure of the
Information is about the operations which the enterprise plans to
discontinue rather than dsclosing on the operations which are already
discontinued. However, the disclosure about discontinued operation is
also covered by this standard.

Interim Financial Reporting (IFR) : Interim financial reporting is

the reporting for periods of less than a year generally for a period of 3
months. As per clause 41 of listing agreement the companies are
required to publish the financial results on a quarterly basis.

Intangible Assets : An Intangible Asset is an Identifiable non-

monetary Asset without physical substance held for use in the
production or supplying of goods or services for rentals to others or for
administrative purpose

Financial Reporting of Interest in joint ventures : Joint Venture is

defined as a contractual arrangement whereby two or more parties
carry on an economic activity under 'joint control'. Control is the
power to govern the financial and operating policies of an economic
activity so as to obtain benefit from it. 'Joint control' is the
contractually agreed sharing of control over economic activity.

Impairment of Assets : The dictionary meanong of 'impairment of

asset' is weakening in value of asset. In other words when the value of
asset decreases, it may be called impairment of an asset. As per AS-
28 asset is said to be impaired when carrying amount of asset is more
than its recoverable amount.

Provisions, Contingent Liabilities And Contingent Assets :

Objective of this standard is to prescribe the accounting for Provisions,
Contingent Liabilitites, Contingent Assets, Provision for restructuring
cost.Provision: It is a liability, which can be measured only by using a
substantial degree of estimation.Liability: A liability is present
obligation of the enterprise arising from past events the settlement of
which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.

Financial Instrument: Recognition and Measurement, issued by The

Council of the Institute of Chartered Accountants of India, comes into
effect in respect of Accounting periods commencing on or after 1-4-
2009 and will be recommendatory in nature for An initial period of two
years. This Accounting Standard will become mandatory in respect of
Accounting periods commencing on or after 1-4-2011 for all
commercial, industrial and business Entities except to a Small and
Medium-sized Entity. The objective of this Standard is to establish
principles for recognizing and measuring Financial assets, financial
liabilities and some contracts to buy or sell non-financial items.
Requirements for presenting information about financial instruments
are in Accounting Standard.

Financial Instrument: presentation : The objective of this

Standard is to establish principles for presenting financial instruments
as liabilities or equity and for offsetting financial assets and financial
liabilities. It applies to the classification of financial instruments, from
the perspective of the issuer, into financial assets, financial liabilities
and equity instruments; the classification of related interest,
dividends, losses and gains; and the circumstances in which financial
assets and financial liabilities should be offset. The principles in this
Standard complement the principles for recognising and measuring
financial assets and financial liabilities in Accounting Standard
Financial Instruments:

Financial Instruments, Disclosures and Limited revision to

accounting standards: The objective of this Standard is to require
entities to provide disclosures in their financial statements that enable
users to evaluate:

• the significance of financial instruments for the entity’s financial

position and performance; and

• the nature and extent of risks arising from financial instruments to which the entity is
exposed during the period and at the reporting date, and how the entity manages those