008 1

BLOCK INTRODUCTION
In the business world, accounting is one discipline of study that all people,
regardless of job position, should have some knowledge of. Its concepts can
be applied to all job specialties, its importance has been promoted in recent
years, and it is useful in people's everyday lives.
First, an accounting education is important because it can be applied in all
job specialties. Secretaries must use accounting skills to manage the
company cheque book and orders, auditors have to study financial
statements to evaluate the accuracy and integrity of the business, and
executives need to judge the success of their business using accounting
statements from the past and present.
Moreover, it is vital that everyone, not just commerce students, acquire an
understanding of accounting for personal benefit. People use accounting in
their daily lives when they study financial statements to make investment
decisions, assess interest rates, to pay off their house mortgages, and
calculate rates for car payments. In the business world, accounting is
utilized in much greater depth, but each individual encounters some
activities in his/her everyday life that requires knowledge of accounting
principles. Accounting is the most basic framework of business. Without an
accounting education, students would be unprepared for the real world.
After completing this course, you will have a solid understanding of
accounting in today's world. By applying the concepts learned in this
course, you will understand the processes behind accounting systems, you
will understand how and why financial transactions are documented.
Moreover, you will know where the money in the company you work for, or
own, goes. The ultimate aim of this programme is to equip today's
managers with right skills and knowledge in accounting to deal with the
changing business paradigms.
Financial Accounting an IntroductionUnit 1
1.1 Introduction
Accounting is an important endeavor: It helps the management of an
organization to have control over its performance. The success of a
business entity depends on the combined effects of four factors — land,
labour, capital and organization. The contribution of each factor has to be
properly measured and then only the resultant performance of the entity can
be properly evaluated.
Accounting has evolved over the years and developed as a system of
double entry bookkeeping. It was a simple recording and analysis of
transactions. it was only during the 19th century a comprehensive
accounting information system was effected.
Every organization needs to be accountable to its members for the use of
funds within the organization. The members of the organization place their
trust in the executive that funds will be used in an honest way to achieve the
goals of the organization.
In the same way that you need to keep records of meetings, letters and
membership you also have to keep the records of the organization's money.
Accounting is the system for keeping the records [books] of all the money
you collect and all the money that you spend.
Generally Books have to be properly kept for different reasons:
1. To make sure that the organization's executive committee and members
can understand exactly what has happened to the organization's money.
2. To help the organization to make realistic plans of what it can spend and
to monitor how the spending compares with the budget.
3. For accountability and transparency — most organizations use public or
donor rnoney and should be able to show how every rupee was spent
for productive purpose
Sikkim Manipal University Page No.: 2

Financial Accounting an Introduction
Unit 1
4. For security to avoid losing money to mismanagement, corruption or
theft.
1.2 Meaning and Definition of Accounting
The Committee on Terminology of the American Institute of Certified Public
Accountants (AICPA) formulated the following definition, which was widely
quoted for many years — "Accounting is the art of recording, classifying and
summarizing in a significant manner, and in terms of money transactions
and events which are in part at least, of a financial character, and
interpreting the results there of."
In 1966, the American Accounting Association (MA) emphasized a broader
prospective of accounting as — "Accounting is the process of identifying,
measuring and communicating economic information to permit informed
judgments and decisions by users of the information."
From the above definitions, it is cleared that accounting is the process of
identifying, measuring, recording, classifying, summarizing, interpreting and
communicating the financial transactions of an organization or a concern to

the interested users of the information. In short accounting is the recording,
classifying, summarizing, of business transactions and interpreting the
results thereof.
In 1970, AICPA of the US defined accounting with reference to the concept
of information — "Accounting is a service activity. Its function is to provide
quantitative information, primarily financial in nature, and about economic
activities, that is intended to be useful in making economic decisions."
Today's accounting focusses on the ultimate needs of those, who use
accounting information, whether these users are inside or outside the
business itself. Fig 1 displays how accounting as an information system aids
business and economic decisions made by user decision makers.
_ - --
L VP"
Unit
Pena ncial Accounting an Introduction
Decision Makers
Accounting
Communication
Processing of (as financial

Recording of data statements, other
Business Data data &
activities & measuring (preparation statements &
transactions-111. business & storage of reports)
transactions data)
Fig.1.1: Accounting as an Information System in Business and Economic
Decision making
1.3 Functions of Accounting
The following are the important functions of accounting:
1. Recording — It is the basic function and concerned with recording of all
1
business transactions in a systematic manner. It consists in recording
a
the day-to-day transactions in journal and subsidiary books.
2. Classifying — It is concerned with the systematic analysis of the recorded
0
transactions with a view to group transactions of similar nature. The
work of classification is done in ledger.
3. Summarizing — The classified data is summarized in the form of trial
balance, profit and loss account and balance sheet. They help in
fir
ascertaining the operational efficiency and the financial strength of a

w
business organization. In short it is the preparation and presentation of
TI
financial statements like profit and loss account and the balance sheet.
1.
4. Dealing with Financial Transactions — It records only those transactions

2.
and events in terms of money, which are of financial character. Other
transactions are not recorded in the books of accounts.
Sil
Sikkim Manipal University

Page No..
Financial Accounting an Introduction Unit 1
5. Analyzing and Interpreting — Analyzing and interpreting means re —
arranging the summarized data in the financial statements and
explaining the significance of those data in a manner that the end users
can make decisions about the financial conditions and profitability of the
business concern.
6. Communicating — After analysis and interpretation, accounting data are
communicated in a proper form and manner. Therefore accounting
reports are prepared which include not only income statement and
balance sheet, but also additional information in the form of ratios,
graphs, diagrams, funds flow and cash flow statements, schedules, etc.
The above functions can be classified as historical functions and managerial
or predictive functions. The historical functions are concerned with
recording, classifying, summarizing, analyzing and interpreting the past
transactions so as to prepare financial statements.
The managerial functions are concerned with planning for the future actions
and controlling the operations of the business. The actual results are
compared with predetermined targets with the objective of promoting overall
operating efficiency.
1.4 Objectives of Accounting

The basic objective of accounting is to provide full, accurate and meaningful
financial information about the financial activities of a business to all those
who have a right and a need to have such information.
The main objectives of accounting include —
1. To maintain complete and proper records of the business.
2. To protect business properties. It is for this reason that accounting
records are called the eyes and ears of the business.

Unit 1
3. To ascertain operating profit or loss and thereby measure the
performance of the business.
4. To ascertain the financial position of business.

The role of accounting has been changing with the economic and social
5. To facilitate rational decision making.
developments over the past years. It is today more concerned with the
measurement and communication of financial information about economic
activities to interested parties. Therefore it is referred to as accounting
information system for decision-making.
1.5 Meaning and Definition of Book-Keeping
simple language book keeping means maintaining the records of
businesses or an individual's financial activities. Bookkeeping's objective is
simply to record and summarize financial transactions into a usable form

that provides financial information about a business.
According to J. R. Batliboi "Book keeping may be defined as the science as
well as the art of recording business transactions under appropriate

accounts".
According to Northcot " Book keeping is the art of recording in the books of
account the monetary aspects of commercial and financial transactions''.
to the wards of L.C. Cropper "Book keeping is the science of recording
transactions irainrnci effect worth in such a manner that, any subsequent

date,
their ffect may be clearly understood and, when required a
combined statement of their result may be prepared."
From the above definitions it is clear that book-keeping is the art and
science of recording business transactions in appropriate books of accounts
in accordance with the principles of accountancy for the purpose of
ascertaining the profit or loss and the financial position of the business. In

Page No.:
6
4.46. :46:1■14
" 8 Postage stamps Rs. 2

" 10 Wages paid Rs.10
" 15 Paid for repairs to chair Rs15
" 18 Sent for repairs to chairs Rs.16
" 20 Refreshments to customers Rs. 12
" 25 Paid Ram in settlement of his account Rs. 5
short, bookkeeping means the recording of business transactions in a set

of account books.
1.6 Features of Book-Keeping

1. It is the recording of only business transactions. That means recording
only those activities of as business, which result in transfer of money or
money's worth.
2. It is the recording of only monetary transactions of the business.
3. It is the recording of business transactions in the books of accounts in a
systematic manner according to the principles of accountancy.
4. The recorded transactions is intended to ensure that information on any
point of the business particularly about the profit and financial position of
the business, is readily available.
1.7 Branches of Accounting

There are three main branches of accounting. viz.
• Financial Accounting
• Management Accounting and
• Cost Accounting
Financial Accounting consists of the classification, recording and analysis of
the transactions of a business in a subjective manner according to the
nature of expenditure so as to enable the presentation at periodic intervals,
of statement of profit or loss of the business and on a specified date its
financial state of affairs (AICPA). In short it is that accounting which is
concerned with the profit or loss of the business for a particular period and
the financial position of the business as on a particular date.
Shilling Law has broadly defined cost accounting as the body of concepts,
methods and procedures used to measure, analyze or estimate the cost,

Unit 1
profitability and performance of individual products, departments and other
se ments of the operations of a business concern. In short cost accounting
g
is that branch of accounting which is mainly concerned with costing
to the management for purpose of cost

information, which is useful
ascertainment and cost control.
According to the Institute of Chartered Accountants of England and Wales
Any form of accounting which enables a business to be conducted more
efficiently can be regarded as management accounting". It is the accounting,
which provides necessary information to the management for discharging its
functions, such as planning, organizing, directing and controlling more

efficiently.
Management accounting is a system of accounting which is concerned with
Internal reporting of information to management for —
1. Planning and controlling operations
2. Decision making on special matters and
3. Formulating long range plans
1.8 Kinds of Accounting Activities
There are different kinds of accounting activities used to meet the
information need of internal and external users like —
1. Financial Accounting: It is connected with recording and
summarizing financial transactions and prepares statements in

accordance with GAAP. They report on the financial condition and
profitability of the business to owner and therefore called stewardship
accounting.
2. Income Tax Accounting: It involves preparing records and reports
necessary for filing tax return to local, state and central Governments.
Tax regulations often differ from accounting concepts and are subject
to continuous change. Every business organization has to comply with
Page No.: 8
* S'S a*Mill,—.1P-
1

Unit 1 1
prevailing regulation and yet minimize the

tax burden by using
appropriate accounting techniques
permissible.
3. Cost Accounting: It is basically concerned with

the determination of
the aggregate as well as various components
of cost through
classification, analysis and interpretation
of data.
re 4. Management Accounting or Management Control
System: It
relates to the use of financial and cost
data for the purpose of
isg, evaluating the performance of the business
as a whole and the
various departments in relation to
predetermined targets.
re 0 5. Management Reporting: It attempts to summarize
and present data
in a predetermined format to various levels

of management at regular
intervals for the purpose of evaluating

performance and undertaking
remedial action if needed.
6. Human Resource Accounting: It is the process of

identifying and
measuring data about human resources and
communicating this
information to interested parties for
decision-making. Human resource
means the energies, skills and knowledge of
which potentially can or
should be applied to productive activities.
It deals with investment in
people and economic results of these
investments. It is accounting for
he people as an organization resource.
7. Social Responsibility Accounting: It is defined
as the measurement
and reporting of internal and external
information concerning the
nd impact of an entity and its activities on
society. Social responsibility
in accounting describes the impact of corporate
decisions on
nd environment, pollution, the consumption of
non-renewable resources
and ecological factors on the rights of
individuals and groups, on the
maintenance of public services, on public
safety, on health and
education and many other such social
concerns. It measures the
irts social cost and benefits of a particular
project in precise monetary
Its. terms.
act
rite Sikkim Manipal University
Page No.: 9
8. Inflation Accounting: It is called Revaluation Accounting or

Replacement Cost Accounting. In USA, it is known as Purchase
Power Accounting or Current Cost Accounting. In UK, it is called
Current Price Accounting. In India, it is known as Price Level Adjusted
Accounting or Inflation Accounting. Techniques used to incorporate
price level changes are known as Revaluation Accounting and
Numeral Accounting. It is a system of accounting, which regularly
records all items in financial statements at their current values. The
system recognizes the fact that the purchasing power of money is
decreasing.
9. Government Accounting: It is kept in view that the principle of
financial propriety has been observed while incurring expenditure. The
transactions are recorded on the single entry system since the final
statements are merely a receipts and payments statement. The cash
basis of accounting is followed.
10. Farm Accounting: In recent years commercial farming in the
corporate sector is developing. They are required to maintain accounts
under the Companies Act. ICWA of India has issued a booklet with the
title Farm Accounting. It is intended to keep a record of farming
activities which may include agriculture, horticulture, animal
husbandry, poultry farming, pisciculture, dairy farming, sericulture,
nurseries for growing and selling seedlings and plants, etc.
1.9 Bases of Accounting

It's important to understand the basics of the two principal methods of
keeping track of a business's income and expenses: cash method and
accrual method (sometimes called cash basis and accrual basis). In a
nutshell, these methods differ only in the timing of when transactions,
including sales and purchases, are credited or debited to your accounts.
1) Accrual Basis: A process of accounting that recognizes the impact of

transactions on the financial statements in the time periods when
revenues and expenses occur instead of when cash is received or
disbursed is called accrual basis. That is, revenue is recorded as it is
earned and expenses are recorded as they are incurred and not
necessarily when cash changes hands.
Under this method, transactions are counted when the order is made,
the item is delivered, or the services occur, regardless of when the
money for them (receivables) is actually received or paid. In other
words, income is counted when the sale occurs, and expenses are
counted when you receive the goods or services. You don't have to wait
until you see the money, or until you actually pay money out of your
checking account, to record a transaction.
More than 95 % of all business is conducted on a credit basis. Cash
receipts and disbursements are not the critical transactions for the
recognition of revenue and expense. Therefore accrual basis evolved in
response to a desire for a more complete and therefore more accurate
report of the financial impact of various events.
2) Cash Basis — A process of accounting where revenue and expense
recognition would occur when cash is received and disbursed is called
cash basis. The major deficiency of the cash basis of accounting is that
it is incomplete. It fails to match efforts and accomplishments (expense
and revenue). Therefore it fails to measure economic performance and
financial position. It also omits key assets (such as account receivables
and prepaid expenses) and key liabilities (such as accounts payable,
outstanding expenses) from balance sheets.

6.-
Financial Accounting an Introduction Una 6
6.4 Posting
It is a process of transferring debits and credits from the journal and other
1
books of original entry to their respective accounts in the ledger. The idea
5
behind posting is to make classified and summarized record of business E

transactions in appropriate accounts. E
0
6.5 Form of a Ledger Accounts b

Usually each ledger account has the shape of the English alphabet "T". It is a
two divided into two sides viz, (1) debit side and (2) credit side. The debit b
side is meant for recording the debit aspect of a transaction and the credit d
side is meant for recording the credit aspect of a transaction. The ledger a
account form is as follows: b
0
Dr Ledger Account Cr.
1 2 3 4 1 2 3 4 9
Is
Date Particulars J.F* Amount Date Particulars J.F* Amount
T
2
i 3
J.F -(abbreviation of Journal Folio) means for entering the page number of
the journal from where the transaction is posted or transferred.
6.6 Rules regarding Posting

Separate accounts should be opened in the ledger for posting the different
5.
transactions recorded in the book of original entry.
All the transactions pertaining to one account should be posted in the same
Ill
account.
J(
a(

Si
INUENLIALICiirr t?V'''1/4/1=1111111fte MEMM111/111111111
IFT AA MIMIWS=

Unit 1
1.10 Users of Accounting Information
The users of accounting information can be broadly classified into two
categories:
1. Management: it includes directors, officers, managers, department
heads, supervisors, etc. They use information for —
a) Short term planning and controlling routine operations, which include
assessing profitability, financial position and actual performance in
terms of plans, goals and policies.
b) Making non-routine decisions, formulating overall policies and long
range plans like investing in equipment, pricing products and
services, choosing which products to emphasize or de-emphasize,
etc.
2. External Parties: They use the information for making decisions about
the company. They may be —
a) Users with direct financial interest like present and potential
shareholders, present and potential creditors, employees, suppliers,
etc. They use information to make investment decisions, assessing
company status and prospects, approving supply decisions, credit
decisions, etc.
b) Users with indirect financial interest include customers, taxation
authorities, regulatory agencies, financial analysts and advisors,
brokers, underwriters, planners, labour unions, customer groups,
general public, press, etc. They make decisions like assessing
taxes, protecting investors and public interest, formulating economic
policies, measuring social and environmental
protection
programmes, negotiating labour agreements, etc.

Paae Nn • 19
Unit 5
5.7 Key Terms
The term Journal is derived from the French word "Jour which means a
•
"Day".
•
The act of recording a transaction in the journal is called Journalizing.
• The record of a transaction in the journal is called a journal entry.
• The term "Petty" is derived from the French word Petit" which means
"Small".
5.8 Self Test
1. What do you mean by book of original entry?
2. What do you mean by journalizing?
3. What are the rules of journalizing?
4. Explain the different types of accounts.
5. What do you mean by three columnar cashbook?
6. What a.,re the different types of subsidiary books?
7. Journalize the following transactions in the books of Kumar and Co.
1k'1/:4 004
Jan. 2 Started the business with Rs. 4,000
Jan. 3 Bought furniture for Rs. 2,000

Bought stationery for Rs. 50
Jan. 6
Purchased goods for cash at Rs. 2,000

Jan 7.
Sold goods for cash worth Rs. 500

Jan. 9
Sold to R Desai goods worth Rs. 1,000

Jan. 11
Jan. 14 Bought goods from Mundra Bros. at Rs. 800
Paid office cleaning charges of Rs. 150

Jan, 18
oods from Shetty worth Rs. 1,000
Jan. 20 Bought g
oods worth Rs. 200
Jan. 22 Sold to Sharma and Co. g

Jan. 24 Received from R Desai, Rs. 500
Jan. 25 Paid to Shetty, Rs. 900 Page No.: 85

Unit s
Jan. 28 Bought typewriter for Rs. 800

Jan. 31 Paid house rent of Rs. 75
Jan. 31 Paid light charges of Rs. 50

Jan. 31 Paid salary amounting to Rs. 50
Jan. 31 Received commission of Rs. 150
8. Mr. Rajaram commenced business ori1st April 2004 with Rs 4,000 as
capital. He had the following cash transactions. Prepare two-column

cashbook.
Rs.
2004
April 1 purchased goods 600

19 2 purchased furniture and paid in cash 500
3 sold goods for cash 300
5 purchased goods 400
6 paid cash to Ram 1,120
6 he allowed discount 20
7 Received cash from Krishna and Co. 1,200
Allowed Discount 40
11 9 Paid for Petty cash 30
9110 Cash purchases
59 12 Cash sales 300
400
15 Received from Mohan
1,200
18 Paid for postage
400
25 Paid for type writer
91 1 600
30 Paid Shetty Brothers
800
They allowed Discount
16
Page No.: 86
Unit 6
6.3 Types of Ledgers
Secondary Books
Main Ledger Subsidiary Ledger
•
General LedgerDebtors LedgerCreditors Ledger
General ledger is a self-sufficient secondary book in the sense that all
entries in the primary books will be posted, directly or indirectly, in this
ledger.
Debtor ledger will have separate accounts for each customer, and it will
show the transactions entered into with the customers.
Creditors ledger will have a separate account for each supplier, and it will
show the transactions entered into with the suppliers.
But the general ledger is self-sufficient, two control accounts are maintained
in the general ledger — one for debtors and one for suppliers. These control
accounts are called Sundry Debtors Account and Sundry Creditors Account.
These control accounts are summarized versions of individual accounts
maintained in the subsidiary ledgers. Therefore, at any particular point of
time the summation of the balances of the debtors' ledger must tally with the
balance shown by sundry debtors account in the general ledger. Again the
summatin of the balances of creditors ledger should tally with the balances
shown by sundry creditors account in the general ledger.
Page No.: 91
ANL mita .4 !r!CPP.0 I I I gg

1.11 Principal Financial Statements

The end product of the financial accounting is a set of reports that are called
financial statements, which include:
1. Profit and loss account
2. Balance sheet
3. Statement of changes in financial position
Profit and Loss Account or Income Statement: It measures the
performance of an organization by matching the revenue and expense. It
also gives the sources and amounts of revenue earned and different types
and amounts of expense.
Balance Sheet: It shows the financial position of an organization at an
instant of time. It is also called the statement of financial position and
indicates the solvency of the company. It also indicates the investing and
financing activities of an organization by showing assets, liabilities and
equity. Assets are economic resources and provide future benefits.
Liabilities are outsider's claim on the assets of the organization. It also
includes equity in the form of equity shares, preference shares and retained
earnings.
Statement of Changes in Financial Position (SCFP): It shows where the
financial resources have come from and where they have gone. It is
prepared on working capital basis and cash basis. Working capital based
SCFP shows increase or decrease in working capital for a specified period
of time. It reports —
1. Amount of changes in working capital associated with the operating
activities of a company.
2. Long term financing or other sources that cause an increase in the
working capital.

Unit 5
Purchase Return Book

Date Name of Supplier
L.F. Debit Note Amount
2004 No. (Rs.)
Jan 1 Shri Traders Udupi

Jan 5 Chandan Mangalore 1 100
Jan 25 Mr. Shetty Hubli 2 100
3 300
500
Sales Book:
The Sales Book (also called Sales Day Book, Sold Day Book, Sales
Journal, Day Book or Outward Invoice Book) used for recording only credit
sale of goods. Cash sale of good should not be entered in this book.
Sales Book
Date Name of Customer L.F. Outward Invoice Amount (Rs.)

No.
Illustration:
Enter the following transactions in the Sales Book of Kamath, a provision
merchant.
2004
Jan 1 Sold to Mr. Shetty Mangalore, 10 bags of rice at Rs. 100 per bag.
Jan. 2 Sold to Manipal Store Manipal, 10 bags of sugar at Rs. 100 per
bag.
Jan.5 Sold to Mr.Reddy Manipal 20 bags of wheat flour at Rs. 100 per
bag.
Jan 15 Sold to Canara Coffee Works Ltd. Mangalore, 100 kgs of coffee at
Rs. 30 per kg.
I.-,■,/nrcitV
•-•llUf I
Unit 6
Journal Entries
Date Particulars
L. Dr
Cr
2004 Cash A/c ........... 7 Amount Amount
Jan.1 To Capital A/c Dr. 5,000
(Being business commenced with

5,000
cash of Rs.5, 000)
Jan.2 Purchases A/c ...............

To Cash A/c Dr. 2,500
(Being the amount of cash
2,500
Jan.3 purchases)
Office Furniture A/c Dr. 500

To Cash A/c
500
(Being the office furniture bought
Jan.4 for cash)
Postage A/c Dr. 10

To Cash A/c
10
Jan.5 (Being the payment for postage)
Purchases A/c Dr. 2,000
2,000
To Rajkumar's A/c
(Being the goods bought from Raj
Jan.7 Kumar)
Cash A/c Dr. 150
150
To Sales A/c
Jan.8 (Being the goods sold for cash)
Purchases A/c Dr. 400
400
To Rahim's A/c
(Being the goods bought from
Jan.9 Rahim on credit 400

Dr.
400
Suresh's A/c ............
To Sales A/c
(Being sale of goods on credit to
300
Jan.10 Mr. Suresh Dr.
300
Nayak's A/c ............
To Sales A/c
(Being sale of goods on credit to 350

350
Jan.11 Mr. Na ak D
Purchases A/c ............
To Cash A/c
(Being the amount of cash 250
250
Jan.13 urchases)___
c . .....................
Cash A/ A/c
To Nayak's
(Being the cash received from

Na ak on account

111111lowar.e• as&
llnit 6
Financial Accountingan Introduction
400
Dr.
Jan.15 Rahim's A/c .........
400
To Cash A/c
Bein• the cash •aid to Rahim 200

............ Dr.
Jan 17 Rajkumar's A/c
200
To Purchase Returns A/c
(Being the goods returned to
Ra'kumarl 50
Dr.
Jan.20 Sales Return A/c
50
To Suresh A/c
(Being the goods returned by
Suresh 150
Dr
P Jan.22 Salaries A/c
150
To Cash A/c
(Being the payment for Salaries)

500
Jan.25 Cash A/c Dr.
500
To Sales A/c
Bain. the •oods sold for cash)

Ja-.26 Drawings A/c Dr. 800
To Cash A/c
(Being the cash withdrawn by Rao

for his personal use)
Jan.27 Stationery A/c Dr. 100
To Cash A/c
(Being the cash paid for stationery)
Jan.29 Rent A/c Dr. 225
To Cash A/c
(Being the cash paid for rent)
Jan.30 Cash A/c

Dr. 50
To Commission A/c
50
(Being cash received for
commission)
Total
14,335
14,335
Ledger Accounts
Dr.
Capital Account
Cr
2004
As. 2004
As
Jan.31 To balance c/d
5,000 Jan. 1 By cash A/c
5,000
5,000
5,000
Feb.i
By balance b/d
5.000
Unit 5
g. Enter the following transactions in a cashbook with cash, bank and

discount columns.
2004
Jan.1
commenced business with Rs16, 000 in cash
" 2 Paid into bank Rs. 14,500
3
Bought goods for Rs. 3,850 and paid by cheque.
" 4 Bought furniture for cash Rs. 680
11 5
Sold goods for cash Rs. 2,600 and deposited the same into
bank.
" 10 Bought goods for Rs. 4,850 and paid by cheque.
" 11 Bought stationery for Rs. 185
" 15 Received cash from Hegde Rs.680 allowing him a discount
of Rs. 20
20 Paid Raj his dues by cheque Rs.240 receiving a discount of
Rs. 10
" 25 Paid Chandra by cheque Rs.400
Sold goods for cash Rs. 585 and remitted the same into the
" 26
bank.
Our cheque to Chandra returned dishonored.

" 27
Drew cheque for salary Rs. 2,365

" 29
Drew cheque for personal use Rs 100

" 31
in transactions in an Analytical Petty Cashbook under
10. Enter the follow g
the imprest system and balance the same.
2004
Jan 1 Received a cheque towards petty cash Rs 100

Paid cartage on goods Rs.5
2
" 4 Paid taxi are Rs.14
,, 5
Postage and telegrams Rs .6
"7 Stationery purchased Rs.13 Page No.: 87

3. Long term investment activities or other uses that cause a reduction in
the working capital.
Cash basis SCFP popularly known as cash flow statement summarizes the
flow of cash in and out of the company over a period of time. It focusses on
various items, which bring out changes in sources of funds.
Even schedules and notes form part of financial statements. These
statements should be based on GAAP. Accounting standards have been
developed with an objective of giving standardized accounting policies for
the treatment of accounting aspects, which form the basis of financial
statements.
1.12 Elements of Financial Statements

The elements directly related to the measurement of profit are income and
expenses. The elements directly related to the measurement of financial
position are assets, liabilities and equities.
The elements directly related to financial position (balance sheet) are:
• Assets
• Liabilities
• Equity
Assets — they are the resources controlled by the concern and from which
future economic benefits are expected. An asset may be —
• Used to produce goods or provide service
• Exchanged for other assets
• Used to settle a liability
• Distributed to the owners
Sikkim Ma_rtipal University

in Liabilities — they are the present obligations arising from past
events. It also
arises when an asset is created or acquired. The settlement of a
present
e obligation may be done by
)n • Payment of cash
• Transfer of assets
;e • Provision of services
)n • Replacement with another obligation
or • Conversion of obligation into equity
al Equity — it is a residual interest in the assets after deducting
liabilities. Equity
is suitably classified as share capital, reserves, surplus, etc.
The elements directly related to performance (income statement) are:
• Income
nd • Expenses
ial Income — it is an increase in economic benefits during the
accounting period
in the form of inflows or enhancements of assets or decrease in
liabilities,
thereby increases equity and net worth. The term income encompasses
both revenues and gains. Revenues arise in the course of the
ordinary
business and is received in different names. Gains may or may not
arise in
the course of business, e.g. profit on the sale of fixed assets.
Gains are
reported net of related expenses and shown separately in the income
ich statement to help the users in making decisions.
Expenses — they are decrease in economic benefits during the
accounting
period in the form of outflows or decrease in assets or increase in
liabilities,
thereby decreasing the equity and net worth. The term expenses
include
losses as well as expenditure incurred. Losses are reported
separately in
the financial statement.
The cash flow statement reflects both income statement elements and
changes in balance sheet elements.
• I Iniversity Page No.: 15

1-Inancial HULAJUI ILii iy cu II it,
Unit 7 Bank Reconciliation Statement

Structure
71 Introduction
7.2 Meaning of Bank Reconciliation Statement
7.3 Need for Bank Reconciliation Statement
7.4 Reasons for Difference
7.5 Procedure for Reconciliation
7.6 Key Terms
7.7 Self Test
Learning Objectives:
After going through this unit one will learn —
• Meaning of Bank Reconciliation Statement
• Need for Bank Reconciliation Statement
• Reasons for Difference
7.1 Introduction
Banks send statements to their depositors each month. Bank reconciliation
compares the information in the bank statement with the company's cash
account, and finds any discrepancies.
The bank column of the cash book shows bank transactions: receipts and
payments; and, the balance in the bank column as on a particular date
represents the amount of money lying with the bank as on that date. The
receipt side of the bank column records cheques deposited in the bank by
the business entity in its account as also cheques received by the bank
directly on behalf of the business. The second category of cheques is
recorded in the bank column of the cash book only after getting intimation
from the bank. When a cheque is deposited into the bank for collection it
Sikkim Mm University Page No.: 102
PIP"
Unit 5
Solution:
Purchase Book
Amount
L.F. Inward Invoiced
Date Name of Supplier No. Rs.
2004 1 1,000
Jan 1 Mr. Shetty Mangalore 2 1,000
Jan 2 Manipal Store Manipal 2,000

3
Jan 5 Mr. Reddy Manipal 4 3,000

Jan 15 Canara Coffee Works
Ltd. Mangalore
7,000
Purchase Returns Book:

The Purchase Return Book (also called as Return Outwards Book,
Purchase Allowance Book) is used to record the goods purchased on credit
and sent back to suppliers, as they are found not conforming to
specifications or for any other reason.
Purchase Returns Book
Date Name of SupplierL.F Debit Note No. Amount (Rs)
Illustration:
Enter the following transactions in the Purchase Returns Book
2004
Jan. 1 Returned goods worth Rs.100 to Shri Traders Udupi
Jan. 5 Returned goods worth Rs.100 to Chandan Mangalore

Jan. 25 Allowance claimed from Mr. Shetty Hubli for shortage Rs. 300.
1.13 Key Terms

Accounting is the recording, classifying, summarizing, of business
transactions and interpreting the results thereof.
Book-keeping is the recording of business transactions in a set of account
books.
Branches of Accounting
• Financial Accounting
• Management Accounting and
• Cost Accounting
Functions of Accounting
• Recording
• Classifying
• Summarizing
• Dealing with financial transactions
• Analyzing and interpreting
• Communicating
1.14 Self Test

1. What is the meaning of accounting?
2. Define accounting.
3. What are the functions of accounting?
.4.4. What are the objectives of accounting?
5. Give the meaning of book keeping.
6. List out the features of bookkeeping.
7. What are the different branches of accounting?
8. What are the different bases of accounting?
9. Explain the different categories in users of accounting information.
10. List out the elements of financial statements.
Unit 2
Unit 2
Accounting Concepts, Conventions
and Principles
Structure:
2.1 Accounting Concepts
2.2 Accounting Conventions
2.3 Accounting Principles2.3.1 Characteristics of Accounting Principles
2.4 Meaning of GAAP 2.4.1 Good Reasons to Use GAAP
2.5 Economic Value Added (EVA)
2.6 Value Added Concept
2.7 Key Terms
2.8 Self Test
After studying this unit one will be able to understand
• Accounting Concepts
• Accounting Conventions
• Accounting Principles
• Meaning of GAAP
• Economic Value Added (EVA)
• Value Added Concept
2.1 Accounting Concepts
Accounting concepts are also self-evident statements or truths. Accounting
concepts are so basic that people accept them as valid without any
questioning. Accounting concepts provide the conceptual guidelines for
application in the financial accounting process, i.e. for recording,
measurement, analysis and communication of information about an
organization. These concepts provide help in resolving future accounting
issues on a permanent or a longer basis, rather than trying to deal with each
issue on an ad hoc basis. The concepts are important because they (a) help
to explain the 'why' of accounting (b) provide guidance when new
accounting situations are encountered, and (c) significantly reduce the need
to memorize accounting procedures when learning about accounting.
Some of the important accounting concepts are:
Money Measurement Concept:
Each transaction and event must be expressible in monetary terms. If an
event cannot be expressed in monetary terms, it cannot be considered for
accounting purposes. Money is the only practical unit of measurement that
can be employed to achieve homogeneity of financial data. Therefore
accounting records only those transactions, which can be expressed in
terms of money. Money is the common unit. which enables various items of
diverse nature to be summed up together and dealt with. Thus it restricts the
scope of accounting. However, this concept has certain shortcomings —for
example, the legal currency does not provide a stable measurement basis. It
does not take care of the effects of inflation because it assumes a stability of
the money measurement unit and also, certain important resources cannot
be measured in monetary terms, like human resources. It does not give a
complete account of the events in a business unit
Business Entity Concept:
This concept implies that a business unit is separate and distinct from the
person who owns or controls it. A business is an artificial entity distinct from
its proprietor(s). It is an economic unit, which owns its assets and has its
own obligations. This enables the business to segregate the transactions of
the company from the private transactions of the proprietor(s). The owner(s)
may have personal bank accounts, real estate, and other assets, but these
will not be considered as assets of the business. Business is kept separate

from the proprietor as that transaction of the business may be recorded with
him.
Going Concern Concept:
According to this concept, it is assumed that the business will exist for a
long time and transactions are recorded on this basis. This notion implies
that existing resources will be used to fulfill the general purposes of a
continuing entity rather than sold. It also implies that existing liabilities will
be
paid at maturity in an orderly manner. This concept forms the basis for the
distinction between expenditure that will yield benefit over a long period of
time and expenditure whose benefit will be exhausted in the short-term.
Going concern concept is not valid in the following cases —
• When an enterprise was set up for a particular purpose.
• When the Government declares a company sick.
• When the company has been in the grip of severe financial crisis and is
expected to wind up shortly.
• When a receiver or liquidator has been appointed to wind up the
company.
Cost Concept:
This concept is closely related to the going concern concept. Assets are
always recorded at acquisition cost or historical cost and that cost becomes
the basis for all future accounting for the asset. The cost concept brings
objectivity in the accounts. In spite of inflation, accounting based on cost
concept still serves as a fair and adequate basis for reporting business
performance. But it may create secret reserves, when the cost is written off,
but the asset is still in good condition or where assets earn some income but
not recorded in the hooks. The transactions are recorded at the amounts
actually involved. For instance, a piece of land may have been purchased at
Sikkim Manipal University Pane Nn • 19
Rs.1, 50,000, whereas the company considers it to be worth Rs.3, 00,000.
The land is recorded in the books of accounts at Rs.1,50,000 only. Thus, an
arbitrary valuation of the company's asset is avoided by recording the value
at the actual amount involved. Since both the parties involved in the
transaction would have mutually agreed upon this amount, it is an objective
valuation.
Accounting Equivalence Concept or Dual Aspect Concept or
Accounting Equation Concept: It is the heart of whole accounting
process. It is an expression of entity concept because it shows that the
business itself owns the assets and in turn owns the various claimants. This
is technically stated as 'for every debit, there is a credit'.
• Business firms raise funds in any of the following ways —
• Additional capital (increase in owners' equity)
• Earning revenue (increase in owners' equity)
• Profits (increase in owners' equity)
• Additional loans (increases outside liability)
• Disposing of assets (reduces assets)
An increase in liabilities (including owners' equity) and reduction in assets
represent sources of funds. These funds can be put to any of the following
uses —
• Purchasing of assets (increase in assets)
• Cash balances (increase in assets)
• Operational expenses (decrease in owners' equity)
• Clearing liabilities due (decrease in liabilities)
• Losses (decrease in owners' equity)
A:1_,,n_c_ ie. ase.s4 in assets and decreases in liabilities (including owners'
equity)
represent the uses of funds.
. I Iniversitv R-.
Two aspects of the business trans
Unit 6
action viz. debit aspect and credit aspect
should be posted in the respective sides.
Balancing of an Account:
Balancing of an account or striking the balance
or act of ascertaining
of an account is the process
rtaining whether a particular account has received more
benefits than it has given or has given more benefits than it has received, on
a particular date. In other words it implies a process of ascertaining the net
balance of an account after considering and comparing the total of both
debit side and credit side. The balance is put on the side, which is smaller,
and two totals — debit side and credit side are made equal. Against the
balance a reference is put that it has been carried forward(c/f). The balance
of an account will be termed as debit balance if the total of debit side is
greater than the total of credit side. On the other hand, if total of credit side
is greater than total of debit side, balance will be a credit balance.
The process of balancing account should be balanced by —
1. Totaling both the sides of the account,
2. Ascertaining the difference between the totals of two sides,
3. If the debit side is more than the credit side, the balance is shown as By
balance c/d on the credit side of its account and it indicates debit
balance,
4. If the credit side is more than the debit side, the balance is shown as To
balance c/d in the debit side and it indicates debit balance,
5. These balances are transferred to the next period on the reverse or b/d
side.
post them to the various ledger
Journal the following transactions and p
Illustration)
accounts and prepare the trial balance as on 31 January 2004
• • _ _ _
I In itiOrSitV
r is
The sum of the sources of funds equals the sum of the uses of funds. Thus,
the dual aspect of accounting means that "Owner's Equity + Outside Liability
Assets". This can be expressed in two other ways. They are —
Assets — Liabilities = Capital
Assets — Capital = Liabilities
Every financial transaction involves a two-fold aspect — yielding the benefit
and giving off that benefit. This forms the basis of whole superstructure of
double entry system.
Accounting Period Concept:
Business firms prepare their income statements for a particular period. This
period. known as the accounting period, is usually the calendar year
(January 1 to December 31) or the financial year (April 1 to March 31). The
measurement of income or loss of a business entity is relatively simple on a
whole life basis, but impossible until it is liquidated. Owners, investors and
the Government are all impatient to know the results of business operations.
Some firms, like trading firms have shorter periods such as a month or less,
while others may have longer terms. The Companies Act, 1956 has set a
maximum limit of 15 months for the accounting period. Normally accounting
period adopted is one year as it helps to take any corrective action, to pay
income tax, to absorb seasonal fluctuations and for reporting to the
outsiders.
Matching Concept:
It is based on the accounting period concept. Matching concept suggests
that to find out the profitability, the expenses incurred to generate revenue
are to be matched against that revenue. The determination of profit of a
particular accounting period is essentially a process of matching the
revenue recognized during the period and the cost to be allocated to the
period to obtain the revenue. Revenue earned in an accounting year is
Page No.: 21
Unit 5
Hilly Pa)ablc Book
Due tegetAmountDv Paid Cash

RttlEs
koi Date of To Whom Drawer RI\ ccWhere ;fen
Pqa.hleof theDate Folio Book
Bill
Folio
Bill
.10 11 12
8
4
Rs. i
Journal Proper:
This book is used to record all transactions, which cannot be included in the
cashbook or any of the other subsidiary books. In other words it is used for
recording only those transactions which can not be recorded in any of the
other subsidiary books like —
• Opening entries
• Transfer entries
• Adjusting entries
• Closing entries
• Entries relating to rectification of errors
• Entries relating to dishonour of bills

• Withdrawal of goods for personal use
• Loss of goods by theft, fire, etc.
• Credit purchase and sale of assets
• Bad debts, etc.
Sikkim ManiDal Univorcit.

offset (matched) with all the expenses incurred during the same period to
generate that revenue, thus providing a measure of the overall profitability of
the economic activity. Costs are reported as expenses. But some of the
expenses are not readily identifiable with a particular period like preliminary
expenses, advertisement expenses, exact amount of depreciation, etc.
because they cannot be traced to particular goods or services.
Realization Concept:
Revenues should be recognized only when they are realized, while
expenses should be recognized as soon as they are reasonably possible.
The realization concept tells that to recognize revenue it has to be 'realized.
A transaction is recorded only on receipt of cash or a legal obligation to pay.
Until then, no income or profit can be said to have arisen. For instance,
suppose a firm sells 100 units of a product on credit for Rs.10, 000. Until the
payment is received, it will not be recorded in the accounting books.
However, if the firm receives information that the customer has lost his
assets and is likely to default the payment, the possible loss is immediately
provided for in the firm's books. Realization principle does not demand that
the revenue has to be received in cash. Revenue from sales transactions
should be recognized when the seller of goods has transferred to the buyer
the property in the goods for a price and no uncertainty exists regarding the
consideration that will be derived from the sale of goods. Revenue arising
from the use by others of enterprise resources yielding interest, royalties
and dividends should only be recognized when no uncertainly exists as to its
measurability and collectibility.
Accrual Concept:
Non-cash resources and obligations change in time periods other than those
in which money is received or paid. Recording these changes are necessary
to determine periodic income and to measure financial position. It suggests
that incomes and expenses should be recognized as and when they are
earned and incurred, irrespective of whether the money is received or

paid
in connection thereof. This concept is used by all businesses that
disclose
their financial statements to various interested parties. In fact, the
Companies Act, 1956 provides that accrual concept has to be maintained
for practically all accounting purposes. The alternative to the accrual
basis
of accounting is called cash basis of accounting. The law in India
provides
that in cases where accrual concept cannot be followed under any
e circumstances, cash basis may be followed.
Examples of accrual concept :
J. (i) Rent paid for fifteen months in advance on 1st January 2004. The
business follows calendar year as the accounting year. In this case
rent for only the first twelve months should be recognized as expenses
for the year 2004.
s. (ii) Credit sales for the year were 2004 As. 2,00,000. Cash collected
from
is customer during 2004 was Rs. 1,50,000. In this case credit sales for
ly 2004 should be considered as Rs. 2,00,000 and not Rs. 1,50,000.
at This concept has given sound accounting principle in respect of
recognition
of revenues and expenses. It implies that " revenues accrue in that year
in
'er which they are earned, and not in the year in which they are actually
he received, and expenses accrue in the year in, which they are incurred and
ng not in the year in which they are actually paid.
ies Legal Aspect Concept:
its This concept implies that the accounting records and books should reflect
the legal position and the accounting records statements should conform
to
legal requirements. The accounting records should be kept and the
se statements should he prepared in the manner provided by law.
ry
is
re Sikkim Manipal University Paso Mrs • on
Financial Accounting an introduction
Unit 5
Sales Returns Book
Date Name of Customer L.F. Credit Note No. Amount Rs.
2004
Ramesh & Co 1 2,000

Jan 1
Mohan 2 250
" 2
5 ' Chandan 3 150

30 Rai & Co 4 100
2500
Bills Receivable Book:
The bills receivable of an enterprise consist of all promissory notes given by
customers or Bills of Exchange accepted by customers in respect of

amounts due from them. Each bill appearing in this book is posted to the
credit of drawee's account. Periodical total is posted to the debit of B/R

account.
Bills Receivable Book
DLL Ltget Amount Cash \R mans
Book
Date Folio
Folio
9 I10
12 13
11
Bills Payable Book:
pror
The bills payable book consists of allnissory notes or bills of exchange
accepted by the business in respect of amounts owing to its suppliers. Each
bill recorded in this book is posted to the debit of drawer's account.
Periodical total is posted to the credit of B/P account.

Page Nirl F13
F
1.,iwcarsitV
2.2 Accounting Conventions
The term convention denotes circumstances or traditions, which guide the
accountants while preparing the financial statements. Concepts and
conventions are often used interchangeably. The basic difference between
them is that concepts are concerned with maintenance of accounts whereas
conventions are applicable while preparing financial statements. Accounting
conventions refers to customs, traditions, usages or practices followed by
accountants as a guide in the preparation of financial statements.
The important accounting conventions are —
Convention of Materiality:
An important convention, as we can see from the application of accounting
standards and accounting policies, the preparation of accounts involves a
high degree of judgement. Where decisions are required about the
appropriateness of a particular accounting judgement, the "materiality".
Convention suggests that this should only be an issue if the judgement is
"significant" or "material" to a user of the accounts. Whether information
should be disclosed or not in the financial statements will depend on
whether it is material or not. Materiality depends on the amount involved in
the transaction. A financial statement is not material if there is omission or
misstatement. which will mislead the user.
Here it is necessary to note that the convention of materiality is comparative,
because what is material for a small concern may not be material for a big
concern.
Convention of Conservatism:
It is a policy of caution or playing safe and had its origin as a safeguard
against possible losses in a world of uncertainty. The working rule is that
"anticipates no profits but provide for all possible losses". Prudence is the
'inclusion of a degree of caution in the exercise of the judgments needed in
.•■■•■•-,
Unit 6
Unit 6
Accounting Mechanics: Ledger
Structure:
6.1 Introduction
6.2 Meaning and Definition of Ledger
6.3 Types of Ledgers
6.4 Posting
6.5 Form of Ledger Accounts
6.6 Rules regarding Posting
6.7 Key Terms
6.8 Self-Test
After studying this unit one will be able to understand:
• Meaning and Definition of Ledger
• Types of Ledgers
• Posting
• Form of a Ledger Accounts
• Rules regarding Posting
6.1 Introduction
The main disadvantage of any primary book is that transactions therein are
recorded date-wise and not as per their nature. Thus if you want to know
ho w much is spe nt on one particular item during a particular year, you have
to go through all the pages of the cash book to finally report the correct
figure. This is very time consuming work and you may find yourself lost in
the jungle of entries in the cashbook. As we all know transactions and

nner that necessary information is readily
events are raw data. To generate information out of raw data, these are to
be classified in such a ma
Page No.: 89
••■•■■-_
Unit 5
5.3 Cash Book
This records all receipts of and payments in cash. It is called a simple
cashbook. Even deposits from the bank and withdrawals from such
accounts and cheque payments are also recorded in the cashbook. A
cashbook, which is used to record both cash and bank transactions, is
referred to as a Two-column cashbook.

Cr.
Dr
L.F Cash Date Payments L.F Cash
Date Receipts (Rs.)
(Rs.)
Specimen of Simple Cash Book
Cr.
Dr.
Date Receipts L.F Cash Bank Date Payments L.F Cash Bank
(Rs.) Rs. (Rs) (Rs.)
Specimen of Two-Column Cash boo
5.4 Cash Discounts
Sometimes for the purpose of encouraging early payments due from
customers, a company may offer a certain percentage of the amount as a
discount. Again a company might be given some discounts by its creditors
for early payment of the amounts payable by it.
Cash Book can also be used to record the cash discounts that are allowed
to customers for prompt payments and the cash discounts that are received
on payments made to suppliers within a stipulated time period. It is
convenient to maintain the column for discounts allowed on the receipt side
and the column for discount received on the payment side of the cash Book.
A cashbook in which the cash and bank transactions and the details of cash
discounts are recorded is referred to as a Three-column Cash Book.
Page No.: 72
airiLP ir- 11111.4m,

making the estimates required under conditions of uncertainty, such that
assets or incomes are not overstated and liabilities or expenses are not
understated.' Expected losses should be accounted for but not anticipated
gains.
The significance of this convention is that financial statements should
indicate the actual position. It should neither show a rosy or better picture by
window dressing nor a worse picture by creating secret reserves.
Convention of Consistency:
Accounting rules, practices and conventions should be continuously
observed and applied. Transactions and valuation methods are treated the
same way from year to year, or period to period. Users of accounts can,
therefore, make more meaningful comparisons of financial performance
from year to year. When accounting policies are changed companies are
required to disclose this fact and explain the impact of any change.
otherwise they are not comparable.
Consistency also implies -
External Consistency - The financial statements of one enterprise should be
comparable with another.
Vertical Consistency - The same accounting rules, policies, practices and
conventions are adopted while preparing interrelated statements of the
same date.
Horizontal Consistency - The same accounting rules, policies, practices and
conventions are adapted from year to year.
Third Dimensional Consistency - All units in the same industry follow the
same accounting policies, methods and practices.
It should be noted that the convention of consistency does not mean that the
accounting treatment of various categories of assets should be consistent
with one another. Moreover it does not mean that the accounting practices
Unit
5
Journal Entries
Date Particulars
L.F. Dr
Cr
Amount Amount
(Rs.)
(Rs.)
2004 Cash A/c Dr. 25,000
Jan.1 To Capital A/c
25,000
(Being Business commenced with cash
of Rs.25, 0001
Jan.2 Purchases A/c Dr. 15,000

To Cash A/c
15,000
(Being the amount of cash purchases)
Jan.3 Freight A/c Dr. 500
To Cash A/c
500 \
(Being the payment for freight'
Jan.7 Raj Kumar's A/c Dr 5,000

To Sales A/c
5,000
(Being sale of goods on credit to Mr
Raj Kumar)
Jan.8 Stationery A/c . Dr 2,000
2,000
To Cash A/c
(Being the payment of stationery)

Jan.10 Rent A/c. Dr 1,000
1,000
To Cash A/c
Being the amount of rent paid) Dr. 15,400

Cash A/c 600
Jan.13Dr. Discount A/c
16,000
To Mohan Das's A/c
(Bein•cash received from Mohan Das 4,000

Premium A/c Dr.
4,000
Jan.15 To Cash A/c

L(Bein, the for premium 1,000
1,000
Postage A/c ............
Jan.20 To Cash A/c
Bein•the a ment for •osta e 500
500
Salaries A/c ...................
Jan 25 To Cash A/c
(Being the payment for salaries)

D 1,000
1,000
Cash A/c ...........................
Jan.30 To Commission A/c

(Being the receipt of commission) 71,000
71,000
Total
ID.nrIra Mn 71
and methods, once adopted should not be changed. Tne accounting 2

practices and methods can be changed when needed but the same thing
should be clearly disclosed and adequately explained.
Convention of Full Disclosure:
All accounting statements should be honestly prepared and full disclosure of
all significant information should be made. The idea behind this convention
is that financial statements are essentially meant for external users and on
the basis of that the external users makes decisions. So the financial
statements should disclose as much as details as possible. All information,
which is of material interest to owners, creditors and investors, should be
disclosed in accounting statements to make them reliable and informative.
As such now the statutes prescribe the form in which financial statements
are to be prepared.
2.3 Accounting Principles

Accounting is more an art than a science. It is based on a set of principles,
on which there is general agreement, not rules that can be proved Principle
is referred to as rule of action or conduct and hence can be aptly applied to
rules in accounting. AICPA defined the term principle as a guide to action, att
settled ground, or basis of conduct or practice. Accounting principles are
general decision rules derived from the accounting. Anthony and Reece
comment: "Accounting principles are man-made. Unlike the principles of
physics, chemistry and other natural sciences, accounting principles were
not deducted from basic axioms, nor can they be verified by observation and
experiment. Instead, they have evolved. This evolutionary process is going
on constantly; accounting principles are not eternal truths."

1
2.3.1 Characteristics of Accounting Principles:
Accounting principles are the results of experience, business practices and
customs, ideas and beliefs of users of financial statements, government
agencies, stock exchange authorities, etc.
Accounting principles are man made, so they do not have the
authoritativeness as universal principle.
The science of accounting is in the process of evolution and hence
accounting principles are fast developing.
The general acceptance of an accounting principle usually depends on three
criteria — relevance, objectivity and feasibility.
The conventions, concepts, rules and procedures that together make up
accepted accounting practice at any given time are called Generally
Accepted Accounting Principles (GAAP). Accounting principles become
generally accepted by agreement, experience, custom, usage and practical
necessity contribute to the set of principles. Therefore some call them
conventions than principles.
GAAPs play a vital role as they make financial accounting information more
meaningful. But they are simply guides to action and may change over time.
They are not immutable laws. Sometimes specific principles must be altered
or new principles must be formulated in accordance with changes in
business practices or economic circumstances.
In India, organizations such as the Accounting Standards Board (ASB) set
up in1977; Institute of Chartered Accountants of India, Department of
Company Affairs, SEBI, IOWA, ICS, Stock Exchanges and the literature
published are instrumental in the development of accounting principles.
American GAAP is largely the work of Financial Accounting Standard Board
(FASB) along with Securities and Exchange Board (SEC). International
Fina
GAAP is set by the IASC (International Accounting Standards Committee
set up in 1973) a group sponsored by the accounting bodies in more than 80 Cert
countries. finar
are t
2.4 Meaning of GAAP Banff

It is a widely accepted set of rules, conventions, standards and procedures have
for reporting financial information, as established by the Financial usinc
state
Accounting Standards Board. GAAP is a combination of authoritative
standards (set by policy boards) and the accepted ways of doing Struc
Accc
accounting. stanc
Every day, accountants make judgments about how to record business Thes
transactions. They often base their decisions on the financial objectives of struc
the companies for which they work. Other times they turn to Generally
Accepted Accounting Principles (GAAP) to steer their decisions.
GAAPs are not a fixed set of rules. They are guidelines or, more precisely, a
group of objectives and conventions that have evolved over time to govern
how financial statements are prepared and presented. The Financial
Accounting Standards Board, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission provide
guidance about acceptable accounting practices.
2.4.1 Good Reasons to Use GAPP:
Every business that expects anyone outside the company to look at its
financial data should use GAAP. Compliance with GAAP helps maintain
creditability with creditors and stockholders because it reassures outsiders
that a company's financial reports accurately portray its financial position.
Plus, anyone who reads your financial statements — stockholders,
creditors, security analysts or outside companies — will assume that the
reports comply with GAAP.

Page No.: 28
Sikkim
•M• 'A

■.■ Unit 2
Certified public accountants routinely

audit companies to determine if their
financial statements are prepared
according to GAAP. These audit findings
are typically included with companies'
financial statements.
Banks and finance companies often require

their clients to use GAAP or
have audited financial statements. And
investors who are accustomed to
res using financial information prepared
according to GAAP might balk if your
:ial statements don't meet their expectations.
lye Structure of GAAPs:
ing Accounting principles are alternatively
referred to as accounting practices,
standards, postulates, assumptions,
concepts, axioms, conventions, etc.
ess These terms are hardly distinguished by
accounting experts. Therefore the
; of structure of GAAPs may be stated as
under:-
ally
Going concern
Assumptions Consistency
Accrual
y, a
✓ern
Business Entity
icial
Cost
Dual Aspect
vide
Concepts Accounting Period
Money Measurement
at its
Reliability
ntain
Objectivity
iders
Disclosure
tion.
Consistency
Iers,
Conventions Materiality
the
Conservatism

Page No.: 29
.: 28
23. Voucher: It refers to any written document in support of a financial

transaction.
24. Receipt: A receipt is a written acknowledgement of the receipt of
money or the acceptance of the delivery of goods given by the receiver
of money or goods to the giver of money or goods.
25. Trial Balance: A worksheet listing of all the accounts appearing in the
general ledger with the dollar amount of the debit or credit balance of
each, used to make sure the books are "in balance" total debits and
credits are equal.
26. Balance Sheet: It is the financial statement, which shows the amount
and nature of business assets, liabilities, and owner's equity as of a
specific point in time. It is also known as a Statement of Financial
Position or a Statement of Financial Condition.
27. Carried Forward: The term carried forward or its abbreviation c/f is
used at the foot of a page to indicate that the total amount at the foot of
that page has been carried forward to the head of the next page.
28. Brought Forward: The term brought forward or its abbreviation b/f is
used at the head of page to indicate that the total amount at the head
of that page has been brought forward from the foot of the previous
page.
29. Carried Down: The term carried down or its abbreviation c/d is written
in a ledger account at the time of its closing to indicate that the balance
in that account has been carried down to the next period.
30. Brought Down: The term brought down or its abbreviation b/d is
written in a ledger account at the time of its opening to indicate that the
opening balance in that account has been brought down from the
previous period.
kildrim ?Janina! I lniVerSitV Page No.: 63

••■ .11■••■■N"
t. lilikWg
7.17,71c
Unit 4
Financ
expense or an entry that decreases a liability, owner's

equity or
23.
income.
1
17. Credit: The term credit has been derived from the Latin word
24. I
"Credere" which means, "to believe". So literally the term

credit
means the account owed to an account for the benefit given by

that
account in the belief that its value will be returned at a

later date. In 25. 1
short, an entry in the financial books of a firm that

increases a liability,
owner's equity or income, or an entry that decreases an asset

or an
expense.
18. Journal: A journal is a daily record of business

transactions. It is a 26.
book of original, prime or first entry in which all the

business
transactions are first entered in the specified manner in the
order of
dates. A preliminary record where business transaction is

first entered
into the accounting system.

27.
19. Ledger: A ledger is an account book in which all the accounts

are
maintained. It is the books of final entry as well as

principal book of
accounts.
28.
20. Entry: It is the record of a transaction made in any book of

account.
given
either in the book of original entry or in the books of final ientn b
entry.
21. Narration: It is a brief explanation to a journal entry,
below the
journal entry, with in brackets. It gives the explanation for
the particular
29.
journal entry.
22. Posting: Posting is the process of entering in the ledger the
information already recorded in the journal or in any of the

subsidiary
30.
books. In other words process of transferring balances from
bookkeeping records called journals to a "final" bookkeeping

record
called the general ledger.

Page No
62
Sikk
2.5 Economic Value Added (EVA)

The technique of EVA has acquired acceptance as a tool for assessing the
existing financial status and predicting the future performance of a company.
It covers all aspects of a company's financial management for capital
budgeting, acquisition, pricing to strategic planning and shareholders
communication, besides identifying the value addition to shareholders by the
organization during the specified period. Economic Value-Added is the
after-tax cash flow generated by a business minus the cost of the capital it
has deployed to generate that cash flow. Representing real profit versus
paper profit, EVA underlies shareholder value, increasingly the main target
of leading companies' strategies. Shareholders are the players who provide
the firm with its capital, they to gain a return on that capital.
The concept of EVA is well established in financial theory, but only recently
has the term moved into the mainstream of corporate finance, as more and
more firms adopt it as the base for business planning and performance
monitoring. There is a growing evidence that EVA, not earnings, determines
the value of a firm. Effective use of capital is the key to value; that message
applies to business processes, too.
EVA has the advantage of being conceptually simple and easy to explain to
non-financial managers, since it starts with familiar operating profits and
simply deducts a charge for the capital invested in the company as a whole,
in a business unit, or even in a single plant, office or assembly line. By
assessing a charge for using capital, EVA makes managers care about
managing assets as well as income, and helps them properly assess the
tradeoffs between the two. This broader, more complete view of the
economics of a business can make dramatic differences.
n
111111131111Nr
Unit 6
Rs.
4
January 1 Rao commenced business with 5,000
2 Bought goods for cash 2,500
3 Bought office furniture for cash 500
4 Paid for postage 10
5 Purchased goods from Rajkumar 2,000
7 Sold goods for cash 150
998 Bought goods from Rahim 400
9 Sold goods to Suresh 400

10 Sold goods to Nayak 300
11 Purchased goods for cash 350
13 Received cash from Nayak 250
15 Paid cash to Rahim 400
17 Returned goods to Rajkumar 200
20 Suresh returned goods 50
22 Paid salaries 150
25 Sold goods for cash 500
26 Rao withdrew for personal use 800
27 Paid for stationery
29 Paid rent 100
31 Received commission 225
50
4.10 Key Terms
• Single-entry system of book-keeping refers to any system of book-
keeping, which is not a complete double entry system.
• The word asset is derived from the French word 'Assez' which means
'enough'.
• The word 'liability is derived from the French word 'Her' which means
'to bind'.
• The term debit has been derived from the Latin word "debere", which
means, "to owe".
• The term credit has been derived from the Latin word "Credere" which
means, "to believe".
• Accounting cycle is the sequence of procedures used to record, classify
and summarize accounting information in financial reports, on a regular
basis
4.11 Self Test

1. What do you mean by single entry system of book-keeping?
2. What do you mean by double entry system of book-keeping?
3. What are the advantages and disadvantages of double entry system of
book-keeping?
4. List out the different terms used in Book-Keeping.
5. What are the steps in accounting cycle?
2.6 Value Added Concept

Value added statement is prepared as an improved replacement of
traditional profit and loss account. Value added is the change in market
value resulting from an alteration in the form, location or availability of a
product or service excluding the cost of bought in material and services. It is
the difference between the sales revenue and the cost of bought in
materials and services. It can also be defined as the wealth the organization
has created by its own and its employees' efforts. In other words, value
added is pre-tax profit plus employees cost, interest and depreciation. The
value so added is distributed among the creators of value i.e. employees,
Government, creditors and shareholders.
2.7 Key Terms
Accounting concept are:
• Money Measurement Concept
• Business Entity Concept
• Going Concern Concept
• Cost Concept
• Accounting Equation Concept
• Accounting Period Concept
• Matching Concept
• Realization Concept
• Accrual Concept
• Legal Aspect Concept
Accounting Conventions:
• Convention of Materiality
• Convention of Conservatism
• Convention of Consistency
• Convention of Full Disclosure

•
Sales Book
Amount
L.F, Outward
Rs.
Date Name of Customer Invoiced No.
2004 1,000
Jan 1 Mr. Shetty Mangalore

1 ,000
2
Manipal Store Manipal

Jan 2
2,000
3
Jan 5 Mr. Reddy Manipal

4 3,000
Canara Coffee Works Ltd.

Jan 15
Mangalore
7,000 1
Sales Returns Book:
The Sales Returns Book (also called Returns Inwards Book) used for
recording transactions relating to goods sold on credit and received back
from the customers as not conforming to the specifications or for any other
reason.
Sales Returns Book
Date Name of Customer L.F. Credit Note No. Amount Rs.

Illustration:
Enter the following transactions in the Sales Returns Book
2004
Jan 1 Ramesh & Co. returned us goods worth As 2,000
Jan 2 Allowance granted to Mohan for breakage Rs 250

Jan 5 Allowance granted to Chandan for over charging Rs. 150
Jan 30 Rai & Co. returned us goods worth Rs 100

Page No.: 82
GAAP is a combination of authoritative standards (set by policy boards) and

the accepted ways of doing accounting.
Economic Value-Added is the after-tax cash flow generated by a business
minus the cost of the capital it has deployed to generate that cash flow.
2.8 Self Test

1. What do you mean by accounting concepts ? Discuss the various
concepts.
2. What are accounting conventions ? Discuss the various conventions.
3. What do you mean by GAAP ?
4. What are the good reasons to use GAAP ?
5. What is economic Value Added ? Discuss the economic value concept.
Unit s
ok analysis of
payments:
i u.a•y ■•••••----
Postage
aPrsintatitnrygAdo Travel Wages Sundry
Cash Date Total a
Carrge exp.
reced 1996 Particulars LF payrnentteleram
Rs Jan —
500 1" To cash
40 40
By postage
25
5 By stationery 25
150
8Th By advtment 150
50
12" By wages 50
161" By carriage 25
25
22
20"' By conveyance 22
80
257' By traveling Cr 80
27"' By postage 50 50
10
28 By wages 10
30m By telegram 20 20
301h By register 10 10
482 120
25 25 150 80 60 22
'30Th By balance b/d 18
5oo 1 500
18 'July To balance b/d
1E'
482 July To cash
111
The total of each column will be posted to respective ledger accounts.

5.6 Subsidiary Books
The Books of Accounts maintained by an organization other than the
cashbook may be classified into Journals and Ledgers. The Journal is used
as the book of first entry for all transactions, which cannot be recorded in the
Cash Book. In other words all non-cash transactions should be recorded in
the journal. For practical convenience the journal is maintained by using a

number of books called the subsidiary books. For example the following
subsidiary books may constitute the journal for an enterprise.
1. Purchase Book
2. Purchase Returns Book

Pane No.: 78
Unit 5
Rules of debit and credit for the above entries:
T No. Aspects
A/c debited Reason for Dr A/c credited Reason
for Cr
i. Cash received Cash a/c Debit what Shetty's Credit
the
and amount is
comes in capital a/c giver
given by Shetty
ii. Goods Purchase Debit what Cash a/c Credit

what
purchased & a/c comes in goes
out
paid cash
goods received Purchase Debit what Creditors Credit

the
given by a/c
comes in a/c giver
creditors
iii. Paid wages and Wages a/c Debit the Cash a/c
Credit what
cash given expense goes

out
iv. Cash received Cash a/c Debit what Sales a/c

Credit what
from goods sold comes in goes

out
Goods sold on Drs a/c Debit the Sales a/c
Credit what
credit receiver goes

out
v. Cash paid to Crs a/c Debit the Cash a/c

Credit what
creditors receiver goes

out
vii. Cash received Cash a/c Debit what Drs a/c

Credit the
from debtors comes in giver
viii. Rent paid Rent a/c Debit all Cash a/c

Credit what
expenses goes
out
Journal:
Date Particulars L.F. Dr Amount

Cr Amount
(Rs)
(Rs)
Dr. 80,000
Jan.1 Cash A/c
80,000
To Capital A/c
(Being Business commenced with cash of
Rs.80, 000)
50,000
Dr.
Jan.10 Purchase A/c
30,000
To Cash A/c
20,000
To creditors A/c
(Being goods purchased on cash & credit)

500
Dr.
Wages A/c
500
Jan 12
To cash A/c
(Being wages paid) 20,000

Dr.
Jan.15 Cash A/c 25,000

Dr.
.....................
45,000
Debtors A/c
To Sales A/c
(Being goods sold on cash and credit)
Page No.: 69
In the journal each transaction is classified into its debit aspect and credit
aspect and both the debit and credit aspects of each transactions are
recorded together in one entry with an explanation for the entry.
Every business transaction is recorded in the General Journal. The
General Journal is called the book of original entry. The act of recording a
transaction in the journal is called Journalizing. The record of a transaction
in the journal is called a journal entry.
Journal entries should be made contemporaneously with the event they are
recording, or reasonably soon after the event. Keep in mind that a journal is
a chronological record of events. A contemporaneous writing is one that
takes place at the same time as the event. This is the best time to record an
event, because the facts and details are still fresh in our minds. Necessary
documents, conversations, calculations, etc., are readily available to create
a correct record of the event. If we wait too long, the event will be much
more difficult to reconstruct.
5.2 Form of Journal

Date Particulars L. F Dr. (Rs.) Cr. (Rs.)
The date column is meant for recording the date on which a particular
transaction takes place.
The particulars column is meant for recording the names of the accounts to
be debited and credited for a particular transaction. While filling up the pc
Particulars column, in the first line, the name of the account to be debited is
written. In the next line the name of the account to be credited is written
after leaving a little space to the left. The idea behind this is to make it easy
to distinguish the debit entry from the credit entry. To keep connection
Sikkim Manipal University Page No.: 67 4
Unit 3 Accounting Equation &

Transaction Analysis
Structure:
3.1 Introduction
3.2 Assets and Liabilities
3.3 Effects of Financial Transaction on Accounting Equation
3.4 Transaction Analysis
3.5 Classification of Accounts
3.6 Key Terms
3.7 Self Test
• Meaning of Assets and Liabilities
• Effects of Financial Transaction on Accounting Equation
• Transaction Analysis
• Classification of Accounts
3.1 Introduction
As we have seen in the dual accounting concept, the equality between the
total assets and the total liabilities and owner's capital is stated in the form
of an equation. Moreover the final result of the accounting process for a
business entity is the financial statements (balance sheet, profit and loss
account, statement of changes in financial position). These statements are
presented in a summarized form and cannot be prepared until the financial
transactions of the business entity have been recorded, classified and
summarized. The framework of the financial statements and the elements
shown in these statements rests on an important and basic relationship
referred to as basic equation. This basic equation is expressed by the
`M.
Unit 4

Financ
4.9 Accounting Cycle

4.10 I
It is a sequence of procedures used to record, classify and

summarize
• Si
accounting information in financial reports, on a regular basis.
kE
P Steps in the Accounting Cycle:

•
1) Analyze the business transactions

le
2) Record (journalize) transactions.

• Ti
3) Post journal entries to Ledger accounts.
4) Prepare a Trial Balance.
• Tl
5) Make adjusting entries.
rr
6) Prepare an Adjusted Trial Balance.
7) Prepare financial statements.
rr
8) Journalize and post closing entries.
•
9) Prepare a post-Closing Trial Balance.
(I)
Analyze business
b
traos..ictions
a)
Journalite
the
(91 transactions
Cpl e a poet-Lluslog
trial babnce 4,
4 Steps (3)
in the Post to
ledger
(81 accoul is
Accounting
journa ire and post
Cycle
closing entries
(4)
Prepare a
(71 trial
balance
Prepare financial
statements: 1
Income statement
(5)
Owner's equity 11- Work sheet Jounalize and
post
statement Optional adjusting
entries:
lillance sheet
PrepamseistsiAccruals
(a)
repa-e an adjusted
tr al ivilarcs.
Sikk

Page No.: 64
3. Sales Book
4. Sales Returns Book
5. Bills Receivable Book
6. Bills Payable Book
7. Journal Proper
Purchases Book:
The Purchases Journal (also called as Purchase Day Book, Bought Book.
Bought Day Book, Invoice Book) is used to record credit purchases of goods
only. Cash purchases of goods should not be recorded in this book. The
term 'goods' covers only those items procured by the business for resale.
Purchase Book
7 Date Name of Supplier L.F. Inward Invoiced No. Amount (Rs.)
4
Illustration:
Enter the following transactions in the Purchase Book of Naveen, a
provision merchant.
2004
Jan. 1 Bought from Mr. Shetty Mangalore, 10 bags of rice at Rs. 100 per
bag.
Jan. 2 Bought from Manipal Store Manipal, 10 bags of sugar at Rs. 100
per bag.
Jan. 5 Bought from Mr.Reddy Manipal 20 bags of wheat flour at Rs. 100
per bag.
Jan. 15 Bought from Canara Coffee Works Ltd. Mangalore, 100 kgs of
coffee at Rs. 30 per kg.
Unit 6
Page No.: 9°
available. It requires identifying the nature of various transactions recorded
in the primary book and giving an appropriate name to an identical class of
transactions and finally, re-recording the transactions in another set of
books according to the defined class.
6.2 Meaning and Definition of Ledger
A ledger account is a summary device and its simplest form is shaped like
the letter T and called a T account.
The ledger contains all the accounts in which all the business transactions
pertaining to a business enterprise are recorded. The main function of the
ledger is to classify and summarize all the items appearing in journal and
other books of original entry under appropriate accounts so that at the end
of the accounting period, each account contains the entire information of all
transactions relating to it.
The term ledger is derived from the Dutch word "Legger" which means to ly.
Ledger therefore means a book where the various accounts kept. In the
words of L.C. Cropper, the book in which a trader's all transactions are
recorded in a classified permanent form is called the Ledger.
A ledger account may be defined as a summary statement of all the
transactions relating to a person, asset, expense or income, which have
taken, place during a given period and shows their net effect or closing
balance.
A journal is maintained only to facilitate the passing of entries. Every entry
recorded in the journal must be posted into the ledger. A ledger contains a
number of related accounts.
Fin
6.3
Gei
entr
ledc,
Det:
sho
Cre
sho
But
in th
acc
The
time
im
bala
sum
shoe
Sikkir
•4 •
balance sheet equation, and therefore, is known as the balance sheet

equation also.
The balance sheet equation indicates that u
Sources of Funds = Uses of Funds ft

or d
Equities = Assets
Or 3
Assets =Proprietor's Equity (Capital) + Outside LiabilityT
tr
A
The above accounting equation signifies that assets of a business are

always equal to the total of outside liabilities and proprietor's equity. It
means that the accounting equation should always be in balance. This is
because whatever funds are raised by the business; either through capital

■Nemelliw
Unit 5

Fir
j) A demand draft was purchased for Rs. 3,000/- from a bank after paying
5.
Rs. 20/- towards their charges and paid to the electricity department
as
Tt
deposit.
"S
k) Interest of Rs. 122/- and Rs. 50/- was credited and debited respectively
re
by the overseas bank and National bank.
st
I) An amount of Rs. 15,000/- was withdrawn from the Overseas Bank and
e)
salaries paid to that extent.
m) Manager's salary of Rs. 10,000/- was paid by cheque drawn on the
National bank.
pt
n) Overseas Bank collected dividends of Rs. 22,500/- and sent a credit
note.
o) An amount of Rs. 15,000/- was transferred from the Overseas Bank to
p
the National bank.
Columnar Cash Book:

Dr.
Cr.
Date .Receipts LF Discount Cash NB OB Date Payments LF

Discount Cash NB OB
.c€.. ' T o :,a.arice 1500 35460 Feb By balance

11240
28" tvd 28"' b/d
To saws 15 12485 By purchase

13210
To sates 13265 By office

450
expenses
To cash C 10000 By stationary

155
To cash C 5000 By National

C
10000
hank
To BR 200 19800 By Smith

13500
To overseas C 5000
By bank
' 115
bank
charges
To interest 122 By National C

5000
bank
To dividend
22500 By cash C
5000
To overseas C
15000 By electricity
bank
3000
expenses
.
By bank
20
cheque
By interest
50
By salaries
15000
By manager
10000
salary
By National C
15000
bank
By balance
215 1140 21195 16057

c/d
Total 215 19765 42485 77882

Total
215 19765 42485 77882
Sikkim Manioal University
f73 k n • 74
or business operations or from outsiders will be tied up one or other form of

uses (assets). Assets represent resources owned by the business entity;
equity represents the claims of those who supplied the assets. Thus, the
fundamental accounting equation emphasizes accounting equivalence or
duality concept.
3.2 Assets Assets and Liabilities

The above-discussed Accounting Equation is concerned with assets and
equities (outside liabilities and proprietor's equity). Following are some of
the assets and equities:
Assets
1. Cash
2. Cash at Bank
3. Bills Receivable
4. Prepaid expenses
5. Debtors or accounts receivable
6. Stock (stock of Raw materials, work-in-progress, finished goods etc)
7. Loose tools
8. Office equipments and furniture
9. Patents, copyrights
10. Machinery
11. Buildings
12. Land
13. Goodwill
Equities (Outside liabilities and proprietor's equity)
(a) Outside liabilities
1. Bank overdraft
2. Outstanding expense
3. Bills payable
vlirv-sle
Unit 5
Finar
" 10 Purchased Stationery Rs. 25
" 20 Tea charges for customers Rs.5
" 31 settled the balance due to Shrilatha Rs.10
N.. •
Simple Petty Cashbook
Amount Cash Date Particulars

Voucher L F Amount
Received Book No
Folio
Rs.
Rs.
100 Jan.1 To Bank
Jan.2 By Postage
15
Jan 3 By Taxi hire

10
Jan 4 By Wages
15
Jan 5 By Telegram
05
Prep
Jan 6 By Cart hire
10
i.
Jan 10 By Stationery
25
Jan 20 By Tea charges

05
Jan 31 By Shrilatha
10
iv.
Jan 31 By Balance c/d
05
v.
vii
100
._100 viii
05 Feb 1 To balance b/d

ix
5.5.2 Analytical Petty Cashbook:

xi
xii
The petty cash book which is ruled in analytical format. A petty cash book,
which contains analytical columns for each class of expenditure, is called
Analytical Petty Cashbook.
SikkIrn !_Jrii•v.'r'
Sikh
Rage No.: 75
rr.rrr- r
Debtor for asset sold is a debtor who owes money to the business or
any asset sold to him on credit.
A debtor for service rendered is a debtor who owes money to the
business for the service rendered to him on credit.
10. Debt: The amount due from a debtor to the business is called a "Debr,
generally debt may be of three types:
Debt
V
Good Debt Bad Debt Doubtful Debt
Figure 2: Different Types of Debts
Good debt refers to fully recoverable debt.
Bad debt refers to debt, which is not recoverable (irrecoverable).
Doubtful debt refers to debt whose recovery is doubtful.
11. Creditors: A creditor is a person to whom the business owes money.
A creditor also may be of 4 types.
Creditors
Trade Loan Creditor for assetExpenses

Creditor Creditor purchased Creditor
Figure 3: Different Types of Creditors
A trade creditor is a person to whom the business owes money for
goods purchased from him on credit.
A loan creditor is a person to whom the business owes money for the
loan borrowed from him.

Dr Cr.
Receipts • Cash Bank Date PaymentsD' Cash \ Bank

L _
D* = Discount
Specimen of Three-Column Cash Book
Example: Mr. Ratan operates two bank accounts, both of which are
maintained in the columnar cashbook itself. You are required to draw up the
cashbook and also how the following transactions relating to 28`h Feb 1996
will appear there in and close the cashbook for the day.
a) Opening balance
Cash Rs. 1,500/-
National Bank Rs. 11,240/- (overdraft)
Overseas Bank Rs. 35,460/-
b) Received cheque for Rs. 12,500/- in respect of sales for realizing which
the National Bank charges Rs. 15/- and credited the balance.
c) Purchased goods for Rs. 13,210/- and a cheque issued on the overseas
bank. The bank charges Rs. 10/- for collection of the cheque to the
concerned party.
was deposited
d) Paid office expenses Rs. 450/- and Rs. 155/- for stationery.
e) Out of cash sales of Rs. 13,265/-, a sum of Rs. 10,0001- w

into the account at National Bank.
f) Credit purchases of Rs. 15,000/- were made from Mr. Smith who sent
the documents relating to the goods through the Overseas Bank for 90°.
of their value. The bank charged Rs. 115/- for releasing the document.
g) Deposited Rs. 5,000/- in National Bank.
h) °A. towards discounting•

Bill Receivable (B/R) for Rs. 20,000/- was discounted with the
overseas bank which charges 1
) Withdrew Rs. 5,000/- from the Overseas Bank.
Page No.: 73

Unit 5
%to...fetal 1-- Analytical Petty
Cashbook . 11
II
Prepare petty cash book on imprest system from the following particulars.
i. Jan 1st — Received for petty cash payment Rs. 500/-
ii. Jan 2nd — Paid for postage Rs. 40/-
iii. Jan 5th — Paid for stationery Rs. 25/-
iv. Jan 8th — Paid for advertisement Rs. 150/-
v. Jan 12th — Paid for wages Rs. 50/-
vi. Jan 16th — Paid for carriage Rs. 25/-
vii. Jan 20th — Paid for conveyance Rs. 22/-
viii. Jan 25th — Paid for traveling expenses Rs. 80/-
ix. Jan 27th — Paid for postage Rs. 50/-
x. Jan 28th — Paid wages to cleaner Rs. 10/-
xi. Jan 30th — paid for telegram Rs. 20/-
xii. Jan 30th — Sent registered notice Rs. 10/-
bk,
Unit 5 Journal and Subsidiary Books

Structure:
5.1 Meaning of Journal
5.2 Form of Journal
5.3 Cash Book
5.4 Cash Discounts
5.5 Petty Cash Book
5.5.1 Simple Petty Cash Book
5.5.2 Analytical Petty Cashbook
5.6 Subsidiary Books
5.7 Key Terms
5.8 Self Test
• Meaning of Journal
• Cash Book
• Cash Discounts
• Petty Cash Book and its Types
• Subsidiary Books and its Types
5.1 Meaning of Journal

The term Journal is derived from the French word "Jour" which means a
"Day". Journal therefore, means a daybook or a daily book. A journal is a
daily record of business transactions. It is a book of original, prime or first
entry in which all the business transactions are first entered in the specified
manner in the order of dates.

Unit 5
5.5 Petty Cash Book
The term "Petty" is derived from the French word "Petit" which means
„small". So petty cash book is an additional cashbook, which is used for
recording petty payments, such as postage and telegrams, printing and
stationery cartage and carriage, advertisement, traveling expenses sundry
expenses etc.
A petty cashbook may be either a simple petty cash book or an analytical
petty cash book.
5.5.1 Simple Petty Cash Book:
A simple petty cash book contains only one amount column for all classes of
petty payments. It does not contain separate amount column for each class
of petty payments. The format of simple petty cash book is:
Cash Book Voucher Ledger

Amount Date Particulars Amount
Received Folio No Folio
R s.
Rs.
illustration:
Enter the following transactions in the simple petty cash book:
2004
Jan.1 Received cheque from Rs. 100 to open the book

" 2 Postage paid Rs. 15
" 3
Paid taxi hire for traveling sales man Rs. 10
4 Wages paid Rs. 15
" 5 Sent Telegram to Manipal Rs. 5
" 6
Cart hire paid on goods bought Rs. 10 Page No.: 75

A creditor for asset purchased is a creditor to whom the business owes

money for any asset purchased from him on credit.
An expenses creditor refers to a creditor to whom the business owes
money for any service received from him on credit. For e.g.: salaries
unpaid, commission unpaid etc.
12. Income: Income refers to the earnings of a business. The gross
increase in owner's equity resulting from the operations and other
activities of the business. In other words a business earns by selling
services and products. Amounts billed to customers for services and/or
products.
13. Expenses: All expense refers to an expenditure in return for which
some benefit is received and the benefit received is enjoyed and
exhausted immediately. Decrease in owner's equity resulting from the
cost of goods, fixed assets, and services and supplies consumed in the
operations of a business. In other words, the costs of doing business.
The stuff we used and had to pay for or charge to run our business.
14. Loss: It refers to money or money's worth given up without any benefit
in return. For e.g.: loss of cash by theft, loss of goods by fire etc.
It is
an amount a business's expenses exceeds revenues. In other words,
we earned less than we spent Here it is very important to note that loss
is different from an expense. An expense brings some benefits, but
loss does not bring any benefit.
15. profit: An amount a business's revenues exceeds expenses. In other
words, the amounts we earned were greater than our expenses.
for 16, Debit: The term debit has been derived from the Latin word "debere",
which means, "to owe". So literally the term debit means the amount
owed by an account for the benefit received by that account. In short,
he an entry in the financial books of a firm that increases an asset or an

60
1M. _AIWA
1.1r a
Unit 3
4. Creditors on accounts
5. Loan -short-term as well as long term
6. Debentures
7. Proprietorship equity
(i) Capital (Plus additions less withdrawals)
(ii) Reserves and surplus of profits/accumulated profits.
3.3 Effects of Financial Transaction on Accounting Equation
Every business transaction can be analyzed by or expressed in terms of its
effect on the balance sheet equation. A business transaction results in a
change in all or any of the components of the equation. Whatever may be
the change, the Accounting Equation remains in balance. Different types of

business transactions may result into a maximum of nine possible effect
combinations on the components of accounting equation
These nine possible combinations of changes or effects are:
• Increase in one asset; decrease in another asset.
• Increase in one liability; decrease in another liability
• Increase in one item of proprietor's equity; decrease in another item of
proprietor's equity.
• Increase in one item of proprietor's equity; decrease in liability.
• Increase in a liability; decrease in proprietor's equity.
• Increase in asset; Increase in liability.
• Increase in asset; increase in proprietor's equity.
• Decrease in asset; decrease in liability.
• Decrease in asset; decrease in proprietor's equity.
3.4 Transaction Analysis

Determining the effect of a business transaction on assets, liabilities and
equities of the accounting equation is called transaction analysis. A
Page No.: 36

r M=Mhek..6.
Unit 5
Jan.16 Creditors A/c Dr. 8,000 8,000

To Cash A/c
(Being amount paid to suppliers of goods)
Jan.20 Cash A/c Dr. 15,000 15.000
To Debtors A/c
(Being cash received from debtors)
Jan.31 Rent A/c Dr. 1,000
To Cash A/c ,000
(Being the payment for rent) 1,99,500 1,99,500
J J ma lize the following transactions in the books of Ravi Kumar Das
004
Rs.
Jan. 1 Commenced business with 25,000
Jan. 2 Goods purchased for cash 15,000
Jan. 3 Paid freight 500
Jan. 7 Goods sold to Raj Kumar on credit 5,000
Jan. 8 Paid for stationery 2,000
Jan. 10 Paid for Rent 1,000
Jan. 13 Cash received from Mohan Das 15,400

Allowed him discount 600
Jan. 15 Paid Premium
4,000
Jan. 20 Paid to postage
1,000
Jan. 25 Paid for salaries
500
Jan. 30 Commission received
1,000
litir•Alahr

Unit 5
Fin
between two accounts, which are written in two different lines,
the word "Dr
(the abbreviation of the term Debtor) is written at the end of the

first line Ru
after the name of the account to be debited and at the beginning

of the T
second line, before the name of the account to be credited, the

word "1-0,, is
written. These two words (Debtor & To) form the link between the
two
accounts.
To explain as to why one account is debited and the other account

is
credited, a brief explanation, usually beginning with the word
"Being " is
written in the "Particulars" column within brackets. This is the

brief
explanation to the journal entry is called "Narration"
iv.
The L.F (the abbreviation of the term Ledger Folio) column is meant
for
recording the page number of the ledger where the journal entry
will be
posted later.
v.
The -Dr" column is meant for recording the amount to be debited.

vii
The "Cr" column is meant for recording the amount to be credited.

vii
Another point to be noted in the context of the form of journal is

that, one Jc
line is drawn below every journal entry to separate one journal
entry to D
another.
J,
.J rnalize the following transactions —
J i. Jan 1 s' — Mr. Shetty started his business with Rs. 80,000/-
which he
bought as his capital in cash
ii. Jan 109' — He purchased goods worth Rs. 30,000/- in cash and
J
Rs. 20000/- on credit.
iii. Jan 12"' - He paid wages Rs. 500/-

iv. Jan 15111 — Sold goods for Rs. 20,000/- in cash and Rs.
25,000/- on J
credit
v. Jan 16th — Paid to suppliers Rs. 8,000/- for goods purchased on
credit J
vi. Jan 20th — Received Rs. 15,000/- from his debtors

vii. Jan 31st — Paid rent Rs. 1,000/- in cash

S
Page
No.: 68
rte. 4
transaction analysis shows increases and decreases in the assets, liabilities

or proprietor's equity of a business entity. Where these effects are
presented in an account form, they are shown by a simultaneous debit and
credit in the relevant accounts of assets, liabilities and/or equities.
It's important to understand more about transaction analysis and the effects
of business transactions on the accounting equation by considering some
examples.
Example 1:
Mr. Shetty starts business and introduces Rs.50, 000 as his capital on 1st
January
Assets = Liabilities + Proprietor's equity
Cash = Mr.Shetty's capital
Effects of transaction 50,000 = 50,000
New balance 50,000 = 50,000
Example 2:
Mr. Shetty purchased machinery for Rs.20, 000 out of his capital on 2'
January
Assets = Liabilities + Proprietors equity
Cash + machinery = Mr.Shetty's capital
Old balance 50,000 50,000
Effects of transaction -20,000+20,000 = 50,000
New balance 30,000+20,000 = 50,000
Example 3:
Mr. Shetty purchases goods for Rs.10,000 on credit on 3rd January
Assets = Liabilities + Proprietors equity

Cash + Machinery +Goods = Creditors + Capital
Old balance 30,000+20,000 = 50,000
Effects of transaction +10,000 = + 10, 000
New balance 30,000+20,000+10,000 = 10,000 + 50,000
Balance Sheet as at
Liabilities Amount Assets Amount
(Rs.) (Rs)
Capital 50,000 Cash 50,000
Creditors 10,000 Machinery 20,000
Stock 10,000
60,000 60,000
Problem 1
Show the accounting equation on the basis of the following transactions —
i. Ram started business with As. 2,00.000/-
ii. Purchased goods on credit from Laxman Rs. 40,000/-
iii. Sold goods for cash Rs. 26,000/- costing Rs. 22,000/-
Accounting Equation:
Transactions Assets Liabilities + Owners equity
Cash or Bank Ram's capital
Started business with 200000 200000
cash
ii. Bank + goods Crs + Ram's capital
Purchased goods on 200000 + 40000 40000 + 200000
credit from Laxman
iii. Bank + goods Crs + Ram's capital + Surplus
Old Balance 200000 +40000 40000 + 200000
Sold goods for cash +26000 -22000 + 4000
Ending 226000 +18000 40000 + 200000 + 4000
Sikkim Manipai University Page No.: 38

1
3.5 Classification of Accounts

Before considering the classification of accounts let me tell you why
accounts are classified into different kinds.
1. The debit and credit aspects of transactions can be easily determined.
2. The nature of the balance of an account can be understood easily.
3. Classification of accounts into different kinds helps a business to divide
the ledger into different ledgers and maintain different types of accounts
in different ledgers.
The accounts maintained by a business concern may be classified into three
kinds. Viz (1) Personal Account (2) Real Account (3) Nominal Account
1. Personal Account - Any account that bears the name of a particular
person (including, of course, names of companies, suppliers, customers
and so forth). For instance, Amar's Account, Sunil's Account, the Suzuki
Motors Ltd.'s Account, Manipal Academy of Higher Education's Account
etc.
2. Real Account Real accounts are accounts of properties, assets or
things owned by a concern and in and with which the business is carried
on. Real accounts may be:
a. Accounts of Tangible assets- such as goods account, cash
account, furniture account, machinery account, building account,
land account etc.
b. Accounts of Intangible Assets such a goodwill account, patent
rights account, copy rights account and trademarks account.
3. Nominal Account:
Nominal accounts are accounts of the expenses and losses which a
concern incurs, and incomes and gains which a concern earns in the
course of its business. These accounts are not represented in any type
of tangible things or assets. They exist only in names, so these accounts
are called nominal accounts.
ilir".1.111M111.111111L,/ P. ow
Unit 8
2. Salary paid Rs. 1,000 has been posted to Rent account.
The rectification entry will be:
Salary A/c
Dr. 1,000
To Rent A/c
1,000
(Salary paid wrong debited to Rent Account, now rectified)
Stage- 2: After the trial but before the final accounts
Once the trial balance is prepared, all ledger balances are drawn. In that
case, to rectify any error, it should be done in such a way that the trial
balance agrees. In other words, if an account is to be debited for
rectification, another account has to be credited by the same amount.
Otherwise, the trial balance will not tally. This is possible only if the
rectification is done with the help of journal entries.
So far as an error affecting two or more accounts are concerned, the
process of rectifying the errors is exactly the same in stage 2 as well. The
•
same journal entries are to be passed. The difficulty arises when the error
affecting one account. This is because such type of errors does not have
necessary information to complete a journal entry. You may note here that
in this case the trial balance will not agree if there exist such errors. Thus,
if
you are in a hurry and your trial balance is not tallying, you can put the
difference to an artificial account created temporarily and make the trial
balance tally. Such an n artificial account is called the Suspense

Account. The lies that there
existence of the Suspense Account in the trial balance imp
exist error/s.
Once one-sided errors are detected these are to be rectified by passing
journal entries and, upon rectification of all such errors, the Suspense
balance. The
Account will be automatically eliminated from the trial
technique for passing journal entries in these cases is to put the Suspense
Account to fill in the unknown side or the difference in amount.

Pane No.: 125
-vow.. 'MEI
cinancial Accounting an Introduction
loss by fire, reserve f
Unit
commission, goods sent on approval or return basis, etc. There may be

ands, goods
hidden adjustments like taken loans at 10 % means interest at 10 % hav
be paid or provided for in profit and loss acc
e to
liability in the balance sheet.

ount and shown as outstanding
10.10 Problems
1) The following balances are extracted from the books of Kiran Trading
Co. on 31st March 2000. You are required to prepare trading and profit
and loss account and a balance sheet as on that date.
Opening stock
Rs. 5000 Commission received
Rs. 2000
B/R
Rs. 22500 Return outwards
Rs. 2500
Purchases
Rs. 195000 Trade expenses
Rs. 1000
Wages
Rs. 14000 Office furniture
Rs. 5000
Insurance
Rs. 5500 Cash in hand
Rs. 2500
Sundry debtors
Rs. 150000 Cash at bank
Rs. 23750
Rs. 4000 Rent and taxes

Rs. 5500
Carriage inwards
Rs . 7250
Rs. 4000 Carriage outwards

Commission paid
Rs. 250000
Rs 3500. Sales
Interest on capital
Rs. 15000
Stationery
Rs. 2250 Bills payable
98250
Return inwards
Rs. 6500 Creditors
Rs. 89500
Capital
The closing stock was valued at Rs. 125000/-

Unit

4. On 31 December 2003 the cash book of Mr. Bhat showed a balance of
ears from the pass book that
bank before 315t December 2003. But it app
Rs.2, 000 at bank. He has sent cheque amounting to Rs. 10,000 to the
cheque worth Rs.4, 000 only had been credited till he date. Similarly out
of cheque for Rs.5, 000 issued during the month of December, cheques
worth Rs. 2,500 were presented and paid in January 2004.
The pass book also showed the following payments: Rs. 320 on life
insurance policy as per instructions and Rs. 2,000 against a promissory
note as per instructions. The pass book showed that the bank had
collected Rs.600 interest on Government Securities. The bank had

charged interest Rs.50 and bank charges Rs.20. There was no entry in
the cash book for the payments, interest collected etc.
Prepare a reconciliation statement as on 31St December 2003 and

nd►oate what balances the bank pass book show on that date.

008 1

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BLOCK INTRODUCTION

Sikkim Manipal University Page No.: 2

4. For security to avoid losing money to mismanagement, corruption or

1.2 Meaning and Definition of Accounting

The Committee on Terminology of the American Institute of Certified Public

Accountants (AICPA) formulated the following definition, which was widely

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 there of."

In 1966, the American Accounting Association (MA) emphasized a broader

prospective of accounting as — "Accounting is the process of identifying,

measuring and communicating economic information to permit informed

judgments and decisions by users of the information."

From the above definitions, it is cleared that accounting is the process of

identifying, measuring, recording, classifying, summarizing, interpreting and

communicating the financial transactions of an organization or a concern to

classifying, summarizing, of business transactions and interpreting the

In 1970, AICPA of the US defined accounting with reference to the concept

of information — "Accounting is a service activity. Its function is to provide

quantitative information, primarily financial in nature, and about economic

activities, that is intended to be useful in making economic decisions."

Today's accounting focusses on the ultimate needs of those, who use

accounting information, whether these users are inside or outside the

business itself. Fig 1 displays how accounting as an information system aids

business and economic decisions made by user decision makers.

Processing of (as financial

Fig.1.1: Accounting as an Information System in Business and Economic

1.3 Functions of Accounting

The following are the important functions of accounting:

1. Recording — It is the basic function and concerned with recording of all

work of classification is done in ledger.

3. Summarizing — The classified data is summarized in the form of trial

ascertaining the operational efficiency and the financial strength of a

business organization. In short it is the preparation and presentation of

4. Dealing with Financial Transactions — It records only those transactions

and events in terms of money, which are of financial character. Other

transactions are not recorded in the books of accounts.

Sikkim Manipal University

1.4 Objectives of Accounting

Sikkim Manipal University Page No.: 5

3. To ascertain operating profit or loss and thereby measure the

performance of the business.

4. To ascertain the financial position of business.

measurement and communication of financial information about economic

activities to interested parties. Therefore it is referred to as accounting

information system for decision-making.

1.5 Meaning and Definition of Book-Keeping

simple language book keeping means maintaining the records of

businesses or an individual's financial activities. Bookkeeping's objective is

simply to record and summarize financial transactions into a usable form

According to J. R. Batliboi "Book keeping may be defined as the science as

well as the art of recording business transactions under appropriate

account the monetary aspects of commercial and financial transactions''.

to the wards of L.C. Cropper "Book keeping is the science of recording

transactions irainrnci effect worth in such a manner that, any subsequent

their ffect may be clearly understood and, when required a

combined statement of their result may be prepared."

science of recording business transactions in appropriate books of accounts

in accordance with the principles of accountancy for the purpose of

Sikkim Manipal University

Financial Accounting an Introduction Unit 5

" 8 Postage stamps Rs. 2

short, book- keeping means the recording of business transactions in a set