Provides information useful forProvides information useful for
shareholders, owners, investors, creditors,shareholders, owners, investors, creditors,
labour, government, researchers etc.labour, government, researchers etc.
Accounting is therefore, the art of recording,Accounting is therefore, the art of recording,
classifying and summarizing in a significantclassifying and summarizing in a significant
manner, and in money terms, transactions andmanner, and in money terms, transactions and
events which are in part at least, of a financialevents which are in part at least, of a financial
nature and interpreting the resultsnature and interpreting the results..
Accounting is the language of businessAccounting is the language of business
Language has toLanguage has to
convey the sameconvey the same
Has to be understoodHas to be understood
by all users ofby all users of
accounting informationaccounting information
AA generally accepted setgenerally accepted set
of rules can thusof rules can thus
provide uniformity inprovide uniformity in
accounting procedureaccounting procedure
and practice.and practice.
Thus certain conceptsThus certain concepts
have been agreed uponhave been agreed upon
by accountantsby accountants
Generally Accepted AccountingGenerally Accepted Accounting
Principles (GAAP)Principles (GAAP) is the term used tois the term used to
refer to the standard framework ofrefer to the standard framework of
guidelines for financial accounting used inguidelines for financial accounting used in
any given jurisdiction.any given jurisdiction.
GAAP includes the standards, conventions,GAAP includes the standards, conventions,
and rules accountants follow in recordingand rules accountants follow in recording
and summarizing transactions, and in theand summarizing transactions, and in the
preparation of financial statements.preparation of financial statements.
Financial accounting is information thatFinancial accounting is information that
must be assembled and reportedmust be assembled and reported
Third-parties who must rely on suchThird-parties who must rely on such
information have a right to be assured thatinformation have a right to be assured that
the data are free from bias andthe data are free from bias and
inconsistency, whether deliberate or not.inconsistency, whether deliberate or not.
For this reason, financial accounting reliesFor this reason, financial accounting relies
on certain standards or guides that areon certain standards or guides that are
called "Generally Accepted Accountingcalled "Generally Accepted Accounting
Principles" (GAAP).Principles" (GAAP).
Many countries use or are converging onMany countries use or are converging on
the International Financial Reportingthe International Financial Reporting
Standards (IFRS), established andStandards (IFRS), established and
maintained by the International Accountingmaintained by the International Accounting
Standards Board.Standards Board.
GAAP are imposed on companies so thatGAAP are imposed on companies so that
investors have a minimum level ofinvestors have a minimum level of
consistency in the financial statementsconsistency in the financial statements
they use when analyzing companies forthey use when analyzing companies for
investment purposes.investment purposes.
GAAP cover such things as revenueGAAP cover such things as revenue
recognition, balance sheet itemrecognition, balance sheet item
classification and outstanding shareclassification and outstanding share
Companies are expected to follow GAAPCompanies are expected to follow GAAP
rules when reporting their financial datarules when reporting their financial data
via financial statements.via financial statements.
Accounting Standards in IndiaAccounting Standards in India
They are accounting rules and procedures relating toThey are accounting rules and procedures relating to
measurement, valuation and disclosure, issued bymeasurement, valuation and disclosure, issued by
The Institute of Chartered Accountants of India.The Institute of Chartered Accountants of India.
Accounting standards are mandatory as regards theAccounting standards are mandatory as regards the
published accounts of limited companies.published accounts of limited companies.
Certain accounting standards such as AS-1, AS-3Certain accounting standards such as AS-1, AS-3
are mandatory for all concerns.are mandatory for all concerns.
For other concerns, accounting standards areFor other concerns, accounting standards are
mandatory when they are required to be audited.mandatory when they are required to be audited.
AS 1 – Disclosure of Accounting PoliciesAS 1 – Disclosure of Accounting Policies
Certain fundamental accounting assumptions underlieCertain fundamental accounting assumptions underlie
the preparation and presentation of financialthe preparation and presentation of financial
statements. They are usually not specifically statedstatements. They are usually not specifically stated
because their acceptance and use are assumed.because their acceptance and use are assumed.
They are going concern, consistency and accrual. InThey are going concern, consistency and accrual. In
case any of the above fundamental assumptions arecase any of the above fundamental assumptions are
not followed, the fact should be disclosed in thenot followed, the fact should be disclosed in the
financial statements along with reasons.financial statements along with reasons.
Accounting policies are specific accounting principlesAccounting policies are specific accounting principles
and methods adopted by enterprises. Differentand methods adopted by enterprises. Different
enterprises operating under diverse and complexenterprises operating under diverse and complex
economic activities may adopt different policies ineconomic activities may adopt different policies in
areas like depreciation, treatment of retirementareas like depreciation, treatment of retirement
benefits, valuation of investments, recognition ofbenefits, valuation of investments, recognition of
profit on long-term contracts, treatment of contingentprofit on long-term contracts, treatment of contingent
liabilities etc.liabilities etc.
Give transactions for each of the following effects –Give transactions for each of the following effects –
1)1) Increase in asset and increase in liabilityIncrease in asset and increase in liability
2)2) Increase in asset and decrease in another assetIncrease in asset and decrease in another asset
3)3) Decrease in asset and decrease in capitalDecrease in asset and decrease in capital
4)4) Decrease in asset and decrease in liabilityDecrease in asset and decrease in liability
5)5) Increase in capital and increase in assetIncrease in capital and increase in asset
6)6) Increase in capital, decrease in asset and decreaseIncrease in capital, decrease in asset and decrease
in liabilityin liability
7)7) Increase in asset, decrease in another asset andIncrease in asset, decrease in another asset and
increase in liabilityincrease in liability
8)8) Increase in asset, increase in capital and decreaseIncrease in asset, increase in capital and decrease
in another assetin another asset
Calculate the amount of capital –Calculate the amount of capital –
Cash in hand Rs.1,000; Bills payable Rs.3,000Cash in hand Rs.1,000; Bills payable Rs.3,000
Plant and machinery Rs.10,000; Creditors Rs.3,000Plant and machinery Rs.10,000; Creditors Rs.3,000
Stock Rs.8,000; Goodwill Rs.6,000Stock Rs.8,000; Goodwill Rs.6,000
Debtors Rs.5,000; Cash at bank Rs.4,000Debtors Rs.5,000; Cash at bank Rs.4,000
Loan taken Rs.1,000; Loan to Mr. Y Rs.5,000Loan taken Rs.1,000; Loan to Mr. Y Rs.5,000
Capital = Assets – LiabilitiesCapital = Assets – Liabilities
= (Cash 1,000 + P&M 10,000 + Stock 8,000 + G/W= (Cash 1,000 + P&M 10,000 + Stock 8,000 + G/W
6,000 + Debtors 5,000 + Bank 4,000 + Loan to Y 5,000)6,000 + Debtors 5,000 + Bank 4,000 + Loan to Y 5,000)
– (B/P 3,000 + Creditors 3,000 + Loan taken 1,000)– (B/P 3,000 + Creditors 3,000 + Loan taken 1,000)
Capital = Rs.32,000Capital = Rs.32,000
Give journal entriesGive journal entries
1)1) Started business with a capital of Rs.75,000Started business with a capital of Rs.75,000
2)2) Opened a bank account with SBI for Rs.40,000Opened a bank account with SBI for Rs.40,000
3)3) Purchased goods from K & Co for Rs.10,000Purchased goods from K & Co for Rs.10,000
4)4) Purchased goods from Mr.Z on credit Rs.25,000Purchased goods from Mr.Z on credit Rs.25,000
5)5) Paid rent to landlord Rs.500 by cashPaid rent to landlord Rs.500 by cash
6)6) Goods returned to Mr.Z Rs.2,500Goods returned to Mr.Z Rs.2,500
7)7) Withdrew cash for household expenses Rs.600Withdrew cash for household expenses Rs.600
8)8) Sold goods to Mr. L for cash Rs.12,000Sold goods to Mr. L for cash Rs.12,000
9)9) Sold goods to D on credit Rs.15,000Sold goods to D on credit Rs.15,000
10)10) Goods returned by D Rs.500Goods returned by D Rs.500
11)11) Received a cheque from D Rs.12,000Received a cheque from D Rs.12,000
12)12) Purchased furniture for office use Rs.12,000 byPurchased furniture for office use Rs.12,000 by
13)13) Paid Rs.1,000 for advertisement by chequePaid Rs.1,000 for advertisement by cheque
14)14) Withdrew from bank Rs.1,500 for office use.Withdrew from bank Rs.1,500 for office use.
15)15) Paid salaries Rs.12,000 by cash.Paid salaries Rs.12,000 by cash.
2.2. Pass journal entries for the following transactions –Pass journal entries for the following transactions –
2006 Nov 1 Cash deposited into bank Rs.1,00,0002006 Nov 1 Cash deposited into bank Rs.1,00,000
5 Paid Rs.30,000 for equipment by cheque5 Paid Rs.30,000 for equipment by cheque
8 Received as commission Rs.5,000 by cheque8 Received as commission Rs.5,000 by cheque
9 Withdrew Rs.10,000 as personal expenses from bank9 Withdrew Rs.10,000 as personal expenses from bank
14 Purchased stationery by cheque Rs.80014 Purchased stationery by cheque Rs.800
17 Paid sales tax by cheque Rs.5,00017 Paid sales tax by cheque Rs.5,000
20 20 Insurance premium paid by cheque Rs.5,000Insurance premium paid by cheque Rs.5,000
20 20 Purchased goods from Basu on credit Rs.55,000Purchased goods from Basu on credit Rs.55,000
21 21 Returned goods to Basu Rs.8,000Returned goods to Basu Rs.8,000
22 22 Sold goods for cash Rs.12,000Sold goods for cash Rs.12,000
23 23 Sold goods to A on credit Rs.40,000Sold goods to A on credit Rs.40,000
24 24 Deposited into bank Rs.7,000Deposited into bank Rs.7,000
25 25 A returned goods worth Rs.5,000A returned goods worth Rs.5,000
26 26 Received interest Rs.1,200Received interest Rs.1,200
27 27 Purchase furniture by cheque Rs.3,500Purchase furniture by cheque Rs.3,500
3. 2006 Dec 1 Sold goods to X for cash Rs.55,0003. 2006 Dec 1 Sold goods to X for cash Rs.55,000
22 Deposited Rs.50,000 into bankDeposited Rs.50,000 into bank
3 Purchased stationery Rs.4003 Purchased stationery Rs.400
4 Purchased goods from Sen on credit4 Purchased goods from Sen on credit
8 Purchased a computer from Banerjee Rs.15,0008 Purchased a computer from Banerjee Rs.15,000
11 Paid advertisement expenses by cheque Rs.7,00011 Paid advertisement expenses by cheque Rs.7,000
15 Paid rent by cheque Rs.5,00015 Paid rent by cheque Rs.5,000
18 Sold goods to Ram on credit Rs.1,20,00018 Sold goods to Ram on credit Rs.1,20,000
20 Ram paid on account Rs.50,00020 Ram paid on account Rs.50,000
21 Paid Sen on account Rs.30,00021 Paid Sen on account Rs.30,000
22 Returned goods to Sen Rs.15,00022 Returned goods to Sen Rs.15,000
24 Paid wages Rs.4,000 by cash24 Paid wages Rs.4,000 by cash
27 Paid commission Rs.1,20027 Paid commission Rs.1,200
29 Withdrew for personal use in cash Rs,1,50029 Withdrew for personal use in cash Rs,1,500
30 Paid salary to office staff by cheque Rs.12,00030 Paid salary to office staff by cheque Rs.12,000