2. CONTENTS
Meaning and definition of Accounting
Features of Accounting
Need for accounting in business
Advantages of maintaining Accounts.
The procedure of maintaining accounts under Double - Entry System
Accounting Cycle
Kinds of Accounts
Rules for debiting and crediting each type of accounts
3. MEANING AND DEFINITIONS OF ACCOUNTING
Accounting is identifying and measuring business transactions in a set of books so as to
measure the business transactions in terms of money analyzing and interpreting the results
there off.
According to The American Institute of Certified Public Accounts (AICPA) defined accounting
as “the art of recoding, 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 off “.
According to American Accounting Association (A.A.A.) defined accounting as “the process of
identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information”.
4. FEATURES OF ACCOUNTING
Accounting is both a science and an art.
It identifies the business transactions.
It shows the value of business transactions in terms of money.
It classifies the business transactions and records them in their respective accounts.
It briefs the business transactions and after getting required information from ledger
prepares, final accounts, namely trading and profit and loss account and balance sheet.
It helps the business to take necessary decisions by showing the result of the business.
5. ADVANTAGES OF MAINTAINING ACCOUNTS
Accounting records of a business concern are the permanent records of transactions
relating to its income and expenditure.
It records provide full information about business transactions
It helps a business concern to compare results of the business from year to year.
It helps to ascertain the financial position of a business concern.
It helps a business concern to know the amount due to others and amount due from
others.
It are the documentary evidence required to prove the status of business concern to
government or to other agencies as and when required.
It helps the management of a concern in its future planning and decision making process.
6. THE PROCEDURE OF MAINTAINING ACCOUNTS
The day to-day business transactions are entered in rough book as and when they take place.
The transactions are analysed so as to which account has to be debited and which account has to be
credited
The Journal entries are then transferred to the respective ledger accounts.
After a particular period or when ever required the balance of ledger accounts is found out. The
balance of account is the difference between Debit and Credit side.
The list of all the balances of all the accounts is prepared. It is called Trial Balance.
After the preparation of Trial balance, final accounts are prepared.
Final accounts are divided into three parts.
a) Trading Account.
b) Profit and Loss account.
c) Balance sheet : Here the list of all Liabilities and Assets are listed out.
The recoding of all the transactions is called Accounting cycle.
8. KINDS OF ACCOUNTS
Accounts are classified into three types. They are :
1. Personal Accounts
2. Real Accounts
3. Nominal Accounts
Personal Accounts: The ledger accounts which are maintained to record the transactions carried out
Ex : Suresh’s a/c, xco’s a/c. etc., Bank a/c.
Real Accounts: The ledger accounts that are maintained by the business concerns to record the assets
possesses.
Ex : Building’s a/c, Cash a/c, Furniture a/c, Machinery a/c. etc.,
Nominal Accounts: The business concerns have to maintain separate accounts for the profits or
losses or expenses it incurs.
Ex : Rent a/c, Salaries a/c, interest a/c, commission a/c, Rates & Taxes a/c, Insurance Premium
paid etc.,
10. ILLUSTRATION
Let’s do the recording of transactions of J.K enterprises into journal books.
Journalize the following transactions.
1. Mr. John Invested Rs.200000 as capital
2. Deposit cash in to SBI Rs.15000
3. Purchased land for Rs.105000
4. Stationery purchased for Rs.1000
5. Rent paid to building owner Rs.1500
11. SOLUTIONS
Transaction Analysis Nature of account Rule Entry
Mr. John Invested
Rs.200000 as
capital
Cash received
by owner
Cash a/c- Real a/c
Capital a/c- Personal a/c
Debit what comes in
Credit the giver
Debit cash a/c
Credit capital a/c
Deposit cash in to
SBI Rs.15000
Cash deposited
to bank
Bank a/c- Personal a/c
Cash a/c- Real a/c
Debit the receiver
Credit what goes
out
Debit bank a/c
Credit cash a/c
Purchased land for
Rs.105000
Purchased land
for cash
Land a/c- Real a/c
Cash a/c- Real a/c
Debit what comes in
Credit what goes
out
Debit land a/c
Credit cash a/c
Stationery
purchased for
Rs.1000
Stationery
purchased for
cash
Stationery a/c- Nominal a/c
Cash a/c- real a/c
Debit all expenses
and losses
Credit what goes
out
Debit stationery a/c
Credit cash a/c
Rent paid to
building owner
Rs.1500
Rent paid to
building owner
for cash
Rent a/c- Nominal a/c
Cash a/c- real a/c
Debit all expenses
and losses
Credit what goes
out
Debit rent a/c
Credit cash a/c