Basic Concept on Accounting

What is the meaning of Accounting ?
“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 result
thereof”
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The widely accepted definition of accounting, given by the
American Accounting Association in 1966 which treated
accounting as :
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“The process of identifying,
measuring and
communicating economic
information to permit
informed judgment and
decisions by the users of
accounts.”

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In 1970, the Accounting Principles Board (APB) of American
Institute of Certified Public Accountants (AICPA) enumerated
the functions of accounting as follows:
“The function of accounting is to provide quantitative
information, primarily of financial nature, about economic
entities, that is needed to be useful in making economic
decisions.”
Thus, accounting may be defined as the process of
recording, classifying, summarizing, analysing and
interpreting the financial transactions and
communicating the result thereof to the persons
interested in such information.

Accounting is an art….
The term “Art” means diverse range of human activities and
study of these activities but most often misused or
misunderstood to refer to painting, film, photography,
sculpture, and other visual media.
Art is using the skills or techniques of any field. We can say that
art is the study of implementation of techniques and methods.
Accounting is an art because it presents the financial findings by
following and implementing a universally accepted method (GAAP).
Art is the study of implying scientific method to practical use. And
Accounting is an art as the established rules and principles of accounting
is applied in bookkeeping process of and economic entity.
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Accounting is the science of recording and presenting the financial data
of an economic entity by observing, detecting, investigating, and
identifying the economic events via established collecting, testing,
analyzing and presenting methods.
Similarly or for scientist; to reach an acceptable conclusive result on a
particular matter or topic requires identifying recording, measuring,
researching it.
Science is obtaining knowledge about by a systematic pattern including
observation, study, practice, experiments and investigation. Like
Science; Accounting requires to gain knowledge about the economic
status of an entity by systematic study.
Accounting is a Science….
.
So, Accounting is a science that includes comprises of rules,
principles, concepts, conventions and standards like science 6
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Views and thoughts about whether accounting
is an art or science differ from accountant to
accountant.
Processes and methods used in accounting can
be underlined as scientific, and the decisions
and estimation making can be classified as an
art.
The rules and principles is the science part of the “accounting” and
choosing the way to use them is considered as the art
Conclusion :
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Book
keeping
Accounting
Accountancy

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Book-keeping is a part of accounting and
is concerned with records keeping &
maintenance of books of accounting which is
often routine & clerical in nature and can be
accomplished through the use of mechanical
and electronic equipments.

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Accounting starts where book keeping ends. It refers to
the actual process of preparing and presenting the accounts.
In others words, it is the art of putting the academic
knowledge of accountancy into practices .
It covers the following activates :
 Summarising the classified transaction and events in
the form of income Statement and Position Statement
etc.
 Analysing the summarised results.
 Interpreting the analysed results.
 Communicating the interpreting information to the
interest of users.

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Accountancy refers to a systematic
knowledge of accounting concerned with the
principle & techniques which are applied in
accounting, It tells how to prepare the books of
accounts, how to summarise the accounting
information and how to communicate it to the
interested parties.

Accounting as a source of information
Information generated
through financial statement such
as profit loss account, balance
sheet, cash flow statements, etc.
facilitate by different users of
groups whether inside or outside
the business enterprises. and
enables them to take
appropriate decisions.
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 Help in Payment of Income tax
Many types of taxes-income-tax, vat and sales-tax are imposed
upon the businessmen now a days. To make payments of this taxes
it is necessary that accounts are maintained according to the
principles of accounting.
 Proof in the court of law
If the accounts of the business are kept properly according to the
principles of accounting .They can be presented in the court of law.
For giving necessary documentary evidence for example the
business man has to present his account in the court if he want
himself to be declared insolvent.
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 Help on Remembering
A businessman cannot remember all the transaction,
how-so-ever sharp his memory may be. Therefore this
transaction should be recorded in black or white , so
there is may not be any misappropriation.
 Facilitates raising loans.
Accounting facilitates raising loans
from banks and various financial
institution by providing them
historical and projected financial
statements

 Helps in the realisation of debit.
Accounting proves useful in realizing debts from other
persons. The business man can produce his account
book in the court of law as a proof of debt.
Facilitates a comparative study.
By keeping a systematic records accounting helps the
owner of the business to compare one year’s cost,
expenses, sales and profit, etc. those value of others years
by commutating various accounting ratio such as
comparison provides the useful information on the basis of
which important decision can be taken more judiciously.
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 Helps in sale of business:
If the business man wants to sale its running business he
can realize its reasonable price only if he had maintained
proper accounts, otherwise it will not be possible to asses
the correct value of the business.
 Assists the management:
Accounting assist the management in planning and
controlling business activities and in taking decisions. For
example, projected cash flow statements facilitates the
management to know future receipts and payments to
take decisions regarding anticipated surplus or shortage of
funds. 18By Nisha Pawar

Limitation of Accounting
• Financial Accounting is not absolutely exact
Financial accounting is not completely free from personal bias or
judgment. Though transaction are recorded on actual basis, but there
are any instances where estimates have to be made for calculating
profits. Such estimates requires judgmental factor For example
provision for doubtful debt, depreciation of asset etc.
• Financial Accounting does not show what the business
is worth
The assets are recorded in the balance sheet at cost less than
depreciation because they meant for use not for sale. Hence the
balance sheet should not to be taken to disclose the realised value of
assets on sale.
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• Financial Accounting does not present the whole
picture.
Financial Accounting information does not include the
qualitative aspects of business such as good labour relation,
quality of the goods, management efficiency, etc.
Accounting is considered only with those activities which can
be expressed in monetary term.
• Window Dressing in Balance Sheet
When accounts apply window dressing in balance sheet,
the balance sheet can’t exhibit the true and fair view of
the state of affairs of the business

 Worthless assets are also shown in Financial
Statements.
Certain Worthless assets are shown in balance sheet just to distort
the factual position e.g. preliminary expenses, discount on issue of
shares and debenture, underwriting commission etc.
 No effects of inflationary trends.
As money is not a stable unit of
measurement of inflation makes most of
figures out of date.
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Thus, Generally Accepted Accounting
Principles (GAAP) refers to the rules or
guidelines adopted for recording and
reporting of business transactions, in
order to bring uniformity in the
preparation and presentation of
financial statements.
The Generally Accepted Accounting Principles have evolved over a
long period of time on the basis of past experiences, usages or
customs, statements by individuals and professional bodies an
regulations by government agencies and have general acceptability
among most accounting professionals.
The term ‘principle’ has been defined by AICPA as `A` general law or
rule adopted or professed as a guide to action, a settled ground or basis
of conduct or practice
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Accounting Principle are based on certain concepts and
conventions.

The term convention relates to customs or
traditions as a guide to the preparation of
accounting statements.
Accounting convention
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Accounting concept is a basic assumptions
concerning the economic environment in which
accounting exists.
Accounting concept
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MONEY MESURMENT CONCEPT
.
The concept of money measurement stats that
only those transactions and happenings in an
organizations which can be expressed in terms of
money such as sale of goods or payment of
expenses or receipt of income, etc., are to be
recorded in the books of accounts.
Events which can not be expressed in money terms do not find
place in the books of account through they may be very important
for the business. Non monetary events like death, dispute,
sentiments, efficiency etc., are not recorded in the books, even
though these may have great effect.
Thus , accounting information is perceived as essentially monetary
and quantified.
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GOING CONCERN CONCEPT
The concept of going concern assumes that a business firm would
continue to carry out its operations indefinitely i.e., for a fairly long
period of time and would not be liquidated in the foreseeable future.
This concept provides the basis for showing the assets in the balance
sheet.
However , if it is certain that
business will continue for a
limited period, then the
accounting records will be
kept on the basis of expected
life of business and there will
be no need for such detailed
accounting information as to
revenue and capital
expenditure. 28By Nisha Pawar

Accrual Concept
• Accrual concept is basic assumption in accounting process.
Accrual means when a payment or due are arise especially an
amount of money that is yet to be paid or received(accrued) i.e.,
not received or paid actually, at the end of the accounting period.
• Accrual means that revenues are recognized when they become
receivable. Suppose the expenses are recognized when they
become payable although cash is paid or not paid.
• Therefore, the accrual concept makes a distinction between the
accrual receipt of cash and the right to receive cash as regards
revenue and actual payment of cash and obligation to pay cash as
regards expenses.
• The accrual concept under accounting assumes that revenue is
realized at the time of sale of goods or services irrespective of
the fact when the actual cash is received. 29
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Realization Concept:
Determines whether a revenue or expense has occurred
so that it can be measured, recorded and reported in
the financial reports. In general, revenue is recognized
along with the associated expenses when an exchange
has taken place, the earnings process is complete, the
amount of income is determinable, and collection of
amounts due is reasonably assured.
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Matching Concept:
Determines that the expenses associated with revenue
are identified and measured. Matching concept states
that expenses incurred in an accounting period should be
matched with revenue during the year. It further state
that all the revenue earned during the accounting year
whether received or not should be taken into account
while ascertaining profit and loss for the period. Thus, it
becomes necessary to provide outstanding and prepaid
expenses for the period costs.
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Business Entity Concept:
Delineates the boundaries of the organization for
which amounts are kept and reports are made.
Business entity concepts states that the business
it to be treated as a separate entity by itself
independent of the owner’s entity . In books of
business each transaction is recorded from the
point of view of the firm not the point of view of
owner.
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Therefore, Assets are initially recorded by measuring
the amount paid for them. As time passes, asset
measurements are not changed even if the current
value of these assets is changing.
Cost Concept:
Cost concept means that the amount where any asset
is bought is to be written in the financial statement.
The marked price is not to be written here but exact the
amount in which the asset is bought should be written.
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Revenues and gains are recognized slower and expenses and losses
are recognized quicker. The concept of conservation provides
guideline for recording transaction in the books of account and its
based on policy of playing safe. There are two principles which
stems out directly from conservation:
(A)The accountant should not anticipated income and should
provides all possible losses.
(B)Faced with the choices between two methods of valuing an asset
the accountant should choose a method which lead to lesser
value.
Conservation (Prudence)
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Some example are: Making provision for bad debt in respect of
doubtful debts, amortising intangible asset like, goodwill, patents ,
trade mark, etc., as early as possible , valuing the stock in hand at
lower of cost or market value.

Consistency Concept:
The concept of consistency means that accounting
methods once adopted must be applied
consistently in future. Also same methods and
techniques must be used for similar situations.
It implies that a business must refrain
from changing its accounting policy unless on reasonable grounds. If
for any valid reasons the accounting policy is changed, a business
must disclose the nature of change, the reasons for the change and
its effects on the items of financial statements.
Consistency concept is important because of the need for
comparability that is, it enables investors and other users of financial
statements to easily and correctly compare the financial statements of
a company. 35By Nisha Pawar

Materiality Concept:
Information is material if its omission or misstatement could influence
the economic decisions of users taken on the basis of the financial
statements (IASB Framework).
Materiality therefore relates to the significance of transactions,
balances and errors contained in the financial statements. Materiality
defines the threshold or cutoff point after which financial information
becomes relevant to the decision making needs of the users.
Information contained in the financial statements must therefore be
complete in all material respects in order for them to present a true
and fair view of the affairs of the entity.
Materiality is relative to the size and particular circumstances of
individual companies. 36By Nisha Pawar

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Disclosure :
As financial information is used by group of people so it becomes all
more important that the financial statements make a full, fair, and
adequate disclosure of all information which is relevant for taking
financial decisions.
Remember that disclosure of material facts does not mean leaking
out the business secrecy but all information of proprietor’s and
investor’s interest. Accordingly, certain unimportant items are left
and some of them are merged with other items. The intention is not
to over-burden accounting with information but present facts
without any malafide intension.

ACCOUNTING PERIOD CONCEPT
Accounting period refers to the span of time at the end of which the financial
statements of an enterprise are prepared, to know whether it has earned profits
or incurred losses during that prepared and what exactly is the position of its
assets and its liabilities at the end of that period.
The assumption of accounting period facilities the business in assessing its worth
after a year. It focuses that the expenditure whose benefit will accrue over a long
period should be apportioned suitably over each year.
An Example of such expenditure is depreciation on machinery. It requires a
process of estimation. At the end of each accounting period an income statement and
a Balance Sheet are prepared. The income statement discloses the profit or loss made
during the accounting period while the Balance Sheet depicts the Financial Position on
the last day of the accounting period.
The financial statements are therefore prepared at regular intervals, normally
after a period of one year, so that timely information is made available to the
users. This intervals of time is called accounting period.
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Sub-Fields of Accounting
 Cost Accounting
 Financial Accounting
 Management Accounting
 Tax Accounting
 Social Responsibility Accounting 39
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Financial Accounting is the original
form of accounting. It deals with the
systematic maintenance of books of
accounts with a view to ascertain the
profitability and the financial status of
business.
The main purpose of this branch of accounting is to ascertain
the financial position of business at the end of certain period.
That is, to find out whether the firm is earned profits or
incurred losses. It relates to the past period, and is monetary in
nature. It is primarily concerned with the provision of financial
information to all the stakeholders.
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Cost accounting
Cost accounting is a
process financial accounting of
accounting of costs .In a view of
limitation of financial accounting in
respect of information relating to
the cost of individual products, cost
accounting was developed .Cost
Accounting is the formal mechanism
by means of which cost of products
or services are as certain controlled.
Its main purpose is to ascertain the cost of production of goods
and cost of running different departments to enable the
management to fix the selling price.
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Tax accounting
The tax accounting is the branch
which is used for tax purpose is
known as tax accounting. Income
tax sales tax ,service tax ,value
added tax (vat) excise duty as
well as customs duty are
computed on the basic of tax
accounting Mechanised
accounting may be of much help
in this regard.
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Management Accounting provides necessary
information to management for discarding
functions. Management accounting covers wide
areas such as Budgetary control, Inventory Control,
Internal auditing, Working capital management,
Statistical methods etc.
The main purpose of this branch is to provide all relevant
information that may be required by management to take decisions
in respect of various aspects of running business enterprises. Such
information include Cash flows, Purchase requirements , Manpower
needs ,environmental data about effects on air, land ,water etc.
Management Accounting
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Social responsibility
Social responsibility of accounting is a process of identifying,
measuring and communicating the social effects of business decisions
to permit informed judgements and decisions by the users of
accounting data and information.
Business has great social responsibility
and its contribution to society may
consists of providing employment ,
supplying good quality products and
services , paying fair wages to employees
and taxes to the government .
Management is held Responsible for
what it contributes to the social well-
being and progress. Accounting for
environment and ecology is part of social
responsibility accounting.
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Personal account
Note that in accounting, persons refer not only to individuals but also
to companies, partnerships or any form of organization with whom
there may be transactions.
As the name says, personal accounts are accounts of persons. They,
therefore, bear the names of persons. Such persons can be credit
customers or credit suppliers. Therefore, personal accounts are kept
in either:
• Sales ledger,
or
• Purchases ledger
Personal Accounts, in practices may be of following types:
• Natural Personal Account
• Artificial or Legal Persons Accounts
• Representative or Groups Personal Accounts 46By Nisha Pawar

• Natural Personal Account
Such as the accounts of proprietor, supplier or receiver
of goods or money, etc., in the name of natural persons
such as Albert Account, James Account etc.
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• Artificial or Legal Persons Accounts
Such as the accounts of legal entities in the nature of
limited companies accounts,
(example : Hindustan Lever Limited , ITC Limited.),
Partnership Firms Accounts
(example: Radhey Ram Nath Bros.)
Government agencies
(Example: Sports Authority of India)
Institutional accounts
(example: Delhi Collage of Arts and Commerce);
Clubs Accounts
(example: Lions club)
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• Representative or Groups Personal Accounts
The group or representative personal accounts are the
accounts of different persons of the same nature but more
than one in numbers.
In the account books, the accounts are opened in the names of
individual persons. But since they are of same nature , they
are grouped into one accounts
Example : Sundry Debtors Account and Sundry Creditors Account.
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Impersonal accounts
As seen in the previous slide, impersonal accounts are of
two types:
1. Real accounts
2. Nominal accounts
Accounts which are not personal such as machinery account, cash
account, rent account etc.
All impersonal accounts are kept in the General ledger.
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.• Real accounts
Real account stands for the resources or properties of a business
enterprises, which can be intangible and tangible.
Tangible accounts refer to properties having
physical existence , like cash, building, stock of
goods, furniture etc.
Intangible refer to those which can not be
physically felt or touched but are capable of
monetary measurement such as Goodwill
patent rights, trademarks, copyrights, etc.
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• Nominal accounts
• Nominal accounts relates to expenses, revenues, capital
and drawing. Examples of accounts are:
 Loan account
 Sales account
 Commission received account,
 Salaries account,
 Rent account,
 Capital account,
 Drawings account
 Purchases Return Account
 Sales Return Account 52By Nisha Pawar

Relationship between types of ledger and
types of accounts
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BASIC ACCOUNTING TERMS
ENTITY:
Entity means a thing that has a definite individual existence. When an
accounting system is devised for a business entity, it is called an
accounting entity. For example Big Bazar, Bhargav Paints Pvt. Ltd. etc.
TRANSACTION:
A event involving some monetary value between two or more entities,
and is capable of changing the financial position of the enterprise. We
can also say that transaction is a activity of a financial nature having
documentary evidence, capable of being presented in numerical,
monetary term causing effect on assets, liabilities, capital, revenue
and expenses. it can be in both forms cash or credit.
Transaction can be purchase of goods, collection of money, payment to
creditors for goods and services, etc.
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Assets
Assets are economic resources of an enterprise that can be useful
expressed in monetary terms.they are those resources that the
business owns. These are the items of value used for the operations of
the business enterprise and also includes the Assets = Capital +
Liabilities due to it from others. some of the examples of assets are
money owing by debtors, stock of goods, cash, furniture, machines,
building, etc.
Assets = Capital + Liabilities
Assets can be broadly classified into two types :
 Fixed Assets
 Current Assets
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CURRENT ASSTES:
Current assets are those which are held on the short
term basis with the intention of converting them into
cash during the normal business operations of the
company. Examples of current assets are -unsold
stock, debtors, bills receivables bank balance, cash in
hand, etc.
FIXED ASSETS
Fixed assets are those assets which are
purchased for the purpose of operating the
business and not for resale i.e., held by the
business enterprise for long term purpose.
Examples of fixed assets are building,
machinery, furniture, etc.
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Liquid Assets
Liquid Assets liquid assets are those which yield cash in a very short
period of time current assets excluding inventory and prepaid
expenses are included in liquid assets
Liquid Assets = Current assets - Prepaid expenses - Inventory
Intangible Assets
Intangible assets are those which can't be seen and touched but
we can feel them for example goodwill, trademark, etc.
Tangible Assets
Tangible assets are those which can be seen and touched . For
example furniture car building etc.
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Liabilities :
Liabilities are obligation or debt that an enterprise has to pay at
some time in the future. They represent the creditors’ claim on the
firms’ assets, or we can say that they are claims of those who are
not owners. They can be expressed as :
Liabilities = Assets - Capital
Liabilities can be classified into following:
Long term Liability are those that are usually payable after the
period of one year. They are also known as Fixed Liabilities.
For example, long-term loan, debenture, public deposit, etc.
Short term Liability are those which are payable with in a year
from the date of balance sheet and paid out of current asset. For
example, bank overdraft, bills payable, outstanding expenses.
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Amount (in terms of money and asset having monetary value)
invested by the owner in the firm is known as capital. For the firm, it
is liability towards the owner, since owner is treated to be separate
from the business. Capital is also known as owner’s equity and is
always equal to assets less liabilities. This can be expressed as:
Capital = Assets – Liabilities
Capital :
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Goods :
Goods refers to product and services in which the business unit is
dealing i.e., in terms of which it is buying and selling or producing or
producing and selling . They are the physical item of trade. Here it
should be noted that items which are purchased of stationery dealer,
purchase of stationery will be goods for him but for others stationery
is just an item of expense.

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Sales are total revenue from goods or services sold or provided to
customers when the goods are sold to cash, they are cash sales
but if good are sold and payment is not received at the time of the
sale, it is termed as credit sale. Some customers might return the
goods, that returned portion is sale return which is deducted from
the total sales but sales of fixed assets is not termed as sales.
Sales:
Purchases
Purchases are total, amount of goods procured by a business on
credit and on cash, for use or sale. In manufacturing, raw material
are purchased, processed further into finished goods and are then
sold. In trading concern, purchases are made of merchandise for
resale with or without processing.

Revenues
Revenues are the amount of the business earned by
selling the goods or services to the customers, they are
the inflow of asset which results in an increase owner
capital sales of goods and services, earning from
interest, dividends, rent, commission etc., are some
example of revenue.
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Expenses
Costs incurred by the business in the process of earning revenue are
known as expenses. They are the amount spend in order to produce
the revenue. It decreases the capital. Expenses may include : Cost of
sales, depreciation, general business expenses such as salary,
advertisement, commission, rent, etc.
Expenses may classified into
Outstanding Expenses.
It refers to those Expenses which have become due during the
accounting period but which yet not paid. They are liability of the firm.
Prepaid expenses:
It refers to those expenses which are not due yet but are paid well
in advance. They are treated as an advances.

Expenditure:
Expenditure may be define as money spend or liability incurred for
some benefit, service or receiving property. Some of the example of
expenditures are – Payment of rent, Salaries, Purchase of Goods,
Purchase of Machinery, Purchase of Furniture, etc. Expenditure may
be classified into :
Capital Expenditure :
Those Expenditure which are incurred for acquiring fixed assets like
Building, machinery ,furniture etc, are referred to as a capital
expenditure , and are shown in the balance sheet as assets
Revenue Expenditure:
Those expenditure which are incurred in the current year and benefit
of which is also taken in the same in the same accounting year .
These expenditure do not result in income of the firm. All revenue
expenditure is termed as expenses 63By Nisha Pawar

Profit
The excess of revenues of a period over its
related expenses during any accounting
year is profit.
Gross Profit It is difference between ales
revenue or the proceeds of goods or services
sold over. its direct cost
 Gross Profit
 Net Profit.
It is the profit made after allowing for all expenses.
 Gain
Profit that arise from events or transactions which is incidental to
business is termed as gain. Example go gain are: sale of fixed asset,
winning o court case, appreciation in value of fixed assets, etc. 64
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The excess of expenses of a period over its related
revenues is termed as loss. It decreases the owner’s equity.
It is also referred to such activities of business which do
not yield any benefit.
For example : Loss due to accident, theft etc. It also include
loss on sale of fixed assets
Loss = Expenses-Revenue
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Income
Income can be classified into followings :
Income is the profit earned during a period of time or we can say
that the difference between revenue and expense is called income.
Income =Revenue – Expenses
 Accrued Income
It refers to that part of income which has been earned by the
business during the accounting year but yet not to become due, and
therefore not yet received. It is treated as an asset for the firm.
 Income received in advance :
It refers to that part of income which has been received by business
well in advance or before being actually earned. It is liability for the
firm.
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Trade Discount
Discount :
Discount is the deduction in the price of the goods sold.
Discount can be classified into two types :
1. Trade Discount
2. Cash Discount
Cash Discount
Offering any deduction at agreed percentage of sale price at the
time of selling the goods, is termed as Trade Discount. It is generally
offered by manufacture to whole seller or whole seller to retailer.
It is always deducted from the sale price and no entry is made in the
books of accounts.
When the buyer is allowed some discount to induce them to
make prompt payment, it is called cash discount. It is recorded
in books of accounts. 67By Nisha Pawar

Any type of withdrawal i.e. in monetary terms of goods, by the owner
from the business for personal use, is known as drawings. It is to be
noted that drawings reduce the owner’s equity in the business
Drawings:
Debtors:
Those persons who owes money to the firm generally on account of
credit sale of goods is called a Debtor. The total amount standing to
the favour of such person and/or entity on the closing date , is
shown in the balance sheet as Sundry Debtors on the asset side.
Creditor:
A person to whom the firm owes money is called a creditor. They are
the persons and/or rather entities who have to be paid by an
enterprise on amount for providing the goods on credit.
The total amount standing to the favour of such person and/or entity
on the closing date is shown as Sundry Creditors on the liability side of
balance sheet. 68By Nisha Pawar

Dual Aspects Principle
This principle is based on the
famous Newton’s Law of Motions
i.e. to every action there is always
an equal and contrary reaction.
Thus every debit balance must have a corresponding credit
and vice-versa and upon this dual aspect whole
superstructure of Double Entry System of Accounting has
been raised.
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Golden Rules Of Accounting
• Rules of Accounting:
Debit all expenses and losses
Credit all income and gains
There are 3 golden rules or types of accounts. These are:-
Debit the Receiver
Credit the Giver.
Debit what comes in
Credit what goes out
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Journal a book of primary record and
often called a book of original entry.
This is also called a day book, perhaps
because of its name having been
derived from a French word jour
meaning “day.”
Journal book
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STEPS IN JOURNALISING
In the process of journalizing the accounts by each and every
transaction are debited and credited separately. Its involves the
following steps:
Step 1 : Ascertaining the names of accounts after examining the
business transaction.
Step 2: Choosing the approach to follow i.e. Traditional O‘ Modern.
Step 3: Analyse the nature of accounts involved in the transaction
based upon the selected approach.
Step 4 :Examine the name of accounts to be debited or credited.
Step 5: Fill in the related information in all the five columns of the
journal.
Step 6: Write the narration of the transaction. 73
By Nisha Pawar

Ledger
The ledger is a book of final entry in which the accounts are recorded
in a classified and summarised form. It is, therefore, the PRINCIPLE
BOOK which supplies detailed information about the trancations
connected with a individual account at a glance.
A ledger Account may be defined
as a summary statement of all the
transactions relating to person,
asset, expense or income which
have taken place during a given
period of time and shows their net
effect.
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FORMAT OF LEDGER ACCOUNTS:
A Ledger account has two sides –
Debit (left part of the accounts) and
Credit (right part of the account) as shown below:

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POSTING:
The process of transferring the debit and credit items from journal to classified
accounts in the ledger is known as ‘Posting’.
Rules regarding Posting:
Separate account is opened in ledger book for each account and entries from
ledger posted to respective account accordingly.
Use the words ‘To” (identifies the accounts to be written on the debit side) and
‘By’ (identifies the accounts to be written on the credit side)
The concerned account debited in the journal should also be debited in the
ledger but reference should be of the respective credit account

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BALANCING
At the end of the each month or year or any specific day it is necessary to determine the
balance in an account. To do that, add the totals of both sides (Debit and credit sides) and
find out the difference in both the side. The difference in both the sides is ‘Balance’. If the
Debit is greater than the credit side, it is a Debit balance or vice-versa.
The Debit balance is written on the Credit side as, “By Balance c/d” (carried down)
or the Credit balance is written on the Debit side as, “To Balance c/d. By doing this,
two sides will be equal.
While preparing the Ledger accounts for next period, this balance would be transferred
from last period Ledger accounts as ‘To Balance b/d’ (brought down) if there was debit
balance or ‘By Balance b/d’ if there was credit balance in the last period Ledger.
It should be noted that Nominal accounts are not balanced, instead the balance at
end need to be transferred to the Profit and Loss Account.

A Trail Balance is a statement of debit
and credit totals or balances, extracted
from the ledger with the view to test the
arithmetical accuracy of the books .
Trail Balance is neither a part of double entry system, nor it appear in the
actual account. It is merely a working paper. Always remember a trail
balances just a statement, not as account.
It is always prepared on a particular date and not a particular period.
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By Nisha Pawar 79
Total Method:
Under this method, every ledger account is totalled and that total amount (both
credit and debit side) is transferred to trial balance. The difference of totals of
each ledger account is the balance of that particular account. This method is not
commonly used as it cannot help in the preparation of financial statements.
METHODS:
Balance Method:
Under this method, every ledger account is balanced and those balances only are
carried forward to the trial balance. Financial statements are commonly prepared on
the basis of this method.
Total and Balance Method:
As name shows it is combination of above two methods. Under this method,
statement of trial balance shows to balance contains the balance in both ways
as explained in the above two methods.

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RULES:
Following are the rules to prepare trial balance from Ledger balances:
2) The following balances must be placed in the credit side of the trial
balance:
Liabilities Accounts
Income Accounts
Profits
Capital Account
1) The following balances must be placed in the debit side of the trial
balance:
Asset Accounts
Expenses Accounts
Losses
Drawings
Cash and Bank Balances

According to Prof. Carter, “A Profit & Loss account is
an account into which all gains and losses are
collected in order to ascertain the excess of gains over
losses or vica versa.”
Profit & Loss account
Trading Account
“The Trading Account shows the result of
buying and selling of goods. In preparing
this account, the general establishment
charges are ignored and only the
transactions in goods are included.”
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New format of Profit & Loss account as per Revised schedule 6 Revised:

In financial accounting, a balance sheet or statement of
financial position is a summary of the financial balances
of a sole proprietorship, a business partnership, a
corporation or other business organization, such as an LLC
or an LLP. Assets, liabilities and ownership equity are listed
as of a specific date, such as the end of its financial year.
business' calendar year.
A balance sheet is often described as a "snapshot of a company's financial
condition". It is also known as position statement.
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TRADITIONAL FORMAT OF BALANCE SHEET :

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New Format of balance sheet as per schedule 6 (Revised)

Accounting cycle is a step -by-step process of recording ,
Classifying and summarization of economic transactions of business
.Its generates useful financial information n the form of financial
statement including income statements, Balance sheet, cash flow
statements and statement of change in equity.
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1. Collect & verify source data
2. Analysing the transactions
3. Recording transaction via Journal Entries
4. Posting Journal Entries to Ledger Account
5. Preparing the trail balance
6. Preparing worksheet
7. Preparing Financial statements
8. Preparing adjusted entries at the end of the
period.
9. Preparing post- closing trail balance
Main steps in an accounting cycle:
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Basic Concept on Accounting

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