Std11 acct-em


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  1. 1. A C C O U N TA N C YHIGHER SECONDARY – FIRST YEAR Untouchability is a Sin Untouchability is a Crime Untouchability is Inhuman. TAMILNADU TEXTBOOK CORPORATION College Road, Chennai - 600 006.
  2. 2. © Government of Tamilnadu First Edition - 2004 PREFACE CHAIRPERSON Dr. (Mrs) R. AMUTHA The book on Accountancy has been written strictly in accordance Reader in Commerce with the new syllabus framed by the Government of Tamil Nadu. Justice Basheer Ahmed Sayeed College for Women Chennai - 600 018. As curriculum renewal is a continuous process, Accountancy curriculum has undergone various types of changes from time to time in REVIEWERS accordance with the changing needs of the society. The present effortDr. K. GOVINDARAJAN Dr. M. SHANMUGAM of reframing and updating the curriculum in Accountancy at the HigherReader in Commerce Reader in Commerce Secondary level is an exercise based on the feed back from the users.Annamalai University SIVET CollegeAnnamalai Nagar - 608002. Gowrivakkam,Chennai-601302. This prescribed text book serves as a foundation for the basic principles of Accountancy. By introducing the subject at the higher Mrs. R. AKTHAR BEGUM secondary level, great care has been taken to emphasize on minute S.G. Lecturer in Commerce details to enable the students to grasp the concepts with ease. The Quaide-Millet Govt. College for Women Anna Salai, Chennai - 600002. vocabulary and terminology used in the text book is in accordance with the comprehension and maturity level of the students. AUTHORS This text would serve as a foot stool while they pursue their higherThiru G. RADHAKRISHNAN Thiru S. S. KUMARAN studies. Since the text carries practical methods of maintaining accountsS.G. Lecturer in Commerce Co-ordinator, Planning Unit the students could use this for their career.SIVET College (Budget & Accounts)Gowrivakkam, Chennai - 601302. Education for All Project Along with examples relating to the immediate environment of the College Road, Chennai-600006. students innovative learning methods like charts, diagrams and tablesThiru N. MOORTHY Mrs. N. RAMA have been presented to simplify conceptualized learning.P.G. Asst. (Special Grade) P.G. AssistantGovt. Higher Secondary School Lady Andal Venkatasubba Rao As mentioned earlier, this text serves as a foundation course whichNayakanpettai - 631601 Matriculation Hr. Sec. School is coupled with sample questions and examples. These questions andKancheepuram District. Chetpet, Chennai - 600031. examples serve for a better understanding of the subject. Questions for examinations need not be restricted to the exercises alone.Price : Rs. This book has been prepared by the Directorate of School Education on behalf of the Govt. of Tamilnadu. Chairperson This book has been printed on 60 G.S.M. paperPrinted by Offset at : iii
  3. 3. 7. Subsidiary Books II SYLLABUS – Cash Book [ 21 Periods ] Features – Advantages – Kinds of cash books.1. Introduction to Accounting [ 14 Periods ] 8. Subsidiary Books III Need and Importance – Book-keeping – Accounting – – Petty Cash Book [ 7 Periods ] Accountancy, Accounting and Book-keeping – Users of Meaning – Imprest system – Analytical petty cash book – Format accounting information – Branches of accounting – Basic – Balancing of petty cash book – Posting of petty cash book accounting terms. entries – Advantages.2. Conceptual Frame work of Accounting [ 7 Periods ] 9. Bank Reconciliation Statement [ 21 Periods ] Basic assumptions – Basic concepts – Modifying principles – Pass book – Difference between cash book and pass book – Accounting Standards. Bank reconciliation statement – Causes of disagreement between3. Basic Accounting Procedures I balance shown by cash book and the balance shown by pass – Double Entry System of Book-Keeping [ 7 Periods ] book – Procedure for preparing bank reconciliation statement – Format. Double entry system – Account – Golden rules of accounting. 10. Trial Balance and Rectification of Errors [ 21 Periods ]4. Basic Accounting Procedures II – Journal [ 21 Periods ] Definition – Objectives – Advantages – Methods – Format – Sundry debtors and creditors – Limitations – Errors in accounting Source documents – Accounting equation – Rules for debiting – Steps to locate the errors – Suspense account – Rectification of and crediting – Books of original entry – Journal – Illustrations. errors.5. Basic Accounting Procedures III 11. Capital and Revenue Transactions [ 7 Periods ] – Ledger [ 21 Periods ] Capital transactions – Revenue transactions – Deferred revenue Meaning – Utility – Format – Posting – Balancing an account – transactions – Revenue expenditure, Capital expenditure and Distinction between journal and ledger. Deferred revenue expenditure – Distinction – Capital profit and6. Subsidiary Books I revenue profit – Capital loss and revenue loss. – Special Purpose Books [ 21 Periods ] 12. Final Accounts [ 22 Periods ] Need – Purchase book – Sales book – Returns books – Bills of Parts of Final Accounts – Trading account – Profit and loss account exchange – Bills book – Journal proper. – Balance sheet – Preparation of Final Accounts. iv v
  4. 4. Books for further reference: CONTENTS 1. T.S.Grewal – Double Entry Book Keeping. 2. R.L. Gupta – Principles and Practice of AccountancyChapter Page No. 3. T.S.Grewal – Introduction to Accountancy1. Introduction to Accounting 1 4. Patil & Korlahalli – Principles and Practices of Accountancy 5. S.Kr.Paul – Accountancy Vol. I.2. Conceptual Frame Work of Accounting 21 6. M.P.Vithal, S.K.Sharma & S.S.Sehrawart – Accountancy Textbook3. Basic Accounting Procedures I for Class XI NCERT. Double Entry System of Book-Keeping 28 7. Institute of Company Secretaries of India – Principle of Accountancy.4. Basic Accounting Procedures II – Journal 38 8. Vinayagam, P.L.Mani, K.L.Nagarajan – Principles of Accountancy.5. Basic Accounting Procedures III – Ledger 82 9. P.C.Tulsian, S.D.Tulsian – ISC Accountancy for Class XI. 10. M.Jambunthan, S.Arokiasamy, V.M.Gopala Krishna, P.Natrajan –6. Subsidiary Books I – Special Purpose Books 109 Book-keeping and Principles of Commerce.7. Subsidiary Books II – Cash Book 140 11. Narayan Vaish – Book-keeping and Accounts. 12. Tamil Nadu Textbook Corporation – Accountancy Higher8. Subsidiary Books III – Petty Cash Book 176 Secondary First Year.9. Bank Reconciliation Statement 194 13. L.S.Porwal, R.G.Saxena, B.Banerjee, Man Mohan, N.K.Agarwal – Accounting A Textbook for Class XI Part I, NCERT.10. Trial Balance and Rectification of Errors 222 14. Jain & Narang – Financial Accounting.11. Capital and Revenue Transactions 256 15. R.L.Gupta, Radha Swamy – Financial Accounting. 16. R.K.Gupta, V.K.Gupta – Financial Accounting.12. Final Accounts 270 17. Basu Das – Practice in Accountancy. 18. S.Kr.Paul – Practical Accounts Vol.I. 19. Ghose Dostidar Das – Graded Accounting Problems. 20. M.C.Shukla – Advanced Accountancy. vi
  5. 5. CHAPTER - 1 INTRODUCTION TO ACCOUNTING Learning Objectives After studying this Chapter, you will be able to: Ø understand the Need, Meaning, Definition, Objectives and Advantages of Book-Keeping. Ø know the Need, Definition, Objectives and Process of Accounting. Ø distinguish between Book-Keeping and Accounting. Ø identify the Users of Accounting Information and their Need. Ø know the Basic Accounting Terms. “Accounting is as old as money itself”. Since in early ages commercial activities were based on barter system, record keeping was not a necessity. The Industrial Revolution of 19th century along with rapid rise in population, paved way for the development of commercial activities, mass production and credit terms. Thus recording of business transaction has become an important feature. In recent years with the change of technologies and marketing along with stiff competition, accounting system has undergone remarkable 1
  6. 6. 1.1 Need and Importance of Accounting 1.2. Book-keeping When a person starts a business, whether large or small, his Book-keeping is that branch of knowledge which tells us howmain aim is to earn profit. He receives money from certain sources to keep a record of business transactions. It is often routine andlike sale of goods, interest on bank deposits etc. He has to spend clerical in nature. It is important to note that only those transactionsmoney on certain items like purchase of goods, salary, rent, etc. related to business which can be expressed in terms of money areThese activities take place during the normal course of his business. recorded. The activities of book-keeping include recording in theHe would naturally be anxious at the year end, to know the progress journal, posting to the ledger and balancing of accounts.of his business. Business transactions are numerous, that it is notpossible to recall his memory as to how the money had been earned 1.2.1 Definitionand spent. At the same time, if he had noted down his incomes and R.N. Carter says, “Book-keeping is the science and art ofexpenditures, he can readily get the required information. Hence, the correctly recording in the books of account all those businessdetails of the business transactions have to be recorded in a clear and transactions that result in the transfer of money or money’s worth”.systematic manner to get answers easily and accurately for thefollowing questions at any time he likes. 1.2.2 Objectives i. What has happened to his investment? The objectives of book-keeping are ii. What is the result of the business transactions? i. to have permanent record of all the business transactions. iii. What are the earnings and expenses? ii. to keep records of income and expenses in such a way that iv. How much amount is receivable from customers to whom the net profit or net loss may be calculated. goods have been sold on credit? v. How much amount is payable to suppliers on account of iii. to keep records of assets and liabilities in such a way that credit purchases? the financial position of the business may be ascertained. vi. What are the nature and value of assets possessed by the iv. to keep control on expenses with a view to minimise the business concern? same in order to maximise profit. vii. What are the nature and value of liabilities of the business v. to know the names of the customers and the amount due concern? from them. vi. to know the names of suppliers and the amount due to These and several other questions are answered with the help them.of accounting. The need for recording business transactions in a clearand systematic manner is the basis which gives rise to Book-keeping. vii. to have important information for legal and tax purposes. 2 3
  7. 7. 1.2.3 Advantages viii. Control over Borrowings: Many businessmen borrow from banks and other sources. These loans are repayable. Just as From the above objectives of book-keeping, the following he must have a control over assets, he should have control overadvantages can be noted liabilities. i. Permanent and Reliable Record: Book-keeping provides ix. Identifying Do’s and Don’ts : Book keeping enables thepermanent record for all business transactions, replacing the memory proprietor to make an intelligent and periodic analysis of variouswhich fails to remember everything. aspects of the business such as purchases, sales, expenditures and ii. Arithmetical Accuracy of the Accounts:With the help of incomes. From such analysis, it will be possible to focus his attentionbook keeping trial balance can be easily prepared. This is used to on what should be done and what should not be done to enhance hischeck the arithmetical accuracy of accounts. profit earning capacity. iii. Net Result of Business Operations: The result (Profit or x. Fixing the Selling Price : In fixing the selling price, theLoss) of business can be correctly calculated. businessmen have to consider many aspects of accounting information such as cost of production, cost of purchases and other expenses. iv. Ascertainment of Financial Position: It is not enough to Accounting information is essential in determining selling prices.know the profit or loss; the proprietor should have a full picture ofhis financial position in business. Once the full picture (say for a year) xi. Taxation: Businessmen pay sales tax, income tax, etc. Theis known, this helps him to plan for the next year’s business. tax authorities require them to submit their accounts. For this purpose, they have to maintain a record of all their business transactions. v. Ascertainment of the Progress of Business: When aproprietor prepares financial statements evey year, he will be in a xii. Management Decision-making: Planning, reviewing,position to compare the statements. This will enable him to ascertain revising, controlling and decision-making functions of the managementthe growth of his business. Thus book keeping enables a long range are well aided by book-keeping records and reports.planning of business activities besides satisfying the short term objective xiii. Legal Requirements: Claims against and for the firm inof calculation of annual profits or losses. relation to outsiders can be confirmed and established by producing vi. Calculation of Dues : For certain transactions payments the records as evidence in the court.may be made later. Therefore, the businessman has to know how 1.3 Accountingmuch he has to pay others. vii. Control over Assets: In the course of business, the Book-keeping does not present a clear financial picture of theproprietor acquires various assets like building, machines, furnitures, state of affairs of a business. When one has to make a judgementetc. He has to keep a check over them and find out their values year regarding the financial position of the firm, the information containedafter year. in these books of accounts has to be analysed and interpreted. It is 4 5
  8. 8. with the purpose of giving such information that accounting came into In order to accomplish its main objective of communicatingbeing. information to the users, accounting embraces the following functions. Accounting is considered as a system which collects and i. Identifying: Identifying the business transactions from theprocesses financial information of a business. These informations are source documents.reported to the users to enable them to make appropriate decisions. ii. Recording: The next function of accounting is to keep a systematic record of all business transactions, which are identified in1.3.1 Definition an orderly manner, soon after their occurrence in the journal or American Accounting Association defines accounting as “the subsidiary books.process of identifying, measuring and communicating economic iii. Classifying: This is concerned with the classification of theinformation to permit informed judgements and decision by users of recorded business transactions so as to group the transactions ofthe information”. similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy of the accounts, trial balance is prepared.1.3.2 Objectives iv. Summarising : The classified information available from the The main objectives of accounting are trial balance are used to prepare profit and loss account and balance i. to maintain accounting records. sheet in a manner useful to the users of accounting information. ii. to calculate the result of operations. v. Analysing: It establishes the relationship between the items iii. to ascertain the financial position. of the profit and loss account and the balance sheet. The purpose of iv. to communicate the information to users. analysing is to identify the financial strength and weakness of the business. It provides the basis for interpretation.1.3.3 Process vi. Interpreting: It is concerned with explaining the meaning The process of accounting as per the above definition is given and significance of the relationship so established by the analysis.below: Interpretation should be useful to the users, so as to enable them to Input Process Output take correct decisions. vii. Communicating: The results obtained from the summarised, Identifying analysed and interpreted information are communicated to the Recording interested parties. Business Classifying Information transactions Summarising to 1.3.4 Meaning of Accounting Cycle (monetary value) Analysing Users Interpreting An accounting cycle is a complete sequence of accounting Communicating process, that begins with the recording of business transactions and ends with the preparation of final accounts. 6 7
  9. 9. Accounting Cycle 1.4 Accountancy, Accounting and Book-keeping Accountancy refers to a systematic knowledge of accounting. Balance It explains “why to do” and “how to do” of various aspects of Sheet accounting. It tells us why and how to prepare the books of accounts Profit & ä (Closing) and how to summarize the accounting information and communicate Transactions Loss â it to the interested parties. Account Balance Accounting refers to the actual process of preparing and á Sheet â presenting the accounts. In other words, it is the art of putting the (Opening) æ academic knowledge of accountancy into practice. Trading Journal Account Book-keeping is a part of accounting and is concerned with ã å record keeping or maintenance of books of accounts. It is often Trial routine and clerical in nature. Ledger Balance ß 1.4.1 Relationship between Accountancy, Accounting and Book-keeping When a businessman starts his business activities, he records Book-keeping provides the basis for accounting and it isthe day-to-day transactions in the Journal. From the journal the complementary to accounting process. Accounting begins wheretransactions move further to the ledger where accounts are written book-keeping ends. Accountancy includes accounting andup. Here, the combined effect of debit and credit pertaining to each book-keeping. The terms Accounting and Accountancy are usedaccount is arrived at in the form of balances. synonymously. This relationship can be easily understood with the To prove the accuracy of the work done, these balances are help of the following diagram.transferred to a statement called trial balance. Preparation of tradingand profit and loss account is the next step. The balancing of profit C O U N TA N C Yand loss account gives the net result of the business transactions. ACTo know the financial position of the business concern balance C O U N T IN AC k-ke ep Gsheet is prepared at the end. oo i ng B These transactions which have completed the current accountingyear, once again come to the starting point – the journal – and theymove with new transactions of the next year. Thus, this cyclicmovement of the transactions through the books of accounts(accounting cycle) is a continuous process. 8 9
  10. 10. 1.4.2 Distinction between Book-keeping and Accounting I. Internal users: Internal users are those individuals or groups who are within the organisation like owners, management, employees In general the following are the differences between and trade and accounting. II. External users: External users are those individuals orSl. Basis of groups who are outside the organisation like creditors, investors, Book-keeping AccountingNo. Distinction banks and other lending institutions, present and potential investors, 1. Scope Recording and maintenance It is not only recording and Government, tax authorities, regulatory agencies and researchers. of books of accounts. maintenance of books of The users and their need for information are as follows: accounts but also includes analysis, interpreting and Users Need for Information communicating the information. Internal 2. Stage Primary stage. Secondary stage. i. Owners To know the profitability and financial soundness of the business. 3. Objective To maintain systematic To ascertain the net result ii. Management To take prompt decisions to manage the records of business of the business operation. business efficiently. transactions. iii. Employees and Trade unions To form judgement about the earning 4. Nature Often routine and clerical in Analytical and executive in capacity of the business since their nature. nature. remuneration and bonus depend on it. 5. Responsi- A book-keeper is respon- An accountant is also External -bility -sible for recording business responsible for the work of i. Creditors, banks and other To determine whether the principal and transactions. a book-keeper. lending institutions the interest thereof will be paid in when 6. Supervision The book-keeper does not An accountant supervises due. supervise and check the and checks the work of the ii. Present investors To know the position, progress and work of an Accountant. book-keeper. prosperity of the business in order to ensure the safety of their investment. 7. Staff Work is done by the junior Senior staff performs the involved staff of the organisation. accounting work. iii. Potential investors To decide whether to invest in the business or not. iv. Government and Tax To know the earnings in order to assess authorities the tax liabilities of the business.1.5 Users of Accounting Information v. Regulatory agencies To evaluate the business operation The basic objective of accounting is to provide information which under the regulatory useful for persons and groups inside and outside the organisation. vi. Researchers To use in their research work. 10 11
  11. 11. Users of Accounting Information 1.6.3 Management Accounting Owners It relates to the use of accounting data collected with the help of financial accounting and cost accounting for the purpose of policy Researchers Management formulation, planning, control and decision making by the management. Branches of Accounting Employees and Regulatory Agencies Trade Unions Accounting Accounting Information Financial Cost Management Accounting Accounting Accounting Government and Creditors, Banks & Tax Authorities Lending Institutions 1.7 Basic Accounting Terms Potential Investors Present Investors The understanding of the subject becomes easy when one has the knowledge of a few important terms of accounting. Some of them1.6 Branches of Accounting are explained below. Increased scale of business operations has made the management 1.7.1 Transactionsfunction more complex. This has given raise to specialised branchesin accounting. The main branches of accounting are Financial Transactions are those activities of a business, which involveAccounting, Cost Accounting and Management Accounting. transfer of money or goods or services between two persons or two accounts. For example, purchase of goods, sale of goods, borrowing1.6.1 Financial Accounting : from bank, lending of money, salaries paid, rent paid, commission It is concerned with recording of business transactions in the received and dividend received. Transactions are of two types, namely,books of accounts in such a way that operating result of a particular cash and credit transactions.period and financial position on a particular date can be known. Cash Transaction is one where cash receipt or payment is1.6.2 Cost Accounting involved in the transaction. For example, When Ram buys goods from Kannan paying the price of goods by cash immediately, it is a It relates to collection, classification and ascertainment of the cash transaction.cost of production or job undertaken by the firm. 12 13
  12. 12. Credit Transaction is one where cash is not involved banks or other persons, creditors for goods supplied, bills payable,immediately but will be paid or received later. In the above example, outstanding expenses, bank overdraft etc.if Ram, does not pay cash immediately but promises to pay later, it 1.7.6 Drawingsis credit transaction. It is the amount of cash or value of goods withdrawn from the1.7.2 Proprietor business by the proprietor for his personal use. It is deducted from A person who owns a business is called its proprietor. He the capital.contributes capital to the business with the intention of earning profit. 1.7.7 Debtors1.7.3 Capital A person (individual or firm) who receives a benefit without It is the amount invested by the proprietor/s in the business. This giving money or money’s worth immediately, but liable to pay inamount is increased by the amount of profits earned and the amount future or in due course of time is a debtor. The debtors are shownof additional capital introduced. It is decreased by the amount of as an asset in the balance sheet. For example, Mr.Arul boughtlosses incurred and the amounts withdrawn. For example, if Mr.Anand goods on credit from Mr.Babu for Rs.10,000. Mr.Arul is a debtorstarts business with Rs.5,00,000, his capital would be Rs.5,00,000. to Mr.Babu till he pays the value of the goods. 1.7.8 Creditors1.7.4 Assets Assets are the properties of every description belonging to the A person who gives a benefit without receiving money or money’sbusiness. Cash in hand, plant and machinery, furniture and fittings, worth immediately but to claim in future, is a creditor. The creditorsbank balance, debtors, bills receivable, stock of goods, investments, are shown as a liability in the balance sheet. In the above exampleGoodwill are examples for assets. Assets can be classified into tangible Mr.Babu is a creditor to Mr.Arul till he receive the value of theand intangible. goods. Tangible Assets: These assets are those having physical 1.7.9 Purchasesexistence. It can be seen and touched. For example, plant & machinery, Purchases refers to the amount of goods bought by a businesscash, etc. for resale or for use in the production. Goods purchased for cash are Intangible Assets: Intangible assets are those assets having no called cash purchases. If it is purchased on credit, it is called asphysical existence but their possession gives rise to some rights and credit purchases. Total purchases include both cash and creditbenefits to the owner. It cannot be seen and touched. Goodwill, purchases.patents, trademarks are some of the examples. 1.7.10 Purchases Return or Returns Outward1.7.5 Liabilities When goods are returned to the suppliers due to defective quality or not as per the terms of purchase, it is called as purchases return. Liabilities refer to the financial obligations of a business. These To find net purchases, purchases return is deducted from the totaldenote the amounts which a business owes to others, e.g., loans from purchases. 14 15
  13. 13. 1.7.11 Sales 1.7.16 Income Sales refers to the amount of goods sold that are already bought Income is the difference between revenue and expense.or manufactured by the business. When goods are sold for cash, theyare cash sales but if goods are sold and payment is not received at 1.7.17 Voucherthe time of sale, it is credit sales. Total sales includes both cash and It is a written document in support of a transaction. It is a proofcredit sales. that a particular transaction has taken place for the value stated in the1.7.12 Sales Return or Returns Inward voucher. It may be in the form of cash receipt, invoice, cash memo, bank pay-in-slip etc. Voucher is necessary to audit the accounts. When goods are returned from the customers due to defectivequality or not as per the terms of sale, it is called sales return or 1.7.18 Invoicereturns inward. To find out net sales, sales return is deducted from Invoice is a business document which is prepared when one selltotal sales. goods to another. The statement is prepared by the seller of goods. It contains the information relating to name and address of the seller1.7.13 Stock and the buyer, the date of sale and the clear description of goods Stock includes goods unsold on a particular date. Stock may be with quantity and price.opening and closing stock. The term opening stock means goodsunsold in the beginning of the accounting period. Whereas the term 1.7.19 Receiptclosing stock includes goods unsold at the end of the accounting Receipt is an acknowledgement for cash received. It is issuedperid. For example, if 4,000 units purchased @ Rs. 20 per unit to the party paying cash. Receipts form the basis for entries in cashremain unsold, the closing stock is Rs.80,000. This will be opening book.stock of the subsequent year. 1.7.20 Account1.7.14 Revenue Account is a summary of relevant business transactions at one Revenue means the amount receivable or realised from sale of place relating to a person, asset, expense or revenue named in thegoods and earnings from interest, dividend, commission, etc. heading. An account is a brief history of financial transactions of a particular person or item. An account has two sides called debit side1.7.15 Expense and credit side. It is the amount spent in order to produce and sell the goodsand services. For example, purchase of raw materials, payment ofsalaries, wages, etc. 16 17
  14. 14. 2. Assets minus liabilities is QUESTIONS a) drawings b) capital c) creditI. Objective Type : 3. A written document in support of a transaction is calleda) Fill in the blanks: a) receipt b) credit note c) voucher 1. The amount which the proprietor has invested in the business 4. Business transactions may be classified into is ______________. a) three b) two c) one 2. Book-keeping is an art of recording ___________ in the 5. Purchases return means goods returned to the supplier due book of accounts. to a) good quality b) defective quality c) super quality 3. ___________ is a written document in support of a transaction. 6. Amount spent inorder to produce and sell the goods and services is called 4. Accounting begins where _______ ends. a) expense b) income c) revenue 5. Liabilities refer to the ___________ obligations of a business. [Answers: 1. (a), 2. (b), 3. (c), 4. (b), 5. (b), 6. (a)] 6. Owner of the business is called __________. II. Other Questions: 7. An account is a _________ of relevant business transactions at one place relating to a person, assets, expense or revenue 1. What is book-keeping? named in the heading. 2. Define Book-keeping. 8. Receipt is an acknowledgement for __________. 3. What are the objectives of book-keeping? 9. Income is the difference between revenue and ________. 4. What are the advantages of book-keeping?[Answers: 1. capital; 2. business transactions; 3. voucher; 5. What information can a businessman obtain from his keeping; 5. financial; 6. Proprietor; 7. summary; 8. cash book-keeping? received; 9. expense] 6. What do you mean by accounting?b) Choose the correct answer: 7. Define Accounting. 1. The debts owing to others by the business is known as 8. What is accounting process? a) liabilities b) expenses c) debtors 18 19
  15. 15. 9. What are the differences between book-keeping and accounting?10. Explain the inter-relationship between book-keeping, accounting and accountancy.11. Briefly explain the users and their need for accounting information.12. What are the branches of accounting?13. Write short notes on : a) Debtors b) Creditors c) Stock14. Briefly explain the following terms a) Voucher b) Invoice c) Account15. Write short note on a) Revenue b) Purchase c) Assets 20
  16. 16. CHAPTER - 2 CONCEPTUAL FRAME WORK OF ACCOUNTINGLearning Objectives After learning this chapter, you will be able to: Ø know the Basic Assumptions of Accounting. Ø understand the Basic Accounting Concepts. Ø know the Modifying Principles of Accounting. Accounting is the language of business. It records businesstransactions taking place during the accounting period. Accountingcommunicates the result of the business transactions in the form of finalaccounts. With a view to make the accounting results understood inthe same sense by all interested parties, certain accounting assumptions,concepts and principles have been developed over a course ofperiod.2.1 Basic Assumptions The basic assumptions of accounting are like the foundationpillars on which the structure of accounting is based. The four basicassumptions are as follows: 21
  17. 17. 2.1.1 Accounting Entity Assumption 2.2.1 Dual Aspect Concept According to this assumption, business is treated as a unit or entity Dual aspect principle is the basis for Double Entry System ofapart from its owners, creditors and others. In other words, the book-keeping. All business transactions recorded in accounts have twoproprietor of a business concern is always considered to be separate aspects - receiving benefit and giving benefit. For example, when aand distinct from the business which he controls. All the business business acquires an asset (receiving of benefit) it must pay cash (givingtransactions are recorded in the books of accounts from the view point of benefit).of the business. Even the proprietor is treated as a creditor to theextent of his capital. 2.2.2 Revenue Realisation Concept2.1.2 Money Measurement Assumption According to this concept, revenue is considered as the income earned on the date when it is realised. Unearned or unrealised revenue In accounting, only those business transactions and events which should not be taken into account. The realisation concept is vital forare of financial nature are recorded. For example, when Sales Manager determining income pertaining to an accounting period. It avoids theis not on good terms with Production Manager, the business is bound possibility of inflating incomes and suffer. This fact will not be recorded, because it cannot be measuredin terms of money. 2.2.3 Historical Cost Concept2.1.3 Accounting Period Assumption Under this concept, assets are recorded at the price paid to acquire The users of financial statements need periodical reports to know them and this cost is the basis for all subsequent accounting for thethe operational result and the financial position of the business concern. asset. For example, if a piece of land is purchased for Rs.5,00,000 andHence it becomes necessary to close the accounts at regular intervals. its market value is Rs.8,00,000 at the time of preparing final accountsUsually a period of 365 days or 52 weeks or 1 year is considered as the land value is recorded only for Rs.5,00,000. Thus, the balancethe accounting period. sheet does not indicate the price at which the asset could be sold for.2.1.4 Going Concern Assumption 2.2.4 Matching Concept As per this assumption, the business will exist for a long period Matching the revenues earned during an accounting period withand transactions are recorded from this point of view. There is neither the cost associated with the period to ascertain the result of the businessthe intention nor the necessity to wind up the business in the foreseeable concern is called the matching concept. It is the basis for finding accuratefuture. profit for a period which can be safely distributed to the owners.2.2 Basic Concepts of Accounting 2.2.5 Full Disclosure Concept These concepts guide how business transactions are reported.On the basis of the above four assumptions the following concepts Accounting statements should disclose fully and completely all the significant information. Based on this, decisions can be taken by various(principles) of accounting have been developed. 22 23
  18. 18. interested parties. It involves proper classification and explanations of 2.3.4 Prudence (Conservatism) Principleaccounting information which are published in the financial statements. Prudence principle takes into consideration all prospective losses2.2.6 Verifiable and Objective Evidence Concept but leaves all prospective profits. The essence of this principle is This principle requires that each recorded business transactions in “anticipate no profit and provide for all possible losses”. For example,the books of accounts should have an adequate evidence to support it. while valuing stock in trade, market price or cost price whichever isFor example, cash receipt for payments made. The documentary less is considered.evidence of transactions should be free from any bias. As accountingrecords are based on documentary evidence which are capable of Frame Work of Accountingverification, it is universally acceptable.2.3 Modifying Principles Assumptions Concepts Modifying Principles To make the accounting information useful to various interested 1. Accounting Entity 1. Dual Aspect 1. Cost Benefitparties, the basic assumptions and concepts discussed earlier have been 2. Money Measurement 2. Revenue Realisation 2. Materialitymodified. These modifying principles are as under. 3. Accounting Period 3. Historical Cost 3. Consistency 4. Going Concern 4. Matching 4. Prudence2.3.1 Cost Benefit Principle 5. Full Disclosure This modifying principle states that the cost of applying a principle 6. Verifiable andshould not be more than the benefit derived from it. If the cost is more objective evidencethan the benefit then that principle should be modified. 2.4 Accounting Standards2.3.2 Materiality Principle To promote world-wide uniformity in published accounts, the The materiality principle requires all relatively relevant information International Accounting Standards Committee (IASC) has beenshould be disclosed in the financial statements. Unimportant and set up in June 1973 with nine nations as founder members. The purposeimmaterial information are either left out or merged with other items. of this committee is to formulate and publish in public interest, standards2.3.3 Consistency Principle to be observed in the presentation of audited financial statements and The aim of consistency principle is to preserve the comparability to promote their world-wide acceptance and observance. IASC existof financial statements. The rules, practices, concepts and principles to reduce the differences between different countries’ accountingused in accounting should be continuously observed and applied year practices. This process of harmonisation will make it easier for theafter year. Comparisons of financial results of the business among users and preparers of financial statement to operate across internationaldifferent accounting period can be significant and meaningful only when boundaries. In our country, the Institute of Chartered Accountantsconsistent practices were followed in ascertaining them. For example, of India has constituted Accounting Standard Board (ASB) in 1977.depreciation of assets can be provided under different methods, The ASB has been empowered to formulate and issue accountingwhichever method is followed, it should be followed regularly. standards, that should be followed by all business concerns in India. 24 25
  19. 19. QUESTIONS 4. As per dual aspect concept, every business transaction hasI. Objective Type : a) three aspects b) one aspect c) two aspectsa) Fill in the Blanks: [Answers : 1 (a), 2. (b), 3. (a), 4. (c)]1. Stock in trade are to be recorded at cost or market price whichever is less is based on _____________ principle. II. Other Questions :2. The assets are recorded in books of accounts in the cost of 1. What are the basic assumptions of accounting? acquisition is based on _____________ concept. 2. What do you mean by business entity assumption?3. The benefits to be derived from the accounting information should 3. Write short notes on the following assumption. exceed its cost is based on _____________ principle. a) Money measurement b) Accounting period4. Transactions between owner and business are recorded separately 4. What do you mean by going concern assumption? due to _____________ assumption. 5. What are the basic concepts of accounting?5. Business concern must prepare financial statements at least once 6. What do you understand by revenue realisation concept? in a year is based on ___________ assumption. 7. What do you mean by historical cost concept?6. _____________ principle requires that the same accounting 8. Describe the following concepts methods should be followed from one accounting period to the a) Matching b) Full disclosure next. 9. What do you understand by verifiable and objective evidence[Answers : 1. prudence, 2. historical cost, 3. cost benefit, 4. business concept? entity, 5. accounting period, 6. consistency] 10. Explain in detail the modifying principles of accounting.b) Choose the correct answer: 11. What do you mean by materiality principle?1. As per the business entity assumption, the business is different 12. What do you understand by consistency principle? from the a) owners b) banker c) government 13. Write short notes on a) Prudence principle b) Dual aspect concept2. Going concern assumption tell us the life of the business is a) very short b) very long c) none 14. Briefly explain the various accounting concepts.3. Cost incurred should be matched with the revenues of the particular 15. Briefly explain the various accounting assumptions. period is based on a) matching concept b) historical cost concept c) full disclosure concept 26 27
  20. 20. of recording business transactions in a systematic manner has originated in Italy, it was perfected in England and other European countries during the 18th century only i.e., after the Industrial Revolution. Many countries have adopted this system today. CHAPTER - 3 3.1 Double Entry System BASIC ACCOUNTING PROCEDURES - I There are numerous transactions in a business concern. Each DOUBLE ENTRY SYSTEM OF BOOK KEEPING transaction, when closely analysed, reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. ThisLearning Objectives is termed as the “Credit aspect”. These two aspects namely “Debit After studying this Chapter, you will be able to: aspect” and “Credit aspect” form the basis of Double Entry System. The double entry system is so named since it records both the aspects Ø understand the Meaning, Features and Advantages of of a transaction. Double Entry System. In short, the basic principle of this system is, for every debit, there Ø know the Meaning and Types of Accounts. must be a corresponding credit of equal amount and for every credit, Ø identify the Accounting Rules. there must be a corresponding debit of equal amount. 3.1.1 Definition According to J.R.Batliboi “Every business transaction has a Recording of business transactions has been in vogue in all two-fold effect and that it affects two accounts in opposite directionscountries of the world. In India, maintenance of accounts was practised and if a complete record were to be made of each such transaction, itnot in such a developed form as we have today. Kautilya’s famous would be necessary to debit one account and credit another account. ItArthasastra not only relates to Politics and Economics, but also explains is this recording of the two fold effect of every transaction that hasthe art of account keeping in a separate chapter. Written in 4th century given rise to the term Double Entry System”.BC, the book gives details about account keeping, methods ofsupervising and checking of accounts and also about the distinction 3.1.2 Featuresbetween capital and revenue, income and expenses etc. i. Every business transaction affects two accounts. Double entry system was introduced to the business world by an ii. Each transaction has two aspects, i.e., debit and credit.Italian merchant named Lucas Pacioli in 1494 A.D. Though the system 28 29
  21. 21. iii. It is based upon accounting assumptions concepts and ii. Complete record of transactions: This system maintains a principles. complete record of all business transactions. iv. Helps in preparing trial balance which is a test of arithmetical iii. A check on the accuracy of accounts: By the use of this accuracy in accounting. system the accuracy of the accounting work can be established v. Preparation of final accounts with the help of trial balance. by the preparation of trial balance.3.1.3 Approaches of Recording iv. Ascertainment of profit or loss: The profit earned or loss occured during a period can be ascertained by the preparation There are two approaches for recording a transaction. of profit and loss account. I. Accounting Equation Approach v. Knowledge of the financial position : The financial position II. Traditional Approach of the concern can be ascertained at the end of each periodI. Accounting Equation Approach through the preparation of balance sheet. This approach is also called as the American Approach. Under vi. Full details for control: This system permits accounts to bethis method transactions are recorded based on the accounting equation, kept in a very detailed form, and thereby provides sufficienti.e., informations for the purpose of control. Assets = Liabilities + Capital vii. Comparative study : The results of one year may be This will be discussed in detail in the next chapter. compared with those of previous years and the reasons for change may be ascertained.II. Traditional Approach viii. Helps in decision making: The mangement may be able to This approach is also called as the British Approach. Recording obtain sufficient information for its work, especially for makingof business transactions under this method are formed on the basis of decisions. Weaknesses can be detected and remedialthe existence of two aspects (debit and credit) in each of the transactions. measures may be applied.All the business transactions are recorded in the books of accounts ix. Detection of fraud: The systematic and scientific recordingunder the ‘Double Entry System’. of business transactions on the basis of this system minimises the chances of fraud.3.1.4 Advantages 3.2 Account The advantages of this system are as follows: i. Scientific system: This is the only scientific system of recording Every transaction has two aspects and each aspect has an account. business transactions. It helps to attain the objectives of It is stated that ‘an account is a summary of relevant transactions accounting. at one place relating to a particular head’. 30 31
  22. 22. 3.2.1 Classification of Accounts iii. Representative Persons: Accounts which represent a particular person or group of persons. For example, Transactions can be divided into three categories. outstanding salary account, prepaid insurance account, etc. i. Transactions relating to individuals and firms The business concern may keep business relations with all the ii. Transactions relating to properties, goods or cash above personal accounts, because of buying goods from them or selling iii. Transactions relating to expenses or losses and incomes or goods to them or borrowing from them or lending to them. Thus they gains. become either Debtors or Creditors. Therefore, accounts can also be classified into Personal, Real The proprietor being an individual his capital account andand Nominal. The classification may be illustrated as follows his drawings account are also personal accounts. Accounts II. Impersonal Accounts: All those accounts which are not personal accounts. This is further divided into two types viz. Real and Nominal accounts. Personal Impersonal i. Real Accounts: Accounts relating to properties and assets which are owned by the business concern. Real accounts include tangible and intangible accounts. For example, Land,Natural Artificial Representative Real Nominal Building, Goodwill, Purchases, etc. ii. Nominal Accounts: These accounts do not have any existence, form or shape. They relate to incomes and expenses Tangible Intangible and gains and losses of a business concern. For example, Salary Account, Dividend Account, etc.I. Personal Accounts : The accounts which relate to persons. Personal accounts include the following. Illustration : 1 Classify the following items into Personal, Real and Nominal Accounts. i. Natural Persons : Accounts which relate to individuals. For example, Mohan’s A/c, Shyam’s A/c etc. 1. Capital 2. Sales ii. Artificial persons : Accounts which relate to a group of 3. Drawings 4. Outstanding salary persons or firms or institutions. For example, HMT Ltd., Indian 5. Cash 6. Rent Overseas Bank, Life Insurance Corporation of India, 7. Interest paid 8. Indian Bank Cosmopolitan club etc. 9. Discount received 10. Building 32 33
  23. 23. 11. Bank 12. Chandrasekar QUESTIONS 13. Murugan Lending Library 14. Advertisement I. Objective Type : 15. Purchases a) Fill in the blanks:Solution: 1. The author of the famous book “Arthasastra” is __________. 1. Personal account 2. Real account 2. Every business transaction reveals __________ aspects. 3. Personal account 4. Personal (Representative) account 5. Real account 6. Nominal account 3. The incoming aspect of a transaction is called _________ and the outgoing aspect of a transaction is called _________. 7. Nominal account 8. Personal (Legal Body) account 4. Traditional approach of accounting is also called as _________ 9. Nominal account 10. Real account approach. 11. Personal account 12. Personal account 5. The American approach is otherwise known as _________ 13. Personal account 14. Nominal account approach. 15. Real account 6. Impersonal accounts are classified into _________ types. 7. Plant and machinery is an example of _________ account.3.3 Golden Rules of Accounting 8. Capital account is an example of _________ account. All the business transactions are recorded on the basis of the 9. Commission received will be classified under _________ account.following rules. [Answers: 1. Kautilya, 2. two, 3. debit, credit, 4. British, 5. AccountingS.No. Name of Account Debit Aspect Credit Aspect equation, 6. two, 7. real, 8. personal, 9. nominal] b) Choose the correct answer: 1. Personal The receiver The giver 1. The receiving aspect in a transaction is called as 2. Real What comes in What goes out a) debit aspect b) credit aspect c) neither of the two 3. Nominal All expenses All incomes 2. The giving aspect in a transaction is called as and losses and gains. a) debit aspect b) credit aspect c) neither of the two 3. Murali account is an example for a) personal A/c b) real A/c c) nominal A/c 34 35
  24. 24. 4. Capital account is classified under 7. Explain nominal accounts. a) personal A/c b) real A/c c) nominal A/c 8. What are the golden rules of Accounting?5. Goodwill is an example of 9. Classify the following items into real, personal and nominal accounts a) tangible real A/c b) intangible real A/c c) nominal A/c a. Capital f. State Bank of India6. Commission received is an example of b. Purchases g. Electricity Charges a) real A/c b) personal A/c c) nominal A/c c. Goodwill h. Dividend7. Outstanding rent A/c is an example for d. Copyright i. Ramesh a) nominal account b) personal account e. Latha j. Outstanding rent c) representative personal account [Answers : Personal account – (a), (e), (f), (i), (j)8. Nominal Account is classified under Real account – (b), (c), (d) a) personal A/c b) impersonal A/c Nominal account – (g), (h)] c) neither of the two9. Drawings account is classified under a) real A/c. b) personal A/c. c) nominal A/c.[Answers : 1. (a), 2. (b), 3. (a), 4. (a), 5. (b), 6. (c), 7. (c), 8. (b), 9. (b)].II. Other Questions:1. Explain the meaning of Double Entry System.2. Define Double Entry System.3. What are the advantages of Double Entry System?4. How are accounts classified?5. Write notes on personal accounts.6. Write notes on real accounts. 36 37
  25. 25. 4.1 Source Documents Source documents are the evidences of business transactions which provide information about the nature of the transaction, the date, the amount and the parties involved in it. Transactions are recorded in the books of accounts when they actually take place and are duly CHAPTER - 4 supported by source documents. According to the verifiable objective principle of Accounting, each transaction recorded in the books of BASIC ACCOUNTING PROCEDURES - II accounts should have adequate proof to support it. These supporting JOURNAL documents are the written and authentic proof of the correctness of the recorded transactions. These documents are required for audit and tax assessment. They also serve as the legal evidence in case of a dispute.Learning Objectives The following are the most common source documents. After learning this chapter, you will be able to: 4.1.1 Cash Memo When a trader sells goods for cash, he gives a cash memo and Ø understand the Origin of Transactions – Source when he purchases goods for cash, he receives a cash memo. Details Documents. regarding the items, quantity, rate and the price are mentioned in the Ø understand the Concept of Accounting Equation. cash memo. Cash Memo Ø know the Rules of Debit and Credit. Vinoth Watch Co. Ø know the Meaning and the Preparation of Journal. 135, South Usman Road, Thyagaraya Nagar, Chennai-17. No: 52 Date : 18.8.2003 Ø bring out the Advantages of Journal. To .............................................................. Rate Amount Qty. Description Rs. Rs. Accounting process starts with identifying the transactions to be 3 Titan Regulia 1,800 5,400recorded in the books of accounts. Accounting identifies only those 2 Titan Raga 1,200 2,400transactions and events which involve money. They should be of financial 7,800character. Accountant does so by sorting out various cash memos, Less: Discount 10% 780invoices, bills, receipts and vouchers. 5 Total 7,020 In the accounting process, the first step is the recording of Goods once sold are not taken back.transactions in the books of accounts. The origin of a transaction is Managerderived from the source document. for Vinoth Watch Co. 38 39
  26. 26. 4.1.2 Invoice or Bill Note : E.&O.E., means errors and omissions excepted. In other words, When a trader sells goods on credit, he prepares a sale invoice. It if there is any error in the invoice, the same has to be adjustedcontains full details relating to the amount, the terms of payment and the and address of the seller and buyer. The original copy of the sale 4.1.3 Receiptinvoice is sent to the purchaser and its duplicate copy is kept for makingrecords in the books of accounts. When a trader receives cash from a customer, he issues a receipt Similarly, when a trader purchases goods on credit, he receives a containing the date, the amount and the name of the customer. Thecredit bill from the supplier of goods. original copy is handed over to the customer and the duplicate copy is kept for record. In the same way, whenever we make payment, we INVOICE obtain a receipt from the party to whom we make payment. Ramesh Electronics RECEIPT 306, Anna Salai, Chennai - 600 002. Saravana Book House No. 405 Date : 20.8.2003 43, 1st Main Road, Chennai - 35. Name & address of the Customer : Bhanu Enterprises 43, Eldams Road, Teynampet, Receipt No. 315 Date :16.9.2003 Chennai - 18. Received with thanks a sum of Rs. 15,000 (Rupees fifteen Terms : 5% cash discount if payment is made within 30 days. thousand only) from M/s. Sulthan & Sons being the supply of books Rate Amount as per the list enclosed. Qty. Description Rs. Rs. Cheque/DD/No. : 10345 Dt. : 10.9.2003 5 Refrigerators 9,000 45,000 Canara Bank, Trichy. Signature 10 Washing Machines 15,000 1,50,000 1,95,000 Seal Sales Tax @ 10% 19,500 Note : If the amount is more than Rs.500, affix a revenue stamp. 2,14,500 Handling & delivery charges 1,500 4.1.4 Debit Note 15 Total 2,16,000 A debit note is prepared by the buyer and it contains the date of (Rupees Two lakhs sixteen thousand only) of the goods returned, name of the supplier, details of the goods Partner returned and reasons for returning the goods. Each debit note is serially E&O.E for Ramesh Electronics numbered. A duplicate copy or counter foil of the debit note is retained by the buyer. On the basis of debit note, the suppliers account is debited in the books. 40 41
  27. 27. credit note is retained for the record purpose. On the basis of credit note, the customer’s account is credited in the books. DEBIT NOTE Ganesh Traders No : 315 CREDIT NOTE 22, Ram Nagar, Date: 14.6.2003 No : 243 Date: 15.9.2003 Chennai - 600 015 COTTON WORLD Name & Address of Supplier : Shanmuga Traders 22, Metha Nagar, Chennai - 600 029. 122, III Street Name & Address of the Customer : Palanichami & Sons Chennai - 600 021. 122, Oppanakkara Street, Terms : 5% cash discount if payment is made within 30 days. Coimbatore - 6. Terms : 2% cash discount if payment is made within 30 days. Date Particulars Rs. Rs. 2003 20 FM Radio sets purchased Date Particulars Rs. Rs. June 14 under your invoice No.394, dated, 2nd June, 2003, now 2003 T-Shirts - 32” - 200 Nos returned, as the sets are not Sept 15 @ Rs.100 each 20,000 in working conditions Less : Discount @10% 2,000 @ Rs.75 per set. 1500 18,000 Add : Packing expenses 100 (Return due to inferior quality) 1,600 Total 18,000 Total 1,600 E & O.E., E & O., E Manager Manager 4.1.6 Pay-in-slip Pay-in-slip is a form available in banks and is used to deposit4.1.5 Credit Note money into a bank account. Each pay-in-slip has a counterfoil which is A credit note is prepared by the seller and it contains the date on returned to the depositor duly sealed and signed by the bank official.which goods are returned, name of the customer, details of the goods This source document relates to bank transactions. It gives detailsreceived back, amount of such goods and reasons for returning the regarding date, account number, amount deposited (in cash or cheque)goods. Each credit note is serially numbered. A duplicate copy of the and name of the account holder. 42 43