CONTENTS

1) Bookkeeping & Accounting Introduction Need and Development Definitions of Book Keeping & Accounting Difference Objectives of Accounting Assignments 2) Basic Accounting terminologies Basic Terms Assignments 3) Accounting Concepts and Conventions Accounting Concepts Assignments 4) Meaning of an Account Accounts Double Entry book Keeping system Assignments 5) Types of Accounts Introduction Personal Accounts Real Accounts Nominal Accounts Chart for Rules of Debit & Credit Assignments 6) Books of Accounts Introduction Stages of Accounting Journal How to journalize the transactions Format of Journal Sub Divisions of Journals Journal Proper Assignments 7) Secondary Books of Accounts 8) Recording transactions in a journal Introduction 9) Ledger Posting Introduction Assignment 10) Trial Balance Introduction

Basics of Accountancy

1. BOOKKEEPING & ACCOUNTING

INTRODUCTION: You have been observing since you have been a child, about how your grandparents or parents would keep a record of their expenses in a diary. You have been receiving pocket money from your parents. Your parents wanted an explanation from you at the end of the month, about the way in which you spent the money. Hence, you had to keep a record of the expenses. That means a record has to be kept of the different transactions. The subject of 'Book-keeping & Accountancy' deals with the various aspects of keeping records for a business organization. Accountancy starts where Bookkeeping ends. It is an art, practice or system of keeping, analyzing and interpreting business accounts. Accounting communicates the results of business operations to various parties who have some stake in the business viz. proprietors, management, creditors, prospective investors, Government, employees, citizens and other agencies. Bookkeeping and Accountancy answer important questions like: (1) Has the business made a profit or loss? (2) What is the amount of profit or loss? (3) What are the sources of funds of the business?

NEED AND DEVELOPMENT: Accounting is as old as money itself. In India Chanakya in his Arthashastra has emphasized the existence and need of proper accounting and auditing. The advent of industrial revolution has resulted in large-scale production, cutthroat competition and Widening of the market. Accounting today has also grown in importance and change in its structure with the evolution of complex and giant industrial organizations. It has come to be recognized as a tool for mastering the various economic problems, which a business organization may have to face.

DEFINITIONS OF BOOKKEEPING:
n

Norcott:

'It is an art of recording in the books of accounts, the monetary aspects of commercial or financial transactions'

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Richard E. Strahelm:

The art of analyzing & recording business transactions, reporting results of business operations through periodic statements and interpreting such results for purposes of effective control of future operations.

DEFINITIONS OF ACCOUNTING:

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* R. N. Anthony 'An Accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business.

The American Institute of Certified Public Accountants:

Accounting is, "the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results thereof.

DIFFERENCE BETWEEN BOOK KEEPING AND ACCOUNTING: Basis of Difference Aspect Book-Keeping It is concerned with Keeping records & is clerical in nature Accountancy It is concerned with the design of the system, analysis of Records, Interpretation and preparation of reports.

Scope

It is confined to It is broader in scope keeping records only. & includes Bookkeeping. It leads to the preparation of Trial Balance. It leads to the preparation of Financial Statements: Profit & Loss Account Balance Sheet

Culmination

OBJECTIVES OF ACCOUNTING: 1. To ascertain the amount of profit or loss during the accounting period. 2. To ascertain the financial position (amount of his Capital, assets and liabilities) of the business on any particular date. 3. To provide information to all the interested parties: (a) Owners: To know about the profit or loss or financial position. (b) Creditors: To find out the creditworthiness of the business. (c) Government: To assess the tax-liability (d) Management: To keep a control on the various aspects of the business.

ASSIGNMENTS: 1. State whether each of the following statements is 'True' or 'False': (a) (b) (c) (e) (f) Bookkeeping records only transactions, which are of a financial character. Book-keeping and Accounting are synonymous terms. Transactions have some financial effect on the business organization. Liabilities are the obligations of the business. A creditor is a person to whom an amount is owed.

2. Write a word, which can substitute each of the following: (a) (b) (c) (d) (e) The work of keeping a record of business accounts. A person whose profession is examining or interpreting business accounts and financial records. Amount invested in Business. Surplus over income over expenses & losses. Articles in which a businessman deals.

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2. BASIC ACCOUNTING TERMINOLOGIES

BASIC TERMS Business is carried on with an intention to earn profit. There are various factor involved to generate this profit and they also deserve their share in profit for eg. A business has four factors i.e.

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1. Land -to start the business/ a place to carry on business 2. Labour - the workforce 3. Outside liabilities- to provide the amount / financial help to start the business. 4. the entrepreneur/ the proprietor himself capital contribution from his own side I.e. owners own investment. Now let us understand some basic terms. 1. Transaction: A transfer of goods and/or services or cash or any other benefit between the business and outsiders or between two accounts. (i) Cash Transactions: Those transactions where one of the exchanged items is cas (including cheques and drafts) are cash transactions. (ii) Credit transactions: When there is an exchange of goods or services but for 'a promise to pay' on a later date, the exchange is called a credit transaction. 2. Goods: Goods are those tangible products, which are produced or purchased for the purpose of sale or resale respectively. 3. Profit/Loss: Profit is the excess of Income / revenue over expenses during the accounting year. Loss is the excess of expenses over income / revenue. 4. Assets: They are the entire property owned by a business which facilitate business operations and are not meant for resale. a) Fixed Assets: Fixed assets are required for relatively long period of time. These are used to generate income over a period of time by using them throughout their life span. These assets are not meant for resale e.g. Land & Building, Plant and machinery. These assets are recorded at cost i.e. acquisition / historical cost. Assets may further be classified as

Tangible assets & Intangible Assets (i) Tangible Assets: These assets are properties, which can be seen, touched felt, measured eg. Plant and Machinery. (ii) Intangible assets: These assets consist of properties, which can not be seen touched, or felt but they are capable of measurement in terms of money. For eg. Goodwill - the name & fame of the business, patents copyrights, Trademarks. b) Current Assets: They are acquired for relatively longer period of time and are generally not meant for resale. 5. Liabilities: The amount that the business owes to outsiders. 6. Net Worth/ Capital: Total Assets of the business (-) Total Liabilities of the business 7. Drawings: Amount withdrawn by the proprietor from the business in cash or goods for personal use. 8. Sundry Debtors: They represent amount outstanding and due from customers against credit sales. 9. Sundry Creditors: They represent amount payable to suppliers against credit purchases. 10. Contingent Liability: There may be certain items, which are not liabilities at the time of assessing the financial position of the business. It becomes a liability on a particular event happening. A contingent liability is therefore, one that may or may not become a liability. 11. Capital Expenditure: A substantial expenditure made by the business organization may be for the purchase of an asset. This would result in increasing the earning capacity of the business and the benefits from the asset will also be received throughout its working life. This expenditure is known as Capital Expenditure. 12. Revenue Expenditure: Expenditure that is incurred on the day-to-day running of the business and chargeable to the revenue earned from the business is called revenue expenditure. The benefits received from these expenses are received during the current accounting year itself. 13. Deferred Revenue Expenditure: Some expenses are essentially revenue in nature but the benefits received there from extend beyond one accounting period. 14. Insolvent: A person or a business who/which is not in a position to payoff its liabilities is said to be insolvent or bankrupt. 15. Accounting Year: The year for which accounts are kept by a proprietor.

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ASSIGNMENTS: 1. State whether each of the following statements is 'True' or 'False': (a) A creditor is a person to whom an amount is owed. (b) The most important asset recorded on the asset side of the Balance Sheet is the human being. (c) Amount paid in return for services received is called an income.

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(d) Withdrawals of cash or goods mad eby a proprietor from business for his personal use is called capital.

2. Fill in the Blanks: (a) A businessman who cannot pay his debt is called________. (b) The asset that can be seen and touched is a________asset. (C) The commodities in which a businessman deals are known as ___________. (d) Surplus of income over expenses is called_________.

3. ACCOUNTING CONCEPTS AND ACCOUNTING CONVENTIONS Accounting Concepts: Accounting concepts are the necessary assumptions or conditions upon which accounting is based. Business Entity concept. For accounting purposes, the 'business' is treated as a separate entity from the proprietor. Going concern concept. It is assumed that a business is a 'going concern' and that it will continue to operate for an indefinite period of time. Money measurement concept. Only transactions or events that can be recorded in terms of money are recorded in the books of accounts. Cost concept. An asset is recorded in the books at cost i.e. the price paid to acquire it. Dual aspect concept. Every transaction that takes place in an organization, has two effects on the balance sheet equation (Total Assets = Owners' Capital + Liabilities to outsiders) such that at any point of time the equation is always maintained. Accounting period concept. The entire life of the business is divided into smaller periods at the end of which the performance is reviewed and reported. The period for which the final accounts of a company are prepared may be a year and is known as an accounting period. Realisation concept. The realization concept states that the amount recognized as revenue is the amount that is reasonably certain to be realized. Accrual concept. The costs and the revenues, which are recorded in the financial statements, should relate to the accounting period of the financial statements to which they relate. The cash may or may not be received or paid in the same accounting period.

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Conservatism It refers to the policy of 'playing safe'. As per this convention, all prospective losses are taken into consideration but not all prospective profits.

ASSIGNMENTS:

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1. State whether each of the following statements is 'True' or 'False': (a) In accounting everything is recorded in terms of money. (B) Continuity of a business for an indefinite period of time is as per the accrual concept.

2. Fill in the Blanks: (A) The concept under which one can sell goods to himself is called __________. (b) Profit should be accounted for only when it is actually realized is stated as per the _________concept.

4. MEANING OF AN ACCOUNT
ACCOUNT: An account may be defined as a systematic and summarised record of transaction pertaining to one person, one property or one head of expense /loss or gain. An account is given a suitable heading, which may be of the person, property or an expense or a gain. An account is always divided into two sides. The left hand side is known as the Debit side and the right hand side is known as the Credit side. To debit and account means to enter the amount of transaction on the debit side i.e. left side and the credit an account means to enter the amount to the transaction on the credit side i.e. right side. An account is a ledger account opened in the ledger on separate pages.

DOUBLE ENTRY BOOK-KEEPING SYSTEMS. Double entry book keeping system denotes that every business transaction has two-fold effect. There cannot be business transaction unless it has effect at least on two account or two parties. So main principles of Double entry book-keeping system are: (I) Every business transaction is split up into two aspects viz. debit aspect and credit aspect (ii) Minimum two parties are required to complete a business transaction (iii) One party is a receiver of the benefit while the other is the giver of the benefit. (Iv) Every debit has a corresponding credit of an equal amount.

ASSIGNMENTS Every account has two sides True False

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5. TYPES OF ACCOUNTS INTRODUCTION: The transactions are recorded on the basis of the rules of debit and credit. For this purpose business transactions have been classified into three categories: 1) Transactions relating to persons.

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2) Transactions relating to properties and assets. 3) Transactions relating to incomes and expenses. ? accounts falling under the first heading are called as "Personal The Accounts." ? Accounts falling under the second heading are called as "Real Accounts" and ? accounts falling under the third heading are termed as "Nominal The Accounts." Let us now understand each type of account.

A) PERSONAL ACCOUNTS: Personal Accounts include the accounts of persons with whom the business deals. These accounts can be classified into three categories:1. Natural Personal Accounts: - The term Natural Persons means persons accounts of individual human beings for e.g. Jassi's Account, Mr. Bhatia's A/c. etc.

B) REAL ACCOUNTS: These are the accounts of properties, assets or possessions of the businessman. These accounts represent the belongings of the businessman. A separate account is maintained for each class of property or asset.

C) NOMINAL ACCOUNTS: Nominal Accounts include accounts of all expenses, losses, incomes and gains. The examples of such accounts are Rent A/c., Salaries A/c. Insurance Charges A/c., Loss by Fire A/c. These accounts of these items are opened to explain how cash has been spent.

CHART FOR RULES OF DEBIT & CREDIT Following are the fundamental rules for recording business transactions in a journal: Debit the Receiver Personal Accounts Credit the Giver Debit what comes in Accounts Real Accounts Credit what goes out Debit all expenses and losses Personal Accounts Credit all Incomes and Gains

Now let us consider these rules with the help of transactions: (1) X started business by investing Rs 1, 00,000 in 'X & Co'. Accounting Entry Accounting Rule Efffect

Cash A/c Dr 1,00,000 Debit what comes in Increase in the value of the asset To X's Capital A/c 1,00,000 Credit the Giver Increase in the value of the liability

(2) 'X & Co' purchases a machine by investing cash Rs 20,000

Accounting Entry Machinery A/c Dr 20,000 To Cash A/c 20,000

Accounting Rule Debit what comes in Credit what goes out

Efffect Increase in the value of an asset Decrease in the value of an asset

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ASSIGNMENT:

1. "DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT" is the rule of REAL Accounts. true false

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2. Fill in the blanks A. Rent Receivable is a________A/c B. Copyright A/c is a________A.c C. Each transaction has at least________accounts D. Debit the_______&_______the_______is the rule of personal account

3. Distinguiish the following in to 'Personal' 'Real' and 'Nominal' accounts. A. Interest on loan A/c B. P's Capital A/c C. Prepaid Wages A/c D. Bad debts A/c E. HDFC A/c

6. BOOKS OF ACCOUNTS
INTRODUCTION: Accounting is an art of recording, classifying and summarizing the financial transactions and interpreting the results thereof. There are specific books of accounts which are used to record and classify the business transactions.

STAGES OF ACCOUNTING: The accounting cycle involves the following stages

1. Recording of transactions

This is done in the book termed as Journal

2. Classifying the transactions:

This is done in the book termed as Ledger

3. Preparing Trial Balance

This is a schedule which shows a list of all debit balance and credit balances of ledger accounts, which match each other.
4. Preparing Final Accounts

This involves preparation of Profit &Loss A/C and balance Sheet

JOURNAL A journal is book of or original entry or primary entry. It is book of daily record first of all the transactions are recorded in the Journal and subsequently they are posted in the ledger. To journalize the transactions means to record in two- fold effects of a transaction in terms of debit and credit. This has to be done by observing the rules of debit and credit. Also a brief explanation of the entry done is transaction executed is given in the bracket just below the entry. It is called Narration.

HOW TO JOURNALIZE THE TRANSACTIONS:

1. First find out the two accounts involved in the transactions i.e. Parties

involved, properties transacted, amounts expressed

2. Ascertain the types of these accounts (i.e. Real, nominal and personal

accounts) then decide by applying rules of debit and credit as to which account is to be debited ad which account is to be credited.

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FORMAT OF JOURNAL JOURNAL Date Particulars L.F Dr.(debit) The date The two aspects It means Ledger In this on which of the transaction folio. The column the The are recorded in transaction amount to Transaction this column i.e. entered in the be debited was entered the details Journal is later is entered is recorded regarding the on posted Here accounts which to the Ledger have to be debited and credited SUBSIDIARY BOOKS (SUB_DIVISIONS OF JOURNAL)

Cr.(credit) In this column the amount to be credited is entered

With the growth of business the number of transaction also increases and there is a need to have a better method of recording business transactions. Also a big business recording of all transactions in one Journal will not only be inconvenient but also cause delay in collecting information required. The journal is therefore sub divided into many subsidiary books. This subdivision results in many advantages namely convenience division of labor, classified information. Sub division of journals (Subsidiary/Day Book) Sr no Subsidiary book/Journal Category of business 1 Purchase Book Credit Purchases of goods only 2 Sales Day book Credit Sales goods only 3 Purchase returns Book All return of good of the (return outward book) suppliers i.e. (returns outwards) 4 Sales return book All goods returned to us by the (return inward book) cutomers(Return Inwards) 5 Cash Book All cash and bank transactions 6 Bills Receivables Book Bills of exchange accepted by customers against purchase of goods 7 Bills payable book bills of exchange drawn up by the supplier on business entity and accepted by the business entity Journal Proper All such transactions which cannot be entered in the above seven books and do not find a place in any primary books (recorded in the journal entries)

JOURNAL PROPER: It records those transactions that do not find place in any of the primary books in the table. It records 1. Credit purchase and sale asset (i.e. No cash payment) 2. Opening entries-At the beginning of an accounting period, the balances of elements appearing the immediately proceeding period are carried forwards with the help of journal entry that is passed in journal proper. Assignments: 1. 2. Journal is a book of original or primary entry: True or false Fill in the blanks: a. A brief description of the transactions written below the journal entry is known as__________ b. A page number of ledger on which debit and credit effect of an account is recorded is known as___________ c. A process of recording business transactions into a journal is known as__________ d. Purchase Returns Book is also called as_______ book e. Invoice for credit sales issued by the company is the document for making entries in the ___________ book.

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7. SECONDARY BOOKS OF ACCOUNTS INTRODUCTION: The main disadvantage of a primary book is that transactions are recorded date wise and not as per their nature. Eg: if you wish to find out the amount spent on salaries in an organization in a particular year, you would have to go through every page of cash book. This would be a time consuming and cumbersome procedure. The basic purpose of accounting is to generate meaningful information in a systematic, properly classified manner. This cannot be achieved with only primary books. This calls for: i) Identifying the nature of various transactions recorded in the primary books. ii) Giving an appropriate name to an identical class of transactions iii) Re-recording the transactions in another set of books according to the defined class. The second book is also called as Ledger. If there are several transactions relating to one account, these appear in different pages in journal as per the dates. However, they will appear in a classified form under that particular account in the Ledger. A Ledger contains a set of accounts as per the requirement of the organization. Specimen of a Ledger: A Ledger is typically written in a 'T' format as follows: Date Particulars J.F. Amount Rs Date Particulars J.F. Amount Rs

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Total

Total

8. RECORDING TRANSACTIONS IN A JOURNAL

INTRODUCTION: We have already seen the rules to be followed for debiting and crediting accounts, while passing journal entries. In journal entries, the word Debit is abbreviated as Dr and the word credit is abbreviated as Cr The account which is to be debited is listed first and the Dr amount entered in the first of the two money columns. Then, the account which is to be credited is listed and the amount entered in second money column. A narration should be written after each journal entry. We will now see how journal entries are to be passed for different transactions 1) Salary to be paid to Mr.Joshi by ABC ltd. Rs 5000/Two accounts are involved a) Salary A/C which is nominal account. Rule for nominal account is: 1. Debit all expenses and losses 2. Credit all gains and incomes Salary is an expense for business, so debit it. Salary A/C ..Dr. b) Cash A/c which is real account. Rule for real account 1. Debit what comes in 2. Credit what goes out Cash has gone out so credit it Cash A/c..Cr. So the journal entry is: Salary A/c Dr.5000 5000 To cash A/c

Pass journal entries for the following( without narrations) 1) Nikhil starts business with a Rs 50000 out of which he deposits Rs 35000 in the bank.. Bank A/C Cash A/C Dr.35000 Dr.15000

To capital A/c 50000

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Assignment 1. Pass journal entries for the following transactions for the month of may 2006 2/5 Bought goods worth Rs. 20,000 for cash 8/5 paid salary Rs 15,000 and advertisements expenses Rs 3500 in cash 14/5 received rent of Rs 2000 in cash

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20/5 bought ICICI Investments of Rs 20,000

9. LEDGER POSTINGS

INTRODUCTION: The process of transferring journal entries to the ledger is known as posting to the ledger. Ledger Posting: It involves the following steps:
a) b) c) d)

In case of simple journal entry, every transaction would affect two accounts One account is debited, while the other is credited It is possible for multiple accounts to be debited or credited The amount of debit and credit must be the same.

Assignment:
1. State whether the following statements are true or false: i)

Ledger is book of original entry

ii) An income of one person is an expense of another iii) Transactions are posted from journal to ledger 2. Fill in the blanks:

A ledger account is known as______________.

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10. TRIAL BALANCE

INTRODUCTION Once the ledger postings have been completed the balances of various accounts are calculated at the end of accounting period. Then, the trial balance is prepared. The trial balance is a statement prepared to test the accuracy of the ledger balances. The Trial Balance is a summary of the balances of every single account on a particular date. As the primary and secondary books are maintained on the double entry book keeping concept, the debit and the credit balances from the trial balance must tally. If the two sides do not match, this means that there is some arithmetical inaccuracy in the books of accounts. The purpose of a trail balance is not only to check arithmetical accuracy of ledger balances, but also to have an overview of the operations of the business as on particular date. A trial balance is not part of the books of accounts. It is drawn up as a separate statement and this becomes the source document for preparing external financial statements like Profit and Loss A/c and the Balance Sheet TRIAL BALANCE AS on_____________ Sr.no 1 2 3 4 5 6 7 8 9 10 11 12 Particulars Bank A/c Capital A/c Machinery A/c Cash A/c Furniture A/c Purchase A/c Sales A/c Investment A/c Brokerage Discount A/c Rent A/c Return Outward A/c Total 62000 3000 20 100 1000 1000 62000 13000 17880 5000 7000 11000 Dr. Rs 15000 5000 Cr.Rs

Basics of Accountancy