CHAPTER 1Meaning and objective of accounting

Meaning Of Account

Definition of account :- Accounting is the art of recording classifying and summarizing in the significant manner and in terms of money transaction and event which are in part at least of the financial character and interpreting the result thereof.

Characteristics of accounting :-

1) Accounting is art as well as science :- Accounting is art of recording classifying and summarizing business transaction with the view of ascertain the net profit and financial position of the business .Any organized body of knowledge which is based on certain specified principle is call science .

2) Recording in the terms of money only :-Each transaction is records in the books of account in the term of money only .

3) Recording of Financial Transaction only :-Only those transaction and event are record in the accounting which are in financial character .

4) Classifying :-After recording the transaction in the journal or subsidiary book the transaction are classified .classification is the Process of grouping the transaction of one nature at one place in the separate account..

5) Interpreting of the result: In accounting the result of the business are present in the such manner (e.g. Trading & Profit Loss a/c and Balance sheet).

6) Summarizing: Summarizing is the art of presenting the classified data in a Mnner which is understandable and use full to management and other users of such data e.g.

Process of Accounting

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Start From

Transaction

Profit & Loss Balance Sheet END

Journal

Ledger

· OBJECTIVE OF ACCOUNTING

1) To calculate profit or loss:-The main object of accounting is to be ascertain the net profit earned or loss suffered on account of business transaction during a particular period.

2) To keep systematic record of business:-The second main objective of accounting is keep complete record of business transaction according to specific rules. Complete record of business help to avoid the possibility of omission and fraud.

3) To ascertain the financial position of business:-For businessman merely (only) ascertaining profit or loss of the business is not sufficient the business man must also now the financial health of the business.

For E.g.: 1.How much recover from debtor

2. How much the business has pay to creditor

3. How much the business has in the cash in hand, cash at bank, closing stock, fixed assets

4) To Prevent and detect errors and frauds.

5) Communicatingaccountinginformationtousers:-Anotherobjectof accounting is to be provide accounting information to users.

e.g. Management, Bank

· ADVANTAGE OF ACCOUNTING

1) Help full management of business:- Management needs a lot of information for the efficient running of the business. E.g.: Helpful in planning, helpful in decision making, helpful in controlling, etc.

2) Information regarding profit and loss:-Accounting report the net result of business activities of an accounting period. The profit and loss prepared at the end of the year disclosed the net profit earn or loss suffered that period.

\3) Information regarding financial position:-Accounting report the financial position of the business by preparing balance sheets at the end of each accounting period. Balance disclosed the assets position and liabilities.

4) Helpful in assessment of tax liabilities:-Properly maintained records will be of a great the firm when firm assessed the income tax or sales tax(vat).

5) Evidence in court:-Systematic record of transactions is often accepted by court as

good evidence.

6) Facilities Loan:-Accounting information is of great help while taking loan from bank and financial institutions.

7) Helpful in prevention and detection of errors and frauds:-Accounting information play role in prevention and detection of errors and frauds.

8) Helps in the Sale of Business: If the business entity is being sold, then the accounting records help to determine the proper purchase price.

· LIMITATION OF ACCOUNTING

1) Incomplete Information:-Accounting statement provides only the incomplete information because the actual profit or loss can be known when the business is closed down.

2) Based in historical cost:-Accounts are prepared on the basis of historical cost original cost and such the figurers in the financial statement do not show effect price level

e.g. land(MARKET PRICE

3)

Affected by window dressing:-Window dressing is refer to practice of manipulation

account so that financial statement may disclosed more favorable position then the actual position.

Unsuitable for forecasting:-Financial account is only record of past events.

· Users of Accounting information &Their Needs or· Parties interested in Accounting Information

These users may be classified by

Internal UsersExternal Users

1. Management1. Bank and financial

Institutions

2. Directors2. Investor (Share holder)

3. Employee and worker3. Creditors

4. Owners4. Government

5. Public

6. Consumer

· USERS OF ACCOUNTING INFORMATION AND THEIR NEEDS

Users

Need for information

1. Short-term creditors [For example, Suppliers of Raw materials/Goods, Suppliers of Short-term Loans]

Short-term creditors need information to determine whether their dues will be paid when due and whether they should extend, maintain or restrict the flow of credit to an individual enterprise.

2. Long-term creditors [For example, Suppliers of Long-term Loans]

Long-term creditors need information to determine whether their principals and the interest thereof will be paid when due and whether they should extend, maintain or restrict the flow of credit to an enterprise.

3. Present investors

[For Example, Shareholders]

Present investors need information to judge prospects for their investment and to determine whether they should buy, hold or sell the shares.

4. Potential Investors [For Example, those who want to invest]

Potential investors need information to judge prospects of an enterprise and to determine whether they should buy the shares.

5. Management

Management need information to review the firm's

(a) Short-term Solvency, (b) Long-term Solvency,

(c) Activity (viz., Effective Utilisation of its Resources), (d) Profitability in relation to turnover,

(e) profitability in relation to Investments and to decide upon the course of action to be taken in future.

6. Employees

Employees and their representative groups are interested in information about the stability and profitability of the employers. They are also interested in information which enables them to assess the ability of the enterprise to pay remuneration, retirement benefits and to provide promotion opportunities.

7. Tax Authorities

Tax authorities need information to assess the tax liabilities of an enterprise.

8. Customers

Customers have an interest in information about the continuation of an enterprise, especially when they have established a long term involvement with, or are dependent on, the enterprise

(Different /Distinguish between Keeping and Accounting)

Bases

Book Keeping

Accounting

1. Scope

Book keeping is the connecting with identifying financial transaction, measuring them in

money terms.

Accounting is the concern with summering the recorded transitions interpreting them

communication the result.

2. Stage

It is primary stage.

It is secondary stage it being

where book keeping end

3. Objective

The objective of the book keeping is to maintain systematic records of financial transitions.

The objective of the accounting is to ascertain net result and the financial position of the

business and communicate to interested parties.

4. Performance

Junior staff is performing this

function

SeniorStaffperformsthis

function

5. Special Skills

6. Designing of Accounting System

Book keeping is the mechanical in nature and thus not required special skills.

It does not cover designing of accounts system.

Accountingrequired special skills and ability to analyses and interpret.

It covers designing of accounting system.

7.Knowledge Level

The book-keeper is not required to have higher level of knowledge than that of an accountant.

The accountant is required to have higher level of knowledge than that of book-keeper.

BRANCHES OF ACCOUNTING

Economic development and technological improvements have resulted in large-scale business operations. In order to keep pace with the changing business scenario, different branches of accounting have emerged and getting developed over the period of time. The main branches are:

BRANCHES OF ACCOUNTING

Financial Accounting

Cost Accounting

Management Accounting

(Deals with Maintenance of Books of

(Deals with accounting which is concerned

(Deals with accounting which is

Accounts to Determine Profitability and

with controlling the cost of products

concerned with decision-making

Financial Position of the Business)

manufactured or services rendered)

process of management)

1. Financial Accounting: Financial Accounting is that branch of accounting which involves identifying, measuring, recording, classifying, summarizing, analyzing, interpreting and communicating the financial transactions. This branch of Accounting is primarily concerned with the systematic maintenance of books of accounts and providing financial information to the users of accounting information.

It aims to:

• Determine Financial Performance, i.e. Profitability of the business by preparing Trading and Profit and Loss Account (or Statement of Profit and Loss); and

• Ascertain Financial Position of the business by preparing Balance Sheet.

Due to inability of Financial Accounting in providing information about cost of products or services, resulted in the development of a specialized branch, known as 'Cost Accounting'.

2. Cost Accounting: Cost Accounting is that branch of accounting which is concerned with the process of accounting and controlling the cost of products manufactured or services rendered by the business enterprise.

It aims to ascertain the cost of product or services in order to enable the management to fix the selling price and exercising controls.

3. Management Accounting: Management Accounting is that part of accounting which is concerned with the decision-making process of the management. Various tools like Ratios and Cash Flow Statements are used for this purpose.

Its main aim is to provide all the relevant information to the management that may be required to take decisions in respect of various aspects of running the business enterpris

CHAPTER 2

1) Capital: - It refers to the amount invested by the proprietor or owner in a business or enterprise. It is the amount with the help of which goods and assets are purchased in the business, called as capital.

2). Drawing: -Any cash or value of goods withdrawn by the owner for personal use or

any private made out of business funds are called drawings.

3) Purchase: -The term purchases is used only for the purchase of ‘Goods’ in which the business deals, in case of a manufacturing concern goods means acquiring of raw material for the purpose of conversion into finished product and then sale. In case of trading concern ‘goods’ are those things which are purchased for resale. In both the case the purpose is to make a profit by its resale.

The term purchases included both cash purchases and credit purchases of goods.

4). Purchase Returns:-When purchase goods are returned to the suppliers these are known as purchase returns . Such returns are also termed as ‘returns outwards’.

5) Sale: -The term ‘sale’ is used only for the sale of those goods which are purchased for resale purpose. It also includes revenue from services provided to customers. The term ‘sale’ is never used for the sale of assets. For example, if a cloth dealer sells cloth, it will be termed as sales, but if the same cloth dealer sells old furniture or a typewriter, it will not be termed as sale.

The term sale includes both cash and credit sales.

6) Sales Returns: - Some customers might return the goods sold to them. These are termed as sales returns or ‘returns inwards’.

7.) TRADE RECEIVABLES. The term Trade Receivables' include Trade Debtors and

Bills Receivables.

1. Debtors/Receivable: -The term ‘Debtors’ represents those persons or firms to whom goods have been sold or services rendered on credit basis and payment have not been received from them. They still owe some amount to the business. For example , if goods worth Rs. 10,000 have been sold to Mohan on Credit, he will continue to remain the debtor of the business so long as, he does not make the full payments.

2.Bill Receivables:- A bill of exchange is an unconditional order in writing given by the creditor to the debtor to pay on demand or at a fixed or determinable future time, a certain sum of money to or to the order of a specified person or to the bearer. This bill of exchange is known as Bills Receivable for the creditor.

8) Trade Payables;- The term Trade Payables' include Trade Creditors and Bills Payables.

1.Creditors/Payable: - The term ‘Creditors’ represents those person or firms from whom goods have been purchased or services procured on credit basis and payment has not been made to them. Some money is still owing to them, for ;

example, if goods worth RS. 5,000 are purchased from Govind on Credit, he will continue to remain the creditor of the firm so long as, the full payment is not made to him.

2. Bills Payable: - A bill of exchanges becomes bill payable for the person who acceptsit (drawee) and return it to the drawer. Thus bills payable is an accounting term for bills of exchanges accepted in favour of creditors. The amount specified in such a bill is payable at a future date. Bills payable are current liabilities

9) Entry: when a transaction or event is recorded in the books of accounts, it is called ‘entry’.

10) Bad Debts: - it is the amount that has become irrecoverable from a debtor. It is a business loss and is debited to Profit & Loss Account as an expense.

11) Insolvent: A person or an enterprise which is not in a position to pay its debts is called insolvent.

12) Solvent: -A person or an enterprise which is in a position to pay its debts is called solvent.

13) Stores: - The term ‘stores’ is used to denote materials held by an enterprise for the purpose of consumption in the business and not for resale. Example are lubricants, spare parts of machinery, packing materials etc.

14) Revenue: - Revenue in accounting means the income of a recurring (regular)nature from any source. It consists of the amount received from sale of goods and from service provided to customers.

15) Outstanding expenses:-Expense which have been incurred during the year but not paid for yet are called outstanding expenses.

16) Prepaid expenses:-In some cases the benefit of the amount already spent will be available in the next accounting year such part of the expenses called as prepaid expenses or unexpired expenses.

17) Accrued income:- Accrued income is that income which has been earned during the accounting period but not has been received till and of accounting period called as accrued income or outstanding income.

18) Income received in advance:- Some time an amount is received during a year in respect of an income that related to the next year called as income received in advance or unearned income.

19) Bank overdraft:-Bank overdraft is a drawing out of bank account more than what has been deposit in it.

20) Petty cash book:-Petty cash book is the cash in which expenses involving small amount are recorded.

21) REVENUE :- The term 'revenue' refers to the amount charged for the goods sold or services rendered, or permitting others to use enterprise's resources yielding Interest, Royalty, and Dividend. For example, Sales, Commission earned, Interest earned, Royalty earned, Dividend earned.

22) Income:-Income is the profit earned during a period .In other word the difference between revenue and expenses is termed as income .it is border termed then the termed profit and include profit from activities other then it’s operating activities for example goods costing 15000 are sold for 21000 the cost of good sold 15000 is expenses the sales of goods Rs 21000 is revenue and difference 6000 is the income .

23) Profit: -profit mean income earned by the business from its operating activities the activities carried out by the enterprises (business) to earn profit . and profit is further divided into gross profit and net profit .

24) Gain: - It is a monetary benefit, profit or advantage resulting from events or transactions which are incidental to business such as sale of fixed assets, winning a court case.

25) Loss: - The term conveys two different meanings. First, it convey the result of the business for a period when total expenses exceed the total revenues, for example. If revenue are Rs. 1,00,000 and expense are Rs. 1,20,000, the loss will be Rs. 20,000 .

26) Voucher:-The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash, we get cash memo, if we buy on credit, we get an invoice; when we make a payment we get a receipt and so on.

27) Goods: -Goods include all those things which are purchased for resale or which are used for producing the finished products which are also meant to be sold. FOR example, for a furniture dealer purchase of chairs and tables is termed as goods, while for others it is furniture and is termed as an asset, similarly, for a stationery trader, stationery is goods, whereas for others it is expense.

(28) Discount: -it is a rebate or an allowance given by the seller to the buyer. It is of two types.

(i) Trade Discount: - when discount is allowed by a seller to its customers at a fixed percentage on the list or catalogue price of the goods it is called trade discount. It is not recorded in the books of accounts as it is deducted in the invoice or cash memo itself from the gross value of goods.

(ii) Cash Discount: - When discount is allowed to the customers for making prompt payment it is called cash discount. For example, if a seller allows 2% discount for payment within a week it will be called discount. It is always recorded in the books of accounts.

Difference between Trade Discount and Cash Discount

Trade Discount

Cash Discount

1.

It is allowed if a certain quantity is

1.

It is allowed if payment is made

with

purchased.

in certain period.

2.

It is allowed to increase the sales.

2.

It is allowed to get prompt payment

from customer.

3.

It is deducted from the invoice itself.

3.

It is not deducted from the invoice.

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4.

It is not recorded in the in the books

4.

Cash discount allowed & received

of accounts or ledger accounts.

both are recorded in their ledger

accounts.

29) Expenditure: - Any disbursement of cash or transfer of property or incurring a liability for the purpose of acquiring assets, goods or services is called expenditure. It means that any type of payment for the receipt of benefit is termed as expenditure. Expenditure may be classified into three categories: (1) Capital expenditure, (2) Revenue expenditure and (3) Deferred revenue expenditure.

1) Capital Expenditure: Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure. As such, the amount spent on the purchase

or erection of Building, Plant, and Furniture etc. is capital expenditure. Such expenditure yields benefit over a long period and hence written in Assets.

1. Meaning

It is an expenditure which is incurred:

(a) to acquire or bring into existence an asset, or

(b) to acquire or bring into existence an advantage or benefit of an enduring nature, or

(c) to increase the productivity or earning capacity.

2. Benefits

It normally yields benefits beyond current accounting period.

3.Accounting Treatment

It is debited to the Respective Asset Account.

4. Examples

(a) Cost of Land and Building

(b) Cost of Plant and Machinery

(c) Cost of Furniture and Fixtures

2) Revenue Expenditure: -Any expenditure, the full benefit of which is received during one accounting period is termed as revenue expenditure. As such, al the revenue expenditure are debited to Trading and Profit & Loss Account. Such expenditure does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity. It also does not bring into existence assets of an enduring nature.

3) Deferred Revenue Expenditure: - There are certain expenditure which are revenue in nature but the benefit of which is likely to be derived over a number of years. Such expenditure are termed as ‘Deferred Reve4nue Expenditure”. The benefit of such an expenditure generally last between 3 to 7 years. As such, the whole of such expenditure is not debited to the Profit & Loss Account of the current years but spread over the years for which the benefit is likely to last.

Example

Heavy advertising to launch a new product is a deferred revenue expenditure since the benefit from it will be availed over the next 3 to 5 years.

Accounting Treatment

Normally such expenditure should be written off over a period of 3 to 5 years.

30 )Expense: -Expense is the cost incurred in producing and selling the goods and services.

Following are included in the terms Expense: -

1. Cost of goods sold.

2. Amount paid for Rent, Commission, Salary, Advertisement etc.

3. Decline in the value of an assets caused by the use of such assets for business purpose or depreciation is also an expense.

31) Liability: Liabilities refer to the financial obligations of an enterprise other than owner's funds. Liabilities may be broadly classified as follows:

· LIABILITIES ON THE BASIS OF PERIOD

1. Current Liabilities — Current liabilities refer to those liabilities which i are expected to be settled either within the Operating Cycle Period or within the 12 Months Period from the date of the Balance Sheet. For example, 1. Short-Term Borrowings, 2. Trade Payables, 3. Other Current Liabilities, 4. Short-Term Provisions.

2. Non-Current Liabilities — Non-Current Liabilities refer to those liabilities which are expected to be settled after 12 months from the date of Balance Sheet or after Operating Cycle which ever is latter. For example, 1. Long-term Borrowings, 2. Other Long term Liabilities, 3. Long-term Provisions.

· LIABILITIES ON THE BASIS OF SOURCE

1. Internal Liabilities: Internal Liabilities refers to the financial obligations of an enterprise towards owners.

2. External Liabilities: External Liabilities refer to the financial obligations of an enterprise towards outsiders.

32).Assets: - “Assets are future economic benefits, the rights of which are owned or controlled by an organization or individual.”

Assets may be classified into the following categories:-

(i) Fixed Assets:- Fixed assets refer to the those assets which are held for continued use in the business for the purpose of producing goods or services and are not meant for resale. Example of fixed assets are :-

Land and building, Plant and Machinery, Motor Vehicles, Furniture etc.

(ii) Current Assets: - Current assets are those assets which are meant for sale or which the management would want to convert into cash within one year. As such, these assets are also termed as Short lived or active assets’. For example, ‘Debtors’ are expected to be converted into cash within a reasonable short period,

(iii) Tangible Assets: - Tangible assets are those assets which can be seen and touched. In other words, which have a physical existence such as Land,

Building, Plant, Furniture, Stock, Cash etc

(iv) Intangible Assets; - Intangible assets are those assets which do not have a physical existence and which cannot be seen or felt. Examples of such assets are Goodwill, Patents, Trade Marks and Prepaid Expenses.

(v) Liquid assets: - liquid assets are those which are either in the form of Cash or can be quickly converted into cash. Such as cash, Bills, Receivable, Short Term Investments, Debtors, Accrued Income etc. In other words, if Prepaid Expense and closing Stock are excluded from Current Assets, the balance will be Liquid Assets.

(vi) Fictitious or Nominal Assets:- These are the Assets which cannot be realized in Cash or no further benefit can be derived from these assets. Such assets include Debit balance on P & L A/c and the expenditure not yet written off such as Advertisement Expenses.

33). Capital Receipt and Revenue Receipt: -It is also necessary to make a proper distinction between capital receipts and revenue receipts because the revenue receipts are shown on the credit side of Trading and Profit & Loss Account whereas the capital receipts are shown in the Balance Sheet either as increase in liabilities or as reduction in the value of the assts

1.Capital Receipts:

Meaning

Capital receipts refer to those receipts which are not revenue i in nature.

Accounting Treatment

These are credited to the respective account of capital nature.

Examples

(a) Sale of Land and Building by a person other than a dealer in real estate.

(b) Raising of Loan by a person other than one engaged in the business of finance/banking.

(c) Raising of Capital.

2 Revenue Receipts:

Meaning

Revenue receipts refer to those receipts which arise in | the normal course of business.

Accounting Treatment

These are credited to Respective Revenue Account.

Examples

(i) Money obtained from sale of goods.

(ii) Commission and fee s received for services rendered.

(iii) Interest and dividend received on investments.

(34) Stock or Inventory: - The term ‘stock’ includes the value of those goods which are lying unsold at the end of accounting period. The stock may be of two types:-

(i) Opening stock, (ii) Closing stock.

i) The term ‘Opening stock’ means the value of goods lying unsold at the beginning of the accounting period

ii) whereas the term ‘Closing stock’ means the value of goods lying unsold at the

end of the accounting period.

Types of Stocks: - In case of a manufacturer, there can be opening and closing stock of three types.

i) Stock of Raw Material: -It includes stock of raw materials purchased for using them in the products manufacturing but still lying unused. For example, the value of cotton is case of cloth mills in the stock of raw materials.

ii) Stock of work in progress: - it is also termed as stock of partly finished goods. It means goods in semi-finished form. Such goods need further processing for converting into finished products.

iii) Stock of Finished Goods: -It includes the stock of those goods which have been completely processed and are ready for sale but are lying unsold at the end of the accounting period.

· Classification of accounts :

1. Traditional Approach (English Approach)

Under this approach, accounts are classified into two groups as shown below:

Traditional Classification of Accounts

Personal Accounts

Impersonal Accounts

Natural Personal Accounts

Artificial Personal Accounts

Representative Personal Accounts

Real

Accounts

Nominal

Accounts

Personal accounts :Accounts recording transactions relating to individuals(HE,SHE) or firms or company are known as personal accounts. It records a trader’s dealings with persons or firms. A separate account is opened for each such person or firm and by recording therein particulars of all transactions in cash, goods etc.

Real Accounts :“Real account is also known as Property Account. It records

dealing in or with property, assets or possessions. A separate account is kept for each class of property, such as Cash, Stock, Plant, Machinery, Furniture, etc.,

Nominal Accounts :The accounts recording transactions relating to the losses, gain, expenses and incomes e.g., rent, salaries, wages, commission, interest, bad debt etc., are nominal accounts.

RULES OF DEBIT AND CREDIT (CLASSIFICATION BASED)

(1) Personal Accounts :Debit the receiver

Credit the giver (supplier)

(2) Real Accounts : Debit what comes in

Credit what goes out

(3) Nominal Accounts :Debit expenses and losses

Credit incomes and gains

· Modern or American Approach :

According to the American Approach of Accounting all accounts are divided into five categories for the purpose of recording the transactions:

A. Assets Accounts

B. Liabilities Accounts

C. Capital Accounts or owner’s Equity Account

D. Expenses/Losses Accounts

E. Incomes/Gains Accounts

· These rules are summarized as follows:

1. Increase in asset= Debit

Decrease in Asset=Credit

2. Increase in Liability=Credit

Decrease in Liability= Debit

3. Increase in Capital=Credit

Decrease in Capital= Debit

4. Increase in Expense or loss = Debit Decrease in Expense or loss = Credit

5. Increase in Income= Credt

· Double Entry Book Keeping System

Business transaction is recorded in the books of accounts on the basis of double entry system. This system of accounting, was invented by ‘Fra Lucas pacioli’ (1494) of Italy in Venice but developed in England. The system is based upon the fact that there are two aspects of every business transaction.

Characteristics of Double Entry System:

a) Every business transaction effects two accounts

b) Every account is divided in two parts

c) Division of amounts column

d) Dual aspect of every transaction

e) Based upon accounting concepts and conventions

f) Preparation of final accounts

Advantages of double entry system

a) Complete record of every transaction

b) Reliable information at a glance

c) Scrutiny and verification of information

d) Knowledge of gross profit or loss

e) Knowledge of net profit or loss

f) Knowledge of assets and liabilities of the business

g) Comparative studies

h) Detection of fraud

Disadvantages of double entry system

a) Errors of omission

b) Errors of principle

c) Compensating errors

· Compound Journal Entries

Sometimes a particular transaction involves more than two accounts. Many transactions are related to specific account on a particular date. These may be certain transaction of the same nature on a certain date. In these cases, we prefer to pass only

one entry instead of passing two or more entries. Such entries can be passed in either of the following three ways :

(a) By debiting one account and crediting two or more accounts.

(b) By crediting one account and debiting two or more accounts.

(c) By debiting two or more accounts and crediting two or more accounts.

Meaning of Journal : Journal may be defined as the book of original entry in which every business transaction is recorded in a systematic manner for the first time. The record of transactions in journal is made in chronological order or in order of date.

Process of recording the transactions in journal is known as “journalizing”.

FormatIn the books of ab Journal entries

Date

Particulars

L.F

Debit Rs.

Credit Rs.

· ADVANTAGE OF JOURNAL

a) Transactions recorded date–wise with explanation

b) Process of classification at convenience–

c) Ensures that double entry rules have been following–Each transaction before recorded in journal is an analyzed for the aspects involved.

d) Reliable evidence

e) Sub–division enables division of labor

f) Detection of arithmetical

LIMITATION OF JOURNAL

(1) The journal will be, too , long if all transactions are recorded there.

(2) Firms may like to asserting the cash balance with it everyday. Hence, they usually record cash transactions directly in a separate book.

(3) By recording different classes of transactions in different books, book keeping and accounting becomes easier and systematic.

Entity:- Entity means a thing that has a definite individual existence. Business entity means a specifically identifiable business enterprise like Super Bazaar, Hire Jewelers’, ITC Limited, etc. An accounting system is always devised for a specific business entity (also called accounting entity).

Transaction :-A event involving some value between two or more entities. It can be a purchase of goods, receipt of money, payment to a creditor, incurring expenses, etc. It can be a cash transaction or a credit transaction.

Meaning of ledger folio:-The ledger allows you to do this, because each page, or folio, represents a different account number. The ledger folio number is therefore the page number of the account. One column in the ledger may be the journal folio number.

CHAPTER-3Accounting Concept Or Assumption

1) Going concern concept:-This concept assumes that an business has indefinite life or existence .it is assumed that the business has neither intention to liquidate (closed) nor to scale down………………. its operations significantly. Eg. Machine purchase for Rs. 200000 and its estimated useful life says 10 year for ascertaining the profit and loss.

Relevance

1. that the assets are classified as Current Assets and Fixed Assets.

2. that the liabilities are classified as Short-term Liabilities and Long-term liabilities

2) Consistency Concept:- This concept states that accounting principal and method should remain consistent………….. from one year to another. This will ensured……….. a meaning full study of the performance of the business for a number of year

Consist assumption does not mean that particular practice once adopted cannot be change. The only requirement that when is changed is desirable………… it should be fully disclosed in the financial statement along with its effect on income statement and balance sheet Eg. firm can choose any one of the several methods of depreciation like SLM or WDV.

Relevance :- It help that management indecision making by utilizing the comparable financial information

3) Accrual Concept:- According to the Accrual Assumption, revenue and expenses are recorded in the period in which they become due, rather when they are received or paid.

• According to this assumption, a transaction is recorded in the books when it is entered into and not when the settlement takes place. It means:

° Revenue is recorded when sales are made or services are rendered, irrespective of the fact whether cash is received or not. For example, if a firm has sold goods on 27th June, 2015 on 2 months credit, then the sale must be recorded on 27th June, 2015, although the amount will be received in August.

° Similarly, expenses are recorded in the period in which they have become due rather than in the period in which they are paid.

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ACCOUNTING PRINCIPLE

1) Business entity/Accounting entity :-An entity has a separate existence…………. from its owner according this principle business is treated as entity...................... which is separate and distinct……………… from its owner there fore transaction are recorded and financial statement are prepared from the business point of view not of the owner .

the owner is treated as a creditor (internal liabilities ) for his investment in the business as if the firm has borrowed……………. from its owner instead………….. of outside parties .interest n capital is treated as expenses like any other business expenses and his private expenses treated as drawing leading to reduction in capital .

2) Money Measurement: According to this principle only those transactions that are measured in money or can be expressed…………. in termed of money are recorded in the books of account of enterprises (business) Non –monetary transaction event like death of any employee/manager ,strike ,dispute etc. are not recorded at all even though these also effect the business operations significantly

Limitation :-

1) It ignore qualitative aspect for e.g. Efficient of human resource (Asset) satisfied customer (assets ) and dishonest employee (liabilities )

3) 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 period and what exactly is the position of its assets and liabilities at the end of that period. Such information is required by different users at regular interval for various purposes, as no firm can wait for long to know its financial results as various decisions are to be taken at regular intervals on the basis of such information. The financial statements are, therefore, prepared at regular interval, normally after a period of one year, so that timely information is made available to the users. This interval of time is called accounting period.

The Companies Act 1956 and the Income Tax Act require that the income statements

should be prepared annually. However, in case of certain situations, preparation of interim financial statements become necessary. For example, at the time of retirement of a partner, the accounting period can be different from twelve months period. Apart from these companies whose shares are listed on the stock exchange, are required to publish quarterly results to ascertain the profitability and financial position at the end of every three months period.

4) Principle of full discloser:-According to this principle apart from legal requirement all significant and material information relating to the economics affairs of the entity should be completely disclosed in its financial statement and accompanying (prepare )to account.

The financial statement should act as means of conveying(massage) and not concealing the information discloser of information in result in better understanding and the parties may be able to take sound decisions on the basis of information provided

For Eg , change in the accounting policy ,market value of investment ,

5) Principle of materiality:-Discloser of all material fats compulsory but it does not imply(meaning) that even those figures which are irrelevant are to be included in financial statement .According to this principle only those item or information should be disclosed that have material effect or being irreverent to user need not be disclosed separately may be merge other items

If the knowledge of information my affect the user decision it is termed as martial information .it should be noted that an item material for one enterprise may not be material another enterprises .

Eg. Amount spent 25,000 rests is material for enterprise having turnover 1,25,000 rest but is not material and enterprise having turnover 1,50,00,000 rest.

6) Principle of conservatism or produce:- The Prudence Principle is many a time described using the phrase…………… ''Do not anticipate a profit, but provide for all possible losses." In other words, it takes into consideration all prospective……………… losses but not the prospective profits. The application of

this concept ensures that the financial statements present a realistic picture………………. of the statement of affairs(Balance sheet) of the enterprise and do not present a better picture than what it actually is. For example, valuation of closing stock at cost or market value whichever is lower , making provision for doubtful debt etc

7) Cost principle or historical principle:- According to the Cost Concept, an asset is recorded in the books of accounts at the price paid to acquire…………… it and the cost is the basis for all subsequent…………….. accounting of the asset. Asset is recorded at cost at the time of its purchase but is systematically………….. reduced in value by charging depreciation. The market value of an asset may change with the passage of time but for accounting purposes it continues to be shown in the books of accounts at its book value (i.e., cost at which it was purchased minus depreciation provided up-to-date). For example, an asset is purchased for Rs.5,00,000 and if at the time of preparing the final accounts, even if its market value is say, Rs.4,00,000 or Rs.7,00,000, yet the asset shall be recorded at its purchase price of Rs.5,00,000.

8) Matching principle:- According to this principle, expenses incurred in an accounting period should be matched with the revenues recognised in that period.

• Profit earned by a business during a period can be correctly measured only when the revenue earned during the period is matched with the expenditure incurred to earn that revenue. Such matching of revenue with expenses is based on accrual system of accounting.

• Following are the points that should be kept in mind for matching cost with revenue:

° When an item of revenue is included in the Profit and Loss Account, then all the expenses incurred, whether paid or not, should be shown as expenses in the Profit and Loss Account. It means, if there is any outstanding expense, then will be shown in the Profit and Loss Account.

° If an expense is paid during an accounting period, but revenue related to it will be earned in the following period, then such expense will be shown as an expense only next year and not this year. For example, Prepaid Insurance. Such prepaid expense is shown as an asset in the Balance Sheet.

° In the same manner, if a revenue is received, but against it services will be rendered next year, then revenue will be also recognised in the next year and will be shown as a liability in the Balance Sheet. For example, Advance Income.

9) Revenue Recognition Principle

According to this principle, revenue must be recognised when a transaction has been entered into and the obligation to receive its payment has been established.

• It is very important to decide the point of time when revenue can be assumed to have been recognised as revenue recognised is only considered for computation of profit.

• Example: Suppose a firm sells goods in January 2015, but receives the amount in March 2015. As per the principle of revenue recognition, revenue from this sale should be recognised in January 2015 itself as the legal obligation to pay the amount has been established on this date. However, if the firm had received only an advance in January 2015 for sale of goods in April, 2015, then revenue from this sale shall be recognised in April, 2015.

10) Verifiable Objective Concept

According to this concept, all transactions should be recorded in an objective manner and they should be free from personal bias.

• It implies that all accounting transactions should be supported by documentary evidence or vouchers.

• These supporting documents include cash memo, invoices, bills, etc.

• For example, cash purchase of goods should be supported by a Cash Memo and credit purchase by an invoice.

11) Dual aspect principle:-According to this principle every business transaction has two aspects - a debit and credit of equal amount .in other word for every debit there is a credit of equal amount in one or more accounts and vice-versa…………………… The system recording transaction based on this principle is called as double Entry system

Due to this principle two side of the balance sheet are always equal .

Eg. Assets= Liabilities + Capital

· MEANING OF ACCOUNTING STANDARDS

The Accounting Standards are a set of guidelines, i.e., Generally Accepted Accounting Principles, issued by the accounting body of the country such as The Institute of Chartered Accountants of India, that are followed for preparation and presentation of Financial Statements

Kohler has defined Accounting Standards as, "a code of conduct imposed on an accountant by custom, law and a professional body."

· OBJECTIVES OF ACCOUNTING STANDARDS

Objectives of Accounting Standards are:

1. Minimize the diverse accounting policies and practices with the aim to eliminate them to the extent possible.

2. Promote better understanding of financial statements.

3. Understand significant Accounting Policies adopted and applied.

4. Facilitating meaningful comparison of financial statements of two or more entities. 5.Enhancing reliability of financial statements.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) Introduction

Globalization integrates………. the national economies into the international economy through trade, foreign direct investments, capital flow, etc. In this age of globalization and technology, enterprises are carrying on businesses worldwide. We also understand that accounting is the language of business. Thus, business enterprises around the world should not be speaking different languages while sharing financial information. Therefore there is a need of single set of accounting standards that can unify the accounting practice worldwide. It is difficult to understand and compare worldwide financial information without a common set of accounting and financial reporting standards, The use of a single set of high quality accounting standards would facilitate investment and other economic decision across borders, increase market efficiency, and reduce the cost of capital. Thus, International Accounting Standards (IAS) were developed, which are being withdrawn or superseded by International Financial Reporting Standards (IFRS).

Assumptions in IFRS The underlying assumptions in IFRS are:

1. Accrual Assumption: The transactions are recorded in the books of accounts on accrual basis, i.e., as and when they occur and not when the settlement of transactions takes place.

2. Going Concern Assumption: It is assumed that the life of the business is infinite, i.e., the entity will continue its operations for an indefinite period.

3. Measuring Unit Assumption: Measuring unit for valuation of capital is the current purchasing power. It means assets should be reflected at current, i.e., fan-value.

4. Constant Purchasing Power Assumption: Constant purchasing power means value of capital be adjusted to inflation in the economy at the end of the financial year.

CHAPTER-4BASIS OF ACCOUNT

1. Cash Basis of Accounting:- It is a system of accounting according to which transactions are recorded in the books of accounts when cash is received or paid. Advantages: Advantages of Cash Basis of Accounting are:

(i) It is a simple basis of accounting as adjustments for outstanding expenses, prepaid expenses, accrued income and income received in advance is not made.

(ii) This approach is more objective as very few estimates and judgments are required.

(iii) This basis of accounting is suitable for those enterprises where most of the transactions are on cash basis.

Disadvantages: Disadvantages of Cash Basis of Accounting are:

(i) It does not give a true and fair view of the profit or loss and the financial position of an enterprise because it ignores outstanding and prepaid expenses and accrued income and income received in advance.

(ii) It does not follow the matching principle of accounting.

(iii) This system does not distinguish between capital and revenue items and, as result, there is no consistency in the profits of the two years.

2. Accrual Basis of Accounting It is a system of accounting according to which transactions are recorded in the books of accounts when transaction is entered into irrespective of cash having been received or not.

Advantages: The advantages of Accrual Basis of Accounting are:

(i) It is more scientific compared to Cash Basis of Accounting and hence is preferred by accountants.

(ii) This basis of accounting shows a complete picture of financial transactions of the business as it takes into account the effect of all transactions relating to a period as

well as adjustments like outstanding expenses, prepaid expenses, accrued income and income received in advance.

(iii) It reflects true profit or loss during the accounting period and. therefore, has wide acceptability. This system is followed by most of the industrial and commercial firms.

Disadvantages: The disadvantages of Accrual Basis of Accounting are:

(i) This system is not as simple as Cash Basis of Accounting.

(ii) The accounting process is too elaborate.

Sr.

No.

Basis

Accrual basis accounting

Cash basis accounting

1.

Record of

Transaction

Both cash and credit

transaction are recorded

Cash transactions are

recorded

2.

Profit & Loss

Correct profit or loss is ascertained because it record cash and credit transaction

Correct profit or loss is not ascertained because it record only cash

transaction

3.

Technical knowledge

The accrual basis of accounting required technical knowledge as many adjustment like prepaid outstanding are

required is to be made

It does not require much of technical knowledge as is required cash basis accounting

4.

Acceptability

Accrual basis accounting more acceptable in the business

Cash basis account is not more acceptable in the

business

5.

Reliability

Accrual basis accounting is more reliable as it record cash and credit transaction and find correct profit and loss

Cash basis of accounting is not more reliable as it record only cash basis of account and not ascertain

correct profit and loss

((iii)A quick appraisal of the profit/loss is not possible because many adjustments are required to ascertain the true financial position of the business.)

· Difference between accrual basis of accounting and cash basis of accounting

CHAPTER 5 GOODS AND SERVICES TAX (GST)

LEARNING OBJECTIVES

□ Meaning

□ Objectives of Goods and Services Tax (GST)

□ Classification of Goods and Services Tax (GST)

· Central GST (CGST)

· State GST (SGST) or Union Territory GST (UTGST)

· Integrated GST (IGST)

MEANING OF GOODS AND SERVICES TAX (GST)

Goods and Services Tax (GST) is a comprehensive indirect tax levied at the prescribed rate on every supply, i.e., sale of goods and/or services except on petroleum and alcohol for human consumption. Supply of goods means sale of goods whereas supply of services means rendering of services.

OBJECTIVES OF GOODS AND SERVICES TAX (GST)

1. Developing Common National Market: GST is levied at same rate on similar goods and services in all the states and Union Territories. For example, Mobile Phones sold across India are levied GST (say) @ 18%. It sets a ground for developing common national market.

2. Ease of Doing Business: In the pre-GST period, there were many indirect taxes administered by different authorities. As a result, a business had to register itself separately under each such Act and also had to comply with each such indirect tax. For example, Excise Duty, Sales Tax and Service Tax etc. were separately administered. The introduction of GST has eased the going of business as it will be registered and administered only under one indirect tax, i.e, GST. Hence, ease of doing business.

3. No Cascading Effect of GST: GST Paid (Input GST) on purchases of goods and/or services is set off against GST Collected on Sale of goods and/or services. As a result, GST is levied on the difference between sale value and purchase value. In effect, GST does not have cascading effect.

4. To Simplify Indirect Tax Regime by having one Tax and Fewer Rates of Taxes: GST has replaced many indirect taxes (Excise Duty, Sales Tax, Service Tax etc.). The earlier indirect tax regime had been complex both for the Government and business. Since, GST has replaced almost all indirect taxes, it simplifies the application and administration of indirect taxes.

5. Better Tax Management: GST, being administered through computer system besides it being a single indirect tax, has resulted in better tax management as tax evasion is controlled besides timely collection of tax. For example, credit for Input GST is granted if the tax payer collecting GST has paid the tax in Government Account.

6. Goods becoming cheaper: Since GST Paid (Input GST) is set off against GST Collected (Output GST), GST does not have cascading effect as against earlier years when there was no set off of indirect taxes (e.g. Excise Duty) paid against indirect taxes collected. As a result, goods and services shall become cheaper.

7. Attracting Foreign Investors: Investments from outside India were not high because of multiple indirect taxes. Introduction of GST and removal of multiple indirect taxes shall increase Foreign Direct Investment (FDI) in India.

8. Uplifting GDP: The structure of GST is such that it is levied at every stage of sale of goods and/or services. It means businesses will be largely through recorded transactions resulting in increase in tax collection by the Government due to recorded sales resulting in uplifting GDP.

Every State and Union Territory has its own Central GST Act and State GST Act. For example, Delhi will have its own Central GST’ (CGST) Act and Delhi GST (DGST) Act. Similarly, Tamil Nadu will have Central GST (CGST) Act and Tamil Nadu GST (TNGST) Act. Central Government has Integrated GST Act (IGST) but for the purpose of better and clear understanding, GST is discussed as CGST, SGST and IGST instead of discussing GST for each state separately.

CLASSIFICATION OF GOODS AND SERVICES TAX (GST)

GST is levied under following three categories:

1. Central GST (CGST)

CGST is levied on intra-state supply (i.e., supply within the state) of goods and/or services or both along with SGST. In case of intra-state supply (sale) both CGST and SGST (or UTGST) is levied at half of the prescribed rate of tax. For example, if rate of GST is 18%, 9% will be levied as CGST and 9% as SGST (or UTGST).

2. State GST (SGST) or Union Territory GST (UTGST)

SGST (or UTGST) is also levied on intra-state supply (i.e., supply within the state) of goods and/or services or both along with CGST. In case of intra-state supply (sale) both SGST (or UTGST) and CGST is levied at half of the prescribed rate of tax. For example, if rate of GST is 18%, 9% will be levied as CGST and 9% as SGST (or UTGST).

Therefore, technically SGST cannot be levied in a Union Territory without legislature. This applies to the following Union Territories of India:

1. Chandigarh

2. Lakshadweep

3. Daman and Diu

4. Dadra and Nagar Haveli

5. Andaman and Nicobar Islands

6. Leh Ladakh

Levy of GST

Sale\

Purchase

Sale

Purchase

Intra-state or\ Inter-state

Intra-state or\ Inter-state

inter-state

Inter-state

GST is not levied on [ exempt goods and services

Infra-state

Intra-state

Both CGST and SGST are levied

IGST is levied

IGST is

levied

Both CGST and SGST are levied

Credit

Output CGST A/c Output SGST A/c

Credit

Output IGST A/c

Debit

Input IGST A/c

Debit

Input CGST A/c Input SGST A/c

CHAPTER-6

TRIAL BALANCE

Meaning of Trial Balance :- In the words of J.R. Batliboi, "A Trial Balance is a statement, prepared with the debit and credit balances of the Ledger Accounts to test the arithmetical accuracy of the books."___________ Like a ledger account, the Trial Balance also has two sides: Dr. side and Cr. side, i.e. there are two columns, one for Dr. Balances of Account and another for Cr. Balance of Account.

• The debit balance of a ledger account is shown on the debit side while credit balance is shown on the credit side of the Trial Balance.

• If the total of the debit and credit amount columns of the Trial Balance are equal, it is assumed that the posting to the ledger in terms of debit and credit amounts is accurate.

Objectives or Need or Functions of preparing trial BalanceThe following are the objects or function of preparing a trial balance:-

1. To Ascertain the arithmetical accuracy of the ledger accounts:- The trial balance provides a useful check upon the ledger postings. If a trial balance tallies, it is proved that the posting to the ledger accounts is correct.

2. To Help in the detection or location of errors:- In the balance does not tally; it indicates that some errors have occurred and the account will then proceed to locate such errors. Even a small difference in the trial balance.

3. To Obtain a summary of the ledger accounts:-As a trial balance serves as a summary of all the ledger accounts. E.g. expenses account, incomes account etc.

4. For the preparation of final accounts:- As the trial balance contains the list of all the ledger accounts. It provides a basis for further processing of accounting data, e.g. preparation of final accounts namely trading and profit and loss account and a balance sheet.

FORMET

Trial BalanceAs on as ............

Particulars

L.F.

Debit

RS.

Credit

Rs.

•

Capital

xxx

•

Land and Buildings

xxx

•

Plant and Machinery

xxx

•

Equipment

xxx

•

Furniture and Fixtures

xxx

•

Cash in Hand

xxx

•

Cash at Bank

xxx

•

Debtors

xxx

•

Bills Receivable

xxx

•

Stock of Raw Materials

xxx

•

Work in Progress

xxx

•

Stock of Finished Goods

xxx

•

Prepaid Insurance

xxx

•

Purchases

xxx

•

Carriage Inwards

xxx

•

Carriage Outwards

xxx

•

Sales

xxx

•

Sales Return

xxx

•

Purchases Return

xxx

•

Interest Paid

xxx

•

Commission/Discount Received

xxx

•

Salaries

xxx

•

Long Term Loan

xxx

•

Bills Payable

xxx

•

Creditors

xxx

•

Outstanding Salaries

xxx

•

Provision for Doubtful Debts

xxx

•

Advances from Customers

xxx

•

Drawings

xxx

•

Reserve Fund

xxx

•

OUTPUT CGST\SGST/UTGST/IGST

xxx

INPUT CGST\UTGST\SGST\IGST

XXXX

Total

xxx

xxx

[48]

· Provisions

CHAPTER-7

Provision and Reserve

There are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make provision for such items for ascertaining true net profit. For example, a trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful Debts to take care of expected loss at the time of realisation from debtors. Ina similar way, Provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets. Examples of provisions are :

· Provision for depreciation;

· Provision for bad and doubtful debts;

· Provision for taxation;

· Provision for discount on debtors; and

· Provision for repairs and renewals.

Reserves

A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation. Unlike provisions, reserves are the appropriations of profit to strengthen the financial position of the business. Reserve is not a charge against profit as it is not meant to cover any known liability or expected loss in future. However, retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital. Examples of reserves are:

· General reserve;

· Workmen compensation fund;

· Investment fluctuation fund;

· Capital reserve;

Types of Reserves

A reserve is created by retention of profit of the business can be for either a general or a specific purpose.

1. General reserve :When the purpose for which reserve is created is not specified, it is called General Reserve . It is also termed as free reserve because the management can freely utilize it for any purpose. General reserve strengthens the financial position of the business.

2. Specific reserve : Specific reserve is the reserve, which is created for some specific purpose and can be utilized only for that purpose. Examples of specific reserves are given below :

(i) Dividend equalization reserve: This reserve is created to stabilize or maintain dividend rate. In the year of high profit, amount is transferred to Dividend Equalization reserve. In the year of low profit, this reserve amount is used to maintain the rate of dividend.

(ii) Workmen compensation fund: It is created to provide for claims of the workers due to accident, etc.

(iii) Investment fluctuation fund: It is created to make for decline in the value of investment due to market fluctuations.

(iv) Debenture redemption reserve .It is created to provide funds for redemption of debentures.

Secret Reserve

Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability . The secret reserve can be merged with the profits during the lean periods to show improved

Difference between provision and reserve

Basis of Difference

Provision

Reserve

1. Basic nature

Charge against profit.

Appropriation of profit.

2. Purpose

It is created for a known

liability or expense pertaining to current accounting period, the amount of which is not

certain.

It is made for strengthening

the financial position of the business. Some reserves

are also mandatory under law.

3. Effect on taxable profits.

It reduces taxable profits.

It has no effect on taxable profit.

4. Presentations in Balance sheet

It is shown either (i) by way of deduction from the item on

the asset side for which it is created, or (ii) In the liabilities side along with current

liabilities.

It is shown on the liabilities. side after capital amount.

5. Element of compulsion

6. Use for the payment of dividend

Creation of provision is necessary to ascertain true

and fair profit or loss in compliance ‘Prudence’ or ‘Conservatism’ concept.

It must be made even if there are no profits.

It can not be used for dividend distribution.

Generally, creation of a Reserve is at the discretion of the mana-

gement. Reserve cannot be created unless there are profits. However, in certain cases law has stipulated for the creation of specific reserves such as ‘Debenture’ ‘Redemption ’

reserve.

It can be used for divided

distribution.

Difference between capital reserve and revenue reserve

Basic of Difference

Revenue Reserve

Capital Reserve

1.

Source of creation

It is created out of revenue

profits which arise out of normal operating activities of the business and are otherwise available for dividend distribution.

It is created primarily out of

capital profit which do not arise out of the normal operating activities of the business and not available for dividend distribution. But revenue profits may also be used for this purpose.

2.

Purpose

It is created to strengthen

the financial position, to meet unforeseen contingencies or for some specific purposes.

It is created for compliance of

legal requirements or accounting practices.

3.

Usage

A specific revenue reserve

can be utilized only for the earmarked purpose while a general reserve can be utilized for any purpose including distribution of

dividend.

It can be utilized for specific

purposes as provided in the law in force e.g. to write off capital losses or issue of bonus shares.

CHAPTER-8

BANK RECONCILATION STATEMENT (BRS)

Reason of difference between cash book and pass book

1. Difference due to timing:-there is always time gap between the recording a transaction in the book of account. It being recording in the book of account immediately but the bank will record it when it is presented for payment.

Eg.

a) Cheque issued but not presented for payment.

b) Cheque paid in to bank but has not cleared yet.

2. Transaction recorded by the bank:-some time transaction is record by the bank which is not known to the account holder.

Eg.

a) Interest credited by the bank but not recorded in the cash book.

b) Bank charged and interest charged by bank but not recorded in the cash book.

c) Direct payment by bank (NDPL Bill)

d) Direct payment in to the bank by customer.

e) Dishonored of the bill discounted with the bank

3. Errors:-Errors may be committed by the bank or the account holder and these error lead to difference in cash book and pass book.

Eg.

a) Error of omission.

CHAPTER-9

DEPRECIATION

DEFAMATION OF DEPRECIATION:- Depreciation is the diminution in intrinsic value

of the assets due to use and laps of time.

Cause (reason) of depreciation1. Use of the assets

2. Efflux of time

3. Obsolescence

4. Accident

Need or object of for providing of deprecation

1) To ascertain the correct profit or loss:-The true profit of the business can be ascertained only when all cost is incurred for the purpose of earning of revenue has been debit profit and loss account.

2) For show true and fair value of the financial position:- If deprecation is not charged the assets will be show in the balance sheets at an amount which is excess is in of their true value.

3) To ascertain the accurate cost production:-As depreciation is an item of expenses the correct cost of production cannot be calculated unless it also taken into the account.

4) For avoiding over payment of income tax:-Deprecation is the deductible for tax purpose. If deprecation is not debit profit and loss account the net profit will be show higher of actual profit hence we will be paid more income tax.

Comparison of straight line and written down value method

Basis of Difference

Straight Line Method

Written Down Value Method

1.Basis of charging depre- ciation

Original cost

Book Value (i.e. original cost lessdepreciation

chargedtilldate)

2.Annual depreciation charge

Fixed (Constant) year

Declines year after year

3.Total charge against profit and loss account in respect of depreciation

and repairs

Unequal year after year. It increases in later years.

Almost equal every year.

4.Recognition by income

tax law

Not recognized

Recognized

5.Suitability

It is suitable for assets in which repair charges are less, the possibility of and obsolescence is low scrap value depends upon the time period involved.

It is suitable for assets, which areaffected by technological changes

and require more repair expenses with passage of time.

CHAPTER-10

BILL OF EXCHANGE

BILL OF EXCHANGE

Meaning

According to Section 5 of the Negotiable Instruments Act, 1881, "A Bill of Exchange is an instrument in writing, containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument"

Characteristics or Features of Bill of Exchange

On the basis of the above definition, following are the main features of Bill of Exchange:

1. Bill of Exchange is a written instrument.

2. It must contain an unconditional order (and not a request) to pay the specified amount.

3. It is drawn and signed by the creditor, i.e., drawer of the bill.

4. It must be signed by the acceptor of the bill, i.e., drawee of the bill.

5. The specified amount is payable to the person named in the bill or to his order or to the bearer of the Bill of Exchange.

6. The amount of the bill is either payable on demand or on a fixed date.

Parties to a Bill of Exchange

A Bill of Exchange has the following three parties:

1. Drawer: Drawer is the person who writes or draws the Bill of Exchange. He is a creditor who is entitled to receive(sic)oney. The bill is signed by the drawer of the bill.

2. Drawee: A person (sic) the bill of exchange is drawn for his acceptance is known as Drawee. He is the purcha(sic) or, who has to pay the money to the drawer. He is also known as 'Acceptor' as he the bill.

3. Payee: Payee is the person named in the Bill of Exchange to whom the payment is to be made. Payee may be the Drawer himself or a third party.

Types of Bill of Exchange

From the accounting point of view, Bills of Exchange are of two types:

1. Trade Bill: When a Bill of Exchange is drawn and accepted for a trade transaction, then it is termed as Trade Bill. A bill of exchange drawn by the seller of goods and accepted by the buyer is a Trade Bill.

2. Accommodation Bill: When a Bill of Exchange is drawn and accepted for the purpose of mutual help, then it is termed as Accommodation Bill.

Example for Better Understanding: Suppose Amit is in need of money He approaches his friend Manish for financial help. For this, Amit draws a bill on Manish, which he accepts at 3 months. Amit discounts the bill with his bank and gets the money. After 3 months, but before the due date, Amit sends the money to Manish in order to meet his acceptance. Manish meets his acceptance by paying the money to Bank on the due date.

Advantages of Bill of Exchange

The main advantages of Bill of Exchange are:

1. Helpful in Purchase and Sale of Goods on Credit: Sale and purchase of goods on credit becomes convenient and safe as Bill of Exchange serves as a written evidence of debt. The seller has a written commitment from the buyer to make the payment on a certain date.

2. Easy to Recover the Amount: A Bill of Exchange is a legal document. If the drawee fails to make the payment on the due date, then it is easier to recover the amount as the bill can be used as an evidence in the court.

3. Discounting Facility: A Bill of Exchange is drawn for a specified period. However, in case of need, drawer can get the bill discounted from the bank and can receive the payment against the bill before its due date.

4. Facilitates Endorsement: \s Bill of Exchange is a negotiable instrument, it can be easily transferred (endorsed) to other parties in settlement of debts.

5. No need to remind the debtor: The drawer is relieved from sending reminders to the drawee to make the payment as the date of payment is fixed and written on the bill of exchange.

6. Valid Evidence of Debt: BUI of Exchange written acknowledgement of debt, which is duly signed and stamped. Moreover, it is legal document, so it can be used as an evidence in case of any default.

7. Helps in Planning Cash Management: The drawer and drawee are aware of the date of receipt / payment of the bill. So, both the parties can plan their cash operations.

8. Convenient means of making Foreign Payment: Bills of Exchange is a convenient means of remittance of money in case of foreign trade.

15.3 PROMISSORY NOTE

Meaning

According to Section 4 of the Negotiable Instruments Act, 1881, "A Promissory Note is an instrument in writing (not being a bank note or a currency note) containing an unconditional undertaking signed by the maker to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instrument".

In other words, Promissory Note is an unconditional written undertaking by the maker to pay the specified amount to the specified person or to his order or to the bearer of the Promissory

Note. As the promissory note is written by the debtor himself, there is no need for its acceptance.

Features of a Promissory Note

The main features of a Promissory Note are:

1. It must contain an unconditional undertaking to pay the specified amount.

2. It is drawn and signed by the maker, i.e., promisor of the bill.

3. The name of the payee must be mentioned in it.

4. The specified amount is payable to the person named in the bill or to his order or to the bearer.

5. It must be dated. The amount is either payable on demand or on a fixed date.

Parties to a Promissory Note

There are two parties to a Promissory Note:

1. Maker: Maker is the person who draws or makes the Promissory Note to pay a certain amount. He makes the promise to pay a amount specified in the Promissory Note. The maker is also termed as 'Drawer' or 'Promisor'.

2. Payee: Payee is the person to whom the payment is to be made, i.e. he is a person who has granted the credit.

15.4 IMPORTANT TERMINOLOGY

1. Term of Bill: The time gap between the date on which a bill is drawn and the date on which it is payable, is termed as Term of the bill. It is also known as Usance, Tenor or Tenure of the BUI.

2. Due Date: The date on which the payment of the bill becomes due is known as Due Date.

3. Days of Grace: Days of Grace are the three extra days added to the period of bill. Every instrument payable, other than on demand, is entitled to three days of grace.

It must be noted that Days of Grace are not added in case of 'Instruments Payable on Demand'.

4. Date of Maturity: The date which comes after adding three days of grace to the due date of a bill, is called Date of Maturity. It is customary to treat 'Due Date' and 'Date of Maturity' as one and the same thing.

Example: Suppose a bill is drawn on 1s' May, 2015 and is payable 1 month after date. Its due date or maturity date will be calculated as: 01.05.15+1 month + 3 days of Grace = 01.06.15 + 3 Days = 04.06.15.

5. Discounting of Bill: Discounting of Bill means encashing the bill before the date of its maturity. The bank charges an amount (Discounting charges) from the bill amount.

• It facilitates the holder to get the cash before the due date of the bill.

6. Endorsement of Bill: End orsement means transfer of Bill of Exchange or Promissory Note to another person.

• As Bill of Exchange or Promissory Note is a negotiable instrument, it can be easily transferred by one person to another in settlement of debts or dues.

• The person endorsing the bill is known as 'Endorser' and the person to whom the bill is endorsed is called Endorsee'.

7. Bill Sent for Collection: When a bill is sent to the bank with instructions that the bill be retained till maturity and realised on its due date, it is known as Bill Sent for Collection.

8. Dishonor of Bill: When the acceptor of the bill refuses to make the payment on the date of maturity, it is termed as Dishonour of Bill. Dishonour of bill may arise when the drawee does not have sufficient funds to pay the bill or he becomes insolvent.

10. Noting Charges: Noting Charges is the fee paid to the Notary Public for noting the Bill of Exchange of its dishonor.

11. Retirement of a Bill: When the Drawee makes the payment of the bill before its due date, it is termed as Retirement of a Bill.

12. Renewal of a Bill: When the acceptor of a bill is unable to meet the bill on the due date, he may request the holder of the bill to cancel the original bill and draw a new bill in place of the old one. If the holder agrees and a new bill is drawn, it is known as Renewal of a Bill.

Difference Between Bill of Exchange and Promissory Note

Basis

Bill of Exchange

Promissory Note

1. Drawer

It is drawn by the creditor.

It is drawn by the debtor.

2. Number of Parties

There may be three parties to a Bill of Exchange: (i) Drawer; (ii) Drawee; and (iii) Payee.

There are only two parties to a Promissory Note: (i) Maker; and (ii) Payee.

3. Acceptance

It needs acceptance by the Drawee.

It does not need acceptance.

4. Order and Promise

It is an order to make the payment.

It is a promise to make the payment.

5. Liability of the Drawer

The liability of the drawer is secondary, i.e. his liability arises only if the acceptor does not pay.

The liability of the maker or drawer is primary, i.e. maker is liable to make the payment.

6. Payee

Drawer of the bill can also be payee of the bill.

Maker of Promissory Note can never be payee.

7. Noting

In case of dishonour of bill, it is better to get it noted.

Noting is not necessary in case of dishonour of Promissory Note.

8. Copies

In case of local bills, only one copy is prepared. But, in case of foreign bills, three copies are made.

Only one copy is prepared, whether it is local or foreign.

9. Stamp

There is no need for fixing the stamp on bills payable on demand. However, it is necessary in all other cases.

It is required in all cases.

CHAPTER-11

RECTIFICATION OF ERROR

CLASSIFICATION OF ERRORS:-There are four types of errors which are as follows.

1) Error of omission

2) Error of commission

3) Error of principle

4) Error of compensation

1) Error of omission : An error of omission is an error which arises when a

transaction is completely or partially omitted from the books of account.

There are two types of Omission of errors:

a) Error of complete omission : This error occurs when a transaction is not recorded in the books of account or a transaction recorded in the journal but not posted in the ledger. Such error does not affect the Trail balance.

b) Error of partial omission: This error occurs when a transaction is not completely recorded or if the recorded transaction has not been completelyposted in to the ledger accounts as a result, Trail balance does not agree.

2) Error of commission :- Error of commission are thoseerrors which arise due to wrong recording ,wrong posting, wrong carrying forward and wrong casting of subsidiary books.

Error of commission may be classified as follows:-

a) Error of recording :- This error arises when any transaction is recorded incorrectly

in the books of account. Such error does not affect the Trail balance. Example: purchase of Rs.109 but recorded Rs.901

b) Error of posting :-This error arises when journal entries correctly recorded but posted into wrong ledger. Such error does not affect the Trail balance.

c) Error of carry forward :- This error arises when a mistake occurs in total, carry forward from one page to next page. Such error does affect the Trail balance.

Example: page no 1 total is 100 but carry forward next page Rs. 1000

d) Error of costing :- The process of totaling at the end of the year is called casting. Such error does affect the Trail balance.

3) Error of principal :- when a transaction is recorded in contravention ( break the rule ) of a accounting principle it is known as error of principle. Such error does not affect the Trail balance.

Example: Right entry: - purchase a/c dr. 100

To cash a/c 100

Wrong entry: - cash a/c dr. 100

To purchase a/c 100

4) Compensation of error :- compensation error are those error the effect of which is nullified ( not affect) by another error of equal amount. Such error does not affect the Trail balance.

Example : Right entry :- Salary a/c Dr. 100

To Cash a/c 100

Wrong entry :- Clerk a/c Dr. 100

To Cash a/c 100

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Salient Features:-

CHAPTER 12 SINGLE ENTRY

1. Maintenance of Personal Account only:- usually under this system, only personal accounts are prepared in the books and the real and nominal accounts are ignored.

2. Dependence on Original Voucher:- In order to collect the required information one has to depend on original vouchers. For example: the figure of purchase at the end of a particular period is ascertained by totaling the original invoices from the suppliers. Similarly, the figure of sale is ascertained by making a total of the copies of invoices which have been issued to the customers during the year.

3. Lack of Uniformity:-The books maintained under system may differ from firm to firm because the semi is only an adjustment puff double entry system according to the actual needs and conveniences of the business houses.

4. Suitability:-Books according to this system can be nominal a real trader or partnership firm. Limited complaints cannot kept their books in this system because of legal provisions.

5. Preparation of Final Accounts: Since a record of all the nominal and real accounts is not maintained under this system, the final accounts cannot the prepared easily. Final accounts can be prepared only after converting the available information into double entry records and after ascertaining the missing figure. Even then the figure or assets and liabilities will be based merely on estimates. Because of this reason the statement of assets and liabilities prepared under this system is termed as statement of Affairs ‘instead of balance sheet’.

Use of reasons for keeping Incomplete Records:

1. Simple Method:- It is an easy and simple method of recording business transactions because it does not require any special knowledge of the principles of double entry system.

2. Less Expensive:-Only the cash book and some of the ledger accounts of maintained under this system. As such the staff required for maintaining the accounts is also comparison to double entry system.

3. Suitable for small concern:- The method is most suitable to small business concerns which have mostly cash transactions and very few assets and liabilities.

4. Easy to calculate profit or loss:-It is easier to calculate profit or loss under this method. For this purpose, only closing capital has to be compared with the opening capital along with some adjustments.

5. Flexible method:-The system is more practical and rejects the strict rules of double entry system. It can be easily changed and adjusted according to the needs of a particular business.

6. Difference Between Double Entry System and Single Entry System

Basis

Double Entry System

Singte Entry System

1. Recording of Both Aspects

Both the aspects of every transaction is recorded in it.

In this system, both aspects of some transactions, one aspect of others and remaining transactions are not recorded at all.

2. Types of Accounts

All transactions related to real, personal and nominal accounts are recorded and maintained under this system.

Only personal accounts and cash book are maintained under this system.

3. Trial Balance

Arithmetical Accuracy of the books of accounts can be checked by preparing the Trial Balance.

Arithmetical Accuracy cannot be checked as Trial Balance cannot be prepared.

4. Net Profit and Loss

Net Profit or Loss can be ascertained by preparing Trading and Profit and Loss Account.

Profit and Loss Account cannot be prepared to ascertain net profit or loss. Net Profit or Loss is ascertained by comparing closing and opening capital with certain adjustments.

5. Financial Position

True financial position is ascertained by preparing a Balance Sheet.

Balance Sheet cannot be prepared under this system. Financial position is ascertained by preparing Statement of Affairs on the basis of estimated values of the assets.

6. Adjustments

Adjustments are made at the time of preparing the Final Accounts.

No adjustments are made due to incompleteness of accounting system.

7. Suitable

This system is suitable for every type of business entity, whether large or small.

This system is suitable only for small business entities.

8. Reliable

This system is more reliable as books are maintained on the basis of scientific principles.

This system is less reliable as there are no fixed set of principles for maintaining the books of accounts.

9. Authenticity

This system is considered authentic by the Courts of law and tax authorities.

This system is not considered authentic by the Courts of law and tax authorities.

Difference Between Balance Sheet and Statement of Affairs

Basis

Balance Sheet

Statement of Affairs

1. Basis of Preparation

It is prepared on the basis of ledger accounts.

It is prepared on the basis of few ledger accounts, estimates and other available information.

2. Accounting Method

It is prepared when accounts are' maintained as per Double Entry System.

It is prepared when accounts are maintained as per Single Entry System.

3. Objective

It is prepared to ascertain the financial position of the business.

It is prepared to ascertain the capital of the business.

4. Trial Balance

Trial Balance is prepared before Balance Sheet.

Trial Balance is not prepared.

5. Arithmetical Accuracy

The tallying of Balance Sheet implies arithmetical accuracy of accounting books as it is prepared on the basis of Trial Balance.

The Statement of Affairs does not prove the arithmetical accuracy of accounting books as it is not prepared on the basis of Trial Balance.

6. Reliability

Balance Sheet is regarded as more reliable ' as it is based on double entry principles.

It is regarded as less reliable as it is based on incomplete records and estimates.

CHAPTER13COMPUTER IN ACCOUNTINGQ1. What is meaning of computer and advantage and disadvantage of computer explain?

Meaning of Commuter:- A computer is an electronic device, which is capable of performing a variety (Many types) of operations (work) as directed a set of instructions. This set of instructions is called a computer programmer.

A computer system possess the following advantage and limitations (disadvantage)

Advantages:-

1. High Speed: A computer processes the data with very high speed this high speed help to process the data by taking a very little time. This time is normally so little time that a human being cannot imagine that time.

2. Accuracy:-A computer does the processing with very hig