Professional Documents
Culture Documents
COM
AN EASY APPROACH TO
ACCOUNTANCY
(FOR BEGINNERS)
CONTENTS
COMMERCEATEASE.COM Page 2
AN EASY APPROACH TO ACCOUNTANCY
COMMERCEATEASE.COM Page 3
AN EASY APPROACH TO ACCOUNTANCY
Meaning of Accountancy
There are three terms used interchangeably :
Account
Account is simply a part of the whole. It does not exist independently of the
other two. Like in learning of the English language a person one uses words.
The exact meaning of the word Account will be discussed later on.
Accounting
Accountancy
Book-keeping
COMMERCEATEASE.COM Page 4
AN EASY APPROACH TO ACCOUNTANCY
Objectives of Accounting
Accounting is used all over the world, but the basic purposes for which
Accounting is used remain almost the same.
For Owner
The owner, who has invested money or something in the business wants to
know the result, as to whether his business is going into profit or loss. He is
interested to know the financial health of his business whether it is weak or
strong.
For Management
A person or a group of persons who are responsible for running the business
want to evaluate the performance of the business they are managing for
someone else. They want to take various decisions like whether a component
of the product they are using, is to be produced or purchased from the
market, what should be the selling price of the product etc.
For Investors
Investors are the persons who have invested their money in any form, known
by any name, want to know safety and growth of their investments and
future of the business.
For Creditors
For Lenders
Those who have provided money to the business on loan, want to know their
repaying capacity and credit worthiness.
COMMERCEATEASE.COM Page 5
AN EASY APPROACH TO ACCOUNTANCY
For Employees
Employees take interest for the profitability to claim higher wages and
bonus, facilities etc.
COMMERCEATEASE.COM Page 6
AN EASY APPROACH TO ACCOUNTANCY
Branches of Accounting
Financial Accounting
Financial accounting is concerned with calculating net result of business
operations. It means to check whether the business has earned profit or
incurred loss during a particular time period.
The second main purpose is to know the financial position of the business at
the end of the accounting year. It means to see how much business owns
and how much it owes to others at the end of that particular time period.
Cost Accounting
It is concerned with determination of total cost of production and per unit
cost of production.
Calculation of cost is necessary for cost control, cost reduction and taking
various decisions also, apart from setting the selling price.
Management Accounting
Management Accounting is concerned with checking the effectiveness of
various management decisions, policies and practices.
COMMERCEATEASE.COM Page 7
AN EASY APPROACH TO ACCOUNTANCY
Financial Accounting
COMMERCEATEASE.COM Page 8
AN EASY APPROACH TO ACCOUNTANCY
This concept assumes that business has distinct and separate entity from its
owners. For the purpose of accounting, business and its owners are to be
treated as two separate entities.
Business assets and personal assets of the proprietor and business liabilities
and personal liabilities of the proprietor are to be kept separate. Only
business transactions should be recorded in accounting books. Any personal
transaction is to be ignored.
The concept of money measurement states that only those transactions and
happenings in an organization, which can be expressed in terms of money
are to be recorded in the book of accounts.
COMMERCEATEASE.COM Page 9
AN EASY APPROACH TO ACCOUNTANCY
Also, the records of the transactions are to be kept not in the physical units
but in the monetary units. Any transaction not expressed in terms of money
should not be recorded e.g. Goods purchased can be recorded but loyalty of
workers towards the business cannot be recorded.
The concept of going concern assumes that a business firm would continue
to carry out its operations indefinitely (for a fairly long period of time) and
would not come to an end in the near future.
So, difference must be made in fixed assets and current assets and capital
items and revenue items.
Accounting period refers to the period of time at the end of which the
financial statements of an enterprise i.e. Statement of Profit and Loss and
Balance Sheet are prepared.
Cost Concept
The cost concept requires that all assets are recorded in the books of
accounts at their cost price, which includes cost of acquisition,
transportation, installation and making the asset ready for the use e.g.an
asset purchased for ` 30,000 on which carriage ` 500 has been paid should
be recorded at ` 30,500.
Dual Aspect
COMMERCEATEASE.COM Page 10
AN EASY APPROACH TO ACCOUNTANCY
Dual aspect or Duality concept states that every transaction has a dual or
twofold effect on various accounts and should therefore be recorded at two
places e.g. when goods are purchased for cash ,goods are increasing stock
and cash is decreasing ,both of which must be recorded and should be same
in books.
Revenue Recognition
Revenue is the gross receipts of cash arising from the sale of goods and
services by an enterprise and interest, royalties and dividends etc.
Matching concept
COMMERCEATEASE.COM Page 11
AN EASY APPROACH TO ACCOUNTANCY
This concept requires that all material and relevant facts concerning financial
performance of an enterprise that can affect the decision making by the
users of accounting information must be fully and completely disclosed in
the financial statements.
Consistency concept
Conservatism concept
This concept requires the business to play safe. It means that business
transactions should be recorded in such a manner that profits are not
overstated.
All anticipated losses should be accounted for but all unrealized gains should
be ignored. It means that profits are to be recorded only when actually
become due, but provisions for any possible losses must be made.
Materiality concept
This concept states that accounting should focus on material facts means
important from effect on decision making point of view. If the item is likely to
COMMERCEATEASE.COM Page 12
AN EASY APPROACH TO ACCOUNTANCY
Objectivity concept
COMMERCEATEASE.COM Page 13
AN EASY APPROACH TO ACCOUNTANCY
Accounting Standards
COMMERCEATEASE.COM Page 14
AN EASY APPROACH TO ACCOUNTANCY
Basis of Accounting
The two broad approach of accounting are Cash basis and Accrual basis.
Under cash basis transactions are recorded only when cash are received or
paid. Whereas under accrual basis, revenues or costs are recognizes when
they occur rather than when they are paid.
COMMERCEATEASE.COM Page 15
AN EASY APPROACH TO ACCOUNTANCY
Systems of Accounting
There are two systems of recording business transactions:
Under double entry system every transaction has two-fold effects . Like a
business sells something to others for cash, it will record the position of cash
as well as that something sold. It is a complete, scientific and widely used
system accepted by law also.
COMMERCEATEASE.COM Page 16
AN EASY APPROACH TO ACCOUNTANCY
Under this method rules are studied on the basis of various types of
accounts. Account is the summary of transactions relating to a particular
item relating to the business, in ૺTૻ form, where left side is used for Debit and
right side is used for Credit.
Types of Account:
Personal accounts:
COMMERCEATEASE.COM Page 17
AN EASY APPROACH TO ACCOUNTANCY
Debit the receiver, Credit the giver e.g. if cash is given to Mahesh, Mahesh is
receiver so Mahesh account should be debited.
Real accounts:
Debit what comes in, Credit what goes out e.g. If furniture is sold to Ramesh,
furniture is going out of the business so Furniture account should be
credited.
Nominal Accounts:
Debit the expenses and losses, Credit the Incomes, gains, revenues and
profits e.g. if commission is received, Commission account should be
credited as it is Income of the business.
Under this method rules of Double Entry are studied on the basis of the items
of Balance Sheet Equation so all the accounts are divided into five categories
for this purpose:
COMMERCEATEASE.COM Page 18
AN EASY APPROACH TO ACCOUNTANCY
Note: It may be noted that there is no specific instruction for the use of
these two methods for the Application of Rules of Debit and Credit. The
results of these two methods are same. So, either of these two may be used.
COMMERCEATEASE.COM Page 19
AN EASY APPROACH TO ACCOUNTANCY
Accounting Terminology
All the basic terms used in accounting work have been explained here in
brief, the details can be understood later on without much difficulty.
Entity
It is the basic unit for which accounting records are to be prepared. It can be
a single person business, a partnership firm, a company, a school, a college,
a hospital etc.
Capital
Anything invested by the proprietor in his business is called capital. A
business owner can bring anything in his business- may be cash, his bank
balance, his household furniture etc.
Liability
It is the amount owed by the business to the outsiders. In other words,
whatever a business has borrowed from others, that is to be repaid in any
form, is called liability for the business.
For example: Loans, creditors, bank overdraft, outstanding expenses, Income
received in advance etc.
Asset
It is the property of the business. In simple words, these are the articles on
which the business has ownership rights as against the outsiders.
For example: cash, bank, stock, debtors, bills receivable, land, plant
and machinery, building, furniture, computer, transport vehicles, etc.
Equity
It means claim on something. It can be owner's equity(Capital) or creditor's
equity(Liability).
Capital
It is called owner's equity and Liability is called creditor's equity.
Assets can be fixed assets or Current assets.
COMMERCEATEASE.COM Page 20
AN EASY APPROACH TO ACCOUNTANCY
Fixed assets
These assets are generally meant to be retained by the business for long
term, generally one year. These are kept for doing the business and not for
re-sale.
For example: Land &building, machinery, furniture etc.
Current assets
These are kept for running day to day activities of the business. (cash, bank,
stock, debtors, bills receivable, prepaid expenses)
Assets can be tangible assets or intangible assets.
Tangible assets
Tangible assets are assets with physical existence. (Land & building, plant&
machinery, furniture)
Intangible assets
Intangible assets are assets without physical existence. (Goodwill,
copyrights, trademarks, patents)
Liabilities can be current or non-current.
Current liabilities
These are the liabilities to be paid within a period of one year.(bank
overdraft, outstanding expenses, creditors, bills payable)
Non-Current liabilities
Non-Current liabilities, popularly known as long term liabilities are to be paid
after one year. (Loans for long term, debentures issued)
Liabilities can be internal or external.
Internal liabilities
These are to be paid by the business to its proprietor (capital).
External liabilities
These are to be paid by the business to the outsiders (liabilities towards
outsiders).
Revenues
It means the total receipts out of sale of goods and/or services by the
business (sale of goods and services sold).
COMMERCEATEASE.COM Page 21
AN EASY APPROACH TO ACCOUNTANCY
Goods
Goods are the articles in which the business deals (computers for computer
dealer).
Purchases
It means are purchase of goods for use or for resale.
Expenses
Expenses are the total costs incurred by the business to generate Revenues
(salaries, wages, rent, electricity charges, water charges, audit fees,
stationery, conveyance charges, etc).
Loss
It is reduction in owner's equity or capital due to any reason (loss of furniture
by fire).
Income
It is increase in the capital due to any reason.
Profit
It is the excess of revenues over costs for the same accounting period.
Gain
It is profit of irregular and non-recurrent nature.
Accounting period
It is the normal period of twelve months for which accounting records are to
be prepared.
Drawings
Drawings mean anything taken out of the business, by the proprietor for his
private use.
Debtors
Debtors are the persons who have purchased goods or services from the
business on credit and the payment is due from them.
Creditors
Creditors are the persons from whom goods or services have been
purchased by the business on credit and the payment is due to be made.
Bills receivable
COMMERCEATEASE.COM Page 22
AN EASY APPROACH TO ACCOUNTANCY
COMMERCEATEASE.COM Page 23
AN EASY APPROACH TO ACCOUNTANCY
Income received in advance: the income which has not been earned but
has been received.
Trade discount: the discount on quantity of sales or purchases.
Cash discount: the discount to encourage early payments/collection.
COMMERCEATEASE.COM Page 24
AN EASY APPROACH TO ACCOUNTANCY
Accounting Process
Accounting process starts with transactions that are recorded usually
in waste book but with the help of vouchers.
Then from there the transactions are recorded in the Journal, which is
classified on the basis of similarity of transactions usually called subsidiary
journals like; Purchases Day Book, Sales Day Book, etc.
The next stage is, when entries passed in journal are further posted
in Ledger. Ledger is set of accounts: real, personal as well as nominal
accounts.
After posting all the journal entries to ledger, ledger accounts are balanced
and from all the balances a summary statement known as Trial Balance is
prepared to check the arithmetical accuracy of records.
Trial Balance is used to prepare the Final Accounts. From Trial Balance all
the nominal accounts are taken to prepare Manufacturing account, Trading
account and Profit and Loss account respectively as the case may be,
and all the real and personal accounts are taken to prepare the Balance
sheet.
Closing Balance Sheet of one accounting year becomes the Opening Balance
Sheet of the next Accounting year. Then, next year transactions enter the
accounting process and this cycle continues, making it Accounting Cycle.
Final accounts i.e. Trading Account, Profit and Loss Account and Balance
Sheet are further analyzed with the help of accounting tools and techniques
and then conclusions are drawn and then communicated to the interested
parties for decision making.
COMMERCEATEASE.COM Page 25
AN EASY APPROACH TO ACCOUNTANCY
2. Journal
Journal is the book of original entry in which the transactions are entered for
the first time from the source documents, in the form of journal entries, after
which the entries are transferred to the ledger, the principal book of entry.
COMMERCEATEASE.COM Page 26
AN EASY APPROACH TO ACCOUNTANCY
Year
Name of the acct. to be debited Dr.
xxxxx
Mon,Date xxxxx
To Name of the acct. to be credited
(Narration)
Date: The first column in a journal is Date on which the transaction took
place.
Line: After writing the narration a line is drawn in the Particulars column,
indicating the end of recording the specific journal entry.
COMMERCEATEASE.COM Page 27
AN EASY APPROACH TO ACCOUNTANCY
Ledger Folio: L.F. records the page number of the ledger book on which
relevant account appears. This column is filled up at the time of posting.
COMMERCEATEASE.COM Page 28
AN EASY APPROACH TO ACCOUNTANCY
7. Cash book:
8. Journal Proper
3. Ledger
The ledger is the principal book of accounting system, containing the set of
different accounts; real, personal as well as nominal accounts. It may be in
the form of bound register or may be maintained in a loose leaf binder.
Importance of Ledger
COMMERCEATEASE.COM Page 29
AN EASY APPROACH TO ACCOUNTANCY
2. Title of the account: The Name of the item is written at the top of the
format with suffix ૺAccountૻ.
3. Dr. /Cr.: Dr. means Debit side of the account i.e. left side and Cr. Means
Credit side of the account, i.e. right side.
8. To/By: It is customary to write ૺToૻ on debit side with particulars and ૺByૻ
on credit site.
4. Trial Balance
Objectives
COMMERCEATEASE.COM Page 31
AN EASY APPROACH TO ACCOUNTANCY
6. Capital Xxx
7. Sales Xxx
COMMERCEATEASE.COM Page 32
AN EASY APPROACH TO ACCOUNTANCY
Capital account---------------------------------------Credit
Gains/Incomes/Profits accounts-------------------Credit
The condition: Totals of both the sides i.e. Debit Balances and Credit
Balances in Trial balance must be equal to ensure the arithmetical
accuracy of the accounting books.
But, there can be cases when this condition is not satisfied and is proof of
presence of some error which must be located (found out) before preparing
Final Accounts i.e. Financial Statements of the business.
Trial Balance is generally prepared at the end of every month and at the en d
of the accounting year to know the balances of all the accounts & to test the
arithmetic accuracy of accounts.
The basic objective of accounting is to know about the profit or loss during
the previous year & present financial position at the end of the accounting
year. This can be known only if Trading account and Profit & Loss account
and Balance Sheet are prepared at the end of year. These are also known as
FINANCIAL STATEMENTS.
2) Balance Sheet
can be prepared.
COMMERCEATEASE.COM Page 33
AN EASY APPROACH TO ACCOUNTANCY
As these two statements are prepared to give the final results of the
business, both of these are collectively called as final accounts. Accounting
cycle finally ends with these statements.
Balance Sheet is the final step in accounting cycle. It shows the true
position of the business in terms of assets, liabilities and capital on a
particular date.
THANKS...
COMMERCEATEASE.COM Page 34
AN EASY APPROACH TO ACCOUNTANCY
COMMERCEATEASE.COM Page 35