Financial Accounting for Online

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[Financial

Accounting]

ABF 103

[ACeL]

In business, however, it is a more serious matter. The student may not

be questioned by his parents or the housewife may just meet her expenses as and when they come without bothering to find out how much she spent, but in business it is a must. You cannot run a business unless you know how much you owe outsiders and how much outsiders owe you. And when you invest money in a business, wouldn‟t you like to know whether you‟ve recovered it, increased it or lost it?

[Amity

University]

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PREFACE

This Financial Accounting module seeks to discuss the concept of

accounting & their application in the organization. The principle concern

of the book is to show how financial accounting theory can be applied to

solve the problems in practice. An attempt has been made to relate

theory to practice to make it understandable easily for all kind of

students i.e. from accounts or non-accounts background.

Each chapter is having various illustrations relating to each topic

covered and followed by numerous questions and multiple choice

questions also, which are designed to reinforce concepts & procedure

presented in the body of chapter.

I wish to express my sincere thanks to many of the authors who have

received due acknowledgements, without whom, this module would not

have been completed.

I have taken every possible effort to remove the errors either of principle

or of printing. Even then, if the reader comes across any error, he/she is

requested to point out the same to me.

I hope that many students will find this module interesting & helpful.

Further suggestion for the improvement of the module is solicited.

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CHAPTER-1 MEANING & SCOPE OF ACCOUNTING

At the end of the chapter you will be conversant with: 1.1 Meaning of Accounting

1.2 The Accounting Process/Accounting Cycle 1.3 Accountancy, Accounting & Book-keeping 1.4 Branches of Accounting

1.5 Objectives of Accountancy 1.6 Users of Financial Statement 1.7 Advantages of Accounting

1.1 MEANING OF ACCOUNTING

All of us do some accounting, often without realizing it. It is a part of our life. Let us say you realize suddenly, one morning, that you needed to buy a book urgently. You ask one of your parents for the money. „But‟ the parent says, “What happened to the money I gave last week?” You either recollect how you spent it or if you believe in being systematic and have noted it in your diary you explain how the money was spent. You are „accounting‟ for the money given to you. When a housewife tries to note down her household expenses, strike the balance she has on hand at the end of the month, or determines how much she needs for the expenses which would arise, she is „accounting‟ for the money she withdrew or was given to run the household.

In business, however, it is a more serious matter. The student may not be questioned by his parents or the housewife may just meet her expenses as and when they come without bothering to find out how much she spent, but in business it is a must. You cannot run a business unless you know how much you owe outsiders and how much outsiders owe you. And when you invest money in a business, wouldn‟t you like to know whether you‟ve recovered it, increased it or lost it?

All this requires systematic record keeping of all that happens on a day-to-day basis in business and analyzing this information to aid business decision making.

In simple words, „accounting‟ merely means, „reckoning‟ or „recounting‟. In an organizational context too, „accounting‟ has more or less the same meaning. As an organization comes into being and commences operations, one would like to evaluate the organization‟s past performance for various reasons. However, in order to be able to do so, it is necessary that as far as possible whatever has transpired in the organization be „reckoned‟ or „recounted‟ in a summarized form in monetary terms. Thus, the process of accounting involves recording, classifying and summarizing of past events and transactions of financial nature, with a view to enabling the user of accounts to interpret the resulting summary.

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The American Institute of Certified Public Accountants defines accounting as “the art of recording, classifying and summarizing in a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof”.

This definition brings out the following as attributes of accounting:

1. Events and transactions of a financial nature are recorded while the events of a non-financial nature cannot be recorded.

2. The record should reflect the importance of the transactions so recorded both individually and collectively, which includes summarization, thereby making it amenable to analysis.

3. The users of the financial statements should be able to obtain the message encompassed in such financial statements.

1.2 The Accounting Process/Accounting Cycle:

It is a complete sequence beginning with the recording of the transactions & ending with the preparation of final accounts. The steps involved in accounting cycle are as follows:

Step 1: - Identification of Transactions & Events:- Accounting identifies transactions & events of a specific entity. A transaction is an exchange in which each participant receives or sacrifices value (e.g. purchase of raw material). An event is a happening of consequences to an entity (e.g. use of raw material for production). An entity means an economic unit that performs economic activities.

Step 2: Preparation of Business Documents:- After identifying, we measure those transactions & events in monetary terms & to record them we prepare business documents.

Step 3:- Journalizing:- It is concerned with the recording of identified & measured financial transactions in an orderly manner, and this process is called as Journalizing.

Step 4:- Posting:- It is concerned with classification of the recorded transactions so as to group the transactions of similar type at one place. This function is performed by maintaining the ledger in which different accounts are opened to which related transactions are brought to one place by posting

Step 5: - Preparation of Trial Balance:- It is concerned with the balancing & summarization of the classified transactions in a manner useful to users. It can further be classified into preparation of unadjusted trial balance & passing the adjustment entries. After balancing all the accounts, we do some adjustments to match our expenses & revenues & then prepare adjusted accounts.

Step 6:- Preparation of Income Statement & Position Statement:- After preparing Trial Balance we prepare Income Statement i.e. Trading & Profit & Loss Account & position statement i.e. Balance Sheet.

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1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: -

Book-keeping is a part of Accounting. Accounting is a part of Accountancy. Accountancy: refers to a systematic knowledge of accounting.

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Book-keeping: is the part of accounting & is concerned with record keeping or maintaining of books of accounting which is often routine & clerical in nature.

Diagrammatically the relationship can be viewed as follows:

Relationship B/w These Three:

We must also understand the difference & relationship between the terms „accounting’ & „book-keeping’. Accounting is broader in scope than bookkeeping, which is merely concerned with orderly record keeping. Going beyond the narrow confines of bookkeeping, accounting involves analysis and judgment at different stages such as recording of transactions, classification, summarization and interpretation.

Distinction B/w Accounting & Book-keeping in Tabular form can be presented as follows: Basis of Distinction Book-keeping Accounting

1 Scope It involves identification, measurement, recording & classification of transaction

In addition it involves summarizing classified transactions. Analyzing, interpreting & communicating the same.

2 Stage It‟s a primary stage It‟s a secondary stage, starts where book-keeping ends

3 Basic Objective To maintain systematic records

To ascertain net results of operations & financial position of the co

4 Who Performs Performed by junior staff By senior staff

5 Knowledge level Not required a high level of knowledge

It needs a high level of knowledge

6 Analytical Skill Not required Required 7 Nature of Job Routine & clerical Analytical

8 Supervision & Checking

Supervised by an accountant

Whereas its work is not supervised by a book-keeper

Accountancy

Accounting

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1.4 BRANCHES OF ACCOUNTING:

Classification of Accounting

Financial Accounting:- Accounting involves recording, classifying and summarizing of past events and thus is historical in nature. It is Historical accounting which is better known as Financial accounting whose primary intention is to prepare the Statements revealing the Income and financial position of the business on the basis of events which have happened in the period being reckoned.

Cost Accounting:- It shows classification and analysis of costs on the basis of functions, processes, products, centers etc. It also deals with cost computation, cost saving, cost reduction, etc.

Management Accounting:- It deals with the processing of data generated in financial accounting and cost accounting for managerial decision-making. It also deals with application of managerial economic concepts for decision-making.

1.5 OBJECTIVES OF ACCOUNTANCY:

1. It is a means of recording the monetary transactions and events.

2. It required to ascertain the earnings of the company, which is achieved by preparation of Profit and Loss account.

3. It is required to identify the obligations (liabilities) and resources (asset) of the organization.

4. Accounting records are required to be maintained statutorily by certain government and regulatory bodies.

5. Accounting records are also required by the management for taking the financial decisions.

6. Generally, investors and certain lenders also require the preparation of financial statements.

1.6 USERS OF FINANCIAL STATEMENT

Management

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Lenders (Long-term)

Suppliers/Creditors (short-term) Customers

Employees

Government & Regulatory Agencies Researchers

1.7 ADVANTAGES OF ACCOUNTING

Facilitate To Replace Memory

Facilitate to comply with legal requirement Facilitate to ascertain net result of operations Facilitate to ascertain financial position Facilitate the users to take decision Facilitate a comparative study Facilitate control over assets

Facilitate the settlement of tax liability

Facilitate the ascertainment of value of business Facilitate Raising Loan

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Chapter1- End Chapter Quizzes

Test Questions:

Q1 The prime function of accounting is to: (a) record economic data

(b) provide the information basis for action (c) classifying & recording business transactions (d) attain non-economic goals.

Q2 The basic function of financial accounting is to: (a) record all business transactions

(b) interpret financial data

(c) assist the management in performing functions effectively (d) All of the above

Q3 Management Accounting provides invaluable services to the management in performing: (a) All management functions

(b) Co-ordinating management functions (c) Controlling functions

(d) None of the above

Q4 Book-keeping is mainly concerned with

(a) recording of financial data relating to business operations

(b) designing the systems in recording, classifying, summarizing the recorded data. (c) Interpreting the data for internal & external end users.

(d) All of the above.

Q5 Who among the following is not considered as an external user of Financial Statements?

(a)Government Agencies (b) Creditors

(c)Customers

(d)Board of Directors.

Q6 Which of the following events is/are not recorded in the books of a business? (a) Significant Monetary events after the balance sheet dates.

(b) Death of a chief executive of the business

(c) Government Investigation into the pricing of the business (d) Both (b) & (c) above

Q7 Which of the following is/are the objectives of Accounting: (a) To keep systematic records

(b) To ascertain the Financial Position of the company (c) To compare the balance sheets of two dates. (d) Both (a) & (b) Above

Q8 Which of the following is/are branches of accounting: (a) Cost Accounting

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(b) Management accounting

(c) Social Responsibility Accounting (d) All of Above

Q9 Which of the following is/are the internal users of accounting information: (a) Creditors

(b) Employees (c) Investors

(d) Both (a) & (b) Above

Q10 Which of the following is not a function of accounting: (a) Recording

(b) Classifying (c) Summarizing (d) Controlling

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CHAPTER 2 ACCOUNTING PRINCIPLES, CONVENTIONS AND

CONCEPTS

At the end of second chapter you will get to know: 2.1 Meaning of GAAP

2.2 Acceptance Criteria 2.3Accounting Concepts 2.4 Accounting Conventions

2.1 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

The double entry system of accounting is based on a set of principles which are called Generally Accepted Accounting Principles (GAAP). GAAP may be defined as those rules of action or conduct which are derived from experience and practice and when they prove useful, they become accepted as principles of accounting.

These principles enable to a certain extent standardization in recording and reporting of information so that the users, once they are aware of the principles, can read and understand the financial statements prepared by diverse organizations.

2.2 Acceptance of accounting principles depends on following three criteria:

Relevance:- A principle is relevant to the extent it results in information that is meaningful & useful to the users of accounting information.

Objectivity:- it connotes reliability & trustworthiness.

Feasibility:- A principle is feasible to the extent it can be implemented without much complexity & cost.

Principles can be classified into two categories: (i) Accounting concepts

(ii) Accounting conventions

2.2 Acceptance of accounting principles depends on following three

criteria:

Relevance:- A principle is relevant to the extent it results in information that is meaningful & useful to the users of accounting information.

Objectivity:- it connotes reliability & trustworthiness.

Feasibility:- A principle is feasible to the extent it can be implemented without much complexity & cost.

Principles can be classified into two categories: (iii) Accounting concepts

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2.3 ACCOUNTING CONCEPTS:

The term concepts includes those basic assumptions or conditions upon which the science of accounting is based. The following are the important accounting concepts:

(1) Money Measurement Concept:

In financial accountancy, a record is made only of information that can be expressed in monetary terms. Recording, classification and summarization of business transactions requires a common unit of measurement which is taken as money. If events cannot be quantified in monetary terms then they do not facilitate accounting. Money is the standard of exchange and the changes in purchasing power caused by inflation are ignored for the purpose of accounting because the assumption about the stability of money, notwithstanding its limitations, is a necessity for ensuring a smooth accounting process. Hence, all transactions are recorded through a common denominator, namely the monetary unit.

(2) Cost Concept:-

Cost concept implies that in accounting, all transactions are generally recorded at cost, and not at market value. For example, if a piece of land is acquired for Rs.1 lakh, it would continue to be shown in the balance sheet at Rs.1 lakh, even when the market value of the land rises to say Rs.2 lakhs. Why should this be so? This is because, cost concept is in fact closely related to the going concern concept. If the land is acquired for the operations of the business and would continue to be used for its operations and would not be sold shortly, then it is largely immaterial what the land‟s market value is, since it is not going to be sold anyway. Thus, it is consistent with going concern concept to keep recording the land at cost, i.e. Rs.1 lakh on an ongoing basis.

(3) Business Entity/Separate Entity Concept:

The legal entity of a corporate business, as distinct from the entity of its owners is well understood today. Less understood, however, is the accounting entity of a business as distinct from its owners. For example, for many purposes, the legal entity of a sole proprietary business may not be very distinct from the entity of the proprietor himself. However, the business entity concept requires that this should not come in the way of treating the business as a distinct accounting entity for the purposes of treating transactions relating to the operations of the business. It is in accordance with this concept that when an owner brings capital into the business, the business in turn is deemed to owe the capital to the owner.

(4) Going Concern Concept:

A business entity is assumed to carry on its operations forever. Seemingly inconsequential, this is a fundamental concept which has far reaching consequences. This is because it is difficult to envisage any economic activity on the part of a business entity if its liquidation were shortly expected. Going concern concept implies that the resources of the concern would continue to be used for the purposes for which they are meant to be used. For instance, in a manufacturing concern, the land, buildings, machinery etc., are primarily required for carrying out the production and selling of certain products. Going concern concept implies that these land, buildings, machinery etc., would continue to be used for this purpose

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It can easily be seen that in business, as elsewhere, funds can be raised in any of the following ways:

Additional capital (increases owners‟ equity) Additional loans (increases outside liability) Earning revenue (increases owners‟ equity) Making profits (increases owners‟ equity)

Disposing or reducing some of the assets (reduces assets).

Thus, all increases in liabilities (including owners‟ equity) and reduction in assets represent sources of funds.

Similarly, the funds thus raised, may be put to any of the following uses: Purchasing of assets (increases assets)

Incurring operational expenses (decreases owners‟ equity) Discharging earlier liabilities (decreases liability)

Keeping idle funds so that cash balance increases (increases assets) Suffering losses (decreases owners‟ equity).

Thus all increases in assets and decreases in liabilities (including owners‟ equity) are uses of funds.

A little reflection must reveal that in a business, the sum of the Sources of Funds must equal the sum of Uses of Funds. This is because, whatever funds are raised by the business, either through capital or operations or from outsiders, must be tied up in one or the other form of uses.

Thus the duality or accounting equivalence concept implies that:

Owners’ Equity + Outside Liability = Assets

This equation is known as the „Fundamental Accounting Equation‟. (6) Accounting Period Concept:

To be able to prepare the income statement for a business, the period for which it is to be prepared must first be specified. Very often the accounting period chosen is a calendar year (January 1 – December 31) or a fiscal year (April 1 – March 31).

(7) Realization Concept: With this concept, accounts recognise transactions (and any profits arising from them) at the point of sale or transfer of legal ownership - rather than just when cash actually changes hands. For example, a company that makes a sale to a customer can recognise that sale when the transaction is legal - at the point of contract. The actual payment due from the customer may not arise until several weeks (or months) later - if the customer has been granted some credit terms.

(8) Matching Concept:

In order to determine the profits or losses accrued in an accounting period, the expenses must relate to the goods or services sold during the period. For instance, assume a situation where nine products are manufactured in an accounting period, seven products are dispatched and money is received on only five. Let the selling price and cost per product be Rs.10 and Rs.6 respectively. Then, depending on whether the sale is

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recognized at production or dispatch or collection, the revenue would be Rs.90 or Rs.70 or Rs.50 respectively. And the cost of goods sold under the three situations will be Rs.54, Rs.42 and Rs.30 respectively. Thus it is clear that the „cost‟ derives its relevance only from the „sale‟ and not vice-versa. It is for this reason that revenue recognition always precedes the matching of cost. If revenue or sale is not defined, the „cost‟ cannot be defined either.

2.4 ACCOUNTING CONVENTIONS:

Conventions are based on what is practicable, these are the methods or procedures employed generally by accounting practitioners. For example, dividing a centimeter into ten equal parts is a convention rather than a concept. They are based on custom and are subject to change as new developments arise.

Some of the accounting conventions are as follows: (1) Materiality:

An important convention. As we can see from the application of accounting standards and accounting policies, the preparation of accounts involves a high degree of judgment. According to this , the accountant should attach importance to material details & ignore insignificant details.

(2) Prudence/Conservatism:

Profits are not recognized until a sale has been completed. In addition, a cautious view is taken for future problems and costs of the business. For example, a sales manager might have finalized a deal with his client for, say, sale of 100 units of their product. But unless these items are produced and delivered to the client there is no reasonable certainty about receiving the payment for these 100 units. It is only thereafter that he can record the sales amount on those 100 units as due from the client. But, on the other hand, if he comes to know that a customer has lost all his assets and is likely to default payment, then he should immediately provide for such loss.

(3) Consistency:

There are in practice several ways of treating an event that may be recorded in the accounts. The consistency concept requires that once an entity has decided on one method, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to change the method of treatment of that event. For example, if a concern is valuing its inventory by a particular method in one year it is expected to value its inventory in the subsequent years also in the same method unless there is a strong reason to change the same. Similarly, if it is charging depreciation by one method it is expected to follow the same method in the subsequent years also.

(4) Full disclosure:

According to this convention accounting report should disclose fully & fairly the information they purport to represent. They should be honestly prepared & sufficiently disclose information which is of material interest to proprietors, to present & potential creditors & to investors.

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End Chapter Quizzes

Test Questions:

Q1 Accounting principles are generally based on: (a) Practicability

(b) Subjectivity

(c) Convenience in recording (d) All of above

Q2 The basic concepts related to balance sheet are (a)Cost Concept

(b) Business Entity

©Accounting period concept (d)Both (a) & (b) Above

Q3 The basic concepts related to P&L Account are (a)Realization Concept

(b) Matching Concept © Cost Concept

(e) Both (a) & (b) above Q4 As per the double entry concept

(a) Assets + Liability = Capital (b) Capital= Assets -Liability (c) Capital – Liability = Assets (d) Capital +Assets =Liabilities

Q5 Only the significant events which affect the business must be recorded as per the principle of:

(a) Separate Entity (b) Accrual Concept (c) Materiality Concept (d) None of above

Q6 P&L account is prepared for a period of one year by following: (a) Consistency Principle

(b) Conservatism Principle (c) Time period concept (d) Cost Concept

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Q7 Under which of the following concepts are shareholders treated as creditors for the amount they paid on the shares they subscribed to?

(a) Cost Concept (b) Duality Concept

(c) Separate Entity Concept (d) Cost Concept

Q8 The underlying accounting principle(s) necessitating amortization of intangible asset(s) is/are:

(a) Cost Concept (b) Matching Concept (c) Realization Concept (d) Both (b) & (c) above

Q9 Which of the following practices is not in consonance with the convention of conservatism?:

(a) Creating Provision for bad debts

(b) Creating provision for discount on debtors (c) Creating provisions for discount on creditors (d) Creating provision for tax

Q10 Recording of fixed assets at cost ensures adherence of: (a) Cost Concept

(b) Matching Concept (c) Realization Concept (d) Both (b) & (c) above

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CHAPTER 3 ACCOUNTING STANDARDS

At the end of this chapter you will be conversant with:

3.1 Meaning of Accounting Standards 3.2 International Accounting Standards

3.3 List of accounting standards issued by IASC 3.4 Auditor‟s duties in relation to accounting standards

3.5 Accounting Standards Issued By ASB of the Institute of Chartered Accountants of India

3.1 MEANING OF ACCOUNTING STANDARDS

An accounting standard is a selected set of accounting policies or broad guidelines regarding the principles & methods to be chosen out of several alternatives. Accounting Bodies all over the world have tried to achieve some uniformity in the accounting policies by prescribing certain accounting standards in order to narrow the range of alternatives available to an organization in respect of collection and presentation of accounting information.

The main objective of accounting standards is to harmonize the diverse accounting policies and practices & ensure comparability of accounts because of uniformity in their presentation.

3.2 INTERNATIONAL ACCOUNTING STANDARDS

Accounting Bodies throughout the world are striving to achieve a reasonable degree of uniformity in the accounting policies by prescribing certain accounting standards with respect to collection and presentation of accounting information. To formulate the accounting standards, they have established a committee called the International Accounting Standards Committee (IASC) in 1973. Accounting bodies of most of the countries, including the Institute of Chartered Accountants of India, are members of this body and these members have resolved to conform to the standards developed by IASC, subject to variations needed due to local conditions or laws.

The objectives of the committee according to its constitution are:

a. formulating, publishing and promoting the use of the accounting standards worldwide, and

b. to work for the improvement and harmonization of regulations, accounting standards and procedures relating to financial statements

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The International Accounting Standards have assumed great importance in recent times for the following reasons:

a. Globalization of the economy has led to Indian companies expanding their operations across the borders and this calls for uniformity in accounts of units located in different countries.

b. Foreign investors would give more weight age to the accounts of those companies which are based on International Accounting Standards.

If there is a conflict between the International Accounting Standards and the local standards or the local laws and regulations, the local standards, laws and regulations will prevail.

3.3 The list of accounting standards issued by the IASC is given

below:

IAS 1 Presentation of Financial Statements IAS 2 Inventories

IAS 7 Cash Flow Statements

IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies

IAS 10 Events after the Balance Sheet Date IAS 11 Construction Contracts

IAS 12 Income Taxes IAS 14 Segment Reporting

IAS 15 Information Reflecting the Effects of Changing Prices IAS 16 Property, Plant and Equipment

IAS 17 Leases IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 22 Business Combinations

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated Financial Statements

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IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions

IAS 31 Financial Reporting of Interests in Joint Ventures

IAS 32 Financial Instruments: Disclosure and Presentation

IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

IAS 35 Discontinuing Operations

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

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3.4 AUDITOR’S DUTIES IN RELATION TO ACCOUNTING STANDARDS

In case the company does not conform to any of the mandatory accounting standards, the auditor will have to qualify his report justifying his deviation. In case he fails to do so the ICAI can take disciplinary action against him on the ground of professional misconduct.

3.5 ACCOUNTING STANDARDS ISSUED BY ASB OF THE INSTITUTE OF

CHARTERED ACCOUNTANTS OF INDIA

(AS 1) Disclosure of Accounting Policies (AS 2) Valuation of Inventories

(AS 3) Cash Flow Statements

(AS 4) Contingencies and Events Occurring after the Balance Sheet Date

(AS 5) Net Profit or Loss for the Period, Prior Period and Extraordinary Items and Changes in Accounting Policies

(AS 6) Depreciation Accounting

(AS 7) Construction Contracts (Revised Accounting Standard) (AS 8) Accounting for Research and Development

(AS 9) Revenue Recognition

(AS 10) Accounting for Fixed Assets

(AS 11) (Revised 2003), The Effects of Changes in Foreign Exchange Rate (AS 12) Accounting for Government Grants

(AS 13) Accounting for Investments (AS 14) Accounting for Amalgamations

(AS 15) Accounting for Retirement Benefits in the Financial Statement of Employers (AS 16) Borrowing Costs

(AS 17) Segment Reporting (AS 18) Related Party Disclosures (AS 19) Leases

(AS 20) Earnings Per Share

(AS 21) Consolidated Financial Statements (AS 22) Accounting for Taxes on Income

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(AS 24) Discontinuing Operations (AS 25) Interim Financial Reporting (AS 26) Intangible Assets

(AS 27) Financial Reporting of Interests in Joint Ventures (AS 28) Impairment of Assets

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End Chapter Quizzes

Q 1 The Objective of Formulating Accounting Standards is to:

(a) harmonize the diverse accounting policies and practices & ensure comparability of accounts. (b) To control the cost

Q2 When International Accounting Standards Committee (IASC) was formulated: (a) 1970

Q3 How many international accounting standards are there: (a) 20

(b) 30 (c) 41 (d) 50

Q4 Which one is IAS 2: (a) Inventories

(b) Events after the Balance Sheet Date (c) Income Taxes

(d) Segment Reporting

Q5 Which one is IAS 8 : (a) Segment Reporting

(b) Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies

(c) Events after the Balance Sheet Date (d) None of above

Q6 Which one IAS 20:

(a) Events after the Balance Sheet Date

(b) The Effects of Changes in Foreign Exchange Rates

(c) Accounting for Government Grants and Disclosure of Government Assistance (d) None of above

Q7 Which one is IAS 17: (a) Segment Reporting (b) Leases

(c) Revenue

(d) Employee benefits

Q8 Which one is IAS 29: (a) Earnings per Share

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(c) Financial Instruments: Disclosure and Presentation (d) Interim Financial Reporting

Q9 Which one is IAS 35:

(a) Interim Financial Reporting (b) Discontinuing Operations (c) Investments in Associates (d) None of the above

Q10 Which on is IAS 39:

(a) Investments in Associates (b) Investment Property

(c) Financial Instruments: Recognition and Measurement (d) Agriculture

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CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING

4.1 Single Entry System 4.2 Double Entry System 4.3 Systems of Accounting

4.1 SINGLE ENTRY SYSTEM:-

An incomplete double entry can be termed as a single entry system. According to Kohler “it is a system of book-keeping in which as a rule only records of cash & personal accounts are maintained, it is always incomplete double entry, varying with circumstances.” This system has been developed by some business houses where, for their convenience, only some essential records are kept. Since all records are not kept, the system is not reliable & can be used only by small business firms.

4.2 DOUBLE ENTRY SYSTEM:-

All the business transactions have two fold effect. Recording of both aspects of a transaction is called Double Entry system of bookkeeping.

Accounting Equation:

In Chapter 2, it was stated that, under the duality concept that sources of funds must always equal to uses of funds and from this equality was derived. The fundamental accounting equation:

Total Liabilities = Total Assets (or)

Owners‟ Equity + Outside Liability = Assets (or)

Assets = Capital + Liabilities (or)

Resources = Sources of Finance (or)

Assets = Internal Equity + External Equity

Where assets refer to resources which are owned by business enterprises, liabilities are debts payable to parties external to business and capital means the amount payable to owner of the business enterprise.

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It was also evident from the earlier discussions that any of the following is a source of funds, in business:

– Incurring Liability (including owners‟ equity) – Earning Revenue

– Making Profits.

It stands to reason that a decrease in liability, revenue or profit must be a use of funds being the opposite of a source.

Similarly, any of the following is a use of funds: – Acquiring Assets

– Incurring Expenses – Incurring Losses.

A business is started with a capital of Rs.10,000 brought in cash. The above event gives rise to a cash balance of Rs.10,000, which, being an increase in an asset (namely cash), is a use.

At the same time, the business now owes Rs.10,000 to the owner who invests the capital in it, so that the owners‟ equity in the business is Rs.10,000. This being a liability of the business towards the owner, constitutes a source.

Steps Involved In Developing Accounting Equation:

An accounting equation may be developed by taking the steps given below: Step 1 –Ascertain the variables of an equation affected by a transaction Step 2- Find out the effect of a transaction on the variables of an equation

Step 3 – Show the effect on the appropriate side of an equation and ensure that the total of right hand side is equal to the total of left hand side

Illustration 1:- A started business with Rs 1,00,000. Analyze the transaction and give Accounting Equation.

Step 1- Variables affected Asset & Capital

Step 2- Effect of transactions on affected variables Increase in asset & Capital

Step 3- Accounting equation Asset = Liability + Capital 1,00,000 = 0+ 1,00,000

Illustration 2:- Borrowed Rs 50,000 from ICICI Bank.

Step 1- Variables affected Asset & Liability

Step 2- Effect of transactions on affected variables Increase in asset & Liability

Step 3- Accounting equation Asset = Liability + Capital 1,00,000 = 50,000+ 0

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Illustration 3: - Purchased furniture worth Rs. 100000.

Step 1- Variables affected Assets

Step 2- Effect of transactions on affected variables Increase & Decrease in assets

Step 3- Accounting equation Asset = Liability + Capital +1,00,000 – 1,00,000 = 0 + 0

Illustration 4: - Purchased goods for cash 20,000.

Step 2- Effect of transactions on affected variables Increase & Decrease in assets

Step 3- Accounting equation Asset = Liability + Capital +20,000-20,000 = 0 + 0

Illustration 5: - Purchased goods on credit for Rs 50000.

Step 1- Variables affected Asset and Liability

Step 2- Effect of transactions on affected variables Increase in asset & Liability

Step 3- Accounting equation Asset = Liability + Capital 50,000 = 50,000 + 0

Illustration 6 :- Sold goods costing Rs 10,000 for Rs 12000.

Step 1- Variables affected Assets & Capital

Step 2- Effect of transactions on affected variables Increase in one asset & Decrease in another asset & Increase in Capital

Illustration 7: - Sold goods costing Rs 20,000 on credit for Rs 25,000.

Step 1- Variables affected Assets & Capital

Step 2- Effect of transactions on affected variables Increase in one asset & Decrease in another asset &

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Increase in Capital

Illustration 8:- Returned goods costing Rs 5,000 to suppliers of goods.

Step 1- Variables affected Asset & Liability

Step 2- Effect of transactions on affected variables decrease in asset & Liability

Step 3- Accounting equation Asset = Liability + Capital -5000 = -5000+ 0

Illustration 9:- Received cash from a customer Rs 20,000.

Step 2- Effect of transactions on affected variables Increase in one asset & Decrease in another asset.

Step 3- Accounting equation Asset = Liability + Capital +20,000 – 20,000 = 0+ 0

Illustration 10: -Withdrew cash Rs 2,000 for personal use.

Step 1- Variables affected Asset & Capital

Step 2- Effect of transactions on affected variables decrease in asset & Capital

Step 3- Accounting equation Asset = Liability + Capital -2000 = 0 - 2000

Problem:-

Mr. Irshad has the following transactions. Draw accounting equation to show the effect of these transactions on his assets, liabilities and capital. Also show his balance sheet:

1. Commenced business with cash Rs 20,000.

2. Purchase goods for cash Rs 5000 and credit Rs 6000. 3. Purchased office equipment for cash Rs 8000.

4. Paid office rent Rs 1000.

5. Sold goods for cash Rs. 10,000 (costing Rs 7000) 6. Sold goods on credit for Rs 6000 (costing Rs 3000) 7. Fore insurance premium paid in advance Rs 500

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8. Salary due but not paid yet (o/s) Rs 1500 Systems of Accounting:-

ACCRUAL BASIS OF ACCOUNTING & CASH BASIS OF ACCOUNTING

Accrual Basis of accounting is a method of recording transactions by which revenue, cash, assets & liabilities are reflected in the accounts for the period in which they accrue. Whereas cash basis accounting in which actual receipts or actual payments are made. These two methods can be differentiated in tabular form as follows:

BASIS OF DISTINCTION _ACCRUAL BASIS CASH BASIS 1 Prepaid/outstanding expenses/accrued/unaccrued income

These things are treated in this accounting

Whereas no entry is done in cash basis accounting

2 Income status in case of prepaid expenses & accrued

income

Income statement will show a relatively high

income

Income statement will show lower income

3 Income status in case of o/s exp and unaccrued income

Income statement will show a relatively lower

income

Income statement will show a high income

4 Recognition under companies Act 1956

It is recognized Not recognized

5 Availability of choosing accounting option like LIFO/FIFO/SLM/WDV

Under this an accountant has an option

Whereas under this an accountant has no option to

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End Term Quizzes

Problem 1: Show the accounting equation on the basis of the following transactions & present a balance sheet: -

Rs Mohan commenced business with 70,000 Purchased goods on credit 14,000

Withdrew for private use 1,700

Purchased goods on cash 10,000

Paid wages 300

Paid to creditors 10,000

Sold goods on credit 15,000

Sold goods for cash (cost price 3000) 4,000

Purchased furniture 500

Problem2 Show accounting equation on the basis of the following transactions, also prepare balance sheet:

Rs i. Manu started business with cash 50,000

ii. Purchased goods on credit 2,500

iii. Purchased goods on cash 6000

iv. Purchased furniture for 3000

v. Paid rent 1200

vi. Withdrew for private use 4200

vii. Received interest for 600

viii. Sold goods on credit (cost Rs 300) for 4200

ix. Paid to creditor 24000

x. Paid salaries for 1200

Problem 3: Show the accounting equation on the basis of following transactions: (i) Harish started business with cash Rs 15000

(ii) He purchased goods on credit Rs 7000. (iii) He purchased furniture for cash Rs 500 (iv) He deposited into bank Rs 2000.

(v) He sold goods on credit to Satish costing Rs 4000 for Rs 6000. (vi) He withdrew cash fir private use Rs 200.

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MULTIPLE CHOICE QUESTIONS: Q1 Cash purchases:

(a) Increase assets

(b) Results in no change of assets (c) Decrease Assets

(d) Increase liability

Q2 Purchase of goods on credit from A increases: (a) Assets

(b) Liability & Assets (c) Capital

(d) Assets & Capital

Q3 Rent outstanding Rs 400 :

(a) Increases capital by 400 & increase liability by 400. (b) Decreases capital by 400 & increase liability by 400. (c) Does not affect capital

(d) Increase assets by 400

Q4 Paid for salaries Rs 10,000:

(a) Decrease asset & increase capital (b) Increase assets & liability both (c) No effect on asset

(d) Decrease in Assets & Capital both Q5 Drew for personal use Rs 500:

(a) Increase assets & Capital (b) Decrease liability

(c) Decrease assets & capital both (d) None of above

Q6 If a firm borrows a sum of money, there will be: (a) Increase in capital

(b) Decrease in capital (c) No effect on capital (d) Increase liability

Q7 Which of the following is correct: (a) Assets = Liability – Capital (b) Assets = capital – liability (c) Liability = Assets – capital (d) Assets = External equity

Q8 Ram has assets of Rs 10,000 & liability of Rs 2,000, his capital would be : (a) 10,000

(b) 2000 (c) 8000 (d) 12000

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(a) 15000 (b) 45000 (c) 105000 (d) 60,000

Q10 He sold goods on credit for Rs 10,000: (a) Increase assets & Liability

(b) Increase one asset & decrease another asset (c) Increase capital

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CHAPTER 5 RECORDING OF ACCOUNTING TRANSACTIONS

5.1 Classification of accounts 5.2 Rules of Debit & Credit 5.3 Meaning & Format of Journal 5.4 Steps in Journalizing

5.5 Compound Entry 5.6 Opening Entry

5.9 Cash discount v/s Trade discount 5.8 Ledger

5.9 Balancing

5.1 TYPES OF ACCOUNTS:

The accounts maintained by a business organization are classified into three types as shown in the Figure 5.1:

Figure 5.1 Types of Accounts

Personal Account: It deals with accounts of individuals like creditors, debtors, bank, etc. It shows the balance due to these individuals or due from them on a particular date.

Real Account: It represents assets like plant and machinery, land and buildings, goodwill, etc. As on a particular date, this account shows the worth of the asset.

Nominal Account: It consists of different types of expenses or incomes or loss or profit. These accounts show the amount of income earned or expenses incurred for a particular period say a month, a year, etc.

Illustration1:

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Capital brought in, drawings A/c, building purchased, purchase A/c, sales A/c, Carriage inward paid, carriage outward paid, cash received, cash paid, interest paid, interest received, discount allowed, repairs, bank a/c, bank overdraft, outstanding rent.

Solution:

Personal Account:- Capital brought in, Drawings, bank a/c, bank overdraft

Real Account:- Building purchases, purchase a/c, sales a/c, cash received, cash paid

Nominal Account:-carriage inward paid, carriage outward paid, interest paid, interest received, discount allowed, repairs, outstanding rent

5.2 DEBIT & CREDIT:

It is necessary to point out at the outset that the words „debit‟ and „credit‟ represent two different concepts. The nature of Debit and Credit is explained in the Figure 5.2:

Figure 5.2 Nature of Debit & Credit

RULES OF DEBIT & CREDIT:

Whether an Account has to be debited or credited is decided by using the rules indicated in Figure 5.3.

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Figure 5.3: Rules of Debit and Credit

5.3 MAENING & FORMAT OF JOURNAL

A journal is a book in which transactions are recorded in chronological order. It is called a book of prime entry or original entry.

FORMAT OF JOURNAL

Date Particulars L.F. Debit Rs.

Credit Rs.

The date on which transactions have taken place is entered in the date column. Two aspects of the transaction are recorded in the particulars column. A brief description of the transaction is also given in the particulars column. The Ledger Folio (L.F.) column is meant for writing the number of the page in the ledger in which the particular transaction is entered. The amount to be debited is entered in the debit column and the amount to be credited is entered in the credit column.

5.4 STEPS IN JOURNALIZING

1. Ascertain what accounts are involved in a transaction? 2. Ascertain what is the nature of the accounts involved?

3. Ascertain what rule of debit & credit is applicable for each of the accounts involved? 4. Ascertain what account is to be debited and credited?

5. Record the date of transaction in the date column.

6. Write the name of accounts to be debited & credited (with abbreviation Dr. & Cr.) in particular column.

7. Write narration in brief describing the transaction. 8. Draw a line to separate one journal entry from other.

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Illustration 2:-

XYZ Ltd. received Rs.1,000 from Geet & Co. on 5-1-2001 Recording the journal entry in the books of XYZ Ltd.

Step 1 The two accounts involved in the above transaction are (i) money being received, and (ii) the person paying the amount i.e., Geet & Co.

Step 2 The nature of the accounts are (i) Real account, and (ii) Personal account respectively.

Step 3

(a) The rule applicable to real account is „debit what comes in and credit what goes out‟. In the given transaction, cash is coming in, therefore debit cash account.

(b) The rule for personal account is „debit the receiver and credit the giver‟. In the above transaction, Geet & Co. is the giver, therefore credit Geet & Co.

Journal

Let us

apply the rules of debit and credit for a few sample transactions after ascertaining dual aspects

Transaction Aspects Account Debited

Reason for the Debit

Account Credited

Reason for the Credit ABC Ltd. received Rs.5,000 from Gupta & Company (In the books of ABC Ltd.) Aspect 1 cash of Rs.5,000 is received. Aspect 2 The amount is given by Gupta & Co.

Cash a/c Cash a/c is a Real a/c. The rule of „Debit what

comes in‟ applies.

Gupta & Co. Gupta & Co a/c is a Personal a/c. The rule of „Credit the giver‟ applies. PQR Ltd. purchased Rs.6,000 worth of goods from X Co. (In the books of PQR Ltd.) Aspect 1 Goods of Rs.6,000 are received. Aspect 2 The goods are supplied by X Co. Inventor y a/c (or Purchase s a/c) Inventory a/c or Purchases a/c in Nominal a/c. The Rule is Debt all Expenses.

X Co. a/c X Co. a/c is a personal a/c. The rule of „Credit the

giver‟ applies.

XYZ Ltd. paid the salaries of Rs.15,500 to

its staff for the month Aspect 1 Payment of an expense of Rs.15,500. Aspect 2 Bank balance is Salaries a/c Salaries a/c is a Nominal a/c. The rule of „Debit all

Bank a/c Bank a/c is a personal a/c the rule of „Credit the giver‟

applies Date Particulars L.F. Debit.

Rs.

Credit Rs. 5.1.2001 Cash a/c Dr.

To Geet & Co. a/c

(Being cash received from Geet & Co.)

_1,000 1,000

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Transaction Aspects Account Debited Reason for the Debit Account Credited

Reason for the Credit through bank

transfer. (In the books of XYZ Ltd.) reduced by Rs.15,500. expenses‟ applies. Illustration 3:

Journalize the following transactions in the books of Dixit Enterprises. i.Started business with a capital of Rs.7,50,000.

ii.Opened a bank account with State Bank of India for Rs.2,00,000.

iii.Purchased goods from Tandon & Co. for cash Rs.1,00,000.

iv.Purchased goods from Burman for Rs.2,00,000.

v.Goods returned to Mr Burman Rs.50,000.

vi.Paid Rs.1,40,000 to Mr Burman in full settlement of his dues.

vii.Paid Mr Dharam, the landlord Rs.50, 000 towards rent.

viii.Withdrew cash for household expenses Rs.60,000.

ix.Sold goods to Mr. Karan for cash Rs.2,50,000.

x.Sold goods to Mr Dev on credit Rs.1,00,000.

xi.Goods returned by Mr. Dev for Rs.25, 000.

xii.Received cash from Mr. Dev Rs.70, 000 in full settlement.

xiii.Paid cartage on goods purchased Rs.35, 000.

xiv.Paid cartage on goods sold Rs.80,000.

xv.Purchased furniture for office purpose Rs.1,00,000.

xvi.Purchased furniture for re-sale Rs.1, 00,000.

xvii.Sold furniture out of those meant for resale Rs.1, 50,000.

xviii.Paid rent out of personal cash Rs.40, 000.

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Date Particulars L.F Debit _Rs. Credit _Rs. i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi xvii. Cash A/c Dr To Capital A/c

(Being cash invested in the business) Bank A/c Dr.

To Cash A/c

(Being cash deposited in the Bank) Purchases A/c Dr.

To Cash A/c

(Being goods purchased from Tandon & Co. for cash) Purchases A/c Dr.

To Burman A/c

(Being goods purchased from Burman on credit) Burman A/c Dr.

To Returns outward A/c

(Being goods returned to Burman) Burman A/c Dr.

To Returns outward A/c To Discount Received A/c

(Being cash paid to Mr Burman and received discount) Rent A/c Dr.

To Cash A/c

(Being rent paid in cash) Drawings A/c Dr. To Cash

(Being cash withdrawn for household expenses) Cash A/c Dr.

To Sales A/c

(Being goods sold for cash) Dev A/c Dr.

To Sales A/c

(Being goods sold to Dev on credit) Returns Inward A/c Dr.

To Dev A/c

(Being goods returned by Dev) Cash A/c Dr.

Discount Allowed A/c Dr. To Dev A/c

(Being cash received from Dev and allowed him discount)

Cartage Inward A/c Dr. To Cash A/c

(Being cartage paid on goods purchased) Cartage Outwards A/ Dr.

To Cash A/c

(Being cartage paid on goods sold) Furniture A/c Dr.

To Cash A/c

(Being furniture purchased on cash for office) Purchases A/c Dr.

To Cash A/c

(Being furniture purchased on cash for re-sale) Cash A/c Dr. 7,50,000 2,00,000 1,00,000 2,00,000 50,000 1,50,000 50,000 60,000 2,50,000 1,00,000 25,000 70,000 5,000 35,000 80,000 1,00,000 1,00,000 1,50,000 7,50,000 2,00,000 1,00,000 2,00,000 50,000 1,40,000 10,000 50,000 60,000 2,50,000 1,00,000 25,000 75,000 35,000 80,000 1,00,000 1,00,000 1,50,000

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xviii. To Sales A/c (Being furniture meant for resale sold for cash) Rent A/c Dr.

To Capital A/c

(Being rent paid out of personal cash)

40,000

Illustration 4:

Special transactions:

Journalize the following transactions in the Books of Rakesh for the month of January, 2001

Date Transactions 2.1.2001 8.1.2001 9.1.2001 10.1.2001 11.1.2001 12.1.2001 12.1.2001 25.1.2001 28.1.200

Withdrawn cash for personal use Rs.2,500

Withdrawn goods for personal use (Sale price Rs.1,500, CostRs.1,250) Goods distributed to children in an orphanage (Sale price Rs.2,000 Cost Rs.17,000)

Goods distributed as free samples (Sale price Rs.1,200; Cost Rs.1,000) Goods stolen (Sale price Rs.1,000 Cost Rs.800)

Goods destroyed by fire (Sale price Rs.1,500 Cost Rs.1,250)

Goods used in furnishing the office (Sale prices Rs.2,000 Cost price Rs.1,750) Recovered from Pramod half the amount which was written off as bad Rs.300 was written off as bad earlier.

Rs.250 payable by Rakesh was written off as bad.

Solution:

In the Books of Rakesh Journal Entries

Date Particulars L.F. Debit

Rs. Credit Rs. 2.1.2001 8.1.2001 9.1.2001 10.1.2001 11.1.2001 12.1.2001 12.1.2001 Drawings a/c Dr. To Cash a/c

(Being cash withdrawn for personal use) Drawings a/c. Dr.

To Purchases a/c

(Being goods withdrawn for personal use) Donation a/c Dr.

To Purchases a/c

(Being goods distributed to the children in an orphanage) Sales Promotion a/c Dr.

To Purchases a/c

(Being goods distributed as free samples) Loss by Theft a/c Dr.

To Purchases a/c (Being goods stolen) Loss by fire a/c Dr.

To Purchases a/c (Being goods destroyed by fire) Office furniture a/c Dr. To Purchases a/c

(Being goods used in furnishing the office) Cash a/c Dr. 2,500 1,250 1,700 1,000 800 1,250 1,750 150 2,500 1,250 1,700 1,000 800 1,250 1,750 150

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25.1.2001

28.1.2001

To Bad Debts Recovered a/c

(Being cash recovered out of an amount which was written off as bad earlier)

Bad Debts a/c Dr. To Rakesh a/c

(Being amount due from Rakesh written off as bad)

250

5.5 COMPOUND JOURNAL ENTRY:

Sometimes there are a number of transactions on the same date relating to one particular account or of one particular nature. Such transactions may be recorded by means of a single entry instead of passing several journal entries. Such an entry is termed as „compound journal entry‟. It may be recorded in any of the following three ways:

(i) One particular account may be debited while several other accounts may be credited. (ii) One particular account may be credited while several other accounts may be debited. (iii) Several accounts may be debited and several accounts may be credited.

Illustrations 5:

Journalize the following transactions in the Books of Rakesh for the month of January, 2001. Date Transactions 2.1.2001 8.1.2001 15.1.2001 20.1.2001 25.1.2001

Purchased goods from Arora at the list price of Rs.8,000. A trade discount of 10% was allowed.

Sold goods to Flora at a list price of Rs.4,000. A trade discount of 5% was allowed.

Received a cheque from Flora for Rs.3,600 in full settlement. Paid Arora Rs.7,000 by cheque in full settlement.

Shyam is declared insolvent and received from his official receiver, a first & final dividend of 60 paise in a rupee against a debt of Rs.2,500

Solution:

Journal Entries

Date Particulars L.F. Debit _Rs. Credit Rs. 2.1.2001 8.1.2001 15.1.2001 Purchases a/c Dr. To Arora a/c

(Being goods purchased from Arora for Rs.8,000 at a trade discount of 10%) Flora a/c Dr.

To Sales a/c

(Being goods sold to Flora for Rs.4,000 at a trade discount of 5%)

Bank a/c Dr. Discount Allowed a/c Dr. To Flora a/c

(Being cheque received from Flora in full settlement) 7,200 3,800 3,600 200 7,200 3,800 3,800

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20.1.2001

25.1.2001

Arora a/c Dr. To Bank a/c

To Discount received a/c (Being cheque paid to Arora in full settlement)

Cash a/c Dr. Bad Debts a/c Dr.

To Shyam a/c

(Being 60 paise in a rupee received from Shyam in full settlement of dues)

7,200 1,500 1,000 7,000 200 2,500

5.6 OPENING ENTRY:

A journal entry by means of which the balances of various assets, liabilities & capital appearing in the balance sheet of previous accounting period are brought forward in the books of current accounting period, is known as „opening entry‟.

Illustration 6:

Pass the opening entry in the journal of Ram (as on 1st April 2008):

Cash in Hand Rs 50,000, stock of Rs 20,000, land & building Rs 1,0,00,00 plant & machinery Rs 50,000, furniture 20,000 owings from X ltd 15000, loan from Y ltd 10,000.

Solution: Date Particulars L.F. Dr (Rs) Cr (Rs) 2008 April1 Cash in hand Dr Stock Dr. Land & Building Dr. Plant & Machinery Dr Furniture Dr To X Ltd

To Loan from Y Ltd To Ram‟s capital A/c

(being the balance brought forward from the last year)

50,000 20,000 1,00,000 50,000 20,000 15000 10,000 2,15,000

5.7 TRADE DISCOUNT V/S CASH DISCOUNT

TRADE DISCOUNT:

It is a reduction granted by a supplier from the list price of goods or service on business considerations (such as quantity bought, trade practices etc) other than for prompt payment. For example: If a supplier sells goods worth Rs 10,000 at trade discount of 10%, trade discount will be calculated as follows:

Price of Goods Rs 10,000

Less: Trade discount Rs 1,000

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CASH DISCOUNT:

A reduction granted by a supplier from the invoice price in consideration of immediate payment or payment within a stipulated period. Example: If in the above example, terms of payment 2%, 30 days, it means buyer will get 2% cash discount if he makes payment within 30 days. And the cash discount will be calculated as follows:

Amount payable as per invoice Rs 9,000

Cash discount Rs 180

Cash paid within 30 days Rs 8,820

Difference between these two discounts can be presented in tabular form as follows: Trade Discount Cash Discount

It is a reduction granted by supplier from the list price of goods/ service on business consideration other than for prompt payment

A reduction granted by supplier from the invoice price in consideration of immediate payment or payment in stipulated period.

It is given to promote sales It is allowed to encourage prompt payment It is allowed on purchase It is given at the time of payment within

stipulated time period It is shown in invoice itself. It is not shown in invoice Trade discount account is not opened in

ledger

It is opened in ledger

It may vary with quantity purchased It may vary with the payment period

5.8 LEDGER

Ledger contains a classified summary of all transactions recorded in Cashbook and journal. It is the main book of account. Ledger is also called Principal book as final information pertaining to the financial position of a business emerges only from the accounts

Format of ledger:

Dr. Account Title Cr. Date Particulars J.F. Amou

nt

Date Particulars J.F. Amoun t

The date column records the year, month and date of the transactions. Particulars column records the title of the other account affected. Name of the account in particulars column on the debit and credit side are preceded by the words „To‟ and „By‟ respectively. Journal Folio (J.F.) column records the page number of the journal from which the posting to the ledger has taken place. Amount column on debit and credit side records the amount mentioned in journal entry against the title of the account prepared.

Ledger Posting

The process of transferring of debits and credits entries from the journal to the ledger is called ledger posting.

Financial Accounting for Online

[Financial

Accounting]

ABF 103

[ACeL]

[Amity

University]

PREFACE

This Financial Accounting module seeks to discuss the concept of

accounting & their application in the organization. The principle concern

of the book is to show how financial accounting theory can be applied to

solve the problems in practice. An attempt has been made to relate

theory to practice to make it understandable easily for all kind of

students i.e. from accounts or non-accounts background.

Each chapter is having various illustrations relating to each topic

covered and followed by numerous questions and multiple choice

questions also, which are designed to reinforce concepts & procedure

presented in the body of chapter.

I wish to express my sincere thanks to many of the authors who have

received due acknowledgements, without whom, this module would not

have been completed.

I have taken every possible effort to remove the errors either of principle

or of printing. Even then, if the reader comes across any error, he/she is

requested to point out the same to me.

I hope that many students will find this module interesting & helpful.

Further suggestion for the improvement of the module is solicited.

Table of Contents

CHAPTER-1 MEANING & SCOPE OF ACCOUNTING

1.1 MEANING OF ACCOUNTING

1.2 The Accounting Process/Accounting Cycle:

1.3 ACCOUNTANCY, ACCOUNTNG & BOOK-KEEPING: -

1.4 BRANCHES OF ACCOUNTING:

1.5 OBJECTIVES OF ACCOUNTANCY:

1.6 USERS OF FINANCIAL STATEMENT

1.7 ADVANTAGES OF ACCOUNTING

Chapter1- End Chapter Quizzes

CHAPTER 2 ACCOUNTING PRINCIPLES, CONVENTIONS AND

CONCEPTS

2.1 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:

2.2 Acceptance of accounting principles depends on following three

criteria:

2.3 ACCOUNTING CONCEPTS:

2.4 ACCOUNTING CONVENTIONS:

End Chapter Quizzes

CHAPTER 3 ACCOUNTING STANDARDS

3.1 MEANING OF ACCOUNTING STANDARDS

3.2 INTERNATIONAL ACCOUNTING STANDARDS

3.3 The list of accounting standards issued by the IASC is given

below:

3.4 AUDITOR’S DUTIES IN RELATION TO ACCOUNTING STANDARDS

3.5 ACCOUNTING STANDARDS ISSUED BY ASB OF THE INSTITUTE OF

CHARTERED ACCOUNTANTS OF INDIA

End Chapter Quizzes

CHAPTER 4 SYSTEMS OF BOOK-KEEPING & ACCOUNTING

4.1 SINGLE ENTRY SYSTEM:-

4.2 DOUBLE ENTRY SYSTEM:-

End Term Quizzes

CHAPTER 5 RECORDING OF ACCOUNTING TRANSACTIONS

5.1 TYPES OF ACCOUNTS:

5.2 DEBIT & CREDIT:

5.3 MAENING & FORMAT OF JOURNAL

5.4 STEPS IN JOURNALIZING

5.5 COMPOUND JOURNAL ENTRY:

5.6 OPENING ENTRY:

5.7 TRADE DISCOUNT V/S CASH DISCOUNT

5.8 LEDGER